G.R. No. 249247 , March 15, 2021
Heirs of Mary Lane R. Kim, represented by Kim Sung II, Janice Kim and Billielyn Shafer, Petitioners, vs. Jasper Jason M. Quicho, joined by his wife, Respondents.

FACTS

During her lifetime, Mary Lane R. Kim owned a 250-ton Portable Crusher and a five-hectare parcel of land in Floridablanca, Pampanga. In 2011, Jasper Jayson M. Quicho proposed to buy the portable crusher to start a crushing plant business. The parties executed a Deed of Conditional Sale dated August 4, 2011, wherein Kim agreed to sell the portable crusher with accessories to Quicho for P18,000,000.00, payable in installments: P5,000,000.00 upon execution, P5,000,000.00 within one month, and the balance of P8,000,000.00 within one year from the commencement of business operations. The deed stipulated that in case of breach by the vendee (Quicho), the contract would be automatically rescinded without court action, and all partial payments made would be forfeited and considered as rentals. The parties also executed a Contract of Lease on August 15, 2011, for the use of the land where the crusher was installed.
In October 2012, Kim turned over the portable crusher and the land to Quicho, who accepted them. Quicho paid a total of P9,000,000.00 but failed to settle the succeeding installments despite demands. Kim sent a Notice of Rescission of Contracts dated October 31, 2013, and subsequently filed a complaint for rescission before the Regional Trial Court (RTC). The RTC ruled in favor of Kim, declaring the Deed of Conditional Sale and Contract of Lease rescinded, ordering Quicho to surrender possession of the crusher and land, and awarding attorney’s fees and exemplary damages. Quicho appealed to the Court of Appeals (CA). The CA affirmed the rescission but modified the RTC decision by ordering petitioners (Kim’s heirs) to return the P9,000,000.00 paid by Quicho, with legal interest, citing mutual restitution as an effect of rescission under Article 1191 of the Civil Code. Petitioners moved for partial reconsideration, arguing that the forfeiture clause in the contract should prevail, but the CA denied it.

ISSUE

Whether the Court of Appeals erred in disregarding the forfeiture clause in the contract and in requiring petitioners to return the partial payments made by respondents despite respondents’ breach of contract.

RULING

The Supreme Court granted the petition, reversing the CA’s modification. The Court held that the forfeiture clause in the Deed of Conditional Sale is valid and enforceable. Rescission under Article 1191 of the Civil Code generally requires mutual restitution to restore the parties to their original positions. However, the parties may stipulate otherwise, and such stipulations are binding unless contrary to law, morals, good customs, public order, or public policy. The forfeiture clause—which provided that upon Quicho’s breach, the contract would be automatically rescinded and all sums paid would be considered as rentals—was a lawful agreement that defined the consequences of breach. The Court emphasized that rescission does not disregard all contractual consequences; lawful stipulations, such as the forfeiture clause, remain effective. Citing Camp John Jay Development Corporation v. Charter Chemical and Coating Corporation, the Court explained that while rescission abrogates the contract from its inception, it does not nullify lawful clauses that define the effects of rescission. The forfeiture clause was intended to compensate Kim for the use of the crusher and land, preventing unjust enrichment by Quicho, who derived income from the properties for years. Thus, petitioners are entitled to retain the P9,000,000.00 as stipulated. The CA’s order for restitution was set aside, and the RTC’s decision, which did not order restitution, was reinstated.