G.R. No. 190080 , June 11, 2014.
Golden Valley Exploration, Inc., Petitioner, vs. Pinkian Mining Company and Copper Valley, Inc., Respondents.

FACTS

Pinkian Mining Company (PMC) owned 81 mining claims in Kayapa, Nueva Vizcaya. On October 30, 1987, PMC entered into an Operating Agreement (OA) with Golden Valley Exploration, Inc. (GVEI), granting GVEI exclusive rights to explore, develop, and mine the claims for 25 years. On June 8, 1999, PMC extra-judicially rescinded the OA, citing GVEI’s violation of Section 5.01 (failure to pay royalties) and other breaches, including failure to advance costs, non-reimbursement of expenses, non-remittance of funds, non-disclosure of contracts, acting as a mere broker, and non-performance of necessary works. GVEI contested the rescission, arguing its royalty obligation would only arise upon commercial production, which had not occurred, and referenced a prior payment of ₱185,000 as future royalties in exchange for a waiver of default. PMC did not respond and instead entered into a Memorandum of Agreement (MOA) with Copper Valley, Inc. (CVI) on May 2, 2000, granting CVI similar rights. GVEI filed a complaint for Specific Performance, Annulment of Contract and Damages. The Regional Trial Court (RTC) ruled in favor of GVEI, declaring the rescission void and the MOA without effect, and ordered PMC to comply with the OA. The Court of Appeals (CA) reversed the RTC, upholding the validity of PMC’s rescission and the subsequent MOA with CVI.

ISSUE

Whether or not there was a valid rescission of the Operating Agreement.

RULING

Yes, the rescission was valid. The Court affirmed the CA’s decision. In reciprocal obligations, a party may rescind the contract upon the other’s substantial breach under Article 1191 of the Civil Code. While judicial action is generally required for rescission, an exception exists when the contract itself provides for cancellation upon violation of its terms. The OA contained such a provision in Section 8.01(b), allowing PMC to cancel the agreement based on GVEI’s failure to make payments due under Section 5.01 (royalties) after written demand and a 90-day grace period. By expressly stipulating that non-payment of royalties was grounds for cancellation, the parties considered it a substantial breach, permitting PMC’s extra-judicial rescission. GVEI’s defense that no royalties were due because commercial production had not begun was unavailing, as the obligation to develop the mining areas and achieve commercial operation also rested on GVEI under the OA. Records indicated that 15 mining claims were already covered by a perfected Mining Lease Contract at the OA’s execution, enabling GVEI to extract minerals, yet GVEI failed to operate or acquire necessary permits for over seven years, constituting a substantial breach that defeated the agreement’s very purpose.