SPOUSES TEODULO PADERNAL AND ANITA A. PADERNAL, PLAINTIFFS-APPELLEES, VS. SPOUSES RENE JARANILLA AND JEAN JARANILLA, DEFENDANTS-APPELLANTS.

Padernal versus Jaranilla

The Case

This is the case of Padernal versus Jaranilla. Spouses Teodulo and Anita Padernal, the registered owners of a parcel of land in New Lucena, Iloilo, sued Spouses Rene and Jean Jaranilla for rescission of contract, recovery of possession and ownership, and damages, after the Jaranillas allegedly failed to pay the balance of the purchase price and failed to assume the Padernals' bank loan. The case matters because it draws the clean line between a contract of sale and a contract to sell, and it tells us what remedy a vendor may use when the buyer of land under a contract to sell does not pay: not rescission under Article 1191, but the enforcement of the suspensive condition and of the stipulations the parties themselves wrote into their deed.

Procedural History

The Padernals filed the complaint in the Regional Trial Court of Iloilo City, Branch 27. After trial, that court rendered judgment in favor of the Padernals: it ordered the contract to sell cancelled or terminated, forfeited the payments made in favor of the vendors, ordered the Jaranillas to deliver possession, to pay reasonable rentals of 2,000 pesos per year since 1983, and to pay attorney's fees of 25,000 pesos plus costs. The Jaranillas appealed to the Court of Appeals, assigning as errors the findings on non-payment of the balance, non-compliance with the bank obligation, the forfeiture, the awards of attorney's fees and rentals, and the rescission itself. The appeal reached the Supreme Court, which decided it in 2014 and rendered the decision now before us.

Facts

On April 6, 1983, the Padernals and the Jaranillas entered into a Deed of Conditional Sale over Lot 8680, with an area of 41,976 square meters, covered by a transfer certificate of title in the name of the Padernals. The terms were these: the vendees would pay 15,000 pesos upon signing; they would assume the vendors' real estate loan with the Philippine Veterans Bank, with interest; they would pay the balance of 38,650 pesos on April 6, 1983, failing which that amount would bear interest at twelve percent per annum beginning April 6, 1983 but not later than October 6, 1983, otherwise whatever payments the vendees had made would be forfeited in favor of the vendors and the vendees would surrender possession; ownership and title would pass to the vendees only upon full payment of the 38,650 pesos including the mortgage obligation; and upon full payment the vendors would execute a deed of absolute sale.

The Jaranillas paid the 15,000 peso down payment. They did not pay the balance, and they did not pay the bank. The bank sent the Padernals a demand letter dated January 24, 1992. Teodulo Padernal wrote the bank in September 1994 asking for condonation of penalties; the bank granted the request and fixed the amount due at 40,841 pesos and 92 centavos, which the Padernals paid on November 7, 1994. As early as November 22, 1983, the Padernals had written the Jaranillas cancelling the contract for failure to pay the balance, and in January 1995 they demanded 70,000 pesos representing rentals of 5,000 pesos per year for the Jaranillas' possession of the land.

At trial, the Jaranillas claimed full payment, relying on several receipts and especially on an undated receipt for 2,950 pesos said to represent full payment, signed by Herbert Padernal, the son of the vendors. Herbert testified that he had borrowed 8,000 pesos from the Jaranillas and signed a receipt calling it partial payment, and later received 2,950 pesos and signed a receipt whose text had been written by Jose Serafin Jaranilla, the brother of the defendant Rene Jaranilla. The trial court found that all the receipts together amounted only to 32,850 pesos, short of the 38,650 pesos owed, apart from accumulated interest, and that the statement of full payment written by Jose Serafin Jaranilla was self-serving. On the bank obligation, the Jaranillas claimed the bank was under liquidation and later refused their tender of a manager's check for 55,610 pesos in October 1994, but no bank official testified and the original check was not presented.

Issues

• Whether or not the Jaranillas failed to pay the balance of the purchase price under the Deed of Conditional Sale.
• Whether or not the Jaranillas failed to comply with their assumed obligation to pay the Padernals' loan with the Philippine Veterans Bank.
• Whether or not the forfeiture of all payments made by the Jaranillas was proper.
• Whether or not the award of attorney's fees and reasonable rentals was proper.
• Whether or not the Deed of Conditional Sale was correctly terminated despite the claim of full payment and compliance.

Applicable Provisions

Article 1306 of the Civil Code provides:

The contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy.

This is the basis for holding the parties to the forfeiture clause they themselves agreed upon.

Article 1191 of the Civil Code provides:

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 Court holds that this remedy of rescission cannot apply to a mere contract to sell, which is why the trial court's use of rescission had to be recast as termination for failure of the suspensive condition.

Ruling

On the first two issues taken together, the Court held that the Jaranillas failed to prove payment of the 38,650 peso balance. The receipts totalled only 32,850 pesos, and the receipt for 2,950 pesos purporting to be full payment was written by Jose Serafin Jaranilla, not by Herbert Padernal, making its statement of full payment self-serving. On the bank obligation, the Court held that the Jaranillas were not excused by the bank's closure; they could have informed the vendors, asked the main office how to pay, or tendered payment in court, and their offer in October 1994 came too late, after the bank had already demanded payment from the Padernals. The Court also stressed that the findings of fact of the trial court are entitled to great weight on appeal and should not be disturbed absent strong and valid reasons.

On the third issue, the Court held the forfeiture valid. It quoted Article 1306 and reasoned that the stipulations of the contract are the law between the parties, and courts have no alternative but to enforce them as agreed and written, there being no law or public policy against the stipulated forfeiture of payments already made, provided the vendees in fact failed to perform. Since the Jaranillas failed both to pay the balance and to pay the bank, the automatic forfeiture clause took effect.

On the fourth issue, the Court deleted the attorney's fees. The award of attorney's fees is the exception rather than the rule, and the trial court must state explicitly the legal reason for it; here the fees appeared only in the dispositive portion, with no discussion in the body of the decision, and no sufficient showing of bad faith.

On the fifth issue, the Court held that where the seller promises to execute a deed of absolute sale only upon completion of payment of the price, the contract is a mere contract to sell. In such a contract, title remains with the vendor and payment of the price is a positive suspensive condition; failure to pay is not a breach that calls for rescission but a situation that prevents the vendor's obligation to convey title from acquiring obligatory force. The Court therefore held that the contract to sell was terminated when the Jaranillas failed to pay the balance and to pay the bank obligation.

Doctrine

First, a contract to sell is not a contract of sale. The vendor retains title until the purchase price is fully paid, and payment of the price is a positive suspensive condition, not a negative resolutory condition. Second, the remedy of rescission under Article 1191 does not apply to a contract to sell; the vendor simply enforces the contract, and the failure of the condition prevents the obligation to convey title from arising. Third, the stipulations of the contract are the law between the parties under Article 1306, and a forfeiture clause freely agreed upon will be enforced where the vendee fails to perform. Fourth, findings of fact of the trial court are entitled to great weight on appeal. Fifth, attorney's fees, being the exception rather than the rule, must be expressly justified in the body of the decision.

Disposition

The appeal was denied, and the decision of the trial court was affirmed with modification, deleting the award of attorney's fees; the Padernals thus prevailed, keeping the forfeited payments and recovering possession of the land.

Remember This

Memorize this line: in a contract to sell, payment of the price is a positive suspensive condition, so non-payment is not a breach to be rescinded under Article 1191 but a failure that prevents the vendor's obligation to convey title from arising. Examiners use this case to test the contract of sale versus contract to sell distinction, the inapplicability of Article 1191 to a contract to sell, and the enforceability of a stipulated forfeiture clause under Article 1306.