Article 1191

Medel vs. CA [299 SCRA 481 (Nov 27 1998)]

Usury Law

Facts: Medel obtained several loans from Gonzales totalling P500,000. These were evidenced by
several promissory notes agreeing to an interest rate of 5.5% per month with additional service charge of
2% per annum, and penalty charge of 1% per month.. On maturity, Medel failed to pay their
indebtedness. Hence, Gonzales filed with the RTC of Bulacan a complaint for collection of the full
amount of the loan.
RTC declared that the promissory notes were genuine, however, it ruled that although the Usury Law had
been repealed, the interest charged by Gonzales on the loans was unconscionable. Hence, RTC applied
the legal rate of interest for loan of money, goods or credit of 12% per annum.
CA reversed the ruling of the RTC holding that the Usury Law had become legally inexistent. Hence, this
petition for review on certiorari.

Issue: Whether or not the interest rate stipulated upon was valid.

Held: NO. SC held that the stipulated rate of interest at 5.5% per month on the P500,000 loan was
excessive. However, it could not consider the rate usurious because CB Circular No. 905 has expressly
removed the interest ceilings prescribed by the Usury Law and that said law is now legally inexistent.
CB Circular 905 did not repeal nor in any way amend the Usury Law but simply suspended the latters
effectivity. A CB Circular cannot repeal a law. Only a law can repeal another law. By virtue of this
circular, the Usury Law has been rendered ineffective. Interest can no be charged as lender and
borrower may agree upon.
Nevertheless, SC held that the interest of 5.5% per month, or 66% per annum, stipulated upon by the
parties in the promissory note was unconscionable, and hence, contrary to morals, if not against the law.
The stipulation is void. The courts shall reduce equitably liquidated damages, whether intended as an
indemnity or a penalty if they are iniquitous or unconscionable.
SC ordered that the interest of 12% per annum and additional 1% a month penalty charge as liquidated
damages reasonable.

Spouses Fernando Viloria and Lourdes Viloria vs Continental Airlines, Inc.

Business Organization Partnership, Agency, Trust Elements of Agency Estoppel
In 1997, while the spouses Viloria were in the United States, they approached Holiday Travel, a travel
agency working for Continental Airlines, to purchase tickets from Newark to San Diego. The travel agent,
Margaret Mager, advised the couple that they cannot travel by train because it is fully booked; that they
must purchase plane tickets for Continental Airlines; that if they wont purchase plane tickets; theyll never
reach their destination in time. The couple believed Magers representations and so they purchased two
plane tickets worth $800.00.
Later however, the spouses found out that the train trip isnt fully booked and so they purchased train
tickets and went to their destination by train instead. Then they called up Mager to request for a refund for
the plane tickets. Mager referred the couple to Continental Airlines. As the couple are now in the
Philippines, they filed their request with Continental Airlines office in Ayala. The spouses Viloria alleged
that Mager misled them into believing that the only way to travel was by plane and so they were fooled
into buying expensive tickets.

Continental Airlines refused to refund the amount of the ticket and so the spouses sued the airline
company. In its defense, Continental Airlines claimed that the ticket sold to them by Mager is nonrefundable; that, if any, they are not bound by the misrepresentations of Mager because theres no
agency existing between Continental Airlines and Mager.
The trial court ruled in favor of spouses Viloria but the Court of Appeals reversed the ruling of the RTC.
ISSUE: Whether or not a contract of agency exists between Continental Airlines and Mager.
HELD: Yes. All the elements of agency are present, to wit:
1.

there is consent, express or implied of the parties to establish the relationship;

2.

the object is the execution of a juridical act in relation to a third person;

3.

the agent acts as a representative and not for himself, and

4.

the agent acts within the scope of his authority.

The first and second elements are present as Continental Airlines does not deny that it concluded an
agreement with Holiday Travel to which Mager is part of, whereby Holiday Travel would enter into
contracts of carriage with third persons on the airlines behalf. The third element is also present as it is
undisputed that Holiday Travel merely acted in a representative capacity and it is Continental Airlines and
not Holiday Travel who is bound by the contracts of carriage entered into by Holiday Travel on its behalf.
The fourth element is also present considering that Continental Airlines has not made any allegation that
Holiday Travel exceeded the authority that was granted to it.
Continental Airlines also never questioned the validity of the transaction between Mager and the spouses.
Continental Airlines is therefore in estoppels. Continental Airlines cannot be allowed to take an altogether
different position and deny that Holiday Travel is its agent without condoning or giving imprimatur to
whatever damage or prejudice that may result from such denial or retraction to Spouses Viloria, who
relied on good faith on Continental Airlines acts in recognition of Holiday Travels authority. Estoppel is
primarily based on the doctrine of good faith and the avoidance of harm that will befall an innocent party
due to its injurious reliance, the failure to apply it in this case would result in gross travesty of justice.
Pryce Corp v PAGCOR
FACTS
Pryce Corp made representations with PAGCOR on the possibility of setting up a casino in Pryce Plaza
Hotel in Cagayan de Oro City (CDO). Parties executed a contract of lease on November 11, 1992. The
contract had a term of 3 years beginning December 1, 1992 and ending on November 30, 1995. The
Sangguniang Panlungsod of CDO passed resolutions and ordinances prohibiting the establishment of a
gambling casino in the city. The court subsequently ruled that the ordinances were unconstitutional.
Despite the absence of legal obstacles, PAGCOR's operations were interrupted by demonstrations and
public rallies. PAGCOR decided to stop its operations upon advice from the Office of the President.
PAGCOR asked for a pre-termination of the contract and demanded a refund of the reimbursable rent
deposits from Pryce Corp. Pryce Corp is instead demanding damages pursuant to Art 20 of their contract.
ISSUE
Whether or not Pryce Corp is entitled to the claim of future rentals for the unexpired period of the contract
of lease.
RULING
The actions of the petitioner show that it never intended to rescind the lease contract, thus there is not
need to mutual restitution. There was termination and not rescission (resolution) of the contract.
Normally, Pryce Corp is not entitled to the collection of future rentals since the termination of the contract
releases PAGCOR from its obligations. But Pryce Corp can recover or claim rentals corresponding to the
remaining term of the lease pursuant to the contract's penal clause. Such stipulation is valid and since the
parties have voluntarily bound themselves to such compliance, the court has no choice but to enforce the
contract. However, the court reduced the penalty to Php687,289.50 since the original claim of
Php7,037,835.40 is highly iniquitous.
F.F. CRUZ & CO., INC vs. HR CONSTRUCTION CORP. March 14,2012
FACTS:
FFCCI entered into a contract with DPWH for the construction of the Magsaysay Viaduct. FFCCI, in turn,
entered into a Subcontract Agreement with HRCC for the supply of materials, labor, equipment, tools and
supervision for the construction of a portion of the said project. Pursuant to the Subcontract Agreement,
HRCC would submit to FFCCI a monthly progress billing which the latter would then pay within 30 days
from receipt thereof. The parties agreed that the requests of HRCC for payment should include progress
accomplishment of its completed works as approved by FFCCI. Eventually, FFCCI did not pay the amount
stated in the second and third progress billing, even though HRCC submitted its progress billins claiming

that it had already paid HRCC for the completed works for the period stated therein. HRCC demanded
payment but still was not paid so HRCC halted the construction of the subcontracted project.
ISSUE:
Whether FFCCIs non-compliance with their contract make HRCC rescission valid
RULING
NO, HRCC had waived its right to rescind the Subcontract agreement
The determination of the validity of HRCCs work stoppage depends on a determination of the following:
first, whether HRCC has the right to extrajudicially rescind the Subcontract Agreement; and second,
whether FFCCI is already barred from disputing the work stoppage of HRCC. HRCC had waived its right
to rescind the Subcontract Agreement.
The right of rescission is statutorily recognized in reciprocal obligations. Article 1191 of the Civil Code
pertinently reads:Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of
the obligors should not comply with what is incumbent upon him.The injured party may choose between
the fulfillment and the rescission of the obligation, with the payment of damages in either case. He may
also seek rescission, even after he has chosen fulfillment, if the latter should become impossible.
Contrary to the respective dispositions of the CIAC and the CA, we find that HRCC had no right to rescind
the Subcontract Agreement in the guise of a work stoppage, the latter having waived such right in its
Subcontract Agreement, Hence, in spite of the existence of dispute or controversy between the parties
during the course of the Subcontract Agreement, HRCC had agreed to continue the performance of its
obligations pursuant to the Subcontract Agreement. In view of the provision of the Subcontract Agreement
quoted above, HRCC is deemed to have effectively waived its right to effect extrajudicial rescission of its
contract with FFCCI.1wphi1 Accordingly, HRCC, in the guise of rescinding the Subcontract Agreement,
was not justified in implementing a work stoppage.
Case: Sacobia Hills Devt Corp. v. Ty, 470 SCRA 395, September 20, 2005
Prepared by: Leny Ignalaga
Facts: Petitioner Sacobia Hills Development Corporation (Sacobia) is the developer of True North Golf
and Country Club which boasts of amenities that include a golf course, clubhouse, sports complex and
several vacation villas. Respondent Allan U. Ty wrote to Sacobia a letter expressing his intention to
acquire one Class A share of True North and accordingly paid the reservation fee of P180,000.00 as
evidenced by PCI Bank Check No. 0038053. Sacobia assured its prospective shareholders that the
development of True North was proceeding on schedule; that the golf course would be playable by
October 1999; that the Environmental Clearance Certificate (ECC) by the Department of Environment and
Natural Resources (DENR) as well as the Permit to Sell from the Securities and Exchange Commission
(SEC) should have been released by October 1997; and that their registration deposits remained intact in
an escrow account. Sacobia then approved the purchase application and membership of Ty for
P600,000.00, subject to certain terms and conditions. The notice of approval provided the following:
Terms and Conditions
1.
Approval of an application to purchase golf/country club shares is subjected to the full payment of
the total purchase price. Should the buyer opt for the deferred payment scheme, approval is subject to
our receipt of a down payment of at least 30% and the balance payable in installments over a maximum
of eleven (11) months from the date of application, and covered by postdated cheques.
2.
Your reserved share shall be considered withdrawn and may be deemed cancelled should you fail
to settle your obligation within fifteen (15) days from due date, or failure to cover the value of the
postdated cheques upon their maturity, or your failure to issue the required postdated cheques. In which
case, we shall reserve the right to offer the said shares to other interested parties. This also means
forfeiture of 50% of the total amount you have already paid.
3.
We will undertake to execute the corresponding sales documents/ Deed of Absolute Sale covering
the reserved shares upon full payment of the total purchase price. The Certificate of Membership shall be
issued thereafter.
However, on January 12, 1998, Ty notified Sacobia that he is rescinding the contract and sought refund of
the payments already made due to the latters failure to complete the project on time as promised
(supposedly October 1997). Sacobia wrote him a letter, stating that the DENR had issued the required
ECC only on March 5, 1998, and that the golf course would be ready for use by end of 1998( in fact
ahead of promised date which is October 1999). Sacobia again wrote the respondent advising him that
the 18-hole golf course would be fully operational by summer of 1999. Sacobia also sought to collect from
respondent the latters outstanding balance of P190,909.08 which was covered by five (5) post dated
checks. However, Ty notified Sacobia that he had stopped payment on the five (5) post dated checks and

reiterated his demand for the refund of his payments which amounted to P409,090.92. Sacobia denied
his request thus Ty filed a complaint for rescission and damages.
Issue: Whether or not respondent Ty can rescind the contract and demand for damages from Sacobia
Hills for breach of contract
Held:
No, Ty cannot rescind the contract and demand for damages from Sacobia Hills for breach of contract
because the contract to sell between them has not yet been perfected for failure by Ty to pay the full
purchase price. The Supreme Court ruled as follows:
1. The terms of the agreement between Sacobia and Ty can be deduced, not on a formal document like a
deed of sale, but from a series of correspondence and acts signifying the parties intention to enter into a
contract. The absence of a formal deed of conveyance is a strong indication that Sacobia did not intend to
transfer title until respondent shall have completely complied with his correlative obligation of paying the
contact price.
2. In a Contract to Sell, the payment of the purchase price is a positive suspensive condition, the failure of
which is not a breach, casual or serious, but a situation that prevents the obligation of the vendor to
convey title from acquiring an obligatory force. It is one where the happening of the event gives rise to an
obligation. Thus, for its non-fulfillment there will be no contract to speak of, the obligor having failed to
perform the suspensive condition which enforces a juridical relation. In fact with this circumstance, there
can be no rescission of an obligation that is still non-existent, the suspensive condition not having
occurred as yet. Emphasis should be made that the breach contemplated in Article 1191 of the New Civil
Code is the obligors failure to comply with an obligation already extant, not a failure of a condition to
render binding that obligation.
3. Ty did not pay the full purchase price which is his obligation under the contract to sell, therefore, it
cannot be said that Sacobia breached its obligation. No obligations arose on its part because
respondents non-fulfillment of the suspensive condition rendered the contract to sell ineffective and
unperfected. Indeed, there can be no rescission under Article 1191of the Civil Code because until the
happening of the condition, i.e. full payment of the contract price, Sacobias obligation to deliver the title
and object of the sale is not yet extant. A non-existent obligation cannot be subject of rescission. Article
1191 speaks of obligations already existing, which may be rescinded in case one of the obligors fails to
comply with what is incumbent upon him.
4. In the present case, respondents failure to fulfill this suspensive condition prevented the perfection of
the contract to sell. With an ineffective contract, Ty had not acquired the status of a shareholder but
remained, at most, a prospective investor. In the absence of a juridical tie between the parties, Ty cannot
claim the rights and privileges accorded to Sacobias full-fledged members and shareowners, including
the full enjoyment of the amenities being offered. Unfortunately for Ty, he cannot avail of rescission as
envisioned by Article 1191 of the Civil Code. However, he can withdraw his investment subject to the
restrictions under the terms and conditions pertinent to a reneging investor.
5. Tys complaint for rescission of contract and damages in Civil Case No. 01-99696 is dismissed He
is ordered to pay to Sacobia Hills Development Corporation the amount of Pesos: One Hundred Ninety
Thousand Nine Hundred Nine and Eight Centavos (P190,909.08) without interest within thirty (30) days
from finality of this decision; otherwise, fifty percent (50%) of his total payments shall be forfeited.

VICELET LALICON AND VVICELEN LALICON, PETITIONERS, VS. NATIONAL HOUSING

AUTHORITY, RESPONDENT.
July 13, 2011
ABAD, J.:
In November 25, 1980 the National Housing Authority (NHA) executed a Deed of Sale with Mortgage over
a Quezon City lot in favor of the spouses Isidro and Flaviana Alfaro (the Alfaros). The deed of sale
provided, among others, that the Alfaros could sell the land within five years from the date of its release
from mortgage without NHAs prior written consent. Thus:
x xx. 5. Except by hereditary succession, the lot herein sold and conveyed, or any part thereof,
cannot be alienated, transferred or encumbered within five (5) years from the date of release of herein
mortgage without the prior written consent and authority from the VENDOR-MORTGAGEE (NHA). x xx.
The mortgage and the restriction on sale were annotated on the Alfaros title on April 14, 1981.
About nine years later or on November 30, 1990, while the mortgage on the land subsisted, the Alfaros
sold the same to their son, Victor Alfaro, who had taken in a common-law wife, Cecilia, with whom he had
two daughters, petitioners Vicelet and VicelenLalicon (the Lalicons). Cecilia, who had the means, had a
house built on the property and paid for the amortizations. After full payment of the loan or on March 21,
1991 the NHA released the mortgage. Six days later or on March 27 Victor transferred ownership of the
land to his illegitimate daughters.
About four and a half years after the release of the mortgage or on October 4, 1995, Victor registered the
November 30, 1990 sale of the land in his favor, resulting in the cancellation of his parents title. On
December 14, 1995 Victor mortgaged the land to Marcela Lao Chua, Rosa Sy, Amparo Ong, and Ida See.
Subsequently, on February 14, 1997 Victor sold the property to Chua, one of the mortgagees, resulting in
the cancellation of his TCT 140646 and the issuance of TCT N-172342 in Chuas name.

A year later or on April 10, 1998 the NHA instituted a case before the Quezon City Regional Trial Court
(RTC) for the annulment of the NHAs 1980 sale of the land to the Alfaros, the latters 1990 sale of the
land to their son Victor, and the subsequent sale of the same to Chua, made in violation of NHA rules and
regulations.
On February 12, 2004 the RTC rendered a decision in the case. It ruled that, although the Alfaros clearly
violated the five-year prohibition, the NHA could no longer rescind its sale to them since its right to do so
had already prescribed, applying Article 1389 of the New Civil Code.
Issue:
Whether or not the period to rescind the same has already prescribed.
Ruling:
Invoking the RTC ruling, the Lalicons claim that under Article 1389 of the Civil Code the action to claim
rescission must be commenced within four years from the time of the commission of the cause for it.
But an action for rescission can proceed from either Article 1191 or Article 1381. It has been held that
Article 1191 speaks of rescission in reciprocal obligations within the context of Article 1124 of the Old Civil
Code which uses the term resolution. Resolution applies only to reciprocal obligations such that a
breach on the part of one party constitutes an implied resolutory condition which entitles the other party to
rescission. Resolution grants the injured party the option to pursue, as principal actions, either a
rescission or specific performance of the obligation, with payment of damages in either case.
Rescission under Article 1381, on the other hand, was taken from Article 1291 of the Old Civil Code,
which is a subsidiary action, not based on a partys breach of obligation. The four-year prescriptive period
provided in Article 1389 applies to rescissions under Article 1381..
Here, the NHA sought annulment of the Alfaros sale to Victor because they violated the five-year
restriction against such sale provided in their contract. Thus, the CA correctly ruled that such violation
comes under Article 1191 where the applicable prescriptive period is that provided in Article 1144 which is
10 years from the time the right of action accrues. The NHAs right of action accrued on February 18,
1992 when it learned of the Alfaros forbidden sale of the property to Victor. Since the NHA filed its action
for annulment of sale on April 10, 1998, it did so well within the 10-year prescriptive period.
Lastly, since mutual restitution is required in cases involving rescission under Article 1191, the NHA must
return the full amount of the amortizations it received for the property, plus the value of the improvements
introduced on the same, with 6% interest per annum from the time of the finality of this judgment. The
Court will no longer dwell on the matter as to who has a better right to receive the amount from the NHA:
the Lalicons, who paid the amortizations and occupied the property, or Chua, who bought the subject lot
from Victor and obtained for herself a title to the same, as this matter was not raised as one of the issues
in this case. Chuas appeal to the Court in a separate case having been denied due course and NHA
failing to file its own petition for review, the CA decision ordering the restitution in favor of the Lalicons has
now become final and binding against them.

SECOND DIVISION
CRISANTA ALCARAZ MIGUEL vs JERRY D. MONTANEZ,
G.R. No. 191336 January 25, 2012
DECISION
REYES, J.:
Before this Court is a Petition for Review on Certiorari under Rule 45 of the Rules of Court.
Petitioner Crisanta Alcaraz Miguel (Miguel) seeks the reversal and setting aside of the September 17,
2009 Decision[1] and February 11, 2010 Resolution [2] of the Court of Appeals (CA) in CA-G.R. SP No.
100544, entitled Jerry D. Montanez v. Crisanta Alcaraz Miguel.
Antecedent Facts
On February 1, 2001, respondent Jerry Montanez (Montanez) secured a loan of One Hundred
Forty-Three Thousand Eight Hundred Sixty-Four Pesos (P143,864.00), payable in one (1) year, or until
February 1, 2002, from the petitioner. The respondent gave as collateral therefor his house and lot
located at Block 39 Lot 39 Phase 3, Palmera Spring, Bagumbong, Caloocan City.
Due to the respondents failure to pay the loan, the petitioner filed a complaint against the
respondent before the Lupong Tagapamayapa of Barangay San Jose, Rodriguez, Rizal. The parties
entered into a Kasunduang Pag-aayos wherein the respondent agreed to pay his loan in installments in
the amount of Two Thousand Pesos (P2,000.00) per month, and in the event the house and lot given as
collateral is sold, the respondent would settle the balance of the loan in full. However, the respondent still
failed to pay, and on December 13, 2004, the Lupong Tagapamayapa issued a certification to file action in
court in favor of the petitioner.

On April 7, 2005, the petitioner filed before the Metropolitan Trial Court (MeTC) of Makati City,
Branch 66, a complaint for Collection of Sum of Money. In his Answer with Counterclaim, [3] the respondent
raised the defense of improper venue considering that the petitioner was a resident of
Bagumbong, Caloocan City while he lived in San Mateo, Rizal.
After trial, on August 16, 2006, the MeTC rendered a Decision, [4] which disposes as follows:
WHEREFORE, premises considered[,] judgment is hereby rendered ordering
defendant Jerry D. Montanez to pay plaintiff the following:
1. The amount of [Php147,893.00] representing the obligation with legal
rate of interest from February 1, 2002 which was the date of the
loan maturity until the account is fully paid;
2. The amount of Php10,000.00 as and by way of attorneys fees; and
the costs.
SO ORDERED. [5]
On appeal to the Regional Trial Court (RTC) of Makati City, Branch 146, the respondent raised
the same issues cited in his Answer. In its March 14, 2007 Decision, [6] the RTC affirmed the MeTC
Decision, disposing as follows:
WHEREFORE, finding no cogent reason to disturb the findings of the court a
quo, the appeal is hereby DISMISSED, and the DECISION appealed from is hereby
AFFIRMED in its entirety for being in accordance with law and evidence.
SO ORDERED.[7]
Dissatisfied, the respondent appealed to the CA raising two issues, namely, (1) whether or not
venue was improperly laid, and (2) whether or not theKasunduang Pag-aayos effectively novated the loan
agreement. On September 17, 2009, the CA rendered the assailed Decision, disposing as follows:
WHEREFORE, premises considered, the petition is hereby GRANTED. The
appealed Decision dated March 14, 2007 of the Regional Trial Court (RTC)
of Makati City, Branch 146, is REVERSED and SET ASIDE. A new judgment is entered
dismissing respondents complaint for collection of sum of money, without prejudice to her
right to file the necessary action to enforce the Kasunduang Pag-aayos.
SO ORDERED.[8]
Anent
the
issue
of
whether
or
not
there
contract, the CA ruled in the negative. It ratiocinated as follows:

is

novation

of

the

loan

Judging from the terms of the Kasunduang Pag-aayos, it is clear that no novation
of the old obligation has taken place. Contrary to petitioners assertion, there was no
reduction of the term or period originally stipulated. The original period in the first
agreement is one (1) year to be counted from February 1, 2001, or until January 31,
2002. When the complaint was filed before the barangay on February 2003, the period of
the original agreement had long expired without compliance on the part of petitioner.
Hence, there was nothing to reduce or extend. There was only a change in the terms of
payment which is not incompatible with the old agreement. In other words,
the Kasunduang Pag-aayos merely supplemented the old agreement.[9]
The CA went on saying that since the parties entered into a Kasunduang Pag-aayos before
the Lupon ng Barangay, such settlement has the force and effect of a court judgment, which may be
enforced by execution within six (6) months from the date of settlement by the Lupon ng Barangay, or by
court action after the lapse of such time. [10] Considering that more than six (6) months had elapsed from
the date of settlement, the CA ruled that the remedy of the petitioner was to file an action for the execution
of the Kasunduang Pag-aayos in court and not for collection of sum of money.[11] Consequently, the CA
deemed it unnecessary to resolve the issue on venue. [12]
The petitioner now comes to this Court.

Issues
(1) Whether or not a complaint for sum of money is the proper remedy for the petitioner,
notwithstanding the Kasunduang Pag-aayos;[13] and
(2) Whether or not the CA should have decided the case
rather than remand the case for the enforcement of the Kasunduang Pag-aayos.[14]

on

the

merits

Our Ruling
Because the respondent failed to comply with the terms of the Kasunduang Pag-aayos, said
agreement is deemed rescinded pursuant to Article 2041 of the New Civil Code and the petitioner
can insist on his original demand. Perforce, the complaint for collection of sum of money is the
proper remedy.
The petitioner contends that the CA erred in ruling that she should have followed the procedure
for enforcement of the amicable settlement as provided in theRevised Katarungang Pambarangay Law,
instead of filing a collection case. The petitioner points out that the cause of action did not arise from
the Kasunduang Pag-aayos but on the respondents breach of the original loan agreement. [15]
This Court agrees with the petitioner.
It is true that an amicable settlement reached at the barangay conciliation proceedings, like
the Kasunduang Pag-aayos in this case, is binding between the contracting parties and, upon its
perfection, is immediately executory insofar as it is not contrary to law, good morals, good
customs, public order and public policy.[16] This is in accord with the broad precept of Article 2037 of the
Civil Code, viz:
A compromise has upon the parties the effect and authority of res judicata; but
there shall be no execution except in compliance with a judicial compromise.
Being a by-product of mutual concessions and good faith of the parties, an amicable settlement
has the force and effect of res judicata even if not judicially approved.[17] It transcends being a mere
contract binding only upon the parties thereto, and is akin to a judgment that is subject to execution in
accordance with the Rules.[18] Thus, under Section 417 of the Local Government Code, [19] such amicable
settlement or arbitration award may be enforced by execution by the Barangay Lupon within six (6)
months from the date of settlement, or by filing an action to enforce such settlement in the appropriate city
or municipal court, if beyond the six-month period.
Under the first remedy, the proceedings are covered by the Local Government Code and
the Katarungang Pambarangay Implementing Rules and Regulations. The Punong Barangay is called
upon during the hearing to determine solely the fact of non-compliance of the terms of the settlement and
to give the defaulting party another chance at voluntarily complying with his obligation under the
settlement. Under the second remedy, the proceedings are governed by the Rules of Court, as amended.
The cause of action is the amicable settlement itself, which, by operation of law, has the force and effect
of a final judgment.[20]
It must be emphasized, however, that enforcement by execution of the amicable settlement, either
under the first or the second remedy, is only applicable if the contracting parties have not repudiated such
settlement within ten (10) days from the date thereof in accordance with Section 416 of the Local
Government Code. If the amicable settlement is repudiated by one party, either expressly or impliedly, the
other party has two options, namely, to enforce the compromise in accordance with the Local Government
Code or Rules of Court as the case may be, or to consider it rescinded and insist upon his original
demand. This is in accord with Article 2041 of the Civil Code, which qualifies the broad application of
Article 2037, viz:
If one of the parties fails or refuses to abide by the compromise, the other party
may either enforce the compromise or regard it as rescinded and insist upon his original
demand.
In the case of Leonor v. Sycip,[21] the Supreme Court (SC) had the occasion to explain this
provision of law. It ruled that Article 2041 does not require an action for rescission, and the aggrieved
party, by the breach of compromise agreement, may just consider it already rescinded, to wit:

It is worthy of notice, in this connection, that, unlike Article 2039 of the same
Code, which speaks of "a cause of annulment or rescission of the compromise" and
provides that "the compromise may be annulled or rescinded" for the cause therein
specified, thus suggesting an action for annulment or rescission, said Article 2041 confers
upon the party concerned, not a "cause" for rescission, or the right to "demand" the
rescission of a compromise, but the authority, not only to "regard it as
rescinded", but, also, to "insist upon his original demand". The language of this Article
2041, particularly when contrasted with that of Article 2039, denotes that no action
for rescission is required in said Article 2041, and that the party aggrieved by the
breach of a compromise agreement may, if he chooses, bring the suit
contemplated or involved in his original demand, as if there had never been any
compromise agreement, without bringing an action for rescission thereof. He need
not seek a judicial declaration of rescission, for he may "regard" the compromise
agreement already "rescinded".[22] (emphasis supplied)
As so well stated in the case of Chavez v. Court of Appeals,[23] a party's non-compliance with the
amicable settlement paved the way for the application of Article 2041 under which the other party may
either enforce the compromise, following the procedure laid out in the Revised Katarungang
Pambarangay Law, or consider it as rescinded and insist upon his original demand. To quote:
In the case at bar, the Revised Katarungang Pambarangay Law provides for a
two-tiered mode of enforcement of an amicable settlement, to wit: (a) by execution by
the Punong Barangay which is quasi-judicial and summary in nature on mere motion of
the party entitled thereto; and (b) an action in regular form, which remedy is judicial.
However, the mode of enforcement does not rule out the right of rescission under Art.
2041 of the Civil Code. The availability of the right of rescission is apparent from the
wording of Sec. 417 itself which provides that the amicable settlement "may" be enforced
by execution by the lupon within six (6) months from its date or by action in the
appropriate city or municipal court, if beyond that period. The use of the word "may"
clearly makes the procedure provided in the Revised Katarungang Pambarangay
Law directory or merely optional in nature.
Thus, although the "Kasunduan" executed by petitioner and respondent
before the Office of the Barangay Captain had the force and effect of a final
judgment of a court, petitioner's non-compliance paved the way for the application
of Art. 2041 under which respondent may either enforce the compromise, following
the procedure laid out in the Revised Katarungang Pambarangay Law, or regard it
as rescinded and insist upon his original demand. Respondent chose the latter
option when he instituted Civil Case No. 5139-V-97 for recovery of unrealized
profits and reimbursement of advance rentals, moral and exemplary damages, and
attorney's fees. Respondent was not limited to claiming P150,000.00 because although
he agreed to the amount in the "Kasunduan," it is axiomatic that a compromise settlement
is not an admission of liability but merely a recognition that there is a dispute and an
impending litigation which the parties hope to prevent by making reciprocal concessions,
adjusting their respective positions in the hope of gaining balanced by the danger of
losing. Under the "Kasunduan," respondent was only required to execute a waiver of all
possible claims arising from the lease contract if petitioner fully complies with his
obligations thereunder. It is undisputed that herein petitioner did not. [24] (emphasis
supplied and citations omitted)
In the instant case, the respondent did not comply with the terms and conditions of
the Kasunduang Pag-aayos. Such non-compliance may be construed as repudiation because it denotes
that the respondent did not intend to be bound by the terms thereof, thereby negating the very purpose for
which it was executed. Perforce, the petitioner has the option either to enforce the Kasunduang Pagaayos, or to regard it as rescinded and insist upon his original demand, in accordance with the provision of
Article 2041 of the Civil Code. Having instituted an action for collection of sum of money, the petitioner
obviously chose to rescind theKasunduang Pag-aayos. As such, it is error on the part of the CA to rule
that enforcement by execution of said agreement is the appropriate remedy under the circumstances.
Considering that the Kasunduang Pag-aayos is deemed rescinded by the non-compliance of the
respondent of the terms thereof, remanding the case to the trial court for the enforcement of said
agreement is clearly unwarranted.
The petitioner avers that the CA erred in remanding the case to the
trial court for the enforcement of the Kasunduang Pag-aayos as it prolonged the process, thereby putting

off the case in an indefinite pendency. [25] Thus, the petitioner insists that she should be allowed to
ventilate her rights before this Court and not to repeat the same proceedings just to comply with the
enforcement of theKasunduang Pag-aayos, in order to finally enforce her right to payment. [26]
The CA took off on the wrong premise that enforcement of the Kasunduang Pag-aayos is the
proper remedy, and therefore erred in its conclusion that the case should be remanded to the trial court.
The fact that the petitioner opted to rescind the Kasunduang Pag-aayos means that she is insisting upon
the undertaking of the respondent under the original loan contract. Thus, the CA should have decided the
case on the merits, as an appeal before it, and not prolong the determination of the issues by remanding it
to the trial court. Pertinently, evidence abounds that the respondent has failed to comply with his loan
obligation. In fact, the Kasunduang Pag-aayos is the well nigh incontrovertible proof of the respondents
indebtedness with the petitioner as it was executed precisely to give the respondent a second chance to
make good on his undertaking. And since the respondent still reneged in paying his indebtedness, justice
demands that he must be held answerable therefor.
WHEREFORE, the petition is GRANTED. The assailed decision of the Court of Appeals is SET
ASIDE and the Decision of the Regional Trial Court, Branch 146, Makati City, dated March 14, 2007
is REINSTATED.