Lim vs. Court of Appeals

A contract of sale is perfected by mere meeting of the minds on the subject matter and price; conditions subsequent to perfection (imposed on performance) merely give the injured party the option to refuse performance or waive the condition under Article 1545, but do not extinguish the contract automatically or allow the breaching seller to unilaterally rescind.

The case involves a dispute over a parcel of land in Quezon City covered by TCT No. 193230. The seller undertook to eject squatters as a condition to the buyer’s payment of the balance, but failed to do so despite being given additional funds and time.

• Filed in RTC (Quezon City, Branch presided by Judge Efren N. Ambrosio) as a complaint for consignation by Luna against the Lims.
• RTC Decision (December 28, 1992): Dismissed the complaint; ordered Luna to comply with the sale upon payment of the balance (P3.8M); awarded P500,000 moral damages and P50,000 attorney’s fees to petitioners.
• Appealed to CA: The CA reversed the RTC, allowed the consignation, and held the contract was conditional upon ejectment; non-fulfillment extinguished the buyers’ right to demand the sale.
• Elevated to SC: Petition for review granted; CA decision reversed; RTC decision reinstated with modification on moral damages.

• September 2, 1988: Liberty H. Luna executed a receipt agreeing to sell a 1,013.6 sqm lot to Vicente and Michael Lim for P3,547,600.
• Earnest Money: P200,000 paid via Metrobank check; to form part of purchase price.
• Key Condition: Paragraph 3 of the receipt required Luna to eject squatters within 60 days; failure to do so obligated her to refund the P200,000 (plus P100,000 liquidated damages, though Luna crossed out the latter portion upon signing).
• Payment of Balance: P3,347,600 to be paid in full after total vacation of premises.
• January 17, 1989: Meeting at broker’s office where parties agreed to increase price to P4,000,000 (rounding off the area) to facilitate ejectment; balance became P3,800,000.
• February 22, 1989: Luna wrote petitioners offering to return the earnest money, claiming the contract ceased to exist due to her failure to eject squatters.
• March 10, 1989: Luna filed a complaint for consignation of the P200,000, alleging petitioners unjustly refused to accept the refund.
• Evidence on Ejectment: Luna claimed she sought help from the Quezon City Building Official and City Engineer’s Office, but no actual demolition occurred; no ejectment case was filed in court.

• The contract was a perfected contract of sale, not a conditional contract to sell; earnest money under Article 1482 proves perfection.
• The ejectment condition was imposed on performance, not perfection; under Article 1545, the buyer (injured party) has the option to waive the condition and proceed with the sale or refuse to proceed—not the seller.
• Luna, as the party who failed to perform her obligation, is the breaching party and cannot unilaterally rescind without violating mutuality of contracts.
• Consignation was improper because no valid obligation to refund existed; petitioners elected to proceed with the sale.
• Luna acted in bad faith: she made only token efforts to eject squatters (no court case filed), accepted a price increase to facilitate ejectment, then tried to back out.

• The contract was a contract with a conditional obligation; the obligation to sell and deliver depended on the fulfillment of the condition (ejectment within 60 days).
• The non-fulfillment of the condition resulted in the automatic extinguishment of the buyers’ right to demand the sale.
• Consignation was proper because Luna’s obligation to refund the earnest money under paragraph 3 became a clear and determinate debt upon her failure to eject.
• Luna exerted earnest efforts to eject squatters by coordinating with the Building Official and City Engineer’s Office; she was not in bad faith.

• Procedural Issues: N/A
• Substantive Issues:
  • Whether the contract between the parties was a perfected contract of sale or a conditional contract to sell dependent on the ejectment of squatters.
  • Whether the failure to eject squatters within 60 days extinguished the contract or merely gave the buyers the option to waive the condition under Article 1545 of the Civil Code.
  • Whether the seller (Luna), as the breaching party, could unilaterally rescind the contract via consignation or otherwise.
  • Whether Luna was liable for moral damages and attorney’s fees for breach of contract in bad faith.

• Procedural: N/A
• Substantive:
  • Perfected Contract: The agreement was a perfected contract of sale. Under Article 1475, meeting of minds on subject (the lot) and price (P4M as agreed upon later) perfected the contract. Article 1482—the earnest money given is proof of perfection.
  • Condition on Performance vs. Perfection: The ejectment condition was imposed on performance of the obligation, not on the perfection of the contract. Failure of a condition on performance gives the injured party (the buyer) the option under Article 1545 to either refuse to proceed or waive the condition—not the breaching seller.
  • No Unilateral Rescission by Breaching Party: Luna, having failed to perform her obligation, is not the injured party. Under Article 1191 and the principle of mutuality of contracts, she cannot rescind the contract. The right to rescind belongs to the injured party (petitioners), who elected to proceed with the sale.
  • Consignation Improper: No valid obligation to refund existed because petitioners validly elected to waive the condition and proceed; thus, consignation was invalid.
  • Bad Faith and Damages: Luna’s failure to file an ejectment case despite having funds and time, and her sudden attempt to rescind after agreeing to a price increase, demonstrated bad faith. The SC modified the RTC’s award: moral damages reduced from P500,000 to P100,000 (to avoid enriching petitioners); attorney’s fees of P50,000 affirmed under Article 2208(4)(5).

• Perfected Contract of Sale (Art. 1475 & 1482) — A contract of sale is perfected by mere consent on the subject matter and price; no specific form is required. Earnest money given in a contract of sale is considered part of the price and proof of the perfection of the contract.
• Condition on Performance vs. Condition on Perfection —
• Condition on perfection: Failure prevents the birth of the contract.
• Condition on performance: Failure gives the injured party the option either to refuse to proceed with the contract or to waive performance of the condition (Art. 1545). The validity of the contract is not affected.
• Waiver of Condition (Art. 1545) — Where the seller’s obligation is subject to a condition not performed, the buyer may:
  1. Refuse to proceed with the contract; or
  2. Waive performance of the condition.
  3. The choice belongs to the injured party (the buyer here), not the party who failed to perform.
  4. Mutuality of Contracts — The validity and performance of a contract cannot be left to the will of one of the parties. A breaching party cannot unilaterally extinguish the contract.
  5. Rescission (Art. 1191) — The power to rescind reciprocal obligations is implied, but the right belongs to the injured party. The party who failed to perform cannot avail of rescission.
  6. Moral Damages (Art. 2220) — Awardable in case of breach of contract where the defendant acted fraudulently or in bad faith. The amount should not be intended to enrich the complainant or penalize the defendant.

• "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."
• "Under the agreement, private respondent is obligated to evict the squatters on the property. The ejectment of the squatters is a condition the operative act of which sets into motion the period of compliance by petitioner of his own obligation... This option clearly belongs to petitioner and not to private respondent." (citing Romero v. CA)
• "Private respondent is not the injured party. She cannot rescind the contract without violating the principle of mutuality of contracts, which prohibits allowing the validity and performance of contracts to be left to the will of one of the parties."

• Romero v. Court of Appeals (250 SCRA 223 [1995]) — Cited as a case "on all fours"; held that ejectment of squatters is a condition on performance giving the buyer the option to waive under Article 1545; established that the breaching seller cannot rescind.
• Dalion v. Court of Appeals (182 SCRA 872 [1990]) — Cited for the principle that a contract of sale is perfected upon meeting of minds on subject and price.
• Korean Airlines Co., Ltd. v. Court of Appeals (234 SCRA 717 [1994]) — Cited for the rule 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 rule that moral damages are not meant to penalize the defendant.

• Article 1475, Civil Code — Perfection of the contract of sale upon meeting of minds on subject and price.
• Article 1482, Civil Code — Earnest money as part of the price and proof of perfection of the contract.
• Article 1545, Civil Code — Obligations subject to conditions; waiver by the injured party.
• Article 1191, Civil Code — Power to rescind reciprocal obligations; right belongs to the injured party.
• Article 2220, Civil Code — Moral damages for breach of contract in bad faith.
• Article 2208(4)(5), Civil Code — Attorney’s fees recoverable where the action against the defendant is clearly unfounded or where defendant acted in gross and evident bad faith.