BRICKTOWN DEVELOPMENT CORP. (ITS NEW CORPORATE NAME MULTINATIONAL REALTY DEVELOPMENT CORPORATION) AND MARIANO Z. VERALDE, PETITIONERS, VS. AMOR TIERRA DEVELOPMENT CORPORATION AN…

A contract, once perfected, has the force of law between the parties
with which they are bound to comply in good faith and from which neither one
may renege without the consent of the other. The autonomy of contracts allows the parties to establish such
stipulations, clauses, terms and conditions as they may deem appropriate
provided only that they are not contrary to law, morals, good customs, public
order or public policy. The standard
norm in the performance of their respective covenants in the contract, as well
as in the exercise of their rights thereunder, is expressed in the cardinal
principle that the parties in that juridical relation must act with justice,
honesty and good faith.

These basic tenets, once again, take the lead in the instant
controversy.

Private respondent reminds us that the factual findings of the
trial court, sustained by the Court of Appeals, should be considered binding on
this Court in this petition. We concede
to this reminder since, indeed, there appears to be no valid justification in
the case at bench for us to take an exception from the rule. We shall, therefore,
momentarily paraphrase these findings.

On 31 March 1981, Bricktown Development Corporation (herein
petitioner corporation), represented by its President and co-petitioner Mariano
Z. Velarde, executed two Contracts to Sell (Exhs. “A” and
“B”) in favor of Amor Tierra Development Corporation (herein private
respondent), represented in these acts by its Vice-President, Moises G.
Petilla, covering a total of 96 residential lots, situated at the Multinational
Village Subdivision, La Huerta, Parañaque, Metro Manila, with an aggregate area
of 82,888 square meters. The total
price of P21,639,875.00 was stipulated to be paid by private respondent in such
amounts and maturity dates, as follows: P2,200,000.00 on 31 March 1981; P3,209,968.75 on 30 June 1981;
P4,729,906.25 on 31 December 1981; and the balance of P11,500,000.00 to be paid
by means of an assumption by private respondent of petitioner corporation’s
mortgage liability to the Philippine Savings Bank or, alternatively, to be made
payable in cash. On even date, 31 March
1981, the parties executed a Supplemental Agreement (Exh. “C”),
providing that private respondent would additionally pay to petitioner
corporation the amounts of P55,364.68, or 21% interest on the balance of downpayment
for the period from 31 March to 30 June 1981, and of P390,369.37 representing
interest paid by petitioner corporation to the Philippine Savings Bank in
updating the bank loan for the period from 01 February to 31 March 1981.

Private respondent was only able to pay petitioner corporation
the sum of P1,334,443.21 (Exhs. “A”
to “K”). In the
meanwhile, however, the parties continued to negotiate for a possible
modification of their agreement, although nothing conclusive would appear to
have ultimately been arrived at.

Finally, on 12 October 1981, petitioner corporation, through its
legal counsel, sent private respondent a “Notice of Cancellation of
Contract” (Exh. “D”) on account of the latter’s continued
failure to pay the installment due 30 June 1981 and the interest on the unpaid
balance of the stipulated initial payment. Petitioner corporation advised private
respondent, however, that it (private respondent) still had the right to pay
its arrearages within 30 days from receipt of the notice “otherwise the
actual cancellation of the contract (would) take place.”

Several months later, or on 26 September 1983, private
respondent, through counsel, demanded (Exh. “E”) the refund of private
respondent’s various payments to petitioner corporation, allegedly “amounting
to P2,455,497.71,” with interest within fifteen days from receipt of said
letter, or, in lieu of a cash payment, to assign to private respondent an
equivalent number of unencumbered lots at the same price fixed in the
contracts. The demand, not having been
heeded, private respondent commenced, on 18 November 1983, its action with the
court a quo.^[1]

Following the reception of evidence, the trial court rendered its
decision, the dispositive portion of which read:

“In view of all the foregoing, judgment is hereby rendered as
follows:

“1. Declaring the Contracts to Sell and the
Supplemental Agreement (Exhibits ‘A’, ‘B’ and ‘C’) rescinded;

“2. Ordering the [petitioner] corporation,
Bricktown Development Corporation, also known as Multinational Realty
Development Corporation, to return to the [private respondent] the amount of
One Million Three Hundred Thirty Four Thousand Four Hundred Forty-Three Pesos
and Twenty-One Centavos (P1,334,443.21) with interest at the rate of Twelve
(12%) percent per annum, starting November 18, 1983, the date when the
complaint was filed, until the amount is fully paid;

“3. Ordering the [petitioner] corporation to
pay the [private respondent] the amount of Twenty-Five Thousand (P25,000.00)
Pesos, representing attorney’s fees;

“4. Dismissing [petitioners’] counterclaim for
lack of merit; and

“5. With
costs against the [petitioner] corporation.

SO ORDERED.”^[2]

On appeal, the appellate court affirmed in toto the trial court’s findings and
judgment.

In their instant petition, petitioners contend that the Court of
Appeals has erred in ruling that –

(1) By petitioners’ acts, conduct and
representation, they themselves delayed or prevented the performance of the
contracts to sell and the supplemental agreement and were thus estopped from
cancelling the same.

(2) Petitioners were not justified in resolving
the contracts to sell and the supplemental agreement.

(3) The cancellation
of the contract required a positive act on the part of petitioners giving
private respondent the sixty (60) day grace period provided in the contracts to
sell; and

(4) In not holding that the forfeiture of the
P1,378,197.48 was warranted
under the liquidated damages provisions of the contracts to sell and the supplemental
agreement and was not iniquitous nor unconscionable.

The core issues would really come down to (a) whether or not the
contracts to sell were validly rescinded or cancelled by petitioner corporation
and, in the affirmative, (b) whether or not the amounts already remitted by
private respondent under said contracts were rightly forfeited by petitioner
corporation.

Admittedly, the terms of payment agreed upon by the parties were
not met by private respondent. Of a total selling price of P21,639,875.00,
private respondent was only able to
remit the sum of P1,334,443.21 which
was even short of the stipulated initial payment of P2,200,000.00. No
additional payments, it would seem, were made. A notice of cancellation
was ultimately made months after the lapse of the contracted grace period. Paragraph 15 of the Contracts to Sell
provided thusly:

“15. Should the PURCHASER fail to pay when due
any of the installments mentioned in stipulation No. 1 above, the OWNER shall
grant the purchaser a sixty (60)-day grace period within which to pay the
amount/s due, and should the PURCHASER still fail to pay the due amount/s
within the 60-day grace period, the PURCHASER shall have the right to ex-parte
cancel or rescind this contract, provided, however, that the actual
cancellation or rescission shall take effect only after the lapse of thirty
(30) days from the date of receipt by the PURCHASER of the notice of
cancellation of this contract or the demand for its rescission by a notarial
act, and thereafter, the OWNER shall have the right to resell the lot/s subject
hereof to another buyer and all payments made, together with all improvements
introduced on the aforementioned lot/s shall be forfeited in favor of the OWNER
as liquidated damages, and in this connection, the PURCHASER obligates itself
to peacefully vacate the aforesaid lot/s without necessity of notice or demand
by the OWNER.”^[3]

A grace period is a right, not an obligation, of the debtor. When unconditionally conferred, such as in
this case, the grace period is effective without further need of demand either
calling for the payment of the obligation or for honoring the
right. The grace period must not be
likened to an obligation, the non-­payment of which, under Article 1169 of the
Civil Code, would generally still require judicial or extrajudicial demand
before “default” can be said to arise.^[4]

Verily, in the case at bench, the sixty-day grace period under
the terms of the contracts to sell became ipso-facto operative from the
moment the due payments were not met at their stated maturities. On this score, the provisions of Article
1169 of the Civil Code would
find no relevance whatsoever.

The cancellation of the contracts to sell by petitioner corporation accords with the contractual
covenants of the parties, and such cancellation must be respected. It may be noteworthy to add that in a contract to sell, the non-payment
of the purchase price (which is
normally the condition for the final sale) can prevent the obligation to convey title from acquiring any obligatory
force (Roque vs. Lapuz, 96 SCRA 741; Agustin vs. Court of Appeals, 186 SCRA
375).

The forfeiture of the payments thus far remitted under the
cancelled contracts in question, given the factual findings of both the trial
court and the appellate court, must be viewed differently. While clearly insufficient to justify a
foreclosure of the right of petitioner corporation to rescind or cancel its
contracts with private respondent, the series of events and circumstances
described by said courts to have prevailed in the interim between the parties,
however, warrant some favorable consideration by this Court.

Petitioners do not deny the fact that there has indeed been a
constant dialogue between the parties during the period of their juridical
relation. Concededly, the negotiations
that they have pursued strictly did not result in the novation, either
extinctive or modificatory, of the contracts to sell; nevertheless, this Court
is unable to completely disregard the following findings of both the trial court
and the appellate court. Said the trial
court:

“It has been duly established through the testimony of
plaintiff’s witnesses Marcosa Sanchez and Vicente Casas that there were
negotiations to enter into another agreement between the parties, after March
31, 1981. The first negotiation took
place before June 30, 1981, when Moises Petilla and Renato Dragon,
Vice-President and president, respectively, of the plaintiff corporation,
together with Marcosa Sanchez, went to the office of the defendant corporation
and made some proposals to the latter, thru its president, the defendant
Mariano Velarde. They told the
defendant Velarde of the plaintiff’s request for the division of the lots to be
purchased into smaller lots and the building of town houses or smaller houses
therein as these kinds of houses can be sold easily than big ones. Velarde replied that subdivision owners
would not consent to the building of small houses. He, however, made two counter-proposals, to wit: that the defendant corporation would assign
to the plaintiff a number of lots corresponding to the amounts the latter had
already paid, or that the defendant corporation may sell the corporation
itself, together with the Multinational Village Subdivision, and its other
properties, to the plaintiff and the latter’s sister companies engaged in the
real estate business. The negotiations
between the parties went on for sometime but nothing definite was
accomplished.”^[5]

For its part, the Court of Appeals observed:

“We agree with the court a quo that there is,
therefore, reasonable ground to believe that because of the negotiations
between the parties, coupled with the fact that the plaintiff never took actual
possession of the properties and the defendants did not also dispose of the
same during the pendency of said negotiations, the plaintiff was led to believe
that the parties may ultimately enter into another agreement in place of the
‘contracts to sell.’ There was, evidently, no malice or bad faith on the part
of the plaintiff in suspending payments. On the contrary, the defendants not only contributed, but had consented
to the delay or suspension of payments. They did not give the plaintiff a categorical answer that their
counter-proposals will not materialize.”^[6]

In fine, while we must conclude that petitioner corporation still
acted within its legal right to declare
the contracts to sell rescinded or
cancelled, considering, nevertheless, the peculiar circumstances found
to be extant by the trial court, confirmed by the Court of Appeals, it would be
unconscionable, in our view, to likewise sanction the forfeiture by petitioner
corporation of payments made to it by private respondent. Indeed, in the opening statement of this ponencia, we have intimated
that the relationship between
parties in any contract must always be characterized and punctuated by good
faith and fair dealing. Judging from
what the courts below have said, petitioners
did fall well behind that standard. We do not find it equitable, however,
to adjudge any interest payment by petitioners on the amount to be thus
refunded, computed from judicial demand, for, indeed, private respondent should
not be allowed to totally free
itself from its own breach.

WHEREFORE, the appealed decision is AFFIRMED insofar as it
declares valid the cancellation of the contracts in question but MODIFIED by
ordering the refund by petitioner corporation of P1,334,443.21 with 12%
interest per annum to commence only, however, from the date of finality of this decision until such
refund is effected. No costs.

SO ORDERED.

Bidin, Romero, and Melo,
JJ., concur.

Feliciano, J.,(Chairman)., on leave.

^[1]
Rollo, pp. 39-41.

^[2]
Rollo, p. 41.

^[3]
Rollo, p. 82.

^[4]
Art.
1169. Those obliged to deliver or to do
something incur in delay from the time the obligee judicially or
extrajudicially demands from them the fulfillment of their obligation.

However, the
demand by the creditor shall not be necessary in order that delay may exist:

(1) When the obligation or the law expressly so
declares; or

(2)
When from the nature and the circumstances of the obligation it appears that
the designation of the time when the thing is to be delivered or the service is
to be rendered was a controlling motive for the establishment of the contract;
or

(3) When demand would be useless, as when the
obligor has rendered it beyond his power to perform.

In reciprocal
obligations, neither party incurs in delay if the other does not comply or is
not ready to comply in a proper manner with what is incumbent upon him. From the moment one of the parties fulfills
his obligation, delay by the other begins.

^[5]
Rollo, pp. 43-44.

^[6]
Rollo, p. 44.