EQUATORIAL REALTY DEVELOPMENT, INC.

& CARMELO & BAUERMANN, for use by Mayfair as a motion picture theater and for a term of twenty
INC., petitioners, (20) years. Mayfair thereafter constructed on the leased property a movie
vs. house known as "Maxim Theatre."
MAYFAIR THEATER, INC., respondent.
Two years later, on March 31, 1969, Mayfair entered into a second
  contract of lease with Carmelo for the lease of another portion of
Carmelo's property, to wit:
HERMOSISIMA, JR., J.:
A PORTION OF THE SECOND FLOOR of the two-storey
Before us is a petition for review of the decision  of the Court of
1 building, situated at C.M. Recto Avenue, Manila, with a
Appeals  involving questions in the resolution of which the respondent appellate
2 floor area of 1,064 square meters.
court analyzed and interpreted particular provisions of our laws on contracts and
sales. In its assailed decision, the respondent court reversed the trial THE TWO (2) STORE SPACES AT THE GROUND
court  which, in dismissing the complaint for specific performance with damages
3
FLOOR and MEZZANINE of the two-storey building
and annulment of contract,  found the option clause in the lease contracts
4
situated at C.M. Recto Avenue, Manila, with a floor area
entered into by private respondent Mayfair Theater, Inc. (hereafter, Mayfair) and of 300 square meters and bearing street numbers 1871
petitioner Carmelo & Bauermann, Inc. (hereafter, Carmelo) to be impossible of and 1875,
performance and unsupported by a consideration and the subsequent sale of the
subject property to petitioner Equatorial Realty Development, Inc. (hereafter, for similar use as a movie theater and for a similar term of twenty (20)
Equatorial) to have been made without any breach of or prejudice to, the said years. Mayfair put up another movie house known as "Miramar Theatre"
lease contracts. 5
on this leased property.

We reproduce below the facts as narrated by the respondent court, which Both contracts of lease provides (sic) identically worded paragraph 8,
narration, we note, is almost verbatim the basis of the statement of facts as which reads:
rendered by the petitioners in their pleadings:
That if the LESSOR should desire to sell the leased
Carmelo owned a parcel of land, together with two 2-storey buildings premises, the LESSEE shall be given 30-days exclusive
constructed thereon located at Claro M Recto Avenue, Manila, and option to purchase the same.
covered by TCT No. 18529 issued in its name by the Register of Deeds
of Manila. In the event, however, that the leased premises is sold to
someone other than the LESSEE, the LESSOR is bound
On June 1, 1967 Carmelo entered into a contract of lease with Mayfair for and obligated, as it hereby binds and obligates itself, to
the latter's lease of a portion of Carmelo's property particularly described, stipulate in the Deed of Sale hereof that the purchaser
to wit: shall recognize this lease and be bound by all the terms
and conditions thereof.
A PORTION OF THE SECOND FLOOR of the two-storey
building, situated at C.M. Recto Avenue, Manila, with a Sometime in August 1974, Mr. Henry Pascal of Carmelo informed Mr.
floor area of 1,610 square meters. Henry Yang, President of Mayfair, through a telephone conversation that
Carmelo was desirous of selling the entire Claro M. Recto property. Mr.
THE SECOND FLOOR AND MEZZANINE of the two- Pascal told Mr. Yang that a certain Jose Araneta was offering to buy the
storey building, situated at C.M. Recto Avenue, Manila, whole property for US Dollars 1,200,000, and Mr. Pascal asked Mr. Yang
with a floor area of 150 square meters. if the latter was willing to buy the property for Six to Seven Million Pesos.
Mr. Yang replied that he would let Mr. Pascal know of his decision. On affirmative defense that the option is void for lack of consideration (sic)
August 23, 1974, Mayfair replied through a letter stating as follows: and is unenforceable by reason of its impossibility of performance
because the leased premises could not be sold separately from the other
It appears that on August 19, 1974 your Mr. Henry Pascal portions of the land and building. It counterclaimed for cancellation of the
informed our client's Mr. Henry Yang through the contracts of lease, and for increase of rentals in view of alleged
telephone that your company desires to sell your above- supervening extraordinary devaluation of the currency. Equatorial
mentioned C.M. Recto Avenue property. likewise cross-claimed against co-defendant Carmelo for indemnification
in respect of Mayfair's claims.
Under your company's two lease contracts with our client,
it is uniformly provided: During the pre-trial conference held on January 23, 1979, the parties
stipulated on the following:
8. That if the LESSOR should desire to sell the leased
premises the LESSEE shall be given 30-days exclusive 1. That there was a deed of sale of the contested
option to purchase the same. In the event, however, that premises by the defendant Carmelo . . . in favor of
the leased premises is sold to someone other than the defendant Equatorial . . .;
LESSEE, the LESSOR is bound and obligated, as it is
(sic) herebinds (sic) and obligates itself, to stipulate in the 2. That in both contracts of lease there appear (sic) the
Deed of Sale thereof that the purchaser shall recognize stipulation granting the plaintiff exclusive option to
this lease and be bound by all the terms and conditions purchase the leased premises should the lessor desire to
hereof (sic). sell the same (admitted subject to the contention that the
stipulation is null and void);
Carmelo did not reply to this letter.
3. That the two buildings erected on this land are not of
On September 18, 1974, Mayfair sent another letter to Carmelo the condominium plan;
purporting to express interest in acquiring not only the leased premises
but "the entire building and other improvements if the price is reasonable. 4. That the amounts stipulated and mentioned in
However, both Carmelo and Equatorial questioned the authenticity of the paragraphs 3 (a) and (b) of the contracts of lease
second letter. constitute the consideration for the plaintiff's occupancy of
the leased premises, subject of the same contracts of
Four years later, on July 30, 1978, Carmelo sold its entire C.M. Recto lease, Exhibits A and B;
Avenue land and building, which included the leased premises housing
the "Maxim" and "Miramar" theatres, to Equatorial by virtue of a Deed of xxx xxx xxx
Absolute Sale, for the total sum of P11,300,000.00.
6. That there was no consideration specified in the option
In September 1978, Mayfair instituted the action a quo for specific to buy embodied in the contract;
performance and annulment of the sale of the leased premises to
Equatorial. In its Answer, Carmelo alleged as special and affirmative 7. That Carmelo & Bauermann owned the land and the
defense (a) that it had informed Mayfair of its desire to sell the entire C.M. two buildings erected thereon;
Recto Avenue property and offered the same to Mayfair, but the latter
answered that it was interested only in buying the areas under lease, 8. That the leased premises constitute only the portions
which was impossible since the property was not a condominium; and (b) actually occupied by the theaters; and
that the option to purchase invoked by Mayfair is null and void for lack of
consideration. Equatorial, in its Answer, pleaded as special and
 9. That what was sold by Carmelo & Bauermann to deemed to be binding on Carmelo because of lack of distinct consideration
defendant Equatorial Realty is the land and the two therefor.
buildings erected thereon.
The court a quo ratiocinated:
xxx xxx xxx
Significantly, during the pre-trial, it was admitted by the parties that the
After assessing the evidence, the court a quo rendered the appealed option in the contract of lease is not supported by a separate
decision, the decretal portion of which reads as follows: consideration. Without a consideration, the option is therefore not binding
on defendant Carmelo & Bauermann to sell the C.M. Recto property to
WHEREFORE, judgment is hereby rendered: the former. The option invoked by the plaintiff appears in the contracts of
lease . . . in effect there is no option, on the ground that there is no
(1) Dismissing the complaint with costs against the consideration. Article 1352 of the Civil Code, provides:
plaintiff;
Contracts without cause or with unlawful cause, produce
(2) Ordering plaintiff to pay defendant Carmelo & no effect whatever. The cause is unlawful if it is contrary
Bauermann P40,000.00 by way of attorney's fees on its to law, morals, good custom, public order or public policy.
counterclaim;
Contracts therefore without consideration produce no effect whatsoever.
(3) Ordering plaintiff to pay defendant Equatorial Realty Article 1324 provides:
P35,000.00 per month as reasonable compensation for
the use of areas not covered by the contract (sic) of lease When the offeror has allowed the offeree a certain period
from July 31, 1979 until plaintiff vacates said area (sic) to accept, the offer may be withdrawn at any time before
plus legal interest from July 31, 1978; P70,000 00 per acceptance by communicating such withdrawal, except
month as reasonable compensation for the use of the when the option is founded upon consideration, as
premises covered by the contracts (sic) of lease dated something paid or promised.
(June 1, 1967 from June 1, 1987 until plaintiff vacates the
premises plus legal interest from June 1, 1987; in relation with Article 1479 of the same Code:
P55,000.00 per month as reasonable compensation for
the use of the premises covered by the contract of lease A promise to buy and sell a determine thing for a price
dated March 31, 1969 from March 30, 1989 until plaintiff certain is reciprocally demandable.
vacates the premises plus legal interest from March 30,
1989; and P40,000.00 as attorney's fees; An accepted unilateral promise to buy or to sell a
determine thing for a price certain is binding upon the
(4) Dismissing defendant Equatorial's crossclaim against promissor if the promise is supported by a consideration
defendant Carmelo & Bauermann. distinct from the price.

The contracts of lease dated June 1, 1967 and March 31, The plaintiff cannot compel defendant Carmelo to comply with the
1969 are declared expired and all persons claiming rights promise unless the former establishes the existence of a distinct
under these contracts are directed to vacate the consideration. In other words, the promisee has the burden of proving the
premises. 6
consideration. The consideration cannot be presumed as in Article 1354:

The trial court adjudged the identically worded paragraph 8 found in both
aforecited lease contracts to be an option clause which however cannot be
 Although the cause is not stated in the contract, it is 3. Upon payment of the sum of P11,300,000, directing Equatorial Realty
presumed that it exists and is lawful unless the debtor Development, Inc. to execute the deeds and documents necessary for
proves the contrary. the issuance and transfer of ownership to Mayfair of the lot registered
under TCT Nos. 17350, 118612, 60936, and 52571; and
where consideration is legally presumed to exists. Article 1354 applies to
contracts in general, whereas when it comes to an option it is governed 4. Should plaintiff-appellant Mayfair Theater, Inc. be unable to pay the
particularly and more specifically by Article 1479 whereby the promisee amount as adjudged, declaring the Deed of Absolute Sale between the
has the burden of proving the existence of consideration distinct from the defendants-appellants Carmelo & Bauermann, Inc. and Equatorial Realty
price. Thus, in the case of Sanchez vs. Rigor, 45 SCRA 368, 372-373, Development, Inc. as valid and binding upon all the parties. 8

the Court said:

Rereading the law on the matter of sales and option contracts, respondent Court
(1) Article 1354 applies to contracts in general, whereas of Appeals differentiated between Article 1324 and Article 1479 of the Civil Code,
the second paragraph of Article 1479 refers to sales in analyzed their application to the facts of this case, and concluded that since
particular, and, more specifically, to an accepted unilateral paragraph 8 of the two lease contracts does not state a fixed price for the
promise to buy or to sell. In other words, Article 1479 is purchase of the leased premises, which is an essential element for a contract of
controlling in the case at bar. sale to be perfected, what paragraph 8 is, must be a right of first refusal and not
an option contract. It explicated:
(2) In order that said unilateral promise may be binding
upon the promissor, Article 1479 requires the concurrence Firstly, the court a quo misapplied the provisions of Articles 1324 and
of a condition, namely, that the promise be supported by 1479, second paragraph, of the Civil Code.
a consideration distinct from the price.
Article 1324 speaks of an "offer" made by an offeror which the offeree
Accordingly, the promisee cannot compel the promissor to may or may not accept within a certain period. Under this article, the offer
comply with the promise, unless the former establishes may be withdrawn by the offeror before the expiration of the period and
the existence of said distinct consideration. In other while the offeree has not yet accepted the offer. However, the offer
words, the promisee has the burden of proving such cannot be withdrawn by the offeror within the period if a consideration
consideration. Plaintiff herein has not even alleged the has been promised or given by the offeree in exchange for the privilege
existence thereof in his complaint.  7
of being given that period within which to accept the offer. The
consideration is distinct from the price which is part of the offer. The
It follows that plaintiff cannot compel defendant Carmelo & Bauermann to contract that arises is known as option. In the case of Beaumont
sell the C.M. Recto property to the former. vs. Prieto, 41 Phil. 670, the Supreme court, citing Bouvier, defined an
option as follows: "A contract by virtue of which A, in consideration of the
Mayfair taking exception to the decision of the trial court, the battleground shifted payment of a certain sum to B, acquires the privilege of buying from or
to the respondent Court of Appeals. Respondent appellate court reversed the selling to B, certain securities or properties within a limited time at a
court a quo and rendered judgment: specified price," (pp. 686-7).

1. Reversing and setting aside the appealed Decision; Article 1479, second paragraph, on the other hand, contemplates of an
"accepted unilateral promise to buy or to sell a determinate thing for a
price within (which) is binding upon the promisee if the promise is
2. Directing the plaintiff-appellant Mayfair Theater Inc. to pay and return
supported by a consideration distinct from the price." That "unilateral
to Equatorial the amount of P11,300,000.00 within fifteen (15) days from
promise to buy or to sell a determinate thing for a price certain" is called
notice of this Decision, and ordering Equatorial Realty Development, Inc.
an offer. An "offer", in laws, is a proposal to enter into a contract
to accept such payment;
(Rosenstock vs. Burke, 46 Phil. 217). To constitute a legal offer, the
proposal must be certain as to the object, the price and other essential right of first refusal, which means that Carmelo should have offered the
terms of the contract (Art. 1319, Civil Code). sale of the leased premises to Mayfair before offering it to other parties,
or, if Carmelo should receive any offer from third parties to purchase the
Based on the foregoing discussion, it is evident that the provision leased premises, then Carmelo must first give Mayfair the opportunity to
granting Mayfair "30-days exclusive option to purchase" the leased match that offer.
premises is NOT AN OPTION in the context of Arts. 1324 and 1479,
second paragraph, of the Civil Code. Although the provision is certain as In fact, Mr. Pascal understood the provision as giving Mayfair a right of
to the object (the sale of the leased premises) the price for which the first refusal when he made the telephone call to Mr. Yang in 1974. Mr.
object is to be sold is not stated in the provision Otherwise stated, the Pascal thus testified:
questioned stipulation is not by itself, an "option" or the "offer to sell"
because the clause does not specify the price for the subject property. Q Can you tell this Honorable Court how
you made the offer to Mr. Henry Yang by
Although the provision giving Mayfair "30-days exclusive option to telephone?
purchase" cannot be legally categorized as an option, it is, nevertheless,
a valid and binding stipulation. What the trial court failed to appreciate A I have an offer from another party to buy
was the intention of the parties behind the questioned proviso. the property and having the offer we
decided to make an offer to Henry Yang
xxx xxx xxx on a first-refusal basis. (TSN November 8,
1983, p. 12.).
The provision in question is not of the pro-forma type customarily found in
a contract of lease. Even appellees have recognized that the stipulation and on cross-examination:
was incorporated in the two Contracts of Lease at the initiative and
behest of Mayfair. Evidently, the stipulation was intended to benefit and Q When you called Mr. Yang on August
protect Mayfair in its rights as lessee in case Carmelo should decide, 1974 can you remember exactly what you
during the term of the lease, to sell the leased property. This intention of have told him in connection with that
the parties is achieved in two ways in accordance with the stipulation. matter, Mr. Pascal?
The first is by giving Mayfair "30-days exclusive option to purchase" the
leased property. The second is, in case Mayfair would opt not to A More or less, I told him that I received
purchase the leased property, "that the purchaser (the new owner of the an offer from another party to buy the
leased property) shall recognize the lease and be bound by all the terms property and I was offering him first choice
and conditions thereof." of the enter property. (TSN, November 29,
1983, p. 18).
In other words, paragraph 8 of the two Contracts of lease, particularly the
stipulation giving Mayfair "30-days exclusive option to purchase the We rule, therefore, that the foregoing interpretation best renders effectual
(leased premises)," was meant to provide Mayfair the opportunity to the intention of the parties.
9

purchase and acquire the leased property in the event that Carmelo
should decide to dispose of the property. In order to realize this intention,
Besides the ruling that paragraph 8 vests in Mayfair the right of first refusal as to
the implicit obligation of Carmelo once it had decided to sell the leased
which the requirement of distinct consideration indispensable in an option
property, was not only to notify Mayfair of such decision to sell the
contract, has no application, respondent appellate court also addressed the claim
property, but, more importantly, to make an offer to sell the leased
of Carmelo and Equatorial that assuming arguendo that the option is valid and
premises to Mayfair, giving the latter a fair and reasonable opportunity to
effective, it is impossible of performance because it covered only the leased
accept or reject the offer, before offering to sell or selling the leased
premises and not the entire Claro M. Recto property, while Carmelo's offer to sell
property to third parties. The right vested in Mayfair is analogous to the
pertained to the entire property in question. The Court of Appeals ruled as to this OF APPEALS DISREGARDED THE CONTRACTS OF LEASE WHICH
issue in this wise: CLEARLY AND UNEQUIVOCALLY PROVIDE FOR AN OPTION, AND
THE ADMISSION OF THE PARTIES OF SUCH OPTION IN THEIR
We are not persuaded by the contentions of the defendants-appellees. It STIPULATION OF FACTS.
is to be noted that the Deed of Absolute Sale between Carmelo and
Equatorial covering the whole Claro M. Recto property, made reference II
to four titles: TCT Nos. 17350, 118612, 60936 and 52571. Based on the
information submitted by Mayfair in its appellant's Brief (pp. 5 and 46) WHETHER AN OPTION OR RIGHT OF FIRST REFUSAL, THE COURT
which has not been controverted by the appellees, and which We, OF APPEALS ERRED IN DIRECTING EQUATORIAL TO EXECUTE A
therefore, take judicial notice of the two theaters stand on the parcels of DEED OF SALE EIGHTEEN (18) YEARS AFTER MAYFAIR FAILED TO
land covered by TCT No. 17350 with an area of 622.10 sq. m and TCT EXERCISE ITS OPTION (OR, EVEN ITS RIGHT OF FIRST REFUSAL
No. 118612 with an area of 2,100.10 sq. m. The existence of four ASSUMING IT WAS ONE) WHEN THE CONTRACTS LIMITED THE
separate parcels of land covering the whole Recto property demonstrates EXERCISE OF SUCH OPTION TO 30 DAYS FROM NOTICE.
the legal and physical possibility that each parcel of land, together with
the buildings and improvements thereof, could have been sold III
independently of the other parcels.
THE COURT OF APPEALS GRIEVOUSLY ERRED WHEN IT
At the time both parties executed the contracts, they were aware of the DIRECTED IMPLEMENTATION OF ITS DECISION EVEN BEFORE ITS
physical and structural conditions of the buildings on which the theaters FINALITY, AND WHEN IT GRANTED MAYFAIR A RELIEF THAT WAS
were to be constructed in relation to the remainder of the whole Recto NOT EVEN PRAYED FOR IN THE COMPLAINT.
property. The peculiar language of the stipulation would tend to limit
Mayfair's right under paragraph 8 of the Contract of Lease to the
IV
acquisition of the leased areas only. Indeed, what is being contemplated
by the questioned stipulation is a departure from the customary situation
wherein the buildings and improvements are included in and form part of THE COURT OF APPEALS VIOLATED ITS OWN INTERNAL RULES IN
the sale of the subjacent land. Although this situation is not common, THE ASSIGNMENT OF APPEALED CASES WHEN IT ALLOWED THE
especially considering the non-condominium nature of the buildings, the SAME DIVISION XII, PARTICULARLY JUSTICE MANUEL HERRERA,
sale would be valid and capable of being performed. A sale limited to the TO RESOLVE ALL THE MOTIONS IN THE "COMPLETION PROCESS"
leased premises only, if hypothetically assumed, would have brought into AND TO STILL RESOLVE THE MERITS OF THE CASE IN THE
operation the provisions of co-ownership under which Mayfair would have "DECISION STAGE". 11

become the exclusive owner of the leased premises and at the same time
a co-owner with Carmelo of the subjacent land in proportion to Mayfair's  
interest over the premises sold to it.
10

We shall first dispose of the fourth assigned error respecting alleged irregularities
Carmelo and Equatorial now comes before us questioning the correctness and in the raffle of this case in the Court of Appeals. Suffice it to say that in our
legal basis for the decision of respondent Court of Appeals on the basis of the Resolution,  dated December 9, 1992, we already took note of this matter and
12

following assigned errors: set out the proper applicable procedure to be the following:

I On September 20, 1992, counsel for petitioner Equatorial Realty

Development, Inc. wrote a letter-complaint to this Court alleging certain
THE COURT OF APPEALS GRAVELY ERRED IN CONCLUDING THAT irregularities and infractions committed by certain lawyers, and Justices
THE OPTION CLAUSE IN THE CONTRACTS OF LEASE IS ACTUALLY of the Court of Appeals and of this Court in connection with case CA-G.R.
A RIGHT OF FIRST REFUSAL PROVISO. IN DOING SO THE COURT CV No. 32918 (now G.R. No. 106063). This partakes of the nature of an
administrative complaint for misconduct against members of the judiciary.
 While the letter-complaint arose as an incident in case CA-G.R. CV No. granted to another for a distinct and separate consideration as to whether or not
32918 (now G.R. No. 106063), the disposition thereof should be separate to purchase a determinate thing at a predetermined fixed price.
and independent from Case G.R. No. 106063. However, for purposes of
receiving the requisite pleadings necessary in disposing of the It is unquestionable that, by means of the document Exhibit E, to wit, the
administrative complaint, this Division shall continue to have control of letter of December 4, 1911, quoted at the beginning of this decision, the
the case. Upon completion thereof, the same shall be referred to the defendant Valdes granted to the plaintiff Borck the right to purchase the
Court En Banc for proper disposition. 13
Nagtajan Hacienda belonging to Benito Legarda, during the period of
three months and for its assessed valuation, a grant which necessarily
This court having ruled the procedural irregularities raised in the fourth assigned implied the offer or obligation on the part of the defendant Valdes to sell
error of Carmelo and Equatorial, to be an independent and separate subject for to Borck the said hacienda during the period and for the price mentioned .
an administrative complaint based on misconduct by the lawyers and justices . . There was, therefore, a meeting of minds on the part of the one and
implicated therein, it is the correct, prudent and consistent course of action not to the other, with regard to the stipulations made in the said document. But
pre-empt the administrative proceedings to be undertaken respecting the said it is not shown that there was any cause or consideration for that
irregularities. Certainly, a discussion thereupon by us in this case would entail a agreement, and this omission is a bar which precludes our holding that
finding on the merits as to the real nature of the questioned procedures and the the stipulations contained in Exhibit E is a contract of option, for, . . . there
true intentions and motives of the players therein. can be no contract without the requisite, among others, of the cause for
the obligation to be established.
In essence, our task is two-fold: (1) to define the true nature, scope and efficacy
of paragraph 8 stipulated in the two contracts of lease between Carmelo and In his Law Dictionary, edition of 1897, Bouvier defines an option as a
Mayfair in the face of conflicting findings by the trial court and the Court of contract, in the following language:
Appeals; and (2) to determine the rights and obligations of Carmelo and Mayfair,
as well as Equatorial, in the aftermath of the sale by Carmelo of the entire Claro A contract by virtue of which A, in consideration of
M. Recto property to Equatorial. the payment of a certain sum to B, acquires the privilege
of buying from, or selling to B, certain securities or
Both contracts of lease in question provide the identically worded paragraph 8, properties within a limited time at a specified price. (Story
which reads: vs. Salamon, 71 N.Y., 420.)

That if the LESSOR should desire to sell the leased premises, the From vol. 6, page 5001, of the work "Words and Phrases," citing the case
LESSEE shall be given 30-days exclusive option to purchase the same. of Ide vs. Leiser (24 Pac., 695; 10 Mont., 5; 24 Am. St. Rep., 17) the
following quotation has been taken:
In the event, however, that the leased premises is sold to someone other
than the LESSEE, the LESSOR is bound and obligated, as it hereby An agreement in writing to give a person the option to
binds and obligates itself, to stipulate in the Deed of Sale thereof that the purchase lands within a given time at a named price is
purchaser shall recognize this lease and be bound by all the terms and neither a sale nor an agreement to sell. It is simply a
conditions thereof. 14
contract by which the owner of property agrees with
another person that he shall have the right to buy his
We agree with the respondent Court of Appeals that the aforecited contractual property at a fixed price within a certain time. He does not
stipulation provides for a right of first refusal in favor of Mayfair. It is not an option sell his land; he does not then agree to sell it; but he does
clause or an option contract. It is a contract of a right of first refusal. sell something; that is, the right or privilege to buy at the
election or option of the other party. The second party
As early as 1916, in the case of Beaumont vs. Prieto,  unequivocal was our
15 gets in praesenti, not lands, nor an agreement that he
characterization of an option contract as one necessarily involving the choice shall have lands, but he does get something of value; that
is, the right to call for and receive lands if he elects. The
 owner parts with his right to sell his lands, except to the When the sale is not absolute but conditional, such as in a "Contract to
second party, for a limited period. The second party Sell" where invariably the ownership of the thing sold in retained until the
receives this right, or, rather, from his point of view, he fulfillment of a positive suspensive condition (normally, the full payment of
receives the right to elect to buy. the purchase price), the breach of the condition will prevent the obligation
to convey title from acquiring an obligatory force. . . .
But the two definitions above cited refer to the contract of option, or, what
amounts to the same thing, to the case where there was cause or An unconditional mutual promise to buy and sell, as long as the object is
consideration for the obligation, the subject of the agreement made by made determinate and the price is fixed, can be obligatory on the parties,
the parties; while in the case at bar there was no such cause or and compliance therewith may accordingly be exacted.
consideration.   (Emphasis ours.)
16

An accepted unilateral promise which specifies the thing to be sold and

The rule so early established in this jurisdiction is that the deed of option or the the price to be paid, when coupled with a valuable consideration distinct
option clause in a contract, in order to be valid and enforceable, must, among and separate from the price, is what may properly be termed a perfected
other things, indicate the definite price at which the person granting the option, is contract of option. This contract is legally binding, and in sales, it
willing to sell. conforms with the second paragraph of Article 1479 of the Civil Code, viz:

Notably, in one case we held that the lessee loses his right to buy the leased property for Art. 1479. . . .
a named price per square meter upon failure to make the purchase within the time
specified;  in one other case we freed the landowner from her promise to sell her land if
17
An accepted unilateral promise to buy or to sell a
the prospective buyer could raise P4,500.00 in three weeks because such option was not determinate thing for a price certain is binding upon the
supported by a distinct consideration;  in the same vein in yet one other case, we also
18
promisor if the promise is supported by a consideration
invalidated an instrument entitled, "Option to Purchase" a parcel of land for the sum of distinct from the price. (1451a).
P1,510.00 because of lack of consideration;  and as an exception to the doctrine
19

enumerated in the two preceding cases, in another case, we ruled that the option to buy Observe, however, that the option is not the contract of sale itself. The
the leased premises for P12,000.00 as stipulated in the lease contract, is not without optionee has the right, but not the obligation, to buy. Once the option is
consideration for in reciprocal contracts, like lease, the obligation or promise of each exercised timely, i.e., the offer is accepted before a breach of the option,
party is the consideration for that of the other.   In all these cases, the selling price of the
20
a bilateral promise to sell and to buy ensues and both parties are then
object thereof is always predetermined and specified in the option clause in the contract reciprocally bound to comply with their respective undertakings.
or in the separate deed of option. We elucidated, thus, in the very recent case of Ang Yu
Asuncion vs. Court of Appeals  that:
21

Let us elucidate a little. A negotiation is formally initiated by an offer. An

imperfect promise (policitacion) is merely an offer. Public advertisements
. . . In sales, particularly, to which the topic for discussion about the case or solicitations and the like are ordinarily construed as mere invitations to
at bench belongs, the contract is perfected when a person, called the make offers or only as proposals. These relations, until a contract is
seller, obligates himself, for a price certain, to deliver and to transfer perfected, are not considered binding commitments. Thus, at any time
ownership of a thing or right to another, called the buyer, over which the prior to the perfection of the contract, either negotiating party may stop
latter agrees. Article 1458 of the Civil Code provides: the negotiation. The offer, at this stage, may be withdrawn; the
withdrawal is effective immediately after its manifestation, such as by its
Art. 1458. By the contract of sale one of the contracting mailing and not necessarily when the offeree learns of the withdrawal
parties obligates himself to transfer the ownership of and (Laudico vs. Arias, 43 Phil. 270). Where a period is given to the offeree
to deliver a determinate thing, and the other to pay within which to accept the offer, the following rules generally govern:
therefor a price certain in money or its equivalent.
(1) If the period is not itself founded upon or supported by a
A contract of sale may be absolute or conditional. consideration, the offeror is still free and has the right to withdraw the
 offer before its acceptance, or if an acceptance has been made, before the parties may enter into upon the consummation of the option. It must be
the offeror's coming to know of such fact, by communicating that supported by consideration.  In the instant case, the right of first refusal is an
22

withdrawal to the offeree (see Art. 1324, Civil Code; see also Atkins, Kroll integral part of the contracts of lease. The consideration is built into the reciprocal
& Co. vs. Cua, 102 Phil. 948, holding that this rule is applicable to a obligations of the parties.
unilateral promise to sell under Art. 1479, modifying the previous decision
in South Western Sugar vs. Atlantic Gulf, 97 Phil. 249; see also Art. 1319, To rule that a contractual stipulation such as that found in paragraph 8 of the
Civil Code; Rural Bank of Parañaque, Inc. vs. Remolado, 135 SCRA 409; contracts is governed by Article 1324 on withdrawal of the offer or Article 1479 on
Sanchez vs. Rigos, 45 SCRA 368). The right to withdraw, however, must promise to buy and sell would render in effectual or "inutile" the provisions on
not be exercised whimsically or arbitrarily; otherwise, it could give rise to right of first refusal so commonly inserted in leases of real estate nowadays. The
a damage claim under Article 19 of the Civil Code which ordains that Court of Appeals is correct in stating that Paragraph 8 was incorporated into the
"every person must, in the exercise of his rights and in the performance contracts of lease for the benefit of Mayfair which wanted to be assured that it
of his duties, act with justice, give everyone his due, and observe honesty shall be given the first crack or the first option to buy the property at the price
and good faith." which Carmelo is willing to accept. It is not also correct to say that there is no
consideration in an agreement of right of first refusal. The stipulation is part and
(2) If the period has a separate consideration, a contract of "option" parcel of the entire contract of lease. The consideration for the lease includes the
deemed perfected, and it would be a breach of that contract to withdraw consideration for the right of first refusal. Thus, Mayfair is in effect stating that it
the offer during the agreed period. The option, however, is an consents to lease the premises and to pay the price agreed upon provided the
independent contract by itself; and it is to be distinguished from the lessor also consents that, should it sell the leased property, then, Mayfair shall be
projected main agreement (subject matter of the option) which is given the right to match the offered purchase price and to buy the property at that
obviously yet to be concluded. If, in fact, the optioner-offeror withdraws price. As stated in Vda. De Quirino vs. Palarca,  in reciprocal contract, the
23

the offer before its acceptance (exercise of the option) by the optionee- obligation or promise of each party is the consideration for that of the other.
offeree, the latter may not sue for specific performance on the proposed
contract ("object" of the option) since it has failed to reach its own stage The respondent Court of Appeals was correct in ascertaining the true nature of
of perfection. The optioner-offeror, however, renders himself liable for the aforecited paragraph 8 to be that of a contractual grant of the right of first
damages for breach of the opinion. . . refusal to Mayfair.

In the light of the foregoing disquisition and in view of the wording of the We shall now determine the consequential rights, obligations and liabilities of
questioned provision in the two lease contracts involved in the instant case, we Carmelo, Mayfair and Equatorial.
so hold that no option to purchase in contemplation of the second paragraph of
Article 1479 of the Civil Code, has been granted to Mayfair under the said lease The different facts and circumstances in this case call for an amplification of the
contracts. precedent in Ang Yu Asuncion vs. Court of Appeals. 24

Respondent Court of Appeals correctly ruled that the said paragraph 8 grants the First and foremost is that the petitioners acted in bad faith to render Paragraph 8
right of first refusal to Mayfair and is not an option contract. It also correctly "inutile".
reasoned that as such, the requirement of a separate consideration for the
option, has no applicability in the instant case.
What Carmelo and Mayfair agreed to, by executing the two lease contracts, was
that Mayfair will have the right of first refusal in the event Carmelo sells the
There is nothing in the identical Paragraphs "8" of the June 1, 1967 and March leased premises. It is undisputed that Carmelo did recognize this right of Mayfair,
31, 1969 contracts which would bring them into the ambit of the usual offer or for it informed the latter of its intention to sell the said property in 1974. There
option requiring an independent consideration. was an exchange of letters evidencing the offer and counter-offers made by both
parties. Carmelo, however, did not pursue the exercise to its logical end. While it
An option is a contract granting a privilege to buy or sell within an agreed time initially recognized Mayfair's right of first refusal, Carmelo violated such right
and at a determined price. It is a separate and distinct contract from that which when without affording its negotiations with Mayfair the full process to ripen to at
least an interface of a definite offer and a possible corresponding acceptance property at the time it was sold to it. Although the Contract of Lease was
within the "30-day exclusive option" time granted Mayfair, Carmelo abandoned not annotated on the transfer certificate of title in the name of the late
negotiations, kept a low profile for some time, and then sold, without prior notice Jose Reynoso and Africa Reynoso, the petitioner cannot deny actual
to Mayfair, the entire Claro M Recto property to Equatorial. knowledge of such lease which was equivalent to and indeed more
binding than presumed notice by registration.
Since Equatorial is a buyer in bad faith, this finding renders the sale to it of the
property in question rescissible. We agree with respondent Appellate Court that A purchaser in good faith and for value is one who buys the property of
the records bear out the fact that Equatorial was aware of the lease contracts another without notice that some other person has a right to or interest in
because its lawyers had, prior to the sale, studied the said contracts. As such, such property and pays a full and fair price for the same at the time of
Equatorial cannot tenably claim to be a purchaser in good faith, and, therefore, such purchase or before he has notice of the claim or interest of some
rescission lies. other person in the property. Good faith connotes an honest intention to
abstain from taking unconscientious advantage of another. Tested by
. . . Contract of Sale was not voidable but rescissible. Under Article 1380 these principles, the petitioner cannot tenably claim to be a buyer in good
to 1381(3) of the Civil Code, a contract otherwise valid may nonetheless faith as it had notice of the lease of the property by the Bonnevies and
be subsequently rescinded by reason of injury to third persons, like such knowledge should have cautioned it to look deeper into the
creditors. The status of creditors could be validly accorded the Bonnevies agreement to determine if it involved stipulations that would prejudice its
for they had substantial interests that were prejudiced by the sale of the own interests.
subject property to the petitioner without recognizing their right of first
priority under the Contract of Lease. The petitioner insists that it was not aware of the right of first priority
granted by the Contract of Lease. Assuming this to be true, we
According to Tolentino, rescission is a remedy granted by law to the nevertheless agree with the observation of the respondent court that:
contracting parties and even to third persons, to secure reparation for
damages caused to them by a contract, even if this should be valid, by If Guzman-Bocaling failed to inquire about the terms of
means of the restoration of things to their condition at the moment prior to the Lease Contract, which includes Par. 20 on priority
the celebration of said contract. It is a relief allowed for the protection of right given to the Bonnevies, it had only itself to blame.
one of the contracting parties and even third persons from all injury and Having known that the property it was buying was under
damage the contract may cause, or to protect some incompatible and lease, it behooved it as a prudent person to have required
preferent right created by the contract. Rescission implies a contract Reynoso or the broker to show to it the Contract of Lease
which, even if initially valid, produces a lesion or pecuniary damage to in which Par. 20 is contained. 25

someone that justifies its invalidation for reasons of equity.

Petitioners assert the alleged impossibility of performance because the entire
It is true that the acquisition by a third person of the property subject of property is indivisible property. It was petitioner Carmelo which fixed the limits of
the contract is an obstacle to the action for its rescission where it is the property it was leasing out. Common sense and fairness dictate that instead
shown that such third person is in lawful possession of the subject of the of nullifying the agreement on that basis, the stipulation should be given effect by
contract and that he did not act in bad faith. However, this rule is not including the indivisible appurtenances in the sale of the dominant portion under
applicable in the case before us because the petitioner is not considered the right of first refusal. A valid and legal contract where the ascendant or the
a third party in relation to the Contract of Sale nor may its possession of more important of the two parties is the landowner should be given effect, if
the subject property be regarded as acquired lawfully and in good faith. possible, instead of being nullified on a selfish pretext posited by the owner.
Following the arguments of petitioners and the participation of the owner in the
Indeed, Guzman, Bocaling and Co. was the vendee in the Contract of attempt to strip Mayfair of its rights, the right of first refusal should include not
Sale. Moreover, the petitioner cannot be deemed a purchaser in good only the property specified in the contracts of lease but also the appurtenant
faith for the record shows that it categorically admitted it was aware of the portions sold to Equatorial which are claimed by petitioners to be indivisible.
lease in favor of the Bonnevies, who were actually occupying the subject Carmelo acted in bad faith when it sold the entire property to Equatorial without
informing Mayfair, a clear violation of Mayfair's rights. While there was a series of
exchanges of letters evidencing the offer and counter-offers between the parties, To follow an alternative solution that Carmelo and Mayfair may resume
Carmelo abandoned the negotiations without giving Mayfair full opportunity to negotiations for the sale to the latter of the disputed property would be unjust and
negotiate within the 30-day period. unkind to Mayfair because it is once more compelled to litigate to enforce its
right. It is not proper to give it an empty or vacuous victory in this case. From the
Accordingly, even as it recognizes the right of first refusal, this Court should also viewpoint of Carmelo, it is like asking a fish if it would accept the choice of being
order that Mayfair be authorized to exercise its right of first refusal under the thrown back into the river. Why should Carmelo be rewarded for and allowed to
contract to include the entirety of the indivisible property. The boundaries of the profit from, its wrongdoing? Prices of real estate have skyrocketed. After having
property sold should be the boundaries of the offer under the right of first refusal. sold the property for P11,300,000.00, why should it be given another chance to
As to the remedy to enforce Mayfair's right, the Court disagrees to a certain sell it at an increased price?
extent with the concluding part of the dissenting opinion of Justice Vitug. The
doctrine enunciated in Ang Yu Asuncion vs. Court of Appeals should be Under the Ang Yu Asuncion vs. Court of Appeals decision, the Court stated that
modified, if not amplified under the peculiar facts of this case. there was nothing to execute because a contract over the right of first refusal
belongs to a class of preparatory juridical relations governed not by the law on
As also earlier emphasized, the contract of sale between Equatorial and Carmelo contracts but by the codal provisions on human relations. This may apply here if
is characterized by bad faith, since it was knowingly entered into in violation of the contract is limited to the buying and selling of the real property. However, the
the rights of and to the prejudice of Mayfair. In fact, as correctly observed by the obligation of Carmelo to first offer the property to Mayfair is embodied in a
Court of Appeals, Equatorial admitted that its lawyers had studied the contract of contract. It is Paragraph 8 on the right of first refusal which created the
lease prior to the sale. Equatorial's knowledge of the stipulations therein should obligation. It should be enforced according to the law on contracts instead of the
have cautioned it to look further into the agreement to determine if it involved panoramic and indefinite rule on human relations. The latter remedy encourages
stipulations that would prejudice its own interests. multiplicity of suits. There is something to execute and that is for Carmelo to
comply with its obligation to the property under the right of the first refusal
Since Mayfair has a right of first refusal, it can exercise the right only if the according to the terms at which they should have been offered then to Mayfair, at
fraudulent sale is first set aside or rescinded. All of these matters are now before the price when that offer should have been made. Also, Mayfair has to accept the
us and so there should be no piecemeal determination of this case and leave offer. This juridical relation is not amorphous nor is it merely preparatory.
festering sores to deteriorate into endless litigation. The facts of the case and Paragraphs 8 of the two leases can be executed according to their terms.
considerations of justice and equity require that we order rescission here and
now. Rescission is a relief allowed for the protection of one of the contracting On the question of interest payments on the principal amount of P11,300,000.00,
parties and even third persons from all injury and damage the contract may it must be borne in mind that both Carmelo and Equatorial acted in bad faith.
cause or to protect some incompatible and preferred right by the contract.  The
26 Carmelo knowingly and deliberately broke a contract entered into with Mayfair. It
sale of the subject real property by Carmelo to Equatorial should now be sold the property to Equatorial with purpose and intend to withhold any notice or
rescinded considering that Mayfair, which had substantial interest over the knowledge of the sale coming to the attention of Mayfair. All the circumstances
subject property, was prejudiced by the sale of the subject property to Equatorial point to a calculated and contrived plan of non-compliance with the agreement of
without Carmelo conferring to Mayfair every opportunity to negotiate within the first refusal.
30-day stipulated period. 27

On the part of Equatorial, it cannot be a buyer in good faith because it bought the
This Court has always been against multiplicity of suits where all remedies property with notice and full knowledge that Mayfair had a right to or interest in
according to the facts and the law can be included. Since Carmelo sold the the property superior to its own. Carmelo and Equatorial took unconscientious
property for P11,300,000.00 to Equatorial, the price at which Mayfair could have advantage of Mayfair.
purchased the property is, therefore, fixed. It can neither be more nor less. There
is no dispute over it. The damages which Mayfair suffered are in terms of actual Neither may Carmelo and Equatorial avail of considerations based on equity
injury and lost opportunities. The fairest solution would be to allow Mayfair to which might warrant the grant of interests. The vendor received as payment from
exercise its right of first refusal at the price which it was entitled to accept or the vendee what, at the time, was a full and fair price for the property. It has used
reject which is P11,300,000.00. This is clear from the records. the P11,300,000.00 all these years earning income or interest from the amount.
Equatorial, on the other hand, has received rents and otherwise profited from the
use of the property turned over to it by Carmelo. In fact, during all the years that
this controversy was being litigated, Mayfair paid rentals regularly to the buyer
who had an inferior right to purchase the property. Mayfair is under no obligation
to pay any interests arising from this judgment to either Carmelo or Equatorial.

WHEREFORE, the petition for review of the decision of the Court of Appeals,
dated June 23, 1992, in CA-G.R. CV No. 32918, is HEREBY DENIED. The Deed
of Absolute Sale between petitioners Equatorial Realty Development, Inc. and
Carmelo & Bauermann, Inc. is hereby deemed rescinded; petitioner Carmelo &
Bauermann is ordered to return to petitioner Equatorial Realty Development the
purchase price. The latter is directed to execute the deeds and documents
necessary to return ownership to Carmelo and Bauermann of the disputed lots.
Carmelo & Bauermann is ordered to allow Mayfair Theater, Inc. to buy the
aforesaid lots for P11,300,000.00.

SO ORDERED
G.R. No. 111538 February 26, 1997 they (sic) may be served with summons and other court processes. Xerox
copy of the general power of attorney is hereto attached as Annex "A".
PARAÑAQUE KINGS ENTERPRISES, INCORPORATED, petitioner,
vs. 2. Defendant Catalina L. Santos is the owner of eight (8) parcels of land
COURT OF APPEALS, CATALINA L. SANTOS, represented by her attorney-in-fact, located at (sic) Parañaque, Metro Manila with transfer certificate of title
LUZ B. PROTACIO, and DAVID A. RAYMUNDO, respondents. nos. S-19637, S-19638 and S-19643 to S-19648. Xerox copies of the
said title (sic) are hereto attached as Annexes "B" to "I", respectively.

3. On November 28, 1977, a certain Frederick Chua leased the above-

PANGANIBAN, J.: described property from defendant Catalina L. Santos, the said lease was
registered in the Register of Deeds. Xerox copy of the lease is hereto
Do allegations in a complaint showing violation of a contractual right of "first option or attached as Annex "J".
priority to buy the properties subject of the lease" constitute a valid cause of action? Is
the grantee of such right entitled to be offered the same terms and conditions as those 4. On February 12, 1979, Frederick Chua assigned all his rights and
given to a third party who eventually bought such properties? In short, is such right of interest and participation in the leased property to Lee Ching Bing, by
first refusal enforceable by an action for specific performance? virtue of a deed of assignment and with the conformity of defendant
Santos, the said assignment was also registered. Xerox copy of the deed
These questions are answered in the affirmative by this Court in resolving this petition for of assignment is hereto attached as Annex "K".
review under Rule 45 of the Rules of Court challenging the Decision   of the Court of
1

Appeals   promulgated on March 29, 1993, in CA-G.R. CV No. 34987 entitled

2 5. On August 6, 1979, Lee Ching Bing also assigned all his rights and
"Parañaque Kings Enterprises, Inc. vs. Catalina L. Santos, et al.," which affirmed the interest in the leased property to Parañaque Kings Enterprises,
order   of September 2, 1991, of the Regional Trial Court of Makati, Branch
3 Incorporated by virtue of a deed of assignment and with the conformity of
57,   dismissing Civil Case No. 91-786 for lack of a valid cause of action.
4 defendant Santos, the same was duly registered, Xerox copy of the deed
of assignment is hereto attached as Annex "L".
Facts of the Case
6. Paragraph 9 of the assigned leased (sic) contract provides among
On March 19, 1991, herein petitioner filed before the Regional Trial Court of Makati a others that:
complaint,   which is reproduced in full below:
5

"9. That in case the properties subject of the lease

Plaintiff, by counsel, respectfully states that: agreement are sold or encumbered, Lessors shall impose
as a condition that the buyer or mortgagee thereof shall
1. Plaintiff is a private corporation organized and existing under and by recognize and be bound by all the terms and conditions of
virtue of the laws of the Philippines, with principal place of business of this lease agreement and shall respect this Contract of
(sic) Dr. A. Santos Avenue, Parañaque, Metro Manila, while defendant Lease as if they are the LESSORS thereof and in case of
Catalina L. Santos, is of legal age, widow, with residence and postal sale, LESSEE shall have the first option or priority to buy
address at 444 Plato Street, Ct., Stockton, California, USA, represented the properties subject of the lease;"
in this action by her attorney-in-fact, Luz B. Protacio, with residence and
postal address at No, 12, San Antonio Street, Magallanes Village, Makati, 7. On September 21, 1988, defendant Santos sold the eight parcels of
Metro Manila, by virtue of a general power of attorney. Defendant David land subject of the lease to defendant David Raymundo for a
A. Raymundo, is of legal age, single, with residence and postal address consideration of FIVE MILLION (P5,000,000.00) PESOS. The said sale
at 1918 Kamias Street, Damariñas Village, Makati, Metro Manila, where was in contravention of the contract of lease, for the first option or priority
to buy was not offered by defendant Santos to the plaintiff. Xerox copy of 15. On June 28, 1989, counsel for plaintiff informed counsel of defendant
the deed of sale is hereto attached as Annex "M". Santos of the fact that plaintiff is the assignee of all rights and interest of
the former lessor. Xerox copy of the letter is hereto attached as Annex
8. On March 5, 1989, defendant Santos wrote a letter to the plaintiff "V".
informing the same of the sale of the properties to defendant Raymundo,
the said letter was personally handed by the attorney-in-fact of defendant 16. On July 6, 1989, counsel for defendant Santos informed the plaintiff
Santos, Xerox copy of the letter is hereto attached as Annex "N". that the new owner is defendant Raymundo. Xerox copy of the letter is
hereto attached as Annex "W".
9. Upon learning of this fact plaintiff's representative wrote a letter to
defendant Santos, requesting her to rectify the error and consequently 17. From the preceding facts it is clear that the sale was simulated and
realizing the error, she had it reconveyed to her for the same that there was a collusion between the defendants in the sales of the
consideration of FIVE MILLION (P5,000,000.00) PESOS. Xerox copies of leased properties, on the ground that when plaintiff wrote a letter to
the letter and the deed of reconveyance are hereto attached as Annexes defendant Santos to rectify the error, she immediately have (sic) the
"O" and "P". property reconveyed it (sic) to her in a matter of twelve (12) days.

10. Subsequently the property was offered for sale to plaintiff by the 18. Defendants have the same counsel who represented both of them in
defendant for the sum of FIFTEEN MILLION (P15,000,000.00) PESOS. their exchange of communication with plaintiff's counsel, a fact that led to
Plaintiff was given ten (10) days to make good of the offer, but therefore the conclusion that a collusion exist (sic) between the defendants.
(sic) the said period expired another letter came from the counsel of
defendant Santos, containing the same tenor of (sic) the former letter. 19. When the property was still registered in the name of defendant
Xerox copies of the letters are hereto attached as Annexes "Q" and "R". Santos, her collector of the rental of the leased properties was her
brother-in-law David Santos and when it was transferred to defendant
11. On May 8, 1989, before the period given in the letter offering the Raymundo the collector was still David Santos up to the month of June,
properties for sale expired, plaintiff's counsel wrote counsel of defendant 1990. Xerox copies of cash vouchers are hereto attached as Annexes "X"
Santos offering to buy the properties for FIVE MILLION (P5,000,000.00) to "HH", respectively.
PESOS. Xerox copy of the letter is hereto attached as Annex "S".
20. The purpose of this unholy alliance between defendants Santos and
12. On May 15, 1989, before they replied to the offer to purchase, Raymundo is to mislead the plaintiff and make it appear that the price of
another deed of sale was executed by defendant Santos (in favor of) the leased property is much higher than its actual value of FIVE MILLION
defendant Raymundo for a consideration of NINE MILLION (P5,000,000.00) PESOS, so that plaintiff would purchase the properties
(P9,000,000.00) PESOS. Xerox copy of the second deed of sale is hereto at a higher price.
attached as Annex "T".
21. Plaintiff has made considerable investments in the said leased
13. Defendant Santos violated again paragraph 9 of the contract of lease property by erecting a two (2) storey, six (6) doors commercial building
by executing a second deed of sale to defendant Raymundo. amounting to THREE MILLION (P3,000,000.00) PESOS. This
considerable improvement was made on the belief that eventually the
14. It was only on May 17, 1989, that defendant Santos replied to the said premises shall be sold to the plaintiff.
letter of the plaintiff's offer to buy or two days after she sold her
properties. In her reply she stated among others that the period has 22. As a consequence of this unlawful act of the defendants, plaintiff will
lapsed and the plaintiff is not a privy (sic) to the contract. Xerox copy of incurr (sic) total loss of THREE MILLION (P3,000,000.00) PESOS as the
the letter is hereto attached as Annex "U". actual cost of the building and as such defendants should be charged of
the same amount for actual damages.
23. As a consequence of the collusion, evil design and illegal acts of the Plaintiff further prays for other just and
defendants, plaintiff in the process suffered mental anguish, sleepless equitable reliefs plus cost of suit.
nights, bismirched (sic) reputation which entitles plaintiff to moral
damages in the amount of FIVE MILLION (P5,000,000.00) PESOS. Instead of filing their respective answers, respondents filed motions to dismiss anchored
on the grounds of lack of cause of action, estoppel and laches.
24. The defendants acted in a wanton, fraudulent, reckless, oppressive or
malevolent manner and as a deterrent to the commission of similar acts, On September 2, 1991, the trial court issued the order dismissing the complaint for lack
they should be made to answer for exemplary damages, the amount left of a valid cause of action. It ratiocinated thus:
to the discretion of the Court.
Upon the very face of the plaintiff's Complaint itself, it therefore
25. Plaintiff demanded from the defendants to rectify their unlawful acts indubitably appears that the defendant Santos had verily complied with
that they committed, but defendants refused and failed to comply with paragraph 9 of the Lease Agreement by twice offering the properties for
plaintiffs just and valid and (sic) demands. Xerox copies of the demand sale to the plaintiff for ~1 5 M. The said offers, however, were plainly
letters are hereto attached as Annexes "KK" to "LL", respectively. rejected by the plaintiff which scorned the said offer as "RIDICULOUS".
There was therefore a definite refusal on the part of the plaintiff to accept
26. Despite repeated demands, defendants failed and refused without the offer of defendant Santos. For in acquiring the said properties back to
justifiable cause to satisfy plaintiff's claim, and was constrained to her name, and in so making the offers to sell both by herself (attorney-in-
engaged (sic) the services of undersigned counsel to institute this action fact) and through her counsel, defendant Santos was indeed
at a contract fee of P200,000.00, as and for attorney's fees, exclusive of conscientiously complying with her obligation under paragraph 9 of the
cost and expenses of litigation. Lease Agreement. . . . .

PRAYER xxx xxx xxx

WHEREFORE, it is respectfully prayed, that judgment be rendered in This is indeed one instance where a Complaint, after barely commencing
favor of the plaintiff and against defendants and ordering that: to create a cause of action, neutralized itself by its subsequent averments
which erased or extinguished its earlier allegations of an impending
a. The Deed of Sale between defendants wrong. Consequently, absent any actionable wrong in the very face of the
dated May 15, 1989, be annulled and the Complaint itself, the plaintiffs subsequent protestations of collusion is
leased properties be sold to the plaintiff in bereft or devoid of any meaning or purpose. . . . .
the amount of P5,000,000.00;
The inescapable result of the foregoing considerations point to no other
b. Dependants (sic) pay plaintiff the sum conclusion than that the Complaint actually does not contain any valid
of P3,000,000.00 as actual damages; cause of action and should therefore be as it is hereby ordered
DISMISSED. The Court finds no further need to consider the other
c. Defendants pay the sum of grounds of estoppel and laches inasmuch as this resolution is sufficient to
P5,000,000.00 as moral damages; dispose the matter. 6

d. Defendants pay exemplary damages Petitioners appealed to the Court of Appeals which affirmed in toto the ruling of the trial
left to the discretion of the Court; court, and further reasoned that:

e. Defendants pay the sum of not less . . . . Appellant's protestations that the P15 million price quoted by
than P200,000.00 as attorney's fees. appellee Santos was reduced to P9 million when she later resold the
leased properties to Raymundo has no valid legal moorings because
 appellant, as a prospective buyer, cannot dictate its own price and leased property to respondent Raymundo from June 15, 1989, to June 30, 1990, was an
forcibly ram it against appellee Santos, as owner, to buy off her leased acknowledgment of the latter's status as new owner-lessor of said property, by virtue of
properties considering the total absence of any stipulation or agreement which petitioner is deemed to have waived or abandoned its first option to purchase.
as to the price or as to how the price should be computed under
paragraph 9 of the lease contract, . . . . 7
Private respondents likewise contend that the deed of assignment of the lease
agreement did not include the assignment of the option to purchase. Respondent
Petitioner moved for reconsideration but was denied in an order dated August 20, 1993.  8
Raymundo further avers that he was not privy to the contract of lease, being neither the
lessor nor lessee adverted to therein, hence he could not be held liable for violation
Hence this petition. Subsequently, petitioner filed an "Urgent Motion for the Issuance of thereof.
Restraining Order and/or Writ of Preliminary Injunction and to Hold Respondent David A.
Raymundo in Contempt of Court."   The motion sought to enjoin respondent Raymundo
9
The Court's Ruling
and his counsel from pursuing the ejectment complaint filed before the barangay captain
of San Isidro, Parañaque, Metro Manila; to direct the dismissal of said ejectment Preliminary Issue: Failure to File
complaint or of any similar action that may have been filed; and to require respondent Sufficient Copies of Brief
Raymundo to explain why he should not be held in contempt of court for forum-shopping.
The ejectment suit initiated by respondent Raymundo against petitioner arose from the We first dispose of the procedural issue raised by respondents, particularly petitioner's
expiration of the lease contract covering the property subject of this case. The ejectment failure to file twelve (12) copies of its brief. We have ruled that when non-compliance with
suit was decided in favor of Raymundo, and the entry of final judgment in respect thereof the Rules was not intended for delay or did not result in prejudice to the adverse party,
renders the said motion moot and academic. dismissal of appeal on mere technicalities — in cases where appeal is a matter of right
— may be stayed, in the exercise of the court's equity jurisdiction.   It does not appear
10

Issue that respondents were unduly prejudiced by petitioner's nonfeasance. Neither has it been
shown that such failure was intentional.
The principal legal issue presented before us for resolution is whether the aforequoted
complaint alleging breach of the contractual right of "first option or priority to buy" states Main Issue: Validity of Cause of Action
a valid cause of action.
We do not agree with respondents' contention that the issue involved is purely factual.
Petitioner contends that the trial court as well as the appellate tribunal erred in dismissing The principal legal question, as stated earlier, is whether the complaint filed by herein
the complaint because it in fact had not just one but at least three (3) valid causes of petitioner in the lower court states a valid cause of action. Since such question assumes
action, to wit: (1) breach of contract, (2) its right of first refusal founded in law, and (3) the facts alleged in the complaint as true, it follows that the determination thereof is one
damages. of law, and not of facts. There is a question of law in a given case when the doubt or
difference arises as to what the law is on a certain state of facts, and there is a question
Respondents Santos and Raymundo, in their separate comments, aver that the petition of fact when the doubt or difference arises as to the truth or the falsehood of alleged
should be denied for not raising a question of law as the issue involved is purely factual facts. 
11

— whether respondent Santos complied with paragraph 9 of the lease agreement — and
for not having complied with Section 2, Rule 45 of the Rules of Court, requiring the filing At the outset, petitioner concedes that when the ground for a motion to dismiss is lack of
of twelve (12) copies of the petitioner's brief. Both maintain that the complaint filed by cause of action, such ground must appear on the face of the complaint; that to determine
petitioner before the Regional Trial Court of Makati stated no valid cause of action and the sufficiency of a cause of action, only the facts alleged in the complaint and no others
that petitioner failed to substantiate its claim that the lower courts decided the same "in a should be considered; and that the test of sufficiency of the facts alleged in a petition or
way not in accord with law and applicable decisions of the Supreme Court"; or that the complaint to constitute a cause of action is whether, admitting the facts alleged, the court
Court of Appeals has "sanctioned departure by a trial court from the accepted and usual could render a valid judgment upon the same in accordance with the prayer of the
course of judicial proceedings" so as to merit the exercise by this Court of the power of petition or complaint.
review under Rule 45 of the Rules of Court. Furthermore, they reiterate estoppel and
laches as grounds for dismissal, claiming that petitioner's payment of rentals of the
A cause of action exists if the following elements are present: (1) a right in favor of the million, the price for which they were finally sold to respondent Raymundo, should have
plaintiff by whatever means and under whatever law it arises or is created; (2) an likewise been first offered to petitioner.
obligation on the part of the named defendant to respect or not to violate such right, and
(3) an act or omission on the part of such defendant violative of the right of plaintiff or The Court has made an extensive and lengthy discourse on the concept of, and
constituting a breach of the obligation of defendant to the plaintiff for which the latter may obligations under, a right of first refusal in the case of Guzman, Bocaling &
maintain an action for recovery of damages.  12
Co. vs. Bonnevie.   In that case, under a contract of lease, the lessees (Raul and
16

Christopher Bonnevie) were given a "right of first priority" to purchase the leased
In determining whether allegations of a complaint are sufficient to support a cause of property in case the lessor (Reynoso) decided to sell. The selling price quoted to the
action, it must be borne in mind that the complaint does not have to establish or allege Bonnevies was 600,000.00 to be fully paid in cash, less a mortgage lien of P100,000.00.
facts proving the existence of a cause of action at the outset; this will have to be done at On the other hand, the selling price offered by Reynoso to and accepted by Guzman was
the trial on the merits of the case. To sustain a motion to dismiss for lack of cause of only P400,000.00 of which P137,500.00 was to be paid in cash while the balance was to
action, the complaint must show that the claim for relief does not exist, rather than that a be paid only when the property was cleared of occupants. We held that even if the
claim has been defectively stated, or is ambiguous, indefinite or uncertain.  13
Bonnevies could not buy it at the price quoted (P600,000.00), nonetheless, Reynoso
could not sell it to another for a lower price and under more favorable terms and
Equally important, a defendant moving to dismiss a complaint on the ground of lack of conditions without first offering said favorable terms and price to the Bonnevies as well.
cause of action is regarded as having hypothetically admitted all the averments thereof.  14 Only if the Bonnevies failed to exercise their right of first priority could Reynoso thereafter
lawfully sell the subject property to others, and only under the same terms and conditions
A careful examination of the complaint reveals that it sufficiently alleges an actionable previously offered to the Bonnevies.
contractual breach on the part of private respondents. Under paragraph 9 of the contract
of lease between respondent Santos and petitioner, the latter was granted the "first Of course, under their contract, they specifically stipulated that the Bonnevies could
option or priority" to purchase the leased properties in case Santos decided to sell. If exercise the right of first priority, "all things and conditions being equal." This Court
Santos never decided to sell at all, there can never be a breach, much less an interpreted this proviso to mean that there should be identity of terms and conditions to
enforcement of such "right." But on September 21, 1988, Santos sold said properties to be offered to the Bonnevies and all other prospective buyers, with the Bonnevies to enjoy
Respondent Raymundo without first offering these to petitioner. Santos indeed realized the right of first priority. We hold that the same rule applies even without the same
her error, since she repurchased the properties after petitioner complained. Thereafter, proviso if the right of first refusal (or the first option to buy) is not to be rendered illusory.
she offered to sell the properties to petitioner for P15 million, which petitioner, however,
rejected because of the "ridiculous" price. But Santos again appeared to have violated From the foregoing, the basis of the right of first refusal* must be the current offer to sell
the same provision of the lease contract when she finally resold the properties to of the seller or offer to purchase of any prospective buyer. Only after the optionee fails to
respondent Raymundo for only P9 million without first offering them to petitioner at such exercise its right of first priority under the same terms and within the period
price. Whether there was actual breach which entitled petitioner to damages and/or other contemplated, could the owner validly offer to sell the property to a third person, again,
just or equitable relief, is a question which can better be resolved after trial on the merits under the same terms as offered to the optionee.
where each party can present evidence to prove their respective allegations and
defenses.  15
This principle was reiterated in the very recent case of Equatorial Realty vs. Mayfair
Theater, Inc.   which was decided en banc. This Court upheld the right of first refusal of
17

The trial and appellate courts based their decision to sustain respondents' motion to the lessee Mayfair, and rescinded the sale of the property by the lessor Carmelo to
dismiss on the allegations of Parañaque Kings Enterprises that Santos had actually Equatorial Realty "considering that Mayfair, which had substantial interest over the
offered the subject properties for sale to it prior to the final sale in favor of Raymundo, but subject property, was prejudiced by its sale to Equatorial without Carmelo conferring to
that the offer was rejected. According to said courts, with such offer, Santos had verily Mayfair every opportunity to negotiate within the 30-day stipulated period" (emphasis
complied with her obligation to grant the right of first refusal to petitioner. supplied).

We hold, however, that in order to have full compliance with the contractual right granting In that case, two contracts of lease between Carmelo and Mayfair provided "that if the
petitioner the first option to purchase, the sale of the properties for the amount of P9 LESSOR should desire to sell the leased premises, the LESSEE shall be given 30 days
exclusive option to purchase the same." Carmelo initially offered to sell the leased
property to Mayfair for six to seven million pesos. Mayfair indicated interest in purchasing And under the subsequent assignment executed between Lee Ching Bing as assignor
the property though it invoked the 30-day period. Nothing was heard thereafter from and the petitioner, represented by its Vice President Vicenta Lo Chiong, as assignee, it
Carmelo. Four years later, the latter sold its entire Recto Avenue property, including the was likewise expressly stipulated that;
leased premises, to Equatorial for P11,300,000.00 without priorly informing Mayfair. The
Court held that both Carmelo and Equatorial acted in bad faith: Carmelo for knowingly . . . . the ASSIGNOR hereby sells, transfers and assigns all his rights,
violating the right of first option of Mayfair, and Equatorial for purchasing the property interest and participation over said leased premises, . . . .   (emphasis
21

despite being aware of the contract stipulation. In addition to rescission of the contract of supplied)
sale, the Court ordered Carmelo to allow Mayfair to buy the subject property at the same
price of P11,300,000.00. One of such rights included in the contract of lease and, therefore, in the assignments of
rights was the lessee's right of first option or priority to buy the properties subject of the
No cause of action lease, as provided in paragraph 9 of the assigned lease contract. The deed of
under P.D. 1517 assignment need not be very specific as to which rights and obligations were passed on
to the assignee. It is understood in the general provision aforequoted that all specific
Petitioner also invokes Presidential Decree No. 1517, or the Urban Land Reform Law, as rights and obligations contained in the contract of lease are those referred to as being
another source of its right of first refusal. It claims to be covered under said law, being assigned. Needless to state, respondent Santos gave her unqualified conformity to both
the "rightful occupant of the land and its structures" since it is the lawful lessee thereof by assignments of rights.
reason of contract. Under the lease contract, petitioner would have occupied the property
for fourteen (14) years at the end of the contractual period. Respondent Raymundo privy
to the Contract of Lease
Without probing into whether petitioner is rightfully a beneficiary under said law, suffice it
to say that this Court has previously ruled that under With respect to the contention of respondent Raymundo that he is not privy to the lease
Section 6   of P.D. 1517, "the terms and conditions of the sale in the exercise of the
18
contract, not being the lessor nor the lessee referred to therein, he could thus not have
lessee's right of first refusal to purchase shall be determined by the Urban Zone violated its provisions, but he is nevertheless a proper party. Clearly, he stepped into the
Expropriation and Land Management Committee. Hence, . . . . certain prerequisites must shoes of the owner-lessor of the land as, by virtue of his purchase, he assumed all the
be complied with by anyone who wishes to avail himself of the benefits of the obligations of the lessor under the lease contract. Moreover, he received benefits in the
decree."   There being no allegation in its complaint that the prerequisites were complied
19
form of rental payments. Furthermore, the complaint, as well as the petition, prayed for
with, it is clear that the complaint did fail to state a cause of action on this ground. the annulment of the sale of the properties to him. Both pleadings also alleged collusion
between him and respondent Santos which defeated the exercise by petitioner of its right
Deed of Assignment included of first refusal.
the option to purchase
In order then to accord complete relief to petitioner, respondent Raymundo was a
Neither do we find merit in the contention of respondent Santos that the assignment of necessary, if not indispensable, party to the case.   A favorable judgment for the
22

the lease contract to petitioner did not include the option to purchase. The provisions of petitioner will necessarily affect the rights of respondent Raymundo as the buyer of the
the deeds of assignment with regard to matters assigned were very clear. Under the first property over which petitioner would like to assert its right of first option to buy.
assignment between Frederick Chua as assignor and Lee Ching Bing as assignee, it
was expressly stated that: Having come to the conclusion that the complaint states a valid cause of action for
breach of the right of first refusal and that the trial court should thus not have dismissed
. . . . the ASSIGNOR hereby CEDES, TRANSFERS and ASSIGNS to the complaint, we find no more need to pass upon the question of whether the complaint
herein ASSIGNEE, all his rights, interest and participation over said states a cause of action for damages or whether the complaint is barred by estoppel or
premises afore-described, . . . .   (emphasis supplied)
20
laches. As these matters require presentation and/or determination of facts, they can be
best resolved after trial on the merits.
While the lower courts erred in dismissing the complaint, private respondents, however,
cannot be denied their day in court. While, in the resolution of a motion to dismiss, the
truth of the facts alleged in the complaint are theoretically admitted, such admission is
merely hypothetical and only for the purpose of resolving the motion. In case of denial,
the movant is not to be deprived of the right to submit its own case and to submit
evidence to rebut the allegations in the complaint. Neither will the grant of the motion by
a trial court and the ultimate reversal thereof by an appellate court have the effect of
stifling such right.   So too, the trial court should be given the opportunity to evaluate the
23

evidence, apply the law and decree the proper remedy. Hence, we remand the instant
case to the trial court to allow private respondents to have their day in court.

WHEREFORE, the petition is GRANTED. The assailed decisions of the trial court and
Court of Appeals are hereby REVERSED and SET ASIDE. The case is REMANDED to
the Regional Trial Court of Makati for further proceedings.

SO ORDERED
G.R. No. 109125 December 2, 1994 were about to sell the property, plaintiffs were compelled to file the
complaint to compel defendants to sell the property to them.
ANG YU ASUNCION, ARTHUR GO AND KEH TIONG, petitioners,
vs. Defendants filed their answer denying the material allegations of the
THE HON. COURT OF APPEALS and BUEN REALTY DEVELOPMENT complaint and interposing a special defense of lack of cause of action.
CORPORATION, respondents.
After the issues were joined, defendants filed a motion for summary
Antonio M. Albano for petitioners. judgment which was granted by the lower court. The trial court found that
defendants' offer to sell was never accepted by the plaintiffs for the
Umali, Soriano & Associates for private respondent. reason that the parties did not agree upon the terms and conditions of the
proposed sale, hence, there was no contract of sale at all. Nonetheless,
the lower court ruled that should the defendants subsequently offer their
property for sale at a price of P11-million or below, plaintiffs will have the
VITUG, J.: right of first refusal. Thus the dispositive portion of the decision states:

Assailed, in this petition for review, is the decision of the Court of Appeals, dated 04 WHEREFORE, judgment is hereby rendered in favor of
December 1991, in CA-G.R. SP No. 26345 setting aside and declaring without force and the defendants and against the plaintiffs summarily
effect the orders of execution of the trial court, dated 30 August 1991 and 27 September dismissing the complaint subject to the aforementioned
1991, in Civil Case No. 87-41058. condition that if the defendants subsequently decide to
offer their property for sale for a purchase price of Eleven
Million Pesos or lower, then the plaintiffs has the option to
The antecedents are recited in good detail by the appellate court thusly: purchase the property or of first refusal, otherwise,
defendants need not offer the property to the plaintiffs if
On July 29, 1987 a Second Amended Complaint for Specific the purchase price is higher than Eleven Million Pesos.
Performance was filed by Ang Yu Asuncion and Keh Tiong, et al., against
Bobby Cu Unjieng, Rose Cu Unjieng and Jose Tan before the Regional SO ORDERED.
Trial Court, Branch 31, Manila in Civil Case No. 87-41058, alleging,
among others, that plaintiffs are tenants or lessees of residential and
commercial spaces owned by defendants described as Nos. 630-638 Aggrieved by the decision, plaintiffs appealed to this Court in
Ongpin Street, Binondo, Manila; that they have occupied said spaces CA-G.R. CV No. 21123. In a decision promulgated on September 21,
since 1935 and have been religiously paying the rental and complying 1990 (penned by Justice Segundino G. Chua and concurred in by
with all the conditions of the lease contract; that on several occasions Justices Vicente V. Mendoza and Fernando A. Santiago), this Court
before October 9, 1986, defendants informed plaintiffs that they are affirmed with modification the lower court's judgment, holding:
offering to sell the premises and are giving them priority to acquire the
same; that during the negotiations, Bobby Cu Unjieng offered a price of In resume, there was no meeting of the minds between
P6-million while plaintiffs made a counter offer of P5-million; that plaintiffs the parties concerning the sale of the property. Absent
thereafter asked the defendants to put their offer in writing to which such requirement, the claim for specific performance will
request defendants acceded; that in reply to defendant's letter, plaintiffs not lie. Appellants' demand for actual, moral and
wrote them on October 24, 1986 asking that they specify the terms and exemplary damages will likewise fail as there exists no
conditions of the offer to sell; that when plaintiffs did not receive any justifiable ground for its award. Summary judgment for
reply, they sent another letter dated January 28, 1987 with the same defendants was properly granted. Courts may render
request; that since defendants failed to specify the terms and conditions summary judgment when there is no genuine issue as to
of the offer to sell and because of information received that defendants any material fact and the moving party is entitled to a
 judgment as a matter of law (Garcia vs. Court of Appeals, described property including capital gains tax and
176 SCRA 815). All requisites obtaining, the decision of accrued real estate taxes.
the court a quo is legally justifiable.
As a consequence of the sale, TCT No. 105254/T-881 in the name of the
WHEREFORE, finding the appeal unmeritorious, the Cu Unjieng spouses was cancelled and, in lieu thereof, TCT No. 195816
judgment appealed from is hereby AFFIRMED, but was issued in the name of petitioner on December 3, 1990.
subject to the following modification: The court a quo in
the aforestated decision gave the plaintiffs-appellants the On July 1, 1991, petitioner as the new owner of the subject property
right of first refusal only if the property is sold for a wrote a letter to the lessees demanding that the latter vacate the
purchase price of Eleven Million pesos or lower; however, premises.
considering the mercurial and uncertain forces in our
market economy today. We find no reason not to grant On July 16, 1991, the lessees wrote a reply to petitioner stating that
the same right of first refusal to herein appellants in the petitioner brought the property subject to the notice of lis
event that the subject property is sold for a price in excess pendens regarding Civil Case No. 87-41058 annotated on TCT No.
of Eleven Million pesos. No pronouncement as to costs. 105254/T-881 in the name of the Cu Unjiengs.

SO ORDERED. The lessees filed a Motion for Execution dated August 27, 1991 of the
Decision in Civil Case No. 87-41058 as modified by the Court of Appeals
The decision of this Court was brought to the Supreme Court by petition in CA-G.R. CV No. 21123.
for review on certiorari. The Supreme Court denied the appeal on May 6,
1991 "for insufficiency in form and substances" (Annex H, Petition). On August 30, 1991, respondent Judge issued an order (Annex A,
Petition) quoted as follows:
On November 15, 1990, while CA-G.R. CV No. 21123 was pending
consideration by this Court, the Cu Unjieng spouses executed a Deed of Presented before the Court is a Motion for Execution filed
Sale (Annex D, Petition) transferring the property in question to herein by plaintiff represented by Atty. Antonio Albano. Both
petitioner Buen Realty and Development Corporation, subject to the defendants Bobby Cu Unjieng and Rose Cu Unjieng
following terms and conditions: represented by Atty. Vicente Sison and Atty. Anacleto
Magno respectively were duly notified in today's
1. That for and in consideration of the sum of FIFTEEN consideration of the motion as evidenced by the rubber
MILLION PESOS (P15,000,000.00), receipt of which in stamp and signatures upon the copy of the Motion for
full is hereby acknowledged, the VENDORS hereby sells, Execution.
transfers and conveys for and in favor of the VENDEE, his
heirs, executors, administrators or assigns, the above- The gist of the motion is that the Decision of the Court
described property with all the improvements found dated September 21, 1990 as modified by the Court of
therein including all the rights and interest in the said Appeals in its decision in CA G.R. CV-21123, and
property free from all liens and encumbrances of elevated to the Supreme Court upon the petition for
whatever nature, except the pending ejectment review and that the same was denied by the highest
proceeding; tribunal in its resolution dated May 6, 1991 in G.R. No.
L-97276, had now become final and executory. As a
2. That the VENDEE shall pay the Documentary Stamp consequence, there was an Entry of Judgment by the
Tax, registration fees for the transfer of title in his favor Supreme Court as of June 6, 1991, stating that the
and other expenses incidental to the sale of above- aforesaid modified decision had already become final and
executory.
 It is the observation of the Court that this property in and to register the new title in favor of the aforesaid
dispute was the subject of the Notice of Lis Pendens and plaintiffs Ang Yu Asuncion, Keh Tiong and Arthur Go.
that the modified decision of this Court promulgated by
the Court of Appeals which had become final to the effect SO ORDERED.
that should the defendants decide to offer the property for
sale for a price of P11 Million or lower, and considering On the same day, September 27, 1991 the corresponding writ of
the mercurial and uncertain forces in our market economy execution (Annex C, Petition) was issued. 1

today, the same right of first refusal to herein

plaintiffs/appellants in the event that the subject property
On 04 December 1991, the appellate court, on appeal to it by private respondent, set
is sold for a price in excess of Eleven Million pesos or
aside and declared without force and effect the above questioned orders of the court a
more.
quo.
WHEREFORE, defendants are hereby ordered to execute
In this petition for review on certiorari, petitioners contend that Buen Realty can be held
the necessary Deed of Sale of the property in litigation in
bound by the writ of execution by virtue of the notice of lis pendens, carried over on TCT
favor of plaintiffs Ang Yu Asuncion, Keh Tiong and Arthur
No. 195816 issued in the name of Buen Realty, at the time of the latter's purchase of the
Go for the consideration of P15 Million pesos in
property on 15 November 1991 from the Cu Unjiengs.
recognition of plaintiffs' right of first refusal and that a new
Transfer Certificate of Title be issued in favor of the buyer.
We affirm the decision of the appellate court.
All previous transactions involving the same property
notwithstanding the issuance of another title to Buen A not too recent development in real estate transactions is the adoption of such
Realty Corporation, is hereby set aside as having been arrangements as the right of first refusal, a purchase option and a contract to sell. For
executed in bad faith. ready reference, we might point out some fundamental precepts that may find some
relevance to this discussion.
SO ORDERED.
An obligation is a juridical necessity to give, to do or not to do (Art. 1156, Civil Code).
The obligation is constituted upon the concurrence of the essential elements thereof, viz:
On September 22, 1991 respondent Judge issued another order, the
(a) The vinculum juris or juridical tie which is the efficient cause established by the
dispositive portion of which reads:
various sources of obligations (law, contracts, quasi-contracts, delicts and quasi-delicts);
(b) the object which is the prestation or conduct; required to be observed (to give, to do
WHEREFORE, let there be Writ of Execution issue in the or not to do); and (c) the subject-persons who, viewed from the demandability of the
above-entitled case directing the Deputy Sheriff Ramon obligation, are the active (obligee) and the passive (obligor) subjects.
Enriquez of this Court to implement said Writ of Execution
ordering the defendants among others to comply with the
Among the sources of an obligation is a contract (Art. 1157, Civil Code), which is a
aforesaid Order of this Court within a period of one (1)
meeting of minds between two persons whereby one binds himself, with respect to the
week from receipt of this Order and for defendants to
other, to give something or to render some service (Art. 1305, Civil Code). A contract
execute the necessary Deed of Sale of the property in
undergoes various stages that include its negotiation or preparation, its perfection and,
litigation in favor of the plaintiffs Ang Yu Asuncion, Keh
finally, its consummation. Negotiation covers the period from the time the prospective
Tiong and Arthur Go for the consideration of
contracting parties indicate interest in the contract to the time the contract is concluded
P15,000,000.00 and ordering the Register of Deeds of the
(perfected). The perfection of the contract takes place upon the concurrence of the
City of Manila, to cancel and set aside the title already
essential elements thereof. A contract which is consensual as to perfection is so
issued in favor of Buen Realty Corporation which was
established upon a mere meeting of minds, i.e., the concurrence of offer and
previously executed between the latter and defendants
acceptance, on the object and on the cause thereof. A contract which requires, in
addition to the above, the delivery of the object of the agreement, as in a pledge
or commodatum, is commonly referred to as a real contract. In a solemn contract, Art. 1479. . . .
compliance with certain formalities prescribed by law, such as in a donation of real
property, is essential in order to make the act valid, the prescribed form being thereby an An accepted unilateral promise to buy or to sell a determinate thing for a
essential element thereof. The stage of consummation begins when the parties perform price certain is binding upon the promissor if the promise is supported by
their respective undertakings under the contract culminating in the extinguishment a consideration distinct from the price. (1451a) 6

thereof.
Observe, however, that the option is not the contract of sale itself.  The optionee has the
7

Until the contract is perfected, it cannot, as an independent source of obligation, serve as right, but not the obligation, to buy. Once the option is exercised timely, i.e., the offer is
a binding juridical relation. In sales, particularly, to which the topic for discussion about accepted before a breach of the option, a bilateral promise to sell and to buy ensues and
the case at bench belongs, the contract is perfected when a person, called the seller, both parties are then reciprocally bound to comply with their respective undertakings. 8

obligates himself, for a price certain, to deliver and to transfer ownership of a thing or
right to another, called the buyer, over which the latter agrees. Article 1458 of the Civil Let us elucidate a little. A negotiation is formally initiated by an offer. An imperfect
Code provides: promise (policitacion) is merely an offer. Public advertisements or solicitations and the
like are ordinarily construed as mere invitations to make offers or only as proposals.
Art. 1458. By the contract of sale one of the contracting parties obligates These relations, until a contract is perfected, are not considered binding commitments.
himself to transfer the ownership of and to deliver a determinate thing, Thus, at any time prior to the perfection of the contract, either negotiating party may stop
and the other to pay therefor a price certain in money or its equivalent. the negotiation. The offer, at this stage, may be withdrawn; the withdrawal is effective
immediately after its manifestation, such as by its mailing and not necessarily when the
A contract of sale may be absolute or conditional. offeree learns of the withdrawal (Laudico vs. Arias, 43 Phil. 270). Where a period is given
to the offeree within which to accept the offer, the following rules generally govern:
When the sale is not absolute but conditional, such as in a "Contract to Sell" where
invariably the ownership of the thing sold is retained until the fulfillment of a positive (1) If the period is not itself founded upon or supported by a consideration, the offeror is
suspensive condition (normally, the full payment of the purchase price), the breach of the still free and has the right to withdraw the offer before its acceptance, or, if an
condition will prevent the obligation to convey title from acquiring an obligatory acceptance has been made, before the offeror's coming to know of such fact, by
force.  In Dignos vs. Court of Appeals (158 SCRA 375), we have said that, although
2
communicating that withdrawal to the offeree (see Art. 1324, Civil Code; see also Atkins,
denominated a "Deed of Conditional Sale," a sale is still absolute where the contract is Kroll & Co. vs. Cua, 102 Phil. 948, holding that this rule is applicable to a unilateral
devoid of any proviso that title is reserved or the right to unilaterally rescind is stipulated, promise to sell under Art. 1479, modifying the previous decision in South Western Sugar
e.g., until or unless the price is paid. Ownership will then be transferred to the buyer vs. Atlantic Gulf, 97 Phil. 249; see also Art. 1319, Civil Code; Rural Bank of Parañaque,
upon actual or constructive delivery (e.g., by the execution of a public document) of the Inc., vs. Remolado, 135 SCRA 409; Sanchez vs. Rigos, 45 SCRA 368). The right to
property sold. Where the condition is imposed upon the perfection of the contract itself, withdraw, however, must not be exercised whimsically or arbitrarily; otherwise, it could
the failure of the condition would prevent such perfection.  If the condition is imposed on
3
give rise to a damage claim under Article 19 of the Civil Code which ordains that "every
the obligation of a party which is not fulfilled, the other party may either waive the person must, in the exercise of his rights and in the performance of his duties, act with
condition or refuse to proceed with the sale (Art. 1545, Civil Code). 4
justice, give everyone his due, and observe honesty and good faith."

An unconditional mutual promise to buy and sell, as long as the object is made (2) If the period has a separate consideration, a contract of "option" is deemed perfected,
determinate and the price is fixed, can be obligatory on the parties, and compliance and it would be a breach of that contract to withdraw the offer during the agreed period.
therewith may accordingly be exacted. 5
The option, however, is an independent contract by itself, and it is to be distinguished
from the projected main agreement (subject matter of the option) which is obviously yet
An accepted unilateral promise which specifies the thing to be sold and the price to to be concluded. If, in fact, the optioner-offeror withdraws the offer before its
be paid, when coupled with a valuable consideration distinct and separate from the acceptance (exercise of the option) by the optionee-offeree, the latter may not sue
price, is what may properly be termed a perfected contract of option. This contract is for specific performance on the proposed contract ("object" of the option) since it has
legally binding, and in sales, it conforms with the second paragraph of Article 1479 of the failed to reach its own stage of perfection. The optioner-offeror, however, renders himself
Civil Code, viz: liable for damages for breach of the option. In these cases, care should be taken of the
real nature of the consideration given, for if, in fact, it has been intended to be part of the let alone ousted from the ownership and possession of the property, without first being
consideration for the main contract with a right of withdrawal on the part of the optionee, duly afforded its day in court.
the main contract could be deemed perfected; a similar instance would be an "earnest
money" in a contract of sale that can evidence its perfection (Art. 1482, Civil Code). We are also unable to agree with petitioners that the Court of Appeals has erred in
holding that the writ of execution varies the terms of the judgment in Civil Case No. 87-
In the law on sales, the so-called "right of first refusal" is an innovative juridical relation. 41058, later affirmed in CA-G.R. CV-21123. The Court of Appeals, in this regard, has
Needless to point out, it cannot be deemed a perfected contract of sale under Article observed:
1458 of the Civil Code. Neither can the right of first refusal, understood in its normal
concept, per se be brought within the purview of an option under the second paragraph Finally, the questioned writ of execution is in variance with the decision of
of Article 1479, aforequoted, or possibly of an offer under Article 1319  of the same
9
the trial court as modified by this Court. As already stated, there was
Code. An option or an offer would require, among other things,  a clear certainty on both
10
nothing in said decision   that decreed the execution of a deed of sale
13

the object and the cause or consideration of the envisioned contract. In a right of first between the Cu Unjiengs and respondent lessees, or the fixing of the
refusal, while the object might be made determinate, the exercise of the right, however, price of the sale, or the cancellation of title in the name of petitioner
would be dependent not only on the grantor's eventual intention to enter into a binding (Limpin vs. IAC, 147 SCRA 516; Pamantasan ng Lungsod ng Maynila vs.
juridical relation with another but also on terms, including the price, that obviously are yet IAC, 143 SCRA 311; De Guzman vs. CA, 137 SCRA 730; Pastor vs. CA,
to be later firmed up. Prior thereto, it can at best be so described as merely belonging to 122 SCRA 885).
a class of preparatory juridical relations governed not by contracts (since the essential
elements to establish the vinculum juris would still be indefinite and inconclusive) but by, It is likewise quite obvious to us that the decision in Civil Case No. 87-41058 could not
among other laws of general application, the pertinent scattered provisions of the Civil have decreed at the time the execution of any deed of sale between the Cu Unjiengs and
Code on human conduct. petitioners.

Even on the premise that such right of first refusal has been decreed under a final WHEREFORE, we UPHOLD the Court of Appeals in ultimately setting aside the
judgment, like here, its breach cannot justify correspondingly an issuance of a writ of questioned Orders, dated 30 August 1991 and 27 September 1991, of the court a quo.
execution under a judgment that merely recognizes its existence, nor would it sanction Costs against petitioners.
an action for specific performance without thereby negating the indispensable element of
consensuality in the perfection of contracts.  It is not to say, however, that the right of
11

SO ORDERED
first refusal would be inconsequential for, such as already intimated above, an unjustified
disregard thereof, given, for instance, the circumstances expressed in Article 19  of the
12

Civil Code, can warrant a recovery for damages.

The final judgment in Civil Case No. 87-41058, it must be stressed, has merely accorded
a "right of first refusal" in favor of petitioners. The consequence of such a declaration
entails no more than what has heretofore been said. In fine, if, as it is here so conveyed
to us, petitioners are aggrieved by the failure of private respondents to honor the right of
first refusal, the remedy is not a writ of execution on the judgment, since there is none to
execute, but an action for damages in a proper forum for the purpose.

Furthermore, whether private respondent Buen Realty Development Corporation, the

alleged purchaser of the property, has acted in good faith or bad faith and whether or not
it should, in any case, be considered bound to respect the registration of the lis
pendens in Civil Case No. 87-41058 are matters that must be independently addressed
in appropriate proceedings. Buen Realty, not having been impleaded in Civil Case No.
87-41058, cannot be held subject to the writ of execution issued by respondent Judge,
G.R. No. 140479 March 8, 2001 the former by the late spouses Tiangcos. The lessees continued to stay in the
premises and allegedly spent their own money amounting from P50,000.00 to
ROSENCOR DEVELOPMENT CORPORATION and RENE JOAQUIN, petitioners, P100,000.00 for its upkeep. These expenses were never deducted from the
vs. rentals which already increased to P1,000.00.
PATERNO INQUING, IRENE GUILLERMO, FEDERICO BANTUGAN, FERNANDO
MAGBANUA and LIZZA TIANGCO, respondents. In June 1990, the lessees received a letter from Atty. Erlinda Aguila demanding
that they vacate the premises so that the demolition of the building be
GONZAGA-REYES, J.: undertaken. They refused to leave the premises. In that same month, de Leon
refused to accept the lessees’ rental payment claiming that they have run out of
This is a petition for review on certiorari under Rule 45 of the Rules of Court seeking receipts and that a new collector has been assigned to receive the payments.
reversal of the Decision1 of the Court of Appeals dated June 25, 1999 in CA-G.R. CV No. Thereafter, they received a letter from Eufrocina de Leon offering to sell to them
53963. The Court of Appeals decision reversed and set aside the Decision2 dated May the property they were leasing for P2,000,000.00. xxx.
13, 1996 of Branch 217 of the Regional Trial Court of Quezon City in Civil Case No. Q-
93-18582. 1âwphi1.nêt
The lessees offered to buy the property from de Leon for the amount of
P1,000,000.00. De Leon told them that she will be submitting the offer to the
The case was originally filed on December 10, 1993 by Paterno Inquing, Irene Guillermo other heirs. Since then, no answer was given by de Leon as to their offer to buy
and Federico Bantugan, herein respondents, against Rosencor Development the property. However, in November 1990, Rene Joaquin came to the leased
Corporation (hereinafter "Rosencor"), Rene Joaquin, and Eufrocina de Leon. Originally, premises introducing himself as its new owner.
the complaint was one for annulment of absolute deed of sale but was later amended to
one for rescission of absolute deed of sale. A complaint-for intervention was thereafter In January 1991, the lessees again received another letter from Atty. Aguila
filed by respondents Fernando Magbanua and Danna Lizza Tiangco. The complaint-in- demanding that they vacate the premises. A month thereafter, the lessees
intervention was admitted by the trial court in an Order dated May 4, 1994.3 received a letter from de Leon advising them that the heirs of the late spouses
Tiangcos have already sold the property to Rosencor. The following month Atty.
The facts of the case, as stated by the trial court and adopted by the appellate court, are Aguila wrote them another letter demanding the rental payment and introducing
as follows: herself as counsel for Rosencor/Rene Joaquin, the new owners of the premises.

"This action was originally for the annulment of the Deed of Absolute Sale dated The lessees requested from de Leon why she had disregarded the pre-emptive
September 4, 1990 between defendants Rosencor and Eufrocina de Leon but right she and the late Tiangcos have promised them. They also asked for a copy
later amended (sic) praying for the rescission of the deed of sale. of the deed of sale between her and the new owners thereof but she refused to
heed their request. In the same manner, when they asked Rene Joaquin a copy
of the deed of sale, the latter turned down their request and instead Atty. Aguila
Plaintiffs and plaintiffs-intervenors averred that they are the lessees since 1971 of
wrote them several letters demanding that they vacate the premises. The lessees
a two-story residential apartment located at No. 150 Tomas Morato Ave., Quezon
offered to tender their rental payment to de Leon but she refused to accept the
City covered by TCT No. 96161 and owned by spouses Faustino and Cresencia
same.
Tiangco. The lease was not covered by any contract. The lessees were renting
the premises then for P150.00 a month and were allegedly verbally granted by
the lessors the pre-emptive right to purchase the property if ever they decide to In April 1992 before the demolition can be undertaken by the Building Official, the
sell the same. barangay interceded between the parties herein after which Rosencor raised the
issue as to the rental payment of the premises. It was also at this instance that
the lessees were furnished with a copy of the Deed of Sale and discovered that
Upon the death of the spouses Tiangcos in 1975, the management of the
they were deceived by de Leon since the sale between her and Rene
property was adjudicated to their heirs who were represented by Eufrocina de
Joaquin/Rosencor took place in September 4, 1990 while de Leon made the offer
Leon. The lessees were allegedly promised the same pre-emptive right by the
to them only in October 1990 or after the sale with Rosencor had been
heirs of Tiangcos since the latter had knowledge that this right was extended to
 consummated. The lessees also noted that the property was sold only for (3) The heirs of Faustino and Crescencia Tiangco, thru appellee
P726,000.00. Eufrocina de Leon, to afford the appellants thirty days within which to
exercise their right of first refusal by paying the amount of ONE MILLION
The lessees offered to reimburse de Leon the selling price of P726,000.00 plus PESOS (P1,000,000.00) for the subject property; and
an additional P274,000.00 to complete their P1,000.000.00 earlier offer. When
their offer was refused, they filed the present action praying for the following: a) (4) The appellants to, in turn, pay the appellees back rentals from May
rescission of the Deed of Absolute Sale between de Leon and Rosencor dated 1990 up to the time this decision is promulgated.
September 4, 1990; b) the defendants Rosencor/Rene Joaquin be ordered to
reconvey the property to de Leon; and c) de Leon be ordered to reimburse the No pronouncement as to costs.
plaintiffs for the repairs of the property, or apply the said amount as part of the
price for the purchase of the property in the sum of P100,000.00."4 SO ORDERED".8

After trial on the merits, the Regional Trial Court rendered a Decision5 dated May 13, Petitioners herein filed a Motion for Reconsideration of the decision of the Court of
1996 dismissing the complaint. The trial court held that the right of redemption on which Appeals but the same was denied in a Resolution dated October 15, 1999.9
the complaint. The trial court held that the right of redemption on which the complaint
was based was merely an oral one and as such, is unenforceable under the law. The
Hence, this petition for review on certiorari where petitioners Rosencor Development
dispositive portion of the May 13, 1996 Decision is as follows:
Corporation and Rene Joaquin raise the following assignment of errors10:
"WHEREFORE, in view of the foregoing, the Court DISMISSES the instant
I.
action. Plaintiffs and plaintiffs-intervenors are hereby ordered to pay their
respective monthly rental of P1,000.00 per month reckoned from May 1990 up to
the time they leave the premises. No costs. THE COURT OF APPEALS GRAVELY ERRED WHEN IT ORDERED THE
RESCISSION OF THE ABSOLUTE DEED OF SALE BETWEEN EUFROCINA
DE LEON AND PETITIONER ROSENCOR.
SO ORDERED."6
II.
Not satisfied with the decision of the trial court, respondents herein filed a Notice of
Appeal dated June 3, 1996. On the same date, the trial court issued an Order for the
elevation of the records of the case to the Court of Appeals. On August 8, 1997, THE COURT OF APPEALS COMMTITED MANIFEST ERROR IN MANDATING
respondents filed their appellate brief before the Court of Appeals. THAT EUFROCINA DE LEON AFFORD RESPONDENTS THE OPPORTUNITY
TO EXERCISE THEIR RIGHT OF FIRST REFUSAL.
On June 25, 1999, the Court of Appeals rendered its decision7 reversing the decision of
the trial court. The dispositive portion of the June 25, 1999 decision is as follows: III.

"WHEREFORE, premises considered, the appealed decision (dated May 13, THE COURT OF APPEALS GRIEVOUSLY ERRED IN CONCLUDING THAT
1996) of the Regional Trial Court (Branch 217) in Quezon City in Case No. Q-93- RESPONDENTS HAVE ESTABLISHED THEIR RIGHT OF FIRST REFUSAL
18582 is hereby REVERSED and SET ASIDE. In its stead, a new one is DESPITE PETITIONERS’ RELIANCE ON THEIR DEFENSE BASED ON THE
rendered ordering: STATUTE OF FRAUDS.

(1) The rescission of the Deed of Absolute Sale executed between the Eufrocina de Leon, for herself and for the heirs of the spouses Faustino and Crescencia
appellees on September 4, 1990; Tiangco, did not appeal the decision of the Court of Appeals.

(2) The reconveyance of the subject premises to appellee Eufrocina de At the onset, we not that both the Court of Appeals and the Regional Trial Court relied on
Leon; Article 1403 of the New Civil Code, more specifically the provisions on the statute of
frauds, in coming out with their respective decisions. The trial court, in denying the d) An agreement for the sale of goods, chattels or things in action, at a
petition for reconveyance, held that right of first refusal relied upon by petitioners was not price not less than five hundred pesos, unless the buyer accept and
reduced to writing and as such, is unenforceable by virtue of the said article. The Court receive part of such goods and chattels, or the evidences, or some of
of Appeals, on the other hand, also held that the statute of frauds governs the "right of them, of such things in action, or pay at the time some part of the
first refusal" claimed by respondents. However, the appellate court ruled that purchase money; but when a sale is made by auction and entry is made
respondents had duly proven the same by reason of petitioners’ waiver of the protection by the auctioneer in his sales book, at the time of the sale, of the amount
of the statute by reason of their failure to object to the presentation of oral evidence of and kind of property sold, terms of sale, price, names of purchasers and
the said right. person on whose account the sale is made, it is a sufficient
memorandum;
Both the appellate court and the trial court failed to discuss, however, the threshold issue
of whether or not a right of first refusal is indeed covered by the provisions of the New e) An agreement for the leasing of a longer period than one year, or for
Civil Code on the statute of frauds. The resolution of the issue on the applicability of the the sale of real property or of an interest therein;
statute of frauds is important as it will determine the type of evidence which may be
considered by the trial court as proof of the alleged right of first refusal. f) A representation to the credit of a third person."

The term "statute of frauds" is descriptive of statutes which require certain classes of The purpose of the statute is to prevent fraud and perjury in the enforcement of
contracts to be in writing. This statute does not deprive the parties of the right to contract obligations depending for their evidence on the unassisted memory of witnesses by
with respect to the matters therein involved, but merely regulates the formalities of the requiring certain enumerated contracts and transactions to be evidenced by a writing
contract necessary to render it enforceable. Thus, they are included in the provisions of signed by the party to be charged.11 Moreover, the statute of frauds refers to specific
the New Civil Code regarding unenforceable contracts, more particularly Art. 1403, kinds of transactions and cannot apply to any other transaction that is not enumerated
paragraph 2. Said article provides, as follows: therein.12 The application of such statute presupposes the existence of a perfected
contract.13
"Art. 1403. The following contracts are unenforceable, unless they are ratified:
The question now is whether a "right of first refusal" is among those enumerated in the
xxx list of contracts covered by the Statute of Frauds. More specifically, is a right of first
refusal akin to "an agreement for the leasing of a longer period than one year, or for the
(2) Those that do not comply with the Statute of Frauds as set forth in this sale of real property or of an interest therein" as contemplated by Article 1403, par. 2(e)
number. In the following cases an agreement hereafter made shall be of the New Civil Code.
unenforceable by action, unless the same, or some note or memorandum
thereof, be in writing, and subscribed by the party charged, or by his agent; We have previously held that not all agreements "affecting land" must be put into writing
evidence, therefore, of the agreement cannot be received without the writing, or a to attain enforceability.14 Thus, we have held that the setting up of boundaries,15 the oral
secondary evidence of its contents: partition of real property16, and an agreement creating a right of way17 are not covered by
the provisions of the statute of frauds. The reason simply is that these agreements are
a) An agreement that by its terms is not to be performed within a year not among those enumerated in Article 1403 of the New Civil Code.
from the making thereof;
A right of first refusal is not among those listed as unenforceable under the statute of
b) A special promise to answer for the debt, default, or miscarriage of frauds. Furthermore, the application of Article 1403, par. 2(e) of the New Civil Code
another; presupposes the existence of a perfected, albeit unwritten, contract of sale.18 A right of
first refusal, such as the one involved in the instant case, is not by any means a
c) An agreement made in consideration of marriage, other than a mutual perfected contract of sale of real property. At best, it is a contractual grant, not of the sale
promise to marry; of the real property involved, but of the right of first refusal over the property sought to be
sold19.
It is thus evident that the statute of frauds does not contemplate cases involving a right of In Guzman, Bocaling and Co, Inc. vs. Bonnevie 23, the Court upheld the decision of a
first refusal. As such, a right of first refusal need not be written to be enforceable and lower court ordering the rescission of a deed of sale which violated a right of first refusal
may be proven by oral evidence. granted to one of the parties therein. The Court held:

The next question to be ascertained is whether or not respondents have satisfactorily "xxx Contract of Sale was not voidable but rescissible. Under Article 1380 to
proven their right of first refusal over the property subject of the Deed of Absolute Sale 1381 (3) of the Civil Code, a contract otherwise valid may nonetheless be
dated September 4, 1990 between petitioner Rosencor and Eufrocina de Leon. subsequently rescinded by reason of injury to third persons, like creditors. The
status of creditors could be validly accorded the Bonnevies for they had
On this point, we agree with the factual findings of the Court of Appeals that respondents substantial interests that were prejudiced by the sale of the subject property to
have adequately proven the existence of their right of first refusal. Federico Bantugan, the petitioner without recognizing their right of first priority under the Contract of
Irene Guillermo, and Paterno Inquing uniformly testified that they were promised by the Lease.
late spouses Faustino and Crescencia Tiangco and, later on, by their heirs a right of first
refusal over the property they were currently leasing should they decide to sell the same. According to Tolentino, rescission is a remedy granted by law to the contracting
Moreover, respondents presented a letter20 dated October 9, 1990 where Eufrocina de parties and even to third persons, to secure reparations for damages caused to
Leon, the representative of the heirs of the spouses Tiangco, informed them that they them by a contract, even if this should be valid, by means of the restoration of
had received an offer to buy the disputed property for P2,000,000.00 and offered to sell things to their condition at the moment prior to the celebration of said contract. It
the same to the respondents at the same price if they were interested. Verily, if Eufrocina is a relief allowed for the protection of one of the contracting parties and even
de Leon did not recognize respondents’ right of first refusal over the property they were third persons from all injury and damage the contract may cause, or to protect
leasing, then she would not have bothered to offer the property for sale to the some incompatible and preferent right created by the contract. Rescission implies
respondents. a contract which, even if initially valid, produces a lesion or pecuniary damage to
someone that justifies its invalidation for reasons of equity.
It must be noted that petitioners did not present evidence before the trial court
contradicting the existence of the right of first refusal of respondents over the disputed It is true that the acquisition by a third person of the property subject of the
property. They only presented petitioner Rene Joaquin, the vice-president of petitioner contract is an obstacle to the action for its rescission where it is shown that such
Rosencor, who admitted having no personal knowledge of the details of the sales third person is in lawful possession of the subject of the contract and that he did
transaction between Rosencor and the heirs of the spouses Tiangco21. They also not act in bad faith. However, this rule is not applicable in the case before us
dispensed with the testimony of Eufrocina de Leon22 who could have denied the because the petitioner is not considered a third party in relation to the Contract of
existence or knowledge of the right of first refusal. As such, there being no evidence to Sale nor may its possession of the subject property be regarded as acquired
the contrary, the right of first refusal claimed by respondents was substantially proven by lawfully and in good faith.
respondents before the lower court.
Indeed, Guzman, Bocaling and Co. was the vendee in the Contract of Sale.
Having ruled upon the question as to the existence of respondents’ right of first refusal, Moreover, the petitioner cannot be deemed a purchaser in good faith for the
the next issue to be answered is whether or not the Court of Appeals erred in ordering record shows that it categorically admitted that it was aware of the lease in favor
the rescission of the Deed of Absolute Sale dated September 4, 1990 between Rosencor of the Bonnevies, who were actually occupying the subject property at the time it
and Eufrocina de Leon and in decreeing that the heirs of the spouses Tiangco should was sold to it. Although the occupying the subject property at the time it was sold
afford respondents the exercise of their right of first refusal. In other words, may a to it. Although the Contract of Lease was not annotated on the transfer certificate
contract of sale entered into in violation of a third party’s right of first refusal be rescinded of title in the name of the late Jose Reynoso and Africa Reynoso, the petitioner
in order that such third party can exercise said right? cannot deny actual knowledge of such lease which was equivalent to and indeed
more binding than presumed notice by registration.
The issue is not one of first impression.
A purchaser in good faith and for value is one who buys the property of another
without notice that some other person has a right to or interest in such property
without and pays a full and fair price for the same at the time of such purchase or
 before he has notice of the claim or interest of some other person in the property. have cautioned it to look further into the agreement to determine if it involved
Good faith connotes an honest intention to abstain from taking unconscientious stipulations that would prejudice its own interests.
advantage of another. Tested by these principles, the petitioner cannot tenably
claim to be a buyer in good faith as it had notice of the lease of the property by Since Mayfair had a right of first refusal, it can exercise the right only if the
the Bonnevies and such knowledge should have cautioned it to look deeper into fraudulent sale is first set aside or rescinded. All of these matters are now before
the agreement to determine if it involved stipulations that would prejudice its own us and so there should be no piecemeal determination of this case and leave
interests." festering sores to deteriorate into endless litigation. The facts of the case and
considerations of justice and equity require that we order rescission here and
Subsequently24 in Equatorial Realty and Development, Inc. vs. Mayfair Theater, Inc.25, now. Rescission is a relief allowed for the protection of one of the contracting
the Court, en banc, with three justices dissenting,26 ordered the rescission of a contract parties and even third persons from all injury and damage the contract may
entered into in violation of a right of first refusal. Using the ruling in Guzman Bocaling & cause or to protect some incompatible and preferred right by the contract. The
Co., Inc. vs. Bonnevie as basis, the Court decreed that since respondent therein had a sale of the subject real property should now be rescinded considering that
right of first refusal over the said property, it could only exercise the said right if the Mayfair, which had substantial interest over the subject property, was prejudiced
fraudulent sale is first set aside or rescinded. Thus: by the sale of the subject property to Equatorial without Carmelo conferring to
Mayfair every opportunity to negotiate within the 30-day stipulate periond.27
"What Carmelo and Mayfair agreed to, by executing the two lease contracts, was
that Mayfair will have the right of first refusal in the event Carmelo sells the In Paranaque Kings Enterprises, Inc. vs. Court of Appeals, 28 the Court held that the
leased premises. It is undisputed that Carmelo did recognize this right of Mayfair, allegations in a complaint showing violation of a contractual right of "first option or priority
for it informed the latter of its intention to sell the said property in 1974. There to buy the properties subject of the lease" constitute a valid cause of action enforceable
was an exchange of letters evidencing the offer and counter-offers made by both by an action for specific performance. Summarizing the rulings in the two previously cited
parties. Carmelo, however, did not pursue the exercise to its logical end. While it cases, the Court affirmed the nature of and concomitant rights and obligations of parties
initially recognized Mayfair’s right of first refusal, Carmelo violated such right under a right of first refusal. Thus:
when without affording its negotiations with Mayfair the full process to ripen to at
least an interface of a definite offer and a possible corresponding acceptance "We hold however, that in order to have full compliance with the contractual right
within the "30-day exclusive option" time granted Mayfair, Carmelo abandoned granting petitioner the first option to purchase, the sale of the properties for the
negotiations, kept a low profile for some time, and then sold, without prior notice amount of P9,000,000.00, the price for which they were finally sold to respondent
to Mayfair, the entire Claro M. Recto property to Equatorial. Raymundo, should have likewise been offered to petitioner.

Since Equatorial is a buyer in bad faith, this finding renders the sale to it of the The Court has made an extensive and lengthy discourse on the concept of, and
property in question, rescissible. We agree with respondent Appellate Court that obligations under, a right of first refusal in the case of Guzman, Bocaling & Co.
the records bear out the fact that Equatorial was aware of the lease contracts vs. Bonnevie. In that case, under a contract of lease, the lessees (Raul and
because its lawyers had, prior to the sale, studied the said contracts. As such, Christopher Bonnevie) were given a "right of first priority" to purchase the leased
Equatorial cannot tenably claim that to be a purchaser in good faith, and, property in case the lessor (Reynoso) decided to sell. The selling price quoted to
therefore, rescission lies. the Bonnevies was 600,000.00 to be fully paid in cash, less a mortgage lien of
P100,000.00. On the other hand, the selling price offered by Reynoso to and
XXX accepted by Guzman was only P400,000.00 of which P137,500.00 was to be
paid in cash while the balance was to be paid only when the property was
As also earlier emphasized, the contract of sale between Equatorial and Carmelo cleared of occupants. We held that even if the Bonnevies could not buy it at the
is characterized by bad faith, since it was knowingly entered into in violation of price quoted (P600,000.00), nonetheless, Reynoso could not sell it to another for
the rights of and to the prejudice of Mayfair. In fact, as correctly observed by the a lower price and under more favorable terms and conditions without first offering
Court of Appeals, Equatorial admitted that its lawyers had studied the contract or said favorable terms and price to the Bonnevies as well. Only if the Bonnevies
lease prior to the sale. Equatorial’s knowledge of the stipulations therein should failed to exercise their right of first priority could Reynoso thereafter lawfully sell
the subject property to others, and only under the same terms and conditions
previously offered to the Bonnevies.
 XXX refusal could the spouses Litonjua validly sell the subject properties to the others,
under the same terms and conditions offered to L&R Corporation.
This principle was reiterated in the very recent case of Equatorial Realty vs.
Mayfair Theater, Inc. which was decided en banc. This Court upheld the right of What then is the status of the sale made to PWHAS in violation of L & R
first refusal of the lessee Mayfair, and rescinded the sale of the property by the Corporation’s contractual right of first refusal? On this score, we agree with the
lessor Carmelo to Equatorial Realty "considering that Mayfair, which had Amended Decision of the Court of Appeals that the sale made to PWHAS is
substantial interest over the subject property, was prejudiced by its sale to rescissible. The case of Guzman, Bocaling & Co. v. Bonnevie is instructive on
Equatorial without Carmelo conferring to Mayfair every opportunity to negotiate this point.
within the 30-day stipulated period"
XXX
In that case, two contracts of lease between Carmelo and Mayfair provided "that
if the LESSOR should desire to sell the leased premises, the LESSEE shall be It was then held that the Contract of Sale there, which violated the right of first
given 30 days exclusive option to purchase the same." Carmelo initially offered to refusal, was rescissible.
sell the leased property to Mayfair for six to seven million pesos. Mayfair
indicated interest in purchasing the property though it invoked the 30-day period. In the case at bar, PWHAS cannot claim ignorance of the right of first refusal
Nothing was heard thereafter from Carmelo. Four years later, the latter sold its granted to L & R Corporation over the subject properties since the Deed of Real
entire Recto Avenue property, including the leased premises, to Equatorial for Estate Mortgage containing such a provision was duly registered with the
P11,300,000.00 without priorly informing Mayfair. The Court held that both Register of Deeds. As such, PWHAS is presumed to have been notified thereof
Carmelo and Equatorial acted in bad faith: Carmelo or knowingly violating the by registration, which equates to notice to the whole world.
right of first option of Mayfair, and Equatorial for purchasing the property despite
being aware of the contract stipulation. In addition to rescission of the contract of
XXX
sale, the Court ordered Carmelo to allow Mayfair to buy the subject property at
the same price of P11,300,000.00.
All things considered, what then are the relative rights and obligations of the
parties? To recapitulate: the sale between the spouses Litonjua and PWHAS is
In the recent case of Litonjua vs L&R Corporation,29 the Court, also citing the case
valid, notwithstanding the absence of L & R Corporation’s prior written consent
of Guzman, Bocaling & Co. vs. Bonnevie, held that the sale made therein in violation of a
thereto. Inasmuch as the sale to PWHAS was valid, its offer to redeem and its
right of first refusal embodied in a mortgage contract, was rescissible. Thus:
tender of the redemption price, as successor-in-interest of the spouses Litonjua,
within the one-year period should have been accepted as valid by the L & R
"While petitioners question the validity of paragraph 8 of their mortgage contract, Corporation. However, while the sale is, indeed, valid, the same is rescissible
they appear to be silent insofar as paragraph 9 thereof is concerned. Said because it ignored L & R Corporation’s right of first refusal."
paragraph 9 grants upon L&R Corporation the right of first refusal over the
mortgaged property in the event the mortgagor decides to sell the same. We see
Thus, the prevailing doctrine, as enunciated in the cited cases, is that a contract of sale
nothing wrong in this provision. The right of first refusal has long been recognized
entered into in violation of a right of first refusal of another person, while valid, is
as valid in our jurisdiction. The consideration for the loan mortgage includes the
rescissible.
consideration for the right of first refusal. L&R Corporation is in effect stating that
it consents to lend out money to the spouses Litonjua provided that in case they
decide to sell the property mortgaged to it, then L&R Corporation shall be given There is, however, a circumstance which prevents the application of this doctrine in the
the right to match the offered purchase price and to buy the property at that price. case at bench. In the cases cited above, the Court ordered the rescission of sales made
Thus, while the spouses Litonjua had every right to sell their mortgaged property in violation of a right of first refusal precisely because the vendees therein could not have
to PWHAS without securing the prior written consent of L&R Corporation, they acted in good faith as they were aware or should have been aware of the right of first
had the obligation under paragraph 9, which is a perfectly valid provision, to refusal granted to another person by the vendors therein. The rationale for this is found
notify the latter of their intention to sell the property and give it priority over other in the provisions of the New Civil Code on rescissible contracts. Under Article 1381 of the
buyers. It is only upon the failure of L&R Corporation to exercise its right of first New Civil Code, paragraph 3, a contract validly agreed upon may be rescinded if it is
"undertaken in fraud of creditors when the latter cannot in any manner collect the claim
due them." Moreover, under Article 1385, rescission shall not take place "when the Respondents did not try to communicate with Atty. Aguila and inform her about their
things which are the object of the contract are legally in the possession of third persons preferential right over the disputed property. There is even no showing that they
who did not act in bad faith."30 contacted the heirs of the spouses Tiangco after they received this letter to remind them
of their right over the property.
It must be borne in mind that, unlike the cases cited above, the right of first refusal
involved in the instant case was an oral one given to respondents by the deceased Respondents likewise point to the letter dated October 9, 1990 of Eufrocina de Leon,
spouses Tiangco and subsequently recognized by their heirs. As such, in order to hold where she recognized the right of first refusal of respondents, as indicative of the bad
that petitioners were in bad faith, there must be clear and convincing proof that faith of petitioners. We do not agree. Eufrocina de Leon wrote the letter on her own
petitioners were made aware of the said right of first refusal either by the respondents or behalf and not on behalf of petitioners and, as such, it only shows that Eufrocina de Leon
by the heirs of the spouses Tiangco. was aware of the existence of the oral right of first refusal. It does not show that
petitioners were likewise aware of the existence of the said right. Moreover, the letter
It is axiomatic that good faith is always presumed unless contrary evidence is was made a month after the execution of the Deed of Absolute Sale on September 4,
adduced.31 A purchaser in good faith is one who buys the property of another without 1990 between petitioner Rosencor and the heirs of the spouses Tiangco. There is no
notice that some other person has a right or interest in such a property and pays a full showing that prior to the date of the execution of the said Deed, petitioners were put on
and fair price at the time of the purchase or before he has notice of the claim or interest notice of the existence of the right of first refusal.
of some other person in the property.32 In this regard, the rule on constructive notice
would be inapplicable as it is undisputed that the right of first refusal was an oral one and Clearly, if there was any indication of bad faith based on respondents’ evidence, it would
that the same was never reduced to writing, much less registered with the Registry of only be on the part of Eufrocina de Leon as she was aware of the right of first refusal of
Deeds. In fact, even the lease contract by which respondents derive their right to respondents yet she still sold the disputed property to Rosencor. However, bad faith on
possess the property involved was an oral one. the part of Eufrocina de Leon does not mean that petitioner Rosencor likewise acted in
bad faith. There is no showing that prior to the execution of the Deed of Absolute Sale,
On this point, we hold that the evidence on record fails to show that petitioners acted in petitioners were made aware or put on notice of the existence of the oral right of first
bad faith in entering into the deed of sale over the disputed property with the heirs of the refusal. Thus, absent clear and convincing evidence to the contrary, petitioner Rosencor
spouses Tiangco. Respondents failed to present any evidence that prior to the sale of will be presumed to have acted in good faith in entering into the Deed of Absolute Sale
the property on September 4, 1990, petitioners were aware or had notice of the oral right over the disputed property.
of first refusal.
Considering that there is no showing of bad faith on the part of the petitioners, the Court
Respondents point to the letter dated June 1, 1990  as indicative of petitioners’
33 of Appeals thus erred in ordering the rescission of the Deed of Absolute Sale dated
knowledge of the said right. In this letter, a certain Atty. Erlinda Aguila demanded that September 4, 1990 between petitioner Rosencor and the heirs of the spouses Tiangco.
respondent Irene Guillermo vacate the structure they were occupying to make way for its The acquisition by Rosencor of the property subject of the right of first refusal is an
demolition. obstacle to the action for its rescission where, as in this case, it was shown that
Rosencor is in lawful possession of the subject of the contract and that it did not act in
We fail to see how the letter could give rise to bad faith on the part of the petitioner. No bad faith.34
mention is made of the right of first refusal granted to respondents. The name of
petitioner Rosencor or any of it officers did not appear on the letter and the letter did not This does not mean however that respondents are left without any remedy for the
state that Atty. Aguila was writing in behalf of petitioner. In fact, Atty. Aguila stated during unjustified violation of their right of first refusal. Their remedy however is not an action for
trial that she wrote the letter in behalf of the heirs of the spouses Tiangco. Moreover, the rescission of the Deed of Absolute Sale but an action for damages against the heirs
even assuming that Atty. Aguila was indeed writing in behalf of petitioner Rosencor, of the spouses Tiangco for the unjustified disregard of their right of first refusal35.
there is no showing that Rosencor was aware at that time that such a right of first refusal
existed.

Neither was there any showing that after receipt of this June 1, 1990 letter, respondents
notified Rosencor or Atty. Aguila of their right of first refusal over the property.
WHEREFORE, premises considered, the decision of the Court of Appeals dated June
25, 1999 is REVERSED and SET ASIDE. The Decision dated May 13, 1996 of the
Quezon City Regional Trial Court, Branch 217 is hereby REINSTATED insofar as it
dismisses the action for rescission of the Deed of Absolute Sale dated September 4,
1990 and orders the payment of monthly rentals of P1,000.00 per month reckoned from
May 1990 up to the time respondents leave the premises.

SO ORDERED
 [G.R. NO. 152411 : September 29, 2004] Supplier : Philippine Laboratory Furniture Co.,
College, Laguna
UNIVERSITY OF THE PHILIPPINES, Petitioner, v. PHILAB INDUSTRIES, Attention : Mr. Hector C. Navasero
INC., Respondent. President
Downpayment : 40% or P1,173,627.56
DECISION
2. Fabrication and Supply of office furniture for the BIOTECH Building Project
CALLEJO, SR., J.: Amount : P573,375.00
Supplier : Trans-Oriental Woodworks, Inc.
Before the Court is a Petition for Review on Certiorari of the Decision1 of the 1st Avenue, Bagumbayan Tanyag, Taguig, Metro Manila
Court of Appeals in CA-G.R. CV No. 44209, as well as its Resolution2 denying the
Downpayment : 50% or P286,687.504
petitioner's motion for the reconsideration thereof. Themo1 mo2 Court of Appeals set
aside the Decision3 of Branch 150 of the Regional Trial Court (RTC) of Makati City,
which dismissed the complaint of the respondent against the petitioner for sum of Padolina assured Lirio that the contract would be prepared as soon as possible
money and damages. before the issuance of the purchase orders and the downpayment for the goods,
and would be transmitted to the FEMF as soon as possible.
The Facts of the Case
In a Letter dated July 23, 1982, Padolina informed Hector Navasero, the
Sometime in 1979, the University of the Philippines (UP) decided to construct an President of PHILAB, to proceed with the fabrication of the laboratory furniture,
integrated system of research organization known as the Research Complex. As per the directive of FEMF Executive Assistant Lirio. Padolina also requested for
part of the project, laboratory equipment and furniture were purchased for the copies of the shop drawings and a sample contract5 for the project, and that such
National Institute of Biotechnology and Applied Microbiology (BIOTECH) at the UP contract and drawings had to be finalized before the down payment could be
Los Baños. Providentially, the Ferdinand E. Marcos Foundation (FEMF) came remitted to the PHILAB the following week. However, PHILAB failed to forward
forward and agreed to fund the acquisition of the laboratory furniture, including any sample contract.
the fabrication thereof.
Subsequently, PHILAB made partial deliveries of office and laboratory furniture to
Renato E. Lirio, the Executive Assistant of the FEMF, gave the go-signal to BIOTECH after having been duly inspected by their representatives and FEMF
BIOTECH to contact a corporation to accomplish the project. On July 23, 1982, Executive Assistant Lirio.
Dr. William Padolina, the Executive Deputy Director of BIOTECH, arranged for
Philippine Laboratory Industries, Inc. (PHILAB), to fabricate the laboratory On August 24, 1982, FEMF remitted P600,000 to PHILAB as downpayment for the
furniture and deliver the same to BIOTECH for the BIOTECH Building Project, for laboratory furniture for the BIOTECH project, for which PHILAB issued Official
the account of the FEMF. Lirio directed Padolina to give the go-signal to PHILAB Receipt No. 253 to FEMF. On October 22, 1982, FEMF made another partial
to proceed with the fabrication of the laboratory furniture, and requested payment of P800,000 to PHILAB, for which the latter issued Official Receipt No.
Padolina to forward the contract of the project to FEMF for its approval. 256 to FEMF. The remittances were in the form of checks drawn by FEMF and
delivered to PHILAB, through Padolina.
On July 13, 1982, Padolina wrote Lirio and requested for the issuance of the
purchase order and downpayment for the office and laboratory furniture for the On October 16, 1982, UP, through Emil Q. Javier, the Chancellor of UP Los
project, thus: Baños and FEMF, represented by its Executive Officer, Rolando Gapud, executed
a Memorandum of Agreement (MOA) in which FEMF agreed to grant financial
1. Supply and Installation of Laboratory furniture for the BIOTECH Building Project support and donate sums of money to UP for the construction of buildings,
installation of laboratory and other capitalization for the project, not to
Amount : P2,934,068.90
exceed P29,000,000.00. The obligations of FEMF under the MOA are the submitted to BIOTECH an accomplishment report on the project as of February
following: 28, 1983, and requested payment thereon.9 By May 1983, PHILAB had completed
78% of the project, amounting to P2,288,573.74 out of the total cost
ARTICLE II of P2,934,068.90. The FEMF had already paid forty percent (40%) of the total
cost of the project. On May 12, 1983, Padolina wrote Lirio and furnished him the
OBLIGATIONS OF THE FOUNDATION progress billing from PHILAB.10 On August 11, 1983, the FEMF made another
partial payment of P836,119.52 representing the already delivered laboratory
and office furniture after the requisite inspection and verification thereof by
2.1. The FOUNDATION, in carrying out its principal objectives of promoting
representatives from the BIOTECH, FEMF, and PHILAB. The payment was made in
philantrophic and scientific projects through financial support to such projects
the form of a check, for which PHILAB issued Official Receipt No. 202 to FEMF
that will contribute to the country's economic development, shall grant such
through Padolina.11
financial support and donate such sums of money to the RESEARCH COMPLEX as
may be necessary for the construction of buildings, installation of laboratories,
setting up of offices and physical plants and facilities and other capital investment On July 1, 1984, PHILAB submitted to BIOTECH Invoice No. 01643 in the amount
of the RESEARCH COMPLEX and/or any of its component Research Institutes not of P702,939.40 for the final payment of laboratory furniture. Representatives
to exceed P29 Million. For this purpose, the FOUNDATION shall: from BIOTECH, PHILAB, and Lirio for the FEMF, conducted a verification of the
accomplishment of the work and confirmed the same. BIOTECH forwarded the
invoice to Lirio on December 18, 1984 for its payment.12 Lirio, in turn, forwarded
(a) Acquire and donate to the UNIVERSITY the site for the RESEARCH COMPLEX;
the invoice to Gapud, presumably sometime in the early part of 1985. However,
andcralawlibrary
the FEMF failed to pay the bill. PHILAB reiterated its request for payment through
a letter on May 9, 1985.13 BIOTECH again wrote Lirio on March 21, 1985,
(b) Donate or cause to be donated to the UNIVERSITY the sum of TWENTY-NINE requesting the payment of PHILAB's bill.14 It sent another letter to Gapud, on
MILLION PESOS (P29,000,000.00) for the construction of the buildings of the November 22, 1985, again appealing for the payment of PHILAB's bill.15 In a
National Institutes of Biotechnology and Applied Microbiology (BIOTECH) and the Letter to BIOTECH dated December 5, 1985, PHILAB requested payment
installation of their laboratories and their physical plants and other facilities to of P702,939.40 plus interest thereon of P224,940.61.16 There was, however, no
enable them to commence operations. response from the FEMF. On February 24, 1986, PHILAB wrote BIOTECH,
appealing for the payment of its bill even on installment basis.17
2.2. In addition, the FOUNDATION shall, subject to the approval of the Board of
Trustees of the FOUNDATION, continue to support the activities of the RESEARCH President Marcos was ousted from office during the February 1986 EDSA
COMPLEX by way of recurrent additional grants and donations for specific Revolution. On March 26, 1986, Navasero wrote BIOTECH requesting for its
research and development projects which may be mutually agreed upon and, much-needed assistance for the payment of the balance already due plus interest
from time to time, additional grants and donations of such amounts as may be of P295,234.55 for its fabrication and supply of laboratory furniture.18
necessary to provide the RESEARCH COMPLEX and/or any of its Research
Institutes with operational flexibility especially with regard to incentives to staff
On April 22, 1986, PHILAB wrote President Corazon C. Aquino asking her help to
purchase of equipment/facilities, travel abroad, recruitment of local and
secure the payment of the amount due from the FEMF.19 The letter was referred
expatriate staff and such other activities and inputs which are difficult to obtain
to then Budget Minister Alberto Romulo, who referred the letter to then UP
under usual government rules and regulations.6
President Edgardo Angara on June 9, 1986. On September 30, 1986, Raul P. de
Guzman, the Chancellor of UP Los Baños, wrote then Chairman of the
The Board of Regents of the UP approved the MOA on November 25, 1982.7 Presidential Commission on Good Government (PCGG) Jovito Salonga, submitting
PHILAB's claim to be officially entered as "accounts payable" as soon as the
In the meantime, Navasero promised to submit the contract for the installation of assets of FEMF were liquidated by the PCGG.20
laboratory furniture to BIOTECH, by January 12, 1983. However, Navasero failed
to do so. In a Letter dated February 1, 1983, BIOTECH reminded Navasero of the In the meantime, the PCGG wrote UP requesting for a copy of the relevant
need to submit the contract so that it could be submitted to FEMF for its contract and the MOA for its perusal.21
evaluation and approval.8 Instead of submitting the said contract, PHILAB
Chancellor De Guzman wrote Navasero requesting for a copy of the contract thus leaving a balance of PESOS: SEVEN HUNDRED TWO THOUSAND NINE
executed between PHILAB and FEMF. In a Letter dated October 20, 1987, HUNDRED THIRTY-NINE & 40/100 (P702,939.40).
Navasero informed De Guzman that PHILAB and FEMF did not execute any
contract regarding the fabrication and delivery of laboratory furniture to 5. That notwithstanding repeated demands for the past eight years, defendant
BIOTECH. arrogantly and maliciously made plaintiff believe that it was going to pay the
balance aforestated, that was why plaintiff's President and General Manager
Exasperated, PHILAB filed a complaint for sum of money and damages against himself, HECTOR C. NAVASERO, personally went to and from UP Los Baños to
UP. In the complaint, PHILAB prayed that it be paid the following: talk with defendant's responsible officers in the hope of expecting payment,
when, in truth and in fact, defendant had no intention to pay whatsoever right
(1) PESOS: SEVEN HUNDRED TWO THOUSAND NINE HUNDRED THIRTY NINE & from the start on a misplaced ground of technicalities. Some of plaintiff's demand
40/100 (P702,939.40) plus an additional amount (as shall be determined during letters since year 1983 up to the present are hereto attached as Annexes A, B, C,
the hearing) to cover the actual cost of money which at the time of transaction D, E, F, G, and H hereof;
the value of the peso was eleven to a dollar (P11.00:$1) and twenty seven (27%)
percent interest on the total amount from August 1982 until fully paid; 6. That by reason of defendant's malicious, evil and unnecessary
misrepresentations that it was going to pay its obligation and asking plaintiff so
(2) PESOS: ONE HUNDRED THOUSAND (P100,000.00) exemplary damages; many red tapes and requirements to submit, compliance of all of which took
plaintiff almost eight (8) years to finish, when, in truth and in fact, defendant had
(3) FIFTY THOUSAND [PESOS] (P50,000.00) as and for attorney's fees; no intention to pay, defendant should be ordered to pay plaintiff no less than
andcralawlibrary PESOS: ONE HUNDRED THOUSAND (P100,000.00) exemplary damages, so that
other government institutions may be warned that they must not unjustly enrich
themselves at the expense of the people they serve.23
(4) Cost of suit.22

In its answer, UP denied liability and alleged that PHILAB had no cause of action
PHILAB alleged, inter alia, that:
against it because it was merely the donee/beneficiary of the laboratory furniture
in the BIOTECH; and that the FEMF, which funded the project, was liable to the
3. Sometime in August 1982, defendant, through its officials, particularly MR. PHILAB for the purchase price of the laboratory furniture. UP specifically denied
WILLIAM PADOLINA, Director, asked plaintiff to supply and install several obliging itself to pay for the laboratory furniture supplied by PHILAB.
laboratory furnitures and equipment at BIOTECH, a research laboratory of herein
defendant located at its campus in College, Laguna, for a total contract price of
After due proceedings, the trial court rendered judgment dismissing the
PESOS: TWO MILLION NINE HUNDRED THIRTY-NINE THOUSAND FIFTY-EIGHT &
complaint without prejudice to PHILAB's recourse against the FEMF. The fallo of
90/100 (P2,939,058.90);
the decision reads:
4. After the completion of the delivery and installation of said laboratory
WHEREFORE, this case is hereby DISMISSED for lack of merit without prejudice
furnitures and equipment at defendant's BIOTECH Laboratory, defendant paid
to plaintiff's recourse to the assets of the Marcos Foundation for the unpaid
three (3) times on installment basis:
balance of P792,939.49.
a) P600,000.00 as per Official Receipt No. 253 dated August 24, 1982;
SO ORDERED.24
b) P800,000.00 as per Official Receipt No. 256 dated October 22, 1982;
Undaunted, PHILAB appealed to the Court of Appeals (CA) alleging that the trial
court erred in finding that:
c) P836,119.52 as per Official Receipt No. 202 dated August 11, 1983;
1. the contract for the supply and installation of subject laboratory furniture and
equipment was between PHILAB and the Marcos Foundation; and,
2. the Marcos Foundation, not the University of the Philippines, is liable to pay it to the petitioner. The respondent submits that the petitioner, being the
the respondent the balance of the purchase price.25 recipient of the laboratory furniture, should not enrich itself at the expense of the
respondent.
The CA reversed and set aside the decision of the RTC and held that there was
never a contract between FEMF and PHILAB. Consequently, PHILAB could not be The petition is meritorious.
bound by the MOA between the FEMF and UP since it was never a party thereto.
The appellate court ruled that, although UP did not bind itself to pay for the It bears stressing that the respondent's cause of action is one for sum of money
laboratory furniture; nevertheless, it is liable to PHILAB under the maxim: "No predicated on the alleged promise of the petitioner to pay for the purchase price
one should unjustly enrich himself at the expense of another." of the furniture, which, despite demands, the petitioner failed to do. However,
the respondent failed to prove that the petitioner ever obliged itself to pay for the
The Present Petition laboratory furniture supplied by it. Hence, the respondent is not entitled to its
claim against the petitioner.
Upon the denial of its motion for reconsideration of the appellate court's decision,
UP, now the petitioner, filed its Petition for Review contending that: There is no dispute that the respondent is not privy to the MOA executed by the
petitioner and FEMF; hence, it is not bound by the said agreement. Contracts
I. THE COURT OF APPEALS ERRED WHEN IT FAILED TO APPLY THE LAW ON take effect only between the parties and their assigns.30 A contract cannot be
CONTRACTS BETWEEN PHILAB AND THE MARCOS FOUNDATION. binding upon and cannot be enforced against one who is not a party to it, even if
he is aware of such contract and has acted with knowledge thereof.31 Likewise
II. THE COURT OF APPEALS ERRED IN APPLYING THE LEGAL PRINCIPLE OF admitted by the parties, is the fact that there was no written contract executed
UNJUST ENRICHMENT WHEN IT HELD THAT THE UNIVERSITY, AND NOT THE by the petitioner, the respondent and FEMF relating to the fabrication and
MARCOS FOUNDATION, IS LIABLE TO PHILAB.26 delivery of office and laboratory furniture to the BIOTECH. Even the CA failed to
specifically declare that the petitioner and the respondent entered into a contract
of sale over the said laboratory furniture. The parties are in accord that the FEMF
Prefatorily, the doctrinal rule is that pure questions of facts may not be the
had remitted to the respondent partial payments via checks drawn and issued by
subject of appeal by certiorari under Rule 45 of the 1997 Rules of Civil Procedure,
the FEMF to the respondent, through Padolina, in the total amount
as this mode of appeal is generally restricted to questions of law.27 However, this
of P2,288,573.74 out of the total cost of the project of P2,934,068.90 and that
rule is not absolute. The Court may review the factual findings of the CA should
the respondent received the said checks and issued receipts therefor to the FEMF.
they be contrary to those of the trial court.28 Correspondingly, this Court may
There is also no controversy that the petitioner did not pay a single centavo for
review findings of facts when the judgment of the CA is premised on a
the said furniture delivered by the respondent that the petitioner had been using
misapprehension of facts.29
ever since.
On the first assigned error, the petitioner argues that the CA overlooked the
We agree with the petitioner that, based on the records, an implied-in-fact
evidentiary effect and substance of the corresponding letters and communications
contract of sale was entered into between the respondent and FEMF. A contract
which support the statements of the witnesses showing affirmatively that an
implied in fact is one implied from facts and circumstances showing a mutual
implied contract of sale existed between PHILAB and the FEMF. The petitioner
intention to contract. It arises where the intention of the parties is not expressed,
furthermore asserts that no contract existed between it and the respondent as it
but an agreement in fact creating an obligation. It is a contract, the existence
could not have entered into any agreement without the requisite public bidding
and terms of which are manifested by conduct and not by direct or explicit words
and a formal written contract.
between parties but is to be deduced from conduct of the parties, language used,
or things done by them, or other pertinent circumstances attending the
The respondent, on the other hand, submits that the CA did not err in not transaction. To create contracts implied in fact, circumstances must warrant
applying the law on contracts between the respondent and the FEMF. It, likewise, inference that one expected compensation and the other to pay.32 An implied-in-
attests that it was never privy to the MOA entered into between the petitioner fact contract requires the parties' intent to enter into a contract; it is a true
and the FEMF. The respondent adds that what the FEMF donated was a sum of contract.33 The conduct of the parties is to be viewed as a reasonable man would
money equivalent to P29,000,000, and not the laboratory equipment supplied by
view it, to determine the existence or not of an implied-in-fact contract.34 The Business is still slow and we will appreciate having these funds as soon as
totality of the acts/conducts of the parties must be considered to determine their possible to keep up our operations.
intention. An implied-in-fact contract will not arise unless the meeting of minds is
indicated by some intelligent conduct, act or sign.35 We look forward to hearing from you regarding this matter.

In this case, the respondent was aware, from the time Padolina contacted it for Very truly yours,
the fabrication and supply of the laboratory furniture until the go-signal was
given to it to fabricate and deliver the furniture to BIOTECH as beneficiary, that PHILAB INDUSTRIES, INC.37
the FEMF was to pay for the same. Indeed, Padolina asked the respondent to
prepare the draft of the contract to be received by the FEMF prior to the
The respondent even wrote former President Aquino seeking her assistance for
execution of the parties (the respondent and FEMF), but somehow, the
the payment of the amount due, in which the respondent admitted it tried to
respondent failed to prepare one. The respondent knew that the petitioner was
collect from her predecessor, namely, the former President Ferdinand E. Marcos:
merely the donee-beneficiary of the laboratory furniture and not the buyer; nor
was it liable for the payment of the purchase price thereof. From the inception,
the FEMF paid for the bills and statement of accounts of the respondent, for YOUR EXCELLENCY:
which the latter unconditionally issued receipts to and under the name of the
FEMF. Indeed, witness Lirio testified: At the instance of the national government, subject laboratory furnitures were
supplied by our company to the National Institute of Biotechnology & Applied
Q: Now, did you know, Mr. Witness, if PHILAB Industries was aware that it was Microbiology (BIOTECH), University of the Philippines, Los Baños, Laguna, in
the Marcos Foundation who would be paying for this particular transaction for the 1984.
completion of this particular transaction?chanroblesvirtualawlibrary
Out of the total contract price of PESOS: TWO MILLION NINE HUNDRED THIRTY-
A: I think they are fully aware. NINE THOUSAND FIFTY-EIGHT & 90/100 (P2,939,058.90), the previous
administration had so far paid us the sum of P2,236,119.52 thus leaving a
balance of PESOS: ONE MILLION FOUR HUNDRED TWELVE THOUSAND SEVEN
Q: What is your basis for saying so?chanroblesvirtualawlibrary
HUNDRED FORTY-EIGHT & 61/100 (P1,412.748.61) inclusive of interest of 24%
per annum and 30% exchange rate adjustment.
A: First, I think they were appraised by Dr. Padolina. Secondly, there were
occasions during our inspection in Los Baños, at the installation site, there were
On several occasions, we have tried to collect this amount from your
occasions, two or three occasions, when we met with Mr. Navasero who is the
predecessor, the latest of which was subject invoice (01643) we submitted to DR.
President, I think, or manager of PHILAB, and we appraised him that it was really
W. PADOLINA, deputy director of BIOTECH. But this, notwithstanding, our claim
between the foundation and him to which includes (sic) the construction company
has remained unacted upon up to now. Copy of said invoice is hereto attached for
constructing the building. He is fully aware that it is the foundation who (sic)
easy reference.
engaged them and issued the payments.36
Now that your excellency is the head of our government, we sincerely hope that
The respondent, in its Letter dated March 26, 1986, informed the petitioner and
payment of this obligation will soon be made as this is one project the Republic of
sought its assistance for the collection of the amount due from the FEMF:
the Philippines has use of and derives benefit from.38

Dear Dr. Padolina:

Admittedly, the respondent sent to the petitioner its bills and statements of
accounts for the payments of the laboratory furniture it delivered to the petitioner
May we request for your much-needed assistance in the payment of the balance which the petitioner, through Padolina, transmitted to the FEMF for its payment.
still due us on the laboratory furniture we supplied and installed two years ago? However, the FEMF failed to pay the last statement of account of the respondent
chanroblesvirtualawlibrary because of the onset of the EDSA upheaval. It was only when the respondent lost
all hope of collecting its claim from the government and/or the PCGG did it file The essential requisites for the application of Article 22 of the New Civil Code do
the complaint against the petitioner for the collection of the payment of its last not obtain in this case. The respondent had a remedy against the FEMF via an
delivery of laboratory furniture. action based on an implied-in-fact contract with the FEMF for the payment of its
claim. The petitioner legally acquired the laboratory furniture under the MOA with
We reject the ruling of the CA holding the petitioner liable for the claim of the FEMF; hence, it is entitled to keep the laboratory furniture.
respondent based on the maxim that no one should enrich itself at the expense of
another. IN LIGHT OF ALL THE FOREGOING, the petition is GRANTED. The assailed
Decision of the Court of Appeals is REVERSED AND SET ASIDE. The Decision of
Unjust enrichment claims do not lie simply because one party benefits from the the Regional Trial Court, Makati City, Branch 150, is REINSTATED. No costs.
efforts or obligations of others, but instead it must be shown that a party was
unjustly enriched in the sense that the term unjustly could mean illegally or SO ORDERED
unlawfully.39

Moreover, to substantiate a claim for unjust enrichment, the claimant must

unequivocally prove that another party knowingly received something of value to
which he was not entitled and that the state of affairs are such that it would be
unjust for the person to keep the benefit.40 Unjust enrichment is a term used to
depict result or effect of failure to make remuneration of or for property or
benefits received under circumstances that give rise to legal or equitable
obligation to account for them; to be entitled to remuneration, one must confer
benefit by mistake, fraud, coercion, or request.41 Unjust enrichment is not itself a
theory of reconvey. Rather, it is a prerequisite for the enforcement of the
doctrine of restitution.42

Article 22 of the New Civil Code reads:

Every person who, through an act of performance by another, or any other

means, acquires or comes into possession of something at the expense of the
latter without just or legal ground, shall return the same to him. (Boldface
supplied)

In order that accion in rem verso may prosper, the essential elements must be
present: (1) that the defendant has been enriched, (2) that the plaintiff has
suffered a loss, (3) that the enrichment of the defendant is without just or legal
ground, and (4) that the plaintiff has no other action based on contract, quasi-
contract, crime or quasi-delict.43

An accion in rem verso is considered merely an auxiliary action, available only

when there is no other remedy on contract, quasi-contract, crime, and quasi-
delict. If there is an obtainable action under any other institution of positive law,
that action must be resorted to, and the principle of accion in rem verso will not
lie.44