Co vs. Custodio

A contract of sale is perfected upon the meeting of the minds on the object and the price, and the giving of earnest money serves as proof of such perfection, distinguishing it from an option contract; absent an express stipulation authorizing extrajudicial rescission, a seller cannot unilaterally rescind a contract of sale, and upon judicial rescission, must return the payments received.

On October 9, 1984, Adoracion Custodio verbally agreed to purchase the house and lot of Spouses Henry and Elizabeth Co for $100,000.00. Custodio paid earnest money and made a partial payment but failed to pay the remaining balance on time. The Cos sent letters demanding payment and eventually declared that Custodio lost her "option" to purchase, offering a different property instead. Custodio manifested her readiness to pay the balance for the original property and subsequently filed a complaint when the Cos refused.

• Nature: Verbal contract for the sale of a house and lot located at 316 Beata St., New Alabang Village, Muntinlupa.
• The Agreement: On October 9, 1984, Custodio agreed to buy the Cos' property for $100,000.00.
• Payments: Custodio paid earnest money of $1,000.00 and P40,000.00. The purchase price was to be paid in two installments: $40,000.00 by December 4, 1984, and $60,000.00 by January 5, 1985.
• Partial Payment: On January 25, 1985, Custodio paid $30,000.00 to Melody Co in the United States, but she failed to pay the full amounts by the deadlines.
• Demand and "Forfeiture": On March 15, 1985, the Cos' counsel demanded payment of the $70,000.00 balance. On August 8, 1986, the Cos' counsel sent another letter stating Custodio lost her "option" to purchase the original property, offered a different property, and warned that failure to exercise the option within 30 days would result in the forfeiture of all payments.
• Custodio's Response and Suit: On September 5, 1986, Custodio's counsel informed the Cos she was ready to pay the remaining balance for the original property. On October 24, 1986, she filed the complaint for rescission and return of payments.

Petitioners maintained that the Court of Appeals erred in ruling that Custodio could still exercise her "option" to pay the balance, arguing that she lost this option when she failed to pay after the March 15, 1985 demand. They contended that the August 8, 1986 letter referred to a new option for a different property, and the original option was already lost. They argued they properly extrajudicially rescinded the contract under Article 1191 of the Civil Code, entitling them to damages. They further argued that the Court of Appeals erred in ordering the return of the $30,000.00 because of the forfeiture clause in the August 8 letter, and erred in denying attorney's fees.

Respondent countered that a perfected contract of sale existed rather than an option contract. She argued that the sellers could not unilaterally and extrajudicially rescind the contract, and because she was willing to perform her obligation while the sellers were not, rescission was in order with the obligation to return the payments received.

• Procedural Issues: N/A
• Substantive Issues: Whether the parties entered into an option contract or a perfected contract of sale. Whether the sellers could unilaterally and extrajudicially rescind the contract of sale and forfeit the buyer's payments. Whether the sellers are obligated to return the partial payment of $30,000.00 upon rescission of the contract.

• Procedural: N/A
• Substantive: The Court ruled that the parties entered into a perfected contract of sale, not an option contract. The March 15, 1985 letter showed a meeting of the minds on the object and price. The earnest money given served as proof of the perfection of the sale under Article 1482 of the Civil Code. The Court held that the sellers could not unilaterally and extrajudicially rescind the contract. In the absence of an express stipulation authorizing extrajudicial rescission, the sellers' declaration that the buyer lost her "option" was of no legal effect. Thus, the contract remained subsisting, and the buyer acted within her rights in attempting to pay the balance. The Court affirmed the order to return the $30,000.00. Upon judicial rescission of the contract under Article 1191, Article 1385 of the Civil Code creates the obligation to return the things which were the object of the contract. Since the property was not delivered to the buyer, she had nothing to return, and the sellers were obligated to return the price received. Furthermore, the forfeiture clause in the August 8, 1986 letter was unilaterally imposed and lacked the buyer's consent, making it unenforceable.

• Perfection of Contract of Sale — A contract of sale is a consensual contract perfected at the moment there is a meeting of the minds upon the thing which is the object of the contract and upon the price. The elements are consent, determinate subject matter, and price certain.
• Earnest Money — Earnest money given in a contract of sale is considered part of the purchase price and proof of the perfection of the sale.
• Option Contract — An option is a contract granting a privilege to buy or sell within an agreed time and at a determined price, separate and distinct from the contract that may be entered into upon the consummation of the option, and must be supported by a consideration distinct from the price.
• Extrajudicial Rescission — In the absence of an express stipulation authorizing the sellers to extrajudicially rescind the contract of sale, they cannot unilaterally and extrajudicially rescind the contract.
• Rescission and Mutual Restitution — Rescission creates the obligation to return the things which were the object of the contract, together with their fruits, and the price with its interest; it can be carried out only when he who demands rescission can return whatever he may be obliged to restore. This applies to rescission of reciprocal obligations under Article 1191.

• "An option is a contract granting a privilege to buy or sell within an agreed time and at a determined price. It is a separate and distinct contract from that which the parties may enter into upon the consummation of the option. It must be supported by consideration."
• "In the absence of an express stipulation authorizing the sellers to extrajudicially rescind the contract of sale, the COS cannot unilaterally and extrajudicially rescind the contract of sale."
• "We cannot uphold the forfeiture clause contained in the petitioners' August 8, 1986 letter. It appears that such condition was unilaterally imposed by the COS and was not agreed to by CUSTODIO. It cannot therefore be considered as part of the contract of sale as it lacks the consent of CUSTODIO."

• Equatorial Realty Development, Inc. vs. Mayfair Theater, Inc., 264 SCRA 483 (1996) — Cited for the definition of an option contract.
• Coronel vs. Court of Appeals, 263 SCRA 15 (1996) — Cited for the doctrine that sellers cannot unilaterally and extrajudicially rescind a contract of sale in the absence of an express stipulation.
• Lim vs. Court of Appeals, 263 SCRA 569 (1996) — Cited for the principle that earnest money is considered part of the purchase price and proof of the perfection of the contract.

• Article 1479, Civil Code — Governs option contracts; an accepted unilateral promise to buy or sell is binding if supported by a consideration distinct from the price. The Court used this to distinguish an option contract from a perfected sale.
• Article 1475, Civil Code — Provides that a contract of sale is perfected at the moment there is a meeting of the minds upon the thing and the price. The Court applied this to hold that the transaction was a perfected sale.
• Article 1458, Civil Code — Defines the elements of a valid contract of sale: consent, determinate subject matter, and price certain. The Court found all three elements present.
• Article 1482, Civil Code — Stipulates that earnest money is considered part of the price and proof of the perfection of the contract. The Court applied this to confirm the perfection of the sale based on the earnest money given.
• Article 1191, Civil Code — Provides the power to rescind obligations in reciprocal ones in case of non-compliance by one obligor. The Court applied this to justify the judicial rescission of the contract.
• Article 1385, Civil Code — States that rescission creates the obligation to return the things which were the object of the contract, together with their fruits, and the price with its interest. The Court applied this to order the return of the $30,000.00 partial payment.
• Article 1318, Civil Code — Enumerates the requisites of a contract, including consent. The Court applied this to invalidate the unilaterally imposed forfeiture clause.

Melo, Vitug, Panganiban, and Purisima, JJ.