De Guzman v. Santos
REITERATIONFacts
The Antecedents: Petitioner Atty. Rogelio B. De Guzman owned a house and lot (Subject Property) covered by TCT No. 5788. In November 2000, he entered into a Contract to Sell with respondents Spouses Bartolome and Susan Santos for ₱1,500,000.00, with a down payment of ₱250,000.00 and monthly installments of ₱15,000.00 plus 9% annual interest on the balance. The spouses Santos took possession of the property but failed to pay monthly installments. In February 2001, they vacated the property. Procedural History: On June 21, 2001, the spouses Santos filed a complaint for rescission of the Contract to Sell, recovery of down payment, and damages, deducting a rental rate of ₱10,000.00 per month. The RTC initially dismissed their complaint and ordered them to pay the balance of the purchase price with interest. Subsequently, the spouses Santos filed a Motion for New Trial upon discovering that De Guzman sold the Subject Property to Elizabeth Algoso on August 17, 2005, during the pendency of the case. The RTC granted the motion, set aside its earlier decision, declared the Contract to Sell rescinded, and ordered De Guzman to return the balance of the down payment (₱208,500.00) with interest. The RTC reasoned that De Guzman's act of selling the property without notice was indicative of bad faith, rendered the disposition of the case moot, and made the contract rescissible under Article 1381(4) of the Civil Code. The Court of Appeals (CA) affirmed the RTC's decision, holding that De Guzman's act constituted bad faith and deception, rendering the contract's enforcement moot and academic, and that the RTC's order was justified in the interest of justice and equity. De Guzman's motion for reconsideration was denied. The Petition: De Guzman filed a Petition for Review on Certiorari, arguing that rescission does not apply to a Contract to Sell and that the spouses Santos' failure to pay rendered the contract ineffective and their payments forfeitable. The spouses Santos countered that reimbursement was necessary to prevent unjust enrichment and reiterated that the sale during litigation was done in bad faith, making the contract rescissible.
Issue(s)
Whether or not the Court of Appeals correctly affirmed the rescission of the Contract to Sell. Whether or not De Guzman is liable to reimburse the spouses Santos their down payment.
Ruling
The petition is granted. The Decision dated December 18, 2014 and the Resolution dated February 18, 2016 of the Court of Appeals in CA-G.R. CV No. 100706 are REVERSED and SET ASIDE.
Ratio Decidendi
On the issue of rescission of the Contract to Sell: The Court ruled that the CA erred in affirming the rescission of the Contract to Sell. A contract to sell is characterized by the seller retaining legal title until full payment of the purchase price, which is a positive suspensive condition. Non-fulfillment of this condition does not constitute a breach but merely prevents the seller from conveying title. Consequently, rescission under Article 1381(4) of the Civil Code, which applies to things under litigation, is not the proper remedy for a contract to sell, especially when the seller disposes of the property before full payment. Such disposition, while constituting bad faith, does not legally justify rescission of the contract to sell itself. The Court reiterated the doctrines in Spouses Roque and Coronel, stating that the seller retains the freedom to sell the property to a third party before full payment, as there is no defect in the seller's title per se at that stage. The buyer's remedy at most is to claim damages against the seller. On the issue of De Guzman's liability to reimburse the down payment: The Court found that the CA erred in ordering De Guzman to reimburse the down payment. While De Guzman's act of selling the property during the trial was an act of bad faith, the Court found that the spouses Santos were also in bad faith for failing to pay installments for four months and unilaterally vacating the property. The Court applied the principle of in pari delicto, stating that when both parties are equally at fault, the courts should leave them where they find them. Therefore, De Guzman could not be granted judicial relief for damages, nor could the spouses Santos be entitled to reimbursement based on equity, as they came to court with unclean hands. The Court emphasized that the Contract to Sell itself stipulated that the dishonor of three successive checks would result in automatic cancellation and forfeiture of payments, a provision that should have governed the situation given the spouses Santos' admitted default.
Main Doctrine
In a contract to sell, the seller's act of selling the property to a third party during the pendency of a case, while constituting bad faith, does not legally justify the rescission of the contract to sell. The buyer's remedy at most is to claim damages. Furthermore, where both parties are found to be in pari delicto, the courts shall leave them where they find them.