Chapter 11. Remedies for Rescission and Cancellation for Immovables

SALES REVIEWER (2013-2014) ATTY. RAY PAOLO SANTIAGO

NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED: MAY 21, 2014)

CHAPTER 11: REMEDIES FOR RESCISSION AND

CANCELLATION FOR IMMOVABLES: CONTRACT OF SALE VERSUS

CONTRACT TO SELL I. Nature Of Remedy Of Rescission (Resolution) (Articles 1191, 1479, 1592) 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 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. (1124)

Article 1479. A promise to buy and sell a determinate thing for a price certain is reciprocally demandable. An accepted unilateral promise to buy or to sell a determinate thing for a price certain is binding upon the promisor if the promise is supported by a consideration distinct from the price. (1451a) Article 1592. In the sale of immovable property, even though it may have been stipulated that upon failure to pay the price at the time agreed upon the rescission of the contract shall of right take place, the vendee may 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 a notarial act. After the demand, the court may not grant him a new term. (1504a)

Article 1191 is rescission grounded on Substantial Breach and is actually resolution.

A. Distinguishing From Other Remedy Of Rescission (Universal Food Corp. v. Court of Appeals, 33 SCRA 22 [1970]1. But see contra Suria v. IAC, 151 SCRA 661 [1987]).

1 Reiterated in Congregation of the Religious of the Virgin Mary v. Orola, 553 SCRA 578 (2008); Heirs of Antonio F. Bernabe v. Court of Appeals, 559 SCRA 53 (2008); Congregation of the Religious of the Virgin Mary v. Orola, 553 SCRA 578 (2008).



1. Article 1191 v. Article 1383

Article 1191 Article 1383 Nature is actually a Resolution Nature is a subsidiary action The premise is substantial

breach of contract Premise is limited to cases under Article 1381 (rescissible contracts)

May only be instituted if the party suffering damage has no other legal

means to obtain reparation Action prescribes within 10

years from the time the rights to bring an action accrues

Action prescribes within 4 years from the time the right to bring an action

accrues There is an obligation to return the things which were the object of the contract, together with the fruits, and the price with its interest, and

that consequently, such rescission can be carried out only when he who demands rescission can return whatever he may be obliged to restore.

While Article 1191 uses the term rescission, the original term which was used in the old Civil Code was resolution. Resolution is a principal action which is based on breach of a party, while rescission under Article 1383 is a subsidiary action limited to cases of rescission for lesion under Article 1381. xOng v. Court of Appeals, 310 SCRA 1 (1999).1

2. Article 1592

1 Iringan v. Court of Appeals, 366 SCRA 41 (2001).

Article 1592 has been construed to apply to all sales of immovables even when there is no stipulation on automatic rescission, because of the use of the phrase even though.2

3. Action For Rescission Not Similar To An Action For

Reconveyance In the sale of real property, the seller is not precluded from going to the court to demand judicial rescission in lieu of a notarial act of rescission. But such action is different from an action for reconveyance of possession on the thesis of a prior rescission of the contract covering the property. The effects that flow from an affirmative judgment in either case would be materially dissimilar in various respects: judicial resolution of a contract gives rise to mutual restitution which is not necessarily the situation that arise in an action for reconveyance. In an action for rescission, unlike in an action for reconveyance predicated on an extrajudicial rescission (rescission by notarial act), the court, instead of decreeing rescission, may authorize for a just cause the fixing of a period. xOlympia Housing v. Panasiatic Travel Corp., 395 SCRA 298 (2003).

B. Remedy of Rescission Covered

1. Basis Of Remedy Of Rescission; Nature Of The Remedy of Resolution or Resolution

Rescission under Article 1191 is predicated on a breach of faith by the other party who violates the reciprocity between them, and the breach contemplated is the obligors failure to comply

2 Jacinto v. Kaparaz, 209 SCRA 246 (1992).



with an existing obligation. When the obligee may seek rescission and, in the absence of any just cause for the court to determine the period of compliance, the court shall decree the rescission. xVelarde v. Court of Appeals, 361 SCRA 56 (2001).1

To rescind is to declare a contract void at its inception and to put an end to it as though it never was. It is not merely to terminate it and release the parties from further obligations to each other, but to abrogate it from the beginning and restore the parties to their relative positions as if no contract has been made. xVelarde v. Court of Appeals, 361 SCRA 56 (2001).2

When a party asks for the resolution or cancellation of a contract it is implied that he recognizes it existence a non-existent contract cannot be cancelled. xPan Pacific Industrial Sales Co., Inc. v. Court of Appeals, 482 SCRA 164 (2006).

Non-payment of the purchase price is a resolutory condition for which the remedy is either rescission or specific performance under Article 1191. This is true for reciprocal obligations where the obligation is a resolutory condition of the other. On the other hand, the buyer is entitled to retain the purchase price or a part thereof if the seller fails to perform any essential obligation of the contract. Such right is premised on the general principles of reciprocal obligation. xGil v. Court of Appeals, 411 SCRA 18 (2003).3

1 Almira v. Court of Appeals, 399 SCRA 351 (2003). 2 Ocampo v. Court of Appeals, 233 SCRA 551 (1994); Co v. Court of Appeals, 312 SCRA 528 (1999). 3 Central Philippine University v. Court of Appeals, 246 SCRA 511 (1995); Romeo v. Court of Appeals, 250 SCRA 223 (1995); Cheng v. Genato, 300 SCRA 722 (1998); Uy v. Court of Appeals, 314 SCRA 63 (1999).

Consignation by the buyer of the purchase price of the property, there having been no previous receipt of a notarial demand for rescission, is sufficient to defeat the right of the seller to demand for a rescission of the deed of absolute sale. xGil v. Court of Appeals, 411 SCRA 18 (2003).

Creditors do not have such material interest as to allow them to sue for rescission of a sale theirs is only a personal right to receive payment for the loan, not a real right over the property subject of the deed of sale. xAdorable v. Court of Appeals, 319 SCRA 200 (1999).

2. Ground For Rescission Under Article 1191: Substantial Breach The power to rescind under Article 1191 is based only on

substantial breach, pursuant to the principle laid down in Article 1234.

o Even when there is substantial breach as to allow the rightful party to rescind, and in fact he does rescind the contract, it is within the power of the courts to fix a period to allow the defaulting party an opportunity to comply with his obligation. This is especially so when the breach constitutes mere negligence (culpa) as distinguished from fraud or malice (dolo) which is defined as a conscious and intentional design to evade the normal fulfillment of existing obligations.4

C. Who May Demand Rescission

4 Luzon Brokerage Co., Inc. v. Maritime Building Co., Inc., 43 SCRA 93 (1972).



Since rescission is predicated on a breach of faith by the other party that violates the reciprocity between them, the power to rescind is given only to the injured party. Uy v. Court of Appeals, 314 SCRA 69 (1999).

Rescission can be carried out only when the one who demands rescission can return whatever he may be obliged to restore. Laforteza v. Machuca, 333 SCRA 643 (2000).

D. Exercising Rescission

1. Power To Rescind Generally Judicial In Nature In a true contract of sale, a provision granting the non-

defaulting party a right to rescind would be superfluous because such remedy is inherent in a contract of sale under Article 1191; consequently, the specification in the contract that in case of breach, the other party has a right to rescind does not generally confer any additional right. Nonetheless, whether express or implied, the remedy of rescission is inherently judicial in nature. Ocejo, Perez & Co. v. International Banking Corp., 37 Phil. 631 (1918); Republic v. Hospital de San Juan de Dios, 84 Phil. 820 (1949); De la Rama Steamship Co. v. Tan, G.R. No. 8784, May 21, 1956, 99 Phil. 1034 Unrep. (1956).

The remedy of rescission in reciprocal contracts is not absolute, since the third paragraph of Article 1191 which provides that the courts shall decree the rescission claimed, unless there be just cause authorizing the fixing of the period, has been the statutory basis by which the Court has held that the injured

party himself cannot resolve the obligation, 1 and requires confirmation of such remedy by the courts.2 In the case of immovables, the general provisions of Article 1191 should give way to the particular provisions of Article 1592 which provides that when there has been a demand made on the buyer for rescission either judicially or by a notarial act, the court may not grant him a new term.3

A seller cannot unilaterally and extrajudicially rescind a contract of sale where there is no express stipulation authorizing it. Unilateral rescission will not be judicially favored or allowed if the breach is not substantial and fundamental to the fulfillment of the obligation. xBenito v. Saquitan-Ruiz, 394 SCRA 250 (2002).4

2. When Extrajudicial Rescission Allowed Nonetheless, the law does not prohibit the parties from

entering into agreement that violation of the terms of the contract would cause cancellation thereof, even without court

1 TOLENTINO, COMMENTARIES AND JURISPRUDENCE ON THE CIVIL CODE OF THE PHILIPPINES, Vol. IV, p. 171 (1973). Angeles v. Calasanz, 135 SCRA 323 (1985). 2 Gaboya v. Cui, 38 SCRA 85 (1971); Luzon Brokerage Co., Inc. v. Maritime Building Co., Inc., 43 SCRA 95 (1972). 3 Luzon Brokerage Co., Inc. v. Maritime Building Co., Inc., 86 SCRA 305 (1978). 4 Ocejo, Perez & Co. v. International Banking Corp. 37 Phil. 631 (1918); Republic v. Hospital de San Juan de Dios, 84 Phil. 820 (1949); De la Rama Steamship Co. v. Tan, G.R. No. 8784, May 21, 1956; 99 Phil. 1034 (unrep.) (1956); Heirs of Jesus M. Mascuana v. Court of Appeals, 461 SCRA 186 (2005).



intervention. xFroilan v. Pan Oriental Shipping Co., 12 SCRA 276 (1964).1

o There is nothing in this law which prohibits the parties from entering into an agreement that a violation of the terms of the contract would cause its cancellation even without court intervention. The rationale for the foregoing is that in contracts providing for automatic revocation, judicial intervention is necessary not for purposes of obtaining a judicial declaration rescinding a contract already deemed rescinded by virtue of an agreement providing for rescission without judicial intervention, but in order to determine whether or not the rescission was proper. Where such propriety is sustained, the decision of the court will be merely declaratory of the revocation, but it is not in itself the revocatory act. Pangilinan v. Court of Appeals, 279 SCRA 590 (1997).

Legal consequences when there is no contractual clause allowing extrajudicial rescission: Consequently, even if the right to rescind is made available to the injured party, the obligation is not ipso facto erased by the failure of the other party to comply with what is incumbent upon him. The party entitled to rescind should apply to the court for a decree of rescission. The right cannot be exercised solely on a partys own judgment that the other committed a breach of the obligation. The operative act which produces the resolution of the contract is the decree of the court and not the mere act of the vendor. Since a judicial

1 Luzon Brokerage Co., Inc. v. Maritime Building Co., Inc., 43 SCRA 95 (1972); Luzon Brokerage v. Maritime Bldg., 86 SCRA 305 (1978).

or notarial act is required by law for a valid rescission to take place, the letter written by respondent declaring his intention to rescind did not operate to validly rescind the contract. Iringan v. Court of Appeals, 366 SCRA 41 (2001).

3. Rescission Requires Positive Act Rescission is a remedy that would have no automatic

application, even when the factual basis therefor (substantial breach) be present in the situation. Being primarily a remedy, rescission requires a positive act on the part of the injured party, since it is legally possible that he may waive rescission and proceed with specific performance.

o This principle is affirmed in the language of Article 1592 that does not allow automatic rescission to take place even by stipulation, and mandates a positive act of notarial or judicial demand on the part of the unpaid seller.

In a case involving a sale of real property, when the buyer failed to pay the stipulated purchase price in accordance with the terms of the contract, but the seller did not give a notice of rescission, and the only notice given to the buyer was a demand to vacate the premises, the Court held that such written demand did not amount to a demand for rescission under Article 1592. City of Cebu v. Heirs of Candido Rubi, 306 SCRA 408 (1999).

E. Mutual Restitution And Forfeiture (Article 1385) Article 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 obliged 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. (1295)

1. Restitution As Consequence Of Rescission The last paragraph in Article 1191 cross-refers to Articles 1385

and 1388 which apply to rescissible contracts. The primary consequence of an effective exercise of the remedy of rescission or resolution would be mutual restitution.

When sale is annulled, parties are governed by Article 1398 whereunder they shall restore to each other the things which have been the subject matter of the contract, with their fruits, and price with interest. xInes v. Court of Appeals, 247 SCRA 312 (1995).1

Pursuant to Article 1188, in a contract to sell, even if the buyers did not mistakenly make partial payments, inasmuch as the suspensive condition was not fulfilled, it is only fair and just that the buyers be allowed to recover what they had paid in expectancy that the condition would happen; otherwise, there

1 Velarde v. Court of Appeals, 361 SCRA 56 (2001); Orden v. Aurea, 562 SCRA 660 (2008).

would be unjust enrichment on the part of the seller. xBuot v. Court of Appeals, 357 SCRA 846 (2001).

2. When Forfeiture Of Payments Allowed In Rescission The effect of restitution in the remedy of rescission may be

stipulated against, and such stipulation would be enforceable to the extent that it is reasonable.

A provision in the contract providing for forfeiture of the amounts paid in a contract of sale is valid being in the nature of a penal clause (now governed by Article 1226) and within the ambit of the freedom of the parties to stipulate in a contract (now governed by Article 1306), since [i]n its double purpose of insuring compliance with the contract and of otherwise measuring beforehand the damages which may result from non-compliance, it is not contrary to law, morals or public order because it was voluntarily and knowingly agreed upon. Manila Racing Club v. The Manila Jockey Club, 69 Phil. 55 (1939).

The sellers right in a contract to sell with reserved title to extrajudicially cancel the sale upon failure of the buyer to pay the stipulated installments and retain the sums and installments already received has long been recognized by the well-established doctrine of 39 years standing. xPangilinan v. Court of Appeals, 279 SCRA 590 (1997).2

Nevertheless, it should be noted that the Court may still allow such forfeiture even in the absence of a forfeiture clause, as a reasonable compensation for the use of the subject matter of the contract. Gomez v. Court of Appeals, 340 SCRA 720 (2000).

2 The Manila Racing Club v. The Manila Jockey Club, 69 Phil. 55 (1939).



II. Distinctions Between Contract Of Sale And Contract To Sell A. Contract Of Sale Versus Contract To Sell (Article 1458) Adelfa Properties, Inc. v. Court of Appeals, 240 SCRA 575 (1995).1 Article 1458. By the contract of sale one of the contracting parties obligates himself to transfer the ownership and to deliver a determinate thing, and the other to pay therefor a price certain in money or its equivalent. A contract of sale may be absolute or conditional. (1445a)

Adelfa Properties, Inc. v. Court of Appeals Facts: Rosario Jimenez-Castaneda, Salud Jimenez and their brothers, Jose and Dominador Jimenez, were the registered co-owners of a parcel of land in Las Pias. In 1988, Jose and Dominador sold their share consisting of 1/2 of said parcel of land, specifically the eastern portion thereof, to Adelfa Properties. Subsequently, a Confirmatory Extrajudicial Partition Agreement was executed by the Jimenezes, wherein the eastern portion of the subject lot, was adjudicated to Jose and Dominador Jimenez, while the western portion was allocated to Rosario and Salud Jimenez. Thereafter, Adelfa Properties expressed interest in buying the western portion of the property from Rosario and Salud. Accordingly, in 1989, an Exclusive Option to Purchase was

1 Sta. Lucia Realty & Dev., Inc. V. Uyecio, 562 SCRA 226 (2008); Ver Reyes v. Salvador, Sr., 564 SCRA 456 (2008).

executed between the parties, with the condition that the selling price shall be P2.86M, that the option money of P50,000 shall be credited as partial payment upon the consummation of sale, that the balance is to be paid on or before 30 November 1989, and that in case of default by Adelfa Properties to pay the balance, the option is cancelled and 50% of the option money shall be forfeited and the other 50% refunded upon the sale of the property to a third party. Meanwhile, a complaint was filed by the nephews and nieces of Rosario and Salud against Jose and Dominador for annulment of the deed of sale in favor of Household Corporation and recovery of ownership of the property. As a consequence, Adelfa Properties held payment of the full purchase price and suggested that they settle the case with their nephews and nieces. In 1990, Adelfa Properties caused to be annotated on the TCT the exclusive option to purchase. On the same day, Rosario and Salud executed a Deed of Conditional Sale in favor of Emylene Chua over the same parcel of land for P3M, of which P1.5M was paid to the former on said date, with the balance to be paid upon the transfer of title to the specified 1/2 portion. Atty. Bernardo wrote Rosario and Salud informing the latter that in view of the dismissal of the case against them, Adelfa Properties was willing to pay the purchase price, and he requested that the corresponding deed of absolute sale be executed. This was ignored by Rosario and Salud. Jimenez counsel sent a letter to Adelfa Properties enclosing therein a check for P25,000.00 representing the refund of 50% of the option money paid under the exclusive option to purchase. Rosario and Salud then requested Adelfa Properties to return the owners duplicate copy of the certificate of title of Salud Jimenez. Adelfa



Properties failed to surrender the certificate of title. Rosario and Salud Jimenez filed a petition for the annulment of contract, while Emylene Chua, the subsequent purchaser of the lot, filed a complaint in intervention. The Regional Trial Court ruled in favor of the Jimenezes and Court of Appeals affirmed. Issue: Whether or not the contract between the Jimenezes and Adelfa Properties is an option contract Held: NO. The alleged option contract is a contract to sell, rather than a contract of sale. The parties never intended to transfer ownership to Adelfa Properties to completion of payment of the purchase price, this is inferred by the fact that the exclusive option to purchase, although it provided for automatic rescission of the contract and partial forfeiture of the amount already paid in case of default, does not mention that Adelfa Properties is obliged to return possession or ownership of the property as a consequence of non-payment. There is no stipulation anent reversion or reconveyance of the property in the event that petitioner does not comply with its obligation. With the absence of such a stipulation, it may legally be inferred that there was an implied agreement that ownership shall not pass to the purchaser until he had fully paid the price. Article 1478 of the Civil Code does not require that such a stipulation be expressly made. Consequently, an implied stipulation to that effect is considered valid and binding and enforceable between the parties. A contract which contains this kind of stipulation is considered a contract to sell. Moreover, that the parties really intended to execute a contract to sell is bolstered by the fact that the deed of absolute sale would have been issued only upon the payment of the

balance of the purchase price, as may be gleaned from Adelfa Properties letter dated 16 April 1990 wherein it informed the vendors that it is now ready and willing to pay you simultaneously with the execution of the corresponding deed of absolute sale. Doctrine: The distinction between a contract of sale and a contract to sell is important for in contract of sale, the title passes to the vendee upon the delivery of the thing sold; whereas in a contract to sell, by agreement the ownership is reserved in the vendor and is not to pass until the full payment of the price. In a contract of sale, the vendor has lost and cannot recover ownership until and unless the contract is resolved or rescinded; whereas in a contract to sell, title is retained by the vendor until the full payment of the price, such payment being a positive suspensive condition and failure of which is not a breach but an event that prevents the obligation of the vendor to convey title from becoming effective. Thus, a deed of sale is considered absolute in nature where there is neither a stipulation in the deed that title to the property sold is reserved in the seller until the full payment of the price, nor one giving the vendor the right to unilaterally resolve the contract the moment the buyer fails to pay within a fixed period.

In a contract of sale, title to the property passes to buyer upon the delivery of the thing sold; in a contract to sell, ownership is, by agreement, reserved in the seller and is not to pass to buyer until full payment of purchase price. Otherwise stated, in a contract of sale, seller loses ownership over the property and cannot recover it until and unless the contract is resolved or rescinded, whereas in a contract to sell, title is retained by the seller until full payment of the price. In the latter contract,



payment of the price is a positive suspensive condition, failure of which is not a breach but an event that prevents the obligation of the vendor to convey title from becoming effective. xCastillo v. Reyes, 539 SCRA 193 (2007).1

1. Rationale Of Contracts To Sell A contract to sell is commonly entered into so as to protect the

seller against a buyer who intends to buy the property in installments by withholding ownership over the property until the buyer effects full payment therefor. It cannot be inferred in a situation where both parties understood the price to be paid in cash. xCity of Cebu v. Heirs of Candido Rubi, 306 SCRA 408 (1999).2

2. Is A Contract To Sell A Sale Under Article 1458? A contract to sell as a bilateral contract whereby the

prospective seller, while expressly reserving the ownership of the subject property despite delivery thereof to the prospective buyer, binds himself to sell the said property exclusively to the

1 Lim v. Court of Appeals, 182 SCRA 564 (1990); Buot v. Court of Appeals, 357 SCRA 846 (2001); Abesamis v. Court of Appeals, 361 SCRA 328 (2001); Tuazon v. Garilao, 362 SCRA 654 (2001); Leao v. Court of Appeals, 369 SCRA 36 (2001); Universal Robina Sugar Milling Corp. v. Heirs of Angel Teves, 389 SCRA 316 (2002); Almira v. Court of Appeals, 399 SCRA 351 (2003); Chua v. Court of Appeals, 401 SCRA 54 (2002); Flancia v. Court of Appeals, 457 SCRA 224 (2005); Vidad, Sr. v. Tayamen, 531 SCRA 147 (2007); Hulst v. PR Builders, Inc., 532 SCRA 74 (2007); Heirs of Antonio F. Bernabe v. Court of Appeals, 559 SCRA 53 (2008); Orden v. Aurea, 562 SCRA 660 (2008); Tan v. Benolirao, 604 SCRA36 (2009); Bank of P.I. v. SMP, Inc., 609 SCRA 134 (2009); De Leon v. Ong, 611 SCRA 381 (2010); Montecalvo v. Heirs of Eugenia T. Primero, 624 SCRA 575 (2010). 2 Montecalvo v. Heirs of Eugenia T. Primero, 624 SCRA 575 (2010).

prospective buyer upon fulfillment of the condition agreed upon, that is, full payment of the purchase price. Coronel v. Court of Appeals, 263 SCRA 15, 27 (1996).3 But see: PNB v. Court of Appeals, 262 SCRA 464 (1996).

Coronel v. Court of Appeals

Facts: In 1985, Coronel executed a document entitled "Receipt of Down Payment" in favor of Alcaraz for P50,000 down payment of P1.24M as purchase price for an inherited house and lot promising to execute a deed of absolute sale as soon as it has been transferred in their name. The balance of P1.19M is due upon the execution of the deed. When title to the property was finally transferred to their names, the Coronels sold the property to Mabanag for P1.58M after she paid P300K down payment. Because of this, they cancelled and rescinded the contract with Alcaraz by returning the P50,00 down payment Alcaraz filed a complaint for specific performance against the Coronels and cause the annotation of a notice of lis pendens on the TCT. Mabanag, on the other hand, caused the annotation of a notice of adverse claim with the RD. However, the Coronels executed a Deed of Absolute Sale in favor Mabanag. RTC ruled in favor of Alcaraz. CA affirmed. Issue: Whether or not the receipt of downpayment serves a contract to sell or a conditional contract of sale

3 Platinum Plans Phil., Inc. v. Cucueco, 488 SCRA 156 (2006); Valenzuela v. Kalayaan Dev. and Industrial Corp., 590 SCRA 380 (2009);Tan v. Benolirao, 604 SCRA 36 (2009);



Held: NO. The agreement could not have been a contract to sell because the sellers made no express reservation of ownership or title to the subject parcel of land. Furthermore, the circumstance, which prevented the parties from entering into an absolute contract of sale, pertained to the sellers themselves (the certificate of title was not in their names) and not the full payment of the purchase price. Under the established facts and circumstances of the case, had the certificate of title been in the names of petitioners-sellers at that time, there would have been no reason why an absolute contract of sale could not have been executed and consummated right there and then. Moreover, unlike in a contract to sell, petitioners did not merely promise to sell the property to private respondent upon the fulfillment of the suspensive condition. On the contrary, having already agreed to sell the subject property, they undertook to have the certificate of title changed to their names and immediately thereafter, to execute the written deed of absolute sale. What is clearly established by the plain language of the subject document is that when the said Receipt of Down Payment was prepared and signed by petitioners, the parties had agreed to a conditional contract of sale, consummation of which is subject only to the successful transfer of the certificate of title from the name of petitioners father to their names. The suspensive condition was fulfilled on 6 February 1985 and thus, the conditional contract of sale between the parties became obligatory, the only act required for the consummation thereof being the delivery of the property by means of the execution of the deed of absolute sale in a public instrument, which petitioners unequivocally committed themselves to do as evidenced by the Receipt of Down Payment.

Doctrine: In a contract to sell, the prospective seller explicitly reserves the transfer of title to the prospective buyer, meaning, the prospective seller does not as yet agree or consent to transfer ownership of the property subject of the contract to sell until the happening of an event, which for present purposes we shall take as the full payment of the purchase price. What the seller agrees or obliges himself to do is to fulfill his promise to sell the subject property when the entire amount of the purchase price is delivered to him. In other words, the full payment of the purchase price partakes of a suspensive condition, the non-fulfillment 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... Stated positively, upon the fulfillment of the suspensive condition which is the full payment of the purchase price, the prospective sellers obligation to sell the subject property by entering into a contract of sale with the prospective buyer becomes demandable as provided in Article 1479 of the Civil Code.

PNB v. Court of Appeals

Facts: PNB owned a parcel of land which Lapaz Kaw Ngo offered to buy. Events under the first letter-agreement. PNB accepted Lapazs offer subject to certain stipulations. The important ones are the following: 1. The selling price shall be P5.4million. Lapaz had already paid P100,000 as deposit. 2. Upon failure to pay the additional deposit worth P970,000, the P100,000 shall be forfeited and PNB shall be authorized to sell the property to another. 3. The property shall be cleared of its present tenants at the expense of



Lapaz. 4. Sale was subject to other terms and conditions to be imposed. Lapaz agreed, so she proceeded to clear the lot of its tenants at her own expense. However, due to difficulties in money, she requested for adjustment of payment proposals, which the bank denied. PNB also reminded her that she had not yet sent her letter of conformity to the agreement reached and told her to pay the full price of P5.4million. If not, the lot will be sold to other parties. Lapaz requested for a reduction of the price as the size of the land was substantially reduced. PNB agreed. However, PNB still did not receive payment from Lapaz, and thus gave the latter a last chance to pay the balance of the down payment. If she failed to pay, the sale shall be cancelled and the P100,000 payment shall be forfeited. Lapaz failed to pay, so P100,000 was forfeited and the sale never materialized. PNB leased the premises to a certain Rivera. Lapaz requested for a refund of her deposit in the total amount of P660,000 and asked that the forfeited P100,000 be reduced to P30,000. PNB agreed. Events under the second letter-agreement. Lapaz requested for a revival of the previously approved offer to PNB. PNB approved. All conditions as in the first agreement were the same, except for the purchase price and deposit. The price was P5.1million, the deposit was P200,000. Lapaz refused, however, to conform to the condition of vacating the premises at her expense as she had already done so under the first agreement. (She apparently considered this second letter-agreement as a continuation of the first so she said that she was no longer required to evict the tenants as she had already done so.) Besides, according to her, the occupants of the property were tenants of PNB. PNB refused this offer . To prevent the forfeiture of her P200,000 deposit, she signed the

letter-agreement. She told PNB that she was willing to pay the remaining deposit of P800K as long as it was PNB who would clear the property. PNB refused, and forfeited the P200,000 of Lapaz. PNB informed Lapaz that they had already decided to sell the property for not less than P7M. Issue: Whether or not there was there a perfected contract of sale between Ngo and PNB Held: NO. The letter agreements were in the nature of contracts to sell. A contract to sell is akin to a conditional sale where the efficacy or obligatory force of the vendors obligation to transfer title is subordinated to the happening of a future and uncertain event so that if the suspensive condition does not take place, the parties would stand as if the conditional obligation had never existed. Commonly, the suspensive condition to transfer ownership is full payment of the purchase price. In this case, Ngos obligation was to deposit an initial amount (100k in the first agreement, 200k in the 2nd) and then subsequently to deposit an additional amount representing 20% of the purchase price (in both agreements). And under both letter-agreements, the failure of the buyer to remit the additional deposits, deposits already given shall be forfeited and the bank can sell the property to others. The failure to remit the required amounts gave occasion for PNB to cancel the agreement. This specific right by PNB is in the nature of a stipulation reserving title in the vendor until full payment of the purchase price or giving the vendor the right to unilaterally rescind the contract the moment the buyer fails to pay within a fixed period. The



letter- agreements were not deeds of sale, no title passes from seller to buyer under such documents. The presumption that earnest money given in a sale transaction is considered as part of the purchase price and is a proof of a perfected contract of sale is rebuttable. Clearly, the letter-agreements show the intention of the parties to enter into negotiations leading to a contract of sale. The initial deposits should be construed as part of the consideration for PNBs promise to reserve subject property for Ngo. It should be noted that there were two separate transactionsthe first was unconditionally cancelled and the effects thereof cannot be deemed applicable to the second transaction. Note: Interesting enough, 7 days after this decision, Coronel v. CA was decided. In that case, the SC said that in a contract to sell, the happening of a suspensive condition does not give rise to an executory contract of sale subject to an action for specific performance, since the obligation of the seller is to enter into a contract of sale (an obligation to do). But in the case above, the SC said that the happening of a condition in a contract to sell converts it to a contract of sell or at the most an executory sale to an executed one.

CLV: The foregoing rulings all point to one thing: that the Supreme Court uses the same term contract to sell to identify two different types of conditional contracts one where the underlying contract embodies bilateral-reciprocal real obligations to give, but that the contracts efficacy is subjected to a suspensive condition; and the other, where the primary obligations created is an obligation to do, i.e., to enter into a

contract of sale, subject to fulfillment of the obligation of the buyer to fully pay the purchase price. The confusing, use of terms has thereby undermined the jurisprudential rules pertaining to the remedies available to the parties.

3. Contract To Sell v. Conditional Contract Of Sale: On Where

the Suspensive Condition Is Pinned Determines Nature of a Sale

Classic Contract to Sell Conditional Sale

Mutual promise to buy and sell Clear reservation of ownership No reservation of ownership

There is no transfer of ownership. Transfer of ownership is conditioned on the payment, but even if the buyer defaults, the ownership has already

vested in the buyer. Condition is usually full payment,

before intent to transfer ownership would arise.

Intent to transfer ownership is clear.

There must be a reservation of the right to rescind (automatic rescission)

Does not require rescission (in theory) ! Thus the action should be for reconveyance for property.

Requires judicial rescission (in theory)

The main ingredient of a contract to sell, which it shares with a

conditional contract of sale, is that it contains clearly a stipulation that must amount to a suspensive condition, for not



every modality introduced in a sale contract would necessarily be a condition.

o Therefore, both a conditional contract of sale and a contract to sell are subject to a suspensive condition, which usually takes the form of the full payment of the purchase price by the buyer. According to a line of decisions, the main ingredient in a contract to sell is the existence of a stipulation or agreement imposing a suspensive condition on the effectivity or demandability of the contract itself, and not just on the obligation of the seller to transfer and deliver the subject matter, for in the latter case, it would amount to a conditional contract of sale.

To be sure, a contract of sale may either be absolute or conditional. One form of conditional sales is what is now popularly termed as a Contract to Sell, where ownership or title is retained until the fulfillment of a positive suspensive condition normally the payment of the purchase price in the manner agreed upon. For a contract, like a contract to sell, involves a meeting of minds between two persons whereby one binds himself, with respect to the other, to give something or to render some service. xGomez v. Court of Appeals, 340 SCRA 720, 728 (2000).1

o A contract to sell is akin to a conditional sale, in which the efficacy or obligatory force of the vendors obligation to transfer title is subordinated to the happening of a future and uncertain event, so that if the

1 Demafelis v. Court of Appeals, 538 SCRA 305 (2007).

suspensive condition does not take place, the parties would stand as if the conditional obligation never existed. Orden v. Aurea, 562 SCRA 660 (2008).2

A perfected contract of sale (as distinguished from a contract to sell) may either be absolute or conditional depending on whether the agreement is devoid of, or subject to, any condition on the passing of title of the thing to be conveyed or on the obligation of a party thereto. It held that the term condition in the context of a perfected contract of sale pertains in reality to the compliance by one party of an undertaking the fulfillment of which would beckon in turn the demandability of the reciprocal prestation of the other party. It also held that where the so-called potestative condition is imposed not on the birth of the obligation but on its fulfillment, only the condition is avoided leaving unaffected the obligation itself. Romero v. Court of Appeals, 250 SCRA 223 (1995).

o It distinguished between one situation where the condition is imposed on an obligation of a party which is not complied with, the other party may either refuse to proceed or waive said condition; from the other situation where the condition is imposed upon the perfection of the contract itself, the failure of such condition would prevent the juridical relation itself from coming into existence. Since under the agreement, the seller was obliged to evict the squatters on the property, therefore the ejectment of the squatters was a condition, the operative act of which sets into motion

2 De Leon v. De Leon, 593 SCRA 768 (2009).



the period of the payment of the balance of the purchase price. The sellers failure to remove the squatters from the property within the stipulated period gave the buyer the right to either refuse to proceed with the agreement or waive that condition in consonance with Article 1545 of the Civil Code. Romero v. Court of Appeals, 250 SCRA 223 (1995).

4. Importance Of Locating The Condition To Pay Price In Full In a contract of sale, the non-payment of the price is a

resolutory condition which extinguishes the transaction that, for a time existed, and discharges the obligations created thereunder. xBlas v. Angeles-Hutalla, 439 SCRA 273 (2004).1 Whereas, in a contract to sell, the payment of the purchase price is a positive suspensive condition. The vendors obligation to convey the title does not become effective in case of failure to pay. xBuot v. Court of Appeals, 357 SCRA 846 (2001).2

When the obligation of buyer to pay the full amount of the purchase price was made subject to the condition that the seller first delivery the clean title over the parcel bough within twenty (20) months from the signing of the contract, such condition is imposed merely on the performance of the obligation, as distinguished from a condition imposed on the perfection of the contract. The non-happening of the condition merely granted the buyer the right to rescind the contract or even to waive it

1 Valenzuela v. Kalayann Development and Industrial Corp., 590 SCRA 380 (2009); Traders Royal Bank v. Cuison Lumber Co., Inc., 588 SCRA 690 (2009). 2 Heirs of Spouses Sandejas v. Lina, 351 SCRA 183 (2001); Zamora Realty and Dev. Corp v. Office of the President, 506 SCRA 591 (2006).

and enforce performance on the part of the seller, all in consonance with Article 1545 of Civil Code which provides that Where the obligation of either party to a contract of sale is subject to any condition which is not performed, such party may refuse to proceed with the contract or he may waive performance of the condition. Babasa v. Court of Appeals, 290 SCRA 532 (1998).

Babasa v. Court of Appeals

Facts: In 1981, a contract of Conditional Sale of Registered Lands was executed between the spouses Vivencio and Elena Babasa as vendors and Tabangao Realty Inc. (Tabangao) as vendee over 3 parcels of land in Batangas. Since the certificates of title over the lots were in the name of third persons who had already executed deeds of reconveyance and disclaimer in favor of the Babasas, it was agreed that the total purchase price of P2,121,920.00 would be paid in the following manner: P300,000.00 upon signing of the contract, and P1,821,920.00 upon presentation by the Babasas of transfer certificates of titles in their name, free from all liens and encumbrances, and delivery of registerable documents of sale in favor of Tabangao within 20 months from the signing of the contract. In the meantime, the retained balance of the purchase price would earn interest at 17% per annum or P20,648.43 monthly payable to the Babasas until 31 December 1982. It was expressly stipulated that Tabangao would have the absolute and unconditional right to take immediate possession of the lots as well as introduce any improvements thereon. On 18 May 1981 Tabangao leased the lots to Shell Gas Philippines, Inc. (SHELL), which immediately started the construction thereon of a Liquefied Petroleum Gas Terminal Project,



an approved zone export enterprise of the Export Processing Zone. Tabangao is the real estate arm of SHELL. The parties substantially complied with the terms of the contract. Tabangao paid the first installment of P300,000.00 to the Babasas while the latter delivered actual possession of the lots to the former . In addition, T abangao paid P379,625.00 to the tenants of the lots as disturbance compensation and as payment for existing crops as well as P334,700.00 to the owners of the houses standing thereon in addition to granting them residential lots with the total area of 2,800 square meters. Tabangao likewise paid the stipulated monthly interest for the 20- month period amounting to P408,580.80. Meanwhile, the Babasas filed Civil Case 519 and Petition 373 for the transfer of titles of the lots in their name. However, 2 days prior to the expiration of the 20-month period, specifically on 31 December 1982, the Babasas asked Tabangao for an indefinite extension within which to deliver clean titles over the lots. They asked that Tabangao continue paying the monthly interest of P20,648.43 starting January 1983 on the ground that Civil Case 519 and Petition 373 had not yet been resolved with finality in their favor. Tabangao refused the request. In retaliation the Babasas executed a notarized unilateral rescission dated 28 February 1983 to which Tabangao responded by reminding the Babasas that they were the ones who did not comply with their contractual obligation to deliver clean titles within the stipulated 20-month period, hence, had no right to rescind their contract. The Babasas insisted on the unilateral rescission and demanded that SHELL vacate the lots. On 19 July 1983 Tabangao instituted an action for specific performance with damages in the RTC Batangas City to compel the spouses to comply with their obligation to deliver clean titles over the properties. The

Babasas moved to dismiss the complaint on the ground that their contract with Tabangao became null and void with the expiration of the 20-month period given them within which to deliver clean certificates of title. SHELL entered the dispute as intervenor praying that its lease over the premises be respected by the Babasas. RTC ruled in favor of Tabangao and Shell. CA affirmed. Issue: Whether or not there was a contract of absolute sale between the Babasa and Tabagao Held: YES. Although denominated Conditional Sale of Registered Lands, the contract between the spouses and Tabangao is one of absolute sale. Aside from the terms and stipulations used therein indicating such kind of sale, there is absolutely no proviso reserving title in the Babasas until full payment of the purchase price, nor any stipulation giving them the right to unilaterally rescind the contract in case of non-payment. A deed of sale is absolute in nature although denominated a conditional sale absent such stipulations. In such cases, ownership of the thing sold passes to the vendee upon the constructive or actual delivery thereof. In the instant case, ownership over Lots 17827-A, 17827-B and 17827-C passed to Tabangao both by constructive and actual delivery. Constructive delivery was accomplished upon the execution of the contract of 11 April 1981 without any reservation of title on the part of the Babasas while actual delivery was made when Tabangao took unconditional possession of the lots and leased them to its associate company SHELL which constructed its multi-million peso LPG Project thereon. In Romero v. Court of Appeals and Lim v. Court of Appeals, the Court



distinguished between a condition imposed on the perfection of a contract and a condition imposed merely on the performance of an obligation. While failure to comply with the first condition results in the failure of a contract, failure to comply with the second merely gives the other party the option to either refuse to proceed with the sale or to waive the condition. In the present case, the spouses contract with Tabangao did not lose its efficacy when the 20- month period stipulated therein expired without the spouses being able to deliver clean certificates of title such that Tabangao may no longer demand performance of their obligation. Doctrine:

The remedy of rescission under Article 1191 of the Civil Code cannot apply to mere contracts to sellin a contract to sell, the payment of the purchase price is a positive suspensive condition, and 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. Tan v. Benolirao, 604 SCRA 36 (2009).1

5. Necessary Stipulations In A Contract To Sell: A contract is one of sale, absent any stipulation therein (a)

reserving title over the property to the vendee until full payment of the purchase price,2 and (b) giving the vendor the

1 Traders Royal Bank v. Cuison Lumber Co., Inc., 588 SCRA 690 (2009); Nabus v. Pacson, 605 SCRA 334 (2009). 2 Topacio v. Court of Appeals, 211 SCRA 219 (1992); Laforteza v. Machuca, 333 SCRA 643 (2000); Almira v. Court of Appeals, 399 SCRA351 (2003).

right to unilaterally rescind the contract in case of non-payment.3 Valdez v. Court of Appeals, 439 SCRA 55 (2004); De Leon v. Ong, 611 SCRA 381 (2010);4 BUT SEE: Dignos v. Court of Appeals, 158 SCRA 375 (1988).

Valdez v. Court of Appeals

Facts: Carlos Valdez Sr. and Josefina Valdez were owners of a parcel of land. When Carlos Sr. died, Josefina subdivided the property into eight lots. On May 1, 1979, she executed a special power attorney, authorizing her son Carlos Jr, who was a practicing lawyer, to sell a portion thereof (lots 3-C and 3-D) to Jose Lagon for P80,000. Part of consideration was also for Lagon to transfer the Rural Bank of Isulan to the subject property, and to construct a commercial building beside the bank. Without knowledge of Josefina, Carlos Jr. entered into a different agreement, selling the property for P40/square meter, and it was indicated in the deed that the P80,000 had already been paid in cash. A downpayment of P20,000 was paid by the wife of Lagon, to which Josefina issued a receipt. Carlos Jr. prepared an affidavit, signed by Lagon, the transfer of the bank and the construction of commercial building as part of the condition, else the deed of absolute sale shall be null and void without need of demand. Lagon failed to comply with the considerations stated in the deed, to which the Valdez refused to deliver

3 Roque v. Lapuz, 96 SCRA 741 (1980); Angeles v. Calanz, 135 SCRA 323 (1985);Alfonso v. Court of Appeals, 186 SCRA 400 (1990) 4 San Andres v. Rodriguez, 332 SCRA 769 (2000); Vda. De Mistica v. Naguiat, 418 SCRA 73 (2003); Blas v. Angeles-Hutalla, 439 SCRA 273 (2004); Villadar, Jr. V. Zabala, 545 SCRA 325 (2008); Heirs of Antonio F. Bernabe v. Court of Appeals, 559 SCRA 53 (2008); Ver Reyes v. Salvador, Sr., 564 SCRA 456 (2008).



the torrens title. Lagon had Lot 3-C to be subdivided into three separate lots, to which he paid the professional services. Josefina used the subdivision survey, and sold Lot 3-C-2 to PCIB, evidenced by a deed of absolute sale, exectued a real mortgage over Lot 3-C-3 to DBP, and executed a deed of absolute sale in favor of Carlos Jr. over Lot 3-C-1. She also sold lot 3-D to Engr. Rodolfo Delfin. Lagon filed a complaint against Josefina and Carlos Jr for specific performance and damages. Trial Court ruled in favor of Lagon. CA reversed, but reversed itself, ruling in favor or Lagon. Issue: Whether the agreement was a contract of sale or contract to sell, and whether the contract was ratified. Held: It is a contract of sale. The nature of the contract must be inferred from the express terms and agreement and from the contemporaneous and subsequent acts of the parties thereto. When Josefina, through her son acting a an attorney-in-fact, executed a deed of absolute sale in favor of Lagon, she did not reserve the ownership of the property, subject to the completion of payment of the consideration. However, Carlos Jr. exceeded his authority when he entered into a different agreement with Lagon, making the contract unenforceable, unless ratified. In this case, it was ratified when Josefina accepted the downpayment of P20,000 and issued a receipt as a consequence of ratifying the contract. It must be noted, however, that an affidavit was signed by Lagon as part of the consideration, to transfer the Rural Bank of Isulan as well as constructing a commercial bank beside the bank, both failed to perform by Lagon, making the deed of absolute sale null and void. It cannot be considered as an afterthought contrived by Carlos Jr. since Lagon admitted in court the authenticity of the affidavit, and its

binding effect against him. There was no need to rescind the contract because it was clearly stipulated that failure to comply with such obligation makes the deed null and void, though petitioners are obliged to refund the respondent's partial payment of the subject property. Doctrine:

Dignos v. Court of Appeals

Facts: Dignos is the owner of a parcel of land in Lapu- Lapu City, which they sold to Jabil for P28,000, payable in 2 installments and with an assumption of indebtedness with First Insular Bank of Cebu for P12,000. However, Dignos also sold the same land in favor of Cabigas, who were US citizens, for P35,000. A Deed of Absolute Sale was executed in favor of the Cabigas spouses. Jabil filed a suit against Dignos with CFI of Cebu. RTC ruled in favor of Jabil and declared the sale to Cabigas null and void. On appeal, CA affirmed RTC decision with modification. Issue: Whether or not the contract between Dignos and Jabil is a contract of sale (as opposed to a contract to sale) Held: YES. A deed of sale is absolute in nature although denominated as a Deed of Conditional Sale where nowhere in the contract in question is a proviso or stipulation to the effect that title to the property sold is reserved in the vendor until full payment of the purchase price, nor is there a stipulation giving the vendor the right to unilaterally rescind the contract the moment the vendee fails to pay within a fixed period. In



the present case, there is no stipulation reserving the title of the property on the vendors nor does it give them the right to unilaterally rescind the contract upon non-payment of the balance thereof within a fixed period. While there was no constructive delivery of the land sold in the present case, as subject Deed of Sale is a private instrument, it is beyond question that there was actual delivery thereof. As found by the trial court, the Dignos spouses delivered the possession of the land in question to Jabil as early as 27 March 1965 so that the latter constructed thereon Sallys Beach Resort also known as Jabils Beach Resort in March, 1965; Mactan White Beach Resort on 15 January 1966 and Bevirlyns Beach Resort on 1 September 1965. Such facts were admitted by the Dignos spouses. Doctrine:

CONTROLLING DOCTRINE: Absent any stipulation in the deed or in the meeting of minds reserving title over the property to the seller until full payment of the purchase price and giving the seller the right to unilaterally rescind the contract is case of non-payment, makes the contract one of sale rather than a contract to sell.1

1 Tugaba v. Vda. De Leon, 132 SCRA 722 (1984); Dignos v. Court of Appeals, 158 SCRA 375 (1988); Topacio v. Court of Appeals, 211 SCRA 291 (1992); Almira v. Court of Appeals, 399 SCRA 351 (2003); Vda. De Mistica v. Naguiat, 418 SCRA 73 (2003); Valdez v. Court of Appeals, 439 SCRA 55 (2004); Blas v. Angeles-Hutalla, 439 SCRA 273 (2004); Portic v. Cristobal, 456 SCRA 577 (2005).

Reservation of Ownership by Seller: The existence or non-existence of the reservation of ownership with seller clause, has been a critical consideration for the Court in determining the nature of a sale contract because it considers that the essence of a true contract of sale under Article 1458 is the passing of ownership of the subject matter. Thus, the Court has often ruled that in a contract of sale, ownership over the subject matter generally passes to the buyer as a result of the tradition thereof; whereas, in a contract to sell, the delivery of the subject matter does not pass ownership to the buyer even though he possesses the same, under the stipulation that ownership shall pass only upon full payment of the purchase price; 2 and that the remedies available to the seller would depend on this particular point.

o It was enough for the Court to characterize the Deed of Condition Sale as a contract to sell alone by the reservation of ownership. Heirs of Antonio F. Bernabe v. Court of Appeals, 559 SCRA 53 (2008).

o The reservation of title may not be found in express provision of the contract, but may also be determined from proven acts of the parties. xSalazar v. Court of Appeals, 258 SCRA 325 (1996).

o The agreement between the buyer and seller that the offer and acceptance was for a bid price to be paid in

2 Valarao v. Court of Appeals, 304 SCRA 155 (1999); Universal Robina Sugar Milling Corp. v. Heirs of Angel Teves, 389 SCRA 316 (2002); Chua v. Court of Appeals, 401 SCRA 54 (2003); Demafelis v. Court of Appeals, 538 SCRA 305 (2007); Castillo v. Reyes, 539 SCRA 193 (2007); Villador, Jr. v. Zaballa, 545 SCRA 325 (2008).



cash, not in staggered payments, taken together with the fact that there was no expressed or apparent intent to reserve ownership over the lot until full payment was made, lead to no other conclusion that the parties entered into a contract of sale and not a contract to sell. City of Cebu v. Heirs of Candido Rubi, 306 SCRA 408 (1999).

o An agreement in which ownership is reserved in the vendor and is not to pass to the vendee until full payment of the purchase price is known as a contract to sell. The absence of full payment suspends the vendors obligation to convey title, even if the sale has already been registered. Registration does not vest, but merely serves as evidence of, title to a particular property. Our land registration laws do not give title holders any better ownership than what they actually had prior to registration. xPortic v. Cristobal, 456 SCRA 577 (2005).1

Agreement As To Deed Of Absolute Sale: In a number of decisions, the Supreme Court has considered as an important factor whether there is a stipulation or promise that the seller shall execute a deed of absolute sale upon completion of payment of the purchase price by the buyer, or whether the agreement between the parties is embodied in a private document. In other words, such situations are treated as equivalent to reservation of title in the name of the seller until the buyer shall have completed the payment of the price.

1 Antonio F. Bernabe v. Court of Appeals, 559 SCRA 53 (2008); Bank of P.I. v. SMP, Inc., 609 SCRA 134 (2009).

o CONTROLLING DOCTRINE: The absence of a formal deed of conveyance is taken as a strong consideration that the underlying agreement is a contract to sell, since there is a strong indication that the parties did not intend to immediately transfer title, but only a transfer after full payment of the price.2

o The absence of a formal deed of conveyance [or a stipulation to execute the deed of sale only full payment of the purchase price] 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, 3 and the seller retained possession of the certificate of tile and all other documents relative to the sale until there was full payment of the purchase price. xChua v. Court of Appeals, 401 SCRA 54 (2003).

Reservation Of Right To Extrajudicially Rescind In Event Of Non-Fulfillment Of Condition:

CONTRACT TO SELL CONTRACT OF SALE In a contract to sell, where the suspensive condition has not been fulfilled, no further

remedy is necessary since ipso jure the contract

In a contract of sale, the non-fulfillment of the condition would

2 Manuel v. Rodriguez, 109 Phil. 1 (1960); Roque v. Lapuz, 96 SCRA 741 (1980); Alfonso v. Court of Appeals, 186 SCRA 400 (1990); Lacanilao v. Court of Appeals, 262 SCRA 486 (1996); David v. Tiongson, 313 SCRA 63 (1999); Rayos v. Court of Appeals, 434 SCRA 365 (2004); Cruz v. Fernando, 477 SCRA 173 (2005). 3 Bowe v. Court of Appeals, 220 SCRA 158 (1993); Rayos v. Court of Appeals, 434 SCRA 365 (2004); Solidstate Multi-Products Corp. v. Catienza-Villaverde, 559 SCRA 197 (2008); Tan v. Benolirao, 604 SCRA 36 (2009); Nabus v. Pacson, 605 SCRA 334 (2009).



would have already been extinguished by non- happening of the condition. However, if there

has been previous delivery of the subject matter to the buyer, although seller has by reservation retained ownership over the

subject matter, since the seller still cannot take the law into his own hands, the seller would still have to seek court action to recover

possession from the buyer if the latter refuses to voluntarily return the subject matter.

However, such action is not for rescission but actually merely a recovery of possession.

authorize the seller to rescind the contract

or to waive the condition and seek enforcement of the

contract, in accordance with Article 1545 of the

Civil Code.

In a contract to sell, by express agreement, delivery of the subject matter does not transfer ownership to the buyer, and therefore when the condition is not fulfilled (i.e., non-payment of the purchase price) no court intervention is

needed to rescind the contract since ownership has remained with the seller. If

court intervention is necessary, it is not for the rescission of the contract, but for the recovery of the possession from the buyer who is not entitled thereto, and refuses to voluntarily

return the subject matter of the sale.

In a contract of sale, delivery would

transfer ownership to the buyer, and

therefore rescission must necessarily be done judicially since only the courts can grant the remedy of recalling ownership

that has passed to the buyer and reverting it

to the seller.

CLV: In some cases, there is an implication that a contract of sale is one that is perfected because the parties have agreed on the three (3) elements to constitute a valid sale: subject matter

and the price and its mode of payment; whereas, a contract to sell is not a perfected contract. Such implication is misleading, for both a contract of sale and a contract to sell are perfected contracts; although the first is binding and demandable, the latter is binding but with obligations subject to suspensive conditions. And just because earnest money has been given, does not determine whether it is a contract of sale or a contract to sell, for indeed even in a contract to sell a substantial portion of the purchase price may have been paid, but that alone does not convert it into a contract of sale.

6. Issue Of Substantial Breach (Articles 1191 And 1234) Article 1234. If the obligation has been substantially performed in good faith, the obligor may recover as though there had been a strict and complete fulfillment, less damages suffered by the obligee. (n)

The concept of substantial breach is irrelevant to a contract of sale. xLuzon Brokerage Co., Inc. v. Maritime Building Co., Inc., 43 SCRA 93 (1972).1

In a contract to sell real property on installments, the full payment of the purchase price is a positive condition, the failure of which is not considered a breach, casual or serious, but simply an event that prevented the obligation of the vendor to convey title from acquiring any obligatory force. The transfer of

1 Siska Dev. Corp. v. Office of the President, 231 SCRA 674 (1994); Sta. Lucia Realty & Dev., Inc. v. Uyecio, 562 SCRA 226 (2008).



ownership and title would occur after full payment of the price. xLeao v. Court of Appeals, 369 SCRA 36 (2001).1

B. Cancellation Of Contract To Sell

1. Remedy Of Rescission Under Articles 1191 And 1592 Have No Application To Contracts To Sell

Articles 1191 and 1592, which require rescission either by judicial action, or notarial act, do not apply to contracts to sell.2 Likewise, the remedy of rescission under Articles 1380 et seq. have no application to a contract to sell, not being included within the enumerated contracts therein, nor is lesion or damage the basis upon which remedy can be sought under a contract to sell.3

o The reasoning is to the effect that since a contract to sell is constituted by a suspensive condition on the full payment of the price, the non-payment of the price would automatically, even without the need of further action nor of the remedy of rescission, extinguish the contract. Manuel v. Rodriguez, 109 Phil. 1 (1960).

2. Minimum Requirement For Cancellation Of Contract To Sell;

Formal Notice Required to Cancel Contracts to Sell The act of a party in treating a contract as cancelled should be

made known to the other party because this act is subject to 1 Manuel v. Rodriguez, 109 Phil. 1 (1960); Laforteza v. Machuca, 333 SCRA 643 (2000); Villamaria, Jr. v. Court of Appeals, 487 SCRA 571 (2006). 2 Pangilinan v. Court of Appeals, 279 SCRA 590 (1997); Valarao v. Court of Appeals, 304 SCRA 155 (1999); Padilla v. Spouses Paredes, 328 SCRA 434 (2000); Gomez v. Court of Appeals, 340 SCRA 720 (2000). 3 Ong v. Court of Appeals, 310 SCRA 1 (1999).

scrutiny and review of the courts in case the alleged defaulter bring the matter for judicial determination. University of the Philippines v. De los Angeles, 35 SCRA 103 (1970); Palay Inc. v. Clave, 124 SCRA 638 (1983).4

University of the Philippines v. De los Angeles

Facts: UP was given a land grant which shall be developed to obtain additional income for its support. UP and ALUMCO entered into a logging agreement where ALUMCO was granted the exclusive authority for an extendible period of 5 years (by mutual agreement), to cut and remove timber from the land grant inconsideration of royalties and fees to be paid to UP. ALUMCO incurred an unpaid amount of P219,363. UP demanded payment but it failed to pay. ALUMCO received a letter that UP would rescind or terminate their logging agreement. They executed an instrument Acknowledgement of Debt & Proposed Manner of Payment which the UP President approved. ALUMCO agreed to give their creditor (UP) the right to consider the logging agreement as rescinded without necessity of any judicial suit and creditor will be entitled to P50,000 for liquidated damages. ALUMCO continued logging but still incurred unpaid accounts. UP then informed them that as of that date, they considered rescinded the agreement and of no further legal effect. UP then filed for collection of the unpaid accounts and the trial court gave them preliminary injunction to prevent ALUMCO from continuing their logging. Through a public bidding, the concession was awarded to Sta. Clara Lumber Company and a new agreement was entered into between them and UP. ALUMCO tried to enjoin the bidding 4 Jison v. CA, 164 SCRA 339 (1988); Lim v. CA, 182 SCRA 564 (1990); Cheng v. Genato, 300 SCRA 722 (1998).



but the contract was already concluded and Sta. Clara started its operation. Upon motion by ALUMCO, UP was declared in contempt of court for violating the writ of injunction against them. ALUMCOs contentions are the following: a. It blamed its former general manager for their failure to pay their account. b. Logs cut were rotten; thus, they were unable to sell them. c. UPs unilateral rescission was invalid without a court order. Issue: Whether or not UP can validly rescind its agreement with ALUMCO even without court order. Held: YES. UP can unilaterally rescind the agreement. UP and ALUMCO expressly stipulated in their Acknowledgement of Debt that upon default of payment, creditor UP has the right and power to rescind their Logging Agreement without the necessity of a judicial suit. There is nothing in the law that prohibits the parties from entering into agreements that violation of terms of the contract would cause its cancellation even without court intervention. Act of a party in treating a contract as cancelled on account of any infraction by the other party must be made known to the other and is always provisional, being subject to scrutiny and review by the proper court. If the other party deems the rescission unjustified, he free to resort to judicial action. The court shall, after due hearing, decide if the rescission was proper, in which case it will be affirmed and if not proper, the responsible party will be liable for damages. A party who deems the contract violated may consider it rescinded and act accordingly, even without court action but it proceeds at its own risk. Only the final judgment of the court will conclusively settle whether the action taken was proper or not. But the

law does not prohibit the parties from exercising due diligence to minimize their own damages. UP was able to show a prima facie case of breach of contract and default in payment by ALUMCO. Excuses by ALUMCO are not proper for them to suspend their payments. Thus, the Supreme Court lifted the injunction Doctrine: Of course, it must be understood that the act of a party in treating a contract as cancelled or resolved on account of infractions by the other contracting party must be made known to the other and is always provisional, being ever subject to scrutiny and review by the proper court. If the other party denies the rescission is justified, it is free to resort to judicial action in its own behalf, and bring the matter to court. Then, should the court, after due hearing, decide that the resolution of the contract was not warranted, the responsible party will be sentenced to damages; in the contrary case, the resolution will be affirmed, and the consequent indemnity awarded to the party prejudiced. In other words, the party who deems the contract violated may consider it resolved or rescinded, and act accordingly, without previous court action, but it proceeds at its own risk. For it is only the final judgment of the corresponding court that will conclusively and finally settle whether the action taken was or was not correct in law. But the law definitely does not require that the contracting party who believes itself injured must first file suit and wait for a judgment before taking extrajudicial steps to protect its interest. Otherwise, the party injured by the others breach will have to passively sit and watch its damages accumulate during the pendency of the suit until the final judgment of rescission is rendered when the law itself requires that he should exercise due diligence to minimize its own damages.



Palay Inc. v. Clave Facts: In 1965, Palay Inc., through its President Onstott, executed in favor of Dumpit (respondent) a Contract to Sell a parcel of land in Antipolo, RIzal. The sale was for P23,300 with 9% interest p.a., payable with a downpayment of P4,660 and monthly installments of least, there was a written notice sent to the defaulter informing him of the rescission. Par. 6 cannot be considered a waiver of Dumpit's right to be notified because it was a contract of adhesion. A waiver must be certain and unequivocal and intelligently made; such waiver follows only where the liberty of choice has been fully accorded. Moreover, the indispensability of notice of cancellation to the buyer is protected under RA 6551. It is a matter of public policy to protect the buyers of real estate on installment payments against onerous and oppressive conditions. Waiver of notice is one such onerous and oppressive condition to buyers of real estate on installment payments. Issue: Whether or not Palay should be liable for the refund of the installment payments made by Dumpit. Held: YES. As a consequence of the rescission of the contract, right to the lot should be restored to Dumpit or the same should be replaced by another acceptable lot. However, considering that the lot had been resold to a third person, Dumpit is entitled to refund of the installments paid plus legal interest of 12%. Doctrine: Well settled is the rule, as held in previous jurisprudence, that judicial action for rescission of a contract is not necessary where the

contract provides that it may be revoked and cancelled for violation of any of its terms and condition. However, even in the cited cases, there was at least a written notice sent to the defaulter informing him of the rescission.

Nevertheless, [seller] is not relieved from the giving of a notice, verbal or written, to the [buyers] for his decision to rescind their contract. In many cases, even though we upheld the validity of a stipulation in a contract to sell authorizing automatic rescission for a violation of its terms and condition, at least a written notice must be sent to the defaulter informing him of the same. The act of a party in treating a contract as cancelled should be made known to the other. For such act is always provisional. It is always subject to the scrutiny and review by the courts in case the alleged defaulter brings the matter to the proper courts. Cheng v. Genato, 300 SCRA 722 (1998).

A contract to sell imposes reciprocal obligations and so cannot be terminated unilaterally by either party. Judicial rescission is required under Article 1191. However, this rule is not absolute. We have held that in proper cases, a party may take it upon itself to consider the contract rescinded and act accordingly albeit subject to judicial confirmation, which may or may not be given. Lim v. Court of Appeals, 182 SCRA 564 (1990).

o BUT SEE: In a contract to sell, upon failure of buyer to comply with its obligation, there was no need to judicially rescind the contract to sell. Failure by one of the parties to abide by the conditions in a contract to sell resulted in the rescission of the contract. AFP



Mutual Benefit Assn., Inc. v. Court of Appeals, 364 SCRA 768 (2001).1

Lim v. Court of Appeals

Facts: In 1965, Orlinos (3 co-owners) mortgaged a parcel of land in Diliman, QC to Progressive Commercial Bank as security for a P100K loan. They failed to pay the loan and the mortgage was foreclosed, where the bank acquired the property as the highest bidder at the auction sale. The bank transferred all its assets, P246.42 until fully paid. Par. 6 of the contract provided for automatic extrajudicial rescission upon default in payment of any monthly installment after the lapse of 90 days from the expiration of the grace period of a month, without need of notice and forfeiture of all installments paid. Dumpit was able to pay the down payment and several installments amounting to P13,722.50, with the last payment made on Dec. 5, 1967 for installments up to Sept. 1967. In 1973, Dumpit requested Palay Inc to update his overdue accounts and sought its permission to assign his rights to Dizon. However, Palay informed him that his Contract to Sell had long been rescinded pursuant to Par. 6 and that the lot had already been resold. Dumpit filed a complaint with the NHA for reconveyance with an alternative prayer for refund. NHA ruled in favor of Dumpit, stating that the rescission is void for lack of either judicial or notarial demand. Office of the President affirmed.

1 Torralba v. De los Angeles, 96 SCRA 69 (1980).

Issue: Whether or not the transaction between the Orlinos and PBC a contract to sell. Held: YES. There was no immediate transfer of title to the Orlinos as what would have happened if there had been a sale. The supposed sale was never registered and there was no new TCT in favor of the Orlinos. They also acknowledged that the title to the property would remain with the bank until their transaction shall be finalized. Moreover , the consideration agreed upon was never paid to convert the agreement into a contract of sale. As payment of the consideration was a positive suspensive condition, title to the property never passed to the private respondents. Thus, the property was legally unencumbered and still belonged to PBC when it was sold to Lim. On RESCISSION: Although a contract to sell imposes reciprocal obligations and cannot be terminated unilaterally by either party, judicial rescission is required under Art. 1911 of the CC. However, this rule is not absolute. Jurisprudence has shown that a party may take it upon itself to consider the contract rescinded and act accordingly albeit subject to judicial confirmation, which may or may not be given. It is true that the rescinding party takes a risk that its action may not be approved by the court. The Orlinos obligated themselves to deliver to PBC P160K and their share on the property in Caloocan City. However, the Orlinos did not act on their obligations. PBC could not be required to wait for them forever. Thus, PBC had the right to consider the contract to sell between them terminated for non-payment of the stipulated consideration.



Doctrine: The seller is allowed to consider the contract to sell between them terminated for non-payment of the stipulated consideration, and the only risk involved is that the courts may not affirm the factual basis upon which to base the non-happening of the suspensive condition.

AFP Mutual Benefit Assn., Inc. v. Court of Appeals

Facts: This case involved Solid Homes Inc's MR of the SC's decision reversing the CA's decision and ordering the RD to cancel the notice of lis pendens on the titles issued to AFPMBAI, declaring it as buyer in good faith and for value. Investco Inc and Solid Homes Inc entered into a contract to sell. During this time, the titles to the Quezon City and Marikina properties had not been transferred in the name of Investco Inc as asignee of the owners, Angela Perez Staley and Antonio Perez. Thus, Investco Inc merely agreed to sell and Solid Homes to buy the former's rights and interest in the properties. However, Solid Homes Inc. reneged or defaulted on its obligation. Thus, Investco Inc rescinded extra-judicially such contract to sell. After such event, AFPMBAI and Investco Inc entered into a contract of absolute sale, wherein the former paid in full, causing the transfer of titles in its name. Issue: Whether or not Investco Inc properly rescinded its contract to sell and buy with Solid Homes Inc. Held: YES. Upon Solid Homes Inc's failure to comply with its obligation under the contract, there was no need to judicially rescind the contract. Failure by one of the parties to abide by the conditions in a contract to sell resulted in the rescission of the c

Chapter 11. Remedies for Rescission and Cancellation for Immovables

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