SECOND DIVISION

G.R. No. 163075 January 23, 2006

AYALA LIFE ASSURANCE, INC., Petitioner,

vs.

RAY BURTON DEVELOPMENT CORPORATION, Respondent.

DECISION

SANDOVAL-GUTIERREZ, J.:

Before us for resolution is the petition for review on certiorari1 assailing the Decision2 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 petitioner’s motion for reconsideration.

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 Alabang Village, 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 the
P1,000,000.00 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 –
P65,103,500.00 representing 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
cancel the 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 respondent’s 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 attorney’s 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 January 21, 2004 in CA-G.R. CV No. 74635,
reversing the trial court’s Decision, thus:

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 petitioner’s allegations and prayed that the petition be denied for
lack of merit.

The issues are:

1. Whether respondent’s 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 SELLER’S 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, non-payment 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?

Black’s 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 contract but 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 119113 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 respondent’s 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 respondent’s 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 are
AFFIRMED. Costs against petitioner.

SO ORDERED.

ANGELINA SANDOVAL-GUTIERREZ