The Court’s Ruling
Three elements are needed to create a perfected contract: 1) the consent of the contracting parties; (2) an object certain which is the subject matter of the contract; and (3) the cause of the obligation which is established.[6] Under the law on sales, a contract of sale is perfected when the seller, obligates himself, for a price certain, to deliver and to transfer ownership of a thing or right to the buyer, over which the latter agrees.[7] From that moment, the parties may demand reciprocal performance.
The Court believes that the April 17, 1988 letter between Licup and Msgr. Cirilos, the representative of the property’s owners, constituted a perfected contract. When Msgr. Cirilos affixed his signature on that letter, he expressed his conformity to the terms of Licup’s offer appearing on it. There was meeting of the minds as to the object and consideration of the contract.
But when Licup ordered a stop-payment on his deposit and proposed in his April 26, 1988 letter to Msgr. Cirilos that the property be instead transferred to SSE, a subjective novation took place.
A subjective novation results through substitution of the person of the debtor or through subrogation of a third person to the rights of the creditor. To accomplish a subjective novation through change in the person of the debtor, the old debtor needs to be expressly released from the obligation and the third person or new debtor needs to assume his place in the relation.[8]
Novation serves two functions – one is to extinguish an existing obligation, the other to substitute a new one in its place – requiring concurrence of four requisites: 1) a previous valid obligation; 2) an agreement of all parties concerned to a new contract; 3) the extinguishment of the old obligation; and 4) the birth of a valid new obligation.[9]
Notably, Licup and Msgr. Cirilos affixed their signatures on the original agreement embodied in Licup’s letter of April 26, 1988. No similar letter agreement can be found between SSE and Msgr. Cirilos.
The proposed substitution of Licup by SSE opened the negotiation stage for a new contract of sale as between SSE and the owners. The succeeding exchange of letters between Mr. Stephen Cu, SSE’s representative, and Msgr. Cirilos attests to an unfinished negotiation. Msgr. Cirilos referred to his discussion with SSE regarding the purchase as a “pending transaction.”[10]
Cu, on the other hand, regarded SSE’s first letter to Msgr. Cirilos as an “updated proposal.”[11] This proposal took up two issues: which party would undertake to evict the occupants on the property and how much must the consideration be for the property. These are clear indications that there was no meeting of the minds between the parties. As it turned out, the parties reached no consensus regarding these issues, thus producing no perfected sale between them.
Parenthetically, Msgr. Cirilos did not act in bad faith when he sold the property to Tropicana even if it was for a lesser consideration. More than a month had passed since the last communication between the parties on February 4, 1989. It is not improbable for prospective buyers to offer to buy the property during that time.
The P100,000.00 that was given to Msgr. Cirilos as “deposit” cannot be considered as earnest money. Where the parties merely exchanged offers and counter-offers, no contract is perfected since they did not yet give their consent to such offers.[12] Earnest money applies to a perfected sale.
SSE cannot revert to the original terms stated in Licup’s letter to Msgr. Cirilos dated April 17, 1988 since it was not privy to such contract. The parties to it were Licup and Msgr. Cirilos. Under the principle of relativity of contracts, contracts can only bind the parties who entered into it. It cannot favor or prejudice a third person.[13] Petitioner SSE cannot, therefore, impose the terms Licup stated in his April 17, 1988 letter upon the owners.
