Fabrigas vs. San Francisco Del Monte, Inc.

Cancellation of an installment sale of real property governed by Republic Act No. 6552, where the buyer has paid less than two years of installments, requires compliance with Section 4’s two-step process: a grace period of at least sixty days from the installment due date, and thereafter a notice of cancellation or demand for rescission by notarial act, effective thirty days from the buyer’s receipt; a mere letter does not suffice, and an automatic cancellation clause is void under Section 7. A first contract that was not validly cancelled may nevertheless be extinguished by novation through a subsequent incompatible restructured contract. A contract executed by a wife without her husband’s consent over conjugal property is not void but unenforceable under Article 1317 and may be ratified by the husband’s continued payments.

Petitioners, spouses Isaias and Marcelina Fabrigas, and respondent San Francisco Del Monte, Inc. were parties to an installment sale of a residential lot in Barrio Almanza, Las Piñas. The property, Lot No. 9, Block No. 3 of Subdivision Plan (LRC) Psd-50064, was covered by Transfer Certificate of Title No. 4980 (161653) T-1083 in Del Monte’s name. The transaction is governed by Republic Act No. 6552, which regulates installment sales of real property, and by the Civil Code provisions on administration of conjugal partnership property.

On April 23, 1983, petitioner spouses Isaias and Marcelina Fabrigas and respondent San Francisco Del Monte, Inc. entered into Contract to Sell No. 2482-V, under which Del Monte agreed to sell to the spouses Lot No. 9, Block No. 3 of Subdivision Plan (LRC) Psd-50064 in Barrio Almanza, Las Piñas, covered by Transfer Certificate of Title No. 4980 (161653) T-1083 in Del Monte’s name. The price was ₱109,200.00, payable with a ₱30,000.00 downpayment and the balance over ten years in monthly installments of ₱1,285.69. Paragraph 7 of the contract provided for automatic cancellation if any payment remained unpaid for thirty days after its due date; the contract would be deemed forfeited and annulled without necessity of notice, all sums paid would be treated as rentals, and the purchaser waived return and agreed to vacate. The spouses paid the downpayment and took possession, but made no installment payments on the balance.

Del Monte sent four demand letters. Its third letter, dated November 9, 1983, demanded arrears of ₱8,999.00 and granted fifteen days to settle. The final demand, dated December 7, 1983, granted another fifteen days and warned that nonpayment would cause rescission and forfeiture. The spouses received the final demand on December 23, 1983, and Del Monte considered the contract cancelled fifteen days later without furnishing them a notice of cancellation.

On November 6, 1984, Marcelina remitted ₱13,000.00 to Del Monte, and on January 12, 1985, she remitted ₱12,000.00. On January 21, 1985, while Isaias was out of the country, Marcelina alone and Del Monte entered into Contract to Sell No. 2491-V covering the same property under restructured terms: a purchase price of ₱131,642.58, a downpayment of ₱26,328.52, and monthly installments of ₱2,984.60 each. Between March 1985 and January 1986, the spouses made irregular payments under the restructured contract: ₱1,328.52 on March 19, 1985; ₱2,600.00 on July 2, 1985; ₱2,600.00 on September 30, 1985; ₱2,600.00 on November 27, 1985; and ₱2,000.00 on January 20, 1986.

On February 3, 1986, Del Monte demanded payment of an overdue account equivalent to nine installments, totaling ₱26,861.40, and sent additional letters on March 5 and April 2, 1986. The spouses thereafter paid ₱2,000.00 each on February 3, March 10, April 9, May 13, June 6, and July 14, 1986. No other payments were made except ₱10,000.00 tendered sometime in October 1987, which Del Monte refused to accept on the ground that it was intended for Contract to Sell No. 2482-V, which had already been cancelled. On March 24, 1988, Del Monte demanded accrued installments under the second contract of ₱165,759.60 less ₱48,128.52, representing payments already made, or a net amount of ₱117,631.08, with a thirty-day grace period. Because payment was not made, Del Monte notified the spouses on March 30, 1989 that Contract to Sell No. 2482-V had been cancelled and demanded that they vacate.

On September 28, 1990, Del Monte filed an action for recovery of possession with damages in the Regional Trial Court, Branch 63, Makati City, alleging an outstanding principal of ₱206,223.80 plus 24% interest per annum. The spouses answered that Del Monte unilaterally cancelled the first contract and forced Marcelina to execute the second contract, which materially and unjustly altered the original terms. The lower courts found that Marcelina signed Contract to Sell No. 2491-V to avoid forfeiture of the downpayment and other amortizations, but that she was entirely free to refuse the new contract; there was no clear case of intimidation or threat, and she was of sufficient intelligence to discern the agreement. They further found that her subsequent monthly amortizations indicated recognition of the contract’s validity, and that after being informed of the second contract, Isaias continued remitting payments for the obligation.

• Maceda Law Noncompliance: Petitioners argued that Contract to Sell No. 2482-V remained valid because Del Monte did not send a notarial notice of cancellation or demand for rescission and did not pay the cash surrender value of the payments on the property, as required by Section 3 of Republic Act No. 6552. They further argued that the automatic rescission clause was invalid under Section 7 of the same law.

• Nullity for Want of Husband’s Consent and Adhesion: Petitioners maintained that Contract to Sell No. 2491-V was void because only Marcelina executed it without Isaias’s consent, and because it was a contract of adhesion.

• Misapplication of Novation: Petitioners contended that the Court of Appeals erred in applying the rules of novation, insisting that Contract to Sell No. 2482-V should remain valid and subsisting and that Contract to Sell No. 2491-V should be nullified.

• Valid Automatic Cancellation: Respondent maintained that it was well within its right to cancel Contract to Sell No. 2482-V by express grant of paragraph 7 thereof without the need of notifying petitioners.

• Enforceability of the Restructured Contract: Respondent sought recovery of possession based on the second contract, alleging that the spouses owed the principal amount of ₱206,223.80 plus 24% interest per annum.

• Validity of Rescission: Whether Contract to Sell No. 2482-V was validly rescinded through the automatic cancellation clause consistent with Republic Act No. 6552.

• Novation: Whether Contract to Sell No. 2482-V was extinguished by novation through the subsequent Contract to Sell No. 2491-V.

• Consent and Binding Effect: Whether Contract to Sell No. 2491-V is void because only Marcelina executed it without Isaias’s consent, and whether it is void as a contract of adhesion.

• Ratification: Whether Isaias’s continued remittances after learning of Contract to Sell No. 2491-V ratified it.

• Liability for Breach: Whether petitioners may be held liable for breach under Contract to Sell No. 2491-V.

• Validity of Rescission: No. Contract to Sell No. 2482-V was not validly rescinded. Section 4 of Republic Act No. 6552 required a notice of cancellation or demand for rescission by notarial act, and the automatic cancellation clause was void under Section 7 in relation to Section 4.

• Novation: Yes. Contract to Sell No. 2482-V was extinguished by novation upon the execution of Contract to Sell No. 2491-V, which imposed new and incompatible obligations.

• Consent and Binding Effect: No. Contract to Sell No. 2491-V was not void. Because it was executed by the wife without the husband’s consent and without court or husband authority, it was unenforceable under Article 1317, not void. Nor was it void merely as a contract of adhesion.

• Ratification: Yes. Isaias’s continued remittances after being informed of the second contract constituted ratification and cleansed the contract from its defects.

• Liability for Breach: Yes. Contract to Sell No. 2491-V was valid and binding, and Del Monte could enforce its stipulations and pursue the proper court action for breach.

• Validity of Rescission: Petitioners defaulted after paying only ₱30,000.00, which was less than two years’ installments, so Section 4 of Republic Act No. 6552 governed the cancellation. Section 4 prescribes a two-step process: first, the seller must extend a grace period of at least sixty days from the installment due date; second, if the buyer fails to pay by the end of that grace period, the seller may cancel only after thirty days from the buyer’s receipt of a notice of cancellation or demand for rescission by notarial act. Del Monte allowed a grace period longer than the statutory minimum but did not comply with the notarial-act requirement. Instead, it applied the automatic rescission clause. That clause was void under Section 7 in relation to Section 4 of Republic Act No. 6552. A mere notice or letter, short of a notarial act, does not suffice.

• Novation: Novation may extinguish obligations. An extinctive novation results by changing the object or principal conditions, or by substituting the person of the debtor, and requires four essential requisites: a previous valid obligation; an agreement of all parties to a new contract; the extinguishment of the old obligation; and the birth of a valid new obligation. Under Article 1292 of the Civil Code, the old obligation must be extinguished in unequivocal terms, or the old and new obligations must be incompatible on every point. The test is whether the two obligations can stand together independently. Here, Contract to Sell No. 2491-V increased the purchase price and created new obligations in lieu of those under the first contract. The parties entered the second contract for different causes: petitioners sought to acquire ownership and avoid the consequences of default, while Del Monte obtained a higher price. The two contracts could not stand independently because they covered the same property. Thus, the first contract was extinguished upon the execution of the second.

• Consent and Binding Effect: The Civil Code recognizes the husband as administrator of the conjugal partnership. Although the wife generally cannot bind the conjugal partnership without the husband’s consent, Article 172 does not expressly declare a wife-executed contract void, and such a contract is not among those enumerated as inexistent and void in Article 1409. In Felipe vs. Heirs of Maximo Aldon, the Court treated a wife’s sale of conjugal land without her husband’s consent as voidable, but the instant case differed because the husband was absent abroad and no express Civil Code provision governed that situation. Articles 167, 168, and 169 permit the wife to administer conjugal property only with court authorization or the husband’s express authority. Absent such authority, a transaction entered by the wife is unenforceable under Article 1317. Contract to Sell No. 2491-V therefore had that status. As for adhesion, such contracts are not void in themselves; they are binding as ordinary contracts, and parties are free to reject the stipulations entirely. The trial court found no intimidation or threat and found that Marcelina was sufficiently intelligent to understand the agreement.

• Ratification: Because Contract to Sell No. 2491-V was unenforceable under Article 1317, it was susceptible to ratification. The lower courts found that after being informed of the contract’s execution, Isaias continued remitting payments for the obligation. Those acts constituted ratification and cleansed the contract from all its defects from the moment it was constituted. The factual findings were beyond review.

• Liability for Breach: Since the second contract was valid and binding after ratification, nothing prevented Del Monte from enforcing its contractual stipulations and pursuing the proper court action to hold petitioners liable for breach.

• Maceda Law — Cancellation where less than two years of installments have been paid — Under Section 4 of Republic Act No. 6552, cancellation is a two-step process: the seller must give the buyer a grace period of not less than sixty days from the date the installment became due; if the buyer fails to pay at the expiration of that grace period, the seller may cancel only after thirty days from the buyer’s receipt of a notice of cancellation or demand for rescission by notarial act. A mere notice or letter, short of a notarial act, does not suffice. An automatic cancellation clause contrary to Section 4 is null and void under Section 7. The Court applied this to hold that Del Monte’s cancellation of Contract to Sell No. 2482-V was ineffective.

• Novation — Extinctive and modificatory; requisites and incompatibility test — Novation is extinctive when an old obligation is terminated by a new obligation that replaces it; it is merely modificatory when the old obligation subsists to the extent compatible with the amendatory agreement. Extinctive novation occurs by changing the object or principal conditions, or by substituting the person of the debtor or subrogating a third person. Its requisites are: (1) a previous valid obligation; (2) an agreement of all parties to a new contract; (3) extinguishment of the old obligation; and (4) birth of a valid new obligation. The test of incompatibility is whether the two obligations can stand together independently. The Court applied these principles to find that the restructured contract extinguished the first contract.

• Contract by wife without husband’s consent over conjugal property — A contract executed by the wife without the husband’s consent is not expressly void. When the wife acts without court authorization or the husband’s express authority, the transaction is unenforceable under Article 1317 of the Civil Code and is susceptible to ratification. The Court applied this to Contract to Sell No. 2491-V, which Marcelina signed alone while her husband was abroad.

• Ratification of unenforceable contracts — Ratification by the person in whose name an unauthorized contract was executed cleanses the contract from all its defects from the moment it was constituted. The husband’s continued remittances after learning of the second contract were held to be such ratification.

• Contracts of adhesion — A contract of adhesion is not void merely because its terms are prepared by one party while the other affixes his or her signature. Such contracts are binding as ordinary contracts, and the adhering party is free to reject the stipulations entirely. The Court applied this principle in rejecting the claim that the second contract was void as a contract of adhesion.

• "Thus, the cancellation of the contract under Section 4 is a two-step process. First, the seller should extend the buyer a grace period of at least sixty (60) days from the due date of the installment. Second, at the end of the grace period, the seller shall furnish the buyer with a notice of cancellation or demand for rescission through a notarial act, effective thirty (30) days from the buyer’s receipt thereof. It is worth mentioning, of course, that a mere notice or letter, short of a notarial act, would not suffice." — This passage states the controlling procedure for cancellation under Section 4 of Republic Act No. 6552 and explains why Del Monte’s automatic rescission failed.

• "An extinctive novation results either by changing the object or principal conditions (objective or real), or by substituting the person of the debtor or subrogating a third person in the rights of the creditor (subjective or personal). Under this mode, novation would have dual functions—one to extinguish an existing obligation, the other to substitute a new one in its place—requiring a conflux of four essential requisites: (1) a previous valid obligation; (2) an agreement of all parties concerned to a new contract; (3) the extinguishment of the old obligation; and (4) the birth of a valid new obligation." — This is the Court’s formulation of extinctive novation and its requisites, applied to the restructured contract.

• "Thus, any transaction entered by the wife without the court or the husband’s authority is unenforceable in accordance with Article 1317 of the Civil Code. That is the status to be accorded Contract to Sell No. 2491-V, it having been executed by petitioner Marcelina without her husband’s conformity." — This passage establishes the legal classification of the second contract and grounds the Court’s ratification analysis.

• "A contract of adhesion is so-called because its terms are prepared by only one party while the other party merely affixes his signature signifying his adhesion thereto. Such contracts are not void in themselves. They are as binding as ordinary contracts. Parties who enter into such contracts are free to reject the stipulations entirely." — This is the Court’s statement on the validity of adhesion contracts, used to reject one of petitioners’ arguments.

• Felipe vs. Heirs of Maximo Aldon, 205 Phil. 537 (1983); 120 SCRA 628 (1983) — Distinguished. The case involved a wife’s sale of conjugal property without the husband’s consent, which the Court treated as voidable. The instant case was distinguished because the husband was absent abroad and no express Civil Code provision governed, leading the Court to classify the wife-only contract as unenforceable under Article 1317 instead.

• Quinto vs. People of the Philippines, 365 Phil. 259 (1999) — Followed. It supplied the four requisites of novation and the incompatibility test used to determine that the second contract novated the first.

• Ermitaño, et al. vs. Court of Appeals, 365 Phil. 671 (1999) — Followed. It supported the rule that contracts of adhesion are not void in themselves and are binding as ordinary contracts.

• Section 4, Republic Act No. 6552 — Applied to the cancellation of Contract to Sell No. 2482-V. It required a grace period of at least sixty days and a subsequent notice of cancellation or demand for rescission by notarial act. Del Monte failed the notarial-act requirement.

• Section 7, Republic Act No. 6552 — Applied to invalidate the automatic cancellation clause in Contract to Sell No. 2482-V as contrary to Section 4.

• Section 3, Republic Act No. 6552 — Cited by petitioners but not applied; the Court held that Section 4 governed because petitioners had paid less than two years of installments.

• Article 1231, Civil Code — Cited for the general modes of extinguishing obligations, including novation.

• Article 1292, Civil Code — Applied to require that an obligation be extinguished by novation only through unequivocal declaration or incompatibility between the old and new obligations.

• Articles 165, 167, 168, 169, 172, and 173, Civil Code — Examined to determine the capacity of spouses to bind the conjugal partnership. They showed that the wife generally needs the husband’s or the court’s authority, but do not expressly void a wife-only contract.

• Article 1317, Civil Code — Applied to classify Contract to Sell No. 2491-V as unenforceable because Marcelina contracted without her husband’s authority, while allowing ratification by Isaias.

• Article 1409, Civil Code — Cited to show that a contract executed by the wife without the husband’s consent is not among those deemed inexistent and void from the beginning.

• Reynato S. Puno
• Ma. Alicia Austria-Martinez (no part)
• Romeo J. Callejo, Sr. (on leave)
• Minita V. Chico-Nazario