G.R. No. 31432 , January 24, 1930
ESTRELLA ORIENTAL, plaintiff-appellee, vs. MATSUNI NAKAMA, defendant-appellant.

FACTS

On May 7, 1919, Estrella Oriental sold a parcel of land planted with abaca to Matsuni Nakama for P24,000, payable in installments. The contract contained a clause stating that if Nakama failed to pay any installment, the unpaid balance would become due, and after a 30-day grace period, the sale would be rescinded. In such event, Nakama would return the land and plantation, and Estrella Oriental could claim indemnity for damages incurred due to Nakama’s non-compliance. Nakama paid only the initial P2,000. On September 17, 1919, unable to continue payments, Nakama informed Estrella Oriental’s president that he was surrendering possession, effectively seeking rescission. Estrella Oriental sued for damages, claiming the unpaid balance of the purchase price as damages. The trial court ruled in favor of Estrella Oriental, awarding P22,000.

ISSUE

Whether, upon rescission of the contract due to the vendee’s failure to pay installments, the vendor is entitled to recover the unpaid balance of the purchase price as damages under the contract’s indemnity clause.

RULING

No. The Supreme Court reversed the trial court’s decision. The indemnity clause in the contract was intended to cover special or actual damages proven to have been suffered by the vendor due to the vendee’s breach (e.g., deterioration or loss of the property). It was not intended to allow recovery of the unpaid purchase price itself. Upon rescission, the parties are released from their reciprocal obligations: the vendor recovers the property, and the vendee is relieved from paying the remaining installments. Since Estrella Oriental failed to prove any special damages beyond the unpaid price, it was not entitled to indemnity. Nakama was absolved from the complaint.