Signs of bad faith

A buyer in a contract of sale must comply with his obligation in good faith. This is the rule applied in this case between the spouses Mike and Linda and their friend, Randy.

Mike and Linda owned three parcels of land in Los Angeles California, USA. Sometime in 1973, they transferred their rights, interest and title over the property in favor of Randy for a consideration of $200,000 payable in 12 monthly installments either in the US or Philippine currency. Paragraph 4 of the Deed provides that if Randy is able to sell the property at a profit, he should pay an additional 20% of the net profit but not exceeding $100,000 since their agreed price was $150,000 lower than the actual value of the properties.

Eleven years later, Randy transferred ownership of the three lots to a company of which he was president for “valuable consideration”. After about ten months the company in turn sold the lands to a partnership that included Ricky, also for “valuable consideration”.

When Mike and Linda learned about the sale of the lots, they demanded payment of the additional sum due them. In reply Randy wrote the US lawyer of the spouses admitting that he had sold the properties and that he would pay them what he owed them in the sum of US$ 100,000 as soon as he got the proceeds of the sale.

After about three years of waiting for such payment, the couple already filed a suit for declaratory relief against Randy and the buyers in California, USA. They asked the court to order Randy to pay them $100,000 with interest from date of first transfer to Randy’s company up to date of judgment. But the US Court just dismissed the case for lack of cause of action because Randy already admitted to the spouses’ lawyer that he owed them the said amount.

So in 1990, the couple sued Randy here in the Philippines before the Regional Trial Court to recover the $100,000 pursuant to Paragraph 4 of their agreement. For his defense, Randy alleged that he has already paid the principal amount due. And while he does not actually deny the full import of his obligation under paragraph 4, he claimed that he had been unable to sell the lots for a profit. He also contended that the couple’s action had already prescribed.

After trial, the RTC dismissed Mike and Linda’s complaint ruling that Randy had already paid the principal consideration due on the sale and that for the additional consideration provided in paragraph 4, the spouses did not have a valid claim because they were not able to prove that Randy sold the lots for profit. Was the RTC correct?

No. The parties themselves agreed in paragraph 4 that the price of $200,000 was lower by at least $150,000 than the actual value of the property. And this is their reason for providing a profit sharing in the event Randy was able to resell the lots to others. From this it is clear that the parties did not contemplate that Randy will own, take possession of and use the lots on a long term basis, but to have them resold to others so that the spouses could recoup their loss in the transfer made to him.

A buyer who enters into a contract of sale assumes to pay his obligation in good faith. While good faith is a state of the mind, the steps taken in fulfilling his obligation constitute the facts expressing good faith or lack of it.

In this case, it is implicit in paragraph 4 that Randy must resell the lots to make a profit within a reasonable time as the ordinary course of business of selling land dictates. Yet he waited for 11 years clearly showing his intention not to share the profits since actions based on contracts ordinarily prescribes in 10 years. Indeed he raised prescription as part of his defense.

He even concealed any sale of the land to genuine third parties by putting in two layers of sales in favor of his own firms both by way of grants.  By doing this he already violated the intention of the parties to resell the lots to third persons for a profit and not to give them away as gifts. Consequently this is a clear attempt on the part of Randy to defraud the couple of their share on the profits.

Randy’s main defense that he was unable to sell the lots for profit is belied by his letter to the couple’s lawyer in the U.S. where he admitted that he had already conditionally sold the lots and that he would pay them as soon as he gets the proceeds of the sale. Even the U.S. court affirmed that Randy owed the couple $100,000 when it dismissed their action for declaratory relief. This admission directly contradicts his theory that he had not made substantial profits from the sale.

Hence it is but fair and just that Mike and Linda be awarded $100,000 as damages equivalent to the maximum profit they would have earned had Randy done the right thing under their contract (Silverio vs, Almeda etc. et.al., G.R. 178255, November 24, 2009).

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