G.R. No. L-11897; October 31, 1964
FERNANDO A. FROILAN, plaintiff-appellee, vs. PAN ORIENTAL SHIPPING COMPANY, defendant-appellant, REPUBLIC OF THE PHILIPPINES, and COMPANIA MARITIMA, intervenors-appellees.

FACTS

Fernando A. Froilan purchased a vessel, MV/FS 197, from the Shipping Administration in 1947, executing a mortgage to secure the unpaid balance. The contract, approved by the President, granted the Administration the right to rescind, take possession, and demand damages upon Froilan’s default. Froilan repeatedly defaulted on installment and insurance premium payments. Following a series of demands and extensions, Froilan, in a letter dated January 28, 1949, explicitly agreed that if he failed to post a required bond by February 15, 1949, he would automatically relinquish all rights to the vessel, and ownership would revert to the Shipping Administration. He failed this final condition.
Consequently, the Shipping Administration’s board resolved to terminate the contract, repossessed the vessel, and re-registered title in the government’s name. Subsequently, the Shipping Administration accepted, “in principle,” an offer from Pan Oriental Shipping Company to charter the vessel. However, Froilan filed an action for replevin, claiming ownership. The Republic of the Philippines and Compania Maritima (Froilan’s successor-in-interest) intervened.

ISSUE

The core issue is whether the Shipping Administration validly rescinded the contract of sale with Froilan and thereby lawfully repossessed the vessel, nullifying any subsequent charter agreement with Pan Oriental.

RULING

The Supreme Court affirmed the lower court’s decision adjudicating the vessel to Froilan/Compania Maritima, but modified it to recognize Pan Oriental’s right to reimbursement for necessary expenses. The legal logic hinges on the validity of the rescission. The Court ruled that the Shipping Administration’s act of rescission was ineffective because it lacked the required approval of the President of the Philippines. The original contract of sale was expressly approved by the President. The Court held that a rescission, which results in the disposition or reacquisition of a government asset, is an act of similar import and gravity that likewise requires presidential approval to be valid. The board resolution of the Shipping Administration and the subsequent acts of repossession and re-registration, absent such presidential approval, were insufficient. Therefore, the rescission was void, and Froilan’s rights under the original contract, despite his defaults, were not effectively extinguished. Consequently, the subsequent “in principle” charter agreement with Pan Oriental, which was predicated on the invalidated repossession, conferred no valid rights to the vessel. However, Pan Oriental, having made useful and necessary expenses on the vessel in good faith prior to the lawsuit, was entitled under Article 546 of the Civil Code to reimbursement from Froilan, Compania Maritima, and the Republic, with a right of retention until paid.