Pangilinan vs. Court of Appeals

A stipulation in a contract to sell allowing automatic extrajudicial rescission upon the vendee's default is valid and Article 1592's requirement of judicial or notarial demand applies only to contracts of sale, not to contracts to sell, because in a contract to sell, full payment is a positive suspensive condition — its non-fulfillment is not a breach but an event preventing the vendor's obligation to convey title from acquiring binding force; moreover, an aggrieved party's unexplained neglect for an unreasonable length of time to assert a right constitutes laches warranting a presumption of abandonment.

On May 18, 1968, petitioners Spouses Adoracion C. Pangilinan and George B. Pangilinan entered into a Contract to Buy and To Sell with private respondents Jose R. Canlas and Luis R. Canlas over Lot No. 1, Block 3, Sto. Niño Village, San Fernando, Pampanga — a subdivision lot measuring 577 square meters at P30.00 per square meter, for a total contract price of P17,310.00, payable on installment at P189.02 monthly for 120 months. Paragraph 5 of the contract stipulated automatic extrajudicial rescission upon failure to pay three consecutive monthly installments, with forfeiture of all amounts paid as rents and damages. The petitioners paid 10% down payment and subsequent monthly installments reaching approximately 85% of the total price, with the last payment made on May 14, 1975, for the January 1974 installment. No further payments were made thereafter.

• Nature of the Action: Petitioners sought specific performance to compel private respondents to accept the remaining balance of the purchase price, execute a final deed of sale, and release the title over the subdivision lot.

• The Contract and Payments: On May 18, 1968, petitioners and private respondents executed a Contract to Buy and To Sell over Lot No. 1, Block 3, Sto. Niño Village, San Fernando, Pampanga, with an area of 577 square meters, at P30.00 per square meter for a total price of P17,310.00, payable at P189.02 monthly for 120 months. Petitioners paid P1,731.00 as 10% down payment and subsequently made monthly installments totaling approximately 85% of the contract price. The last payment was made on May 14, 1975, covering the January 1974 installment.

• The Automatic Rescission Clause: Paragraph 5 of the contract provided that upon failure to pay three consecutive monthly installments or to comply with any term or condition, the contract "shall be considered automatically rescinded and canceled and of no further force or effect," with the vendors having the right to resell the lot as if the contract had never been entered into. All amounts paid were to be considered as rents and payment for damages, with the vendee renouncing the right to reclaim them.

• Attempt to Complete Payment: Equipped with a Special Power of Attorney dated May 15, 1983, Arcadio S. Mallari, on behalf of the spouses Pangilinan, went to private respondents and requested release of the title, offering to pay the alleged remaining balance of P1,875.00. Private respondents asked him to return after two weeks. Upon his return, Jose R. Canlas informed Mallari that the lot had already been disposed of. Mallari subsequently discovered the lot had been mortgaged to the Rural Bank of Sta. Rita.

• Court of Appeals Findings on the Parties' Conduct: The appellate court noted several disturbing circumstances: the spouses Pangilinan did not personally prosecute the case; Mallari was the sole witness; the notary public who notarized the Special Power of Attorney was not presented; the Pangilinan spouses never appeared in the lower court; and there was no testimony regarding their whereabouts or why the case had to be filed by Mallari. The appellate court expressed doubt as to whether the spouses were genuinely interested in prosecuting the case and whether the Special Power of Attorney had been satisfactorily proven genuine. The Court of Appeals observed that from the last payment on May 14, 1975, until the filing of the complaint on July 25, 1983, a period of eight years elapsed during which the actual buyers had not personally shown interest in compelling the vendors to accept the remaining balance, execute a deed of sale, or deliver the title.

• Invalidity of Unilateral Rescission: Petitioners argued that automatic extrajudicial rescission by a creditor is valid only if the defaulter is first duly informed of the intention to rescind; if the defaulter objects, the matter must be submitted to judicial determination. They further contended that even if a waiver was stipulated in a contract of adhesion, such waiver would not apply because it must be unequivocal and intelligently made.

• Breach Merely Slight: Petitioners maintained that even assuming a breach occurred due to non-payment of the balance, the breach was only slight considering that 85% of the total consideration had already been paid.

• Laches Inapplicable: Petitioners averred that laches did not apply because: (1) their failure to pay the remaining 15% balance was due to private respondents' failure to improve the subdivision and install facilities; and (2) the mortgage of the lot to the Rural Bank of Sta. Rita was done without their consent and knowledge.

• Validity of Automatic Rescission: Private respondents relied on the express stipulation in paragraph 5 of the Contract to Buy and To Sell providing for automatic rescission upon default. They maintained that Article 1592's demand requirement did not apply, as the contract was a contract to sell, not a contract of sale.

• Laches: Private respondents asserted that the spouses Pangilinan's unexplained eight-year delay in asserting their rights constituted laches, warranting dismissal of the complaint.

• Rescission: Whether a creditor may unilaterally and summarily rescind a contract to sell a subdivision lot by virtue of an automatic rescission clause, without judicial or notarial demand.

• Laches: Whether petitioners were guilty of laches in enforcing their rights under the contract.

• Rescission: Article 1592 of the New Civil Code — requiring demand by suit or notarial act before a vendor of realty may rescind — applies only to a contract of sale, not to a contract to sell. In a contract to sell, ownership is retained by the seller and does not pass until full payment; such payment operates as a positive suspensive condition, the failure of which is not a breach, casual or serious, but simply an event preventing the vendor's obligation to convey title from acquiring binding force. The applicable provision is Article 1191, which makes available to the injured party the alternative remedies of rescission or enforcement of fulfillment, with damages in either case. Nothing in Article 1191 prohibits parties from agreeing that a violation of the contract's terms would cause its cancellation even without court intervention. Judicial intervention in contracts providing for automatic revocation is necessary not to obtain a declaration rescinding an already rescinded contract, but to determine whether the rescission was proper — the court's decision is merely declaratory of the revocation, not the revocatory act itself. The vendor's right in contracts to sell with reserved title to extrajudicially cancel the sale upon the vendee's failure to pay installments and to retain sums already received has long been recognized by a well-established doctrine of 39 years standing. The stipulation in paragraph 5, being in the nature of an agreement granting a party the right to rescind unilaterally in case of breach without resort to court, is not contrary to law, morals, good customs, public order, or public policy. Rescission under Article 1191 was inevitable due to petitioners' failure to pay the stipulated price within the original period.

• Laches: The contention that petitioners' failure to pay the balance was due to private respondents' failure to improve the subdivision and install facilities was raised for the first time on appeal and could not be considered, as issues not averred in the complaint or raised during trial cannot be raised for the first time on appeal. Even assuming the issue was properly raised, private respondents' failure to install facilities would not have deterred them from seeking rescission if petitioners failed to comply with their payment obligations, otherwise the right of rescission would be rendered inutile. Petitioners were bound to comply with the contract in good faith. The factual circumstances demonstrated laches: the spouses Pangilinan did not personally prosecute the case; the Special Power of Attorney in favor of Mallari was executed only on May 15, 1983 — approximately eight years after the last payment on May 14, 1975; during that entire period, the actual buyers had not personally shown interest in compelling the vendors to accept the balance, execute a deed of sale, or deliver the title. The genuineness of the Special Power of Attorney had not been satisfactorily proved, and doubts existed as to whether the spouses were genuinely interested in the prosecution of the case. Failure or neglect for an unreasonable and unexplained length of time to do that which by exercising due diligence could have been done earlier warrants a presumption of abandonment or declination to assert such right. Laches, based on public policy discouraging stale claims, is principally a question of the inequity of permitting a right or claim to be enforced or asserted.

• Distinction Between Contract to Sell and Contract of Sale for Purposes of Rescission — In a contract to sell, ownership is retained by the seller and does not pass until full payment of the price; such payment is a positive suspensive condition, the failure of which is not a breach but an event preventing the vendor's obligation to convey title from acquiring binding force. Consequently, Article 1592's requirement of judicial or notarial demand for rescission applies only to contracts of sale, not to contracts to sell. To argue that there was only a casual breach proceeds from the assumption that the contract is one of absolute sale where non-payment is a resolutory condition — which is not the case in a contract to sell. The applicable provision for rescission in contracts to sell is Article 1191 of the New Civil Code.

• Validity of Automatic Extrajudicial Rescission Clause — Nothing in Article 1191 prohibits parties from entering into an agreement that a violation of the contract's terms would cause its cancellation even without court intervention. A stipulation providing for automatic rescission upon non-payment is in the nature of an agreement granting a party the right to rescind a contract unilaterally in case of breach without need of going to court. Judicial intervention is necessary not for purposes of obtaining a judicial declaration rescinding a contract already deemed rescinded by virtue of the agreement, but in order to determine whether the rescission was proper. Where such propriety is sustained, the decision is merely declaratory of the revocation, not the revocatory act itself.

• Elements of Laches — Laches is defined as the failure or neglect for an unreasonable and unexplained length of time to do that which by exercising due diligence could or should have been done earlier. Such failure or negligence warrants a presumption of abandonment or declination to assert the right. Laches is based on grounds of public policy requiring, for the peace of society, the discouragement of stale claims and, unlike the statute of limitations, is not a mere question of time but is principally a question of the inequity or unfairness of permitting a right or claim to be enforced or asserted.

• Prohibition Against Raising Issues for the First Time on Appeal — Issues of fact and arguments not averred in the complaint nor raised during trial in the court below cannot be raised for the first time on appeal. A reviewing court need not and ordinarily will not consider matters not adequately brought to the attention of the trial court.

• "Article 1592 of the New Civil Code, requiring demand by suit or by notarial act in case the vendor of realty wants to rescind does not apply to a contract to sell but only to contract of sale. In contracts to sell, where ownership is retained by the seller and is not to pass until the full payment, such payment, as we said, is a positive suspensive condition, the failure of which is not a breach, casual or serious, but simply an event that prevented the obligation of the vendor to convey title from acquiring binding force." — This passage articulates the controlling distinction for determining the applicable rescission regime.

• "There is nothing in this law which prohibits the parties from entering into an agreement that a violation of the terms of the contract would cause its cancellation even without court intervention. The rationale for the foregoing is that in contracts providing for automatic revocation, judicial intervention is necessary not for purposes of obtaining a judicial declaration rescinding a contract already deemed rescinded by virtue of an agreement providing for rescission even without judicial intervention, but in order to determine whether or not the rescission was proper." — This defines the nature and purpose of judicial review in cases of contractual automatic rescission clauses.

• "Tempus enim modus tollendi obligationes et actiones, quia tempus currit contra desides et sui juris contemptores — For time is a means of dissipating obligations and actions, because time runs against the slothful and careless of their own rights." — The legal maxim invoked to underscore the doctrine of laches.

• Manuel v. Rodriguez, No. L-13435, July 27, 1960, 109 Phil. 1; Roque v. Lapuz, No. L-32811, March 31, 1980, 96 SCRA 741 — Cited for the controlling distinction between a contract to sell and a contract of sale: in a contract to sell, payment is a positive suspensive condition whose failure prevents the vendor's obligation from acquiring binding force, and Article 1592 does not apply.

• Luzon Brokerage Co., Inc. v. Maritime Building Co., Inc., No. L-25885, November 16, 1978, 86 SCRA 305 — Recognized as the source of the well-established doctrine of 39 years standing affirming the vendor's right in contracts to sell with reserved title to extrajudicially cancel the sale upon the vendee's failure to pay installments and retain sums already received.

• Roman Catholic Archbishop of Manila v. Court of Appeals, G.R. Nos. 77425 and 77450, June 19, 1991, 198 SCRA 300; De Luna v. Abrigo, G.R. No. 57455, January 18, 1990, 181 SCRA 150 — Cited for the principle that in contracts providing for automatic revocation, judicial intervention is merely declaratory of the revocation and determines whether rescission was proper, not the revocatory act itself.

• Bergado v. Court of Appeals, G.R. No. 84051, May 19, 1989, 173 SCRA 497; Marcelino v. Court of Appeals, G.R. No. 94422, June 26, 1992, 210 SCRA 444 — Cited for the definition and application of the doctrine of laches as based on public policy discouraging stale claims.

• Article 1191, New Civil Code — Provides the remedy of rescission in reciprocal obligations where one obligor fails to comply with what is incumbent upon him; the injured party may choose between fulfillment and rescission, with damages in either case. Applied as the governing provision for rescission in contracts to sell, as it does not prohibit parties from stipulating automatic extrajudicial rescission.

• Article 1592, New Civil Code — Provides that in the sale of immovable property, even if automatic rescission upon failure to pay the price is stipulated, the vendee may still pay after expiration of the period as long as no demand for rescission — judicial or by notarial act — has been made. Held inapplicable because the contract in question was a contract to sell, not a contract of sale.

Justices Regalado and Puno concurred. Justice Mendoza was on leave.