Orden v. Aurea
REITERATIONFacts
The Antecedents: Petitioners Sps. Orden executed a Deed of Absolute Sale over two parcels of land and a residential house to respondents Sps. Aurea for P1.9M. Simultaneously, Sps. Aurea executed a Joint Affidavit declaring respondents Sps. Cobile as the true buyers, as Sps. Cobile were American citizens. Sps. Cobile paid P384,000.00 as partial payment and executed a promissory note promising to pay P566,000.00 on or before October 31, 1994, and the remaining P950,000.00 upon transfer of titles. Sps. Cobile failed to pay the P566,000.00. They later paid P354,596.28, bringing the total payment to P738,596.28. Sps. Orden sent a letter giving Sps. Cobile ten days to pay the balance, otherwise, the properties would be sold to others. Sps. Cobile did not pay further. Sps. Orden subsequently sold the properties to Fortunata Adalim Houthuijzen and transferred the titles. Procedural History: Sps. Aurea and Sps. Cobile, along with Franklin Quijano, filed a complaint for Enforcement of Contract and Damages against Sps. Orden and the Register of Deeds, seeking delivery of titles or payment of the full consideration plus interest. The RTC initially dismissed the case for lack of interest but reinstated it upon motion for reconsideration. The RTC later dismissed the case against Sps. Houthuijzen, finding them buyers in good faith. The RTC, in its decision dated April 26, 2002, ordered Sps. Orden to return P738,596.28 to Sps. Cobile with 20% interest per annum. The Court of Appeals affirmed the RTC decision in toto. The Petition: Petitioners Sps. Orden filed a Petition for Review on Certiorari, arguing that the contract was a Conditional Contract of Sale, not a Contract of Sale, and that the Court of Appeals erred in holding otherwise and in ordering the return of payments.
Issue(s)
Whether the contract entered into by the parties was a Contract of Sale or a Contract to Sell. Whether rescission under Article 1191 of the Civil Code was necessary for the cancellation of the contract. Whether respondents Cobile are entitled to the return of their partial payments, and the propriety of awarding damages and attorney's fees.
Ruling
The Supreme Court modified the decision of the Court of Appeals. It ordered Sps. Orden to return P738,596.28 to Sps. Cobile with 12% interest per annum from September 30, 1997, until fully paid. It also ordered Sps. Cobile to pay Sps. Orden moral damages of P50,000.00 and attorney's fees of P20,000.00.
Ratio Decidendi
On the nature of the contract: The Court held that the contract entered into by Sps. Orden and Sps. Cobile was a contract to sell, not a contract of sale. This was determined by considering all three documents executed: the Deed of Absolute Sale, the Joint Affidavit, and the Promissory Note. The promissory note clearly indicated that the payment of the balance was conditional upon the transfer of titles, and the remaining balance was to be paid "as soon as the titles of the properties shall have been transferred to them." This reservation of ownership until full payment is characteristic of a contract to sell. The Court emphasized that the true intent of the parties, as gleaned from the totality of their agreements, dictates the nature of the contract, not merely the title given to a document. On the necessity of rescission: The Court clarified that rescission under Article 1191 of the Civil Code is not required for contracts to sell. In a contract to sell, the failure of the buyer to pay the purchase price is not a breach but an event that prevents the seller's obligation to convey title from arising. Therefore, the contract is deemed ipso facto rescinded or ineffective from the moment the suspensive condition (full payment) is not met. The Court found that the letter sent by Sps. Orden to Sps. Cobile, informing them of the intention to sell the properties to others if payment was not made, served as sufficient notice for the cancellation of their contract to sell. On the return of partial payments, damages, and attorney's fees: The Court affirmed the lower courts' ruling that the partial payments made by Sps. Cobile must be returned, noting the absence of a forfeiture clause, as retaining the payments would result in unjust enrichment. The Court, however, modified the interest rate on the returned amount to 12% per annum from the date of filing of the complaint until fully paid. The Court also awarded moral damages and attorney's fees to Sps. Orden, considering that the failure of Sps. Cobile to pay the balance was the source of all the troubles.
Main Doctrine
In a contract to sell, the full payment of the purchase price is a positive suspensive condition, the failure of which is not a breach but an event that prevents the obligation of the vendor to convey title from arising. The parties stand as if the conditional obligation had never existed. Rescission under Article 1191 of the Civil Code does not apply to contracts to sell.