G.R. No. 25249 , September 25, 1926
J. M. PO PAUCO, plaintiff-appellee, vs. DOLORES SIGUENZA and MARIANO AGUILAR, defendants-appellants.

Ponente: STREET, J.

FACTS

Plaintiff J.M. Po Pauco, a capitalist and broker, had been making advances to defendant Mariano Aguilar for sugar cultivation on Hacienda San Agustin. On July 28, 1921, Aguilar and his wife Dolores Siguenza executed a chattel mortgage in favor of Po Pauco over 30 carabaos, 30 heads of cattle, and the growing sugar cane crop. The mortgage secured a prior indebtedness of P61,504.52 and future advances of up to P13,495.48 for the crop year. The contract stipulated, among other things, that the mortgagors would deliver the entire annual sugar crop to the mortgagee for sale, with two-thirds of the proceeds applied to the debt. It also required the delivery of 6,000 piculs of muscovado sugar annually. For the 1921-1922 crop year, the defendants delivered only 3,024.11 piculs (valued at P18,880.63) to the plaintiff, retaining over 1,000 piculs for themselves, despite the harvest yielding about 4,087 piculs. The defendants failed to settle the debt within the stipulated two-year period. Po Pauco filed an action for foreclosure of the chattel mortgage. The trial court, instead of ordering foreclosure, declared the contract resolved due to the defendants’ non-compliance and awarded a money judgment for the debt plus interest and attorney’s fees. The defendants appealed.

ISSUE

1. Whether the trial court erred in declaring the resolution (rescission) of the mortgage contract instead of ordering its foreclosure.
2. Whether the defendants’ failure to deliver the entire sugar harvest for 1921-1922 constituted a breach justifying resolution of the contract under Article 1124 of the Civil Code.

RULING

1. The trial court did not err in declaring the resolution of the contract. The right to resolve (rescind) an obligation for non-performance by the other party is implied in reciprocal obligations under Article 1124 of the Civil Code, and need not be expressly stipulated. The defendants’ breach of their obligation to deliver the entire harvest was a fundamental violation that entitled the creditor to seek resolution of the entire contract, as an alternative to specific enforcement or foreclosure. Contractual clauses relied upon by the defendants (e.g., extension clauses) pertained to scenarios where the creditor opts to continue the contract, not to the creditor’s inherent right to seek resolution for breach.

2. The defendants’ failure to deliver the entire harvest was a breach justifying resolution. The defendants’ obligation was to deliver the entire produce of the hacienda to the mortgagee. Their retention of over 1,000 piculs from the 1921-1922 harvest, regardless of whether the total harvest met the optimistic 6,000-picul estimate, constituted an act of bad faith and a direct violation of the contract’s core stipulations. This breach provided a sufficient legal basis for the resolution of the contract.

DISPOSITIVE PORTION:
The Supreme Court affirmed the trial court’s judgment in so far as it declared the contract resolved. However, it reversed the monetary award because the trial court’s calculation was based on an incorrect application of 12% compound interest, which was not stipulated. The case was remanded to the trial court for a proper liquidation of the account. The plaintiff was entitled to recover: (a) the principal indebtedness of P61,504.52 as of July 28, 1921, with simple interest at 6% per annum; (b) subsequent advances with lawful interest; and (c) the value of merchandise and supplies furnished, with lawful interest. The defendants were entitled to credits for: (a) P2,691 (proceeds from attached property sold); and (b) P18,880.63 (value of sugar delivered in 1921-1922). The trial court was directed to compute the final balance based on these guidelines. No costs were awarded.