Spouses Velarde v. Court of Appeals
REITERATIONFacts
The Antecedents: Spouses Mariano and Avelina Velarde (petitioners) entered into a Deed of Sale with Assumption of Mortgage with David Raymundo (private respondent) for a property valued at P800,000.00 downpayment and an assumption of a P1,800,000.00 mortgage obligation to the Bank of the Philippine Islands (BPI). Avelina Velarde executed an Undertaking, agreeing to pay the mortgage obligations in David Raymundo's name until BPI approved her application to assume the mortgage. The Undertaking stipulated that in case of violation, the downpayment and all payments made would be forfeited, and the sale would be automatically cancelled. Petitioners paid the monthly interest for three months. On December 15, 1986, BPI disapproved the application for assumption of mortgage. Petitioners ceased making payments. On January 5, 1987, respondents notified petitioners of their non-payment constituting non-performance. On January 7, 1987, petitioners offered to pay the balance in cash but imposed three new conditions: delivery of possession, release of title from BPI, and execution of an absolute deed of sale, all by specific dates. On January 8, 1987, respondents sent a notarial notice of cancellation/rescission of the sale. Procedural History: Petitioners filed a Complaint for specific performance, nullity of cancellation, writ of possession, and damages. The Regional Trial Court (RTC) initially dismissed the Complaint. Upon reconsideration, another RTC judge granted the motion and ordered the parties to proceed with the sale. Private respondents appealed to the Court of Appeals (CA). The CA set aside the RTC order and reinstated the decision dismissing the Complaint, upholding the validity of the rescission made by private respondents. The Petition: Petitioners seek review of the CA's decision, arguing that their non-payment did not constitute a breach, the rescission was unjustified, and their letter did not constitute an attempt to novate.
Issue(s)
Whether the non-payment of the mortgage obligation constituted a breach of contract. Whether the rescission of the contract by private respondents was justified. Whether petitioners' January 7, 1987 letter constituted an attempt to novate the contract.
Ruling
The Supreme Court affirmed the Court of Appeals' decision with modification. It held that the non-payment of the balance of the purchase price constituted a substantial breach of the reciprocal obligation, justifying the rescission of the contract. However, it modified the ruling by ordering private respondents to return the amount paid by petitioners, with legal interest, due to the rescission being governed by Article 1191 of the Civil Code, which requires mutual restitution.
Ratio Decidendi
On the issue of breach of contract: The Court ruled that petitioners' non-payment of the mortgage obligation was not the primary breach, but rather their failure to pay the balance of the purchase price of P1.8 million. The agreement stipulated that if the assumption of mortgage was disapproved, petitioners should pay the balance to the respondents. The disapproval by BPI on December 15, 1986, triggered this obligation. Instead of paying, petitioners sent a letter on January 7, 1987, offering to pay but imposing new conditions not originally agreed upon. This conditional offer did not discharge their obligation to pay the purchase price. The Court emphasized that in a contract of sale, the buyer's correlative obligation is to pay the price, and petitioners failed to perform this obligation in the agreed manner. They even demanded that respondents perform additional obligations beyond the contract before fulfilling their own payment obligation. On the validity of the rescission: The Court held that private respondents validly exercised their right to rescind the contract under Article 1191 of the Civil Code. The breach committed by petitioners was the nonperformance of their reciprocal obligation to pay the purchase price, which was substantial and defeated the object of the agreement. While petitioners expressed willingness to pay a month after it was due, this was not actual payment and was conditioned on new demands. The Court distinguished this case from others where slight delays or minor breaches did not warrant rescission. Here, the breach involved not just a delay but the imposition of new obligations, which constituted a repudiation of an existing and demandable obligation. The rescission was further justified by the notarial notice sent by respondents on January 8, 1987, after petitioners' failure to pay. On the attempt to novate: The Court found it unnecessary to discuss this issue in detail, given the prior findings. However, it noted that the three conditions in petitioners' January 7, 1987 letter were not part of the original contract. By that time, petitioners were already obligated to pay the balance of the sale price. They had no right to demand preconditions for fulfilling an obligation that had become due and demandable. The qualified offer to pay was considered a repudiation of their existing obligation, leaving rescission as the legal option for the respondents.
Main Doctrine
A substantial breach of a reciprocal obligation, such as failure to pay the price in the manner prescribed by the contract, entitles the injured party to rescind the obligation. Rescission abrogates the contract from its inception and requires a mutual restitution of benefits received.