Palay, Inc. v Clave (1983) Melencio-Herrera, J.

Petitioner: Palay, Inc and Albert Onstott

Respondents: Jacobo Clave, National Housing
Authority, and Nazario Dumpit
Concept: The Corporate Entity
Brief Facts: Palay Inc and its President Onstott
executed a Contract to Sell a Parcel of Land in favour of
respondent Dumpit. Par 6 thereof provides for the
automatic extrajudicial rescission upon default of
payment of the monthly installments. Dumpit
defaulted. 6 years later, he wrote Palay that he is
planning to update all his overdue accounts, but the
latter informed him that the contract was rescinded
and that the land was already sold to a third party.
Dumpit filed a complaint, questioning the validity of
the rescission. The NHA and the Office of the President
ruled that such was void for lack of judicial or notarial
demand.
Doctrine: As a general rule, a corporation may not be
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.
Mere ownership by a single stockholder or by another
corporation is not of itself sufficient ground for
disregarding the separate corporate personality.
FACTS:
1. March 28, 1965 Palay Inc through its President
Albert Onstott, executed a Contract to Sell a
Parcel of Land in favour of Nazario Dumpit.
o Sale price was P23,300 with 9%
interest per annum, payable with a
down payment of P4,660 and monthly
instalments of P246.42 until fully paid.
2. Par 6 of their contract provided for automatic
extrajudicial rescission upon default in payment of
any monthly instalment after the lapse of 90 days
from the expiration of the grace period of one
month, without the need of notice and with
forfeiture of all instalments paid.
3. Dumpit paid the down payment and several
instalments amounting to P13, 722.50. The last
payment he made was on December 5, 1967 for
instalments up to September 1967.
4. May 10, 1973 or 6 years later, Dumpit wrote Palay
Inc, offering to update all its overdue accounts with
interest and seeking its written consent to the
assignment of his rights to Lourdes Dizon.
5. June 20, 1973 Dumpit wrote Palay again,
reiterating the same request.
6. Palay replied that their Contract to Sell had already
been rescinded pursuant to Par 6 of their contract,
and that the lot had already been resold to a 3 rd
party.
7. Dumpit filed a letter complaint questioning the
validity of the rescission of the contract with the
National
Housing
Authority
(NHA)
for
reconveyance with an alternative prayer of refund.
8. NHA: found the rescission void in the absence of
either judicial or notarial demand. Ordered Palay
and Onstott to refund to Dumpit P13,722.50 with
12% interest from the filing of the complaint on
November 8, 1974.
o Palays Motion for Reconsideration was
denied

9.

On appeal to the Office of the President:

Presidential Executive Assistant affirmed the NHA
Resolution.
10. SC issued a TRO enjoining the enforcement of the
resolution. On Oct 28, 1981, the SC dismissed the
petition. However, upon Palays motion, the SC
reconsidered and gave due course to the petition.
ISSUES:
1. WON Palay was justified in rescinding the contract to
sell without prior notice or demand (NO)
2. WON respondent had waived his right to be notified
under Par 6 of the contract (NO)
3. WON refund of the instalment payments is proper
(YES)
4. WON petitioner Onstott may be held jointly and
severally liable with Palay (NO)
RATIO:
1. Rescission of the contract was ineffective and
inoperative against Dumpit for lack of notice of
resolution.
- Well settled is the rule that judicial action for the
rescission of a 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, as held in University of the Philippines v
de los Angeles, the act of a party in treating a
contract as cancelled should be made known to the
other.
o The party who deems the contract
violated may consider it rescinded and
act accordingly, without previous court
action, but it proceeds at its own risk.
For it is only the final judgment of the
court that will conclusively settle
whether the action taken was or was
not correct in law
- This was reiterated in Zulueta v Mariano, where the
court held that extrajudicial rescission has legal
effect where the other party does not oppose it.
Where it is objected to, a judicial determination of
the issue is still necessary.
- In other words, resolution of reciprocal contracts
may be made extrajudicially unless successfully
impugned in Court.
- However, the rescission made by petitioners was
ineffective and inoperative for lack of notice of
resolution.
- The indispensability of notice of cancellation to the
buyer is underscored in RA 6551 1 wherein it
provided that the actual cancellation of the
contract shall take place after 30 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
2. There was no waiver of the right to be notified
since the contract is a contract of adhesion.
- A waiver must be certain and unequivocal, and
intelligently made; such waiver follows only where
liberty of choice has been fully accorded.

1 An Act to Provide Protection to Buyers of Real Estate

on Installment Payments

It is a matter of public policy to protect buyers of

real estate on instalment payments against
onerous and oppressive condition to buyers of real
estate on instalment.

3. 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. 10 It would be most 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.
4. 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.
- 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 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 intended by the law that

created it; or to defeat public convenience, justify
wrong, protect fraud, or defend crime; or to
perpetuate fraud or confuse legitimate issues; or to
circumvent the law or perpetuate deception; or as
an alter ego, adjunct or business conduit for the
sole benefit of the stockholders.
We find no badges of fraud on petitioners' part.
They had literally relied, albeit mistakenly, on
paragraph 6 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 appeared 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.

DISPOSITIVE: 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.
Digest maker: Kat