G.R. No. 129760 - Cheng vs. Genato

Case Summary (G.R. No. 129760)

Factual Background

Respondent Ramon B. Genato owned two parcels at Paradise Farms, San Jose del Monte, Bulacan covered by TCT Nos. T-76.196 (M) and T-76.197 (M) with an aggregate area of 35,821 square meters. On September 6, 1989, Genato executed a notarized Contract to Sell in favor of respondents Ernesto R. Da Jose & Socorro B. Da Jose at P80.00 per square meter, and caused annotation of that contract on the two titles the same day. Clause 3 made payment of P950,000.00 due thirty days after execution as a suspensive condition to delivery of possession. The Da Jose spouses asked for and were granted an extension until November 5, 1989. On October 13, 1989 Genato executed an Affidavit to Annul the Contract to Sell, claiming breach, but did not immediately annotate the affidavit on the titles. On October 24, 1989 Cheng approached Genato, inspected the titles and the annotations, issued a check for P50,000.00 and received a handwritten receipt. Genato deposited Cheng’s check on October 25, 1989 and, after reminders, caused registration of the affidavit to annul on October 26, 1989. The Da Jose spouses discovered the affidavit on October 27, 1989, protested, and later agreed with Genato to continue their contract. Genato returned the transaction with Cheng and remitted a BPI cashier’s check for P50,000.00 on November 2, 1989 which Cheng returned by telegram on November 6, 1989. On November 2, 1989 the Da Jose spouses paid the P950,000.00 down payment and delivered three postdated checks for the balance dated May 6, 1990; they also annotated an affidavit of adverse claim on the titles. Cheng likewise executed an affidavit of adverse claim and annotated it on the titles on November 2, 1989. Cheng filed a complaint for specific performance on December 8, 1989 to compel Genato to execute a deed of sale.

Trial Court Proceedings

At trial the court found that the handwritten receipt given to Cheng on October 24, 1989 constituted a sale and not merely a priority or option, that time was of the essence, and that Genato validly rescinded the Contract to Sell with the Da Jose spouses by his affidavit dated October 13, 1989. The court applied Article 1169 to hold demand unnecessary and Article 1191 to justify rescission. The trial court directed rescission of the September 6, 1989 Contract to Sell, ordered return of P1,000,000.00 plus interest to the intervenors, directed Genato to execute a deed of sale in favor of Cheng at P70.00 per square meter less P50,000.00, and awarded nominal damages and attorneys’ fees to both Cheng and the Da Jose spouses.

Court of Appeals Ruling

The Court of Appeals reversed the trial court and rendered judgment in favor of respondents Ernesto R. Da Jose & Socorro B. Da Jose. The appellate court held that the first Contract to Sell in favor of the Da Jose spouses was not validly rescinded, that the later transaction with Cheng had no force because the prior contract remained effective, and that Cheng acted in bad faith. The CA ordered dismissal of Cheng’s complaint, cancellation of his annotations, payment by the intervenors of the balance of the purchase price, execution by Genato of the deed of absolute sale in favor of the Da Jose spouses, the return by Genato of Cheng’s P50,000.00, and awards of moral, exemplary, and attorney’s fees against Cheng and in favor of the intervenors and Genato.

Issues Presented to the Supreme Court

The petition asserted three principal grounds: that the Da Jose spouses’ Contract to Sell had been validly rescinded or resolved; that Cheng’s agreement with Genato was not a mere Contract to Sell but a conditional contract of sale that conferred superior rights; and that the Court of Appeals erred in holding Cheng liable for damages.

Petitioner’s Contentions

Petitioner Ricardo Cheng contended that Genato’s affidavit effected a valid rescission or resolution of the prior Contract to Sell, that Cheng’s own agreement was a conditional contract of sale which vested him with superior rights over the Da Jose spouses, and that the award of damages against him was erroneous. Petitioner invoked Coronel vs. Court of Appeals to support the contention that the transaction with him constituted a conditional sale rather than a mere contract to sell.

Respondents’ Contentions

Respondents Ramon B. Genato and the Da Jose spouses maintained that the Da Jose spouses were the first buyers and had annotated their Contract to Sell on the titles before Cheng’s intervention. The Da Jose spouses asserted superior rights as first vendees, denied that the attempted unilateral cancellation was effective, and alleged that Cheng acted in bad faith after having been informed of the existing annotated Contract to Sell.

Supreme Court Ruling

The Supreme Court denied the petition and affirmed the decision of the Court of Appeals in toto. The Court found no reversible error in the CA’s conclusion that there was no valid and effective rescission of the Da Jose spouses’ Contract to Sell. The Court held that the Contract to Sell was subject to a suspensive condition—the payment of the P950,000.00 down payment—which, when unfulfilled, prevented the obligation to convey from acquiring obligatory force. The Court explained that Article 1191 contemplates rescission for breach of an already existing obligation, not the nonoccurrence of a suspensive condition which prevents formation of an obligation. The Court observed that the thirty-day extension given to the Da Jose spouses had not yet expired when the affidavit was executed and that Genato’s conduct in subsequently honoring the prior contract undermined any claim of valid unilateral rescission.

Legal Basis and Reasoning

The Court emphasized that where a contract is subject to a suspensive condition, its obligation arises only upon fulfillment of that condition; absence of fulfillment leaves the parties as if the conditional obligation had never existed. The Court required, as an adjunct to extrajudicial acts of rescission, at least a notice to the defaulting party even when an automatic rescission clause is asserted. The Court cited prior jurisprudence, including University of the Philippines vs. De Los Angeles, to underscore that extrajudicial action to treat a contract as rescinded proceeds at the actor’s risk and is subject to judicial review. On the nature of Cheng’s transaction, the Court accepted the factual findings of the courts below that Cheng himself treated the transaction as a Contract to Sell in his pleadings and testimony, and it rejected petitioner’s belated characterization of the receipt as a conditional contract of sale. The Court explained that even if the receipt were a conditional contract of sale, it was subject to the suspensive condition of prior rescission of the Da Jose spouses’ contract—a condition never met.

Case Syllabus (G.R. No. 129760)

Parties and Procedural Posture

Ricardo Cheng, Petitioner, filed a petition for review on certiorari assailing a decision of the Court of Appeals dated July 7, 1997 in CA-G.R. No. CV No. 44706.
Ramon B. Genato and Ernesto R. Da Jose & Socorro B. Da Jose, Respondents, were the vendor and the original vendees, respectively, of the subject properties.
The Regional Trial Court, Branch 96, Quezon City, rendered judgment on January 18, 1994 in favor of Petitioner and ordered specific performance against Respondent Genato.
The Court of Appeals reversed the trial court and rendered judgment in favor of the Respondents, which decision was the subject of the present petition.
The Supreme Court, G.R. No. 129760, resolved the petition by denying the same and affirming the Court of Appeals decision on December 29, 1998.

Key Factual Allegations

Respondent Genato owned two parcels covered by Transfer Certificates of Title Nos. T-76.196 (M) and T-76.197 (M) with an aggregate area of 35,821 square meters.
On September 6, 1989, Respondents Da Jose entered into a Contract to Sell with Genato at P80.00 per square meter with a partial down payment of P50,000.00 and a P950,000.00 downpayment to be paid within thirty days under clause three.
Genato granted the Da Jose spouses an extension on October 4, 1989 to November 5, 1989 for verification, which the parties dispute as to additional conditions.
Genato executed an Affidavit to Annul the Contract to Sell on October 13, 1989 but did not immediately annotate it on the titles.
On October 24, 1989, Petitioner Cheng inspected the titles, learned of the annotation of the Contract to Sell, saw the unregistered affidavit, and issued a check for P50,000.00 to Genato who issued a handwritten receipt (Exh. "D").
Genato deposited Cheng’s check on October 25, 1989 and, after reminder, caused registration of the affidavit on October 26, 1989.
On October 27, 1989, the Da Jose spouses discovered the affidavit, protested, secured a conforme letter from Genato, and later paid the full P950,000.00 downpayment on November 2, 1989 with three postdated checks dated May 6, 1990 totaling P1,865,680.00.
Petitioner Cheng executed an affidavit of adverse claim and had it annotated on the titles on November 2, 1989, and subsequently filed a complaint for specific performance on December 8, 1989.

Issues Presented

Whether the Contract to Sell between Respondent Genato and Respondents Da Jose was validly rescinded by the Affidavit to Annul the Contract to Sell.
Whether the transaction between Petitioner Cheng and Respondent Genato constituted a conditional contract of sale that conferred better rights than a Contract to Sell and thus displaced the prior vendee under Article 1544, Civil Code.
Whether Petitioner Cheng acted in bad faith and therefore was liable for damages for wrongful interference with the contractual relations of Respondents Da Jose and Genato.

Contentions of Parties

Petitioner Cheng contended that Genato validly annulled his contract with the Da Jose spouses, that Cheng’s payment perfected a contract entitling him to conveyance, and that he was not in bad faith.
Respondent Genato contended that the payment from Cheng was an option-bid deposit and that his affidavit rescinded the prior contract.
Respondents Da Jose contended that they had a superior right as first vendees by virtue of their earlier Contract to Sell duly annotated on the titles and that Cheng acted in bad faith after being informed of their rights.

Statutory Framework

Article 1191, Civil Code governs the power to rescind reciprocal obligations and applies to breaches of existing obligations.
Article 1169, Civil Code provides that a demand is not necessary where time was of the essence in the obligation.
Article 1544, Civil Code prescribes priority among conflicting buyers of immovable property, favoring the