1191 – RESCISSION/RESOLUTION

[G.R. No. 139523. May 26, 2005]

SPS. FELIPE AND LETICIA CANNU, petitioners, vs. SPS. GIL AND FERNANDINA GALANG AND
NATIONAL HOME MORTGAGE FINANCE CORPORATION, respondents.

DECISION
CHICO-NAZARIO, J.:

Before Us is a Petition for Review on Certiorari which seeks to set aside the decision[1] of the Court of
Appeals dated 30 September 1998 which affirmed with modification the decision of Branch 135 of the
Regional Trial Court (RTC) of Makati City, dismissing the complaint for Specific Performance and Damages
filed by petitioners, and its Resolution[2] dated 22 July 1999 denying petitioners’ motion for reconsideration.
A complaint[3] for Specific Performance and Damages was filed by petitioners-spouses Felipe and
Leticia Cannu against respondents-spouses Gil and Fernandina Galang and the National Home Mortgage
Finance Corporation (NHMFC) before Branch 135 of the RTC of Makati, on 24 June 1993. The case was
docketed as Civil Case No. 93-2069.
The facts that gave rise to the aforesaid complaint are as follows:
Respondents-spouses Gil and Fernandina Galang obtained a loan from Fortune Savings & Loan
Association for P173,800.00 to purchase a house and lot located at Pulang Lupa, Las Piñas, with an area
of 150 square meters covered by Transfer Certificate of Title (TCT) No. T-8505 in the names of
respondents-spouses. To secure payment, a real estate mortgage was constituted on the said house and
lot in favor of Fortune Savings & Loan Association. In early 1990, NHMFC purchased the mortgage loan
of respondents-spouses from Fortune Savings & Loan Association for P173,800.00.
Respondent Fernandina Galang authorized[4] her attorney-in-fact, Adelina R. Timbang, to sell the
subject house and lot.
Petitioner Leticia Cannu agreed to buy the property for P120,000.00 and to assume the balance of the
mortgage obligations with the NHMFC and with CERF Realty[5] (the Developer of the property).
Of the P120,000.00, the following payments were made by petitioners:
Date Amount Paid
July 19, 1990 P40,000.00[6]
March 13, 1991 15,000.00[7]
April 6, 1991 15,000.00[8]
November 28, 1991 5,000.00[9]
Total P75,000.00
Thus, leaving a balance of P45,000.00.
A Deed of Sale with Assumption of Mortgage Obligation[10] dated 20 August 1990 was made and
entered into by and between spouses Fernandina and Gil Galang (vendors) and spouses Leticia and Felipe
Cannu (vendees) over the house and lot in question which contains, inter alia, the following:

NOW, THEREFORE, for and in consideration of the sum of TWO HUNDRED FIFTY THOUSAND PESOS
(P250,000.00), Philippine Currency, receipt of which is hereby acknowledged by the Vendors and the
assumption of the mortgage obligation, the Vendors hereby sell, cede and transfer unto the Vendees,
their heirs, assigns and successor in interest the above-described property together with the existing
improvement thereon.

It is a special condition of this contract that the Vendees shall assume and continue with the payment of
the amortization with the National Home Mortgage Finance Corporation Inc. in the outstanding balance
of P_______________, as of __________ and shall comply with and abide by the terms and conditions of
the mortgage document dated Feb. 27, 1989 and identified as Doc. No. 82, Page 18, Book VII, S. of 1989
of Notary Public for Quezon City Marites Sto. Tomas Alonzo, as if the Vendees are the original
signatories.

Petitioners immediately took possession and occupied the house and lot.
Petitioners made the following payments to the NHMFC:
Date Amount Receipt No.
July 9, 1990 P 14,312.47 D-503986[11]
March 12, 1991 8,000.00 D-729478[12]
February 4, 1992 10,000.00 D-999127[13]
March 31, 1993 6,000.00 E-563749[14]
April 19, 1993 10,000.00 E-582432[15]
April 27, 1993 7,000.00 E-618326[16]
P 55,312.47
Petitioners paid the “equity” or second mortgage to CERF Realty. [17]
Despite requests from Adelina R. Timbang and Fernandina Galang to pay the balance of P45,000.00
or in the alternative to vacate the property in question, petitioners refused to do so.
In a letter[18] dated 29 March 1993, petitioner Leticia Cannu informed Mr. Fermin T. Arzaga, Vice
President, Fund Management Group of the NHMFC, that the ownership rights over the land covered by
TCT No. T-8505 in the names of respondents-spouses had been ceded and transferred to her and her
husband per Deed of Sale with Assumption of Mortgage, and that they were obligated to assume the
mortgage and pay the remaining unpaid loan balance. Petitioners’ formal assumption of mortgage was not
approved by the NHMFC.[19]
Because the Cannus failed to fully comply with their obligations, respondent Fernandina Galang, on
21 May 1993, paid P233,957.64 as full payment of her remaining mortgage loan with NHMFC.[20]
Petitioners opposed the release of TCT No. T-8505 in favor of respondents-spouses insisting that the
subject property had already been sold to them. Consequently, the NHMFC held in abeyance the release
of said TCT.
Thereupon, a Complaint for Specific Performance and Damages was filed asking, among other things,
that petitioners (plaintiffs therein) be declared the owners of the property involved subject to
reimbursements of the amount made by respondents-spouses (defendants therein) in preterminating the
mortgage loan with NHMFC.
Respondent NHMFC filed its Answer.[21] It claimed that petitioners have no cause of action against it
because they have not submitted the formal requirements to be considered assignees and successors-in-
interest of the property under litigation.
In their Answer,[22] respondents-spouses alleged that because of petitioners-spouses’ failure to fully
pay the consideration and to update the monthly amortizations with the NHMFC, they paid in full the existing
obligations with NHMFC as an initial step in the rescission and annulment of the Deed of Sale with
Assumption of Mortgage. In their counterclaim, they maintain that the acts of petitioners in not fully
complying with their obligations give rise to rescission of the Deed of Sale with Assumption of Mortgage
with the corresponding damages.
After trial, the lower court rendered its decision ratiocinating:
On the basis of the evidence on record, testimonial and documentary, this Court is of the view that
plaintiffs have no cause of action either against the spouses Galang or the NHMFC. Plaintiffs have
admitted on record they failed to pay the amount of P45,000.00 the balance due to the Galangs in
consideration of the Deed of Sale With Assumption of Mortgage Obligation (Exhs. “C” and
“3”). Consequently, this is a breach of contract and evidently a failure to comply with obligation arising
from contracts. . . In this case, NHMFC has not been duly informed due to lack of formal requirements to
acknowledge plaintiffs as legal assignees, or legitimate tranferees and, therefore, successors-in-interest
to the property, plaintiffs should have no legal personality to claim any right to the same property. [23]

The decretal portion of the decision reads:

Premises considered, the foregoing complaint has not been proven even by preponderance of evidence,
and, as such, plaintiffs have no cause of action against the defendants herein. The above-entitled case is
ordered dismissed for lack of merit.

Judgment is hereby rendered by way of counterclaim, in favor of defendants and against plaintiffs, to wit:

1. Ordering the Deed of Sale With Assumption of Mortgage Obligation (Exhs. “C” and “3”) rescinded
and hereby declared the same as nullified without prejudice for defendants-spouses Galang to return the
partial payments made by plaintiffs; and the plaintiffs are ordered, on the other hand, to return the
physical and legal possession of the subject property to spouses Galang by way of mutual restitution;

2. To pay defendants spouses Galang and NHMFC, each the amount of P10,000.00 as litigation
expenses, jointly and severally;

3. To pay attorney’s fees to defendants in the amount of P20,000.00, jointly and severally; and

4. The costs of suit.

5. No moral and exemplary damages awarded.[24]

A Motion for Reconsideration[25] was filed, but same was denied. Petitioners appealed the decision of
the RTC to the Court of Appeals. On 30 September 1998, the Court of Appeals disposed of the appeal as
follows:

Obligations arising from contract have the force of law between the contracting parties and should be
complied in good faith. The terms of a written contract are binding on the parties thereto.

Plaintiffs-appellants therefore are under obligation to pay defendants-appellees spouses Galang the sum
of P250,000.00, and to assume the mortgage.

Records show that upon the execution of the Contract of Sale or on July 19, 1990 plaintiffs-appellants
paid defendants-appellees spouses Galang the amount of only P40,000.00.

The next payment was made by plaintiffs-appellants on March 13, 1991 or eight (8) months after the
execution of the contract. Plaintiffs-appellants paid the amount of P5,000.00.

The next payment was made on April 6, 1991 for P15,000.00 and on November 28, 1991, for another
P15,000.00.

From 1991 until the present, no other payments were made by plaintiffs-appellants to defendants-
appellees spouses Galang.
Out of the P250,000.00 purchase price which was supposed to be paid on the day of the execution of
contract in July, 1990 plaintiffs-appellants have paid, in the span of eight (8) years, from 1990 to present,
the amount of only P75,000.00. Plaintiffs-appellants should have paid the P250,000.00 at the time of the
execution of contract in 1990. Eight (8) years have already lapsed and plaintiffs-appellants have not yet
complied with their obligation.

We consider this breach to be substantial.

The tender made by plaintiffs-appellants after the filing of this case, of the Managerial Check in the
amount of P278,957.00 dated January 24, 1994 cannot be considered as an effective mode of payment.

Performance or payment may be effected not by tender of payment alone but by both tender and
consignation. It is consignation which is essential in order to extinguish plaintiffs-appellants obligation to
pay the balance of the purchase price.

In addition, plaintiffs-appellants failed to comply with their obligation to pay the monthly amortizations due
on the mortgage.

In the span of three (3) years from 1990 to 1993, plaintiffs-appellants made only six payments. The
payments made by plaintiffs-appellants are not even sufficient to answer for the arrearages, interests and
penalty charges.

On account of these circumstances, the rescission of the Contract of Sale is warranted and justified.

...

WHEREFORE, foregoing considered, the appealed decision is hereby AFFIRMED with

modification. Defendants-appellees spouses Galang are hereby ordered to return the partial payments
made by plaintiff-appellants in the amount of P135,000.00.

No pronouncement as to cost.[26]

The motion for reconsideration[27] filed by petitioners was denied by the Court of Appeals in a
Resolution[28] dated 22 July 1999.
Hence, this Petition for Certiorari.
Petitioners raise the following assignment of errors:

1. THE HONORABLE COURT OF APPEALS ERRED WHEN IT HELD THAT PETITIONERS’

BREACH OF THE OBLIGATION WAS SUBSTANTIAL.

2. THE HONORABLE COURT OF APPEALS ERRED WHEN IN EFFECT IT HELD THAT THERE
WAS NO SUBSTANTIAL COMPLIANCE WITH THE OBLIGATION TO PAY THE MONTHLY
AMORTIZATION WITH NHMFC.

3. THE HONORABLE COURT OF APPEALS ERRED WHEN IT FAILED TO CONSIDER THE

OTHER FACTS AND CIRCUMSTANCES THAT MILITATE AGAINST RESCISSION.

4. THE HONORABLE COURT OF APPEALS ERRED WHEN IT FAILED TO CONSIDER THAT THE
ACTION FOR RESCISSION IS SUBSIDIARY.[29]
 Before discussing the errors allegedly committed by the Court of Appeals, it must be stated a priori that
the latter made a misappreciation of evidence regarding the consideration of the property in litigation when
it relied solely on the Deed of Sale with Assumption of Mortgage executed by the respondents-spouses
Galang and petitioners-spouses Cannu.
As above-quoted, the consideration for the house and lot stated in the Deed of Sale with Assumption
of Mortgage is P250,000.00, plus the assumption of the balance of the mortgage loan with
NHMFC. However, after going over the record of the case, more particularly the Answer of respondents-
spouses, the evidence shows the consideration therefor is P120,000.00, plus the payment of the
outstanding loan mortgage with NHMFC, and of the “equity” or second mortgage with CERF Realty
(Developer of the property).[30]
Nowhere in the complaint and answer of the petitioners-spouses Cannu and respondents-spouses
Galang shows that the consideration is “P250,000.00.” In fact, what is clear is that of the P120,000.00 to
be paid to the latter, only P75,000.00 was paid to Adelina Timbang, the spouses Galang’s attorney-in-
fact. This debunks the provision in the Deed of Sale with Assumption of Mortgage that the amount
of P250,000.00 has been received by petitioners.
Inasmuch as the Deed of Sale with Assumption of Mortgage failed to express the true intent and
agreement of the parties regarding its consideration, the same should not be fully relied upon. The
foregoing facts lead us to hold that the case on hand falls within one of the recognized exceptions to the
parole evidence rule. Under the Rules of Court, a party may present evidence to modify, explain or add to
the terms of the written agreement if he puts in issue in his pleading, among others, its failure to express
the true intent and agreement of the parties thereto.[31]
In the case at bar, when respondents-spouses enumerated in their Answer the terms and conditions
for the sale of the property under litigation, which is different from that stated in the Deed of Sale with
Assumption with Mortgage, they already put in issue the matter of consideration. Since there is a difference
as to what the true consideration is, this Court has admitted evidence aliunde to explain such
inconsistency. Thus, the Court has looked into the pleadings and testimonies of the parties to thresh out
the discrepancy and to clarify the intent of the parties.
As regards the computation[32] of petitioners as to the breakdown of the P250,000.00 consideration,
we find the same to be self-serving and unsupported by evidence.
On the first assigned error, petitioners argue that the Court erred when it ruled that their breach of the
obligation was substantial.
Settled is the rule that rescission or, more accurately, resolution,[33] of a party to an obligation under
Article 1191[34] is predicated on a breach of faith by the other party that violates the reciprocity between
them.[35] Article 1191 reads:

Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors
should not comply with what is incumbent upon him.

The injured party may choose between the fulfillment and the rescission of the obligation, with the
payment of damages in either case. He may also seek rescission, even after he has chosen fulfillment, if
the latter should become impossible.

The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a
period.

Rescission will not be permitted for a slight or casual breach of the contract. Rescission may be had
only for such breaches that are substantial and fundamental as to defeat the object of the parties in making
the agreement.[36] The question of whether a breach of contract is substantial depends upon the attending
circumstances[37] and not merely on the percentage of the amount not paid.
 In the case at bar, we find petitioners’ failure to pay the remaining balance of P45,000.00 to be
substantial. Even assuming arguendo that only said amount was left out of the supposed consideration
of P250,000.00, or eighteen (18%) percent thereof, this percentage is still substantial. Taken together with
the fact that the last payment made was on 28 November 1991, eighteen months before the respondent
Fernandina Galang paid the outstanding balance of the mortgage loan with NHMFC, the intention of
petitioners to renege on their obligation is utterly clear.
Citing Massive Construction, Inc. v. Intermediate Appellate Court,[38] petitioners ask that they be
granted additional time to complete their obligation. Under the facts of the case, to give petitioners
additional time to comply with their obligation will be putting premium on their blatant non-compliance of
their obligation. They had all the time to do what was required of them (i.e., pay the P45,000.00 balance
and to properly assume the mortgage loan with the NHMFC), but still they failed to comply. Despite
demands for them to pay the balance, no payments were made.[39]
The fact that petitioners tendered a Manager’s Check to respondents-spouses Galang in the amount
of P278,957.00 seven months after the filing of this case is of no moment. Tender of payment does not by
itself produce legal payment, unless it is completed by consignation. [40] Their failure to fulfill their obligation
gave the respondents-spouses Galang the right to rescission.
Anent the second assigned error, we find that petitioners were not religious in paying the amortization
with the NHMFC. As admitted by them, in the span of three years from 1990 to 1993, their payments
covered only thirty months.[41] This, indeed, constitutes another breach or violation of the Deed of Sale with
Assumption of Mortgage. On top of this, there was no formal assumption of the mortgage obligation with
NHMFC because of the lack of approval by the NHMFC [42] on account of petitioners’ non-submission of
requirements in order to be considered as assignees/successors-in-interest over the property covered by
the mortgage obligation.[43]
On the third assigned error, petitioners claim there was no clear evidence to show that respondents-
spouses Galang demanded from them a strict and/or faithful compliance of the Deed of Sale with
Assumption of Mortgage.
We do not agree.
There is sufficient evidence showing that demands were made from petitioners to comply with their
obligation. Adelina R. Timbang, attorney-in-fact of respondents-spouses, per instruction of respondent
Fernandina Galang, made constant follow-ups after the last payment made on 28 November 1991, but
petitioners did not pay.[44] Respondent Fernandina Galang stated in her Answer[45] that upon her arrival from
America in October 1992, she demanded from petitioners the complete compliance of their obligation by
paying the full amount of the consideration (P120,000.00) or in the alternative to vacate the property in
question, but still, petitioners refused to fulfill their obligations under the Deed of Sale with Assumption of
Mortgage. Sometime in March 1993, due to the fact that full payment has not been paid and that the
monthly amortizations with the NHMFC have not been fully updated, she made her intentions clear with
petitioner Leticia Cannu that she will rescind or annul the Deed of Sale with Assumption of Mortgage.
We likewise rule that there was no waiver on the part of petitioners to demand the rescission of the
Deed of Sale with Assumption of Mortgage. The fact that respondents-spouses accepted, through their
attorney-in-fact, payments in installments does not constitute waiver on their part to exercise their right to
rescind the Deed of Sale with Assumption of Mortgage. Adelina Timbang merely accepted the installment
payments as an accommodation to petitioners since they kept on promising they would pay. However,
after the lapse of considerable time (18 months from last payment) and the purchase price was not yet fully
paid, respondents-spouses exercised their right of rescission when they paid the outstanding balance of
the mortgage loan with NHMFC. It was only after petitioners stopped paying that respondents-spouses
moved to exercise their right of rescission.
Petitioners cite the case of Angeles v. Calasanz[46] to support their claim that respondents-spouses
waived their right to rescind. We cannot apply this case since it is not on all fours with the case before
us. First, in Angeles, the breach was only slight and casual which is not true in the case before us. Second,
in Angeles, the buyer had already paid more than the principal obligation, while in the instant case, the
buyers (petitioners) did not pay P45,000.00 of the P120,000.00 they were obligated to pay.
 We find petitioners’ statement that there is no evidence of prejudice or damage to justify rescission in
favor of respondents-spouses to be unfounded. The damage suffered by respondents-spouses is the effect
of petitioners’ failure to fully comply with their obligation, that is, their failure to pay the remaining P45,000.00
and to update the amortizations on the mortgage loan with the NHMFC. Petitioners have in their
possession the property under litigation. Having parted with their house and lot, respondents-spouses
should be fully compensated for it, not only monetarily, but also as to the terms and conditions agreed upon
by the parties. This did not happen in the case before us.
Citing Seva v. Berwin & Co., Inc.,[47] petitioners argue that no rescission should be decreed because
there is no evidence on record that respondent Fernandina Galang is ready, willing and able to comply with
her own obligation to restore to them the total payments they made. They added that no allegation to that
effect is contained in respondents-spouses’ Answer.
We find this argument to be misleading.
First, the facts obtaining in Seva case do not fall squarely with the case on hand. In the former, the
failure of one party to perform his obligation was the fault of the other party, while in the case on hand,
failure on the part of petitioners to perform their obligation was due to their own fault.
Second, what is stated in the book of Justice Edgardo L. Paras is “[i]t (referring to the right to rescind
or resolve) can be demanded only if the plaintiff is ready, willing and able to comply with his own obligation,
and the other is not.” In other words, if one party has complied or fulfilled his obligation, and the other has
not, then the former can exercise his right to rescind. In this case, respondents-spouses complied with
their obligation when they gave the possession of the property in question to petitioners. Thus, they have
the right to ask for the rescission of the Deed of Sale with Assumption of Mortgage.
On the fourth assigned error, petitioners, relying on Article 1383 of the Civil Code, maintain that the
Court of Appeals erred when it failed to consider that the action for rescission is subsidiary.
Their reliance on Article 1383 is misplaced.
The subsidiary character of the action for rescission applies to contracts enumerated in Articles
1381[48] of the Civil Code. The contract involved in the case before us is not one of those mentioned
therein. The provision that applies in the case at bar is Article 1191.
In the concurring opinion of Justice Jose B.L. Reyes in Universal Food Corp. v. Court of
Appeals,[49] rescission under Article 1191 was distinguished from rescission under Article 1381. Justice
J.B.L. Reyes said:

. . . The rescission on account of breach of stipulations is not predicated on injury to economic interests of
the party plaintiff but on the breach of faith by the defendant, that violates the reciprocity between the
parties. It is not a subsidiary action, and Article 1191 may be scanned without disclosing anywhere that
the action for rescission thereunder is subordinated to anything other than the culpable breach of his
obligations by the defendant. This rescission is a principal action retaliatory in character, it being unjust
that a party be held bound to fulfill his promises when the other violates his. As expressed in the old Latin
aphorism: “Non servanti fidem, non est fides servanda.” Hence, the reparation of damages for the breach
is purely secondary.

On the contrary, in the rescission by reason of lesion or economic prejudice, the cause of action is
subordinated to the existence of that prejudice, because it is the raison d être as well as the measure of
the right to rescind. Hence, where the defendant makes good the damages caused, the action cannot be
maintained or continued, as expressly provided in Articles 1383 and 1384. But the operation of these two
articles is limited to the cases of rescission for lesion enumerated in Article 1381 of the Civil Code of the
Philippines, and does not apply to cases under Article 1191.

From the foregoing, it is clear that rescission (“resolution” in the Old Civil Code) under Article 1191 is
a principal action, while rescission under Article 1383 is a subsidiary action. The former is based on breach
by the other party that violates the reciprocity between the parties, while the latter is not.
 In the case at bar, the reciprocity between the parties was violated when petitioners failed to fully pay
the balance of P45,000.00 to respondents-spouses and their failure to update their amortizations with the
NHMFC.
Petitioners maintain that inasmuch as respondents-spouses Galang were not granted the right to
unilaterally rescind the sale under the Deed of Sale with Assumption of Mortgage, they should have first
asked the court for the rescission thereof before they fully paid the outstanding balance of the mortgage
loan with the NHMFC. They claim that such payment is a unilateral act of rescission which violates existing
jurisprudence.
In Tan v. Court of Appeals,[50] this court said:

. . . [T]he power to rescind obligations is implied in reciprocal ones in case one of the obligors should not
comply with what is incumbent upon him is clear from a reading of the Civil Code provisions. However, it
is equally settled that, in the absence of a stipulation to the contrary, this power must be invoked
judicially; it cannot be exercised solely on a party’s own judgment that the other has committed a breach
of the obligation. Where there is nothing in the contract empowering the petitioner to rescind it without
resort to the courts, the petitioner’s action in unilaterally terminating the contract in this case is unjustified.

It is evident that the contract under consideration does not contain a provision authorizing its
extrajudicial rescission in case one of the parties fails to comply with what is incumbent upon him. This
being the case, respondents-spouses should have asked for judicial intervention to obtain a judicial
declaration of rescission. Be that as it may, and considering that respondents-spouses’ Answer (with
affirmative defenses) with Counterclaim seeks for the rescission of the Deed of Sale with Assumption of
Mortgage, it behooves the court to settle the matter once and for all than to have the case re-litigated again
on an issue already heard on the merits and which this court has already taken cognizance of. Having
found that petitioners seriously breached the contract, we, therefore, declare the same is rescinded in favor
of respondents-spouses.
As a consequence of the rescission or, more accurately, resolution of the Deed of Sale with
Assumption of Mortgage, it is the duty of the court to require the parties to surrender whatever they may
have received from the other. The parties should be restored to their original situation.[
51]

The record shows petitioners paid respondents-spouses the amount of P75,000.00 out of the
P120,000.00 agreed upon. They also made payments to NHMFC amounting to P55,312.47. As to the
petitioners’ alleged payment to CERF Realty of P46,616.70, except for petitioner Leticia Cannu’s bare
allegation, we find the same not to be supported by competent evidence. As a general rule, one who pleads
payment has the burden of proving it.[52] However, since it has been admitted in respondents-spouses’
Answer that petitioners shall assume the second mortgage with CERF Realty in the amount of P35,000.00,
and that Adelina Timbang, respondents-spouses’ very own witness, testified[53] that same has been paid, it
is but proper to return this amount to petitioners. The three amounts total P165,312.47 -- the sum to be
returned to petitioners.
WHEREFORE, premises considered, the decision of the Court of Appeals is hereby AFFIRMED with
MODIFICATION. Spouses Gil and Fernandina Galang are hereby ordered to return the partial payments
made by petitioners in the amount of P165,312.47. With costs.
SO ORDERED.

G.R. No. 147695 September 13, 2007

MANUEL C. PAGTALUNAN, petitioner,

vs.
RUFINA DELA CRUZ VDA. DE MANZANO, respondent.
 DECISION

AZCUNA, J.:

This is a petition for review on certiorari under Rule 45 of the Rules of Court of the Court of Appeals’ (CA)
Decision promulgated on October 30, 2000 and its Resolution dated March 23, 2001 denying petitioner’s
motion for reconsideration. The Decision of the CA affirmed the Decision of the Regional Trial Court
(RTC) of Malolos, Bulacan, dated June 25, 1999 dismissing the case of unlawful detainer for lack of merit.

The facts are as follows:

On July 19, 1974, Patricio Pagtalunan (Patricio), petitioner’s stepfather and predecessor-in-interest,
entered into a Contract to Sell with respondent, wife of Patricio’s former mechanic, Teodoro Manzano,
whereby the former agreed to sell, and the latter to buy, a house and lot which formed half of a parcel of
land, covered by Transfer Certificate of Title (TCT) No. T-10029 (now TCT No. RT59929 [T-254773]), with
an area of 236 square meters. The consideration of P17,800 was agreed to be paid in the following
manner: P1,500 as downpayment upon execution of the Contract to Sell, and the balance to be paid in
equal monthly installments of P150 on or before the last day of each month until fully paid.

It was also stipulated in the contract that respondent could immediately occupy the house and lot; that in
case of default in the payment of any of the installments for 90 days after its due date, the contract would
be automatically rescinded without need of judicial declaration, and that all payments made and all
improvements done on the premises by respondent would be considered as rentals for the use and
occupation of the property or payment for damages suffered, and respondent was obliged to peacefully
vacate the premises and deliver the possession thereof to the vendor.

Petitioner claimed that respondent paid only P12,950. She allegedly stopped paying after December 1979
without any justification or explanation. Moreover, in a "Kasunduan"1 dated November 18, 1979,
respondent borrowedP3,000 from Patricio payable in one year either in one lump sum payment or by
installments, failing which the balance of the loan would be added to the principal subject of the monthly
amortizations on the land.

Lastly, petitioner asserted that when respondent ceased paying her installments, her status of buyer was
automatically transformed to that of a lessee. Therefore, she continued to possess the property by mere
tolerance of Patricio and, subsequently, of petitioner.

On the other hand, respondent alleged that she paid her monthly installments religiously, until sometime
in 1980 when Patricio changed his mind and offered to refund all her payments provided she would
surrender the house. She refused. Patricio then started harassing her and began demolishing the house
portion by portion. Respondent admitted that she failed to pay some installments after December 1979,
but that she resumed paying in 1980 until her balance dwindled to P5,650. She claimed that despite
several months of delay in payment, Patricio never sued for ejectment and even accepted her late
payments.

Respondent also averred that on September 14, 1981, she and Patricio signed an agreement (Exh. 2)
whereby he consented to the suspension of respondent’s monthly payments until December 1981.
However, even before the lapse of said period, Patricio resumed demolishing respondent’s house,
prompting her to lodge a complaint with the Barangay Captain who advised her that she could continue
suspending payment even beyond December 31, 1981 until Patricio returned all the materials he took
from her house. This Patricio failed to do until his death.

Respondent did not deny that she still owed Patricio P5,650, but claimed that she did not resume paying
her monthly installment because of the unlawful acts committed by Patricio, as well as the filing of the
ejectment case against her. She denied having any knowledge of the Kasunduan of November 18, 1979.
Patricio and his wife died on September 17, 1992 and on October 17, 1994, respectively. Petitioner
became their sole successor-in-interest pursuant to a waiver by the other heirs. On March 5, 1997,
respondent received a letter from petitioner’s counsel dated February 24, 1997 demanding that she
vacate the premises within five days on the ground that her possession had become unlawful.
Respondent ignored the demand. The Punong Barangayfailed to settle the dispute amicably.

On April 8, 1997, petitioner filed a Complaint for unlawful detainer against respondent with the Municipal
Trial Court (MTC) of Guiguinto, Bulacan praying that, after hearing, judgment be rendered ordering
respondent to immediately vacate the subject property and surrender it to petitioner; forfeiting the amount
of P12,950 in favor of petitioner as rentals; ordering respondent to pay petitioner the amount of P3,000
under the Kasunduan and the amount of P500 per month from January 1980 until she vacates the
property, and to pay petitioner attorney’s fees and the costs.

On December 22, 1998, the MTC rendered a decision in favor of petitioner. It stated that although the
Contract to Sell provides for a rescission of the agreement upon failure of the vendee to pay any
installment, what the contract actually allows is properly termed a resolution under Art. 1191 of the Civil
Code.

The MTC held that respondent’s failure to pay not a few installments caused the resolution or termination
of the Contract to Sell. The last payment made by respondent was on January 9, 1980 (Exh. 71).
Thereafter, respondent’s right of possession ipso facto ceased to be a legal right, and became
possession by mere tolerance of Patricio and his successors-in-interest. Said tolerance ceased upon
demand on respondent to vacate the property.

The dispositive portion of the MTC Decision reads:

Wherefore, all the foregoing considered, judgment is hereby rendered, ordering the defendant:

a. to vacate the property covered by Transfer Certificate of Title No. T-10029 of the
Register of Deeds of Bulacan (now TCT No. RT-59929 of the Register of Deeds of
Bulacan), and to surrender possession thereof to the plaintiff;

b. to pay the plaintiff the amount of P113,500 representing rentals from January 1980 to
the present;

c. to pay the plaintiff such amount of rentals, at P500/month, that may become due after
the date of judgment, until she finally vacates the subject property;

d. to pay to the plaintiff the amount of P25,000 as attorney’s fees.

SO ORDERED.2

On appeal, the RTC of Malolos, Bulacan, in a Decision dated June 25, 1999, reversed the decision of the
MTC and dismissed the case for lack of merit. According to the RTC, the agreement could not be
automatically rescinded since there was delivery to the buyer. A judicial determination of rescission must
be secured by petitioner as a condition precedent to convert the possession de facto of respondent from
lawful to unlawful.

The dispositive portion of the RTC Decision states:

WHEREFORE, judgment is hereby rendered reversing the decision of the Municipal Trial Court of
Guiguinto, Bulacan and the ejectment case instead be dismissed for lack of merit. 3
The motion for reconsideration and motion for execution filed by petitioner were denied by the RTC for
lack of merit in an Order dated August 10, 1999.

Thereafter, petitioner filed a petition for review with the CA.

In a Decision promulgated on October 30, 2000, the CA denied the petition and affirmed the Decision of
the RTC. The dispositive portion of the Decision reads:

WHEREFORE, the petition for review on certiorari is Denied. The assailed Decision of the
Regional Trial Court of Malolos, Bulacan dated 25 June 1999 and its Order dated 10 August 1999
are hereby AFFIRMED.

SO ORDERED. 4

The CA found that the parties, as well as the MTC and RTC failed to advert to and to apply Republic Act
(R.A.) No. 6552, more commonly referred to as the Maceda Law, which is a special law enacted in 1972
to protect buyers of real estate on installment payments against onerous and oppressive conditions.

The CA held that the Contract to Sell was not validly cancelled or rescinded under Sec. 3 (b) of R.A. No.
6552, and recognized respondent’s right to continue occupying unmolested the property subject of the
contract to sell.

The CA denied petitioner’s motion for reconsideration in a Resolution dated March 23, 2001.

Hence, this petition for review on certiorari.

Petitioner contends that:

A. Respondent Dela Cruz must bear the consequences of her deliberate withholding of, and
refusal to pay, the monthly payment. The Court of Appeals erred in allowing Dela Cruz who acted
in bad faith from benefiting under the Maceda Law.

B. The Court of Appeals erred in resolving the issue on the applicability of the Maceda Law,
which issue was not raised in the proceedings a quo.

C. Assuming arguendo that the RTC was correct in ruling that the MTC has no jurisdiction over a
rescission case, the Court of Appeals erred in not remanding the case to the RTC for trial.5

Petitioner submits that the Maceda Law supports and recognizes the right of vendors of real estate to
cancel the sale outside of court, without need for a judicial declaration of rescission, citing Luzon
Brokerage Co., Inc., v. Maritime Building Co., Inc.6

Petitioner contends that respondent also had more than the grace periods provided under the Maceda
Law within which to pay. Under Sec. 37 of the said law, a buyer who has paid at least two years of
installments has a grace period of one month for every year of installment paid. Based on the amount
of P12,950 which respondent had already paid, she is entitled to a grace period of six months within
which to pay her unpaid installments after December, 1979. Respondent was given more than six months
from January 1980 within which to settle her unpaid installments, but she failed to do so. Petitioner’s
demand to vacate was sent to respondent in February 1997.

There is nothing in the Maceda Law, petitioner asserts, which gives the buyer a right to pay arrearages
after the grace periods have lapsed, in the event of an invalid demand for rescission. The Maceda Law
only provides that actual cancellation shall take place after 30 days from receipt of the notice of
cancellation or demand for rescission and upon full payment of the cash surrender value to the buyer.

Petitioner contends that his demand letter dated February 24, 1997 should be considered the notice of
cancellation since the demand letter informed respondent that she had "long ceased to have any right to
possess the premises in question due to [her] failure to pay without justifiable cause." In support of his
contention, he citedLayug v. Intermediate Appellate Court8 which held that "the additional formality of a
demand on [the seller’s] part for rescission by notarial act would appear, in the premises, to be merely
circuitous and consequently superfluous." He stated that in Layug, the seller already made a written
demand upon the buyer.

In addition, petitioner asserts that whatever cash surrender value respondent is entitled to have been
applied and must be applied to rentals for her use of the house and lot after December, 1979 or after she
stopped payment of her installments.

Petitioner argues that assuming Patricio accepted respondent’s delayed installments in 1981, such act
cannot prevent the cancellation of the Contract to Sell. Installments after 1981 were still unpaid and the
applicable grace periods under the Maceda Law on the unpaid installments have long lapsed.
Respondent cannot be allowed to hide behind the Maceda Law. She acted with bad faith and must bear
the consequences of her deliberate withholding of and refusal to make the monthly payments.

Petitioner also contends that the applicability of the Maceda Law was never raised in the proceedings
below; hence, it should not have been applied by the CA in resolving the case.

The Court is not persuaded.

The CA correctly ruled that R.A No. 6552, which governs sales of real estate on installment, is applicable
in the resolution of this case.

This case originated as an action for unlawful detainer. Respondent is alleged to be illegally withholding
possession of the subject property after the termination of the Contract to Sell between Patricio and
respondent. It is, therefore, incumbent upon petitioner to prove that the Contract to Sell had been
cancelled in accordance with R.A. No. 6552.

The pertinent provision of R.A. No. 6552 reads:

Sec. 3. In all transactions or contracts involving the sale or financing of real estate on installment
payments, including residential condominium apartments but excluding industrial lots, commercial
buildings and sales to tenants under Republic Act Numbered Thirty-eight hundred forty-four as
amended by Republic Act Numbered Sixty-three hundred eighty-nine, where the buyer has paid
at least two years of installments, the buyer is entitled to the following rights in case he defaults in
the payment of succeeding installments:

(a) To pay, without additional interest, the unpaid installments due within the total grace period
earned by him, which is hereby fixed at the rate of one month grace period for every one year of
installment payments made: Provided, That this right shall be exercised by the buyer only once in
every five years of the life of the contract and its extensions, if any.

(b) If the contract is cancelled, the seller shall refund to the buyer the cash surrender value
of the payments on the property equivalent to fifty percent of the total payments made and,
after five years of installments, an additional five percent every year but not to exceed ninety
percent of the total payments made: Provided, That the actual cancellation of the contract
shall take place after thirty days from receipt by the buyer of the notice of cancellation or
 the demand for rescission of the contract by a notarial act and upon full payment of the
cash surrender value to the buyer.9

R.A. No. 6552, otherwise known as the "Realty Installment Buyer Protection Act," recognizes in
conditional sales of all kinds of real estate (industrial, commercial, residential) the right of the seller to
cancel the contract upon non-payment of an installment by the buyer, which is simply an event that
prevents the obligation of the vendor to convey title from acquiring binding force.10 The Court agrees with
petitioner that the cancellation of the Contract to Sell may be done outside the court particularly when the
buyer agrees to such cancellation.

However, the cancellation of the contract by the seller must be in accordance with Sec. 3 (b) of R.A. No.
6552, which requires a notarial act of rescission and the refund to the buyer of the full payment of the
cash surrender value of the payments on the property. Actual cancellation of the contract takes place
after 30 days from receipt by the buyer of the notice of cancellation or the demand for rescission of the
contract by a notarial act and upon full payment of the cash surrender value to the buyer.

Based on the records of the case, the Contract to Sell was not validly cancelled or rescinded under Sec. 3
(b) of R.A. No. 6552.

First, Patricio, the vendor in the Contract to Sell, died on September 17, 1992 without canceling the
Contract to Sell.

Second, petitioner also failed to cancel the Contract to Sell in accordance with law.

Petitioner contends that he has complied with the requirements of cancellation under Sec. 3 (b) of R.A.
No. 6552. He asserts that his demand letter dated February 24, 1997 should be considered as the notice
of cancellation or demand for rescission by notarial act and that the cash surrender value of the payments
on the property has been applied to rentals for the use of the house and lot after respondent stopped
payment after January 1980.

The Court, however, finds that the letter11 dated February 24, 1997, which was written by petitioner’s
counsel, merely made formal demand upon respondent to vacate the premises in question within five
days from receipt thereof since she had "long ceased to have any right to possess the premises x x x due
to [her] failure to pay without justifiable cause the installment payments x x x."

Clearly, the demand letter is not the same as the notice of cancellation or demand for rescission by a
notarial actrequired by R.A No. 6552. Petitioner cannot rely on Layug v. Intermediate Appellate
Court12 to support his contention that the demand letter was sufficient compliance. Layug held that "the
additional formality of a demand on [the seller’s] part for rescission by notarial act would appear, in the
premises, to be merely circuitous and consequently superfluous" since the seller therein filed an action
for annulment of contract, which is a kindred concept of rescission by notarial act.13 Evidently, the case
of unlawful detainer filed by petitioner does not exempt him from complying with the said requirement.

In addition, Sec. 3 (b) of R.A. No. 6552 requires refund of the cash surrender value of the payments on
the property to the buyer before cancellation of the contract. The provision does not provide a different
requirement for contracts to sell which allow possession of the property by the buyer upon execution of
the contract like the instant case. Hence, petitioner cannot insist on compliance with the requirement by
assuming that the cash surrender value payable to the buyer had been applied to rentals of the property
after respondent failed to pay the installments due.

There being no valid cancellation of the Contract to Sell, the CA correctly recognized respondent’s right to
continue occupying the property subject of the Contract to Sell and affirmed the dismissal of the unlawful
detainer case by the RTC.
The Court notes that this case has been pending for more than ten years. Both parties prayed for other
reliefs that are just and equitable under the premises. Hence, the rights of the parties over the subject
property shall be resolved to finally dispose of that issue in this case.

Considering that the Contract to Sell was not cancelled by the vendor, Patricio, during his lifetime or by
petitioner in accordance with R.A. No. 6552 when petitioner filed this case of unlawful detainer after 22
years of continuous possession of the property by respondent who has paid the substantial amount
of P12,300 out of the purchase price of P17,800, the Court agrees with the CA that it is only right and just
to allow respondent to pay her arrears and settle the balance of the purchase price.

For respondent’s delay in the payment of the installments, the Court, in its discretion, and applying Article
220914of the Civil Code, may award interest at the rate of 6% per annum 15 on the unpaid balance
considering that there is no stipulation in the Contract to Sell for such interest. For purposes of computing
the legal interest, the reckoning period should be the filing of the complaint for unlawful detainer on April
8, 1997.

Based on respondent’s evidence16 of payments made, the MTC found that respondent paid a total
of P12,300 out of the purchase price of P17,800. Hence, respondent still has a balance of P5,500, plus
legal interest at the rate of 6% per annum on the unpaid balance starting April 8, 1997.

The third issue is disregarded since petitioner assails an inexistent ruling of the RTC on the lack of
jurisdiction of the MTC over a rescission case when the instant case he filed is for unlawful detainer.

WHEREFORE, the Decision of the Court of Appeals dated October 30, 2000 sustaining the dismissal of
the unlawful detainer case by the RTC is AFFIRMED with the following MODIFICATIONS:

1. Respondent Rufina Dela Cruz Vda. de Manzano shall pay petitioner Manuel C. Pagtalunan the
balance of the purchase price in the amount of Five Thousand Five Hundred Pesos (P5,500) plus
interest at 6% per annum from April 8, 1997 up to the finality of this judgment, and thereafter, at
the rate of 12% per annum;

2. Upon payment, petitioner Manuel C. Pagtalunan shall execute a Deed of Absolute Sale of the
subject property and deliver the certificate of title in favor of respondent Rufina Dela Cruz Vda. de
Manzano; and

3. In case of failure to pay within 60 days from finality of this Decision, respondent Rufina Dela
Cruz Vda. de Manzano shall immediately vacate the premises without need of further demand,
and the downpayment and installment payments of P12,300 paid by her shall constitute rental for
the subject property.

No costs.

SO ORDERED.

SECOND DIVISION

G.R. No. 179965 February 20, 2013

NICOLAS P. DIEGO, Petitioner,
vs.
RODOLFO P. DIEGO and EDUARDO P. DIEGO, Respondents.

DECISION

DEL CASTILLO, J.:

It is settled jurisprudence, to the point of being elementary, that an agreement which stipulates that the
seller shall execute a deed of sale only upon or after tl1ll payment of the purchase price is a contract to
sell, not a contract of sale. In Reyes v. Tuparan, 1 this Court declared in categorical terms that "[w]here
the vendor promises to execute a deed of absolute sale upon the completion by the vendee of the
payment of the price, the contract is only a contract to sell. The aforecited stipulation shows that
the vendors reserved title to the subject property until full payment of the purchase price."

In this case, it is not disputed as in tact both parties agreed that the deed of sale shall only be executed
upon payment of the remaining balance of the purchase price. Thus, pursuant to the above stated
jurisprudence, we similarly declare that the transaction entered into by the parties is a contract to sell.

Before us is a Petition for Review on Certiorari2 questioning the June 29, 2007 Decision3 and the October
3, 2007 Resolution4 of the Court of Appeals (CA) in CA-G.R. CV No. 86512, which affirmed the April 19,
2005 Decision5 of the Regional Trial Court (RTC), Branch 40, of Dagupan City in Civil Case No. 99-
02971-D.

Factual Antecedents

In 1993, petitioner Nicolas P. Diego (Nicolas) and his brother Rodolfo, respondent herein, entered into an
oral contract to sell covering Nicolas’s share, fixed at P500,000.00, as co-owner of the family’s Diego
Building situated in Dagupan City. Rodolfo made a downpayment of P250,000.00. It was agreed that the
deed of sale shall be executed upon payment of the remaining balance of P250,000.00. However,
Rodolfo failed to pay the remaining balance.

Meanwhile, the building was leased out to third parties, but Nicolas’s share in the rents were not remitted
to him by herein respondent Eduardo, another brother of Nicolas and designated administrator of the
Diego Building. Instead, Eduardo gave Nicolas’s monthly share in the rents to Rodolfo. Despite demands
and protestations by Nicolas, Rodolfo and Eduardo failed to render an accounting and remit his share in
the rents and fruits of the building, and Eduardo continued to hand them over to Rodolfo.

Thus, on May 17, 1999, Nicolas filed a Complaint6 against Rodolfo and Eduardo before the RTC of
Dagupan City and docketed as Civil Case No. 99-02971-D. Nicolas prayed that Eduardo be ordered to
render an accounting of all the transactions over the Diego Building; that Eduardo and Rodolfo be
ordered to deliver to Nicolas his share in the rents; and that Eduardo and Rodolfo be held solidarily liable
for attorney’s fees and litigation expenses.

Rodolfo and Eduardo filed their Answer with Counterclaim 7 for damages and attorney’s fees. They argued
that Nicolas had no more claim in the rents in the Diego Building since he had already sold his share to
Rodolfo. Rodolfo admitted having remitted only P250,000.00 to Nicolas. He asserted that he would pay
the balance of the purchase price to Nicolas only after the latter shall have executed a deed of absolute
sale.

Ruling of the Regional Trial Court

After trial on the merits, or on April 19, 2005, the trial court rendered its Decision8 dismissing Civil Case
No. 99-02971-D for lack of merit and ordering Nicolas to execute a deed of absolute sale in favor of
Rodolfo upon payment by the latter of the P250,000.00 balance of the agreed purchase price. It made the
following interesting pronouncement:

It is undisputed that plaintiff (Nicolas) is one of the co-owners of the Diego Building, x x x. As a co-owner,
he is entitled to [his] share in the rentals of the said building. However, plaintiff [had] already sold his
share to defendant Rodolfo Diego in the amount of P500,000.00 and in fact, [had] already received a
partial payment in the purchase price in the amount of P250,000.00. Defendant Eduardo Diego testified
that as per agreement, verbal, of the plaintiff and defendant Rodolfo Diego, the remaining balance
of P250,000.00 will be paid upon the execution of the Deed of Absolute Sale. It was in the year 1997
when plaintiff was being required by defendant Eduardo Diego to sign the Deed of Absolute Sale. Clearly,
defendant Rodolfo Diego was not yet in default as the plaintiff claims which cause [sic] him to refuse to
sign [sic] document. The contract of sale was already perfected as early as the year 1993 when plaintiff
received the partial payment, hence, he cannot unilaterally revoke or rescind the same. From then on,
plaintiff has, therefore, ceased to be a co-owner of the building and is no longer entitled to the fruits of the
Diego Building.

Equity and fairness dictate that defendant [sic] has to execute the necessary document regarding the sale
of his share to defendant Rodolfo Diego. Correspondingly, defendant Rodolfo Diego has to perform his
obligation as per their verbal agreement by paying the remaining balance of P250,000.00.9

To summarize, the trial court ruled that as early as 1993, Nicolas was no longer entitled to the fruits of his
aliquot share in the Diego Building because he had "ceased to be a co-owner" thereof. The trial court held
that when Nicolas received the P250,000.00 downpayment, a "contract of sale" was perfected.
Consequently, Nicolas is obligated to convey such share to Rodolfo, without right of rescission. Finally,
the trial court held that theP250,000.00 balance from Rodolfo will only be due and demandable when
Nicolas executes an absolute deed of sale.

Ruling of the Court of Appeals

Nicolas appealed to the CA which sustained the trial court’s Decision in toto. The CA held that since there
was a perfected contract of sale between Nicolas and Rodolfo, the latter may compel the former to
execute the proper sale document. Besides, Nicolas’s insistence that he has since rescinded their
agreement in 1997 proved the existence of a perfected sale. It added that Nicolas could not validly
rescind the contract because: "1) Rodolfo ha[d] already made a partial payment; 2) Nicolas ha[d] already
partially performed his part regarding the contract; and 3) Rodolfo opposes the rescission."10

The CA then proceeded to rule that since no period was stipulated within which Rodolfo shall deliver the
balance of the purchase price, it was incumbent upon Nicolas to have filed a civil case to fix the same.
But because he failed to do so, Rodolfo cannot be considered to be in delay or default.

Finally, the CA made another interesting pronouncement, that by virtue of the agreement Nicolas entered
into with Rodolfo, he had already transferred his ownership over the subject property and as a
consequence, Rodolfo is legally entitled to collect the fruits thereof in the form of rentals. Nicolas’
remaining right is to demand payment of the balance of the purchase price, provided that he first
executes a deed of absolute sale in favor of Rodolfo.

Nicolas moved for reconsideration but the same was denied by the CA in its Resolution dated October 3,
2007.

Hence, this Petition.

Issues
The Petition raises the following errors that must be rectified:

THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING THAT THERE WAS NO
PERFECTED CONTRACT OF SALE BETWEEN PETITIONER NICOLAS DIEGO AND RESPONDENT
RODOLFO DIEGO OVER NICOLAS’S SHARE OF THE BUILDING BECAUSE THE SUSPENSIVE
CONDITION HAS NOT YET BEEN FULFILLED.

II

THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THE CONTRACT OF SALE
BETWEEN PETITIONER AND RESPONDENT RODOLFO DIEGO REMAINS LEGALLY BINDING AND
IS NOT RESCINDED GIVING MISPLACED RELIANCE ON PETITIONER NICOLAS’ STATEMENT THAT
THE SALE HAS NOT YET BEEN REVOKED.

III

THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING THAT PETITIONER NICOLAS
DIEGO ACTED LEGALLY AND CORRECTLY WHEN HE UNILATERALLY RESCINDED AND
REVOKED HIS AGREEMENT OF SALE WITH RESPONDENT RODOLFO DIEGO CONSIDERING
RODOLFO’S MATERIAL, SUBSTANTIAL BREACH OF THE CONTRACT.

IV

THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONER HAS NO MORE
RIGHTS OVER HIS SHARE IN THE BUILDING, DESPITE THE FACT THAT THERE WAS AS YET NO
PERFECTED CONTRACT OF SALE BETWEEN PETITIONER NICOLAS DIEGO AND RODOLFO
DIEGO AND THERE WAS YET NO TRANSFER OF OWNERSHIP OF PETITIONER’S SHARE TO
RODOLFO DUE TO THE NON-FULFILLMENT BY RODOLFO OF THE SUSPENSIVE CONDITION
UNDER THE CONTRACT.

THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING THAT RESPONDENT RODOLFO
HAS UNJUSTLY ENRICHED HIMSELF AT THE EXPENSE OF PETITIONER BECAUSE DESPITE NOT
HAVING PAID THE BALANCE OF THE PURCHASE PRICE OF THE SALE, THAT RODOLFO HAS NOT
YET ACQUIRED OWNERSHIP OVER THE SHARE OF PETITIONER NICOLAS, HE HAS ALREADY
BEEN APPROPRIATING FOR HIMSELF AND FOR HIS PERSONAL BENEFIT THE SHARE OF THE
INCOME OF THE BUILDING AND THE PORTION OF THE BUILDING ITSELF WHICH WAS DUE TO
AND OWNED BY PETITIONER NICOLAS.

VI

THE HONORABLE COURT OF APPEALS ERRED IN NOT AWARDING ACTUAL DAMAGES,

ATTORNEY’S FEES AND LITIGATION EXPENSES TO THE PETITIONER DESPITE THE FACT THAT
PETITIONER’S RIGHTS HAD BEEN WANTONLY VIOLATED BY THE RESPONDENTS.11

Petitioner’s Arguments

In his Petition, the Supplement12 thereon, and Reply,13 Nicolas argues that, contrary to what the CA
found, there was no perfected contract of sale even though Rodolfo had partially paid the price; that in the
absence of the third element in a sale contract – the price – there could be no perfected sale; that failing
to pay the required price in full, Nicolas had the right to rescind the agreement as an unpaid seller.

Nicolas likewise takes exception to the CA finding that Rodolfo was not in default or delay in the payment
of the agreed balance for his (Nicolas’s) failure to file a case to fix the period within which payment of the
balance should be made. He believes that Rodolfo’s failure to pay within a reasonable time was a
substantial and material breach of the agreement which gave him the right to unilaterally and
extrajudicially rescind the agreement and be discharged of his obligations as seller; and that his repeated
written demands upon Rodolfo to pay the balance granted him such rights.

Nicolas further claims that based on his agreement with Rodolfo, there was to be no transfer of title over
his share in the building until Rodolfo has effected full payment of the purchase price, thus, giving no right
to the latter to collect his share in the rentals.

Finally, Nicolas bewails the CA’s failure to award damages, attorney’s fees and litigation expenses for
what he believes is a case of unjust enrichment at his expense.

Respondents’ Arguments

Apart from echoing the RTC and CA pronouncements, respondents accuse the petitioner of "cheating"
them, claiming that after the latter received the P250,000.00 downpayment, he "vanished like thin air and
hibernated in the USA, he being an American citizen,"14 only to come back claiming that the said amount
was a mere loan.

They add that the Petition is a mere rehash and reiteration of the petitioner’s arguments below, which are
deemed to have been sufficiently passed upon and debunked by the appellate court.

Our Ruling

The Court finds merit in the Petition.

The contract entered into by Nicolas and Rodolfo was a contract to sell.

a) The stipulation to execute a deed of sale upon full payment of the purchase price is a unique
and distinguishing characteristic of a contract to sell. It also shows that the vendor reserved title
to the property until full payment.

There is no dispute that in 1993, Rodolfo agreed to buy Nicolas’s share in the Diego Building for the price
ofP500,000.00. There is also no dispute that of the total purchase price, Rodolfo paid, and Nicolas
received,P250,000.00. Significantly, it is also not disputed that the parties agreed that the remaining
amount ofP250,000.00 would be paid after Nicolas shall have executed a deed of sale.

This stipulation, i.e., to execute a deed of absolute sale upon full payment of the purchase price, is a
unique and distinguishing characteristic of a contract to sell. In Reyes v. Tuparan,15 this Court ruled that
a stipulation in the contract, "[w]here the vendor promises to execute a deed of absolute sale upon
the completion by the vendee of the payment of the price," indicates that the parties entered into
a contract to sell. According to this Court, this particular provision is tantamount to a reservation of
ownership on the part of the vendor. Explicitly stated, the Court ruled that the agreement to execute a
deed of sale upon full payment of the purchase price"shows that the vendors reserved title to the
subject property until full payment of the purchase price."16

In Tan v. Benolirao,17 this Court, speaking through Justice Brion, ruled that the parties entered into
a contract to sell as revealed by the following stipulation:
d) That in case, BUYER has complied with the terms and conditions of this contract, then the SELLERS
shall execute and deliver to the BUYER the appropriate Deed of Absolute Sale;18

The Court further held that "[j]urisprudence has established that where the seller promises to
execute a deed of absolute sale upon the completion by the buyer of the payment of the price, the
contract is only a contract to sell."19

b) The acknowledgement receipt signed by Nicolas as well as the contemporaneous acts of the
parties show that they agreed on a contract to sell, not of sale. The absence of a formal deed of
conveyance is indicative of a contract to sell.

In San Lorenzo Development Corporation v. Court of Appeals,20 the facts show that spouses Miguel and
Pacita Lu (Lu) sold a certain parcel of land to Pablo Babasanta (Pablo). After several payments, Pablo
wrote Lu demanding "the execution of a final deed of sale in his favor so that he could effect full payment
of the purchase price."21 To prove his allegation that there was a perfected contract of sale between him
and Lu, Pablo presented a receipt signed by Lu acknowledging receipt of P50,000.00 as partial
payment.22

However, when the case reached this Court, it was ruled that the transaction entered into by Pablo and
Lu was only a contract to sell, not a contract of sale. The Court held thus:

The receipt signed by Pacita Lu merely states that she accepted the sum of fifty thousand pesos
(P50,000.00) from Babasanta as partial payment of 3.6 hectares of farm lot situated in Sta. Rosa,
Laguna. While there is no stipulation that the seller reserves the ownership of the property until full
payment of the price which is a distinguishing feature of a contract to sell, the subsequent acts of the
parties convince us that the Spouses Lu never intended to transfer ownership to Babasanta except
upon full payment of the purchase price.

Babasanta’s letter dated 22 May 1989 was quite telling. He stated therein that despite his repeated
requests for the execution of the final deed of sale in his favor so that he could effect full payment of the
price, Pacita Lu allegedly refused to do so. In effect, Babasanta himself recognized that ownership of
the property would not be transferred to him until such time as he shall have effected full payment
of the price. Moreover, had the sellers intended to transfer title, they could have easily executed
the document of sale in its required form simultaneously with their acceptance of the partial
payment, but they did not. Doubtlessly, the receipt signed by Pacita Lu should legally be
considered as a perfected contract to sell.23

In the instant case, records show that Nicolas signed a mere receipt24 acknowledging partial payment
ofP250,000.00 from Rodolfo. It states:

July 8, 1993

Received the amount of [P250,000.00] for 1 share of Diego Building as partial payment for Nicolas Diego.

(signed)
Nicolas Diego25

As we ruled in San Lorenzo Development Corporation v. Court of Appeals,26 the parties could have
executed a document of sale upon receipt of the partial payment but they did not. This is thus an
indication that Nicolas did not intend to immediately transfer title over his share but only upon full payment
of the purchase price. Having thus reserved title over the property, the contract entered into by Nicolas is
a contract to sell. In addition, Eduardo admitted that he and Rodolfo repeatedly asked Nicolas to sign the
deed of sale27 but the latter refused because he was not yet paid the full amount. As we have ruled in San
Lorenzo Development Corporation v. Court of Appeals,28 the fact that Eduardo and Rodolfo asked
Nicolas to execute a deed of sale is a clear recognition on their part that the ownership over the property
still remains with Nicolas. In fine, the totality of the parties’ acts convinces us that Nicolas never intended
to transfer the ownership over his share in the Diego Building until the full payment of the purchase price.
Without doubt, the transaction agreed upon by the parties was a contract to sell, not of sale.

In Chua v. Court of Appeals,29 the parties reached an impasse when the seller wanted to be first paid the
consideration before a new transfer certificate of title (TCT) is issued in the name of the buyer. Contrarily,
the buyer wanted to secure a new TCT in his name before paying the full amount. Their agreement was
embodied in a receipt containing the following terms: "(1) the balance of P10,215,000.00 is payable on or
before 15 July 1989; (2) the capital gains tax is for the account of x x x; and (3) if [the buyer] fails to pay
the balance x x x the [seller] has the right to forfeit the earnest money x x x."30 The case eventually
reached this Court. In resolving the impasse, the Court, speaking through Justice Carpio, held that "[a]
perusal of the Receipt shows that the true agreement between the parties was a contract to sell." 31 The
Court noted that "the agreement x x x was embodied in a receipt rather than in a deed of sale, ownership
not having passed between them."32 The Court thus concluded that "[t]he absence of a formal deed of
conveyance is a strong indication that the parties did not intend immediate transfer of ownership,
but only a transfer after full payment of the purchase price."33 Thus, the "true agreement between the
parties was a contract to sell."34

In the instant case, the parties were similarly embroiled in an impasse. The parties’ agreement was
likewise embodied only in a receipt. Also, Nicolas did not want to sign the deed of sale unless he is fully
paid. On the other hand, Rodolfo did not want to pay unless a deed of sale is duly executed in his favor.
We thus say, pursuant to our ruling in Chua v. Court of Appeals35 that the agreement between Nicolas
and Rodolfo is a contract to sell.

This Court cannot subscribe to the appellate court’s view that Nicolas should first execute a deed of
absolute sale in favor of Rodolfo, before the latter can be compelled to pay the balance of the price. This
is patently ridiculous, and goes against every rule in the book. This pronouncement virtually places the
prospective seller in a contract to sell at the mercy of the prospective buyer, and sustaining this point of
view would place all contracts to sell in jeopardy of being rendered ineffective by the act of the
prospective buyers, who naturally would demand that the deeds of absolute sale be first executed before
they pay the balance of the price. Surely, no prospective seller would accommodate.

In fine, "the need to execute a deed of absolute sale upon completion of payment of the price
generally indicates that it is a contract to sell, as it implies the reservation of title in the vendor
until the vendee has completed the payment of the price."36 In addition, "[a] stipulation reserving
ownership in the vendor until full payment of the price is x x x typical in a contract to sell." 37 Thus, contrary
to the pronouncements of the trial and appellate courts, the parties to this case only entered into a
contract to sell; as such title cannot legally pass to Rodolfo until he makes full payment of the agreed
purchase price.

c) Nicolas did not surrender or deliver title or possession to Rodolfo.

Moreover, there could not even be a surrender or delivery of title or possession to the prospective buyer
Rodolfo. This was made clear by the nature of the agreement, by Nicolas’s repeated demands for the
return of all rents unlawfully and unjustly remitted to Rodolfo by Eduardo, and by Rodolfo and Eduardo’s
repeated demands for Nicolas to execute a deed of sale which, as we said before, is a recognition on
their part that ownership over the subject property still remains with Nicolas.

Significantly, when Eduardo testified, he claimed to be knowledgeable about the terms and conditions of
the transaction between Nicolas and Rodolfo. However, aside from stating that out of the total
consideration ofP500,000.00, the amount of P250,000.00 had already been paid while the
remaining P250,000.00 would be paid after the execution of the Deed of Sale, he never testified that
there was a stipulation as regards delivery of title or possession. 38

It is also quite understandable why Nicolas belatedly demanded the payment of the rentals. Records
show that the structural integrity of the Diego Building was severely compromised when an earthquake
struck Dagupan City in 1990.39 In order to rehabilitate the building, the co-owners obtained a loan from a
bank.40 Starting May 1994, the property was leased to third parties and the rentals received were used to
pay off the loan.41 It was only in 1996, or after payment of the loan that the co-owners started receiving
their share in the rentals.42 During this time, Nicolas was in the USA but immediately upon his return, he
demanded for the payment of his share in the rentals which Eduardo remitted to Rodolfo. Failing which,
he filed the instant Complaint. To us, this bolsters our findings that Nicolas did not intend to immediately
transfer title over the property.

It must be stressed that it is anathema in a contract to sell that the prospective seller should deliver title to
the property to the prospective buyer pending the latter’s payment of the price in full. It certainly is absurd
to assume that in the absence of stipulation, a buyer under a contract to sell is granted ownership of the
property even when he has not paid the seller in full. If this were the case, then prospective sellers in a
contract to sell would in all likelihood not be paid the balance of the price.

This ponente has had occasion to rule that "[a] contract to sell is one where the prospective seller
reserves the transfer of title to the prospective buyer until the happening of an event, such as full payment
of the purchase price. What the seller obliges himself to do is to sell the subject property only when the
entire amount of the purchase price has already been delivered to him. ‘In other words, the full payment
of the purchase price partakes of a suspensive condition, the nonfulfillment of which prevents the
obligation to sell from arising and thus, ownership is retained by the prospective seller without further
remedies by the prospective buyer.’ It does not, by itself, transfer ownership to the buyer."43

The contract to sell is terminated or cancelled.

Having established that the transaction was a contract to sell, what happens now to the parties’
agreement?

The remedy of rescission is not available in contracts to sell.44 As explained in Spouses Santos v. Court
of Appeals:45

In view of our finding in the present case that the agreement between the parties is a contract to sell, it
follows that the appellate court erred when it decreed that a judicial rescission of said agreement was
necessary. This is because there was no rescission to speak of in the first place. As we earlier pointed
out, in a contract to sell, title remains with the vendor and does not pass on to the vendee until the
purchase price is paid in full. Thus, in a contract to sell, the payment of the purchase price is a positive
suspensive condition. Failure to pay the price agreed upon is not a mere breach, casual or serious, but a
situation that prevents the obligation of the vendor to convey title from acquiring an obligatory force. This
is entirely different from the situation in a contract of sale, where non-payment of the price is a negative
resolutory condition. The effects in law are not identical. In a contract of sale, the vendor has lost
ownership of the thing sold and cannot recover it, unless the contract of sale is rescinded and set aside.
In a contract to sell, however, the vendor remains the owner for as long as the vendee has not complied
fully with the condition of paying the purchase price. If the vendor should eject the vendee for failure to
meet the condition precedent, he is enforcing the contract and not rescinding it. When the petitioners in
the instant case repossessed the disputed house and lot for failure of private respondents to pay the
purchase price in full, they were merely enforcing the contract and not rescinding it. As petitioners
correctly point out, the Court of Appeals erred when it ruled that petitioners should have judicially
rescinded the contract pursuant to Articles 1592 and 1191 of the Civil Code. Article 1592 speaks of non-
payment of the purchase price as a resolutory condition. It does not apply to a contract to sell. As to
Article 1191, it is subordinated to the provisions of Article 1592 when applied to sales of immovable
property. Neither provision is applicable in the present case.46

Similarly, we held in Chua v. Court of Appeals47 that "Article 1592 of the Civil Code permits the buyer to
pay, even after the expiration of the period, as long as no demand for rescission of the contract has been
made upon him either judicially or by notarial act. However, Article 1592 does not apply to a contract to
sell where the seller reserves the ownership until full payment of the price," 48 as in this case.1âwphi1

Applying the above jurisprudence, we hold that when Rodolfo failed to fully pay the purchase price, the
contract to sell was deemed terminated or cancelled.49 As we have held in Chua v. Court of
Appeals,50 "[s]ince the agreement x x x is a mere contract to sell, the full payment of the purchase price
partakes of a suspensive condition. The non-fulfillment of the condition prevents the obligation to
sell from arising and ownership is retained by the seller without further remedies by the buyer."
Similarly, we held in Reyes v. Tuparan51 that "petitioner’s obligation to sell the subject properties becomes
demandable only upon the happening of the positive suspensive condition, which is the respondent’s full
payment of the purchase price. Without respondent’s full payment, there can be no breach of
contract to speak of because petitioner has no obligation yet to turn over the title. Respondent’s
failure to pay in full the purchase price in full is not the breach of contract contemplated under Article 1191
of the New Civil Code but rather just an event that prevents the petitioner from being bound to convey title
to respondent." Otherwise stated, Rodolfo has no right to compel Nicolas to transfer ownership to him
because he failed to pay in full the purchase price. Correlatively, Nicolas has no obligation to transfer his
ownership over his share in the Diego Building to Rodolfo.52

Thus, it was erroneous for the CA to rule that Nicolas should have filed a case to fix the period for
Rodolfo’s payment of the balance of the purchase price. It was not Nicolas’s obligation to compel Rodolfo
to pay the balance; it was Rodolfo’s duty to remit it.

It would appear that after Nicolas refused to sign the deed as there was yet no full payment, Rodolfo and
Eduardo hired the services of the Daroya Accounting Office "for the purpose of estimating the amount to
which [Nicolas] still owes [Rodolfo] as a consequence of the unconsummated verbal agreement regarding
the former’s share in the co-ownership of [Diego Building] in favor of the latter."53 According to the
accountant’s report, after Nicolas revoked his agreement with Rodolfo due to non-payment, the
downpayment of P250,000.00 was considered a loan of Nicolas from Rodolfo. 54 The accountant opined
that the P250,000.00 should earn interest at 18%.55Nicolas however objected as regards the imposition of
interest as it was not previously agreed upon. Notably, the contents of the accountant’s report were not
disputed or rebutted by the respondents. In fact, it was stated therein that "[a]ll the bases and
assumptions made particularly in the fixing of the applicable rate of interest have been discussed with
[Eduardo]."56

We find it irrelevant and immaterial that Nicolas described the termination or cancellation of his
agreement with Rodolfo as one of rescission. Being a layman, he is understandably not adept in legal
terms and their implications. Besides, this Court should not be held captive or bound by the conclusion
reached by the parties. The proper characterization of an action should be based on what the law says it
to be, not by what a party believed it to be. "A contract is what the law defines it to be x x x and not what
the contracting parties call it."57

On the other hand, the respondents’ additional submission – that Nicolas cheated them by "vanishing and
hibernating" in the USA after receiving Rodolfo’s P250,000.00 downpayment, only to come back later and
claim that the amount he received was a mere loan – cannot be believed. How the respondents could
have been cheated or disadvantaged by Nicolas’s leaving is beyond comprehension. If there was
anybody who benefited from Nicolas’s perceived "hibernation", it was the respondents, for they certainly
had free rein over Nicolas’s interest in the Diego Building. Rodolfo put off payment of the balance of the
price, yet, with the aid of Eduardo, collected and appropriated for himself the rents which belonged to
Nicolas.
Eduardo is solidarily liable with Rodolfo as regards the share of Nicolas in the rents.

For his complicity, bad faith and abuse of authority as the Diego Building administrator, Eduardo must be
held solidarily liable with Rodolfo for all that Nicolas should be entitled to from 1993 up to the present, or
in respect of actual damages suffered in relation to his interest in the Diego Building. Eduardo was the
primary cause of Nicolas’s loss, being directly responsible for making and causing the wrongful payments
to Rodolfo, who received them under obligation to return them to Nicolas, the true recipient.1âwphi1 As
such, Eduardo should be principally responsible to Nicolas as well. Suffice it to state that every person
must, in the exercise of his rights and in the performance of his duties, act with justice, give everyone his
due, and observe honesty and good faith; and every person who, contrary to law, wilfully or negligently
causes damage to another, shall indemnify the latter for the same.58

Attorney’s fees and other costs.

"Although attorney’s fees are not allowed in the absence of stipulation, the court can award the same
when the defendant’s act or omission has compelled the plaintiff to incur expenses to protect his interest
or where the defendant acted in gross and evident bad faith in refusing to satisfy the plaintiff’s plainly
valid, just and demandable claim."59 In the instant case, it is beyond cavil that petitioner was constrained
to file the instant case to protect his interest because of respondents’ unreasonable and unjustified refusal
to render an accounting and to remit to the petitioner his rightful share in rents and fruits in the Diego
Building. Thus, we deem it proper to award to petitioner attorney’s fees in the amount of P50,000.00,60 as
well as litigation expenses in the amount ofP20,000.00 and the sum of P1,000.00 for each court
appearance by his lawyer or lawyers, as prayed for.

WHEREFORE, premises considered, the Petition is GRANTED. The June 29, 2007 Decision and
October 3, 2007 Resolution of the Court of Appeals in CA-G.R. CV No. 86512, and the April 19, 2005
Decision of the Dagupan City Regional Trial Court, Branch 40 in Civil Case No. 99-02971-D, are
hereby ANNULLED and SET ASIDE.

The Court further decrees the following:

1. The oral contract to sell between petitioner Nicolas P. Diego and respondent Rodolfo P. Diego
isDECLARED terminated/cancelled;

2. Respondents Rodolfo P. Diego and Eduardo P. Diego are ORDERED to surrender possession
and control, as the case may be, of Nicolas P. Diego’s share in the Diego Building. Respondents
are further commanded to return or surrender to the petitioner the documents of title, receipts,
papers, contracts, and all other documents in any form or manner pertaining to the latter’s share
in the building, which are deemed to be in their unauthorized and illegal possession;

3. Respondents Rodolfo P. Diego and Eduardo P. Diego are ORDERED to immediately render
an accounting of all the transactions, from the period beginning 1993 up to the present, pertaining
to Nicolas P. Diego’s share in the Diego Building, and thereafter commanded to jointly and
severally remit to the petitioner all rents, monies, payments and benefits of whatever kind or
nature pertaining thereto, which are hereby deemed received by them during the said period, and
made to them or are due, demandable and forthcoming during the said period and from the date
of this Decision, with legal interest from the filing of the Complaint;

4. Respondents Rodolfo P. Diego and Eduardo P. Diego are ORDERED, immediately and
without further delay upon receipt of this Decision, to solidarily pay the petitioner attorney’s fees in
the amount ofP50,000.00; litigation expenses in the amount of P20,000.00 and the sum
of P1,000.00 per counsel for each court appearance by his lawyer or lawyers;
 5. The payment of P250,000.00 made by respondent Rodolfo P. Diego, with legal interest from
the filing of the Complaint, shall be APPLIED, by way of compensation, to his liabilities to the
petitioner and to answer for all damages and other awards and interests which are owing to the
latter under this Decision; and

6. Respondents’ counterclaim is DISMISSED.

SO ORDERED.

G.R. No. 201167 February 27, 2013

GOTESCO PROPERTIES, INC., JOSE C. GO, EVELYN GO, LOURDES G. ORTIGA, GEORGE GO,
and VICENTE GO, Petitioners,
vs.
SPOUSES EUGENIO and ANGELINA FAJARDO, Respondents.

DECISION

PERLAS-BERNABE, J.:

Assailed in this Petition for Review on Certiorari under Rule 45 of the Rules of Court is the July 22, 2011
Decision1and February 29, 2012 Resolution2 of the Court of Appeals (CA) in CA-G.R. SP No. 112981,
which affirmed with modification the August 27, 2009 Decision3 of the Office of the President (OP).

The Facts

On January 24, 1995, respondent-spouses Eugenio and Angelina Fajardo (Sps. Fajardo) entered into a
Contract to Sell4 (contract) with petitioner-corporation Gotesco Properties, Inc. (GPI) for the purchase of a
100-square meter lot identified as Lot No. 13, Block No.6, Phase No. IV of Evergreen Executive Village, a
subdivision project owned and developed by GPI located at Deparo Road, Novaliches, Caloocan City.
The subject lot is a portion of a bigger lot covered by Transfer Certificate of Title (TCT) No.
2442205 (mother title).

Under the contract, Sps. Fajardo undertook to pay the purchase price of P126,000.00 within a 10-year
period, including interest at the rate of nine percent (9%) per annum. GPI, on the other hand, agreed to
execute a final deed of sale (deed) in favor of Sps. Fajardo upon full payment of the stipulated
consideration. However, despite its full payment of the purchase price on January 17, 2000 6 and
subsequent demands,7 GPI failed to execute the deed and to deliver the title and physical possession of
the subject lot. Thus, on May 3, 2006, Sps. Fajardo filed before the Housing and Land Use Regulatory
Board-Expanded National Capital Region Field Office (HLURBENCRFO) a complaint 8 for specific
performance or rescission of contract with damages against GPI and the members of its Board of
Directors namely, Jose C. Go, Evelyn Go, Lourdes G. Ortiga, George Go, and Vicente Go (individual
petitioners), docketed as HLURB Case No. REM-050306-13319.

Sps. Fajardo averred that GPI violated Section 209 of Presidential Decree No. 95710 (PD 957) due to its
failure to construct and provide water facilities, improvements, infrastructures and other forms of
development including water supply and lighting facilities for the subdivision project. They also alleged
that GPI failed to provide boundary marks for each lot and that the mother title including the subject lot
had no technical description and was even levied upon by the Bangko Sentral ng Pilipinas (BSP) without
their knowledge. They thus prayed that GPI be ordered to execute the deed, to deliver the corresponding
certificate of title and the physical possession of the subject lot within a reasonable period, and to develop
Evergreen Executive Village; or in the alternative, to cancel and/or rescind the contract and refund the
total payments made plus legal interest starting January 2000.

For their part, petitioners maintained that at the time of the execution of the contract, Sps. Fajardo were
actually aware that GPI's certificate of title had no technical description inscribed on it. Nonetheless, the
title to the subject lot was free from any liens or encumbrances. 11 Petitioners claimed that the failure to
deliver the title to Sps. Fajardo was beyond their control12 because while GPI's petition for inscription of
technical description (LRC Case No. 4211) was favorably granted13 by the Regional Trial Court of
Caloocan City, Branch 131 (RTC-Caloocan), the same was reversed14 by the CA; this caused the delay in
the subdivision of the property into individual lots with individual titles. Given the foregoing incidents,
petitioners thus argued that Article 1191 of the Civil Code (Code) – the provision on which Sps. Fajardo
anchor their right of rescission – remained inapplicable since they were actually willing to comply with
their obligation but were only prevented from doing so due to circumstances beyond their control.
Separately, petitioners pointed out that BSP's adverse claim/levy which was annotated long after the
execution of the contract had already been settled.

The Ruling of the HLURB-ENCRFO

On February 9, 2007, the HLURB-ENCRFO issued a Decision15 in favor of Sps. Fajardo, holding that
GPI’s obligation to execute the corresponding deed and to deliver the transfer certificate of title and
possession of the subject lot arose and thus became due and demandable at the time Sps. Fajardo had
fully paid the purchase price for the subject lot. Consequently, GPI’s failure to meet the said obligation
constituted a substantial breach of the contract which perforce warranted its rescission. In this regard,
Sps. Fajardo were given the option to recover the money they paid to GPI in the amount of P168,728.83,
plus legal interest reckoned from date of extra-judicial demand in September 2002 until fully paid.
Petitioners were likewise held jointly and solidarily liable for the payment of moral and exemplary
damages, attorney's fees and the costs of suit.

The Ruling of the HLURB Board of Commissioners

On appeal, the HLURB Board of Commissioners affirmed the above ruling in its August 3, 2007
Decision,16finding that the failure to execute the deed and to deliver the title to Sps. Fajardo amounted to
a violation of Section 25 of PD 957 which therefore, warranted the refund of payments in favor of Sps.
Fajardo.

The Ruling of the OP

On further appeal, the OP affirmed the HLURB rulings in its August 27, 2009 Decision.17 In so doing, it
emphasized the mandatory tenor of Section 25 of PD 957 which requires the delivery of title to the buyer
upon full payment and found that GPI unjustifiably failed to comply with the same.

The Ruling of the CA

On petition for review, the CA affirmed the above rulings with modification, fixing the amount to be
refunded to Sps. Fajardo at the prevailing market value of the property18 pursuant to the ruling in Solid
Homes v. Tan (Solid Homes).19

The Petition
Petitioners insist that Sps. Fajardo have no right to rescind the contract considering that GPI's inability to
comply therewith was due to reasons beyond its control and thus, should not be held liable to refund the
payments they had received. Further, since the individual petitioners never participated in the acts
complained of nor found to have acted in bad faith, they should not be held liable to pay damages and
attorney's fees.

The Court's Ruling

The petition is partly meritorious.

A. Sps. Fajardo’s right to rescind

It is settled that in a contract to sell, the seller's obligation to deliver the corresponding certificates of title
is simultaneous and reciprocal to the buyer's full payment of the purchase price. 20 In this relation, Section
25 of PD 957, which regulates the subject transaction, imposes on the subdivision owner or developer the
obligation to cause the transfer of the corresponding certificate of title to the buyer upon full payment, to
wit:

Sec. 25. Issuance of Title. The owner or developer shall deliver the title of the lot or unit to the
buyer upon full payment of the lot or unit. No fee, except those required for the registration of the deed
of sale in the Registry of Deeds, shall be collected for the issuance of such title. In the event a mortgage
over the lot or unit is outstanding at the time of the issuance of the title to the buyer, the owner or
developer shall redeem the mortgage or the corresponding portion thereof within six months from such
issuance in order that the title over any fully paid lot or unit may be secured and delivered to the buyer in
accordance herewith. (Emphasis supplied.)

In the present case, Sps. Fajardo claim that GPI breached the contract due to its failure to execute the
deed of sale and to deliver the title and possession over the subject lot, notwithstanding the full payment
of the purchase price made by Sps. Fajardo on January 17, 200021 as well as the latter’s demand for GPI
to comply with the aforementioned obligations per the letter 22 dated September 16, 2002. For its part,
petitioners proffer that GPI could not have committed any breach of contract considering that its purported
non-compliance was largely impelled by circumstances beyond its control i.e., the legal proceedings
concerning the subdivision of the property into individual lots. Hence, absent any substantial breach, Sps.
Fajardo had no right to rescind the contract.

The Court does not find merit in petitioners’ contention.

A perusal of the records shows that GPI acquired the subject property on March 10, 1992 through a Deed
of Partition and Exchange23 executed between it and Andres Pacheco (Andres), the former registered
owner of the property. GPI was issued TCT No. 244220 on March 16, 1992 but the same did not bear any
technical description.24 However, no plausible explanation was advanced by the petitioners as to why the
petition for inscription (docketed as LRC Case No. 4211) dated January 6, 2000,25 was filed only after
almost eight (8) years from the acquisition of the subject property.

Neither did petitioners sufficiently explain why GPI took no positive action to cause the immediate filing of
a new petition for inscription within a reasonable time from notice of the July 15, 2003 CA Decision which
dismissed GPI’s earlier petition based on technical defects, this notwithstanding Sps. Fajardo's full
payment of the purchase price and prior demand for delivery of title. GPI filed the petition before the RTC-
Caloocan, Branch 122 (docketed as LRC Case No. C-5026) only on November 23, 2006,26 following
receipt of the letter27 dated February 10, 2006 and the filing of the complaint on May 3, 2006, alternatively
seeking refund of payments. While the court a quo decided the latter petition for inscription in its
favor,28 there is no showing that the same had attained finality or that the approved technical description
had in fact been annotated on TCT No. 244220, or even that the subdivision plan had already been
approved.
Moreover, despite petitioners’ allegation29 that the claim of BSP had been settled, there appears to be no
cancellation of the annotations30 in GPI’s favor. Clearly, the long delay in the performance of GPI's
obligation from date of demand on September 16, 2002 was unreasonable and unjustified. It cannot
therefore be denied that GPI substantially breached its contract to sell with Sps. Fajardo which thereby
accords the latter the right to rescind the same pursuant to Article 1191 of the Code, viz:

ART. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors
should not comply with what is incumbent upon him.

The injured party may choose between the fulfillment and the rescission of the obligation, with the
payment of damages in either case. He may also seek rescission, even after he has chosen fulfillment, if
the latter should become impossible.

The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a
period.

This is understood to be without prejudice to the rights of third persons who have acquired the thing, in
accordance with articles 1385 and 1388 and the Mortgage Law.

B. Effects of rescission

At this juncture, it is noteworthy to point out that rescission does not merely terminate the contract and
release the parties from further obligations to each other, but abrogates the contract from its inception
and restores the parties to their original positions as if no contract has been made. 31 Consequently,
mutual restitution, which entails the return of the benefits that each party may have received as a result of
the contract, is thus required.32To be sure, it has been settled that the effects of rescission as provided for
in Article 1385 of the Code are equally applicable to cases under Article 1191, to wit:

xxxx

Mutual restitution is required in cases involving rescission under Article 1191.1âwphi1 This means
bringing the parties back to their original status prior to the inception of the contract. Article 1385 of the
Civil Code provides, thus:

ART. 1385. Rescission creates the obligation to return the things which were the object of the
contract, together with their fruits, and the price with its interest; consequently, it can be carried
out only when he who demands rescission can return whatever he may be obligated to restore.

Neither shall rescission take place when the things which are the object of the contract are legally in the
possession of third persons who did not act in bad faith.

In this case, indemnity for damages may be demanded from the person causing the loss.

This Court has consistently ruled that this provision applies to rescission under Article 1191:

Since Article 1385 of the Civil Code expressly and clearly states that "rescission creates the obligation to
return the things which were the object of the contract, together with their fruits, and the price with its
interest," the Court finds no justification to sustain petitioners’ position that said Article 1385 does not
apply to rescission under Article 1191. x x x33 (Emphasis supplied; citations omitted.)

In this light, it cannot be denied that only GPI benefited from the contract, having received full payment of
the contract price plus interests as early as January 17, 2000, while Sps. Fajardo remained prejudiced by
the persisting non-delivery of the subject lot despite full payment. As a necessary consequence,
considering the propriety of the rescission as earlier discussed, Sps. Fajardo must be able to recover the
price of the property pegged at its prevailing market value consistent with the Court’s pronouncement
in Solid Homes,34 viz:

Indeed, there would be unjust enrichment if respondents Solid Homes, Inc. & Purita Soliven are made to
pay only the purchase price plus interest. It is definite that the value of the subject property already
escalated after almost two decades from the time the petitioner paid for it. Equity and justice dictate
that the injured party should be paid the market value of the lot, otherwise, respondents Solid
Homes, Inc. & Purita Soliven would enrich themselves at the expense of herein lot owners when
they sell the same lot at the present market value. Surely, such a situation should not be
countenanced for to do so would be contrary to reason and therefore, unconscionable. Over time, courts
have recognized with almost pedantic adherence that what is inconvenient or contrary to reason is not
allowed in law. (Emphasis supplied.)

On this score, it is apt to mention that it is the intent of PD 957 to protect the buyer against unscrupulous
developers, operators and/or sellers who reneged on their obligations.35 Thus, in order to achieve this
purpose, equity and justice dictate that the injured party should be afforded full recompense and as such,
be allowed to recover the prevailing market value of the undelivered lot which had been fully paid
for.1âwphi1

C. Moral and exemplary damages, attorney’s fees and costs of suit

Furthermore, the Court finds that there is proper legal basis to accord moral and exemplary damages and
attorney's fees, including costs of suit. Verily, GPI’s unjustified failure to comply with its obligations as
above-discussed caused Sps. Fajardo serious anxiety, mental anguish and sleepless nights, thereby
justifying the award of moral damages. In the same vein, the payment of exemplary damages remains in
order so as to prevent similarly minded subdivision developers to commit the same transgression. And
finally, considering that Sps. Fajardo were constrained to engage the services of counsel to file this suit,
the award of attorney’s fees must be likewise sustained.

D. Liability of individual Petitioners

However, the Court finds no basis to hold individual petitioners solidarily liable with petitioner GPI for the
payment of damages in favor of Sps. Fajardo since it was not shown that they acted maliciously or dealt
with the latter in bad faith. Settled 1s the rule that in the absence of malice and bad faith, as in this case,
officers of the corporation cannot be made personally liable for liabilities of the corporation which, by legal
fiction, has a personality separate and distinct from its officers, stockholders, and members. 36

WHEREFORE, the assailed July 22, 2011 Decision and February 29, 2012 Resolution of the Court of
Appeals in CA-G.R. SP No. 112981 are hereby AFFIRMED WITH MODIFICATION, absolving individual
petitioners Jose C. Go, Evelyn Go, Lourdes G. Ortiga, George Go, and Vicente Go from personal liability
towards respondent-spouses Eugenio and Angelina Fajardo.

SO ORDERED.

FIRST DIVISION

G.R. No. 188986 March 20, 2013

GALILEO A. MAGLASANG, doing business under the name GL Enterprises, Petitioner,
vs.
NORTHWESTERN INC., UNIVERSITY, Respondent.

DECISION

SERENO, CJ.:

Before this Court is a Rule 45 Petition, seeking a review of the 27 July 2009 Court of Appeals (CA)
Decision in CA-G.R. CV No. 88989,1 which modified the Regional Trial Court (RTC) Decision of 8 January
2007 in Civil Case No. Q-04-53660.2 The CA held that petitioner substantially breached its contracts with
respondent for the installation of an integrated bridge system (IBS).

The antecedent .facts are as follows:3

On 10 June 2004, respondent Northwestern University (Northwestern), an educational institution offering

maritime-related courses, engaged the services of a Quezon City-based firm, petitioner GL Enterprises, to
install a new IBS in Laoag City. The installation of an IBS, used as the students’ training laboratory, was
required by the Commission on Higher Education (CHED) before a school could offer maritime
transportation programs.4

Since its IBS was already obsolete, respondent required petitioner to supply and install specific
components in order to form the most modern IBS that would be acceptable to CHED and would be
compliant with the standards of the International Maritime Organization (IMO). For this purpose, the
parties executed two contracts.

The first contract partly reads:5

That in consideration of the payment herein mentioned to be made by the First Party (defendant), the
Second Party agrees to furnish, supply, install and integrate the most modern INTEGRATED BRIDGE
SYSTEM located at Northwestern University MOCK BOAT in accordance with the general conditions,
plans and specifications of this contract.

SUPPLY & INSTALLATION OF THE FOLLOWING:

INTEGRATED BRIDGE SYSTEM

A. 2-RADAR SYSTEM

B. OVERHEAD CONSOLE MONITORING SYSTEM

C. ENGINE TELEGRAPH SYSTEM

D. ENGINE CONTROL SYSTEM

E. WEATHER CONTROL SYSTEM

F. ECDIS SYSTEM

G. STEERING WHEEL SYSTEM

H. BRIDGE CONSOLE
 TOTAL COST: Php 3,800,000.00

LESS: OLD MARITIME

EQUIPMENT TRADE-IN VALUE 1,000,000.00

DISCOUNT 100,000.00

PROJECT COST (MATERIALS & INSTALLATION) PhP 2,700,000.00

(Emphasis in the original)

The second contract essentially contains the same terms and conditions as follows: 6

That in consideration of the payment herein mentioned to be made by the First Party (defendant), the
Second Party agrees to furnish, supply, install & integrate the most modern INTEGRATED BRIDGE
SYSTEM located at Northwestern University MOCK BOAT in accordance with the general conditions,
plans and specifications of this contract.

SUPPLY & INSTALLATION OF THE FOLLOWING:

1. ARPA RADAR SIMULATION ROOM

xxxx

2. GMDSS SIMULATION ROOM

xxxx

TOTAL COST: PhP 270,000.00

(Emphasis in the original)

Common to both contracts are the following provisions: (1) the IBS and its components must be compliant
with the IMO and CHED standard and with manuals for simulators/major equipment; (2) the contracts
may be terminated if one party commits a substantial breach of its undertaking; and (3) any dispute under
the agreement shall first be settled mutually between the parties, and if settlement is not obtained, resort
shall be sought in the courts of law.

Subsequently, Northwestern paid P1 million as down payment to GL Enterprises. The former then
assumed possession of Northwestern’s old IBS as trade-in payment for its service. Thus, the balance of
the contract price remained at P1.97 million.7

Two months after the execution of the contracts, GL Enterprises technicians delivered various materials
to the project site. However, when they started installing the components, respondent halted the
operations. GL Enterprises then asked for an explanation.8

Northwestern justified the work stoppage upon its finding that the delivered equipment were
substandard.9 It explained further that GL Enterprises violated the terms and conditions of the contracts,
since the delivered components (1) were old; (2) did not have instruction manuals and warranty
certificates; (3) contained indications of being reconditioned machines; and (4) did not meet the IMO and
CHED standards. Thus, Northwestern demanded compliance with the agreement and suggested that GL
Enterprises meet with the former’s representatives to iron out the situation.
Instead of heeding this suggestion, GL Enterprises filed on 8 September 2004 a Complaint 10 for breach of
contract and prayed for the following sums: P1.97 million, representing the amount that it would have
earned, had Northwestern not stopped it from performing its tasks under the two contracts; at
least P100,000 as moral damages; at least P100,000 by way of exemplary damages; at least P100,000
as attorney’s fees and litigation expenses; and cost of suit. Petitioner alleged that Northwestern breached
the contracts by ordering the work stoppage and thus preventing the installation of the materials for the
IBS.

Northwestern denied the allegation. In its defense, it asserted that since the equipment delivered were not
in accordance with the specifications provided by the contracts, all succeeding works would be futile and
would entail unnecessary expenses. Hence, it prayed for the rescission of the contracts and made a
compulsory counterclaim for actual, moral, and exemplary damages, and attorney’s fees.

The RTC held both parties at fault. It found that Northwestern unduly halted the operations, even if the
contracts called for a completed project to be evaluated by the CHED. In turn, the breach committed by
GL Enterprises consisted of the delivery of substandard equipment that were not compliant with IMO and
CHED standards as required by the agreement.

Invoking the equitable principle that "each party must bear its own loss," the trial court treated the
contracts as impossible of performance without the fault of either party or as having been dissolved by
mutual consent. Consequently, it ordered mutual restitution, which would thereby restore the parties to
their original positions as follows:11

Accordingly, plaintiff is hereby ordered to restore to the defendant all the equipment obtained by reason of
the First Contract and refund the downpayment of P1,000,000.00 to the defendant; and for the defendant
to return to the plaintiff the equipment and materials it withheld by reason of the non-continuance of the
installation and integration project. In the event that restoration of the old equipment taken from
defendant's premises is no longer possible, plaintiff is hereby ordered to pay the appraised value of
defendant's old equipment atP1,000,000.00. Likewise, in the event that restoration of the equipment and
materials delivered by the plaintiff to the defendant is no longer possible, defendant is hereby ordered to
pay its appraised value at P1,027,480.00.

Moreover, plaintiff is likewise ordered to restore and return all the equipment obtained by reason of the
Second Contract, or if restoration or return is not possible, plaintiff is ordered to pay the value thereof to
the defendant.

SO ORDERED.

Aggrieved, both parties appealed to the CA. With each of them pointing a finger at the other party as the
violator of the contracts, the appellate court ultimately determined that GL Enterprises was the one guilty
of substantial breach and liable for attorney’s fees.

The CA appreciated that since the parties essentially sought to have an IBS compliant with the CHED
and IMO standards, it was GL Enterprises’ delivery of defective equipment that materially and
substantially breached the contracts. Although the contracts contemplated a completed project to be
evaluated by CHED, Northwestern could not just sit idly by when it was apparent that the components
delivered were substandard.

The CA held that Northwestern only exercised ordinary prudence to prevent the inevitable rejection of the
IBS delivered by GL Enterprises. Likewise, the appellate court disregarded petitioner’s excuse that the
equipment delivered might not have been the components intended to be installed, for it would be
contrary to human experience to deliver equipment from Quezon City to Laoag City with no intention to
use it.
This time, applying Article 1191 of the Civil Code, the CA declared the rescission of the contracts. It then
proceeded to affirm the RTC’s order of mutual restitution. Additionally, the appellate court
granted P50,000 to Northwestern by way of attorney’s fees.

Before this Court, petitioner rehashes all the arguments he had raised in the courts a quo. 12 He maintains
his prayer for actual damages equivalent to the amount that he would have earned, had respondent not
stopped him from performing his tasks under the two contracts; moral and exemplary damages; attorney’s
fees; litigation expenses; and cost of suit.

Hence, the pertinent issue to be resolved in the instant appeal is whether the CA gravely erred in (1)
finding substantial breach on the part of GL Enterprises; (2) refusing petitioner’s claims for damages, and
(3) awarding attorney’s fees to Northwestern.

RULING OF THE COURT

Substantial Breaches of the Contracts

Although the RTC and the CA concurred in ordering restitution, the courts a quo, however, differed on the
basis thereof. The RTC applied the equitable principle of mutual fault, while the CA applied Article 1191
on rescission.

The power to rescind the obligations of the injured party is implied in reciprocal obligations, such as in this
case. On this score, the CA correctly applied Article 1191, which provides thus:

The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not
comply with what is incumbent upon him.

The injured party may choose between the fulfillment and the rescission of the obligation, with the
payment of damages in either case. He may also seek rescission, even after he has chosen fulfillment, if
the latter should become impossible.

The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a
period.

The two contracts require no less than substantial breach before they can be rescinded. Since the
contracts do not provide for a definition of substantial breach that would terminate the rights and
obligations of the parties, we apply the definition found in our jurisprudence.

This Court defined in Cannu v. Galang13 that substantial, unlike slight or casual breaches of contract, are
fundamental breaches that defeat the object of the parties in entering into an agreement, since the law is
not concerned with trifles.14

The question of whether a breach of contract is substantial depends upon the attending circumstances.15

In the case at bar, the parties explicitly agreed that the materials to be delivered must be compliant with
the CHED and IMO standards and must be complete with manuals. Aside from these clear provisions in
the contracts, the courts a quo similarly found that the intent of the parties was to replace the old IBS in
order to obtain CHED accreditation for Northwestern’s maritime-related courses.

According to CHED Memorandum Order (CMO) No. 10, Series of 1999, as amended by CMO No. 13,
Series of 2005, any simulator used for simulator-based training shall be capable of simulating the
operating capabilities of the shipboard equipment concerned. The simulation must be achieved at a level
of physical realism appropriate for training objectives; include the capabilities, limitations and possible
errors of such equipment; and provide an interface through which a trainee can interact with the
equipment, and the simulated environment.

Given these conditions, it was thus incumbent upon GL Enterprises to supply the components that would
create an IBS that would effectively facilitate the learning of the students.

However, GL Enterprises miserably failed in meeting its responsibility. As contained in the findings of the
CA and the RTC, petitioner supplied substandard equipment when it delivered components that (1) were
old; (2) did not have instruction manuals and warranty certificates; (3) bore indications of being
reconditioned machines; and, all told, (4) might not have met the IMO and CHED standards. Highlighting
the defects of the delivered materials, the CA quoted respondent’s testimonial evidence as follows: 16

Q: In particular which of these equipment of CHED requirements were not complied with?

A: The Radar Ma'am, because they delivered only 10-inch PPI, that is the monitor of the Radar. That is
16-inch and the gyrocompass with two (2) repeaters and the history card. The gyrocompass - there is no
marker, there is no model, there is no serial number, no gimbal, no gyroscope and a bulb to work it
properly to point the true North because it is very important to the Cadets to learn where is the true North
being indicated by the Master Gyrocompass.

xxxx

Q: Mr. Witness, one of the defects you noted down in this history card is that the master gyrocompass
had no gimbals, gyroscope and balls and was replaced with an ordinary electric motor. So what is the
Implication of this?

A: Because those gimbals, balls and the gyroscope it let the gyrocompass to work so it will point the true
North but they being replaced with the ordinary motor used for toys so it will not indicate the true North.

Q: So what happens if it will not indicate the true North?

A: It is very big problem for my cadets because they must, to learn into school where is the true North and
what is that equipment to be used on board.

Q: One of the defects is that the steering wheel was that of an ordinary automobile. And what is the
implication of this?

A: Because. on board Ma’am, we are using the real steering wheel and the cadets will be implicated if
they will notice that the ship have the same steering wheel as the car so it is not advisable for them.

Q:. And another one is that the gyrocompass repeater was only refurbished and it has no serial number.
What is wrong with that?

A: It should be original Ma’am because this gyro repeater, it must to repeat also the true North being
indicated by the Master Gyro Compass so it will not work properly, I don’t know it will work properly.
(Underscoring supplied)

Evidently, the materials delivered were less likely to pass the CHED standards, because the navigation
system to be installed might not accurately point to the true north; and the steering wheel delivered was
one that came from an automobile, instead of one used in ships. Logically, by no stretch of the
imagination could these form part of the most modern IBS compliant with the IMO and CHED standards.
Even in the instant appeal, GL Enterprises does not refute that the equipment it delivered was
substandard. However, it reiterates its rejected excuse that Northwestern should have made an
assessment only after the completion of the IBS.17 Thus, petitioner stresses that it was Northwestern that
breached the agreement when the latter halted the installation of the materials for the IBS, even if the
parties had contemplated a completed project to be evaluated by CHED. However, as aptly considered
by the CA, respondent could not just "sit still and wait for such day that its accreditation may not be
granted by CHED due to the apparent substandard equipment installed in the bridge system."18 The
appellate court correctly emphasized that, by that time, both parties would have incurred more costs for
nothing.

Additionally, GL Enterprises reasons that, based on the contracts, the materials that were hauled all the
way from Quezon City to Laoag City under the custody of the four designated installers might not have
been the components to be used.19 Without belaboring the point, we affirm the conclusion of the CA and
the RTC that the excuse is untenable for being contrary to human experience.20

Given that petitioner, without justification, supplied substandard components for the new IBS, it is thus
clear that its violation was not merely incidental, but directly related to the essence of the agreement
pertaining to the installation of an IBS compliant with the CHED and IMO standards.

Consequently, the CA correctly found substantial breach on the part of petitioner.

In contrast, Northwestern’s breach, if any, was characterized by the appellate court as slight or
casual.21 By way of negative definition, a breach is considered casual if it does not fundamentally defeat
the object of the parties in entering into an agreement. Furthermore, for there to be a breach to begin
with, there must be a "failure, without legal excuse, to perform any promise which forms the whole or part
of the contract."22

Here, as discussed, the stoppage of the installation was justified. The action of Northwestern constituted
a legal excuse to prevent the highly possible rejection of the IBS. Hence, just as the CA concluded, we
find that Northwestern exercised ordinary prudence to avert a possible wastage of time, effort, resources
and also of theP2.9 million representing the value of the new IBS.

Actual Damages, Moral and Exemplary Damages, and Attorney's Fees

As between the parties, substantial breach can clearly be attributed to GL

Enterprises.1âwphi1 Consequently, it is not the injured party who can claim damages under Article 1170
of the Civil Code. For this reason, we concur in the result of the CA's Decision denying petitioner actual
damages in the form of lost earnings, as well as moral and exemplary damages.

With respect to attorney's fees, Article 2208 of the Civil Code allows the grant thereof when the court
deems it just and equitable that attorney's fees should be recovered. An award of attorney's fees is proper
if one was forced to litigate and incur expenses to protect one's rights and interest by reason of an
unjustified act or omission on the part of the party from whom the award is sought.23

Since we affirm the CA's finding that it was not Northwestern but GL Enterprises that breached the
contracts without justification, it follows that the appellate court correctly awarded attorney’s fees to
respondent. Notably, this litigation could have altogether been avoided if petitioner heeded respondent's
suggestion to amicably settle; or, better yet, if in the first place petitioner delivered the right materials as
required by the contracts.

IN VIEW THEREOF, the assailed 27 July 2009 Decision of the Court of Appeals in CA-G.R. CV No.
88989 is hereby AFFIRMED.
SO ORDERED.

G.R. No. 189145 December 4, 2013

OPTIMUM DEVELOPMENT BANK, Petitioner,

vs.
SPOUSES BENIGNO V. JOVELLANOS and LOURDES R. JOVELLANOS, Respondents.

DECISION

PERLAS-BERNABE, J.:

Assailed in this petition for review on certiorari1 are the Decision2 dated May 29, 2009 and
Resolution 3 dated August 10, 2009 of the Court of Appeals (CA) in CA-G.R. SP No. 104487 which
reversed the Decision4 dated December 27, 2007 of the Regional Trial Court of Caloocan City, Branch
128 (RTC) in Civil Case No. C-21867 that, in turn, affirmed the Decision5 dated June 8, 2007 of the
Metropolitan Trial Court, Branch 53 of that same city (MeTC) in Civil Case No. 06-28830 ordering
respondents-spouses Benigno and Lourdes Jovellanos (Sps. Jovellanos) to, inter alia, vacate the
premises of the property subject of this case.

The Facts

On April 26, 2005, Sps. Jovellanos entered into a Contract to Sell6 with Palmera Homes, Inc. (Palmera
Homes) for the purchase of a residential house and lot situated in Block 3, Lot 14, Villa Alegria
Subdivision, Caloocan City (subject property) for a total consideration of P1,015,000.00. Pursuant to the
contract, Sps. Jovellanos took possession of the subject property upon a down payment of P91,500.00,
undertaking to pay the remaining balance of the contract price in equal monthly installments
of P13,107.00 for a period of 10 years starting June 12, 2005.7

On August 22, 2006, Palmera Homes assigned all its rights, title and interest in the Contract to Sell in
favor of petitioner Optimum Development Bank (Optimum) through a Deed of Assignment of even date.8

On April 10, 2006, Optimum issued a Notice of Delinquency and Cancellation of Contract to Sell9 for Sps.
Jovellanos’s failure to pay their monthly installments despite several written and verbal notices.10

In a final Demand Letter dated May 25, 2006,11 Optimum required Sps. Jovellanos to vacate and deliver
possession of the subject property within seven (7) days which, however, remained unheeded. Hence,
Optimum filed, on November 3, 2006, a complaint for unlawful detainer 12 before the MeTC, docketed as
Civil Case No. 06-28830. Despite having been served with summons, together with a copy of the
complaint,13 Sps. Jovellanos failed to file their answer within the prescribed reglementary period, thus
prompting Optimum to move for the rendition of judgment.14

Thereafter, Sps. Jovellanos filed their opposition with motion to admit answer, questioning the jurisdiction
of the court, among others. Further, they filed a Motion to Reopen and Set the Case for Preliminary
Conference, which the MeTC denied.

The MeTC Ruling

In a Decision15 dated June 8, 2007, the MeTC ordered Sps. Jovellanos to vacate the subject property and
pay Optimum reasonable compensation in the amount of P5,000.00 for its use and occupation until
possession has been surrendered. It held that Sps. Jovellanos’s possession of the said property was by
virtue of a Contract to Sell which had already been cancelled for non-payment of the stipulated monthly
installment payments. As such, their "rights of possession over the subject property necessarily
terminated or expired and hence, their continued possession thereof constitute[d] unlawful detainer."16

Dissatisfied, Sps. Jovellanos appealed to the RTC, claiming that Optimum counsel made them believe
that a compromise agreement was being prepared, thus their decision not to engage the services of
counsel and their concomitant failure to file an answer.17

They also assailed the jurisdiction of the MeTC, claiming that the case did not merely involve the issue of
physical possession but rather, questions arising from their rights under a contract to sell which is a
matter that is incapable of pecuniary estimation and, therefore, within the jurisdiction of the RTC. 18

The RTC Ruling

In a Decision19 dated December 27, 2007, the RTC affirmed the MeTC’s judgment, holding that the latter
did not err in refusing to admit Sps. Jovellanos’ s belatedly filed answer considering the mandatory period
for its filing. It also affirmed the MeTC’s finding that the action does not involve the rights of the respective
parties under the contract but merely the recovery of possession by Optimum of the subject property after
the spouses’ default.20

Aggrieved, Sps. Jovellanos moved for reconsideration which was, however, denied in a
Resolution21 dated June 27, 2008. Hence, the petition before the CA reiterating that the RTC erred in
affirming the decision of the MeTC with respect to:

(a) the non-admission of their answer to the complaint; and

(b) the jurisdiction of the MeTC over the complaint for unlawful detainer.22

The CA Ruling

In an Amended Decision23 dated May 29, 2009, the CA reversed and set aside the RTC’s decision, ruling
to dismiss the complaint for lack of jurisdiction. It found that the controversy does not only involve the
issue of possession but also the validity of the cancellation of the Contract to Sell and the determination
of the rights of the parties thereunder as well as the governing law, among others, Republic Act No. (RA)
6552.24

Accordingly, it concluded that the subject matter is one which is incapable of pecuniary estimation and
thus, within the jurisdiction of the RTC.25

Undaunted, Optimum moved for reconsideration which was denied in a Resolution 26 dated August 10,
2009. Hence, the instant petition, submitting that the case is one for unlawful detainer, which falls within
the exclusive original jurisdiction of the municipal trial courts, and not a case incapable of pecuniary
estimation cognizable solely by the regional trial courts.

The Court’s Ruling

The petition is meritorious. What is determinative of the nature of the action and the court with jurisdiction
over it are the allegations in the complaint and the character of the relief sought, not the defenses set up
in an answer.27

A complaint sufficiently alleges a cause of action for unlawful detainer if it recites that:
 (a) initially, possession of the property by the defendant was by contract with or by tolerance of
the plaintiff;

(b) eventually, such possession became illegal upon notice by plaintiff to defendant of the
termination of the latter's right of possession;

(c) thereafter, defendant remained in possession of the property and deprived plaintiff of the
enjoyment thereof; and

(d) within one year from the last demand on defendant to vacate the property, plaintiff instituted
the complaint for ejectment.28

Corollarily, the only issue to be resolved in an unlawful detainer case is physical or material possession of
the property involved, independent of any claim of ownership by any of the parties involved. 29

In its complaint, Optimum alleged that it was by virtue of the April 26, 2005 Contract to Sell that Sps.
Jovellanos were allowed to take possession of the subject property. However, since the latter failed to
pay the stipulated monthly installments, notwithstanding several written and verbal notices made upon
them, it cancelled the said contract as per the Notice of Delinquency and Cancellation dated April 10,
2006. When Sps. Jovellanos refused to vacate the subject property despite repeated demands, Optimum
instituted the present action for unlawful detainer on November 3, 2006, or within one year from the final
demand made on May 25, 2006.

While the RTC upheld the MeTC’s ruling in favor of Optimum, the CA, on the other hand, declared that
the MeTC had no jurisdiction over the complaint for unlawful detainer, reasoning that the case involves a
matter which is incapable of pecuniary estimation – i.e., the validity of the cancellation of the Contract to
Sell and the determination of the rights of the parties under the contract and law – and hence, within the
jurisdiction of the RTC. The Court disagrees. Metropolitan Trial Courts are conditionally vested with
authority to resolve the question of ownership raised as an incident in an ejectment case where the
determination is essential to a complete adjudication of the issue of possession. 30 Concomitant to the
ejectment court’s authority to look into the claim of ownership for purposes of resolving the issue of
possession is its authority to interpret the contract or agreement upon which the claim is premised. Thus,
in the case of Oronce v. CA,31 wherein the litigants’ opposing claims for possession was hinged on
whether their written agreement reflected the intention to enter into a sale or merely an equitable
mortgage, the Court affirmed the propriety of the ejectment court’s examination of the terms of the
agreement in question by holding that, "because metropolitan trial courts are authorized to look into the
ownership of the property in controversy in ejectment cases, it behooved MTC Branch 41 to examine the
bases for petitioners’ claim of ownership that entailed interpretation of the Deed of Sale with Assumption
of Mortgage."32Also, in Union Bank of the Philippines v. Maunlad Homes, Inc.33 (Union Bank), citing Sps.
Refugia v. CA,34 the Court declared that MeTCs have authority to interpret contracts in unlawful detainer
cases, viz.:35

The authority granted to the MeTC to preliminarily resolve the issue of ownership to determine the issue
of possession ultimately allows it to interpret and enforce the contract or agreement between the plaintiff
and the defendant. To deny the MeTC jurisdiction over a complaint merely because the issue of
possession requires the interpretation of a contract will effectively rule out unlawful detainer as a remedy.
As stated, in an action for unlawful detainer, the defendant’s right to possess the property may be by
virtue of a contract, express or implied;

corollarily, the termination of the defendant’s right to possess would be governed by the terms of the
same contract.

Interpretation of the contract between the plaintiff and the defendant is inevitable because it is the
contract that initially granted the defendant the right to possess the property; it is this same contract that
the plaintiff subsequently claims was violated or extinguished, terminating the defendant’s right to
possess. We ruled in Sps. Refugia v. CA that – where the resolution of the issue of possession hinges on
a determination of the validity and interpretation of the document of title or any other contract on which
the claim of possession is premised, the inferior court may likewise pass upon these issues.

The MeTC’s ruling on the rights of the parties based on its interpretation of their contract is, of course, not
conclusive, but is merely provisional and is binding only with respect to the issue of possession.
(Emphases supplied; citations omitted)

In the case at bar, the unlawful detainer suit filed by Optimum against Sps. Jovellanos for illegally
withholding possession of the subject property is similarly premised upon the cancellation or termination
of the Contract to Sell between them. Indeed, it was well within the jurisdiction of the MeTC to consider
the terms of the parties’ agreement in order to ultimately determine the factual bases of Optimum’s
possessory claims over the subject property. Proceeding accordingly, the MeTC held that Sps.
Jovellanos’s non-payment of the installments due had rendered the Contract to Sell without force and
effect, thus depriving the latter of their right to possess the property subject of said contract. 36 The
foregoing disposition aptly squares with existing jurisprudence. As the Court similarly held in the Union
Bank case, the seller’s cancellation of the contract to sell necessarily extinguished the buyer’s right of
possession over the property that was the subject of the terminated agreement.37

Verily, in a contract to sell, the prospective seller binds himself to sell the property subject of the
agreement exclusively to the prospective buyer upon fulfillment of the condition agreed upon which is the
full payment of the purchase price but reserving to himself the ownership of the subject property despite
delivery thereof to the prospective buyer.38

The full payment of the purchase price in a contract to sell is a suspensive condition, the non-fulfillment of
which prevents the prospective seller’s obligation to convey title from becoming effective,39 as in this
case. Further, it is significant to note that given that the Contract to Sell in this case is one which has for
its object real property to be sold on an installment basis, the said contract is especially governed by –
and thus, must be examined under the provisions of – RA 6552, or the "Realty Installment Buyer
Protection Act", which provides for the rights of the buyer in case of his default in the payment of
succeeding installments. Breaking down the provisions of the law, the Court, in the case of Rillo v.
CA,40 explained the mechanics of cancellation under RA 6552 which are based mainly on the amount of
installments already paid by the buyer under the subject contract, to wit:41

Given the nature of the contract of the parties, the respondent court correctly applied Republic Act No.
6552. Known as the Maceda Law, R.A. No. 6552 recognizes in conditional sales of all kinds of real estate
(industrial, commercial, residential) the right of the seller to cancel the contract upon non-payment of an
installment by the buyer, which is simply an event that prevents the obligation of the vendor to convey title
from acquiring binding force. It also provides the right of the buyer on installments in case he defaults in
the payment of succeeding installments, viz.:

(1) Where he has paid at least two years of installments,

(a) To pay, without additional interest, the unpaid installments due within the total grace period earned by
him, which is hereby fixed at the rate of one month grace period for every one year of installment
payments made:

Provided, That this right shall be exercised by the buyer only once in every five years of the life of the
contract and its extensions, if any. (b) If the contract is cancelled, the seller shall refund to the buyer the
cash surrender value of the payments on the property equivalent to fifty per cent of the total payments
made and, after five years of installments, an additional five per cent every year but not to exceed ninety
per cent of the total payments made:
Provided, That the actual cancellation of the contract shall take place after cancellation or the demand for
rescission of the contract by a notarial act and upon full payment of the cash surrender value to the buyer.

Down payments, deposits or options on the contract shall be included in the computation of the total
number of installments made.

(2) Where he has paid less than two years in installments, Sec. 4. x x x the seller shall give the buyer a
grace period of not less than sixty days from the date the installment became due. If the buyer fails to pay
the installments due at the expiration of the grace period, the seller may cancel the contract after thirty
days from receipt by the buyer of the notice of cancellation or the demand for rescission of the contract by
a notarial act. (Emphasis and underscoring supplied)

Pertinently, since Sps. Jovellanos failed to pay their stipulated monthly installments as found by the
MeTC, the Court examines Optimum’s compliance with Section 4 of RA 6552, as above-quoted and
highlighted, which is the provision applicable to buyers who have paid less than two (2) years-worth of
installments. Essentially, the said provision provides for three (3) requisites before the seller may actually
cancel the subject contract: first, the seller shall give the buyer a 60-day grace period to be reckoned
from the date the installment became due; second, the seller must give the buyer a notice of
cancellation/demand for rescission by notarial act if the buyer fails to pay the installments due at the
expiration of the said grace period; and third, the seller may actually cancel the contract only after thirty
(30) days from the buyer’s receipt of the said notice of cancellation/demand for rescission by notarial act.
In the present case, the 60-day grace period automatically operated42 in favor of the buyers, Sps.
Jovellanos, and took effect from the time that the maturity dates of the installment payments lapsed. With
the said grace period having expired bereft of any installment payment on the part of Sps.
Jovellanos,43 Optimum then issued a notarized Notice of Delinquency and Cancellation of Contract on
April 10, 2006. Finally, in proceeding with the actual cancellation of the contract to sell, Optimum gave
Sps. Jovellanos an additional thirty (30) days within which to settle their arrears and reinstate the
contract, or sell or assign their rights to another.44

It was only after the expiration of the thirty day (30) period did Optimum treat the contract to sell as
effectively cancelled – making as it did a final demand upon Sps. Jovellanos to vacate the subject
property only on May 25, 2006. Thus, based on the foregoing, the Court finds that there was a valid and
effective cancellation of the Contract to Sell in accordance with Section 4 of RA 6552 and since Sps.
Jovellanos had already lost their right to retain possession of the subject property as a consequence of
FILsuch cancellation, their refusal to vacate and turn over possession to Optimum makes out a valid case
for unlawful detainer as properly adjudged by the MeTC.

WHEREFORE, the petition is GRANTED. The Decision dated May 29, 2009 and Resolution dated August
10, 2009 of the Court of Appeals in CA-G.R. SP No. 104487 are SET ASIDE. The Decision dated June 8,
2007 of Metropolitan Trial Court, Branch 53, Caloocan City in Civil Case No. 06-28830 is hereby
REINSTATED.

SO ORDERED.

G.R. No. 185798 January 13, 2014

FIL-ESTATE PROPERTIES, INC. AND FIL-ESTATE NETWORK INC., Petitioners,

vs.
SPOUSES CONRADO AND MARIA VICTORIA RONQUILLO, Respondents.

DECISION
PEREZ, J.:

Before the Court is a petition for review on certiorari under Rule 45 of the 1997 Rules .of Civil Procedure
assailing the Decision1 of the Court of Appeals in CA-G.R. SP No. 100450 which affirmed the Decision of
the Office of the President in O.P. Case No. 06-F-216.

As culled from the records, the facts are as follow:

Petitioner Fil-Estate Properties, Inc. is the owner and developer of the Central Park Place Tower while co-
petitioner Fil-Estate Network, Inc. is its authorized marketing agent. Respondent Spouses Conrado and
Maria Victoria Ronquillo purchased from petitioners an 82-square meter condominium unit at Central Park
Place Tower in Mandaluyong City for a pre-selling contract price of FIVE MILLION ONE HUNDRED
SEVENTY-FOUR THOUSAND ONLY (P5,174,000.00). On 29 August 1997, respondents executed and
signed a Reservation Application Agreement wherein they deposited P200,000.00 as reservation fee. As
agreed upon, respondents paid the full downpayment of P1,552,200.00 and had been paying
the P63,363.33 monthly amortizations until September 1998.

Upon learning that construction works had stopped, respondents likewise stopped paying their monthly
amortization. Claiming to have paid a total of P2,198,949.96 to petitioners, respondents through two (2)
successive letters, demanded a full refund of their payment with interest. When their demands went
unheeded, respondents were constrained to file a Complaint for Refund and Damages before the
Housing and Land Use Regulatory Board (HLURB). Respondents prayed for reimbursement/refund
of P2,198,949.96 representing the total amortization payments, P200,000.00 as and by way of moral
damages, attorney’s fees and other litigation expenses.

On 21 October 2000, the HLURB issued an Order of Default against petitioners for failing to file their
Answer within the reglementary period despite service of summons. 2

Petitioners filed a motion to lift order of default and attached their position paper attributing the delay in
construction to the 1997 Asian financial crisis. Petitioners denied committing fraud or misrepresentation
which could entitle respondents to an award of moral damages.

On 13 June 2002, the HLURB, through Arbiter Atty. Joselito F. Melchor, rendered judgment ordering
petitioners to jointly and severally pay respondents the following amount:

a) The amount of TWO MILLION ONE HUNDRED NINETY-EIGHT THOUSAND NINE

HUNDRED FORTY NINE PESOS & 96/100 (P2,198,949.96) with interest thereon at twelve
percent (12%) per annum to be computed from the time of the complainants’ demand for refund
on October 08, 1998 until fully paid,

b) ONE HUNDRED THOUSAND PESOS (P100,000.00) as moral damages,

c) FIFTY THOUSAND PESOS (P50,000.00) as attorney’s fees,

d) The costs of suit, and

e) An administrative fine of TEN THOUSAND PESOS (P10,000.00) payable to this Office fifteen
(15) days upon receipt of this decision, for violation of Section 20 in relation to Section 38 of PD
957.3

The Arbiter considered petitioners’ failure to develop the condominium project as a substantial breach of
their obligation which entitles respondents to seek for rescission with payment of damages. The Arbiter
also stated that mere economic hardship is not an excuse for contractual and legal delay.
Petitioners appealed the Arbiter’s Decision through a petition for review pursuant to Rule XII of the 1996
Rules of Procedure of HLURB. On 17 February 2005, the Board of Commissioners of the HLURB
denied4 the petition and affirmed the Arbiter’s Decision. The HLURB reiterated that the depreciation of the
peso as a result of the Asian financial crisis is not a fortuitous event which will exempt petitioners from the
performance of their contractual obligation.

Petitioners filed a motion for reconsideration but it was denied5 on 8 May 2006. Thereafter, petitioners
filed a Notice of Appeal with the Office of the President. On 18 April 2007, petitioners’ appeal was
dismissed6 by the Office of the President for lack of merit. Petitioners moved for a reconsideration but
their motion was denied7 on 26 July 2007.

Petitioners sought relief from the Court of Appeals through a petition for review under Rule 43 containing
the same arguments they raised before the HLURB and the Office of the President:

I.

THE HONORABLE OFFICE OF THE PRESIDENT ERRED IN AFFIRMING THE DECISION OF THE
HONORABLE HOUSING AND LAND USE REGULATORY BOARD AND ORDERING PETITIONERS-
APPELLANTS TO REFUND RESPONDENTS-APPELLEES THE SUM OF P2,198,949.96 WITH 12%
INTEREST FROM 8 OCTOBER 1998 UNTIL FULLY PAID, CONSIDERING THAT THE COMPLAINT
STATES NO CAUSE OF ACTION AGAINST PETITIONERS-APPELLANTS.

II.

THE HONORABLE OFFICE OF THE PRESIDENT ERRED IN AFFIRMING THE DECISION OF THE
OFFICE BELOW ORDERING PETITIONERS-APPELLANTS TO PAY RESPONDENTS-APPELLEES
THE SUM OF P100,000.00 AS MORAL DAMAGES AND P50,000.00 AS ATTORNEY’S FEES
CONSIDERING THE ABSENCE OF ANY FACTUAL OR LEGAL BASIS THEREFOR.

III.

THE HONORABLE OFFICE OF THE PRESIDENT ERRED IN AFFIRMING THE DECISION OF THE
HOUSING AND LAND USE REGULATORY BOARD ORDERING PETITIONERS-APPELLANTS TO
PAY P10,000.00 AS ADMINISTRATIVE FINE IN THE ABSENCE OF ANY FACTUAL OR LEGAL BASIS
TO SUPPORT SUCH FINDING.8

On 30 July 2008, the Court of Appeals denied the petition for review for lack of merit. The appellate court
echoed the HLURB Arbiter’s ruling that "a buyer for a condominium/subdivision unit/lot unit which has not
been developed in accordance with the approved condominium/subdivision plan within the time limit for
complying with said developmental requirement may opt for reimbursement under Section 20 in relation
to Section 23 of Presidential Decree (P.D.) 957 x x x."9 The appellate court supported the HLURB
Arbiter’s conclusion, which was affirmed by the HLURB Board of Commission and the Office of the
President, that petitioners’ failure to develop the condominium project is tantamount to a substantial
breach which warrants a refund of the total amount paid, including interest. The appellate court pointed
out that petitioners failed to prove that the Asian financial crisis constitutes a fortuitous event which could
excuse them from the performance of their contractual and statutory obligations. The appellate court also
affirmed the award of moral damages in light of petitioners’ unjustified refusal to satisfy respondents’
claim and the legality of the administrative fine, as provided in Section 20 of Presidential Decree No. 957.

Petitioners sought reconsideration but it was denied in a Resolution10 dated 11 December 2008 by the
Court of Appeals.

Aggrieved, petitioners filed the instant petition advancing substantially the same grounds for review:
 A.

THE HONORABLE COURT OF APPEALS ERRED WHEN IT AFFIRMED IN TOTO THE DECISION OF
THE OFFICE OF THE PRESIDENT WHICH SUSTAINED RESCISSION AND REFUND IN FAVOR OF
THE RESPONDENTS DESPITE LACK OF CAUSE OF ACTION.

B.

GRANTING FOR THE SAKE OF ARGUMENT THAT THE PETITIONERS ARE LIABLE UNDER THE
PREMISES, THE HONORABLE COURT OF APPEALS ERRED WHEN IT AFFIRMED THE HUGE
AMOUNT OF INTEREST OF TWELVE PERCENT (12%).

C.

THE HONORABLE COURT OF APPEALS LIKEWISE ERRED WHEN IT AFFIRMED IN TOTO THE
DECISION OF THE OFFICE OF THE PRESIDENT INCLUDING THE PAYMENT OF P100,000.00 AS
MORAL DAMAGES, P50,000.00 AS ATTORNEY’S FEES AND P10,000.00 AS ADMINISTRATIVE FINE
IN THE ABSENCE OF ANY FACTUAL OR LEGAL BASIS TO SUPPORT SUCH CONCLUSIONS.11

Petitioners insist that the complaint states no cause of action because they allegedly have not committed
any act of misrepresentation amounting to bad faith which could entitle respondents to a refund.
Petitioners claim that there was a mere delay in the completion of the project and that they only resorted
to "suspension and reformatting as a testament to their commitment to their buyers." Petitioners attribute
the delay to the 1997 Asian financial crisis that befell the real estate industry. Invoking Article 1174 of the
New Civil Code, petitioners maintain that they cannot be held liable for a fortuitous event.

Petitioners contest the payment of a huge amount of interest on account of suspension of development
on a project. They liken their situation to a bank which this Court, in Overseas Bank v. Court of
Appeals,12 adjudged as not liable to pay interest on deposits during the period that its operations are
ordered suspended by the Monetary Board of the Central Bank.

Lastly, petitioners aver that they should not be ordered to pay moral damages because they never
intended to cause delay, and again blamed the Asian economic crisis as the direct, proximate and only
cause of their failure to complete the project. Petitioners submit that moral damages should not be
awarded unless so stipulated except under the instances enumerated in Article 2208 of the New Civil
Code. Lastly, petitioners refuse to pay the administrative fine because the delay in the project was caused
not by their own deceptive intent to defraud their buyers, but due to unforeseen circumstances beyond
their control.

Three issues are presented for our resolution: 1) whether or not the Asian financial crisis constitute a
fortuitous event which would justify delay by petitioners in the performance of their contractual obligation;
2) assuming that petitioners are liable, whether or not 12% interest was correctly imposed on the
judgment award, and 3) whether the award of moral damages, attorney’s fees and administrative fine was
proper.

It is apparent that these issues were repeatedly raised by petitioners in all the legal fora. The rulings were
consistent that first, the Asian financial crisis is not a fortuitous event that would excuse petitioners from
performing their contractual obligation; second, as a result of the breach committed by petitioners,
respondents are entitled to rescind the contract and to be refunded the amount of amortizations paid
including interest and damages; and third, petitioners are likewise obligated to pay attorney’s fees and the
administrative fine.
This petition did not present any justification for us to deviate from the rulings of the HLURB, the Office of
the President and the Court of Appeals.

Indeed, the non-performance of petitioners’ obligation entitles respondents to rescission under Article
1191 of the New Civil Code which states:

Article 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors
should not comply with what is incumbent upon him.

The injured party may choose between the fulfillment and the rescission of the obligation, with payment of
damages in either case. He may also seek rescission, even after he has chosen fulfillment, if the latter
should become impossible.

More in point is Section 23 of Presidential Decree No. 957, the rule governing the sale of condominiums,
which provides:

Section 23. Non-Forfeiture of Payments.1âwphi1 No installment payment made by a buyer in a

subdivision or condominium project for the lot or unit he contracted to buy shall be forfeited in favor of the
owner or developer when the buyer, after due notice to the owner or developer, desists from further
payment due to the failure of the owner or developer to develop the subdivision or condominium project
according to the approved plans and within the time limit for complying with the same. Such buyer may, at
his option, be reimbursed the total amount paid including amortization interests but excluding delinquency
interests, with interest thereon at the legal rate. (Emphasis supplied).

Conformably with these provisions of law, respondents are entitled to rescind the contract and demand
reimbursement for the payments they had made to petitioners.

Notably, the issues had already been settled by the Court in the case of Fil-Estate Properties, Inc. v.
Spouses Go13 promulgated on 17 August 2007, where the Court stated that the Asian financial crisis is
not an instance of caso fortuito. Bearing the same factual milieu as the instant case, G.R. No. 165164
involves the same company, Fil-Estate, albeit about a different condominium property. The company
likewise reneged on its obligation to respondents therein by failing to develop the condominium project
despite substantial payment of the contract price. Fil-Estate advanced the same argument that the 1997
Asian financial crisis is a fortuitous event which justifies the delay of the construction project. First off, the
Court classified the issue as a question of fact which may not be raised in a petition for review
considering that there was no variance in the factual findings of the HLURB, the Office of the President
and the Court of Appeals. Second, the Court cited the previous rulings of Asian Construction and
Development Corporation v. Philippine Commercial International Bank 14 and Mondragon Leisure and
Resorts Corporation v. Court of Appeals15 holding that the 1997 Asian financial crisis did not constitute a
valid justification to renege on obligations. The Court expounded:

Also, we cannot generalize that the Asian financial crisis in 1997 was unforeseeable and beyond the
control of a business corporation. It is unfortunate that petitioner apparently met with considerable
difficulty e.g. increase cost of materials and labor, even before the scheduled commencement of its real
estate project as early as 1995. However, a real estate enterprise engaged in the pre-selling of
condominium units is concededly a master in projections on commodities and currency movements and
business risks. The fluctuating movement of the Philippine peso in the foreign exchange market is an
everyday occurrence, and fluctuations in currency exchange rates happen everyday, thus, not an
instance of caso fortuito.16

The aforementioned decision becomes a precedent to future cases in which the facts are substantially the
same, as in this case. The principle of stare decisis, which means adherence to judicial precedents,
applies.
In said case, the Court ordered the refund of the total amortizations paid by respondents plus 6% legal
interest computed from the date of demand. The Court also awarded attorney’s fees. We follow that ruling
in the case before us.

The resulting modification of the award of legal interest is, also, in line with our recent ruling in Nacar v.
Gallery Frames,17 embodying the amendment introduced by the Bangko Sentral ng Pilipinas Monetary
Board in BSP-MB Circular No. 799 which pegged the interest rate at 6% regardless of the source of
obligation.

We likewise affirm the award of attorney’s fees because respondents were forced to litigate for 14 years
and incur expenses to protect their rights and interest by reason of the unjustified act on the part of
petitioners.18 The imposition of P10,000.00 administrative fine is correct pursuant to Section 38 of
Presidential Decree No. 957 which reads:

Section 38. Administrative Fines. The Authority may prescribe and impose fines not exceeding ten
thousand pesos for violations of the provisions of this Decree or of any rule or regulation thereunder.
Fines shall be payable to the Authority and enforceable through writs of execution in accordance with the
provisions of the Rules of Court.

Finally, we sustain the award of moral damages. In order that moral damages may be awarded in breach
of contract cases, the defendant must have acted in bad faith, must be found guilty of gross negligence
amounting to bad faith, or must have acted in wanton disregard of contractual obligations. 19 The Arbiter
found petitioners to have acted in bad faith when they breached their contract, when they failed to
address respondents’ grievances and when they adamantly refused to refund respondents' payment.

In fine, we find no reversible error on the merits in the impugned Court of Appeals' Decision and
Resolution.

WHEREFORE, the petition is PARTLY GRANTED. The appealed Decision is AFFIRMED with the
MODIFICATION that the legal interest to be paid is SIX PERCENT (6%) on the amount due computed
from the time of respondents' demand for refund on 8 October 1998.

SO ORDERED.