G.R. No. 163244 ; June 22, 2009
SPOUSES JOSE T. VALENZUELA and GLORIA VALENZUELA, Petitioners, vs. KALAYAAN DEVELOPMENT & INDUSTRIAL CORPORATION, Respondent.

FACTS

Kalayaan Development and Industrial Corporation (Kalayaan) is the registered owner of a parcel of land. Petitioners Spouses Valenzuela occupied the property and later negotiated to purchase a 236-square meter portion. The parties executed a Contract to Sell on August 5, 1994, stipulating a total price of ₱1,416,000.00. Petitioners paid ₱500,000.00 upon signing and agreed to pay the balance in twelve monthly installments. The contract provided that Kalayaan would execute a deed of absolute sale only upon full payment and that failure to pay any installment would incur a 3% monthly compounded penalty.
After initial payments totaling ₱708,000.00, petitioners defaulted. They requested Kalayaan to issue a deed of sale for only half the area (118 sq. m.), arguing their payment corresponded to that portion, but Kalayaan refused. Later, Gloria Valenzuela’s sister, Juliet Giron, made several ₱10,000.00 monthly payments, which Kalayaan accepted. Despite this, Kalayaan sent multiple demand letters for the full outstanding balance and, upon continued non-payment, filed a Complaint for Rescission of Contract and Damages. The Regional Trial Court ruled in favor of Kalayaan, rescinding the contract and ordering petitioners to vacate and pay attorney’s fees. The Court of Appeals affirmed the decision.

ISSUE

Whether the Court of Appeals erred in affirming the rescission of the Contract to Sell and in not recognizing that partial payments and the acceptance of payments from a third party novated the contract or barred rescission.

RULING

The Supreme Court denied the petition and affirmed the lower courts’ decisions. The legal logic is anchored on the nature of a contract to sell and the principle of substantial breach in reciprocal obligations. A contract to sell is a bilateral promise where ownership is reserved by the seller until the buyer completes payment. Petitioners failed to fulfill their essential obligation to pay the full purchase price as stipulated. Their proposal to pay only for a portion constituted a counter-offer that Kalayaan validly rejected; no novation occurred as there was no clear agreement to replace the original contract. The acceptance of payments from Juliet Giron was merely a conditional accommodation that did not waive Kalayaan’s right to demand full compliance, especially since subsequent formal demands were made. Under Article 1191 of the Civil Code, Kalayaan, as the aggrieved party, had the right to seek rescission due to petitioners’ substantial breach. The Court found the rescission proper and the award of attorney’s fees justified.