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369 Phil. 243


[ G.R. No. 97347, July 06, 1999 ]




Before us is a petition for review on certiorari from the judgment rendered by the Court of Appeals which, except as to the award of exemplary damages, affirmed the decision of the Regional Trial Court of Lucena City, Branch 60, setting aside the "Agreement of Purchase and Sale" entered into by herein petitioner and private respondent spouses in Civil Case No. 85-85.

On May 10, 1983, petitioner Jaime Ong, on the one hand, and respondent spouses Miguel K. Robles and Alejandra Robles, on the other hand, executed an "Agreement of Purchase and Sale" respecting two parcels of land situated at Barrio Puri, San Antonio, Quezon. The terms and conditions of the contract read:
"1. That for and in consideration of the agreed purchase price of TWO MILLION PESOS (P2,000,000.00), Philippine currency, the mode and manner of payment is as follows:
  1. The initial payment of SIX HUNDRED THOUSAND PESOS (P600,000.00) as verbally agreed by the parties, shall be broken down as follows:

    1. P103,499.91 shall be paid, and as already paid by the BUYER to the SELLERS on March 22, 1983, as stipulated under the Certification of undertaking dated March 22, 1983 and covered by a check voucher of even date.

    2. That the sum of P496,500.09 shall be paid directly by the BUYER to the Bank of Philippine Islands to answer for the loan of the SELLERS which as of March 15, 1983 amounted to P537,310.10, and for the interest that may accrued (sic) from March 15, 1983, up to the time said obligation of the SELLERS with the said bank has been settled, provided however that the amount in excess of P496,500.09, shall be chargeable from the time deposit of the SELLERS with the aforesaid bank.

  2. That the balance of ONE MILLION FOUR HUNDRED THOUSAND (P1,400,000.00) PESOS shall be paid by the BUYER to the SELLERS in four (4) equal quarterly installments of THREE HUNDRED FIFTY THOUSAND PESOS (P350,000.00), the first to be due and payable on June 15, 1983, and every quarter thereafter, until the whole amount is fully paid, by these presents promise to sell to said BUYER the two (2) parcels of agricultural land including the rice mill and the piggery which are the most notable improvements thereon, situated at Barangay Puri, San Antonio Quezon, x x x.
"2. That upon the payment of the total purchase price by the BUYER the SELLERS bind themselves to deliver to the former a good and sufficient deed of sale and conveyance for the described two (2) parcels of land, free and clear from all liens and encumbrances.

"3. That immediately upon the execution of this document, the SELLERS shall deliver, surrender and transfer possession of the said parcels of land including all the improvements that may be found thereon, to the BUYER, and the latter shall take over from the SELLER the possession, operation, control and management of the RICEMILL and PIGGERY found on the aforesaid parcels of land.

"4. That all payments due and payable under this contract shall be effected in the residence of the SELLERS located at Barangay Puri, San Antonio, Quezon unless another place shall have been subsequently designated by both parties in writing.
x x x x x x x x x."[1]

On May 15, 1983, petitioner Ong took possession of the subject parcels of land together with the piggery, building, ricemill, residential house and other improvements thereon.

Pursuant to the contract they executed, petitioner paid respondent spouses the sum of P103,499.91[2] by depositing it with the United Coconut Planters Bank. Subsequently, petitioner deposited sums of money with the Bank of Philippine Islands (BPI),[3] in accordance with their stipulation that petitioner pay the loan of respondents with BPI.

To answer for his balance of P1,400,000.00 petitioner issued four (4) post-dated Metro Bank checks payable to respondent spouses in the amount of P350,0000.00 each, namely: Check No. 157708 dated June 15, 1983,[4] Check No. 157709 dated September 15,1983,[5] Check No. 157710 dated December 15, 1983[6] and Check No. 157711 dated March 15, 1984.[7] When presented for payment, however, the checks were dishonored due to insufficient funds. Petitioner promised to replace the checks but failed to do so. To make matters worse, out of the P496,500.00 loan of respondent spouses with the Bank of the Philippine Islands, which petitioner, as per agreement, should have paid, petitioner only managed to dole out no more than P393,679.60. When the bank threatened to foreclose the respondent spouses' mortgage, they sold three transformers of the rice mill worth P51,411.00 to pay off their outstanding obligation with said bank, with the knowledge and conformity of petitioner.[8] Petitioner, in return, voluntarily gave the spouses authority to operate the rice mill.[9] He, however, continued to be in possession of the two parcels of land while private respondents were forced to use the rice mill for residential purposes.

On August 2, 1985, respondent spouses, through counsel, sent petitioner a demand letter asking for the return of the properties. Their demand was left unheeded, so, on September 2, 1985, they filed with the Regional Trial Court of Lucena City, Branch 60, a complaint for rescission of contract and recovery of properties with damages. Later, while the case was still pending with the trial court, petitioner introduced major improvements on the subject properties by constructing a complete fence made of hollow blocks and expanding the piggery. These prompted the respondent spouses to ask for a writ of preliminary injunction.[10] The trial court granted the application and enjoined petitioner from introducing improvements on the properties except for repairs.[11]

On June 1, 1989 the trial court rendered a decision, the dispositive portion of which reads as follows:
"IN VIEW OF THE FOREGOING, judgment is hereby rendered:

a) Ordering that the contract entered into by plaintiff spouses Miguel K. Robles and Alejandra M. Robles and the defendant, Jaime Ong captioned `Agreement of Purchase and Sale,' marked as Exhibit `A' set aside;

b) Ordering defendant, Jaime Ong to deliver the two (2) parcels of land which are the subject matter of Exhibit `A' together with the improvements thereon to the spouses Miguel K. Robles and Alejandro M. Robles;

c) Ordering plaintiff spouses, Miguel Robles and Alejandra Robles to return to Jaime Ong the sum of P497,179.51;

d) Ordering defendant Jaime Ong to pay the plaintiffs the sum of P100,000.00 as exemplary damages; and

e) Ordering defendant Jaime Ong to pay the plaintiffs spouses Miguel K. Robles and Alejandra Robles the sum of P20,000.00 as attorney's fees and litigation expenses.

"The motion of the plaintiff spouses Miguel K. Roles and Alejandra Robles for the appointment of receivership is rendered moot and academic.

From this decision, petitioner appealed to the Court of Appeals, which affirmed the decision of the Regional Trial Court but deleted the award of exemplary damages. In affirming the decision of the trial court, the Court of Appeals noted that the failure of petitioner to completely pay the purchase price is a substantial breach of his obligation which entitles the private respondents to rescind their contract under Article 1191 of the New Civil Code. Hence, the instant petition.

At the outset, it must be stated that the issues raised by the petitioner are generally factual in nature and were already passed upon by the Court of Appeals and the trial court. Time and again, we have stated that it is not the function of the Supreme Court to assess and evaluate all over again the evidence, testimonial and documentary, adduced by the parties to an appeal, particularly where, such as in the case at bench, the findings of both the trial court and the appellate court on the matter coincide. There is no cogent reason shown that would justify the court to discard the factual findings of the two courts below and to superimpose its own.[13]

The only pertinent legal issues raised which are worthy of discussion are: (1) whether the contract entered into by the parties may be validly rescinded under Article 1191 of the New Civil Code; and (2) whether the parties had novated their original contract as to the time and manner of payment.

Petitioner contends that Article 1191 of the New Civil Code is not applicable since he has already paid respondent spouses a considerable sum and has therefore substantially complied with his obligation. He cites Article 1383 instead, to the effect that where specific performance is available as a remedy, rescission may not be resorted to.

A discussion of the aforesaid articles is in order.

Rescission, as contemplated in Articles 1380, et seq., of the New Civil Code, is a remedy granted by law to the contracting parties and even to third persons, to secure the reparation of damages caused to them by a contract, even if this should be valid, by restoration of things to their condition at the moment prior to the celebration of the contract.[14] It implies a contract, which even if initially valid, produces a lesion or a pecuniary damage to someone.[15]

On the other hand, Article 1191 of the New Civil Code refers to rescission applicable to reciprocal obligations. Reciprocal obligations are those which arise from the same cause, and in which each party is a debtor and a creditor of the other, such that the obligation of one is dependent upon the obligation of the other.[16] They are to be performed simultaneously such that the performance of one is conditioned upon the simultaneous fulfillment of the other. Rescission of reciprocal obligations under Article 1191 of the New Civil Code should be distinguished from rescission of contracts under Article 1383. Although both presuppose contracts validly entered into and subsisting and both require mutual restitution when proper, they are not entirely identical.

While Article 1191 uses the term "rescission," the original term which was used in the old Civil Code, from which the article was based, was "resolution."[17] Resolution is a principal action which is based on breach of a party, while rescission under Article 1383 is a subsidiary action limited to cases of rescission for lesion under Article 1381 of the New Civil Code, which expressly enumerates the following rescissible contracts:
  1. Those which are entered into by guardians whenever the wards whom they represent suffer lesion by more than one fourth of the value of the things which are the object thereof;

  2. Those agreed upon in representation of absentees, if the latter suffer the lesion stated in the preceding number;

  3. Those undertaken in fraud of creditors when the latter cannot in any manner collect the claims due them;

  4. Those which refer to things under litigation if they have been entered into by the defendant without the knowledge and approval of the litigants or of competent judicial authority;

  5. All other contracts specially declared by law to be subject to rescission.
Obviously, the contract entered into by the parties in the case at bar does not fall under any of those mentioned by Article 1381. Consequently, Article 1383 is inapplicable.

May the contract entered into between the parties, however, be rescinded based on Article 1191?

A careful reading of the parties' "Agreement of Purchase and Sale" shows that it is in the nature of a contract to sell, as distinguished from a contract of sale. 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, reserved in the vendor and is not to pass to the vendee until full payment of the purchase price.[18] 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.[19]

Respondents in the case at bar bound themselves to deliver a deed of absolute sale and clean title covering the two parcels of land upon full payment by the buyer of the purchase price of P2,000,000.00. This promise to sell was subject to the fulfillment of the suspensive condition of full payment of the purchase price by the petitioner. Petitioner, however, failed to complete payment of the purchase price. The non-fulfillment of the condition of full payment rendered the contract to sell ineffective and without force and effect. 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.[20] 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 binding force.[21] Hence, the agreement of the parties in the case at bench may be set aside, but not because of a breach on the part of petitioner for failure to complete payment of the purchase price. Rather, his failure to do so brought about a situation which prevented the obligation of respondent spouses to convey title from acquiring an obligatory force.

Petitioner insists, however, that the contract was novated as to the manner and time of payment.

We are not persuaded. Article 1292 of the New Civil Code states that, "In order that an obligation may be extinguished by another which substitutes the same, it is imperative that it be so declared in unequivocal terms, or that the old and the new obligations be on every point incompatible with each other."

Novation is never presumed, it must be proven as a fact either by express stipulation of the parties or by implication derived from an irreconcilable incompatibility between the old and the new obligation.[22] Petitioner cites the following instances as proof that the contract was novated: the retrieval of the transformers from petitioner's custody and their sale by the respondents to MERALCO on the condition that the proceeds thereof be accounted for by the respondents and deducted from the price of the contract; the take-over by the respondents of the custody and operation of the rice mill; and the continuous and regular withdrawals by respondent Miguel Robles of installment sums per vouchers (Exhs. "8" to "47") on the condition that these installments be credited to petitioner's account and deducted from the balance of the purchase price.

Contrary to petitioner's claim, records show that the parties never even intended to novate their previous agreement. It is true that petitioner paid respondents small sums of money amounting to P48,680.00, in contravention of the manner of payment stipulated in their contract. These installments were, however, objected to by respondent spouses, and petitioner replied that these represented the interest of the principal amount which he owed them.[23] Records further show that petitioner agreed to the sale of MERALCO transformers by private respondents to pay for the balance of their subsisting loan with the Bank of Philippine Islands. Petitioner's letter of authorization reads:

"x x x x x x x x x
"Under this authority, it is mutually understood that whatever payment received from MERALCO as payment to the transformers will be considered as partial payment of the undersigned's obligation to Mr. and Mrs. Miguel K. Robles.

"The same will be utilized as partial payment to existing loan with the Bank of Philippine Islands.

"It is also mutually understood that this payment to the Bank of Philippine Islands will be reimbursed to Mr. and Mrs. Miguel K. Robles by the undersigned." [Underscoring supplied][24]
It should be noted that while it was agreed that part of the purchase price in the sum of P496,500.00 would be directly deposited by petitioner to the Bank of Philippine Islands to answer for the loan of respondent spouses, petitioner only managed to deposit P393,679.60. When the bank threatened to foreclose the properties, petitioner apparently could not even raise the sum needed to forestall any action on the part of the bank. Consequently, he authorized respondent spouses to sell the three (3) transformers. However, although the parties agreed to credit the proceeds from the sale of the transformers to petitioner's obligation, he was supposed to reimburse the same later to respondent spouses. This can only mean that there was never an intention on the part of either of the parties to novate petitioner's manner of payment.

Petitioner contends that the parties verbally agreed to novate the manner of payment when respondent spouses proposed to operate the rice mill on the condition that they will account for its earnings. We find that this is unsubstantiated by the evidence on record. The tenor of his letter dated August 12, 1984 to respondent spouses, in fact, shows that petitioner had a "little misunderstanding" with respondent spouses whom he was evidently trying to appease by authorizing them to continue temporarily with the operation of the rice mill. Clearly, while petitioner might have wanted to novate the original agreement as to his manner of payment, the records are bereft of evidence that respondent spouses willingly agreed to modify their previous arrangement.

In order for novation to take place, the concurrence of the following requisites is indispensable: (1) there must be a previous valid obligation; (2) there must be an agreement of the parties concerned to a new contract; (3) there must be the extinguishment of the old contract; and (4) there must be the validity of the new contract.[25] The aforesaid requisites are not found in the case at bench. The subsequent acts of the parties hardly demonstrate their intent to dissolve the old obligation as a consideration for the emergence of the new one. We repeat to the point of triteness, novation is never presumed, there must be an express intention to novate.

As regards the improvements introduced by petitioner to the premises and for which he claims reimbursement, we see no reason to depart from the ruling of the trial court and the appellate court that petitioner is a builder in bad faith. He introduced the improvements on the premises knowing fully well that he has not paid the consideration of the contract in full and over the vigorous objections of respondent spouses. Moreover, petitioner introduced major improvements on the premises even while the case against him was pending before the trial court.

The award of exemplary damages was correctly deleted by the Court of Appeals inasmuch as no moral, temperate, liquidated or compensatory damages in addition to exemplary damages were awarded.

WHEREFORE, the decision rendered by the Court of Appeals is hereby AFFIRMED with the MODIFICATION that respondent spouses are ordered to return to petitioner the sum of P48,680.00 in addition to the amounts already awarded. Costs against petitioner.


Davide, Jr., C.J., (Chairman), Melo, Kapunan, and Pardo, JJ., concur.

[1] Exhibits "A" and "1."

[2] Exhibits "6" and "H."

[3] TSN, October 11, 1985, pp. 9-11.

[4] Exh. "C."

[5] Exh. "D."

[6] Exh. "E."

[7] Exh. "F."

[8] Exh. "48."

[9] Exh. "P."

[10] Records, Vol. I, p. 388.

[11] Records, Vol. I, p. 414.

[12] Rollo, pp. 109-119.

[13] Odyssey Park Inc. vs. Court of Appeals, 280 SCRA 253 [1997].

[14] IV Tolentino, Civil Code 570 (1991), citing 8 Manresa 748-749.

[15] Ibid., at 571, citing 2 Castan 652.

[16] Areola vs. Court of Appeals, 236 SCRA 643 [1994].

[17] Article 1191 was based on Article 1124 of the old Civil Code.

[18] PNB vs. Court of Appeals, 262 SCRA 464 [1996]; Salazar vs. Court of Appeals, 258 SCRA 317 [1996].

[19] Agustin vs. Court of Appeals, 186 SCRA 375 [1990]; Roque vs. Lapuz, 96 SCRA 741 [1980]; Manuel vs. Rodriguez, 109 Phil 1 [1960].

[20] Ibid.

[21] Villaflor vs. Court of Appeals, 280 SCRA 297 [1997].

[22] Uraca vs. Court of Appeals, 278 SCRA 702 [1997]; Ajax Marketing and Development Corporation vs. Court of Appeals, 248 SCRA 222 [1995].

[23] TSN, December 2, 1987, pp. 30-33.

[24] Exhibit "48."

[25] Reyes vs. Court of Appeals, 264 SCRA 35 [1996].

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