Good Faith in Profit-Sharing Agreements: Lessons from Silverio v. Almeda

The Obligation of Good Faith in Profit-Sharing Land Sales

When parties agree to share profits from a future resale of property, the transaction rests on more than just the written terms. It rests on trust. The Supreme Court's decision in Silverio v. Almeda (G.R. No. 178255, November 24, 2009) clarifies that a seller who conceals the details of a resale—or structures transactions to avoid sharing profits—violates the fundamental duty of good faith that underpins every contract.

The Facts of the Case

In 1973, Ponciano and Eufemia Almeda sold three lots in Los Angeles, California to Ricardo Silverio for $200,000, payable in 12 monthly installments. The agreement contained a profit-sharing clause: if Silverio resold the lots at a profit, the Almedas would receive 20 percent of the net profit, capped at $100,000.

Eleven years later, in 1984, Silverio transferred the lots to Silcor USA, Inc., a company where he served as president. The transfer was made by "grant deed" for "valuable consideration," but the deed also described the transaction as a "gift." Months later, Silcor sold the same lots to Lancaster Properties, a partnership that included Silverio himself. Again, the deed stated only that the transfer was "for valuable consideration" without specifying the amount.

When the Almedas learned of these transactions, they demanded payment under the profit-sharing clause. Silverio wrote to their U.S. lawyer in 1985, admitting he had conditionally sold the property and would pay what he owed once he received the proceeds. But no payment followed.

The Legal Issue

The central question was whether Silverio's transfers of the lots—first to his own company, then to a partnership he belonged to—triggered his obligation to share profits with the Almedas under paragraph 4 of their agreement.

The Supreme Court's Ruling

The Court ruled against Silverio, affirming that he owed the Almedas $100,000, the maximum amount under the profit-sharing clause.

The Court noted that the parties' agreement clearly contemplated that Silverio would resell the lots to third parties for a profit. The Almedas had sold the property at a price below its actual value precisely because they expected to recoup the difference through the profit-sharing arrangement.

Silverio's defense was that he made no profit because the transfers were gifts. But the Court found this hard to believe. His own 1985 letter admitted he had conditionally sold the lots and would pay the Almedas—an admission that contradicted his "gift" theory. If there was no profit, what was he promising to pay?

The Court also emphasized that Silverio alone knew the actual amounts involved in the transfers. By keeping the deeds silent on the consideration and refusing to disclose the figures during trial, he suppressed information that would have shown his profit. Under the rules of evidence, such suppression gives rise to the presumption that disclosure would hurt his interests.

The Duty of Good Faith

The Court anchored its ruling on Article 19 of the Civil Code, which requires every person to act with justice, give everyone his due, and observe honesty and good faith in the performance of duties. This obligation is implied in every contract but is just as binding as the express terms.

The Court observed that Silverio waited 11 years before making any move to resell the lots. Since actions on written contracts prescribe in 10 years under Article 1144, the Court suspected he calculated that delaying beyond that period would extinguish the Almedas' claim. This delay, combined with his layered transfers through his own companies, demonstrated a deliberate scheme to evade his obligations.

Practical Takeaways

• Good faith is an implied term in every contract. Even if the written agreement does not explicitly state it, parties must perform their obligations honestly and without concealment.
• Profit-sharing clauses require transparency. When a resale triggers a profit-sharing obligation, the seller must disclose the actual sale price and terms. Silence or vague deeds will not shield the seller from liability.
• Transfers to related entities do not avoid the obligation. Selling property to one's own company or partnership does not defeat a profit-sharing clause if the transaction is a disguised resale.
• Prescription runs from the breach, not the contract date. The 10-year period to file an action under a written contract begins when the right of action accrues—in this case, when the resale occurred, not when the original agreement was signed.
• Suppression of evidence can be used against a party. Courts may presume that a party who withholds relevant information does so because disclosure would harm their case.

This article is general information and not legal advice. For your specific situation, consult a lawyer or ask ASG Legal AI.