SPOUSES EDUARDO AND ANN AGUSTIN, PETITIONERS, VS. HON. COURT OF APPEALS AND LABRADOR DEVELOPMENT CORPORATION, RESPONDENTS.

Agustin versus Labrador Development Corporation

The Case

This is a petition for review on certiorari brought by spouses Eduardo and Ann Agustin against the Court of Appeals and Labrador Development Corporation. The spouses bought a house and lot from Labrador Development Corporation under a contract to sell, failed to complete the purchase price, and now resist the developer's demand that they reconvey the land. The case matters because it draws the classic line between a contract of sale and a contract to sell, and it shows how a positive suspensive condition works when the buyer does not pay: the seller's obligation to convey never acquires binding force, and reconveyance follows.

Procedural History

Labrador Development Corporation filed a complaint for reconveyance and damages before the Regional Trial Court of Quezon City. After trial on the merits, the trial court ruled for the developer. It ordered the spouses, jointly and severally, to reconvey the parcel covered by the transfer certificate of title, to pay 20,000 pesos as exemplary damages, and to pay 5,000 pesos as attorney's fees, plus costs of suit.

The spouses appealed to the Court of Appeals. The appellate court affirmed the trial court's decision in all other respects but deleted the award of exemplary damages, and made no pronouncement as to costs. The spouses moved for reconsideration, and the Court of Appeals denied the motion. Hence this petition for review on certiorari before the Supreme Court.

Facts

Labrador Development Corporation, a subdivision developer, owned a lot in the San Pedro Compound in Tandang Sora, Quezon City. On November 7, 1981, it agreed to sell that lot to the spouses, together with a residential house to be constructed on it under a stated house plan, for a total price of 202,980 pesos. The spouses were to pay 42,980 pesos as equity, consisting of a 30,133 peso down payment and a balance of 12,847 pesos upon completion and delivery of the property. The remaining 160,000 pesos was to be funded through a Pag-Ibig housing loan that the spouses would apply for. The contract provided that if the loan fell short of the full contract price, the spouses would pay the difference in cash on or before occupancy and acceptance of the unit.

To accommodate the loan application, the developer executed a deed of sale over the lot in favor of the spouses, without additional consideration beyond the down payment, and a transfer certificate of title was issued in their names. The spouses then applied for a 160,000 peso housing loan with an accredited financing institution. After initial approval, the loan was downgraded to 128,000 pesos upon reassessment. The developer informed the spouses of this development and enclosed the bank's letter requiring a co-borrower related within the fourth degree of consanguinity if they wanted an increased loan. The spouses did not reply. A follow-up letter gave them time to decide on their options, on pain of enforcement of the contract to sell. Still there was no reaction.

The developer then enforced the contractual stipulations and remitted a check for 30,133 pesos representing the equity the spouses had paid. The spouses accepted the check and deposited it. Instead of reconveying the title, they sought time to buy the property, and the developer agreed provided payment be made in cash. The spouses failed to pay in cash despite a second thirty-day period. The developer demanded reconveyance anew, and then filed the complaint for reconveyance and damages. In their answer, the spouses maintained that approval of the 160,000 peso loan had been assured upon completion of the house with proof of delivery and acceptance, but that they could not reasonably accept the house because certain specifications had not been complied with.

Issues

• Whether or not the contract between the parties is a contract to sell rather than an absolute sale, such that full payment of the price is a condition precedent to the seller's obligation to convey.
• Whether or not the spouses' failure to pay the purchase price and to comply with the loan requirements was a substantial breach that barred the developer from cancelling the contract.
• Whether or not the spouses are barred by acquiescence from questioning the extrajudicial cancellation of the contract to sell.
• Whether or not reconveyance of the title is proper.
• Whether or not the award of attorney's fees is justified.

Applicable Provisions

Paragraph 5 of the contract to sell, quoted by the Court, provides:

Upon complete payment of the VENDEE/S of the purchase price herein above stated, and faithful compliance with all his obligations stipulated therein, the VENDOR, agrees to execute a valid deed of sale in favor of the VENDEE/S and cause the issuance of the Certificate of Title in the name of the latter, free from all liens and encumbrances except those provided for in the Land Registration Act and other laws, Presidential Decrees, General Orders, Letters of Instruction, Zoning Ordinances, and the attached Deed of Restrictions, which form part of this Contract.

This stipulation shows that the seller's duty to execute a deed of sale and cause the issuance of title arises only upon complete payment, which is the condition precedent at the heart of the case.

Paragraph 4(f) of the same contract to sell, quoted in the appellate court's decision, provides:

Failure of the Vendee to comply with any or all of the above stipulations shall ipso facto cancel this contract to sell; and thereupon, this contract to sell or any other contract executed in connection thereof, shall be of no further force and effect; and the title to the property, if already transfered in the name of the Vendee, shall automatically revert to the Vendor.

This clause is the contractual basis for the extrajudicial cancellation and for the reconveyance of the title to the developer.

Ruling

On the first issue, the Court held that the contract is not an absolute sale but a conditional sale, or contract to sell, whereby ownership is retained by the vendor until full payment of the purchase price. Without such full payment, there is no obligation to sell and deliver. The subsequent execution of a deed of absolute sale and the transfer and registration of the title in the spouses' names is of no moment, because by mutual agreement of the parties it was made without consideration and solely to facilitate the approval and release of the Pag-Ibig loan, not to transfer ownership. The Court quoted its own repeated ruling:

In contracts to sell, where ownership is retained by the seller and is not to pass until the full payment of the price, such payment, as we said is a positive suspensive condition, the failure of which is a not a breach, casual or serious, but simply an event that prevented the obligation of the vendor to convey title from acquiring binding force, in accordance with Article 1117 of the Old Civil Code.

On the second issue, the Court rejected the argument that the developer's failure to complete the construction barred cancellation. The spouses' obligation to fully comply with their undertakings was necessarily determinative of the developer's obligation to complete the construction of the house. Where one party did not perform the undertaking he was bound to perform, he is not entitled to insist upon performance by the other, and the other party does not incur delay. The spouses' repeated failure and refusal, despite due notice, to look for a qualified co-borrower, and their failure to communicate how they intended to cover the difference between the approved loan and the unpaid amount, clearly indicated their intention not to perform. The Court found that the spouses were merely posturing when they raised belated complaints about the imperfections of the house.

On the third issue, the Court held that the spouses were already barred from questioning the validity of the cancellation by their acquiescence. Their acceptance and encashment of the check representing their total equity payment, coupled with their failure to object or file an action for more than one year despite due notice, clearly showed assent. Their later offer to buy the property anew, which was never consummated despite two thirty-day extensions, confirmed this. Extrajudicial rescission produces legal effects where the other party does not oppose it.

On the fourth issue, the Court held that reconveyance is proper and exigible under paragraph 4(f) of the contract to sell, and on the basic principle that when an obligation has been extinguished or resolved, the court must require the parties to surrender whatever they may have received from each other and restore them, as far as practicable, to their original situation.

On the fifth issue, the Court disallowed the award of attorney's fees. The award of exemplary damages had been eliminated by the appellate court, and the text of the trial court's decision was bereft of any findings of fact and law to justify the award. The reason for attorney's fees must be stated in the text of the decision; if stated only in the dispositive portion, it must be disallowed on appeal.

Doctrine

A contract to sell is distinct from a contract of sale: in a contract to sell, ownership is retained by the vendor until full payment of the purchase price, and such payment is a positive suspensive condition to the vendor's obligation to convey. The failure of that condition is not a breach, casual or serious, but simply an event that prevents the vendor's obligation from acquiring binding force. Where the buyer fails to pay, the seller may extrajudicially terminate the contract and refuse conveyance where the contract expressly so provides, and the buyer's acceptance of the refund of his payments, without timely objection, amounts to acquiescence in the cancellation. Attorney's fees, being the exception rather than the general rule, must be justified by findings of fact and law stated in the text of the decision.

Disposition

The Supreme Court affirmed the decision of the Court of Appeals, except that the award of attorney's fees was deleted.

Remember This

Memorize this line: in a contract to sell, full payment is a positive suspensive condition, and its non-fulfillment is not a breach but an event that prevents the seller's obligation to convey from acquiring binding force. Examiners use this case to test the contract to sell versus contract of sale distinction, the effect of a buyer's acquiescence in an extrajudicial cancellation, and the rule that attorney's fees must be justified in the text of the decision.