FACTS:

On October 4, 1997, the PEZA published an invitation to bid for its acquisition of two brand new fire truck units.

Three companies participated in the bidding: Starbilt Enterprise, Inc., Shurway Industries, Inc., and Pilhino.

Pilhino secured the contract for the acquisition of the fire trucks. 

The contract awarded to Pilhino stipulated that Pilhino was to deliver to the PEZA two FF3HP brand fire trucks within 45 days of receipt of a purchase order from the PEZA. 

A further stipulation stated that “in case of failure to deliver the . . . good on the date specified . . . , the Supplier agrees to pay penalty at the rate of 1/10 of 1% of the total contract price for each day commencing on the first day after the date stipulated above.”

Pilhino failed to deliver the trucks as it had committed. 

As Pilhino still failed to comply, despite repeated demands, the PEZA filed before the RTC a Complaint for rescission of contract and damages. 

The RTC ruled for the PEZA. 

Subsequently, the CA partly granted Pilhino’s appeal by deleting the forfeiture of Pilhino’s performance bond and pegging the liquidated damages due from it to the PEZA in the amount of P1,400,000.00.

The PEZA moved for reconsideration, but it was denied by the CA.

Hence, this Petition for Review on Certiorari.

Petitioner asks for the reinstatement of the RTC’s award asserting that it already suffered damage when respondent Pilhino Sales Corporation failed to deliver the trucks on time; that the contractually stipulated penalty of 1/10 of 1% of the contract price for every day of delay was neither unreasonable nor contrary to law, morals, or public order; that the stipulation on liquidated damages was freely entered into by it and respondent; and that the CA’s computation had no basis in fact and law.

On the other hand, respondent suggests that with the rescission of its contract with petitioner must have come the negation of the contractual stipulation on liquidated damages and the obliteration of its liability for such liquidated damages.

ISSUE:

Whether or not an award based on contractually stipulated liquidated damages  is proper notwithstanding the rescission of the same contract stipulating it.

RULING: 

Although the provisions of a contract are legally null and void, the stipulated method of computing liquidated damages may be accepted as evidence of the intent of the parties. 

The provisions, therefore, can be basis for finding a factual anchor for liquidated damages. The liable party may nevertheless present better evidence to establish a more accurate basis for awarding damages. In this case, the respondent failed to do so.

Respondent’s intimation that with the rescission of a contract necessarily and inexorably follows the obliteration of liability for what the same contracts stipulates as liquidated damages is entirely misplaced.

A contract of sale, such as that entered into by petitioner and respondent, entails reciprocal obligations. 

As explained in Spouses Velarde v. CA, 

“[i]n a contract of sale, the seller obligates itself to transfer the ownership of and deliver a determinate thing, and the buyer to pay therefor a price certain in money or its equivalent.”

Rescission on account of breach of reciprocal obligations is provided for in Article 1191 of the Civil Code:

Article 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply with what is incumbent upon him.

The injured party may choose between the fulfillment and the rescission of the obligation, with the payment of damages in either case. 

He may also seek rescission, even after he has chosen fulfillment, if the latter should become impossible.

The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period.

This is understood to be without prejudice to the rights of third persons who have acquired the thing, in accordance with articles 1385 and 1388 and the Mortgage Law.

Jurisprudence has long settled that the restoration of the contracting parties to their original state is the very essence of rescission. 

In Spouses Velarde:

Considering that the rescission of the contract is based on Article 1191 of the Civil Code, mutual restitution is required to bring back the parties to their original situation prior to the inception of the contract. 

Accordingly, the initial payment of P800,000 and the corresponding mortgage payments . . . should be returned by private respondents, lest the latter unjustly enrich themselves at the expense of the former.

Rescission creates the obligation to return the object of the contract. It can be carried out only when the one who demands rescission can return whatever he may be obliged to restore. 

To rescind is to declare a contract void at its inception and to put an end to it as though it never was. It is not merely to terminate it and release the parties from further obligations to each other, but to abrogate it from the beginning and restore the parties to their relative positions as if no contract has been made.

Contrary to respondent’s assertion, mutual restitution under Article 1191 is, however, no license for the negation of contractually stipulated liquidated damages.

Article 1191 itself clearly states that the options of rescission and specific performance come with “with the payment of damages in either case.” The very same breach or delay in performance that triggers rescission is what makes damages due.

When the contracting parties, by their own free acts of will, agreed on what these damages ought to be, they established the law between themselves. Their contemplation of the consequences proper in the event of a breach has been articulated. When courts are, thereafter, confronted with the need to award damages in tandem with rescission, courts must not lose sight of how the parties have explicitly stated, in their own language, these consequences. To uphold both Article 1191 of the Civil Code and the parties’ will, contractually stipulated liquidated damages must, as a rule, be maintained.

To sustain respondent’s claim would be to sustain an absurdity and an injustice. Respondent’s position suggests that with rescission must necessarily come the obliteration of the punitive consequence which, to begin with, was the product of its own (along with the other contracting party’s) volition. Its position turns delinquency into a profitable enterprise, enabling contractual breach to itself be the means for evading its own fallout. It is a position we cannot tolerate.