Jison vs. Court of Appeals

The Court held that a contractual stipulation providing for automatic rescission upon the buyer's failure to pay three consecutive monthly installments is valid and enforceable through extrajudicial means, provided the seller gives notice of cancellation to the buyer. Furthermore, the Court ruled that the forfeiture of all payments made as liquidated damages may be equitably reduced under Articles 1229 and 2227 of the Civil Code when such forfeiture is found to be iniquitous or unconscionable, considering the extent of the buyer's partial compliance.

Petitioners-spouses Newton Jison and Salvacion I. Josue entered into a Contract to Sell with private respondent Robert O. Phillips & Sons, Inc. for a subdivision lot in Antipolo, Rizal, payable in monthly installments. After making several payments, petitioners incurred delays, leading private respondent to invoke the contract's automatic rescission clause following three consecutive missed payments. Private respondent notified petitioners of the cancellation via a letter dated April 6, 1967, after their checks were returned. Petitioners subsequently filed a complaint for specific performance, contesting the rescission and the forfeiture of all payments made.

Petitioners entered into a Contract to Sell with private respondent for a subdivision lot, with a total price of P55,000.00 payable in monthly installments. After paying a down payment and several monthly amortizations, petitioners failed to construct a house on the lot as required by the contract, resulting in the imposition of a penalty that increased their monthly payments. Petitioners subsequently failed to pay installments due on several occasions. Despite prior warnings and a reminder of the automatic rescission clause, petitioners again failed to pay three consecutive installments from February to April 1967. Private respondent returned petitioners' check and, in a letter dated April 6, 1967, declared the contract cancelled. Petitioners' subsequent tender of payment was refused, prompting them to file a complaint for specific performance while consigning the amounts due with the court.

Petitioners argued that they had substantially complied with the contract terms. They contended that the contract could not be automatically rescinded without judicial action and that private respondent's unilateral rescission and rejection of their consigned payments were highly iniquitous and unconscionable. They further argued that the forfeiture of all previous payments was contrary to law.

Respondent relied on the contract's paragraph 3, which stipulated automatic rescission and forfeiture of all payments upon the buyer's failure to pay three consecutive monthly installments. Respondent maintained that this clause was valid and that it had duly notified petitioners of the cancellation via its April 6, 1967 letter.

• Procedural Issues: N/A
• Substantive Issues:
  • Whether the extrajudicial rescission of the contract to sell was valid.
  • Whether the forfeiture of all payments made by the petitioners as liquidated damages was enforceable.

• Procedural: N/A
• Substantive: The Court upheld the validity of the extrajudicial rescission, finding that the contractual stipulation for automatic cancellation was enforceable and that private respondent had provided sufficient notice to petitioners. However, the Court modified the judgment regarding the forfeiture of payments. Applying Articles 1229 and 2227 of the Civil Code, the Court held that the forfeiture of the entire amount paid (which included accumulated fines) was iniquitous and unconscionable. It equitably reduced the forfeited amount to fifty percent (50%) of the total payments made, considering the partial compliance by petitioners and the fact that the seller would regain possession of the lot.

• Extrajudicial Rescission of Reciprocal Contracts — The Court reiterated the rule that judicial action for rescission is not necessary when the contract provides for automatic cancellation upon violation of its terms, provided the party treating the contract as cancelled gives notice to the other party. This principle allows for resolution outside of court, subject to judicial review if challenged.
• Equitable Reduction of Liquidated Damages — Under Articles 1229 and 2227 of the Civil Code, the penalty or liquidated damages stipulated in a contract may be equitably reduced by the courts if the principal obligation has been partly or irregularly complied with, or if the stipulated amount is iniquitous or unconscionable.

• "Well settled is the rule... that judicial action for the rescission of a contract is not necessary where the contract provides that it may be cancelled for violation of any of its terms and conditions. However, even in the cited cases, there was at least a written notice sent to the defaulter, informing him of the rescission."
• "The Code provides that liquidated damages, whether intended as an indemnity or a penalty, shall be equitably reduced if they are iniquitous or unconscionable [Art. 2227.]"

• Palay, Inc. v. Clave — Cited and distinguished. In that case, the Court invalidated a rescission because the seller failed to notify the buyer of the cancellation. The Court found the instant case different because here, the seller provided timely written notice.
• University of the Philippines v. De los Angeles — Cited for the principle that the act of a party in treating a contract as cancelled must be made known to the other party.
• Makati Development Corp. v. Empire Insurance Co. — Cited to support the reduction of a stipulated penalty where there had been partial compliance with the contractual obligation.

• Article 1229, Civil Code — Provides that the judge shall equitably reduce the penalty when the principal obligation has been partly or irregularly complied with by the debtor.
• Article 2227, Civil Code — Provides that liquidated damages, whether intended as an indemnity or a penalty, shall be equitably reduced if they are iniquitous or unconscionable.
• Paragraph 3 of the Contract to Sell — The automatic rescission and forfeiture clause invoked by private respondent.