CHAPTER 10
REMEDIES OF PARTIES
INTRODUCTION
In the realm of performance, the main rule in Sales was
that of caveat emptor (“Let the buyer beware”), which required
the buyer to be aware of the supposed title of the seller to the
subject matter; and that a buyer who buys without checking the
seller’s title takes all the risks and losses consequent to such
failure.
Today, the doctrine is not meant to excuse the seller
from his warranties, but is essentially used
1. to determine whether the buyer, in taking delivery of
the subject matter of sale, can be considered a buyer
in good faith;or
2. to determine whether the buyer assumed the risks and
contingencies attached to the subject matter of sale.
In one case the Supreme Court held that while the buyer
purchases vessels at its own risk, such assumed risk pertained
only to the possibility of the sale being rescinded. Therefore, in
the absence of a formal rescission of the sale, it would be
erroneous to make such buyer liable for the value of the vessels
lost, or to order the return of the vessels without the sale first
being rescinded.
In another case, the Court held that the rule of caveat
emptor also applies to execution sales, and consequently, the
sheriff does not warrant the title to the property sold by him and
it is not incumbent on him to place the purchaser in possession
of the property.
The principles embodied in our Torrens system present an
exception to the caveat emptor rule, since under such system a
buyer need only rely upon the title of a registered land and has
no obligation to look beyond such title. Although, jurisprudence
still supports the rules that one who deals with registered land
must still ensure that he is dealing with the actual registered
owner; and that one must conduct in ocular examination of the
land or real estate he is purchasing and cannot just rely upon
the description in the title.8 In addition, the Law on Sales
provides for certain remedies available to the seller and the
buyer in case of breach of contract on the part of the other party.
Finally, note must be taken of what the Court held in Erquiagav.
Court of Appealsthat “A basic premise of the doctrine of ‘Let the
buyer beware’ is that there be no false representation by the
seller. The ancient defense of caveat emptor belongs to a
bygone age, and has no place in contemporary business ethics.”
REMEDIES IN CASES OF MOVABLES
A. ORDINARY REMEDIES OF SELLER
1. Movables in General
In the sale of movables, in case the buyer, upon the expiration
of the period fixed for the delivery of the thing, should not have
appeared to receive it, or, having appeared, he should not
have tendered the price at the same time, unless a longer
period has been stipulated for its payment, the seller may
maintain an action to rescind the sale.
2. Sale of Goods
a. Non-Payment of Price by Buyer
Ownership Transferred to Buyer — Where the ownership of the
goods has passed to the buyer who wrongfully neglects or
refuses to pay for them according to the terms of the contract,
the seller may maintain an action against him for the price of the
goods,11 i.e., an action for specific performance.
No Transfer of Ownership to Buyer — When the ownership in
the goods has not passed, if they cannot readily be resold for a
reasonable price, the seller may offer to deliver the goods to
the buyer, and, if the buyer refuses to receive them, may notify
the buyer that the goods are thereafter held by the seller as
bailee for the buyer; thereafter, the seller may treat the goods
as the buyer’s and may maintain an action for the price.12
When Price Payable on Certain Day — Where the price is
payable on a certain day, irrespective of delivery or of transfer
of title, and the buyer wrongfully neglects or refuses to pay
such price, the seller may maintain an action for the price
although the ownership in the goods has not passed.
However, it shall be a defense to such an action that the seller
at any time before the judgment in such action has manifested
an inability to perform the sale on his part or an intention not to
perform it.
b. When Buyer Wrongfully Neglects/Refuses to Accept
Goods
Where the buyer wrongfully neglects or refuses to accept and
pay for the goods, the seller may maintain an action against him
for damages for non-acceptance, in accordance with the
following rules:
a) Damages shall cover the estimated loss directly and
naturally resulting in the ordinary course of events from
the buyer’s breach of contract;
b) Where there is an available market for the goods in
question, in the absence of special circumstances
showing proximate damage of a different amount, the
measure of damages is the difference between the
contract price and market or current price at the time or
times when the goods ought to have been accepted,
or, if no time was fixed for acceptance, then at the time
of the refusal to accept;
c) If the buyer repudiates the contract or notifies the seller
to proceed no further, buyer shall be liable for labor
performed or expenses of material amount is
necessary on the part of the seller to enable him to fulfill
his obligations under the sale made before receiving
notice of the buyer’s repudiation or countermand; and
d) The profits the seller would have made if the contract
or the sale had been fully performed shall be
considered in awarding damages.
B. SPECIAL REMEDIES OF “UNPAID SELLER” OF GOODS
The provisions of the Civil Code on the remedies of an unpaid
seller demonstrate the intention of the Code Commission to
empower individuals with remedies “to take matters into their
own hands” when the circumstances warrant the same,
provided it does not involve physical intrusion into the person or
privacy of the buyer in default, by being able to achieve legal
effects without need of seeking the intervention of the courts.
The remedies of an unpaid seller are similar to the “doctrine of
self-help” embodied in Article 429 of the Civil Code, which
authorizes the owner or lawful possessor of a thing to use force
as may be reasonably necessary to repel or prevent an actual
or threatened unlawful physical invasion or usurpation of his
property.
In the case of the remedies of the unpaid seller, the minimum
requirement is that the goods are in the possession of the seller
so as to prevent an actual physical tussle with the buyer in the
exercise of such remedies.
1. Definition of “Unpaid Seller”
Under Article 1525 of the Civil Code, the seller of goods is
deemed to be an “unpaid seller” either:
(a) When the whole of the price has not been paid or tendered;
or
(b) When a bill of exchange or other negotiable instrument has
been received as conditional payment, and the condition on
which it was received has been broken by reason of the dishonor
of the instrument, the insolvency of the buyer, or otherwise.
The term “unpaid seller” includes an agent of the seller to whom
the bill of lading has been indorsed, or consignor or agent who
has himself paid, or is directly responsible for the price, or any
other person who is in the position of a seller.
2. Rights of Unpaid Seller
When a seller is an “unpaid seller” as defined by law, whether
or not ownership over the goods has been transferred to the
buyer, the unpaid seller is entitled to the following rights or
remedies:
(a) Possessory lien;
(b) Stoppage in transitu;
17Art. 1525, Civil Code.
366 LAW ON SALES
(c) Special right of resale; and
(d) Special right to rescind.
The four (4) remedies of an unpaid seller have a hierarchical
application, as in fact, the special rights to resell and to rescind
can be availed of by the unpaid seller only when either of the
two prior rights of possessory lien or stoppage in transitu have
been exercised by the unpaid seller. The designation “special”
is
attached to the rights to resell and to rescind, because they are
rights accorded only to the unpaid seller as technically defi ned
by law, and are not of the same nature as the right to rescind
accorded under Article 1191 of the Civil Code to reciprocal
contracts.
3. Possessory Lien
The general rule is that when it comes to movables, the
seller is not bound to deliver the thing sold, if the buyer has not
paid him the price, or if no period for the payment has been
fixed in the contract.
However, in the absence of stipulation to the contrary, delivery
of the goods to the buyer transfers ownership to the latter, and
the non-payment of the price does not prevent such transfer of
ownership as a result of tradition to take effect.
If the seller is an unpaid seller as defined by law, notwithstanding
that the ownership in the goods may have passed to the buyer,
the unpaid seller still has a lien on the goods or right to retain
them for the price while he is in possession of them.
Where the ownership in the goods has not passed to the buyer,
the unpaid seller has, in addition to his other remedies, a right
of withholding delivery similar to and co-extensive with his right
of lien.
The possessory lien of the unpaid seller is exerciseable only
in the following instances:
(a) Where the goods have been sold without any stipulation as
to credit;
(b) Where the goods have been sold on credit, but the term of
credit has expired;
(c) Where the buyer becomes insolvent.
The seller may exercise his right of lien notwithstanding that he
is in possession of the goods as agent or bailee for the buyer.
The unpaid seller’s right of lien is not affected by any sale, or
other disposition of the goods which the buyer may have
made, unless the seller assented thereto.
a. When Negotiable Document of Title Issued
If a negotiable document of title has been issued for goods, no
seller’s lien shall defeat the right of any purchaser for value
and in good faith to whom such document has been
negotiated, whether such negotiation be prior or subsequent to
the notification to the carrier, or other bailee who issued such
document, of the seller’s claim to a lien.
b. When Part Delivery Effected
Where an unpaid seller has made part delivery of the goods, he
may exercise his right of lien on the remainder, unless such part
delivery has been made under such circumstances as to show
an intent to waive the lien or right of retention.
c. Instances When Possessory Lien Lost
The unpaid seller of goods loses his lien on the goods
whenever:
(a) Seller delivers the goods to a carrier or other bailee for the
purpose of transmission to buyer without reserving the
ownership in the goods or the right to the possession thereof;
(b) The buyer or his agent lawfully obtains possession of the
goods;
(c) By waiver thereof.
However, the unpaid seller of goods, having a lien thereon, does
not lose his lien by reason only that he has obtained judgment
or decree for the price of the goods. As will be noted, the unpaid
seller losses his possessory lien, when he parts with physical
possession of the goods, as when he delivers the goods to the
carrier. In that case, he still has the remedy of stoppage in
transitu, but only if the buyer has in the meantime become
insolvent.
4. Stoppage in Transitu
Notwithstanding that the ownership in the goods may have
passed to the buyer, the unpaid seller of goods has, in case of
the insolvency of the buyer, a right of stopping the goods in
transit after he has parted with the possession of them.
Under Article 1530 of the Civil Code, when the buyer of goods
is or becomes insolvent, the unpaid seller who has parted with
the possession of the goods has the right of stopping them in
transitu, that is to say, he may resume possession of the goods
at any time while they are in transit, and he will then become
entitled to the same rights in regard to the goods as he would
have had if he had never parted with the possession.
The unpaid seller’s right of stoppage in transitu is not affected
by any sale or other disposition of the goods which the buyer
may have made, unless the seller assented thereto.
a. When Negotiable Document of Title Issued
If a negotiable document of title has been issued for goods, no
seller’s right to stoppage in transitu shall defeat the right of any
purchaser for value and in good faith to whom such document
has been negotiated, whether such negotiation be prior or
subsequent to the notification to the carrier, or other bailee who
issued such document, of the seller’s claim to right of stoppage
in transitu.
b. When Buyer Is Deemed “Insolvent”
Under the Law on Sales, a buyer is deemed insolvent who either
has ceased to pay his debts in the ordinary course of business
or cannot pay his debts as they become due, whether insolvency
proceedings have been commenced or not.
c. When Goods Are Deemed “In Transit”
Goods are in transit to authorize the unpaid seller to exercise
his right of stoppage in transitu:
(a) From the time they are delivered to a carrier by land, water,
or air, or other bailee for the purpose of transmission to the
buyer, until the buyer, or his agent in that behalf, takes delivery
of them from such carrier or other bailee; or
(b) If the goods are rejected by the buyer, and the carrier or other
bailee continues in possession of them, even if the seller has
refused to receive them back.
d. When Goods Are Deemed No Longer In Transit
Goods are no longer in transit when:
(a) The buyer or his agent obtains delivery of the goods before
their arrival at the appointed destination;
(b) After the arrival of the goods at the appointed destination, the
carrier or other bailee acknowledges to the buyer or his agent
that he holds the goods on his behalf and continues
in possession of them as bailee for the buyer or his agent (and
it is immaterial that further destination for the goods may have
been indicated by the buyer);
(c) The carrier or other bailee wrongfully refuses to deliver the
goods to the buyer or his agent.
If the goods are delivered to a ship, freight train, truck, or
airplane chartered by the buyer, it is a question depending on
the circumstances of the particular case, whether they are in the
possession of the carrier as such or as agent of the buyer.
e. When Part Delivery Already Made
If part delivery of the goods has been made to the buyer, or his
agent in that behalf, the remainder of the goods may be stopped
in transitu, unless such part delivery has been under such
circumstances as to show an agreement with the buyer to give
up possession of the whole of the goods.
f. How Right Is Exercised
The unpaid seller may exercise his right of stoppage in transitu
either by:
(a) Obtaining actual possession of the goods; or
(b) Giving notice of his claim to the carrier or other bailee in
whose possession the goods are.When notice is given, such
notice may be given either to the person in actual possession of
the goods or to his principal.
In the latter case the notice, to be effectual, must be given at
such time and under such circumstances that the principal, by
the exercise of reasonable diligence, may prevent a delivery to
the buyer.
When notice of stoppage in transitu is given by the seller to the
carrier, or other bailee in possession of the goods, he must
redeliver the goods to, or according to the directions of, the
seller. The expenses of such delivery must be borne by the
seller.
g. When Goods Covered by Negotiable Document of Title
When a negotiable document of title representing goods has
been issued by the carrier or other bailee, he shall not be
obliged to deliver or justified in delivering the goods to the
unpaid seller unless such document is fi rst surrendered for
cancellation.
It is only when the unpaid seller has exercised either his right
of possessory lien or his right of stoppage in transitu, that he
can then proceed with his other special rights of resale or to
rescind.
5. Special Right to Resell Goods
Notwithstanding that the ownership in the goods may have
passed to the buyer, the unpaid seller has a special right of
resale, but only under the conditions provided by law.
a. When Right Exercisable
The special right of resale can be made only when the unpaid
seller has previously exercised either his right of possessory
lien or stoppage in transitu, and under any of the following
conditions:
(a) The goods are of perishable nature;
(b) Where the seller has been expressly reserved in case the
buyer should make default; or
(c) Where the buyer has been in default in the payment of the
price for an unreasonable time.
In Hanlon v. Hausserman even before the formal statutory
adoption of the remedies of an unpaid seller, the Court had
already recognized the right of a seller, when the sale is still
executory in stage, to resell the movables subject matter of the
sale, when the buyer fails to pay the purchase price:
... In the present case the contract between Hanlon and the
mining company was executory as to both parties, and the
obligation of the company to deliver the shares could not arise
until Hanlon should pay or tender payment of the money. The
situation is similar to that which arises every day in business
transactions in which the purchaser of goods upon an executory
contract fails to take delivery and pay the purchase price. The
vendor in such case is entitled to resell the goods. If he is obliged
to sell for less than the contract price, he holds the buyer for the
difference; if he sells for as much as or more than the contract
price, the breach of contract by the original buyer is damnum
absque injuria. But it has never been held that there is any need
of an action of rescission to authorize the vendor, who is still in
possession, to dispose of the property, where the buyer fails to
pay the price and take delivery ...
Katigbak v. Court of Appeals,41 held that if the buyer fails to
take delivery and pay the purchase price of the subject matter
of the contract, the seller, without need of fi rst rescinding the
contract judicially, is entitled to resell the same, and if he is
obliged to sell it for less than the contract price, the buyer is
liable for the difference
b. Effect of Having Exercised Right of Resale
When the unpaid seller has exercised his right of resale, he shall
not thereafter be liable to the original buyer upon the sale or for
any profit made by such resale, but may recover from the buyer
damages for any loss occasioned by the breach of the sale
c. Transfer of Ownership
Where a resale is made by the unpaid seller, the buyer acquires
a good title as against the original buyer. This is the special
feature of the right of the unpaid seller to resell: not only is he
able to destroy or obliterate the ownership over the goods in the
original buyer, he is also able to transfer ownership to the
subsequent buyer, even if at the time of tradition, he no longer
had ownership over the goods. Ordinarily, the destruction or
taking away of ownership in one person and placing it in another
person in such manner can only be done through court action.
But in the case of an unpaid seller, he can effect these, even
without judicial action.
d. Notice to Defaulting Buyer
It is not essential to the validity of a resale that notice of an
intention to resell the goods be given by the seller to the original
buyer. But where the right to resell is not based on the
perishable nature of the goods or upon an express provision of
the sale, the giving or failure to give such notice shall be relevant
in any issue involving the question whether the buyer had been
in default for an unreasonable time before the resale was made.
It is not essential to the validity of a resale that notice of the time
and place of such resale should be given by the seller to the
original buyer.
e. Standard of Care and Disqualification in Resale
The seller is bound to exercise reasonable care and judgment
in making a resale, and subject to this requirement may make
a resale either by public or private sale. He cannot, however,
directly or indirectly buy the goods.
6. Special Right to Rescind
Notwithstanding that the ownership in the goods may have
passed to the buyer, the unpaid seller has a special right to
extrajudicially rescind the sale.
a. When Right May Be Exercised
An unpaid seller having the right of lien or having stopped
the goods in transitu, may rescind the transfer of title and
resume the ownership in the goods, where:
(a) The seller has expressly reserved the right to do so in case
the buyer should make default; or
(b) The buyer has been in default in the payment of the price
for an unreasonable time.
b. Effect of Exercise of Such Right
The seller shall not thereafter be liable to the buyer upon the
sale, but may recover from the buyer damages for any loss
occasioned by the breach of the contract.
c. Transfer of Title
The transfer of title shall not be held to have been rescinded by
an unpaid seller until he has manifested by notice to the buyer
or by some other overt act an intention to rescind. It is not
necessary that such overt act should be communicated to the
buyer, but the giving or failure to give notice to the buyer of the
intention to rescind shall be relevant in any issue involving the
question whether the buyer had been in default for an
unreasonable time before the right of rescission was
asserted.
C. REMEDIES OF BUYER
1. Failure of Seller to Deliver
Where the seller has broken a contract to deliver specifi c or
ascertained goods, the buyer may seek action for specifi c
performance to direct that the contract shall be performed
specifi cally, without giving the seller the option of retaining the
goods on payment of damages.
The judgment or decree may be unconditional, or upon such
terms and conditions as to damages, payment of the price and
otherwise, as the court may deem just.52
2. Breach of Seller’s Warranty
Under Article 1599 of the Civil Code, where there is a breach
of warranty by the seller in the sale of goods, the buyer may, at
his election, avail of the following remedies:
(a) Accept or keep the goods and set up against
the seller, the breach of warranty by way of
recoupment in diminution or extinction of
the price;
(b) Accept or keep the goods and maintain an
action against the seller for damages for the
breach of warranty;
(c) Refuse to accept the goods, and maintain
an action against the seller for damages for
breach of warranty;
(d) Rescind the sale and refuse to receive the
goods or if the goods have already been
received, return them or offer to return them
50Art. 1534, Civil Code.
51Art. 1598, Civil Code.
52Art. 1598, Civil Code.
376 LAW ON SALES
to the seller and recover the price or any
part thereof which has been paid.
When the buyer has claimed and been granted a remedy in
any of these ways, no other remedy can thereafter be granted,
without prejudice to the buyer’s right to rescind, even if
previously
he has chosen specifi c performance when fulfi llment has
become
impossible.53
3. Suspension of Payments in Anticipation of Breach
Under Article 1590 of the Civil Code, should the buyer
be disturbed in the possession or ownership of the thing
acquired, or should he have reasonable grounds to fear
such disturbance, by a vindicatory action or a foreclosure of
mortgage, he may suspend the payment of the price until the
seller has caused the disturbance or danger to cease, unless
the latter gives security for the return of the price in a proper
case, or it has been stipulated that, notwithstanding any such
contingency, the buyer shall be bound to make the payment.
A mere trespass shall not authorize the suspension of the
payment of the price.
a. Remedy of Buyer for Pending Suit
The pendency of suit over the subject matter of the sale
justifi es the buyer in suspending payment of the balance of the
purchase price by reason of aforesaid vindicatory action fi led
against it. The assurance made by the seller that the buyer
did not have to worry about the case because it was pure and
simple harassment is not the kind of guaranty contemplated
under the exceptive clause in Article 1590 wherein the buyer
is bound to make payment even with the existence of a
vindicatory action if the seller should give a security for the
return of the price.54
53Art. 1191, second paragraph, Civil Code.
54Adelfa Properties, Inc. v. Court of Appeals, 240 SCRA 565,
586 (1995).
REMEDIES OF PARTIES 377
D. RECTO LAW: SALES OF MOVABLES ON
INSTALLMENTS
1. Coverage of Law
Article 1484 of the Civil Code provides for the remedies of a
seller in contracts of sale of personal property by installments,
and
incorporates the provisions of Act No. 4122 passed by the
Philippine
Legislature on 9 December 1939, known as the “Installment
Sales Law,” but more popularly referred to as the “Recto Law,”
which then amended Article 1454 of the Civil Code of 1889.55
Under Article 1484 of the New Civil Code, in a sale of
personal property the price of which is payable in installments,
the seller may exercise any of the following remedies:
(a) Exact fulfi llment of the obligation, should
the buyer fail to pay any installment;
(b) Rescind the sale, should the buyer’s failure
to pay cover two or more installments;
(c) Foreclose the chattel mortgage on the thing
sold, if one has been constituted, should
the buyer’s failure to pay cover two or more
installments.
The article specifi cally provides that if the seller should
foreclose
on the mortgage constituted on the thing sold, he shall have
no further action against the purchaser to recover “any unpaid
balance
of the price” and any agreement to the contrary shall be void.
The original wordings of the Recto Law which introduced
Article 1454-A in the old Civil Code had used the term “unpaid
balance owing” instead of the present wording limiting it to the
“unpaid balance of the price,” thus —
ART. 1454-A. In a contract for the sale of personal
property payable in installments, failure to pay two or
more installments shall confer upon the vendor the right
to cancel the sale or foreclose the mortgage if one has
been given on the property, without reimbursement to
55Macondray & Co., Inc. v. Ablaza, 71 Phil. 297 (1941).
378 LAW ON SALES
the purchaser of the installments already paid, if there
be an agreement to this effect.
However, if the vendor has chosen to foreclose
the mortgage he shall have no further action against
the purchaser for the recovery of any unpaid balance
owing by the same, any agreement to the contrary
shall be null and void.
a. Rationale of Recto Law
The passage of the Recto Law was meant to remedy the
abuses committed in connection with the foreclosure of chattel
mortgages and to prevent mortgagees from seizing the
mortgaged
property, buying it at foreclosure sale for a low price and then
bringing suit against the mortgagor for a defi ciency judgment.
The invariable result of such a procedure was that the
mortgagor
found himself minus the property and still owing practically the
full amount of his original indebtedness.56
The Recto Law “aims to correct a social and economic evil,
the inordinate love for luxury of those who, without suffi cient
means, purchase personal effects, and the ruinous practice of
some commercial houses of purchasing back the goods sold
for a nominal price besides keeping a part of the price already
paid and collecting the balance, with stipulated interest, cost
and attorney’s fees. ... And although, of course, the purchaser
must suffer the consequences of his imprudence and lack of
foresight, the chastisement must not be to the extent of ruining
him completely and, on the other hand, enriching the vendor in
a manner which shocks the conscience. The object of the law
is
highly commendable.”57
b. When Is Sale “on Installments?”
In Levy Hermanos, Inc. v. Gervacio,58 the seller sold a car
whereby the buyer paid an initial payment, and issued a
promissory
56Bachrach Motor Co. v. Millan, 61 Phil. 409 (1935); Cruz v.
Filipinas Investment &
Finance Corp., 23 SCRA 791 (1968); PCI Leasing and
Finance, Inc. v. Giraffe-X Creative
Imaging, Inc., 527 SCRA 405 (2007).
57Manila Trading and Supply Co. v. Reyes, 62 Phil. 461, 463-
464, 467 (1935).
5869 Phil. 52 (1939).
REMEDIES OF PARTIES 379
note for the balance payable on or before a specifi ed date,
with
stipulated interest. When the buyer failed to pay the note at its
maturity, the seller foreclosed the mortgage constituted on the
car and sold the same at public auction, which resulted into a
defi ciency judgment. When the action was brought to collect
on
the defi ciency, the buyer sought the application of the
provisions
of the then Article 1454-A of the old Civil Code, and held that
the
seller could no longer collect on the balance unpaid.
The Court held that the provisions of the Recto Law
cannot apply to a sale where there is an initial payment, and
the
balance payable in the future, because the same is not a sale
on
installment but actually a “straight sale.” Since such a sale is
not
covered by the Recto Law, the barring effects of the law cannot
be made to apply, and the seller may recover the unpaid
balance
of the purchase price against the buyer even when the latter
shall
have lost by foreclosure the subject matter of the sale.
The Court held that when there is only one payment to be
paid in the future, there is no basis to apply the Recto Law,
since
under the language of then Article 1454-A, the buyer needs to
have defaulted in the payment of two or more installments to
allow the seller to rescind or foreclose on the chattel mortgage.
In addition, the Court held that the Recto Law “is aimed at
those sales where the price is payable in several installments,
for, generally, it is in these cases that partial payments consists
in relatively small amounts, constituting thus a great temptation
for improvident purchasers to buy beyond their means. There
is
no such temptation where the price is to be paid in cash, or, as
in the instant case, partly in cash and partly in one term, for, in
the latter case, the partial payments are not so small as to
place
purchasers off their guard and delude them to a miscalculation
of
their ability to pay.”59
c. Loans and Financing Transactions
The provisions of the Recto Law are applicable to fi nancing
transactions derived or arising from sales of movables on
59Ibid, at p. 54.
380 LAW ON SALES
installments, even if the underlying contract at issue is a loan
because the promissory note had been assigned or negotiated
by the original seller.
In Industrial Finance Corp. v. Ramirez,60 the seller who sold
his car to the buyer payable in eighteen monthly installments,
secured by a chattel mortgage on the car, which mortgaged
was
assigned by the seller to a fi nance company, which brought an
action for specifi c performance coupled with a prayer for a writ
of
replevin to recover the possession of the car and if effected
would
proceed with the extrajudicial foreclosure thereof. In discussing
whether the action taken by the fi nance company amounted to
“virtual foreclosure of the chattel mortgage,” the Court applied
the
provisions of Article 1484 of the Civil Code, even when clearly,
as to the fi nance company, its involvement in the affair was as
assignee of the mortgage contract.
Zayas, Jr. v. Luneta Motor Company,61 affi rmed that Article
1484 would apply to a person or entity which has fi nanced the
purchase on installments of a motor vehicle, where the seller
subsequently assigns the loan documents to the fi nancing
person or entity. In that case, the Court held that “the nature of
the transaction as a sale of personal property on installment
basis
remains. When, therefore, Escaño Enterprises, assigned its
rights
vis-á-vis the sale to respondent Luneta Motor Company, the
nature
of the transaction ... did not change at all. As assignee,
respondent
Luneta Motor Company had no better rights than assignor
Escaño
Enterprises under the same transaction. The transaction would
still
be a sale of personal property in installments covered by
Article
1484 of the New Civil Code. To rule otherwise would pave the
way for subverting the policy underlying Article 1484 of the
New
Civil Code, on the foreclosure of chattel mortgages over
personal
property sold on installment basis.”62
In all other cases, where the fi nancing transaction is not
derived from a sale, the provisions of the Recto Law do not
6077 SCRA 152 (1977).
61117 SCRA 726 (1982). Reiterated in Nonato v. Intermediate
Appellate Court, 140
SCRA 255 (1985).
62Ibid, at pp. 732-733.
REMEDIES OF PARTIES 381
apply. Thus, in PAMECA Wood Treatment Plant, Inc. v. Court
of
Appeals,63 the Court held that a mortgagee-bank is not
prevented
from recovering on a defi ciency caused by the foreclosure and
sale at public auction of the mortgage movable which security
arose from a loan given to the mortgagor. The provisions of
Article 1484 cannot be applied by analogy or by equity since
the
provisions apply to a sale on installments.
d. Contracts to Sell Movables Not Covered
When the contract governing the sale of movables is a
contract to sell, then the rules on rescission and substantial
breach are not applicable, since when the suspensive
condition
upon which the contract is based fails to materialize, it would
extinguish the contract, and consequently there is no contract
to rescind.64 Nevertheless, the provisions of Article 1597
would
apply which would grant the seller the right to “rescind” the
contract “by giving notice of his election so to do to the
buyer.”65
2. Remedies Provided Under Article 1484
a. Nature of Remedies under Article 1484
Should the buyer of a personal property default in the
payment of two or more of the agreed installments, the vendor
or
seller has the option to avail of any of these three remedies:
(a) Exact fulfi llment by the purchaser of the
obligation;
(b) Rescind or cancel the sale; or
(c) Foreclose the mortgage on the purchased
personal property, if one was constituted.
The remedies under Article 1484 have been recognized as
alternative, not cumulative, in that the exercise of one would
bar
the exercise of the others.66
63310 SCRA 281, 289 (1999).
64Visayan Sawmill Company, Inc. v. Court of Appeals, 219
SCRA 378 (1993).
65Ibid.
66 Bachrach Motor Co. v. Millan, 61 Phil. 409 (1935); Manila
Trading and Supply
382 LAW ON SALES
The remedies cannot also be pursued simultaneously, as
when a complaint is fi led to exact fulfi llment of the obligation,
to seize the property purchased and to foreclose the mortgage
executed thereof.67
In Borbon II v. Servicewide Specialists, Inc.,68 the Court
discussed the alternative nature of the remedies provided
under
Article. 1484, thus:
The remedies under Article 1484 of the Civil Code
are not cumulative but alternative and exclusive x
x x.69 In an ordinary alternative obligation, a mere
choice categorically and unequivocally made and then
communicated by the person entitled to exercise the
option concludes the parties. The creditor may not
thereafter exercise any other option, unless the chosen
alternative proves to be ineffectual or unavailing due
to no fault on his part. This rule, in essence, is the
difference between alternative obligations, on the one
hand, and the alternative remedies, upon the other
hand, where in the latter case, the choice generally
becomes conclusive upon the exercise of the remedy.
For instance, in one of the remedies expressed in
Article 1484 of the Civil Code, it is only when there has
been a foreclosure of the chattel mortgage that the
vendee-mortgagor would be permitted to escape from
a defi ciency liability. Thus, if the case is one for specifi c
performance, even when this action is selected after
the vendee has refused to surrender the mortgaged
property to permit an extrajudicial foreclosure, the
property may still be levied on execution and an alias writ
may be issued if the proceeds thereof are insuffi cient to
satisfy the judgment credit. So, also, a mere demand
Co. v. Reyes, 72 Phil. 461 (1935); Pacifi c Commercial Co. v.
De la Rama, 72 Phil. 380
(1941) Manila Motors, Inc. v. Fernandez, 99 Phil. 782 (1956);
Radiowealth v. Lavin, 7
SCRA 804 (1963); Cruz v. Filipinas Investment and Finance
Corp., 23 SCRA 791 (1968);
Nonato v. Intermediate Appellate Court, 140 SCRA 255 (1985);
Delta Motor Sales Corp.
v. Niu Kim Duan, 213 SCRA 259 (1992); Borbon II v.
Servicewide Specialists, Inc., 258
SCRA 634 (1996).
67Luneta Motor Co. v. Dimagiba, 3 SCRA 884 (1961).
68258 SCRA 634 (1996).
69Ibid, at p. 639.
REMEDIES OF PARTIES 383
to surrender the object which is not heeded by the
mortgagor will not amount to a foreclosure, but the
repossession thereof by the vendor-mortgagee would
have the effect of foreclosure.70
b. Two Groups of Barring Effects of Remedies
Article 1484 of the Civil Code actually has two (2) levels of
barring effects: the fi rst level on the choice of remedies
(vertical);
and the second level, on the non-recovery of any unpaid
balance
when it comes to the remedies of rescission and foreclosure
(horizontal). There can be no mixing of the effects of the
remedies
provided in Article 1484.
In Tajanlangit v. Southern Motors, Inc.,71 the Court held
that although the subject matter of the sale on installment was
mortgaged to secure the note issued to the seller for the
balance
of the purchase price, where the seller actually chose to collect
on the note and did not seek foreclosure of the mortgage, and
although the execution of the judgment resulted in the levy on
execution and eventual sale at public auction of the very
subject
matter of the sale, nevertheless, the barring effect of
foreclosure
cannot be applied, and the seller had every right to recover on
the unpaid balance of the purchase price from the buyer. The
Court held: “[The seller] had a right to select among the three
remedies established in Article 1484. In choosing to sue on the
note, it was not thereby limited to the proceeds of the sale, on
execution, of the mortgaged good.”72
In Southern Motors, Inc. v. Moscoso,73 a direct plea was made
to the Court insisting that “considering [the] history of the
[Recto]
law, the circumstances leading to its enactment, the evil that
the
law was intended to correct and the remedy afforded,” then
when
the seller who had in fact obtained a preliminary attachment of
the
subject property and sold it at public auction where he became
the only bidder, should not be allowed to recover the balance
70Ibid, at pp. 640-641.
71101 Phil. 606 (1957).
72Ibid, at p. 610.
732 SCRA 168 (1961).
384 LAW ON SALES
although his complaint may assert that the remedy of specifi c
performance was being sought. It was proposed to the Court
that “the matter should be looked at, not by the allegations in
the complaint, but by the very effect and result of the
procedural
steps taken and that [seller] tried to camoufl age its acts by fi
ling
a complaint purportedly to exact the fulfi llment of an obligation,
in an attempt to circumvent the provisions of Article 1484 of the
new Civil Code.”74
The Court refused the view that the substance of the
proceedings should be looked into and that the barring effects
of
foreclosure should also be applied to specifi c performance
when
the effect was the same as foreclosure. The Court held: “The
complaint is an ordinary civil action for recovery of the
remaining
unpaid balance due on the promissory note. The [seller] had
not adopted the procedure or methods outlined by Sec. 14 of
the Chattel Mortgage Law but those prescribed for ordinary
civil
actions, under the Rules of Court.”75 The Court found nothing
unlawful or irregular in seller’s act of attaching the mortgaged
subject matter of the sale itself, since a mortgage creditor may
recover judgment on the mortgage debt and cause an
execution
on the mortgaged property and may cause an attachment to
be issued and levied on such property, upon beginning his civil
action.
In his concurring opinion, Justice J.B.L. Reyes wrote that the
argument of the buyer “ignores a substantial difference
between
the effect of foregoing the chattel mortgage and attaching the
mortgaged chattel. The variance lies in the ability of the debtor
to
retain possession of the property attached by giving a
counterbond
and thereby discharging the attachment. This remedy the
debtor
does not have in the event of foreclosure.”76
The rule that in installment sales, if the action instituted is for
specifi c performance and the mortgaged property is
subsequently
attached and sold, the sale does not amount to a foreclosure
74Ibid, at pp. 170-171.
75Ibid, at p. 171.
76Ibid, at p. 172.
REMEDIES OF PARTIES 385
of the mortgage, has been upheld in subsequent decisions and
seems now well-established.77
3. Remedy of Specifi c Performance
The general rule is that when the seller has chosen specifi c
performance, he can no longer seek for rescission nor
foreclosure
of the chattel mortgage constituted on the thing sold. Although
it can be reasoned that even if the seller had chosen specifi c
performance, but the same has become impossible, he may
still
choose rescission pursuant to the provisions of Article 1191 of
the Civil Code, which provides that the non-defaulting party to
a reciprocal obligation “may also seek rescission, even after he
has chosen fulfi llment, if the latter should become impossible;”
nonetheless, it is diffi cult to see how the generic obligation of
the
buyer to pay can become impossible.
The seller is deemed to have chosen specifi c performance
to foreclose the resort to the other two remedies under Article
1484, when he fi les an action in court for recovery. Generally,
the
mere sending of demand letters to the buyer to pay the
balance
of the purchase price should not be considered as having
barred
the resort to either the remedies of rescission or foreclosure.
A judgment in an action for specifi c performance may be
executed on all personal and real properties of the buyer which
are not exempt from execution and which are suffi cient to
satisfy
such judgment, which would include the subject matter of the
sale
upon which payment is being sought. It has been held
therefore
that the mere fact that the seller secured possession of the
property subject of the sale by installments did not necessarily
mean that the seller would resort to a foreclosure of the
mortgage
constituted thereon.78
4. Remedy of Rescission
When a seller chooses the remedy of rescission, then
generally he is under obligation to make restitution, which
77Industrial Finance Corp. v. Ramirez, 77 SCRA 152 (1977).
78Palma v. Court of Appeals, 232 SCRA 714 (1994).
386 LAW ON SALES
would include the return of any amount of the purchase price
that the buyer may have paid. However, under the terms of
Article 1486 of the Civil Code which provides that “a stipulation
that the installments or rents paid shall not be returned to the
vendee or lessee shall be valid insofar as the same may not be
unconscionable under the circumstances.”
A stipulation for the forfeiture of the amounts paid by the
buyer even when the contract is rescinded is not really contrary
to
the “mutual restitution” characteristic of the remedy of
rescission,
since to a great extent it offers a means of restitution to the
obligee for the loss in value or deterioration of the thing subject
of the sale, or recompense for the lost opportunity suffered by
the
seller due to the default of the buyer. In fact, when the remedy
of
rescission is chosen, the rescinding party may recover
damages
against the party in default, since the recovery of damages is
supposed to make the rescinding party “whole” again to bring
him back to the position he was prior to the entering into the
contract. In the same manner, the stipulation of the forfeiture of
the amounts paid by the buyer in case of rescission can also
be
considered a measure of recompense for damages suffered by
the seller, and this is more the rationale since when the
forfeiture
becomes unconscionable the courts may reduce the effect of
such stipulation pursuant to the provision of Article 1486 which
provides that such stipulation is valid only “insofar as the same
may not be unconscionable under the circumstances.”
In Delta Motor Sales Corp. v. Niu Kim Duan,79 the Court
recognized that “[a] stipulation in a contract that the
installments
paid shall not be returned to the vendee is valid insofar as the
same may not be unconscionable under the circumstances,”80
The Court took pains to show that the treatment of the forfeited
installments as rental is more than justifi ed by the retention
and
use of the air-conditioning units by the buyer for 22 months.
However, even if the contract stipulates a forfeiture of the
amounts paid in the event of rescission, the Court in Bricktown
79213 SCRA 259 (1992).
80Ibid, at p. 263.
REMEDIES OF PARTIES 387
Development Corp. v. Amor Tierra Dev. Corp.,81 held that “we
have intimated that the relationship between parties in any
contract must always be characterized and punctuated by
good
faith and fair dealing.”82 The Court denied forfeiture of the
amounts
paid by taking into consideration that prior to rescission,
several
negotiations were held between the parties to try to amend the
relationship.
a. When Rescission Deemed Chosen
The general rule is that the seller is deemed to have chosen
the remedy of rescission, and can no longer avail of the other
two
(2) remedies under Article 1484, when he has clearly indicated
to
end the contract, such as when he sends a notice of
rescission,
or takes possession of the subject matter of the sale, or when
he
fi les an action for rescission.
Nonato v. Intermediate Appellate Court,83 held that when
the seller’s assignee, a fi nancing company, is able to take
back
possession of the motor vehicle with a condition that the
vehicle
could be redeemed by the buyers within fi fteen (15) days, then
such taking of possession is clearly with the intent to cancel
the
contract.
Earlier in Vda. de Quiambao v. Manila Motor Co., Inc.,84 the
Court held that only the taking back of the property coupled
with
“an unequivocal desire on its part to rescind its contract” or “for
the purpose of appropriating the same,” would suffi ce to bar
the
seller from proceeding with specifi c performance. In that case,
it
was not the seller who demanded a return of the subject motor
vehicle, but rather it was the buyer who voluntarily returned the
same to postpone the satisfaction of the enforcement of the
judgment debt obtained by the seller on the unpaid balance of
the purchase price.
81239 SCRA 126 (1994).
82Ibid.
83140 SCRA 255 (1985).
843 SCRA 445 (1961).
388 LAW ON SALES
b. Barring Effect of Rescission
The present version of the Recto Law under Article 1484
only provides for a barring on recovery of balance only when it
comes to the remedy of foreclosure. Delta Motor Sales Corp. v.
Niu Kim Duan,85 would assert that “[t]he third option or
remedy,
however, is subject to the limitation that the vendor cannot
recover any unpaid balance of the price and any agreement to
the
contrary is void,”86 implying no such barring effect to the
remedy
of rescission. Nevertheless, it recognized that when the seller
takes possession of the subject property in rescission of the
sale,
the seller is barred from recovering the balance of the price.
Although no barring effect is expressly provided for the
remedy of rescission under the present language of Article
1484 of the Civil Code, the same is implicit from the nature
of the remedy of rescission, which requires mutual restitution.
Under Article 1385 of the Civil Code, even a non-defaulting
party cannot seek rescission unless he is in a position to return
what he has received under the contract. In other words, when
the unpaid seller shall have chosen the remedy of rescission,
then generally he cannot seek further action on the purchase
price against the buyer, and in fact, where there is no
stipulation
to the contrary, the seller is even obliged to return any portion
of the purchase price he received from the buyer, although he
can recover damages.
In Nonato v. Intermediate Appellate Court,87 Justice Escolin,
in concluding that the seller’s assignee had chosen to rescind
the
sale by having taken possession of the subject motor vehicle,
held
that since it has “opted to cancel the sale of the vehicle, it is
thus
barred from exacting payment from the [buyers] of the balance
of the price of the vehicle which it had already repossessed. It
cannot have its cake and eat it too.”88
Perhaps it was a good judgment to limit the statutory barring
effect of Article 1484 to the remedy of foreclosure and allowed
85213 SCRA 259 (1992).
86Ibid, at p. 264.
87140 SCRA 255 (1985).
88Ibid, at p. 259.
REMEDIES OF PARTIES 389
the barring effect of rescission to continue to be governed by
the
very nature of the remedy itself. Otherwise, a lumping together
of
the remedies of rescission and foreclosure into the same
barring
effect clause, would have the unintended consequence that
any
and all interpretations and constructions of the Court having
to do with the barring effect of foreclosure would be tied to the
barring effect on the remedy of rescission when it comes to
sale
of movables on installments. The two remedies are not the
same,
and in fact seek to achieve opposite results: rescission seeks
to
cancel the contract and to waive further claim on the purchase
price; whereas, foreclosure seeks to pursue and realize on the
purchase price of the sale.
The complete barring effect on the remedy of foreclosure
under the Recto Law which covers any and all further claims
against the buyer, even for attorney’s fees and stipulated
damages and interests,89 is contrary to the nature of the
remedy of rescission that allows the non-defaulting party in a
reciprocal obligation to recover damages, precisely to make
him again whole resulting from the breach of the defaulting
party.
5. Foreclosure of Chattel Mortgage Constituted on
Subject Property
a. When Remedy of Foreclosure Deemed Chosen
When the seller shall have chosen to foreclose on the
mortgage constituted on the subject matter of the sale, he can
seek neither the remedies of specifi c performance nor
rescission.
Note however, that an action for foreclosure seeks the same
objective as an action for specifi c performance: to recover
from
the buyer the price agreed upon in the sale.
Although generally, the fi ling of an action for foreclosure
should be the point in which the seller is deemed to have
chosen
such remedy, and at which time he can no longer resort to
either
the remedies of specifi c performance or rescission, yet the
Court
89Macondray & Co. v. Eustaquio, 64 Phil. 446 (1937).
390 LAW ON SALES
held that the point by which the seller is deemed to have
chosen
the remedy of foreclosure is only at the time of actual sale of
the subject property at public auction pursuant to the
foreclosure
proceedings commenced.90
Universal Motors Corp. v. Sy Hian Tat,91 held that the fi ling
by the seller of an action for the issuance of a writ of replevin,
and the actual recovery of possession of the subject property,
would not amount to a foreclosure, even with the attachment of
the mortgage contract on the complaint itself, since no actual
foreclosure pursuant to the relevant provisions of the Rules of
Court have been pursued. The Court held that “the mere fact
that
[the seller] has secured possession of the truck in question
does
not necessarily mean that it will foreclose its mortgage. Indeed,
there is no showing at all that [the seller] is causing the sale
thereof at public auction or is even preparing to do so. It is
quite
possible that [the seller] wanted merely to be sure that the
truck
is not lost or rendered valueless, preparatory to having it levied
upon under a writ of attachment.”92
Industrial Finance Corp. v. Ramirez,93 held that even with
the fi ling of an action denominated as “replevin with damages”
where the allegations of the complaint sought the repossession
of the movable to allow extrajudicial foreclosure and sale of the
same, and in the alternative should the movable not be
recovered
sought for the recovery of the unpaid balance of the price, the
fi ling of such complaint does not amount to having chosen the
remedy of foreclosure.
b. Barring Effect of Foreclosure
It is the foreclosure and actual sale at public action of the
mortgaged chattel that shall bar further recovery by the seller
of any balance on the purchaser’s outstanding obligation not
satisfi ed by the sale; prior to that point in time, the seller has
90Manila Trading & Supply Co. v. Reyes, 62 Phil. 461 (1935);
Manila Motor Co., Inc.
v. Fernandez, 99 Phil. 782 (1956).
9128 SCRA 161 (1969).
92Ibid, at p. 166.
9377 SCRA 152 (1977).
REMEDIES OF PARTIES 391
every right to receive payments on the unpaid balance of the
price from the buyer.94
In Northern Motors, Inc. v. Sapinoso,95 although the seller
had already fi led an action for foreclosure, if prior to the actual
sale of the subject property at public auction, the seller had
received further payments from the buyer, the seller was not
obliged to refund said payments after foreclosure to the buyer.
The Court held that “If the mortgage creditor, before the actual
foreclosure sale, is not precluded from recovering the unpaid
balance of the price although he has fi led an action of replevin
for
the purpose of extrajudicial foreclosure, or if a mortgage
creditor
who has elected to foreclose but who subsequently desist from
proceeding with the auction sale, without gaining any
advantage
or benefi t, and without causing any disadvantage or harm to
the vendee-mortgagor, is not barred from suing on the unpaid
account ... there is no reason why a mortgage creditor should
be barred from accepting, before a foreclosure sale, payments
made by the buyer.”96
c. Barring Effect on Other Securities Given
for Payment of Price
In Cruz v. Filipinas Investment & Finance Corp.,97 where the
seller had already foreclosed on the chattel mortgage
constituted
on the subject property of the sale, it sought to recover the
defi ciency judgment by foreclosing on the real estate
mortgage
constituted by third-party mortgagors, on the ground that
Article
1484 prohibited further action “against the purchaser” only.
In holding that the seller could no longer proceed to
foreclose on the real estate mortgage pursuant to the barring
effect provided under Article 1484 of the Civil Code, the Court
held that “[T]o sustain [seller’s] argument is to overlook the fact
that if the guarantor should be compelled to pay the balance
94Manila Motor Co., v. Millan, 61 Phil. 409 (1935); Manila
Trading & Supply Co. v.
Reyes, 62 Phil. 461 (1935).
9533 SCRA 356 (1970).
96Ibid, at pp. 361-362.
9723 SCRA 791 (1968).
392 LAW ON SALES
of the purchase price, the guarantor will in turn be entitled to
recover what she has paid from the debtor vendee (Art. 2066,
Civil Code); so that ultimately, it will be the buyer who will be
made to bear the payment of the balance of the price, despite
the
earlier foreclosure of the chattel mortgage given by him. Thus,
the protection given by Article 1484 would be indirectly
subverted,
and public policy overturned.”98
Cruz also held that the further “action” being barred under
Article 1484 is not limited to judicial proceedings, but should
include extrajudicial proceedings by virtue of which the seller
may be enabled to exact recovery of the supposed unsatisfi ed
balance of the purchase price from the purchaser or his privy.
Pascual v. Universal Motors Corp.,99 reiterated the Cruz
doctrine as it denied the position taken by the seller that
Article 1484 withholds from the seller the right to recover any
defi ciency from the purchaser after the foreclosure of the
chattel
mortgage and not a recourse to the additional security put up
by a third party to guarantee the purchaser’s performance of
his
obligation.
Ridad v. Filipinas Investment and Finance Corp.,100 held that
if under the Cruz doctrine a seller is prohibited from having a
recourse against the additional security put up by a third party
insofar as how the burden would ultimately fall on the buyer
himself is concerned, there is no ground why such seller
should
not likewise be precluded from further extrajudicially
foreclosing
the additional security put up by the buyer himself.
Previous classroom discussions of Cruz have always lead
to the issue of what would be the effect if instead of proceeding
fi rst on the foreclosure of the chattel mortgage constituted on
the subject matter of the sale, the seller should fi rst proceed to
foreclose on the real estate mortgage constituted by a third-
party
mortgagor, and should there be defi ciency judgment, only then
should the seller proceed to foreclose on the chattel mortgage.
98Ibid, at p. 797.
9961 SCRA 121 (1974).
100120 SCRA 246 (1983).
REMEDIES OF PARTIES 393
One school of thought held that since it is the actual
foreclosure and sale at public auction of the subject matter of
the sale that creates the barring effect, then by simply
reversing
the process followed in Cruz, the seller would be able to effect
the same result sought to be avoided in Cruz. The other school
of thought posited that if we were to take the rationale given in
Cruz, then it would be easy to say that one cannot escape by
indirection the matter prohibited by law. Nevertheless, if indeed
the reverse process is pursued, where the seller fi rst
forecloses
on the third-party real estate mortgage, when does the barring
effect actually come in?
If the barring effect comes in after foreclosure on the real
estate mortgage, that would not be in accordance with the
language of Article 1484 and the jurisprudential
pronouncements
of the Court itself which held that it is the actual sale at public
action when the barring effect becomes effective.
On the other hand, the barring effect comes by the fact that
the seller seeks to foreclose the real estate mortgage, then it
would be certainly unfair to the seller who at that point has not
even
taken any action to recover any amount of the purchase price.
In
addition, such a position would render void and ineffective any
real estate mortgage constituted to secure the payment of the
purchase price, in addition to the chattel mortgage constituted
thereon, since by barring the initial foreclosure thereof, it would
be like saying only the foreclosure of the chattel mortgage can
be
availed of by the seller.
The issue was fi nally addressed, albeit by obiter, in Borbon
II v. Servicewide Specialists, Inc.,101 where it held that when
the
assignee forecloses on the chattel mortgage, there can be no
further recovery of the defi ciency, and the seller-mortgagee is
deemed to have renounced any right thereto. A contrario, the
Court held that in the event the seller-mortgagee fi rst seeks
the enforcement of the additional mortgages, guarantees or
other security arrangement, he must then be held to have lost
by waiver or non-choice his lien on the chattel mortgage of the
101258 SCRA 634 (1996).
394 LAW ON SALES
personal property sold by and mortgaged back to him,
although,
similar to an action for specifi c performance, he may still levy
on
it. The implication is that the remedy of foreclosing the chattel
mortgage is no longer available, but the barring effect as to
prevent recovery of defi ciency judgment does not come into
play since the Court confi rmed that the seller “may still levy on
it.”102
d. Extent of Barring Effect
Under the original version of the Recto Law, it explicitly stated
that “if the vendor has chosen to foreclose the mortgage he
shall
have no further action against the purchaser for the recovery of
any unpaid balance owing by the same, any agreement to the
contrary shall be null and void.” The extent of the barring effect
of
foreclosure was then all-encompassing and did not limit itself
to
the balance of the purchase price.
Therefore, in Macondray & Co., Inc. v. Eustaquio,103 the
Court held that the words “any unpaid balance” should be
interpreted as having reference to the defi ciency judgment to
which the mortgagee may be entitled where, after the
mortgaged
chattel is sold at public auction, the proceeds obtained
therefrom
are insuffi cient to cover the full amount of the secured
obligation
which in the case at bar as shown by the note and by the
mortgage deed, include interest on the principal, attorney’s
fees,
expenses of collection, and the costs. “Were it the intention of
the Legislature to limit its meaning to the unpaid balance of the
principal, it would have so stated.”104
If we were to follow the line in Eustaquio that if it were the
intention of Legislature to limit the barring effect to the unpaid
balance of the price “it would have so stated,” then it follows
that
in enacting the present Civil Code, and adopting the present
version of Article 1484 which limits the right of recovery to “any
unpaid balance of the price,” then clearly the Legislature has
“so
stated” and therefore the barring effect of the present version
102Ibid, at p. 640.
10364 Phil. 446 (1937).
104Ibid, at p. 453.
REMEDIES OF PARTIES 395
of the Recto Law is only on the purchase price, and cannot
cover stipulations in the contract for damages, interests and
attorney’s fees. Nevertheless, current jurisprudence upholds
the full barring effect on recovery even of the present language
of Article 1484.
e. Perverse Buyer-Mortgagor
By way of exception to the complete barring effect on the
remedy of foreclosure, Filipinas Investment & Finance Corp. v.
Ridad,105 held that when a defaulting buyer-mortgagor
refuses
to surrender the chattel to the seller to allow the latter to be
able
to proceed with foreclosure, then the seller, even after actual
foreclosure, should be allowed to recover expenses and
attorney’s
fees incurred in trying to obtain possession of the chattel. The
Court held —
Where the mortgagor plainly refuses to deliver the
chattel subject of the mortgage upon his failure to pay
two or more installments, or if he conceals the chattel to
place it beyond the reach of the mortgagee, what then is
the mortgagee expected to do? It is part of conventional
wisdom and the rule of law that no man can take the
law into his own hands; so it is not to be supposed that
the Legislature intended that the mortgagee should
wrest or seize the chattel forcibly from the control and
possession of the mortgagor, even to the extent of
using violence which is unwarranted in law. Since the
mortgagee would enforce his rights through the means
and within the limits delineated by law, the next step in
such situations being the fi ling of an action for replevin
to the end that he may recover immediate possession
of the chattel and, thereafter, enforce his rights in
accordance with the contractual relationship between
him and the mortgagor as embodied in their agreement,
then it logically follows as a matter of common sense,
that the necessary expenses incurred in the prosecution
by the mortgagee of the action for replevin so that he
can regain possession of the chattel, should be borne
by the mortgagor. Recoverable expenses would, in our
10530 SCRA 564 (1969).
396 LAW ON SALES
view, include expenses properly incurred in effecting
seizure of the chattel and reasonable attorney’s fees in
prosecuting the action for replevin.106
The transaction in Ridad was entered into in 1964, and the
decision itself promulgated in 1969, when the current version
of
Article 1484 was effective and which limited the barring effect
only to “any unpaid balance of the price.” And yet the Court in
Ridad applied without reservation the 1937 Eustaquio doctrine
completely barring any recovery by the seller against the buyer
after the former has foreclosed on the chattel subject of the
sale.
We may safely presume therefore, that in spite of the limiting
language of the present Article 1484, the Eustaquio doctrine
still
applies.
Agustin v. Court of Appeals,107 held that where the mortgagor
plainly refuses to deliver the chattel subject of the mortgage
upon his failure to pay two or more installments, or if he
conceals
the chattel to place it beyond the reach of the mortgagee, the
necessary expenses incurred in the prosecution by the
mortgagee
of the action for replevin so that he can regain possession of
the
chattel should be borned by the mortgagor.
In Borbon II v. Servicewide Specialist, Inc., the Court held:
A mere demand to surrender the object which
is not heeded by the mortgagor will not amount to
a foreclosure, but the repossession thereof by the
vendor-mortgagee would have the effect of foreclosure.
Hence, where the mortgagor unjustifi ably refused to
surrender the chattel subject of the mortgage upon
failure of two or more installments, or if he concealed
the chattel to place it beyond the reach of the
mortgagee, that thereby constrained the latter to seek
court relief, the expenses incurred for the prosecution
of the case, such as attorney’s fees, could rightly be
awarded. Furthermore, the interests of justice dictate
that the issue on liquidated damages and attorney’s
fees must be considered and resolved, as long as they
106Ibid, at pp. 572-573; emphasis supplied.
107271 SCRA 457 (1997).
REMEDIES OF PARTIES 397
bear relevance and close relation to those specifi cally
raised, notwithstanding failure to specifi cally raise
them.108
E. LEASE WITH OPTION TO PURCHASE
Under Article 1485 Civil Code, the provisions of Article 1484
are expressly made applicable to “contracts purporting to be
leases of personal property with option to buy, when the lessor
has deprived the lessee of the possession or enjoyment of the
thing.” Article 1486 provides that “a stipulation that the rents
paid
shall not be returned to the lessee shall be valid insofar as the
same may not be unconscionable under the circumstances.”
The Court has recognized that sellers who do not wish
to enter into conditional contracts of sale have often resorted
to lease with options to purchase, but that nevertheless the
underlying contract would not prevent the transfer of ownership
of the subject matter to the buyer-lessee upon fulfi llment of the
condition of the full payment of the “rents,”109 thus:
Sellers desirous of making conditional sales of
their goods, but who do not wish openly to make a
bargain in that form, for one reason or another, have
frequently resorted to the device of making contracts
in the form of leases either with options to the buyer to
purchase for a small consideration at the end of term,
provided the so-called rent has been duly paid, or with
stipulations that if the rent throughout the term is paid,
title shall thereupon vest in the lessee. The so-called
rent must necessarily be regarded as payment of the
price in installments since the due payment of the
agreed amount results, by the terms of the bargain, in
the transfer of title to the lessee.110
Elisco Tool Manufacturing Corp. v. Court of Appeals,111
recognized that “[t]his Court has long been aware of the
practice
108258 SCRA 634 (1996).
109Vda. De Jose v. Barrueco, 67 Phil. 191 (1939).
110Ibid, at p. 195.
111307 SCRA 731 (1999).
398 LAW ON SALES
of vendors of personal property of denominating a sale on
installment as one of lease to prevent the ownership of the
object
of the sale from passing to the vendee until and unless the
price
is fully paid.”112
The provision of the Recto Law may be to apply to lease
arrangements over moveables which do not expressly provide
for an option on the part of the lessee to purchase. In PCI
Leasing and Finance, Inc. v. Giraffe-X Creative Imaging,
Inc.,113
although the Financing Lease Agreement entered into did not
provide an option to purchase in favor of the lessee,
nonetheless,
the demand made by the lessor which “fashioned its claim in
the alternative: payment of the full amount of the
58,248,657.47,
representing the unpaid balance, for the entire 36-month lease
period or the surrender of the fi nanced asset and pain of legal
action,114 was interpreted to reveal the real agreement that
the
lessee had the option to purchase the property leased, thus —
The demand could only be that the [lessee] need
not return the equipment if it paid the 58,248,657.47
outstanding balance, ineluctably suggest that the
[lessee] can keep possession of the equipment if it
exercise its option to acquire the same by paying
the unpaid balance of the purchase price. Stated
otherwise, if the [lessee] was not minded to exercise
its option of acquiring the equipment by returning them,
then it need not pay the outstanding balance. This is
the logical import of the letter: that the transaction in
this case is a lease only. The so-called monthly rentals
are in truth monthly amortization of the price of the
leased offi ce equipment.115
a. What Is the Barring Effect on Such Contracts?
The issue that arises when it comes to purported contracts
of lease with option to purchase is whether the taking back of
112Ibid, at p. 741. Also, PCI Leasing and Finance, Inc. v.
Giraffe-X Creative Imaging,
Inc., 527 SCRA 405 (2007).
113527 SCRA 405 (2007).
114Ibid, at p. 421.
115Ibid, at pp. 422-423.
REMEDIES OF PARTIES 399
possession or enjoyment of the property leased as treated by
Article 1485 carries the concept of rescission or foreclosure.
The
distinction is critical, because if the taking back of possession
or
enjoyment of the leased movable is treated as a rescission,
then
the barring effect of rescission is applicable, which means that
even after taking back possession or enjoyment, and forfeiting
all rentals previously paid, the lessor-seller will be able to
collect
damages as may be warranted by the circumstances. On the
other hand, if the taking back of possession or enjoyment of
the leased movable is equivalent to foreclosure, then although
the seller-lessor may forfeit in his favor all rentals previously
paid, if such has been stipulated, he can no longer collect any
further amounts against the buyer-lessee, whether in the form
of
damages, attorney’s fees, or even unpaid but accrued rentals,
and not even the expenses incurred in repairing the movable.
In the early case of Manila Gas Corp. v. Calupita,116 the
Court considered that the only remedies of the seller-lessor
would be specifi c performance and rescission. In that case, it
was held that when a purported lease contract of personal
property is determined to be a conditional sale, and it has been
shown that the buyer-lessee has not complied with his
obligation
to pay the “rentals” due under the contract, the seller-lessor
may
elect between compliance with or rescission of the obligation,
with indemnity for damages and interest in either case. Thus,
the
barring effect would be equivalent to that of rescission.
In the 1938 case of H.E. Heacock Company v. Buntal
Manufacturing Co.,117 the Court treated the return of the
sewing
machine subject of the contract of lease with option to
purchase,
as an act of rescission, and for which the seller-lessor could
no longer obtain from the buyer-lessee a reimbursement of the
unpaid rentals. In that case, the fi xing of the price of the
machine
in the contract of lease was considered as a factor in
considering
the contract as of sale payable on installments because the fi
xing
of a fi xed purchase price is not the usual feature of a lease.
11666 Phil. 747 (1938).
11766 Phil. 245 (1938).
400 LAW ON SALES
The rulings in both Manila Gas Corporation and H.E.
Heacock Company do not provide us with any useful guide in
resolving the issue posed because they were both decided
when
the Recto Law was not yet a feature included in the pertinent
Civil Code provision, and indeed the only remedy available to
the seller-lessor was either specifi c performance or rescission.
Consequently, the barring effect of “foreclosure” was not a
matter
that the Court had to face when the decisions were rendered.
U.S. Commercial Co. v. Halili,118 decided on the proper
coverage of then Article 1454-A (now Article 1484) of the Civil
Code when it came to purported lease contracts of personal
property with option to purchase. In that case, the seller-lessor
had leased eight army vehicles under the stipulation that the
value
of the vehicles was divided into twelve equal parts to be made
as monthly and by the end of the period, the vehicles would be
owned by the buyer-lessee. The contract also provided waiver
of
the benefi ts of Article 1454-A of the Civil Code. When the
lessee
defaulted in the payment of the rentals, upon demand of the
seller-lessor, the buyer-lessee voluntarily returned the vehicles,
but refused to pay the rentals in arrears. When the action was
brought by the seller-lessor to recover on the rentals, the Court
held that the waiver of the provisions of Art. 1454-A was void
because said article expressly provided that any waiver of its
benefi t would be void. The Court also ruled that with the
recovery
of the possession of all the vehicles, the seller-lessor was
without
further remedy to recover the accrued rentals thereon, thus:
Being leases of personal property with option to
purchase as contemplated in the above-article, the
contracts in question are subject to the provision that
when the lessor in such case “has chosen to deprive
the lessee of the enjoyment of such personal property,”
“he shall have no further action” against the lessee “for
the recovery of any unpaid balance” owing by the latter,
“any agreement to the contrary being null and void.”119
11893 Phil. 271 (1953).
119Ibid, at p. 274.
REMEDIES OF PARTIES 401
Note that in its ruling in Halili, the Court uses the language
of then Article 1454-A which refers to the effects of foreclosure.
The case of Filinvest Credit Corp. v. Court of Appeals,120
provides us with a more auspicious setting to resolve the
issue because it was decided based on the current versions of
Articles 1484 and 1485, and there was even an underlying real
estate mortgage constituted on the real property of the
buyerlessee.
In that case the buyers had inspected and tested a rock
crusher and thereafter sought to have the purchase fi nanced
by Filipinas Credit Corporation, which agreed to fi nance the
purchase only if the machinery be purchased in the name of
the
fi nance company, but to be leased back with option to
purchase
to the buyers; and that the buyers would execute a real estate
mortgage in favor of the fi nance company to secure the fi
nanced
amount.
When the buyers had received delivery of the machinery,
and they found that it did not have the features they desired,
they stopped paying the installment obligations. The fi nance
company began the process of extra-judicially foreclosing on
the
real estate mortgage. The buyers then commenced an action
to
enjoin the foreclosure, to rescind the contract of lease with
option
to purchase, and to annul the real estate mortgage. The fi
nance
company interposed that it merely fi nanced the purchase and
therefore any defect on the machinery should be addressed to
the real and original seller.
The Court held that in any event, the fi nance company
obtained ownership of the rock crusher, that is why it was able
to enter into a contract of lease with option to purchase with
the buyer. “The nomenclature of the agreement cannot change
its true essence, i.e., a sale on installments. It is basic that a
contract is what the law defi nes it and what the parties intend
it
to be, not what it is called by the parties. It is apparent here
that
the intent of the parties to the subject contract is for the so-
called
rentals to be the installment payments. Upon completion of the
payments, then the rock crusher, subject matter of the
contract,
120178 SCRA 188 (1989).
402 LAW ON SALES
would become the property of the [buyers-lessees]. This form
of
agreement has been criticized as a lease only in name.”121
The Court explained the rationale of Article 1485 of the Civil
Code:
Indubitably, the device — contract of lease with
option to buy — is at times resorted to as a means
to circumvent Article 1484, particularly paragraph (3)
thereof. Through the set-up, the vendor, by retaining
ownership over the property in the guise of being the
lessor, retains, likewise, the right to repossess the
same, without going through the process of foreclosure,
in the event the vendee-lessee defaults in the payment
of the installments. There arises therefore no need to
constitute a chattel mortgage over the movable sold.
More importantly, the vendor, after repossessing the
property and, in effect, cancelling the contract of sale,
gets to keep all the installments-cum-rentals already
paid.122
The reasoning of the Court as afore-quoted would clearly
imply that the rationale behind the Recto Law found in Article
1484 is meant to cover purported lease of personal property
with option to purchase and are considered a circumvention of
the prohibition under Article 1484 in order to obviate the need
to
constitute a chattel mortgage over the movable sold.
However, no defi nite ruling on the nature barring effect
under Article 1485 was issued, the Court holding therein that
the
buyers-lessees have defaulted on their contract with the fi
nance
company, and therefore dismissed the complaint of the
buyerslessees.
A reading of the ratiocination in both Halili and Filinvest
Credit Corp. would give the impression that in the case of
purported contracts of lease with option to buy, the taking back
of possession or enjoyment of the leased movable by the
sellerlessor
would amount to both a foreclosure that bars all other
121Ibid, at pp. 193-194.
122Ibid, at p. 195.
REMEDIES OF PARTIES 403
actions of whatever nature, and not rescission that would still
authorize the seller the right to recover damages to make him
whole.
In Elisco Tool Manufacturing Corp. v. Court of Appeals,123
the Court held that under a purported contract of lease with
option
to purchase which is covered under Articles 1484 and 1485,
the condition that the lessor has deprived the lessee of
possession
or enjoyment of the thing for the purpose of applying Article
1485 which would be fulfi lled by the fi ling by the lessor of a
complaint
for replevin to recover possession of movable property and
its enforcement by the sheriff, and barred all action to recover
any amount from the lessee. However, the Court also held that
if
the main purpose for seeking recovery of the personal property
under a writ of replevin was merely to ensure enforcement of
the remedy of specifi c performance under Article 1484(1),
there
would be no barring effect by reason of the enforcement of the
writ. Therefore, not every deprivation of possession would
result
in producing the barring effect under Article 1485 of the Civil
Code.
Lately, in PCI Leasing and Finance, Inc. v. Giraffe-X Creative
Imaging, Inc.,124 the Court held that when the lessor in a
lease
with option to purchase, in choosing, through replevin, to
deprive
the lessee of possession of the leased equipment, waived its
right
to bring an action to recover unpaid rentals, since the remedies
provided for in Article 1484 are alternative, not cumulative —
the
exercise of one bar the exercise of the others.
By and large, it seems to be the thinking of the Court that
a sale of movables on installment, when structured as a lease
with option to purchase is equivalent to a security arrangement
whereby the subject movables are mortgaged by the buyer
to the seller. Consequently, when the purported lessor takes
possession of the subject movable, the same is treated legally
as a foreclosure and the barring effect applicable to foreclosure
remedy, not rescission, is given application.
123307 SCRA 731 (1999).
124527 SCRA 405 (2007).
404 LAW ON SALES
REMEDIES IN CASES OF IMMOVABLES
A. REMEDIES OF SELLER
1. Anticipatory Breach
Under Article 1591 of the Civil Code, if the seller has
reasonable grounds to fear the loss of the immovable property
sold and its price, he may immediately sue for the rescission of
the sale.
Should such ground not exist, the provisions of Article 1191
of the Civil Code on rescission shall be observed, which means
that upon substantial breach by the buyer for failure to comply
with his obligation to pay the price when due, the seller may
sue
for rescission of the sale.
2. Failure of Buyer to Pay Price
a. Rescission under Article 1592
The failure of the buyer to pay the price in full within a fi xed
period does not, by itself, bar the transfer of the ownership or
possession, much less dissolve the sale.125 On failure of the
buyer
to pay the price, the seller has the option under Article 1592 of
the
Civil Code to rescind the sale upon judicial or notarial
demand.126
Under Article 1592 of the Civil Code, 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 buyer 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 who
notarial act.
Although Article 1592 also provides that “[a]fter the demand
[of the seller], the court may not grant [the buyer] a new term,”
nevertheless in cases of residential immovables, the Court has
tended to interpret Article 1592 liberally in favor of the buyer to
125Ocampo v. Court of Appeals, 233 SCRA 551 (1994).
126Ibid.
REMEDIES OF PARTIES 405
give him every opportunity to comply with his obligation and
proceed to take the subject immovable.
b. Contracts to Sell Not Covered by Article 1592
In J.M. Tuason & Co., Inc. v. Javier,127 despite the rescission
clause provided for in the contract to sell a residential lot in a
subdivision project, the Court refused to rule on the proper
application of Article 1592 to the case, nor to allow either a
rescission or cancellation on the part of the seller in spite of
clear
default on the part of the buyer holding:
Plaintiff maintains that this provision governs
contracts of sale, not contracts to sell, such as the one
entered into by the parties in this case. Regardless,
however, of the propriety of applying said Art. 1592
thereto, We fi nd that plaintiff herein has not been
denied substantial justice, for, according to Art. 1234
of said Code: “If the obligation has been substantially
performed in good faith, the obligor may recover as
though there has been a strict and complete fulfi llment,
less damages suffered by the obligee.” ... accordingly,
the trial court sentenced the defendant to pay all such
installments, interests, fees and costs. Thus, plaintiff
will thereby recover everything due thereto, pursuant to
its contract with the defendant, including such damages
as the former may have suffered in consequence of the
latter’s default. Under these circumstances, We feel
that, in the interest of justice and equity, the decision
appeal from may be upheld upon the authority of Art.
1234 of the Civil Code.128
In Luzon Brokerage v. Maritime Bldg.,129 the Court held
that if Article 1592 is applicable to a sale contract, the fi ling of
a The
crossclaim in court may be constituted as a judicial demand for
rescission that satisfi es the requirement of said article. The
Court
also held that in any event Article 1592 of the Civil Code has
no application to a contract to sell; the said article applies only
12731 SCRA 829 (1970).
128Ibid, at pp. 832-833.
12943 SCRA 93 (1972).
406 LAW ON SALES
to ordinary sale transferring ownership simultaneously with the
delivery of the real property sold, but not to one in which the
seller
retained ownership of the immovable object of the sale, merely
undertaking to convey it provided the buyer strictly complied
with
the terms of the contract.
c. Resort to Equitable Resolutions
In Legarda Hermanos v. Saldana,130 the contract between
the parties covering the purchase of two residential lots clearly
provided that in case of default on the part of the buyer, all
amounts paid in accordance with the agreement together with
the improvements on the premises shall be considered as
rents
and as payment for damages suffered by reason of such
breach.
Nevertheless, the Court held that the buyer of the two small
residential lots on installment contracts on a ten-year basis
has faithfully paid for eight continuous years on the principal
alone already more than the value of one lot, besides the
larger
stipulated interests on both lots, was entitled to the
conveyance
of one fully paid lot of his choice. In upholding such ruling, the
Court held that “the judgment is fair and just and in accordance
with law and equity.”131
B. REMEDIES OF BUYER
1. Suspension of Payment
Under Article 1590 of the Civil Code, should the buyer be
disturbed in the possession or ownership of the thing acquired,
or should he have reasonable grounds to fear such
disturbance,
by a vindicatory action or a foreclosure of mortgage, the buyer
may suspend the payment of the price until the seller has
caused
the disturbance or danger to cease, unless the seller gives a
security for the return of the price in a proper case, or it has
been stipulated that, notwithstanding any such contingency,
the
buyer shall be bound to make the payment. Again, a mere act
of
trespass shall not authorize the suspension of the payment of
the price.
13055 SCRA 324 (1974).
131Ibid, at p. 325.
REMEDIES OF PARTIES 407
2. In Case of Subdivision or Condominium Projects
Sections 23 and 24 of Pres. Decree 957, provide that no
installment payments made by the buyer in a subdivision or
condominium project for the lot or unit he contracts 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.
sections also grant to the buyer the option to be reimbursed
the
total amount paid.
In Casa Filipinas Realty Corp. v. Offi ce of the President,132
the Court held that Pres. Decree 957 “was issued in the wake
of numerous reports that many real estate subdivision owners,
developers, operators and/or sellers ‘have reneged on their
representations and obligations to provide and maintain
properly
subdivision roads, drainage, sewerage, water systems, lighting
systems and other basic requirements’ for the health and
safety of
home and lot buyers. It was designed to stem the tide of
‘fraudulent
manipulations perpetrated by unscrupulous subdivision and
condominium sellers free from liens and encumbrances.’”133
Relucio v. Brillante-Garfi n,134 held that the decree vests
upon the buyer the option to demand reimbursement of the
total
amount paid, or to wait for further development of the
subdivision
or condominium project; and when the latter opts for the latter
alternative by waiting for the proper development of the site, he
may not be ousted from the subdivision.135
Lim v. De los Santos,136 and Consing v. Court of Appeals,137
recognized the right of a buyer in a subdivision land to compel
the
seller to complete the roads and other facilities of the
subdivision,
132241 SCRA 165 (1995).
133Ibid, at p. 173.
134187 SCRA 405 (1990).
135See also Antipolo Realty Corp. v. National Housing
Authority, 153 SCRA 399
(1987).
1368 SCRA 798 (1963).
137177 SCRA 14 (1989).
408 LAW ON SALES
even when nothing to that effect is stipulated in the sale: “A
seller’s duty is to deliver the thing sold in a condition suitable
for
its enjoyment by the buyer for the purposes contemplated ...
and
a proper access to a residence is essential to its
enjoyment.”138
The seller cannot shift to the buyer the burden of providing for
an access to and from the subdivision, and when the seller has
so defaulted in such obligation, the buyer “should be entitled to
a with, it is obvious that the law — as an instrument of
proportionate reduction in her purchase price of the two
lots.”139
In Gold Loop Properties, Inc. v. Court of Appeals,140 it was
held that a buyer of a condominium unit is justifi ed in
suspending
payment of his monthly amortization where the seller fails to
give a
copy of the Contract to Sell despite repeated demands
therefore.
The buyer is entitled to a copy of the deed, otherwise, he
would
not be informed of the rights and obligations under the
contract.
Yet, in Cho Chien v. Sta Lucia Realty & Dev., Inc.,141 it was
held that nothing in P.D. 957 provides for the nullifi cation of a
contract to sell in the event that the seller, at the time the
contract
was entered into did not posses a certifi cate of registration
and
a license to sell.
a. Notice Required under Section 23 of P.D. 957
Section 23 of Pres. Decree 957 does not require that a
notice be given fi rst by the buyer to the seller before a demand
for refund can be made as the notice and demand can be
made
in the same letter or communication.142
b. Retroactive Application of P.D. 957
In Eugenio v. Drilon,143 the Court held that the failure to
develop a subdivision constitute legal justifi cation for the
nonpayment
of amortization by the buyer on installment under the
land purchase agreements entered into prior to the enactment
138Lim v. Delos Santos, supra, at p. 802.
139Consing v. Court of Appeals, supra, at p. 24.
140350 SCRA 371 (2001).
141513 SCRA 570 (2007).
142Casa Filipinas Realty Corp. v. Offi ce of the President, 241
SCRA 165 (1995).
143252 SCRA 106 (1996).
REMEDIES OF PARTIES 409
of Pres. Decree 957: “P.D. 957 did not expressly provide for
retroactivity in its entirety, but such can be plainly inferred from
the unmistakable intent of the law. The intent of the law, as
culled from its preamble and from the situation, circumstances
and conditions it sought to remedy, must be enforced.144 x x x
It
goes without saying that, as an instrument of social justice, the
law must favor the weak and the disadvantaged, including, in
this instance, small lot buyers and aspiring homeowners. P.D.
957 was enacted with no other end in view than to provide a
protective mantle over helpless citizens who may fall prey to
the
manipulations and machinations of ‘unscrupulous subdivisions
and condominium sellers.”145
In Philippine National Bank v. Offi ce of the President,146 the
Court held that a buyer of a property at a foreclosure sale may
not dispossess prior purchasers on installments of individuals
lots therein, nor compel them to pay again for the lots which
they
previously brought from the defaulting mortgagor-subdivision
developer, based on the provisions of Pres. Decree 957 which
may even be applied retroactively, thus:
While P.D. 957 did not expressly provide for
retroactivity in its entirety, yet the same can be plainly
inferred from the unmistakable intent of the law to
protect innocent lot buyers from scheming subdivision
developers. As between small lot buyers and the
gigantic fi nancial institution which the developers deal
social justice — must favor the weak. ...147
xxx.
“We cannot over emphasize the fact that the BANK
cannot barefacedly argue that simply because the
title or titles offered as security were clean of any
encumbrance or lien, that it was thereby relieved
of taking any other step to verify the over-reaching
144Ibid, at p. 110.
145Ibid, at p. 111.
146252 SCRA 5 (1996). See also Union Bank of the
Philippines v. Housing and
Land Use Regulatory Board, 210 SCRA 558 (1992).
147Ibid, at p. 10.
410 LAW ON SALES
implications should the subdivision be auctioned on
foreclosure. The BANK could not have closed it eyes
that it was dealing over a subdivision where there
were already houses constructed. Did it not enter the
mind of the responsible offi cers of the BANK that there
may even be subdivision residents who have almost
completed their installment payments?”148
3. Right to Grace Period Stipulated
When a grace period is provided for in the contract of sale,
it should be construed as a right, not an obligation of the
debtor,
and when unconditionally conferred, the grace period is
effective
without further need of demand either calling for the payment
of
the obligation or for honoring the right.149
C. MACEDA LAW: SALES OF REAL ESTATE ON
INSTALLMENTS
Republic Act 6552, entitled the “Realty Installment Buyer
Protection Act” (also the “Maceda Law”), provides for certain
protection to particular buyers of real estate payable on
installments. The law declares as “public policy to protect
buyers
of real estate on installment payments against onerous and
oppressive conditions.150
In Luzon Brokerage v. Maritime Bldg.,151 the Court viewed
the enactment of the Maceda Law as a confi rmation of its
jurisprudential
rulings that recognizes the seller’s right of cancellation
of sale on installments of industrial and commercial properties
with full retention of previous payments. The Court held:
... The enactment on September 14, 1972 by
Congress of Republic Act No. 6552 entitled “An Act
to Provide Protection to Buyer of Real Estate on
Installment Payments,” which inter alia compels the
seller of real estate on installments (but excluding
148Ibid, at p.15.
149Bricktown Dev. Corp. v. Amor Tierra Dev. Corp., 239
SCRA 126 (1995).
150Sec. 2, Rep. Act No. 6552; OIympia Housing Inc. v.
Panasiatic Travel Corp., 395
SCRA 298 (2003).
15186 SCRA 305 (1978).
REMEDIES OF PARTIES 411
industrial lots, commercial buildings among others
from the Act’s coverage) to grant one month grace
period for every one year of installments made before
the contract to sell may be cancelled for non-payment
of the installments due forecloses any overturning of
this Court’s long-established jurisprudence. Republic
Act 6552 recognizes in conditional sales of all kinds
of real estate (industrial and commercial as well as
residential) the non-applicability of Article 1592 (1504)
Civil Code to such contracts to sell on installments
and the right of the seller to cancel the contract (in
accordance with the established doctrine of this Court)
upon non-payment “which is simply an event that
prevents the obligation of the vendor to convey title
from acquiring binding force.” (Manuel vs. Rodriguez,
109 Phil. 1, 10, per Reyes, J.B.L.). The Act in modifying
the terms of the application of Art. 1592 Civil Code
reaffi rms the vendor’s right to cancel unqualifi edly in
the case of industrial lots and commercial buildings
(as in the case at bar) and requires a grace period in
other cases, particularly residential lots, with a refund
of certain percentages of payments made on account
of the cancelled contract.152
This view was reiterated by Rillo v. Court of Appeals,153 which
held that in the case of a contract to sell land, the applicable
law is
the Maceda Law which recognizes in conditional sales of all
kinds
of real estate, whether industrial, commercial, or 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 seller to convey title from acquiring binding
force.154
Active Realty & Dev. Corp. v. Daroya,155 gave an
allencompassing
diatribe on the purpose and objectives of the
Maceda Law, thus: “The Realty Installment Buyer Protection
Act,”
152Ibid, at pp. 327-328.
153274 SCRA 461 (1997).
154Reiterated in Cordero v. F.S. Management & Dev. Corp.,
506 SCRA 451 (2006);
Pagtulungan v. Dela Cruz Vda. De Manzano, 533 SCRA 242
(2008).
155382 SCRA 152 (2002).
412 LAW ON SALES
or more popularly known as the Maceda Law, [its] declared
policy
is to protect buyers of real estate on installment basis against
onerous and oppressive condition. The law seeks to address
the
acute housing shortage problem in our country that has
prompted
thousands of middle and lower class buyers of houses, lots
and
condominium units to enter into all sorts of contracts with
private
housing developers involving installment schemes. Lot buyers,
mostly low income earners eager to acquire a lot upon which to
build their homes, readily affi x their signatures on these
contracts,
without an opportunity to question the onerous provisions
therein
as the contract is offered to them on a “take it or leave it” basis.
Most of these contracts of adhesion, drawn exclusively by the
developers, entrap innocent buyers by requiring cash deposits
for reservation agreements which often time include, in fi ne
print,
onerous default clauses where all the installment payment
made
will be forfeited to pay any installment due even if the buyers
had
made payments for several years. Real estate developers thus
enjoy an unnecessary advantage over lot buyers who they
often
exploit with iniquitous results. They get to forfeit all the
installment
payments of defaulting buyers and resell the same lot to
another
buyer with the same exigent conditions. To help especially the
low
income lot buyers, the legislature enacted R.A. 6552
delineating
the rights and remedies of lot buyers and protect them from
one
sided and pernicious contract stipulations.”156
a. “Role” of Maceda Law
It would seem that more than just providing for a substantial
and procedural setting for the rescission and cancellation of
contracts covered therein, the Maceda Law in whole is relied
upon and used by the courts, including the Supreme Court, as
“a
policy statement” of the State in protecting the interests of
buyers
of residential real estate on installments. Thus, in the
McLaughlin
v. Court of Appeals157 the Court took the Law “as an
expression
of public policy to protect buyers of real estate on installments
against onerous and oppressive conditions (Sec. 2 of Republic
156Ibid, at p. 158.
157144 SCRA 693 (1986).
REMEDIES OF PARTIES 413
Act No. 6552).”158 If that be the case, then the value of the
Maceda
Law goes beyond its language and can be interpreted to
further a
policy that may not even be found within its language.
Take for example the case of Palay, Inc. v. Clave,159 which
involved a contract to sell entered into by the parties in 1965
(the
Maceda Law took effect in 1972), which 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 one month, without need of notice and with
forfeiture
of all installments paid. Although the Maceda Law was
inapplicable,
the Court took into consideration Section 3 of the Law
which provided for the indispensability of notice of cancellation
to
the buyer and declared “it is a matter of public policy to protect
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.”160
b. Retroactive Application of Law
In Siska Dev. Corp. v. Offi ce of the President,161 the Court
extended the formal requirements of rescission under the
Maceda
Law to apply even to contracts entered into prior to the
effectivity
of the Maceda Law.
However, in one case, the Court refused to apply retroactively
the terms of the Maceda Law, thus: “As with Presidential
Decrees
Nos. 9576 and 1344, Republic Act No. 6552 does not
expressly
provide for its retroactive application and, therefore, it could not
have encompass(ed) the cancellation of the contracts to sell
pursuant to an automatic cancellation clause which had
become
operational long before the approval of the law.”162
158Ibid, at p. 700.
15912 SCRA 639 (1983).
160Ibid, at pp. 66-67.
161231 SCRA 674 (1994).
162People’s Industrial and Commercial Corp. v. Court of
Appeals, 281 SCRA 206
(1997).
414 LAW ON SALES
1. Transactions Covered
It should be noted that the Maceda Law does not cover all
sales of realty on installments, but primarily residential real
estate.
But unlike the Recto Law on movables, the Maceda Law
covers not
only “sales” on installments of real estate, but also “fi nancing”
of
such acquisitions. It expressly covers “all transactions or
contracts
involving the sale or fi nancing of real estate on installment
payments, including residential condominium apartments.”163
Unlike Article 1592 of the Civil Code, which the Court has
interpreted not to be applicable to contracts to sell, the Maceda
Law clearly includes in its provisions both contracts of sale and
contracts to sell. This conclusion is clear from the use by the
Law of the twin terms of “notice of cancellation or the demand
for
rescission” of the contract.
On the other hand, we would adopt for the Maceda Law the
same defi nition of “sale by installments” held by Levy
Hermanos,
Inc. for sales of movables by installments, which should involve
at least two (2) installments to be paid in the future at the time
of
the perfection of the contract. The rationale of Levy Hermanos,
Inc. as to sales of movables, equally should apply to sale of
real
estate in installments, thus: “the law is aimed at those sales
where
the price is payable in several installments, for, generally, it is
in these cases that partial payments consists in relatively small
amounts, constituting thus a great temptation for improvident
purchasers to buy beyond their means.”164
In any event, the public policy behind the Maceda Law is
so all-encompassing with respect to residential real estate and
condominium units, that it would cover even sales or fi nancing
transactions which may not fi t into the “installment” concept.
a. Maceda Law Covers Contracts to Sell
The employment of the term “cancellation” under the Maceda
Law clearly indicates that it covers contracts to sell residential
real estate on installments.
163Sec. 3, Rep. Act 6552.
164Ibid, at p. 54.
REMEDIES OF PARTIES 415
For that reason, the author fi nds quite surprising the ruling in
Mortel v. KASSCO, Inc.,165 which held that when a contract to
sell
is constituted over a condominium unit subject to the
suspensive
condition which is the acquisition of individual condominium
certifi cates of title (CCT) over the building which seller
undertook
to accomplish within one year from the date of execution, then
the
non-fulfi llment of the condition extinguished the contract
meant
that “the contract to sell did not take into effect. Consequently,
the [Maceda Law] invoked by [buyer] ... fi nd no application to
the
present case because said laws presuppose the existence of a
valid and effective contract to sell a condominium.”166
The reasoning in Mortel is defective for the following
reasons: First, there is no doubt under the provisions of the
Maceda Law that it covers both contracts of sale and contracts
to sell on installments condominium units, and the coverage is
based on the nature of the contract and subject matter at the
time
of perfection, and not what happens at consummation.
Secondly,
precisely when the conditions attaching to the contract to sell
(such as non-payment of the installments) is not fulfi lled which
have the effect of “extinguishing” the contract, the Maceda Law
governs the effective remedies and consequences available to
the parties (i.e., notarial rescission and return of cash
surrender
value, etc.). Therefore, the non-fulfi llment of condition under a
contract to sell does not take it out of the Maceda Law.
2. Transactions Excluded from Coverage
The following transactions, although involving sales on
installments, are expressly excluded from the coverage of the
Law, thus:
(a) Sales covering industrial lots;
(b) Sales covering commercial buildings (and
commercial lots by implication); and
(c) Sales to tenants under agrarian reform laws.
165348 SCRA 391 (2000).
166Ibid, at p. 398.
416 LAW ON SALES
The enumeration of the transactions not covered by the
Maceda Law is not exclusive, since other transactions over
immovables, although not within the enumerated exclusions
are
to be considered as excluded because they are not within the
clearly expressed coverage. An example would be the sale on
installment of commercial or offi ce condominium units.
In one case, the Court held that the Maceda Law normally
applies to the sale or fi nancing of real estate on installments
payments, and excludes “industrial lots, commercial buildings,
and sales to tenants under R.A. No. 3844. It has no application
to a sale on installment of a commercial building.167
a. Maceda Law Cannot Be Invoked by Highest
Bidder in Foreclosure Proceedings
The Court has ruled that the terms of the Maceda Law cannot
be invoked by a person or entity who acquired the subdivision
lots
in a foreclosure sale on the mortgaged constituted thereon by
the
developer. Such person or entity, although binding itself to the
terms of the contracts of sale, is not the real party to the
original
installment sales, and more importantly, does not have any
rights
promoted under the Maceda Law which contains provisions for
the benefi ts of real estate buyers on installments.168
3. Rights Granted
The rights granted to a buyer of real estate in a sale or
fi nancing covered by the Maceda Law, depend on whether or
not
he has paid less than or more than two (2) years of
installments.
a. At Least Two (2) Years Installments Paid
Where the buyer has paid at least two (2) years of installments,
he is entitled to the following rights in case he defaults in
the payments of succeeding installments:
(a) To pay, without additional interest, the unpaid
installments due within the total grace period
167Odyssey Park, Inc. v. Court of Appeals, 280 SCRA 253
(1997).
168Lagandao v. Court of Appeals, 290 SCRA 330 (1998).
REMEDIES OF PARTIES 417
earned by him, which is fi xed at the rate of
one (1) month grace period for every one
(1) year of installment payments;
(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 50% of the total payments made and, after
fi ve (5) years of installments, an additional
5% every year but not to exceed 90% of the
total payments made.
(1) Exercise of Grace Period
The right to make use of the grace period can be exercised
by the buyer only once in every fi ve (5) years of the life of the
contract and its extensions, if any.
Down payments, deposits or options on the contract shall
be included in the computation of the total number of
installments
made.
(2) How Cancellation of Contract Can Be Effected
The actual cancellation of the contract shall take place after
thirty (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.
In one case,169 it was held that a decision rendered is an
ejectment case operated as the required notice of cancellation,
pursuant to Section 3(b) of the Maceda Law. In an earlier
case,170
the Court dispensed with the additional formality of a demand
on
the seller’s part for recission superfl uous since the action fi
lled
was one for “annulment of contract, which is kindred concept of
rescission by notarial act.”
In another case,171 it was held that the letter notice given
by the seller’s counsel which merely made formal demand
upon
169Layug v. Intermediate Appellate Court, 167 SCRA 627
(1988).
170Leaño v. Court of Appeals, 369 SCRA 36 (2001).
171Pagtulungan v. Dela Cruz Vda. De Manzano, 533 SCRA
242 (2008).
418 LAW ON SALES
the buyer to vacate the premises in question did not serve the
same requirement as that of notice of cancellation or demand
for recission “by a notarial act” as required under the Maceda
Law. It was also reitereated that a case for unlawful detainer
does not exempt the seller from complying with the notarial act
required under the law.
b. Less Than Two (2) Years Installments Paid
In case where less than two (2) years of installments were
paid, the buyer shall still be entitled to a grace period of sixty
(60)
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 (30) days from receipt by the buyer of the notice of
cancellation or the demand for rescission of the contract by a
notarial act.
c. Compensation Rule on Amortization Payments
The Court’s ruling in Leaño v. Court of Appeals,172 recognizes
the principle of compensation to be applicable to remedies
under
the Maceda Law.
Leaño held that although the contract to sell allows
a total of 10 years within which to pay the purchase price,
nevertheless, the buyer cannot ignore the stipulation on the
monthly amortization payments required under the contract by
claiming that the ten-year period within which to pay has not
elapsed. When the buyer fails to pay any monthly amortization,
he is under Article 1169 already in default and liable for the
damages stipulated in the contract. Nevertheless, the Court
agreed with the trial court that the default committed by the
buyer in respect of the obligation could be compensated by
the interest and surcharges imposed upon the buyer under the
contract.
172369 SCRA 36 (2001).
REMEDIES OF PARTIES 419
d. Formula to Compute the Installment Mode
In Jestra Dev. and Mgt. Corp. v. Pacifi co,173 the Court clarifi
ed that the proper formula to apply in determining how many
installments have been made is to include any payment made
as downpayment or reservation fee as part of the installments
made, and then to divide them by the stipulated mode of
payment,
i.e., whether it is monthly, quarterly, semi-annual or annual.
Thus, in Jestra, where the Contract to Sell provided for a
total Purchase Price of 52,500,000 with 30% thereof or
5750,000
was to a downpayment payable in six montly installments, and
the balance of 51,750,000 was to be paid in 10 years of equal
payment of 534,983 the Court used the stipulated divisor of
5121,666.66 for the period covering the downpayment, and
refused to apply the monthly amortization of 534,983 as the
divisor to all payments made by the buyer. The result was quite
substantial in that the Court found the buyer to have paid less
than 2 years of installments, and therefore not entitled to
receive
any cash surrender value to complete the effect of the notice of
cancellation of the Contract to Sell.
4. Interpretation of Grace Period and
Mode of Cancellation
Although a formal reading of the provisions of the Maceda
Law would imply that once a buyer fails to avail of the grace
period granted to him, then either rescission or cancellation of
the contract becomes a matter of right on the part of the seller,
provided he complies with the procedure provided for in the
Law,
the Court has interpreted it otherwise.
In McLaughlin v. Court of Appeals,174 the parties had
entered into a contract of conditional sale of real property, with
the stipulated purchase price payable on installments. When
the
buyer defaulted in the payment of the installments, a complaint
was fi led by the seller in court for the rescission of the deed of
conditional sale, which suit was eventually compromised, with
173513 SCRA 413 (2007).
174144 SCRA 693 (1986).
420 LAW ON SALES
the buyer agreeing on a scheduled payment of the balance of
the purchase price. The compromise agreement approved by
the
court also provided that in case of failure of the buyer to
comply
with the terms of payment, all payments previously made shall
be
forfeited in favor of the seller as liquidated damages.
When the buyer failed to pay on the dates provided for in the
compromise agreement, the seller subsequently refused to
accept
further payment and eventually fi led a motion with the trial
court for
the issuance of a writ of execution to declare the rescission of
the
contract of conditional sale, and the forfeiture of all payments
of the
buyer previously made. The buyer fi led a motion for
reconsideration
on the order granting the writ of execution, and tendered with
the
trial court the balance due to the seller on the sale.
On appeal, the Court upheld the right of the buyer to prevent
the rescission of the contract by his tender of the balance of
the
purchase price, based on the provisions of the Maceda Law.
Although there was no doubt that the buyer was no longer
entitled to the benefi ts of the grace period under the Maceda
Law, the court held that if the motion for the issuance of the
writ
of execution is considered as the notice of cancellation under
the Law, the seller could cancel the contract only thirty (30)
days
after the receipt of such notice, and then concluded that since
the
tender of payment of the balance of the purchase price was
made
within said thirty (30) day period, this prevented the
cancellation
of the contract of conditional sale.
McLaughlin ruling therefore clearly provides for two basic
doctrines applicable to the Maceda Law. First, although the
Law
seem to require rescission and cancellation to be both by
notarial
act, McLaughlin would hold notarial act as merely applicable
to rescission, whereas “notice of cancellation” need not be by
notarial act. Second, McLaughlin would hold that even after the
expiration of the grace period provided by the Law, the buyer
still
can prevent rescission or cancellation of the contract within the
30-day period when rescission or cancellation is to take effect.
In other words, McLaughlin would provide for two grace
periods: the fi rst grace period is the one provided for expressly
REMEDIES OF PARTIES 421
by the Law, which is a minimum of 60 days; and the other
would
be the period before rescission or cancellation actually takes
effect. Perhaps, the distinction between the two types of grace
period, is that in the statutory grace period, availment of the
right to update the installment payments is without interest
and penalties, even when these are stipulated in the contract;
whereas, in the period prior to the effectivity of the rescission
or
cancellation of the contract, the buyer would be liable for and
would have to include in his payments the stipulated interests
and penalties incurred.
The McLaughlin ruling would therefore encourage buyers
of real estate on installments covered by the Maceda Law not
to take advantage of the statutory grace period, because even
with its expiration, they have a jurisprudential grace period
which
allows them to prevent the rescission or cancellation of their
contracts even after they have received the demand for
rescission
or notice of cancellation, by paying-up the unpaid balance prior
to
the expiration of the 30-day period provided in the Maceda Law
for effectivity of the notice of rescission or cancellation.
In Leaño v. Court of Appeals,175 the Court held that in cases
falling under the Maceda Law, the issues as to rescission or
cancellation, breach of contract, tender and consignation must
all
give way to the explicit provisions of the Maceda Law that
grants
to the buyer a minimum 60-day grace period and the
requirement
that notarial notice of cancellation or rescission shall be
effective
only after 30-days from service thereof.176
Leaño affi rmed the principle that even when the requisite
notice of cancellation is given but the buyer has not been given
the cash surrender value of the payments made, these was still
no actual cancellation of the conditional sale, and the buyer
may
still reinstate the contract by updating the account. This is true
even when a decision has been rendered in an ejectment case
which would operate as the required notice of cancellation.
175369 SCRA 36, Pagtulungan v. Dela Cruz Vda. de
Manzano, 533 SCRA 242
(2008)(2001).
176Reiterated in Villadar v. Zaballa, 545 SCRA 325 (2008);
Pagtulungan v. Dela
Cruz Vda. de Manzano, 553 SCRA 292 (2008).
422 LAW ON SALES
The principle was reiterated in Active Realty & Dev. Corp.
v. Daroya,177 which held that the refund of the cash surrender
value is one of the mandatory twin requriements for a valid and
effective cancellation under the Maceda Law, and absence of
which would mean that the contract remains valid and
subsisting.
However, in that case, since the lot had already been sold to
an innocent second buyer, the seller was ordered to refund to
the fi rst buyer the actual market value of the lot sold with 12%
interest per annum or to deliver a substitute lot, at the option of
the fi rst buyer.
Olympia Housing v. Panasiatic Travel Corp.,178 held that
the Maceda law recognizes the right of the seller to cancel the
contract but any such cancellation must be done in conformity
with the requirements therein prescribed. The Court held that
In
addition to the notarial act of rescission, the seller is required to
refund to the buyer the cash surrender value of the payments
on the property; and that the actual cancellation of the contract
can only be deemed to take place upon the expiration of a 30-
day period following the receipt by the buyer of the notice of
cancellation or demand for rescission by a notarial act and the
full payment of the cash surrender value.
5. Other Rights Granted to Buyer
In addition, the Maceda Law provides for the following rights
to the buyer:
(a) To sell his rights or assign the same to
another person or to reinstate the contract
by updating the account during the grace
period and before actual cancellation of the
contract. The deed of sale assignment shall
be done by notarial act.179
(b) To pay in advance any installment or the
full unpaid balance of the purchase price
177382 SCRA 152 (2002).
178395 SCRA 298 (2003).
179Sec. 5, Rep. Act 6552.
REMEDIES OF PARTIES 423
any time without interest and to have such
full payment of the purchase price annotated
in the certifi cate of title covering the
property.180
Notice that the provisions of Section 6 of the Maceda Law
render nugatory all provisions in loan agreements covering the
fi nancing of residential real estate and condominium units
“pretermination
penalty clauses” whereby any payment ahead to
the scheduled amortization was met with a penalty clause to
compensate the bank or fi nancial institution for the inability of
such pre-payment to earn interest income on the loan.
6. Effect of Contrary Stipulations
Under Section 7 of the Maceda Law, any stipulation in any
contract entered into contrary to the provisions of the Law,
shall
be null and void.
7. Maceda Law Cannot Be Availed of by Developer
In Lagandaon v. Court of Appeals,181 the Court held that
the Maceda Law has no application to protect the developer
or one who succeeds the developer, since “the policy of that
law, as embodied in its title, is ‘to provide protection to buyers
of real estate on installment payments.’ As clearly specifi ed in
Section 3, the declared public policy espoused by Republic
Act No. 6552 is ‘to protect buyers of real estate on installment
payments against onerous and oppressive conditions.’”182
Therefore, one who buys the property from the developer and
who steps into the shoes of the seller under the Contract to
Sell cannot claim any right or protection under the Law. If the
Maceda Law has any relevance at all, it is to protect the buyer,
not the developer-seller or his successor-in-interest. The Court
further held that “Section 3(b) of the same law does not grant
petitioner [developer] any legal ground to cancel the contracts
180Sec. 6, Rep. Act 6552.
181290 SCRA 330 (1998).
182Ibid, at p. 345.
424 LAW ON SALES
to sell; rather, it prescribes the responsibility of the seller in
case
the ‘contract[s are] cancelled.’”183
CANCELLATION OF JUDICIAL SALE
Where a judicial sale is voided without fault of the purchaser,
the latter is entitled to reimbursement of the purchase money
paid by him. A judicial sale can only be set aside upon the
return
to the buyer of the purchase price with simple interest, together
with all sums paid out by him in improvements introduced on
the
property, taxes, and other expenses by him.184
—oOo—
183Ibid.
184Seven Brothers Shipping Corp. v. Court of Appeals, 246
SCRA 33 (1995).
425
CHAPTER 11
REMEDIES OF RESCISSION AND
CANCELLATION FOR SALES OF
IMMOVABLES:
425
CONTRACT OF SALE VERSUS CONTRACT
TO SELL
Previously, the differences between the remedy of rescission
as it pertained to contracts of sale, and the effects of
cancellation
or extinguishment due to non-fulfi llment of a suspensive
condition
in contracts to sell, seemed well-defi ned. With the passage of
the
Maceda Law which had lumped together both remedies of
rescission
and cancellation into a uniform procedural straight-jacket
when it comes to sale and fi nancing contracts involving
residential
real estates, even the Supreme Court has began to blur what
used
to be different remedies, and, in the process, has almost made
indistinguishable the substantive differences between a
contract
of sale and a contract to sell involving immovables.
In addition, the study of the remedies of rescission and
cancellation would also place in focus the issue of whether
contracts to sell are within the defi nition of “sale” under Article
1458 of the Civil Code.
REMEDY OF RESCISSION OR RESOLUTION
1. Remedy of “Rescission” Not Covered
This chapter does not cover the remedy of “rescission” when
it pertains to rescissible contracts defi ned under Articles 1381
et
seq. of the Civil Code, where economic damage or lesion is the
main basis for allowing the rescission of what otherwise is a
valid
426 LAW ON SALES
contract. Such remedy in rescissible contracts is subsidiary in
nature and cannot be instituted except when the party suffering
damage has no other legal means to obtain reparation for the
damage sustained.1 Such characterization has no application
to
the remedy of “rescission” under Article 1191 of the Civil Code,
which remedy is principal in nature and the legal premise of
which
is substantial breach of contract.
On the other hand, the principles that rescission of
rescissible contracts creates the 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,2 apply equally to
rescission covered by Article 1191.
The point being made is this: Before a party employs in legal
argument a principle of rescission to bolster his case, he has
to be sure which of the remedies of rescission he is invoking.
Justice J.B.L. Reyes had pointed out the distinctions between
the two types of rescissions in his concurring opinion in
Universal
Food Corp. v. Court of Appeals,3 thus —
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 obligation by the defendant. This
rescission is a principal action retaliatory in character,
it being unjust that a party be held bound to fulfi ll his
promises when the other violates his. As expressed in
the old Latin aphorism: “Non servanti fi dem, non est
fi des servanda.” Hence, the reparation of damages for
the breach is purely secondary.4
1Art. 1382, Civil Code.
2Art. 1385, Civil Code.
333 SCRA 22 (1970).
4Ibid, at pp. 22-23. Reiterated in Iringan v. Court of Appeals,
366 SCRA 41 (2001).
REMEDIES OF RESCISSION 427
AND CANCELLATION FOR IMMOVABLES
He also distinguished rescission under Article 1191 from
the remedy of rescission for rescissible contracts, thus: “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’ etre 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.”5
The eminent jurist explained the apparent confusion between
the two types of remedies: “It is probable that the petitioner’s
confusion arose from the defective technique of the new Code
that terms both instances as ‘rescission’ without distinctions
between them; unlike the previous Spanish Civil Code of 1889,
that differentiated ‘resolution’ for breach of stipulations from
‘rescission’ by reason of lesion or damage. But the
terminological
vagueness does not justify confusing one case with the other,
considering that patent difference in causes and results of
either
action.”6
In another case,7 the Court has held that the prescriptive
period applicable to rescission or resolution under Article 1191
and 1592 is found in Article 1144 which provides that the
action
upon a written contract should be brought within ten (10) years
from the rights of action accrue, and not the four (4) year
period
provided for rescissible contracts.8
a. When Principles of Rescission for Rescissible
Contract Applied to Resolution of Sale
On the basis of the clear distinctions between the two
remedies of rescission and resolution, the author takes
exceptions
5Ibid, at p. 23.
6Ibid, at p. 23. Difference between remedies of resolution and
rescission reiterated
in Ong v. Court of Appeals, 310 SCRA 1 (1999).
7Iringan v. Court of Appeals, 366 SCRA 41 (2001).
8Art. 1389, Civil Code.
428 LAW ON SALES
to the ruling in Suria v. Intermediate Appellate Court,9 which
involved a “Deed of Sale with Mortgage,” where the mortgage
was constituted to secure the payment of the purchase price.
The sellers sought to rescind the contract of sale (instead of
foreclosing) by reason of the failure of the buyer to pay the
balance of the purchase price secured by the mortgage
contract.
In ruling that the sellers could not avail of the remedy of
rescission under Article 1191, Suria held that since a contract
of sale obligates the seller to transfer the ownership of and to
deliver a determinate thing to the buyer, and the buyer in turn
is
obligated to pay a price certain in money or its equivalent, then
by the execution of the deed of mortgage, the buyer was
deemed
to have fulfi lled his end of the bargain: “The payments on an
installment basis secured by the execution of a mortgage took
the place of a cash payment. In other words, the relationship
between the parties is no longer one of buyer and seller
because
the contract of sale has been perfected and consummated. It
is already one of a mortgagor and a mortgagee.”10 The ruling,
although taking note of Justice J.B.L. Reyes’ reasoning in
Universal Food Corp., went on to conclude that the situation is
“different” and held that the remedy of rescission under Article
1384 of the Civil Code is merely subsidiary in the absence of
legal remedies available to the seller, such as foreclosure.
The reasoning fails to take into consideration that the
mortgage contract was merely a subsidiary contract, and
could not exist without principal contractual obligation (i.e., the
obligation to pay the price), which was part and parcel of the
contract of sale entered into between the parties. The
mortgage
contract therefore was only meant to secure, not to replace,
the
obligation of the buyer to pay the purchase price.
b. When Rescission Should Have Been Applied
The decision in Uy v. Court of Appeals,11 demonstrates an
instance when the remedy of rescission or resolution was not
9151 SCRA 661 (1987).
10Ibid, at p. 667.
11314 SCRA 69 (1999).
REMEDIES OF RESCISSION 429
AND CANCELLATION FOR IMMOVABLES
applied by the Court, when it seemed the more appropriate
solution to the issues raised.
In Uy, a contract of sale covered the purchase of eight (8)
residential lots, and it was determined that three (3) of the lots
delivered were subject to landslide and could not be used for
the
construction of residential building. The trial court held that the
rescission effected by the buyer was not the appropriate
remedy
since in such a case the seller had delivered and did not
commit
any breach of his obligation, and the buyer-NHA did not suffer
any injury by the performance thereof. The Court held —
The cancellation, therefore, was not a rescission
under Article 1191. Rather, the cancellation was based
on the negation of the cause arising from the realization
that the lands, which were the object of the sale, were
not suitable for housing.
Cause is the essential reason which moves the
contracting parties to enter into it. In other words,
the cause is the immediate, direct and proximate
reason which justifi es the creation of an obligation
through the will of the contracting parties. Cause,
which is the essential reason for the contract, should
be distinguished from motive, which is the particular
reason of a contracting party which does not affect the
other party. x x x.
Ordinarily, a party’s motive for entering into the
contract do not affect the contract. However, when the
motive predetermines the cause, the motive may be
regarded as the cause ... x x x.
Accordingly, we hold that the NHA was justifi ed
in canceling the contract. The realization of the
mistake as regards the quality of the land resulted in
the negation of the motive/cause thus rendering the
contract inexistent ... [under] Article 1318 of the Civil
Code [defi ning the essential requisite of contracts].12
Perhaps the better solution would have been to allow
rescission on the ground that it violated the warranty on the
12Ibid, at pp. 82-85.
430 LAW ON SALES
indicated use of the subject matter. The facts did indicate that
“NHA would not have entered into the contract were the lands
not suitable for housing. In other words, the quality of the land
was an implied condition for the NHA to enter into the
contract.”
Under Article 1545 of the Civil Code, where the obligation of
the
party to a contract of sale is subject to any condition which is
not performed, the other party may refuse to proceed with the
contract or he may waive performance of the condition; if the
other party promised that the condition should happen or be
performed, the other party may also treat the non-performance
of the condition as a breach of warranty, which would entitle
the
other party to rescind. Rescission may have also been justifi ed
for breach of warranty against hidden defects.
2. Remedy of “Rescission” Covered
The remedy of rescission covered by this chapter is that
referred to in Article 1191 of the Civil Code, thus:
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 fulfi llment
and the rescission of the obligation, with the payment of
damages in either case. He may also seek rescission,
even after he has chosen fulfi llment, if the latter should
become impossible.
The court shall decree the rescission claimed, unless
there be just cause authorizing the fi xing 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.
In the sales of immovables on installments, a specifi c
remedy of rescission is provided for under Article 1592 of the
Civil Code, thus —
ART. 1592. In the sale of immovable property, even
though it may have been stipulated that upon failure to
REMEDIES OF RESCISSION 431
AND CANCELLATION FOR IMMOVABLES
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.
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.”13
Two other laws have varied the power to rescind covered in
Article 1191 when it comes to immovables, namely, the
Maceda
Law and Section 23 of Pres. Decree No. 957, which have been
covered in more details in the previous chapter.
a. Nature of the Remedy of Rescission or Resolution
The Supreme Court has ruled in one case,14 that “to rescind”
is to declare a contract void at its inception and to put on end
to it
as though it never was; it is not merely to terminate the
contract
and release the parties from further obligations to each other,
but to abrogate it from the beginning and to restore the parties
to
their relative positions as if no contract had been made.
In another case,15 the Court held that the right of rescission
of a party to an obligation under Article 1191 is predicated on
a breach of faith by the other party that violates the reciprocity
between them.16 In yet another case,17 it held that the breach
contemplated in Article 1191 is the obligor’s failure to comply
with an obligation already extant, and does not cover the
failure
of a condition to render binding that obligation. Ironically, in
one
case,18 the Court characterized the failure of a party to comply
13Jacinto v. Kaparaz, 209 SCRA 246 (1992).
14Laforteza v. Machuca, 333 SCRA 643 (2000), citing
Ocampo v. Court of Appeals,
233 SCRA 551 (1994).
15Romero v. Court of Appeals, 250 SCRA 223 (1995).
16Uy v. Court of Appeals, 314 SCRA 69 (1999); Velarde v.
Court of Appeals, 361
SCRA 56 (2001).
17Odyssey Park, Inc. v. Court of Appeals, 280 SCRA 253, 260
(1997).
18Gil v. Court of Appeals, 411 SCRA 18 (2003).
432 LAW ON SALES
with his obligation in reciprocal contracts as the happening of
“a
resolutory condition for which the remedy is either rescission or
specifi c performance under Article 1191 of the New Civil
Code.” It
had been generally understood that the happening of a
resolutory
condition ipso facto extinguishes the contract without need of
the
exercise of any remedy of rescission.19
b. Rescission Must Be Based on Substantial Breach
The power to rescind under Article 1191 is based only on
substantial breach, pursuant to the principle laid down in Article
1234 which states that “[I]f the obligation has been
substantially
performed in good faith, the obligor may recover as though
there
has been a strict and complete fulfi llment, less damages
suffered
by the obligee.”
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 fi x 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
defi ned as a “conscious and intentional design to evade the
normal fulfi llment of existing obligations.”20
Luzon Brokerage Co., Inc. v. Maritime Building Co., Inc.,21
held that when the buyer in not paying the balance of the
purchase price had acted in bad faith, such buyer would not be
entitled to ask the courts to give it further time to make
payment
and thereby erase the default or breach that it had deliberately
incurred: “To do otherwise would be to sanction a deliberate
and
reiterated infringement of the contractual obligations incurred
... an attitude repugnant to the stability and obligatory force of
contracts.”22
19This ruling would perhaps fi nd basis under Article 1545
which provides that
“Where the ownership in the thing has not passed, the buyer
may treat the fulfi llment by
the seller of his obligation to deliver the same as described and
as warranted expressly
or by implication in the contract of sale as a condition of the
obligation of the buyer to
perform his promise to accept and pay for the thing.”
20Luzon Brokerage Co., Inc. v. Maritime Building Co., Inc., 43
SCRA 93 (1972).
2143 SCRA 93 (1972).
22Ibid, at p. 101.
REMEDIES OF RESCISSION 433
AND CANCELLATION FOR IMMOVABLES
c. Restitution as Consequence of Rescission
The last paragraph in Article 1191 cross-refers to Articles
1385 and 1388 which apply to rescissible contracts. Under
Article
1385, the employment of the remedy of rescission “creates
the obligation to return the things which were the object of the
contract, together with their fruits, and the price with its
interests;
consequently, it can be carried out only when he who demands
rescission can return whatever he may be obliged to
restore.”23
The same article also provides that rescission shall not 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 and that indemnity for damages may be demanded from
the
person causing the loss.24 On the other hand, under Article
1388,
whoever acquires in bad faith the things alienated in fraud of
creditors, shall indemnify the latter for damages suffered by
them
on account of the alienation, whenever it should be impossible
for him to return them.
Consequently, the primary consequence of an effective
exercise of the remedy of rescission or resolution would be
mutual restitution.
d. 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.
Early on in The Manila Racing Club v. The Manila Jockey
Club,25 the Court held that 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
23See also Supercars Management & Dev. Corp. v. Flores,
446 SCRA 34 (2004).
24“Under Article 1385 of the Civil Code, rescission creates the
obligation to return
the things which were the object of the contract but such
rescission can only be carried out
when the one who demands rescission can return whatever he
may be obliged to restore.
This principal has been applied to rescission of reciprocal
obligations under Article 1191
of the Civil Code.” Co v. Court of Appeals, 312 SCRA 528
(1999).
2569 Phil. 55 (1939).
434 LAW ON SALES
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.”26
Parenthetically, Article 1486 now provides that in the sale
of personal property on installments, “a stipulation that the
installments or rents paid shall not be returned to the vendee
or lessee shall be valid insofar as the same may not be
unconscionable under the circumstances.”
Thus, Pangilinan v. Court of Appeals,27 held: “The seller’s
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.”
Nevertheless, it should be noted that the Court may still allow,
as in its decision in Gomez v. Court of Appeals,28 such
forfeiture
even in the absence of a forfeiture clause, as a reasonable
compensation for the use of the subject matter of the contract.
e. Who May Demand Rescission
Since rescission is predicated on a breach of faith by the
other party that violates the reciprocity between them, Uy v.
Court
of Appeals,29 held that the power to rescind, therefore, is
given
only to the injured party.
In addition, Laforteza v. Machuca,30 held that when rescission
of a contract of sale is based on Article 1191, mutual restitution
is
required to bring back the parties to their original situation prior
to the inception of the contract; and that consequently,
rescission
can be carried out only when the one who demands rescission
can return whatever he may be obliged to restore.31
26Ibid, at p. 57.
27279 SCRA 590 (1997).
28340 SCRA 720 (2000).
29314 SCRA 69 (1999).
30333 SCRA 643 (2000).
31Ibid, citing Co v. Court of Appeals, 312 SCRA 528 (1999).
Also Supercars
Management & Dev. Corp. v. Flores, 446 SCRA 34 (2004).
REMEDIES OF RESCISSION 435
AND CANCELLATION FOR IMMOVABLES
f. Rescission Generally Judicial in Nature
In a true contract of sale, a provision granting the nondefaulting
party a right to rescind would be superfl uous because
such remedy is inherent in a contract of sale under Article
1191;
consequently, the specifi cation 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,32
in accordance with the general principle that “No man may,
even
one with a valid and lawful cause of action, take the law into
his
own hands and must resort to the aid of the courts to enforce
his
rights.”33
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 fi xing of the period,” has been
the
statutory basis by which the Court has held that the injured
party
himself cannot resolve the obligation,34 and requires confi
rmation
of such remedy by the courts.35 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.”36
g. When Extrajudicial Rescission Allowed
To the general principle that rescission must be exercised
judicially, the Court has recognized the validity and effectivity
of
an express stipulation by the parties to a reciprocal contract
that
rescission in case of default by one party, may be resorted to
by
the other party extrajudicially.
32Ocejo, 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).
33See Arts. 433 and 539, Civil Code.
34TOLENTINO, COMMENTARIES AND JURISPRUDENCE
ON THE CIVIL CODE OF THE PHILIPPINES,
Vol. IV, p. 171 (1973). Angeles v. Calasanz, 135 SCRA 323
(1985).
35Gaboya v. Cui, 38 SCRA 85 (1971); Luzon Brokerage Co.,
Inc. v. Maritime
Building Co., Inc., 43 SCRA 95 (1972).
36Luzon Brokerage Co., Inc. v. Maritime Building Co., Inc., 86
SCRA 305 (1978).
436 LAW ON SALES
Earlier, Froilan v. Pan Oriental Shipping Co.,37 held that
“there is nothing in the law that prohibits the parties from
entering
into an agreement that violation of the terms of the contract
would
cause cancellation thereof, even without court intervention.”38
Curiously enough though, the contract in Froilan did not
expressly
give to the mortgagee the right to cancel the agreement, and
the only relevant provision granted the mortgagee the power to
rescind the contract “as it may see fi t in case of breach of the
terms thereof by the mortgagor,” which ordinarily would still
mean
seeking remedy of rescission through court action.
Since Article 1191 makes available to the injured either of
the alternative remedies to rescind or to enforce fulfi llment of
the contract, with damages in either case, if the obligor does
not comply with what is incumbent upon him, then Pangilinan
v.
Court of Appeals,39 has held that —
... 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. ...40
In contrast, Iringan v. Court of Appeals,41 provides for the
legal consequences when there is no contractual clause
allowing
extrajudicial rescission. In that decision, the Court held that a
3712 SCRA 276 (1964).
38Ibid, at p. 286.
39279 SCRA 590 (1997).
40Ibid, at pp. 597-598. Reiterated in Gomez v. Court of
Appeals, 340 SCRA 720
(2000).
41366 SCRA 41 (2001).
REMEDIES OF RESCISSION 437
AND CANCELLATION FOR IMMOVABLES
stipulation in a sale allowing rescission under Article 1191 is
valid,
but it does not grant “automatic rescission,” since rescission
must
be invoked judicially, and the courts are granted power to deny
rescission should there be grounds which justify the allowance
of
a term for the performance of the obligation, thus —
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
party’s 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 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.42
The essence of the doctrine has been reiterated in Spouses
Benito v. Saquitan-Ruiz,43 where the Court held that a seller
cannot
unilaterally and extrajudicially rescind a sale where there is
no express stipulation authorizing it; and that unilateral
rescission
will not be judicially favored or allowed if the breach is not
substantial and fundamental to the fulfi llment of the
obligation.44
h. 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 specifi c performance. This principle is affi rmed
in the language of Article 1592 that does not allow automatic
42Ibid, at p. 48.
43394 SCRA 250 (2002).
44Reiterated in Heirs of Jesus M. Mascuñana v. Court of
Appeals, 461 SCRA 186
(2005).
438 LAW ON SALES
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 City of Cebu v. Heirs of Candido Rubi,45 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.
Co v. Court of Appeals,46 ruled that although the failure
of the buyer to pay the balance of the purchase price was
a breach of her obligation under Article 1191, nevertheless,
since the seller did not sue for either specifi c performance nor
rescission, then the seller would have no right, without any
express provision to that effect, to forfeit the payments already
made by the buyer.
On the other hand, rescission to resolve a contract of
sale should be distinguished from, and cannot be deemed
necessarily included in, an action for reconveyance fi led to
recover possession of the subject matter of the sale. Thus,
Olympia Housing v. Panasiatic Travel Corp.,47 held that in the
sale of real property, the seller is not precluded from going to
the courts to demand judicial rescission in lieu of a notarial act
of rescission; however, such action would be different from
an action for reconveyance of possession; and that although
judicial resolution of a contract would in turn give rise to mutual
restitution, it would not necessarily arise when the action fi led
was for reconveyance. In addition, the Court held that 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 fi xing of a period.48
45306 SCRA 408 (1999).
46312 SCRA 528 (1999).
47395 SCRA 298 (2003).
48Reiterated in Ramos v. Heruela, 473 SCRA 79 (2005).
REMEDIES OF RESCISSION 439
AND CANCELLATION FOR IMMOVABLES
CONTRACT OF SALE VERSUS CONTRACT TO SELL
Since this chapter will employ the differences between a
contract of sale and a contract to sell to evaluate the evolving
characterization of the remedies of rescission or resolution
and cancellation, it would be worthwhile to discuss briefl y what
clearly were the agreed differences between the two types of
sale contracts.
1. Importance of Proper Characterization
of Contract to Sell
It is the author’s position that both a contract of sale and a
contract to sell may be governed by the genus “sale” as defi
ned
by Article 1458 of the Civil Code, as a contract where “one of
the
contracting parties obligates himself to transfer the ownership
of
and to deliver a determinate thing, and the other to pay
therefor
a price certain in money or its equivalent;” especially when the
article also provides that “[a] contract of sale may be absolute
or conditional.” In addition, under Article 1479, a provision in
the
Title on Sale, it is expressly recognized that “[a] promise to buy
and sell a determinate thing for a price certain is reciprocally
demandable,” which obviously covers a contract to sell.
The importance of characterizing contracts to sell as species
of the genus “sale” under Article 1458 is to determine the set
of laws that govern such contracts, including the appropriate
remedies available to the contracting parties. Consequently, if
contracts to sell fall within the same genus as contracts of sale,
then the rules and principles applicable to contracts of sale
would
also apply to contracts to sell, except as modifi ed by the fact
that
contracts to sell are primarily subject to suspensive conditions,
and therefore must be governed by the doctrines pertaining to
conditional contracts. For example, in the application of the
rules
on double sales, it has been generally held that they have no
applications to contracts to sell.49
49Mendoza v. Kalaw, 42 Phil. 236 (1921); Lim v. Court of
Appeals, 162 SCRA 564
(1990); Cheng v. Genato, 300 SCRA 722 (1998); San Lorenzo
Dev. Corp. v. Court of
Appeals, 449 SCRA 99 (2005).
440 LAW ON SALES
It cannot be denied, however, that there is a class of
“contracts to sell” that do not fall within the genus sale as defi
ned
under Article 1458, when the underlying primary obligation is
not
an obligation “to give” (i.e., to transfer ownership and delivery
possession of the subject matter), but rather an obligation “to
do,” which constitutes essentially of an obligation “to enter into
a contract of sale.” Such contracts to sell can also fall within
the
defi nition of “mutual promise to buy and sale” under Article
1479
of the Civil Code.
As discussed hereunder, the Supreme Court itself has not
defi nitively decided on the proper classifi cation of contracts to
sell,
which has led to confl icting rulings on important issues related
to
such contracts, mainly on the appropriate remedies available
to
parties in cases of “breach.”
2. Recent Rulings that Consider Contracts to Sell
Not Covered by the Genus Sale
To jumpstart the discussions on the matter, it may be
appropriate to look at recent pronouncements of the Court that
indicate that it has not yet clearly pinned down the essence of
contracts to sell.
In Coronel v. Court of Appeals,50 the Court, through Justice
Melo, held that a contract to sell “may not be considered a
contract of sale because the fi rst essential element is lacking,”
which is consent or meeting of the minds, “that is, consent to
transfer ownership in exchange for the price,”51 thus —
... 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 fulfi ll his
50263 SCRA 15 (1996).
51Ibid, at p. 26.
REMEDIES OF RESCISSION 441
AND CANCELLATION FOR IMMOVABLES
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-fulfi llment
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 fulfi llment of the suspensive
condition which is the full payment of the purchase
price, the prospective seller’s 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...52
Coronel therefore defi ned 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 prospective buyer upon fulfi llment
of
the condition agreed upon, that is, full payment of the purchase
price.”53 Under such ruling, even upon the fulfi llment of the
suspensive condition (i.e., the full payment of the purchase
price), ownership will not automatically transfer to the buyer
although the property may have been previously delivered to
the buyer, since the prospective seller still has to convey title
to the prospective buyer by entering into a contract of sale.54
Accordingly, the happening of the suspensive condition does
not
give rise to an executory contract of sale subject to an action
for specifi c performance, since the obligation of the “seller” is
to
enter into a contract of sale, merely a personal obligation “to
do”
which cannot be the subject of an action for specifi c
performance.
Ironically, only a few days before the Coronel decision, the
Court in Philippine National Bank v. Court of Appeals,55 held
that —
52Ibid, at pp. 26-27; emphasis supplied.
53Ibid, at p. 27. Reiterated in Edrada v. Ramos, 468 SCRA
597 (2005).
54Ibid, at p. 28. Reiterated in Hulst v. PR Builders, Inc., 532
SCRA 74 (2007);
Castillo v. Reyes, 539 SCRA 193 (2007).
55262 SCRA 464 (1996).
442 LAW ON SALES
A contract to sell is akin to a conditional sale where
the effi cacy or obligatory force of the vendor’s 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. ...
If it were not full payment of the purchase price upon
which depends the passing of title from the vendor to
the vendee, it may be some other condition or conditions
that have been stipulated and must be fulfi lled before
the contract is converted from a contract to sell or
at the most an executory sale into an executed one.56
More telling is the ruling in David v. Tiongson,57 where the
Court, in spite of the fi nding that underlying agreement was a
contract to sell (i.e., brought about by the stipulation that the
deed of sale and corresponding title would be issued only after
full payment), held explicitly that there was a perfected
contract,
and granted the remedy of specifi c performance. To a great
extent, David denies the characterization under Coronel that
upon fulfi llment of the suspensive condition, there is no
contract
of sale upon which an action for specifi c performance may be
interposed.
In Gomez v. Court of Appeals,58 the Court clearly treated a
contract to sell as within the same genus as a contract of sale,
when it held that —
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 “Contract to Sell,”
where ownership or title is retained until the fulfi llment
of a positive suspensive condition normally the
payment of the purchase price in the manner agreed
upon. x x x.59
56Ibid, at pp. 477-478. Reiterated in Almocera v. Ong, 546
SCRA 164 (2008).
57313 SCRA 63 (1999).
58340 SCRA 720 (2000).
59Reiterated in Demafelis v. Court of Appeals, 538 SCRA 305
(2007); Villador, Jr.
v. Zaballa, 545 SCRA 325 (2008).
REMEDIES OF RESCISSION 443
AND CANCELLATION FOR IMMOVABLES
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. Contracts, in general,
are perfected by mere consent, which is manifested
by the meeting of the offer and the acceptance upon
the thing and the cause which are to constitute the
contract. The offer must be certain and the acceptance
absolute. x x x.60
Leaño v. Court of Appeals,61 held that in a contract to sell real
property on installments, the full payment of the purchase price
is
a positive condition, and that “[t]he transfer of ownership and
title
would occur after full payment of the price.”62 In Carrascoso,
Jr. v.
Court of Appeals,63 the Court held that if the suspensive
condition
is fulfi lled, the contract of sale is thereby perfected, such that if
there had already been previous delivery of the property
subject
of the sale to the buyer, ownership thereto automatically
transfers
to the buyer by operation of law, without any further at having
to
be performed by the seller.
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 contract’s effi cacy 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 fulfi llment 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.
60Ibid, at pp. 727-729,citing Galang v. Court of Appeals, 225
SCRA 37 (1993). Also
Villamaria, Jr. v. Court of Appeals, 487 SCRA 571 (2006).
61369 SCRA 36 (2001).
62Ibid, at p. 44.
63477 SCRA 666 (2005).
444 LAW ON SALES
3. Rulings Characterizing Contracts to Sell
a. Rationale for Parties Entering into Contracts to Sell
Coronel v. Court of Appeals,64 explains the rationale on why
parties would opt to enter into a contract to sell instead of a
contract
of sale, in that “a contract to sell ... is most commonly entered
into so as to protect the seller against a buyer who intends
to buy the property in installment by withholding ownership
over
the property until the buyer effects full payment therefor.”65
It should be noted, nonetheless, that even in a true contract
of sale or a conditional contract of sale, transfer of ownership
to the buyer may be expressly withheld even when delivery is
effected by the seller. Although the principle is that what the
seller
decides to do at consummation stage should not change the
essential characterization of the contract at the point of
perfection,
the Court has often employed the actuations of the parties
during
consummation to characterize what the contract essentially
was
at the point of perfection.
b. “On Where” the Suspensive Condition Is
Pinned Determines Nature of a Sale
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.
For example, Heirs of San Andres v. Rodriguez,66 held
that a sale, even when denominated as a “Deed of Conditional
Sale,” should still be construed to be an absolute sale where
the
contract is devoid of any proviso that title is reserved or the
right
to unilaterally rescind until or unless the price is paid. The
Court
held that the stipulation that the “payment of full consideration
based on a survey shall be due and payable in fi ve (5) years
from
64263 SCRA 15, 30 (1996).
65Ibid, at pp. 30-31. Reiterated in Cebu v. Heirs of Candido
Rubi, 306 SCRA 408
(1999).
66332 SCRA 769 (2000).
REMEDIES OF RESCISSION 445
AND CANCELLATION FOR IMMOVABLES
the execution of a formal deed of sale,” was not a condition
which
affected the effi cacy of the contract of sale; it merely provided
the
manner by which the full consideration is to be computed and
the
time when it is to be paid.
On the other hand, Gonzales v. Heirs of Thomas and
Paula Cruz,67 held that the provision in the contract that the
lessee-buyer shall be obliged to purchase the property only if
the lessor-seller is able to obtain separate title to the property
in
his name, was a conditional obligation to purchase the land
and
governed by Article 1181 of the Civil Code, which provides that
“In conditional obligations, the acquisition of rights, as well as
the
extinguishment or loss of those already acquired, shall depend
upon the happening of the event which constitutes the
condition.”
The Court held that the underlying contract was a contract to
sell,
and consequently “[t]he obligatory force of a conditional
obligation
is subordinated to the happening of a future and uncertain
event,
so that if that event does not take place, the parties would
stand
as if the conditional obligation had never existed.”68
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.
Thus, in Romero v. Court of Appeals,69 the Court held that
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
67314 SCRA 585, 597 (1999).
68Ibid, at p. 601, citing Rose Packing Company, Inc. v. Court
of Appeals, 167 SCRA
309 (1988) per Paras, J.; Gaite v. Fonacier, 2 SCRA 831
(1961).
69250 SCRA 223 (1995).
446 LAW ON SALES
a perfected contract of sale pertains in reality to the
compliance by
one party of an undertaking the fulfi llment 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 fulfi llment,
only
the condition is avoided leaving unaffected the obligation itself.
In Romero the parties entered into a “Deed of Conditional
Sale” with the provision that should the seller fail to eject the
squatters from the property within 60 days from the contract
date,
the downpayment shall be returned to the buyer. An ejectment
case was brought by seller, but judgment was rendered after
the
60-day period had lapsed. The seller then offered to return to
the
buyer the downpayment contending that there is no contract to
enforce with the non-fulfi llment of the condition imposed under
the contract.
The Court held that the seller could neither seek rescission
of the contract of sale, nor could he challenge the agreement
as
not being duly perfected contract. 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;70 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 the period of the payment of the
balance
of the purchase price. The seller’s 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.71
In Heirs of Pedro Escanlar v. Court of Appeals,72 where the
sale contract contained the stipulation “this Contract of Sale of
70Art. 1545, Civil Code.
71Reiterated in Lim v. Court of Appeals, 263 SCRA 569
(1996); Babasa v. Court of
Appeals, 309 SCRA 532 (1998); and Caoili v. Court of
Appeals, 314 SCRA 345 (1999).
72281 SCRA 176 (1997).
REMEDIES OF RESCISSION 447
AND CANCELLATION FOR IMMOVABLES
rights, interests and participations shall become effective only
upon the approval by the Honorable Court,” it was held that the
non-happening of the condition did not affect the validity of the
contract itself, thus —
There has arisen here a confusion in the concepts of
validity and the effi cacy of a contract. Under Art. 1318
of the Civil Code, the essential requisites of a contract
are: consent of the contracting parties; object certain
which is the subject matter of the contract and cause
of the obligation which is established. Absent one of
the above, no contract can arise. Conversely, where
all are present, the result is a valid contract. However,
some parties introduce various kinds of restrictions or
modalities, the lack of which will not, however, affect
the validity of the contract.
In the instant case, the Deed of Sale, complying
as it does with the essential requisites, is a valid one.
However, it did not bear the stamp of approval of the
court. This notwithstanding, the contract’s validity was
not affected. ... In other words, only the effectivity and
not the validity of the contract is affected.73
Heirs of Pedro Escanlar distinguishes between the
demandability or effi cacy of a sale from the requisites by
which it
is constituted as a valid contract; that a contract to sell
constitutes
a “valid contract,” but it may not be wholly demandable until the
suspensive condition upon which it based is fulfi lled. To a
great
extent, it denies the “lack of consent” characterization of
Coronel
for contracts to sell.
Coronel itself recognized the distinction between a contract
to sell and a conditional contract of sale along these lines, thus
— existence of such agreement as an integral component of a
A contract to sell ... may not even be considered
as a conditional contract of sale where the seller may
likewise reserve title to the property subject of the sale
until the fulfi llment of a suspensive condition, because
in a conditional contract of sale, the fi rst element of
73Ibid, at p. 190.
448 LAW ON SALES
consent is present, although it is conditioned upon the
happening of a contingent event which may or may not
occur. If the suspensive condition is not fulfi lled, the
perfection of the contract of sale is completely abated.
... However, if the suspensive condition is fulfi lled, the
contract of sale is thereby perfected, such that if there
had already been previous delivery of the property
subject of the sale to the buyer, ownership thereto
automatically transfers to the buyer by operation of law
without any further act having to be performed by the
seller.
In a contract to sell, upon the fulfi llment of the
suspensive condition which is the full payment of
the purchase price, ownership will not automatically
transfer to the buyer although the property may have
been previously delivered to him. The prospective
seller still has to convey title to the prospective buyer
by entering into a contract of absolute sale.74
The usual form of such an agreement is making the fulfi llment
of the buyer’s obligation to pay in full the purchase price as the
condition upon which:
(a) Only then shall arise a demandable sale
contract;
(b) The obligation of the seller “to sell” the
subject matter of the shall only then arise;
or
(c) The obligation of the seller to transfer the
ownership of the subject matter sold shall
then arise.
It would seem from Coronel, that from the standpoint of
perfection it is not the existence of a clause “reserving
ownership
with the seller even when there would be delivery of the
subject
74Ibid, at pp. 27-28, citing Homesite and Housing Corp. v.
Court of Appeals, 133
SCRA 777 (1984). See also Santos v. Court of Appeals, 337
SCRA 67 (2000); Abesamis
v. Court of Appeals, 361 SCRA 328 (2001); Almira v. Court of
Appeals, 399 SCRA 351
(2003); Vidal, Jr. v. Tayamen, 531 SCRA 147 (2007); Hulst v.
PR Builders, Inc., 532
SCRA 74 (2007).
REMEDIES OF RESCISSION 449
AND CANCELLATION FOR IMMOVABLES
matter to the buyer” that determines whether there is a contract
to sell, but to where the suspensive condition (i.e., full payment
of the purchase) is pinned to: the fi rst two above-enumerated
conditions would give rise to a contract to sell, while the third
type
of condition would give rise to a conditional contract of sale.
c. Requisite Stipulations for Contracts to Sell
There is another line of decisions, that seems to be the
main school of thought, which holds that what determines
whether a sale contract is a “contract to sell” is that there must
exist an agreement, whether express or implied, at the time of
perfection of the sale contract, that the obligation of the seller
to
transfer ownership to the buyer pursuant to a sale (even when
physical possession may have been effected) is conditioned
upon the full payment by the buyer of the purchase price. The
contract to sell, lies in locating the existence of two (2) clauses,
namely:
(a) Reservation of the ownership of the subject
matter with the seller, even if there should
be delivery thereof to the buyer; and
(b) Reservation of the right of the seller to
rescind the contract extrajudicially in the
event the suspensive condition (usually the
full payment of the purchase price) does not
happen.
The prevailing doctrine therefore is that 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.75
75Tugaba 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).
450 LAW ON SALES
(1) 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;76 and
that the remedies available to the seller would depend on this
particular point.
Thus, Manuel v. Rodriguez,77 held that in a contract of sale,
delivery will effectively transfer ownership of the subject matter
to the buyer, and the seller cannot recover ownership by the
fact of non-payment of the price without rescinding the contract
through judicial action. On the other hand, in a contract to sell,
since delivery does not transfer ownership to the buyer, the
nonpayment
of the purchase price prevents the obligation to sell
from arising and thus ownership is retained by the seller
without
further remedies.78
In Padilla v. Spouses Paredes,79 where the contract between
the parties provided that: (a) the sellers agree not to alienate,
encumber, or in any manner to modify the right of title to said
property; (b) the sellers shall pay real estate taxes thereon until
it has been transferred to the buyer; (c) that on the full payment
of the purchase price of the property, the sellers will execute
and deliver a deed conveying to the buyer the title in fee simple
free from all liens and encumbrances; the Court held that said
76Valarao 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).
77109 Phil. 1 (1960).
78Ong v. Court of Appeals, 310 SCRA 1 (1999).
79328 SCRA 434 (2000).
REMEDIES OF RESCISSION 451
AND CANCELLATION FOR IMMOVABLES
provisions signify that the title to the property remains in the
sellers until the buyer should have fully paid the purchase
price,
which is a typical characteristic of a contract to sell.
In other cases,80 even in the absence of such express
stipulation, when it is clearly evidenced that the seller did not
intend to transfer title to the buyer until full payment of the
purchase price, the contract was still deemed to be a contract
to sell.
It must be noted, however, that in the natural course of
things, a positive agreement or stipulation to such effect must
accompany the perfection of a sale, since delivery or tradition
by itself (pursuant to a valid sale) would transfer ownership
without need of express stipulation to that effect. To illustrate,
in City of Cebu v. Heirs of Candido Rubi,81 the Court held that
the agreement between the buyer and seller that the offer
and acceptance was for a bid price to be paid in 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.
Nevertheless, the Supreme Court has also ruled otherwise,
in the sense that by the subsequent acts or omissions of the
parties and not by an express reservation clause, it is possible
to derive such situation to determine that the contract between
them is a contract to sell.
In Adelfa Properties, Inc. v. Court of Appeals,82 two features
convinced the Court that the parties never intended to transfer
ownership to petitioner except upon full payment of the
purchase
price: “Firstly, 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 petitioner is obliged to return possession or ownership
80City of Cebu v. Heirs of Candido Rubi, 306 SCRA 408
(1999); Santos v. Court of
Appeals, 337 SCRA 67 (2000).
81306 SCRA 408 (1999).
82240 SCRA 575 (1995). See also Ong v. Court of Appeals,
240 SCRA 565, 576-
577 (1995).
452 LAW ON SALES
of the property as a consequence of non-payment. There is no
stipulation anent reversion or reconveyance of the property to
herein private respondents in the event that the petitioner does
not comply with its obligation. With the absence of such a
stipulation,
although there is a provision on the remedies available to
the parties in case of breach, it may legally be inferred that the
parties never intended to transfer ownership to the petitioner
prior
to completion of payment of the purchase price.”83 The Court
further held that “[I]n effect, 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 therefore,
binding
and enforceable between the parties. It should be noted that
under the law and jurisprudence, a contract which contains this
kind of stipulation is considered a contract to sell.”84
On the other hand, Babasa v. Court of Appeals,85 ruled that
a “Conditional Sale of Registered Lands,” which required the
fi nal payment of the balance of the purchase price only when
the seller is able to obtain clean titles to the properties sold
within twenty (20) months from the date of the sale, was still an
absolute sale, and not a contract to sell, because “In the
instant
case, ownership over [the subject properties] passed to
[Vendee]
both by constructive and actual delivery. Constructive delivery
was accomplished upon the execution of the contract ...
without
reservation of title on the part of the [Vendor] while actual
delivery
was made when [Vendee] took unconditional possession of the
lots and leased them to its associate company.”86
The Court has equated stipulations (which are looked into
at the perfection stage of the contract) with actual transfer of
ownership, which dwells into the performance of the
obligations
under a contract. What should determine the nature of the
contract,
and therefore the available remedies in case of breach, should
83240 SCRA 575, 577.
84Ibid, at p. 577.
85290 SCRA 532 (1998).
86Ibid, at p. 540. Also Buot v. Court of Appeals, 357 SCRA
846 (2001).
REMEDIES OF RESCISSION 453
AND CANCELLATION FOR IMMOVABLES
be the existence or non-existence of the requisite stipulations
at
the time of perfection, and not by what the parties do or fail to
do
during performance stage.
To illustrate, in Santos v. Court of Appeals,87 in characterizing
the contract, the Court held that “Article 1458 ... expressly
obliges
the vendor to transfer ownership of the thing sold as an
essential
element of a contract of sale. This is because the transfer
of ownership in exchange for a price paid or promised is the
very essence of a contract of sale. ... When the circumstances
categorically and clearly show that no valid transfer of
ownership
was made by the vendors to the vendee, their agreement
cannot
be deemed a contract of sale, but merely a contract to sell,
where
ownership is reserved by the vendor and is not to pass until full
payment of the purchase price, which constitutes a positive
suspensive condition.”88
The test employed by the Court seems to be an after-thefact
(i.e., after perfection) determination of whether the seller has
by tradition transferred ownership to the buyer. Tradition does
not determine the nature of the contract, but is pursued only as
a consequence of the contract. If seller refuses to deliver in
spite
of a clear obligation to do so, that would be a breach that
should
entitle the buyer to rescind the contract. On the other hand,
when there is an express stipulation that seller will not transfer
ownership until buyer shall have fully paid the purchase price,
the
refusal of the seller to effect tradition until the buyer shall have
complied with his own obligation, would not authorize the buyer
to rescind the contract for then there would be no breach.
(2) 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
87337 SCRA 67 (2000).
88Ibid, at pp. 75-76.
454 LAW ON SALES
equivalent to reservation of title in the name of the seller until
the
buyer shall have completed the payment of the price.
Thus, in Chua v. Court of Appeals,89 the Court held 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,”90
especially when the seller retained possession of the certifi
cate
of title and all other documents relative to the sale until there
was
full payment of the purchase price.
The present rule therefore is 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.91
However, there are also cases where the Court did not
consider such factor as determinative. For example, in Dignos
v.
Court of Appeals,92 where there was an express stipulation
that
the sellers would execute a fi nal deed of absolute sale in favor
of the buyer upon payment of the balance of the purchase
price,
the contract was still construed not to be a contract to sell,
since
nowhere in the contract in question was there a stipulation to
the
effect that title to the property sold is reserved in the seller until
full payment of the purchase price, nor was there a stipulation
giving the seller the right to unilaterally rescind the contract the
moment the buyer fails to pay within a fi xed period.93
Closely connected with the lack of a formal deed of sale to
evidence the sale is when only a receipt is issued by the seller
to
the buyer, for partial payment of the price. Thus, in Chua v.
Court
of Appeals,94 the Court held that when the meeting of the
minds
89401 SCRA 54 (2003).
90Ibid, at p. 67.
91Manuel 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).
92158 SCRA 375 (1988).
93Same ruling in Jacinto v. Kaparaz, 209 SCRA 246 (1992).
94401 SCRA 54 (2003).
REMEDIES OF RESCISSION 455
AND CANCELLATION FOR IMMOVABLES
of the parties is evidenced merely by a receipt which provided
that the earnest money shall be forfeited in case the buyer fails
to pay the balance of the purchase price on the stipulated sale,
that would indicate that the agreement between the parties
was
a contract to sell: “This is in the nature of a stipulation
reserving
ownership in the seller until full payment of the purchase price.
This is also similar to giving the seller the right to rescind
unilaterally the contract the moment the buyer fails to pay
within
a fi xed period.”95
(3) Reservation of Right to Extrajudicially Rescind in
Event of Non-Fulfi llment of Condition
Although it seems established in our jurisdiction that in
order to fi nd a sale contract to be a true “contract to sale,” it
must
contain a clause which reserves to the seller the right to
rescind
the contract without need of court action in the event the buyer
fails to pay the purchase price as agreed upon, such a
doctrinal
requirement appears incongruent to the nature of a contract to
sell, as one where the contract itself is subject to a suspensive
condition.
In a contract to sell, where the suspensive condition has
not been fulfi lled, no further remedy is necessary since ipso
jure the contract would have already been extinguished by
nonhappening
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. Article 539 of the Civil Code
provides that “[e]very possessor has a right to be respected in
his possession; and should he be disturbed therein he shall be
protected in or restored to said possession by means
established
by the laws and the Rules of Court.” In turn, Article 433
provides
that “[a]ctual possession under a claim of ownership raises a
95Ibid, at p. 67.
456 LAW ON SALES
disputable presumption of ownership [and] [t]he true owners
must resort to judicial process for the recovery of the property.”
On the other hand, in a contract of sale, the non-fulfi llment
of the condition would 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. Thus, in
Babasa
v. Court of Appeals,96 the Court held that when the obligation
of the buyer to fully pay the purchase price was made subject
to the condition that the seller fi rst delivers the clean title over
the parcel bought within twenty (20) months from the signing
of the contract, such condition was 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 and enforce performance on
the
part of the seller, all in consonance with Art. 1545 which
provides
that “[w]here 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. If the other party has promised that the
condition
should happen or be performed, such fi rst mentioned party
may
also treat the non-performance of the condition as a breach of
warranty.”
Dignos v. Court of Appeals,97 which involved a “Deed of
Conditional Sale” over a parcel of land, what was executed
was a
private instrument, which among others provided, that the
sellers
would execute a fi nal deed of absolute sale in favor of the
buyer
upon payment of the balance of the purchase price. In holding
that the contract was not a contract to sell, but a contract of
sale,
the Court held that “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
96290 SCRA 532 (1998).
97158 SCRA 375 (1988).
REMEDIES OF RESCISSION 457
AND CANCELLATION FOR IMMOVABLES
the vendees fails to pay within a fi xed period.98 Somehow, the
logic of such ruling sounds unconvincing when taken from the
essence of a true contract to sell.
A contract to sell, precisely because it constitutes a contract
subject to a suspensive condition, does not require a specifi c
stipulation that the seller (who is the obligee) has the right to
“rescind” or more properly to terminate the contract when the
condition does not happen, since such effect is ipso jure, and
any express stipulation granting such right is superfl uous. It is
in fact in a contract of sale that such a stipulation must appear,
otherwise, the seller cannot extrajudicially rescind the contract
and has to go to court for such remedy. In other words,
contrary
to the ratiocination in Dignos, the absence of such provision
granting the seller the right to rescind extrajudicially should be
interpreted to mean that the contract is a contract to sell, and
the
presence of that provision would indicate that it is a contract of
sale.
In Topacio v. Court of Appeals,99 the Court, in determining
whether the contract is one of sale or a contract to sell, held
that “[n]owhere in the transaction is it indicated that BPI [seller]
reserved its title on the property nor did it provide for any
automatic rescission in case of default. So when petitioner
failed
to pay the balance of 5875,000.00 despite several extensions
given by private respondent, the latter could not validly rescind
the contract without complying with the provision of Article
1592
or Article 1191 on notarial or judicial rescission
respectively.”100
The author would agree with Topacio in that if there is no
provision reserving title with the seller, it would be construed as
a contract of sale, because without such reservation, and the
subject property is delivered to the buyer, it would produce the
effect of tradition and there is no suspensive condition to talk
about. What seems enigmatic in Topacio are the discussions
of
the Court on the effect of earnest money in determining
whether
the contract is one of sale or contract to sell, thus —
98Ibid, at p. 382; emphasis supplied; citing Luzon Brokerage
Co., Inc. v. Maritime
Building Co., Inc., 86 SCRA 305 (1978); Tabuga v. Vda. de
Leon, 132 SCRA 722 (1984).
99211 SCRA 291 (1992).
100Ibid, at p. 295.
458 LAW ON SALES
The payment by the petitioner of 5375,000.00 on
November 28, 1991 which respondent accepted, and
for which an offi cial receipt was issued x x x was the
operative act that gave rise to a perfected contract of
sale between the parties. Article 1482 of the Civil Code
provides: x x x…
Earnest money is something of value to show that
the buyer was really in earnest, and given to the seller to
bind the bargain. Under the Civil Code, earnest money
is considered part of the purchase price and as proof of
the perfection of the contract. The 5375,000.00 given
by petitioner representing 30% of the purchase price is
earnest money...
Based on the aforecited article the parties have
agreed on the object of the contract which is the house
and lot ... and even before November 27, 1985 (the
date petitioner sent his letter together with the 30%
downpayment), the parties have agreed on the price
which is 51,250,000.00.101
The impression one gets from the afore-quoted discussions
in Topacio is the 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 fi rst 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.
Therefore, in the subsequent decision in Philippine National
Bank v. Court of Appeals,102 the Court held that provision of
101Ibid, at pp. 294-295.
102262 SCRA 464, 482-483 (1996).
REMEDIES OF RESCISSION 459
AND CANCELLATION FOR IMMOVABLES
Article 1482 on earnest money gives no more than a
disputable
presumption, and when the letter agreements between the
parties do not contain the substantial condition precedents,
do not lead to the conclusion that there was a contract to sell
at all.
In any event, as previously discussed above, the failure to
fi nd a provision in a sale contract reserving power on the part
of
the seller to extrajudicially rescind the contract in the event the
buyer fails to pay the purchase price would not qualify
arrangement
to be one of contract to sell.
4. Substantial Breach Issue Relevant Only
in Contracts of Sale
In a contract of sale, rescission can be availed of only in
case there has been substantial breach; whereas, in a contract
to sell, the doctrine of substantial breach has no application,
since the non-happening of the condition by whatever means
or
reason, substantial or not, ipso jure prevents the obligation to
sell
from arising.
Thus, in Heirs of Pedro Escanlar v. Court of Appeals,103 the
Court held that in a sale of real property on installments, when
the buyer has defaulted and the seller, instead of rescinding,
accepted late payments beyond the deadline stipulated, the
seller in effect waived and was estopped from exercising their
right to rescind under Article 1592 of the Civil Code.
This is in stark contrast to the ruling of the Court under the
same situation pertaining to contracts to sell, in Santos v. Court
of Appeals,104 where it held that “[f]ailure to pay the price
agreed
upon in a contract to sell 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.”105
103281 SCRA 176, 193-194 (1997).
104337 SCRA 67 (2000).
105Ibid, at p. 77.
460 LAW ON SALES
In Padilla v. Spouses Paredes,106 the Court held that in a
contract to sell, the acceptance of partial payment cannot be
deemed a waiver of the right to cancel the contract; at best, it
can
only be considered as an act of tolerance on the part of the
seller
that could not modify the contract, absent any written
agreement
to the effect signed by the parties.
In Buot v. Court of Appeals,107 the Court held that pursuant
to the second paragraph of Article 1188 of the Civil Code, in a
contract to sell, even if the buyers did not mistakenly make
partial
payments, inasmuch as the suspensive condition was not fulfi
lled,
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 would be unjust enrichment on the part of the
seller.
It should be noted however, that the non-fulfi llment of the
condition, which would bring about breach of a contract of sale
or
cancellation of the contract to sell, should be distinguished
from
the “pendency” of the happening of the condition. For example,
in Adalin v. Court of Appeals,108 the Court held liable the
seller
who re-sold the subject matter during the time when the
condition
had not yet been fulfi lled, holding that nothing in the law justifi
es
the seller to undertake a radical change of posture to justify
the re-selling of the property previously sold under a Contract
of Conditional Sale, to hold that pending the happening of the
condition, that the contract “was dependent on the sellers not
changing their minds about selling the property.”109
5. Crux of the Distinction
In a rather simplistic manner of considering the issue, and
apart from a contract to sell which embodies only the primary
obligation of the seller to “enter into a contract of sale,” the
author
would dare say that a contract of sale and a contract to sell are
the opposite ways of approaching the very same sale
transaction
106328 SCRA 434 (2000).
107357 SCRA 846 (2001).
108280 SCRA 536 (1997).
109Ibid, at p. 554.
REMEDIES OF RESCISSION 461
AND CANCELLATION FOR IMMOVABLES
at the executory stage, with respect to the obligation to transfer
ownership of the subject matter.
The contract of sale is basically one where the reciprocal
obligations created are deemed to be subject to one another
as
each being the resolutory condition for the other. That is why
Article 1191 provides that the “power to rescind” is implied in
reciprocal obligations. As Tolentino aptly observed:
This article recognizes an implied or tacit resolutory
condition in reciprocal obligations. It is a condition
imposed exclusively by law, even if there is no corresponding
agreement between the parties.110
On the other hand, a contract to sell is one where the
reciprocal obligations created are deemed to be subject to the
full payment of the purchase price as constituting the normal
suspensive condition for the obligation of the seller to deliver
possession and/or transfer ownership; although it is possible
that the suspensive condition may take other form rather than
its
reference to the full payment of the purchase price.
Therefore, the manner and effect of extinguishment of
obligations subject to conditions should make both the contract
of sale and the contract to sell basically the same since in an
obligation subject to a suspensive condition, the non-
happening
thereof prevents the obligation from arising, whereas in an
obligation subject to a resolutory condition, the happening
thereof
extinguishes in almost like manner the obligation as if it never
arose. However, such seeming similarity between the two
types
of sale contracts is clear only when both are compared in their
perfection stages, when no obligation has been performed.
When, however, performance stage is reached (i.e., when
the subject matter of the sale has been delivered by the seller
to
the buyer), a contract of sale assumes different consequences
from a contract to sell. In a contract of sale, delivery would
transfer ownership to the buyer, and therefore rescission must
110COMMENTARIES AND JURISPRUDENCE ON THE CIVIL
CODE OF THE PHILIPPINES, Vol. IV, p.
170 (1973).
462 LAW ON SALES
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. On the other hand, 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 fulfi lled (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 their executory stages (i.e., the subject matter of sale has
not been delivered to the buyer), there is no practical
difference in
remedies available to the innocent party in both a contract of
sale
and a contract to sell for purposes of rescission, since both can
be
done extrajudicially: in a contract of sale, by mere notarial
notice
of rescission under Article 1592 the contract may be rescinded;
in
a contract to sell, mere notice of cancellation would be suffi
cient
under Supreme Court rulings.111 When performance stage
has
been reached, generally, court action is necessary to rescind a
contract of sale; whereas, no such court action is necessary to
rescind a contract to sell.
GOVERNING PROVISIONS AND PRINCIPLES FOR
REMEDIES
OF RESCISSION AND CANCELLATION
1. Pre-Maceda Law Period
Prior to the passage of the Maceda Law, the legal provisions
governing the remedies of parties covering sales of
immovables
were Articles 1191, 1591 and 1592 of the Civil Code.
Although Article 1191 provides for the power of rescission in
reciprocal contracts in general, it is Articles 1591 and 1592
which
specifi cally govern the power to rescind contracts of sale
covering
immovables. Article 1591 states that “[s]hould the vendor have
reasonable grounds to fear the loss of immovable property sold
111University of the Philippines v. De los Angeles, 35 SCRA
103 (1970); Palay, Inc.
v. Clave, 124 SCRA 638 (1983); Cheng v. Genato, 300 SCRA
722 (1998).
REMEDIES OF RESCISSION 463
AND CANCELLATION FOR IMMOVABLES
and its price, he may immediately sue for the rescission of the
sale;” otherwise, if no such grounds exist, the provisions of
Article
1191 must be observed.
As discussed above, Article 1592 provides that even when
automatic rescission may have been expressly stipulated,
nonetheless, the buyer may still remove the default by
payment
of what is due as long as no demand for rescission of the
contract
has been made upon him either judicially or by notarial act.
Therefore, Article 1592 contains the principle that the remedy
of
rescission requires the taking of a positive act on the part of
the
non-defaulting party.
Although Article 1592 provides that “[a]fter the demand, the
court may not grant him a new term,” the Supreme Court has,
in a
few instances and on grounds of equity, given the buyer
reprieve,
even after the seller had given notarial demand for rescission.
In one case,112 the Court held that Article 1592 allows the
buyer of an immovable property to pay as long as no demand
for rescission has been made, and the consignation, of the
balance of the purchase price before the trial court operated as
full payment, which resulted in the extinguishment of the
buyer’s
obligation under the contract of sale.
a. 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.113
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.114
112Province of Cebu v. Heirs of Rufi na Morales, 546 SCRA
315 (2008).
113Pangilinan 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).
114Ong v. Court of Appeals, 310 SCRA 1 (1999).
464 LAW ON SALES
In the early cases of Caridad Estates, Inc. v. Santero,115 and
Manuel v. Rodriguez,116 the Court had held that then Article
1504
(now Article 1592) applied only to a contract of sale of
immovable,
and had no application to a contract to sell. In making such
ruling,
Manuel held that the contention of the buyer that the seller —
... had no right to cancel the contract as there was
only a “casual breach” is likewise untenable. In contracts
to sell, where ownership is retained by the seller and
is not to pass until the full payment of the price, such
payment, as we said, is a positive suspensive condition,
the failure of which is not a breach, casual or serious,
but simply an event that prevented the obligation of
the vendor to convey title from acquiring binding force
in accordance with Article 1117 of the Old Civil Code
[now Article 1184]. To argue that there was only a casual
breach is to proceed from the assumption that the
contract is one of absolute sale, where non-payment is
a resolutory condition, which is not the case [here].117
The reasoning in Manuel 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.
Under the New Civil Code, Ong v. Court of Appeals,118
discussed the rationale on why the remedy of rescission
cannot
apply to a contract to sell, thus:
“In a contract of sale, the title to the property passes
to the vendee upon the delivery of the thing sold;
while in a contract to sell, ownership is, by agreement,
11571 Phil. 114 (1940).
116109 Phil. 1 (1960).
117Ibid, at p. 10.
118310 SCRA 1 (1999). The application of the Maceda Law
never fi gured in the
resolution of the case perhaps because it was never invoked
by the buyers. Also, the
subject matter of the purchase constituted of residential areas,
piggery and a ricemill.
Likewise, the facts did indicate that formal demands were
made upon buyers and
eventually a case to recover possession where the grace
period provided by the Maceda
Law was never invoked.
REMEDIES OF RESCISSION 465
AND CANCELLATION FOR IMMOVABLES
reserved in the vendor and is not to pass to the vendee
until full payment of the purchase price. In a contract
to sell, the payment of the purchase price is a positive
suspensive condition, the failure of which is not a
breach, casual or serious, but a situation that prevents
the obligation of the vendor to convey title from
acquiring an obligatory force. ... The non-fulfi llment of
the condition of full payment rendered the contract to
sell ineffective and without force and effect.119 It must
be stressed that the breach contemplated in Article
1191 of the New Civil Code is the obligor’s failure to
comply with an obligation already extant, not a failure
of a condition to render binding that obligation. Failure
to pay, in this instance, is not even a breach but merely
an event which prevents the vendor’s obligation to
convey title from acquiring biding force.”120
b. Equity Resolution for Contracts to Sell
Prior to the applicability of the Maceda Law, although the
principle of substantial breach and the remedies of rescission
found in Articles 1191 and 1592 have no application to
contracts
to sell involving immovable, the Supreme Court has on
occasion
applied them, under the principle of equity.
In J.M. Tuazon Co., Inc. v. Javier,121 where the buyer had
religiously been paying his monthly installments for eight years,
with interests, but even after default he was willing and had
offered to pay all the arrears, the Court granted additional
period
of 60 days from receipt of judgment for the buyer to make all
installment payments in arrears plus interests, although
demand
for rescission had already been made.
In Legarda Hermanos v. Saldana,122 although the buyer
clearly defaulted in the payment of his installments on a
contract
119Also Odyssey Park, Inc. v. Court of Appeals, 280 SCRA
253 (1997).
120Ibid, at p. 10. Same ruling as in Luzon Brokerage Co., Inc.
v. Maritime Building
Co., Inc., 46 SCRA 381 (1972); Rillo v. Court of Appeals, 274
SCRA 461 (1997); Cheng
v. Genato, 300 SCRA 722 (1998); Gonzales v. Heirs of
Thomas and Paula Cruz, 314
SCRA 585 (1999); Padilla v. Spouses Paredes, 328 SCRA 434
(2000); Santos v. Court of
Appeals, 337 SCRA 67 (2000).
12131 SCRA 829 (1970).
12255 SCRA 324 (1974).
466 LAW ON SALES
to sell covering two parcels of land, the Court nevertheless
awarded ownership over one of the two (2) lots jointly
purchased
by the buyer, when it found that the total amount of
installments
paid, although not enough to cover the purchase price of the
two
lots, were enough to cover fully the purchase price of one lot.
The
Court deemed that there was substantial performance insofar
as
one of the lots concerned as to prevent rescission thereof.
In both J.M. Tuazon Co. and Legarda Hermanos, the Court
acknowledged the “impropriety” of applying Article 1592, but
that
there would be denial of “substantial justice” for the leeway
given
to the buyers pursuant to Article 1234 of the Civil Code which
provides that “[i]f the obligation has been substantially
performed
in good faith, the obligor may recover as though there had
been
a strict and complete fulfi llment, less damages suffered by the
oblige.” Reliance upon Article 1234 was misplaced for it
embodies
the concept of “casual breach” (which would not authorized the
exercise of the remedy of rescission) from “substantial breach,”
both concepts of which are inapplicable to a contract to sell, for
the non-happening of the condition, whether casual or
substantial,
is not a breach but prevents the obligations from arising, or
more
accurately, extinguishes the underlying contract as though it
never existed.
In spite of previous decisions applying equity reasoning for
treating a contract to sell as a contract of sale when the subject
matters involve residential real estate, sometimes the Court
still
adhered to the strict rule that substantial compliance will not be
a basis to save a buyer who has failed to pay the contract price
in a contract to sell.
In Lacanilao v. Court of Appeals,123 which involved a verbal
contract to sell a residential lot, the Court found the transaction
to be a contract to sell “where ownership is retained by the
seller
until payment of the price in full, such payment is a positive
suspensive condition, failure of which is not really a breach but
an
event that prevents the obligation of the vendor to convey title
in
accordance with Article 1184 of the Civil Code.”124 The Court
also
123262 SCRA 486 (1996).
124Ibid, at p. 490.
REMEDIES OF RESCISSION 467
AND CANCELLATION FOR IMMOVABLES
referred to Article 1545 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.”125
To the author, the application of the principle of equity was
inappropriate in Lacanilao because not a single centavo had
been paid by the buyers pursuant to the alleged verbal sale.
The Court took into account the fact that the buyers have been
occupying the lot as lessees for almost three (3) decades, for
which they could have obtained a right of fi rst refusal or could
have
consigned the purchase price in court when the seller allegedly
refused to execute the deed of sale in their favor. However, it
held
that: “This Court, while aware of its equity jurisdiction, is fi rst
and
foremost a court of law. Hence, while equity might tilt on the
side
of the [buyers], the same cannot be enforced so as to overrule
a REMEDIES OF RESCISSION 469
positive provision of law in favor of the [seller].”126
In Rillo v. Court of Appeals,127 the Court recognized that
since the contract between the parties was a contract to sell
covering non-residential immovables, it ruled that in such case
the applicable law is the Maceda Law which 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 seller to convey title
from
acquiring binding force. It also provides the buyer on
installments
in case he defaults in the payment of succeeding installments.
This was the same ruling in Odyssey Park, Inc. v. Court of
Appeals,128 which covered a contract to sell commercial lots.
The foregoing rulings show the accommodating attitude
of the Supreme Court to buyers of residential real estate who
have exhibited a measure of good faith in complying with their
obligation to pay the purchase price even under a contract to
sell, as to go beyond form and accompanying rules on the
effects
125Ibid, at pp. 490-491.
126Ibid, at p. 491.
127274 SCRA 461 (1997).
128280 SCRA 253 (1997).
468 LAW ON SALES
of non-happening of the suspensive condition to achieve equity
based on the circumstances present in a case; whereas, in the
case where the subject matter is commercial or industrial real
estate, the Court has maintained a stern adherence to the form
chosen by the parties for their contract, i.e., a contract to sell,
and
implement the accompanying legal effects concomitant with
such
form of sale.
c. Formal Notice Required to Cancel Contracts to Sell
Although legal provisions requiring notarial rescission, such
as Article 1592, have no application to contracts to sell
involving
real property, nevertheless, the Court has required as a
minimum
procedural rule for the “rescission” (i.e., cancellation) of a
contract
to sell that at least notice be given by the seller to the buyer.
University of the Philippines v. De los Angeles,129 mentions
such requirement for the “rescission” of a contract to sell to be
“effective,” thus —
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 justifi ed, 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 affi rmed, 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 fi nal judgment
of the corresponding court that will conclusively and
fi nally settle whether the action taken was or was not
12935 SCRA 103 (1970).
AND CANCELLATION FOR IMMOVABLES
correct in law. But the law defi nitely does not require
that the contracting party who believes itself injured
must fi rst fi le suit and wait for a judgment before taking
extrajudicial steps to protect its interest. Otherwise,
the party injured by the other’s breach will have to
passively sit and watch its damages accumulate during
the pendency of the suit until the fi nal judgment of
rescission is rendered when the law itself requires that
he should exercise due diligence to minimize its own
damages...”130
University of the Philippines therefore did not question the
validity of the power to rescind a contract of sale extrajudicially
when stipulated, or the power to cancel or resolve a contract to
sell when the condition of payment of the purchase price is not
fulfi lled. What it did stress was that the factual bases for either
rescission or cancellation may not be present to warrant the
exercise of either such remedies, and the same is always
subject
to the fi nal determination of a court of law. It further held that
the fears expressed that a stipulation providing for a unilateral
rescission in case of breach of contract may render nugatory
the
general rule requiring judicial action and lead to abuse, is met
by the fact that “in case of abuse or error by the rescinder, the
other party is not barred from questioning in court such abuse
or error, the practical effect of the stipulation being merely to
transfer to the defaulter the initiative of instituting suit, instead
of
the rescinder.”131
However, no amount of reading of University of the Philippines
explains the basis of why it held that in the cancellation of a
contract to sell, “the act of a party treating a contract as
canceled
or resolved ... must be made known to the other.” The only
pronouncement that University of the Philippines explained
was
that every act of rescission or cancellation would be provisional
unless the courts decree the existence of a factual basis for
such
extrajudicial act. But nowhere did the decision explain why
notice
to the other party was essential, other than perhaps the implied
130Ibid, at p. 107; emphasis supplied.
131Ibid, at p. 108; emphasis supplied.
470 LAW ON SALES
fairness to allow the other party the right to question in court
the
propriety of the act of the seller. Nevertheless, whether there
was
notice or not, if the factual basis for an extrajudicial rescission
or
cancellation is present, the courts should decree the
cancellation
to have become effective.
Indeed, in a contract to sell, as the Court itself held in a later
case of Torralba v. De los Angeles,132 on the contention of the
buyer that the seller should have resorted to a judicial decree
rescinding the contract to sell before awarding the lot to
another
buyer —
This contention is untenable. The contract executed
by the petitioner and the PHHC expressly provided that
the contract shall be deemed annulled and cancelled
and the PHHC shall be at liberty to take possession
of said property and dispose the same to any other
person upon default of the petitioner to pay the installments
due. Hence, there was no contract to rescind
in court because from the moment the petitioner defaulted
in the timely payment of the installments, the
contract between the parties was deemed ipso facto
rescinded.133
Torralba thus correctly expressed the principle that the nonfulfi
llment of the condition ipso facto cancels or resolves a contract
to sell so that there is legally nothing else to do at that
point.134 So
that notice to the defaulting party cannot be the operative act to
make the cancellation or resolution of a contract to sell valid
and
effective. However, the facts of Torralba still show that despite
its pronouncements notice was given by the seller to the buyer
before “rescinding” the contract to sell.
One cannot say that Torralba decided as it did because
essentially
even possession of the subject property, although the
covering contract was a contract to sell, had not been
transferred
to the buyer; and that had possession been transferred to the
13296 SCRA 69 (1980).
133Ibid, at p. 76; emphasis supplied.
134Reiterated in AFP Mutual Benefi t Asso. v. Court of
Appeals, 364 SCRA 768
(2001).
REMEDIES OF RESCISSION 471
AND CANCELLATION FOR IMMOVABLES
buyer, even in a contract to sell, judicial action is necessary to
recover
the property from the buyer. But even then, the court action
is not one really to rescind, but for recovery of possession, and
certainly notice is not required to have such a cause of action.
Lim v. Court of Appeals,135 expressly applied the University
of the Philippines ruling as allowing the seller “to consider the
contract to sell between them terminated for non-payment of
the
stipulated consideration,”136 and the only risk involved is that
the
courts may not affi rm the factual basis upon which to base the
non-happening of the suspensive condition.
In Palay, Inc. v. Clave,137 a “Contract to Sell” a piece of
land expressly provided that the contract shall be automatically
rescinded upon default in payment of any monthly installment
after the lapse of 90 days from the expiration of the grace
period
of one month, without need of notice and with forfeiture of all
installments paid. For failure of the buyer to pay installments
due,
the seller treated the contract as canceled without notice to the
buyer. In ruling that the cancellation was void because of lack
of
notice, the Court held —
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. As
stressed in University of the Philippines vs. Walfrido de
los Angeles the act of a party in treating a contract as
cancelled should be made known to the other.138
The reasoning of Palay, Inc. on why notice of cancellation
of a contract to sell by virtue of non-fulfi llment of the
suspensive
condition must be given to the other party seems to be either of
two things as aforequoted: fi rst, it has always been the
practice;
135182 SCRA 564 (1990).
136Ibid, at p. 572.
137124 SCRA 638 (1983).
138Ibid, at p. 644.
472 LAW ON SALES
and second, it was so decreed in University of the Philippines.
The fi rst reasoning is unacceptable because a usage or
practice
without legal or logical basis should be abandoned. The
second
is unsupported by any reasoning found in University of the
Philippines.
The other legal basis of Palay, Inc. in mandating notice to
the other party is that even under the Maceda Law, notice of
cancellation is required to be given to the buyer by notarial act.
But then, as discussed below, the Maceda Law, is an
aberration of
what otherwise would be established principles of cancellation
in
contracts to sell. For cases covered by Maceda Law, such
notice
to the other party is required simply and peculiarly because
such
special law requires it. However, for cases not covered by the
Maceda Law, and especially on the general principles
governing
the effects of non-fulfi llment of the suspensive condition in
a contract to sell, why should the provisions of a special and
peculiar law govern?
The contract to sell in Palay, Inc. expressly waived notice on
the part of the buyer in case the seller should seek to rescind
or
cancel the contract. In disallowing such waiver, the Court held
— notice to the defaulting buyer. This doctrine has since then
The contention that private respondent had waived
his right to be notifi ed under paragraph 6 of the
contract is neither (sic) meritorious because it was
a contract of adhesion, a standard form of petitioner
corporation, and private respondent had no freedom
to stipulate. A waiver must be certain and unequivocal,
and intelligently made; such waiver follows only where
liberty of choice has been fully accorded. Moreover,
it is a matter of public policy to protect 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.139
In one swoop, Palay, Inc. had decreed that a waiver of notice
in a contract of adhesion is void; and even when not contained
in
139Ibid, at pp. 646-647; emphasis supplied.
REMEDIES OF RESCISSION 473
AND CANCELLATION FOR IMMOVABLES
a contract of adhesion, such waiver is invalid for being contrary
to
public policy when it covers real estate sold on installment
basis.
Cheng v. Genato,140 reiterated the ruling that —
Even assuming in gratia argumenti that ... [there
was] default ... in their Contract to Sell, the execution by
[seller] of the affi davit to annul the contract is not even
called for. For with or without the aforesaid affi davit
their non-payment to complete the full downpayment
of the purchase price ipso facto avoids their contract to
sell, it being subjected to a suspensive condition. When
a contract is subject to a suspensive condition, its birth
or effectivity can take place only if and when the even
which constitutes the condition happens or is fulfi lled.
If the suspensive condition does not take place, the
parties would stand as if the condition obligation had
never existed.
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. ...
This rule validates, both in equity and justice,
contracts such as the one at bar, in order to avoid and
prevent the defaulting party from assuming the offer
as still in effect due to the obligee’s tolerance for such
non-fulfi llment. Resultantly, litigations of this sort shall
be prevented and the relations among would-be parties
may be preserved ...141
140300 SCRA 722 (1998).
141Ibid, at pp. 735-737; emphasis supplied. The application of
the doctrine of prior
notice of cancellation of contracts to sell has been applied to
movables in Visayan Sawmill
Co., Inc. v. Court of Appeals, 219 SCRA 378 (1993).
474 LAW ON SALES
So, there we have it (for now, at least): notice of extrajudicial
rescission of a contract of sale and even cancellation of a
contract to sell even when the suspensive condition has not
been fulfi lled, require at the very least to be effective or
operative,
been
consistently adhered to in cases subsequent cases for all types
of immovables.142
What form of notice is required for the declaration of
cancellation of a contract to sell? We take our cue from what
the Court held in Dignos v. Court of Appeals,143 that such
notice
should be in a public instrument pursuant to the provision of
Article
1358 of the Civil Code which requires “that acts and contracts
which have for their object the extinguishment of real rights
over
immovable property must appear in a public document.”144
d. Rescission Principles Applied to Contracts to Sell
By the nature of a contract to sell, the remedy of rescission
is irrelevant to contracts to sell because the non-fulfi llment of
the suspensive condition of full payment of the purchase price
prevents a contract of sale from even materializing, and
therefore
there is really nothing to resolve or rescind. And certainly, any
stipulation authorizing the seller to “rescind” the contract to sell
in
the event the buyer fails to fully pay the purchase price is a
mere
surplusage.
To illustrate, in Luzon Brokerage Co., Inc. v. Maritime
Building Co., Inc.,145 the “Deed of Conditional Sale,” ruled to
be a
contract to sell, provided only —
(d) ... that should the Vendee fail to pay any of the
monthly installments, when due, or otherwise fail to
comply with any of the terms and conditions herein
stipulated, then this Deed of Conditional Sale shall
automatically and without any further formality, become
142See Jison v. Court of Appeals, 164 SCRA 339 (1988);
Ocampo v. Court of
Appeals, 233 SCRA 551, 561-562 (1994).
143158 SCRA 375 (1988).
144Ibid, at p. 384.
14543 SCRA 95 (1972).
REMEDIES OF RESCISSION 475
AND CANCELLATION FOR IMMOVABLES
null and void, and all sums so paid by the Vendee by
reason thereof, shall be considered as rentals and the
Vendor shall then and there be free to enter into the
premises, take possession thereof or sell the properties
to any other party.146
Strictly speaking the afore-quoted provision did not create a
right of automatic rescission because even without such
clause,
the non-payment of the installments would ipso jure result in
the
obligation to sell not arising at all. The only additional right that
the provision did create was the right of forfeiture of payments
previously made. On the insistence by the buyer that the seller
could not extrajudicially rescind or resolve the contract but
must
fi rst seek recourse to the courts, Luzon Brokerage held that —
The distinction between contracts of sale and
contracts to sell with reserved title has been recognized
by this Court in repeated decisions upholding the
power of the promissor under contracts to sell in case
of failure of the other party to complete payment, to
extrajudicially terminate the operation of the contract,
refuse conveyance and retain the sums or installments
already received, where such rights are expressly
provided for, as in the case at bar.147
A reading of the afore-quoted reasoning would imply that
even the right to “rescind” a contract to sell where ownership
has
been retained by the seller, would have to be expressly
reserved
in the deed in order to be binding. Such a conclusion does not
correspond with the nature of a contract to sell. In the
resolution
denying the fi rst motion for reconsideration, the Court ruled
that
“in a contract to sell, the full payment of the price through the
punctual performance of the monthly payments is a condition
precedent to the execution of the fi nal sale and to the transfer
of
the property from the owner to the proposed buyer; so that
there
will be no actual sale until and unless full payment is
made.”148
The emphasized quotation imply therefore that upon full
payment
146Ibid, at p. 98.
147Ibid, at pp. 104-105; emphasis supplied.
14846 SCRA 381, 387 (1972).
476 LAW ON SALES
of the price, there automatically arises a contract of sale which
may be enforced by an action for specifi c performance.
Roque v. Lapuz,149 reiterated the Luzon Brokerage ruling
that “in a contract to sell, the full payment of the price through
the punctual performance of the monthly payments is a
condition
precedent to the execution of the fi nal sale and to the transfer
of
the property from the owner to the proposed buyer; so that
there
will be no actual sale until and unless full payment is
made.”150 The
contract having been construed as a contract to sell, Roque
held
that the provisions of Article 1592 had no application.
Amazingly
however, the Court held that “Art. 1191 of the New Civil Code
is
the applicable provision where the obligee ... elects to rescind
or
cancel his obligation to delivery the ownership.” However,
since
the Court found that only 4 out of 116 monthly installments
were
ever paid, and since the buyer has long been in default, it
refused
to grant the buyer the benefi t of the period under Article 1191.
Roque therefore has brought us to a critical junction:
substantial compliance or whether there has been good faith or
bad faith on the part of the buyer in defaulting in the payment
of the
purchase price is and should be irrelevant when the agreement
on hand is one of contract to sell, thus —
... We hold that the contract between the petitioner
and the respondent was a contract to sell where the
ownership or title is retained by the seller and is not to
pass until the full payment of the price, such payment
being a positive suspensive condition and failure of
which is not a breach, casual or serious, but simply
an event that prevented the obligation of the vendor to
convey title from acquiring binding force.151
Under such premise, it seemed wrong for Roque to thereafter
hold that “We agree with the respondent Court of Appeals that
Article 1191 of the New Civil Code is the applicable provision
where the obligee, like petitioner herein, elects to rescind or
14996 SCRA 741 (1980).
150Ibid, at p. 755.
151Ibid, at p. 757; emphasis supplied.
REMEDIES OF RESCISSION 477
AND CANCELLATION FOR IMMOVABLES
cancel his obligation to deliver the ownership of the two lots in
question for failure of the respondent to pay in full the purchase
price,” and then implied that had the buyer substantially paid
the
purchase price, the Court would have upheld the new 90 day
period granted by the Court of Appeals.152
In addition, Roque ruled out the granting of new period
pursuant to Article 1191 on the basis that the buyer has
introduced
substantial improvements on the lots since “to grant the same
would place the vendor at the mercy of the buyer who can
easily
construct substantial improvement on the land but beyond the
capacity of the vendor to reimburse in case he elects to rescind
the contract by reason of the vendee’s default or deliberate
refusal
to pay or continue paying the purchase price of the land.”153
The “mixing-up” of doctrinal pronouncements was glaringly
displayed subsequently in Angeles v. Calasanz,154 which also
involved a contract to sell a parcel of land, where the issue was
the validity of the provision providing for automatic cancellation
on
failure of the buyer to comply with the installments terms
thereof.
The buyer insisted that the provision insofar as it provided that
in case of specifi ed breaches of its terms, the sellers have the
right to declare the contract canceled and of no effect, to be
void,
because it granted the sellers an absolute and automatic right
of rescission. Clearly, the reference to the remedy of rescission
was not relevant at all to the contract to sell, but nevertheless,
the Court plunged deep into the doctrinal pronouncements on
rescission, and despite the fact that the contract at issue was a
contract to sell, held that the breach of the contract adverted to
by the seller —
... is so slight and casual when we consider that apart
from the initial downpayment of 5392.00 the plaintiffsappellee
had already paid the monthly installments
for a period of almost nine (9) years. In other words,
in only a short time, the entire obligation would have
152This particular ruling in Roque was reiterated in Alfonso v.
Court of Appeals, 186
SCRA 400 (1990).
153Ibid, at p. 760.
154135 SCRA 323 (1985).
478 LAW ON SALES
been paid x x x to sanction the rescission made by the
defendants-appellants will work injustice to (sic) the
plaintiffs-appellees.155
In effect, justice and equity had been the bases to erode
the fundamental nature of a contract to sell, and make doctrinal
pronouncements pertaining to contracts of sale applicable to
it. The remedy of rescission and all its accompanying doctrinal
baggages have been expressly made applicable to contracts to
sell. It was downhill from that time on.156
On the other hand, Gimenez v. Court of Appeals,157 refused
to grant any further reprieve to a buyer who had not paid the
balance of the purchase price of the house and lot he bought
under a contract to sell, in spite of several extension granted
to him in the past by the seller when he had failed to meet the
deadlines, thus —
Requiring the sellers to execute a deed of absolute
sale in favor of Mercado would penalize the former
for their magnanimity in granting the latter extensions
of time to complete payment of the price of the sale
(which he never did), and reward his defaults and
contractual breaches, while continuing to enjoy the
petitioner’s property.158
Jacinto v. Kaparaz,159 in determining whether the seller had
a right to rescind an agreement involving the sale of a parcel of
land, held —
Vital to the resolution of the controversy is the
determination of the true nature of the questioned
agreement. Is it a contract of sale or a contract to sell?
The two are not, of course, the same. In the latter
case, ownership is retained by the seller and is not to
pass until full payment of the price. Such payment is
155Ibid, at p. 331.
156Joseph & Sons Enterprises, Inc. v. Court of Appeals, 143
SCRA 663 (1986);
Dignos v. Court of Appeals, 158 SCRA 375 (1988).
157195 SCRA 205 (1991).
158Ibid, at p. 210.
159209 SCRA 246 (1992).
REMEDIES OF RESCISSION 479
AND CANCELLATION FOR IMMOVABLES
a positive suspensive condition the failure of which is
not a breach, casual or serious, but simply an event
that prevents the obligation of the vendor to convey
title from acquiring binding force. In such a situation, to
argue that there was only a casual breach is to proceed
from the assumption that the contract is one of absolute
sale, where non-payment is a resolution question.
Otherwise stated, as capsulized in Luzon Brokerage
Co., Inc. vs. Maritime Building Co., Inc., “there can
be no rescission or resolution of an obligation as yet
non-existent, because the suspensive condition did not
happen.’”...160
So once in a while, the Court recognizes the fundamental
difference between a contract of sale and a contract to sell,
and
doctrinal pronouncements having to do with rescission are not
made to apply to the latter. But where is one to put one’s self,
in
this confusion of Supreme Court pronouncements?
What ruined it for Jacinto is the fact that it took the same
position of Dignos that the absence in the contract of a
reservation
on the part of the seller the right to unilaterally rescind the
contract
the moment the vendee fails to pay within the fi xed period,
indicated that it is a contract of sale and not a contract to sell,
leading to what the author considers an erroneous conclusion
that express reservation of the power to rescind is essential in
a Appeals,167 where the issue was who between two “buyers” of
contract to sell arrangement.
But then Jacinto went on to say that even if it were a contract
to sell and resolution would have been the proper remedy,
according to the Court, the buyer would still have been validly
granted an opportunity to pay the accrued installments
because
of the third paragraph of Article 1191 which provides that “The
Court shall decree the rescission claimed, unless there be just
cause authorizing the fi xing of a period.” The paragraph talks
of rescission, and legally, when the suspensive condition has
not been fulfi lled, not even the courts can make the obligation
effective.
160Ibid, at pp. 254-255.
480 LAW ON SALES
2. Maceda Law Period161
The Maceda Law has further blurred the basic distinction
between a contract of sale and a contract to sell, at least in the
specifi c types of residential real estate and condominium units
covered by said law. By legislative injunctions, the Maceda
Law
has decreed that whether it be a contract of sale or a contract
to sell, the actual rescission or cancellation thereof shall take
place “thirty days from receipt by the buyer of the notice of
cancellation or the demand for rescission of the contract by a
notarial act.”
In Siska Dev’t. Corp. v. Offi ce of the President of the
Phils.,162
on the contention that the application of the Maceda Law to a
contract to sell that had been entered into prior its enactment
would constitute a violation of the non-impairment clause of the
Constitution, the Court held that the “[i]mpairment is anything
that
diminishes the effi cacy of the contract. There is an impairment
if
a subsequent law changes the terms of a contract between the
parties, imposes new conditions, dispenses with those agreed
upon or withdraws remedies for the enforcement of the rights
of
the parties.”163
a. Maceda Law Does Not Overcome Other
Applicable Rules to Contracts to Sell
More importantly, Siska Dev’t Corp. provided for the proper
application of the provisions of the Maceda Law with respect to
the other rules pertaining to contracts of sale, when it held that
“[t]he requirement of notice of the rescission under the Maceda
Law does not change the time or mode of performance or
impose
new conditions or dispense with the stipulations regarding the
binding effect of the contract. Neither does it withdraw the
remedy for its enforcement. At most, it merely provides for a
procedure in aid of the remedy of rescission.”164
161The discussions on the operative aspects of the Maceda
Law are found in the
previous Chapter 10.
162231 SCRA 674 (1994).
163Ibid, at p. 680.
164Ibid, emphasis supplied.
REMEDIES OF RESCISSION 481
AND CANCELLATION FOR IMMOVABLES
For example, Boston Bank of the Philippines v. Manalo,165
held that the protective mantle of the Maceda Law to buyers of
residential real estate would not serve to validate a contract to
sell which is void for failure of the parties to agree on the
manner
of payment of the purchase price, thus: “Republic Act No. 6552
applies only to a perfected contract to sell and not to a contract
with no binding and enforceable effect.”166
Another example would be the case of Lim v. Court of
the same property had preference of the same subject matter,
the Court ruled against the fi rst buyer under a contract to sell,
and
in favor of the second buyer under a contract of sale under the
well-established doctrine that the rules on double sale have no
application to favor a buyer under a contract to sell. The
decision
was arrived at even when the facts showed that there was
never
any notarial cancellation of the fi rst sale as mandated under
the
Maceda Law, and in fact without reference to the Maceda Law.
This shows that the rules under the Maceda Law are
applicable
only to issues of rescission between the seller and the buyer,
and
do not overcome prevailing rules when it involves a
controversy,
say between two buyers as to the same property bought.
The other issue that pertains to the application of the Maceda
Law when it comes to contract to sell involving residential real
estate and condominium units is whether the Supreme Court
would apply the “substantial breach” doctrine under Article
1191,
and would grant the buyer an opportunity to cure the defect
even
when notarial notice of cancellation has been effected and the
30-day requisite period has expired.
In Siska Dev’t. Corp., the Court not only reaffi rmed the
necessity of notice of cancellation in contracts to sell, but also
the
applicability of the doctrine that prohibits “rescission” for casual
or slight breaches even involving contracts to sell.168
165482 SCRA 108 (2006).
166Ibid, at p. 140.
167182 SCRA 564 (1990).
168Reiterated in Liu v. Loy, Jr., 405 SCRA 316 (2003).
482 LAW ON SALES
In Rillo v. Court of Appeals,169 which involved a contract
to sell a residential condominium unit, where the buyer had
defaulted on the payment of the amortization payments despite
several chances given to him by the seller, the Court re-affi
rmed
its protective mode only for a buyer who in good faith has
sought
to fulfi ll his obligation to pay the price. Particularly, on the
issue
on whether the seller could rescind the contract to sell when
the
buyer had not committed substantial breach under Article
1191,
the Court held that the applicable law in resolving the issue
would
be the Maceda Law, and since the buyer has paid less than
two
years of installment, he could only have availed of the 60-day
grace period, and having failed in that, the seller had a right to
cancel the contract, which it did by the fi ling of the judicial
action
for rescission.
RECAP OF THE RULINGS
An outline survey of Supreme Court decisions covering the
bases of determining whether a sale is one of contract of sale
or a
contract to sell would often show contradictory
pronouncements
on the matter, thus:
A. AT PERFECTION:
1. Requisite Contractual Stipulations — In a contract to
sell, there must be a stipulation that:
(a) Full payment of the purchase price by the buyer
constitutes a suspensive condition on the obligation
of the seller to sell and transfer ownership of the
subject matter;170
(b) Accompanied by stipulations or agreements that:
• ownership of the subject matter shall
remain with the seller until full payment
of the price; and
169274 SCRA 461 (1997).
170Heirs of San Andres v. Rodriguez, 332 SCRA 769 (2000).
REMEDIES OF RESCISSION 483
AND CANCELLATION FOR IMMOVABLES
• specifi c right is granted to the seller
to extrajudicially rescind or cancel the
contract in case of default.171
The lack of stipulation expressly reserving title to the seller
in spite delivery of the subject matter to the buyer would not
constitute the transaction into a contract to sell.172
The lack of a stipulation allowing the seller to rescind the
contract in the event the buyer fails to comply with his
obligation
to pay the purchase price clearly prevents the contract from
being
classifi ed as a contract to sell. 173
Contra to (a): What really defi nes a contract to sell is the
express stipulation that the effectivity or demandability of the
contract is subject to the happening of a suspensive condition
(usually full payment of the price), as distinguished from a
situation
where the suspensive condition modifi es not the contract
itself but rather only the obligation of the seller to sell and
deliver
the subject matter, in which case it is a conditional contract of
sale.174
Contra to (b): The Court has also ruled that even in
the absence of such stipulations, the contract would still be
considered a contract to sell, because of the absence of deeds
of conveyance covering registered land where the operative
act
of sale is registration of the deed of sale.175
171Vda. 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).
172Coronel v. Court of Appeals, 263 SCRA 15 (1996); David v.
Tiongson, 313 SCRA
63 (1999); Gomez v. Court of Appeals, 340 SCRA 720 (2000);
Villanueva, Jr. v. Court of
Appeals, 487 SCRA 571 (2006); Demafelis v. Court of
Appeals, 538 SCRA 305 (2007);
Villador, Jr. v. Zaballa, 545 SCRA 325 (2008).
173Luzon Brokerage Co., Inc. v. Maritime Building Co., Inc., 43
SCRA 95 (1972);
Jacinto v. Kaparaz, 209 SCRA 246 (1992); Topacio v. Court of
Appeals, 211 SCRA 219
(1992); Adelfa Properties, Inc. v. Court of Appeals, 240 SCRA
575 (1995); Ong v. Court
of Appeals, 240 SCRA 565 (1995); Babasa v. Court of
Appeals, 290 SCRA 532 (1998);
Almira v. Court of Appeals, 399 SCRA 351 (2003).
174Romero v. Court of Appeals, 250 SCRA 223 (1995);
Coronel v. Court of Appeals,
263 SCRA 15, 27 (1996); Heirs of Pedro Escanlar v. Court of
Appeals, 281 SCRA 176
(1997); Almocera v. Ong, 546 SCRA 164 (2008).
175Roque v. Lapuz, 96 SCRA 741 (1980).
484 LAW ON SALES
➣ But See Contra Rulings in Dignos v. Court of
Appeals;176 and in Portic v. Cristobal,177 which held
that registration does not vest title, but when the
contract to sell expressly reserves title with the
seller until full payment of the purchase price.
2. Stipulation on Execution of Deed of Absolute Sale
— When 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, the
agreement is a contract to sell, because it would be
equivalent to reservation of title clause.178
Contra: Where there is an express stipulation that
the sellers would execute a fi nal deed of absolute sale
in favor of the buyer upon payment of the balance of the
purchase price, the contract would still not be a contract
to sell, 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 seller until full payment of the
purchase price, nor is there a stipulation giving the seller
the right to unilaterally rescind the contract the moment
the buyer fails to pay within a fi xed period.179
3. Stipulation on the Payment of Price — In contract
to sell, payment of the price is a suspensive condition,
failure of which is not a breach, casual or serious, but an
event that prevents the obligation of the seller to convey
title from acquiring obligatory force.180
176158 SCRA 375 (1988).
177456 SCRA 659 (2005).
178Roque v. Lapuz, 96 SCRA 741 (1980); Lacanilao v. Court
of Appeals, 262
SCRA 486 (1996); Padilla v. Spouses Paredes, 328 SCRA 434
(2000); Rayos v. Court of
Appeals, 434 SCRA 365 (2004); Cruz v. Fernando, 477 SCRA
173 (2005).
179Dignos v. Court of Appeals, 158 SCRA 375 (1988).
180Salazar v. Court of Appeals, 258 SCRA 325 (1996);
Lacanilao v. Court of Appeals,
262 SCRA 486 (1996); Rillo v. Court of Appeals, 274 SCRA
461 (1997); Odyssey Park,
Inc. v. Court of Appeals, 280 SCRA 253 (1997); Ong v. Court
of Appeals, 310 SCRA 1
(1999); Blas v. Angeles-Hutalla, 439 SCRA 273 (2004); Cruz v.
Fernando, 477 SCRA 173
(2005).
REMEDIES OF RESCISSION 485
AND CANCELLATION FOR IMMOVABLES
Contra: If there has been substantial compliance
with the obligation to pay the price, then cancellation
cannot be effected, for unilateral rescission will not
be judicially favored or allowed if the breach is not
substantial and fundamental to the fulfi llment of the
obligation.181
B. DURING CONSUMMATION STAGE
1. Legal Effect of Delivery Made — In contract of sale,
the title to the property passes to the buyer upon the
delivery of the thing sold; whereas, in a contract to sell,
ownership is, by agreement, reserved in the seller and is
not to pass to the buyer until full payment of the purchase
price.182
2. Legal Effect of Full Payment of Price — In a contract to
sell, full payment of the price constitutes the happening
of the condition which would convert it into an executory
contract of sale,183 thus:
(a) If delivery of the subject matter had previously been
made, then ownership is transferred ipso jure to the
buyer.184
(b) If delivery of the subject matter has not been made,
then it allows the buyer to demand for specifi c
performance.185
Contra: There is still no perfected or executory
contract of sale; it merely gives rise to an action to
enforce the obligation of the seller to enter into a contract
of sale; there is no transfer of ownership to buyer even
181Spouses Benito v. Saquitan-Ruiz, 394 SCRA 250 (2002);
Heirs of Jesus M.
Mascuñana v. Court of Appeals, 461 SCRA 186 (2005).
182Salazar v. Court of Appeals, 258 SCRA 325 (1996);
Universal Robina Sugar
Milling Corp. v. Heirs of Angel Teves, 389 SCRA 3167 (2002);
Chua v. Court of Appeals,
401 SCRA 54 (2002); Vidal, Sr. v. Tayamen, 531 SCRA 147
(2007); Hulst v. PR Builders,
Inc., 532 SCRA 74 (2007); Castillo v. Reyes, 539 SCRA 193
(2007).
183Philippine National Bank v. Court of Appeals, 262 SCRA
464 (1996).
184Leaño v. Court of Appeals, 369 SCRA 36 (2001);
Carrascoso, Jr. v. Court of
Appeals, 477 SCRA 666 (2005).
185David v. Tiongson, 313 SCRA 63 (1999).
486 LAW ON SALES
when delivery was previously made; and much less can
there be demand to deliver the subject matter when no
contract of sale has been executed.186
3. Legal Effect of Non-Payment of Price —
(a) In contract of sale, the non-payment of the purchase
price is a breach, and when substantial in nature,
would allow the seller to rescind the sale.
(b) In contract to sell, where ownership is retained by
the seller until payment of the price in full, such
payment is a positive suspensive condition, failure
of which is not really a breach but an event that
prevents the obligation of the vendor to convey title
in accordance with Article 1184 of the Civil Code.”187
Contra to (b):
(i) Even when the basis for the breach of the
condition is present, a notice of “rescission” or
cancellation must be made on buyer to effect
the extinguishment of the contract to sell.188
➢ But see contra ruling in Torralba v. De los
Angeles.189
(ii) In residential real estate, when the non-payment
of the purchase price constitute merely a casual
breach, it would not extinguish the contract to
sell, and the courts may extend equity rights to
the buyer.
186Coronel v. Court of Appeals, 263 SCRA 15, 27 (1996);
Abesamis v. Court of
Appeals, 361 SCRA 328 (2001); Hulst v. PR Builders, Inc., 532
SCRA 74 (2007).
187Lacanilao v. Court of Appeals, 262 SCRA 486 (1996);
Odyssey Park, Inc. v.
Court of Appeals, 280 SCRA 253 (1997); Vidal, Sr. v.
Tayamen, 531 SCRA 147 (2007);
Hulst v. PR Builders, Inc., 532 SCRA 74 (2007).
188University of the Philippines v. De los Angeles, 35 SCRA
103 (1970); Palay,
Inc. v. Clave, 124 SCRA 638 (1983); Jison v. Court of Appeals,
164 SCRA 339 (1988);
Siska Development Corp. v. Offi ce of the President, 231
SCRA 674 (1994); Ocampo v.
Court of Appeals, 233 SCRA 551 (1994); Spouses Benito v.
Saquitan-Ruiz, 394 SCRA
250 (2002).
18996 SCRA 69 (1980).
REMEDIES OF RESCISSION 487
AND CANCELLATION FOR IMMOVABLES
C. REMEDIES AVAILABLE:
1. When Condition on Price Payment Not Fulfi lled:
(a) In contract of sale, if seller had delivered the subject
matter previously without reserving title, it would Saldana, 55 SCRA 3246 (1974); Siska Dev. Corp. v. Offi ce of
mean that ownership has been transferred to the the President, 231 SCRA
buyer, and seller cannot recover ownership until 674 (1994).
and unless the contract is resolved or rescinded by 195262 SCRA 486 (1996).
court action. 196University of the Philippines v. De los Angeles, 35 SCRA
Whereas in contract to sell, since ownership was 103 (1970); Palay, Inc.
retained by the seller by express reservation v. Clave, 124 SCRA 638 (1983); Siska Dev. Corp. v. Offi ce of
until full payment of the price, and the contract is the President, 231 SCRA
extinguished, then no action is necessary other 674 (1994).
than recovery of possession in case buyer refuses 19796 SCRA 69 (1980).
to voluntarily deliver.190 REMEDIES OF RESCISSION 489
(b) In conditional contract of sale, the non-happening AND CANCELLATION FOR IMMOVABLES
of the condition may be waived by the obligee who being incompatible thereto,198 the applicable rules are
may still seek specifi c performance. found in Articles 1184 and 1545.199 The issue of whether
Whereas, in contract to sell, the non-happening of the breach was casual or serious under Article 1191 is
the condition prevents the contract from coming into completely irrelevant in a contract to sell.200
existence (i.e., extinguishes the contract) and consequently Contra: There have been several instances when Article
neither rescission or specifi c performance 1191 was made to apply to a contract to sell involving
may be pursued.191 residential real estate, with application of the doctrine of
(c) In conditional contract of sale, the basis of rescission substantial breach.201
must be substantial breach. But: The requirements of the Maceda Law on grace
Whereas, in a contract to sell, the issue of breach is period, cash surrender value and prescribed
completely irrelevant.192 manner of notarial rescission or cancellation must
(d) In contract of sale and conditional contract of sale, always apply, whether it is a contract of sale or contract
rescission may be pursued with forfeiture of the to sell, involving installment sales of residential real
190The Caridad Estates, Inc. v. Santero, 71 Phil. 114 (1940); estate and residential condominium unit.202
Manuel v. Rodriguez, —oOo—
109 Phil. 1 (1960); Salazar v. Court of Appeals, 258 SCRA 325 198Luzon
(1996); Pangilinan v. Court
of Appeals, 279 SCRA 590 (1997); Vidal, Sr. v. Tayamen, 531
SCRA 147 (2007); Hulst v.
PR Builders, Inc., 532 SCRA 74 (2007).
191Romero v. Court of Appeals, 250 SCRA 223 (1995); Lim v.
Court of Appeals, 263
SCRA 569 (1996).
192 Luzon Brokerage Co., Inc. v. Maritime Building Co., Inc.,
43 SCRA 93 (1972).
488 LAW ON SALES
amounts paid when that has been expressly provided
for.
Whereas, in contract to sell, it becomes imperative
that the amounts paid must be returned and there
would be no basis upon which to retain them since
there was no breach upon which a claim of damage
may be interposed.193
Contra to (d): Based on equity principles, the
doctrine of substantial breach to allow rescission and
court discretion under Article 1191 have been made
to apply to contracts to sell involving residential immovables.
194
➣ But see contrary ruling in Lacanilao v. Court
of Appeals.195
Even when the suspensive condition has not
happened, which would extinguish thereby
the contract to sell, nevertheless, such
extinguishment can only have legal effect if
notice of cancellation is given to the buyer.196
➣ But see contrary ruling in Torralba v. De los
Angeles.197
2. Laws Applicable – In contract of sale, the applicable
rules are found in Articles 1191 and 1592 providing
for the remedy of rescission, but when there is a
suspensive condition, Article 1545 allows the seller to
choose between rescission or waiving the condition;
whereas, in contract to sell, the remedies of rescission
193The Manila Racing Club v. The Manila Jockey Club, 69
Phil. 55 (1939).
194J.M. Tuazon Co., Inc. v. Javier, 31 SCRA 829 (1970);
Legarda Hermanos v.