Ong vs. Court of Appeals

In a contract to sell, the buyer's failure to fully pay the purchase price is not a breach of obligation under Article 1191 of the Civil Code, but rather the non-fulfillment of a suspensive condition that prevents the seller's obligation to convey title from acquiring obligatory force.

On May 10, 1983, Jaime Ong and spouses Miguel and Alejandra Robles executed an "Agreement of Purchase and Sale" over two parcels of land with improvements for P2,000,000.00. Ong made an initial payment and issued post-dated checks for the balance, which were dishonored for insufficient funds. Ong also failed to fully pay the spouses' bank loan as agreed. The spouses demanded the return of the properties and filed a complaint for rescission of contract and recovery of properties with damages.

• The Agreement: On May 10, 1983, petitioner Ong and respondent spouses executed an "Agreement of Purchase and Sale" for P2,000,000.00. The terms required an initial payment of P103,499.91, payment of P496,500.09 to the Bank of the Philippine Islands (BPI) to answer for the spouses' loan, and the balance of P1,400,000.00 to be paid in four equal quarterly installments. The vendors bound themselves to deliver a deed of absolute sale upon full payment by the buyer. Possession of the properties was to be transferred immediately.
• Petitioner's Default: On May 15, 1983, Ong took possession of the properties. He paid the initial P103,499.91 and deposited P393,679.60 with BPI, falling short of the agreed P496,500.09. To cover the P1,400,000.00 balance, Ong issued four post-dated checks, all of which were dishonored for insufficient funds. Ong promised to replace the checks but failed to do so.
• Subsequent Arrangements: When BPI threatened to foreclose the mortgage due to the unpaid balance, the spouses sold three transformers worth P51,411.00 with Ong's authorization. The proceeds were credited to Ong's obligation, but Ong was required to reimburse the spouses. Ong also authorized the spouses to temporarily operate the rice mill. Ong made small payments amounting to P48,680.00, which the spouses objected to, and which Ong claimed were for interest.
• Litigation and Improvements: On August 2, 1985, the spouses demanded the return of the properties. Unheeded, they filed a complaint on September 2, 1985. While the case was pending, Ong introduced major improvements on the properties, prompting the trial court to issue a writ of preliminary injunction enjoining him from making further improvements.

• Petitioner maintained that Article 1191 of the Civil Code is inapplicable because he had substantially complied with his obligation by paying a considerable sum.
• Petitioner argued that Article 1383 should apply instead, contending that rescission is a subsidiary remedy that cannot be resorted to when specific performance is available.
• Petitioner insisted that the original contract was novated as to the time and manner of payment, citing the sale of the transformers, the spouses' operation of the rice mill, and the small cash withdrawals by the spouses as evidence of a new agreement.

• Respondent spouses countered that petitioner's failure to completely pay the purchase price constituted a substantial breach of his obligation, entitling them to rescind the contract under Article 1191 of the Civil Code.

• Procedural Issues: N/A
• Substantive Issues:
  • Whether the contract entered into by the parties may be validly rescinded under Article 1191 of the Civil Code.
  • Whether the parties had novated their original contract as to the time and manner of payment.

• Procedural: N/A
• Substantive:
  • On Rescission/Resolution: The Court held that the contract is a contract to sell, not a contract of sale, because the vendors bound themselves to deliver a deed of sale only upon full payment of the purchase price. In a contract to sell, full payment is a positive suspensive condition. Petitioner's failure to complete payment is not a breach under Article 1191 but an event that prevented the vendors' obligation to convey title from acquiring obligatory force. Consequently, the contract may be set aside, not due to breach under Article 1191, but due to the non-fulfillment of the suspensive condition. Article 1383, which governs rescission for lesion, is inapplicable because the contract does not fall under any of the rescissible contracts enumerated in Article 1381.
  • On Novation: The Court ruled that novation did not occur. Novation is never presumed and must be proven by express stipulation or irreconcilable incompatibility between the old and new obligations. The subsequent acts of the parties did not demonstrate an intent to dissolve the old obligation. The small payments were objected to by respondents. The authorization for the sale of transformers explicitly stated that Ong would reimburse the spouses, maintaining the original obligation. The temporary authorization to operate the rice mill was merely to appease a misunderstanding, not to novate the contract.
  • On Improvements and Damages: The Court agreed with the lower courts that Ong is a builder in bad faith because he introduced improvements knowing he had not fully paid and despite the spouses' objections, even while the case was pending. The Court also affirmed the deletion of exemplary damages by the Court of Appeals because no moral, temperate, liquidated, or compensatory damages were awarded.

• Contract to Sell vs. Contract of Sale — In a contract of sale, title passes to the vendee upon delivery of the thing sold. In a contract to sell, ownership is reserved in the vendor and does not pass to the vendee until full payment of the purchase price. Payment of the purchase price in a contract to sell is a positive suspensive condition.
• Resolution under Article 1191 vs. Rescission under Article 1381 — Article 1191 refers to resolution based on the breach of reciprocal obligations, where the obligation of one is dependent upon the simultaneous fulfillment of the other. Article 1381 refers to rescission for lesion, which is a subsidiary action. Failure to pay the purchase price in a contract to sell is not a breach under Article 1191 but the non-fulfillment of a suspensive condition.
• Novation — Novation is never presumed; it must be proven as a fact either by express stipulation of the parties or by implication derived from an irreconcilable incompatibility between the old and the new obligation. The requisites for novation are: (1) a previous valid obligation; (2) an agreement of the parties to a new contract; (3) the extinguishment of the old contract; and (4) the validity of the new contract.

• "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."
• "Novation is never presumed, it must be proven as a fact either by express stipulation of the parties or by implication derived from an irreconcilable incompatibility between the old and the new obligation."

• Agustin vs. Court of Appeals, 186 SCRA 375 [1990] — Followed. Held that in a contract to sell, payment of the purchase price is a positive suspensive condition.
• Villaflor vs. Court of Appeals, 280 SCRA 297 [1997] — Followed. Held that failure to pay the purchase price is not a breach but an event that prevents the vendor's obligation from acquiring obligatory force.
• Uraca vs. Court of Appeals, 278 SCRA 702 [1997] — Followed. Stated that novation is never presumed and must be proven by express stipulation or irreconcilable incompatibility.

• Article 1191, Civil Code — Governs the resolution of reciprocal obligations. The Court clarified that while the article uses the term "rescission," it refers to resolution based on breach, which is distinct from the non-fulfillment of a suspensive condition in a contract to sell.
• Article 1381, Civil Code — Enumerates rescissible contracts based on lesion. The Court held this provision inapplicable because the subject contract did not fall under any of the enumerated categories.
• Article 1383, Civil Code — Provides that rescission is subsidiary. The Court found this inapplicable as the action pursued was based on the non-fulfillment of a suspensive condition, not rescission for lesion.
• Article 1292, Civil Code — Requires that novation be declared in unequivocal terms or that the old and new obligations be incompatible on every point. The Court applied this to rule out novation due to the absence of express intent or incompatibility.

Davide, Jr., C.J., Melo, Kapunan, and Pardo, JJ.