Reyes vs. Lim

A trial court may validly order the deposit of a down payment in court during the pendency of a rescission action based on its equity jurisdiction, when the seller has sold the property to another buyer and seeks rescission, to prevent unjust enrichment and ensure restitution.

On November 7, 1994, David Reyes and Jose Lim entered into a Contract to Sell involving a parcel of land occupied by Harrison Lumber, Inc. The contract stipulated a P28 million purchase price, with P10 million paid as a down payment and the balance due upon the vacation of the premises by the tenants. Reyes subsequently sold the property to Line One Foods Corporation on March 1, 1995, before the balance became due and while the tenants remained in possession. Reyes then filed a complaint for annulment of the contract, while Lim sought the contract's cancellation and the return of his down payment.

• Contract to Sell: Reyes and Lim executed a contract for a Pasay City property. Lim paid a P10 million down payment. The P18 million balance was due on March 8, 1995, upon the vacation of the tenants (Harrison Lumber). A 4% monthly penalty on the down payment was stipulated if the tenants failed to vacate.
• Tenant Dispute: Reyes demanded Harrison Lumber vacate by January 1995. Reyes alleged Lim connived with the tenant to accumulate penalties. The tenant claimed Reyes granted an extension due to relocation difficulties and vacated on April 30, 1995.
• Subsequent Sale: On March 1, 1995, Reyes sold the property to Line One Foods Corporation for P16.7 million. Title was transferred on March 3, 1995. On March 9, 1995, Reyes offered to return the down payment, citing issues with the lessee, but Lim refused.
• Order to Deposit: During the pendency of the rescission suit, Lim moved for Reyes to deposit the P10 million down payment with the court. The trial court granted the motion, and the Court of Appeals affirmed.

• Exclusivity of Provisional Remedies: Petitioner argued that a court cannot order a deposit because it is not among the provisional remedies enumerated in Rules 57 to 61 of the Rules of Court, which are exclusive.
• Equity Cannot Override Law: Petitioner maintained that equity cannot be applied to override statutory law or procedural rules, invoking the principle that equity is applied only in the absence of, and never against, statutory law.

• Equity Jurisdiction: Respondent countered that the trial court could validly issue the order in the exercise of its equity jurisdiction to breathe life and force into substantive law, such as Article 1385 of the Civil Code, given the absence of an applicable provisional remedy.
• Protection of Interest: Respondent argued that the order merely directed the deposit to protect Lim's interest in the down payment and did not automatically return the money to him.

• Equity Jurisdiction vs. Provisional Remedies: Whether a trial court may order the deposit of a down payment during the pendency of an action when deposit is not among the provisional remedies enumerated in the Rules of Court.
• Application of Equity: Whether a trial court may issue such an order on grounds of equity despite the existence of the Rules on Provisional Remedies.

• Equity Jurisdiction vs. Provisional Remedies: The order of deposit was validly issued. There exists a hiatus in the law and the Rules of Court where no specific provisional remedy applies. Pursuant to Article 9 of the Civil Code, courts must render judgment despite the silence or insufficiency of the laws, which calls for the application of equity to fill the open spaces in the law.
• Application of Equity: Equity was properly applied because the case involves the insufficiency of the law, not an instance of equity overruling a positive provision of law. A seller who seeks rescission after selling the property to another cannot refuse to deposit the down payment, as rescission requires restitution under Article 1385 of the Civil Code. Retaining the down payment pendente lite would result in unjust enrichment at the buyer's expense.

• Equity Jurisdiction — Equity fills the open spaces in the law and is applied when statutory or legal jurisdiction is inflexible or insufficient to attain substantial justice. Applied here to justify the deposit of the down payment, filling the hiatus in the Rules of Court regarding provisional remedies to prevent unjust enrichment and ensure restitution.
• Unjust Enrichment — No person may unjustly retain a benefit to the loss of another, or retain money or property of another against the principles of justice, equity, and good conscience. Applied here to prevent the seller from retaining the down payment pendente lite after selling the property to another buyer.
• Restitution as a Precondition to Rescission — Rescission creates the obligation to return the things that are the object of the contract; consequently, it can be carried out only when the person demanding rescission can return whatever he may be obliged to restore. Applied here to require the seller to deposit the down payment, as both parties sought rescission and the seller must be prepared to return what he received.

• "This is not a case of equity overruling a positive provision of law or judicial rule for there is none that governs this particular case. This is a case of silence or insufficiency of the laws. In this case, Article 9 of the Civil Code expressly mandates the courts to make a ruling despite the 'silence, obscurity or insufficiency of the laws.'"
• "By seeking rescission, a seller necessarily offers to return what he has received from the buyer. Such a seller may not take back his offer if the court deems it equitable, to prevent unjust enrichment and ensure restitution, to put the money in judicial deposit."

• Eternal Gardens Memorial Parks Corp. v. IAC, G.R. No. L-73794, 19 September 1988, 165 SCRA 439 — Followed. A party cannot continue to benefit from property or funds in litigation during the pendency of the suit at the expense of whomever the court might ultimately adjudge as the lawful owner.
• Government of the Philippine Islands v. Wagner and Cleland Wagner, 49 Phil. 944 (1927) — Followed. The refund of amounts received under a contract is a precondition to the rescission of the contract.
• Zabat, Jr. v. CA, 226 Phil. 489 (1986) — Distinguished. Petitioner invoked this case for the principle that equity is applied only in the absence of, and never against, statutory law; the Court distinguished the present case as one involving a hiatus in the law rather than a conflict with it.
• Bonzon v. Standard Oil Co. and Osorio, 27 Phil. 141 (1914) — Followed. One person may not enrich himself at the expense of another; a judgment creditor would not be permitted to retain the purchase price of land sold as the property of the judgment debtor after it has been made to appear that the judgment debtor had no title to the land.

• Article 9, Civil Code — Mandates courts to render judgment despite the silence, obscurity, or insufficiency of the laws. Applied as the basis for invoking equity jurisdiction to fill the hiatus in the Rules of Court.
• Article 22, Civil Code — Prohibits a person from acquiring or possessing something at the expense of another without just or legal ground. Applied to prevent the seller from unjustly retaining the down payment.
• Article 1385, Civil Code — Requires that rescission creates the obligation to return the object of the contract and can be carried out only when the person demanding rescission can return what he may be obliged to restore. Applied to justify the deposit of the down payment to ensure restitution.
• Rules 57-61, Rules of Court — Enumerate the provisional remedies (preliminary attachment, preliminary injunction, receivership, replevin, and support pendente lite). Interpreted as not precluding the issuance of a deposit order under equity jurisdiction when no specific provisional remedy applies.

Davide, Jr., C.J., Vitug, Ynares-Santiago, and Azcuna, JJ.