JOSE BENARES, ET AL., PLAINTIFFS AND APPELLANT VS. CAPITOL SUBDIVISION, INC., DEFENDANT AND APPELLEE.

Benares versus Capitol Subdivision

The Case

This is a civil action for specific performance or damages founded on an alleged option to purchase a parcel of land. Jose Benares and Carmen Benares sued Capitol Subdivision, Incorporated, claiming that the company had granted them an option over one hundred fifty hectares of Hacienda Mandalagan in Bacolod. The case matters because it teaches, with unusual clarity, that an option is not born of hopeful correspondence: the party who indorses an offer must actually hold the power to accept it, and even a genuine option may be lost by abandonment when the parties allow it to lapse beyond the time the transaction demanded.

Procedural History

The plaintiffs commenced the action in the Court of First Instance of Negros Occidental. After trial, that court dismissed the complaint and ordered the plaintiffs to pay the defendant ten thousand pesos as attorney's fees, ten thousand pesos as actual expenses of litigation, and ten thousand pesos as moral, nominal, temperate and exemplary damages, plus the costs of suit. The plaintiffs appealed, and the case reached the Supreme Court on that appeal. The Supreme Court affirmed the decision appealed from, with costs against the plaintiffs.

Facts

Jose Benares Montelibano, father of the plaintiffs, mortgaged the whole of Hacienda Mandalagan to the Philippine National Bank in 1926 to secure an obligation of three hundred thirty one thousand pesos. In 1950, upon the mortgagor's default, the bank filed a foreclosure suit and thereafter acquired the property at public auction. Earlier, on November 8, 1935, the bank had granted Carlos P. Benares an option to purchase the hacienda; Carlos transferred his rights to the defendant, and the bank approved the transfer on January 29, 1936.

In the latter part of 1936, facing difficulties in meeting amortization payments, Alfredo Montelibano, president of the defendant company, asked the bank to sell large portions of the hacienda, those most remote from the provincial highway and least suitable for subdivision. The defendant caused a surveying company to segregate an area of one hundred fifty hectares. On May 15, 1937, the brothers Jose Benares Fernandez and Ernesto Benares offered to buy that area for one hundred thousand pesos. The defendant, which had already asked the bank to sell, referred the offer to the bank. On July 18, 1938, the brothers reiterated the offer at a reduced price of seventy thousand pesos. Having been told that any offer had to be approved by the bank, the plaintiffs, Jose Benares Fernandez and Carmen Benares in lieu of Ernesto, addressed their offer directly to the bank on November 28, 1938, and on December 3, 1938, the defendant indorsed that offer.

On July 24, 1940, the defendant reminded the bank that it had not acted on the offer and asked for authority to sell the same land for as low as fifty thousand pesos. The bank inquired about the status of the offer, and on August 28, 1940, the defendant's president answered that the plaintiffs had already backed out. Only after the war, on August 11, 1948, did the plaintiffs renew their offer to the bank, which referred the matter to the defendant; the defendant replied that it had ceased to be interested. The plaintiffs then sued on September 29, 1949.

Issues

• Whether or not the defendant granted the plaintiffs a binding option to purchase the one hundred fifty hectares, considering that the power to accept the offer and execute the sale belonged to the Philippine National Bank.
• Whether or not the alleged option, assuming one existed, was abandoned by the plaintiffs.

Applicable Provisions

The decision does not quote a statutory article; it construes the contractual stipulation between the bank and the defendant, paragraph 13 of their agreement, which provides:

13. At the request of Capitol Subdivision Inc., and for its account and at its expense, the Bank will execute the corresponding deed of sale to the purchasers of lots who have paid the stipulated purchase price and interest and with respect to which the Bank shall have received the 70% thereof. Capitol Subdivision, Inc., will pay the Bank a special fee of P1.50 for each such deed of sale executed by the bank pursuant hereto.

This stipulation bears on the case because it fixes who may accept an offer and execute the sale, namely the bank and not the defendant.

Ruling

On the first issue, the Court held that no binding option was granted by the defendant. The plaintiffs' offer of November 28, 1938 was contained in their letter to the bank, and the defendant merely indorsed it favorably on December 3, 1938. Under paragraph 13 of the agreement, it was the bank which should accept the offer and execute the sale. All that the defendant could do, as it in fact did, was to negotiate for the sale and recommend the offer favorably; the final determination rested upon the bank. The Court further reasoned that, given the defendant's urgent financial problem and the arrangement that the price of any sale by the bank would be deducted from the amounts due from the defendant, the parties intended the sale to be approved by the bank immediately, or within a reasonable time, for the sale to serve its purpose.

On the second issue, the Court held that the option had been abandoned. It relied not only on oral evidence but on the defendant's memorandum to the bank of August 28, 1940, which stated:

Request No. 3. As regards the sale of 150 hectares with the corresponding sugar quota of 7200 piculs, no action was taken on same because the party who wished to purchase this lots backed out. These lots are Nos. 1205-K-2, 1205-L-1 and 1641 as per blue print plan.

The Court found this statement not self-serving, since the defendant was then still in financial decline, and it was confirmed by the fact that on March 31, 1940 Jose Benares merely leased a portion of the land for five years, renewable for another five years.

Doctrine

An option to purchase is a distinct contract by which one party grants another the power to accept an offer within a period; it cannot arise from a mere indorsement or recommendation by one who does not hold the power to accept and execute the sale. Where the agreement reserves acceptance and execution of the deed of sale to a third party, the intermediary's favorable indorsement creates no demandable option against it. Even a valid option may be lost by abandonment, inferred from the conduct of the parties and the lapse of the reasonable time within which the transaction, by its nature and purpose, had to be consummated.

Disposition

The Supreme Court affirmed the decision of the trial court dismissing the complaint, with costs against the plaintiffs.

Remember This

An option is a power to accept held by the party who can actually sell; a mere indorsement by one who cannot execute the sale creates no option, and an option left unused beyond the reasonable time the transaction demands is deemed abandoned. Examiners use this case to test the nature of an option and the doctrine of abandonment by conduct.