Garcia vs. Rita Legarda, Inc.

A cancellation clause in a contract to sell which grants the vendor the right to declare the contract cancelled only after the vendee’s default and the expiration of a month of grace plus an additional ninety-day period is a valid resolutory condition and does not leave the contract’s validity to the uncontrolled will of one party in violation of Article 1308 of the New Civil Code. Prior acceptance of late installments by the vendor is an act of forbearance or accommodation that does not constitute waiver of the vendor’s right to cancel the contract for future defaults.

Respondent Rita Legarda, Inc., a domestic corporation, was engaged in the sale and resale of residential lots in Manila and suburbs, subdivided from the Rita Legarda Estate, on an installment basis. Between March 1947 and January 1948, respondent entered into three separate Contracts to Sell (Nos. 322, 324, and 965) with original vendees covering three parcels of approximately 150 square meters each. Through successive transfers made with respondent’s written consent, all rights and interests under the three contracts were eventually consolidated in favor of petitioners, the spouses Maria A. Garcia and Marcelino A. Timbang. Petitioners subsequently defaulted on their monthly installment obligations, and respondent cancelled the contracts after applying the contractual grace periods.

• The Contracts: Respondent Rita Legarda, Inc. executed three separate Contracts to Sell covering residential lots in Manila: Contract No. 322 (Lot 40, Block 8-CC) dated March 1, 1947 in favor of Emiliano Orellana; Contract No. 324 (Lot 20, Block 5-CC) dated March 1, 1947 in favor of Jesusa Felix; and Contract No. 965 (Lot 27, Block 5-CC) dated January 8, 1948 in favor of Angela Alvarez Solomon. Each contract contained a Sixth Paragraph providing for a month of grace upon default, an additional ninety-day period, and thereafter the vendor’s right to declare the contract cancelled, with all prior payments deemed as rents and the vendee obliged to vacate.

• Transfers to Petitioners: All rights and interests under the three contracts were eventually transferred to petitioners Maria A. Garcia and Marcelino A. Timbang with respondent’s written consent. Contract No. 322 passed from Orellana to Encarnacion Vito on June 26, 1947, then to Delfin Bacho on November 3, 1947, and finally to petitioners on May 29, 1948. Contract No. 324 was transferred by Jesusa Felix to petitioners in May 1947. Contract No. 965 was transferred by Angela Alvarez Solomon to petitioners on May 11, 1948.

• Default and Cancellation: Petitioners’ last installment payments were made on November 7, 1951, covering the installments due for July 1951. As of June 11, 1952, petitioners were in arrears for eleven months (August 1951 through June 1952) under Contracts Nos. 322 and 324, and for ten months (August 1951 through May 1952) under Contract No. 965. Respondent made several demands for payment between December 1951 and June 1952. Upon expiration of the ninety-day grace period stipulated in the Sixth Paragraph, respondent cancelled the three contracts.

• Petitioners’ Claim: Petitioners denied being in arrears and alleged that the cancellation was unlawful and arbitrary. They pointed to prior instances where respondent had accepted late installment payments, arguing that such acceptance constituted a waiver of the right to cancel. Petitioners also contended that the Ninth Paragraph of the contracts—the cancellation clause—was void under Article 1308 of the New Civil Code because it left the validity or compliance of the contract to the will of one party.

• Waiver by Acceptance of Late Payments: Petitioners argued that respondent, having previously accepted late payments of installments due under the contracts, must be deemed to have waived its right to cancel said contracts on the ground of late payment.

• Violation of Mutuality (Article 1308, New Civil Code): Petitioners contended that the questioned stipulation in the contracts—specifically Paragraph 6—violated Article 1308 of the New Civil Code, which prohibits leaving the validity or compliance of a contract to the will of one of the contracting parties.

• Arbitrariness of Cancellation: Petitioners maintained that after having tolerated and accepted late payments, respondent acted precipitously and arbitrarily in suddenly cancelling the contracts without suitable warning or further opportunity to pay, thereby forfeiting all payments already made.

• Existence of Default: Respondent averred that petitioners had failed to pay stipulated monthly installments for extended periods—eleven months for Contracts Nos. 322 and 324, and ten months for Contract No. 965—despite several demands for payment made between December 1951 and June 1952.

• Valid Exercise of Contractual Right: Respondent argued that upon expiration of the ninety-day grace period stipulated in the Sixth Paragraph of the contracts, respondent had lawfully cancelled them pursuant to the express terms agreed upon by the parties.

• Validity of Cancellation Clause under Article 1308: Whether Paragraph 6 of the contracts to sell, which grants the vendor the right to declare the contract cancelled after default and the expiration of grace periods, is void for violating Article 1308 of the New Civil Code on mutuality of contracts.

• Waiver by Acceptance of Late Payments: Whether respondent’s prior acceptance of overdue installment payments constituted a waiver of its right to cancel the contracts for subsequent defaults.

• Arbitrariness of Cancellation: Whether the cancellation was arbitrary, considering that respondent had previously tolerated late payments and cancelled the contracts without additional warning or opportunity to pay.

• Validity of Cancellation Clause under Article 1308: The stipulation was held valid and not violative of Article 1308 of the New Civil Code. The clause did not leave the validity or compliance of the contract entirely to the will of one party; it merely gave the vendor the right to declare the contract cancelled upon fulfillment of conditions therein set forth—namely, default by the vendee, expiration of a month of grace, and expiration of an additional ninety-day period. The provision constituted a resolutory condition, the exercise of which was conditioned on the vendee’s breach. The authority of Taylor v. Ky Tieng Piao, 43 Phil. 873, was invoked, where a similar stipulation was upheld on the ground that cancellation upon breach of a resolutory condition is not arbitrary but is, in reality, the fulfillment of the parties’ agreement.

• Waiver by Acceptance of Late Payments: Prior acceptance of overdue installments was deemed an act of forbearance or accommodation, not a waiver of the right to cancel. At the time of cancellation on June 11, 1952, petitioners were ten to eleven months in arrears. Respondent’s earlier acceptance of late payments was characterized as an additional opportunity extended to petitioners to keep the contracts alive. Rather than giving rise to a presumption of waiver, such forbearance strengthened respondent’s right to cancel because petitioners subsequently defaulted again despite the accommodation.

• Arbitrariness of Cancellation: The cancellation was not arbitrary. The consequences of default—including forfeiture of amounts already paid—had been foreseen by the contracting parties. All conditions for cancellation under the contracts had been fulfilled. Petitioners’ failure to comply with their payment obligations left them without valid ground to complain, notwithstanding the severity of the forfeiture. The principle that a poor bargain is no reason to set aside an agreement, as stated in Fernandez v. Manila Railroad, 14 Phil. 274, 287, was applied.

• Principle of Mutuality under Article 1308 of the New Civil Code — A contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them. The provision is rooted in the principle that obligations arising from contracts have the force of law between the contracting parties and that there must be mutuality based on their essential equality. A condition that makes fulfillment dependent exclusively upon the uncontrolled will of one party is void. A contractual clause granting a vendor the right to cancel upon the vendee’s breach and after the expiration of specified grace periods does not violate this principle, because the power to cancel is not arbitrary but is triggered solely by the other party’s non-performance.

• Doctrine on Resolutory Conditions in Contracts to Sell — A contract expressly granting one party the right to cancel upon non-fulfillment of a resolutory condition is valid. The cancellation under such a stipulation is deemed the fulfillment of the parties’ agreement, not an arbitrary act. The power thus granted can be exercised only upon the other contracting party’s breach. (See Taylor v. Ky Tieng Piao, 43 Phil. 873.)

• Waiver by Acceptance of Late Payments — Mere acceptance of overdue installment payments does not constitute a waiver of the vendor’s right to cancel the contract for future defaults. Such acceptance is properly characterized as an act of forbearance or accommodation that provides the vendee an additional opportunity to comply. Where the vendee again defaults after such accommodation, the vendor’s right to cancel is strengthened rather than diminished.

• “The above stipulation, to our mind, merely gives the vendor ‘the right to declare this contract cancelled and of no effect’ upon fulfillment of the conditions therein set forth. It does not leave the validity or compliance of the contract entirely ‘to the will of one of the contracting parties’ …” — This passage articulates the ratio on why the cancellation clause does not offend the mutuality principle.

• “That prior to the cancellation it had in fact accepted payment of installments in arrears was but another act of forbearance on its part to give the petitioners an additional opportunity to keep the contracts alive. Rather than give rise to the presumption that by such act of humanity it waived its right to cancel the contracts, it strengthens its right to do so, considering that even after such act of accommodation beneficial to the petitioners, the latter subsequently defaulted again and again in the fulfillment of their obligation.” — This excerpt defines the Court’s treatment of prior acceptance of late payments as forbearance rather than waiver.

• “That one contracting party appears to have made a poor bargain is no reason for setting aside the agreement …” — Citing Fernandez v. Manila Railroad, the Court underscored that the severity of forfeiture consequences does not invalidate a freely entered contract.

• Taylor v. Ky Tieng Piao, et al., 43 Phil. 873 — Followed. The Court relied on this case as controlling authority that a contract expressly giving one party the right to cancel if a resolutory condition is not fulfilled is valid, because such cancellation fulfills the agreement of the parties rather than being an arbitrary exercise of will.

• Fernandez v. Manila Railroad, 14 Phil. 274, 287 — Cited as authority for the principle that an unfavorable or poor bargain is not a valid ground for setting aside a contract.

• Article 1308, New Civil Code — “The contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them.” The provision was interpreted as rendering void only those conditions that make fulfillment dependent exclusively upon the uncontrolled will of one party. The cancellation clause in respondent’s contracts was held not to fall within the prohibition because its exercise was conditioned on the vendee’s breach and the lapse of stipulated periods.

Concepcion, C.J., Reyes, J.B.L., Makalintal, Bengzon, J.P., Zaldivar, Sanchez, Castro, Angeles, and Fernando, JJ., concurred.