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D E C I S I O N

GAERLAN, J.:

A Contract to Sell is defined as "a bilateral contract whereby the prospective seller, while expressly reserving the ownership of the subject property despite delivery thereof to the prospective buyer, binds himself to sell the said property exclusively to the prospective buyer upon fulfillment of the condition agreed upon, that is, full payment of the purchase price."

The peculiar characteristic of a Contract to Sell is that the seller retains legal title to the property to be sold until the buyer fully pays the purchase price. The full payment of the purchase price is a positive suspensive condition, the non-fulfillment of which does not constitute a breach of contract, but merely an event that prevents the seller from conveying title to the buyer.

Considering that non-payment of the full purchase price does not amount to a breach of contract, the remedy of specific performance cannot be availed of. The remedy of rescission is also unavailable since it is impossible to rescind an obligation that is non-existing, the suspensive condition not having happened yet. The buyer's non-payment thus only renders the contract to sell ineffective and without force and effect. This Court has even pronounced that the failure to make full payment of the purchase price in a contract to sell is not really a breach, serious or otherwise, and therefore not a sufficient ground to award damages.

On the other hand, the seller has no obligation to transfer ownership over the property to the intending buyer until they execute a contract of sale after full payment of the purchase price, even if they already entered into a contract to sell. It was thus recognized in Spouses Roque v. Aguado (Spouses Roque) that the seller retains the freedom and legal right to sell the property to a third party before the intending buyer's full payment of the purchase price. It was explained in Coronel v. CA (Coronel) that such sale to third party is legal because prior to full payment of the purchase price, there is no defect in the seller's title per se. In such an event, the intending buyer under the contract to sell is not even entitled to reconveyance of the property sold to the third party and can at most seek damages against the seller. The Court in Coronel pertinently held:

In a contract to sell, upon the fulfillment of the suspensive condition which is the full payment of the purchase price, ownership will not automatically transfer to the buyer although the property may have been previously delivered to him. The prospective seller still has to convey title to the prospective buyer by entering into a contract of absolute sale.

It is essential to distinguish between a contract to sell and a conditional contract of sale specially in cases where the subject property is sold by the owner not to the patty the seller contracted with, but to a third person, as in the case at bench. In a contract to sell, there being no previous sale of the property, a third person buying such property despite the fulfillment of the suspensive condition such as the full payment of the purchase price, for instance, cannot be deemed a buyer in bad faith and the prospective buyer cannot seek the relief of reconveyance of the property. There is no double sale in such case. Title to the property will transfer to the buyer after registration because there is no defect in the owner-seller's title per se, but the latter, of course, may be used for damages by the intending buyer. (Emphasis and underscoring supplied)

Based on the foregoing, the assailed CA Decision and Resolution in this case must be reversed for being contrary to prevailing law and jurisprudence.

To recall, the RTC rescinded the Contract to Sell because of De Guzman's act of selling the Subject Property in bad faith during the trial stage. He was then ordered to reimburse the down payment since there was allegedly no longer any existing sale between the parties. This was affirmed by the CA ruling that the sale to a third party rendered the enforcement of the Contract to Sell moot and academic. It additionally ruled that this was necessary in the broader interest of justice and equity.

This Court rules that the CA erred in affirming the rescission of the Contract to Sell and the order for De Guzman to reimburse the down payment. Although his act of selling the Subject Property to Algoso during the trial stage constituted bad faith, it was not a legal ground for rescission pursuant to Article 1381(4) of the New Civil Code. This was likewise not a sufficient ground to nullify it under any existing laws.

Following the doctrines in Spouses Roque and Coronel, De Guzman's sale to Algoso was legal and valid because there was still no defect in his title to the Subject Property at the time. It is undisputed that the spouses Santos did not fully pay the purchase price to obligate the sale of the Subject Property exclusively to them.

The spouses Santos were not entitled to seek the rescission of the Contract to Sell as the RTC erroneously granted in its Order. Necessarily, its order directing De Guzman to reimburse the down payment on the ground that there was no longer any sale between the parties was also erroneous. At most, the spouses Santos could only demand the payment of damages from De Guzman for selling the Subject Property prior to their full payment of the purchase price.

Having established the foregoing, the remaining ground to possibly justify the order for De Guzman to reimburse the down payment is the CA's finding that it was necessary in the broader interest of justice and equity.

In this regard, an analysis of the circumstances of this case warrants a reversal of the CA rulings. The determination of this issue involves factual matters which are generally beyond the scope of petitions filed under Rule 45 of the Rules of Court. However, this case falls under an exception when the assailed judgment is based on a misapprehension of facts.

It is clear from the evidence on record that the spouses Santos were the parties first in bad faith in complying with their obligations under the Contract to Sell. They readily admitted in their complaint that they stayed on the Subject Property for four months but deliberately did not pay even a single installment agreed upon. They also never had any intention of complying with their obligations as evidenced by the fact that they unilaterally abandoned the Subject Property. This blatant disregard for their contractual obligations prior to the filing of their complaint reeked of bad faith and must be considered in determining what is just and equitable.

However, it is also undeniable that De Guzman committed a grave fault and was guilty of bad faith when he sold the Subject Property to Algoso during the trial stage without any judicial authorization. This made the enforcement of the Contract to Sell moot and academic, and constituted a violation of his duties to the court.

Consequently, the spouses Santos are not entitled to seek protection from the courts because they themselves were guilty of grossly violating the Contract to Sell. It is settled that parties who come to court with unclean hands must not be allowed to profit from their own wrongdoings. The parties seeking equity must be free from fault. The fact that they violated the Contract to Sell and then filed the instant case to try and escape the consequences cannot be countenanced by this Court.

In the same vein, De Guzman cannot be granted any judicial relief in the form of damages since he was guilty of bad faith in selling the Subject Property to Algoso without any judicial authorization.

It is apparent from the foregoing that the parties in this case are in pari delicto, or "in equal fault." In such cases, the parties shall have no action against each other and the courts shall leave them where it finds them. The CA therefore gravely erred in ordering De Guzman to reimburse the down payment in the interest of justice and equity for lack of legal and factual basis.

Lastly, this Court stresses that its non-intervention with the parties leaves the Contract to Sell to govern the adjudication of their rights. Significantly, paragraph 1 of the Contract to Sell states that the dishonor of three checks covering payments of the installments due shall result in the automatic cancellation of the contract and the forfeiture of all payments made:

1. The purchase price of the house and lot is ONE MILLION FIVE HUNDRED THOUSAND PESOS (P1,500,000.00), Philippine Currency, payable by the Vendees as follows:

a. Two Hundred Fifty Thousand Pesos (P250,000.00) upon the signing of this Contract;

b. The balance of One Million Two Hundred Fifty Thousand Pesos (P1,250,000.00) shall be paid in equal installment of FIFTEEN THOUSAND PESOS (P15,000.00) Philippine Currency, every month with an interest of Nine Percent (9%) per annum the total amount of which shall be computed and paid after full payment of the principal amount hereof;

c. The Vendees shall issue upon signing hereof twelve (12) checks as payment for every year installment of twelve (12) months encashable every last day of the month and every year thereafter until the total amount hereof is actually and fully paid;

d. The Vendees shall avoid [dishonor] of any of the checks they will issue in payment of the house and lot of the Vendor, otherwise, any three (3) successive dishonor of the said checks shall be a ground for automatic cancellation of this Contract and forfeiture of all payment[s] made to the Vendor. (Emphasis and underscoring supplied)

By applying the clear provisions of the Contract to Sell, the spouses Santos' admission of default for the four months they stayed on the Subject Property should have resulted in the automatic cancellation of the contract and the forfeiture of all their payments made.

It is only fair, just, and equitable to apply the provisions of the Contract to Sell which both parties voluntarily and intelligently agreed upon. This is in line with the fundamental principle that obligations arising from contracts have the force of law between the parties and should be complied with in good faith.

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