AYALA LIFE ASSURANCE, INC.

,
Petitioner,

G.R. No. 163075

Present:
PUNO, J., Chairman,
SANDOVAL-GUTIERREZ,
CORONA,
AZCUNA, and
GARCIA, JJ.

- versus -

RAY
BURTON
CORPORATION,

DEVELOPMENT

Promulgated:

Respondent.

January 23, 2006

x-----------------------------------------------------------------------------------------x
DECISION
SANDOVAL-GUTIERREZ, J.:
Before us for resolution is the petition for review on certiorari [1] assailing the
Decision[2] dated January 21, 2004 of the Court of Appeals in CA-G.R. CV No. 74635,[3] as well
as its Resolution dated April 2, 2004 denying petitioners motion forreconsideration.
The facts are:
On December 22, 1995, Ayala Life Assurance, Inc., petitioner, and Ray Burton
Development Corporation, respondent, entered into a contract denominated as a Contract to
Sell, with a Side Agreement of even date. In these contracts, petitioner agreed to sell to
respondent a parcel of land, with an area of 1,691 square meters, situated
at Madrigal Business Park, Ayala AlabangVillage, Muntinlupa City, covered by Transfer
Certificate of Title No. 186485 of the Registry of Deeds of Makati City. The purchase price of
the land is P55,000.00 per square meter or a total of P93,005,000.00, payable as follows:
(a)
On contract date P24,181,300.00 representing 26 percent of the
purchase price, inclusive of theP1,000,000.00 option money;
(b)
Not later than January 6, 1996 P3,720,200.00 representing 4
percent of the purchase price to complete 30 percent down payment; and

(c)
In consecutive quarterly installments for a period of 5 years
from December 22, 1995 P65,103,500.00representing the 70 percent balance of
the purchase price.

The contract contains a stipulation in paragraphs 3 and 3.1 for an Event of Default. It
provides that in case the purchaser (respondent) fails to pay any installment for any reason not
attributable to the seller (petitioner), the latter has the right to assess the purchaser a late penalty
interest on the unpaid installment at two (2%) percent per month, computed from the date the
amount became due until full payment thereof. And if such default continues for a period of six
(6) months, the seller has the right to cancelthe contract without need of court declaration by
giving the purchaser a written notice of cancellation. In case of such cancellation, the seller
shall return to the purchaser the amount he received, less penalties, unpaid charges and dues on
the property.
Respondent paid thirty (30%) down payment and the quarterly amortization, including
the one that fell due on June 22, 1998.
However, on August 12, 1998, respondent notified petitioner in writing that it will no
longer continue to pay due to the adverse effects of the economic crisis to its business.
Respondent then asked for the immediate cancellation of the contract and for a refund of its
previous payments as provided in the contract.
Petitioner refused to cancel the contract to sell. Instead, on November 25, 1999, it filed
with the Regional Trial Court, Branch 66, Makati City, a complaint for specific performance
against respondent, docketed as Civil Case No. 99-2014, demanding from the latter the payment
of the remaining unpaid quarterly installments beginning September 21, 1999 in the total sum
of P33,242,382.43, inclusive of interest and penalties.
Respondent, in its answer, denied any further obligation to petitioner, asserting that
on August 12, 1998, it (respondent) notified the latter of its inability to pay the remaining
installments. Respondent invoked the provisions of paragraphs 3 and 3.1 of the contract to sell
providing for the refund to it of the amounts paid, less interest and the sum of 25% of all sums
paid as liquidated damages.
After pre-trial, petitioner moved for a summary judgment on the ground that respondents
answer failed to tender any genuine issue as to any material fact, except as to the amount of
damages. The trial court granted the motion and ordered the parties to submit their memoranda.

On December 10, 2001, the trial court rendered a Decision holding that respondent
transgressed the law in obvious bad faith. The dispositive portion reads:
WHEREFORE, defendant (now respondent) is hereby sentenced and
ordered to pay plaintiff (now petitioner) the sum of P33,242,383.43, representing
the unpaid balance of the principal amount owing under the contract, interest
agreed upon, and penalties. Defendant is further ordered to pay plaintiff the sum
of P200,000.00 as attorneys fees and the costs of suit.
Upon full payment of the aforementioned amounts by defendant, plaintiff
shall, as it is hereby ordered, execute the appropriate deed of absolute sale
conveying and transferring full title and ownership of the parcel of land subject of
the sale to and in favor of defendant.

On appeal, the Court of Appeals rendered a Decision dated

CA-G.R. CV No. 74635, reversing the trial courts Decision, thus:

January 21, 2004 in

WHEREFORE,
the
decision
appealed
from
is
hereby REVERSED and SET ASIDE.
Ayala Life is hereby ordered
to refund all sums paid under the Contract to Sell, with interest of twelve percent
(12%) per annum from 12 August 1998 until fully paid, less the amount
equivalent to 25% of the total amount paid as liquidated damages.
SO ORDERED.

The Court of Appeals ruled that the parties transaction in question is in the nature of a
contract to sell, as distinguished from a contract of sale. Under their contract, ownership of the
land is retained by petitioner until respondent shall have fully paid the purchase price. Its failure
to pay the price in full is not a breach of contract but merely an event that prevents petitioner
from conveying the title to respondent. Under such a situation, a cause of action for specific
performance does not arise. What should govern the parties relation are the provisions of their
contract on the Event of Default stated earlier.
Hence, the instant petition for review on certiorari.
Petitioner contends that the Court of Appeals committed a reversible error in holding that:
(a) the remedy of specific performance is not available in a contract to sell, such as the one at
bar; and (b) petitioner is liable to refund respondent all the sums the latter paid under the contract
to sell, with interest at 12% per annum from August 12, 1998 until fully paid, less the amount
equivalent to 25% of the total amount paid as liquidated damages.

Petitioner argues that by virtue of the contract to sell, it has the right to choose between
fulfillment and rescission of the contract, with damages in either case. Thus, it is immaterial to
determine whether the parties subject agreement is a contract to sell or a contract of sale.
In its comment, respondent disputed petitioners allegations and prayed that the petition
be denied for lack of merit.
The issues are:
1. Whether respondents non-payment of the balance of the purchase
price gave rise to a cause of action on the part of petitioner to demand full
payment of the purchase price; and
2. Whether petitioner should refund respondent the amount the latter paid
under the contract to sell.

At the outset, it is significant to note that petitioner does not dispute that its December 22,
1995 transaction with respondent is a contract to sell. It bears stressing that the exact nature of
the parties contract determines whether petitioner has the remedy of specific performance.
It is thus imperative that we first determine the nature of the parties contract.
The real nature of a contract may be determined from the express terms of the written
agreement and from the contemporaneous and subsequent acts of the contracting parties. [4] In
the construction or interpretation of an instrument, the intention of the parties is primordial and is
to be pursued.[5] If the terms of the contract are clear and leave no doubt upon the intention of
the contracting parties, the literal meaning of its stipulations shall control. [6] If the words appear
to be contrary to the evident intention of the parties, the latter shall prevail over the former. [7]
The denomination or title given by the parties in their contract is not conclusive of the nature of
its contents.[8]
Here, the questioned agreement clearly indicates that it is a contract to sell, not a contract
of sale. Paragraph 4 of the contract provides:
4. TITLE AND OWNERSHIP OF THE PROPERTY. The title to the
property shall transfer to the PURCHASER upon payment of the balance of the
Purchase Price and all expenses, penalties and other costs which shall be due and
payable hereunder or which may have accrued thereto. Thereupon, the SELLER
shall execute a Deed of Absolute Sale in favor of the PURCHASER conveying all

the SELLERS rights, title and interest in and to the Property to the
PURCHASER.[9]

As correctly stated by the Court of Appeals in its assailed Decision, The ruling of the
Supreme Court in Lim v. Court of Appeals (182 SCRA 564 [1990]) is most illuminating. In the
said case, a contract to sell and a contract of sale were clearly and thoroughly distinguished from
each other, with the High Tribunal stressing that in a contract of sale, the title passes to the buyer
upon the delivery of the thing sold. In a contract to sell, the ownership is reserved in the seller
and is not to pass until the full payment of the purchase price is made. In the first case, nonpayment of the price is a negative resolutory condition; in the second case, full payment is a
positive suspensive condition. In the first case, the vendor has lost and cannot recover the
ownership of the property until and unless the contract of sale is itself resolved and set aside. In
the second case, the title remains in the vendor if the vendee does not comply with the condition
precedent of making payment at the time specified in the contract.[10]
Considering that the parties transaction is a contract to sell, can petitioner, as seller,
demand specific performance from respondent, as buyer?
Blacks Law Dictionary defined specific performance as (t)he remedy of requiring exact
performance of a contract in the specific form in which it was made, or according to the precise
terms agreed upon. The actual accomplishment of a contract by a party bound to fulfill it.[11]
Evidently, before the remedy of specific performance may be availed of, there must be
a breach of the contract.
Under a contract to sell, the title of the thing to be sold is retained by the seller until the
purchaser makes full payment of the agreed purchase price. Such payment is a
positive suspensive condition, the non-fulfillment of which is not a breach of contractbut merely
an event that prevents the seller from conveying title to the purchaser. The non-payment of the
purchase price renders the contract to sell ineffective and without force and effect. Thus, a
cause of action for specific performance does not arise.
In Rayos v. Court of Appeals,[12] we held:
x x x. Under the two contracts, the petitioners bound and obliged
themselves to execute a deed of absolute sale over the property and transfer title
thereon to the respondents after the payment of the full purchase price of the
property, inclusive of the quarterly installments due on the petitioners loan with
the PSB:
xxx

Construing the contracts together, it is evident that the parties executed

a contract to sell and not a contract of sale. The petitioners retained ownership
without further remedies by the respondents until the payment of the purchase
price of the property in full. Such payment is a positive suspensive condition,
failure of which is not really a breach, serious or otherwise, but an event that
prevents the obligation of the petitioners to convey title from arising, in
accordance with Article 1184 of the Civil Code (Leano v. Court of Appeals, 369
SCRA 36 [2001]; Lacanilao v. Court of Appeals, 262 SCRA 486 [1996]).
The non-fulfillment by the respondent of his obligation to pay, which
is a suspensive condition to the obligation of the petitioners to sell and deliver
the title to the property, rendered the contract to sell ineffective and without
force and effect (Agustin v. Court of Appeals, 186 SCRA 375 [1990]). The
parties stand as if the conditional obligation had never existed. Article
1191[13] of the New Civil Code will not apply because it presupposes an
obligation already extant (Padilla v. Posadas, 328 SCRA 434 [2001]. There
can be no rescission of an obligation that is still non-existing,
the suspensive condition not having happened (Rillo v. Court of Appeals, 274
SCRA 461 [1997]). (Underscoring supplied)

Here, the provisions of the contract to sell categorically indicate that respondents default
in the payment of the purchase price is considered merely as an event, the happening of which
gives rise to the respective obligations of the parties mentioned therein, thus:
3. EVENT OF DEFAULT. The following event shall constitute an Event
of Default under this contract: the PURCHASER fails to pay any installment on
the balance, for any reason not attributable to the SELLER, on the date it is due,
provided, however, that the SELLER shall have the right to charge the
PURCHASER a late penalty interest on the said unpaid interest at the rate of 2%
per month computed from the date the amount became due and payable until full
payment thereof.
3.1. If the Event of Default shall have occurred, then at any time
thereafter, if any such event shall then be continuing for a period of six (6)
months, the SELLER shall have the right to cancel this Contract without need of
court declaration to that effect by giving the PURCHASER a written notice of
cancellation sent to the address of the PURCHASER as specified herein by
registered mail or personal delivery. Thereafter, the SELLER shall return to the
PURCHASER the aggregate amount that the SELLER shall have received as of
the cancellation of this Contract, less: (i) penalties accrued as of the date of such
cancellation, (ii) an amount equivalent to twenty five percent (25%) of the total
amount paid as liquidated damages, and (iii) any unpaid charges and dues on the

Property. Any amount to be refunded to the PURCHASER shall be collected by

the PURCHASER at the office of the SELLER. Upon notice to the
PURCHASER of such cancellation, the SELLER shall be free to dispose of the
Property covered hereby as if this Contract had not been executed. Notice to the
PURCHASER sent by registered mail or by personal delivery to its address stated
in this Contract shall be considered as sufficient compliance with all requirements
of notice for purposes of this Contract.[14]

Therefore, in the event of respondents default in payment, petitioner, under the above
provisions of the contract, has the right to retain an amount equivalent to 25% of the total
payments. As stated by the Court of Appeals, petitioner having been informed in writing by
respondent of its intention not to proceed with the contract on August 12, 1998, or prior to
incurring delay in payment of succeeding installments,[15] the provisions in the contract relative
to penalties and interest find no application.
The Court of Appeals further held that with respect to the award of interest, petitioner is
liable to pay interest of 12% per annum upon the net refundable amount due from the time
respondent made the extrajudicial demand upon it on August 12, 1998 to refund payment under
the Contract to Sell,[16] pursuant to our ruling in Eastern Shipping Lines, Inc. v. Court of Appeals.
[17]

In sum, we find that the Court of Appeals, in rendering the assailed Decision and
Resolution, did not commit any reversible error.

WHEREFORE, the petition is DENIED. The assailed Decision and Resolution of the
Court of Appeals areAFFIRMED. Costs against petitioner.
SO ORDERED.