PHILIPPINE NATIONAL OIL CORPORATION v.

KEPPEL PHILIPPINE HOLDINGS

THE 1976 LEASE AGREEMENT

In 1976, Respondent Keppel entered into a lease agreement with Luzon Stevedoring Corporation
(Lusteveco) over 11 hectares of land located in Batangas. The lease period was for 25 years and for a
consideration of P2.1 million pesos as the rental fee which at the option of Lusteveco, could be totally
or partially converted into equity shares in Keppel.

STIPULATIONS

The Stipulations of the Contract of Lease are as follows:

1.) First, at the end of the 25-year lease period, Keppel has the option to purchase the land for
P4.09 million pesos which at the option of Lusteveco, be converted into equity shares in
Keppel, provided that it is constitutionally qualified to purchase lands in the country.
2.) If at the end of such period, Keppel was still not qualified to purchase the same, the Contract
of Lease would be automatically renewed for another 25 years, and Keppel can still exercise
its option to purchase until the 30th year of the contract which was in 2006 subject to the same
conditions of being constitutionally qualified to purchase the lands.
3.) Lusteveco also warranted not to sell or assign its rights over the land without the prior written
consent of Keppel.

PHILIPPINE NATIONAL OIL CORPORATION (PNOC) ACQUIRES THE RIGHTS OF LAND FROM
LUSTEVECO

Subsequently, the petitioner PNOC acquired the rights over the land from Lusteveco and Keppel did
not object to it as the lease agreement was annotated in PNOC’s title.

KEPPEL EXERCISES ITS OPTION TO BUY

On December 8, 2000, Keppel informed PNOC that it had met the constitutional requirement to own
lands in the Philippines and expressed its readiness to exercise its option to purchase. However,
despite Keppel’s demands, PNOC did not answer, pushing Keppel to file a complaint for specific
performance before the RTC against PNOC.

THE RTC AND CA RULED IN FAVOR OF KEPPEL

The RTC and CA upheld the right of Keppel to acquire the lands -- explaining that since the option
contract was embodied in the lease agreement, which was a reciprocal contract, the consideration
for such was the obligation which each of the parties assumed.
ARGUMENTS OF THE PARTIES BEFORE THE SUPREME COURT

FOR PNOC (Petitioner)

• Before the Supreme Court, PNOC argues that the option contract was void as it lacks a
separate consideration as required by Art. 1479 of the Civil Code. PNOC alleges that the
option contract is distinct from the main contract of lease and must be supported by a
consideration other than the rental fees provided in the lease agreement.

FOR KEPPEL (Respondent)

• On the other hand, Keppel posits that the requirement of a separate consideration for an
option contract is only applicable when the option contract is granted in a separate contract.
In this case, the option is embodied in a reciprocal contract, hence, for Keppel, the option is
supported by the same consideration supporting the main contract. (following the ruling of
Vda. De Quirino v. Palarca).

ISSUE: THE VALIDITY OF THE OPTION CONTRACT: WHETHER THE OPTION TO PURCHASE THE
LAND GIVEN TO KEPPEL IS SUPPORTED BY A SEPARATE VALUABLE CONSIDERATION

RULE: The Court ruled that NO. The option to purchase the land was not supported by any
separate consideration. An option contract must be supported by a separate consideration that
is either clearly specified as such in the contract or duly proven by the offeree/promisee.

An option contract is defined in the second paragraph of Art. 1479 of the Civil Code which provides
that:

An accepted 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.

An option contract is a contract where one-person (the oferror/promissor) grants to another person
(the offeree/promisee) 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 have the essential elements of subject matter, consent, and consideration.
Although an option contract is deemed a preparatory contract to the principal contract of sale, it is
separate and distinct therefrom, as such, its essential elements should be distinguished from those
of a sale.
 ELEMENTS OPTION CONTRACT SALE CONTRACT
SUBJECT MATTER The right of privilege to buy a determinate The subject matter is the
thing for a price certain. determinate thing itself.
CONSENT The acceptance by the offeree of the The offeree asserts his or her
offeror’s promise to sell (or buy) the right or privilege to buy or sell
determinate thing within a specified which constitutes his or her
period. consent to the sales contract.
CONSIDERATION The consideration may be anything of The purchase price must be in
Is sufficient if value. money or its equivalent.
there is benefit to
the offeree or any
detriment to the
offeror.

Here, Keppel argues that a separate consideration is not necessary to support its option to buy
because the option is one of the stipulations of the lease contract following the ruling of Vda. De
Quirino v. Palarca. However, the Court stated that such a ruling was taken out of context and was
erroneously applied. The Court explained that a reciprocal contract should be closely scrutinized
and assessed whether it contains additional concessions that the parties intended to
constitute as a consideration for the option contract, separate from that of the purchase price.

VOID OPTION CONTRACT

In the present case, the agreement provided that should Keppel exercise its option to buy, Lusteveco
could opt to convert the purchase price into equity shares in Keppel. Is such an option sufficient as
a separate consideration for Keppel’s option to buy? The Court reiterates that the consideration of an
option contract need not be monetary. However, when the consideration is not monetary, it must
be clearly specified as such in the option contract or clause.

In this case, the Court found that there was nothing in the stipulations indicating that the grant to
Lusteveco of the option to convert the purchase price into equity shares in Keppel was intended by
the parties as the consideration for Keppel’s option to buy the land. Keppel also did not present any
evidence to support such findings. On the contrary, the option to convert the purchase price into
shares should be deemed part of the consideration for the contract of sale itself, since the shares
are merely an alternative to the actual cash price.

For uniformity and consistency in contract interpretation, the Court ruled 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 exists. As the Agreement did not categorically refer to any consideration supporting Keppel’s
option to buy and Keppel failed to prove the existence of a separate consideration, the Court held
that an option contract was non-existent in this case. (no perfected option contract)
VALID UNACCEPTED OFFER TO BUY OR SELL

However, applying the Sanchez v. Rigos doctrine, the absence of consideration supporting the
option contract, does not invalidate an offer to buy or to sell. An option unsupported by a separate
consideration stands as an unaccepted offer to buy or sell which may be withdrawn by the offeror at
any time prior to the communication of the offeree’s acceptance. When properly accepted, a mutual
promise to buy or sell under the first paragraph of 1479 of the Civil Code ensues and the parties’
respective obligations become reciprocally demandable.

In this case, Keppel timely accepted the offer to buy the land as when it communicated it to PNOC,
the latter did not withdraw the offer. As such, a contract to sell ensued and Keppel can rightfully
demand from PNOC to comply with its obligations.

SC DECISION

Affirms the CA ruling upholding Keppel’s option to buy the land and Remands the case to the RTC to
determine whether Keppel had met the required Filipino equity ownership.

PERTINENT PROVISIONS

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.

Art. 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 promisor if the promise is supported by a consideration distinct from the price.

DOCTRINES
Sanchez v. Rigos (Controlling Doctrine) Vda. De Quirino v. Palarca (Basis for Keppel’s Claim)
An accepted unilateral promise can only have a The option to buy the leased property is supported by
binding effect if supported by consideration, the same consideration as that of the lease itself: “in
meaning the option can still be withdrawn, even if reciprocal contracts”, the obligation or promise of
accepted, if the same is not supported by any each party is the consideration for that of the other.
consideration.

This reconciled the apparent conflict between 1324

and 1479 provisions of the Civil Code.
How was the Vda. De Quirino Ruling applied erroneously? - the option to buy given to the lessee Palarca
by the lessor Quirino was in fact supported by a separate consideration: Palarca paid a higher amount of rent
and, if he does not exercise the option to buy the leased property, gave Quirino the option to buy the
improvements he introduced thereon. These additional concessions were separate from the purchase price
and deemed by the Court as sufficient consideration to support the option contract.
Southwestern Sugar Doctrine (Abandoned Already) was based on the reasoning that Article 1479 of the
Civil Code is distinct from Article 1324 of the Civil Code and is a provision that specifically governs options
to buy (or to sell)
- 扎克