Lim vs. Court of Appeals

In a contract of sale, a condition requiring the seller to eject squatters from the property before delivery and payment of the balance is a condition imposed on the performance of the obligation, not on the perfection of the contract. Under Article 1545 of the Civil Code, the buyer has the option to either refuse to proceed with the contract or waive performance of the condition, and the seller cannot unilaterally rescind the contract by offering to return the earnest money when the buyer elects to proceed with the sale.

• Private respondent Liberty Luna owned a 1,013.6 square meter lot located at the corner of G. Araneta Avenue and Quezon City, covered by TCT No. 193230.
• On September 2, 1988, Luna sold the property to petitioners Vicente and Michael Lim for P3,547,600.00, evidenced by a receipt prepared by Zapata Realty Company.
• The receipt stated that P200,000.00 was paid as earnest money, with the balance of P3,347,600.00 to be paid in full after the squatters/occupants totally vacated the premises.
• Luna assumed full responsibility to eject the squatters within 60 days from receipt of the earnest money, with a stipulation that failure to do so would require her to refund the P200,000.00 (though a provision for P100,000.00 liquidated damages was crossed out by Luna upon signing).
• Luna failed to eject the squatters within the 60-day period despite alleged efforts involving the building official and city engineers.
• On January 17, 1989, the parties met to negotiate a price increase of P500.00 per square meter, rounding off the total price to P4,000,000.00, leaving a balance of P3,800,000.00 after deducting the earnest money.
• Subsequently, Luna attempted to return the earnest money claiming the contract ceased to exist due to her failure to eject the squatters, but petitioners refused to accept the refund.
• On February 22, 1989, Luna notified petitioners of her intent to deposit the earnest money in court by consignation.
• On March 10, 1989, Luna filed a complaint for consignation alleging that her obligation to return the earnest money had arisen due to the unfulfilled condition.

• The legal requisites for a valid consignation were not present, making the consignation improper.
• Luna never really intended to eject the squatters as evidenced by the absence of any ejectment case filed in court.
• Luna used her own failure to eject squatters as an excuse to get out of the contract.
• The Court of Appeals erred in ruling that the non-fulfillment of the ejectment condition resulted in petitioners losing the right to demand the sale, which is contrary to Article 1545 of the Civil Code.
• The Court of Appeals distorted the contract by rewarding rather than sanctioning non-performance of a contractual obligation.
• Luna was in bad faith for failing to exert earnest efforts to eject the squatters, making her liable for damages.

• The failure to eject the squatters within 60 days was a condition precedent that prevented the perfection of the contract or extinguished the obligations thereunder.
• The contract was a "contract with a conditional obligation" where the parties' reciprocal obligations to sell/deliver and to pay the balance depended on the fulfillment of the ejectment condition.
• Upon non-fulfillment of the condition, petitioners lost the right to demand the sale, and Luna's obligation to sell ceased.
• Consignation was proper because the obligation to refund the earnest money was a clear and definite debt.
• Luna exerted earnest efforts to eject the squatters by seeking assistance from the building official and city engineers, and therefore acted in good faith.

• Procedural:
  • Whether the Court of Appeals erred in allowing the consignation of the earnest money.
• Substantive Issues:
  • Whether the failure to eject the squatters within the stipulated period resulted in the automatic extinguishment of the contract of sale or merely gave the buyer the option to waive the condition under Article 1545 of the Civil Code.
  • Whether private respondent Luna was liable for moral damages and attorney's fees for breach of contract.

• Procedural:
  • The Supreme Court held that the consignation was improper. A valid consignation requires the existence of a debt that is due, but in this case, no debt existed because the earnest money formed part of the purchase price of a perfected contract. Since petitioners chose to waive the condition of ejectment and proceed with the sale, Luna had no obligation to return the earnest money; rather, she had an obligation to proceed with the sale upon payment of the balance.
• Substantive:
  • The Court held that there was a perfected contract of sale under Article 1475 of the Civil Code, as there was a meeting of the minds on the subject matter and price, evidenced by the earnest money given under Article 1482.
  • The stipulation regarding ejectment of squatters was a condition imposed on the performance of the obligation (specifically, the seller's obligation to deliver), not a condition on the perfection of the contract.
  • Under Article 1545 of the Civil Code, where the obligation is subject to a condition not performed, the other party may refuse to proceed with the contract or waive performance of the condition. This option belongs to the buyer (petitioners), not the seller.
  • Luna could not unilaterally rescind the contract because she was not the injured party; allowing her to do so would violate the principle of mutuality of contracts under Article 1191.
  • Luna was liable for breach of contract in bad faith for failing to eject the squatters despite having time and resources, and for attempting to rescind the contract after agreeing to a price increase to facilitate ejectment.
  • Moral damages were reduced from P500,000.00 to P100,000.00 because the higher amount would unjustly enrich the petitioners and penalize Luna, contrary to the purpose of moral damages under Article 2220.
  • Attorney's fees of P50,000.00 were affirmed under Article 2208(4)(5) due to Luna's clearly unfounded position and bad faith.

• Perfection of Contract of Sale — A contract of sale is perfected upon the meeting of the minds of the parties on the subject matter and the price, requiring no particular form. Earnest money given serves as proof of the perfection of the contract under Article 1482 of the Civil Code.
• Condition Imposed on Performance vs. Perfection — A condition requiring the ejectment of squatters before payment of the balance is a condition imposed on the performance of the obligation, not on the perfection of the contract. Failure to comply with the former gives the other party the option to refuse to proceed or waive the condition, while failure to comply with the latter prevents contract formation.
• Option to Waive Condition (Article 1545) — In a contract of sale where the seller's obligation is subject to a condition (such as ejectment of squatters), the buyer has the exclusive option either to refuse to proceed with the contract or to waive performance of the condition. The seller cannot compel rescission when the buyer elects to proceed.
• Mutuality of Contracts — Under Article 1191 of the Civil Code, the power to rescind reciprocal obligations is implied in case of breach, but this right belongs only to the injured party. The party who fails to perform his obligation cannot unilaterally rescind the contract.
• Moral Damages for Breach of Contract — Under Article 2220 of the Civil Code, moral damages may be awarded in case of breach of contract where the defendant acted fraudulently or in bad faith, but the amount should not be so excessive as to enrich the plaintiff or penalize the defendant.

• "Whenever earnest money is given in a contract of sale, it shall be considered as part of the price and as proof of the perfection of the contract."
• "Private respondent fails to distinguish between a condition imposed on the perfection of the contract and a condition imposed on the performance of an obligation. Failure to comply with the first condition results in the failure of a contract, while failure to comply with the second condition only gives the other party the option either to refuse to proceed with the sale or to waive the condition."
• "The right of resolution of a party to an obligation under Article 1191 of the Civil Code is predicated on a breach of faith by the other party that violates the reciprocity between them. It is private respondent who has failed in her obligation under the contract."
• "Moral damages are not intended to enrich the complainant at the expense of the defendant or to penalize the defendant."

• Dalion v. Court of Appeals, 182 SCRA 872 (1990) — Cited for the principle that a contract of sale is perfected upon meeting of the minds on the subject and price, and parties can reciprocally demand performance.
• Romero v. Court of Appeals, 250 SCRA 223 (1995) — Cited as a case on all fours with the instant case, establishing that the ejectment of squatters is a condition the operative act of which sets into motion the period of compliance by the buyer, and that the option to waive the condition belongs to the buyer.
• Korean Airlines Co., Ltd. v. Court of Appeals, 234 SCRA 717 (1994) — Cited for the principle that moral damages are not intended to enrich the complainant.
• SIMEX International (Manila), Inc. v. Court of Appeals, 183 SCRA 360 (1990) — Cited for the principle that moral damages are not meant to penalize the defendant.

• Article 1475 (Civil Code) — Defines the perfection of a contract of sale upon meeting of minds on subject matter and price.
• Article 1482 (Civil Code) — Provides that earnest money is considered part of the price and proof of perfection of the contract.
• Article 1545 (Civil Code) — Governs conditions in contracts of sale, giving the injured party the option to refuse to proceed or waive performance of the condition.
• Article 1191 (Civil Code) — Provides for the power to rescind reciprocal obligations in case of breach by the other party.
• Article 2220 (Civil Code) — Allows the award of moral damages for breach of contract where the defendant acted fraudulently or in bad faith.
• Article 2208(4)(5) (Civil Code) — Provides for the recovery of attorney's fees when the civil action is clearly unfounded or when the defendant acted in gross and evident bad faith.