796 Phil. 79
LEONEN, J.:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendant ordering the latter to:Pilhino then appealed before the Court of Appeals.SO ORDERED.[23]
- Pay the plaintiff in liquidated damages a[t] the rate of 1/10 of 1% of the total contract price of Php 5,800,000.00 for each day of delay commencing from June 19, 1998.
- Pay the plaintiff exemplary damages in the amount of Php 100,00[0].00.
- That the contract be declared rescinded and the performance bond posted by the defendant be forfeited in favor of the plaintiff.
- For defendant to pay the cost of the suit.
[P]lease allow us to submit our new proposal for your consideration (please see attached specifications). Our price for this new specification if P3,600,000.00/unit. However, we are willing to shoulder the difference between the original price of P2,900,000.00/unit and P3,600,000.00 in lieu of the penalty. May we also request your good office to stop the accumulation of the penalty [.][28]In calibrating the amount of liquidated damages, the Court of Appeals cited Articles 1229[29] and 2227[30] of the Civil Code. It reasoned that through its March 29, 1999 letter, Pilhino made an attempt at rectification or mitigation:
In the instant case, we consider the supervening reality that after appellant's failure to deliver to appellee the two (2) brand new units of fire trucks in accordance with the specifications previously agreed upon, appellant nevertheless tried to remedy the situation by offering to appellee new specifications at P3,600,000.00 per unit; and expressed willingness to shoulder the difference between the original price (based on the contract) of P2,900,000.00 per unit and the price corresponding to the new specifications. Further, it is undisputed that appellee has not paid any amount to appellant in connection with said undelivered two (2) brand new units of fire trucks. We thus equitably reduce said liquidated damages to P1,400,000.00, which is the difference between the contract price of P5,800,000.00 and P7,200,000.00 based on the new specifications for two (2) new units of fire trucks.[31]The Philippine Economic Zone Authority moved for reconsideration of the modifications to the Regional Trial Court's award. As this Motion was denied in the Court of Appeals' assailed November 25, 2008 Resolution,[32] the Philippine Economic Zone Authority filed the present Petition.
Whether or not a contract can be rescinded and declared void ab initio, and then thus rescinded, can a stipulation for liquidated damages or penalty contained in that very same contract be given separate life, force and effect, that is, separate and distinct from the rescinded and voided contract itself?[40]Therefore, respondent suggests that with the rescission of its contract with petitioner must have come the negation of the contractual stipulation on liquidated damages and the obliteration of its liability for such liquidated damages.[41]
Article 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.Respondent correctly notes that rescission under Article 1911 results in mutual restitution. Jurisprudence has long settled that the restoration of the contracting parties to their original state is the very essence of rescission. In Spouses Velarde:
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.
The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period.
This is understood to be without prejudice to the rights of third persons who have acquired the thing, in accordance with articles 1385 and 1388 and the Mortgage Law. (Emphasis supplied)
Considering that the rescission of the contract is based on Article 1191 of the Civil Code, mutual restitution is required to bring back the parties to their original situation prior to the inception of the contract. Accordingly, the initial payment of P800,000 and the corresponding mortgage payments . . . should be returned by private respondents, lest the latter unjustly enrich themselves at the expense of the former.Laperal v. Solid Homes, Inc.[46] has explained how the restitution spoken of in rescission under Article 1385 of the Civil Code equally holds true for rescission under Article 1191 of the Civil Code:
Rescission creates the obligation to return the object of the contract. It can be carried out only when the one who demands rescission can return whatever he may be obliged to restore. To rescind is to declare a contract void at its inception and to put an end to it as though it never was. It is not merely to terminate it and release the parties from further obligations to each other, but to abrogate it from the beginning and restore the parties to their relative positions as if no contract has been made.[45] (Citations omitted)
Despite the fact that Article 1124 of the old Civil Code from whence Article 1191 was taken, used the term "resolution", the amendment thereto (presently, Article 1191) explicitly and clearly used the term "rescission". Unless Article 1191 is subsequently amended to revert back to the term "resolution", this Court has no alternative but to apply the law, as it is written.Contrary to respondent's assertion, mutual restitution under Article 1191 is, however, no license for the negation of contractually stipulated liquidated damages.
Again, since Article 1385 of the Civil Code expressly and clearly states that "rescission creates the obligation to return the things which were the object of the contract, together with their fruits, and the price with its interest," the Court finds no justification to sustain petitioners' position that said Article 1385 does not apply to rescission under Article 1191.
In Palay, Inc. vs. Clave, this Court applied Article 1385 in a case involving "resolution" under Article 1191, thus:Regarding the second issue on refund of the installment payments made by private respondent. Article 1385 of the Civil Code provides:Applying the clear language of the law and the consistent jurisprudence on the matter, therefore, the Court rules that rescission under Article 1191 in the present case, carries with it the corresponding obligation of restitution.[47] (Citations omitted)"ART. 1385. Rescission creates the obligation to return the things which were the object of the contract, together with their fruits, and the price with its interest; consequently, it can be carried out only when he who demands rescission can return whatever he may be obliged to restore.As a consequence of the resolution by petitioners, rights to the lot should be restored to private respondent or the same should be replaced by another acceptable lot. However, considering that the property had already been sold to a third person and there is no evidence on record that other lots are still available, private respondent is entitled to the refund of installments paid plus interest at the legal rate of 12% computed from the date of the institution of the action. It would be most inequitable if petitioners were to be allowed to retain private respondent's payments and at the same time appropriate the proceeds of the second sale to another.
"Neither shall rescission take place when the things which are the object of the contract are legally in the possession of third persons who did not act in bad faith.
"In this case, indemnity for damages may be demanded from the person causing the loss."
This notwithstanding, the Court does not agree with the Court of Appeals that, as a consequence of the obligation of mutual restitution in this case, petitioners should return the amount of P5,200,833.27 to respondent.We see no reason for departing from this. It is true that Laperal involved extrajudicial rescission, while this case involves rescission through judicial action. The distinction between judicial and extrajudicial rescission is in how extrajudicial rescission is possible only when the contract has an express stipulation to that effect.[50] This distinction does not diminish the rights of a contracting party under Article 1191 of the Civil Code and is immaterial for purposes of the availability of liquidated damages.
Article 1191 states that "the injured party may choose between fulfillment and rescission of the obligation, with the payment of damages in either case." In other words, while petitioners are indeed obliged to return the said amount to respondent under Article 1385, assuming said figure is correct, respondent is at the same time liable to petitioners in the same amount as liquidated damages by virtue of the forfeiture/penalty clause as freely stipulated upon by the parties in the Addendum, paragraphs 1 and 2 of which respectively read:WHEREAS, included as part of said agreement are the following:If this Court recognized the right of the parties to stipulate on an extrajudicial rescission under Article 1191, there is no reason why this Court will not allow the parties to stipulate on the matter of damages in case of such rescission under Book IV, Title VIII, Chapter 3, Section 2 of the Civil Code governing liquidated damages.[49] (Citations omitted)
1. Further to the stipulations on paragraph 10, upon default of performances, violations and/or non-compliance with the terms and conditions herein agreed upon by the DEVELOPER wherein it appears that the DEVELOPER deliberately abandoned or discontinued the work on the project, said party shall lose any entitlement, if any, to any refund and/or advances it may have incurred in connection with or relative to previous development works in the subdivision; likewise, all improvements of whatever nature and kind introduced by the DEVELOPER on the property, existing as of the date of default or violation, shall automatically belong to the OWNER without obligation on his part to pay for the costs thereof.
2. Similarly with the same condition of default or violation obtaining, as stated in paragraph 10 of said agreement, all advances made and remittances of proceeds from reservations and sales given by the DEVELOPER to the OWNER as provided for in this agreement shall be deemed absolutely forfeited in favor of the OWNER, resulting to waiver of DEVELOPER'S rights, if any, with respect to said amount(s).
1. With the increase in the number of locator-enterprises at the regular zones, there is a need for additional units of fire trucks to address any eventuality. The onset of the El NiƱo phenomena further makes it imperative that PEZA be more prepared.The Court of Appeals itself recognized that "time was of the essence when the contract . . . was awarded to [respondent] and the non-compliance therewith exposed [petitioner's] operations [at] risk."[53]
2. At present, there are only six (6) units of serviceable fire trucks distributed as follows:Bataan EZ 2
Baguio City EZ 1
Cavite EZ 1
Mactan EZ 2[52] (Emphasis supplied)
An essential element of a publicly bidded contract is that all bidders must be on equal footing. Not simply in terms of application of the procedural rules and regulations imposed by the relevant government agency, but more importantly, on the contract bidded upon. Each bidder must be able to bid on the same thing. The rationale is obvious. If the winning bidder is allowed to later include or modify certain provisions in the contract awarded such that the contract is altered in any material respect, then the essence of fair competition in the public bidding is destroyed. A public bidding would indeed be a farce if after the contract is awarded, the winning bidder may modify the contract and include provisions which are favorable to it that were not previously made available to the other bidders. Thus:By definition, liquidated damages are a penalty, meant to impress upon defaulting obligors the graver consequences of their own culpability. Liquidated damages must necessarily make non-compliance more cumbersome than compliance. Otherwise, contracts might as well make no threat of a penalty at all:It is inherent in public biddings that there shall be a fair competition among the bidders. The specifications in such biddings provide the common ground or basis for the bidders. The specifications should, accordingly, operate equally or indiscriminately upon all bidders.The same rule was restated by Chief Justice Stuart of the Supreme Court of Minnesota:The law is well settled that where, as in this case, municipal authorities can only let a contract for public work to the lowest responsible bidder, the proposals and specifications therefore must be so framed as to permit free and full competition. Nor can they enter into a contract with the best bidder containing substantial provisions beneficial to him, not included or contemplated in the terms and specifications upon which the bids were invited.[55] (Emphasis supplied)
Liquidated damages are those that the parties agree to be paid in case of a breach. As worded, the amount agreed upon answers for damages suffered by the owner due to delays in the completion of the project. Under Philippine laws, these damages take the nature of penalties. A penal clause is an accessory undertaking to assume greater liability in case of a breach. It is attached to an obligation in order to ensure performance.[56] (Citations omitted)Respondent cannot now balk at the natural result of its own breach. As for the Court of Appeals, we find it to be in error in frustrating the express terms of the contract that respondent actively endeavored to be awarded to it. The exigencies that impelled petitioner to obtain fire trucks made it imperative for respondent to act with dispatch. Instead, it dragged its feet, left petitioner with inadequate means for addressing the very emergencies that engendered the need for fire trucks, and forced it into litigation to enforce its rights.