G.R. No. L-5953, February 24, 1912
ANTONIO M. PABALAN, plaintiff-appellant, vs. FELICIANO VELEZ, as administrator of the intestate estate of Walter A. Fitton, defendant-appellee.

FACTS

On June 27, 1900, Antonio M. Pabalan and Walter A. Fitton executed a contract before a notary public. The contract contained two principal agreements: (1) Pabalan sold two parcels of land to Fitton for a total price of 6,000 pesos Mexican currency; and (2) the parties formed a mercantile partnership named “A. M. Pabalan and Company” with a capital of 9,000 pesos. Pabalan’s contribution was 3,000 pesos in cash (which he obtained from the initial payment of 3,000 pesos from Fitton for the land). Fitton’s contribution was 6,000 pesos, represented by the same two parcels of land he just purchased from Pabalan. The remaining 3,000 pesos of the purchase price for the land was to be paid by Fitton into the partnership funds as Pabalan’s capital. Fitton failed to pay this 3,000 pesos. Both parties subsequently died. Pabalan’s estate filed a complaint against Fitton’s estate, seeking rescission of the contract, dissolution of the partnership, annulment of the sale, and damages.

ISSUE

Whether the contract between Pabalan and Fitton should be rescinded due to Fitton’s failure to pay the stipulated 3,000 pesos into the partnership funds.

RULING

Yes, the contract should be rescinded. The Supreme Court affirmed the lower court’s judgment ordering rescission. The contract was essentially one of sale and partnership combined. Fitton’s obligation to pay the 3,000 pesos into the partnership fund was a principal and essential condition of the agreement. His failure to fulfill this obligation for a significant period, continuing until his death, gave Pabalan the right to seek rescission under Article 1124 of the Civil Code. The Court rejected the argument that the obligation was merely among partners, noting that the payment was a fundamental part of the consideration for the sale of the land. The partnership was dissolved as a consequence. The Court ordered mutual restitution: Fitton’s estate must return the two parcels of land to Pabalan’s estate, and Pabalan’s estate must return the 3,000 pesos initially received (converted to Philippine currency, amounting to P2,700), with the right to deduct P348.20 representing two-thirds of the land tax Pabalan had advanced for the partnership properties.