Title
Goldenrod, Inc. vs. Court of Appeals
Case
G.R. No. 126812
Decision Date
Nov 24, 1998
A property sale agreement between BARRETTO REALTY and GOLDENROD collapsed due to GOLDENROD's failure to pay. GOLDENROD rescinded the contract, demanding the return of P1M earnest money. The Supreme Court ruled in GOLDENROD's favor, holding that the earnest money, forming part of the purchase price, must be returned as no forfeiture clause existed, preventing unjust enrichment.
seller
real estate
earnest money

Case Summary (G.R. No. 126812)

Parties, Transactions, and Material Dates

In 1988, the corporate obligation of BARRETTO & SONS to UCPB remained unpaid, and foreclosure was described as imminent. GOLDENROD made an offer to buy the property. On 25 May 1988, through its president Sonya G. Mathay, GOLDENROD wrote Anthony Que and stated that the offer was accepted with amendments on interest payment frequency and the period for removal of trusses, steel frames, and similar items. The letter enclosed earnest money of P1 million, which GOLDENROD stated “shall form part of the purchase price,” and requested acknowledgement of receipt.

When the term of existence of BARRETTO & SONS expired, all its assets and liabilities, including the Quiapo property, were transferred to BARRETTO REALTY. The parties’ arrangement then required GOLDENROD to pay (a) P24.5 million representing the outstanding obligation of BARRETTO REALTY with UCPB as of 30 June 1988, and (b) P20 million as the balance of the purchase price to be paid in installments within a three-year period, with interest at 18% per annum.

The buyer did not pay the P24.5 million on the bank’s deadline. GOLDENROD requested an initial one-month extension up to 31 July 1988, which the bank granted. On 31 July 1988, GOLDENROD sought another extension of sixty (60) days, but UCPB denied it. By then, BARRETTO REALTY was able to cause reconsolidation of the forty-three (43) titles into two (2) titles—Lots 1 and 2—issued on 4 August 1988, an act described as made pursuant to GOLDENROD’s earlier request. BARRETTO REALTY claimed expenses of P250,000.00 for the reconsolidation.

Because UCPB denied the extension, on 30 August 1988 the broker-agent Alicia P. Logarta, acting for GOLDENROD, informed Anthony Que that GOLDENROD could not go through with the purchase due to circumstances beyond its fault (the denial of extension). The same letter demanded refund of the P1 million earnest money. BARRETTO REALTY, on 31 August 1988, sold Lot 2 to Asiaworld Trade Center Phils., Inc. (ASIAWORLD) for P23 million. On 13 October 1988, BARRETTO REALTY executed a dacion deed transferring Lot 1 to UCPB, which then sold it to ASIAWORLD for P24 million.

On 12 December 1988, and later on 7 February 1989, Logarta and then GOLDENROD through its lawyer demanded return of the earnest money, but BARRETTO REALTY did not comply. On GOLDENROD’s complaint filed with the Regional Trial Court of Manila, it sought return of P1 million and payment of damages including lost interests or profits.

Trial Court Proceedings and Ruling

In its answer, private respondents contended that the agreement of the parties provided that the P1 million earnest money would be forfeited to answer for losses and damages should GOLDENROD fail to comply with the terms of the purchase agreement.

On 15 March 1991, the trial court ruled in GOLDENROD’s favor. It ordered private respondents, jointly and severally, to pay P1,000,000.00 with legal interest from 9 February 1989 until fully paid, P50,000.00 representing unrealized profits, and P10,000.00 as attorneys’ fees. The trial court found no written agreement on forfeiture of the earnest money if the sale did not push through. It held that the earnest money was intended to form part of the purchase price, and it concluded that refusal to return the money after the sale failed amounted to a violation of Arts. 22 and 23 of the Civil Code against unjust enrichment.

Appellate Review and the Petition

Dissatisfied, the private respondents appealed to the Court of Appeals, which reversed the trial court and dismissed the complaint. GOLDENROD then petitioned the Supreme Court, assigning error to the Court of Appeals for disregarding the trial court’s factual finding that the earnest money should be returned in the absence of an express forfeiture stipulation.

The Parties’ Positions on Earnest Money and Forfeiture

GOLDENROD argued that the Court of Appeals erred in holding for the private respondents despite the absence of a specific stipulation allowing forfeiture. It maintained that, without a clear and express agreement, a forfeiture would enable the vendor to keep money advanced as part of the purchase price, which would amount to unjust enrichment.

Private respondents, by contrast, defended their refusal to refund by asserting that the agreement effectively made the earnest money forfeitable as liquidated damages for losses and injuries that might be suffered by the vendor if the buyer failed to comply.

Core Legal Issues

The principal question was whether, in the absence of a specific stipulation, the seller of real estate could keep the earnest money to answer for damages when the sale failed because of the buyer’s fault. A related issue followed from that framing: whether the earnest money, as an advance payment forming part of the purchase price, could properly be retained by the vendor without violating the Civil Code’s prohibition against unjust enrichment, especially after the buyer had signaled non-consummation and the vendor sold the property to third parties.

Legal Basis and Reasoning

The Supreme Court anchored its ruling on Art. 1482 of the Civil Code, which provides that when earnest money is given in a contract of sale, it is considered part of the purchase price and proof of the perfection of the contract. The Court emphasized that GOLDENROD’s 25 May 1988 letter expressly stated that the P1 million earnest money “shall form part of the purchase price,” and that the respondents did not object to this characterization.

Because the earnest money was treated as an advance payment that must be deducted from the total price, the Court reasoned that the parties could not have intended its forfeiture when the buyer failed to pay the balance, particularly in the absence of a clear and express agreement on forfeiture.

The Court also addressed rescission. It noted that GOLDENROD, through its agent, informed private respondents that it would no longer push through with the purchase after the bank denied its requested extensions. Thus, the Court treated the buyer’s act as an extrajudicial rescission of the agreement. It cited University of the Philippines v. de los Angeles for the proposition that the right to rescind contracts is not absolute and is subject to scrutiny by the proper court. It further relied on Adelfa Properties, Inc. v. Court of Appeals, where the Court held that rescission of reciprocal contracts may be extrajudicial unless successfully impugned in court, and that a party’s silence in the face of rescission—when it does not oppose the rescission and does not protest the grounds—may indicate admission of the rescinding party’s claim.

The Court found that private respondents did not oppose the rescission claimed by GOLDENROD. It further observed that, as the Court of Appeals had found, BARRETTO REALTY sold Lot 2 to ASIAWORLD one day after Anthony Que received the broker’s rescission letter. It later conveyed ownership of Lot 1 by dacion to UCPB, which then sold it to ASIAWORLD. These subsequent transfers supported the conclusion that the contract was effectively called off and that the vendor had moved to dispose of the property.

Applying Art. 1385 of the Civil Code, the Court held that rescission creates the obligation to return the things which were the object of the contract, together with their fruits and interest. As a consequence, the vendor was obliged to return the purchase price paid by the buyer when the sale was rescinded, or when the transaction was called off and the property had already been sold to a third person. The Court cited Halili v. Doret and Palay Inc. v. Clave for these principles.

The Court therefore ruled that, by virtue of GOLDENROD’s extrajudicial rescission without opposition and with the vendor’s subsequent sales to third parties, BARRETTO REALTY, as vendor, had the obligation to return the P1,000,000.00 earnest money plus legal interest from the date of notice of rescission, which the Court identified as 30 August 1988, until full payment.

The Court also stressed the inequity of allowing BARRETTO REALTY to retain the buyer’s payment while simultaneously appropriating the proceeds of the second sale, a sce

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