Title
Spouses Garcia vs. Court of Appeals
Case
G.R. No. 172036
Decision Date
Apr 23, 2010
Petitioners failed to pay the final installment in a Contract to Sell, leading to valid rescission by Dela Cruz. Maceda Law inapplicable; Bartolome deemed a good faith buyer. SC upheld appellate court's decision.
contract dispute
sale of land
rescind contract
A

Case Summary (G.R. No. 172036)

Factual Background

On May 28, 1993, petitioners and Emerlita dela Cruz entered into a Contract to Sell whereby dela Cruz agreed to sell to petitioners for P3,170,220.00 five parcels of land identified by Lot Nos. 47, 2768, 2776, 2767, 2769 and covered by specific transfer certificates of title. At the time of contract execution, three of the lots—Lot Nos. 2776, 2767, and 2769—were registered under the name of Angel Abelida, from whom dela Cruz allegedly acquired the properties through a Deed of Absolute Sale dated March 31, 1989.

The contract required a down payment of P500,000.00 upon signing, and a balance of P2,670,220.00 to be paid in three installments: P500,000.00 on June 30, 1993; P500,000.00 on August 30, 1993; and P1,670,220.00 on December 31, 1993. Petitioners failed to pay the last installment of P1,670,220.00 on its due date (December 31, 1993). Around July 1995, petitioners offered to pay the unpaid balance, which had already been delayed by about one and a half years, but dela Cruz refused to accept payment. On September 23, 1995, dela Cruz sold the same parcels to Diogenes G. Bartolome for P7,793,000.00.

Petitioners filed an action for specific performance, insisting that they were justified in withholding the last installment because they allegedly discovered that the earlier deed of sale by which Abelida supposedly conveyed the properties to dela Cruz was spurious, due to alleged falsification of signatures of Abelida and his wife. Petitioners claimed that Abelida and his wife were in the United States at the time of that deed, and that their apprehension about authenticity caused them to withhold the last installment. Petitioners also asserted that after Abelida supposedly ratified the sale to dela Cruz, they tendered payment in July 1995, yet dela Cruz refused to accept it.

In her answer, dela Cruz denied that the deed was spurious and argued that petitioners failed to pay the purchase price in full despite demands. She relied on a contractual proviso stating that failure to pay would cause rescission and forfeiture in favor of the vendor equivalent to one-half percent (1/2%) of the total amount paid. She also averred that a notarized letter notifying the intended rescission and forfeiture was sent to petitioners’ last known address but was returned for being an “insufficient address.” Bartolome intervened by alleging that the contract had been rescinded and had become ineffective due to petitioners’ unwarranted failure to pay the balance on time, and that he bought the properties from dela Cruz by a deed dated September 23, 1995 in consideration of P7,793,000.00, claiming clean title and interest in the parcels.

Trial Court Proceedings and Ruling

In its Decision dated 15 April 1999, the trial court ruled that dela Cruz’s rescission of the contract was not valid. It held that dela Cruz was not allowed to unilaterally cancel the Contract to Sell. The trial court found that petitioners were justified in withholding the balance due to the alleged spurious sale between Abelida and dela Cruz. It further ruled that Bartolome was not a purchaser in good faith, reasoning that he was aware of petitioners’ interest in the properties.

Accordingly, the trial court ordered dela Cruz to accept the balance of the purchase price in the amount of P1,670,220.00 within ten (10) days from the finality of judgment and to execute a final deed of sale in petitioners’ favor. It also awarded P400,000.00 as moral damages, P100,000.00 as exemplary damages, and P100,000.00 as attorney’s fees. The trial court declared the sale to Bartolome void and ordered dela Cruz to return P7,793,000.00 to Bartolome within ten (10) days from finality.

Court of Appeals Ruling

Both dela Cruz and Bartolome appealed. In its Decision promulgated on 25 January 2006, the Court of Appeals reversed the trial court and dismissed Civil Case No. TM-622. The appellate court ruled that dela Cruz’s obligation under the contract did not arise because petitioners unduly failed to pay the agreed purchase price in full on the stipulated date. It further held that judicial action for rescission was not necessary where the contract itself provided for revocation and cancellation upon violation of its terms.

The appellate court also ordered a limited restitution: it directed dela Cruz to return to petitioners the amount in excess of one-half percent (1/2%) of P1,500,000.00 which had earlier been paid, and it denied liability of Bartolome. It subsequently denied petitioners’ motion for reconsideration in a Resolution dated 16 March 2006.

The Parties’ Contentions in the Supreme Court

Petitioners moved to reinstate the trial court’s outcome, asserting that the appellate court erred in failing to apply the Maceda Law, in failing to recognize that dela Cruz could not pass title at the time she entered the Contract to Sell because her purported ownership was “tainted with fraud,” and in disregarding that dela Cruz’s “rescission” was allegedly made in evident bad faith and malice due to a subsequent sale at a higher price. They also argued that Bartolome was not an innocent purchaser for value because of evidence of his bad faith.

The Supreme Court noted, however, that both sides admitted key facts: first, that the parties’ agreement was a contract to sell; second, that petitioners failed to pay the purchase price in full on the stipulated date; and third, that dela Cruz did not want to accept petitioners’ payment and did not want to execute a document of transfer in their favor.

Legal Basis and Reasoning

The Court treated the contract’s nature as dispositive. Applying the controlling contract principle that contracts are law between the parties, the Court emphasized that the contract expressly retained title in the vendor and required full payment before any transfer obligation would arise. The Court focused on the contractual provisions that: (a) failure of the vendees to comply with the payment stipulations would cause rescission and return of payments to the vendees, subject to forfeiture of 1/2% of the total amount paid; and (b) possession would remain with the vendor until a Deed of Absolute Sale was executed after full payment.

The Court held that the agreement operated as a contract to sell because dela Cruz retained ownership and did not undertake an obligation to execute the deed until petitioners paid the full purchase price. It characterized the full payment requirement as a positive suspensive condition. Under this framework, the non-payment of the balance on time did not constitute breach of a present obligation to convey, but instead prevented the vendor’s obligation to transfer from becoming effective. Because the obligation to convey title had not yet arisen, the Court reasoned that there could not strictly be rescission of an obligation that was still non-existent due to the non-happening of the suspensive condition.

To support that approach, the Court invoked its prior ruling in Pangilinan v. Court of Appeals, stating that Article 1592 of the Civil Code on demand by suit or by notarial act in case the vendor of realty wants to rescind does not apply to a contract to sell, but applies to an absolute sale. The Court reiterated that in contracts to sell with reserved ownership, the failure to pay the purchase price on time simply prevented the vendor’s obligation to convey from attaining binding force. It also clarified that while Article 1191 of the Civil Code provides for rescission in reciprocal obligations and grants the injured party alternative remedies, nothing in that provision prohibits parties from agreeing that violations will lead to automatic cancellation even without court intervention, so long as the propriety of the cancellation is later capable of judicial determination.

The Court then rejected petitioners’ invocation of the alleged defect in dela Cruz’s title as a basis to excuse non-payment. It held that petitioners could not successfully justify delay by invoking notice of dela Cruz’s alleged lack of ownership. It stated that Abelida’s affidavit confirming the sale to dela Cruz strengthened dela Cruz’s claim of absolute ownership at the time the Contract to Sell was executed. The Court also observed that dela Cruz did not conceal the continuing registration of Lot Nos. 2776, 2767, and 2769 under Abelida’s name, and that the contract contemplated that petitioners would shoulder expenses for transferring ownership from Abelida to dela Cruz.

On Maceda Law, the Court held that the trial court erred in applying R.A. 6552. It explained that the Maceda Law applies to contracts of sale of real estate on installment payments, including residential condominium apartments, but excluding industrial lots, commercial buildings, and sales to tenants. The Court ruled that the subject lands, comprising five parcels and aggregating 69,028 square meters, did not constitute “residential real estate” within the contemplation of the statute, and therefore Maceda Law did not apply.

Even assuming arguendo that it applied, the Court held that petitioners’ offer of payment was made a year and a half after the stipulated date, which exceeded the sixty-day grace period under Section 4 of the Maceda Law. The Court further ruled that petitioners could not rely on the second

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