Buenviaje vs. Salonga

A buyer who primarily prays for specific performance in a contract to sell is bound by that choice and cannot subsequently demand rescission (resolution) absent a showing that fulfillment has become impossible; moreover, joint venture partners who are not parties to a contract to sell cannot be held solidarily liable for obligations thereunder in the absence of privity of contract or proof of control and bad faith under Section 40 of PD 957.

Jebson Holdings Corporation (Jebson), a real estate developer, entered into a Joint Venture Agreement (JVA) with Spouses Jovito and Lydia Salonga (Sps. Salonga) for the construction of ten high-end residential units (Brentwoods Tagaytay Villas) on land owned by the latter in Tagaytay City. Under the JVA, Jebson would construct the units at its own expense and secure necessary permits, while Sps. Salonga would receive three units and Jebson would market the remaining seven. Jebson subsequently entered into a Contract to Sell with Dr. Restituto Buenviaje for Unit 5, accepting partial payment through a "swapping arrangement" involving non-cash assets (a house and lot and a golf share), without the conformity of Sps. Salonga as required by the JVA. Jebson failed to complete the unit within the stipulated period, prompting Buenviaje to file a complaint for specific performance with an alternative prayer for rescission before the Housing and Land Use Regulatory Board.

• On May 29, 1997, Jebson and Sps. Salonga executed a Joint Venture Agreement (JVA) for the development of Brentwoods Tagaytay Villas, consisting of ten residential units on a 2,935-square-meter property covered by TCT No. T-9000.
• Under the JVA, Sps. Salonga would receive Units 1, 2, and 7, while Jebson would own Units 3, 4, 5, 6, 8, 9, and 10; Jebson undertook to secure all development permits and the license to sell from the HLURB, and to hold Sps. Salonga free from liability to third parties for non-compliance with HLURB rules.
• On June 9, 1997, Jebson, through its Executive Vice President Ferdinand Juat Bañez, entered into a Contract to Sell with Buenviaje for Unit 5 with a total consideration of P10,500,000.00, without securing the conformity of Sps. Salonga as required by the JVA.
• Buenviaje paid P7,800,000.00 through a "swapping arrangement" consisting of a house and lot valued at P5,800,000.00 and a Tagaytay Highlands Golf share worth P2,000,000.00, plus an additional P125,000.00 for a retaining wall and air-conditioning system.
• Jebson failed to complete Unit 5 within the twelve-month period stipulated in the contract, citing the 1997 financial crisis, and despite being given until early 2000, still failed to deliver the unit.
• On May 27, 2002, Buenviaje filed a Complaint for Specific Performance with Damages before the HLURB Regional Field Office IV, praying for completion and delivery of the unit, or alternatively, rescission of the contract and return of all payments with interest and the swapped properties.

• Buenviaje argued that Jebson's failure to complete and deliver the unit constituted a substantial breach warranting rescission (resolution) of the Contract to Sell and mutual restitution, including the return of the swapped properties.
• He contended that Sps. Salonga should be held solidarily liable with Jebson and Bañez as joint venture partners who were liable to the general buying public, invoking Section 40 of PD 957 and Articles 1822 and 1824 of the Civil Code.
• He maintained that the HLURB-BOC and the Court of Appeals erred in denying his prayer for rescission and in awarding moral damages and attorney's fees against him to Sps. Salonga.

• Sps. Salonga argued that they could not be held solidarily liable because there was no privity of contract between them and Buenviaje, and the JVA expressly provided that Jebson would hold them free from liability to third parties for non-compliance with HLURB rules.
• They contended that the "swapping arrangement" was entered into without their conformity and deprived the project of necessary cash funds, constituting a fraud upon them as creditors under the JVA, warranting rescission under Article 1381(3) of the Civil Code.
• They claimed that Buenviaje connived with Jebson in diluting the cash portion of the payments, justifying the award of moral damages and attorney's fees.

• Procedural: N/A
• Substantive Issues:
  • Whether the Court of Appeals correctly ruled that the remedy of specific performance was proper under the circumstances, rather than rescission (resolution) of the Contract to Sell.
  • Whether Sps. Salonga are solidarily liable with Jebson and Bañez for the completion and delivery of the unit.
  • Whether the "swapping arrangement" entered into by Jebson and Buenviaje is valid or should be rescinded for being in fraud of creditors.
  • Whether Buenviaje is liable to Sps. Salonga for moral damages and attorney's fees.

• Procedural: N/A
• Substantive:
  • The Court affirmed the propriety of specific performance, holding that Buenviaje was bound by his primary prayer for fulfillment rather than rescission under Article 1191 of the Civil Code, and there was no showing that fulfillment had become impossible; the breach was not substantial enough to defeat the object of the contract since the units were at their finishing stages.
  • The Court held that Sps. Salonga cannot be held solidarily liable because they were not parties to the Contract to Sell, and under Article 1311 (relativity of contracts), they cannot be bound by obligations they did not assume; furthermore, there was no proof that they controlled Jebson or acted in bad faith to induce the violation under Section 40 of PD 957, and Articles 1822 and 1824 on partnership liability were inapplicable absent privity with the joint venture.
  • The Court reversed the rescission of the "swapping arrangement," holding that while it was entered into without Sps. Salonga's conformity, there was no proof of fraudulent intent required under Article 1381(3) of the Civil Code; the arrangement was a bona fide business decision, and economic prejudice alone does not justify rescission without proof of fraud or trick to defeat creditor rights.
  • The Court deleted the award of moral damages and attorney's fees against Buenviaje, holding that absent proof of bad faith or connivance (which the alleging party failed to prove), and given that good faith is always presumed, there was no factual basis for such awards under Articles 2219 and 2208 of the Civil Code.

• Relativity of Contracts (Article 1311, Civil Code) — Contracts take effect only between the parties, their assigns and heirs, and cannot favor or prejudice third persons who are not parties thereto; thus, Sps. Salonga, not being parties to the Contract to Sell, could not be held liable for obligations thereunder.
• Specific Performance vs. Resolution (Article 1191, Civil Code) — The injured party in a reciprocal obligation may choose between fulfillment and rescission (resolution), but having chosen specific performance, he is bound thereby unless fulfillment becomes impossible; resolution will not be permitted for slight or casual breaches but only for substantial and fundamental violations.
• Rescission in Fraud of Creditors (Article 1381(3), Civil Code) — Contracts undertaken in fraud of creditors are rescissible only when there is proof of fraudulent intent or a trick and contrivance to defeat creditor rights; mere economic prejudice or unsound business decisions without mal-intent do not suffice.
• Solidary Liability — Solidary liability presupposes the existence of an obligation; without an obligation binding upon a person, there can be no solidary liability imputed against them, even under Section 40 of PD 957 which requires proof of control and bad faith.
• Presumption of Good Faith — Good faith is always presumed, and the burden of proving bad faith rests upon the party alleging it.

• "Specific performance and 'rescission' (more accurately referred to as resolution) are alternative remedies available to a party who is aggrieved by a counter-party's breach of a reciprocal obligation."
• "The injured party may choose between the fulfillment and the rescission of the obligation, with the payment of damages in either case. He may also seek rescission, even after he has chosen fulfillment, if the latter should become impossible."
• "Resolution under Article 1191 of the Civil Code will not be permitted for a slight or casual breach, but only for such substantial and fundamental violations as would defeat the very object of the parties in making the agreement."
• "Contracts take effect only between the parties, their assigns and heirs... Thus, absent any privity of contract as to them, there is no basis to hold Sps. Salonga liable for any of the obligations stated under the said contract to sell."
• "Good faith is always presumed, and upon him who alleges bad faith rests the burden of proof."
• "Contracts in fraud of creditors are those executed with the intention to prejudice the rights of creditors. They should not be confused with those entered into without such mal-intent, even if, as a direct consequence thereof, the creditor may suffer some damage."

• Ayala Life Assurance, Inc. v. Ray Burton Development Corporation — Cited for the definition of specific performance as the remedy of requiring exact performance of a contract.
• Gotesco Properties, Inc. v. Spouses Fajardo — Cited for the definition of resolution as the unmaking of a contract and the requirement of mutual restitution.
• Nolasco v. Cuerpo — Cited for the principle that resolution will not be permitted for slight or casual breaches but only for substantial and fundamental violations.
• Union Bank Philippines v. Spouses Ong — Cited for the requirement of fraud in rescissible contracts under Article 1381, distinguishing fraudulent conveyances from those entered into without mal-intent.
• Mahinay v. Velasquez — Cited for the requirement that moral damages must have a factual basis and causal connection to defendant's acts, and that the claimant must satisfactorily show the existence of the factual basis of damages.
• Spouses Berot v. Siapno — Cited for the distinction between solidary and joint obligations.

• Article 1191, Civil Code — Governs the power to rescind reciprocal obligations and the alternative remedies of fulfillment and rescission.
• Article 1311, Civil Code — Establishes the principle of relativity of contracts.
• Article 1381(3), Civil Code — Lists contracts undertaken in fraud of creditors as rescissible.
• Article 1383, Civil Code — States that the action for rescission is subsidiary.
• Article 1384, Civil Code — Limits rescission to the extent necessary to cover damages caused.
• Article 2208, Civil Code — Enumerates the instances when attorney's fees may be awarded.
• Article 2219, Civil Code — Enumerates the cases when moral damages may be recovered.
• Section 40, Presidential Decree No. 957 — Provides for the liability of controlling persons in real estate transactions.
• Articles 1822 and 1824, Civil Code — Provide for the liability of partners for wrongful acts and the solidary liability of partners with the partnership.