Doctrine: Contract of Sale v.

Contract to Sell

“Where the vendor promises to execute a deed of absolute sale upon the completion by
the vendee of the payment of the price, the contract is only a contract to sell. The aforecited
stipulation shows that the vendors reserved title to the subject property until full payment of the
purchase price."

Case Title: Nicolas P. Diego v. Rodolfo P. Diego and Eduardo P. Diego, G.R. No. 179965,
J.Del Castillo, February 20, 2013

Facts:

In 1993, petitioner Nicolas P. Diego (Nicolas) and his respondent brother Rodolfo Diego
(Rodolfo) entered into an oral contract to sell covering Nicolas’s share, fixed at ₱500,000.00, as
co-owner of the family’s “Diego Building”. Rodolfo made a downpayment of ₱250,000.00. It
was agreed that the deed of sale shall be executed upon payment of the remaining balance of
₱250,000.00. However, Rodolfo failed to pay the remaining balance.

The subject building was leased out to third parties, but Nicolas’s share in the rents were
not remitted to him by respondent Eduardo, another brother of Nicolas and designated
administrator of the Diego Building. Instead, Eduardo gave Nicolas’s monthly share in the rents
to Rodolfo. Despite demands and protestations by Nicolas, Rodolfo and Eduardo failed to render
an accounting and remit his share in the rents and fruits of the building, and Eduardo continued
to hand them over to Rodolfo. Thus, Nicolas filed a Complaint against Rodolfo and Eduardo
before the RTC of Dagupan City. Nicolas prayed, inter alia, that Eduardo be ordered to render an
accounting of all the transactions over the “Diego Building”; that Eduardo and Rodolfo be
ordered to deliver to Nicolas his share in the rent.

Rodolfo and Eduardo argued that Nicolas had no more claim in the rents in the Diego
Building since he had already sold his share to Rodolfo. Rodolfo admitted having remitted only
₱250,000.00 to Nicolas. Rodolfo asserted that he would pay the balance of the purchase price to
Nicolas only after the latter shall have executed a deed of absolute sale. The RTC dismissed the
complaint filed by Nicolas against his brothers for lack of merit and ordered the former to
execute a deed of absolute sale in favor of Rodolfo upon payment by the latter of the
₱250,000.00 balance of the agreed purchase price. The trial court further ruled that as early as
1993, Nicolas was no longer entitled to the fruits of his aliquot share in the Diego Building
because he had "ceased to be a co-owner" thereof. It held that there was a perfected contract of
sale when Nicolas received the ₱250,000.00 downpayment, Consequently, Nicolas is obligated
to convey such share to Rodolfo, without right of rescission.

The Court of Appeals affirmed the decision of the trial court and made a pronouncement
that by virtue of the contract entered into between Nicolas and Rodolfo, the former had already
transferred his ownership over the subject property and as a consequence, Rodolfo is legally
entitled to collect the fruits thereof in the form of rentals. Nicolas’ remaining right is to demand
payment of the balance of the purchase price, provided that he first executes a deed of absolute
sale in favor of Rodolfo. Hence, Nicolas appealed to the Supreme Court.

Issue/s:

1. Whether not the contract entered into by Nicolas and Rodolfo is a contract of sale or a
contract to sell; and

2. Whether or not Nicolas could rescind the contract.

Held:

1. The contract entered into by Nicolas and Rodolfo was a contract to sell.
 The stipulation to execute a deed of sale upon full payment of the purchase price is a
unique and distinguishing characteristic of a contract to sell. It also shows that the vendor
reserved title to the property until full payment. This stipulation, i.e., to execute a deed of
absolute sale upon full payment of the purchase price, is a unique and distinguishing
characteristic of a contract to sell.

Jurisprudence is replete with cases where the Court ruled that where the vendor promises
to execute a deed of absolute sale upon the completion by the vendee of the payment of the
price, indicates that the parties entered into a contract to sell. Accordingly, this particular
provision is tantamount to a reservation of ownership on the part of the vendor. Explicitly stated,
the Court ruled that the agreement to execute a deed of sale upon full payment of the purchase
price "shows that the vendors reserved title to the subject property until full payment of the
purchase price."

The Court further held that "jurisprudence has established that where the seller promises
to execute a deed of absolute sale upon the completion by the buyer of the payment of the price,
the contract is only a contract to sell."

In the case at bar, there is no dispute that in 1993, Rodolfo agreed to buy Nicolas’s share
in the Diego Building for the price of ₱500,000.00. There is also no dispute that of the total
purchase price, Rodolfo paid, and Nicolas received, ₱250,000.00. Significantly, it is also not
disputed that the parties agreed that the remaining amount of ₱250,000.00 would be paid after
Nicolas shall have executed a deed of sale.

Further, the parties could have executed a document of sale upon receipt of the partial
payment but they did not. This is thus an indication that Nicolas did not intend to immediately
transfer title over his share but only upon full payment of the purchase price. Having thus
reserved title over the property, the contract entered into by Nicolas is a contract to sell.

Moreover, Eduardo admitted that he and Rodolfo repeatedly asked Nicolas to sign the
deed of sale but the latter refused because he was not yet paid the full amount. The fact that
Eduardo and Rodolfo asked Nicolas to execute a deed of sale is a clear recognition on their part
that the ownership over the property still remains with Nicolas. In fine, the totality of the parties’
acts convinces the Court that Nicolas never intended to transfer the ownership over his share in
the Diego Building until the full payment of the purchase price. Without doubt, the transaction
agreed upon by the parties was a contract to sell, not of sale.

2. The remedy of rescission is not available in contracts to sell.

This is no rescission to speak of in the first place. In a contract to sell, title remains with
the vendor and does not pass on to the vendee until the purchase price is paid in full. Thus, in a
contract to sell, the payment of the purchase price is a positive suspensive condition. Failure to
pay the price agreed upon is not a mere breach, casual or serious, but a situation that prevents the
obligation of the vendor to convey title from acquiring an obligatory force. This is entirely
different from the situation in a contract of sale, where non-payment of the price is a negative
resolutory condition. The effects in law are not identical. In a contract of sale, the vendor has lost
ownership of the thing sold and cannot recover it, unless the contract of sale is rescinded and set
aside. In a contract to sell, however, the vendor remains the owner for as long as the vendee has
not complied fully with the condition of paying the purchase price. If the vendor should eject the
vendee for failure to meet the condition precedent, he is enforcing the contract and not rescinding
it.

Article 1592 of the Civil Code speaks of non-payment of the purchase price as a
resolutory condition. It does not apply to a contract to sell. As to Article 1191, it is subordinated
to the provisions of Article 1592 when applied to sales of immovable property. Neither provision
is applicable in the present case.
 Such as when Rodolfo failed to fully pay the purchase price, the contract to sell was
deemed terminated or cancelled. Since the agreement is a mere contract to sell, the full payment
of the purchase price partakes of a suspensive condition. The non-fulfillment of the condition
prevents the obligation to sell from arising and ownership is retained by the seller without further
remedies by the buyer. Without respondent’s full payment, there can be no breach of contract to
speak of because petitioner has no obligation yet to turn over the title. Respondent’s failure to
pay in full the purchase price in full is not the breach of contract contemplated under Article
1191 of the New Civil Code but rather just an event that prevents the petitioner from being
bound to convey title to respondent. Otherwise stated, Rodolfo has no right to compel Nicolas to
transfer ownership to him because he failed to pay in full the purchase price. Correlatively,
Nicolas has no obligation to transfer his ownership over his share in the Diego Building to
Rodolfo.

The SC ANNULLED and SET ASIDE the decisions of the lower and appellate courts
and it further declared, among others, the termination/cancellation of the oral contract to sell
between petitioner Nicolas P. Diego and respondent Rodolfo P. Diego. Thus, respondents
Rodolfo P. Diego and Eduardo P. Diego are ORDERED to surrender possession and control, as
the case may be, of Nicolas P. Diego’s share in the Diego Building. Respondents are further
commanded to return or surrender to the petitioner the documents of title, receipts, papers,
contracts, and all other documents in any form or manner pertaining to the latter’s share in the
building, which are deemed to be in their unauthorized and illegal possession and the payment of
₱250,000.00 made by respondent Rodolfo P. Diego, with legal interest from the filing of the
Complaint, shall be APPLIED, by way of compensation, to his liabilities to the petitioner and to
answer for all damages and other awards and interests.