Litonjua vs. L & R Corporation

A contractual stipulation granting a right of first refusal is distinct from an option contract and does not require a consideration separate from that of the principal contract; the consideration for such right is deemed built into the reciprocal obligations of the parties, making it valid and enforceable under Article 1420 (divisible contracts) and independently of Article 1479 (option contracts).

The case involves a mortgage contract executed between petitioners (mortgagors) and respondent L & R Corporation (mortgagee) containing provisions limiting the mortgagor's right to sell the property and granting the mortgagee a right of first refusal. After petitioners sold the mortgaged property to a third party without honoring the right of first refusal, respondent sought to enforce the contractual stipulations, leading to litigation concerning the validity of the contractual provisions and the consequent rescission of the sale.

• Petitioners Spouses Reynaldo K. Litonjua and Erlinda P. Litonjua and Phil. White House Auto Supply, Inc. executed a mortgage contract with respondent L & R Corporation.
• Paragraph 8 of the mortgage contract limited the mortgagor's right to sell the property without the mortgagee's consent, which the Court previously declared void as constituting pactum commissarium.
• Paragraph 9 granted respondent Corporation a right of first refusal should the mortgagor decide to sell the property, requiring the mortgagor to first offer the property to the mortgagee at the price it was willing to accept from third parties.
• On August 6, 1974, petitioners executed a Deed of Sale conveying the mortgaged property to Philippine White House Auto Supply, Inc. without first offering it to respondent Corporation in accordance with Paragraph 9.
• In its Decision dated December 9, 1999, the Supreme Court rescinded the Deed of Sale and upheld the validity of Paragraph 9 as an enforceable right of first refusal.
• Petitioners filed a Motion for Partial Reconsideration raising three grounds: (I) Paragraph 9 is null and void ab initio as part of a "tandem" with void Paragraph 8 designed to subvert the prohibition against pactum commissarium; (II) the rescission of the Deed of Sale was never invoked as a defense and is thus deemed waived; and (III) the rescission deprived petitioners of due process.
• Petitioners additionally argued that Paragraph 9 is unenforceable for lack of consideration under Article 1479 of the Civil Code, claiming it is an option contract without distinct consideration, and that the contract is a contract of adhesion requiring strict interpretation against respondent.

• Paragraphs 8 and 9 constitute an inseparable "package" or tandem designed to subvert the prohibition against pactum commissarium; therefore, the invalidity of Paragraph 8 automatically renders Paragraph 9 invalid.
• Paragraph 9 is null and void ab initio for lack of consideration as mandated by Article 1479 of the Civil Code, arguing that the Court's finding that the consideration for the pre-emptive right is incorporated in the loan amount is a presumption without basis.
• The stipulation in Paragraph 9 constitutes an option contract requiring distinct consideration, which is absent in this case.
• The rescission of the Deed of Sale dated August 6, 1974 was never invoked as a defense by respondent Corporation in the proceedings below and is thus deemed waived under the rules of procedure.
• The decision rescinding the Deed of Sale deprived petitioners of their basic right to due process since they were never given the opportunity to confront the issue of rescission.
• The contract is a contract of adhesion and should be strictly interpreted against respondent Corporation, with ambiguities resolved in favor of the petitioners who are the weaker parties.

• Paragraphs 8 and 9 are separate and independent provisions; under Article 1420 of the Civil Code, the invalidity of Paragraph 8 does not affect the enforceability of Paragraph 9 as they are severable without doing violence to the manifest intention of the parties.
• Paragraph 9 constitutes a right of first refusal, not an option contract, and therefore does not require separate consideration under Article 1479; the consideration is built into the reciprocal obligations of the loan-mortgage contract.
• Respondent consistently invoked its right of first refusal throughout the proceedings, making rescission the necessary and automatic consequence of petitioners' violation thereof; thus, the defense was not waived.
• Petitioners were not deprived of due process because they were given ample opportunity to meet the issue of violation of the right of first refusal, upon which the rescission was properly anchored.
• Petitioners, being educated businesspersons, cannot claim to be disadvantaged parties so as to warrant strict interpretation of the contract against respondent, especially since the stipulations are plain and unambiguous.

• Procedural Issues:
  • Whether petitioners can belatedly raise the invalidity of Paragraph 9 in a motion for reconsideration when they remained silent on this provision in the lower courts
  • Whether the defense of rescission of the Deed of Sale was deemed waived for having been allegedly never invoked by respondent Corporation
  • Whether petitioners were deprived of due process by the rescission order
• Substantive Issues:
  • Whether Paragraph 9 (right of first refusal) is valid and enforceable despite the nullity of Paragraph 8 (pactum commissarium) under the principle of divisible contracts
  • Whether a right of first refusal requires separate consideration under Article 1479 of the Civil Code to be valid
  • Whether the contract provision should be strictly interpreted against respondent as a contract of adhesion under Article 24 of the Civil Code

• Procedural:
  • The Court held that petitioners cannot belatedly raise the issue of invalidity of Paragraph 9 at the motion for reconsideration stage because they had remained silent regarding this provision throughout the lower court proceedings, concentrating their objections solely on Paragraph 8; issues not timely raised below cannot be raised for the first time on appeal or motion for reconsideration.
  • The Court ruled that rescission was not waived because respondent Corporation consistently invoked its right of first refusal, and rescission was the necessary relief arising from the violation of such right; the invocation of the right of first refusal necessarily carried with it the prayer for rescission of the unauthorized sale.
  • The Court held that petitioners were not deprived of due process because they were given the opportunity to meet the issue of violation of the right of first refusal upon which the rescission was anchored, and they were able to present their arguments thereon.
• Substantive:
  • Paragraphs 8 and 9 are separate provisions of the contract; applying Article 1420 of the New Civil Code, the invalidity of Paragraph 8 (pactum commissarium) does not automatically render Paragraph 9 invalid, as the illegal term can be separated from the legal ones without doing violence to the manifest intention of the parties.
  • Paragraph 9 constitutes a right of first refusal, not an option contract under Article 1479; a right of first refusal is an integral part of the principal contract (loan-mortgage) and does not require separate consideration because the consideration is built into the reciprocal obligations of the parties—the obligation or promise of each party is the consideration for that of the other.
  • The contract is not subject to strict interpretation against respondent as a contract of adhesion because petitioners are educated businesspersons who cannot claim to be the weaker or disadvantaged parties, and the stipulations in Paragraph 9 are plain and unambiguous, leaving no room for interpretation.

• Pactum Commissarium — A stipulation in a mortgage contract that prohibits the mortgagor from alienating the mortgaged property or that automatically vests ownership of the property in the mortgagee upon the mortgagor's default is void as contrary to public policy; however, such invalidity does not automatically invalidate other severable provisions of the contract.
• Right of First Refusal vs. Option Contract — A right of first refusal is a contractual grant giving the holder the priority to match the offer of a third party to purchase the property, integrated into the principal contract and requiring no separate consideration; an option contract is a separate and distinct contract granting the privilege to buy within an agreed time at a determined price, which requires distinct consideration under Article 1479 to be binding.
• Divisible Contracts (Article 1420) — In case of a divisible contract, if the illegal terms can be separated from the legal ones, the latter may be enforced; the test is whether the valid provisions can stand independently without the invalid ones.
• Contract of Adhesion (Article 24) — While courts must be vigilant for the protection of parties at a disadvantage in contractual relations, strict interpretation against the drafter applies only when the party is morally dependent, ignorant, indigent, or otherwise handicapped, and when the stipulations are obscure or ambiguous; clear and unambiguous terms control regardless of the contract's adhesive nature.

• "To be sure, paragraphs 8 and 9 are separate provisions of the subject contract and the invalidity of one does not automatically render the other invalid."
• "Petitioners' contention that absent a consideration therefor, the right of first refusal embodied in paragraph 9 is void ab initio is misplaced. Such contention loses sight of the difference between a right of first refusal and an option contract where a separate consideration is, indeed, required."
• "The consideration for the lease includes the consideration for the right of first refusal."
• "Rescission was the necessary relief arising out of the violation of the right of first refusal."
• "Here, petitioners, being not only educated but businesspersons as well, cannot claim being the weaker or disadvantaged parties in the subject contract so as to call for a strict interpretation against respondent Corporation."

• Equatorial Realty Development, Inc. vs. Mayfair Theater, Inc., 264 SCRA 483 (1996) — Controlling precedent establishing that a right of first refusal is distinct from an option contract and does not require separate consideration because the consideration is built into the reciprocal obligations of the principal contract.
• Beaumont vs. Prieto (1916) — Established the principle that option contracts require distinct consideration to be valid and enforceable.
• Ang Yu Asuncion vs. Court of Appeals — Discussed the perfection of contracts of sale and the nature of option contracts under Article 1479 of the Civil Code.
• Vda. De Quirino vs. Palarca — Held that in reciprocal contracts, the obligation or promise of each party is the consideration for that of the other.
• Ayala Corporation vs. Ray Burton Development Corporation, 294 SCRA 48 (1998) — Discussed the application of strict interpretation to contracts of adhesion only when the party is disadvantaged and the terms are ambiguous.
• Velayo vs. Court of Appeals, 107 Phil. 587 — Cited regarding the separability of invalid provisions in divisible contracts under Article 1420.
• Rizal Commercial Banking Corporation vs. Court of Appeals, G.R. No. 133107, March 25, 1999 — Cited regarding the interpretation of clear and unambiguous contractual stipulations.

• Article 1420 of the New Civil Code — Provides that in case of a divisible contract, if illegal terms can be separated from legal ones, the latter may be enforced.
• Article 1479 of the New Civil Code — Requires that an accepted unilateral promise to buy or sell a determinate thing for a price certain be supported by a consideration distinct from the price to be binding; interpreted as applicable only to option contracts, not rights of first refusal.
• Article 1458 of the Civil Code — Defines the contract of sale and its essential elements (price certain and determinate thing).
• Article 1324 of the Civil Code — Governs the withdrawal of offers where the period is not supported by consideration.
• Article 19 of the New Civil Code — Mandates that every person must, in the exercise of rights and performance of duties, act with justice, give everyone his due, and observe honesty and good faith.
• Article 24 of the New Civil Code — Requires courts to be vigilant for the protection of parties who are at a disadvantage in contractual relations due to moral dependence, ignorance, indigence, mental weakness, tender age, or other handicap.

• Davide, Jr., C.J. — Reiterates his original vote and joins Justice Vitug's separate opinion.
• Vitug, J. — Reiterates his separate opinion filed in the original Decision.
• Mendoza, J. — Reiterates his previous vote from the original Decision.