Suria vs. Intermediate Appellate Court

The Court held that in a consummated contract of sale where the unpaid balance is secured by a mortgage, the seller's remedy for the buyer's default is foreclosure of the mortgage, not rescission of the sale. The action for rescission under Article 1191 is a subsidiary remedy that cannot be instituted when the aggrieved party has another legal means to obtain reparation, such as the stipulated right to foreclose.

Private respondents Spouses Crispin (sellers) sold a parcel of land to petitioners Suria and Joven (buyers) via a "Deed of Sale with Mortgage" on March 31, 1975. The deed transferred title to the buyers, who executed a mortgage on the same property to secure payment of the balance on an installment basis. The buyers defaulted on the installments after making only one late payment. After several written demands failed, the sellers filed a complaint for rescission of contract and damages.

On March 31, 1975, private respondents Spouses Crispin executed a "Deed of Sale with Mortgage" over a parcel of land in San Pedro, Laguna, in favor of petitioners Suria and Joven. The deed transferred ownership and title to the buyers. To secure payment of the balance of the purchase price payable in installments, the buyers simultaneously executed a mortgage on the same property in favor of the sellers. The buyers defaulted after making only one installment payment, which was paid late. The sellers made repeated demands for payment. On August 6, 1984, the buyers offered to pay the full outstanding balance, but the sellers rejected the offer.

Petitioners argued that the complaint failed to state a cause of action for rescission because: (1) the subsidiary remedy of rescission under Article 1191 of the Civil Code is unavailable where the contract itself provides another remedy, specifically foreclosure of the mortgage; and (2) assuming rescission were proper, the sellers failed to comply with the requirements of law, including offering to restore the payments received and complying with the Maceda Law (Republic Act No. 6552).

Private respondents argued that the applicable law was Article 1191 on reciprocal obligations. They maintained that the stipulation granting the right to foreclose did not preclude them from availing of other legal remedies, such as rescission and damages. They contended that the buyers' breach of the installment payments was a breach of the reciprocal obligations under the contract of sale, entitling them to rescission as a principal action.

• Procedural Issues: N/A
• Substantive Issues:
  • Whether the sellers in a consummated contract of sale with mortgage may resort to the subsidiary remedy of rescission under Article 1191 of the Civil Code for the buyers' non-payment of installments, despite the presence of a contractual remedy of foreclosure.
  • Whether the sellers legally demanded rescission without offering to restore the buyers' payments or complying with the Maceda Law.

• Procedural: N/A
• Substantive: The Court ruled that rescission was not the proper remedy. Because the contract was a contract of sale (not a contract to sell) and title had already been transferred, the sale was perfected and consummated. The subsequent default related to the mortgage obligation, not the sale itself. Therefore, the parties' relationship was that of mortgagor and mortgagee. Under Article 1383 of the Civil Code, the action for rescission is subsidiary and cannot be instituted when the aggrieved party has another legal means to obtain reparation. Here, foreclosure was not only a legal remedy but a specific contractual right. The Court distinguished this case from situations covered by Article 1191, which applies to breaches of reciprocal obligations in a perfected but not yet consummated sale.

• Rescission is a Subsidiary Remedy (Article 1383, Civil Code) — The action for rescission under this article is subsidiary; it cannot be instituted except when the party suffering damage has no other legal means to obtain reparation. The Court applied this by finding that the sellers had the specific legal remedy of foreclosure available, thus barring the rescissory action.
• Distinction Between Contract of Sale and Contract to Sell — The Court reiterated that in a contract of sale, ownership passes to the buyer upon delivery. Once ownership is transferred, the seller's remedy for non-payment of the price is generally an action for collection or, if secured, foreclosure of the security. Rescission under Article 1191 is proper only if the contract is a contract to sell or if the sale is not yet consummated.
• Pacto Comisorio and Waiver of Resolution — Citing Villaruel v. Tan King, the Court noted that when the parties to a sale of real property stipulate that the balance is secured by a mortgage, this acknowledges the sale's consummation and constitutes a waiver of the pacto comisorio (automatic rescission) clause. The vendor's adequate remedy in case of non-payment is foreclosure.

• "The petitioners' breach of obligations is not with respect to the perfected contract of sale but in the obligations created by the mortgage contract. The remedy of rescission is not a principal action retaliatory in character but becomes a subsidiary one which by law is available only in the absence of any other legal remedy." — This passage clarifies the shift in the legal relationship from seller-buyer to mortgagee-mortgagor upon consummation of the sale, making foreclosure the primary remedy.

• Villaruel v. Tan King (43 Phil. 251) — Cited as controlling precedent. The Court followed its ruling that when a sale of real property is secured by a mortgage, the vendor's remedy for non-payment is foreclosure, not rescission of the sale, as the execution of the mortgage constitutes a waiver of the right to resolve the sale.
• Universal Food Corp. v. Court of Appeals (33 SCRA 22) — The Court referenced Justice J.B.L. Reyes' concurring opinion to distinguish between rescission for breach of reciprocal obligations (a principal action) and rescission for lesion (a subsidiary action). The Court clarified that the present case falls under the latter category due to the existence of the mortgage security.

• Article 1191, Civil Code — Provides for the power to rescind reciprocal obligations in case of breach. The Court held this article inapplicable because the breach was of the mortgage obligation, not the reciprocal obligations of the consummated sale.
• Article 1383, Civil Code — States that the action for rescission is subsidiary. The Court applied this to bar the rescissory action because the sellers had the alternative legal remedy of foreclosure.
• Article 1385, Civil Code — Requires mutual restitution upon rescission. The Court noted the sellers' failure to offer restoration, but the primary basis for the ruling was the subsidiarity principle.
• Republic Act No. 6552 (Maceda Law) — Governs installment sales of real property. The Court did not need to rule on its applicability because the primary issue was the unavailability of rescission as a remedy.