PHIL. NATIONAL OIL V.

KEPPEL HOLDINGS 798 SCRA 65

1324 – Option Contract
(Distinction between Earnest Money and Option Money)

FACTS: Almost 40 years ago or on August 6, 1976, Keppel Holdings (Keppel) entered into a Lease Agreement with Lusteveco covering 11 hectares of land Batangas. The lease
was for a period of 25 years for a consideration of P2.1M. At the option of Lusteveco, the rental fee could be totally or partially converted into equity shares in Keppel.

At the end of the 25-year period, Keppel was given the “firm and absolute option to purchase” the land for P4.09M provided that it had acquired the necessary qualification to
own land under Philippine laws at the time the option is exercised. When the lease agreement was executed, less than 60% of the shareholding was Filipino-owned thus, it was
not yet constitutionally qualified to acquire private lands.

At the end of the 25-year lease period or in 2001, Keppel remained unqualified to own private lands, the agreement provided that the lease would be automatically renewed for
another 25 years. Keppel was further allowed to exercise the option to purchase the land up to the 30th year of lease or in 2006, also on the condition that, by then, it would have
acquired the requisite qualification to own land in the Philippines. PNOC acquired the land from Lusteveco.

On 2000, Keppel wrote PNOC infirming that at least 60% of its shares were now Filipino-owned and expressed its readiness to exercise its option to purchase the land. PNOC
did not favorably respond to Keppel’s repeated demands. Keppel then filed a complaint for specific performance.

RTC ruled in favor of Keppel and ordered PNOC to execute a deed of absolute sale upon payment by Keppel of the P4.09M purchase price. CA affirmed RTC ruling.

ISSUE: WON the option contract is valid

RULING: An option contract is a contract where one-person (the offeror) grants to another person (offeree) the right or privilege to buy or to sell a determinate thing at a fixed
price, if he or she chooses to do so within an agreed period.

As a contract it must necessarily have the essential elements of subject matter, consent and consideration. Even though it is deemed as a preparatory contract to the principal
contract of sale, it is separate and distinct therefrom.

Option Contract Sale

Subject Matter Right or privilege to buy The determinate thing
or to sell a determinate itself.
thing for a price certain

Consent Acceptance by the offeree Acceptance of the offer

of the offeror’s promise to itself constitutes as
sell or to buy a consent to the sales
determinate thing. contract.

Consideration Anything of value Purchase price; money or

its equivalent

Paragraph 5 of the agreement provided that should Keppel exercise its option to buy, Lusteveco could opt to convert the purchase price into equity shares in Keppel.

The consideration for an option contract does not need to be monetary and may be anything of value. However, when the consideration is not monetary, the consideration must be
clearly specified as such in the option contract.

When the written agreement itself does not state the consideration for the option contract, the offeree or promisee bears the burden of proving existence of a separate consideration
for the option.

There is nothing in the Agreement indicating that the grant of Lusteveco of the option to convert purchase price for Keppel shares was intended as consideration.

For uniformity and consistency, the better rule to follow is that the consideration for the option contract should be clearly specified as such in the option contract or clause.
Otherwise the offeree must bear the burden of proving that a separate consideration for the option contract exist.

Hence, the Court held that Given our finding that the Agreement did not categorically refer to any consideration to support Keppel’s option to buy and for Keppel’s failure to
present evidence in this regard, we cannot uphold the existence of an option contract in this case.

The absence of a consideration supporting the option contract, however, does not invalidate an offer to buy. An option unsupported by a separate consideration stands as an
unaccepted offer to buy (or to sell) which when properly accepted ripens into a contract of sale.

Article 1324. When the offerer has allowed the offeree a certain period to accept, the offer may be withdrawn at any time before acceptance by communicating such withdrawal,
except when the option is founded upon a consideration, as something paid or promised.

Article 1479. A promise to buy and sell a determinate thing for a price certain is reciprocally demandable.
An accepted unilateral promise to buy or to sell a determinate thing for a price certain is binding upon the promissor if the promise is supported by a consideration distinct from
the price.

The Court en banc held that there is no distinction between the two provisions.

Thus, when an offer is supported by a separate consideration, a valid option contract exists, there is a contracted offer which the offeror cannot withdraw from without incurring
liability in damages. On the other hand, when the offer is not supported by a separate consideration, the offer stands but, in the absence of a binding contract, the offeror
may withdraw it anytime.

In both cases, once the acceptance of the offer is duly communicated before withdrawal of offer, a bilateral conduct to buy and sell is generated.

As early as 1994, Keppel expressed its desire to exercise its option to buy the land. By 2000 upon meeting the proportion but PNOC backtracked. When Keppel communicated its
acceptance, the offer to purchase Bauan stood, the offer was accepted, a contract to the sell the land can be demanded.

***
We have to make that distinction – offers with valuable consideration and offers without valuable consideration.

An option contract and option money, which is paid for in an option contract, is an exception in Art. 1324. You will go through this again on the Law on Sales

We will discuss the rules on advertisements. This is provided in Art. 1325 – 1326.
Art. 1325 – what does “mere invitations to make an offer” mean?

Example: When you see a billboard of Coke which advertises the 8 oz. Coke product with SRP of PhP 12.00. The next day, you decide to go to the Coke plant to buy Coke and
argue that the advertisement was their offer to sell you Coke, and you are giving your acceptance. “Here is PhP 12.00, give me Coke!”

Is that correct?
No. Advertisements are merely proposals of suggested retail price. When you go to retailers or grocery store, there is usually a markup; otherwise, the grocery will go bankrupt.

These advertisements are NOT offers. They are mere invitations to make an offer.

How about the price tags on the grocery items? Are those offers? Of course. The price tags indicate the consideration to be offered. The moment you pay for it, there is a
contract of sale perfected by mere consent.
So those are some of the rules on advertisements. It’s not that interesting when it comes to Oblicon, because it is always just related to contracts of sale. However, in your
Intellectual Property Laws, there is something called Unfair Competition. When there are false statements in an advertisement in relation to certain goods, it can bring about
criminal liability. So that is the more interesting law that talks about advertisements, marketing, etc. So if you are more business-minded, you wait for 2 nd year because that is
where you will encounter laws on advertisements, marketing, trademarks.

But, for your purposes, just know the RULES ON ADVERTISEMENTS in relation to OFFERS for your ObliCon subject.