ROGELIO S. NOLASCO, NICANORA N. GUEVARA, LEONARDA N. ELPEDES, HEIRS OF ARNULFO S. NOLASCO, AND REMEDIOS M. NOLASCO, REPRESENTED BY ELENITA M. NOLASCO PETITIONERS, VS. CELERINO S…

Nolasco versus Cuerpo

The Case

This is a petition for review on certiorari brought by the sellers, the Nolasco family, against the buyers, Celerino Cuerpo and his co-respondents, over a Contract to Sell covering a large parcel of land in Rodriguez, Rizal. The buyers asked the courts to rescind the contract and to return what they had paid; the sellers resisted, and later asked that the contract instead be cancelled and the payments forfeited. The case matters because it draws the line between a breach that justifies rescission under Article 1191 of the Civil Code and a breach that does not, and because it reminds the Bar candidate that a party may not change his theory of the case on appeal.

Procedural History

The buyers filed a complaint for rescission before the Regional Trial Court of Quezon City, Branch 81. The sellers failed to file the required pre-trial brief, were declared as in default, and the buyers were allowed to present their evidence ex parte. The trial court ruled for the buyers, ordered the rescission of the contract, and directed the return of the amounts already paid as well as the remaining post-dated checks. The sellers appealed to the Court of Appeals, which affirmed the trial court in toto, agreeing that the sellers had substantially breached the contract and that forfeiture of the payments was improper. The sellers moved for reconsideration, which was denied. They then came to the Supreme Court by petition for review on certiorari.

Facts

On July 22, 2008, the sellers and the buyers entered into a Contract to Sell over a 165,775 square meter parcel of land covered by Original Certificate of Title No. 152. The price was 33,155,000 pesos, payable partly as down payment, inclusive of two million pesos earlier given as earnest money, and the balance of 21,550,750 pesos in thirty-six monthly installments of 598,632 pesos each, through post-dated checks. The contract provided that dishonored checks would allow forfeiture and cancellation without judicial recourse, that the buyers could not possess the land until full payment, and that the sellers would transfer the title from one Edilberta N. Santos to their own names within ninety days, failing which the buyers could cause the transfer themselves and charge the cost to the monthly amortizations.

The sellers did not complete that transfer of title within the ninety-day period. On November 7, 2008, the buyers wrote the sellers seeking to rescind the contract on the ground of financial difficulties, and asked for the return of 12,202,882 pesos they had already paid. The letter went unheeded, so the buyers filed the complaint for rescission.

In their defense, the sellers argued that the buyers were unilaterally cancelling the contract without their consent, and that financial difficulties are not a ground for rescission. Because the sellers failed to file a pre-trial brief, they were declared as in default and presented no evidence.

Issues

• Whether or not the Court of Appeals correctly affirmed the rescission of the Contract to Sell on the ground of the sellers' failure to transfer the title within ninety days.
• Whether or not the Court of Appeals correctly ordered the return of the amounts already paid and the remaining post-dated checks.
• Whether or not the sellers may now obtain the cancellation of the contract and the forfeiture of the payments on the ground of the buyers' failure to pay the monthly amortizations.

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 on which the buyers rested their claim, and which the Court construes to require a substantial breach before rescission may be decreed.

Ruling

On the first issue, the Court held that the lower courts erred. Rescission, more accurately called resolution, is available only for a substantial and fundamental breach that defeats the very object of the parties in making the agreement; a slight or casual breach will not do. The Court quoted paragraph 7 of the contract in full and noted that it itself gives the buyers a remedy: if the sellers fail to transfer the title within the period, the buyers may undertake the transfer on the sellers' behalf and charge the costs to the monthly amortizations. Because the contract supplies that recourse, the sellers' failure did not defeat the object of the agreement and was not a substantial breach. There was therefore no basis for rescission.

On the second and third issues, the Court refused to grant the sellers' prayer for cancellation and forfeiture. The sellers had not prayed for that relief in their Answer before the trial court, and having been declared as in default, they presented no evidence. The Court quoted its ruling in Peña versus Spouses Tolentino:

Indeed, the settled rule in this jurisdiction, according to Mon v. Court of Appeals, is that a party cannot change his theory of the case or his cause of action on appeal. This rule affirms that courts of justice have no jurisdiction or power to decide a question not in issue. Thus, a judgment that goes beyond the issues and purports to adjudicate something on which the court did not hear the parties is not only irregular but also extrajudicial and invalid. The legal theory under which the controversy was heard and decided in the trial court should be the same theory under which the review on appeal is conducted. Otherwise, prejudice will result to the adverse party. We stress that points of law, theories, issues, and arguments not adequately brought to the attention of the lower court will not be ordinarily considered by a reviewing court, inasmuch as they cannot be raised for the first time on appeal. This would be offensive to the basic rules of fair play, justice, and due process.

Since the sellers never raised that theory below, they could not raise it for the first time on appeal.

Doctrine

Under Article 1191 of the Civil Code, the power to rescind or resolve a reciprocal obligation arises only upon a substantial and fundamental breach that defeats the object of the parties in entering into the agreement; a slight or casual breach will not justify rescission. Whether a breach is substantial depends on the attending circumstances. Where the contract itself provides the injured party a remedy for the other's non-performance, such as the right to perform at the other's expense, the failure is not substantial and rescission will not lie. Finally, a party may not change his theory of the case on appeal; a relief not prayed for and not litigated below cannot be granted for the first time on review.

Disposition

The petition was partially granted; the Court of Appeals decision and resolution were reversed and set aside, and the Contract to Sell was declared valid and subsisting, without granting the sellers' prayer for cancellation and forfeiture.

Remember This

Memorize the line that rescission under Article 1191 requires a substantial and fundamental breach that defeats the object of the agreement, not a slight or casual one. Examiners use this case to test the substantial breach standard in reciprocal contracts and the rule against changing one's theory on appeal.