Case Summary (G.R. No. 112182)
Petitioner
Bricktown Development Corporation (also styled in the records as Multinational Realty Development Corporation) executed two Contracts to Sell and a Supplemental Agreement; it relied on the contracts’ cancellation/rescission clauses to terminate the agreements for nonpayment and sought to retain payments as liquidated damages and pursue counterclaims.
Respondent
Amor Tierra Development Corporation entered into the Contracts to Sell and Supplemental Agreement as purchaser; it made partial payments totaling P1,334,443.21, engaged in negotiations with the seller, later demanded refund or assignment of unencumbered lots, and filed suit after the seller declared cancellation.
Key Dates
- March 31, 1981: Execution of two Contracts to Sell (Exhs. A and B) and Supplemental Agreement (Exh. C).
- Payment schedule in contracts: initial payment P2,200,000.00 (due March 31, 1981), subsequent installments due June 30, 1981 and December 31, 1981, and balance by assumption of mortgage or cash.
- October 12, 1981: Seller’s Notice of Cancellation (Exh. D) advising purchaser of right to cure within 30 days from receipt.
- September 26, 1983: Purchaser’s demand for refund or assignment (Exh. E).
- November 18, 1983: Filing of the complaint by purchaser in the trial court.
- Appeals and final resolution by the Supreme Court (decision rendered December 12, 1994).
Applicable Law
1987 Philippine Constitution (applicable because the decision date is 1994). Civil Code provisions relevant to delay/default, notably Article 1169 (text reproduced in the record). Contract law principles invoked: autonomy of contracts, binding force of perfected contracts, obligation of parties to act in good faith, and the contractual stipulation permitting rescission and forfeiture as liquidated damages where applicable. Precedential authorities cited in the decision include Roque v. Lapuz and Agustin v. Court of Appeals regarding the effect of nonpayment in contracts to sell.
Factual Summary
Petitioners sold 96 lots to respondent for P21,639,875.00 under a payment schedule; respondent paid only P1,334,443.21 (less than the stipulated initial downpayment of P2,200,000.00). Supplemental Agreement required additional interest payments. Between execution and attempted cancellation the parties engaged in prolonged negotiations about modifying the deal (including proposals to divide lots or assign lots corresponding to amounts already paid), but no novation or definitive modification was concluded. Petitioner sent a Notice of Cancellation on October 12, 1981 for nonpayment; purchaser thereafter demanded refund in 1983 and filed suit when the demand was not honored.
Procedural History
The trial court, after receiving evidence, declared the Contracts to Sell and the Supplemental Agreement rescinded; ordered refund to the purchaser of P1,334,443.21 with 12% interest per annum starting November 18, 1983 (date of filing), awarded P25,000.00 attorney’s fees, dismissed petitioner’s counterclaim, and imposed costs against petitioners. The Court of Appeals affirmed the trial court in toto. Petitioners elevated the case to the Supreme Court.
Issues Presented to the Supreme Court
Petitioners argued that the Court of Appeals erred by: (1) finding that petitioners’ acts and conduct delayed performance and estopped them from cancelling; (2) concluding that petitioners were unjustified in rescinding the contracts; (3) holding that cancellation required a positive act giving the purchaser a 60‑day grace period under the contracts; and (4) failing to enforce forfeiture of payments (P1,378,197.48) as liquidated damages under the contract terms.
Court’s Analysis — Contractual Autonomy and Binding Force
The Court reiterated the foundational principle that perfected contracts have the force of law between the parties and must be performed in good faith; parties may stipulate terms provided they do not contravene law, morals, or public policy. The Court accepted that factual findings of the trial court, as affirmed by the Court of Appeals, are binding in this petition and proceeded to analyze the case on that factual basis.
Court’s Analysis — Grace Period, Article 1169, and Validity of Cancellation
The contracts contained a clause (Paragraph 15) granting the purchaser a 60‑day grace period for overdue installments, with actual cancellation to take effect only after 30 days from receipt of notice of cancellation. The Court characterized a contracted grace period as a right of the debtor that, when unconditionally conferred, becomes operative ipso facto upon failure of payment at maturity. Consequently, Article 1169 (which generally makes delay dependent on judicial or extrajudicial demand unless expressly otherwise provided) was held not to be relevant where the contract itself establishes a specific grace period. On this basis the Court concluded that petitioner corporation acted within its contractual right to rescind the contracts for nonpayment.
Court’s Analysis — Forfeiture, Equity, and Effect of Parties’ Conduct
Although the seller’s cancellation was legally valid, the Court examined whether complete forfeiture of payments as liquidated damages should be permitted. The trial court and the Court of Appeals found extensive, ongoing negotiations between the parties after the contracts’ execution; the purchaser never took actual possession of the lots, and the seller did not dispose of the lots during negotiations. The appellate court found that the seller’s conduct and proposed counteroffers led the purchaser reasonably to believe that a new or modified agreement might be entered into, and that there was no malice or bad faith on the purchaser’s part in suspending payments. Considering these factual findings and the overarching principle of good faith in contractual relations, the Supreme Court determined that it would be unconscionable to allow the seller to retain all payments as forfeited amounts.
Court’s Holding and Relief Granted
The Supreme Court affirmed the courts below
...continue readingCase Syllabus (G.R. No. 112182)
Procedural Posture
- Petition for review to the Supreme Court from a decision of the Court of Appeals affirming the trial court.
- Trial court had rescinded the Contracts to Sell and the Supplemental Agreement, ordered refund of P1,334,443.21 with 12% interest from date of filing (November 18, 1983), awarded attorney’s fees of P25,000, dismissed petitioners’ counterclaim, and taxed costs against petitioners.
- Court of Appeals affirmed the trial court’s findings and judgment in toto.
- Petitioners raised errors before the Supreme Court contesting the appellate court’s rulings on estoppel, justification for rescission, adequacy of notice/grace period, and the application of liquidated damages/forfeiture provisions.
Parties and Representation
- Petitioners: Bricktown Development Corporation (new corporate name Multinational Realty Development Corporation) and Mariano Z. Velarde (president and co-petitioner).
- Respondents: Amor Tierra Development Corporation and the Honorable Court of Appeals.
- Petitioners were represented in the original contracts by Mariano Z. Velarde; private respondent's transactions were represented by Vice-President Moises G. Petilla.
Facts — Contracts Executed
- On March 31, 1981, two Contracts to Sell (Exhs. “A” and “B”) were executed by petitioners in favor of private respondent covering 96 residential lots at Multinational Village Subdivision, La Huerta, Parañaque, Metro Manila, aggregating 82,888 square meters.
- Total selling price: P21,639,875.00.
- Stipulated payment schedule:
- P2,200,000.00 on March 31, 1981;
- P3,209,968.75 on June 30, 1981;
- P4,729,906.25 on December 31, 1981;
- Balance P11,500,000.00 by assumption of petitioner’s mortgage to Philippine Savings Bank or alternatively in cash.
- Supplemental Agreement (Exh. “C”), dated March 31, 1981, provided for additional payments by private respondent of:
- P55,364.68 (21% interest on the balance of downpayment for period March 31 to June 30, 1981);
- P390,369.37 (interest paid by petitioner to Philippine Savings Bank for loan updating for period February 1 to March 31, 1981).
Payments Actually Made
- Private respondent paid a total of P1,334,443.21 (Exhs. “A” to “K”).
- This amount was short of the stipulated initial downpayment of P2,200,000.00.
- No conclusive evidence of additional payments thereafter was presented in the record as summarized by the courts.
Negotiations Between the Parties After Execution
- Parties engaged in continued negotiations for possible modification of the agreement after March 31, 1981, but no conclusive new agreement or novation was reached.
- Trial court findings (based on testimony of plaintiff’s witnesses Marcosa Sanchez and Vicente Casas) describe negotiations before June 30, 1981:
- Representatives of private respondent proposed division of lots into smaller lots and construction of townhouses for easier sale.
- Petitioner’s president Velarde allegedly replied subdivision owners would not consent to small houses, but made two counter-proposals:
- Assign to private respondent a number of lots corresponding to amounts already paid; or
- Sell the defendant corporation (with the subdivision and other properties) to private respondent and its sister companies.
- Negotiations continued for some time but produced no definite result.
- Court of Appeals observed negotiations, combined with plaintiff’s lack of actual possession and defendants’ non-disposition of the lots during negotiations, led plaintiff to reasonably believe another agreement might be reached; defendants did not give a categorical negative to counter-proposals.
Default, Notice of Cancellation and Demand for Refund
- Private respondent failed to pay the installment due June 30, 1981 and interest on the unpaid balance of initial payment.
- On October 12, 1981, petitioner corporation, through counsel, sent a "Notice of Cancellation of Contract" (Exh. “D”) citing continued failure to pay.
- Notice advised private respondent had the right to pay arrearages within 30 days from receipt; otherwise actual cancellation would take place.
- On September 26, 1983, private respondent, through counsel, demanded refund of alleged payments amounting to P2,455,497.71 with interest within 15 days, or alternatively assignment of an equivalent number of unencumbered lots at contract price (Exh. “E”).
- Demand was not complied with; private respondent filed suit on November 18, 1983.