PALAY, INC.

and ALBERT ONSTOTT, petitioner,

vs.
JACOBO C. CLAVE, Presidential Executive Assistant NATIONAL HOUSING AUTHORITY and
NAZARIO DUMPIT respondents.

Santos, Calcetas-Santos & Geronimo Law Office for petitioner.

Wilfredo E. Dizon for private respondent.

MELENCIO-HERRERA, J.:

The Resolution, dated May 2, 1980, issued by Presidential Executive Assistant Jacobo Clave in O.P.
Case No. 1459, directing petitioners Palay, Inc. and Alberto Onstott jointly and severally, to refund to
private respondent, Nazario Dumpit, the amount of P13,722.50 with 12% interest per annum, as
resolved by the National Housing Authority in its Resolution of July 10, 1979 in Case No. 2167, as
well as the Resolution of October 28, 1980 denying petitioners' Motion for Reconsideration of said
Resolution of May 2, 1980, are being assailed in this petition.

On March 28, 1965, petitioner Palay, Inc., through its President, Albert Onstott executed in favor of
private respondent, Nazario Dumpit, a Contract to Sell a parcel of Land (Lot No. 8, Block IV) of the
Crestview Heights Subdivision in Antipolo, Rizal, with an area of 1,165 square meters, - covered by
TCT No. 90454, and owned by said corporation. The sale price was P23,300.00 with 9% interest per
annum, payable with a downpayment of P4,660.00 and monthly installments of P246.42 until fully
paid. Paragraph 6 of the contract provided for automatic extrajudicial rescission upon default in
payment of any monthly installment after the lapse of 90 days from the expiration of the grace period
of one month, without need of notice and with forfeiture of all installments paid.

Respondent Dumpit paid the downpayment and several installments amounting to P13,722.50. The
last payment was made on December 5, 1967 for installments up to September 1967.

On May 10, 1973, or almost six (6) years later, private respondent wrote petitioner offering to update
all his overdue accounts with interest, and seeking its written consent to the assignment of his rights
to a certain Lourdes Dizon. He followed this up with another letter dated June 20, 1973 reiterating
the same request. Replying petitioners informed respondent that his Contract to Sell had long been
rescinded pursuant to paragraph 6 of the contract, and that the lot had already been resold.

Questioning the validity of the rescission of the contract, respondent filed a letter complaint with the
National Housing Authority (NHA) for reconveyance with an altenative prayer for refund (Case No.
2167). In a Resolution, dated July 10, 1979, the NHA, finding the rescission void in the absence of
either judicial or notarial demand, ordered Palay, Inc. and Alberto Onstott in his capacity as
President of the corporation, jointly and severally, to refund immediately to Nazario Dumpit the
amount of P13,722.50 with 12% interest from the filing of the complaint on November 8, 1974.
Petitioners' Motion for Reconsideration of said Resolution was denied by the NHA in its Order dated
October 23, 1979.  1

On appeal to the Office of the President, upon the allegation that the NHA Resolution was contrary
to law (O.P. Case No. 1459), respondent Presidential Executive Assistant, on May 2, 1980, affirmed
the Resolution of the NHA. Reconsideration sought by petitioners was denied for lack of merit. Thus,
the present petition wherein the following issues are raised:

Whether notice or demand is not mandatory under the circumstances and, therefore,
may be dispensed with by stipulation in a contract to sell.

II

Whether petitioners may be held liable for the refund of the installment payments
made by respondent Nazario M. Dumpit.

III

Whether the doctrine of piercing the veil of corporate fiction has application to the
case at bar.

IV

Whether respondent Presidential Executive Assistant committed grave abuse of

discretion in upholding the decision of respondent NHA holding petitioners solidarily
liable for the refund of the installment payments made by respondent Nazario M.
Dumpit thereby denying substantial justice to the petitioners, particularly petitioner
Onstott

We issued a Temporary Restraining Order on Feb 11, 1981 enjoining the enforcement of the
questioned Resolutions and of the Writ of Execution that had been issued on December 2, 1980. On
October 28, 1981, we dismissed the petition but upon petitioners' motion, reconsidered the dismissal
and gave due course to the petition on March 15, 1982.

On the first issue, petitioners maintain that it was justified in cancelling the contract to sell without
prior notice or demand upon respondent in view of paragraph 6 thereof which provides-

6. That in case the BUYER falls to satisfy any monthly installment or any other
payments herein agreed upon, the BUYER shall be granted a month of grace within
which to make the payment of the t in arrears together with the one corresponding to
the said month of grace. -It shall be understood, however, that should the month of
grace herein granted to the BUYER expire, without the payment & corresponding to
both months having been satisfied, an interest of ten (10%) per cent per annum shall
be charged on the amounts the BUYER should have paid; it is understood further,
that should a period of NINETY (90) DAYS elapse to begin from the expiration of the
month of grace hereinbefore mentioned, and the BUYER shall not have paid all the
amounts that the BUYER should have paid with the corresponding interest up to the
date, the SELLER shall have the right to declare this contract cancelled and of no
effect without notice, and as a consequence thereof, the SELLER may dispose of the
lot/lots covered by this Contract in favor of other persons, as if this contract had
never been entered into. In case of such cancellation of this Contract, all the
amounts which may have been paid by the BUYER in accordance with the
agreement, together with all the improvements made on the premises, shall be
considered as rents paid for the use and occupation of the above mentioned
 premises and for liquidated damages suffered by virtue of the failure of the BUYER
to fulfill his part of this agreement : and the BUYER hereby renounces his right to
demand or reclaim the return of the same and further obligates peacefully to vacate
the premises and deliver the same to the SELLER.

Well settled is the rule, as held in previous jurisprudence,   that judicial action for the rescission of a
2

contract is not necessary where the contract provides that it may be revoked and cancelled for
violation of any of its terms and conditions. However, even in the cited cases, there was at least a
written notice sent to the defaulter informing him of the rescission. As stressed in University of the
Philippines vs. Walfrido de los Angeles   the act of a party in treating a contract as cancelled should
3

be made known to the other. We quote the pertinent excerpt:

Of course, it must be understood that the act of a party in treating a contract as

cancelled or resolved in account of infractions by the other contracting party must be
made known to the other and is always provisional being ever subject to scrutiny and
review by the proper court. If the other party denies that rescission is justified it is
free to resort to judicial action in its own behalf, and bring the matter to court. Then,
should the court, after due hearing, decide that the resolution of the contract was not
warranted, the responsible party will be sentenced to damages; in the contrary case,
the resolution will be affirmed, and the consequent indemnity awarded to the party
prejudiced.

In other words, the party who deems the contract violated may consider it resolved or
rescinded, and act accordingly, without previous court action, but it proceeds at its
own risk. For it is only the final judgment of the corresponding court that will
conclusively and finally settle whether the action taken was or was not correct in law.
But the law definitely does not require that the contracting party who believes itself
injured must first file suit and wait for a judgment before taking extrajudicial steps to
protect its interest. Otherwise, the party injured by the other's breach will have to
passively sit and watch its damages accumulate during the pendency of the suit until
the final judgment of rescission is rendered when the law itself requires that he
should exercise due diligence to minimize its own damages (Civil Code, Article
2203).

We see no conflict between this ruling and the previous jurisprudence of this Court
invoked by respondent declaring that judicial action is necessary for the resolution of
a reciprocal obligation (Ocejo Perez & Co., vs. International Banking Corp., 37 Phil.
631; Republic vs. Hospital de San Juan De Dios, et al., 84 Phil 820) since in every
case where the extrajudicial resolution is contested only the final award of the court
of competent jurisdiction can conclusively settle whether the resolution was proper or
not. It is in this sense that judicial action win be necessary, as without it, the
extrajudicial resolution will remain contestable and subject to judicial invalidation
unless attack thereon should become barred by acquiescense, estoppel or
prescription.

Fears have been expressed that a stipulation providing for a unilateral rescission in
case of breach of contract may render nugatory the general rule requiring judicial
action (v. Footnote, Padilla Civil Law, Civil Code Anno., 1967 ed. Vol. IV, page 140)
but, as already observed, in case of abuse or error by the rescinder the other party is
not barred from questioning in court such abuse or error, the practical effect of the
stipulation being merely to transfer to the defaulter the initiative of instituting suit,
instead of the rescinder (Emphasis supplied).
Of similar import is the ruling in Nera vs. Vacante   , reading:
4

A stipulation entitling one party to take possession of the land and building if the
other party violates the contract does not ex propio vigore confer upon the former
the right to take possession thereof if objected to without judicial intervention and
determination.

This was reiterated in Zulueta vs. Mariano   where we held that extrajudicial rescission has legal
5

effect where the other party does not oppose it.  Where it is objected to, a judicial determination of
6

the issue is still necessary.

In other words, resolution of reciprocal contracts may be made extrajudicially unless successfully
impugned in Court. If the debtor impugns the declaration, it shall be subject to judicial
determination. 7

In this case, private respondent has denied that rescission is justified and has resorted to judicial
action. It is now for the Court to determine whether resolution of the contract by petitioners was
warranted.

We hold that resolution by petitioners of the contract was ineffective and inoperative against private
respondent for lack of notice of resolution, as held in the U.P. vs. Angeles case, supra

Petitioner relies on Torralba vs. De los Angeles   where it was held that "there was no contract to
8

rescind in court because from the moment the petitioner defaulted in the timely payment of the
installments, the contract between the parties was deemed ipso facto rescinded." However, it should
be noted that even in that case notice in writing was made to the vendee of the cancellation and
annulment of the contract although the contract entitled the seller to immediate repossessing of the
land upon default by the buyer.

The indispensability of notice of cancellation to the buyer was to be later underscored in Republic
Act No. 6551 entitled "An Act to Provide Protection to Buyers of Real Estate on Installment
Payments." which took effect on September 14, 1972, when it specifically provided:

Sec. 3(b) ... the actual cancellation of the contract shall take place after thirty days
from receipt by the buyer of the notice of cancellation or the demand for rescission of
the contract by a notarial act and upon full payment of the cash surrender value to
the buyer. (Emphasis supplied).

The contention that private respondent had waived his right to be notified under paragraph 6 of the
contract is neither meritorious because it was a contract of adhesion, a standard form of petitioner
corporation, and private respondent had no freedom to stipulate. A waiver must be certain and
unequivocal, and intelligently made; such waiver follows only where liberty of choice has been fully
accorded.   Moreover, it is a matter of public policy to protect buyers of real estate on installment
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payments against onerous and oppressive conditions. Waiver of notice is one such onerous and
oppressive condition to buyers of real estate on installment payments.

Regarding the second issue on refund of the installment payments made by private
respondent. Article 1385 of the Civil Code provides:

ART. 1385. Rescission creates the obligation to return the things which were the
object of the contract, together with their fruits, and the price with its interest;
 consequently, it can be carried out only when he who demands rescission can return
whatever he may be obliged to restore.

Neither sham rescission take place when the things which are the object of the
contract are legally in the possession of third persons who did not act in bad faith.

In this case, indemnity for damages may be demanded from the person causing the
loss.

As a consequence of the resolution by petitioners, rights to the lot should be restored to private
respondent or the same should be replaced by another acceptable lot. However, considering that the
property had already been sold to a third person and there is no evidence on record that other lots
are still available, private respondent is entitled to the refund of installments paid plus interest at the
legal rate of 12% computed from the date of the institution of the action.   It would be most
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inequitable if petitioners were to be allowed to retain private respondent's payments and at the same
time appropriate the proceeds of the second sale to another.

We come now to the third and fourth issues regarding the personal liability of petitioner Onstott who
was made jointly and severally liable with petitioner corporation for refund to private respondent of
the total amount the latter had paid to petitioner company. It is basic that a corporation is invested by
law with a personality separate and distinct from those of the persons composing it as wen as from
that of any other legal entity to which it may be related.   As a general rule, a corporation may not be
11

made to answer for acts or liabilities of its stockholders or those of the legal entities to which it may
be connected and vice versa. However, the veil of corporate fiction may be pierced when it is used
as a shield to further an end subversive of justice   ; or for purposes that could not have been
12

intended by the law that created it   ; or to defeat public convenience, justify wrong, protect fraud, or
13

defend crime.   ; or to perpetuate fraud or confuse legitimate issues   ; or to circumvent the law or
14 15

perpetuate deception   ; or as an alter ego, adjunct or business conduit for the sole benefit of the
16

stockholders. 17

We find no badges of fraud on petitioners' part. They had literally relied, albeit mistakenly, on
paragraph 6 (supra) of its contract with private respondent when it rescinded the contract to sell
extrajudicially and had sold it to a third person.

In this case, petitioner Onstott was made liable because he was then the President of the
corporation and he a to be the controlling stockholder. No sufficient proof exists on record that said
petitioner used the corporation to defraud private respondent. He cannot, therefore, be made
personally liable just because he "appears to be the controlling stockholder". Mere ownership by a
single stockholder or by another corporation is not of itself sufficient ground for disregarding the
separate corporate personality.   In this respect then, a modification of the Resolution under review
18

is called for.

WHEREFORE, the questioned Resolution of respondent public official, dated May 2, 1980, is hereby
modified. Petitioner Palay, Inc. is directed to refund to respondent Nazario M. Dumpit the amount of
P13,722.50, with interest at twelve (12%) percent per annum from November 8, 1974, the date of
the filing of the Complaint. The temporary Restraining Order heretofore issued is hereby lifted.

No costs.

SO ORDERED.