G.R. No. 118749 ; April 25, 2003
SPOUSES LORENZO G. FRANCISCO and LORENZA D. FRANCISCO, petitioners, vs. HONORABLE COURT OF APPEALS, and BIENVENIDO C. MERCADO, respondents.

FACTS

Petitioners, the landowners, and respondent, the developer, entered into a Contract of Development for the Franda Village Subdivision. Respondent agreed to finance and complete the development within 27 months, advancing P200,000.00 for initial expenses. In return, he was entitled to 50% of gross sales and exclusive authority to manage sales, with a contractual duty to submit monthly reports on collections. Respondent failed to submit these reports. During the contract period, petitioners contracted another person, Nicasio Rosales, to undertake partial development work. Petitioners later demanded an accounting from respondent and instructed him to stop selling lots and collecting payments, which he ignored until September 1986.
In January 1987, petitioners issued a conditional authority for respondent to resume operations, requiring a joint bank account, their approval for withdrawals, and their countersignature on receipts. Respondent refused these conditions, asserting they violated his exclusive management rights under the contract. He then filed an action for rescission and damages. Petitioners counterclaimed, alleging respondent breached the contract by failing to finish on time and by engaging in double selling of a lot.

ISSUE

Whether respondent, as the developer, is entitled to rescind the contract and recover damages due to petitioners’ breach.

RULING

Yes. The Supreme Court affirmed the rescission of the contract and the award of damages to respondent. The legal logic is anchored on petitioners’ prior and substantial breach of their contractual obligations, which justified respondent’s action for rescission under Article 1191 of the Civil Code. Petitioners committed a fundamental breach by unilaterally hiring another developer, Rosales, to perform work within the subdivision during the exclusivity period granted to respondent. This act directly contravened respondent’s exclusive and irrevocable right to manage, control, and supervise the development and sales, constituting a violation of the contract’s core terms.
Furthermore, petitioners’ subsequent issuance of the conditional authority, which imposed controls over finances and receipts, was a repudiation of respondent’s exclusive management rights. This confirmed petitioners’ refusal to be bound by the original agreement. While respondent failed to submit monthly reports, this was a minor contractual lapse that did not amount to a substantial breach warranting rescission by petitioners, especially since petitioners themselves had already committed a prior material breach. The delay in development was also attributable to petitioners’ own obstructive actions. Consequently, respondent was not in delay, and petitioners were not entitled to unilaterally stop his operations. Rescission was proper, and respondent was rightly awarded actual and moral damages for petitioners’ bad faith.