G.R. No. L-45349 August 15, 1988
NEWTON JISON and SALVACION I. JOSUE, petitioners, vs. COURT OF APPEALS and ROBERT O. PHILLIPS & SONS, INC., respondents.

FACTS

Petitioners Newton Jison and Salvacion Josue entered into a Contract to Sell with respondent Robert O. Phillips & Sons, Inc. for a subdivision lot in Antipolo, Rizal. The contract contained an automatic rescission clause stating that failure to pay three or more consecutive monthly installments would result in automatic cancellation, forfeiture of all amounts paid as liquidated damages, and reconveyance of the lot to the vendor. Petitioners made a down payment and several monthly installments but subsequently incurred multiple delinquencies. Despite receiving demand letters and reminders about the automatic rescission clause, petitioners failed to pay the installments due on February 1, March 1, and April 1, 1967. On April 6, 1967, respondent declared the contract cancelled, refused a subsequent tender of payment, and forfeited all prior payments.

ISSUE

The principal issue is the validity of the automatic rescission of the contract and the consequent forfeiture of all payments made by the petitioners as liquidated damages.

RULING

The Supreme Court upheld the validity of the automatic rescission of the contract. Citing settled jurisprudence, the Court ruled that judicial action is not necessary for rescission when the contract expressly stipulates automatic cancellation upon breach of its terms. The petitioners’ failure to pay three consecutive monthly installments triggered the contractual clause, making the rescission valid and effective. However, the Court modified the ruling regarding the forfeiture. Applying Articles 2227 and 1229 of the Civil Code, the Court held that stipulated liquidated damages, intended as a penalty, must be equitably reduced if found iniquitous or unconscionable, especially when the obligation has been partially or irregularly complied with. The Court found the forfeiture of the entire sum of P47,312.64, representing all payments made, to be excessive and unconscionable. Considering that the respondent regained possession of the lot and was free to resell it, and drawing analogy from the policy of subsequent protective laws like R.A. No. 6552 , the Court reduced the forfeitable amount to fifty percent (50%) of the payments made, or P23,656.32. The respondent was ordered to refund the excess to the petitioners. The decision of the Court of Appeals was thus modified regarding the forfeiture and affirmed in all other respects.