Case Summary (G.R. No. 153979)
Core Contractual Documents and Essential Terms
On August 8, 1986, a Deed of Sale with Assumption of Mortgage was executed by vendor David Raymundo in favor of vendee Avelina Velarde for a total consideration reflecting an acknowledged downpayment of P800,000.00 and an outstanding mortgage obligation of P1,800,000.00 with the Bank of the Philippine Islands (BPI). The Deed expressly provided that the vendee would assume and strictly comply with the mortgage terms “as if the same were originally signed and executed by the vendee.” Allocation of taxes and fees was also set: capital gains tax and documentary stamps for the vendor; registration fees and transfer tax for the vendee.
The Undertaking and the Forfeiture/Automatic-Rescission Clause
Simultaneously, the vendee (Avelina, with husband Mariano’s consent) executed an Undertaking confirming payment of the P800,000 downpayment, agreement to pay the mortgage obligations in the vendor’s name pending approval by BPI of the assumption, and an express stipulation that, upon violation of any mortgage terms, the downpayment plus payments to BPI would be forfeited in favor of the vendor and the Deed of Sale would be “automatically cancelled and be of no further force or effect.” David Raymundo likewise confirmed and agreed to the Undertaking.
Facts on Performance, Bank Action, and Subsequent Communications
Plaintiffs paid monthly mortgage interest installments to BPI for three months: P27,225.00 (Sept. 19, 1986), P23,000.00 (Oct. 20, 1986), and P23,925.00 (Nov. 19, 1986). On December 15, 1986 plaintiffs were notified that BPI disapproved their application to assume the mortgage, which, under the Deed of Sale terms, required them to pay the P1.8 million balance in full. Plaintiffs ceased further payments. On January 5, 1987 respondents’ counsel notified plaintiffs that non-payment constituted non-performance. On January 7, 1987 plaintiffs’ counsel sent a letter offering to pay the P1.8 million balance in cash not later than January 21, 1987 provided respondents (a) deliver actual possession by January 15, (b) cause release of title and mortgage by BPI and make title free of liens, and (c) execute an absolute deed of sale free of liens by January 21. On January 8, 1987 respondents sent a notarial notice of cancellation/rescission of the sale for alleged failure to comply with contractual obligations.
Trial Court Proceedings and Intermediate Rulings
Petitioners filed a complaint (Civil Case No. 15952, RTC Makati, Branch 149) for specific performance, nullity of cancellation, writ of possession, and damages. The trial court (Judge Consuelo Ynares‑Santiago) dismissed the complaint in a decision dated November 14, 1990. After a motion for reconsideration and reassignment, Judge Salvador S. A. Abad Santos granted reconsideration in an Order dated May 15, 1991 directing the parties to proceed with the sale: petitioners to pay the P1.8 million balance; respondents to execute a deed of absolute sale and surrender possession. Respondents appealed to the Court of Appeals.
Court of Appeals’ Ruling and Rationale
The Court of Appeals set aside Judge Abad Santos’s Order and reinstated the trial court judgment dismissing the complaint. The CA held that assumption of the mortgage was part of petitioner’s consideration; upon BPI’s disapproval the Deed required payment of the P1.8 million balance. The CA concluded that petitioners’ failure to pay the balance constituted a substantial breach of the reciprocal obligation, entitling respondents to elect rescission under Article 1191 of the Civil Code. The CA treated petitioners’ January 7, 1987 letter as a conditional offer that introduced new terms (an attempt at novation) and was therefore not performance. The CA also recognized the notarial rescission notice as effectuating the vendor’s election to rescind.
Issues Presented to the Supreme Court
Petitioners raised three primary assignments of error: (I) that their nonpayment of the mortgage obligation did not constitute breach because BPI’s disapproval removed the obligation; (II) that respondents’ rescission was unjustified because the breach was not substantial and petitioners had expressed willingness to pay; and (III) that the January 7, 1987 letter did not introduce new conditions amounting to novation.
Supreme Court’s Analysis — Breach of Contract (Reciprocal Obligation)
The Court found that petitioners did more than merely cease paying mortgage installments: they failed to pay the P1.8 million balance that the contract required in the event BPI disapproved the assumption. The Deed and Undertaking expressly placed on petitioners the obligation to pay the balance if assumption was not approved. Petitioners’ January 7 letter conditioned their willingness to pay on additional, previously unagreed obligations by respondents; a conditional or qualified offer cannot substitute for actual payment and thus did not satisfy the vendee’s reciprocal obligation. The Court reiterated the elementary principle that in a contract of sale the buyer’s correlative obligation is to pay the price agreed upon.
Supreme Court’s Analysis — Validity of Rescission under Article 1191
Applying Article 1191, the Court held that voters of a reciprocal obligation may elect rescission when the other party fails to perform. The failure to pay the purchase price balance constituted a breach of an existing obligation, defeating the reciprocity of the contract and justifying rescission. The Court distinguished precedent relied upon by petitioners (cases involving slight or temporary delays where unconditional offers were accepted or the breaches were insubstantial) and emphasized that here petitioners both failed to pay and introduced conditions amounting to repudiation of a then-due obligation. The Court therefore affirmed that respondents validly exercised their right to rescind.
Supreme Court’s Analysis — Effect of Automatic-Rescission/Forfeiture Clause and Mutual Restitution
Because rescission was sought and effected under Article 1191 as a consequence of nonperformance of the reciprocal obligation (not for br
Case Syllabus (G.R. No. 153979)
Procedural Posture
- Petition for Review on Certiorari to the Supreme Court from the Court of Appeals decision in CA-G.R. CV No. 32991 dated October 9, 1992 and its Resolution dated December 29, 1992 denying motion for reconsideration.
- The dispositive portion of the CA Decision ordered: "WHEREFORE, the Order dated May 15, 1991 is hereby ANNULLED and SET ASIDE and the Decision dated November 14, 1990 dismissing the [C]omplaint is REINSTATED. The bonds posted by plaintiffs-appellees and defendants-appellants are hereby RELEASED." (CA Decision, p. 11; rollo, p. 20).
- Case originally filed as Civil Case No. 15952 at the Regional Trial Court of Makati, Branch 149.
- Trial court (Judge Consuelo Ynares-Santiago) dismissed complaint in Decision dated November 14, 1990; a later Order dated May 15, 1991 by Judge Salvador S. A. Abad Santos granted motion for reconsideration and directed parties to proceed with the sale; defendants appealed to the Court of Appeals.
- Supreme Court resolution: petition was partially meritorious; affirmed CA decision with modification ordering private respondents to return P874,150 with legal interest from January 8, 1987; no pronouncement as to costs.
Factual Background — Parties and Property
- Private respondent David A. Raymundo was the absolute and registered owner of a parcel of land with house and improvements located at 1918 Kamias St., Dasmariñas Village, Makati, covered by TCT No. 142177.
- Defendant George Raymundo is David Raymundo's father who negotiated the sale with petitioners Mariano and Avelina Velarde.
- The property was under lease at the time of negotiations (Exh. `6', p. 232, Record of Civil Case No. 15952).
Deed of Sale with Assumption of Mortgage (August 8, 1986)
- A Deed of Sale with Assumption of Mortgage was executed by vendor David A. Raymundo in favor of vendee Avelina Velarde with the following salient terms (Exh.
A', Exh.1', pp. 11-12, Record):- Purchase price/consideration stated as EIGHT HUNDRED THOUSAND PESOS (P800,000.00), receipt of which was acknowledged by the vendor.
- The parcel and improvements had been mortgaged by the vendor to Bank of the Philippine Islands (BPI) to secure a loan of ONE MILLION EIGHT HUNDRED THOUSAND PESOS (P1,800,000.00).
- As part of the consideration, the vendee (Velarde) assumed payment of the mortgage obligations of P1,800,000 in favor of BPI in the name of the vendor, and agreed to comply strictly with the mortgage terms, including interests and charges for late payment, "as if the same were originally signed and executed by the VENDEE."
- Capital gains tax and documentary stamps to be for the account of the vendor; registration fees and transfer tax for the account of the vendee.
Undertaking Signed by Avelina (and Mariano) Velarde (August 8, 1986)
- An Undertaking executed by Avelina Velarde, with the consent of husband Mariano, confirmed:
- Payment to David Raymundo of P800,000 and assumption of mortgage obligations of P1,800,000 with BPI (Exh. `C', pp. 13-14, Record).
- While application for assumption of mortgage by vendee to the mortgagee bank was pending, vendee agreed to pay mortgage obligations in the name of Mr. David A. Raymundo in accordance with mortgage terms.
- Covenant to continue paying the loan in the name of Mr. Raymundo until the bank approved the assumption.
- A clause providing that in the event vendee violated any terms of the mortgage deed, the downpayment of P800,000 plus all payments made with BPI would be forfeited in favor of Mr. Raymundo as liquidated damages without necessity of notice or judicial declaration, and the Deed of Sale would be automatically cancelled and of no further force or effect, with Mr. Raymundo resuming ownership and possession.
- David A. Raymundo confirmed and agreed to the vendee's undertakings pertinent to the assumption.
Understanding of the Parties on Assumption and Payment Mechanism
- The parties agreed that the P1.8 million balance was to be sourced from proceeds of a bank loan that petitioners were to secure, using defendants' standing approved credit line with BPI, subject to BPI approval of the application for assumption of mortgage by petitioners.
- Pending BPI approval, petitioners agreed to continue paying monthly interest on the loan secured by the real estate mortgage.
Payments Made by Petitioners to BPI
- Petitioners paid monthly interest to BPI for three months as follows (Exh.
E',H' & `J', pp. 15, 17 and 18, Record):- September 19, 1986 — P27,225.00
- October 20, 1986 — P23,000.00
- November 19, 1986 — P23,925.00
- Total of initial downpayment plus these mortgage payments equals P874,150.00 as later identified by the Supreme Court.
Bank Disapproval, Correspondence, and Notarial Notice
- On December 15, 1986, petitioners were advised that the Application for Assumption of Mortgage with BPI was not approved (Exh. `J', p. 133, Record). This prompted petitioners to cease further payments.
- On January 5, 1987, defendants, through counsel, informed petitioners that their non-payment to the mortgage bank constituted non-performance of their obligation (Exh. `3', p. 220, Record).
- On January 7, 1987, petitioners, through counsel, replied indicating willingness to pay the balance in cash not later than January 21, 1987 provided three conditions were met:
- (a) Actual possession delivered not later than January 15, 1987 for immediate occupancy;
- (b) Release of title and mortgage from BPI and title made available free from liens and encumbrances;
- (c) Execution of an absolute deed of sale free from liens or encumbrances not later than January 21, 1987 (Exhs.
K',4', p. 223, Record).
- On January 8, 1987, defendants sent petitioners a notarial notice of cancellation/rescission of the intended sale alleging petitioners' failure to comply with the terms and conditions of the Deed of Sale and the Undertaking (Exh. `5', pp. 225-226, Record).
Trial Court Proceedings and Intermediate Orders
- Petitioners filed a Complaint on February 9, 1987 for specific performance, nullity of cancellation, writ of possession and damages (docketed as Civil Case No. 15952, RTC Makati Branch 149).
- Trial court (Judge Consuelo Ynares-Santiago) dismissed the Complaint in a Decision dated November 14, 1990 (Records, pp. 280-284).
- Petitioners filed a Motion for Reconsideration (Records, pp. 285-293).
- Judge Salvador S. A. Abad Santos, in an Order dated May 15, 1991, granted petitioners' Motion for Reconsideration and directed the parties to proceed with the sale; instructed petitioners to pay the