Central Bank of the Philippines vs. Spouses Bichara

A party to a reciprocal obligation who has itself committed a substantial breach of an essential stipulation may not demand rescission of the contract under Article 1191 of the Civil Code; the vendee's obligation to pay arises upon registration and issuance of a clean title, but the vendee may justifiably withhold payment where the vendor fails to perform a correlative essential obligation, such as filling the lots with escombro as expressly stipulated.

Spouses Alfonso and Anacleta Bichara were the registered owners of two lots in Legazpi City (Lots 621-C-1 and 621-C-2, totaling 811 square meters) covered by TCT Nos. 18138 and 18139. Central Bank of the Philippines sought to acquire the lots as part of a consolidated 6,700-square-meter estate intended for the site of its regional office serving the Bicol region. The Bichara lots, shaped roughly like a right triangle, represented twelve per cent of the total consolidated area and provided access to Calle Rizal. The parties executed a deed of absolute sale on July 19, 1983, at P500.00 per square meter or a total of P405,500.00, with specific stipulations allocating responsibility for transfer taxes and fees to the vendors and requiring the vendors to fill the lots with escombro at their expense upon signing.

On July 19, 1983, respondents Spouses Alfonso and Anacleta Bichara sold Lots 621-C-1 and 621-C-2, with an aggregate area of 811 square meters situated in Legazpi City and covered by Transfer Certificates of Title Nos. 18138 and 18139, to petitioner Central Bank of the Philippines for P405,500.00, or P500.00 per square meter. The deed of sale stipulated that payment would be effected only after registration of the deed and issuance of a clean title in the vendee's name, with all fees, expenses, documentary and science stamps, and transfer taxes to be borne by the vendors. Paragraph 4 of the deed likewise required the vendors, at their expense, to fill the parcels of land with escombro free from waste materials compacted to street level upon signing of the deed, to prepare the site for construction of CBP's regional office.

Petitioner consolidated the two lots with several other parcels into a single estate of 6,700 square meters. Despite respondents' failure to pay the capital gains tax and other transfer fees, TCT No. 25267 was issued in petitioner's name on September 6, 1983. Two annotations were recorded: a notice of adverse claim in favor of the heirs of Lutgarda Arcos Rempillo (Entry No. 58127, December 27, 1983) and a notice of lis pendens in favor of Jaime Rempillo in connection with Civil Case No. 7253 (Entry No. 58336, January 24, 1984). Both were subsequently cancelled pursuant to a decision in Civil Case No. 7253, per Entry No. 60214 dated September 12, 1984. The trial court also found that neither annotation pertained to the subject properties.

Despite the issuance of title, petitioner did not pay the purchase price. On their part, respondents did not fill the lots with escombro despite several demands from petitioner. Petitioner was thus constrained to contract the services of BGV Construction to fill the lots at a cost of P45,000.00, which amount petitioner deducted from the purchase price. Petitioner, however, still did not pay the balance. On September 7, 1992, respondents commenced Civil Case No. 8645 before the RTC of Legazpi City, an action for rescission or specific performance with damages, alleging that petitioner failed to pay the purchase price despite demand. They prayed for rescission and return of the properties, or alternatively that petitioner be compelled to pay the purchase price plus 12% per annum interest from July 19, 1983, and to pay the capital gains and documentary stamp taxes and registration fees.

Petitioner tendered payment by Central Bank check no. 483008 in the amount of P360,500.00, which respondents refused in view of their pending complaint. In its answer, petitioner justified the delay on three grounds: respondents' failure to pay the capital gains tax and transfer fees, the presence of squatters on the premises, and respondents' failure to fill the lots with escombro as stipulated. Petitioner counterclaimed for P8,000,000.00 in rental expenses for temporary office space, P100,000.00 exemplary damages, P50,000.00 attorney's fees, and costs. On January 22, 1993, petitioner filed a motion for consignation, which was granted on January 26, 1993. The squatters had left the premises of their own volition in 1988 following a storm. Alfonso Bichara testified that he saw no need to fill the lots because they were already level with the street, but offered no proof that they were in a condition suitable for construction. The trial court found that the escombro-filling obligation was demandable upon signing and that respondents had failed to comply, justifying petitioner's withholding of payment; it ordered specific performance. The Court of Appeals reversed, decreeing rescission on the ground that petitioner's nine-year non-payment constituted a substantial and fundamental breach.

• Respondents' Lack of Good Faith: Petitioner contended that respondents did not comply with their obligations to CBP in good faith and were therefore not entitled as a matter of right to rescission.
• Justified Withholding of Payment: Petitioner argued that it was justified in withholding payment of the purchase price because respondents breached several conditions in the contract: failure to pay capital gains tax and transfer fees, failure to evict squatters, and failure to fill the lots with escombro as stipulated.
• Trial Court Correctly Ordered Specific Performance: Petitioner maintained that the trial court did not commit reversible error when it ordered specific performance instead of rescission.

• Substantial Breach by Petitioner: Respondents argued that petitioner's deliberate refusal to pay the purchase price for nine years constituted a substantial and fundamental breach of obligation defeating the object of the parties, justifying rescission.
• Petitioner's Bad Faith: Respondents contended that petitioner could have undertaken the filling of the lots as early as 1989 at a cost of only about P9,000.00, and that petitioner's failure to do so earlier demonstrated bad faith.
• Entitlement to Rescission: Respondents asserted that as the injured party, they were entitled under Article 1191 of the Civil Code to elect rescission instead of specific performance.

• Good Faith and Entitlement to Rescission: Whether respondents complied with their obligations in good faith and are entitled to rescission.
• Justified Withholding of Payment: Whether petitioner was justified in withholding payment of the purchase price.
• Specific Performance vs. Rescission: Whether the trial court erred in ordering specific performance instead of rescission.

• Good Faith and Entitlement to Rescission: No. Respondents were themselves in bad faith for failing to perform their essential obligation to fill the lots with escombro, and may not seek rescission of a contract they themselves breached.
• Justified Withholding of Payment: Yes, in part. Petitioner was justified in withholding payment on account of respondents' failure to fill the lots with escombro as stipulated, though not on account of the transfer tax or squatter issues.
• Specific Performance vs. Rescission: No. The trial court did not err in ordering specific performance; its decision was reinstated as just and proper.

• Good Faith and Entitlement to Rescission: The Court examined the deed of sale and found that respondents were guilty of non-performance of the escombro-filling stipulation in paragraph 4. The use to which the lots were to be devoted—construction of CBP's regional office—was known to both parties, and the specification of the nature, quantity, and quality of filling material indicated its importance. Alfonso Bichara offered no proof of compliance other than his testimony that the lots were already at street level, but it was not shown they were suitable for construction. The fact that petitioner incurred P45,000.00 to have the lots filled by BGV Corporation belied the claim that the lots were already in suitable condition. A contract of sale involves reciprocity between the parties; since respondents were in bad faith, they could not seek rescission of the agreement they themselves breached. The Court relied on the principle that a party who has not performed its own essential obligation may not invoke Article 1191 against the other.

• Justified Withholding of Payment: Petitioner's obligation to pay arose upon registration of the deed and issuance of a clean title. Petitioner raised three justifications for non-payment. First, respondents' failure to pay capital gains tax and transfer fees: the Court found nothing in the contract making such payment a condition precedent to petitioner's duty to pay; the stipulation merely allocated who would bear the costs. Second, the presence of squatters: the Court held that squatters' illegal occupation could not be deemed a lien or encumbrance, and under Article 1590 of the Civil Code, a mere act of trespass does not authorize suspension of payment; moreover, the squatters left in 1988. The adverse claim and lis pendens annotations were cancelled within a year and did not pertain to the subject properties. Third, respondents' failure to fill the lots with escombro: the Court found this argument well-taken. The filling obligation was demandable upon signing of the contract, and respondents' non-performance constituted a substantial breach of an essential stipulation. Under general principles of reciprocal obligations, the vendee may withhold payment where the vendor fails to perform any essential obligation. Petitioner was entitled to have the lots filled at respondents' expense under Article 1167 of the Civil Code, and respondents were not in a position to question the resulting expense, since had they performed timely the cost would have been even less.

• Specific Performance vs. Rescission: The Court of Appeals erred in decreeing rescission. Rescission is allowed only for substantial breaches, not slight or casual ones. While non-payment of the purchase price ordinarily constitutes a resolutory condition warranting rescission under Article 1191, respondents should not be allowed to rescind where they themselves did not perform their essential obligation. The trial court's decision ordering specific performance—acceptance of the consigned amount with interest—was just and proper and was reinstated.

• Rescission in Reciprocal Obligations (Article 1191, Civil Code) — The power to rescind is implied in reciprocal obligations in case one obligor does not comply with what is incumbent upon him. The injured party may choose between fulfillment and rescission, with damages in either case. The Court applied this provision to hold that only the party who has faithfully performed, or who is not itself in breach, may invoke rescission; a party who has breached its own essential obligation may not demand rescission against the other.

• Substantial Breach Doctrine — Resolution or rescission is allowed only for substantial breaches that defeat the object of the parties, not for slight or casual breaches. The Court determined that respondents' failure to fill the lots with escombro was a substantial breach of an essential stipulation, while the transfer-tax and squatter issues did not constitute substantial breaches warranting rescission.

• Withholding Payment by the Vendee — Under Article 1590 of the Civil Code, a vendee disturbed in possession or ownership, or with reasonable grounds to fear such disturbance, may suspend payment until the vendor causes the disturbance to cease. Beyond Article 1590, general principles of reciprocal obligations allow the vendee to withhold payment where the vendor fails to perform any essential obligation of the contract. The Court found that the escombro-filling obligation was essential and correlative, justifying petitioner's suspension of payment, while a mere act of trespass (squatter occupation) does not authorize suspension under Article 1590.

• Literal Interpretation of Contract Stipulations — Where the terms of a contract are clear, they should be fulfilled according to the literal tenor of their stipulations. The Court applied this principle to enforce the escombro-filling requirement, rejecting respondents' argument that the lots were already at street level.

• "Respondents should not be allowed to rescind the contract where they themselves did not perform their essential obligation thereunder. It should be emphasized that a contract of sale involves reciprocity between the parties. Since respondents were in bad faith, they may not seek the rescission of the agreement they themselves breached." — This is the ratio decidendi: a party who breaches its own essential reciprocal obligation cannot invoke rescission against the other party.

• "Resolution is allowed only for substantial breaches and not for those which are slight or casual." — This formulation of the substantial breach doctrine governs when rescission is warranted under Article 1191 and is frequently cited in subsequent jurisprudence on reciprocal obligations.

• "The vendee is bound to accept the delivery and to pay the price of the thing sold at the time and place stipulated in the contract." — The Court quoted Article 1582 of the Civil Code to establish when the vendee's obligation to pay arises, while clarifying that demandability may be suspended by the vendor's non-performance of a correlative essential obligation.

• "A mere act of trespass shall not authorize the suspension of the payment of the price." — The Court invoked Article 1590 of the Civil Code to reject petitioner's argument that squatter occupation justified withholding payment, distinguishing trespass from liens or encumbrances.

• Borromeo vs. Franco, 5 Phil. 49 (1905) — Cited for the principle that rescission requires a breach of a correlative or reciprocal obligation; a failure to comply with a non-essential stipulation that is independent of the main obligation does not give the other party the right to cancel. The Court used this to distinguish between essential and non-essential stipulations in the deed of sale.
• Siy vs. Court of Appeals, 138 SCRA 536 — Cited by the Court of Appeals for the proposition that non-payment of the purchase price constitutes a breach of contract entitling the vendor to rescission. The Supreme Court acknowledged this principle but distinguished the case on the ground that respondents themselves had breached an essential obligation.
• Nagamull vs. Binalbagan Isabel Sugar Co., Inc., 33 SCRA 52 — Cited by the Court of Appeals for the rule that breach of contract gives the injured party the right to rescind or demand specific performance with damages. The Supreme Court applied this principle in reverse: respondents were not the injured party because they themselves had breached the contract.
• Vermen Realty Development Corporation vs. Court of Appeals, 224 SCRA 549 (1993) — Cited for the proposition that whether a breach is substantial is largely determined by the attendant circumstances.
• Salvatierra vs. Court of Appeals, 261 SCRA 45 (1996) — Cited for the rule that where the terms of a contract are clear, they should be fulfilled according to the literal tenor of their stipulations.

• Article 1191, Civil Code — Provides the power to rescind in reciprocal obligations when one obligor does not comply. The Court applied this to hold that only the injured party—the one not in breach—may elect between fulfillment and rescission; respondents, being themselves in breach, could not invoke it.
• Article 1458, Civil Code — Defines the contract of sale as one where a party obligates himself to transfer ownership and deliver a determinate thing, and the other to pay a price certain. The Court cited this to underscore that non-payment of the price violates the very essence of a sale and is a resolutory condition.
• Article 1582, Civil Code — States that the vendee is bound to accept delivery and pay the price at the time and place stipulated. The Court used this to establish when petitioner's obligation to pay arose—upon registration and issuance of a clean title.
• Article 1590, Civil Code — Allows the vendee to suspend payment if disturbed in possession or ownership, or with reasonable grounds to fear such disturbance, but provides that a mere act of trespass shall not authorize suspension. The Court applied this to reject the squatter-occupation argument while recognizing the broader principle that failure to perform an essential obligation also justifies withholding.
• Article 1167, Civil Code — Provides that if a person obliged to do something fails to do it, the same shall be executed at his cost. The Court invoked this to justify petitioner's having the lots filled by a third party at respondents' expense.

Justices Bellosillo, Mendoza, Quisumbing, and Buena concurred.