G.R. No. 177939; January 18, 2012
STARBRIGHT SALES ENTERPRISES, INC., Petitioner, vs. PHILIPPINE REALTY CORPORATION, MSGR. DOMINGO A. CIRILOS, TROPICANA PROPERTIES AND DEVELOPMENT CORPORATION and STANDARD REALTY CORPORATION, Respondents.

FACTS

On April 17, 1988, Ramon Licup wrote Msgr. Domingo A. Cirilos, representing The Holy See and Philippine Realty Corporation (PRC), offering to buy three parcels of land for ₱1,240.00 per square meter. Licup enclosed a ₱100,000.00 check to “close the transaction,” undertook to clear the land of illegal settlers, and promised to pay the balance upon title transfer and clearing. Msgr. Cirilos signed the conforme portion and accepted the check. Licup later stopped payment on the check and, in an April 26, 1988 letter, requested the titles be transferred instead to petitioner Starbright Sales Enterprises, Inc. (SSE), enclosing a new check. SSE’s representatives did not sign this letter.
Subsequent correspondence showed ongoing negotiations. On November 29, 1988, Msgr. Cirilos asked SSE to remove the occupants or he would return the ₱100,000.00. On January 24, 1989, SSE replied with an “updated proposal,” offering to comply if the price was lowered to ₱1,150.00 per square meter. On January 26, 1989, Msgr. Cirilos rejected this, counter-offering at ₱1,400.00 per square meter on an “as is, where is” basis and giving SSE seven days to accept, enclosing a refund check. On February 4, 1989, SSE asserted that a perfected contract existed based on the April 17, 1988 letter and that Msgr. Cirilos could not amend its terms.
The land was later sold to Tropicana Properties on March 30, 1989, and subsequently to Standard Realty on August 4, 1989. SSE filed a complaint for annulment of sale and reconveyance. The Regional Trial Court (RTC) ruled in favor of SSE, finding a perfected contract in the April 17, 1988 letter. The Court of Appeals (CA) reversed, holding no perfected contract existed.

ISSUE

Whether or not the Court of Appeals erred in holding that no perfected contract of sale existed between SSE and the land owners represented by Msgr. Cirilos.

RULING

The Supreme Court DISMISSED the petition and AFFIRMED the Court of Appeals Decision. No perfected contract of sale existed between SSE and the respondents.
The Court held that while the April 17, 1988 letter between Licup and Msgr. Cirilos constituted a perfected contract of sale, a subjective novation occurred when Licup, in his April 26, 1988 letter, proposed to substitute SSE as the buyer. Novation requires: 1) a previous valid obligation; 2) agreement of all parties to a new contract; 3) extinguishment of the old obligation; and 4) birth of a new obligation. Here, the proposed substitution opened a new negotiation stage between SSE and the owners. The subsequent exchange of letters (SSE’s “updated proposal” and Msgr. Cirilos’s counter-offer) demonstrated there was no meeting of the minds on essential terms like who would evict the occupants and the final purchase price, thus no perfected sale was reached between them.
Furthermore, under the principle of relativity of contracts, SSE could not impose the terms of the April 17, 1988 agreement to which it was not a party. The ₱100,000.00 could not be considered earnest money, which applies only to a perfected sale. The negotiations between SSE and Msgr. Cirilos remained at the offer and counter-offer stage. Msgr. Cirilos did not act in bad faith by later selling the property to Tropicana Properties.