Tumibay vs. Lopez

In a contract to sell, the seller retains ownership of the property until the buyer has paid the price in full, and a buyer who covertly usurps the seller's ownership prior to full payment commits a substantial and fundamental breach that defeats the very object of the contract, entitling the seller to rescission under Article 1191 of the Civil Code.

Petitioners Spouses Delfin and Aurora Tumibay owned a parcel of land in Sumpong, Malaybalay, Bukidnon covered by Transfer Certificate of Title (TCT) No. T-25334 registered in the name of Aurora. Petitioner Delfin acquired American citizenship while Aurora remained a Filipino citizen. Aurora's sister, Reynalda Visitacion, resided in the Philippines and acted as the couple's representative regarding the property. Sometime in 1994, respondent Rowena Gay T. Visitacion Lopez (Reynalda's daughter) and petitioners entered into negotiations regarding the sale of the subject land.

• The Special Power of Attorney: On December 12, 1990, petitioners executed a Special Power of Attorney (SPA) in favor of Reynalda Visitacion authorizing her to administer and offer for sale the subject land, with the express condition that the selling price be subject to petitioners' approval.
• The Oral Contract to Sell: Sometime in 1994, petitioners and respondent Rowena entered into an oral contract to sell the subject land for P800,000.00 payable in ten years through monthly installments. On January 25, 1995, Rowena paid the first installment of $1,000.00 in cash to petitioner Aurora, followed by 22 intermittent monthly installments of $500.00 spanning almost three years.
• The Premature Transfer: By July 19, 1997, Rowena had paid a total of $12,000.00, equivalent to P260,626.50 or 32.58% of the purchase price. Despite non-payment of the full price, Rowena instructed her mother Reynalda to transfer the title to the property in Rowena's name. Using the SPA, Reynalda executed a deed of sale dated July 23, 1997 in favor of Rowena for P95,000.00 (not the P800,000.00 agreed price), and TCT No. T-62674 was issued in Rowena's name without the knowledge or consent of petitioners.
• The Complaint: On March 23, 1998, petitioners filed a complaint for declaration of nullity of the sale and recovery of ownership, alleging the sale was executed without their consent and beyond the agent's authority. Respondents countered that the sale was valid and that petitioners had ratified it by accepting the monthly installments.
• Lower Court Findings: The RTC ruled that Reynalda exceeded her authority under the SPA and violated Article 1491 of the Civil Code (agent purchasing the property subject of agency), rendering the sale void. The CA reversed, finding that petitioners had impliedly ratified the sale by continuing to accept payments and that the SPA conferred sufficient authority.

• Scope of Authority: Petitioner maintained that the SPA merely authorized Reynalda to offer the land for sale, not to sell it, and required petitioners' approval of the price, which was never obtained.
• Nature of Payments: Petitioner argued that the payments received from 1995 to 1997 were mere deposits for safekeeping pending final agreement on the purchase price, not installments under a perfected contract.
• No Ratification: Petitioner contended that acceptance of monthly installments did not constitute ratification of the July 23, 1997 sale because the payments preceded the execution of the deed and petitioners were unaware of the unauthorized transfer when they received subsequent payments.
• Violation of Public Policy: Petitioner asserted that the sale violated Article 1491 of the Civil Code prohibiting an agent from acquiring the property subject of the agency, alleging Reynalda used her daughter Rowena as a dummy.
• Lack of Price Agreement: Petitioner disputed the CA's adoption of the P800,000.00 selling price for lack of factual basis, claiming no agreement was reached.

• Perfection of Contract: Respondent countered that the existence of a perfected contract of sale was inextricably related to the validity of the deed of sale, and that the appellate court properly considered the issue.
• Implied Ratification: Respondent argued that petitioners' acceptance of monthly installments over three years constituted implied ratification of any defect in the SPA and the deed of sale.
• Reasonable Price: Respondent maintained that the P800,000.00 price was reasonable and agreed upon, evidenced by the consistent payment of installments.
• Validity of Agency: Respondent contended that the SPA sufficiently conferred authority to sell and that the sale was valid as petitioners had received substantial consideration.

• Existence of Contract to Sell: Whether an oral contract to sell existed between petitioners and respondent Rowena for the subject land.
• Scope of Agent's Authority: Whether Reynalda, acting under the SPA, had the authority to sell the subject land and execute the deed of sale dated July 23, 1997.
• Ratification: Whether petitioners' acceptance of monthly installments constituted ratification of the sale executed without their knowledge or consent.
• Rescission: Whether respondent Rowena's premature transfer of title constituted a substantial and fundamental breach of the contract to sell entitling petitioners to rescission under Article 1191 of the Civil Code.
• Validity of Sale: Whether the deed of sale dated July 23, 1997 is void under Article 1898 of the Civil Code.

• Existence of Contract to Sell: An oral contract to sell existed between the parties for the price of P800,000.00 payable in ten years through monthly installments. The pattern of 23 monthly payments over three years, the retention of title by petitioners until the deed was executed, and respondent Rowena's admission that she had the title transferred only later as security for installments paid, established the existence and nature of the agreement as a contract to sell.
• Breach of Contract: Respondent Rowena was in substantial and fundamental breach of the contract to sell. At the time of the deed of sale on July 23, 1997, only P260,626.50 (32.58% of P800,000.00) had been paid. The covert transfer of title without petitioners' knowledge or consent defeated the fundamental object of a contract to sell, which is to protect the seller by withholding ownership until full payment.
• Rescission: The contract to sell is rescissible under Article 1191 of the Civil Code. Rescission is permitted for breaches that are substantial and fundamental as to defeat the object of the parties in entering into the agreement. The premature usurpation of ownership by the buyer while the price remained unpaid constitutes such a breach.
• Void Sale: The deed of sale dated July 23, 1997 is void under Article 1898 of the Civil Code. Reynalda exceeded the scope of her authority under the SPA, which required petitioners' approval of the selling price. Respondent Rowena, being aware of the limits of the SPA (as evidenced by her testimony regarding the P800,000.00 price), cannot claim validity. The principal's continued receipt of four monthly installments after the transfer did not constitute ratification because petitioners had not yet discovered the covert transfer.
• Damages and Reimbursement: Respondent Rowena is liable for moral damages (P100,000.00) and attorney's fees (P50,000.00) due to fraud in the performance of her obligations. Petitioners are ordered to reimburse respondent Rowena the total amount of P327,442.00 (the peso equivalent of all installments paid) with legal interest of 6% per annum from May 19, 1998 until finality of judgment, and 12% per annum thereafter until fully paid.

• Contract to Sell — A bilateral contract whereby the prospective seller expressly reserves ownership of the subject property despite delivery to the prospective buyer, binding himself to sell exclusively to the prospective buyer upon fulfillment of the condition of full payment of the purchase price. Ownership is retained by the seller and does not pass until full payment.
• Substantial Breach in Contract to Sell — The power to rescind obligations is implied in reciprocal ones under Article 1191 of the Civil Code. Rescission is permitted only for breaches that are substantial and fundamental as to defeat the object of the parties in making the agreement. In a contract to sell, the buyer's covert transfer of title to herself prior to full payment, without the seller's knowledge or consent, constitutes such a substantial and fundamental breach because it defeats the seller's primary object of withholding ownership as security for payment.
• Agency and Void Contracts (Article 1898) — If an agent contracts in the name of the principal exceeding the scope of his authority, and the principal does not ratify the contract, the contract is void if the party with whom the agent contracted is aware of the limits of the powers granted by the principal. The agent is liable if he undertook to secure the principal's ratification.
• Ratification — Ratification requires knowledge of the facts constituting the breach or unauthorized act. Mere continuation of receiving payments under a contract to sell, when the seller is unaware that the buyer has already caused the title to be transferred, does not constitute ratification of the unauthorized transfer.

• "In a contract to sell, the seller retains ownership of the property until the buyer has paid the price in full. A buyer who covertly usurps the seller's ownership of the property prior to the full payment of the price is in breach of the contract and the seller is entitled to rescission because the breach is substantial and fundamental as it defeats the very object of the parties in entering into the contract to sell." — This passage establishes the core ruling regarding the nature of breach in a contract to sell.
• "As a general rule, 'rescission will not be permitted for a slight or casual breach of the contract, but only for such breaches as are substantial and fundamental as to defeat the object of the parties in making the agreement.'" — This clarifies the standard for rescission under Article 1191.
• "The main object or purpose of a seller in entering into a contract to sell is to protect himself against a buyer who intends to buy the property in installments by withholding ownership over the property until the buyer effects full payment therefor." — This explains the rationale for protecting sellers in contracts to sell.
• "That petitioners continued to receive four monthly installments even after the premature titling of the subject land in the name of respondent Rowena, through the deed of sale dated July 23, 1997, did not, by itself, establish that petitioners ratified such sale. On the contrary, the fact that petitioners continued to receive the aforesaid monthly installments tended to establish that they had yet to discover the covert transfer of title in the name of respondent Rowena." — This establishes that ratification requires knowledge of the facts.

• Coronel v. Court of Appeals, 331 Phil. 294 (1996) — Cited for the definition of a contract to sell and the principle that ownership is retained by the seller until full payment.
• Manuel v. Rodriguez, 109 Phil. 1 (1960) — Distinguished; held that failure to pay the price in full is not a breach but an event preventing the obligation to convey from acquiring binding force, whereas in the present case the breach consisted of the premature transfer of title.
• Song Fo and Company v. Hawaiian-Philippine Co., 47 Phil. 821 (1925) — Cited for the rule that rescission is permitted only for substantial and fundamental breaches.
• Eastern Shipping Lines, Inc. v. Court of Appeals, G.R. No. 97412, July 12, 1994 — Applied for the computation of legal interest (6% from filing of complaint until finality, 12% thereafter).

• Article 1191, Civil Code — Provides the power to rescind reciprocal obligations when one obligor does not comply with what is incumbent upon him; rescission is decreed unless there is just cause for fixing a period.
• Article 1170, Civil Code — Provides for liability for damages for those guilty of fraud, negligence, or delay, or who contravene the tenor of obligations.
• Article 1898, Civil Code — Provides that if an agent contracts exceeding the scope of authority and the principal does not ratify, the contract is void if the third party was aware of the limits of the agent's powers.
• Article 2208(2), Civil Code — Allows recovery of attorney's fees when the defendant's act compels the plaintiff to litigate with third persons or incur expenses to protect his interest.

Arturo D. Brion (Acting Chairperson), Jose Portugal Perez, Estela M. Perlas-Bernabe, and Marvic Mario Victor F. Leonen.