515 Phil. 431


[ G.R. NO. 163075, January 23, 2006 ]




Before us for resolution is the petition for review on certiorari[1] assailing the Decision[2] dated January 21, 2004 of the Court of Appeals in CA-G.R. CV No. 74635,[3] as well as its Resolution dated April 2, 2004 denying petitioner's motion for reconsideration.

The facts are:

On December 22, 1995, Ayala Life Assurance, Inc., petitioner, and Ray Burton Development Corporation, respondent, entered into a contract denominated as a "Contract to Sell," with a "Side Agreement" of even date. In these contracts, petitioner agreed to sell to respondent a parcel of land, with an area of 1,691 square meters, situated at Madrigal Business Park, Ayala Alabang Village, Muntinlupa City, covered by Transfer Certificate of Title No. 186485 of the Registry of Deeds of Makati City. The purchase price of the land is P55,000.00 per square meter or a total of P93,005,000.00, payable as follows:
(a) On contract date – P24,181,300.00 representing 26 percent of the purchase price, inclusive of the P1,000,000.00 option money;

(b) Not later than January 6, 1996 – P3,720,200.00 representing 4 percent of the purchase price to complete 30 percent down payment; and

(c) In consecutive quarterly installments for a period of 5 years from December 22, 1995 – P65,103,500.00 representing the 70 percent balance of the purchase price.
The contract contains a stipulation in paragraphs 3 and 3.1 for an "Event of Default." It provides that in case the purchaser (respondent) fails to pay any installment for any reason not attributable to the seller (petitioner), the latter has the right to assess the purchaser a late penalty interest on the unpaid installment at two (2%) percent per month, computed from the date the amount became due until full payment thereof. And if such default continues for a period of six (6) months, the seller has the right to cancel the contract without need of court declaration by giving the purchaser a written notice of cancellation. In case of such cancellation, the seller shall return to the purchaser the amount he received, less penalties, unpaid charges and dues on the property.

Respondent paid thirty (30%) down payment and the quarterly amortization, including the one that fell due on June 22, 1998.

However, on August 12, 1998, respondent notified petitioner in writing that it will no longer continue to pay due to the adverse effects of the economic crisis to its business. Respondent then asked for the immediate cancellation of the contract and for a refund of its previous payments as provided in the contract.

Petitioner refused to cancel the contract to sell. Instead, on November 25, 1999, it filed with the Regional Trial Court, Branch 66, Makati City, a complaint for specific performance against respondent, docketed as Civil Case No. 99-2014, demanding from the latter the payment of the remaining unpaid quarterly installments beginning September 21, 1999 in the total sum of P33,242,382.43, inclusive of interest and penalties.

Respondent, in its answer, denied any further obligation to petitioner, asserting that on August 12, 1998, it (respondent) notified the latter of its inability to pay the remaining installments. Respondent invoked the provisions of paragraphs 3 and 3.1 of the contract to sell providing for the refund to it of the amounts paid, less interest and the sum of 25% of all sums paid as liquidated damages.

After pre-trial, petitioner moved for a summary judgment on the ground that respondent's answer failed to tender any genuine issue as to any material fact, except as to the amount of damages. The trial court granted the motion and ordered the parties to submit their memoranda.

On December 10, 2001, the trial court rendered a Decision holding that respondent transgressed the law in obvious bad faith. The dispositive portion reads:
WHEREFORE, defendant (now respondent) is hereby sentenced and ordered to pay plaintiff (now petitioner) the sum of P33,242,383.43, representing the unpaid balance of the principal amount owing under the contract, interest agreed upon, and penalties. Defendant is further ordered to pay plaintiff the sum of P200,000.00 as attorney's fees and the costs of suit.

Upon full payment of the aforementioned amounts by defendant, plaintiff shall, as it is hereby ordered, execute the appropriate deed of absolute sale conveying and transferring full title and ownership of the parcel of land subject of the sale to and in favor of defendant.
On appeal, the Court of Appeals rendered a Decision dated January 21, 2004 in CA-G.R. CV No. 74635, reversing the trial court's Decision, thus:
WHEREFORE, the decision appealed from is hereby REVERSED and SET ASIDE. Ayala Life is hereby ordered to refund all sums paid under the Contract to Sell, with interest of twelve percent (12%) per annum from 12 August 1998 until fully paid, less the amount equivalent to 25% of the total amount paid as liquidated damages.

The Court of Appeals ruled that the parties' transaction in question is in the nature of a contract to sell, as distinguished from a contract of sale. Under their contract, ownership of the land is retained by petitioner until respondent shall have fully paid the purchase price. Its failure to pay the price in full is not a breach of contract but merely an event that prevents petitioner from conveying the title to respondent. Under such a situation, a cause of action for specific performance does not arise. What should govern the parties' relation are the provisions of their contract on the "Event of Default" stated earlier.

Hence, the instant petition for review on certiorari.

Petitioner contends that the Court of Appeals committed a reversible error in holding that: (a) the remedy of specific performance is not available in a contract to sell, such as the one at bar; and (b) petitioner is liable to refund respondent all the sums the latter paid under the contract to sell, with interest at 12% per annum from August 12, 1998 until fully paid, less the amount equivalent to 25% of the total amount paid as liquidated damages.

Petitioner argues that by virtue of the contract to sell, it has the right to choose between fulfillment and rescission of the contract, with damages in either case. Thus, it is immaterial to determine whether the parties' subject agreement is a contract to sell or a contract of sale.

In its comment, respondent disputed petitioner's allegations and prayed that the petition be denied for lack of merit.

The issues are:
  1. Whether respondent's non-payment of the balance of the purchase price gave rise to a cause of action on the part of petitioner to demand full payment of the purchase price; and

  2. Whether petitioner should refund respondent the amount the latter paid under the contract to sell.
At the outset, it is significant to note that petitioner does not dispute that its December 22, 1995 transaction with respondent is a contract to sell. It bears stressing that the exact nature of the parties' contract determines whether petitioner has the remedy of specific performance.

It is thus imperative that we first determine the nature of the parties' contract.

The real nature of a contract may be determined from the express terms of the written agreement and from the contemporaneous and subsequent acts of the contracting parties.[4] In the construction or interpretation of an instrument, the intention of the parties is primordial and is to be pursued.[5] If the terms of the contract are clear and leave no doubt upon the intention of the contracting parties, the literal meaning of its stipulations shall control.[6] If the words appear to be contrary to the evident intention of the parties, the latter shall prevail over the former.[7] The denomination or title given by the parties in their contract is not conclusive of the nature of its contents.[8]

Here, the questioned agreement clearly indicates that it is a contract to sell, not a contract of sale. Paragraph 4 of the contract provides:
  1. TITLE AND OWNERSHIP OF THE PROPERTY. – The title to the property shall transfer to the PURCHASER upon payment of the balance of the Purchase Price and all expenses, penalties and other costs which shall be due and payable hereunder or which may have accrued thereto. Thereupon, the SELLER shall execute a Deed of Absolute Sale in favor of the PURCHASER conveying all the SELLER'S rights, title and interest in and to the Property to the PURCHASER.[9]
As correctly stated by the Court of Appeals in its assailed Decision, "The ruling of the Supreme Court in Lim v. Court of Appeals (182 SCRA 564 [1990]) is most illuminating. In the said case, a contract to sell and a contract of sale were clearly and thoroughly distinguished from each other, with the High Tribunal stressing that in a contract of sale, the title passes to the buyer upon the delivery of the thing sold. In a contract to sell, the ownership is reserved in the seller and is not to pass until the full payment of the purchase price is made. In the first case, non-payment of the price is a negative resolutory condition; in the second case, full payment is a positive suspensive condition. In the first case, the vendor has lost and cannot recover the ownership of the property until and unless the contract of sale is itself resolved and set aside. In the second case, the title remains in the vendor if the vendee does not comply with the condition precedent of making payment at the time specified in the contract."[10]

Considering that the parties' transaction is a contract to sell, can petitioner, as seller, demand specific performance from respondent, as buyer?

Black's Law Dictionary defined specific performance as "(t)he remedy of requiring exact performance of a contract in the specific form in which it was made, or according to the precise terms agreed upon. The actual accomplishment of a contract by a party bound to fulfill it."[11]

Evidently, before the remedy of specific performance may be availed of, there must be a breach of the contract.

Under a contract to sell, the title of the thing to be sold is retained by the seller until the purchaser makes full payment of the agreed purchase price. Such payment is a positive suspensive condition, the non-fulfillment of which is not a breach of contract but merely an event that prevents the seller from conveying title to the purchaser. The non-payment of the purchase price renders the contract to sell ineffective and without force and effect. Thus, a cause of action for specific performance does not arise.

In Rayos v. Court of Appeals,[12] we held:
x x x. Under the two contracts, the petitioners bound and obliged themselves to execute a deed of absolute sale over the property and transfer title thereon to the respondents after the payment of the full purchase price of the property, inclusive of the quarterly installments due on the petitioners' loan with the PSB:

x x x

Construing the contracts together, it is evident that the parties executed a contract to sell and not a contract of sale. The petitioners retained ownership without further remedies by the respondents until the payment of the purchase price of the property in full. Such payment is a positive suspensive condition, failure of which is not really a breach, serious or otherwise, but an event that prevents the obligation of the petitioners to convey title from arising, in accordance with Article 1184 of the Civil Code (Leano v. Court of Appeals, 369 SCRA 36 [2001]; Lacanilao v. Court of Appeals, 262 SCRA 486 [1996]).

The non-fulfillment by the respondent of his obligation to pay, which is a suspensive condition to the obligation of the petitioners to sell and deliver the title to the property, rendered the contract to sell ineffective and without force and effect (Agustin v. Court of Appeals, 186 SCRA 375 [1990]). The parties stand as if the conditional obligation had never existed. Article 1191[13] of the New Civil Code will not apply because it presupposes an obligation already extant (Padilla v. Posadas, 328 SCRA 434 [2001]. There can be no rescission of an obligation that is still non-existing, the suspensive condition not having happened (Rillo v. Court of Appeals, 274 SCRA 461 [1997]). (Underscoring supplied)
Here, the provisions of the contract to sell categorically indicate that respondent's default in the payment of the purchase price is considered merely as an "event," the happening of which gives rise to the respective obligations of the parties mentioned therein, thus:
3. EVENT OF DEFAULT. The following event shall constitute an Event of Default under this contract: the PURCHASER fails to pay any installment on the balance, for any reason not attributable to the SELLER, on the date it is due, provided, however, that the SELLER shall have the right to charge the PURCHASER a late penalty interest on the said unpaid interest at the rate of 2% per month computed from the date the amount became due and payable until full payment thereof.

3.1. If the Event of Default shall have occurred, then at any time thereafter, if any such event shall then be continuing for a period of six (6) months, the SELLER shall have the right to cancel this Contract without need of court declaration to that effect by giving the PURCHASER a written notice of cancellation sent to the address of the PURCHASER as specified herein by registered mail or personal delivery. Thereafter, the SELLER shall return to the PURCHASER the aggregate amount that the SELLER shall have received as of the cancellation of this Contract, less: (i) penalties accrued as of the date of such cancellation, (ii) an amount equivalent to twenty five percent (25%) of the total amount paid as liquidated damages, and (iii) any unpaid charges and dues on the Property. Any amount to be refunded to the PURCHASER shall be collected by the PURCHASER at the office of the SELLER. Upon notice to the PURCHASER of such cancellation, the SELLER shall be free to dispose of the Property covered hereby as if this Contract had not been executed. Notice to the PURCHASER sent by registered mail or by personal delivery to its address stated in this Contract shall be considered as sufficient compliance with all requirements of notice for purposes of this Contract.[14]
Therefore, in the event of respondent's default in payment, petitioner, under the above provisions of the contract, has the right to retain an amount equivalent to 25% of the total payments. As stated by the Court of Appeals, petitioner having been informed in writing by respondent of its intention not to proceed with the contract on August 12, 1998, or prior to incurring delay in payment of succeeding installments,[15] the provisions in the contract relative to penalties and interest find no application.

The Court of Appeals further held that with respect to the award of interest, petitioner is liable to pay interest of 12% per annum upon the net refundable amount due from the time respondent made the extrajudicial demand upon it on August 12, 1998 to refund payment under the Contract to Sell,[16] pursuant to our ruling in Eastern Shipping Lines, Inc. v. Court of Appeals.[17]

In sum, we find that the Court of Appeals, in rendering the assailed Decision and Resolution, did not commit any reversible error.

WHEREFORE, the petition is DENIED. The assailed Decision and Resolution of the Court of Appeals are AFFIRMED. Costs against petitioner.


C.J., Puno, Corona, Azcuna, and Garcia, JJ., concur.

Filed under Rule 45 of the 1997 Rules of Civil Procedure, as amended.

[2] Penned by Presiding Justice Romeo A. Brawner (now retired) and concurred in by Justice Rebecca De Guia-Salvador and Justice Jose C. Reyes, Jr.

[3] Titled "Ayala Life Assurance, Inc., Plaintiff-Appellee, v. Ray Burton Development Corporation, Defendant-Appellant."

[4] Blas v. Angeles-Hutalla, G.R. No. 155594, September 27, 2004, 439 SCRA 273, citing Velasquez v. Court of Appeals, 345 SCRA 468 (2000).

[5] Blas v. Angeles-Hutalla, id., citing Golden Diamond, Inc. v. Court of Appeals, 332 SCRA 605 (2000).

[6] Article 1370, New Civil Code.

[7] Id.

[8] Blas v. Angeles-Hutalla, supra, citing Romero v. Court of Appeals, 250 SCRA 223 (1995).

[9] Contract to Sell, p. 3; Records, p. 19.

[10] See also Dijamco v. Court of Appeals, G.R. No. 113665, October 7, 2004, 440 SCRA 190; Rayos v. Court of Appeals, G.R. No. 135528, July 14, 2004, 434 SCRA 365.

[11] Sixth Centennial Edition at 1138.

[12] Supra; see also Pingol v. Court of Appeals, G.R. No. 102909, September 6, 1993, 226 SCRA 118.

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

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

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

This is understood to be without prejudice to the rights of third persons who have acquired the thing, in accordance with Articles 1385 and 1388 and the Mortgage Law. (1124)"

[14] Contract to Sell, p. 2; Record, p. 19.

[15] Paragraph 7, p. 3 of the Complaint states that default in payment of installments began on 21 September 1998. (Records, p. 14)

[16] Rollo, pp. 77-83.

[17] G.R. No. 97412, July 12, 1994, 234 SCRA 78.

Source: Supreme Court E-Library
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