DARREL CORDERO, EGMEDIO BAUTISTA, ROSEMAY BAUTISTA, MARION BAUTISTA, DANNY BOY CORDERO, LADYLYN CORDERO AND BELEN CORDERO, PETITIONERS, VS. F.S. MANAGEMENT & DEVELOPMENT CORPORA…

Cordero versus F.S. Management and Development Corporation

The Case

This is a petition for review of the decision of the Court of Appeals in a complaint for rescission of contract with damages. The petitioners, the Cordero family led by Belen Cordero, sold five parcels of land in Nasugbu, Batangas to the respondent, F.S. Management and Development Corporation, under a contract to sell. When the buyer failed to complete the agreed payments, the sellers sued to rescind and to recover damages. The case matters because it draws the sharp line between a contract of sale and a contract to sell, explains why rescission under Article 1191 of the Civil Code has no place in a contract to sell, and identifies the Realty Installment Buyer Protection Act, Republic Act Number 6552, as the law that governs cancellation and the retention of payments.

Procedural History

Belen Cordero, in her own behalf and as attorney-in-fact of her co-petitioners, filed a complaint for rescission of contract with damages before Branch 260 of the Regional Trial Court of Parañaque. The respondent corporation failed to appear at the pre-trial conference and failed to submit a pre-trial brief, so the trial court declared it as in default and allowed the petitioners to present evidence ex parte. The trial court ruled for the petitioners, declaring the contract to sell rescinded and ordering the respondent to pay actual, moral and exemplary damages and attorney's fees, less the two million five hundred thousand pesos already paid.

The respondent appealed to the Court of Appeals, which set aside the trial court's decision. The appellate court held that the petitioners' obligation never arose because the respondent did not pay the full purchase price, set aside the award of damages for lack of proof, and ordered the petitioners to return the amounts received. The petitioners' motion for reconsideration was denied, so they came to the Supreme Court by petition for review.

Facts

On October 27, 1994, Belen Cordero, for herself and as attorney-in-fact of her co-petitioners, entered into a contract to sell with F.S. Management and Development Corporation over five parcels of land in Nasugbu, Batangas, about fifty hectares at twenty-five pesos per square meter, for a total price of twelve million five hundred thousand pesos. The contract provided for earnest money of five hundred thousand pesos, a down payment of three million five hundred thousand pesos on or before April 30, 1995, and the balance within eighteen months from that payment in six equal quarterly payments. It also provided that title would be transferred to the buyer upon complete payment of the agreed purchase price.

The respondent paid the earnest money of five hundred thousand pesos on October 27, 1994. It paid one million pesos on June 30, 1995 and another one million pesos on July 6, 1995. No further payments were made. The petitioners then sent a demand letter dated November 28, 1996, revoking and canceling the contract, treating the payments already made as damages, and demanding ten million pesos in actual damages for loss of income. The respondent ignored the demand.

On February 21, 1997, the petitioners filed the complaint for rescission with damages, alleging that the respondent failed to pay the down payment of three million five hundred thousand pesos by April 30, 1995 and the balance within eighteen months thereafter. The respondent answered that the petitioners had no cause of action because they were the first to violate the contract by preventing access to the properties despite payment of two million five hundred thousand pesos, and that the petitioners refused to execute the final contract of sale unless additional legal interest was paid. Because the respondent did not appear at pre-trial and filed no pre-trial brief, it was declared in default.

Issues

• Whether or not the Court of Appeals erred in ruling on the nature of the contract even though that matter was not raised as an assigned error on appeal.
• Whether or not a contract to sell may be subject to rescission under Article 1191 of the Civil Code.
• Whether or not the Court of Appeals erred in setting aside the award of damages and attorney's fees.

Applicable Provisions

Article 1191 of the Civil Code provides:

Article 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 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.

This is the provision the trial court applied, and the Supreme Court holds that it does not apply to a contract to sell because it presupposes an obligation already in existence.

Article 2208 of the Civil Code provides:

Article 2208. In the absence of stipulation, attorney's fees and expenses of litigation, other than judicial costs, cannot be recovered, except: (1) When exemplary damages are awarded; (2) When the defendant's act or omission has compelled the plaintiff to litigate with third persons or to incur expenses to protect his interest; (3) In criminal cases of malicious prosecution against the plaintiff; (4) In case of a clearly unfounded civil action or proceeding against the plaintiff; (5) Where the defendant acted in gross and evident bad faith in refusing to satisfy the plaintiff's plainly valid, just and demandable claim; (6) In actions for legal support; (7) In actions for the recovery of wages of household helpers, laborers and skilled workers; (8) In actions for indemnity under workmen's compensation and employer's liability laws; (9) In a separate civil action to recover civil liability arising from a crime; (10) When at least double judicial costs are awarded; (11) In any other case where the court deems it just and equitable that attorney's fees and expenses of litigation should be recovered. In all cases, the attorney's fees and expenses of litigation must be reasonable.

This governs the petitioners' claim for attorney's fees, which the Court denies because none of the enumerated exceptions is present.

Ruling

On the first issue, the Court held that while a party must assign errors on appeal, appellate courts may rule on matters not assigned when these are indispensable or necessary to the just resolution of the pleaded issues. The nature and characteristics of a contract to sell determine the propriety of rescission and of the award of damages, and the trial court's application of Article 1191 was a manifest error lying at the base and foundation of the proceeding. The Court of Appeals therefore acted correctly in ruling on these matters.

On the second issue, the Court held that a contract to sell is not subject to rescission under Article 1191. Under a contract to sell, the seller retains title until the purchaser fully pays the agreed purchase price, and full payment is a positive suspensive condition. The non-fulfillment of that condition is not a breach of contract but merely an event that prevents the seller from conveying title. Since the obligation of the petitioners did not arise, Article 1191 has no application, for it presupposes an obligation already extant. The Court quoted with approval the rule that there can be no rescission of an obligation that is still non-existing, the suspensive condition not having happened. While rescission does not apply, the petitioners may nevertheless cancel the contract to sell, their obligation not having arisen. The Court then applied Republic Act Number 6552, the Realty Installment Buyer Protection Act, holding that because the properties were intended for commercial purposes, the petitioners are entitled to retain the payments already made, with full retention of previous payments. Even assuming the properties were not commercial or industrial, the respondent paid less than two years of installments and so is not entitled to any refund.

On the third issue, the Court held that the award of damages is not warranted, because failure to make full payment of the purchase price in a contract to sell is not a breach but an event that prevents the vendor's obligation to convey title from arising. As to attorney's fees, the Court applied Article 2208 and found that none of its exceptions is present, stressing that the policy of the law is to put no premium on the right to litigate.

Doctrine

A contract to sell is distinct from a contract of sale. In a contract to sell, the seller retains title until the buyer fully pays the purchase price, and full payment is a positive suspensive condition. Non-payment is not a breach, serious or otherwise, but an event that prevents the seller's obligation to convey title from arising, so the parties stand as if the conditional obligation had never existed. Article 1191 of the Civil Code does not apply, because it presupposes an obligation already extant, and there can be no rescission of an obligation that is still non-existing. The seller may nevertheless cancel the contract to sell, and cancellation of installment sales of real estate is governed by Republic Act Number 6552, the Maceda Law, which recognizes the seller's right to cancel contracts to sell industrial and commercial properties with full retention of previous payments. Where the buyer has paid less than two years of installments, the buyer is not entitled to any refund. Damages are not warranted for non-payment in a contract to sell, and attorney's fees cannot be recovered absent stipulation and outside the exceptions of Article 2208.

Disposition

The Court affirmed the decision and resolution of the Court of Appeals with modification, holding that the petitioners are entitled to retain the payments already received from the respondent, and set aside the awards of damages and attorney's fees.

Remember This

Memorize this line: in a contract to sell, full payment is a positive suspensive condition, so non-payment is not a breach and Article 1191 rescission does not lie; the seller's remedy is cancellation under the Maceda Law, with retention of payments. Examiners use this case to test the contract of sale versus contract to sell distinction, the inapplicability of Article 1191, and the retention rule for commercial and industrial lots under Republic Act Number 6552.