Bricktown Development Corp. vs. Amor Tierra Development Corporation

While a seller may validly cancel contracts to sell upon the buyer's failure to pay within the stipulated grace period, forfeiture of payments already made may be denied as unconscionable where the seller's own conduct—prolonged, inconclusive negotiations and failure to give categorical answers—contributed to the delay in performance.

Bricktown Development Corporation (later renamed Multinational Realty Development Corporation), represented by its president Mariano Z. Velarde, was the owner-developer of the Multinational Village Subdivision in Parañaque, Metro Manila. Amor Tierra Development Corporation, represented by its vice-president Moises G. Petilla, was a real estate buyer seeking to acquire residential lots within the subdivision. The dispute arose from two Contracts to Sell and a Supplemental Agreement covering 96 residential lots with an aggregate area of 82,888 square meters and a total price of P21,639,875.00, which private respondent ultimately failed to fully pay, prompting petitioner corporation to cancel the contracts and retain all amounts remitted.

On 31 March 1981, Bricktown Development Corporation, represented by its president Mariano Z. Velarde, executed two Contracts to Sell in favor of Amor Tierra Development Corporation, represented by its vice-president Moises G. Petilla, covering a total of 96 residential lots at the Multinational Village Subdivision, La Huerta, Parañaque, Metro Manila, with an aggregate area of 82,888 square meters. The total selling price was P21,639,875.00, payable as follows: P2,200,000.00 on 31 March 1981; P3,209,968.75 on 30 June 1981; P4,729,906.25 on 31 December 1981; and the balance of P11,500,000.00 to be paid through private respondent's assumption of petitioner corporation's mortgage liability to the Philippine Savings Bank or, alternatively, in cash. On the same date, the parties executed a Supplemental Agreement providing that private respondent would additionally pay P55,364.68, representing 21% interest on the balance of the downpayment for the period from 31 March to 30 June 1981, and P390,369.37 representing interest paid by petitioner corporation to the Philippine Savings Bank in updating the bank loan for the period from 1 February to 31 March 1981.

Private respondent was only able to remit the sum of P1,334,443.21, which was short even of the stipulated initial payment of P2,200,000.00, and no additional payments appear to have been made. In the interim, the parties continued to negotiate for a possible modification of their agreement. According to the trial court's findings, supported by the testimony of plaintiff's witnesses Marcosa Sanchez and Vicente Casas, the first negotiation took place before 30 June 1981, when Moises Petilla and Renato Dragon, vice-president and president respectively of private respondent corporation, together with Marcosa Sanchez, went to the office of petitioner corporation and proposed the division of the lots into smaller lots and the building of townhouses thereon. Velarde replied that subdivision owners would not consent to the building of small houses but made two counter-proposals: that petitioner corporation assign to private respondent a number of lots corresponding to the amounts already paid, or that petitioner corporation sell the corporation itself, together with the subdivision and its other properties, to private respondent and its sister companies. The negotiations continued for some time but nothing definite was accomplished.

On 12 October 1981, petitioner corporation, through its legal counsel, sent private respondent a "Notice of Cancellation of Contract" on account of the latter's continued failure to pay the installment due 30 June 1981 and the interest on the unpaid balance. Petitioner corporation advised private respondent that it still had the right to pay its arrearages within 30 days from receipt of the notice, "otherwise the actual cancellation of the contract (would) take place." Several months later, on 26 September 1983, private respondent, through counsel, demanded the refund of its various payments, allegedly amounting to P2,455,497.71, with interest within fifteen days, or in lieu of cash, the assignment of an equivalent number of unencumbered lots at the same price fixed in the contracts. The demand not having been heeded, private respondent commenced its action with the court a quo on 18 November 1983.

Both the trial court and the Court of Appeals found that because of the ongoing negotiations between the parties, coupled with the fact that private respondent never took actual possession of the properties and petitioner corporation did not dispose of the same during the pendency of said negotiations, private respondent was led to believe that the parties might ultimately enter into another agreement in place of the contracts to sell. The appellate court found no malice or bad faith on the part of private respondent in suspending payments and concluded that petitioners not only contributed to but had consented to the delay or suspension of payments, never giving private respondent a categorical answer that their counter-proposals would not materialize.

• Estoppel by Conduct: Petitioners argued that they did not, by their acts, conduct, or representations, delay or prevent the performance of the contracts and were thus not estopped from cancelling the same.
• Justification for Rescission: Petitioners maintained that they were justified in resolving or cancelling the contracts to sell and the Supplemental Agreement.
• Grace Period Requirement: Petitioners contended that the cancellation of the contracts did not require a positive act on their part giving private respondent the sixty-day grace period, as the grace period was ipso facto operative upon non-payment.
• Forfeiture as Liquidated Damages: Petitioners argued that the forfeiture of the P1,378,197.48 was warranted under the liquidated damages provisions of the contracts and was neither iniquitous nor unconscionable.

• Binding Factual Findings: Private respondent argued that the factual findings of the trial court, sustained by the Court of Appeals, should be considered binding on the Supreme Court, there being no valid justification to take exception to the rule.
• Refund of Payments: Private respondent demanded the refund of its various payments to petitioner corporation, allegedly amounting to P2,455,497.71, with interest, or in lieu of cash, the assignment of an equivalent number of unencumbered lots at the same price fixed in the contracts.

• Validity of Cancellation: Whether the contracts to sell were validly rescinded or cancelled by petitioner corporation.
• Forfeiture of Payments: Whether the amounts already remitted by private respondent under the cancelled contracts were rightly forfeited by petitioner corporation.

• Validity of Cancellation: Yes. The cancellation of the contracts to sell accords with the contractual covenants of the parties, the sixty-day grace period having become ipso facto operative from the moment the due payments were not met at their stated maturities, without need of further demand under Article 1169 of the Civil Code.
• Forfeiture of Payments: No. While the cancellation was valid, forfeiture of the P1,334,443.21 already remitted was unconscionable, given that petitioner corporation contributed to the delay through prolonged, inconclusive negotiations and never gave private respondent a categorical answer regarding its counter-proposals.

• Validity of Cancellation: The sixty-day grace period under Paragraph 15 of the Contracts to Sell became ipso facto operative from the moment the due payments were not met at their stated maturities. A grace period is a right, not an obligation, of the debtor; when unconditionally conferred, it is effective without further need of demand either calling for payment or for honoring the right. It must not be likened to an obligation, the non-payment of which under Article 1169 of the Civil Code would generally require judicial or extrajudicial demand before default arises. Accordingly, Article 1169 finds no relevance in this case. The cancellation of the contracts to sell by petitioner corporation accords with the contractual covenants of the parties and must be respected. In a contract to sell, the non-payment of the purchase price—which is normally the condition for the final sale—can prevent the obligation to convey title from acquiring any obligatory force, as held in Roque vs. Lapuz and Agustin vs. Court of Appeals.

• Forfeiture of Payments: While the insufficiency of private respondent's payments did not foreclose petitioner corporation's right to rescind or cancel, the series of events and circumstances found by both lower courts warranted a different treatment of the forfeiture question. The trial court found, and the Court of Appeals confirmed, that there were ongoing negotiations between the parties, that private respondent never took actual possession of the properties, and that petitioner corporation did not dispose of the same during the pendency of the negotiations. Private respondent was led to believe that the parties might ultimately enter into another agreement, and there was no malice or bad faith on its part in suspending payments. Petitioners not only contributed to but consented to the delay or suspension of payments, never giving a categorical answer that their counter-proposals would not materialize. While the negotiations did not result in novation of the contracts, the Court could not completely disregard these findings. The relationship between parties in any contract must be characterized by good faith and fair dealing, and petitioners fell well behind that standard. Forfeiture was therefore unconscionable. However, the Court found it inequitable to adjudge interest payment from judicial demand, since private respondent should not be totally freed from its own breach; interest was instead reckoned only from the date of finality of the decision.

• Autonomy of Contracts — The autonomy of contracts allows parties to establish such stipulations, clauses, terms, and conditions as they may deem appropriate, provided they are not contrary to law, morals, good customs, public order, or public policy. The Court relied on this principle to uphold the contractual grace period and cancellation provisions.
• Force of Law Between Parties — A contract, once perfected, has the force of law between the parties, who are bound to comply in good faith and from which neither may renege without the other's consent. This principle anchored the Court's recognition of the validity of the cancellation.
• Good Faith and Fair Dealing — The standard norm in the performance of contractual covenants and the exercise of rights thereunder requires that parties act with justice, honesty, and good faith. The Court invoked this principle to deny forfeiture, finding that petitioner corporation fell below this standard by contributing to the delay through inconclusive negotiations.
• Grace Period as a Right, Not an Obligation — A grace period, when unconditionally conferred, is effective ipso facto from the moment due payments are not met, without need of further demand. It must not be likened to an obligation whose non-payment under Article 1169 of the Civil Code would require judicial or extrajudicial demand before default arises.
• Contract to Sell — Effect of Non-Payment — In a contract to sell, the non-payment of the purchase price, which is normally the condition for the final sale, can prevent the obligation to convey title from acquiring any obligatory force.

• "A contract, once perfected, has the force of law between the parties with which they are bound to comply in good faith and from which neither one may renege without the consent of the other." — This opening passage articulates the foundational principle governing contractual relations that the Court applied throughout the decision, particularly in evaluating both the validity of cancellation and the unconscionability of forfeiture.

• "A grace period is a right, not an obligation, of the debtor. When unconditionally conferred, such as in this case, the grace period is effective without further need of demand either calling for the payment of the obligation or for honoring the right." — This passage defines the Court's treatment of the contractual grace period and explains why Article 1169 of the Civil Code was held inapplicable, establishing that the cancellation was validly effected.

• "it would be unconscionable, in our view, to likewise sanction the forfeiture by petitioner corporation of payments made to it by private respondent. Indeed, in the opening statement of this ponencia, we have intimated that the relationship between parties in any contract must always be characterized and punctuated by good faith and fair dealing." — This passage states the ratio decidendi for denying forfeiture despite upholding the cancellation, tying the equitable result to the good-faith principle articulated at the outset.

• Roque vs. Lapuz, 96 SCRA 741 — Cited as supporting authority for the proposition that in a contract to sell, non-payment of the purchase price can prevent the obligation to convey title from acquiring any obligatory force. Followed.
• Agustin vs. Court of Appeals, 186 SCRA 375 — Cited alongside Roque vs. Lapuz for the same proposition regarding the effect of non-payment in a contract to sell. Followed.

• Article 1169, Civil Code — Provides that those obliged to deliver or to do something incur in delay from the time the obligee judicially or extrajudicially demands fulfillment, with exceptions where the obligation or law so declares, where the designation of time was a controlling motive, or where demand would be useless. The Court held this provision inapplicable because the grace period was a right, not an obligation, and became ipso facto operative upon non-payment without need of demand.

Bidin, Romero, and Melo, JJ., concurred. Feliciano, J., was on leave.