UP vs. De Los Angeles

Land owner (P) vs. Logging company (D)
GR L-28602	[T]

Summary: UP granted logging concessions to a certain company. However, it failed to pay royalties so UP threatened to rescind the agreement. In an instrument acknowledging the debt, the logging company gave UP the right to rescind extra judicially. After further violations, UP did rescind and awarded logging rights to another company.

Rule of Law: The act of 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.

Facts: The University of the Philippines (P) granted ALUMCO (D) a logging concession on a land grant to UP (P) in consideration of royalties. ALUMCO (D) failed to pay its arrears despite repeated demands prompting UP (P) to threaten rescission of the agreement. ALUMCO (D) executed an instrument entitled "Acknowledgment of Debt and Proposed Manner of Payments" and gave UP (P) the right to rescind extra judicially in case of violations.

ALUMCO (D) continued its logging operations, but again incurred an unpaid account in addition to the indebtedness that it had previously acknowledged. Thereafter, UP (P) rescinded the agreement and filed for collection of the unpaid accounts against ALUMCO (D) and prayed for an injunction to restrain ALUMCO (D) from continuing logging operations.

Before the issuance of the injunction against ALUMCO (D), UP (P) accepted bids for logging concession on the land grant and awarded Sta. Clara Lumber Company a logging contract. Meanwhile, ALUMCO (D) petitioned the court and was granted a preliminary injunction to stop UP (P) from awarding logging rights to other parties.

ALUMCO (D) alleged that it is only after a final court decree declaring the contract rescinded for violation of its terms that UP (P) could disregard ALUMCO's (D) rights under the contract and treat the agreement as breached and of no force or effect.

Issues: Was the logging contract validly rescinded?

Ruling: Yes, but with qualifications. It is true that the parties expressly stipulated in their agreement that upon default by ALUMCO (D), UP (P) has "the right and the power to consider, the Logging Agreement as rescinded without the necessity of any judicial suit."

As to such special stipulation, and in connection with Article 1191 of the Civil Code, this Court stated in Froilan vs. Pan Oriental Shipping Co. (GR L-11897, October 31, 1964, 12 SCRA 276):

There is nothing in the law that prohibits the parties from entering into agreement that violation of the terms of the contract would cause cancellation thereof, even without court intervention. In other words, it is not always necessary for the injured party to resort to court for rescission of the contract.

However, it must be understood that the act of party in treating a contract as canceled 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.
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* Keywords : rescission