University of the Philippines

COLLEGE OF LAW
Obligations & Contracts | Professor Tan
Block F2021

Topic Reciprocal Obligations

Action for Rescission
Case G.R. No.47206
No.
Case De Erquiaga, petitioner,
Name vs.
Honorable Court of Appeals, respondent
Ponente Grio-Aquino, J.

RELEVANT FACTS
On November 4, 1968, Santiago de Erquiaga (Erquiaga), owner of 100%
(3,100 paid-up stock shares) of Erquiaga Development Corporation (EDC)
which owns Hacienda San Jose in Irosin, Sorsogon entered into an Agreement
with Jose L. Reynoso (Reynoso) to sell to the latter the 3,100 shares for
P900,000 payable in installments on definite fixed dates in the contract but
should not be later than November 30, 1968.
The price of sale was increased to P971,371.70 payable on or before
December 17, 1969 due to the fact that Reynoso failed to pay the second and
third installments on time. The difference of 71,371.70 from original price
represented brokers commission and interest.
As of December 17, 1968, Reynoso had paid a sum total of P410,000 to
Erquiaga who then transferred all the shares in his possession to the the
former, including possession of Hacienda San Jose which was the sole asset of
EDC. In the contract of sale however Reynoso pledged 1,500 of the shares in
favor of Erquiaga as security for his outstanding balance.
As of December 17, 1969, Reynoso failed to pay his balance of P561, 321.70
as was provided in his promissory note to Erquiaga.
In view of Reynosos failure to pay his outstanding balance, Erquiaga
informed Reynoso of his decision to rescind the sale of his shares in EDC on
March 2, 1970.
The issue between the parties was brought up in the CFI of Sorsogon which
after deciding the merits of the trial, rendered its decision to rescind the sale
fo 3,100 shares of EDC between the parties and ordered (on September 30,
1972):
o Reynoso, as defendant to:
Return and reconvey to Erquiaga the 3,100 shares of stock of
EDC;
To render full accounting of the fruits received through the
shares of stock and to return said fruits received by him to
Erquiaga;
To pay actual damages in the amount of P12,000, attorneys
fees of P50,000 to Erquiaga and to pay for the costs of the suit
and expenses of the litigation.
 o Erquiaga, as plaintiff to:
Return to Reynoso the amounts of P100,000 plus legal interests
from November 4, 1968 and P310,000 plus legal interest from
December 17, 1968 until paid.
On March 21, 1973, the CFI issued an order, relevant provisions of which
provided that Erquiagas return of the P410,000 total plus interests to
Reynoso should be put on hold until the accounting of fruits received by the
latter on behalf of the 3,100 shares be rendered. The lower court, in this
Order, likewise stated that the fruits referred to, due to Erquiaga from
Reynoso, must be understood as referring not only to the dividends received
on the 3,100 shares of stocks but more particularly the products received
from the Hacienda as the sole asset of EDC.
In the same Order, the Sorsogon CFI appointed a receiver upon the filing of a
P100,000 bond on grounds that Erquiaga had produced sufficient and
justifiable reason to preserve the Hacienda which had been mismanaged by
Reynoso to the point where arrears in the payment of amortization with the
DBP had risen to amount of P503,510.70 as of October 19, 1972 presenting
danger of foreclosure proceedings.
On April 26, 1973, defendant Reynoso died after which he was substituted by
his surviving spouse and children as party defendants.
On June 28, 1973, the CA dismissed petition for certiorari with writ of
preliminary injunction filed by defendants seeking annulment of the CFI
Order. The defendants sought to bring their appeal to the SC which was
likewise denied by said tribunal in a Resolution dated Fenruary 5, 1974.
A second Order was issued by the Sorsogon CFI on February 12, 1975, upon
motion of Erquiaga dissolving the receivership of March 21, 1973 and
ordering delivery of possession of the Hacienda to Erquiaga. The P410,000
bond filed by Erquiaga conditioned the payment of whatever may be due to
substituted heirs of Reynoso after approval of accounting report due from the
latter. The Order further directed Reynoso to allow counsel for Erquiaga to
inspect copy and photograph documents related to accounting report.
On March 3, 1975, CFI approved the bond submitted by Erquiaga and the
possession of the hacienda was turned over to the latter.
On the same date, the hacienda was returned to Erquiaga upon the approval
of his surety bond of P410,000 in favor of Reynoso.
On June 23, 1975, the Sorsogon CFI denied the motion of reconsideration filed
by Reynosos.
The Sorsogon CFI, on October 29,1975 issued an order which stated:
o That Reynosos, as defendants are ordered to turn over in the
possession of Erquiaga the 1,600 shares within 5 days from receipt of
the Order and that in the event of refusal or delay in compliance with
such order, relevant provisions of which authorizes plaintiff Erquiaga
to:
Call and hold a special meeting of EDC to elect Board Members;
That in said meeting, he is authorized to vote in his name the
untransferred 1,600 shares;
Exercise his discretion in on the question as to who shall be
elected Members of the Board;
 o The said Order likewise denied the reimbursement of purchase price of
the stocks paid by Reynoso in the amount of P410,000 with interests
and setting off the damages and attorneys fees due from Reynosos
from that said amount.
The defendant Reynosos then brought their appeal to the CA on account of
the issued Order of October 29, 1975 by the Sorsogon CFI for certiorari,
prohibition and mandamus.
On May 31, 1976, the CA rendered its judgment holding that CFI of Sorsogon,
in its issued Order of October 29, 1975, acted with grave abuse of discretion
and or in excess of jurisdiction insofar as it granted Erquiaga voting rights on
the 3,100 shares of stock without first divesting the right over said shares
from the Reynosos pursuant to Section 10, Rule 39 of the Revised Rules of
Court (RRC), authority to call for meeting and elect Board Members and
refusing to order reimbursement to Reynosos of paid price of purchase for
stocks in the original agreement.
In view of the findings of CA, it then ordered writ of certiorari and prohibition
against Orders of CFI which were found to be grave abuse of discretion on the
part of the lower court. It likewise issued a writ of mandamus to compel
respondent Judge to order execution of necessary deed of conveyance to
effect valid transfer of the shares in case of failure of Reynosos to deliver the
same to Erquiaga within 5 days from receipt of this Order and to order writ of
execution to pay Reynosos the P410,000 with interests on the part of
Erquiaga upon the formers compliance with their obligation to deliver the
shares of stocks to the latter. This Order likewise included the set-off of the
P62,000 of damages and attoneys fees in favor of Erquiaga by deducting the
amount from the P410,000 Erquiaga is obligated to return to Reynoso.
Erquiaga, after CAs decision, brought the case to the Supreme Court (SC) on
petition for review raising certain issues.
ISSUES
The primary issue in relation to the course topic of Reciprocal Obligations,
particularly the action for rescission is Issue No. 3.
1. W/N CA erred in ordering entry of its judgment
2. W/N CA erroneously applied the Corporation Law
3. W/N CA violated the law of the case and Article 1385 of the Civil
Code by ordering Erquiaga to pay the Reynosos the sum of P410,000
plus interests before the rendering of accounts of the fruits of the
hacienda which the Reynosos have the obligation to deliver
RATIO DECIDENDI

ISSUE RATIO
1. W/N CA erred Yes.
in ordering
entry of its The SC ruled, concerning this issue, that CAs entry of
judgment judgment was improvident because respondent court, in
its Resolution, suspended the proceedings before it
pending the parties settlement negotiations as prayed for
in a joint motion by both parties. Without giving both
parties an ultimatum or setting a deadline for the parties
compromise agreement, CA issued a Resolution ordering
 the Judgment Section of the Court to enter final judgment
in the case.

2. W/N CA No.
erroneously
applied the The SC held that there is no reversible error committed by
Corporation the CA insofar as the application of the provisions of the
Law Corporation Law is concerned in its order to direct the
clerk of trial court to execute a deed of conveyance to
Erquiaga of the 1,600 shares still in Reynosos
name/possession in accordance with Section 10, Rule 30
of the RRC. Furthermore, the SC upheld the CAs decision
to nullify CFIs Order regarding transfer of voting rights
and other rights connected to the owning of shares to
Erquiaga preceding an effective and valid transfer of the
same by registering them in his name. The fundamental
rule in Corporation Law is that a stockholder only
acquires voting rights when the shares of stock to
be voted are registered in his name in the
corporate books. This is so that the transferee may be
enabled to exercise all rights of a stockholder and to
inform the corporation of any change in share ownership
so that it may ascertain persons entitled to rights and
subject to liabilities of a stockholder.
3. W/N CA No.
violated the
law of the The SC ruled that CA order to Erquiaga to return the
case and amount of P410,000 (or net P348,000 after deducting the
Article 1385 P62,000 of damages and attorneys fees due from
of the Civil Reynoso) with legal rate of interests, and the return of the
Code by 3,100 shares with fruits (dividends and fruits of haciendas
ordering products) is in full accord with Article 1385 of the Civil
Erquiaga to Code. The relevant provision of the subject article in
pay the relation with this case provides that rescission creates
Reynosos the obligation to return the things which were the
the sum of object(s) of the contract, together with their fruits
P410,000 and the price with its interest; consequently, it can
plus be carried out only when he who demands
interests rescission can return whatever he may be obliged
before the to restore. The SC, in noting the facts that 1,500 of the
rendering of shares and the Hacienda San Jose had already been
accounts of returned to Erquiaga, therefore, upon conveyance to him
the fruits of of the remaining 1,600 shares, he is obligated to return to
 the hacienda Reynoso the price with which he had paid to purchase the
which the shares.
Reynosos
have the The SC rules that there must be a simultaneous mutual
obligation to restitution of the principal object and the
deliver consideration paid and that this restitution should
NOT await the mutual restitution of the fruits, the
dividends and fruits of product of haciendas as well
as interest on the price paid. The SC modifies the
decision of the CA however, insofar as the fruits of the
object of the obligation and consideration of the same are
concerned. It ruled that since Reynoso had not yet
submitted the accounting for the fruits of the principal
object, Erquiaga must not yet be compelled to pay to the
former the interest of the sum paid for purchase of the
shares.

RULING
In view of the SCs judgments on the issues raised in the instant case, it granted the
petition for review raised by plaintiff De Erquiaga, administratix of the estate of the
late Santiago De Erquiaga, affirming the decision of the CA in all other respects save
the modifications on the payment of the interest on the P410,000 due on the part of
Erquiaga to pay Reynoso, that such obligation to pay such interest would only arise
from the time of submission or reporting of the accounting of the fruits of the
hacienda by Reynoso.
NO SEPARATE OPINIONS