G.R. No. L-39778 September 13, 1985
VIRGILIO SIY, petitioner, vs. COURT OF APPEALS, SERGIO VALDEZ, AND VIRGINIA VALDEZ, respondents.

FACTS

The private respondents, spouses Valdez, owned a house and lot in Makati. They entered into a Deed of Conditional Sale with petitioner Virgilio Siy for P22,000, contingent upon Siy securing an SSS loan. As the property was mortgaged to GSIS, the parties later executed a Deed of Sale with Assumption of Mortgage. Subsequently, they entered into three more agreements, progressively reducing the purchase price to P14,000 and setting new deadlines for payment, with Siy agreeing to pay monthly rentals and daily penalties for delay. The final agreement required Siy to pay P12,000 upon signing and the balance of P4,376 within 45 days. Siy failed to pay any amount within this period. When his SSS loan was finally approved, the respondents refused to execute a final deed of absolute sale, citing his breach.
Siy filed an action for specific performance. The trial court initially ruled in his favor, ordering the respondents to execute the sale. However, upon reconsideration, it reversed itself and ordered the rescission of the contract. The Court of Appeals affirmed the rescission and awarded damages of P4,376 to the respondents, which included a P2,000 portion of the purchase price and penalties for delay calculated from a 1963 agreement.

ISSUE

Whether the Court of Appeals erred in its computation of damages awarded to the respondents upon rescinding the contract of sale.

RULING

The Supreme Court modified the appellate court’s decision, setting aside the award of P4,376 in damages. The Court clarified the legal consequences of rescission under Article 1191 of the Civil Code. In reciprocal obligations like a contract of sale, rescission results in mutual restitution; the parties are to be restored to their original positions. The injured party may choose between fulfillment and rescission with damages, but cannot opt for rescission and simultaneously demand partial fulfillment of the obligation.
The appellate court’s computation was erroneous because it included a P2,000 portion of the rescinded purchase price as part of the damages. This amounted to enforcing part of the very obligation that was being rescinded. Furthermore, enforcing the daily penalty clause from a 1963 agreement to calculate damages would result in excessive and iniquitous penalties. The correct remedy was to order Siy to vacate the property and pay compensation for its use. Consequently, the Court ordered Siy to pay monthly rentals of P50 with legal interest from March 1963 until he vacates the premises, affirming the rescission in all other respects.