Contractual rupture

Ben was the registered owner of a parcel of land in Batangas. A domestic corporation, PATAF, claimed adverse ownership over the same land on the basis of another transfer certificate title.

Meanwhile, Ben and Olive Realty Corp. (ORC) entered into a contract of conditional sale over the property. The Deed of Conditional contained, among others, the following provisions:

The total purchase price is P19 million. The down payment of P5 million is to be paid in five monthly installments. As to the remaining balance, ORC agreed to pay in 30 equal monthly installments every eighth day of the month beginning in the month that the parties would receive a decision voiding PATAF’s title to the property.

ORC assumes responsibility of filing the necessary legal action to have the PATF’s claim/title nullified and voided, with the full assistance of Ben. Should the action against the PATAF be denied, Ben agreed to reimburse all the amounts paid by ORC.

In the event that the court denies the petition against PATAF, all sums received by Ben shall be reimbursed to the ORC without interest.

ORC undertook to pay the tenants “disturbance compensation,” while Ben undertook to clear the land of the tenants within six months from the signing of the deed of conditional sale. Should Ben fail to clear the land within six months, ORC may suspend its monthly down payment until the tenants vacate the property. The fee shall not form part of the purchase price. In excess of this amount, all claims shall be for the account of Ben.

Ben shall clear the land of [the] legitimate tenants within a period of six months upon signing of the contract, and in case Ben fails, ORC shall have the right to suspend monthly down payment until such time that the tenants [move] out of the land.

ORC may immediately occupy the property upon signing of the deed of conditional sale. Should the contract be cancelled, ORC agreed to return the property’s possession to Ben and forfeit all the improvements it may have introduced on the property.

After the parties had signed the deed of conditional sale, ORC immediately took possession of the property. However, the corporation only paid P2.5 million of the purchase price.

Contrary to the agreement, the corporation did not file any action against PATAF to void the latter’s title to the property. The corporation neither cleared the land of the tenants nor paid them disturbance compensation. Despite demand, ORC refused to fully pay the purchase price.

Ben was constrained to file a complaint against the ORC, praying for the alternative reliefs of rescission of contract and reformation of instrument of their contract to sell.

ORC argued, on the other hand, that Ben failed to fully assist the corporation in filing an action against the PATAF; and that Ben did clear the property of the tenants within six months from the signing of the deed of conditional sale.

Thus, according to ORC, it had all the legal right to withhold the subsequent payments to fully pay the purchase price.

Q: Is the payment of the disturbance compensation subject to the actual clearing of the land of tenants within six months from the signing of the deed of conditional sale?

A: ORC’s obligation to pay disturbance compensation is a pure obligation. The performance of the obligation to pay disturbance compensation did not depend on any condition.

Moreover, the deed of conditional sale did not give ORC a period to perform the obligation. As such, the obligation to pay disturbance compensation was demandable at once.

ORC should have paid the tenants disturbance compensation upon execution of the deed of conditional sale.

With respect to Ben’s obligation to clear the land of the tenants within six months from the signing of the contract, his obligation was an obligation with a resolutory period.

The obligation to clear the land of the tenants took effect at once, specifically, upon the parties’ signing of the deed of conditional sale.

Ben had six months, from the time the parties signed the deed of conditional sale, to clear the land of tenants. Consequently, ORC had no right to withhold payments of the purchase price.

Q: Is Ben’s complaint dismissable because of his prayer for irreconcilable reliefs of rescission of contract and reformation of instrument is not a ground to dismiss his complaint?

A: No. A plaintiff may allege two or more claims in the complaint alternatively or hypothetically, either in one cause of action or in separate causes of action per Section 2, Rule 8 of the 1997 Rules of Civil Procedure.

Q: Is Ben entitled to cancel the contract of conditional sale?

A: Yes. Since ORC illegally withheld payments of the purchase price, Ben is entitled to cancel his contract with petitioner corporation. It must be noted, however, that the parties’ contract is a contract to sell, not a contract of conditional sale.

Q: What are the similarities and differences of a contract to sell and a contract of conditional sale?

A: In both contracts to sell and contracts of conditional sale, title to the property remains with the seller until the buyer fully pays the purchase price. Both contracts are subject to the positive suspensive condition of the buyer’s full payment of the purchase price.

In a contract of conditional sale, the buyer automatically acquires title to the property upon full payment of the purchase price. This transfer of title is by operation of law without any further act having to be performed by the seller.

In a contract to sell, transfer of title to the prospective buyer is not automatic. The prospective seller must convey title to the property through a deed of conditional sale.

The distinction is important to determine the applicable laws and remedies in case a party does not fulfill his or her obligations under the contract.

In contracts of conditional sale, our laws on sales under the Civil Code of the Philippines apply. On the other hand, contracts to sell are not governed by our law on sales, but by the Civil Code provisions on conditional obligations.

Specifically, Article 1191 of the Civil Code on the right to rescind reciprocal obligations does not apply to contracts to sell. As explained in the Supreme Court case of Ong v. Court of Appeals, failure to fully pay the purchase price in contracts to sell is not the breach of contract under Article 1191.

Failure to fully pay the purchase price is “merely an event which prevents the [seller’s] obligation to convey title from acquiring binding force.” This is because “there can be no rescission of an obligation that is still nonexistent, the suspensive condition not having [happened].”

In this case, Ben reserved his title to the property and undertook to execute a deed of absolute sale upon ORC’s full payment of the purchase price.

Since Castillo still has to execute a deed of absolute sale to ORC upon full payment of the purchase price, the transfer of title is not automatic. The contract in this case is a contract to sell.

As this case involves a contract to sell, Article 1191 of the Civil Code of the Philippines does not apply. The contract to sell is instead cancelled, and the parties shall stand as if the obligation to sell never existed.

(Source: Olivarez Realty Corporation vs. Castillo, G.R. No. 196251, July 9, 2014)

Ma. Soledad Deriquito-Mawis is the Dean for the Lyceum of the Philippines University; chairperson of the Philippines Association of Law Schools; and Senior Partner at the Gatchalian Castro & Mawis Law Office