G.R. No. 84751 . June 6, 1990.
SPOUSES EDUARDO and ANN AGUSTIN, petitioners, vs. HON. COURT OF APPEALS and LABRADOR DEVELOPMENT CORPORATION, respondents.

FACTS

Petitioners, the Spouses Agustin, entered into a Contract to Sell with private respondent Labrador Development Corporation (LADECO) for a house and lot. The contract stipulated a total price of P202,980.00, with a down payment and the balance to be funded through a Pag-IBIG loan to be applied for by the petitioners. A critical provision stated that if the housing loan was insufficient to cover the full price, the petitioners were obligated to pay the deficiency in cash upon occupancy. The contract further provided that failure to comply with any stipulation would ipso facto cancel the agreement, and title, if already transferred, would automatically revert to the vendor. As an accommodation to facilitate the loan, LADECO executed a deed of absolute sale over the lot, transferring title to the petitioners.
The Pag-IBIG loan, however, was approved only for P128,000.00, not the anticipated P160,000.00. LADECO notified the petitioners of this shortfall and requested them to pay the balance in cash or find a co-borrower. The petitioners failed to respond to these demands. LADECO subsequently sent a notice of cancellation, refunded the down payment via check (which the petitioners accepted and encashed), and demanded reconveyance of the title. The petitioners sought extensions to purchase the property in cash but ultimately failed to pay.

ISSUE

Whether the Court of Appeals erred in affirming the trial court’s decision ordering the petitioners to reconvey the title to the lot and to pay attorney’s fees.

RULING

The Supreme Court affirmed the Court of Appeals’ decision with modification regarding attorney’s fees. The legal logic centers on the nature of the parties’ obligations and the valid cancellation of the contract. The Contract to Sell created reciprocal obligations. The petitioners’ primary obligation was to pay the full purchase price. The approval of a lesser loan amount triggered their contractual duty to pay the deficiency in cash. Their unjustified failure to do so constituted a substantial breach, not a slight or casual one. Their subsequent acceptance and encashment of the refund check constituted an acquiescence to the contract’s cancellation.
The Court rejected the petitioners’ defense that LADECO’s alleged failure to complete the house construction was a prior substantial breach barring rescission. This claim was deemed a mere posturing, raised only after the loan deficiency issue arose, and did not excuse the petitioners’ own default in payment. The contractual stipulation for automatic cancellation upon failure to comply was validly invoked. Consequently, the contract was lawfully rescinded. The remedy of reconveyance is proper pursuant to the contract’s terms and the principle of restitution—when an obligation is extinguished, parties must be restored to their original condition as far as practicable. However, the award of attorney’s fees was deleted for lack of factual and legal justification stated in the body of the decision, as such an award is exceptional and requires explicit reasoning.