Sandoval Shipyards vs. Philippine Merchant Marine Academy

[Civil Law: Obligations and Contract; Rescission]

Sandoval Shipyards, Inc., Petitioner, vs.

Philippine Merchant Marine Academy (PMMA), Respondent

GR No. 188633, April 10, 2013

Facts:  The PMMA entered into Ship Building Contract with Sandoval Shipyards, Inc. with the latter obliging itself to construct two units of lifeboats to be used by the students of PMMA for training.  The parties agreed on the specifications of the boats, the date of delivery and the amount of payment as stated in the contract.  However, upon inspection by the PMMA, it found that the construction being done by the petitioner was not in conformity with the approved plan.  Because of this, respondent’s dean submitted a report and recommendation for ratification of the contract to its President.  A meeting was held in order to settle the issue.  Sandoval asked for extension of the time of delivery of the lifeboats which was granted by PMMA.  However, Sandoval was not able to comply with the agreed specifications for the boats and the agreed time of delivery despite repeated demands from PMMA.  As a result, PMMA filed a Complaint for Rescission of Contract with damages against the petitioners.

The RTC held that although the caption for the complaint filed by PMMA was for Rescission for Contract, the allegations in the body were for breach of contract. Thus, the respondents were made jointly and severally liable for actual damages plus attorney’s fees plus cost of suits.  The petitioners appealed the case to the CA where it found that indeed the petitioners committed a clear substantial breach of contract which warranted its rescission.  However, since rescission requires mutual restoration of benefits received, the respondents cannot be compelled to return what it does not possess - the lifeboats which the petitioners failed to deliver.  A motion for reconsideration was filed by the petitioners but was denied by the CA hence the petition for certiorari filed under rule 45.

Issue:  Whether or not the case is for rescission and not for damages due to breach of contract.

Ruling: No, the case is for damages due to breach of contract.  It held that the RTC was correct in determining whether there was a breach of contract and if such breach would warrant rescission and or damages.  In this case, it found that the breach was found to be substantial and sufficient to warrant a rescission of the contract.  However, since rescission entails a mutual restitution of benefits received and the factual circumstances rendered this mutual restitution impossible, an injured party who has chosen rescission is also entitled to the payment of damages.