G.R. No. 217414 - Dela Cruz-Cagampan vs. One Network Bank, Inc.

Case Summary (G.R. No. 217414)

Petitioner

Petitioner sought rescission of the Deed of Conditional Sale with Assumption of Mortgage and damages, alleging respondent failed to pay the P805,000 balance of the agreed P4,200,000 purchase price and breached verbal side agreements (including nonpayment of interest at 6% monthly, failure to renew fire insurance, wrongful retention of rental income), thereby entitling petitioner to rescission, interest, back rentals, actual damages, moral and exemplary damages, and attorney’s fees.

Respondent

Respondent maintained the tripartite instrument was a contract to sell (not an absolute sale) and defended that she had paid the mortgage obligation (P2,278,078.13) to avert foreclosure and paid additional sums directly to petitioner, effectively paying in excess of P4,200,000 when improvements and payments to the bank are considered. She asserted willingness to pay outstanding sums, denied liability for interest beyond contractual terms, and contested petitioner’s claims for back rentals and damages.

Key Dates

June 20, 1988: Petitioner mortgaged properties to FSL Bank (loan of P2,000,000).
November 15, 1990: Mortgage outstanding reached P2,278,078.13.
November 26, 1990: Deed of Conditional Sale with Assumption of Mortgage executed among petitioner, respondent and FSL Bank.
December 31, 1991: Final installment due under deed (P800,000).
September 10, 1992: Petitioner filed complaint for rescission with damages.
Procedural history includes RTC decision (February 22, 2006), CA decision (February 13, 2009) affirmed with modification, and final Supreme Court decision denying the petition.

Applicable Law and Constitutional Context

Applicable constitution: 1987 Philippine Constitution (decision date post‑1990). Key statutory provisions and authorities applied and discussed by the courts include Civil Code provisions (Article 1191 on rescission, Article 1458 defining contract of sale, Article 1479 on promise to buy and sell, and Articles 2219–2220 on damages and moral damages as referenced), and jurisprudence distinguishing contract of sale from contract to sell (cases cited in the record: Nabus v. Joaquin & Julia Pacson; Heirs of Atienza v. Espidol; Chua v. Court of Appeals; GG Sportswear Mfg. Corp. v. World Class Properties, Inc.).

Procedural Posture

Petitioner filed for rescission of contract with damages in 1992. The RTC characterized the instrument as a contract to sell, declined immediate rescission but ordered respondent to pay P805,000 within 30 days with interest (2% monthly) and stipulated conditions for automatic rescission upon failure. The CA affirmed that the instrument was a contract to sell, deleted the trial court’s automatic rescission clause, and ordered respondent to pay P805,000 within 30 days with interest at 6% per annum from filing of complaint and 12% thereafter. Petitioner sought review, advancing multiple assignments of error challenging the denial of rescission, the reduction of interest, the refusal to award damages and attorney’s fees, and other rulings.

Material Contractual Terms (Deed of Conditional Sale)

The Deed expressly:

Reserved title in the seller (petitioner) until full payment of the purchase price and liquidation of the mortgage assumed by the buyer (respondent); prohibited resale or encumbrance without consent pending payment.
Required the buyer to pay a total purchase price of P4,200,000 with specified allocations: cash paid directly to bank (P278,078.13) to reduce mortgage; P721,921.87 additional payment to petitioner; P1,200,000 payable in three installments (P200,000 due Jan 31, 1991; P200,000 due June 30, 1991; P800,000 due Dec 31, 1991), with the clause “All the installments shall not bear interest.”
Stipulated that upon full payment the bank would issue a Deed of Cancellation of Mortgage and the seller would execute a Deed of Absolute Sale.

Core Legal Issue

Whether the CA correctly concluded that there was no legal basis for rescission of the Deed of Conditional Sale with Assumption of Mortgage, given respondent’s failure to pay the unpaid balance of P805,000.

Classification of the Contract: Contract to Sell vs. Contract of Sale

The Court concurred with RTC and CA that the instrument is a contract to sell. The Deed’s express reservation of title until full payment and the requirement that FSL Bank issue a Deed of Cancellation of Mortgage and petitioner execute the Deed of Absolute Sale upon full payment establish that transfer of ownership was subject to a positive suspensive condition (full payment). Under Article 1458 and related jurisprudence cited, a contract to sell differs from a contract of sale in that the seller retains ownership until the suspensive condition is fulfilled; thus, the buyer’s failure to pay is an event preventing conveyance rather than a breach of an already existing obligation to convey.

Effect of Classification on Right to Rescind (Article 1191)

Because the Deed is a contract to sell, the seller’s obligation to convey was contingent on the buyer’s full payment; non‑fulfillment of that positive suspensive condition does not create an existing obligation whose breach would justify rescission under Article 1191. The Court emphasized that Article 1191 contemplates rescission for breach of an obligation already in existence; failure of a condition precedent prevents the obligation from arising and thus is not a breach that supports rescission. Consequently, petitioner could not invoke rescission merely because the suspensive condition (full payment) had not occurred.

Assessment of Breach: Substantial or Slight

Even assuming rescission were available, the Court found respondent’s nonpayment amounted to a slight or casual breach based on the attendant circumstances. The record showed respondent had paid substantial portions of the purchase price and assumed and paid the mortgage obligation to FSL Bank; out of P4,200,000, respondent’s actual payments amounted to roughly P3,400,000, leaving an unpaid balance of about P805,000. Given that a substantial portion of the price had been paid and respondent had offered to settle outstanding sums, the courts deemed it equitable to allow respondent a reasonable period to pay the balance rather than permit rescission. The Court therefore upheld the CA’s allowance for payment of the balance rather than automatic rescission.

Interest: Contractual Stipulation and Judicial Determination

The Deed expressly stated “All the installments shall not bear interest.” Petitioner asserted an oral or subsequent commitment by respondent to pay interest at 6% monthly from delinquency; the Court found petitioner did not substantiate such a personal commitment. Given the contractual no‑interest stipulation, the CA nevertheless imposed judicial interest at 6% per annum from the filing of the complaint (September 11, 1992) and 12% per annum thereafter until full payment. The Supreme Court upheld that imposition, rejecting petitioner’s claim for 6% per month from December 31, 1991, for lack of proof of such an agreement and in light of the written contractual provision excluding interest on installments.

Damages, Back Rentals, Moral/Exemplary Damages and Attorney’s Fees

Petitioner’s claims for actual damages (lost rental income), back rentals (P2

Case Syllabus (G.R. No. 217414)

Procedural History

Petition for review to the Supreme Court from the Court of Appeals (CA) Decision dated February 13, 2009 (G.R. No. 188064, June 1, 2011 case citation 665 Phil. 425).
Underlying action: Civil Case No. 3945-V-92 filed before the Regional Trial Court (RTC), Branch 172, Valenzuela City — complaint for Rescission of Contract with Damages filed by petitioner on September 10, 1992.
RTC rendered its Decision on February 22, 2006; CA affirmed with modification on February 13, 2009; petitioner’s motion for reconsideration denied; respondent’s motion for partial reconsideration denied; petitioner filed the present petition for review.
Final disposition by the Supreme Court: petition denied.

Parties and Role

Petitioner: Mila A. Reyes — registered owner of subject real properties (1,274 sq. m. lot in Karuhatan, Valenzuela City, covered by TCT No. V-4130); operator of ground-floor drugstore and cosmetics store in RBJ Building; seller under the contested deed.
Respondent: Victoria T. Tuparan — lessee since December 1989 of a ground-floor space in RBJ Building for a pawnshop; later purchaser/assumer under the Deed of Conditional Sale with Assumption of Mortgage executed November 26, 1990; defendant in the rescission action.
Third party in the Deed: Farmers Savings and Loan Bank, Inc. (FSL Bank) — mortgagee whose mortgage the respondent agreed to assume.

Statement of Facts (as pleaded by Petitioner)

Petitioner owned a 1,274 sq. m. residential/commercial lot in Karuhatan, Valenzuela City (TCT No. V-4130) with a three-storey commercial building (RBJ Building) and a residential apartment building; petitioner operated a drugstore and cosmetics store on the ground floor and resided there.
Since 1990 petitioner leased remaining building spaces and sidewalks to tenants and street vendors, deriving rental income.
December 1989: respondent leased space for a pawnshop at monthly rental P4,000.00; close friendship and business dealings developed leading to respondent investing thousands of pesos in petitioner’s financing/lending business (Feb 7, 1990 to May 27, 1990) at 6% per month.
June 20, 1988: petitioner mortgaged the properties to FSL Bank to secure a P2,000,000.00 loan payable in installments; by November 15, 1990 outstanding mortgage account reached P2,278,078.13.
Petitioner decided to sell the properties for at least P6,500,000.00 to liquidate bank loan and finance businesses.
Respondent verbally offered to conditionally buy the properties for P4,200,000.00 in installments without interest and to assume the bank loan; to induce acceptance respondent offered concessions:
- Conditional right of cancellation by petitioner if she could find a buyer for P6,500,000.00 within three months, with refund of amounts received plus 6% monthly interest.
- Petitioner’s continued free use of her drugstore space during installment payments.
- A 15-year lease in favor of petitioner at P8,000.00/month after full payment.
- Respondent to undertake renewal/payment of fire insurance on the two buildings after existing policy expiration until petitioner fully paid the P4,200,000.00.
Parties worked with FSL Bank to obtain approval for respondent to assume mortgage; FSL Bank conditioned approval on petitioner signing or remaining as co-maker for the mortgage obligation assumed by respondent.
November 26, 1990: parties and FSL Bank executed the Deed of Conditional Sale of Real Properties with Assumption of Mortgage.
Under the Deed respondent bound to pay petitioner P1,200,000.00 in three installments (no interest on installments): P200,000.00 due Jan 31, 1991; P200,000.00 due June 30, 1991; P800,000.00 due Dec 31, 1991. Other parts of the purchase price included P278,078.13 paid directly to FSL Bank and P721,921.87 received in cash by petitioner (per Deed stipulations).
Respondent defaulted on lump-sum payments and instead made small payments from time to time; to compensate respondent agreed to pay petitioner 6% a month on delayed payments (petitioner’s averment).
As of August 31, 1992 respondent had paid P395,000.00 to petitioner with a remaining principal balance of P805,000.00 and unpaid accumulated interest of P466,893.25 (petitioner’s averment).
Petitioner allegedly found a buyer within the agreed 3-month period, but respondent refused cancellation and sought to own and redevelop the properties; respondent did not collect rent from petitioner for the drugstore space since December 1990.
March 19, 1992: residential building gutted by fire; petitioner lost rental income of P8,000.00/month since April 1992; respondent neglected to renew fire insurance policy.
Since December 1990 respondent took possession, collected and received monthly rental income from tenants and sidewalk vendors without sharing with petitioner.
September 2, 1992: respondent offered P751,000.00 payable September 7, 1992 as full payment and demanded execution of deed of absolute sale.

Material Terms of the Deed of Conditional Sale (stipulations and operative clauses)

Deed executed November 26, 1990 among petitioner (First Party), respondent (Second Party) and FSL Bank (Third Party).
Clause on purchase price and payments:
- Total agreed purchase price: P4,200,000.00.
- Components: P278,078.13 paid directly to FSL Bank as partial mortgage payment; P721,921.87 received in cash by petitioner; P1,200,000.00 payable in three installments (P200k; P200k; P800k — “All the installments shall not bear any interest.”); P2,000,000.00 outstanding mortgage assumed by respondent.
Clause 8: Title and ownership shall remain with the First Party (petitioner) until full payment of the balance of the purchase price and liquidation of the mortgage obligation assumed by the Second Party; pending such payment respondent shall not sell, transfer, convey or encumber without written consent of First and Third Parties.
Clause 9: Upon full payment of purchase price and assumed mortgage, Third Party (FSL Bank) shall issue Deed of Cancellation of Mortgage and First Party shall execute Deed of Absolute Sale in favor of Second Party.

Respondent’s Answer and Defenses (as plead by respondent)

Characterized the tripartite Deed as a pure and absolute contract of sale with a term and not a conditional sale, arguing acquisition of contractual rights and performance did not depend on a future uncertain event.
Alleged petitioner failed to pay capital gains tax, documentary stamps, other expenses and real estate taxes up to 1990 as required.
Claimed respondent “rescued” properties from foreclosure by paying assumed mortgage of P2,278,078.13 plus interest and finance charges; obtained deed of cancellation of mortgage and release of mortgage on subject properties and petitioner’s ancestral property in Sta. Maria, Bulacan.
Asserted she paid more than the agreed purchase price (P4,200,000.00), introduced improvements worth more than P4,800,000.00, and therefore petitioner’s claim for balance was baseless.
Argued rescission was not available because parties could not be restored to former positions.
Counterclaimed or raised offsets: petitioner obtained a loan of P400,000.00 from respondent with interest and took jewelry worth P120,000.00; petitioner failed/refused to pay monthly rental of P20,000.00 since November 16, 1990, accruing arrears of P470,000.00 as of October 1992.
Denied petitioner’s claims for back rentals and other damages, asserting lack of proof.

Findings and Decree of the RTC (February 22, 2006)

RTC found respondent failed to fully pay the P4.2 million purchase price leaving balance of P805,000.00.
RTC considered checks and receipts submitted by respondent to refer to mortgage payments to FSL Bank and not to payment of the P1,200,000.00 balance due petitioner.
RTC classified the Deed of Conditional Sale as a contract to sell (contract to sell vs contract of sale).
RTC held petitioner entitled to rescission but restrained from immediate rescission because non-payment did not constitute a substantial and fundamental breach “as to defeat the object of the parties.”
RTC found respondent’s offer (counsel’s letter Sept 2, 1992) to settle unpaid balance of P751,000.00 showed sincerity; equitable to allow a grace period.
RTC con