Cheng vs. Genato

The Court held that the failure to pay the purchase price in a contract to sell is the non-fulfillment of a suspensive condition, not a breach of an existing obligation, and thus does not warrant rescission under Article 1191 of the Civil Code; moreover, a second buyer who has knowledge of a prior annotated contract acts in bad faith and cannot invoke Article 1544 on double sales to defeat the rights of the first buyer.

Respondent Genato owned two parcels of land and entered into a contract to sell with respondent Spouses Da Jose, which was annotated on the titles. Before the extension period for the Da Jose spouses' downpayment expired, Genato executed an affidavit to annul the contract and entered into a handwritten receipt agreement with petitioner Cheng, who was aware of the prior annotated contract. Genato later reconciled with the Da Jose spouses, accepted their payment, and returned Cheng's money, prompting Cheng to file suit.

• The First Contract to Sell: On September 6, 1989, respondent Genato and respondent Spouses Da Jose executed a contract to sell over two parcels of land for P80.00 per square meter. The contract was annotated on the titles the same day. Clause 3 stipulated that the Da Jose spouses would pay the remaining P950,000.00 of the downpayment 30 days after execution, subject to their verification of the titles.
• The Extension and Unilateral Rescission: On October 4, 1989, the Da Jose spouses requested and were granted a 30-day extension to finish verifying the titles. Pending the expiration of this period, Genato executed an Affidavit to Annul the Contract to Sell on October 13, 1989, claiming breach of contract for non-payment, though he did not immediately annotate it.
• The Second Agreement: On October 24, 1989, petitioner Cheng approached Genato and expressed interest in buying the properties. Genato showed Cheng the titles with the Da Jose annotation and the unannotated affidavit. Despite this knowledge, Cheng issued a P50,000.00 check, and Genato issued a handwritten receipt.
• Registration and Reconciliation: Upon Cheng's request, Genato registered the affidavit to annul on October 26, 1989. On October 27, 1989, the Da Jose spouses confronted Genato at the Registry of Deeds, protesting the rescission because the extension period was still running and they were ready to pay. Genato decided to continue the contract with the Da Jose spouses, formalized in a conforme letter.
• Cheng's Actions: Genato advised Cheng of the continuation and returned Cheng's P50,000.00 check. Cheng refused the return, filed an adverse claim on the titles on November 2, 1989, and filed the complaint for specific performance on December 8, 1989. On November 2, 1989, the Da Jose spouses paid the full downpayment and issued postdated checks for the balance.

• Petitioner Cheng maintained that the Da Jose spouses' contract to sell was validly rescinded or resolved due to their failure to pay the downpayment and the execution of the affidavit to annul.
• Petitioner argued that his agreement with Genato was a conditional contract of sale, not merely a contract to sell, which gave him better rights and precluded the application of Article 1544 on double sales.
• Petitioner contended that the Court of Appeals erred in holding him liable for damages.

• Respondents countered that the Da Jose spouses' contract was not validly rescinded because the extension period had not yet expired, meaning no default occurred, and no proper notice of rescission was made.
• Respondents argued that Cheng's agreement was merely a contract to sell subject to the condition that the prior contract be rescinded—a condition that never occurred.
• Respondents asserted that Cheng acted in bad faith because he was fully aware of the prior annotated contract and wrongfully interfered with the existing contractual relations.

• Procedural Issues: N/A
• Substantive Issues:
  • Whether the Contract to Sell between Genato and the Da Jose spouses was validly rescinded.
  • Whether Cheng's agreement with Genato was a conditional contract of sale that gave him superior rights over the Da Jose spouses.
  • Whether Cheng is liable for damages.

• Procedural: N/A
• Substantive:
  • The Court ruled that the Da Jose spouses' contract was not validly rescinded. In a contract to sell, full payment is a positive suspensive condition; failure to pay prevents the obligation from acquiring obligatory force and is not a breach of an existing obligation under Article 1191. Because the suspensive condition was not fulfilled, there was no existing obligation to rescind. Furthermore, even assuming default, Genato could not unilaterally rescind without notice to the Da Jose spouses, as extrajudicial rescission is provisional and subject to court review.
  • The Court ruled that Cheng's agreement was a contract to sell, not a conditional contract of sale. Even assuming it was conditional, the suspensive condition (the rescission of the Da Jose contract) was never fulfilled. Article 1544 on double sales does not strictly apply because no ownership was transferred, but the principle of primus tempore, potior jure (first in time, stronger in right) governs. More importantly, Cheng acted in bad faith because he had knowledge of the prior annotated contract, barring him from claiming priority over the first buyer.
  • The Court upheld the award of damages. Cheng's bad faith in pursuing the agreement despite knowledge of the prior contract, his wrongful interference with the respondents' contractual relations, and his filing of the suit justified the award of moral and exemplary damages, as well as attorney's fees.

• Rescission vs. Suspensive Condition in Contracts to Sell — In a contract to sell, the payment of the purchase price is a positive suspensive condition. The failure of this condition is not a breach of obligation but merely prevents the obligation of the vendor to convey title from acquiring obligatory force. Article 1191 of the Civil Code, which governs rescission of reciprocal obligations, applies only to existing obligations, not to obligations that never arose due to the non-fulfillment of a suspensive condition.
• Extrajudicial Rescission — A party who deems a contract violated may consider it rescinded without prior court action, but does so at their own risk. The act of treating a contract as cancelled must be made known to the other party and is always provisional, subject to scrutiny by the courts.
• Good Faith in Double Sales — For a second buyer to displace a first buyer under Article 1544, the second buyer must act in good faith from the time of acquisition until title is transferred by registration. Knowledge of a prior sale or annotation on the title taints the second buyer with bad faith, barring them from claiming priority even if they register first.
• Primus Tempore, Potior Jure — First in time, stronger in right. This principle applies when the specific circumstances mandated under Article 1544 do not fit, giving priority to the buyer whose contract was first in time and registered.

• "In a Contract to Sell, the payment of the purchase price is a positive suspensive condition, the failure of which is not a breach, casual or serious, but a situation that prevents the obligation of the vendor to convey title from acquiring an obligatory force."
• "Registration alone in such cases without good faith is not sufficient. Good faith must concur with registration for such prior right to be enforceable."
• "One who purchases real estate with knowledge of a defect . . . of title in his vendor cannot claim that he has acquired title thereto in good faith as against . . . an interest therein; and the same rule must be applied to one who has knowledge of facts which should have put him upon such inquiry and investigation as might be necessary to acquaint him with the defects in the title of his vendor."

• Odyssey Park, Inc. vs. CA — Followed. Held that the breach contemplated in Article 1191 is the obligor's failure to comply with an obligation already extant, not a failure of a condition to render binding that obligation.
• University of the Philippines vs. De Los Angeles — Followed. Stressed that extrajudicial rescission is provisional and subject to court review; the party treating the contract as cancelled must notify the other and proceeds at their own risk.
• Coronel vs. Court of Appeals — Distinguished. In Coronel, the parties clearly intended to transfer title, and the receipt outlined the agreement definitively, whereas Cheng's receipt lacked the requisites of a valid contract of sale.
• Leung Yee vs. F.L. Strong Machinery Co. — Followed. A purchaser with knowledge of facts that should put a reasonable person on inquiry cannot claim good faith.

• Article 1544, Civil Code — Governs double sales. The Court held that while this provision does not strictly apply to contracts to sell since no ownership is transferred, its underlying principle of protecting the first registrant in good faith applies. A second buyer with knowledge of a prior annotated contract acts in bad faith and cannot invoke this article.
• Article 1191, Civil Code — Governs rescission of reciprocal obligations. The Court held this inapplicable to contracts to sell where the suspensive condition (full payment) has not been fulfilled, as there is no existing obligation to rescind.
• Article 1169, Civil Code — Governs default (mora). The Court noted that no default could be ascribed to the Da Jose spouses because the extension period had not yet expired.

Belosillo, Puno, and Mendoza, JJ.