G.R. No.

147575

October 22, 2004

TERESITA B. MENDOZA, petitioner,

vs.
BETH DAVID, respondent.
DECISION
CARPIO, J.:
The Case
This is a petition for review 1 of the Decision2 dated 10 October 2000 and
the Resolution dated 20 March 2001 of the Court of Appeals in CA-G.R. SP
No. 58087. The Court of Appeals dismissed Teresita B. Mendozas
("Mendoza") petition for review for being insufficient in form and
substance and denied her motion to reconsider the Decision.
The Facts
This case3 arose from an action for collection of money with damages that
Mendoza filed against Beth David ("David") before the Metropolitan Trial
Court of Quezon City ("MTC"), Branch 35.
In her complaint, Mendoza alleged that on 17 February 1997, she ordered
three sets of furniture from David worthP185,650 and paid an initial
deposit of P40,650. Mendoza and David agreed on the specifications of the
dining set, sofa set and tea set including the material and quality. On 18
February 1997, Mendoza cancelled some of the furniture she ordered and
David agreed to the cancellation. On 12 April 1997, Mendoza paid an
additional deposit ofP40,000.
When David delivered the dining set to Mendoza on 17 April 1997,
Mendoza rejected the set because of inferior material and poor quality.
Mendoza likewise rejected the sala set and the tea set for the same
reason. When Mendoza requested a refund of her total deposit of P80,650,
David refused. Mendoza then sent David a letter dated 27 May 1997
demanding the refund of her deposit but David ignored the demand
letter.4 The parties failed to arrive at an amicable settlement. Thus,
Mendoza filed a complaint for collection of money with damages. 5

In her Answer, David admitted that she and Mendoza agreed on the
material and quality of the furniture Mendoza ordered since that was the
normal practice for "made to order" furniture. David stated that on 17 April
1997, she delivered some of the furniture which was received by
Mendozas father. However, Mendoza could not pay the balance of the
price and requested payment on installment which David rejected. As a
result of Mendozas non-payment, David reclaimed the furniture already
delivered and informed Mendoza she could get the furniture upon
payment of the balance of P105,000. In the meantime, David stored the
furniture in her warehouse. When David received Mendozas demand
letter, she refused to comply with Mendozas request for a refund of the
deposit since all the three sets of furniture Mendoza ordered were already
finished and delivered on the agreed date. David only retrieved the
furniture due to non-payment of the balance.6
On 2 August 1999, the MTC dismissed Mendozas complaint for lack of
merit. The MTC held that David is not liable to return the deposit Mendoza
paid. The MTC found there was already a perfected contract of sale which
imposes reciprocal obligations on the parties. Mendoza is obligated to pay
the balance of the purchase price while David is obligated to deliver the
three sets of furniture to Mendoza upon payment of the purchase price.
The MTC found no proof of breach of contract on Davids part. Mendoza
failed to present any evidence that the furniture David delivered to her on
17 April 1997 was not in accordance with the agreed specifications.
Besides, the order receipt for the sofa set, tea set and dining set contained
no specifications on the required material or the quality of workmanship.
Mendoza appealed to the Regional Trial Court of Quezon City ("RTC"),
Branch 105, which modified the decision of the MTC. The dispositive
portion of the RTCs decision reads:
WHEREFORE, in the light of the foregoing, the decision appealed
from is affirmed with MODIFICATION in that the plaintiff-appellant
is ordered to pay to the defendant within sixty (60) days from
receipt of this decision the amount of P55,850.00, with legal
interest from 17 April 1997 until fully paid; otherwise, the deposit
ofP80,650.00 will be deemed forfeited and the defendant-appellee
shall, thereafter, be authorized to dispose of the subject furniture.
Upon timely payment of said obligation by the plaintiff-appellant

to the defendant-appellee, the latter is ordered to deliver the

subject furniture to the former.7
The RTC agreed with the MTC that there was a perfected contract of sale.
The RTC found that Mendoza failed to present any proof to show that the
furniture delivered was not in accordance with the agreed specifications.
Applying the doctrine of caveat emptor, the RTC held that Mendoza should
have specified in writing the details of her order. However, the RTC held
that the remaining balance for the furniture ordered was only P55,850
since the total purchase price was reduced to P136,5008 because of the
cancelled orders.

We find the petition partly meritorious. Mendoza substantially complied

with the formal requirements when she filed her motion for
reconsideration with the Court of Appeals. However, to avoid further delay,
the Court will resolve the petition on the merits instead of remanding the
case to the Court of Appeals.
Compliance with the Formal Requirements
The Court of Appeals dismissed the case based on Sections 2 and 3, Rule
42 of the 1997 Rules of Civil Procedure which read:

On 6 November 2000, Mendoza filed a motion for reconsideration which

the Court of Appeals denied. Hence, the instant petition.

SEC. 2. Form and contents. The petition shall be filed in seven (7)
legible copies, with the original copy intended for the court being
indicated as such by the petitioner, and shall (a) state the full
names of the parties to the case, without impleading the lower
courts or judges thereof either as petitioners or respondents; (b)
indicate the specific material dates showing that it was filed on
time; (c) set forth concisely a statement of the matters involved,
the issues raised, the specification of errors of fact or law, or both,
allegedly committed by the Regional Trial Court, and the reasons
or arguments relied upon for the allowance of the appeal; (d) be
accompanied by clearly legible duplicate originals or true copies of
the judgments or final orders of both lower courts, certified correct
by the clerk of court of the Regional Trial Court, the requisite
number of plain copies thereof and of the pleadings and other
material portions of the record as would support the allegations of
the petition.

The Issues

xxx

Mendoza raises the following issues:

SEC. 3. Effect of failure to comply with requirements. The failure

of the petitioner to comply with any of the foregoing requirements
regarding the payment of the docket and other lawful fees, the
deposit for costs, proof of service of the petition, and the contents
of and the documents which should accompany the petition shall
be sufficient ground for the dismissal thereof. (Emphasis supplied)

Mendoza filed a petition for review with the Court of Appeals. On 10

October 2000, the Court of Appeals dismissed the petition for being
insufficient in form and substance. The Court of Appeals held that failure
to append the complaint, answer, position papers, memoranda and other
evidence is sufficient ground to dismiss the petition, citing Sections 2 and
3, Rule 42 of the 1997 Rules of Civil Procedure. Nevertheless, despite the
absence of pleadings and other pertinent documents, the Court of Appeals
ruled that there is no basis for Mendozas claim that the furniture sets did
not meet the agreed specifications. Relying merely on the decisions of the
MTC and the RTC, the Court of Appeals held that factual findings of the
lower courts are entitled to great weight and should not be disturbed
except for cogent reasons.9

1. Whether the Court of Appeals erred in dismissing the petition

for review on the ground that Mendoza failed to attach the
required documents to the petition despite subsequent
compliance by Mendoza in her motion for reconsideration.
2. Whether the Court of Appeals erred in dismissing the petition
despite the fact that the transaction between the parties was one
of sale by description or sample.
The Ruling of the Court

However, Section 6, Rule 1 of the 1997 Rules of Civil Procedure also

provides that rules shall be liberally construed in order to promote their
objective of securing a just, speedy and inexpensive disposition of every
action and proceeding. Indeed, rules of procedure should be used to
promote, not frustrate justice.10 This Court has ruled against the dismissal

of appeals based solely on technicalities in several cases, especially when

the appellant had substantially complied with the formal requirements. 11
In Donato v. Court of Appeals, 12 the Court of Appeals dismissed the
petition on two grounds: (a) the certificate of non-forum shopping was
signed by petitioners counsel and not by petitioner himself; 13 and (b) only
a certified copy of the questioned decision was annexed to the petition
leaving out copies of the pleadings and other material portions of the
record to support the allegations of the petition. This Court reversed the
Court of Appeals dismissal of the case since in petitioners motion for
reconsideration, he submitted a certificate of non-forum shopping signed
by him and attached copies of the pleadings and material portions of the
records. This Court considered the subsequent filing of the certification of
non-forum shopping duly signed by petitioner himself as substantial
compliance which justifies relaxation of the rule. As regards the failure to
attach the necessary pleadings and material portions of the records, this
Court held:
In like manner, the failure of the petitioner to comply with Section
3, paragraph b, Rule 6 of the RIRCA, that is, to append to his
petition copies of the pleadings and other material portions of the
records as would support the petition, does not justify the outright
dismissal of the petition. It must be emphasized that the RIRCA
gives the appellate court a certain leeway to require parties to
submit additional documents as may be necessary in the interest
of substantial justice. Under Section 3, paragraph d of Rule 3 of
the RIRCA, the CA may require the parties to complete the
annexes as the court deems necessary, and if the petition is given
due course, the CA may require the elevation of a complete record
of the case as provided for under Section 3(d)(5) of Rule 6 of the
RIRCA. At any rate, petitioner attached copies of the pleadings and
other material portions of the records below with his motion for
reconsideration. In Jaro vs. Court of Appeals, the Court reiterated
the doctrine laid down in Cusi-Hernandez vs. Diaz and PiglasKamao vs. National Labor Relations Commission that subsequent
submission of the missing documents with the motion for
reconsideration amounts to substantial compliance which calls for
the relaxation of the rules of procedure. xxx (Emphasis supplied)
Similarly, in this case, although Mendoza failed to append the pleadings
and pertinent documents in her petition to the Court of Appeals, Mendoza
rectified her error by filing a motion for reconsideration and appending the
pleadings and documents required by the Court of Appeals. Mendoza

appended copies of the following pleadings and documents in her motion

for reconsideration:
1. Complaint filed in the MTC (Annex A)
2. Davids Answer (Annex B)
3. Pre-Trial Order of the MTC (Annex C)
4. Mendozas Memorandum filed in the MTC (Annex D)
5. Davids Memorandum filed in the MTC (Annex E)
6. Mendozas Memorandum filed in the RTC (Annex F)
7. Davids Comment to the Motion for Reconsideration of Mendoza
(Annex G)
The Complaint that Mendoza appended also contained the following
annexes: (a) the sales invoice dated 17 February 1997 which indicated the
total deposit for the furniture ordered; (b) the letter of Mendoza to David
dated 27 May 1997 demanding the return of the P80,650 deposit; and (c)
the certification to file action from the Office of the Barangay Captain of
Barangay Pasong Tamo, Quezon City.
Instead of denying the Motion for Reconsideration, the Court of Appeals
should have ruled on the merits of the case considering that Mendoza
already submitted the pleadings and documents required by the Court of
Appeals. The rules of procedure are designed to ensure a fair, orderly and
expeditious disposition of cases. 14 As much as possible, appeals should not
be dismissed on a mere technicality in order to afford the litigants the
maximum opportunity for the adjudication of their cases on the merits. 15
Reliance on the Factual Findings of the Lower Courts
Likewise, the Court of Appeals should have refrained from hastily
dismissing the petition through the expediency of applying the doctrine
that factual findings of the lower courts are entitled to great weight. The
doctrine is applicable where there is substantial evidence to support the
findings of fact by the lower court as borne by the records of the case. 16 In
this case, the Court of Appeals admitted that without the pertinent

documents and pleadings, it is deprived of a full opportunity to know all

the facts and issues involved in the case. 17 The doctrine therefore is not
applicable considering the absence of the records of the case to determine
whether substantial evidence supports the factual findings of the lower
court. Instead of relying on the doctrine, the Court of Appeals could have
required Mendoza to submit additional documents in accordance with
Section 3 (d), Rule 3 of the Revised Internal Rules of the Court of
Appeals18 so that it would have a basis for its ruling. Furthermore, the
Court of Appeals could order the Clerk of the RTC to elevate the original
records of the case for a complete adjudication of the case. 19
Made to Order or Sale by Description or Sample?
David alleges that the three sets of furniture were "made to order" in
accordance with the usual practice of furniture stores. On the other hand,
Mendoza insists that the transaction was a sale by sample or description
which can be rescinded as provided under Article 1481 20 of the Civil Code.
There is a sale by sample when a small quantity is exhibited by the seller
as a fair specimen of the bulk, which is not present and there is no
opportunity to inspect or examine the same. 21 To constitute a sale by
sample, it must appear that the parties treated the sample as the
standard of quality and that they contracted with reference to the sample
with the understanding that the product to be delivered would correspond
with the sample.22 In a contract of sale by sample, there is an implied
warranty that the goods shall be free from any defect which is not
apparent on reasonable examination of the sample and which would
render the goods unmerchantable.23
There is a sale of goods by description where "a seller sells things as being
of a particular kind, the buyer not knowing whether the sellers
representations are true or false, but relying on them as true; or as
otherwise stated, where the buyer has not seen the article sold and relies
on the description given to him by the seller, or has seen the goods, but
the want of identity is not apparent on inspection." 24 A sellers description
of the goods which is made part of the basis of the transaction creates a
warranty that the goods will conform to that description. 25 Where the
goods are bought by description from a seller who deals in the goods of
that description, there is an implied warranty that the goods are of
merchantable quality.26

Whether a transaction is a sale by sample, a sale by description or "made

to order" is a question of fact for the trial court to decide from the
evidence presented. In this case, the MTC found that there was a
consummated "made to order" agreement between Mendoza and David.
The Court agrees with the MTC that the transaction in this case was a
"made to order" agreement. There is nothing in the records which would
show that the intent of the parties was for a sale by sample or description.
Whether a sale is by sample or description depends upon the facts
disclosing the intention of the parties. Other than Mendozas bare
allegations that the transaction was a sale by sample or description,
Mendoza failed to produce evidence to substantiate her claim.
The sale of furniture in this case is not a sale by sample. The term sale by
sample does not include an agreement to manufacture goods to
correspond with the pattern.27 In this case, the three sets of furniture were
manufactured according to the specifications provided by the buyer.
Mendoza did not order the exact replica of the furniture displayed in
Davids shop but made her own specifications on the measurement,
material and quality of the furniture she ordered.
Neither is the transaction a sale by description. Mendoza did not rely on
any description made by David when she ordered the furniture. Mendoza
inspected the furniture displayed in Davids furniture shop and made her
own specifications on the three sets of furniture she ordered.
Breach of Contract Not Proven
It is undisputed that there was a perfected contract of sale of furniture
between Mendoza and David. The three sets of furniture were delivered or
ready for delivery within the agreed period. The issue for resolution is
whether there was breach of contract on Davids part. The Court finds
none.
Part of the exhibits David submitted to the MTC were pictures of the sets
of furniture Mendoza ordered. The MTC found the furniture to be strictly in
accordance with the tenor of the contract between Mendoza and David.
The MTC and the RTC, noting the lack of written specifications on the
material and quality of the furniture ordered, held that Mendoza failed to
present any proof to show that the furniture was not in accordance with
the agreed specifications. The records show that the parties agreed that
the furniture should be made of narra. Mendoza admitted that the

furniture delivered was made of narra but was of inferior quality. She also
complained of deep nail marks and rough surface at the back of the table
and chairs. However, Mendoza failed to prove these allegations.
In civil cases, the burden of proof28 rests on the party who asserts the
affirmative of an issue based on the pleadings or the nature of the
case.29 In this case, the burden lies on Mendoza who must prove her
allegation that there was breach of contract. After reviewing the records of
the case, the Court finds that Mendoza failed to substantiate her claim of
breach of contract. Mendoza failed to present any evidence to overcome
the presumption that the transaction was fair and regular. 30
WHEREFORE, the Decision of the Court of Appeals dated 10 October
2000 and the Resolution dated 20 March 2001 are MODIFIED. Petitioner
Teresita B. Mendoza is ordered to pay respondent Beth David the amount
ofP55,850 with interest at 6% per annum from 17 April 1997 until finality
of this Decision and 12% per annum thereafter until full payment. Beth
David is ordered to deliver to Teresita B. Mendoza the three sets of
furniture Mendoza ordered upon her payment of the balance of the
purchase price with interest.
SO ORDERED.

G.R. No. 158635 December 9, 2005

MAGNA FINANCIAL SERVICES GROUP, INC., Petitioner,
vs.
ELIAS COLARINA, Respondent.
DECISION
CHICO-NAZARIO, J.:
The undisputed facts of this case show that on 11 June 1997, Elias
Colarina bought on installment from Magna Financial Services Group, Inc.,
one (1) unit of Suzuki Multicab, more particularly described as follows:
MAKE - SUZUKI MULTICAB
MODEL - ER HT
ENGINE NO. - 834963
FRAME NO. - LTO -067886-RO7-C
COLOR - WHITE1
After making a down payment, Colarina executed a promissory note for
the balance of P229,284.00 payable in thirty-six (36) equal monthly
installments at P6,369.00 monthly, beginning 18 July 1997. To secure
payment thereof, Colarina executed an integrated promissory note and
deed of chattel mortgage over the motor vehicle.
Colarina failed to pay the monthly amortization beginning January 1999,
accumulating an unpaid balance ofP131,607.00. Despite repeated
demands, he failed to make the necessary payment. On 31 October 2000
Magna Financial Services Group, Inc. filed a Complaint for Foreclosure of
Chattel Mortgage with Replevin2 before the Municipal Trial Court in Cities
(MTCC), Branch 2, Legaspi City, docketed as Civil Case No. 4822. 3 Upon
the filing of a Replevin Bond, a Writ of Replevin was issued by the MTCC.
On 27 December 2000, summons, together with a copy of the Writ of
Replevin, was served on Colarina who voluntarily surrendered physical
possession of the vehicle to the Sheriff, Mr. Antonio Lozano. On 02 January

2001, the aforesaid motor vehicle was turned over by the sheriff to Magna
Financial Services Group, Inc.4 On 12 July 2001, Colarina was declared in
default for having filed his answer after more than six (6) months from the
service of summons upon him. Thereupon, the trial court rendered
judgment based on the facts alleged in the Complaint. In a decision dated
23 July 2001, it held:5
WHEREFORE, judgment is hereby rendered in favor of plaintiff Magna
Financial Services Group, Inc. and against the defendant Elias Colarina,
ordering the latter:
a) to pay plaintiff the principal sum of one hundred thirty one thousand six
hundred seven (P131,607.00) pesos plus penalty charges at 4.5% per
month computed from January, 1999 until fully paid;
b) to pay plaintiff P10,000.00 for attorneys fees; and
c) to pay the costs.
The foregoing money judgment shall be paid within ninety (90) days from
the entry of judgment. In case of default in such payment, the one (1) unit
of Suzuki Multicab, subject of the writ of replevin and chattel mortgage,
shall be sold at public auction to satisfy the said judgment. 6
Colarina appealed to the Regional Trial Court (RTC) of Legazpi City, Branch
4, where the case was docketed as Civil Case No. 10013. During the
pendency of his appeal before the RTC, Colarina died and was substituted
in the case by his heirs. 7 In a decision dated 30 January 2002, the RTC
affirmed in toto the decision of the MTCC.8
Colarina filed a Petition for Review before the Court of Appeals, docketed
as CA-G.R. SP No. 69481. On 21 January 2003, the Court of Appeals
rendered its decision9 holding:
. . . We find merit in petitioners assertion that the MTC and the RTC erred
in ordering the defendant to pay the unpaid balance of the purchase price
of the subject vehicle irrespective of the fact that the instant complaint
was for the foreclosure of its chattel mortgage. The principal error
committed by the said courts was their immediate grant, however
erroneous, of relief in favor of the respondent for the payment of the

unpaid balance without considering the fact that the very prayer it had
sought was inconsistent with its allegation in the complaint.
Verily, it is beyond cavil that the complaint seeks the judicial foreclosure of
the chattel mortgage. The fact that the respondent had unconscionably
sought the payment of the unpaid balance regardless of its complaint for
the foreclosure of the said mortgage is glaring proof that it intentionally
devised the same to deprive the defendant of his rights. A judgment in its
favor will in effect allow it to retain the possession and ownership of the
subject vehicle and at the same time claim against the defendant for the
unpaid balance of its purchase price. In such a case, the respondent would
luckily have its cake and eat it too. Unfortunately for the defendant, the
lower courts had readily, probably unwittingly, made themselves abettors
to respondents devise to the detriment of the defendant.
...
WHEREFORE, finding error in the assailed decision, the instant petition is
hereby GRANTED and the assailed decision is hereby REVERSED AND SET
ASIDE. Let the records be remanded to the court of origin. Accordingly, the
foreclosure of the chattel mortgage over the subject vehicle as prayed for
by the respondent in its complaint without any right to seek the payment
of the unpaid balance of the purchase price or any deficiency judgment
against the petitioners pursuant to Article 1484 of the Civil Code of the
Philippines, is hereby ORDERED.10
A Motion for Reconsideration dated 11 February 2003 11 filed by Magna
Financial Services Group, Inc., was denied by the Court of Appeals in a
resolution dated 22 May 2003.12 Hence, this Petition for Review
on Certiorari based on the sole issue:
WHAT IS THE TRUE NATURE OF A FORECLOSURE OF CHATTEL MORTGAGE,
EXTRAJUDICIAL OR JUDICIAL, AS AN EXERCISE OF THE 3 RD OPTION UNDER
ARTICLE 1484, PARAGRAPH 3 OF THE CIVIL CODE.
In its Memorandum, petitioner assails the decision of the Court of Appeals
and asserts that a mortgage is only an accessory obligation, the principal
one being the undertaking to pay the amounts scheduled in the
promissory note. To secure the payment of the note, a chattel mortgage is
constituted on the thing sold. It argues that an action for foreclosure of
mortgage is actually in the nature of an action for sum of money instituted
to enforce the payment of the promissory note, with execution of the

security. In case of an extrajudicial foreclosure of chattel mortgage, the

petition must state the amount due on the obligation and the sheriff, after
the sale, shall apply the proceeds to the unpaid debt. This, according to
petitioner, is the true nature of a foreclosure proceeding as provided under
Rule 68, Section 2 of the Rules of Court.13
On the other hand, respondent countered that the Court of Appeals
correctly set aside the trial courts decision due to the inconsistency of the
remedies or reliefs sought by the petitioner in its Complaint where it
prayed for the custody of the chattel mortgage and at the same time
asked for the payment of the unpaid balance on the motor vehicle. 14
Article 1484 of the Civil Code explicitly provides:
ART. 1484. In a contract of sale of personal property the price of which is
payable in installments, the vendor may exercise any of the following
remedies:
(1) Exact fulfillment of the obligation, should the vendee fail to pay;
(2) Cancel the sale, should the vendees failure to pay cover two or more
installments;
(3) Foreclose the chattel mortgage or the thing sold, if one has been
constituted, should the vendees failure to pay cover two or more
installments. In this case, he shall have no further action against the
purchaser to recover any unpaid balance of the price. Any agreement to
the contrary shall be void.
Our Supreme Court in Bachrach Motor Co., Inc. v. Millan 15 held:
"Undoubtedly the principal object of the above amendment (referring to
Act 4122 amending Art. 1454, Civil Code of 1889) was to remedy the
abuses committed in connection with the foreclosure of chattel
mortgages. This amendment prevents mortgagees from seizing the
mortgaged property, buying it at foreclosure sale for a low price and then
bringing the suit against the mortgagor for a deficiency judgment. The
almost invariable result of this procedure was that the mortgagor found
himself minus the property and still owing practically the full amount of his
original indebtedness."
In its Complaint, Magna Financial Services Group, Inc. made the following
prayer:

WHEREFORE, it is respectfully prayed that judgment render ordering

defendant:
1. To pay the principal sum of P131,607.00 with penalty charges at 4.5%
per month from January 1999 until paid plus liquidated damages.
2. Ordering defendant to reimburse the plaintiff for attorneys fee at 25%
of the amount due plus expenses of litigation at not less than P10,000.00.
3. Ordering defendant to surrender to the plaintiff the possession of the
Multicab described in paragraph 2 of the complaint.
4. Plaintiff prays for other reliefs just and equitable in the premises.
It is further prayed that pendent lite, an Order of Replevin issue
commanding the Provincial Sheriff at Legazpi City or any of his deputies to
take such multicab into his custody and, after judgment, upon default in
the payment of the amount adjudged due to the plaintiff, to sell said
chattel at public auction in accordance with the chattel mortgage law. 16
In its Memorandum before us, petitioner resolutely declared that it has
opted for the remedy provided under Article 1484(3) of the Civil
Code,17 that is, to foreclose the chattel mortgage.
It is, however, unmistakable from the Complaint that petitioner preferred
to avail itself of the first and third remedies under Article 1484, at the
same time suing for replevin. For this reason, the Court of Appeals
justifiably set aside the decision of the RTC. Perusing the Complaint, the
petitioner, under its prayer number 1, sought for the payment of the
unpaid amortizations which is a remedy that is provided under Article
1484(1) of the Civil Code, allowing an unpaid vendee to exact fulfillment of
the obligation. At the same time, petitioner prayed that Colarina be
ordered to surrender possession of the vehicle so that it may ultimately be
sold at public auction, which remedy is contained under Article 1484(3).
Such a scheme is not only irregular but is a flagrant circumvention of the
prohibition of the law. By praying for the foreclosure of the chattel, Magna
Financial Services Group, Inc. renounced whatever claim it may have
under the promissory note.18
Article 1484, paragraph 3, provides that if the vendor has availed himself
of the right to foreclose the chattel mortgage, "he shall have no further
action against the purchaser to recover any unpaid balance of the

purchase price. Any agreement to the contrary shall be void." In other

words, in all proceedings for the foreclosure of chattel mortgages executed
on chattels which have been sold on the installment plan, the mortgagee
is limited to the property included in the mortgage. 19
Contrary to petitioners claim, a contract of chattel mortgage, which is the
transaction involved in the present case, is in the nature of a conditional
sale of personal property given as a security for the payment of a debt, or
the performance of some other obligation specified therein, the condition
being that the sale shall be void upon the seller paying to the purchaser a
sum of money or doing some other act named. 20 If the condition is
performed according to its terms, the mortgage and sale immediately
become void, and the mortgagee is thereby divested of his title. 21 On the
other hand, in case of non payment, foreclosure is one of the remedies
available to a mortgagee by which he subjects the mortgaged property to
the satisfaction of the obligation to secure that for which the mortgage
was given. Foreclosure may be effected either judicially or extrajudicially,
that is, by ordinary action or by foreclosure under power of sale contained
in the mortgage. It may be effected by the usual methods, including sale
of goods at public auction.22 Extrajudicial foreclosure, as chosen by the
petitioner, is attained by causing the mortgaged property to be seized by
the sheriff, as agent of the mortgagee, and have it sold at public auction in
the manner prescribed by Section 14 of Act No. 1508, or the Chattel
Mortgage Law.23 This rule governs extrajudicial foreclosure of chattel
mortgage.
In sum, since the petitioner has undeniably elected a remedy of
foreclosure under Article 1484(3) of the Civil Code, it is bound by its
election and thus may not be allowed to change what it has opted for nor
to ask for more. On this point, the Court of Appeals correctly set aside the
trial courts decision and instead rendered a judgment of foreclosure as
prayed for by the petitioner.
The next issue of consequence is whether or not there has been an actual
foreclosure of the subject vehicle.
In the case at bar, there is no dispute that the subject vehicle is already in
the possession of the petitioner, Magna Financial Services Group, Inc.
However, actual foreclosure has not been pursued, commenced or
concluded by it.

Where the mortgagee elects a remedy of foreclosure, the law requires the
actual foreclosure of the mortgaged chattel. Thus, in Manila Motor Co. v.
Fernandez,24 our Supreme Court said that it is actual sale of the
mortgaged chattel in accordance with Sec. 14 of Act No. 1508 that would
bar the creditor (who chooses to foreclose) from recovering any unpaid
balance.25 And it is deemed that there has been foreclosure of the
mortgage when all the proceedings of the foreclosure, including the sale of
the property at public auction, have been accomplished. 26
That there should be actual foreclosure of the mortgaged vehicle was
reiterated in the case of De la Cruz v. Asian Consumer and Industrial
Finance Corporation:27
It is thus clear that while ASIAN eventually succeeded in taking possession
of the mortgaged vehicle, it did not pursue the foreclosure of the
mortgage as shown by the fact that no auction sale of the vehicle was
ever conducted. As we ruled in Filinvest Credit Corp. v. Phil. Acetylene Co.,
Inc. (G.R. No. 50449, 30 January 1982, 111 SCRA 421)
Under the law, the delivery of possession of the mortgaged property to the
mortgagee, the herein appellee, can only operate to extinguish appellants
liability if the appellee had actually caused the foreclosure sale of the
mortgaged property when it recovered possession thereof (Northern
Motors, Inc. v. Sapinoso, 33 SCRA 356 [1970]; Universal Motors Corp. v. Dy
Hian Tat, 28 SCRA 161 [1969]; Manila Motors Co., Inc. v. Fernandez, 99
Phil. 782 [1956]).
Be that as it may, although no actual foreclosure as contemplated under
the law has taken place in this case, since the vehicle is already in the
possession of Magna Financial Services Group, Inc. and it has persistently
and consistently avowed that it elects the remedy of foreclosure, the Court
of Appeals, thus, ruled correctly in directing the foreclosure of the said
vehicle without more.
WHEREFORE, premises considered, the instant petition is DENIED for lack
of merit and the decision of the Court of Appeals dated 21 January 2003 is
AFFIRMED. Costs against petitioner.
SO ORDERED.

G.R. No. 125347 June 19, 1997

EMILIANO RILLO, petitioner,
vs.
COURT OF APPEALS and CORB REALTY INVESTMENT,
CORP., respondents.

PUNO, J.:
This is an appeal under Rule 45 of the Rules of Court to set aside the
decision 1 of the Court of Appeals in CA G.R. CV No. 39108 cancelling the
"Contract to Sell" between petitioner Emiliano Rillo and private respondent
Corb Realty Investment Corporation. It also ordered Rillo to vacate the
premises subject of the contract and Corb Realty to return 50% of
P158,184.00 or P79,092.00 to Rillo.
The facts of the case are the following:
On June 18, 1985, petitioner Rillo signed a "Contract To Sell of
Condominium Unit" with private respondent Corb Realty Investment
Corporation. Under the contract, CORB REALTY agreed to sell to RILLO a
61.5 square meter condominium unit located in Mandaluyong, Metro
Manila. The contract price was P150,000.00, one half of which was paid
upon its execution, while the balance of P75,000.00 was to be paid in
twelve (12) equal monthly installments of P7,092.00 beginning July 18,
1985. It was also stipulated that all outstanding balance would bear an
interest of 24% per annum; the installment in arrears would be subject to
liquidated penalty of 1.5% for every month of default from due date. It
was further agreed that should petitioner default in the payment of three
(3) or four (4) monthly installments, forfeiture proceedings would be
governed by existing laws, particularly the Condominium Act. 2
On July 18, 1985, RILLO failed to pay the initial monthly amortization. On
August 18, 1985, he again defaulted in his payment. On September 20,
1985, he paid the first monthly installment of P7,092.00. On October 2,
1985, he paid the second monthly installment of P7,092.00. His third
payment was on February 2, 1986 but he paid only P5,000.00 instead of
the stipulated P7,092.00. 3

On July 20, 1987 or seventeen (17) months after RILLO's last payment,
CORB REALTY informed him by letter that it is cancelling their contract due
to his failure to settle his accounts on time. CORB REALTY also expressed
its willingness to refund RILLO's money. 4
CORB REALTY, however, did not cancel the contract for on September 28,
1987, it received P60,000.00 from petitioner. 5
RILLO defaulted again in his monthly installment payment. Consequently,
CORB REALTY informed RILLO through letter that it was proceeding to
rescind their contract. 6 In a letter dated August 29, 1988, it requested
RILLO to come to its office and withdraw P102,459.35 less the rentals of
the unit from July 1, 1985 to February 28, 1989. 7 Again the threatened
rescission did not materialize. A "compromise" was entered into by the
parties on March 12, 1989, which stipulated the following:
1. Restructure Outstanding Balance Down
to P50,000.00
2. Payment @ P2,000.00/Month @
18%
(Eighteen
Percent)
Monthly To Compute No. of
Installments
3. To Pay Titling Plus Any Real Estate Tax
Due
4. Installments to start April 15, 1989.

Rillo once more failed to honor their agreement. RILLO was able to pay
P2,000.00 on April 25, 1989 and P2,000.00 on May 15, 1989. 9
On April 3, 1990, CORB REALTY sent RILLO a statement of accounts which
fixed his total arrears, including interests and penalties, to P155,129.00.
When RILLO failed to pay this amount, CORE REALTY filed a complaint 10for
cancellation of the contract to sell with the Regional Trial Court of Pasig.
In his answer to the complaint, RILLO averred, among others, that while he
had already paid a total of P149,000.00, CORB REALTY could not deliver to
him his individual title to the subject property; that CORB REALTY could not
claim any right under their previous agreement as the same was already

novated by their new agreement for him to pay P50,000.00 representing

interest charges and other penalties spread through twenty-five (25)
months beginning April 1989; and that CORB REALTY's claim of
P155,129.99 over and above the amount he already paid has no legal
basis. 11
At the pre-trial, the parties stipulated that RILLO's principal outstanding
obligation as of March 12, 1989 was P50,000.00 and he has paid only
P4,000.00 thereof and that the monthly amortization of P2,000.00 was to
bear 18% interest per annum based on the unpaid balance. The issues
were defined as: (1) whether or not CORB REALTY was entitled to a
rescission of the contract; and (2) if not, whether or not RILLO's current
obligation to CORB REALTY amounts to P62,000.00 only inclusive of
accrued interests. 12
The Regional Trial Court held that CORB REALTY cannot rescind the
"Contract to Sell" because petitioner did not commit a substantial breach
of its terms. It found that RILLO substantially complied with the "Contract
to Sell" by paying a total of P154,184.00. It ruled that the remedy of CORB
REALTY is to file a case for specific performance to collect the outstanding
balance of the purchase price.

The respondent Court of Appeals reversed the decision. It ruled: (1) that
rescission does not apply as the contract between the parties is not an
absolute conveyance of real property but is a contract to sell; (2) that the
Condominium Act (Republic Act No. 4726, as amended by R.A. 7899) does
not provide anything on forfeiture proceedings in cases involving
installment sales of condominium units, hence, it is Presidential Decree
No. 957 (Subdivision and Condominium Buyers Protective Decree) which
should be applied to the case at bar. Under Presidential Decree No. 957,
the rights of a buyer in the event of failure to pay installment due, other
than the failure of the owner or developer to develop the project, shall be
governed by Republic Act No. 6552 or the REALTY INSTALLMENT BUYER
PROTECTION ACT also known as the Maceda Law (enacted on September
14, 1972). The dispositive portion of its Decision states:
WHEREFORE, the decision appealed from is hereby SET
ASIDE. The Contract to Sell is hereby declared cancelled
and rendered ineffective. Plaintiff-Appellant is hereby
ordered to return 50% of P158,184.00 or P79,092.00 to
appellee who is hereby ordered to vacate the subject
premises.
SO ORDERED.

CORB REALTY appealed the aforesaid decision to public respondent Court

of Appeals assigning the following errors, to wit:

13

Hence, this appeal with the following assignment of errors:

THE TRIAL COURT ERRED IN DISREGARDING OTHER FACTS

OF THE CASE, INCLUDING THE FACT THAT THE CONTRACT
TO
SELL,
AS
NOVATED,
CREATED
RECIPROCAL
OBLIGATIONS ON BOTH PARTIES;

THE HONORABLE COURT OF APPEALS SERIOUSLY AND

GRAVELY ERRED IN HOLDING AND DECIDING THAT
RESCISSION IS THE PROPER REMEDY ON A PERFECTED
AND CONSUMMATED CONTRACT;

THE TRIAL COURT ERRED IN DISREGARDING ARTICLE 1191

OF THE CIVIL CODE;

THE HONORABLE COURT OF APPEALS SERIOUSLY AND

GRAVELY ERRED IN NOT HOLDING AND DECIDING THAT
THE OLD CONSUMMATED CONTRACT HAS BEEN
SUPERSEDED BY A NEW, SEPARATE, INDEPENDENT AND
SUBSEQUENT CONTRACT BY NOVATION.

THE TRIAL COURT ERRED IN RENDERING JUDGMENT BY

SIMPLY DISREGARDING THE CASE OF ROQUE V. LAPUZ, 96
SCRA 744, AND WITHOUT INDICATING THE APPLICABLE
LAW ON THE CASE.
THE TRIAL COURT ERRED IN RENDERING A DECISION
WHICH DID NOT COMPLETELY DISPOSE OF THE CASE.

The petition is without merit.

The respondent court did not err when it did not apply Articles 1191 and
1592 of the Civil Code on rescission to the case at bar. The contract
between the parties is not an absolute conveyance of real property but a
contract to sell. In a contract to sell real property on installments, the full

payment of the purchase price is a positive suspensive condition, the

failure of which is not considered a breach, casual or serious, but simply
an event which prevented the obligation of the vendor to convey title from
acquiring any obligatory force." 14 The transfer of ownership and title
would occur after full payment of the purchase price. We held in Luzon
Brokerage Co., Inc. v. Maritime Building Co., Inc. 15 that there can be no
rescission of an obligation that is still non-existent, the suspensive
condition not having happened.
Given the nature of the contract of the parties, the respondent court
correctly applied Republic Act No. 6552. Known as the Maceda Law, R.A.
No. 6552 recognizes in conditional sales of all kinds of real estate
(industrial, commercial, residential) the right of the seller to cancel the
contract upon non-payment of an installment by the buyer, which is
simply an event that prevents the obligation of the vendor to convey title
from acquiring binding force. 16 It also provides the right of the buyer on
installments in case he defaults in the payment of succeeding
installments, viz:
(1) Where he has paid at least two years of installments,
(a) To pay, without additional interest, the unpaid
installments due within the total grace period earned by
him, which is hereby fixed at the rate of one month grace
period for every one year of installment payments
made: Provided, That this right shall be exercised by the
buyer only once in every five years of the life of the
contract and its extensions, if any.
(b) If the contract is cancelled, the seller shall refund to
the buyer the cash surrender value of the payments on the
property equivalent to fifty per cent of the total payments
made and, after five years of installments, an additional
five per cent every year but not to exceed ninety per cent
of the total payments made: Provided, That the actual
cancellation of the contract shall take place after
cancellation or the demand for rescission of the contract
by a notarial act and upon full payment of the cash
surrender value to the buyer.

Down payments, deposits or options on the contract shall

be included in the computation of the total number of
installments made.
(2) Where he has paid less than two years in installments,
Sec. 4. . . . the seller shall give the buyer a grace period of
not less than sixty days from the date the installment
became due. If the buyer fails to pay the installments due
at the expiration of the grace period, the seller may cancel
the contract after thirty days from receipt by the buyer of
the notice of cancellation or the demand for rescission of
the contract by a notarial act.
Petitioner RILLO paid less than two years in installment payments, hence,
he is only entitled to a grace period of not less than sixty (60) days from
the due date within which to make his installment payment. CORB REALTY,
on the otherhand, has the right to cancel the contract after thirty (30)
days from receipt by RILLO of the notice of cancellation. Hence, the
respondent court did not err when it upheld CORB REALTY's right to cancel
the subject contract upon repeated defaults in payment by RILLO.
Petitioner further contends that the contract to sell has been novated by
the parties agreement of March 12, 1989. The contention cannot be
sustained. Article 1292 of the Civil Code provides that "In order that an
obligation may be extinguished by another which substitutes the same, it
is imperative that it be so declared in unequivocal terms, or that the old
and the new obligations be on every point incompatible with each other."
Novation is never presumed. 17Parties to a contract must expressly agree
that they are abrogating their old contract in favor of a new one. 18 In the
absence of an express agreement, novation takes place only when the old
and the new obligations are incompatible on every point. 19In the case at
bar, the parties executed their May 12, 1989 "compromise agreement"
precisely to give life to their "Contract to Sell". It merely clarified the total
sum owed by petitioner RILLO to private respondent CORB REALTY with
the view that the former would find it easier to comply with his obligations
under the Contract to Sell. In fine, the "compromise agreement" can stand
together with the Contract to Sell.
Nevertheless, we do not agree with the respondent Court so far as it
ordered private respondent CORB REALTY to refund 50% of P158,184.00 or
P79,092.00 to petitioner RILLO. Under Republic Act No. 6552, the right of

the buyer to a refund accrues only when he has paid at least two (2) years
of installments. In the case at bar, RILLO has paid less than two (2) years
in installments, hence, he is not entitled to a refund.
IN VIEW WHEREOF, the decision appealed from is AFFIRMED with the
MODIFICATION that the refund of 50% P158,184.00 or P79,092.00 made in
favor of petitioner Emiliano Rillo is deleted. No costs.
SO ORDERED.

FIRST DIVISION
[G.R. No. 94828. September 18, 1992.]
SPOUSES ROMULO DE LA CRUZ and DELIA DE LA CRUZ, and
DANIEL FAJARDO, Petitioners, v. ASIAN CONSUMER AND
INDUSTRIAL FINANCE CORPORATION and the HONORABLE COURT
OF APPEALS, Respondents.

SYLLABUS

1. CIVIL LAW; SPECIAL CONTRACTS; SALE; REMEDIES OF UNPAID SELLER

OF PERSONAL PROPERTY PAYABLE IN INSTALLMENT; RULE. The instant
case is covered by the so-called "Recto Law", now Art. 1484 of the New
Civil Code, which provides: "In a contract of sale of personal property the
price of which is payable in installments, the vendor may exercise any of
the following remedies: (1) Exact fulfillment of the obligation, should the
vendee fail to pay; (2) Cancel the sale, should the vendees failure to pay
cover two or more installments; (3) Foreclose the chattel mortgage on the
thing sold, if one has been constituted, should the vendees failure to pay
cover two or more installments. In this case, he shall have no further
action against the purchaser to recover any unpaid balance of the price.
Any agreement to the contrary shall be void." In this jurisdiction, the three
(3) remedies provided for in the "Recto Law" are alternative and not
cumulative; the exercise of one would preclude the other remedies.
Consequently, should the vendee-mortgagor default in the payment of two
or more of the agreed installments, the vendor-mortgagee has the option
to avail of any of these three (3) remedies: either to exact fulfillment of
the obligation, to cancel the sale, or to foreclose the mortgage on the
purchased chattel, if one was constituted. (Pacific Commercial Co. v. De la
Rama, 72 Phil. 380 (1941); Manila Motor, Inc. v. Fernandez, 99 Phil. 782
(1956); Radiowealth v. Lavin, L-18563, April 27, 1963, 7 SCRA 804).
2. ID.; ID.; ID.; ID.; EFFECT OF FAILURE OF VENDOR TO FORECLOSE THE
MORTGAGED PROPERTY. It is thus clear that while ASIAN eventually
succeeded in taking possession of the mortgaged vehicle, it did not pursue
the foreclosure of the mortgage as shown by the fact that no auction sale
of the vehicle was ever conducted. As we ruled in Filinvest Credit Corp. v.
Phil. Acetylene Co., Inc. (G.R. No. 50449, January 1982, 111 SCRA 421)
"Under the law, the delivery of possession of the mortgaged property to
the mortgagee, the herein appellee, can only operate to extinguish
appellants liability if the appellee had actually caused the foreclosure sale
of the mortgaged property when it recovered possession thereof (Northern
Motors, Inc. v. Sapinoso, 33 SCRA 356 [1970]; Universal Motors Corp. v. Dy
Hian Tat, 28 SCRA 161 [1969]; Manila Motors Co., Inc. v. Fernandez, 99
Phil. 782 [1956]). It is worth noting that it is the fact of foreclosure and
actual sale of the mortgaged chattel that bar recovery by the vendor of

any balance of the purchasers outstanding obligation not satisfied by the

sale (New Civil Code, par. 3, Article 1484). As held by this Court, if the
vendor desisted, on his own initiative, from consummating the auction
sale, such desistance was a timely disavowal of the remedy of foreclosure,
and the vendor can still sue for specific performance" (Industrial Finance
Corp. v. Tobias, 78 SCRA 28 [1977]; Radiowealth, Inc. v. Lavin, L-18563,
April 27, 1963, 7 SCRA 804; Pacific Commercial Co. v. dela Rama, 72 Phil.
380 [1941]). Consequently, in the case before Us, there being no actual
foreclosure of the mortgaged property, ASIAN is correct in resorting to an
ordinary action for collection of the unpaid balance of the purchase price.
3. ID.; ID.; ID.; ID.; ID.; POSSESSION OF MORTGAGED PROPERTY SHOULD
BE RETURNED TO MORTGAGEE-VENDEE UPON PAYMENT OF UNPAID
BALANCE; CASE AT BAR. We note however that the trial court, as well as
the Court of Appeals failed to consider that the vehicle was already in the
possession of ASIAN when it directed petitioners herein to pay
P184,466.67 representing the balance of the purchase price of the
mortgaged property. Law and equity will not permit ASIAN to have its cake
and eat it too, so to speak. By allowing ASIAN to retain possession of the
vehicle and then directing petitioners to pay the unpaid balance would
certainly result in unjust enrichment of the former. Accordingly, the
ownership and possession of the vehicle should be returned to petitioners
by ASIAN in the condition that it was when delivered to it, and if this be no
longer feasible, to deduct from the adjudged liability of petitioners the
amount of P60,000.00, its corresponding appraised value.

DECISION

BELLOSILLO, J.:

The pivotal point before Us is whether a chattel mortgagee, after opting to

foreclose the mortgage but failing afterwards to sell the property at public
auction, may still sue to recover the unpaid balance of the purchase price.
On 22 September 1982, the spouses Romulo de la Cruz and Delia de la
Cruz, and one Daniel Fajardo, petitioners herein, purchased on installment
basis one (1) unit Hino truck from Benter Motor Sales Corporation (BENTER
for brevity). To secure payment, they executed in favor of BENTER a
chattel mortgage over the vehicle 1 and a promissory note for
P282,360.00 payable in thirty (30) monthly installments of P9,412.00. 2
On the same date, BENTER assigned its rights and interest over the
vehicle in favor of private respondent Asian Consumer and Industrial
Finance Corporation (ASIAN for brevity). 3 Although petitioners initially
paid some installments they subsequently defaulted on more than two (2)
installments. Thereafter, notwithstanding the demand letter of ASIAN, 4
petitioners
failed
to
settle
their
obligation.

provides:jgc:chanrobles.com.ph
On 26 September 1984, by virtue of a petition for extrajudicial foreclosure
of chattel mortgage, the sheriff attempted to repossess the vehicle but
was unsuccessful because of the refusal of the son of petitioner, Rolando
de la Cruz to surrender the same. Hence, the return of the sheriff that the
service
was
not
satisfied.chanrobles
law
library
:
red
On 10 October 1984, petitioner Romulo de la Cruz brought the vehicle to
the office of ASIAN and left it there where it was inventoried and
inspected.
5
On 27 November 1984, ASIAN filed an ordinary action with the court a quo
for collection of the balance of P196,152.99 of the purchase price, plus
liquidated
damages
and
attorneys
fees.
6
After trial, the court below rendered judgment in favor of ASIAN.
On appeal, the Court of Appeals affirmed the judgment and held that
". . . no extrajudicial foreclosure of chattel mortgage ever transpired in the
case at bar. Undoubtedly, plaintiff had first chosen to extrajudically
foreclose the mortgage, but this did not materialize through no fault of
plaintiff, as defendant refused to surrender the Hino truck. The mere fact
that the writ in now in possession of plaintiff and a Technical and
Inspection Report was made in connection therewith is not conclusive of
the extrajudicial foreclosure, for in this kind of foreclosure, possession of
the chattel by the sheriff is necessary, aside from the sale at public
auction."cralaw
virtua1aw
library

"In a contract of sale of personal property the price of which is payable in

installments, the vendor may exercise any of the following remedies: (1)
Exact fulfillment of the obligation, should the vendee fail to pay; (2) Cancel
the sale, should the vendees failure to pay cover two or more
installments; (3) Foreclose the chattel mortgage on the thing sold, if one
has been constituted, should the vendees failure to pay cover two or
more installments. In this case, he shall have no further action against the
purchaser to recover any unpaid balance of the price. Any agreement to
the
contrary
shall
be
void."cralaw
virtua1aw
library
In this jurisdiction, the three (3) remedies provided for in the "Recto Law"
are alternative and not cumulative; the exercise of one would preclude the
other remedies. Consequently, should the vendee-mortgagor default in
the payment of two or more of the agreed installments, the vendormortgagee has the option to avail of any of these three (3) remedies:
either to exact fulfillment of the obligation, to cancel the sale, or to
foreclose the mortgage on the purchased chattel, if one was constituted.
7
The records show that on 14 September 1984 ASIAN initiated a petition for
extrajudicial foreclosure of the chattel mortgage. But the sheriff failed to
recover the motor vehicle from petitioners due to the refusal of the son of
petitioners Romulo and Delia de la Cruz to surrender it. It was not until 10
October 1984, or almost a month later that petitioners delivered the unit
to ASIAN. The action to recover the balance of the purchase price was
instituted on 27 November 1984.chanrobles virtual lawlibrary

"Though the remedy of foreclosure was first chosen, this remedy however
proved ineffectual due to no fault of plaintiff. Therefore, plaintiff may
exercise other remedies such as exact fulfillment of the obligation and
thereafter recover the deficiency. This is the essence of the rule of
alternative
remedies
under
Article
1484." cralawnad

It is thus clear that while ASIAN eventually succeeded in taking possession

of the mortgaged vehicle, it did not pursue the foreclosure of the
mortgage as shown by the fact that no auction sale of the vehicle was
ever conducted. As we ruled in Filinvest Credit Corp. v. Phil. Acetylene Co.,
Inc.
8

Petitioners take exception. While they do not dispute that where the
mortgagee elects the remedy of foreclosure which, according to them,
includes the option to sell in a public or private sale, commences and
pursues it, and in consideration of which he also performs everything that
is incumbent upon him to do to implement the foreclosure they
nevertheless insist that he should not later be allowed to change course
midway in the process, abandon the foreclosure and shift to other
remedies such as collection of the balance, especially after having
recovered the mortgaged chattel from them and while retaining
possession
thereof.

"Under the law, the delivery of possession of the mortgaged property to

the mortgagee, the herein appellee, can only operate to extinguish
appellants liability if the appellee had actually caused the foreclosure sale
of the mortgaged property when it recovered possession thereof (Northern
Motors, Inc. v. Sapinoso, 33 SCRA 356 [1970]; Universal Motors Corp. v. Dy
Hian Tat, 28 SCRA 161 [1969]; Manila Motors Co., Inc. v. Fernandez, 99
Phil. 782 [1956]). It is worth noting that it is the fact of foreclosure and
actual sale of the mortgaged chattel that bar recovery by the vendor of
any balance of the purchasers outstanding obligation not satisfied by the
sale (New Civil Code, par. 3, Article 1484). As held by this Court, if the
vendor desisted, on his own initiative, from consummating the auction
sale, such desistance was a timely disavowal of the remedy of foreclosure,
and the vendor can still sue for specific performance" (Industrial Finance
Corp. v. Tobias, 78 SCRA 28 [1977]; Radiowealth, Inc. v. Lavin, L-18563,
April 27, 1963, 7 SCRA 804; Pacific Commercial Co. v. dela Rama, 72 Phil.

We

do

not

agree

with

petitioners.

It is not disputed that the instant case is covered by the so-called "Recto
Law",
now
Art.
1484
of
the
New
Civil
Code,
which

380

[1941]).

Consequently, in the case before Us, there being no actual foreclosure of

the mortgaged property, ASIAN is correct in resorting to an ordinary action
for collection of the unpaid balance of the purchase price.
We note however that the trial court, as well as the Court of Appeals failed
to consider that the vehicle was already in the possession of ASIAN when it
directed petitioners herein to pay P184,466.67 representing the balance of
the purchase price of the mortgaged property. Law and equity will not
permit ASIAN to have its cake and eat it too, so to speak. By allowing
ASIAN to retain possession of the vehicle and then directing petitioners to
pay the unpaid balance would certainly result in unjust enrichment of the
former. Accordingly, the ownership and possession of the vehicle should
be returned to petitioners by ASIAN in the condition that it was when
delivered to it, and if this be no longer feasible, to deduct from the
adjudged liability of petitioners the amount of P60,000.00, its
corresponding
appraised
value.
9
WHEREFORE, the assailed decision is AFFIRMED, with the MODIFICATION
that the subject vehicle be returned to petitioners or, at their option, they
be allowed to deduct P60,000.00 from their adjudged liability. No costs. SO
ORDERED.

G.R. No. L-14475

May 30, 1961

SOUTHERN MOTORS, INC., plaintiff-appellee,

vs.
ANGELO MOSCOSO, defendant-appellant.
Diosdado Garingalao for plaintiff-appellee.
Calixto Zaldivar for defendant-appellant.
PAREDES, J.:
The case was submitted on agreed statement of facts.
On June 6, 1957, plaintiff-appellee Southern Motors, Inc. sold to defendantappellant Angel Moscoso one Chevrolet truck, on installment basis, for
P6,445.00. Upon making a down payment, the defendant executed a
promissory note for the sum of P4,915.00, representing the unpaid
balance of the purchase price (Annex A, complaint), to secure the
payment of which, a chattel mortgage was constituted on the truck in
favor of the plaintiff (Annex B). Of said account of P4,915.00, the
defendant had paid a total of P550.00, of which P110.00 was applied to
the interest up to August 15, 1957, and P400.00 to the principal, thus
leaving an unpaid balance of P4,475.00. The defendant failed to pay 3
installments on the balance of the purchase price.
On November 4, 1957, the plaintiff filed a complaint against the
defendant, to recover the unpaid balance of the promissory note. Upon
plaintiff's petition, embodied in the complaint, a writ of attachment was
issued by the lower court on the properties Of the defendant. Pursuant
thereto, the said Chevrolet truck, and a house and lot belonging to
defendant, were attached by the Sheriff of San Jose, Antique, where
defendant was residing on November 25, 1957, and said truck was
brought to the plaintiff's compound in Iloilo City, for safe keeping.
After attachment and before the trial of the case on the merits, acting
upon the plaintiff's motion dated December 23, 1957, for the immediate
sale of the mortgaged truck, the Provincial Sheriff of Iloilo on January 2,
1958, sold the truck at public auction in which plaintiff itself was the only
bidder for P1,000.00. The case had not been set for hearing, then.
The trial court on March 27, 1958, condemned the defendant to pay the
plaintiff the amount of P4,475.00 with interest at the rate of 12% per
annum from August 16, 1957, until fully paid, plus 10% thereof as
attorneys fees and costs against which defendant interposed the present
appeal, contending that the trial court erred
(1) In not finding that the attachment caused to be levied on the
truck and its immediate sale at public auction, was tantamount to
the foreclosure of the chattel mortgage on said truck; and
(2) In rendering judgment in favor of the plaintiff-appellee.
Both parties agreed that the case is governed by Article 1484 of the new
Civil Case, which provides:
ART. 1484. In a contract of sale of personal property the price of
which is payable in installments, the vendor may exercise any of
the following remedies:
(1) Exact fulfillment of the obligation, should the vendee fail to
pay; .

(2) Cancel the sale, should the vendee's failure to pay cover two or
more installments;
(3) Foreclose the chattel mortgage on the thing sold, if one has
been constituted, should the vendee's failure to pay cover two or
more installments. In this case, he shall have no further action
against the purchaser to recover any unpaid balance of the price.
Any agreement to the contrary shall be void.
While the appellee claims that in filing the complaint, demanding payment
of the unpaid balance of the purchase price, it has availed of the first
remedy provided in said article i.e. to exact fulfillment of the obligation
(specific performance); the appellant, on the other hand, contends that
appellee had availed itself of the third remedy viz, the foreclosure of the
chattel mortgage on the truck.
The appellant argues that considering history of the law, the
circumstances leading to its enactment, the evil that the law was intended
to correct and the remedy afforded (Art. 1454-A of the old Civil Code; Act
No. 4122; Bachrach Motor Co. vs. Reyes, 62 Phil. 461, 466-469); that the
appellee did not content itself by waiting for the judgment on the
complaint and then executed the judgment which might be rendered in its
favor, against the properties of the appellant; that the appellee obtained a
preliminary attachment on the subject of the chattel mortgage itself and
caused said truck to be sold at public auction petition, in which he was
bidder for P1,000.00; the result of which, was similar to what would have
happened, had it foreclosed the mortgage pursuant to the provisions of
Sec. 14 of Act No. 1508 (Chattel Mortgage Law) the said appellee had
availed itself of the third remedy aforequoted. In other words, appellant
submits that the matter should be looked at, not by the allegations in the
complaint, but by the very effect and result of the procedural steps taken
and that appellee tried to camouflage its acts by filing a complaint
purportedly to exact the fulfillment of an obligation petition, in an attempt
to circumvent the provisions of Article 1484 of the new Civil Code.
Appellant concludes that under his theory, a deficiency judgment would be
without legal basis.
We do not share the views of the appellant on this matter. Manifestly, the
appellee had chosen the first remedy. The complaint is an ordinary civil
action for recovery of the remaining unpaid balance due on the promissory
note. The plaintiff had not adopted the procedure or methods outlined by
Sec. 14 of the Chattel Mortgage Law but those prescribed for ordinary civil
actions, under the Rules of Court. Had appellee elected the foreclosure, it
would not have instituted this case in court; it would not have caused the
chattel to be attached under Rule 59, and had it sold at public auction, in
the manner prescribed by Rule 39. That the herein appellee did not intend
to foreclose the mortgage truck, is further evinced by the fact that it had
also attached the house and lot of the appellant at San Jose, Antique. In
the case of Southern Motors, Inc. vs. Magbanua, G.R. No. L-8578, Oct. 29,
1956, we held:
By praying that the defendant be ordered to pay it the sum of
P4,690.00 together with the stipulated interest of 12% per annum
from 17 March 1954 until fully paid, plus 10% of the total amount
due as attorney's fees and cost of collection, the plaintiff elected

to exact the fulfillment of the obligation, and not to foreclose the

mortgage on the truck. Otherwise, it would not have gone to court
to collect the amount as prayed for in the complaint. Had it
elected to foreclose the mortgage on the truck, all the plaintiff had
to do was to cause the truck to be sold at public auction pursuant
to section 14 of the Chattel Mortgage Law. The fact that aside from
the mortgaged truck, another Chevrolet truck and two parcels of
land belonging to the defendant were attached, shows that the
plaintiff did not intend to foreclose the mortgage.
As the plaintiff has chosen to exact the fulfillment of the
defendant's obligation, the former may enforce execution of the
judgment rendered in its favor on the personal and real property
of the latter not exempt from execution sufficient to satisfy the
judgment. That part of the judgment against the properties of the
defendant except the mortgaged truck and discharging the writ of
attachment on his other properties is erroneous.
We perceive nothing unlawful or irregular in appellee's act of attaching the
mortgaged truck itself. Since herein appellee has chosen to exact the
fulfillment of the appellant's obligation, it may enforce execution of the
judgment that may be favorably rendered hereon, on all personal and real
properties of the latter not exempt from execution sufficient to satisfy such
judgment. It should be noted that a house and lot at San Jose, Antique
were also attached. No one can successfully contest that the attachment
was merely an incident to an ordinary civil action. (Sections 1 & 11, Rule
59; Sec. 16, Rule 39). The mortgage creditor may recover judgment on the
mortgage debt and cause an execution on the mortgaged property and
may cause an attachment to be issued and levied on such property, upon
beginning his civil action (Tizon vs. Valdez, 48 Phil. 910-911).
IN VIEW HEREOF, the judgment appealed from hereby is affirmed, with
costs against the defendant-appellant.
Bengzon, C.J., Bautista Angelo, Labrador, Concepcion, Dizon, De Leon and
Natividad,
JJ., concur.
Reyes,
J.B.L.,
J., concurs
in
a
separate
opinion.
Padilla and Barrera, JJ., took no part.
Separate Opinions
REYES, J.B.L., J., concurring:
I fully concur in the opinion, and would only add that appellant's argument
ignores a substantial difference between the effect of foreclosing the
chattel mortgage and attaching the mortgaged chattel. The variance lies
in the ability of the debtor to retain possession of the property attached by
giving a counterbond and thereby discharging the attachment. This
remedy the debtor does not have in the event of foreclosure.

G.R. No. 140468

January 16, 2003
OLYMPIA HOUSING, INC., petitioner,
vs.
PANASIATIC TRAVEL CORPORATION and MA. NELIDA GALVEZYCASIANO, respondents.
VITUG, J.:
The petition for review on certiorari before the Court assails the decision,
promulgated on 11 June 1999, and the resolution, promulgated on 14
October 1999, of the Court of Appeals in CA-G.R. CV Case No. 53516.
The case originated from a complaint for Recovery of Possession (Accion
Publiciana) filed by Olympia Housing, Inc., against Panasiatic Travel
Corporation, Maria Nelida Ycasiano and the latter's husband. The object in
litigation is a condominium unit sold at the price of P2,340,000.00 payable
on installments at the rate of P33,657.40 per month.
On the basis of the facts encapsulated by the trial court, it would appear
that
"On August 8, 1984, plaintiff and defendant Ma. Nelida GalvezYcasiano entered into a Contract to Sell, whereby the former
agreed to sell to the latter condominium unit no. D-12, comprising
an area of 160.50 square meters, more or less, situated on the
ground floor of Olympia Condominium located at Makati, Metro
Manila, covered by Condominium Certificate of Title No. 6711, for
the agreed price of P2,340,000.00 payable in installments of
P33,657.40 per month.
"The schedule of payments [were] as follows:
Date
Particulars
Amount
July
1984

17, Reservation/Depos P100,000.00

it

July
19, 50%
Down P1,070,000.
1984
payment
00
"Balance of 50% payable in sixty (60) monthly installments at 24%
per annum base on diminishing balance.
"Monthly
amortization
to
commence
on
Sept.
17
1984 .................... P33,657.40/month
"Interest of 2% is included in regular monthly amortization, past
due amortization shall bear interest of 2% per month plus penalty
charge of 2% per month.
"Pursuant to the Contract to Sell, defendant Ma. Nelida GalvezYcasiano made a reservation/deposit in the amount of
P100,000.00 on July 17, 1984 and 50% down payment in the
amount of P1,070,000.00 on July 19, 1984.
"Defendants made several payments in cash and thru credit
memos issued by plaintiff representing plane tickets bought by
plaintiff from defendant Panasiatic Travel Corp., which is owned by
defendant Ma. Nelida Galvez-Ycasiano, who credited/offset the
amount of the said plane tickets to defendant's account due to
plaintiff.

"Plaintiff alleged that far from complying with the terms and
conditions of said Contract to Sell, defendants failed to pay the
corresponding monthly installments which as of June 2, 1988
amounted to P1,924,345.52. Demand to pay the same was sent to
defendant Ma. Nelida Galvez-Ycasiano, but the latter failed to
settle her obligation.
"For failure of defendant to pay her obligation plaintiff allegedly
rescinded the contract by a Notarial Act of Rescission.
"At present, the subject condominium unit is being occupied by
defendant Panasiatic Travel Corp., hence the suit for Recovery of
Possession (Accion Publiciana) with prayer for attorney's fees,
exemplary damages and reasonable rentals for the unit from July
28, 1988 at the rate of P32,100.00 per month until the
condominium unit is finally vacated.
"Defendant Ma. Nelida Galvez-Ycasiano, while admitting the
existence of the contract to sell, interposed the defense that she
has made substantial payments of the purchase price of the
subject condominium unit amounting to P1,964,452.82 in
accordance with the provisions of the contract to sell; that she
decided to stop payment of the purchase price in the meantime
because of substantial differences between her and the plaintiff in
the computation of the balance of the purchase price.
"xxx
xxx
xxx
"Evidence adduced by plaintiff such as the statement of account of
defendant Ma. Nelida Galvez-Ycasiano (Exh. 'C') has been
established by plaintiff's witness, Mrs. Isabelita Rivera, which
indeed shows that on several occasions defendant either failed to
pay on time or was completely in default in the payment of the
monthly installment of the subject condominium unit.
"It can be deduced from said documentary evidence that
defendant should start paying the installment on September 17,
1984, but defendant paid on September 21, 1984 the amount of
P51,238.00 thru credit memo. Witness claimed that a credit memo
is a document issued by Olympia Housing Inc. to Panasiatic Travel
Corp. for the amount of ticket purchased instead of paying in cash
they just issued credit memo in order that it would be offset on the
monthly amortization due to Olympia Housing Corp. She claimed
that they based it on the invoice that they [were] sending them.
"Witness further claimed that since the amount due was only
P33,657.40 what she did to the excess of P51,238.00 was to apply
it to the next installment. The next installment was due on October
12, 1984 in the amount of P26,158.00 representing the excess. It
was paid thru credit memo no. 031 on October 17, 1984. In fact,
there was still an excess of P10,081.20. The third installment was
due on November 17, 1984. Defendant made partial payment
because the excess payment of P10,081.20 was applied to the
third installment. The 4th installment was due on December 17,
1984; the defendant did not pay instead she paid on January 9,
1985 the amount of P51,619.08 in cash per O.R. No. 295. Before
this payment on January 9, 1985 defendant owed plaintiff

P59,931.81 based on the amortization. The basis [was] the unpaid

amortization due and payable plus 2% interest and 2% penalty
charges per month. After payment, the amount due was
P8,312.73. The 5th installment was due on January 17, 1985. No
payment was made on the 6th, 7th, 8th installments which were
due on January, February, March, April 17, 1985 respectively. The
9th installment was due on May 17, 1985, it was not paid.
Defendant made a payment on June 1985 for P33,231.90 in cash
per O.R. No. 439. The next payment was made on June 8, 1985 for
P25,574.59. After these two payments, there was still an
outstanding amount due of P32,552.44. No payment was made on
the 10th and 11th installments. The next payment was made on
July 24, 1985 for P60,000.00. After this payment the outstanding
amount due was P43,881.76. She made payment on August 16,
1985 for P30,067.00 thru credit memo no. 045. After this payment
the outstanding amount due was P15,160.46. She did not on the
12th installment, instead she paid on August 28, 1985 for
P26,043.00 thru credit memo no. 046. After this payment the
outstanding amount due was P23,511.07. She did not pay on the
13th installment, instead she paid on October 10, 1985 for
P20,830.00 thru credit memo no. 006. After this payment the
outstanding amount due was P38,728.61. She did not pay on the
14th installment, instead payment was made on November 10,
1985 for P16,212.00 thru credit memo no. 010. After this payment
the outstanding amount due was P58,851.83. No payments were
made on the 15th, 16th and 17th installments. She paid on
January 30, 1986 for P33,657.40 in cash per O.R. No. 842. After
this payment the outstanding balance was P138,233.23. No
payment was made on the 18th and 19th installment which fell
due on February 17 and March 17, 1986. The next payment was
made on April 15, 1986 for P25,263.23. After this payment the
outstanding balance was P198,425.88. She did not pay for six (6)
consecutive months from April 17 to September 17, 1986
corresponding to the 20th up to the 25th installment. The next
payment was made on October 14, 1986 for P82,780.33 in cash
per O.R. No. 1628. After this payment the outstanding amount due
was P350,712.73. The 26th and 27th installments were not paid.
She paid on November 24, 1986 for P134,629.60. After this
payment the outstanding balance was P306,306.66. Witness
claimed that the basis for the computation was the unpaid
amortization due payable for the particular period plus 2% interest
and 2% penalty charge per month. In computing the interest she
used the simple method. The 28th up to the 31st installments
were not paid. The next payment was made on April 30, 1987 for
P22,213.00 thru credit memo no. 134. After this payment the
outstanding balance was P471,317.60. The basis for this
computation is the unpaid amortization due plus 2% interest and
2% penalty charge per month. The 33rd, 34th and 35th
installments were not paid. The next payment was made on July
22, 1987 for P19,752.00 thru credit memo no. 146. After this

payment the outstanding balance was P664,822.78. The 36th and

37th installments were not paid." 1
On 31 January 1995, the Regional Trial Court, Branch V, of Makati City
ruled thusly
"WHEREFORE, premises considered, judgment is hereby rendered
as follows:
"1. As the complaint has been prematurely filed without
complying with the mandate of Republic Act No. 6552, the
complaint is hereby dismissed;
"2. That the obligation of defendant Maria Nelida Galvez
Ycasiano has now become due and demandable, said
defendant is hereby ordered to pay the sum of
P4,007,473.49 as of November 30, 1994 plus 18% interest
per annum, computed from 1 December 1994, but within
sixty days from receipt of a copy of this decision;
"3. Upon payment thereof, for plaintiff to issue the
corresponding certificate of title in favor of defendant;
"4. In the event that said amount in full is not paid
including the current amount due including the interest
sans penalties, then immediately thereafter, without
necessity of demand, the defendants must vacate the
premises and all payments will be charged as rentals to
the property.
"No award of damages and attorney's fees for any parties is being
adjudged.
"No costs." 2
Thereupon, respondents tendered the amount of P4,304,026.53 to
petitioner via Metrobank Cashier's Check No. CC008857. Petitioner refused
to accept the payment, constraining respondents to consign at the
disposal of the court a quo the check on 26 April 1995. In an order, dated
05 June 1996, the check was allowed to be substituted by another
cashier's check payable to the Clerk of Court of the Makati Regional Trial
Court. Complying with yet another court order of 04 January 1996,
respondents deposited the amount of P4,304,026.53 with the Land Bank
of the Philippines and subsequently submitted to the court the
corresponding bank book as well as the bank's verification.
Meanwhile, both parties appealed the judgment of the trial court. In its
now questioned decision of 11 June 1999, the appellate court sustained
the trial court.
The denial of the motion for reconsideration prompted petitioner to file the
instant petition for review on certiorari, raising the following assignment of
errors, to wit:
"I
"THE COURT OF APPEALS ACTED IN A MANNER NOT IN ACCORD WITH LAW
AND APPLICABLE JURISPRUDENCE OF THE SUPREME COURT WHEN IT
FAILED AND/OR REFUSED TO RULE UPON THE EFFECT OF THE FILING OF
THE COMPLAINT AND THE NOTARIAL ACT OF RESCISSION ATTACHED
THERETO VIS--VIS THE REQUIREMENTS OF R.A. 6552.
"II

"THE COURT OF APPEALS ACTED IN A MANNER NOT IN ACCORD WITH LAW

AND APPLICABLE JURISPRUDENCE OF THE SUPREME COURT IN REFUSING
TO DECREE THE RESCISSION OF THE SUBJECT CONTRACT TO SELL ON THE
GROUND THAT PETITIONER FAILED TO PAY THE CASH SURRENDER VALUE
PRIOR TO THE FILING OF THE COMPLAINT.
"III
"THE COURT OF APPEALS ERRED IN AFFIRMING THE TRIAL COURT'S
DECISION ALLOWING RESPONDENT YCASIANO TO PAY ON HER ALREADYDEFAULTED OBLIGATIONS AND, UPON SUCH PAYMENT, ORDERING
PETITIONER TO ISSUE THE CERTIFICATE OF TITLE TO HER." 3
Respondents, upon the other hand, would insist that the petition should be
held devoid of merit considering that:first, the issues raised in the petition
would strike at fundamentally factual questions beyond the province of a
petition for review on certiorari with this Court; second, there was no valid
rescission of the contract to sell on account of the failure of petitioner to
give notice of rescission by notarial act, a requisite laid down in Republic
Act No. 6552; third, the oft-invoked Layug vs. IAC 4 case would scarcely
find application, it being a case for annulment of contract, not one for the
recovery of possession; fourth, no effective rescission had taken place on
account of the failure of petitioner to pay the cash surrender value,
conformably with the terms of the law; and fifth, there being no valid
rescission, the contract remained valid and subsisting, still thereby
obligating respondents to pay the outstanding balance of the purchase
price.
In its Reply Brief, petitioner asseverated that, while not categorically
made, the Court, in Layug, 5 had held to be sufficiently anchored,
nevertheless, an action for judicial rescission even if no notarial act of
rescission was priorly executed and the non-payment of the cash
surrender value before the filing of the complaint. 6 Moreover, petitioner
argued that while the complaint before the trial court was denominated as
one for "recovery of possession," the suit could still be considered as a
case for judicial rescission considering that the issue of whether or not it
was entitled to recover possession over the property subject matter of the
contract to sell would require, for its resolution, passing upon the initial
issue of whether or not the contract was in fact rescinded by virtue of a
notarial act. 7
The petition must be denied.
The action for reconveyance filed by petitioner was predicated on an
assumption that its contract to sell executed in favor of respondent buyer
had been validly cancelled or rescinded. The records would show that,
indeed, no such cancellation took place at any time prior to the institution
of the action for reconveyance. What had been sent by petitioner to
respondent was a letter, dated 02 June 1988, that read:
"02 June 1988
"MS.
NELIDA
GALVEZ
Pan
Asiatic
Travel
Corp.
3rd
Floor,
S
&
L
Building
Roxas Boulevard, Manila
"Dear Ms. Galvez:

"We have sent you many letters in the past asking you to update
your payments in accordance with the terms of our Contract to
Sell dated August 25, 1984 as follows:
Purchase Price, Unit No. D-12
P2,340,000.00
Terms of Payment:
-

July 17, 1984, Reservation/ Deposit

100,000.00

July 19, 1984, 50% Down payment

1,070,000.00

balance payable in 60 monthly

installments with 24% p.a. interest
on diminishing balance. Monthly
payments to commence Sept. 12, 33,657.04/mon
1984
th
Note: Past due payments to bear interest of 2% per month plus
penalty charge of 2% per month.
"You are in default and your overdue account now stands as
follows:
Purchase Price
P2,340,000.00
Add:

Interest on
Monthly Amortizations

849,444.00
P3,189,444.00

Add:

Interest and
penalties
on
overdues
(Refer to Exh. 'A')
679,002.34
P3,868,446.34

Less:

Payments (Refer To Exh. 'B')

1,944,100.82

TOTAL DUE AND DEMANDABLE

P1,924,345.52
"Unless we receive payment in full within 30 days after service of
this notice upon you, our Contract to Sell shall be cancelled and/or
rescinded.
"Please give this matter its due attention.
"Very truly yours,
"(Sgd.) Illegible
(Type)
FELIX
H.
LIMCAOCO,
JR.
"President" 8
As so aptly observed by the courts below, the foregoing communication to
the buyer merely demanded payment within thirty (30) days from receipt
thereof with the threat that if the demand were not heeded, the contract
would forthwith be cancelled or rescinded. Nor did the appellate court
erroneously ignore the "notarial rescission" attached to the complaint for
reconveyance. Apparently, the so-called "notarial rescission" was not sent
to respondents prior to the institution of the case for reconveyance but
merely served on respondents by way of an attachment to the complaint.
In any case, a notarial rescission, standing alone, could not have invalidly
effected, in this case, the cancellation of the contract.

As the trial court elaborated in this case:

"A careful study of the evidence presented does not show a notice
of cancellation or the demand for rescission of the contract by a
notarial act. The plaintiff appears to be claiming that the June 2,
1988 letter is a notice of cancellation or a demand for rescission of
the contract by a notarial act. This could not be what the law
contemplates. It should be a notice of cancellation or demand for
rescission of the contract by notarial act.
"Further, the law requires also full payment of the cash surrender
value to the buyer but there is no evidence adduced by the
plaintiff that they delivered to the defendant the cash surrender
value. Admittedly, no such full payment of the cash surrender
value to the defendant was made. A mere promise to return is not
what the law contemplates."9
The governing law is Republic Act No. 6552, otherwise known as the
"Realty Installment Buyer Protection Act," which has become effective
since 16 September 1972. Republic Act No. 6552 is a special law
governing transactions that involve, subject to certain exceptions, the sale
on installment basis of real property. 10 The law has been enacted mainly
"to protect buyers of real estate on installment payments against onerous
and oppressive conditions." 11 Section 3 of the statute provides:
"Sec. 3. In all transactions or contracts involving the sale or
financing of real estate on installment payments, including
residential condominium apartments but excluding industrial lots,
commercial buildings and sales to tenants under Republic Act
Number Thirty-eight hundred forty-four as amended by Republic
Act Numbered Sixty three hundred eighty-nine, where the buyer
has paid at least two years of installments, the buyer is entitled to
the following rights in case he defaults in the payment of
succeeding installments:
"a) To pay without additional interest, the unpaid
installments due within the total grace period earned by
him, which is hereby fixed at the rate of one month grace
period for every one year of installment payments made:
Provided, That this right shall be exercised by the buyer
only once in every five years of the life of the contract and
its extensions, if any.
"b) If the contract is cancelled, the seller shall refund to
the buyer the cash surrender value of the payments on the
property equivalent to fifty per cent of the total payments
made and, after five years of installments, an additional
five per cent every year but not to exceed ninety per cent
of the total payments made: Provided, That the actual
cancellation of the contract shall take place after thirty
days from receipt by the buyer of the notice of
cancellation or the demand for rescission of the contract
by a notarial act and upon full payment of the cash
surrender value to the buyer.

"Down payments, deposits or options on the contract shall be

included in the computation of the total number of installments
made."
The enactment recognizes the right of the seller to cancel the contract but
any such cancellation must be done in conformity with the requirements
therein prescribed. 12 In addition to the notarial act of rescission, the seller
is required to refund to the buyer the cash surrender value of the
payments on the property. 13 The actual cancellation of the contract can
only be deemed to take place upon the expiry of a 30-day period following
the receipt by the buyer of the notice of cancellation or demand for
rescission by a notarial act and the full payment of the cash surrender
value.
The Court agrees with petitioner that it is not precluded from going to the
court to demand judicial rescission in lieu of a notarial act of rescission.
This much must be recognized. Thus, in Layug vs. Intermediate Appellate
Court 14 the Court has ruled that a demand for rescission by notarial act
would appear to be merely circuitous, consequently superfluous, with the
filing by the seller of an action for annulment of contract and for recovery
of damages. Unfortunately for petitioner, it would be incorrect to
apply Layug to the instant case. Layug is basically an action for annulment
of contract, a kindred concept of rescission, whereas the instant case
before the Court is one for recovery of possession on the thesis of a prior
rescission of the contract covering the property. 15 Not only is an action for
reconveyance conceptually different from an action for rescission but that,
also, the effects that flow from an affirmative judgment in either case
would be materially dissimilar in various respects. The judicial resolution of
a contract gives rise to mutual restitution which is not necessarily the
situation that can arise in an action for reconveyance. Additionally, in an
action for rescission (also often termed as resolution), unlike in an action
for reconveyance predicated on an extrajudicial rescission (rescission by
notarial act), the Court, instead of decreeing rescission, may authorize for
a just cause the fixing of a period. 16
Nor should a party in litigation be permitted to freely and substantially
change the theory or the cause of action of his case 17 that, otherwise, can
put to undue disadvantage the other party by not being accurately and
timely apprised of what he is up against. The character of an action is
determined from the issues raised by the complaint, from the nature of
the right or grievance asserted, and from the relief sought in the
complaint. 18 A change of theory can result in grave alteration of the stand
theretofore taken by the parties, and a court must not thereafter take it
upon itself to assume its own position on, or the factual and legal
considerations of, the case.
WHEREFORE, all premises considered, the instant petition is DENIED and
the appealed decision is AFFIRMED. No costs.
SO ORDERED.

G.R. No. 75364 November 23, 1988

ANTONIO LAYUG, petitioner,
vs.
INTERMEDIATE APPELLATE COURT and RODRIGO
GABUYA, respondents.
Francisco Ma. Garcia for petitioner.
Moises F. Dalisay, Sr. for private respondent.
NARVASA, J.:
Involved in the appellate proceedings at bar is a contract for the purchase
on installments by Antonio Layug of twelve (12) lots owned by Rodrigo
Gabuya, situated at Barrio Bara-as, Iligan City. The contract, entered into
on October 4, 1978, set the price for the lots at P120,000.00 payable in
three (3) yearly installments, viz:
1. P40,000.00, Philippine Currency, upon the signing of
this agreement/contract.
2. Another P40,000.00 after twelve (12) months or one
year from the signing of the contract/agreement.
3. The balance of P40,000.00 after 24 months or two years
from the signing of the contract/agreement.
The contract also provided for the automatic cancellation of the contract
and forfeiture of all installments thus far paid, which would be considered
as rentals for the use of the lots, to wit:
... (S)hould the vendee fail to pay any of the yearly
installments when due or otherwise fail to comply with any
of the terms and conditions herein stipulated, then this
deed of conditional sale shall automatically and without
any further formality, become null and void, and all sums
so paid by the vendee by reason thereof, shall be
considered as rentals and the vendor shall then and there
be free to enter into the premises, take possession thereof
or sell the properties to any other party. 1

Layug paid the first two annual installments, totalling P80,000.00. But he
failed to pay the last installment of P40,000.00, which fell due on October
5, 1980. Gabuya made several informal demands for payment; and when
all these proved unavailing, he made a formal written demand therefor
under date of April 18, 1981 which was sent to and received by Layug by
registered mail. When this, too, went unheeded, Gabuya finally brought
suit in the Court of First Instance of Lanao del Norte for the annulment of
his contract with Layug and for the recovery of damages. 2
The Trial Court's judgment went against Layug. It declared the contract of
conditional sale cancelled, and forfeited in Gabuya's favor all payments
made by Layug, considering them as rentals for the 12 lots for the period
from the perfection of the contract in 1978 to June 11, 1981, besides
requiring him to pay attorney's fees. 3 The judgment was, on appeal,
affirmed by the Court of Appeals, except that it made the application of
the forfeited payments, as rentals, extend up to the date of its decision:
August 30, 1985. 4
The Appellate Court overruled Layug's claim that the contract had not
fixed the date for the payment of the third and last installment and
consequently, he could not be considered to have defaulted in the
payment thereof. A reading of the contract immediately makes possible
the determination of the due dates of each yearly installment intended by
the parties; the first, on October 4, 1978, the date of execution of the
contract; the second, after 12 months or 1 year "from the signing of the
contract/agreement," or on October 5, 1979, and the third, or last, after
"24 months from ... (such) signing," or on October 5, 1980." That it was so
understood by Layug is established by the evidence. As observed by the
Court of Appeals, when Layug "paid the first (second, actually) yearly
installment of P40,000.00 on January 24, 1980, or three (3) months and
twenty (20) days beyond October 4, 1979, he paid an additional amount of
P800.00 as interest. If he did not agree that the first (second) installment
was due on October 4, 1979, it puzzles Us why he had to pay an additional
amount of P800.00 which was included in the receipt, Exhibit '6'." 5
Correctly overruled, too, was Layug's other claim that there was some
doubt as to the amount of the balance of his obligationby his
computation he only owed P30,000.00, since there was an advance
payment of P10,000.00 made by him for which he should be creditedand
this had to be first resolved before his obligation to pay the last
installment could be exigible. The Court of Appeals declared this to be but
a lame excuse for his delinquency; the P10,000.00 was in truth part
payment of the first installment of P40,000.00; for had it been otherwise,

the document of sale would have reflected it as a separate and distinct

payment from the first installment of P40,000.00 paid upon the signing of
the agreement; but Layug subscribed to the contract without asking for its
revision. According to the Court of Appeals, "If the theory of the
defendant-appellant that the P10,000.00 was separate and distinct from
the down payment of P40,000.00, then the balance as set forth in subpars.
2 and 3 quoted above should have been (correspondingly amended, e.g.,)
P35,000.00 each, or a total of P70,000.00 for both installments, instead of
P40,000.00 per installment, or a total of P80,000.00." 6
Prescinding from the well established and oft applied doctrine that the
findings of fact of the Court of Appeals are conclusive and generally
binding even on this Court, 7 nothing in the record has been brought to our
attention to justify modification, much less reversal, of those findings.
Petitioner adverts to the stipulation in his contract (a) granting him, as
vendee, a "30 days grace period within which to pay" any yearly
installment not paid within the time fixed therefor, and (b) declaring him
liable, in the event of his failure to pay within the grace period, "for
interest at the legal rate." He argues that the stipulation indicates that
rescission was not envisioned as a remedy against a failure to pay
installments; such failure was not ground for abrogating the contract but
merely generated liability for interest at the legal rate. The argument is
unimpressive. It would negate the explicit provision that the failure to pay
any of the yearly installments when due (or to comply with any other
covenant) would automatically render the contract null and void. The
stipulations of a contract shall be interpreted together, the law
says, 8 attributing to the doubtful ones that sense which may result from
all of them taken jointly. The grace period clause should be read conjointly
with the stipulation on rescission, and in such a manner as to give both full
effect. It is apparent that there is no such inconsistency between the two
as would support a hypothesis that one cannot be given effect without
making the other a dead letter. The patent and logical import of both
provisions, taken together, is that when the vendee fails to pay any
installment on its due date, he becomes entitled to a grace period of 30
days to cure that default by paying the amount of the installment plus
interest; but that if he should still fail to pay within the grace period, then
rescission of the contract takes place. It was for the judicial affirmation of
this plain proposition that the private respondent instituted the original
action for annulment which has given rise to this appeal.
Layug posits that, at the very least, he is entitled to a conveyance of at
least 8 of the 12 lots subject of the conditional sale, on the theory that

since the total price of the 12 lots was P120,000.00, each lot then had a
value of P10,000.00 and, therefore, with his P80,000.00, he had paid in full
the price for 8 lots. In support, he invokes our earlier rulings in Legarda
Hermanos v. Saldaa 9 and Calasanz v. Angeles. 10 The cited precedents
are however inapplicable. In Legarda Hermanos, the contract of sale
provided for payment of the price of two (2) subdivision lots at P1,500.00
each, exclusive of interest, in 120 monthly installments, and at time of
default, the buyer had already paid P3,582.00, inclusive of interest; and in
Calasanz, the agreement fixed a price of P3,720.00 with interest at 7% per
annum, and at time of default, the buyer had paid installments totaling
P4,533.38, inclusive of interest. Upon considerations of justice and equity
and in light of the general provisions of the civil law, we resolved
in Legarda Hermanos to direct the conveyance of one of the lots to the
buyer since he had already paid more than the value thereof, and
in Calasanz, to disallow cancellation by the seller and direct transfer of
title to the buyer upon his payment of the few installments yet unpaid. In
both said cases, we strove to equitably allocate the benefits and losses
between the parties to preclude undue enrichment by one at the expense
of the other; and by this norm, Layug cannot be permitted to claim that all
his payments should be credited to him in their entirety, without regard
whatever to the damages his default might have caused to Gabuya.
It is not however possible, in any event, to apply the rulings in Legarda
Hermanos and Calasanz to the case at bar; i.e., to resort to principles of
equity and the general provisions of the Civil Code in resolution of the
controversy. That was done in the cited cases because there was at then
no statute specifically governing the situation. It was not so as regards the
instant case. At the time of the execution of the contract in question, and
the breach thereof, there was a statute already in force and applicable
thereto, Republic Act No. 6552. 11 This statute makes unnecessary if not
indeed improper, a resort to analogous provisions of the Civil Code. It also
precludes a resort to principles of equity it being axiomatic that where
there is an adequate remedy at law available to the parties, equity should
not come into play. 12 And it allows a mitigation of the impact of the
stringent contractual provisions on Layug and makes possible the grant of
some measure of relief to him under the circumstances of the case.
R.A. 6552 governs sales of real estate on installments. It recognizes the
vendor's right to cancel such contracts upon failure of the vendee to
comply with the terms of the sale, but imposes, chiefly for the latter's
protection, certain conditions thereon. We have had occasion to rule that
"even in residential properties the Act" recognizes and reaffirms the

vendor's right to cancel the contract to sell upon breach and nonpayment
of the stipulated installments. ..." 13
The law provides inter alia 14 that "in all transactions or contracts involving
the sale or financing of real estate on installment payments, including
residential condominium apartments, ..., 15 where the buyer has paid at
least two years of installments, the buyer is entitled to the following rights
in case he defaults in the payment of succeeding installments:
[Grace Period]
(a) To pay, without additional interest, the unpaid
installments due within the total grace period earned by
him which is hereby fixed at the rate of one month grace
period for every year of installment payments made:
Provided , That this right shall be exercised by the buyer
only once in every five years of the life of the contract and
its extensions, if any;
[Refund of "Cash Surrender Value"]
(b) If the contract is cancelled, the seller shall refund to
the buyer the cash surrender value of the payments on
the property equivalent to fifty percent of the total
payments made and, after five years of installments, an
additional five per cent every year but not to exceed
ninety per cent of the total payments made; Provided,
That the actual cancellation of the contract shall take
place after thirty days from receipt by the buyer of the
notice of cancellation or the demand for rescission of the
contract by a notarial act and upon full payment of the
cash surrender value to the buyer.
In the case at bar, Layug had paid two (2) annual installments of
P40,000.00 each. He is deemed therefore, in the words of the law, to have
"paid at least two years of installments." He therefore had a grace period
of "one month .. for every year of installment payments made," or two (2)
months (corresponding to the two years of installments paid) from October
5, 1980 within which to pay the final installment. That he made no
payment within this grace period is plain from the evidence. He has thus
been left only with the right to a refund of the "cash surrender value of the
payments on the property equivalent to fifty percent of the total

payments made," or P40,000.00 (i.e., of the total payments of

P80,000.00).<re||an1w> Such refund will be the operative act to
make effective the cancellation of the contract by Gabuya, conformably
with the terms of the law. The additional formality of a demand on
Gabuya's part for rescission by notarial act would appear, in the premises,
to be merely circuitous and consequently superfluous.
WHEREFORE, the decision of the Court of Appeals is AFFIRMED particularly
in so far as it authorizes and sanctions the cancellation by private
respondent Gabuya of his contract of sale with petitioner Layug, but is
MODIFIED only in the sense that such cancellation shall become effective
and fully operative only upon payment to the latter's satisfaction of the
"cash surrender value" of his payments, in the sum of P40,000.00. No
costs.

G.R. No. 160107

October 22, 2014

SPOUSES JAIME SEBASTIAN AND EVANGELINE

SEBASTIAN, Petitioners,
vs.
BPI FAMILY BANK, INC., CARMELITA ITAPO AND BENJAMIN
HAO, Respondents.
DECISION
BERSAMIN, J.:
The protection of Republic Act No. 6552 (Realty Installment Buyer
Protection Act) does not cover a loan extended by the employer to enable
its employee to finance the purchase of a house and lot. The law protects
only a buyer acquiring the property by installment, not a borrower whose
rights are governed by the terms of the loan from the employer.
The Case
Under appeal is the decision promulgated on November 21,
2002,1 whereby the Court of Appeals (CA) affirmed the dismissal of the
action for injunction filed by the petitioners against the respondents to
prevent the foreclosure of the mortgage constituted on the house and lot
acquired out of the proceeds of the loan from respondent BPI Family Bank
(BPI Family), their employer.
Antecedents
The petitioners are spouses who used to work for BPI Family. At the time
material to this case, Jaime was the Branch Manager of BPI Familys San
Francisco del Monte Branch in Quezon City and Evangeline was a bank
teller at the Blumentritt Branch in Manila. On October 30, 1987, they
availed themselves of a housing loan from BPI Family as one of the
benefits extended to its employees. Their loan amounted to P273,000.00,
and was covered by a Loan Agreement, 2 whereby they agreed that the
loan would be payable in 108 equal monthly amortizations ofP3,277.57
starting on January 10, 1988 until December 10, 1996; 3 and that the
monthly amortizations would be deducted from his monthly salary. 4 To
secure the payment of the loan, they executed a real estate mortgage in
favor of BPI Family5 over the property situated in Bo. Ibayo, Marilao,

Bulacan and covered by TCT No. T-30.827 (M) of the Register of Deeds of
Bulacan.6
Apart from the loan agreement and the real estate mortgage, Jaime signed
an undated letter-memorandum addressed to BPI Family, 7 stating as
follows:
In connection with the loan extended to me by BPI Family Bank, I hereby
authorize you to automatically deduct an amount from my salary or any
money due to me to be applied to my loan, more particularly described as
follows:
xxxx
This authority is irrevocable and shall continue to exist until my loan is
fully paid. I hereby declare that I have signed this authority fully aware of
the circumstances leading to the loan extended to me by BPI Family Bank
and with full knowledge of the rights, obligations, and liabilities of a
borrower under the law.
I am an employee of BPI Family Bank and I acknowledge that BPI Family
Bank has granted to me the above-mentioned loan in consideration of this
relationship. In the event I leave, resign or am discharged from the service
of BPI Family Bank or my employment with BPI Family Bank is otherwise
terminated, I also authorize you to apply any amount due me from BPI
Family Bank to the payment of the outstanding principal amount of the
aforesaid loan and the interest accrued thereon which shall thereupon
become entirely due and demandable on the effective date of such
discharge, resignation or termination without need of notice of demand,
and to do such other acts as may be necessary under the circumstances.
(Bold emphasis added)
x x x x.
The petitioners monthly loan amortizations were regularly deducted from
Jaimes monthly salary since January 10, 1988.1wphi1 On December 14,
1989, however, Jaime received a notice of termination from BPI Familys
Vice President, Severino P. Coronacion,8 informing him that he had been
terminated from employment due to loss of trust and confidence resulting
from his wilful non-observance of standard operating procedures and
banking laws. Evangeline also received a notice of termination dated

February 23, 1990,9 telling her of the cessation of her employment on the
ground of abandonment. Both notices contained a demand for the full
payment of their outstanding loans from BPI Family, viz:
Demand is also made upon you to pay in full whatever outstanding
obligations by way of Housing Loans,Salary Loans, etc. that you may have
with the bank. You are well aware that said obligations become due and
demandable upon your separation from the service of the
bank.10 (Emphasis supplied.)
Immediately, the petitioners filed a complaint for illegal dismissal against
BPI Family in the National Labor Relations Commission (NLRC). 11
About a year after their termination from employment, the petitioners
received a demand letter dated January 28, 1991 from BPI Familys
counsel requiring them to pay their total outstanding obligation amounting
to P221,534.50.12The demand letter stated that their entire outstanding
balance had become due and demandable upon their separation from BPI
Family. They replied through their counsel on February 12, 1991. 13
In the meantime, BPI Family instituted a petition for the foreclosure of the
real estate mortgage.14 The petitioners received on March 6, 1991 the
notice of extrajudicial foreclosure of mortgage dated February 21, 1991.
To prevent the foreclosure of their property, the petitioners filed against
the respondents their complaint for injunction and damages with
application for preliminary injunction and restraining order15 in the
Regional Trial Court (RTC) in Malolos, Bulacan.16 They therein alleged that
their obligation was not yet due and demandable considering that the
legality of their dismissal was still pending resolution by the labor court;
hence, there was yet no basis for the foreclosure of the mortgaged
property; and that the property sought to be foreclosed was a family
dwelling in which they and their four children resided.
In its answer with counterclaim, 17 BPI Family asserted that the loan
extended to the petitioners was a special privilege granted to its
employees; that the privilege was coterminous withthe tenure of the
employees with the company; and that the foreclosure of the mortgaged
property was justified by the petitioners failure to pay their past due loan
balance.
Judgment of the RTC

On June 27, 1995, the RTC rendered judgment,18 disposing thusly:

IN VIEW OF THE FOREGOING CONSIDERATIONS, the Court hereby renders
judgment DISMISSING the instant case as well as defendant banks
counterclaim withoutany pronouncement as to costs.
SO ORDERED.19
Decision of the CA
The petitioners appealed upon the following assignment of errors, namely:
I. THE TRIAL COURT ERRED IN FINDING THAT APPELLEE BANKS
FORECLOSURE OF THE REAL ESTATE MORTGAGE CONSTITUTED ON
APPELLANTS FAMILY HOME WAS IN ORDER.
A. Appellants cannot be consideredas terminated from
their employment with appellee bank during the pendency
of their complaint for illegal dismissal with the NLRC.
B. Appellee bank wrongfully refused to accept the
payments of appellants monthly amortizations.
II. THE TRIAL COUT ERRED IN DENYING APPELLANTS PRAYER FOR
INJUNCTION.
A. The foreclosure of appellants mortgage was premature.
B. Appellants are entitled to damages.20
On November 21, 2002, the CA promulgated its assailed decision affirming
the judgment of the RTC in toto.21
The petitioners then filed their motion for reconsideration, 22 in which they
contended for the first timethat their rights under Republic Act No. 6552
(Realty Installment Buyer Protection Act) had been disregarded,
considering that Section 3 of the law entitled them to a grace period
within which to settle their unpaid installments without interest; and that
the loan agreement was in the natureof a contract of adhesion that must
be construed strictly against the one who prepared it, that is, BPI Family
itself.

On September 18, 2003, the CA denied the petitioners motion for

reconsideration.23

the viewing court, as they cannot be raised for the first time at that late
stage. Basic considerations of fairness and due process impel this rule.
Any issue raised for the first time on appeal is barred by estoppel.

Issues
In this appeal, the petitioners submit for our consideration and resolution
the following issues, to wit:
WHETHER OR NOT RESPONDENT COURT OF APPEALS GRAVELY ERRED IN
DECLARING THE FORECLOSURE OF THE REAL ESTATE MORTGAGE ON
PETITIONERS FAMILY HOME IN ORDER.
WHETHER OR NOT RESPONDENT COURT OF APPEALS GRAVELY ERRED IN
DENYING PETITIONERS MOTION FOR RECONSIDERATION DESPITE
JUSTIFIABLE REASONS THEREFOR.24
Ruling
The petition for review has no merit.
When the petitioners appealed the RTC decision to the CA, their
appellants brief limited the issues to the following:
(a) Whether or not appellee bank wrongfully refused to accept
payments by appellants of their monthly amortizations.
(b) Whether or not the foreclosure of appellants real estate
mortgage was premature.25
The CA confined its resolution to these issues. Accordingly, the petitioners
could not raise the applicability of Republic Act No. 6552, or the strict
construction of the loan agreement for being a contract of adhesion as
issues for the first time either in their motion for reconsideration or in their
petition filed in this Court. To allow them to do so would violate the
adverse parties right to fairness and due process. As the Court held in
S.C. Megaworld Construction and Development Corporation v. Parada: 26
It is well-settled that no question will be entertained on appeal unless it
has been raised in the proceedings below. Points of law, theories, issues
and arguments not brought to the attention of the lower court,
administrative agency or quasi-judicial body, need not be considered by

The procedural misstep of the petitioners notwithstanding, the Court finds

no substantial basis to reverse the judgments of the lower courts.
Republic Act No. 6552 was enacted to protect buyers of real estate on
installment payments against onerous and oppressive conditions. 27 The
protections accorded to the buyers were embodied in Sections 3, 4 and 5
of the law, to wit:
Section 3. In all transactions or contracts, involving the sale or financing of
real estateon installment payments, including residential condominium
apartments but excluding industrial lots, commercial buildings and sales
to tenants under Republic Act Numbered Thirty-Eight hundred forty-four as
amended byRepublic Act Sixty-three hundred eighty-nine, where the buyer
has paid atleast two years of installments, the buyer is entitled to the
following rights in case he defaults in the payment of succeeding
installments:
(a) To pay, without additional interest, the unpaid installments due
within the total grace period earned by him which is hereby fixed
at that rate of one month grace period for every one year of
installment payments made; provided, That this right shall be
exercised by the Buyer only once in every five years of the life of
the contract and its extensions, if any.
(b) If the contract is cancelled, the seller shall refund to the buyer
the cash surrender value of the payments on the property
equivalent to fifty percent of the total payments made, and, after
five years of installments, an additional five per cent every year
but not to exceed ninety per cent of the total payments made;
Provided, That the actual cancellation or the demand for rescission
of the contract by a notarial act and upon full payment of the cash
surrender value to the buyer.
Down payments, deposits or options on the contract shall be included in
the computation of the total number of installment payments made.

SECTION 4. In case where less than two years of installments were paid,
the seller shall give the buyers a grace period of not less than sixty days
from the date the installment become due.
If the buyer fails to pay the installments due at the expiration of the grace
period, the seller may cancel the contract after thirty days from receipt by
the buyer of the notice of cancellation or the demand for rescission of the
contract by a notarial act.
SECTION 5. Under Section 3 and 4,the buyer shall have the right to sell his
rights or assign the same to another person or to reinstate the contract by
updating the account during the grace period and before actual
cancellation of the contract. The deed of sale or assignment shall be done
by notarial act.
Having paid monthly amortizations for two years and four months, the
petitioners now insist that they were entitled to the grace period within
which to settle the unpaid amortizations without interest provided under
Section 3, supra.28Otherwise, the foreclosure of the mortgaged property
should be deemed premature inasmuch as their obligation was not yet
due and demandable.29
The petitioners insistence would have been correct if the monthly
amortizations being paid to BPI Family arose from a sale or financing of
real estate. In their case, however, the monthly amortizations represented
the installment payments of a housing loan that BPI Family had extended
to them as an employees benefit. The monthly amortizations they were
liable for was derived from a loan transaction, not a sale transaction,
thereby giving rise to a lender-borrower relationship between BPI Family
and the petitioners. It bears emphasizing that Republic Act No. 6552
aimed to protect buyers of real estate on installment payments, not
borrowers or mortgagors who obtained a housing loan to pay the costs of
their purchase of real estate and used the real estate assecurity for their
loan. The "financing of real estate in installment payments" referred to in
Section 3, supra, should be construed only as a mode of payment vis--vis
the seller of the real estate, and excluded the concept of bank financing
that was a type of loan. Accordingly, Sections 3, 4 and 5, supra, must be
read as to grant certain rights only to defaulting buyers of real estate on
installment, which rights are properly demandable only against the seller
of real estate.

Thus, in Luzon Brokerage Co., Inc. v.Maritime Building Co., Inc., 30 the Court
held:
Congress in enacting in September 1972 Republic Act 6552 (the Maceda
law), has by law which is its proper and exclusive province (and not that of
this Court which is not supposed to legislate judicially) has taken care of
Justice Barredos concern over "the unhappy and helpless plight of
thousands upon thousands of subdivision buyers" of residential lots.
The Act even in residential properties recognizes and reaffirms the
vendor's right to cancel the contractto sell upon breach and non-payment
of the stipulated installments but requires a grace period after at least two
years of regular installment payments (of one month for every one year of
installment payments made, but to be exercise by the buyer only once in
every five years of the life of the contract) with a refund of certain
percentages of payments made on account of the cancelled contract
(starting with fifty percent with gradually increasing percentages after five
years of installments). In case of industrial and commercial properties, as
in the case at bar, the Act recognizes and reaffirms the Vendor's right
unqualifiedly to cancel the sale upon the buyer's default.
The petitioners purchased the realestate from PHILVILLE Realty, 31 not from
BPI Family. Without the buyer-seller relationship between them and BPI
Family, the provisions of Republic Act No. 6552 were inapplicable and
could not be invoked by them against BPI Family.
Apart from relying on the grace period provided in Republic Act No. 6552
to assert the prematurity of the foreclosure of the mortgage, 32 the
petitioners argue that the foreclosure of the mortgage was null and void
because BPI Familys acceptance of their late payments estopped it from
invoking sanctions against them.33 They further argue that the printed
conditions appearing at the back of BPI Familys official receipt, 34 which the
CA cited to affirm the validity of the foreclosure, partook of a contract of
adhesion that must be strictly construed against BPI Family as the party
who prepared the same.35
The petitioners arguments do not persuade. To reiterate, their reliance on
Republic Act No. 6552 was misplaced because its provisions could not
extend to a situation bereft of any seller-buyer relationship. Hence, they
could not escape the consequences of the maturity of their obligation by
invoking the grace period provided in Section 3, supra.

The CA correctly found that there was basis to declare the petitioners
entire outstanding loan obligation matureas to warrant the foreclosure of
their mortgage. It is settled that foreclosure is valid only when the debtor
is in default in the payment of his obligation. 36 Here, the records show that
the petitioners were defaulting borrowers, a fact that the CA thoroughly
explained in the following manner:

only by showing that it was made through palpable mistake or that no

such admission is made. Judicial admissions are those made voluntarily by
a party, which appear on record in the proceedings of the court. Formal
acts done by a party or his attorney in court on the trial of a cause for the
purpose of dispensing with proof by the opposing party of some fact
claimed by the latter to be true.

Appellants insist that there was no valid ground for appellee bank to
institute the foreclosure proceedings because they still have a pending
case for illegal dismissal before the NLRC. They argue that the reason for
the banks foreclosure is their dismissal from employment. As they are still
questioning the illegality of their dismissal, the bank has no legal basis in
foreclosing the property.

xxxx

xxxx
The arguments fail to persuade Us.
First, appellants cannot rely on the mere possibility that if the decision of
the NLRC will be in their favor, part of the reliefs prayed for would be
reinstatement without loss of seniority and other privilege. Such argument
is highly speculative. On the contrary, in a thirteen-page decision, the
Labor Arbiter exhaustively discussed the validity of appellant Jaime
Sebastians termination. x x x
xxxx
Moreover, appellants appealed the Labor Arbiters decision as early as
January 10, 1994. To date, however, nothing has been heard from
appellants if they obtained a favorable judgment from the NLRC.
Second, even if it turns out the appellants werenot validly terminated from
their employment, there is valid reason to foreclose the mortgaged
property.
Appellants themselves admit that they were in arrears when they made
the late payments in March, 1991. While this admission was not in the
course of the testimony of appellant Jaime Sebastian, this was done during
the hearing of the case when the trial judge propounded the question to
him. Hence, this constitute (sic) judicial admission. An admission, verbal or
written, made by a party in the course of the trial or other proceedings in
the same case does not require proof. The admission may be contradicted

Fourth, the terms and conditions of the loan agreement, promissory notes
and the real estate mortgage contract, do not partake of a contract of
adhesion. It must be noted that appellants are personnel of the bank.
Jaime Sebastian was then a branch manager while his wife Evangeline was
a bank teller. It is safe to conclude that they are familiar with the
documents they signed, including the conditions stated therein. It is also
presumed that they take ordinary care of their concerns and that they
voluntarily and knowingly signed the contract.
Appellant Jaime Sebastian, in his letter addressed to appellee bank, even
acknowledged that "in the event of resignation or otherwise terminated
from his employment, the principal as well as the interest due shall
become entirely due and demandable" (Exh. "E"). The freedom to enter
into contracts is protected by law and the courts are not quick to interfere
with such freedom unless the contract is contrary to law, morals, good
customs, public policy or public order. Courts are not authorized to
extricate parties from the necessary consequences of their acts, and the
fact that the contractual stipulations may turn out to be financially
disadvantageous will not relieve parties thereto of their obligations,
Fifth, We cannot also buy appellants argument that appellee refused to
accept the subsequent payments made by them. It is settled that an issue
which was not raised during the trial in the court below could not be raised
for the first time on appeal, as to do so, would be offensive to the basic
rules of fair play, justice and due process. Here, appellant Jaime Sebastian
twice testified before the Court, first, during the hearing on the preliminary
injunction and on the trial proper. Nothing was mentioned about the
refusal on the part of the bank to accept their subsequent payments.
Assuming, arguendo, that appellee bank indeed refused to accept the
subsequent payment from appellants, they could have consigned the

same before the Court. They failed to do so. There was no effort on their
part to continue paying their obligations.
Thus, having signed a deed of mortgage in favor of appellee bank,
appellants should have foreseen thatwhen their principal obligation was
not paid when due, the mortgagee has the right to foreclose the mortgage
and to have the property seized and sold with a view to applying the
proceeds to the payment ofthe principal obligation.37

strained relations between them; and(c) when the dismissed employee

opted not to be reinstated, or the payment of separation benefits would be
for the best interest of the parties involved. In these instances, separation
pay is the alternative remedy to reinstatement in addition to the award of
backwages. The payment of separation pay and reinstatement are
exclusive remedies. The payment of separation pay replaces the legal
consequences of reinstatement to an employee who was illegally
dismissed.

x x x In the event I leave, resign or amdischarged from the service of BPI

Family Bank or my employment with BPI Family Bank is otherwise
terminated, I also authorize you to apply any amount due me from BPI
Family Bank to the payment of the outstanding principal amount of the
aforesaid loan and the interest accrued thereon which shall there upon
become entirely due and demandable on the effective date of such
discharge, resignation or termination without need of notice of demand,
and to do such other acts as may be necessary under the circumstances. 38

Nonetheless, it is noteworthy that the Labor Arbiter ultimately ruled that

Jaimes dismissal was valid and legal. Such ruling affirmed the legality of
the termination of James from BPI Familys employment. Under the
circumstances, the entire unpaid balance of the housing loan extended to
him by BPI Family became due and demandable upon such termination in
accordance with Jaimes express and written commitment to BPI Family.
Even if we were to disregard this condition, their admission of default in
their monthly amortizations constituted an event of default within the
context of Section 7 of the loan agreement that produced the same effect
of rendering any outstanding loan balance due and demandable. Section 7
the loan agreement reads as follows:

(Bold emphasis supplied.)

SECTION 7. EVENTS OF DEFAULT

The petitioners thereby explicitly acknowledged that BPI Family Bank had
granted the housing loan inconsideration of their employer employee
relationship. They were thus presumed to understand the conditions for
the grant of their housing loan. Considering that the maturity of their loan
obligation did not depend on the legality of their termination from
employment, their assertion that the resolution of their labor complaint for
illegal dismissal was prejudicial to the ripening of BPI Familys cause of
action was properly rejected. Indeed, a finding of illegal dismissal in their
favor would not automatically and exclusively result in their reinstatement.
As fittingly ruled in Bani Rural Bank, Inc. v. De Guzman: 39

If any of the following Events of Default shall have occurred and be

continuing:

Equally notable was that Jaimes undated letter-memorandum to BPI

Family expressly stated the following:

"By jurisprudence derived from this provision, separation pay may [also]
be awarded to an illegally dismissed employee in lieu of reinstatement."
Section 4(b), Rule I of the Rules Implementing Book VI of the Labor Code
provides the following instances when the award of separation pay, in lieu
of reinstatement to an illegally dismissed employee, is proper: (a) when
reinstatement is no longer possible, in cases where the dismissed
employee s position is no longer available; (b) the continued relationship
between the employer and the employee is no longer viable due to the

a) The Borrower shall fail to pay when due the Loan(s) any installment
thereof, or any other amount payable under this Agreement the Note(s) or
under the Collateral; or
xxxx
then, and in any such event, the Bank may by written notice to the
Borrower cancel the Commitment and/or declare all amounts owing to the
Bank under this Agreement and the Note(s), whether of principal, interest
or otherwise, to be forthwith due and payable, whereupon all such
amounts shall become immediately due and payable without demand or
other notice of any kind, all of which are expressly waived by the Borrower.
The Borrower shall pay on demand by the Bank, in respect of any amount
or principal paid in advance of stated maturity pursuant to this Section 7,
a prepayment penalty equal to the rate mentioned in Section 2.07 (c). 40

With demand, albeit unnecessary, having been made on the petitioners,

they were undoubtedly in default in their obligations.
The foreclosure of a mortgage is but the necessary consequence of the
non-payment of an obligation secured by the mortgage.1wphi1 Where
the parties have stipulated in their agreement, mortgage contract and
promissory note that the mortgagee is authorized to foreclose the
mortgage upon the mortgagor's default, the mortgagee has a clear right
to the foreclosure in case of the mortgagor's default. Thereby, the
issuance of a writ of preliminary injunction upon the application of the
mortgagor to prevent the foreclosure will be improper. 41 As such, the lower
courts did not err in dismissing the injunction complaint of the petitioners.
WHEREFORE, the Court DENIES the petition for review on certiorari;
AFFIRMS the decision promulgated on November 21, 2002; and ORDERS
the petitioners to pay the costs of suit.
SO ORDERED.

G.R. No. L-57499 June 22, 1984

MERCEDES CALIMLIM- CANULLAS, petitioner,
vs.
HON. WILLELMO FORTUN, Judge, Court of First instance of
Pangasinan, Branch I, and CORAZON DAGUINES, respondents.
Fernandez Law Offices for petitioner.
Francisco Pulido for respondents.
MELENCIO-HERRERA, J.:
Petition for Review on certiorari assailing the Decision, dated October 6,
1980, and the Resolution on the Motion for Reconsideration, dated
November 27, 1980, of the then Court of First Instance of Pangasinan,
Branch I, in Civil Case No. 15620 entitled "Corazon DAGUINES vs.
MERCEDES Calimlim-Canullas," upholding the sale of a parcel of land in
favor of DAGUINES but not of the conjugal house thereon'
The background facts may be summarized as follows: Petitioner
MERCEDES Calimlim-Canullas and FERNANDO Canullas were married on
December 19, 1962. They begot five children. They lived in a small house
on the residential land in question with an area of approximately 891
square meters, located at Bacabac, Bugallon, Pangasinan. After
FERNANDO's father died in 1965, FERNANDO inherited the land.

where she and her children were residing, including the coconut trees on
the land, were built and planted with conjugal funds and through her
industry; that the sale of the land together with the house and
improvements to DAGUINES was null and void because they are conjugal
properties and she had not given her consent to the sale,
In its original judgment, respondent Court principally declared DAGUINES
"as the lawful owner of the land in question as well as the one-half () of
the house erected on said land." Upon reconsideration prayed for by
MERCEDES, however, respondent Court resolved:
WHEREFORE, the dispositive portion of the Decision of this
Court, promulgated on October 6, 1980, is hereby
amended to read as follows:
(1) Declaring plaintiff as the true and lawful owner of the
land in question and the 10 coconut trees;
(2) Declaring as null and void the sale of the conjugal
house to plaintiff on April 15, 1980 (Exhibit A) including
the 3 coconut trees and other crops planted during the
conjugal relation between Fernando Canullas (vendor) and
his legitimate wife, herein defendant Mercedes CalimlimCanullas;
xxx xxx xxx

In 1978, FERNANDO abandoned his family and was living with private
respondent Corazon DAGUINES. During the pendency of this appeal, they
were convicted of concubinage in a judgment rendered on October 27,
1981 by the then Court of First Instance of Pangasinan, Branch II, which
judgment has become final.

The issues posed for resolution are (1) whether or not the construction of a
conjugal house on the exclusive property of the husband ipso facto gave
the land the character of conjugal property; and (2) whether or not the
sale of the lot together with the house and improvements thereon was
valid under the circumstances surrounding the transaction.

On April 15, 1980, FERNANDO sold the subject property with the house
thereon to DAGUINES for the sum of P2,000.00. In the document of sale,
FERNANDO described the house as "also inherited by me from my
deceased parents."

The determination of the first issue revolves around the interpretation to

be given to the second paragraph of Article 158 of the Civil Code, which
reads:
xxx xxx xxx

Unable to take possession of the lot and house, DAGUINES initiated a

complaint on June 19, 1980 for quieting of title and damages against
MERCEDES. The latter resisted and claimed that the house in dispute

Buildings constructed at the expense of the partnership

during the marriage on land belonging to one of the

spouses also pertain to the partnership, but the value of

the land shall be reimbursed to the spouse who owns the
same.

The foregoing premises considered, it follows that FERNANDO could not

have alienated the house and lot to DAGUINES since MERCEDES had not
given her consent to said sale. 4

We hold that pursuant to the foregoing provision both the land and the
building belong to the conjugal partnership but the conjugal partnership is
indebted to the husband for the value of the land. The spouse owning the
lot becomes a creditor of the conjugal partnership for the value of the
lot, 1 which value would be reimbursed at the liquidation of the conjugal
partnership. 2

Anent the second issue, we find that the contract of sale was null and void
for being contrary to morals and public policy. The sale was made by a
husband in favor of a concubine after he had abandoned his family and
left the conjugal home where his wife and children lived and from whence
they derived their support. That sale was subversive of the stability of the
family, a basic social institution which public policy cherishes and
protects. 5

In his commentary on the corresponding provision in the Spanish Civil

Code (Art. 1404), Manresa stated:
El articulo cambia la doctrine; los edificios construidos
durante el matrimonio en suelo propio de uno de los
conjuges son gananciales, abonandose el valor del suelo al
conj uge a quien pertenezca.
It is true that in the case of Maramba vs. Lozano, 3 relied upon by
respondent Judge, it was held that the land belonging to one of the
spouses, upon which the spouses have built a house, becomes conjugal
property only when the conjugal partnership is liquidated and indemnity
paid to the owner of the land. We believe that the better rule is that
enunciated by Mr. Justice J.B.L. Reyes in Padilla vs. Paterno, 3 SCRA 678,
691 (1961), where the following was explained:
As to the above properties, their conversion from paraphernal to
conjugal assets should be deemed to retroact to the time the
conjugal buildings were first constructed thereon or at the very
latest, to the time immediately before the death of Narciso A.
Padilla that ended the conjugal partnership. They can not be
considered to have become conjugal property only as of the time
their values were paid to the estate of the widow Concepcion
Paterno because by that time the conjugal partnership no longer
existed and it could not acquire the ownership of said properties.
The acquisition by the partnership of these properties was, under
the 1943 decision, subject to the suspensive condition that their
values would be reimbursed to the widow at the liquidation of the
conjugal partnership; once paid, the effects of the fulfillment of
the condition should be deemed to retroact to the date the
obligation was constituted (Art. 1187, New Civil Code) ...

Article 1409 of the Civil Code states inter alia that: contracts whose cause,
object, or purpose is contrary to law, morals, good customs, public order,
or public policy are void and inexistent from the very beginning.
Article 1352 also provides that: "Contracts without cause, or with unlawful
cause, produce no effect whatsoever. The cause is unlawful if it is contrary
to law, morals, good customs, public order, or public policy."
Additionally, the law emphatically prohibits the spouses from selling
property to each other subject to certain exceptions. 6 Similarly, donations
between spouses during marriage are prohibited. 7 And this is so because
if transfers or con conveyances between spouses were allowed during
marriage, that would destroy the system of conjugal partnership, a basic
policy in civil law. It was also designed to prevent the exercise of undue
influence by one spouse over the other, 8 as well as to protect the
institution of marriage, which is the cornerstone of family law. The
prohibitions apply to a couple living as husband and wife without benefit
of marriage, otherwise, "the condition of those who incurred guilt would
turn out to be better than those in legal union." Those provisions are
dictated by public interest and their criterion must be imposed upon the
wig of the parties. That was the ruling in Buenaventura vs. Bautista, also
penned by Justice JBL Reyes (CA) 50 O.G. 3679, and cited in Matabuena
vs. Cervantes. 9 We quote hereunder the pertinent dissertation on this
point:
We reach a different conclusion. While Art. 133 of the Civil Code
considers as void a donation between the spouses during the
marriage, policy considerations of the most exigent character as
wen as the dictates of morality require that the same prohibition
should apply to a common-law relationship.

As announced in the outset of this opinion, a 1954 Court of

Appeals decision, Buenaventura vs. Bautista, 50 OG 3679,
interpreting a similar provision of the old Civil Code speaks
unequivocally. If the policy of the law is, in the language of the
opinion of the then Justice J.B.L. Reyes of that Court, 'to prohibit
donations in favor of the other consort and his descendants
because of fear of undue influence and improper pressure upon
the donor, a prejudice deeply rooted in our ancient law, ...,
then there is every reason to apply the same prohibitive policy to
persons living together as husband and wife without benefit of
nuptials. For it is not to be doubted that assent to such irregular
connection for thirty years bespeaks greater influence of one
party over the other, so that the danger that the law seeks to
avoid is correspondingly increased'. Moreover, as pointed out by
Ulpian (in his lib 32 ad Sabinum, fr. 1), "It would not be just that
such donations should subsist, lest the conditions of those who
incurred guilt should turn out to be better." So long as marriage
remains the cornerstone of our family law, reason and morality
alike demand that the disabilities attached to marriage should
likewise attach toconcubinage (Emphasis supplied),
WHEREFORE, the Decision of respondent Judge, dated October 6, 1980, and his
Resolution of November 27, 1980 on petitioner's Motion for Reconsideration, are
hereby set aside and the sale of the lot, house and improvements in question, is
hereby declared null and void. No costs.
SO ORDERED.

G.R. No. 112954

August 25, 2000

RICARDO DISTAJO, ERNESTO DISTAJO, RAUL DISTAJO, FEDERICO

DISTAJO, ZACARIAS A. DISTAJO, EDUARDO DISTAJO, and PILAR
DISTAJO TAPAR, petitioners,
vs.
COURT OF APPEALS and LAGRIMAS SORIANO DISTAJO, respondents.
DECISION
PARDO, J.:
The case under consideration is a petition for review on certiorari of a
decision of the Court of Appeals 1 , which modified the ruling of the
Regional Trial Court, Roxas City regarding seven parcels of land located in
Barangay Hipona, Pontevedra, Capiz.2
During the lifetime of Iluminada Abiertas, she designated one of her sons,
Rufo Distajo, to be the administrator of her parcels of land denoted as Lot
Nos. 1018, 1046, 1047, and 1057 situated in Barangay Hipona,
Pontevedra, Capiz.
On May 21, 1954, Iluminada Abiertas sold a portion of Lot No. 1018 (1018A) to her other children, namely, Raul Distajo, Ricardo Distajo, Ernesto
Distajo, Federico Distajo, and Eduardo Distajo.3
On May 29, 1963, Iluminada Abiertas certified to the sale of Lot Nos. 1046
and 1047 in favor of Rufo Distajo.4
On June 4, 1969, Iluminada Abiertas sold Lot No. 1057 to Rhodora Distajo,
the daughter of Rufo Distajo.5
On July 12, 1969, Iluminada Abiertas sold Lot No. 1018 to Rufo Distajo. 6
Meanwhile, Justo Abiertas, Jr., the brother of Iluminada Abiertas, died
leaving behind his children, Teresita, Alicia, Josefa and Luis Abiertas.
Teresita paid for the real estate taxes of the following properties, which
she inherited from her father: Lot Nos. 1001, 1048, 1049, and a portion of
Lot No. 1047, all located in Capiz. On May 26, 1954, Teresita Abiertas sold
Lot No. 1001 in favor of Rufo Distajo.7 On June 2, 1965, Teresita Abiertas,

for herself and representing her sisters and brother, sold Lot Nos. 1048,
1049, and a portion of Lot No. 1047 to Rufo Distajo. 8
After purchasing the above-mentioned parcels of land, Rufo Distajo took
possession of the property and paid the corresponding real estate taxes
thereon. Rhodora Distajo likewise paid for the real estate taxes of Lot No.
1057.
When Iluminada Abiertas died in 1971, Zacarias Distajo, Pilar DistajoTapar, and Rizaldo Distajo,9 demanded possession of the seven parcels of
land from Lagrimas S. Distajo, and her husband, Rufo Distajo. The latter
refused.
Consequently, on June 5, 1986, Ricardo Distajo, with the other heirs of
Iluminada Abiertas, namely, Ernesto Distajo, Raul Distajo, Federico Distajo,
Zacarias Distajo, Eduardo Distajo, and Pilar Distajo, filed with the Regional
Trial Court, Roxas City a complaint for recovery of possession and
ownership of Lot No. 1018, partition of Lot Nos. 1001, 1018-B, 1046, 1047,
1048, 1049, 1057, and damages.
On September 4, 1986, private respondent Lagrimas Distajo 10 filed an
answer with counterclaim.
On April 9, 1990, the trial court dismissed the complaint for lack of cause
of action, laches and prescription. The counterclaim was likewise
dismissed. The parties appealed to the Court of Appeals. 11
On August 21, 1992, the Court of Appeals rendered its decision, 12 the
dispositive portion of which states as follows:"PREMISES CONSIDERED, the
decision appealed from is hereby SET ASIDE and a new judgment
rendered, as follows:
WHEREFORE, the Court decides the case in favor of the defendant and
dismisses the plaintiffs complaint for lack of cause of action except with
regard to the plaintiffs claim over a 238 sq. m. portion of Lot No. 1018
(the portion adjoining the market site and measuring seventeen meters
and that adjoining the property of E. Rodriguez measuring 14 meters). The
Court hereby Orders the partition of Lot No. 1018 to conform to the
following: 238 sq. m. as above specified to belong to the plaintiffs as
prayed for by them while the rest is declared property of the defendant.

Upon partition of Lot No. 1018 in accordance with this Courts Order, the
City Assessor of Roxas City is hereby Ordered to cancel Tax Declaration
2813 in the name of Rufo Distajo (or any subsequent tax declaration/s
issued relative to the above-cited Tax Declaration No. 2813) and forthwith
to issue the corresponding tax declarations in the names of the respective
parties herein.
SO ORDERED."
On September 10, 1992, Ricardo Distajo filed a motion for
reconsideration.13 On December 9, 1993, the Court of Appeals denied the
motion.14
Hence, this petition.15
Petitioner alleges that Iluminada Abiertas exclusively owns the seven
parcels of land delineated as Lot Nos. 1001, 1018, 1046, 1047, 1048,
1049, and 1057, all of which should be partitioned among all her heirs.
Furthermore, Rufo Distajo cannot acquire the subject parcels of land
owned by Iluminada Abiertas because the Civil Code prohibits the
administrator from acquiring properties under his administration. 16 Rufo
Distajo merely employed fraudulent machinations in order to obtain the
consent of his mother to the sale, and may have even forged her signature
on the deeds of sale of the parcels of land.
In her comment dated May 13, 1994, private respondent Lagrimas S.
Distajo contends that Rufo Distajo rightfully owns the subject parcels of
land because of various deeds of sale executed by Iluminada Abiertas
selling Lot Nos. 1018-B, 1047 and 1046 in favor of Rufo Distajo and Lot No.
1057 in favor of Rhodora Distajo. Private respondent also avers that
petitioner cannot claim any right over Lot Nos. 1001, 1048 and 1049,
considering that such lands belong to the brother of Iluminada Abiertas,
namely, Justo Abiertas, Jr., whose heirs sold said parcels of land to Rufo
Distajo.
The petition lacks merit.
Factual findings of the trial court will not be disturbed on appeal unless the
court has overlooked or ignored some fact or circumstance of sufficient
weight or significance, which, if considered, would alter the result of the
case.17When there is no conflict between the findings of the trial and

appellate courts, a review of the facts found by the appellate court is

unnecessary.18
Since the trial court and the Court of Appeals agree that Iluminada
Abiertas owned Lot Nos. 1046, 1057 and a portion of Lot No. 1047, and
that Justo Abiertas Jr. owned Lot Nos. 1001, 1048, and 1049, such findings
are binding on this Court, which is not a trier of facts. 19 However, the
record shows that Lot No. 1018 should be divided into Lot No. 1018-A and
1018-B, the delineation of which the Court of Appeals clarified in its
decision.
The issues in this case, therefore, are limited to those properties which
were owned by Iluminada Abiertas, ascendant of petitioner, consisting of
Lot Nos. 1018-A, 1046, 1057, and a portion of 1047.
In his petition, Ricardo Distajo assails the genuineness of the signatures of
Iluminada Abiertas in the deeds of sale of the parcels of land, and claims
that Rufo Distajo forged the signature of Iluminada Abiertas. However, no
handwriting expert was presented to corroborate the claim of forgery.
Petitioner even failed to present a witness who was familiar with the
signature of Iluminada Abiertas. Forgery should be proved by clear and
convincing evidence, and whoever alleges it has the burden of proving the
same.20
Petitioner likewise contends that the sale transactions are void for having
been entered into by the administrator of the properties.1wphi1 We
disagree. The pertinent Civil Code provision provides:
"Art. 1491. The following persons cannot acquire by purchase, even at a
public or judicial auction, either in person or through the mediation of
another:
(1) The guardian, the property of the person or persons who may
be under guardianship;
(2) Agents, the property whose administration or sale may have
been entrusted to them, unless the consent of the principal has
been given;
(3) Executors and administrators, the property of the estate under
administration;" x x x

Under paragraph (2) of the above article, the prohibition against agents
purchasing property in their hands for sale or management is not
absolute. It does not apply if the principal consents to the sale of the
property in the hands of the agent or administrator. In this case, the deeds
of sale signed by Iluminada Abiertas shows that she gave consent to the
sale of the properties in favor of her son, Rufo, who was the administrator
of the properties. Thus, the consent of the principal Iluminada Abiertas
removes the transaction out of the prohibition contained in Article
1491(2).
Petitioner also alleges that Rufo Distajo employed fraudulent machinations
to obtain the consent of Iluminada Abiertas to the sale of the parcels of
land. However, petitioner failed to adduce convincing evidence to
substantiate his allegations.
In the absence of any showing of lack of basis for the conclusions made by
the Court of Appeals, this Court finds no cogent reason to reverse the
ruling of the appellate court.
WHEREFORE, the Court DENIES the petition and AFFIRMS the decision of
the Court of Appeals in CA-G.R. CV No. 30063.
SO ORDERED.

G.R. No. L-65594 July 9, 1986

MAHARLIKA PUBLISHING CORPORATION, ANGELA CALICA, ADOLFO
CALICA and the HEIRS OF THE LATE PIO CALICA, petitioners,
vs.
SPOUSES LUZ R. TAGLE and EDILBERTO TAGLE and the
GOVERNMENT SERVICE INSURANCE SYSTEM and the HONORABLE
INTERMEDIATE APPELLATE COURT, respondents.
GUTIERREZ, JR., J.:
The Government Service Insurance System (GSIS) was the registered
owner of a parcel of land consisting of 1,373 square meters situated in the
district of Paco and covered by Transfer Certificate of Title No. 5986 of the
Registry of Deeds of Manila.
On June 4, 1963, the GSIS entered into a conditional contract to sell the
parcel of land to petitioner Maharlika Publishing Corporation (Maharlika for
short) together with the building thereon as well as the printing machinery
and equipment therein. Among the conditions of the sale are that the
petitioner shall pay to the GSIS monthly installments of P969.94 until the
total purchase price shall have been fully paid and that upon the failure of
petitioner to pay any monthly installment within ninety (90) days from due
date, the contract shall be deemed automatically cancelled.
After Maharlika failed to pay the installments for several months, the GSIS,
on June 7, 1966, notified Maharlika in writing of its arrearages and warned
Maharlika that the conditions of the contract would be enforced should
Maharlika fail to settle its account within fifteen (15) days from notice.
Because of Maharlika's failure to settle the unpaid accounts, the GSIS
notified Maharlika in writing on June 26, 1967 that the conditional contract
of sale was annulled and cancelled and required Maharlika to sign a lease
contract. Maharlika refused to vacate the premises and to sign the lease
contract.
Sometime later, the GSIS published an invitation to bid several acquired
properties, among which was the property in question, to be held at the
Office of the General Manager, second floor, GSIS Building, Arroceros
Street, Manila, from 9:00 a.m. to 3:00 p.m. on February 12, 1971.

Meanwhile, on February 11, 1971, or one day before the scheduled public
bidding, Maharlika represented by its president Adolfo Calica addressed to
GSIS a letter-proposal to repurchase their foreclosed properties proposing
that they be allowed to pay P11,000.00 representing ten percent (10%) of
their total account; that they be allowed to pay P18,300.00 as balance to
complete
the
twenty-five
percent
(25%)
of
their
total
arrearages( P117,175.00) not later than February 28, 1971 and the
remaining seventy-five percent (75%) to be paid in twenty four (24)
months.
This letter-proposal was discussed by Adolfo Calica with GSIS Board ViceChairman Leonilo Ocampo, who wrote a note to the General Manager
Roman Cruz, Jr., the last paragraph of which reads as follows:
It sounds fair and reasonable subject to your wise
judgment, as usual. (Exhibit 4, Maharlika)
Said letter-proposal and Ocampo's note were taken by Calica to General
Manager Cruz, Jr., who, in turn, wrote on the face of Exhibit 4-Maharlika a
note to one Mr. Ibaez which reads: "Hold Bidding. Discuss with me." The
letter-proposal together with two (2) checks amounting to P11,000.00
were submitted to the office of General Manager Cruz, Jr. and were
received by his Secretary.
On February 12, 1971, however, the public bidding of this particular
property was held as scheduled prompting Adolfo Calica to submit his bid
to the Bidding Committee with a deposit of P11,000.00 represented by the
same two checks submitted to General Manager Cruz, Jr., together with his
letter-proposal. His bid proposal reads: "I bid to match the highest bidder."
The bidding committee rejected Maharlika's bid as an imperfect bid and
recommended acceptance of private respondent Luz Tagle's bid of
P130,000.00 with a ten percent (10%) deposit of P13,000.00.
On February 19, 1971, the GSIS addressed a letter to Adolfo Calica
informing him of the non-acceptance of his bid and returning his two
checks.
After approval and confirmation of the sale of the subject property to Luz
Tagle on April 20, 1971, the GSIS executed a Deed of Conditional Sale in
favor of the Tagles on June 8, 1971.

Due to the refusal of petitioners to surrender the possession of the

property in question, respondent spouses Luz R. Tagle and Edilberto Tagle
filed a case for Recovery of Possession with Damages with the Court of
First Instance of Manila which rendered the following decision on May 15,
1974:"

(f) dismissing the cross-claim of defendants Maharlika and

the Calicos against defendant GSIS;"

IN VIEW OF THE FOREGOING CONSIDERATIONS, the Court

hereby renders judgment:

(h) directing defendants Maharlika, Adolfo Calica and

Angela Calica to pay the costs of this suit.

(a) declaring the letter-proposal (Exh.. 3-Maharlika)

ineffective and without any binding effect, being imperfect
to create any contractual relation between GSIS and
defendants Maharlika and Adolfo Calica;

After a motion to set aside judgment and grant a new trial was denied by
the trial court for lack of merit, the case was brought on appeal to the
former Court of Appeals on April 8, 1976. On March 2, 1983, the
Intermediate Appellate Court affirmed the decision of the trial court,
stating as follows:

(b) declaring plaintiffs and (sic) entitled to the possession

of the properties in question and directing, therefore,
defendants Maharlika and Adolfo Calica, or any person or
persons holding or possessing the properties in their
behalf, to forthwith vacate the properties in question and
to surrender the same to the plaintiffs;"
(c) dismissing the complaint as against defendants 'Heirs
of the deceased Pio Calica' (except Angela Calica) it
appearing that they were not properly summoned and
represented in the instant suit:"
(d) directing the defendants Maharlika, Adolfo Calica and
Angela Calica, to pay jointly and severally the plaintiffs a
monthly rental of the properties in question in the sum of
P976.00 a month commencing 12 February 1971, until the
said properties are vacated by said defendants, with legal
interest of all sums due from 12 Feb. 1971 up to the
rendition of this judgment in this instant suit, such interest
to commence from the filing of the complaint until the
same is fully paid; and that such monthly rentals
commencing from the date of this judgment, shall also
earn interest at the legal rate unless paid within the first
ten days of the current month for the rental of the
preceding month;"
(e) dismissing the counterclaim of defendants Maharlika
and the Calicas against plaintiffs;

(g) dismissing all other claims which the parties may have
against each other; and

xxx xxx xxx

The mere offer to repurchase of the subject property and
the deposit of the amount of P11,000.00 by the
defendants on February 11, 1971, does not have the effect
of reviving the conditional deed of sale (Exhibit 4GSIS, Ibid, p. 29) executed by the GSIS and the
defendants. To revive the said contract, and for the
defendants to be deemed to have repurchased the subject
property, there should have been payment in favor of the
GSIS of all the installments due and interests thereon in
the total amount of P117,175.00 as of February 11, 1971
But the defendants insist that the notations of Leonilo M.
Ocampo, Vice-Chairman of the GSIS Board of Trustees, to
GSIS General Manager Roman Cruz, Jr. (Exhibits 4-A and 4B Maharlika, Ibid, p. 76) as well as the notation of GSIS
General Manager Roman Cruz, Jr.' to hold bidding. Discuss
with me' (Exhibit 4-C Maharlika, Ibid, p. 76) means that the
GSIS had accepted defendants' offer and had revived the
conditional contract of sale dated June 4, 1963.
This interpretation is far-fetched. The notations referred to
by the defendants do not show acceptance of defendants'
offer to repurchase the subject property. In fact, the
defendants themselves were aware that their offer was not
accepted at all because they submitted to and

participated in the bidding of the subject property on

February 12,1971 (Exhibits K, K-1, 6, 6-A, Ibid, pp. 16-34),
using its letter- proposal as deposit for its bid. But
defendants' bid was rejected because it was imperfect and
not accompanied with a deposit of 10% of the highest bid
(Exhibits B-1, 7 GSIS, 7-A Maharlika, Ibid, pp. 5, 35), and
that defendants' bid did not contain a specific bid price
proposal (Exhibit 7 GSIS, Ibid, p. 35).
The consequent auction sale of the property on February
12, 1971 and execution of the conditional deed of sale in
favor of the plaintiffs (Exhibit A, Ibid, p. 1) is valid. The
plaintiffs are entitled to the possession of the subject
property.
xxx xxx xxx
A motion for reconsideration and/or new trial was filed by petitioners. The
motion was denied by the respondent Appellate Court.
Hence, this petition for review on certiorari filed on December 16,1983.
On January 9, 1984, we resolved to deny in a minute resolution, the
petition for lack of merit. A timely motion for reconsideration was filed by
the petitioners which contained the following reasons to warrant review of
the case:
It is apparent that petitioners will suffer serious injustice,
consisting in the loss of the subject property, by reason of
the failure of respondent Court to decide questions of
substance involved herein in a way not in accord with law
and the applicable decisions of this Honorable Court, such
questions being the following:
(1) Whether or not respondent Edilberto Tagle's being a
GSIS officer at the time of the sale by the GSIS of the
subject property to his wife should be allowed to be
introduced as newly discovered evidence or at any rate
received in the interest of justice;"
(2) Whether or not respondent Court acted with grave
abuse of discretion in ignoring the irregular appearance of

respondent Luz Tagle's bid and the inference of fraud

flowing therefrom in the context of surrounding
circumstances;
(3) Whether or not the auction sale in question is void for
having been conducted despite the directive of the GSIS
General Manager to suspend the same in virtue of
petitioners' offer to repurchase the subject property and
their payment of P11,000.00 in checks as earnest money
which he accepted.
Significantly, on September 21, 1984, the GSIS filed a Supplemental
Memorandum submitting for resolution of this Court the matter of whether
the respondent spouses Luz and Edilberto Tagle can still enforce their
claim as winning bidders considering the fact that they have so far made
only two payments to the GSIS amounting to P32,500.00 in violation of the
terms and conditions of the conditional sale executed in their favor and
which provides for its automatic cancellation in such case, or whether the
petitioners can still repurchase the property in question as original owners
thereof.
We find the petitioners' motion for reconsideration impressed with merit.
The certification secured by the petitioners from GSIS on April 28, 1983
shows that Edilberto Tagle was Chief, Retirement Division, GSIS, from 1970
to 1978. He worked for the GSIS since 1952. Strictly speaking, the
evidence of Mr. Tagle's being a GSIS official when his wife bid for the
disputed property is not newly discovered evidence. However, we cannot
simply ignore the fact that on February 12, 1971 when Adolfo Calica was
desperately trying to retrieve the property foreclosed against him, after
receiving assurances from the highest GSIS officials that his letterproposal would be accepted and after the sale at public auction of the
property was, in fact, ordered to be stopped, the wife of a GSIS official
would be allowed to bid for that property and would actually win in the
bidding.
As stated by the petitioners, this important factor implicit in good
government, should have been considered in the interest of justice. It was
incumbent under the law for GSIS to have rejected the bid of the wife of a
GSIS official and to have refused to enter into the deed of conditional sale
with the respondents Tagle.

The petitioners bank on the allegation that the indirect participation of

Edilberto Tagle in the public bidding creates a "conflict of interests
situation" which invalidates the aforesaid transaction under the precept
laid down in Article 1409 paragraph (1) of the Civil Code making his
participation void for being contrary to morals, good customs, and public
policy.

(2) Agents, the property whose administration or sale may

have been intrusted to them, unless the consent of the
principal has been given;

The Supreme Court has ample authority to go beyond the pleadings when
in the interest of justice and the promotion of public policy there is a need
to make its own finding to support its conclusions. In this particular case,
there is absolutely no doubt that Mr. Edilberto Tagle was a GSIS Division
Chief when his wife bid for the property being sold by GSIS. The only issue
is whether or not to consider this fact because it surfaced only after trial
proper.

(4) Public officers and employees, the property of the

State or of any subdivisions thereof, or of any government
owned or controlled corporation, or institution, the
administration of which has been intrusted to them; this
provision shall apply to judges and government experts
who, in any manner whatsoever, take part in the sale;

We declare it to be a policy of the law that public officers who hold

positions of trust may not bid directly or indirectly to acquire prop
properties foreclosed by their offices and sold at public auction.
Article XIII, Section 1 of our Constitution states that:
Public office is a public trust. Public officers and employees
shall serve with the highest degree of responsibility,
integrity, loyalty and efficiency, and shall remain
accountable to the people.

(3) Executors and administrators, the property of the

estate under administration;

(5) Justices, judges, prosecuting attorneys, clerk of

superior and inferior courts, and other officers and
employees connected with the administration of justice,
the property and rights in litigation or levied upon an
execution before the court within whose jurisdiction or
territory they exercise their respective functions; this
prohibition includes the act of acquiring by assignment
and shall apply to lawyers, with respect to the property
and rights which may be the object of any litigation in
which they may take part by virtue of their profession;
(6) Any others specially disqualified by law.

We stated in Ancheta vs. Hilario (96 SCRA 62);

xxx xxx xxx
...A public servant must exhibit at all times the highest sense of honesty
and integrity. ...
Under Article 1491 of the Civil Code the following persons cannot acquire
by purchase, even at a public or judicial auction, either in person or
through the mediation of another:
(1) The guardian, the property of the person or persons
who may be under his guardianship;

In so providing, the Code tends to prevent fraud, or more precisely, tends

not to give occasion for fraud, which is what can and must be done
(Francisco, Sales, p. 111). We, therefore, reject the contention of
respondents that the fact that Edilberto Tagle was, at the time of the
public bidding, a GSIS official, will not alter or change the outcome of the
case.
A Division Chief of the GSIS is not an ordinary employee without influence
or authority. The mere fact that he exercises ample authority with respect
to a particular activity, i.e., retirement, shows that his influence cannot be
lightly regarded.
The point is that he is a public officer and his wife acts for and in his name
in any transaction with the GSIS. If he is allowed to participate in the
public bidding of properties foreclosed or confiscated by the GSIS, there

will always be the suspicion among other bidders and the general public
that the insider official had access to information and connections with his
fellow GSIS officials as to allow him to eventually acquire the property. It is
precisely the need to forestall such suspicions and to restore confidence in
the public service that the Civil Code now declares such transactions to be
void from the beginning and not merely voidable (Rubias vs. Batiller, 51
SCRA 120). The reasons are grounded on public order and public policy.
We do not comment on the motives of the private respondents or the
officers supervising the bidding when they entered into the contract of
sale. Suffice it to say that it fags under the prohibited transactions under
Article 1491 of the Civil Code and, therefore, void under Article 1409.
In the case of Garciano vs. Oyao (102 SCRA 195), this Court held:
xxx xxx xxx
...We need not exaggerate the importance of being
absolutely free from any suspicion which may
unnecessarily erode the faith and confidence of the People
in their government. As the Constitution categorically
declared: 'Public office is a public trust. Public officers and
employees shall serve with the highest degree of
responsibility, integrity, loyalty and efficiency, and shall
remain accountable to the people' (Art. XIII, Sec. 1,
Constitution).

As the efficiency of the public service is a matter of vital

concern to the public, it is not surprising that agreements
tending to injure such service should be regarded as being
contrary to public policy. It is not necessary that actual
fraud should be shown, for a contract which tends to the
injury of the public service is void, although the parties
entered into it honestly, and proceeded under it in good
faith. The courts do not inquire into the motives of the
parties in the particular case to ascertain whether they
were corrupt or not, but stop when it is ascertained that
the contract is one which is opposed to public policy. Nor is
it necessary to show that any evil was in fact, done by or
through the contract. The purpose of the rule is to prevent
persons from assuming a position where selfish motives
may impel them to sacrifice the public good to private
benefit.
There is no need, therefore, to pass upon the issue of irregularity in the
appearance of the private respondents' bid and the alleged inference of
fraud flowing therefrom.
We reiterate that assuming the transaction to be fair and not tainted with
irregularity, it is still looked upon with disfavor because it places the officer
in a position which might become antagonistic to his public duty.
There are other grounds which contain us to grant this petition.

xxx xxx xxx

Respondent Wilfredo Oyao, should avoid so far as
reasonably possible a situation which would normally tend
to arouse any reasonable suspicion that he is utilizing his
official position for personal gain or advantage to the
prejudice of party litigants or the public in general. In the
language of then Justice, now Chief Justice Enrique M.
Fernando in the case of Pineda vs. Claudio (28 SCRA 34,
54): 'There may be occasion then where the needs of the
collectivity that is the government may collide with his
private interest as an individual.
In Mclain vs. Miller County (23 SW 2d. 2-4; 255) the Court ruled that:

We now come to the issue whether or not there was a repurchase of the
property in question from the GSIS effected by the petitioners the day
before the public bidding.
In Article 1475 of the Civil Code, we find that "the contract of sale is
perfected at the moment there is a meeting of minds upon the thing which
is the object of the contract and upon the price. From that moment, the
parties may reciprocally demand performance, subject to the law
governing the form of contracts. "
This Court in the case of Central Bank of the Philippines vs. Court of
Appeals (63 SCRA 431) ruled on the perfection of government contracts in
the following manner:

We are not persuaded that petitioner's posture conforms

with law and equity. According to Paragraph IB 114.1 of
the Instructions to Bidders, Ablaza was 'required to appear
in the office of the Owner (the Bank) in person, or, if a firm
or corporation, a duly authorized representative (thereof )
and to execute the contract within five (5) days after
notice that the contract has been awarded to him. Failure
or neglect to do so shall constitute a breach of agreement
effected by the acceptance of the Proposal. There can be
no other meaning of this provision than that the Bank's
acceptance of the bid of respondent Ablaza effected an
actionable agreement between them. We cannot read it in
the unilateral sense suggested by petitioner that it bound
only
the
contractor,
without
any
corresponding
responsibility or obligation at all on the part of the Bank.
An agreement presupposed a meeting of minds and when
that point is reached in the negotiations between two
parties intending to enter into a contract, the purported
contract is deemed perfected and none of them may
thereafter disengage himself therefrom without being
liable to the other in an action for specific performance. "
In American Jurisprudence, 2d., Section 73 (pp. 186-187), we read:
The principle is fundamental that a party cannot be held to
have contracted if there was no assent, and this is so both
as to express contracts and contracts implied in fact.
There must be mutual assent or a meeting of minds in all
essential elements or terms in order to form a binding
contract. However, ordinarily no more is meant by this
than an expression or manifestation of mutual assent, as
an objective thing, is necessary, and that is generally
deemed sufficient in the formation of a contract ... In other
words, appropriate conduct by the parties may be
sufficient to establish an agreement, and there may be
instances where interchanged correspondence does not
disclose the exact point at which the deal was closed, but
the actions of the parties may indicate that a binding
obligation has been undertaken.
It is undisputed that when the letter-proposal of petitioners was presented
to GSIS General Manager Roman Cruz, Jr., he wrote on the face of such
letter the words "Hold Bidding. Discuss with me." These instructions were

addressed to one Mr. Ibaez who was in-charge of public bidding.

Thereafter, a deposit of P11,000.00 in checks was accepted by the
Secretary of Mr. Roman Cruz, Jr. In the light of these circumstances an
inference may be made that General Manager Cruz, Jr. had already
accepted the petitioners' offer of repurchase or at the very least had led
them to understand that he had arrived at a decision to accept it.
It should also be noted that there is no serious denial as to General
Manager Cruz, Jr.'s capacity to enter into binding contractual obligations
for GSIS without the prior approval of the Board of Trustees.
On the other hand, the letter of endorsement made by the GSIS Board
Vice-Chairman Leonilo Ocampo which states ...subject to your wise
judgment, as usual leads one to conclude that it has been the practice of
GSIS to permit the General Manager to do acts within the scope of his
apparent authority.
In the case of Francisco vs. Government Service Insurance System (7
SCRA 577), we held that:
xxx xxx xxx
... Corporate transactions would speedily come to a
standstill were every person dealing with a corporation
held duty-bound to disbelieve every act of its responsible
officers, no matter how regular they should appear on
their face. This Court has observed in Ramirez vs.
Orientalist Co., 38 Phil. 634, 654-655, that
In passing upon the liability of a corporation in cases of
this kind it is always well to keep in mind the situation as it
presents itself to the third party with whom the contract is
made. Naturally he can have little or no information as to
what occurs in corporate meetings; and he must
necessarily rely upon the external manifestation of
corporate
consent.
The
integrity
of
commercial
transactions can only be maintained by holding the
corporation strictly to the liability fixed upon it by its
agents in accordance with law; and we would be sorry to
announce a doctrine which would permit the property of a
man in the city of Paris to be whisked out of his hands and
carried into a remote quarter of the earth without recourse

against the corporation whose name and authority had

been used in the manner disclosed in this case. As already
observed, it is familiar doctrine that if a corporation
knowingly permits one of its officers, or any other agent,
to do acts within the scope of an apparent authority, and
thus holds him out to the public as possessing power to do
those acts, the corporation will, as against any one who
has in good faith dealt with the corporation through such
agent, be estopped from denying his authority; and where
it is said if the corporation permits' this means the same
as 'if the thing is permitted by the directing power of the
corporation.
We note that the petitioners are not complete strangers entering into a
contract with respondent GSIS for the first time. There was an earlier
contract to sell the same properties to the petitioners. That contract was
perfected and there had been partial compliance with its terms. The
transaction now under question in this case merely referred to the curing
of certain defects which led to the cancellation of the earlier contract by
GSIS. Under the peculiar circumstances of this case, therefore, the
acceptance of the petitioners' letter-proposal by Mr. Roman Cruz, Jr., the
person with authority to do so, and his order to his subordinates to stop
the bidding so that they could first discuss the matter with him, created an
agreement of binding nature with the petitioners.
WHEREFORE, the decision and resolution of the Intermediate Appellate
Court subject of the instant petition for review on certiorari are hereby SET
ASIDE. The conditional sale entered into between public respondent GSIS
and private respondents Luz and Edilberto Tagle is declared NULL and
VOID for being contrary to public policy. The prayer of petitioners for the
repurchase of the subject property in an amount equal to the amount
offered by private respondents and to retain ownership and possession of
the disputed property is GRANTED.
SO ORDERED.

G.R. No. L-68838

March 11, 1991

FLORENCIO FABILLO and JOSEFA TANA (substituted by their heirs

Gregorio Fabillo, Roman Fabillo, Cristeta F. Maglinte and Antonio
Fabillo), petitioners,
vs.
THE HONORABLE INTERMEDIATE APPELLATE COURT (Third Civil
Case Division) and ALFREDO MURILLO (substituted by his heirs
Fiamita M. Murillo, Flor M. Agcaoili and Charito M.
Babol), respondents.
Francisco A. Tan for petitioners.
Von Kaiser P. Soro for private respondent.
FERNAN, C.J.:
In the instant petition for review on certiorari, petitioners seek the reversal
of the appellate court's decision interpreting in favor of lawyer Alfredo M.
Murillo the contract of services entered into between him and his clients,
spouses Florencio Fabillo and Josefa Taa.
In her last will and testament dated August 16, 1957, Justina Fabillo
bequeathed to her brother, Florencio, a house and lot in San Salvador
Street, Palo, Leyte which was covered by tax declaration No. 19335, and to
her husband, Gregorio D. Brioso, a piece of land in Pugahanay, Palo,
Leyte. 1 After Justina's death, Florencio filed a petition for the probate of
said will. On June 2, 1962, the probate court approved the project of
partition "with the reservation that the ownership of the land declared
under Tax Declaration No. 19335 and the house erected thereon be
litigated and determined in a separate proceedings." 2
Two years later, Florencio sought the assistance of lawyer Alfredo M.
Murillo in recovering the San Salvador property. Acquiescing to render his
services, Murillo wrote Florencio the following handwritten letter:
Dear Mr. Fabillo:
I have instructed my stenographer to prepare the complaint and file the
same on Wednesday if you are ready with the filing fee and sheriffs fee of
not less than P86.00 including transportation expenses.
Considering that Atty. Montilla lost this case and the present action is a
revival of a lost case, I trust that you will gladly give me 40% of the money
value of the house and lot as a contigent (sic) fee in case of a success.
When I come back I shall prepare the contract of services for your
signature.
Thank you.
Cordially
yours,
(Sgd.)
Alfredo
M.
Murillo
Aug. 9, 1964 3
Thirteen days later, Florencio and Murillo entered into the following
contract:
CONTRACT OF SERVICES
KNOW ALL MEN BY THESE PRESENTS:
That I, FLORENCIO FABILLO, married to JOSEFA TANA, of
legal age, Filipino citizen and with residence and postal
address at Palo, Leyte, was the Petitioner in Special
Proceedings No. 843, entitled "In the Matter of the Testate
Estate of the late Justina Fabillo, Florencio Fabillo,
Petitioner" of the Court of First Instance of Leyte;

That by reason of the Order of the Court of First Instance

of Leyte dated June 2, 1962, my claim for the house and
lot mentioned in paragraph one (1) of the last will and
testament of the late Justina Fabillo, was denied altho the
will was probated and allowed by the Court;
That acting upon the counsel of Atty. Alfredo M. Murillo, I
have cause(d) the preparation and filing of another case,
entitled "Florencio Fabillo vs. Gregorio D. Brioso," which
was docketed as Civil Case No. 3532 of the Court of First
Instance of Leyte;
That I have retained and engaged the services of Atty.
ALFREDO M. MURILLO, married and of legal age, with
residence and postal address at Santa Fe, Leyte to be my
lawyer not only in Social Proceedings No. 843 but also in
Civil Case No. 3532 under the following terms and
conditions;
That he will represent me and my heirs, in case of my
demise in the two cases until their successful conclusion
or until the case is settled to my entire satisfaction;
That for and in consideration for his legal services, in the
two cases, I hereby promise and bind myself to pay Atty.
ALFREDO M. MURILLO, in case of success in any or both
cases the sum equivalent to FORTY PER CENTUM (40%) of
whatever benefit I may derive from such cases to be
implemented as follows:
If the house and lot in question is finally awarded to me or
a part of the same by virtue of an amicable settlement,
and the same is sold, Atty. Murillo, is hereby constituted as
Atty. in-fact to sell and convey the said house and lot and
he shall be given as his compensation for his services as
counsel and as attorney-in-fact the sum equivalent to
forty per centum of the purchase price of the house and
lot;
If the same house and lot is just mortgage(d) to any
person, Atty. Murillo shall be given the sum equivalent to
forty per centum (40%) of the proceeds of the mortgage;
If the house and lot is leased to any person, Atty. Murillo
shall be entitled to receive an amount equivalent to 40%
(FORTY PER CENTUM) of the rentals of the house and lot,
or a part thereof;
If the house and lot or a portion thereof is just occupied by
the undersigned or his heirs, Atty. Murillo shall have the
option of either occupying or leasing to any interested
party FORTY PER CENT of the house and lot.
Atty. Alfredo M. Murillo shall also be given as part of his
compensation for legal services in the two cases
FORTY PER CENTUM of whatever damages, which the
undersigned can collect in either or both cases, provided,
that in case I am awarded attorney's fees, the full amount

of attorney's fees shall be given to the said Atty. ALFREDO

M. MURILLO;
That in the event the house and lot is (sic) not sold and
the same is maintained by the undersigned or his heirs,
the costs of repairs, maintenance, taxes and insurance
premiums shall be for the account of myself or my heirs
and Attorney Murillo, in proportion to our rights and
interest thereunder that is forty per cent shall be for the
account of Atty. Murillo and sixty per cent shall be for my
account or my heirs.
IN WITNESS HEREOF, I hereby set unto my signature below
this 22nd day of August 1964 at Tacloban City.
(Sgd.) FLORENCIO FABILLO
(Sgd.)
JOSEFA
T.
FABILLO
WITH MY CONFORMITY:
(Sgd.) ALFREDO M. MURILLO
(Sgd.)
ROMAN
T.
FABILLO (Sgd.) CRISTETA F. MAGLINTE
(Witness)
(Witness) 4
Pursuant to said contract, Murillo filed for Florencio Fabillo Civil Case No.
3532 against Gregorio D. Brioso to recover the San Salvador property. The
case was terminated on October 29, 1964 when the court, upon the
parties' joint motion in the nature of a compromise agreement, declared
Florencio Fabillo as the lawful owner not only of the San Salvador property
but also the Pugahanay parcel of land.
Consequently, Murillo proceeded to implement the contract of services
between him and Florencio Fabillo by taking possession and exercising
rights of ownership over 40% of said properties. He installed a tenant in
the Pugahanay property.
Sometime in 1966, Florencio Fabillo claimed exclusive right over the two
properties and refused to give Murillo his share of their
produce. 5 Inasmuch as his demands for his share of the produce of the
Pugahanay property were unheeded, Murillo filed on March 23, 1970 in the
then Court of First Instance of Leyte a complaint captioned "ownership of a
parcel of land, damages and appointment of a receiver" against Florencio
Fabillo, his wife Josefa Taa, and their children Ramon (sic) Fabillo and
Cristeta F. Maglinte. 6
Murillo prayed that he be declared the lawful owner of forty per cent of the
two properties; that defendants be directed to pay him jointly and
severally P900.00 per annum from 1966 until he would be given his share
of the produce of the land plus P5,000 as consequential damages and
P1,000 as attorney's fees, and that defendants be ordered to pay moral
and exemplary damages in such amounts as the court might deem just
and reasonable.
In their answer, the defendants stated that the consent to the contract of
services of the Fabillo spouses was vitiated by old age and ailment; that
Murillo misled them into believing that Special Proceedings No. 843 on the
probate of Justina's will was already terminated when actually it was still
pending resolution; and that the contingent fee of 40% of the value of the
San Salvador property was excessive, unfair and unconscionable

considering the nature of the case, the length of time spent for it, the
efforts exerted by Murillo, and his professional standing.
They prayed that the contract of services be declared null and void; that
Murillo's fee be fixed at 10% of the assessed value of P7,780 of the San
Salvador property; that Murillo be ordered to account for the P1,000 rental
of the San Salvador property which he withdrew from the court and for the
produce of the Pugahanay property from 1965 to 1966; that Murillo be
ordered to vacate the portion of the San Salvador property which he had
occupied; that the Pugahanay property which was not the subject of either
Special Proceedings No. 843 or Civil Case No. 3532 be declared as the
exclusive property of Florencio Fabillo, and that Murillo be ordered to pay
moral damages and the total amount of P1,000 representing expenses of
litigation and attorney's fees.
In its decision of December 2, 1975, 7 the lower court ruled that there was
insufficient evidence to prove that the Fabillo spouses' consent to the
contract was vitiated. It noted that the contract was witnessed by two of
their children who appeared to be highly educated. The spouses
themselves were old but literate and physically fit.
In claiming jurisdiction over the case, the lower court ruled that the
complaint being one "to recover real property from the defendant spouses
and their heirs or to enforce a lien thereon," the case could be decided
independent of the probate proceedings. Ruling that the contract of
services did not violate Article 1491 of the Civil Code as said contract
stipulated a contingent fee, the court upheld Murillo's claim for
"contingent attorney's fees of 40% of the value of recoverable properties."
However, the court declared Murillo to be the lawful owner of 40% of both
the San Salvador and Pugahanay properties and the improvements
thereon. It directed the defendants to pay jointly and severally to Murillo
the amount of P1,200 representing 40% of the net produce of the
Pugahanay property from 1967 to 1973; entitled Murillo to 40% of the
1974 and 1975 income of the Pugahanay property which was on deposit
with a bank, and ordered defendants to pay the costs of the suit.
Both parties filed motions for the reconsideration of said decision: Fabillo,
insofar as the lower court awarded 40% of the properties to Murillo and
the latter insofar as it granted only P1,200 for the produce of the
properties from 1967 to 1973. On January 29, 1976, the lower court
resolved the motions and modified its decision thus:
ACCORDINGLY, the judgment heretofore rendered is modified to
read as follows:
(a) Declaring the plaintiff as entitled to and the true and lawful
owner of forty percent (40%) of the parcels of land and
improvements thereon covered by Tax Declaration Nos. 19335 and
6229 described in Paragraph 5 of the complaint;
(b) Directing all the defendants to pay jointly and severally to the
plaintiff the sum of Two Thousand Four Hundred Fifty Pesos
(P2,450.00) representing 40% of the net produce of the
Pugahanay property from 1967 to 1973;
(c) Declaring the plaintiff entitled to 40% of the 1974 and 1975
income of said riceland now on deposit with the Prudential Bank,

Tacloban City, deposited by Mr. Pedro Elona, designated receiver of

the property;
(d) Ordering the defendants to pay the plaintiff the sum of Three
Hundred Pesos (P 300.00) as attorney's fees; and
(e) Ordering the defendants to pay the costs of this suit.
SO ORDERED.
In view of the death of both Florencio and Justina Fabillo during the
pendency of the case in the lower court, their children, who substituted
them as parties to the case, appealed the decision of the lower court to
the then Intermediate Appellate Court. On March 27, 1984, said appellate
court affirmed in toto the decision of the lower court. 8
The instant petition for review on certiorari which was interposed by the
Fabillo children, was filed shortly after Murillo himself died. His heirs
likewise substituted him in this case. The Fabillos herein question the
appellate court's interpretation of the contract of services and contend
that it is in violation of Article 1491 of the Civil Code.
The contract of services did not violate said provision of law. Article 1491
of the Civil Code, specifically paragraph 5 thereof, prohibits lawyers from
acquiring by purchase even at a public or judicial auction, properties and
rights which are the objects of litigation in which they may take part by
virtue of their profession. The said prohibition, however, applies only if the
sale or assignment of the property takes place during the pendency of the
litigation involving the client's property. 9
Hence, a contract between a lawyer and his client stipulating a contingent
fee is not covered by said prohibition under Article 1491 (5) of the Civil
Code because the payment of said fee is not made during the pendency of
the litigation but only after judgment has been rendered in the case
handled by the lawyer. In fact, under the 1988 Code of Professional
Responsibility, a lawyer may have a lien over funds and property of his
client and may apply so much thereof as may be necessary to satisfy his
lawful fees and disbursements. 10
As long as the lawyer does not exert undue influence on his client, that no
fraud is committed or imposition applied, or that the compensation is
clearly not excessive as to amount to extortion, a contract for contingent
fee is valid and enforceable. 11 Moreover, contingent fees were impliedly
sanctioned by No. 13 of the Canons of Professional Ethics which governed
lawyer-client relationships when the contract of services was entered into
between the Fabillo spouses and Murillo. 12
However, we disagree with the courts below that the contingent fee
stipulated between the Fabillo spouses and Murillo is forty percent of the
properties subject of the litigation for which Murillo appeared for the
Fabillos. A careful scrutiny of the contract shows that the parties intended
forty percent of the value of the properties as Murillo's contingent fee. This
is borne out by the stipulation that "in case of success of any or both
cases," Murillo shall be paid "the sum equivalent to forty per centum of
whatever benefit" Fabillo would derive from favorable judgments. The
same stipulation was earlier embodied by Murillo in his letter of August 9,
1964 aforequoted.
Worth noting are the provisions of the contract which clearly states that in
case the properties are sold, mortgaged, or leased, Murillo shall be

entitled respectively to 40% of the "purchase price," "proceeds of the

mortgage," or "rentals." The contract is vague, however, with respect to a
situation wherein the properties are neither sold, mortgaged or leased
because Murillo is allowed "to have the option of occupying or leasing to
any interested party forty per cent of the house and lot." Had the parties
intended that Murillo should become the lawful owner of 40% of the
properties, it would have been clearly and unequivocally stipulated in the
contract considering that the Fabillos would part with actual portions of
their properties and cede the same to Murillo.
The ambiguity of said provision, however, should be resolved against
Murillo as it was he himself who drafted the contract. 13 This is in
consonance with the rule of interpretation that, in construing a contract of
professional services between a lawyer and his client, such construction as
would be more favorable to the client should be adopted even if it would
work prejudice to the lawyer. 14 Rightly so because of the inequality in
situation between an attorney who knows the technicalities of the law on
the one hand and a client who usually is ignorant of the vagaries of the
law on the other hand. 15
Considering the nature of the case, the value of the properties subject
matter thereof, the length of time and effort exerted on it by Murillo, we
hold that Murillo is entitled to the amount of Three Thousand Pesos
(P3,000.00) as reasonable attorney's fees for services rendered in the case
which ended on a compromise agreement. In so ruling, we uphold "the
time-honored legal maxim that a lawyer shall at all times uphold the
integrity and dignity of the legal profession so that his basic ideal becomes
one of rendering service and securing justice, not money-making. For the
worst scenario that can ever happen to a client is to lose the litigated
property to his lawyer in whom all trust and confidence were bestowed at
the very inception of the legal controversy." 16
WHEREFORE, the decision of the then Intermediate Appellate Court is
hereby reversed and set aside and a new one entered (a) ordering the
petitioners to pay Atty. Alfredo M. Murillo or his heirs the amount of
P3,000.00 as his contingent fee with legal interest from October 29, 1964
when Civil Case No. 3532 was terminated until the amount is fully paid
less any and all amounts which Murillo might have received out of the
produce or rentals of the Pugahanay and San Salvador properties, and (b)
ordering the receiver of said properties to render a complete report and
accounting of his receivership to the court below within fifteen (15) days
from the finality of this decision. Costs against the private respondent.
SO ORDERED.

A.M. No. 632

June 27, 1940

In re Attorney MELCHOR E. RUSTE, respondent,

The respondent in his own behalf.
Office of the Solicitor-General Hilado for the Government.
LAUREL, J.:
By virtue of an administrative complaint filed by Mateo San Juan against
Melchor E. Ruste on February 27, 1934, to which the respondent made
answer on March 15, 1934, this Court, by resolution of December 1, 1934,
referred the case to the Solicitor-General for report. The reference brought
forth the following formal complaint filed by the Solicitor-General against
the respondent on March 26, 1935:
Comes now the undersigned Solicitor-General of the Philippine
Islands in the above entitled administrative case, and pursuant to
the provisions of Rule 5 of the rules concerning disbarment or
suspension of attorneys-at-law, to this Honorable Supreme Court,
respectively alleges:
1. That in cadastral case No. 6, G. L. R. O. Record No. 483 of the
Court of First Instance of Zamboanga, the respondent, Melchor E.
Ruste, appeared for and represented, as counsel, Severa Ventura
and her husband, Mateo San Juan, the herein complainant, who
claimed lot No. 3765; and as a result of said cadastral
proceedings, an undivided eleven-twentieth (11/20) share of said
lot was adjudicated by said court to said claimants;
2. That there was no agreement the respondent and his said
clients as to the amount of his fees; but that they paid to him upon
demand on different occasions the sums of (30 and P25 as
attorney's fees;
3. That after said payments, the respondent again demanded of
the complainant and his wife as additional fees the sum of P25,
but they had no money to pay, him, and so he asked them to
execute in his favor a contract of lease, and a contract of sale, of
their share in said lot No. 3764 in order that he may be able to
borrow or raise said sum of P25;

4. That in accordance with said respondent's request, the

complainant and his wife executed on September 22, 1930, a
contract of lease, whereby in consideration of P100, they leased to
him their coconut and banana plantation in said lot No. 3764 for a
term of five years, and also a deed of sale, whereby in
consideration of P1,000, they sold and transferred to him their
undivided eleven-twentieth (11/20) share in said lot No . 3764,
although, ,in fact and in truth, neither of the consideration
mentioned in said contracts of lease and sale were ever receive by
them;
5. That on March 21, 1931, the respondent executed a deed of
sale, whereby in consideration of P370 he sold and transferred to
Ong Chua said undivided eleven-twentieth (11/20) share in lot No.
3764 excluding the house and its lot, occupied by the complainant
and his wife; and on March 28, 1931, the respondent executed
another deed of sale, whereby in consideration of the same
amount of P370 paid to him by the same Ong Chua, he sold and
transferred to the latter the same undivided eleven-twentieth
(11/20") share in lot No. 3764, but already including said houses
and its lot;
6. That by virtue of the sale to him, Ong Chua has taken
possession of said eleven-twentieth share in lot No. 3764;
7. That notwithstanding said second deed of sale, the respondent
obtained from Ong Chua to allow the complaint and his wife to
continue living house for a period of two years without paying any
rent;
8. That on October 10, 1933, however, the respondent notified the
complainant and his wife in writing that the said house still
belonged to the respondent, and requires said spouses to pay, the
sum of P40.50, representing ten months' rental in arrears, and
thereafter a monthly rental of P1.50; and
9. That the respondent did not turn over to the complainant and
his wife the amount of P370 paid by Ong Chua nor any part
thereof.

Wherefore, the undersigned prays that disciplinary action be taken

against the respondent.
To the foregoing complaint, the respondent, on April 23, 1935, interposed
the following answer:
Comprarece el infrascrito, en su propiarepresentacion y a la
Honorable Corte Suprema, alega:
Niega, general y especificamente sus alegaciones en dicha
demanda, sobretodo en cuanto al pago de cantidades monetarias
alli especificadas, y como defensa especial, alega:
Que el denunciante Mateo San Juan, y sus testigos Esperato Bucoy
y Severa Ventura han infringido la Ley del Perjurio; ademasd el
Fiscal Provincial Jose Evangelista es una parte interesada en el
resultado de este asunto;
Por todo lo expuesto, al Honorable Tribunal pide:
(a) Que para la substanciacion de esta causa que actue de Fiscal,
el Honorable Enrique Braganza, Fiscal de Jolo, Sulu;
(b) Que dicho Honorable Fiscal Enrique Braganza, sea requerido a
investigar a los testigos, Esperato Bucoy y Severa, Ventura, y la
Ley del Perjirio tal como esta enmendada.
Sometido respetuosamente.
By resolution of this court of April 24, 1935, the said formal complaint and
answer were referred to the judge of First Instance of Zamboanga for
investigation, report, and recommendation. After various and
postponements, transpiring between August 3, 1935 and October 18,
1939, the Honorable Catalino Buenaventura, then presiding over the Court
of First Instance of Zamboanga, elevated the record of the case of this
court. On October 31, 1939, the case was included in the January, 1940
calendar, and at the hearing thereof on February 1, 1940, the respondent
submitted the case without oral argument, and the memorandum
presented by the Solicitor-General, recommending the dismissal of the
complaint filed against respondent, was ordered attached to the record.

From a perusal of the entire record, particularly of the formal complaint

filed by the Solicitor-General against the respondent attorney, we gather
the following material charges formulated against the latter, to wit, (1)
that he engineered the execution in his favor, by the spouses Mateo San
Juan and Severa Ventura, of the contract of lease, Exhibit A, and of the
deed of sale, Exhibit B, covering the property in question; (2) that he did
turn over the considerations therefor to the said spouses; (3) that he
likewise deeded the same property to one Ong Chua, for P370, without
paying the spouses the said purchase price, and (4) that he required the
spouses to pay (40.50 for ten months' rental in arrears, and thereafter a
monthly rental of P1.50 for the house occupied by the said spouses.
Sometime in July, 1930, the respondent acted as counsel for the
complainant and his wife when the latter laid claim of ownership upon lot
No. 3764 in case No. 6, G. L. R. O., Cadastral Record 483 of the Court of
First Instance of Zamboanga, eleven-twentieth of said lot having been
eventually adjudicated to the wife, Severa Ventura, on December 20,
1933. On September 22, 1930, that is, during pendency of said cadastral
case, the spouses purportedly leased a part of said lot to the respondent
for P100, which lease was cancelled and superseded by a deed of sale
executed on the same date, whereby the said spouses, in consideration of
P1,000, conveyed eleven-twentieth of the same land in favor of the
respondent. This is also the finding of the Solicitor-General in his report
submitted in this case:
. . . convinieron cancelar el arrendamiento y otorgar en sustitucion
un contrato de compraventa absoluta a favor del recurrido, como
en efecto se hizo y es el Exhibito B (pp. 37-38, Rollo 1), por cuyo
documento Severa Ventura con el consentimiento marital
correspondiente
vendio
definitivamente
al
recurrido
su
participacion pro indivisa da 11/20 partes en el rferido lote, y
estando aun el mismo pendiente de vista u decision el Expediente
Catastral No. 6, Record No. 483, del Juzgado de Primera Instancia
de Zamboanga. (Pp. 19-20.)
The property being thus in suit, which the respondent was waging on
behalf of his clients, his acquisition thereof by the deed of sale, Exhibit B,
constitutes malpractice. (Hernandez vs. Villanueva, 40 Phil., 775; In
re Calderon, 7 Phil. 427.) Whether the deed of sale in question was
executed at the instance of the spouses driven by financial necessity, as
contended by the respondent, or at the latter's behest, as contended by
the complainant, is of no moment. In either case as attorney occupies a
vantage position to press upon or dictate his terms to a harassed client, in

breach of the "rule so amply protective of the confidential relations, which

must necessarily exist between attorney and client, and of the rights of
both." (Hernandez vs. Villanueva, supra.)
There is evidence to show that the respondent has failed to account to the
aggrieved spouses for the various amounts received by him on account of
the transactions effected by him pertaining to the portion of lot No. 3764.
However, as the evidence is conflicting and the statements of the parties
are contradictory on this point, it is believed that the determination of the
exact amount due them by the respondent should better elucidated and
determined in an appropriate action which the complaint and his spouse
may institute against the respondent for this purpose.
For having improperly acquired the property referred to in Exhibits A and
B, under the above circumstances, which property was then subject
matter of a judicial proceedings, in which he was counsel, the respondent
is found guilty of malpractice and is hereby suspended for a period of one
year, reserving to the complainant and his spouse such action as may by
proper for the recovery of such amount or amounts as may be due from
the respondent. So ordered.

G.R. No. 91029

February 7, 1991
NORKIS DISTRIBUTORS, INC., petitioner,
vs.
THE COURT OF APPEALS & ALBERTO NEPALES, respondents.
Jose D. Palma for petitioner.
Public Attorney's Office for private respondent.
GRIO-AQUINO, J.:
Subject of this petition for review is the decision of the Court of Appeals
(Seventeenth Division) in CA-G.R. No. 09149, affirming with modification
the judgment of the Regional Trial Court, Sixth (6th) Judicial Region,
Branch LVI. Himamaylan, Negros Occidental, in Civil Case No. 1272, which
was private respondent Alberto Nepales' action for specific performance of
a contract of sale with damages against petitioner Norkis Distributors, Inc.
The facts borne out by the record are as follows:
Petitioner Norkis Distributors, Inc. (Norkis for brevity), is the distributor of
Yamaha motorcycles in Negros Occidental with office in Bacolod City with
Avelino Labajo as its Branch Manager. On September 20, 1979, private
respondent Alberto Nepales bought from the Norkis-Bacolod branch a
brand new Yamaha Wonderbike motorcycle Model YL2DX with Engine No.
L2-329401K Frame No. NL2-0329401, Color Maroon, then displayed in the
Norkis showroom. The price of P7,500.00 was payable by means of a
Letter of Guaranty from the Development Bank of the Philippines (DBP),
Kabankalan Branch, which Norkis' Branch Manager Labajo agreed to
accept. Hence, credit was extended to Nepales for the price of the
motorcycle payable by DBP upon release of his motorcycle loan. As
security for the loan, Nepales would execute a chattel mortgage on the
motorcycle in favor of DBP. Branch Manager Labajo issued Norkis Sales
Invoice No. 0120 (Exh.1) showing that the contract of sale of the
motorcycle had been perfected. Nepales signed the sales invoice to signify
his conformity with the terms of the sale. In the meantime, however, the
motorcycle remained in Norkis' possession.
On November 6, 1979, the motorcycle was registered in the Land
Transportation Commission in the name of Alberto Nepales. A registration
certificate (Exh. 2) in his name was issued by the Land Transportation
Commission on November 6, 1979 (Exh. 2-b). The registration fees were
paid by him, evidenced by an official receipt, Exhibit 3.
On January 22, 1980, the motorcycle was delivered to a certain Julian
Nepales who was allegedly the agent of Alberto Nepales but the latter
denies it (p. 15, t.s.n., August 2, 1984). The record shows that Alberto and
Julian Nepales presented the unit to DBP's Appraiser-Investigator Ernesto
Arriesta at the DBP offices in Kabankalan, Negros Occidental Branch (p.
12, Rollo). The motorcycle met an accident on February 3, 1980 at
Binalbagan, Negros Occidental. An investigation conducted by the DBP
revealed that the unit was being driven by a certain Zacarias Payba at the
time of the accident (p. 33, Rollo). The unit was a total wreck (p. 36, t.s.n.,
August 2,1984; p. 13, Rollo), was returned, and stored inside Norkis'
warehouse.
On March 20, 1980, DBP released the proceeds of private respondent's
motorcycle loan to Norkis in the total sum of P7,500. As the price of the
motorcycle later increased to P7,828 in March, 1980, Nepales paid the

difference of P328 (p. 13, Rollo) and demanded the delivery of the
motorcycle. When Norkis could not deliver, he filed an action for specific
performance with damages against Norkis in the Regional Trial Court of
Himamaylan, Negros Occidental, Sixth (6th) Judicial Region, Branch LVI,
where it was docketed as Civil Case No. 1272. He alleged that Norkis failed
to deliver the motorcycle which he purchased, thereby causing him
damages.
Norkis answered that the motorcycle had already been delivered to private
respondent before the accident, hence, the risk of loss or damage had to
be borne by him as owner of the unit.
After trial on the merits, the lower court rendered a decision dated August
27, 1985 ruling in favor of private respondent (p. 28, Rollo.) thus:
WHEREFORE, judgment is rendered in favor of the plaintiff and
against the defendants. The defendants are ordered to pay
solidarity to the plaintiff the present value of the motorcycle which
was totally destroyed, plus interest equivalent to what the
Kabankalan Sub-Branch of the Development Bank of the
Philippines will have to charge the plaintiff on fits account, plus
P50.00 per day from February 3, 1980 until full payment of the
said present value of the motorcycle, plus P1,000.00 as exemplary
damages, and costs of the litigation. In lieu of paying the present
value of the motorcycle, the defendants can deliver to the plaintiff
a brand-new motorcycle of the same brand, kind, and quality as
the one which was totally destroyed in their possession last
February 3, 1980. (pp. 28-29, Rollo.)
On appeal, the Court of appeals affirmed the appealed judgment on
August 21, 1989, but deleted the award of damages "in the amount of
Fifty (P50.00) Pesos a day from February 3, 1980 until payment of the
present value of the damaged vehicle" (p35, Rollo). The Court of Appeals
denied Norkis' motion for reconsideration. Hence, this Petition for Review.
The principal issue in this case is who should bear the loss of the
motorcycle. The answer to this question would depend on whether there
had already been a transfer of ownership of the motorcycle to private
respondent at the time it was destroyed.
Norkis' theory is that:
. . . After the contract of sale has been perfected (Art. 1475) and
even before delivery, that is, even before the ownership is
transferred to the vendee, the risk of loss is shifted from the
vendor to the vendee. Under Art. 1262, the obligation of the
vendor to deliver a determinate thing becomes extinguished if the
thing is lost by fortuitous event (Art. 1174), that is, without the
fault or fraud of the vendor and before he has incurred in delay
(Art. 11 65, par. 3). If the thing sold is generic, the loss or
destruction does not extinguish the obligation (Art. 1263). A thing
is determinate when it is particularly designated or physically
segregated from all others of the same class (Art. 1460). Thus, the
vendor becomes released from his obligation to deliver the
determinate thing sold while the vendee's obligation to pay the
price subsists. If the vendee had paid the price in advance the
vendor may retain the same. The legal effect, therefore, is that the

vendee assumes the risk of loss by fortuitous event (Art. 1262)

after the perfection of the contract to the time of delivery. (Civil
Code of the Philippines, Ambrosio Padilla, Vol. 5,1987 Ed., p. 87.)
Norkis concedes that there was no "actual" delivery of the vehicle.
However, it insists that there was constructive delivery of the unit upon:
(1) the issuance of the Sales Invoice No. 0120 (Exh. 1) in the name of the
private respondent and the affixing of his signature thereon; (2) the
registration of the vehicle on November 6, 1979 with the Land
Transportation Commission in private respondent's name (Exh. 2); and (3)
the issuance of official receipt (Exh. 3) for payment of registration fees (p.
33, Rollo).
That argument is not well taken. As pointed out by the private respondent,
the issuance of a sales invoice does not prove transfer of ownership of the
thing sold to the buyer. An invoice is nothing more than a detailed
statement of the nature, quantity and cost of the thing sold and has been
considered not a bill of sale (Am. Jur. 2nd Ed., Vol. 67, p. 378).
In all forms of delivery, it is necessary that the act of delivery whether
constructive or actual, be coupled with the intention of delivering the
thing. The act, without the intention, is insufficient (De Leon, Comments
and Cases on Sales, 1978 Ed., citing Manresa, p. 94).
When the motorcycle was registered by Norkis in the name of private
respondent, Norkis did not intend yet to transfer the title or ownership to
Nepales, but only to facilitate the execution of a chattel mortgage in favor
of the DBP for the release of the buyer's motorcycle loan. The Letter of
Guarantee (Exh. 5) issued by the DBP, reveals that the execution in its
favor of a chattel mortgage over the purchased vehicle is a pre-requisite
for the approval of the buyer's loan. If Norkis would not accede to that
arrangement, DBP would not approve private respondent's loan
application and, consequently, there would be no sale.
In other words, the critical factor in the different modes of effecting
delivery, which gives legal effect to the act, is the actual intention of the
vendor to deliver, and its acceptance by the vendee. Without that
intention, there is no tradition (Abuan vs. Garcia, 14 SCRA 759).
In the case of Addison vs. Felix and Tioco (38 Phil. 404, 408), this Court
held:
The Code imposes upon the vendor the obligation to deliver the
thing sold. The thing is considered to be delivered when it is
"placed in the hands and possession of the vendee." (Civil Code,
Art. 1462). It is true that the same article declares that the
execution of a public instrument is equivalent to the delivery of
the thing which is the object of the contract, but, in order that this
symbolic delivery may produce the effect of tradition, it is
necessary that the vendor shall have had such control over the
thing sold that, at the moment of the sale, its material
delivery could have been made. It is not enough to confer upon
the purchaser the ownership and the right of possession. The
thing sold must be placed in his control. When there is no
impediment whatever to prevent the thing sold passing into the
tenancy of the purchaser by the sole will of the vendor, symbolic
delivery through the execution of a public instrument is sufficient.

But if notwithstanding the execution of the instrument, the

purchaser cannot have the enjoyment and material tenancy of the
thing and make use of it himself or through another in his name,
because such tenancy and enjoyment are opposed by the
interposition of another will, then fiction yields to reality-the
delivery has riot been effects .(Emphasis supplied.)
The Court of Appeals correctly ruled that the purpose of the execution of
the sales invoice dated September 20, 1979 (Exh. B) and the registration
of the vehicle in the name of plaintiff-appellee (private respondent) with
the Land Registration Commission (Exhibit C) was not to transfer to
Nepales the ownership and dominion over the motorcycle, but only to
comply with the requirements of the Development Bank of the Philippines
for processing private respondent's motorcycle loan. On March 20, 1980,
before private respondent's loan was released and before he even paid
Norkis, the motorcycle had already figured in an accident while driven by
one Zacarias Payba. Payba was not shown by Norkis to be a representative
or relative of private respondent. The latter's supposed relative, who
allegedly took possession of the vehicle from Norkis did not explain how
Payba got hold of the vehicle on February 3, 1980. Norkis' claim that Julian
Nepales was acting as Alberto's agent when he allegedly took delivery of
the motorcycle (p. 20, Appellants' Brief), is controverted by the latter.
Alberto denied having authorized Julian Nepales to get the motorcycle
from Norkis Distributors or to enter into any transaction with Norkis
relative to said motorcycle. (p. 5, t.s.n., February 6, 1985). This
circumstances more than amply rebut the disputable presumption of
delivery upon which Norkis anchors its defense to Nepales' action (pp. 3334, Rollo).
Article 1496 of the Civil Code which provides that "in the absence of an
express assumption of risk by the buyer, the things sold remain at seller's
risk until the ownership thereof is transferred to the buyer," is applicable
to this case, for there was neither an actual nor constructive delivery of
the thing sold, hence, the risk of loss should be borne by the seller, Norkis,
which was still the owner and possessor of the motorcycle when it was
wrecked. This is in accordance with the well-known doctrine of res perit
domino.
WHEREFORE, finding no reversible error in the decision of the Court of
Appeals in CA-G.R. No. 09149, we deny the petition for review and hereby
affirm the appealed decision, with costs against the petitioner.
SO ORDERED.

G.R. No. 147839

June 8, 2006

GAISANO CAGAYAN, INC. Petitioner,

vs.
INSURANCE COMPANY OF NORTH AMERICA, Respondent.
DECISION
AUSTRIA-MARTINEZ, J.:
Before the Court is a petition for review on certiorari of the Decision 1 dated
October 11, 2000 of the Court of Appeals (CA) in CA-G.R. CV No. 61848
which set aside the Decision dated August 31, 1998 of the Regional Trial
Court, Branch 138, Makati (RTC) in Civil Case No. 92-322 and upheld the
causes of action for damages of Insurance Company of North America
(respondent) against Gaisano Cagayan, Inc. (petitioner); and the CA
Resolution dated April 11, 2001 which denied petitioner's motion for
reconsideration.
The factual background of the case is as follows:
Intercapitol Marketing Corporation (IMC) is the maker of Wrangler Blue
Jeans. Levi Strauss (Phils.) Inc. (LSPI) is the local distributor of products
bearing trademarks owned by Levi Strauss & Co.. IMC and LSPI separately
obtained from respondent fire insurance policies with book debt
endorsements. The insurance policies provide for coverage on "book debts
in connection with ready-made clothing materials which have been sold or
delivered to various customers and dealers of the Insured anywhere in the
Philippines."2 The policies defined book debts as the "unpaid account still
appearing in the Book of Account of the Insured 45 days after the time of
the loss covered under this Policy." 3 The policies also provide for the
following conditions:
1. Warranted that the Company shall not be liable for any unpaid
account in respect of the merchandise sold and delivered by the
Insured which are outstanding at the date of loss for a period in
excess of six (6) months from the date of the covering invoice or
actual delivery of the merchandise whichever shall first occur.
2. Warranted that the Insured shall submit to the Company within
twelve (12) days after the close of every calendar month all

amount shown in their books of accounts as unpaid and thus

become receivable item from their customers and dealers. x x x 4
xxxx
Petitioner is a customer and dealer of the products of IMC and LSPI. On
February 25, 1991, the Gaisano Superstore Complex in Cagayan de Oro
City, owned by petitioner, was consumed by fire. Included in the items lost
or destroyed in the fire were stocks of ready-made clothing materials sold
and delivered by IMC and LSPI.
On February 4, 1992, respondent filed a complaint for damages against
petitioner. It alleges that IMC and LSPI filed with respondent their claims
under their respective fire insurance policies with book debt
endorsements; that as of February 25, 1991, the unpaid accounts of
petitioner on the sale and delivery of ready-made clothing materials with
IMC was P2,119,205.00 while with LSPI it was P535,613.00; that
respondent paid the claims of IMC and LSPI and, by virtue thereof,
respondent was subrogated to their rights against petitioner; that
respondent made several demands for payment upon petitioner but these
went unheeded.5
In its Answer with Counter Claim dated July 4, 1995, petitioner contends
that it could not be held liable because the property covered by the
insurance policies were destroyed due to fortuities event or force majeure;
that respondent's right of subrogation has no basis inasmuch as there was
no breach of contract committed by it since the loss was due to fire which
it could not prevent or foresee; that IMC and LSPI never communicated to
it that they insured their properties; that it never consented to paying the
claim of the insured.6
At the pre-trial conference the parties failed to arrive at an amicable
settlement.7 Thus, trial on the merits ensued.
On August 31, 1998, the RTC rendered its decision dismissing respondent's
complaint.8 It held that the fire was purely accidental; that the cause of
the fire was not attributable to the negligence of the petitioner; that it has
not been established that petitioner is the debtor of IMC and LSPI; that
since the sales invoices state that "it is further agreed that merely for
purpose of securing the payment of purchase price, the above-described
merchandise remains the property of the vendor until the purchase price

is fully paid", IMC and LSPI retained ownership of the delivered goods and
must bear the loss.

Hence, the present petition for review on certiorari anchored on the

following Assignment of Errors:

Dissatisfied, petitioner appealed to the CA. 9 On October 11, 2000, the CA

rendered its decision setting aside the decision of the RTC. The dispositive
portion of the decision reads:

THE COURT OF APPEALS ERRED IN HOLDING THAT THE INSURANCE IN THE

INSTANT CASE WAS ONE OVER CREDIT.

WHEREFORE, in view of the foregoing, the appealed decision is REVERSED

and SET ASIDE and a new one is entered ordering defendant-appellee
Gaisano Cagayan, Inc. to pay:
1. the amount of P2,119,205.60 representing the amount paid by
the plaintiff-appellant to the insured Inter Capitol Marketing
Corporation, plus legal interest from the time of demand until fully
paid;
2. the amount of P535,613.00 representing the amount paid by
the plaintiff-appellant to the insured Levi Strauss Phil., Inc., plus
legal interest from the time of demand until fully paid.
With costs against the defendant-appellee.
SO ORDERED.10
The CA held that the sales invoices are proofs of sale, being detailed
statements of the nature, quantity and cost of the thing sold; that loss of
the goods in the fire must be borne by petitioner since
the proviso contained in the sales invoices is an exception under Article
1504 (1) of the Civil Code, to the general rule that if the thing is lost by a
fortuitous event, the risk is borne by the owner of the thing at the time the
loss under the principle of res perit domino; that petitioner's obligation to
IMC and LSPI is not the delivery of the lost goods but the payment of its
unpaid account and as such the obligation to pay is not extinguished, even
if the fire is considered a fortuitous event; that by subrogation, the insurer
has the right to go against petitioner; that, being a fire insurance with
book debt endorsements, what was insured was the vendor's interest as a
creditor.11
Petitioner filed a motion for reconsideration 12 but it was denied by the CA
in its Resolution dated April 11, 2001.13

THE COURT OF APPEALS ERRED IN HOLDING THAT ALL RISK OVER THE
SUBJECT GOODS IN THE INSTANT CASE HAD TRANSFERRED TO PETITIONER
UPON DELIVERY THEREOF.
THE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS AUTOMATIC
SUBROGATION UNDER ART. 2207 OF THE CIVIL CODE IN FAVOR OF
RESPONDENT.14
Anent the first error, petitioner contends that the insurance in the present
case cannot be deemed to be over credit since an insurance "on credit"
belies not only the nature of fire insurance but the express terms of the
policies; that it was not credit that was insured since respondent paid on
the occasion of the loss of the insured goods to fire and not because of the
non-payment by petitioner of any obligation; that, even if the insurance is
deemed as one over credit, there was no loss as the accounts were not yet
due since no prior demands were made by IMC and LSPI against petitioner
for payment of the debt and such demands came from respondent only
after it had already paid IMC and LSPI under the fire insurance policies. 15
As to the second error, petitioner avers that despite delivery of the goods,
petitioner-buyer IMC and LSPI assumed the risk of loss when they secured
fire insurance policies over the goods.
Concerning the third ground, petitioner submits that there is no
subrogation in favor of respondent as no valid insurance could be
maintained thereon by IMC and LSPI since all risk had transferred to
petitioner upon delivery of the goods; that petitioner was not privy to the
insurance contract or the payment between respondent and its insured
nor was its consent or approval ever secured; that this lack of privity
forecloses any real interest on the part of respondent in the obligation to
pay, limiting its interest to keeping the insured goods safe from fire.
For its part, respondent counters that while ownership over the readymade clothing materials was transferred upon delivery to petitioner, IMC
and LSPI have insurable interest over said goods as creditors who stand to
suffer direct pecuniary loss from its destruction by fire; that petitioner is

liable for loss of the ready-made clothing materials since it failed to

overcome the presumption of liability under Article 1265 16 of the Civil
Code; that the fire was caused through petitioner's negligence in failing to
provide stringent measures of caution, care and maintenance on its
property because electric wires do not usually short circuit unless there
are defects in their installation or when there is lack of proper
maintenance and supervision of the property; that petitioner is guilty of
gross and evident bad faith in refusing to pay respondent's valid claim and
should be liable to respondent for contracted lawyer's fees, litigation
expenses and cost of suit.17
As a general rule, in petitions for review, the jurisdiction of this Court in
cases brought before it from the CA is limited to reviewing questions of
law which involves no examination of the probative value of the evidence
presented by the litigants or any of them.18 The Supreme Court is not a
trier of facts; it is not its function to analyze or weigh evidence all over
again.19 Accordingly, findings of fact of the appellate court are generally
conclusive on the Supreme Court.20
Nevertheless, jurisprudence has recognized several exceptions in which
factual issues may be resolved by this Court, such as: (1) when the
findings are grounded entirely on speculation, surmises or conjectures; (2)
when the inference made is manifestly mistaken, absurd or impossible; (3)
when there is grave abuse of discretion; (4) when the judgment is based
on a misapprehension of facts; (5) when the findings of facts are
conflicting; (6) when in making its findings the CA went beyond the issues
of the case, or its findings are contrary to the admissions of both the
appellant and the appellee; (7) when the findings are contrary to the trial
court; (8) when the findings are conclusions without citation of specific
evidence on which they are based; (9) when the facts set forth in the
petition as well as in the petitioner's main and reply briefs are not
disputed by the respondent; (10) when the findings of fact are premised
on the supposed absence of evidence and contradicted by the evidence on
record; and (11) when the CA manifestly overlooked certain relevant facts
not disputed by the parties, which, if properly considered, would justify a
different conclusion.21 Exceptions (4), (5), (7), and (11) apply to the
present petition.
At issue is the proper interpretation of the questioned insurance policy.
Petitioner claims that the CA erred in construing a fire insurance policy on
book debts as one covering the unpaid accounts of IMC and LSPI since
such insurance applies to loss of the ready-made clothing materials sold
and delivered to petitioner.

The Court disagrees with petitioner's stand.

It is well-settled that when the words of a contract are plain and readily
understood, there is no room for construction. 22 In this case, the
questioned insurance policies provide coverage for "book debts in
connection with ready-made clothing materials which have been sold or
delivered to various customers and dealers of the Insured anywhere in the
Philippines."23 ; and defined book debts as the "unpaid account still
appearing in the Book of Account of the Insured 45 days after the time of
the loss covered under this Policy." 24 Nowhere is it provided in the
questioned insurance policies that the subject of the insurance is the
goods sold and delivered to the customers and dealers of the insured.
Indeed, when the terms of the agreement are clear and explicit that they
do not justify an attempt to read into it any alleged intention of the
parties, the terms are to be understood literally just as they appear on the
face of the contract.25 Thus, what were insured against were the accounts
of IMC and LSPI with petitioner which remained unpaid 45 days after the
loss through fire, and not the loss or destruction of the goods delivered.
Petitioner argues that IMC bears the risk of loss because it expressly
reserved ownership of the goods by stipulating in the sales invoices that
"[i]t is further agreed that merely for purpose of securing the payment of
the purchase price the above described merchandise remains the property
of the vendor until the purchase price thereof is fully paid."26
The Court is not persuaded.
The present case clearly falls under paragraph (1), Article 1504 of the Civil
Code:
ART. 1504. Unless otherwise agreed, the goods remain at the seller's risk
until the ownership therein is transferred to the buyer, but when the
ownership therein is transferred to the buyer the goods are at the buyer's
risk whether actual delivery has been made or not, except that:
(1) Where delivery of the goods has been made to the buyer or to a bailee
for the buyer, in pursuance of the contract and the ownership in the goods
has been retained by the seller merely to secure performance by the
buyer of his obligations under the contract, the goods are at the buyer's
risk from the time of such delivery; (Emphasis supplied)

xxxx
Thus, when the seller retains ownership only to insure that the buyer will
pay its debt, the risk of loss is borne by the buyer. 27 Accordingly, petitioner
bears the risk of loss of the goods delivered.
IMC and LSPI did not lose complete interest over the goods. They have an
insurable interest until full payment of the value of the delivered goods.
Unlike the civil law concept of res perit domino, where ownership is the
basis for consideration of who bears the risk of loss, in property insurance,
one's interest is not determined by concept of title, but whether insured
has substantial economic interest in the property.28
Section 13 of our Insurance Code defines insurable interest as "every
interest in property, whether real or personal, or any relation thereto, or
liability in respect thereof, of such nature that a contemplated peril might
directly damnify the insured." Parenthetically, under Section 14 of the
same Code, an insurable interest in property may consist in: (a) an
existing interest; (b) an inchoate interest founded on existing interest; or
(c) an expectancy, coupled with an existing interest in that out of which
the expectancy arises.
Therefore, an insurable interest in property does not necessarily imply a
property interest in, or a lien upon, or possession of, the subject matter of
the insurance, and neither the title nor a beneficial interest is requisite to
the existence of such an interest, it is sufficient that the insured is so
situated with reference to the property that he would be liable to loss
should it be injured or destroyed by the peril against which it is
insured.29 Anyone has an insurable interest in property who derives a
benefit
from
its
existence
or would
suffer
loss
from
its
destruction.30Indeed, a vendor or seller retains an insurable interest in the
property sold so long as he has any interest therein, in other words, so
long as he would suffer by its destruction, as where he has a vendor's
lien.31 In this case, the insurable interest of IMC and LSPI pertain to the
unpaid accounts appearing in their Books of Account 45 days after the
time of the loss covered by the policies.
The next question is: Is petitioner liable for the unpaid accounts?
Petitioner's argument that it is not liable because the fire is a fortuitous
event under Article 117432 of the Civil Code is misplaced. As held earlier,
petitioner bears the loss under Article 1504 (1) of the Civil Code.

Moreover, it must be stressed that the insurance in this case is not for loss
of goods by fire but for petitioner's accounts with IMC and LSPI that
remained unpaid 45 days after the fire. Accordingly, petitioner's obligation
is for the payment of money. As correctly stated by the CA, where the
obligation consists in the payment of money, the failure of the debtor to
make the payment even by reason of a fortuitous event shall not relieve
him of his liability.33 The rationale for this is that the rule that an obligor
should be held exempt from liability when the loss occurs thru a fortuitous
event only holds true when the obligation consists in the delivery of a
determinate thing and there is no stipulation holding him liable even in
case of fortuitous event. It does not apply when the obligation is pecuniary
in nature.34
Under Article 1263 of the Civil Code, "[i]n an obligation to deliver a generic
thing, the loss or destruction of anything of the same kind does not
extinguish the obligation." If the obligation is generic in the sense that the
object thereof is designated merely by its class or genus without any
particular designation or physical segregation from all others of the same
class, the loss or destruction of anything of the same kind even without
the debtor's fault and before he has incurred in delay will not have the
effect of extinguishing the obligation.35 This rule is based on the principle
that the genus of a thing can never perish. Genus nunquan perit. 36 An
obligation to pay money is generic; therefore, it is not excused by
fortuitous loss of any specific property of the debtor.37
Thus, whether fire is a fortuitous event or petitioner was negligent are
matters immaterial to this case. What is relevant here is whether it has
been established that petitioner has outstanding accounts with IMC and
LSPI.
With respect to IMC, the respondent has adequately established its claim.
Exhibits "C" to "C-22"38 show that petitioner has an outstanding account
with IMC in the amount of P2,119,205.00. Exhibit "E"39 is the check
voucher evidencing payment to IMC. Exhibit "F" 40 is the subrogation
receipt executed by IMC in favor of respondent upon receipt of the
insurance proceeds. All these documents have been properly identified,
presented and marked as exhibits in court. The subrogation receipt, by
itself, is sufficient to establish not only the relationship of respondent as
insurer and IMC as the insured, but also the amount paid to settle the
insurance claim. The right of subrogation accrues simply upon payment by
the insurance company of the insurance claim. 41 Respondent's action
against petitioner is squarely sanctioned by Article 2207 of the Civil Code
which provides:

Art. 2207. If the plaintiff's property has been insured, and he has received
indemnity from the insurance company for the injury or loss arising out of
the wrong or breach of contract complained of, the insurance company
shall be subrogated to the rights of the insured against the wrongdoer or
the person who has violated the contract. x x x
Petitioner failed to refute respondent's evidence.
As to LSPI, respondent failed to present sufficient evidence to prove its
cause of action. No evidentiary weight can be given to Exhibit "F Levi
Strauss",42 a letter dated April 23, 1991 from petitioner's General Manager,
Stephen S. Gaisano, Jr., since it is not an admission of petitioner's unpaid
account with LSPI. It only confirms the loss of Levi's products in the
amount of P535,613.00 in the fire that razed petitioner's building on
February 25, 1991.
Moreover, there is no proof of full settlement of the insurance claim of
LSPI; no subrogation receipt was offered in evidence. Thus, there is no
evidence that respondent has been subrogated to any right which LSPI
may have against petitioner. Failure to substantiate the claim of
subrogation is fatal to petitioner's case for recovery of the amount
of P535,613.00.
WHEREFORE, the petition is partly GRANTED. The assailed Decision dated
October 11, 2000 and Resolution dated April 11, 2001 of the Court of
Appeals
in
CA-G.R.
CV
No.
61848
are AFFIRMED with
the MODIFICATION that the order to pay the amount of P535,613.00 to
respondent is DELETED for lack of factual basis.
No pronouncement as to costs.
SO ORDERED.

G.R. No. L-46715-16 July 29, 1988

LEONCIA T. ZAIDE and PRIMITIVO ZAIDE, substituted by SIMEON
TOLENTINO, Guardian ad litem of the Minors PACITA, ALEX, MARIA
ZERLINA
all
surnamed
ZAIDE,
etc., petitioners,
vs.
HON. COURT OF APPEALS, ROBERTO DE LEON and EDITA T.
ZAIDE respondents.
Tolentino & Associates for petitioners.
Benjamin C. Sebastian for private respondents.

NARVASA, J.:
Edita Zaide and her husband, Roberto de Leon, were the registered owners
of a parcel of land situated in Makati, Rizal, with an area of 201 square
meters, covered by TCT No. 69088 of the Register of Deeds of Rizal.
Sometime in the middle sixties, Primitivo Zaide, Edita's brother, gave to
Edita and her husband, Roberto de Leon, P2,000.00 as a loan, which the
latter used to redeem the land mortgaged by them to the Pasay Rural
Bank. At about this time, too, Primitive Zaide and his wife, Leoncia T.
Zaide, transferred ownership of a jitney 1 owned by them, valued at
P7,000.00, to Roberto de Leon. It is the Zaide Spouses' claim that the
vehicle was thus ceded as part of the purchase price of the de Leons'
above described land, which they had agreed to buy. In any case, neither
the loan nor the transfer of the vehicle is disputed.
On January 11, 1965, Edita Zaide executed a public instrument
denominated "Deed of Sale" by which, in consideration of P5,000.00 paid
to her, she sold the parcel of land covered by TCT No. 69088 to Leoncia T.
Zaide. 2The deed described both the vendor, Edita Zaide, and the vendee,
Leoncia T. Zaide, as "married," but named neither of their husbands. The
document however did bear the signature of Edita's husband, Roberto de
Leon, indicating his "marital consent."
The omission of the name of the vendee's husband in the deed of sale
gave rise to a problem. Precisely because of it, the Register of Deeds

refused to accept it for registration. A second deed of sale couched in

the same terms as the first, acknowledge before the same Notary Public,
Judge Rafael Madrazo, and bearing exactly the same date (January 11,
1965) and document Identification in Judge Madrazo's Notarial Registry
(i.e. "Doc. 955, Page No. 92, Book No. 4, Series of 1965"), actually differing
from the first only in that it set forth the names of the husbands of both
the vendor and the vendee 3-was shortly thereafter presented to, and was
promptly accepted for registration, by the Register of Deeds. The latter
then cancelled TCT No. 69088, and issued a new one, TCT No. 138606, in
the name of "Leoncia T. Zaide, married to Primitivo Zaide."
With this lot as collateral, the Zaide Spouses thereafter obtained a loan
from the Government Service Insurance System in the sum of P28,500.00.
This was sometime in November, 1964. The proceeds were used to
construct a two-story apartment building on the land. 4
On June 1, 1969, the house of the de Leons burned down. They moved to
one of the doors of the apartment built by the Zaide Spouses. They were
asked to pay rentals. They refused. Litigation ensued.
On July 4, 1969, the de Leon Spouses filed a complaint with the Court of
First Instance of Rizal against the Zaide Spouses. 5 The case was docketed
as Civil Case No. 11977. Briefly, the de Leons alleged that in June, 1964
they discovered that their title to the land in question (TCT No. 69088) had
been cancelled and another (TCT No. 138606) issued to the Zaides, on the
strength of "a forged deed of sale supposedly executed in Tagaytay City on
the 11th day of January, 1965," and that they "could not possibly have
sold their lot for the measly sum of P5,000.00 appearing in the forged
deed ..considering that the market price of the land ... cannot be less than
P20,000.00." They thus prayed for the cancellation of TCT No. 138606 and
the re-issuance of another "in the name of plaintiff, EDITA ZAIDE," as well
as the payment to them of damages and attorneys' fees. Because
Primitivo Zaide and Leoncia T. Zaide "were both killed in Tagaytay City" on
January 14, 1970, the complaint was amended to substitute in their stead
their minor children: Pacita, Alexander and Maria Zerlina, represented by
their guardian ad litem,Simeon Tolentino. 6
On October 20, 1970, said Zaide children, through their guardian, Simeon
Tolentino, in turn filed suit against the de Leon Spouses in the same Court
of First Instance of Rizal, to recover the possession of the apartment unit
occupied by the latter and pay rentals at the rate of P300.00 pursuant to a

"verbal contract of lease. 7" The case, docketed as Civil Case No. 14044,
was later transferred to the same branch to which the earlier one (No.
11977), had been assigned. The cases were then tried jointly. 8
Judgment was rendered in favor of the Zaide Spouses on September 25,
1972, 9 the dispositive portion of which reads: 10
WHEREFORE, the Court renders judgment dismissing the
complaint filed in Civil Case No. 11977 and declaring the
sale of the lot covered by Transfer Certificate of Title No.
138606 issued in the names of the deceased spouses
Leoncia T. Zaide and Primitivo Zaide legal and valid;
ordering the plaintiffs as defendants in Civil Case No.
14044 to pay Pacita, Alexander and Maricar all surnamed
Zaide, as plaintiffs in Civil Case No. 14044 the sum of
P250.00 representing the rental of the use and occupancy
of one of the doors of the apartment, beginning January 1,
1969 and every month thereafter until the said Edita Zaide
and Roberto de Leon shall have finally vacated the
premises; and ordering Edita Zaide and Roberto de Leon or
any person claiming rights from them to immediately
vacate the apartment they are now occupying situated on
the land in question. With costs against Edita Zaide and
Roberto de Leon as plaintiffs in Civil Case No. 11977 and
defendants in Civil Case No. 14044.
This judgment was however reversed by another Judge by Order dated
April 10, 1973, 11 upon a motion for reconsideration seasonably presented
by the Spouses de Leon. In that Order, the Court declared that the "firm
and unshakable" testimony of an NBI handwriting expert established that
the signatures of both plaintiffs Edita Zaide and Roberto de Leon as
appearing in the .. (second deed of sale,) Exhibit "A" (Exhibit 2 of the
defendants) .. were forgeries based on the sample signatures of the two
appearing in the other documents furnished to the NBI ..." The Court
further stated that the defect in the admittedly genuine first deed of sale
consisting of the omission of the names of the husbands of the vendor
and vendee could not be corrected by a forged document which is
considered inexistent before the law. It therefore ruled that TCT No.
138606 issued to the Zaide Spouses was null and void, being "the fruit of
a forged deed of sale." The Order closed with the following dispositive
paragraph:

WHEREFORE, in view of the findings of this Court the

motion for the reconsideration of the decision is hereby
granted, and the decision insofar as the Court ruled the
dismissal of the complaint in Civil Case No. 11977 and
declared the sale of the lot covered by Transfer Certificate
of Title No. 138606 issued in the names of the deceased
spouses Leoncia T. Zaide and Primitivo Zaide legal and
valid is set aside, and this Court declares that Transfer
Certificate of Title No. 138606 issued in the name of
defendant Leoncia T. Zaide as cancelled, it being found by
the Court as proceeding from a forged Deed of Sale Exhibit
"A." As a result of this, this Court orders the Register of
Deeds of Rizal to reissue the Transfer Certificate of Title
over the disputed parcel of land in the name of the
plaintiff. With respect to the other case, Civil Case No.
14044, this Court will not disturb the findings made by the
Presiding Judge who rendered the decision sought to be
reconsidered. The decision having been thus reconsidered
insofar as Civil Case No. 11977 is concerned, costs of suit
in this case are chargeable to the defendants.
There is, it will be observed, a curious ambivalence in the amending order:
while it declares the de Leons to be the owner of the land (and orders the
re-issuance of title to them), it did "not disturb the findings" in the original
judgment "with respect to Civil Case No. 14044," to the effect that the
Zaide children are entitled to receive rents for "the use and occupancy of
one of the doors of the apartment" by the de Leons. 12 Be this as it may,
the defendants in Civil Case No. 11977-the children of the deceased Zaide
Spouses-and the defendant in Civil Case No. 14044 Roberto de Leon
appealed to the Court of Appeals. 13
The Court of Appeals found that, contrary to the Zaides' claim, there had
been no admission by the de Leons of the genuineness of the first deed of
sale (Exh. 1), and their counsel's statement in the course of the trial that
his clients were not contesting" that deed, did "not amount to an outright
admission of the genuineness thereof but .. (was) rather an indication on
their part to limit themselves within the issue of forgery of Exhibit 2 or the
second deed of sale;" that the signatures on the latter deed were
definitely forgeries, and since the Zaides invoked that deed as basis of
their title to the land, they could not be deemed buyers in good faith; and
the judgment in Civil Case No. 14044 decreeing the ejectment of the de
Leons was incongruous to its findings of the spurious nature of the deed of
sale and the Zaides' character as buyers in bad faith. The Court of Appeals

thus AFFIRMED the Order of April 10, 1973 which superseded the
judgment of September 25, 1972-in so far as it declared that the sale of
the land in favor of the Zaides was null and void and the land should
therefore revert to the de Leons, but MODIFIED it by relieving Roberto de
Leon of any obligation to pay rent for his occupancy of one door of the
apartment building on the land, "which should not be vacated by him and
his wife or any person claiming any right from them." The dispositive
paragraph of the Court's decision 14 reads as follows:
WHEREFORE, We hereby affirm the appealed Order dated
April 10, 1973, insofar as it relates to Civil Case No. 11977
of the Court of First Instance at Pasig, Rizal, and hereby
modify that portion of the same order insofar as it relates
to Civil Case No. 14044 of the same Court by (1) declaring
the late spouses Primitivo Zaide and Leoncia T. Zaide,
parents of the minors who are the plaintiffs-appellees in
CA-G.R. No. 53880-R, as builders in bad faith of the
apartment built on the contested lot in CA-G.R. No. 53879R and (2) relieving appellant Roberto de Leon in CA-G.R.
No. 53880-R (who is the defendant in Civil Case No.
14044) from paying rental in occupying one door of said
apartment which should not be vacated by him and his
wife or any person claiming any right from them. In all
other respects, the said portion relative to Civil Case No.
14044 is AFFIRMED with costs in both instances to be
taxed on the defendants-appellants, Simeon Tolentino,
guardian ad litem of the Minors Pacita, Alexander, Maria
Zerlina, all surnamed Zaide, who are the plaintiffsappellees in CA-G.R. No. 53880-R.
The case is now before this Court on an appeal by certiorari of the Zaide
children from the decision of the Appellate Court.
There are two (2) deeds of sale which, as already remarked, are exactly
the same as to date, contents, and Identification in the notarial registry,
differing only in that the second contains the names of the spouses of the
vendor and the vendee. 15 It is the Zaides' claim that the second, Exhibit 2,
is a forgery, and the first, Exhibit 1, had not been admitted by them.
The record shows that the deed, Exhibit 1, was in fact admitted by the de
Leons. Copies of both deeds, Exhibits 1 and 2, were pleaded by the Zaides
in their amended answer as an "actionable document" 16 or as "a written
instrument or document" on which "an action or defense is based" in

accordance with Section 7, Rule 8 of the Rules of Court. The de Leons

failed to specifically deny "the genuineness and due execution of the
annexed instrument(s) .. under oath, .. (and to set forth what they claim)
to be the facts;" hence, under Section 8 of the same Rule, "the
genuineness and due execution" of the deeds should "be deemed
admitted."
The de Leons however insist that they should not be saddled with any
such admission because the amended answer (in which the deeds had
been pleaded) had never been admitted by the Court a quo. This is not
correct. At least two (2) orders of the Trial Court made clear its admission
of the amended answer. At one of the hearings, the Court categoricaly
stated that "for purposes of record, the court admits the amended
complaint as well as the amended answer." 17 In an earlier Order, dated
January 6, 1971, lifting an order of default entered against the Zaides, the
Court cited as reason therefor the fact that "defendants have filed not
only an answer but also an amended answer to the original
complaint." 18 It is not the ceremonial phrase of express admission of an
amended pleading that should control, but the unequivocal acts of the
Court in relation to the revised pleading.
Moreover, the de Leons' counsel, Atty. Mariano, explicitly manifested to
the Court that they were not contesting Exhibit 1. This is made clear by
the following recorded exchange 19 between the Court and counsel,
following the observation of the Zaides' attorney, Mr. San Jose, that inter
alia the de Leons had not objected to the genuineness of Exhibit 1 when
formally offered, the only objection being "that it did not contain
documentary stamps."
ATTY. MARIANO:
The trouble is we are not contesting
Exhibit 1, what we are contesting is Exhibit
2, as a forgery which Exh. 2 is the basis of
the registration.
COURT:
What has been attached to the answer?
ATTY. SAN JOSE:

Both of them. May we have it on

record that what they are contesting is
Exhibit 2, and not Exhibit 1.
COURT:
Put it on record. But (that) he is not so
such objecting on the document Exhibit 1.
ATTY. MARIANO:
We are not contesting Exhibit 1. We are
contesting Exhibit 2.
COURT:
Precisely, you are not contesting Exhibit 1.
ATTY. MARIANO:
Yes, Your Honor.
It is difficult to imagine how an admission of a document could be made
any more plain. Prescinding from this, no evidence whatever has been
presented or proferred by the de Leons of the spuriousness of Exhibit 1.
Their manifestations with respect to Exhibit 1 have been limited to an
insistence in limiting the issue to the alleged falsity of the second deed,
Exhibit 2. But, to repeat, they have made no effort whatever to prove
Exhibit 1 to be other than genuine. Under the circumstances, the
genuineness and due execution of Exhibit 1, which had been formally
offered and admitted by the Court, cannot but be conceded, not merely on
the strength of the unrebutted presumptions of regularity of private
transactions, 20 but also and particularly, the admissions by the de Leons
just detailed.
However, although the first deed of sale (Exh. 1) was genuine, it was so
far defective as to render it unregistrable in the Registry of Property. As
already pointed out, it did not set forth the name of the vendee's husband
and was for this reason refused registration by the Register of Deeds. The
defect was unsubstantial. It did not invalidate the deed. The legal
dispositions are clear. Though defective in form, the sale was valid; and
the parties could compel each other to do what was needful to make the

document of sale registrable. The law generally allows a contract of sale to

be entered into in any form, whether "in writing, or by word of mouth, or
partly in writing and partly by word or mouth, or (even) inferred from the
conduct of the parties;" but if the agreement concerns "the sale of land or
of an interest therein," the law requires not only that "the same, or some
note or memorandum thereof, be in writing, and subscribed by the party
charged" in order that it may be enforceable by action, 21 but also that the
writing be in the form of a "public document." 22 The law finally provides
that "If the law requires a document or other special form, as in the acts
and contracts enumerated in .. (Article 1358), the contracting parties may
compel each other to observe that form, once the contract has been
perfected .. (and such) right may be exercised simultaneously with the
action upon the contract." 23
In the case at bar, the Zaides thus had the right to compel the de Leons to
observe the special form prescribed by law; i.e., revised the public
document by inserting the name of the vendee's husband. Indeed, this
was precisely what was done in the second deed of sale, Exhibit 2.
The de Leons however contend that Exhibit 2 is a nullity: they had never
signed it; their purported signatures thereon had been forged. Assuming
this to be so, for the sake of argument, it does not alter (1) the fact that
the parties had voluntarily executed a sale in writing Exhibit 1, which
recites that the price of P5,000.00 had been paid, and the further fact that
(a) the de Leons had received from the Zaides the sum of P2,000.00 as
well as a vehicle valued at P7,000.00 and (b) they, the de Leons, knew
that the Zaides had exercised an act of ownership over the property
thereby acquired by mortgaging it as security for a loan; or (2) the legal
consequence flowing therefrom: that in order to cure the defect in the first
deed, in that it did not specify the name of the vendee's husband, the
Zaides could legally compel the de Leons to execute another deed
containing this omitted circumstance. Hence, even if the second document
of sale be invalidated as a forgery, and the de Leons' title to the land
restored to them, this would be inutile, an empty ceremony, since the de
Leons could nevertheless still be compelled by the Zaides to execute
another deed, in proper form, to carry into effect the sale originally
entered into.
But it is not as indubitable as the Appellate Court and the Trial Court seem
to believe that the second deed of sale, Exhibit 2, was in truth a forgery.
The conclusion of forgery was founded on the testimony of a handwriting
expert. There is in any case no satisfactory explanation why the expert did
not see fit to use, for purposes of comparison, the document nearest in

point of time to the questioned deed (Exhibit 2), namely, Exhibit 1; or why
such expert's testimony should be accorded full faith and credit despite its
(1) not having been subjected to cross-examination, and (2) being
contradicted by the positive testimony of a subscribing witness, and of the
judge who, as notary publicex oficio, had notarized both deeds of sale,
both of whom had affirmed that the vendors and vendees had actually
signed the documents. There was simply a naked assertion that the
expert's evidence proved the forgery without any discussion, much less
refutation, of the facts militating against it. Obviously, such an unreasoned
assertion cannot be sustained. It cannot be accorded that conclusiveness
conceded as a rule to factual findings of the Court of Appeals. In this
situation, it cannot rightfully be ruled that the second deed of sale, Exhibit
2, is indeed a forgery. The most that may perhaps be said about it is that
its genuineness has been placed in doubt by the evidence given by the
handwriting expert. But this is inconsequential, in view of the facts and
legal considerations set out in the next preceding paragraph.
WHEREFORE, the judgment of the Court of Appeals in CA-G.R. No. 53879-R
and CA-G.R. No. 53880-R dated July 26, 1977, and the Order of the Trial
Court dated April 10, 1973 thereby affirmed with modification, are
REVERSED AND SET ASIDE, and the decision of said Trial Court rendered
on September 25, 1972, SUSTAINED AND AFFIRMED in toto. Costs against
private respondents.

G.R. No. 119255

April 9, 2003
TOMAS K. CHUA, petitioner,
vs.
COURT OF APPEALS and ENCARNACION VALDES-CHOY, respondents.
CARPIO, J.:
The Case
This is a petition for review on certiorari seeking to reverse the decision1 of
the Court of Appeals in an action for specific performance 2 filed in the
Regional Trial Court3 by petitioner Tomas K. Chua ("Chua") against
respondent Encarnacion Valdes-Choy ("Valdes-Choy"). Chua sought to
compel Valdes-Choy to consummate the sale of her paraphernal house
and lot in Makati City. The Court of Appeals reversed the
decision4 rendered by the trial court in favor of Chua.
The Facts
Valdes-Choy advertised for sale her paraphernal house and lot ("Property")
with an area of 718 square meters located at No. 40 Tampingco Street
corner Hidalgo Street, San Lorenzo Village, Makati City. The Property is
covered by Transfer Certificate of Title No. 162955 ("TCT") issued by the
Register of Deeds of Makati City in the name of Valdes-Choy. Chua
responded to the advertisement. After several meetings, Chua and ValdesChoy agreed on a purchase price of P10,800,000.00 payable in cash.
On 30 June 1989, Valdes-Choy received from Chua a check for
P100,000.00. The receipt ("Receipt") evidencing the transaction, signed by
Valdes-Choy as seller, and Chua as buyer, reads:
30 June 1989
RECEIPT
RECEIVED from MR. TOMAS K. CHUA PBCom Check No. 206011 in
the amount of ONE HUNDRED THOUSAND PESOS ONLY
(P100,000.00) as EARNEST MONEY for the sale of the property
located at 40 Tampingco cor. Hidalgo, San Lorenzo Village, Makati,
Metro Manila (Area : 718 sq. meters).
The balance of TEN MILLION SEVEN HUNDRED THOUSAND
(P10,700,000.00) is payable on or before 155July 1989. Capital
Gains Tax for the account of the seller. Failure to pay balance on or
before 15 July 1989 forfeits the earnest money. This provided that
all papers are in proper order.6
CONFORME:
ENCARNACION VALDES
Seller
TOMAS K. CHUA
Buyer
x x x.7
In the morning of 13 July 1989, Chua secured from Philippine Bank of
Commerce ("PBCom") a manager's check for P480,000.00. Strangely, after
securing the manager's check, Chua immediately gave PBCom a verbal
stop payment order claiming that this manager's check for P480,000.00
"was lost and/or misplaced."8 On the same day, after receipt of Chua's

verbal order, PBCom Assistant VicePresident Julie C. Pe notified in

writing9 the PBCom Operations Group of Chua's stop payment order.
In the afternoon of 13 July 1989, Chua and Valdes-Choy met with their
respective counsels to execute the necessary documents and arrange the
payments.10 Valdes-Choy as vendor and Chua as vendee signed two Deeds
of Absolute Sale ("Deeds of Sale"). The first Deed of Sale covered the
house and lot for the purchase price of P8,000,000.00. 11 The second Deed
of Sale covered the furnishings, fixtures and movable properties contained
in the house for the purchase price of P2,800,000.00. 12 The parties also
computed the capital gains tax to amount to P485,000.00.
On 14 July 1989, the parties met again at the office of Valdes-Choy's
counsel. Chua handed to Valdes-Choy the PBCom manager's check for
P485,000.00 so Valdes-Choy could pay the capital gains tax as she did not
have sufficient funds to pay the tax. Valdes-Choy issued a receipt showing
that Chua had a remaining balance of P10,215,000.00 after deducting the
advances made by Chua. This receipt reads:
July 14, 1989
Received from MR. TOMAS K. CHUA PBCom. Check No. 325851 in
the amount of FOUR HUNDRED EIGHTY FIVE THOUSAND PESOS
ONLY (P485,000.00) as Partial Payment for the sale of the property
located at 40 Tampingco Cor. Hidalgo St., San Lorenzo Village,
Makati, Metro Manila (Area 718 sq. meters), covered by TCT No.
162955 of the Registry of Deeds of Makati, Metro Manila.
The total purchase price of the above-mentioned property is TEN
MILLION EIGHT HUNDRED THOUSAND PESOS only, broken down as
follows:

P10,800
00

SELLING PRICE
EARNEST MONEY

P100,000.00

PARTIAL PAYMENT

485,000.00

585,00
BALANCE
DUE
ENCARNACION VALDEZ-CHOY

TO

PLUS P80,000.00 for documentary stamps

paid in advance by seller

P10,215
00

80,000

P10,295
00
x x x.13
On the same day, 14 July 1989, Valdes-Choy, accompanied by Chua,
deposited the P485,000.00 manager's check to her account with Traders
Royal Bank. She then purchased a Traders Royal Bank manager's check for
P480,000.00 payable to the Commissioner of Internal Revenue for the
capital gains tax. Valdes-Choy and Chua returned to the office of ValdesChoy's counsel and handed the Traders Royal Bank check to the counsel
who undertook to pay the capital gains tax. It was then also that Chua

showed to Valdes-Choy a PBCom manager's check for P10,215,000.00

representing the balance of the purchase price. Chua, however, did not
give this PBCom manager's check to Valdes-Choy because the TCT was
still registered in the name of Valdes-Choy. Chua required that the Property
be registered first in his name before he would turn over the check to
Valdes-Choy. This angered Valdes-Choy who tore up the Deeds of Sale,
claiming that what Chua required was not part of their agreement. 14
On the same day, 14 July 1989, Chua confirmed his stop payment order by
submitting to PBCom an affidavit of loss 15 of the PBCom Manager's Check
for P480,000.00. PBCom Assistant Vice-President Pe, however, testified
that the manager's check was nevertheless honored because Chua
subsequently verbally advised the bank that he was lifting the stoppayment order due to his "special arrangement" with the bank. 16
On 15 July 1989, the deadline for the payment of the balance of the
purchase price, Valdes-Choy suggested to her counsel that to break the
impasse Chua should deposit in escrow the P10,215,000.00
balance.17 Upon such deposit, Valdes-Choy was willing to cause the
issuance of a new TCT in the name of Chua even without receiving the
balance of the purchase price. Valdes-Choy believed this was the only way
she could protect herself if the certificate of title is transferred in the name
of the buyer before she is fully paid. Valdes-Choy's counsel promised to
relay her suggestion to Chua and his counsel, but nothing came out of it.
On 17 July 1989, Chua filed a complaint for specific performance against
Valdes-Choy which the trial court dismissed on 22 November 1989. On 29
November 1989, Chua re-filed his complaint for specific performance with
damages. After trial in due course, the trial court rendered judgment in
favor of Chua, the dispositive portion of which reads:
Applying the provisions of Article 1191 of the new Civil Code, since
this is an action for specific performance where the plaintiff, as
vendee, wants to pursue the sale, and in order that the fears of
the defendant may be allayed and still have the sale materialize,
judgment is hereby rendered:
I. 1. Ordering the defendant to deliver to the Court not later than
five (5) days from finality of this decision:
a. the owner's duplicate copy of TCT No. 162955
registered in her name;
b. the covering tax declaration and the latest tax receipt
evidencing payment of real estate taxes;
c. the two deeds of sale prepared by Atty. Mark Bocobo on
July 13, 1989, duly executed by defendant in favor of the
plaintiff, whether notarized or not; and
2. Within five (5) days from compliance by the defendant of the
above, ordering the plaintiff to deliver to the Branch Clerk of Court
of this Court the sum of P10,295,000.00 representing the balance
of the consideration (with the sum of P80,000.00 for stamps
already included);
3. Ordering the Branch Clerk of this Court or her duly authorized
representative:
a. to make representations with the BIR for the payment of
capital gains tax for the sale of the house and lot (not to

include the fixtures) and to pay the same from the funds
deposited with her;
b. to present the deed of sale executed in favor of the
plaintiff, together with the owner's duplicate copy of TCT
No. 162955, real estate tax receipt and proof of payment
of capital gains tax, to the Makati Register of Deeds;
c. to pay the required registration fees and stamps (if not
yet advanced by the defendant) and if needed update the
real estate taxes all to be taken from the funds deposited
with her; and
d. surrender to the plaintiff the new Torrens title over the
property;
4. Should the defendant fail or refuse to surrender the two deeds
of sale over the property and the fixtures that were prepared by
Atty. Mark Bocobo and executed by the parties, the Branch Clerk
of Court of this Court is hereby authorized and empowered to
prepare, sign and execute the said deeds of sale for and in behalf
of the defendant;
5. Ordering the defendant to pay to the plaintiff;
a. the sum of P100,000.00 representing moral and
compensatory damages for the plaintiff; and
b. the sum of P50,000.00 as reimbursement for plaintiff's
attorney's fees and cost of litigation.
6. Authorizing the Branch Clerk of Court of this Court to release to
the plaintiff, to be taken from the funds said plaintiff has deposited
with the Court, the amounts covered at paragraph 5 above;
7. Ordering the release of the P10,295,000.00 to the defendant
after deducting therefrom the following amounts:
a. the capital gains tax paid to the BIR;
b. the expenses incurred in the registration of the sale,
updating of real estate taxes, and transfer of title; and
c. the amounts paid under this judgment to the plaintiff.
8. Ordering the defendant to surrender to the plaintiff or his
representatives the premises with the furnishings intact within
seventy-two (72) hours from receipt of the proceeds of the sale;
9. No interest is imposed on the payment to be made by the
plaintiff because he had always been ready to pay the balance and
the premises had been used or occupied by the defendant for the
duration of this case.
II. In the event that specific performance cannot be done for
reasons or causes not attributable to the plaintiff, judgment is
hereby rendered ordering the defendant:
1. To refund to the plaintiff the earnest money in the sum of
P100,000.00, with interest at the legal rate from June 30, 1989
until fully paid;
2. To refund to the plaintiff the sum of P485,000.00 with interest at
the legal rate from July 14, 1989 until fully paid;
3. To pay to the plaintiff the sum of P700,000.00 in the concept of
moral damages and the additional sum of P300,000.00 in the
concept of exemplary damages; and

4. To pay to the plaintiff the sum of P100,000.00 as reimbursement

of attorney's fees and cost of litigation.
SO ORDERED.18
Valdes-Choy appealed to the Court of Appeals which reversed the decision
of the trial court. The Court of Appeals handed down a new judgment,
disposing as follows:
WHEREFORE, the decision appealed from is hereby REVERSED and
SET ASIDE, and another one is rendered:
(1) Dismissing Civil Case No. 89-5772;
(2) Declaring the amount of P100,000.00, representing
earnest money as forfeited in favor of defendantappellant;
(3) Ordering defendant-appellant to return/refund the
amount of P485,000.00 to plaintiff-appellee without
interest;
(4) Dismissing defendant-appellant's compulsory counterclaim; and
(5) Ordering the plaintiff-appellee to pay the costs. 19
Hence, the instant petition.
The Trial Court's Ruling
The trial court found that the transaction reached an impasse when
Valdes-Choy wanted to be first paid the full consideration before a new
TCT covering the Property is issued in the name of Chua. On the other
hand, Chua did not want to pay the consideration in full unless a new TCT
is first issued in his name. The trial court faulted Valdes-Choy for this
impasse.
The trial court held that the parties entered into a contract to sell on 30
June 1989, as evidenced by the Receipt for the P100,000.00 earnest
money. The trial court pointed out that the contract to sell was subject to
the following conditions: (1) the balance of P10,700,000.00 was payable
not later than 15 July 1989; (2) Valdes-Choy may stay in the Property until
13 August 1989; and (3) all papers must be "in proper order" before full
payment is made.
The trial court held that Chua complied with the terms of the contract to
sell. Chua showed that he was prepared to pay Valdes-Choy the
consideration in full on 13 July 1989, two days before the deadline of 15
July 1989. Chua even added P80,000.00 for the documentary stamp tax.
He purchased from PBCom two manager's checks both payable to ValdesChoy. The first check for P485,000.00 was to pay the capital gains tax. The
second check for P10,215,000.00 was to pay the balance of the purchase
price. The trial court was convinced that Chua demonstrated his capacity
and readiness to pay the balance on 13 July 1989 with the production of
the PBCom manager's check for P10,215,000.00.
On the other hand, the trial court found that Valdes-Choy did not perform
her correlative obligation under the contract to sell to put all the papers in
order. The trial court noted that as of 14 July 1989, the capital gains tax
had not been paid because Valdes-Choy's counsel who was suppose to pay
the tax did not do so. The trial court declared that Valdes-Choy was in a
position to deliver only the owner's duplicate copy of the TCT, the signed
Deeds of Sale, the tax declarations, and the latest realty tax receipt. The

trial court concluded that these documents were all useless without the
Bureau of Internal Revenue receipt evidencing full payment of the capital
gains tax which is a pre-requisite to the issuance of a new certificate of
title in Chua's name.
The trial court held that Chua's non-payment of the balance of
P10,215,000.00 on the agreed date was due to Valdes-Choy's fault.
The Court of Appeals' Ruling
In reversing the trial court, the Court of Appeals ruled that Chua's stance
to pay the full consideration only after the Property is registered in his
name was not the agreement of the parties. The Court of Appeals noted
that there is a whale of difference between the phrases "all papers are in
proper order" as written on the Receipt, and "transfer of title" as
demanded by Chua.
Contrary to the findings of the trial court, the Court of Appeals found that
all the papers were in order and that Chua had no valid reason not to pay
on the agreed date. Valdes-Choy was in a position to deliver the owner's
duplicate copy of the TCT, the signed Deeds of Sale, the tax declarations,
and the latest realty tax receipt. The Property was also free from all liens
and encumbrances.
The Court of Appeals declared that the trial court erred in considering
Chua's showing to Valdes-Choy of the PBCom manager's check for
P10,215,000.00 as compliance with Chua's obligation to pay on or before
15 July 1989. The Court of Appeals pointed out that Chua did not want to
give up the check unless "the property was already in his
name."20 Although Chua demonstrated his capacity to pay, this could not
be equated with actual payment which he refused to do.
The Court of Appeals did not consider the non-payment of the capital
gains tax as failure by Valdes-Choy to put the papers "in proper order." The
Court of Appeals explained that the payment of the capital gains tax has
no bearing on the validity of the Deeds of Sale. It is only after the deeds
are signed and notarized can the final computation and payment of the
capital gains tax be made.
The Issues
In his Memorandum, Chua raises the following issues:
1. WHETHER THERE IS A PERFECTED CONTRACT OF SALE OF
IMMOVABLE PROPERTY;
2. WHETHER VALDES-CHOY MAY RESCIND THE CONTRACT IN
CONTROVERSY WITHOUT OBSERVING THE PROVISIONS OF ARTICLE
1592 OF THE NEW CIVIL CODE;
3. WHETHER THE WITHHOLDING OF PAYMENT OF THE BALANCE OF
THE PURCHASE PRICE ON THE PART OF CHUA (AS VENDEE) WAS
JUSTIFIED BY THE CIRCUMSTANCES OBTAINING AND MAY NOT BE
RAISED AS GROUND FOR THE AUTOMATIC RESCISSION OF THE
CONTRACT OF SALE;
4. WHETHER THERE IS LEGAL AND FACTUAL BASIS FOR THE COURT
OF APPEALS TO DECLARE THE "EARNEST MONEY" IN THE AMOUNT
OF P100,000.00 AS FORFEITED IN FAVOR OF VALDES-CHOY;
5. WHETHER THE TRIAL COURT'S JUDGMENT IS IN ACCORD WITH
LAW, REASON AND EQUITY DESERVING OF BEING REINSTATED
AND AFFIRMED.21

The issues for our resolution are: (a) whether the transaction between
Chua and Valdes-Choy is a perfected contract of sale or a mere contract to
sell, and (b) whether Chua can compel Valdes-Choy to cause the issuance
of a new TCT in Chua's name even before payment of the full purchase
price.
The Court's Ruling
The petition is bereft of merit.
There is no dispute that Valdes-Choy is the absolute owner of the Property
which is registered in her name under TCT No.162955, free from all liens
and encumbrances. She was ready, able and willing to deliver to Chua the
owner's duplicate copy of the TCT, the signed Deeds of Sale, the tax
declarations, and the latest realty tax receipt. There is also no dispute that
on 13 July 1989, Valdes-Choy received PBCom Check No. 206011 for
P100,000.00 as earnest money from Chua. Likewise, there is no
controversy that the Receipt for the P100,000.00 earnest money
embodied the terms of the binding contract between Valdes-Choy and
Chua.
Further, there is no controversy that as embodied in the Receipt, ValdesChoy and Chua agreed on the following terms: (1) the balance of
P10,215,000.00 is payable on or before 15 July 1989; (2) the capital gains
tax is for the account of Valdes-Choy; and (3) if Chua fails to pay the
balance of P10,215,000.00 on or before 15 July 1989, Valdes-Choy has the
right to forfeit the earnest money, provided that "all papers are in proper
order." On 13 July 1989, Chua gave Valdes-Choy the PBCom manager's
check for P485,000.00 to pay the capital gains tax.
Both the trial and appellate courts found that the balance of
P10,215,000.00 was not actually paid to Valdes-Choy on the agreed date.
On 13 July 1989, Chua did show to Valdes-Choy the PBCom manager's
check for P10,215,000.00, with Valdes-Choy as payee. However,
Chua refused to give this check to Valdes-Choy until a new TCT covering
the Property is registered in Chua's name. Or, as the trial court put it, until
there is proof of payment of the capital gains tax which is a pre-requisite
to the issuance of a new certificate of title.
First and Second Issues: Contract of Sale or Contract to Sell?
Chua has consistently characterized his agreement with Valdez-Choy, as
evidenced by the Receipt, as a contract to sell and not a contract of sale.
This has been Chua's persistent contention in his pleadings before the trial
and appellate courts.
Chua now pleads for the first time that there is a perfected contract of sale
rather than a contract to sell. He contends that there was no reservation in
the contract of sale that Valdes-Choy shall retain title to the Property until
after the sale. There was no agreement for an automatic rescission of the
contract in case of Chua's default. He argues for the first time that his
payment of earnest money and its acceptance by Valdes-Choy precludes
the latter from rejecting the binding effect of the contract of sale. Thus,
Chua claims that Valdes-Choy may not validly rescind the contract of sale
without following Article 159222 of the Civil Code which requires demand,
either judicially or by notarial act, before rescission may take place.
Chua's new theory is not well taken in light of well-settled jurisprudence.
An issue not raised in the court below cannot be raised for the first time on

appeal, as this is offensive to the basic rules of fair play, justice and due
process.23 In addition, when a party deliberately adopts a certain theory,
and the case is tried and decided on that theory in the court below, the
party will not be permitted to change his theory on appeal. To permit him
to change his theory will be unfair to the adverse party. 24
Nevertheless, in order to put to rest all doubts on the matter, we hold that
the agreement between Chua and Valdes-Choy, as evidenced by the
Receipt, is a contract to sell and not a contract of sale. The distinction
between a contract of sale and contract to sell is well-settled:
In a contract of sale, the title to the property passes to the vendee
upon the delivery of the thing sold; in a contract to sell, ownership
is, by agreement, reserved in the vendor and is not to pass to the
vendee until full payment of the purchase price. Otherwise stated,
in a contract of sale, the vendor loses ownership over the property
and cannot recover it until and unless the contract is resolved or
rescinded; whereas, in a contract to sell, title is retained by the
vendor until full payment of the price. In the latter contract,
payment of the price is a positive suspensive condition, failure of
which is not a breach but an event that prevents the obligation of
the vendor to convey title from becoming effective.25
A perusal of the Receipt shows that the true agreement between the
parties was a contract to sell. Ownership over the Property was retained
by Valdes-Choy and was not to pass to Chua until full payment of the
purchase price.
First, the Receipt provides that the earnest money shall be forfeited in
case the buyer fails to pay the balance of the purchase price on or before
15 July 1989. In such event, Valdes-Choy can sell the Property to other
interested parties. There is in effect a right reserved in favor of ValdesChoy not to push through with the sale upon Chua's failure to remit the
balance of the purchase price before the deadline. This is in the nature of
a stipulation reserving ownership in the seller until full payment of the
purchase price. This is also similar to giving the seller the right to rescind
unilaterally the contract the moment the buyer fails to pay within a fixed
period.26
Second, the agreement between Chua and Valdes-Choy was embodied in
a receipt rather than in a deed of sale, ownership not having passed
between them. The signing of the Deeds of Sale came later when ValdesChoy was under the impression that Chua was about to pay the balance of
the purchase price. The absence of a formal deed of conveyance is a
strong indication that the parties did not intend immediate transfer of
ownership, but only a transfer after full payment of the purchase price. 27
Third, Valdes-Choy retained possession of the certificate of title and all
other documents relative to the sale. When Chua refused to pay ValdesChoy the balance of the purchase price, Valdes-Choy also refused to turnover to Chua these documents. 28 These are additional proof that the
agreement did not transfer to Chua, either by actual or constructive
delivery, ownership of the Property.29
It is true that Article 1482 of the Civil Code provides that "[W]henever
earnest money is given in a contract of sale, it shall be considered as part
of the price and proof of the perfection of the contract." However, this

article speaks of earnest money given in a contract of sale. In this case,

the earnest money was given in a contract to sell. The Receipt evidencing
the contract to sell stipulates that the earnest money is a forfeitable
deposit, to be forfeited if the sale is not consummated should Chua fail to
pay the balance of the purchase price. The earnest money forms part of
the consideration only if the sale is consummated upon full payment of
the purchase price. If there is a contract of sale, Valdes-Choy should have
the right to compel Chua to pay the balance of the purchase price. Chua,
however, has the right to walk away from the transaction, with no
obligation to pay the balance, although he will forfeit the earnest money.
Clearly, there is no contract of sale. The earnest money was given in a
contract to sell, and thus Article 1482, which speaks of a contract of sale,
is not applicable.
Since the agreement between Valdes-Choy and Chua is a mere contract to
sell, the full payment of the purchase price partakes of a suspensive
condition. The non-fulfillment of the condition prevents the obligation to
sell from arising and ownership is retained by the seller without further
remedies by the buyer.30 Article 1592 of the Civil Code permits the buyer
to pay, even after the expiration of the period, as long as no demand for
rescission of the contract has been made upon him either judicially or by
notarial act. However, Article 1592 does not apply to a contract to sell
where the seller reserves the ownership until full payment of the price. 31
Third
and
Fourth
Issues:
Withholding
of
Payment
of
the
Balance of the Purchase Price and Forfeiture of the Earnest Money
Chua insists that he was ready to pay the balance of the purchase price
but withheld payment because Valdes-Choy did not fulfill her contractual
obligation to put all the papers in "proper order." Specifically, Chua claims
that Valdes-Choy failed to show that the capital gains tax had been paid
after he had advanced the money for its payment. For the same reason,
he contends that Valdes-Choy may not forfeit the earnest money even if
he did not pay on time.
There is a variance of interpretation on the phrase "all papers are in
proper order" as written in the Receipt. There is no dispute though, that as
long as the papers are "in proper order," Valdes-Choy has the right to
forfeit the earnest money if Chua fails to pay the balance before the
deadline.
The trial court interpreted the phrase to include payment of the capital
gains tax, with the Bureau of Internal Revenue receipt as proof of
payment. The Court of Appeals held otherwise. We quote verbatim the
ruling of the Court of Appeals on this matter:
The trial court made much fuss in connection with the payment of
the capital gains tax, of which Section 33 of the National Internal
Revenue Code of 1977, is the governing provision insofar as its
computation is concerned. The trial court failed to consider Section
34-(a) of the said Code, the last sentence of which provides, that
"[t]he amount realized from the sale or other disposition of
property shall be the sum of money received plus the fair market
value of the property (other than money) received;" and that the
computation of the capital gains tax can only be finally assessed
by the Commission on Internal Revenue upon the presentation of

the Deeds of Absolute Sale themselves, without which any

premature computation of the capital gains tax becomes of no
moment. At any rate, the computation and payment of the capital
gains tax has no bearing insofar as the validity and effectiveness
of the deeds of sale in question are concerned, because it is only
after the contracts of sale are finally executed in due form and
have been duly notarized that the final computation of the capital
gains tax can follow as a matter of course. Indeed, exhibit D, the
PBC Check No. 325851, dated July 13, 1989, in the amount of
P485,000.00, which is considered as part of the consideration of
the sale, was deposited in the name of appellant, from which she
in turn, purchased the corresponding check in the amount
representing the sum to be paid for capital gains tax and drawn in
the name of the Commissioner of Internal Revenue, which then
allayed any fear or doubt that that amount would not be paid to
the Government after all.32
We see no reason to disturb the ruling of the Court of Appeals.
In a contract to sell, the obligation of the seller to sell becomes
demandable only upon the happening of the suspensive condition. In this
case, the suspensive condition is the full payment of the purchase price by
Chua. Such full payment gives rise to Chua's right to demand the
execution of the contract of sale.
It is only upon the existence of the contract of sale that the seller becomes
obligated to transfer the ownership of the thing sold to the buyer. Article
1458 of the Civil Code defines a contract of sale as follows:
Art. 1458. By the contract of sale one of the contracting parties
obligates himself to transfer the ownership of and to deliver a
determinate thing, and the other to pay therefor a price certain in
money or its equivalent.
x x x. (Emphasis supplied)
Prior to the existence of the contract of sale, the seller is not obligated to
transfer ownership to the buyer, even if there is a contract to sell between
them. It is also upon the existence of the contract of sale that the buyer is
obligated to pay the purchase price to the seller. Since the transfer of
ownership is in exchange for the purchase price, these obligations must be
simultaneously fulfilled at the time of the execution of the contract of sale,
in the absence of a contrary stipulation.
In a contract of sale, the obligations of the seller are specified in Article
1495 of the Civil Code, as follows:
Art. 1495. The vendor is bound to transfer the ownership of and
deliver, as well as warrant the thing which is the object of the sale.
(Emphasis supplied)
The obligation of the seller is to transfer to the buyer ownership of the
thing sold. In the sale of real property, the seller is not obligated to
transfer in the name of the buyer a new certificate of title, but rather to
transfer ownership of the real property. There is a difference between
transfer of the certificate of title in the name of the buyer, and transfer of
ownership to the buyer. The buyer may become the owner of the real
property even if the certificate of title is still registered in the name of the
seller. As between the seller and buyer, ownership is transferred not by

the issuance of a new certificate of title in the name of the buyer but by
the execution of the instrument of sale in a public document.
In a contract of sale, ownership is transferred upon delivery of the thing
sold. As the noted civil law commentator Arturo M. Tolentino explains it, Delivery is not only a necessary condition for the enjoyment of the
thing, but is a mode of acquiring dominion and determines the
transmission of ownership, the birth of the real right. The delivery,
therefore, made in any of the forms provided in articles 1497 to
1505 signifies that the transmission of ownership from vendor to
vendee has taken place. The delivery of the thing constitutes an
indispensable requisite for the purpose of acquiring ownership.
Our law does not admit the doctrine of transfer of property by
mere consent; the ownership, the property right, is derived only
from delivery of the thing. x x x.33 (Emphasis supplied)
In a contract of sale of real property, delivery is effected when the
instrument of sale is executed in a public document. When the deed of
absolute sale is signed by the parties and notarized, then delivery of the
real property is deemed made by the seller to the buyer. Article 1498 of
the Civil Code provides that
Art. 1498. When the sale is made through a public instrument, the
execution thereof shall be equivalent to the delivery of the thing
which is the object of the contract, if from the deed the contrary
does not appear or cannot clearly be inferred.
x x x.
Similarly, in a contract to sell real property, once the seller is ready, able
and willing to sign the deed of absolute sale before a notary public, the
seller is in a position to transfer ownership of the real property to the
buyer. At this point, the seller complies with his undertaking to sell the real
property in accordance with the contract to sell, and to assume all the
obligations of a vendor under a contract of sale pursuant to the relevant
articles of the Civil Code. In a contract to sell, the seller is not obligated to
transfer ownership to the buyer. Neither is the seller obligated to cause
the issuance of a new certificate of title in the name of the buyer.
However, the seller must put all his papers in proper order to the point
that he is in a position to transfer ownership of the real property to the
buyer upon the signing of the contract of sale.
In the instant case, Valdes-Choy was in a position to comply with all her
obligations as a seller under the contract to sell. First, she already signed
the Deeds of Sale in the office of her counsel in the presence of the buyer.
Second, she was prepared to turn-over the owner's duplicate of the TCT to
the buyer, along with the tax declarations and latest realty tax receipt.
Clearly, at this point Valdes-Choy was ready, able and willing to transfer
ownership of the Property to the buyer as required by the contract to sell,
and by Articles 1458 and 1495 of the Civil Code to consummate the
contract of sale.
Chua, however, refused to give to Valdes-Choy the PBCom manager's
check for the balance of the purchase price. Chua imposed the condition
that a new TCT should first be issued in his name, a condition that is found
neither in the law nor in the contract to sell as evidenced by the Receipt.
Thus, at this point Chua was not ready, able and willing to pay the full

purchase price which is his obligation under the contract to sell. Chua was
also not in a position to assume the principal obligation of a vendee in a
contract of sale, which is also to pay the full purchase price at the agreed
time. Article 1582 of the Civil Code provides that
Art. 1582. The vendee is bound to accept delivery and to pay the
price of the thing sold at the time and place stipulated in the
contract.
x x x. (Emphasis supplied)
In this case, the contract to sell stipulated that Chua should pay the
balance of the purchase price "on or before 15 July 1989." The signed
Deeds of Sale also stipulated that the buyer shall pay the balance of the
purchase price upon signing of the deeds. Thus, the Deeds of Sale, both
signed by Chua, state as follows:
Deed of Absolute Sale covering the lot:
xxx
For and in consideration of the sum of EIGHT MILLION PESOS
(P8,000,000.00), Philippine Currency, receipt of which in full is
hereby acknowledged by the VENDOR from the VENDEE, the
VENDOR sells, transfers and conveys unto the VENDEE, his heirs,
successors and assigns, the said parcel of land, together with the
improvements existing thereon, free from all liens and
encumbrances.34 (Emphasis supplied)
Deed of Absolute Sale covering the furnishings:
xxx
For and in consideration of the sum of TWO MILLION
PESOS (P2,800,000.00), Philippine Currency, receipt
acknowledged by the VENDOR from the VENDEE, the
conveys unto the VENDEE, his heirs, successors and
fixtures and other movable properties thereon,
encumbrances.35 (Emphasis supplied)

EIGHT HUNDRED THOUSAND

of which in full is hereby
VENDOR sells, transfers and
assigns, the said furnitures,
free from all liens and

However, on the agreed date, Chua refused to pay the balance of the
purchase price as required by the contract to sell, the signed Deeds of
Sale, and Article 1582 of the Civil Code. Chua was therefore in default and
has only himself to blame for the rescission by Valdes-Choy of the contract
to sell.
Even if measured under existing usage or custom, Valdes-Choy had all her
papers "in proper order." Article 1376 of the Civil Code provides that:
Art. 1376. The usage or custom of the place shall be borne in mind
in the interpretation of the ambiguities of a contract, and shall fill
the omission of stipulations which are ordinarily established.
Customarily, in the absence of a contrary agreement, the submission by
an individual seller to the buyer of the following papers would complete a
sale of real estate: (1) owner's duplicate copy of the Torrens title; 36 (2)
signed deed of absolute sale; (3) tax declaration; and (3) latest realty tax
receipt. The buyer can retain the amount for the capital gains tax and pay
it upon authority of the seller, or the seller can pay the tax, depending on
the agreement of the parties.
The buyer has more interest in having the capital gains tax paid
immediately since this is a pre-requisite to the issuance of a new Torrens
title in his name. Nevertheless, as far as the government is concerned, the

capital gains tax remains a liability of the seller since it is a tax on the
seller's gain from the sale of the real estate. Payment of the capital gains
tax, however, is not a pre-requisite to the transfer of ownership to the
buyer. The transfer of ownership takes effect upon the signing and
notarization of the deed of absolute sale.
The recording of the sale with the proper Registry of Deeds 37 and the
transfer of the certificate of title in the name of the buyer are necessary
only to bind third parties to the transfer of ownership. 38 As between the
seller and the buyer, the transfer of ownership takes effect upon the
execution of a public instrument conveying the real estate. 39Registration of
the sale with the Registry of Deeds, or the issuance of a new certificate of
title, does not confer ownership on the buyer. Such registration or
issuance of a new certificate of title is not one of the modes of acquiring
ownership.40
In this case, Valdes-Choy was ready, able and willing to submit to Chua all
the papers that customarily would complete the sale, and to pay as well
the capital gains tax. On the other hand, Chua's condition that a new TCT
be first issued in his name before he pays the balance of P10,215,000.00,
representing 94.58% of the purchase price, is not customary in a sale of
real estate. Such a condition, not specified in the contract to sell as
evidenced by the Receipt, cannot be considered part of the "omissions of
stipulations which are ordinarily established" by usage or custom. 41 What
is increasingly becoming customary is to deposit in escrow the balance of
the purchase price pending the issuance of a new certificate of title in the
name of the buyer. Valdes-Choy suggested this solution but unfortunately,
it drew no response from Chua.
Chua had no reason to fear being swindled. Valdes-Choy was prepared to
turn-over to him the owner's duplicate copy of the TCT, the signed Deeds
of Sale, the tax declarations, and the latest realty tax receipt. There was
no hindrance to paying the capital gains tax as Chua himself had
advanced the money to pay the same and Valdes-Choy had procured a
manager's check payable to the Bureau of Internal Revenue covering the
amount. It was only a matter of time before the capital gains tax would be
paid. Chua acted precipitately in filing the action for specific performance
a mere two days after the deadline of 15 July 1989 when there was an
impasse. While this case was dismissed on 22 November 1989, he did not
waste any time in re-filing the same on 29 November 1989.
Accordingly, since Chua refused to pay the consideration in full on the
agreed date, which is a suspensive condition, Chua cannot compel ValdesChoy to consummate the sale of the Property. Article 1181 of the Civil
Code provides that ART. 1181. In conditional obligations, the acquisition of rights, as
well as the extinguishment or loss of those already acquired shall
depend upon the happening of the event which constitutes the
condition.
Chua acquired no right to compel Valdes-Choy to transfer ownership of the
Property to him because the suspensive condition - the full payment of the
purchase price - did not happen. There is no correlative obligation on the
part of Valdes-Choy to transfer ownership of the Property to Chua. There is
also no obligation on the part of Valdes-Choy to cause the issuance of a

new TCT in the name of Chua since unless expressly stipulated, this is not
one of the obligations of a vendor.
WHEREFORE, the Decision of the Court of Appeals in CA-G.R. CV No. 37652
dated 23 February 1995 is AFFIRMED in toto.
SO ORDERED.

[G.R. No. 144225. June 17, 2003]

SPOUSES GODOFREDO ALFREDO and CARMEN LIMON ALFREDO,
SPOUSES ARNULFO SAVELLANO and EDITHA B. SAVELLANO,
DANTON D. MATAWARAN, SPOUSES DELFIN F. ESPIRITU, JR. and
ESTELA S. ESPIRITU and ELIZABETH TUAZON, petitioners,
vs. SPOUSES
ARMANDO
BORRAS
and
ADELIA
LOBATON
BORRAS, respondents.
DECISION
CARPIO, J.:
The Case
Before us is a petition for review assailing the Decision [1] of the Court
of Appeals dated 26 November 1999 affirming the decision [2] of the
Regional Trial Court of Bataan, Branch 4, in Civil Case No. DH-25694. Petitioners also question the Resolution of the Court of Appeals dated
26 July 2000 denying petitioners motion for reconsideration.
The Antecedent Facts
A parcel of land measuring 81,524 square meters (Subject Land) in
Barrio Culis, Mabiga, Hermosa, Bataan is the subject of controversy in this
case. The registered owners of the Subject Land were petitioner spouses,
Godofredo Alfredo (Godofredo) and Carmen Limon Alfredo (Carmen). The
Subject Land is covered by Original Certificate of Title No. 284 (OCT No.
284) issued to Godofredo and Carmen under Homestead Patent No. V69196.
On 7 March 1994, the private respondents, spouses Armando Borras
(Armando) and Adelia Lobaton Borras (Adelia), filed a complaint for
specific performance against Godofredo and Carmen before the Regional
Trial Court of Bataan, Branch 4. The case was docketed as Civil Case No.
DH-256-94.
Armando and Adelia alleged in their complaint that Godofredo and
Carmen mortgaged the Subject Land for P7,000.00 with the Development
Bank of the Philippines (DBP). To pay the debt, Carmen and Godofredo sold
the Subject Land to Armando and Adelia for P15,000.00, the buyers to pay

the DBP loan and its accumulated interest, and the balance to be paid in
cash to the sellers.
Armando and Adelia gave Godofredo and Carmen the money to pay
the loan to DBP which signed the release of mortgage and returned the
owners duplicate copy of OCT No. 284 to Godofredo and Carmen. Armando
and Adelia subsequently paid the balance of the purchase price of the
Subject Land for which Carmen issued a receipt dated 11 March
1970. Godofredo and Carmen then delivered to Adelia the owners
duplicate copy of OCT No. 284, with the document of cancellation of
mortgage, official receipts of realty tax payments, and tax declaration in
the name of Godofredo. Godofredo and Carmen introduced Armando and
Adelia, as the new owners of the Subject Land, to the Natanawans, the old
tenants of the Subject Land.Armando and Adelia then took possession of
the Subject Land.
In January 1994, Armando and Adelia learned that hired persons had
entered the Subject Land and were cutting trees under instructions of
allegedly new owners of the Subject Land.Subsequently, Armando and
Adelia discovered that Godofredo and Carmen had re-sold portions of the
Subject Land to several persons.
On 8 February 1994, Armando and Adelia filed an adverse claim with
the Register of Deeds of Bataan. Armando and Adelia discovered that
Godofredo and Carmen had secured an owners duplicate copy of OCT No.
284 after filing a petition in court for the issuance of a new
copy. Godofredo and Carmen claimed in their petition that they lost their
owners duplicate copy. Armando and Adelia wrote Godofredo and Carmen
complaining about their acts, but the latter did not reply. Thus, Armando
and Adelia filed a complaint for specific performance.
On 28 March 1994, Armando and Adelia amended their complaint to
include the following persons as additional defendants: the spouses
Arnulfo Savellano and Editha B. Savellano, Danton D. Matawaran, the
spouses Delfin F. Espiritu, Jr. and Estela S. Espiritu, and Elizabeth Tuazon
(Subsequent Buyers). The Subsequent Buyers, who are also petitioners in
this case, purchased from Godofredo and Carmen the subdivided portions
of the Subject Land. The Register of Deeds of Bataan issued to the
Subsequent Buyers transfer certificates of title to the lots they purchased.

In their answer, Godofredo and Carmen and the Subsequent

Buyers (collectively petitioners) argued that the action is unenforceable
under the Statute of Frauds. Petitioners pointed out that there is no written
instrument evidencing the alleged contract of sale over the Subject Land
in favor of Armando and Adelia. Petitioners objected to whatever parole
evidence Armando and Adelia introduced or offered on the alleged sale
unless the same was in writing and subscribed by Godofredo. Petitioners
asserted that the Subsequent Buyers were buyers in good faith and for
value. As counterclaim, petitioners sought payment of attorneys fees and
incidental expenses.
Trial then followed. Armando and Adelia presented the following
witnesses: Adelia, Jesus Lobaton, Roberto Lopez, Apolinario Natanawan,
Rolando Natanawan, Tomas Natanawan, and Mildred Lobaton. Petitioners
presented two witnesses, Godofredo and Constancia Calonso.
On 7 June 1996, the trial court rendered its decision in favor of
Armando and Adelia. The dispositive portion of the decision reads:
WHEREFORE, premises considered, judgment is hereby rendered in favor
of plaintiffs, the spouses Adelia Lobaton Borras and Armando F. Borras,
and against the defendant-spouses Godofredo Alfredo and Carmen Limon
Alfredo, spouses Arnulfo Sabellano and Editha B. Sabellano, spouses Delfin
F. Espiritu, Jr. and Estela S. Espiritu, Danton D. Matawaran and Elizabeth
Tuazon, as follows:
1. Declaring the Deeds of Absolute Sale of the disputed
parcel of land (covered by OCT No. 284) executed
by the spouses Godofredo Alfredo and Camen
Limon Alfredo in favor of spouses Arnulfo
Sabellano and Editha B. Sabellano, spouses Delfin
F. Espiritu, Danton D. Matawaran and Elizabeth
Tuazon, as null and void;
2. Declaring the Transfer Certificates of Title Nos. T-163266
and T-163267 in the names of spouses Arnulfo
Sabellano and Editha B. Sabellano; Transfer
Certificates of Title Nos. T-163268 and 163272 in
the names of spouses Delfin F. Espiritu, Jr. and
Estela S. Espiritu; Transfer Certificates of Title Nos.
T-163269 and T-163271 in the name of Danton D.
Matawaran; and Transfer Certificate of Title No. T-

163270 in the name of Elizabeth Tuazon, as null

and void and that the Register of Deeds of Bataan
is hereby ordered to cancel said titles;
3. Ordering the defendant-spouses Godofredo Alfredo and
Carmen Limon Alfredo to execute and deliver a
good and valid Deed of Absolute Sale of the
disputed parcel of land (covered by OCT No. 284)
in favor of the spouses Adelia Lobaton Borras and
Armando F. Borras within a period of ten (10) days
from the finality of this decision;
4. Ordering defendant-spouses Godofredo Alfredo and
Carmen Limon Alfredo to surrender their owners
duplicate copy of OCT No. 284 issued to them by
virtue of the Order dated May 20, 1992 of the
Regional Trial Court of Bataan, Dinalupihan Branch,
to the Registry of Deeds of Bataan within ten (10)
days from the finality of this decision, who, in turn,
is directed to cancel the same as there exists in
the possession of herein plaintiffs of the owners
duplicate copy of said OCT No. 284 and, to restore
and/or reinstate OCT No. 284 of the Register of
Deeds of Bataan to its full force and effect;
5. Ordering the defendant-spouses Godofredo Alfredo and
Carmen Limon Alfredo to restitute and/or return
the amount of the respective purchase prices
and/or consideration of sale of the disputed
parcels of land they sold to their co-defendants
within ten (10) days from the finality of this
decision with legal interest thereon from date of
the sale;
6. Ordering the defendants, jointly and severally, to pay
plaintiff-spouses the sum of P20,000.00 as and for
attorneys fees and litigation expenses; and
7. Ordering defendants to pay the costs of suit.
Defendants counterclaims are hereby dismissed for lack of merit.

SO ORDERED.[3]

Statute of Frauds is not applicable because in this case the sale was
perfected.

Petitioners appealed to the Court of Appeals.

On 26 November 1999, the Court of Appeals issued its Decision
affirming the decision of the trial court, thus:
WHEREFORE, premises considered, the appealed decision in Civil Case No.
DH-256-94 is hereby AFFIRMED in its entirety. Treble costs against the
defendants-appellants.
SO ORDERED.[4]
On 26 July 2000, the Court of Appeals denied petitioners motion for
reconsideration.
The Ruling of the Trial Court
The trial court ruled that there was a perfected contract of sale
between the spouses Godofredo and Carmen and the spouses Armando
and Adelia. The trial court found that all the elements of a contract of sale
were present in this case. The object of the sale was specifically identified
as the 81,524-square meter lot in Barrio Culis, Mabigas, Hermosa, Bataan,
covered by OCT No. 284 issued by the Registry of Deeds of Bataan. The
purchase price was fixed at P15,000.00, with the buyers assuming to pay
the sellers P7,000.00 DBP mortgage loan including its accumulated
interest. The balance of the purchase price was to be paid in cash to the
sellers. The last payment of P2,524.00 constituted the full settlement of
the purchase price and this was paid on 11 March 1970 as evidenced by
the receipt issued by Carmen.
The trial court found the following facts as proof of a perfected
contract of sale: (1) Godofredo and Carmen delivered to Armando and
Adelia the Subject Land; (2) Armando and Adelia treated as their own
tenants the tenants of Godofredo and Carmen; (3) Godofredo and Carmen
turned over to Armando and Adelia documents such as the owners
duplicate copy of the title of the Subject Land, tax declaration, and the
receipts of realty tax payments in the name of Godofredo; and (4) the DBP
cancelled the mortgage on the Subject Property upon payment of the loan
of Godofredo and Carmen. Moreover, the receipt of payment issued by
Carmen served as an acknowledgment, if not a ratification, of the verbal
sale between the sellers and the buyers. The trial court ruled that the

The trial court concluded that the Subsequent Buyers were not
innocent purchasers. Not one of the Subsequent Buyers testified in court
on how they purchased their respective lots.The Subsequent Buyers totally
depended on the testimony of Constancia Calonso (Calonso) to explain the
subsequent sale. Calonso, a broker, negotiated with Godofredo and
Carmen the sale of the Subject Land which Godofredo and Carmen
subdivided so they could sell anew portions to the Subsequent Buyers.
Calonso admitted that the Subject Land was adjacent to her own
lot. The trial court pointed out that Calonso did not inquire on the nature of
the tenancy of the Natanawans and on who owned the Subject
Land. Instead, she bought out the tenants for P150,000.00. The buy out
was embodied in a Kasunduan. Apolinario Natanawan (Apolinario) testified
that
he
and
his
wife
accepted
the
money
and
signed
the Kasunduan because Calonso and the Subsequent Buyers threatened
them with forcible ejectment. Calonso brought Apolinario to the Agrarian
Reform Office where he was asked to produce the documents showing that
Adelia is the owner of the Subject Land. Since Apolinario could not produce
the documents, the agrarian officer told him that he would lose the
case. Thus, Apolinario was constrained to sign the Kasunduan and accept
the P150,000.00.
Another indication of Calonsos bad faith was her own admission that
she saw an adverse claim on the title of the Subject Land when she
registered the deeds of sale in the names of the Subsequent Buyers.
Calonso ignored the adverse claim and proceeded with the registration of
the deeds of sale.
The trial court awarded P20,000.00 as attorneys fees to Armando and
Adelia. In justifying the award of attorneys fees, the trial court invoked
Article 2208 (2) of the Civil Code which allows a court to award attorneys
fees, including litigation expenses, when it is just and equitable to award
the same. The trial court ruled that Armando and Adelia are entitled to
attorneys fees since they were compelled to file this case due to
petitioners refusal to heed their just and valid demand.
The Ruling of the Court of Appeals

The Court of Appeals found the factual findings of the trial court well
supported by the evidence. Based on these findings, the Court of Appeals
also concluded that there was a perfected contract of sale and the
Subsequent Buyers were not innocent purchasers.
The Court of Appeals ruled that the handwritten receipt dated 11
March 1970 is sufficient proof that Godofredo and Carmen sold the Subject
Land to Armando and Adelia upon payment of the balance of the purchase
price. The Court of Appeals found the recitals in the receipt as sufficient to
serve as the memorandum or note as a writing under the Statute of
Frauds.[5] The Court of Appeals then reiterated the ruling of the trial court
that the Statute of Frauds does not apply in this case.
The Court of Appeals gave credence to the testimony of a witness of
Armando and Adelia, Mildred Lobaton, who explained why the title to the
Subject Land was not in the name of Armando and Adelia. Lobaton
testified that Godofredo was then busy preparing to leave for
Davao. Godofredo promised that he would sign all the papers once they
were ready. Since Armando and Adelia were close to the family of Carmen,
they trusted Godofredo and Carmen to honor their commitment. Armando
and Adelia had no reason to believe that their contract of sale was not
perfected or validly executed considering that they had received the
duplicate copy of OCT No. 284 and other relevant documents. Moreover,
they had taken physical possession of the Subject Land.
The Court of Appeals held that the contract of sale is not void even if
only Carmen signed the receipt dated 11 March 1970. Citing Felipe v.
Heirs of Maximo Aldon,[6] the appellate court ruled that a contract of
sale made by the wife without the husbands consent is not void but
merely voidable. The Court of Appeals further declared that the sale in this
case binds the conjugal partnership even if only the wife signed the
receipt because the proceeds of the sale were used for the benefit of the
conjugal partnership. The appellate court based this conclusion on Article
161[7] of the Civil Code.
The Subsequent Buyers of the Subject Land cannot claim that they
are buyers in good faith because they had constructive notice of the
adverse claim of Armando and Adelia. Calonso, who brokered the
subsequent sale, testified that when she registered the subsequent deeds
of sale, the adverse claim of Armando and Adelia was already annotated
on the title of the Subject Land. The Court of Appeals believed that the act
of Calonso and the Subsequent Buyers in forcibly ejecting the Natanawans

from the Subject Land buttresses the conclusion that the second sale was
tainted with bad faith from the very beginning.
Finally, the Court of Appeals noted that the issue of prescription was
not raised in the Answer. Nonetheless, the appellate court explained that
since this action is actually based on fraud, the prescriptive period is four
years, with the period starting to run only from the date of the discovery
of the fraud. Armando and Adelia discovered the fraudulent sale of the
Subject Land only in January 1994. Armando and Adelia lost no time in
writing a letter to Godofredo and Carmen on 2 February 1994 and filed this
case on 7 March 1994. Plainly, Armando and Adelia did not sleep on their
rights or lose their rights by prescription.
The Court of Appeals sustained the award of attorneys fees and
imposed treble costs on petitioners.
The Issues
Petitioners raise the following issues:
I
Whether the alleged sale of the Subject Land in favor of Armando
and Adelia is valid and enforceable, where (1) it was orally
entered into and not in writing; (2) Carmen did not obtain the
consent and authority of her husband, Godofredo, who was the
sole owner of the Subject Land in whose name the title thereto
(OCT No. 284) was issued; and (3) it was entered into during the
25-year prohibitive period for alienating the Subject Land without
the approval of the Secretary of Agriculture and Natural
Resources.
II
Whether the action to enforce the alleged oral contract of sale
brought after 24 years from its alleged perfection had been
barred by prescription and by laches.
III
Whether the deeds of absolute sale and the transfer certificates
of title over the portions of the Subject Land issued to the

Subsequent Buyers, innocent purchasers in good faith and for

value whose individual titles to their respective lots are absolute
and indefeasible, are valid.
IV
Whether petitioners are liable to pay Armando and
Adelia P20,0000.00 as attorneys fees and litigation expenses and
the treble costs, where the claim of Armando and Adelia is clearly
unfounded and baseless.
V
Whether petitioners are entitled to the counterclaim for
attorneys fees and litigation expenses, where they have
sustained such expenses by reason of institution of a clearly
malicious and unfounded action by Armando and Adelia.[8]
The Courts Ruling
The petition is without merit.
In a petition for review on certiorari under Rule 45, this Court reviews
only errors of law and not errors of facts. [9] The factual findings of the
appellate court are generally binding on this Court. [10] This applies with
greater force when both the trial court and the Court of Appeals are in
complete agreement on their factual findings. [11] In this case, there is no
reason to deviate from the findings of the lower courts. The facts relied
upon by the trial and appellate courts are borne out by the record. We
agree with the conclusions drawn by the lower courts from these facts.
Validity and Enforceability of the Sale
The contract of sale between the spouses Godofredo and Carmen and
the spouses Armando and Adelia was a perfected contract. A contract is
perfected once there is consent of the contracting parties on the object
certain and on the cause of the obligation. [12] In the instant case, the
object of the sale is the Subject Land, and the price certain
is P15,000.00. The trial and appellate courts found that there was a
meeting of the minds on the sale of the Subject Land and on the purchase
price of P15,000.00. This is a finding of fact that is binding on this

Court.We find no reason to disturb this finding since it is supported by

substantial evidence.
The contract of sale of the Subject Land has also been consummated
because the sellers and buyers have performed their respective
obligations under the contract. In a contract of sale, the seller obligates
himself to transfer the ownership of the determinate thing sold, and to
deliver the same, to the buyer who obligates himself to pay a price certain
to the seller.[13] In the instant case, Godofredo and Carmen delivered the
Subject Land to Armando and Adelia, placing the latter in actual physical
possession of the Subject Land. This physical delivery of the Subject Land
also constituted a transfer of ownership of the Subject Land to Armando
and Adelia.[14] Ownership of the thing sold is transferred to the vendee
upon its actual or constructive delivery. [15] Godofredo and Carmen also
turned over to Armando and Adelia the documents of ownership to the
Subject Land, namely the owners duplicate copy of OCT No. 284, the tax
declaration and the receipts of realty tax payments.
On the other hand, Armando and Adelia paid the full purchase price
as evidenced by the receipt dated 11 March 1970 issued by
Carmen. Armando and Adelia fulfilled their obligation to provide
the P7,000.00 to pay the DBP loan of Godofredo and Carmen, and to pay
the latter the balance of P8,000.00 in cash. The P2,524.00 paid under the
receipt dated 11 March 1970 was the last installment to settle fully the
purchase price. Indeed, upon payment to DBP of the P7,000.00 and the
accumulated interests, the DBP cancelled the mortgage on the Subject
Land and returned the owners duplicate copy of OCT No. 284 to Godofredo
and Carmen.
The trial and appellate courts correctly refused to apply the Statute of
Frauds to this case. The Statute of Frauds [16] provides that a contract for
the sale of real property shall be unenforceable unless the contract or
some note or memorandum of the sale is in writing and subscribed by the
party charged or his agent. The existence of the receipt dated 11 March
1970, which is a memorandum of the sale, removes the transaction from
the provisions of the Statute of Frauds.
The Statute of Frauds applies only to executory contracts and not to
contracts either partially or totally performed. [17] Thus, where one party
has performed ones obligation, oral evidence will be admitted to prove the
agreement.[18] In the instant case, the parties have consummated the sale
of the Subject Land, with both sellers and buyers performing their
respective obligations under the contract of sale. In addition, a contract

that violates the Statute of Frauds is ratified by the acceptance of benefits

under the contract.[19] Godofredo and Carmen benefited from the contract
because they paid their DBP loan and secured the cancellation of their
mortgage using the money given by Armando and Adelia. Godofredo and
Carmen also accepted payment of the balance of the purchase price.
Godofredo and Carmen cannot invoke the Statute of Frauds to deny
the existence of the verbal contract of sale because they have performed
their obligations, and have accepted benefits, under the verbal
contract. [20] Armando and Adelia have also performed their obligations
under the verbal contract. Clearly, both the sellers and the buyers have
consummated the verbal contract of sale of the Subject Land. The Statute
of Frauds was enacted to prevent fraud.[21] This law cannot be used to
advance the very evil the law seeks to prevent.
Godofredo and Carmen also claim that the sale of the Subject Land to
Armando and Adelia is void on two grounds. First, Carmen sold the Subject
Land without the marital consent of Godofredo. Second, the sale was
made during the 25-year period that the law prohibits the alienation of
land grants without the approval of the Secretary of Agriculture and
Natural Resources.
These arguments are without basis.
The Family Code, which took effect on 3 August 1988, provides that
any alienation or encumbrance made by the husband of the conjugal
partnership property without the consent of the wife is void. However,
when the sale is made before the effectivity of the Family Code, the
applicable law is the Civil Code.[22]
Article 173 of the Civil Code provides that the disposition of conjugal
property without the wifes consent is not void but merely voidable. Article
173 reads:
The wife may, during the marriage, and within ten years from the
transaction questioned, ask the courts for the annulment of any contract
of the husband entered into without her consent, when such consent is
required, or any act or contract of the husband which tends to defraud her
or impair her interest in the conjugal partnership property. Should the wife
fail to exercise this right, she or her heirs, after the dissolution of the
marriage, may demand the value of property fraudulently alienated by the
husband.

In Felipe v. Aldon,[23] we applied Article 173 in a case where the wife sold
some parcels of land belonging to the conjugal partnership without the
consent of the husband. We ruled that the contract of sale was voidable
subject to annulment by the husband. Following petitioners argument that
Carmen sold the land to Armando and Adelia without the consent of
Carmens husband, the sale would only be voidable and not void.
However, Godofredo can no longer question the sale. Voidable
contracts are susceptible of ratification. [24] Godofredo ratified the sale
when he introduced Armando and Adelia to his tenants as the new owners
of the Subject Land. The trial court noted that Godofredo failed to deny
categorically on the witness stand the claim of the complainants witnesses
that Godofredo introduced Armando and Adelia as the new landlords of the
tenants.[25] That Godofredo and Carmen allowed Armando and Adelia to
enjoy possession of the Subject Land for 24 years is formidable proof of
Godofredos acquiescence to the sale. If the sale was truly unauthorized,
then Godofredo should have filed an action to annul the sale. He did not.
The prescriptive period to annul the sale has long lapsed. Godofredos
conduct belies his claim that his wife sold the Subject Land without his
consent.
Moreover, Godofredo and Carmen used most of the proceeds of the
sale to pay their debt with the DBP. We agree with the Court of Appeals
that the sale redounded to the benefit of the conjugal partnership. Article
161 of the Civil Code provides that the conjugal partnership shall be liable
for debts and obligations contracted by the wife for the benefit of the
conjugal partnership. Hence, even if Carmen sold the land without the
consent of her husband, the sale still binds the conjugal partnership.
Petitioners contend that Godofredo and Carmen did not deliver the
title of the Subject Land to Armando and Adelia as shown by this portion of
Adelias testimony on cross-examination:
Q -- No title was delivered to you by Godofredo Alfredo?
A -- I got the title from Julie Limon because my sister told me. [26]
Petitioners raise this factual issue for the first time. The Court of
Appeals could have passed upon this issue had petitioners raised this
earlier. At any rate, the cited testimony of Adelia does not convincingly
prove that Godofredo and Carmen did not deliver the Subject Land to

Armando and Adelia. Adelias cited testimony must be examined in context

not only with her entire testimony but also with the other circumstances.
Adelia stated during cross-examination that she obtained the title of
the Subject Land from Julie Limon (Julie), her classmate in college and the
sister of Carmen. Earlier, Adelias own sister had secured the title from the
father of Carmen. However, Adelias sister, who was about to leave for the
United States, gave the title to Julie because of the absence of the other
documents. Adelias sister told Adelia to secure the title from Julie, and this
was how Adelia obtained the title from Julie.
It is not necessary that the seller himself deliver the title of the
property to the buyer because the thing sold is understood as delivered
when it is placed in the control and possession of the vendee. [27] To repeat,
Godofredo and Carmen themselves introduced the Natanawans, their
tenants, to Armando and Adelia as the new owners of the Subject
Land. From then on, Armando and Adelia acted as the landlords of the
Natanawans. Obviously, Godofredo and Carmen themselves placed control
and possession of the Subject Land in the hands of Armando and Adelia.
Petitioners invoke the absence of approval of the sale by the
Secretary of Agriculture and Natural Resources to nullify the
sale. Petitioners never raised this issue before the trial court or the Court
of Appeals. Litigants cannot raise an issue for the first time on appeal, as
this would contravene the basic rules of fair play, justice and due process.
[28]
However, we will address this new issue to finally put an end to this
case.
The sale of the Subject Land cannot be annulled on the ground that
the Secretary did not approve the sale, which was made within 25 years
from the issuance of the homestead title.Section 118 of the Public Land
Act (Commonwealth Act No. 141) reads as follows:
SEC. 118. Except in favor of the Government or any of its branches, units,
or institutions or legally constituted banking corporation, lands acquired
under free patent or homestead provisions shall not be subject to
encumbrance or alienation from the date of the approval of the application
and for a term of five years from and after the date of the issuance of the
patent or grant.
xxx

No alienation, transfer, or conveyance of any homestead after 5 years and

before twenty-five years after the issuance of title shall be valid without
the approval of the Secretary of Agriculture and Commerce, which
approval shall not be denied except on constitutional and legal grounds.
A grantee or homesteader is prohibited from alienating to a private
individual a land grant within five years from the time that the patent or
grant is issued.[29] A violation of this prohibition renders a sale void. [30] This
prohibition, however, expires on the fifth year. From then on until the next
20 years[31] the land grant may be alienated provided the Secretary of
Agriculture and Natural Resources approves the alienation. The Secretary
is required to approve the alienation unless there are constitutional and
legal grounds to deny the approval. In this case, there are no apparent
constitutional or legal grounds for the Secretary to disapprove the sale of
the Subject Land.
The failure to secure the approval of the Secretary does not ipso
facto make a sale void.[32] The absence of approval by the Secretary does
not nullify a sale made after the expiration of the 5-year period, for in such
event the requirement of Section 118 of the Public Land Act becomes
merely directory[33] or a formality.[34] The approval may be secured later,
producing the effect of ratifying and adopting the transaction as if the sale
had been previously authorized.[35] As held in Evangelista v. Montano:[36]
Section 118 of Commonwealth Act No. 141, as amended, specifically
enjoins that the approval by the Department Secretary "shall not be
denied except on constitutional and legal grounds." There being no
allegation that there were constitutional or legal impediments to the sales,
and no pretense that if the sales had been submitted to the Secretary
concerned they would have been disapproved, approval was aministerial
duty, to be had as a matter of course and demandable if refused. For this
reason, and if necessary, approval may now be applied for and its effect
will be to ratify and adopt the transactions as if they had been previously
authorized. (Emphasis supplied)
Action Not Barred by Prescription and Laches
Petitioners insist that prescription and laches have set in. We
disagree.
The Amended Complaint filed by Armando and Adelia with the trial
court is captioned as one for Specific Performance. In reality, the ultimate

relief sought by Armando and Adelia is the reconveyance to them of the

Subject Land. An action for reconveyance is one that seeks to transfer
property, wrongfully registered by another, to its rightful and legal owner.
[37]
The body of the pleading or complaint determines the nature of an
action, not its title or heading.[38] Thus, the present action should be
treated as one for reconveyance.[39]
Article 1456 of the Civil Code provides that a person acquiring
property through fraud becomes by operation of law a trustee of an
implied trust for the benefit of the real owner of the property. The
presence of fraud in this case created an implied trust in favor of Armando
and Adelia. This gives Armando and Adelia the right to seek reconveyance
of the property from the Subsequent Buyers.[40]
To determine when the prescriptive period commenced in an action
for reconveyance, plaintiffs possession of the disputed property is
material. An action for reconveyance based on an implied trust prescribes
in ten years.[41] The ten-year prescriptive period applies only if there is an
actual need to reconvey the property as when the plaintiff is not in
possession of the property. [42] However, if the plaintiff, as the real owner of
the property also remains in possession of the property, the prescriptive
period to recover title and possession of the property does not run against
him.[43] In such a case, an action for reconveyance, if nonetheless filed,
would be in the nature of a suit for quieting of title, an action that is
imprescriptible.[44]
In this case, the appellate court resolved the issue of prescription by
ruling that the action should prescribe four years from discovery of the
fraud. We must correct this erroneous application of the four-year
prescriptive period. In Caro v. Court of Appeals,[45] we explained why an
action for reconveyance based on an implied trust should prescribe in ten
years. In that case, the appellate court also erroneously applied the fouryear prescriptive period. We declared in Caro:
We disagree. The case of Liwalug Amerol, et al. v. Molok Bagumbaran, G.R.
No. L-33261, September 30, 1987,154 SCRA 396 illuminated what used to
be a gray area on the prescriptive period for an action to reconvey the title
to real property and, corollarily, its point of reference:
xxx It must be remembered that before August 30, 1950, the date of the
effectivity of the new Civil Code, the old Code of Civil Procedure (Act No.
190) governed prescription. It provided:

SEC. 43. Other civil actions; how limited.- Civil actions other than for the
recovery of real property can only be brought within the following periods
after the right of action accrues:
xxx xxx xxx
3. Within four years: xxx An action for relief on the ground of fraud, but
the right of action in such case shall not be deemed to have accrued until
the discovery of the fraud;
xxx xxx xxx
In contrast, under the present Civil Code, we find that just as an implied or
constructive trust is an offspring of the law (Art. 1456, Civil Code), so is
the corresponding obligation to reconvey the property and the title thereto
in favor of the true owner. In this context, and vis-a-vis prescription, Article
1144 of the Civil Code is applicable.
Article 1144. The following actions must be brought within ten years from
the time the right of action accrues:
(1) Upon a written contract;
(2) Upon an obligation created by law;
(3) Upon a judgment.
xxxxxxxxx
(Emphasis supplied).
An action for reconveyance based on an implied or constructive
trust must perforce prescribe in ten years and not otherwise. A
long line of decisions of this Court, and of very recent vintage at that,
illustrates this rule. Undoubtedly, it is now well-settled that an
action for reconveyance based on an implied or constructive trust
prescribes in ten years from the issuance of the Torrens title over
the property. The only discordant note, it seems, is Balbin vs. Medalla
which states that the prescriptive period for a reconveyance action is four
years. However, this variance can be explained by the erroneous reliance
on Gerona vs. de Guzman. But in Gerona, the fraud was discovered on

June 25,1948, hence Section 43(3) of Act No. 190, was applied, the new
Civil Code not coming into effect until August 30, 1950 as mentioned
earlier. It must be stressed, at this juncture, that article 1144 and article
1456, are new provisions. They have no counterparts in the old Civil Code
or in the old Code of Civil Procedure, the latter being then resorted to as
legal basis of the four-year prescriptive period for an action for
reconveyance of title of real property acquired under false pretenses.
An action for reconveyance has its basis in Section 53, paragraph 3 of
Presidential Decree No. 1529, which provides:
In all cases of registration procured by fraud, the owner may pursue all his
legal and equitable remedies against the parties to such fraud without
prejudice, however, to the rights of any innocent holder of the decree of
registration on the original petition or application, xxx
This provision should be read in conjunction with Article 1456 of the Civil
Code, which provides:
Article 1456. If property is acquired through mistake or fraud, the person
obtaining it is, by force of law, considered a trustee of an implied trust for
the benefit of the person from whom the property comes.
The law thereby creates the obligation of the trustee to reconvey the
property and the title thereto in favor of the true owner. Correlating
Section 53, paragraph 3 of Presidential Decree No. 1529 and Article 1456
of the Civil Code with Article 1144(2) of the Civil Code, supra, the
prescriptive period for the reconveyance of fraudulently registered real
property is ten (10) years reckoned from the date of the issuance of the
certificate of title xxx (Emphasis supplied)[46]
Following Caro, we have consistently held that an action for
reconveyance based on an implied trust prescribes in ten years. [47] We
went further by specifying the reference point of the ten-year prescriptive
period as the date of the registration of the deed or the issuance of the
title.[48]
Had Armando and Adelia remained in possession of the Subject Land,
their action for reconveyance, in effect an action to quiet title to property,
would not be subject to prescription. Prescription does not run against the
plaintiff in actual possession of the disputed land because such plaintiff
has a right to wait until his possession is disturbed or his title is

questioned before initiating an action to vindicate his right. [49] His

undisturbed possession gives him the continuing right to seek the aid of a
court of equity to determine the nature of the adverse claim of a third
party and its effect on his title.[50]
Armando and Adelia lost possession of the Subject Land when the
Subsequent Buyers forcibly drove away from the Subject Land the
Natanawans, the tenants of Armando and Adelia. [51] This created an actual
need for Armando and Adelia to seek reconveyance of the Subject Land.
The statute of limitation becomes relevant in this case. The ten-year
prescriptive period started to run from the date the Subsequent Buyers
registered their deeds of sale with the Register of Deeds.
The Subsequent Buyers bought the subdivided portions of the Subject
Land on 22 February 1994, the date of execution of their deeds of sale.
The Register of Deeds issued the transfer certificates of title to the
Subsequent Buyers on 24 February 1994. Armando and Adelia filed the
Complaint on 7 March 1994. Clearly, prescription could not have set in
since the case was filed at the early stage of the ten-year prescriptive
period.
Neither is the action barred by laches. We have defined laches as the
failure or neglect, for an unreasonable time, to do that which, by the
exercise of due diligence, could or should have been done earlier. [52] It is
negligence or omission to assert a right within a reasonable time,
warranting a presumption that the party entitled to assert it either has
abandoned it or declined to assert it. [53] Armando and Adelia discovered in
January 1994 the subsequent sale of the Subject Land and they filed this
case on 7 March 1994. Plainly, Armando and Adelia did not sleep on their
rights.
Validity of Subsequent Sale of Portions of the Subject Land
Petitioners maintain that the subsequent sale must be upheld
because the Subsequent Buyers, the co-petitioners of Godofredo and
Carmen, purchased and registered the Subject Land in good
faith. Petitioners argue that the testimony of Calonso, the person who
brokered the second sale, should not prejudice the Subsequent
Buyers. There is no evidence that Calonso was the agent of the
Subsequent Buyers and that she communicated to them what she knew
about the adverse claim and the prior sale. Petitioners assert that the

adverse claim registered by Armando and Adelia has no legal basis to

render defective the transfer of title to the Subsequent Buyers.
We are not persuaded. Godofredo and Carmen had already sold the
Subject Land to Armando and Adelia. The settled rule is when ownership
or title passes to the buyer, the seller ceases to have any title to transfer
to any third person.[54] If the seller sells the same land to another, the
second buyer who has actual or constructive knowledge of the prior sale
cannot be a registrant in good faith. [55] Such second buyer cannot defeat
the first buyers title.[56] In case a title is issued to the second buyer, the
first buyer may seek reconveyance of the property subject of the sale. [57]
Thus, to merit protection under the second paragraph of Article
1544[58] of the Civil Code, the second buyer must act in good faith in
registering the deed.[59] In this case, the Subsequent Buyers good faith
hinges on whether they had knowledge of the previous sale. Petitioners do
not dispute that Armando and Adelia registered their adverse claim with
the Registry of Deeds of Bataan on 8 February 1994. The Subsequent
Buyers purchased their respective lots only on 22 February 1994 as shown
by the date of their deeds of sale.Consequently, the adverse claim
registered prior to the second sale charged the Subsequent Buyers with
constructive notice of the defect in the title of the sellers, [60] Godofredo
and Carmen.
It is immaterial whether Calonso, the broker of the second sale,
communicated to the Subsequent Buyers the existence of the adverse
claim. The registration of the adverse claim on 8 February 1994
constituted, by operation of law, notice to the whole world. [61] From that
date onwards, the Subsequent Buyers were deemed to have constructive
notice of the adverse claim of Armando and Adelia. When the Subsequent
Buyers purchased portions of the Subject Land on 22 February 1994, they
already had constructive notice of the adverse claim registered earlier.
[62]
Thus, the Subsequent Buyers were not buyers in good faith when they
purchased their lots on 22 February 1994. They were also not registrants
in good faith when they registered their deeds of sale with the Registry of
Deeds on 24 February 1994.
The Subsequent Buyers individual titles to their respective lots are
not absolutely indefeasible. The defense of indefeasibility of the Torrens
Title does not extend to a transferee who takes the certificate of title with
notice of a flaw in his title. [63] The principle of indefeasibility of title does
not apply where fraud attended the issuance of the titles as in this case. [64]

Attorneys Fees and Costs

We sustain the award of attorneys fees. The decision of the court
must state the grounds for the award of attorneys fees. The trial court
complied with this requirement.[65] We agree with the trial court that if it
were not for petitioners unjustified refusal to heed the just and valid
demands of Armando and Adelia, the latter would not have been
compelled to file this action.
The Court of Appeals echoed the trial courts condemnation of
petitioners fraudulent maneuverings in securing the second sale of the
Subject Land to the Subsequent Buyers. We will also not turn a blind eye
on petitioners brazen tactics. Thus, we uphold the treble costs imposed by
the Court of Appeals on petitioners.
WHEREFORE, the petition is DENIED
AFFIRMED. Treble costs against petitioners.

and

the

appealed

decision

is

[G.R. No. 145982. July 3, 2003]

FRANK N. LIU, deceased, substituted by his surviving spouse
Diana Liu, and children, namely: Walter, Milton, Frank, Jr.,
Henry and Jockson, all surnamed Liu, Rebecca Liu Shui and
Pearl Liu Rodriguez, petitioners, vs. ALFREDO LOY, JR.,
TERESITA A. LOY and ESTATE OF JOSE VAO,respondents.
DECISION
CARPIO, J.:
The Case
This is a petition for review on certiorari of the Decision [1] dated 13
June 2000 and the Resolution dated 14 November 2002 of the Court of
Appeals which affirmed the Decision [2] of the Regional Trial Court, Branch
14, Cebu City. The Court of Appeals agreed with the trial court that the
sales by the late Teodoro Vao to respondents Alfredo Loy, Jr. and Teresita A.
Loy of Lot Nos. 5 and 6, respectively, were valid. The Court of Appeals also
agreed with the trial court that the unilateral extrajudicial rescission by the
late Teodoro Vao of the contract to sell involving five lots, including Lot
Nos. 5 and 6, between him and Benito Liu (predecessor-in-interest of Frank
Liu) was valid.

The Facts
On 13 January 1950, Teodoro Vao, as attorney-in-fact of Jose Vao, sold
seven lots of the Banilad Estate located in Cebu City to Benito Liu and
Cirilo Pangalo.[3] Teodoro Vao dealt with Frank Liu, the brother of Benito Liu,
in the sale of the lots to Benito Liu and Cirilo Pangalo. The lots sold to
Benito Liu were Lot Nos. 5, 6, 13, 14, and 15 of Block 12 for a total price
ofP4,900. Benito Liu gave a down payment of P1,000, undertaking to pay
the balance of P3,900 in monthly installments of P100 beginning at the
end of January 1950. The lots sold to Cirilo Pangalo were Lot Nos. 14 and
15 of Block 11 for a total price of P1,967.50. Cirilo Pangalo gave P400 as
down payment, undertaking to pay the balance of P1,567.50 in monthly
installments of P400 beginning at the end of January 1950. Meanwhile,
Jose Vao passed away.
Benito Liu subsequently paid installments totaling P2,900, leaving a
balance of P1,000.[4] Apparently, Benito Liu stopped further payments
because Teodoro Vao admitted his inability to transfer the lot titles to
Benito Liu. Later, in a letter[5] dated 16 October 1954, Teodoro Vao
informed Frank Liu[6] that the Supreme Court had already declared valid
the will of his father Jose Vao. Thus, Teodoro Vao could transfer the titles to
the buyers names upon payment of the balance of the purchase price.
When Frank Liu failed to reply, Teodoro Vao sent him another letter,
dated 1 January 1955, reminding him of his outstanding balance. It
appears that it was only after nine years that Frank Liu responded through
a letter,[8] dated 25 January 1964. In the letter, Frank Liu informed Teodoro
Vao that he was ready to pay the balance of the purchase price of the
seven lots. He requested for the execution of a deed of sale of the lots in
his name and the delivery of the titles to him.

original contract. In the letter, Frank Liu referred to another letter, dated
25 June 1966, which he allegedly sent to Teodoro Vao. According to Frank
Liu, he enclosed PBC Check No. D-782290 dated 6 May 1966 for P1,417,
which is the total balance of the accounts of Benito Liu and Cirilo Pangalo
on the seven lots. However, Frank Liu did not offer in evidence the letter or
the check. Frank Liu sent two other letters, [11] dated 7 June 1968 and 29
July 1968, to Teodoro Vao reiterating his request for the execution of the
deed of sale in his favor but to no avail.
On 19 August 1968, Teodoro Vao sold Lot No. 6 to respondent Teresita
Loy for P3,930.[12] The Register of Deeds of Cebu City entered this sale in
the Daybook on 24 February 1969.[13]
On 2 December 1968, Frank Liu filed a complaint against Teodoro Vao
for specific performance, execution of deed of absolute sale, issuance of
certificates of title and construction of subdivision roads, before the Court
of First Instance of Davao. The case was docketed as Civil Case No. 6300.
[14]

On 19 December 1968, Frank Liu filed with the Register of Deeds of

Cebu City a notice of lis pendens on the seven lots due to the pendency of
Civil Case No. 6300.[15] However, the Register of Deeds denied the
registration of the lis pendens on the ground that the property is under
administration and said claim must be filed in court. [16]

[7]

On 22 April 1966, Benito Liu sold to Frank Liu the five lots (Lot Nos. 5,
6, 13, 14 and 15 of Block 12) which Benito Liu purchased from Teodoro
Vao.[9] Frank Liu assumed the balance ofP1,000 for the five lots. Cirilo
Pangalo likewise sold to Frank Liu the two lots (Lot Nos. 14 and 15 of Block
11) that Pangalo purchased from Teodoro Vao. Frank Liu likewise assumed
the balance of P417 for the two lots.
On 21 March 1968, Frank Liu reiterated in a letter [10] his request for
Teodoro Vao to execute the deed of sale covering the seven lots so he
could secure the corresponding certificates of title in his name. He also
requested for the construction of the subdivision roads pursuant to the

On 16 December 1969, Teodoro Vao sold Lot No. 5 to respondent

Alfredo Loy for P3,910.[17] The Register of Deeds of Cebu City entered this
sale in the Daybook on 16 January 1970.[18]
On 3 October 1970, the Court of First Instance of Davao, on motion of
Teodoro Vao, dismissed Civil Case No. 6300 on the ground that Frank Liu
should have filed the claim with the probate court. [19] Thus, on 17 February
1972, Frank Liu filed before the probate court a claim against the Estate of
Jose Vao for Specific Performance, Execution of Deed of Absolute Sale,
Issuance of Certificate of Title, and Construction of Subdivision Roads. [20]
During the proceedings, Teodoro Vao died. His widow, Milagros Vao,
succeeded as administratrix of the Estate of Jose Vao.
On 24 February 1976, the probate court approved the claim of Frank
Liu. On 5 March 1976, Milagros Vao executed a deed of conveyance
covering the seven lots in favor of Frank Liu, in compliance with the

probate courts order.[21] The deed of conveyance included Lot Nos. 5 and 6,
the same lots Teodoro Vao sold respectively to Alfredo Loy, Jr. on 16
December 1969 and to Teresita Loy on 19 August 1968.
On 19 March 1976, the probate court, upon an ex-parte motion filed
by Teresita Loy, issued an Order[22] approving the 16 August 1968 sale by
Teodoro Vao of Lot No. 6 in her favor.Likewise, upon an ex-parte motion
filed by Alfredo Loy, Jr., the probate court issued on 23 March 1976 an
Order[23] approving the 16 December 1969 sale of Lot No. 5 by Teodoro Vao
in his favor.
On 10 May 1976, the Register of Deeds of Cebu City cancelled TCT
No. 44204 in the name of the Estate of Jose Vao covering Lot No. 5 and
issued a new title, TCT No. 64522, in the name of Alfredo Loy, Jr. and
Perfeccion V. Loy.[24] Likewise, on the same date, the Register of Deeds
cancelled TCT No. 44205 in the name of the Estate of Jose Vao covering
Lot No. 6, and issued TCT No. 64523 in the name of Teresita A. Loy. [25]
On 3 June 1976, Milagros Vao, as administratrix of the estate, filed a
motion for reconsideration of the Orders of the probate court dated 19 and
23 March 1976. She contended that she already complied with the probate
courts Order dated 24 February 1976 to execute a deed of sale covering
the seven lots, including Lot Nos. 5 and 6, in favor of Frank Liu. She also
stated that no one notified her of the motion of the Loys, and if the Loys or
the court notified her, she would have objected to the sale of the same
lots to the Loys.
On 4 June 1976, Frank Liu filed a complaint for reconveyance or
annulment of title of Lot Nos. 5 and 6. Frank Liu filed the case in the
Regional Trial Court of Cebu City, Branch 14, which docketed it as Civil
Case No. R-15342.
On 5 August 1978, the probate court denied the motion for
reconsideration of Milagros Vao on the ground that the conflicting claims
regarding the ownership of Lot Nos. 5 and 6 were already under litigation
in Civil Case No. R-15342.
On 8 April 1991, the Regional Trial Court of Cebu City (trial court),
Branch 14, rendered judgment against Frank Liu as follows:
WHEREFORE, judgment is hereby rendered:

(1) Dismissing the complaint at bar; and

(2) Confirming the unilateral extrajudicial rescission of the
contract Exhibit A by the late Teodoro Vao, conditioned upon
the refund by the Estate of Jose Vao of one-half (1/2) of what
the plaintiff had paid under that contract.
The counterclaims by the defendants Alfredo A. Loy, Jr. and Teresita A. Loy
and by the defendant Estate of Jose Vao, not having been substantiated,
are hereby denied.
Without special pronouncement as to costs.
SO ORDERED.[26]
Frank Liu appealed to the Court of Appeals, which affirmed in toto the
decision of the trial court. Frank Liu[27] filed a motion for reconsideration
but the Court of Appeals denied the same.
Hence, the instant petition.
The Trial Courts Ruling
The trial court held that the contract between Teodoro Vao and Benito
Liu was a contract to sell. Since title to Lot Nos. 5 and 6 never passed to
Benito Liu due to non-payment of the balance of the purchase price,
ownership of the lots remained with the vendor. Therefore, the trial court
ruled that the subsequent sales to Alfredo Loy, Jr. and Teresita Loy of Lot
Nos. 5 and 6, respectively, were valid.
The trial court viewed the letter of Teodoro Vao dated 1 January 1995
addressed to Frank Liu as a unilateral extrajudicial rescission of the
contract to sell. The trial court upheld the unilateral rescission subject to
refund by the Estate of Jose Vao of one-half (1/2) of what Frank Liu paid
under the contract.
The trial court ruled that Teodoro Vao, as administrator of the Estate
of Jose Vao and as sole heir of Jose Vao, acted both as principal and as
agent when he sold the lots to Alfredo Loy, Jr. and Teresita Loy. The
probate court subsequently approved the sales. The trial court also found
that Alfredo Loy, Jr. and Teresita Loy were purchasers in good faith.

The Court of Appeals Ruling

In affirming in toto the trial courts decision, the appellate court found
no evidence of fraud or ill-motive on the part of Alfredo Loy, Jr. and
Teresita Loy. The Court of Appeals cited the rule that the law always
presumes good faith such that any person who seeks to be awarded
damages due to the acts of another has the burden of proving that the
latter acted in bad faith or ill-motive.
The Court of Appeals also held that the sales to Alfredo Loy, Jr. and
Teresita Loy of Lot Nos. 5 and 6, respectively, were valid despite lack of
prior approval by the probate court. The Court of Appeals declared that
Teodoro Vao sold the lots in his capacity as heir of Jose Vao. The appellate
court ruled that an heir has a right to dispose of the decedents property,
even if the same is under administration, because the hereditary property
is deemed transmitted to the heir without interruption from the moment of
the death of the decedent.
The Court of Appeals held that there is no basis for the claim of moral
damages and attorneys fees. The appellate court found that Frank Liu
failed to prove that he suffered mental anguish due to the actuations of
the Loys. The Court of Appeals likewise disallowed the award of attorneys
fees. The fact alone that a party was compelled to litigate and incur
expenses to protect his claim does not justify an award of attorneys
fees. Besides, the Court of Appeals held that where there is no basis to
award moral damages, there is also no basis to award attorneys fees.
The Issues
Petitioners[28] raise the following issues:[29]
1. Whether prior approval of the probate court is necessary to
validate the sale of Lot Nos. 5 and 6 to Loys;
2. Whether the Loys can be considered buyers and registrants in
good faith despite the notice of lis pendens;
3. Whether Frank Liu has a superior right over Lot Nos. 5 and 6;
4. Whether the Court of Appeals erred in not passing upon the
trial courts declaration that the extra-judicial rescission by
Teodoro Vao of the sale in favor of Frank Liu is valid;

5.Whether petitioners are entitled to moral damages and

attorneys fees.
The Courts Ruling
The petition is meritorious.
Whether there was a valid cancellation of the
contract to sell
There was no valid cancellation of the contract to sell because there
was no written notice of the cancellation to Benito Liu or Frank Liu. There
was even no implied cancellation of the contract to sell. The trial court
merely viewed the alleged unilateral extrajudicial rescission from the letter
of Teodoro Vao, dated 1 January 1955, addressed to Frank Liu, stating that:
Two months, I believe, is ample for the allowance of delays caused by your
(sic) either too busy, or having been some place else, or for consultations.
These are the only reasons I can think of that could have caused the delay
in your answer, unless you do not think an answer is necessary at all, as
you are not the party concerned in the matter.
I shall therefor (sic) appreciate it very much, if you will write me within ten
days from receipt of this letter, or enterprete (sic) your silence as my
mistake
in
having
written
to
the
wrong
party,
and
therefor(sic) proceed to write Misters: B. Liu and C. Pangalo.
[30]
(Emphasis supplied)
Obviously, we cannot construe this letter as a unilateral extrajudicial
rescission of the contract to sell. As clearly stated in the letter, the only
action that Teodoro Vao would take if Frank Liu did not reply was that
Teodoro Vao would write directly to Benito Liu and Cirilo Pangalo. The letter
does not mention anything about rescinding or cancelling the contract to
sell.
Although the law allows the extra-judicial cancellation of a contract to
sell upon failure of one party to comply with his obligation, notice of such
cancellation must still be given to the party who is at fault. [31] The notice of
cancellation to the other party is one of the requirements for a valid
cancellation of a contract to sell, aside from the existence of a lawful

cause. Even the case cited by the trial court emphasizes the importance of
such notice:

should they have paid in full. A few have already received their Titles. And
yours can be had too in two days time from the time you have paid in full.

Of course, it must be understood that the act of a party in

treating a contract as cancelled or resolved on account of
infractions by the other contracting party must be made known to
the other and is always provisional, being ever subject to scrutiny and
review by the proper court. If the other party denies that rescission is
justified, it is free to resort to judicial action in its own behalf, and bring
the matter to court. Then, should the court, after due hearing, decide that
the resolution of the contract was not warranted, the responsible party will
be sentenced to damages; in the contrary case, the resolution will be
affirmed, and the consequent indemnity awarded to the party prejudiced.
[32]
(Emphasis supplied)

Nevertheless, the subsequent approval by the probate court of the

sale of Lot Nos. 5 and 6 to Frank Liu rendered moot any question on the
continuing validity of the contract to sell.

The fact that Teodoro Vao advised Frank Liu to file his claim with the
probate court is certainly not the conduct of one who supposedly
unilaterally rescinded the contract with Frank Liu.[33]
In this case, there was prior delay or default by the seller. As admitted
by Teodoro Vao, he could not deliver the titles because of a case
questioning the authenticity of the will of his father. In a letter[34] to Frank
Liu dated 16 October 1954, Teodoro Vao stated:
Some time last May, if I remember correctly, you offered to settle the
whole balance of your account if I can have the Titles transferred
immediately in your brothers name, and to that of Mr. Pangalos. I cannot
blame you if you were disappointed then, to know that I could not have
the titles transferred, even should you have paid in full. (Emphasis
supplied)
In the same letter of 16 October 1954, Teodoro Vao informed Frank
Liu that the titles were ready for transfer, thus:
However, last June 30, of this year, the Supreme Court, unanimously
concurred in the reversal of the decision of the Court of First Instance, as
regard the legality of the Will of my father. Now that the Will of my Father
has been declared Legal, my opponents have lost their personality in the
case, and with it their power to harass me in court. Also, sometime in the
middle of July, also this year, the Supreme Court again declared that all
the sales I have made of the properties of my Father, were Legal, and that
I should be empowered to have the Titles transferred in the buyers names,

Whether the lis pendens in the Davao case

served as notice to the Loys
The lis pendens in the Davao case did not serve as notice to the Loys.
The Register of Deeds of Cebu City denied registration of the lis
pendens on 19 December 1968.[35] Frank Liu did not appeal to the Land
Registration Commission[36] to keep alive the lis pendens. Republic Act No.
1151,[37] which took effect 17 June 1954, provides:
SEC. 4. Reference of doubtful matters to Commissioner of Land
Registration. When the Register of Deeds is in doubt with regard to the
proper step to be taken or memorandum to be made in pursuance of any
deed, mortgage, or other instrument presented to him for registration,
or where any party in interest does not agree with the Register of
Deeds with reference to any such matter, the question shall be
submitted to the Commissioner of Land Registration either upon
the certification of the Register of Deeds, stating the question
upon which he is in doubt, or upon the suggestion in writing by
the party in interest; and thereupon the Commissioner, after
consideration of the matter shown by the records certified to him, and in
case of registered lands, after notice to the parties and hearing, shall enter
an order prescribing the step to be taken or memorandum to be made. His
decision in such cases shall be conclusive and binding upon all Registers
of Deeds: Provided, however, That when a party in interest disagrees with
a ruling or resolution of the Commissioner and the issue involves a
question of law, said decision may be appealed to the Supreme Court
within thirty days from and after receipt of the notice thereof. (Emphasis
supplied)
Frank Lius failure to appeal [38] the denial of the registration rendered
the lis pendens ineffective. The Court of First Instance of Davao City
eventually dismissed Frank Lius complaint on 3 October 1970.
Whether the registration by the Loys of their

contracts of sale made them the first registrants

Whether the probate courts ex-parte

in good faith to defeat prior buyers

approval of the contracts of the Loys was valid

The registration by the Loys of their contracts of sale did not defeat
the right of prior buyers because the person who signed the Loys
contracts was not the registered owner. The registered owner of Lot Nos. 5
and 6 was the Estate of Jose Vao. Teodoro Vao was the seller in the
contract of sale with Alfredo Loy, Jr. The Estate of Jose Vao was the seller in
the contract of sale with Teresita Loy. Teodoro Vao signed both contracts of
sale. The rule is well-settled that one who buys from a person who is
not the registered owner is not a purchaser in good faith.[39] As
held in Toledo-Banaga v. Court of Appeals:[40]

Section 8, Rule 89 of the 1964 Rules of Court [42] specifically requires

notice to all interested parties in any application for court approval to
convey property contracted by the decedent in his lifetime. Thus:

To repeat, at the time of the sale, the person from whom petitioner Tan
bought the property is neither the registered owner nor was the former
authorized by the latter to sell the same. She knew she was not dealing
with the registered owner or a representative of the latter. One who buys
property with full knowledge of the flaws and defects in the title of his
vendor is enough proof of his bad faith and cannot claim that he acquired
title in good faith as against the owner or of an interest therein. When she
nonetheless proceeded to buy the lot, petitioner Tan gambled on the result
of litigation. She is bound by the outcome of her indifference with no one
to blame except herself if she looses her claim as against one who has a
superior right or interest over the property. x x x.
The Loys were under notice to inquire why the land was not
registered in the name of the person who executed the contracts of
sale. They were under notice that the lots belonged to the Estate of Jose
Vao and any sale of the lots required court approval. Any disposition would
be subject to the claims of creditors of the estate who filed claims before
the probate court.[41]
The contracts of the Loys did not convey ownership of the lots to
them as against third persons. The contracts were binding only on the
seller, Teodoro Vao. The contracts of the Loys would become binding
against third persons only upon approval of the sale by the probate court
and registration with the Register of Deeds. Registration of the contracts
without court approval would be ineffective to bind third persons,
especially creditors of the estate. Otherwise, this will open the door to
fraud on creditors of the estate.

SECTION 8. When court may authorize conveyance of realty which

deceased contracted to convey. Notice. Effect of deed. Where the
deceased was in his lifetime under contract, binding in law, to
deed real property, or an interest therein, the court having
jurisdiction of the estate may, on application for that purpose,
authorize the executor or administrator to convey such property
according to such contract, or with such modifications as are agreed
upon by the parties and approved by the court; and if the contract is to
convey real property to the executor or administrator, the clerk of the
court shall execute the deed. The deed executed by such executor,
administrator, or clerk of court shall be as effectual to convey the property
as if executed by the deceased in his lifetime; but no such conveyance
shall be authorized until notice of the application for that purpose
has been given personally or by mail to all persons interested,
and such further notice has been given, by publication or
otherwise, as the court deems proper; nor if the assets in the hands
of the executor or administrator will thereby be reduced so as to prevent a
creditor from receiving his full debt or diminish his dividend. (Rule 89,
1964 Rules of Court) (Emphasis supplied)
Despite the clear requirement of Section 8 of Rule 89, the Loys did
not notify the administratrix of the motion and hearing to approve the sale
of the lots to them. The administratrix, who had already signed the deed
of sale to Frank Liu as directed by the same probate court, objected to the
sale of the same lots to the Loys. Thus, as found by the trial court:
On June 3, 1976, Milagros H. Vao moved for the reconsideration of the
Order issued by Judge Ramolete on March 19, 1976 and March 23, 1976,
contending that she had not been personally served with copies of the
motions presented to the Court by Alfredo Loy, Jr. and by Teresita Loy
seeking the approval of the sales of the lots in their favor, as well as the
Orders that were issued by the Court pursuant thereto; that the Court in
its Order of February 24, 1976 had ordered her (Milagros H. Vao), to
execute a deed of absolute sale in favor of the plaintiff, which sale had

been approved by the Court; that she had not known of the sale of Lots 5
and 6 to any other person except to the plaintiff; that the sale of the two
lots in favor of plaintiff was made earlier, when there was yet no litigation
with the Bureau of Internal Revenue, while those in favor of the defendant
Loys were made when there was already a prohibition by the Court against
any sale thereof; that the sales in favor of the Loys were made without
Court authority; and that if the approval of the sales had not been
obtained ex-parte she would have informed the Court of the complication
arising therefrom, and she would not have executed the sale in favor of
plaintiff, and she would have asked the Court to decide first as to who had
preference over said lots.[43]
The failure to notify the administratrix and other interested persons
rendered the sale to the Loys void. As explained by Justice J.B.L. Reyes
in De Jesus v. De Jesus:[44]
Section 9, Rule 90, however, provides that authority can be given by the
probate court to the administrator to convey property held in trust by the
deceased to the beneficiaries of the trust only after notice given as
required in the last preceding section; i.e., that no such conveyance
shall be authorized until notice of the application for that purpose
has been given personally or by mail to all persons interested,
and such further notice has been given, by publication or
otherwise, as the court deems proper (sec. 8, Rule 90). This rule
makes it mandatory that notice be served on the heirs and other
interested persons of the application for approval of any
conveyance of property held in trust by the deceased, and where
no such notice is given, the order authorizing the conveyance, as
well as the conveyance itself, is completely void. (Emphasis
supplied)
In this case, the administratrix, the wife of the deceased Teodoro Vao,
was not notified of the motion and hearing to approve the sale of the lots
to the Loys. Frank Liu did not also receive any notice, although he
obviously was an interested party. The issuance of new titles to the Loys
on 10 May 1976 by the Registry of Deeds did not vest title to the Loys
because the conveyance itself was completely void. The consequences for
the failure to notify the administratrix and other interested parties must be
borne by the Loys.
Necessity of court approval of sales

Indisputably, an heir can sell his interest in the estate of the

decedent, or even his interest in specific properties of the
estate. However, for such disposition to take effect against third parties,
the court must approve such disposition to protect the rights of creditors
of the estate. What the deceased can transfer to his heirs is only the net
estate, that is, the gross estate less the liabilities. As held in Baun v.
Heirs of Baun:[45]
The heir legally succeeds the deceased, from whom he derives his right
and title, but only after the liquidation of the estate, the payment of the
debts of the same, and the adjudication of the residue of the estate of the
deceased; and in the meantime the only person in charge by law to attend
to all claims against the estate of the deceased debtor is the executor or
administrator appointed by the court.
In Opulencia v. Court of Appeals,[46] an heir agreed to convey in a
contract to sell her share in the estate then under probate settlement. In
an action for specific performance filed by the buyers, the seller-heir
resisted on the ground that there was no approval of the contract by the
probate court. The Court ruled that the contract to sell was binding
between the parties, but subject to the outcome of the testate
proceedings. The Court declared:
x x x Consequently, although the Contract to Sell was perfected between
the petitioner (seller-heir) and private respondents (buyers) during the
pendency of the probate proceedings, the consummation of the sale or the
transfer of ownership over the parcel of land to the private respondents
is subject to the full payment of the purchase price and to the
termination and outcome of the testate proceedings. x x xIndeed, it
is settled that the sale made by an heir of his share in an
inheritance, subject to the pending administration, in no wise stands
in the way of such administration. (Emphasis supplied)
In Alfredo Loys case, his seller executed the contract of sale after the
death of the registered owner Jose Vao. The seller was Teodoro Vao who
sold the lot in his capacity as sole heir of the deceased Jose
Vao. Thus, Opulencia applies to the sale of the lot to Alfredo Loy, Jr.,
which means that the contract of sale was binding between Teodoro Vao
and Alfredo Loy, Jr., butsubject to the outcome of the probate
proceedings.

In Frank Lius case, as successor-in-interest of Benito Liu, his seller was

Jose Vao, who during his lifetime executed the contract to sell through an
attorney-in-fact, Teodoro Vao. This is a disposition of property contracted
by the decedent during his lifetime. Section 8 of Rule 89 specifically
governs this sale:
SECTION 8. When court may authorize conveyance of realty which
deceased contracted to convey. Notice. Effect of deed. Where the
deceased was in his lifetime under contract, binding in law, to
deed real property, or an interest therein, the court having
jurisdiction of the estate may, on application for that purpose,
authorize the executor or administrator to convey such property
according to such contract, or with such modifications as are
agreed upon by the parties and approved by the court; x x x
Thus, Frank Liu applied to the probate court for the grant of authority to
the administratrix to convey the lots in accordance with the contract made
by the decedent Jose Vao during his lifetime. The probate court approved
the application.

he ignores specific directives to execute proper documents and get court

approval for the sales validity.
Section 91 of Act No. 496 (Land Registration Act) specifically requires
court approval for any sale of registered land by an executor or
administrator, thus:
SEC. 91. Except in case of a will devising the land to an executor to his
own use or upon some trust or giving to the executor power to sell, no
sale or transfer of registered land shall be made by an executor
or by an administrator in the course of administration for the
payment of debts or for any other purpose, except in pursuance
of an order of a court of competent jurisdiction obtained as
provided by law.(Emphasis supplied)
Similarly, Section 88 of Presidential Decree No. 1529 (Property Registration
Decree) provides:

In Teresita Loys case, her seller was the Estate of Jose Vao. Teodoro
Vao executed the contract of sale in his capacity as administrator of the
Estate of Jose Vao, the registered owner of the lots. The Court has held
that a sale of estate property made by an administrator without court
authority is void and does not confer on the purchaser a title that is
available against a succeeding administrator.[47]

SEC. 88. Dealings by administrator subject to court approval. After a

memorandum of the will, if any, and order allowing the same, and letters
testamentary or letters of administration have been entered upon the
certificate of title as hereinabove provided, the executor or
administrator may alienate or encumber registered land
belonging to the estate, or any interest therein, upon approval of
the court obtained as provided by the Rules of Court. (Emphasis
supplied)

Manotok Realty, Inc. v. Court of Appeals [48] emphasizes the need

for court approval in the sale by an administrator of estate property. The
Court held in Manotok Realty:

Clearly, both the law and jurisprudence expressly require court

approval before any sale of estate property by an executor or
administrator can take effect.

We also find that the appellate court committed an error of law when it
held that the sale of the lot in question did not need the approval of the
probate court.

Moreover, when the Loys filed in March 1976 their ex-parte motions
for approval of their contracts of sale, there was already a prior order of
the probate court dated 24 February 1976 approving the sale of Lot Nos. 5
and 6 to Frank Liu. In fact, the administratrix had signed the deed of sale
in favor of Frank Liu on 5 March 1976 pursuant to the court approval. This
deed of sale was notarized on 5 March 1976, which transferred ownership
of Lot Nos. 5 and 6 to Frank Liu on the same date.[49]

Although the Rules of Court do not specifically state that the sale of an
immovable property belonging to an estate of a decedent, in a special
proceeding, should be made with the approval of the court, this authority
is necessarily included in its capacity as a probate court.
An administrator under the circumstances of this case cannot enjoy
blanket authority to dispose of real estate as he pleases, especially where

Thus, when the probate court approved the contracts of the Loys on
19 and 23 March 1976, the probate court had already lost jurisdiction over

Lot Nos. 5 and 6 because the lots no longer formed part of the Estate of
Jose Vao.

He is deemed a possessor in bad faith who possesses in any case contrary

to the foregoing.

In Dolar v. Sundiam,[50] an heir sold parcels of land that were part of

the estate of the decedent. The probate court approved the sale.
Thereafter, the probate court authorized the administrator to sell again the
same parcels of land to another person. The Court ruled that the probate
court had already lost jurisdiction to authorize the further sale of the
parcels of land to another person because such property no longer formed
part of the estate of the decedent. The Court declared:

Mistake upon a doubtful or difficult question of law may be the basis of

good faith.

In our opinion, where, as in this case, a piece of property which originally

is a part of the estate of a deceased person is sold by an heir of the
deceased having a valid claim thereto, and said piece of property is, by
mistake, subsequently inventoried or considered part of the deceaseds
estate subject to settlement, and, thereafter, with the authority and
approval of the probate court, it sold once more to another person, a
receiver of the property so sold may, during the pendency of a motion to
set aside the second sale, be appointed by the court when in its sound
judgment the grant of such temporary relief is reasonably necessary to
secure and protect the rights of its real owner against any danger of loss
or material injury to him arising from the use and enjoyment thereof by
another who manifestly cannot acquire any right of dominion thereon
because the approving surrogate court had already lost
jurisdiction
to
authorize
the
further
sale
of
such
property. (Emphasis supplied)
Similarly, in this case, the Loys cannot acquire any right of dominion
over Lot Nos. 5 and 6 because the probate court had already lost
jurisdiction to authorize the second sale of the same lots. Moreover, the
probate courts approval of the sale to the Loys was completely void due to
the failure to notify the administratrix of the motion and hearing on the
sale.
Whether the Loys were in good faith when they
built on the Lots.
The Civil Code describes a possessor in good faith as follows:
Art. 526. He is deemed a possessor in good faith who is not aware that
there exists in his title or mode of acquisition any flaw which invalidates it.

Art. 1127. The good faith of the possessor consists in the reasonable belief
that the person from whom he received the thing was the owner thereof,
and could transmit his ownership.
In Duran v. Intermediate Appellate Court,[51] the Court explained
possession in good faith in this manner:
Guided by previous decisions of this Court, good faith consists in the
possessors belief that the person from whom he received the thing was
the owner of the same and could convey his title (Arriola vs. Gomez de la
Serna, 14 Phil. 627). Good faith, while it is always presumed in the
absence of proof to the contrary, requires a well-founded belief that the
person from whom title was received was himself the owner of the land,
with the right to convey it (Santiago vs. Cruz, 19 Phil. 148). There is good
faith where there is an honest intention to abstain from taking
unconscientious advantage from another (Fule vs. Legare, 7 SCRA 351).
The Loys were not in good faith when they built on the lots because
they knew that they bought from someone who was not the registered
owner. The registered owner on the TCTs of the lots was the Estate of Jose
Vao, clearly indicating that the sale required probate court
approval. Teodoro Vao did not show any court approval to the Loys when
they purchased the lots because there was none. To repeat, any one who
buys from a person who is not the registered owner is not a purchaser in
good faith.[52] If the Loys built on the lots before the court approval, then
they took the risk.
Contract to sell versus contract of sale
A prior contract to sell made by the decedent prevails over the
subsequent contract of sale made by the administrator without probate
court approval. The administrator cannot unilaterally cancel a contract to
sell made by the decedent in his lifetime. [53] Any cancellation must observe
all legal requisites, like written notice of cancellation based on lawful
cause.[54]

It is immaterial if the prior contract is a mere contract to sell and does

not immediately convey ownership.[55] If it is valid, then it binds the estate
to convey the property in accordance with Section 8 of Rule 89 upon full
payment of the consideration.
Frank Lius contract to sell became valid and effective upon its
execution.[56] The seller, Jose Vao, was then alive and thus there was no
need for court approval for the immediate effectivity of the contract to
sell. In contrast, the execution of the contracts of sale of the Loys took
place after the death of the registered owner of the lots. The law requires
court approval for the effectivity of the Loys contracts of sale against third
parties. The probate court did not validly give this approval since it failed
to notify all interested parties of the Loys motion for court approval of the
sale. Besides, the probate court had lost jurisdiction over the lots after it
approved the earlier sale to Frank Liu. Clearly, Frank Lius contract to sell
prevails over the Loys contracts of sale.
Whether petitioners are entitled to award of
moral damages and attorneys fees.
The Court upholds the ruling of the trial and appellate courts that
petitioners are not entitled to moral damages. Moral damages should not
enrich a complainant at the expense of the defendant.[57]
Likewise, as found by the trial court and the appellate court, there is
no basis to award attorneys fees. The policy of the law is to put no
premium on the right to litigate. [58] The court may award attorneys fees
only in the instances mentioned in Article 2208 of the Civil Code. The
award of attorneys fees is the exception rather than the rule. [59] None of
the instances mentioned in Article 2208 apply to this case.
Conclusion
Since the Loys have no contract of sale validly approved by the
probate court, while Frank Liu has a contract of sale approved by the
probate court in accordance with Section 8 of Rule 89, Lot Nos. 5 and 6
belong to Frank Liu. The Estate of Jose Vao should reimburse the Loys their
payments on Lot Nos. 5 and 6, with annual interest at 6% from 4 June
1976, the date of filing of the complaint, until finality of this decision, and
12% thereafter until full payment.[60]

WHEREFORE, the Decision of the Court of Appeals is SET ASIDE and

a new one is RENDERED:
1. Declaring null and void the deeds of sale of Lot Nos. 5 and 6
executed by Teodoro Vao in favor of Alfredo Loy, Jr. and
Teresita Loy, respectively.
2.Ordering the Register of Deeds of Cebu City to cancel TCT Nos.
64522 and 64523 and to issue a new one in the name of
petitioner Frank N. Liu;
3. Ordering the Estate of Jose Vao to reimburse to respondent
Loys the amounts paid on Lot Nos. 5 and 6, with interest at
6% per annum from 4 June 1976 until finality of this decision,
and 12% per annum thereafter until full payment.
SO ORDERED.

G.R. No. 116635 July 24, 1997

the said two hectares shall have been delivered

to the defendants; and

CONCHITA NOOL and GAUDENCIO ALMOJERA, petitioner,

vs.
COURT OF APPEALS, ANACLETO NOOL and EMILIA
NEBRE, respondents.

5. To pay the costs.

SO ORDERED.

PANGANIBAN, J.:
A contract of repurchase arising out of a contract of sale where the seller
did not have any title to the property "sold" is not valid. Since nothing was
sold, then there is also nothing to repurchase.

The Antecedent Facts

The facts, which appear undisputed by the parties, are narrated by the
Court of Appeals as follows:

Statement of the Case

This postulate is explained by this Court as it resolves this petition for
review on certiorari assailing the January 20, 1993 Decision 1 of
Respondent Court of Appeals 2 in CA-G.R. CV No. 36473, affirming the
decision 3 of the trial court 4which disposed as follows: 5
WHEREFORE, judgment is hereby rendered
complaint for no cause of action, and hereby:

dismissing

the

1. Declaring the private writing, Exhibit "C", to

be an option to sell, not binding and considered
validly withdrawn by the defendants for want of
consideration;
2. Ordering the plaintiffs to return to the
defendants the sum of P30,000.00 plus interest
thereon at the legal rate, from the time of filing
of defendants' counterclaim until the same is
fully paid;
3. Ordering the plaintiffs to deliver peaceful
possession of the two hectares mentioned in
paragraph 7 of the complaint and in paragraph
31 of defendants' answer (counterclaim);
4. Ordering the plaintiffs to pay reasonable
rents on said two hectares at P5,000.00 per
annum or at P2,500.00 per cropping from the
time of judicial demand mentioned in paragraph
2 of the dispositive portion of this decision, until

Two (2) parcels of land are in dispute and litigated upon

here. The first has an area of 1 hectare. It was formerly
owned by Victorino Nool and covered by Transfer
Certificate of Title No. T-74950. With an area of 3.0880
hectares, the other parcel was previously owned by
Francisco Nool under Transfer Certificate of Title No. T100945. Both parcel's are situated in San Manuel, Isabela.
The plaintiff spouses, Conchita Nool and Gaudencio
Almojera, now the appellants, seek recovery of the
aforementioned parcels of land from the defendants,
Anacleto Nool, a younger brother of Conchita, and Emilia
Nebre, now the appellees.
In their complaint, plaintiff-appellants alleged inter
alia that they are the owners of subject parcels of land,
and they bought the same from Conchita's other brothers,
Victorino Nool and Francisco Nool; that as plaintiffs were in
dire need of money, they obtained a loan from the Ilagan
Branch of the Development Bank of the Philippines, in
Ilagan, Isabela, secured by a real estate mortgage on said
parcels of land, which were still registered in the names of
Victorino Nool and Francisco Nool, at the time, and for the
failure of plaintiffs to pay the said loan, including interest
and surcharges, totaling P56,000.00, the mortgage was
foreclosed; that within the period of redemption, plaintiffs
contacted defendant Anacleto Nool for the latter to
redeem the foreclosed properties from DBP, which the
latter did; and as a result, the titles of the two (2) parcels
of land in question were transferred to Anacleto Nool; that

as part of their arrangement or understanding, Anacleto

Nool agreed to buy from plaintiff Conchita Nool the two (2)
parcels of land under controversy, for a total price of
P100,000.00, P30,000.00 of which price was paid to
Conchita, and upon payment of the balance of P14,000.00,
plaintiffs were to regain possession of the two (2) hectares
of land, which amounts defendants failed to pay, and the
same day the said arrangement 6 was made; another
covenant 7 was entered into by the parties, whereby
defendants agreed to return to plaintiffs the lands in
question, at anytime the latter have the necessary
amount; that plaintiffs asked the defendants to return the
same but despite the intervention of the Barangay Captain
of their place, defendants refused to return the said
parcels of land to plaintiffs; thereby impelling them
(plaintiffs) to come to court for relief.
In their Answer, defendants-appellees theorized that they
acquired the lands in question from the Development Bank
of the Philippines, through negotiated sale, and were
misled by plaintiffs when defendant Anacleto Nool signed
the private writing, agreeing to return subject lands when
plaintiffs have the money to redeem the same; defendant
Anacleto having been made to believe, then, that his
sister, Conchita, still had the right to redeem the said
properties.
The pivot of inquiry here, as aptly observed below, is the
nature and significance of the private document, marked
Exhibit "D" for plaintiffs, which document has not been
denied by the defendants, as defendants even averred in
their Answer that they gave an advance payment of
P30,000.00 therefor, and acknowledged that they had a
balance of P14,000.00 to complete their payment. On this
crucial issue, the lower court adjudged the said private
writing (Exhibit "D") as an option to sell not binding upon
and considered the same validly withdrawn by defendants
for want of consideration; and decided the case in the
manner above-mentioned.
There is no quibble over the fact that the two (2) parcels of
land in dispute were mortgaged to the Development Bank
of the Philippines, to secure a loan obtained by plaintiffs

from DBP (Ilagan Branch), Ilagan, Isabela. For the nonpayment of said loan, the mortgage was foreclosed and in
the process, ownership of the mortgaged lands was
consolidated in DBP (Exhibits 3 and 4 for defendants).
After DBP became the absolute owner of the two parcels of
land, defendants negotiated with DBP and succeeded in
buying the same. By virtue of such sale by DBP in favor of
defendants, the titles of DBP were cancelled and the
corresponding Transfer Certificates of Title (Annexes "C"
and "D" to the Complaint) issued to the defendants. 8
It should be stressed that Manuel S. Mallorca, authorized officer of DBP,
certified that the one-year redemption period was from March 16, 1982 up
to March 15, 1983 and that the mortgagors' right of redemption was not
exercised within this period. 9 Hence, DBP became the absolute owner of
said parcels of land for which it was issued new certificates of title, both
entered on May 23, 1983 by the Registry of Deeds for the Province of
Isabela. 10 About two years thereafter, on April 1, 1985, DBP entered into a
Deed of Conditional Sale 11 involving the same parcels of land with Private
Respondent Anacleto Nool as vendee. Subsequently, the latter was issued
new certificates of title on February 8, 1988. 12

The Court of Appeals ruled:

13

WHEREFORE, finding no reversible error infirming it, the

appealed Judgment is hereby AFFIRMED in toto. No
pronouncement as to costs.
The Issues
Petitioners impute to Respondent Court the following alleged "errors":
1. The Honorable Court of Appeals, Second Division has
misapplied the legal import or meaning of Exhibit "C" in a
way contrary to law and existing jurisprudence in stating
that it has no binding effect between the parties and
considered validly withdrawn by defendants-appellees for
want of consideration.

2. The Honorable Court of Appeals, Second Division has

miserably failed to give legal significance to the actual
possession and cultivation and appropriating exclusively
the palay harvest of the two (2) hectares land pending the
payment of the remaining balance of fourteen thousand
pesos (P14,000.00) by defendants-appellees as indicated
in Exhibit "C".
3. The Honorable Court of Appeals has seriously erred in
affirming the decision of the lower court by awarding the
payment of rents per annum and the return of P30,000.00
and not allowing the plaintiffs-appellants to re-acquire the
four (4) hectares, more or less upon payment of one
hundred thousand pesos (P100,000.00) as shown in
Exhibit "D". 14
The Court's Ruling
The petition is bereft of merit.
First Issue: Are Exhibits "C" and "D" Valid and Enforceable?
The petitioner-spouses plead for the enforcement of their agreement with
private respondents as contained in Exhibits "C" and "D," and seek
damages for the latter's alleged breach thereof. In Exhibit C, which was a
private handwritten document labeled by the parties as Resibo ti
Katulagan or Receipt of Agreement, the petitioners appear to have "sold"
to private respondents the parcels of land in controversy covered by TCT
No. T-74950 and TCT No. T-100945. On the other hand, Exhibit D, which
was also a private handwritten document in Ilocano and labeled
asKasuratan, private respondents agreed that Conchita Nool "can acquire
back or repurchase later on said land when she has the money." 15
In seeking to enforce her alleged right to repurchase the parcels of land,
Conchita (joined by her co-petitioner-husband) invokes Article 1370 of the
Civil Code which mandates that "(i)f the terms of a contract are clear and
leave no doubt upon the intention of the contracting parties, the literal
meaning of its stipulations shall control." Hence, petitioners contend that
the Court of Appeals erred in affirming the trial court's finding and
conclusion that said Exhibits C and D were "not merely voidable but
utterly void and inexistent."

We cannot sustain petitioners' view. Article 1370 of the Civil Code is

applicable only to valid and enforceable contracts. The Regional Trial Court
and the Court of Appeals ruled that the principal contract of sale contained
in Exhibit C and the auxiliary contract of repurchase in Exhibit D are both
void. This conclusion of the two lower courts appears to find support
in Dignos vs. Court of Appeals, 16 where the Court held:
Be that as it may, it is evident that when petitioners sold
said land to the Cabigas spouses, they were no longer
owners of the same and the sale is null and void.
In the present case, it is clear that the sellers no longer had any title to the
parcels of land at the time of sale. Since Exhibit D, the alleged contract of
repurchase, was dependent on the validity of Exhibit C, it is itself void. A
void contract cannot give rise to a valid one. 17 Verily, Article 1422 of the
Civil Code provides that "(a) contract which is the direct result of a
previous illegal contract, is also void and inexistent."
We should however add that Dignos did not cite its basis for ruling that a
"sale is null and void" where the sellers "were no longer the owners" of the
property. Such a situation (where the sellers were no longer owners) does
not appear to be one of the void contracts enumerated in Article 1409 of
the Civil Code. 18 Moreover, the Civil Code 19itself recognizes a sale where
the goods are to be "acquired . . . by the seller after the perfection of the
contract of sale," clearly implying that a sale is possible even if the seller
was not the owner at the time of sale, provided he acquires title to the
property later on.
In the present case however, it is likewise clear that the sellers can no
longer deliver the object of the sale to the buyers, as the buyers
themselves have already acquired title and delivery thereof from the
rightful owner, the DBP. Thus, such contract may be deemed to be
inoperative 20 and may thus fall, by analogy, under item no. 5 of Article
1409 of the Civil Code: "Those which contemplate an impossible service."
Article 1459 of the Civil Code provides that "the vendor must have a right
to transfer the ownership thereof [object of the sale] at the time it is
delivered." Here, delivery of ownership is no longer possible. It has
become impossible.
Furthermore, Article 1505 of the Civil Code provides that "where goods are
sold by a person who is not the owner thereof, and who does not sell them
under authority or with consent of the owner, the buyer acquires no better

title to the goods than the seller had, unless the owner of the goods is by
his conduct precluded from denying the seller's authority to sell." Here,
there is no allegation at all that petitioners were authorized by DBP to sell
the property to the private respondents. Jurisprudence, on the other hand,
teaches us that "a person can sell only what he owns or is authorized to
sell; the buyer can as a consequence acquire no more than what the seller
can legally transfer." 21 No one can give what he does not have nono
dat quod non habet. On the other hand, Exhibit D presupposes that
petitioners could repurchase the property that they "sold" to private
respondents. As petitioners "sold" nothing, it follows that they can also
"repurchase" nothing. Nothing sold, nothing to repurchase. In this light,
the contract of repurchase is also inoperative and by the same analogy,
void.
Contract of Repurchase
Dependent on Validity of Sale
As borne out by the evidence on record, the private respondents bought
the two parcels of land directly from DBP on April 1, 1985 after discovering
that petitioners did not own said property, the subject of Exhibits C and D
executed on November 30, 1984. Petitioners, however, claim that they can
exercise their alleged right to "repurchase" the property, after private
respondents had acquired the same from DBP. 22 We cannot accede to this,
for it clearly contravenes the intention of the parties and the nature of
their agreement. Exhibit D reads:
WRITING
That I, Anacleto Nool have bought from my sister Conchita Nool a
land an area of four hectares (4 has.) in the value of One Hundred
Thousand (100,000.00) Pesos. It is our agreement as brother and
sister that she can acquire back or repurchase later on said land
when she has the money. [Emphasis supplied].
As proof of this agreement we sign as brother and sister this written
document this day of Nov. 30, 1984, at District 4, San Manuel,
Isabela.

Sgd Emilio Paron

Witness

One "repurchases" only what one has previously sold. In other words, the
right to repurchase presupposes a valid contract of sale between
the same parties. Undisputedly, private respondents acquired title to the
property from DBP, and not from petitioners.
Assuming arguendo that Exhibit D is separate and distinct from Exhibit C
and is not affected by the nullity of the latter, still petitioners do not
thereby acquire a right to repurchase the property. In that scenario, Exhibit
D ceases to be a "right to repurchase" ancillary and incidental to the
contract of sale; rather, it becomes an accepted unilateral promise to sell.
Article 1479 of the Civil Code, however, provides that "an accepted
unilateral promise to buy or 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." In the present case, the alleged written contract of
repurchase contained in Exhibit D is bereft of any consideration distinct
from the price. Accordingly, as an independent contract, it cannot bind
private respondents. The ruling in Diamante vs. CA 24 supports this. In that
case, the Court through Mr. Justice Hilario G. Davide, Jr. explained:
Article 1601 of the Civil Code provides:
Conventional redemption shall take place when the vendor
reserves the right to repurchase the thing sold, with the
obligation to comply with the provisions of article 1616
and other stipulations which may have been agreed upon.
In Villarica, et al. Vs. Court of Appeals, et al., decided on
29 November 1968, or barely seven (7) days before the
respondent Court promulgated its decisions in this case,
this Court, interpreting the above Article, held:
The right of repurchase is not a right granted the vendor
by the vendee in a subsequent instrument, but is a right
reserved by the vendor in the same instrument of sale as
one of the stipulations of the contract. Once the
instrument of absolute sale is executed, the vendor can
not longer reserve the right to repurchase, and any right
thereafter granted the vendor by the vendee in a separate

instrument cannot be a right of repurchase but some other

right like the option to buy in the instant case. . . .
In the earlier case of Ramos, et al. vs. Icasiano, et al.,
decided in 1927, this Court had already ruled that "an
agreement to repurchase becomes a promise to sell when
made after the sale, because when the sale is made
without such an agreement, the purchaser acquires the
thing sold absolutely, and if he afterwards grants the
vendor the right to purchase, it is a new contract entered
into by the purchaser, as absolute owner already of the
object. In that case the vendor has nor reserved to himself
the right to repurchase.
In Vda. De Cruzo, et al. vs. Carriaga, et al. this Court found
another occasion to apply the foregoing principle.
Hence, the Option to Repurchase executed by private
respondent in the present case, was merely a promise to
sell, which must be governed by Article 1479 of the Civil
Code which reads as follows:
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
promissor if the promise is supported by a consideration
distinct from the price.
Right to Repurchase Based on
Homestead or Trust Non-Existent
Petitioners also base their alleged right to repurchase on (1) Sec. 119 of
the Public Land Act 25 and (2) an implied trust relation as "brother and
sister." 26
The Court notes that Victorino Nool and Francisco Nool mortgaged the land
to DBP. The brothers, together with Conchita Nool and Anacleto Nool, were
all siblings and heirs qualified to repurchase the two parcels of land under
Sec. 119 of the Public Land Act which provides that "(e)very conveyance of
land acquired under the free patent or homestead provisions, when

proper, shall be subject to repurchase by the applicant, his widow or legal

heirs, within a period of five years from the date of conveyance."
Assuming the applicability of this statutory provision to the case at bar, it
is indisputable that Private Respondent Anacleto Nool already repurchased
from DBP the contested properties. Hence, there was no more right of
repurchase that his sister Conchita or brothers Victorino and Francisco
could exercise. The properties were already owned by an heir of the
homestead grantee and the rationale of the provision to keep homestead
lands within the family of the grantee was thus fulfilled. 27
The claim of a trust relation is likewise without merit. The records show
that private respondents did not purchase the contested properties from
DBP in trust for petitioners. The former, as previously mentioned, in fact
bought the land from DBP upon realization that the latter could not validly
sell the same. Obviously, petitioners bought it for themselves. There is no
evidence at all in the records that they bought the land in trust for private
respondents. The fact that Anacleto Nool was the younger brother of
Conchita Nool and that they signed a contract of repurchase, which as
discussed earlier was void, does not prove the existence of an implied
trust in favor of petitioners.
Second
Issue:
No
Validity of Void Contracts

Estoppel

in

Impugning

the

Petitioners argue that "when Anacleto Nool took the possession of the two
hectares, more or less, and let the other two hectares to be occupied and
cultivated by plaintiffs-appellant, Anacleto Nool cannot later on disclaim
the terms or contions (sic) agreed upon and his actuation is within the
ambit of estoppel . . . 28 We disagree. The private respondents cannot be
estopped from raising the defense of nullity of contract, specially in this
case where they acted in good faith, believing that indeed petitioners
could sell the two parcels of land in question. Article 1410 of the Civil Code
mandates that "(t)he action or defense for the declaration of the
inexistence of a contract does not prescribe." It is a well-settled doctrine
that "as between parties to a contract, validity cannot be given to it by
estoppel if it is prohibited by law or it is against public policy (19 Am. Jur.
802). It is not within the competence of any citizen to barter away what
public policy by law seeks to preserve." 29 Thus, it is immaterial that
private respondents initially acted to implement the contract of sale,
believing in good faith that the same was valid. We stress that a contract
void at inception cannot be validated by ratification or prescription and
certainly cannot be binding on or enforceable against private
respondents. 30

Third Issue: Return of P30,000.00 with Interest

and Payment of Rent
Petitioners further argue that it would be a "miscarriage of justice" to order
them (1) to return the sum of P30,000.00 to private respondents when
allegedly it was Private Respondent Anacleto Nool who owed the former a
balance of P14,000.00 and (2) to order petitioners to pay rent when they
"were allowed to cultivate the said two hectares." 31
We are not persuaded. Based on the previous discussion, the balance of
P14,000.00 under the void contract of sale may not be enforced.
Petitioners are the ones who have an obligation to return what they unduly
and improperly received by reason of the invalid contract of sale. Since
they cannot legally give title to what they "sold," they cannot keep the
money paid for the object of the sale. It is basic that "(e)very person who
through an act of performance by another, or any other means, acquires
or comes into possession of something at the expense of the latter without
just or legal ground, shall return the same." 32 Thus, if a void contract has
already "been performed, the restoration of what has been given is in
order." 33 Corollarily and as aptly ordered by respondent appellate court,
interest thereon will run only from the time of private respondents'
demand for the return of this amount in their counterclaim. 34 In the same
vein, petitioners' possession and cultivation of the two hectares are
anchored on private respondents' tolerance. Clearly, the latter's tolerance
ceased upon their counterclaim and demand on the former to vacate.
Hence, their right to possess and cultivate the land ipso facto ceased.
WHEREFORE, the petition is DENIED and the assailed Decision of the Court
of Appeals affirming that of the trial court is hereby AFFIRMED.
SO ORDERED.

G.R. No. 122463 December 19, 2005

RUDOLF LIETZ, INC., Petitioner,
vs.
THE COURT OF APPEALS, AGAPITO BURIOL, TIZIANA TURATELLO &
PAOLA SANI, Respondents.
DECISION
Tinga, J.:
This is a petition for review on certiorari under Rule 45 of the Revised
Rules of Court, praying for the annulment of the Decision1 dated April 17,
1995 and the Resolution2 dated October 25, 1995 of the Court of Appeals
in CA-G.R. CV No. 38854. The Court of Appeals affirmed the Decision3 in
Civil Case No. 2164 of the Regional Trial Court (RTC), Branch 48, of
Palawan and Puerto Princesa City with the modification that herein
respondents Tiziana Turatello and Paola Sani are entitled to damages,
attorneys fees, and litigation expenses.
The dispositive portion of the RTC Decision reads:
WHEREFORE, in view of the foregoing and as prayed for by the
defendants, the instant complaint is hereby DISMISSED. Defendants
counterclaim is likewise DISMISSED. Plaintiff, however, is ordered to pay
defendant Turatello and Sanis counsel the sum of P3,010.38 from August
9, 1990 until fully paid representing the expenses incurred by said counsel
when the trial was cancelled due to the non-appearance of plaintiffs
witnesses. With costs against the plaintiff.
SO ORDERED.4
As culled from the records, the following antecedents appear:
Respondent Agapito Buriol previously owned a parcel of unregistered land
situated at Capsalay Island, Port Barton, San Vicente, Palawan. On August
15, 1986, respondent Buriol entered into a lease agreement with Flavia
Turatello and respondents Turatello and Sani, all Italian citizens, involving
one (1) hectare of respondent Buriols property. The lease agreement was
for a period of 25 years, renewable for another 25 years. The lessees took
possession of the land after paying respondent Buriol a down payment

of P10,000.00.5 The lease agreement, however, was reduced into writing

only in January 1987.
On November 17, 1986, respondent Buriol sold to petitioner Rudolf Lietz,
Inc. the same parcel of land for the amount of P30,000.00. The Deed of
Absolute Sale embodying the agreement described the land as follows:
A parcel of land, consisting of FIVE (5) hectares, more or less, a portion of
that parcel of land declared in the name of Agapito Buriol, under Tax
Declaration No. 0021, revised in the year 1985, together with all
improvements thereon, situated at the Island of Capsalay, Barangay Port
Barton, municipality of San Vicente, province of Palawan which segregated
from the whole parcel described in said tax declaration, has the following
superficial boundaries: NORTH, Sec. 01-017; and remaining property of the
vendor; EAST, by Seashore; SOUTH, 01-020; and WEST, by 01-018 (now
Elizabeth Lietz).6
Petitioner later discovered that respondent Buriol owned only four (4)
hectares, and with one more hectare covered by lease, only three (3)
hectares were actually delivered to petitioner. Thus, petitioner instituted
on April 3, 1989 a complaint for Annulment of Lease with Recovery of
Possession with Injunction and Damages against respondents and Flavia
Turatello before the RTC. The complaint alleged that with evident bad faith
and malice, respondent Buriol sold to petitioner five (5) hectares of land
when respondent Buriol knew for a fact that he owned only four (4)
hectares and managed to lease one more hectare to Flavia Turatello and
respondents Tiziana Turatello and Paola Sani. The complaint sought the
issuance of a restraining order and a writ of preliminary injunction to
prevent Flavia Turatello and respondents Turatello and Sani from
introducing improvements on the property, the annulment of the lease
agreement between respondents, and the restoration of the amount paid
by petitioner in excess of the value of the property sold to him. Except for
Flavia Turatello, respondents filed separate answers raising similar
defenses of lack of cause of action and lack of jurisdiction over the action
for recovery of possession. Respondents Turatello and Sani also prayed for
the award of damages and attorneys fees.7
After trial on the merits, the trial court rendered judgment on May 27,
1992, dismissing both petitioners complaint and respondents
counterclaim for damages. Petitioner and respondents Turatello and Sani
separately appealed the RTC Decision to the Court of Appeals, which

affirmed the dismissal of petitioners complaint and awarded respondents

Turatello and Sani damages and attorneys fees. The dispositive portion of
the Court of AppealsDecision reads:

Art. 1539. The obligation to deliver the thing sold includes that of placing
in the control of the vendee all that is mentioned in the contract, in
conformity with the following rules:

WHEREFORE, the decision appealed from is hereby AFFIRMED, with the

following modification:
Plaintiff-appellant Rudolf Lietz, Inc. is hereby (1) ordered to pay
defendants-appellants Turatello and Sani, the sum of P100,000.00 as
moral damages; (2) P100,000.00 as exemplary damages; (3) P135,728.73
as attorneys fees; and (4) P10,000.00 as litigation expenses.

If the sale of real estate should be made with a statement of its area, at
the rate of a certain price for a unit of measure or number, the vendor
shall be obliged to deliver to the vendee, if the latter should demand it, all
that may have been stated in the contract; but, should this be not
possible, the vendee may choose between a proportional reduction of the
price and the rescission of the contract, provided that, in the latter case,
the lack in the area be not less than one-tenth of that stated.

SO ORDERED.8

....

Petitioner brought to this Court the instant petition after the denial of its
motion for reconsideration of the Court of Appeal Decision. The instant
petition imputes the following errors to the Court of Appeals.

The Court of Appeals Decision, however, declared as inapplicable the

abovequoted provision and instead ruled that petitioner is no longer
entitled to a reduction in price based on the provisions of Article 1542 of
the Civil Code, which read:

I. IN DEFENDING AGAPITO BURIOLS GOOD FAITH AND IN STATING THAT

ASSUMING THAT HE (BURIOL) WAS IN BAD FAITH PETITIONER WAS SOLELY
RESPONSIBLE FOR ITS INEXCUSABLE CREDULOUSNESS.
II. IN ASSERTING THAT ARTICLES 1542 AND 1539 OF THE NEW CIVIL CODE
ARE, RESPECTIVELY, APPLICABLE AND INAPPLICABLE IN THE CASE AT BAR.
III. IN NOT GRANTING PETITIONERS CLAIM FOR ACTUAL AND EXEMPLARY
DAMAGES.
IV. IN GRANTING RESPONDENTS TIZIANA TURATELLO AND PAOLA SANI
EXHORBITANT [sic] AMOUNTS AS DAMAGES WHICH ARE EVEN BEREFT OF
EVIDENTIARY BASIS.9
Essentially, only two main issues confront this Court, namely: (i) whether
or not petitioner is entitled to the delivery of the entire five hectares or its
equivalent, and (ii) whether or not damages may be awarded to either
party.
Petitioner contends that it is entitled to the corresponding reduction of the
purchase price because the agreement was for the sale of five (5)
hectares although respondent Buriol owned only four (4) hectares. As in its
appeal to the Court of Appeals, petitioner anchors its argument on the
second paragraph of Article 1539 of the Civil Code, which provides:

Art. 1542. In the sale of real estate, made for a lump sum and not at the
rate of a certain sum for a unit of measure or number, there shall be no
increase or decrease of the price, although there be a greater or lesser
area or number than that stated in the contract.
The same rule shall be applied when two or more immovables are sold for
a single price; but if, besides mentioning the boundaries, which is
indispensable in every conveyance of real estate, its area or number
should be designated in the contract, the vendor shall be bound to deliver
all that is included within said boundaries, even when it exceeds the area
or number specified in the contract; and, should he not be able to do so,
he shall suffer a reduction in the price, in proportion to what is lacking in
the area or number, unless the contract is rescinded because the vendee
does not accede to the failure to deliver what has been stipulated.
Article 1539 governs a sale of immovable by the unit, that is, at a stated
rate per unit area. In a unit price contract, the statement of area of
immovable is not conclusive and the price may be reduced or increased
depending on the area actually delivered. If the vendor delivers less than
the area agreed upon, the vendee may oblige the vendor to deliver all that
may be stated in the contract or demand for the proportionate reduction
of the purchase price if delivery is not possible. If the vendor delivers more
than the area stated in the contract, the vendee has the option to accept

only the amount agreed upon or to accept the whole area, provided he
pays for the additional area at the contract rate.10
In some instances, a sale of an immovable may be made for a lump sum
and not at a rate per unit. The parties agree on a stated purchase price for
an immovable the area of which may be declared based on an estimate or
where both the area and boundaries are stated.
In the case where the area of the immovable is stated in the contract
based on an estimate, the actual area delivered may not measure up
exactly with the area stated in the contract. According to Article 1542 11 of
the Civil Code, in the sale of real estate, made for a lump sum and not at
the rate of a certain sum for a unit of measure or number, there shall be
no increase or decrease of the price although there be a greater or lesser
area or number than that stated in the contract. However, the discrepancy
must not be substantial. A vendee of land, when sold in gross or with the
description "more or less" with reference to its area, does not thereby ipso
facto take all risk of quantity in the land. The use of "more or less" or
similar words in designating quantity covers only a reasonable excess or
deficiency.12
Where both the area and the boundaries of the immovable are declared,
the area covered within the boundaries of the immovable prevails over the
stated area. In cases of conflict between areas and boundaries, it is the
latter which should prevail. What really defines a piece of ground is not the
area, calculated with more or less certainty, mentioned in its description,
but the boundaries therein laid down, as enclosing the land and indicating
its limits. In a contract of sale of land in a mass, it is well established that
the specific boundaries stated in the contract must control over any
statement with respect to the area contained within its boundaries. It is
not of vital consequence that a deed or contract of sale of land should
disclose the area with mathematical accuracy. It is sufficient if its extent is
objectively indicated with sufficient precision to enable one to identify it.
An error as to the superficial area is immaterial. 13 Thus, the obligation of
the vendor is to deliver everything within the boundaries, inasmuch as it is
the entirety thereof that distinguishes the determinate object. 14
As correctly noted by the trial court and the Court of Appeals, the sale
between petitioner and respondent Buriol involving the latters property is
one made for a lump sum. The Deed of Absolute Sale shows that the
parties agreed on the purchase price on a predetermined area of five
hectares within the specified boundaries and not based on a particular
rate per area. In accordance with Article 1542, there shall be no reduction

in the purchase price even if the area delivered to petitioner is less than
that stated in the contract. In the instant case, the area within the
boundaries as stated in the contract shall control over the area agreed
upon in the contract.
The Court rejects petitioners contention that the propertys boundaries as
stated in the Deed of Absolute Sale are superficial and unintelligible and,
therefore, cannot prevail over the area stated in the contract. First, as
pointed out by the Court of Appeals, at an ocular inspection prior to the
perfection of the contract of sale, respondent Buriol pointed to petitioner
the boundaries of the property. Hence, petitioner gained a fair estimate of
the area of the property sold to him. Second, petitioner cannot now assail
the contents of the Deed of Absolute Sale, particularly the description of
the boundaries of the property, because petitioners subscription to
the Deed of Absolute Saleindicates his assent to the correct description of
the boundaries of the property.
Petitioner also asserts that respondent Buriol is guilty of misleading
petitioner into believing that the latter was buying five hectares when he
knew prior to the sale that he owned only four hectares. The review of the
circumstances of the alleged misrepresentation is factual and, therefore,
beyond the province of the Court. Besides, this issue had already been
raised before and passed upon by the trial court and the Court of Appeals.
The factual finding of the courts below that no sufficient evidence supports
petitioners allegation of misrepresentation is binding on the Court.
The Court of Appeals reversed the trial courts dismissal of respondents
Turatello and Sanis counterclaim for moral and exemplary damages,
attorneys fees and litigation expenses. In awarding moral damages in the
amount ofP100,000 in favor of Turatello and Sani, the Court of Appeals
justified the award to alleviate the suffering caused by petitioners
unfounded civil action. The filing alone of a civil action should not be a
ground for an award of moral damages in the same way that a clearly
unfounded civil action is not among the grounds for moral damages. 15
Exemplary or corrective damages are imposed, by way of example or
correction for the public good, in addition to the moral, temperate,
liquidated or compensatory damages. 16 With the deletion of the award for
moral damages, there is no basis for the award of exemplary damages.
WHEREFORE, the instant petition for review on certiorari is GRANTED in
PART. The Court of Appeals Decision in CA-G.R. CV No. 38854 is AFFIRMED

with the MODIFICATION that the award of moral and exemplary damages
is DELETED.
SO ORDERED.

G.R. No. 142403

March 26, 2003

ALEJANDRO GABRIEL and ALFREDO GABRIEL, petitioners,

vs.
SPOUSES PABLO MABANTA and ESCOLASTICA COLOBONG,
DEVELOPMENT BANK OF THE PHILIPPINES (Isabela Branch) and
ZENAIDA TAN-REYES, respondents.
SANDOVAL-GUTIERREZ, J.:
Born of the need to protect our land registration system from being
converted into an instrument of fraud, this Court has consistently adhered
to the principle that "a mere registration of title in case of double sale is
not enough, good faith must concur with the registration."
In this petition for review on certiorari, Alejandro Gabriel and Alfredo
Gabriel assailed the Decision1 dated March 30, 1999 of the Court of
Appeals in CA-G.R. CV No. 33941 modifying the Decision 2 dated April 12,
1991 of the Regional Trial Court, Branch 21, Santiago, Isabela in Civil Case
No. 0399 for specific performance, reconveyance and damages with
application for preliminary injunction.
The facts are as follows:
Spouses Pablo and Escolastica Mabanta were the registered owners of two
lots located in Patul and Capaltitan, Santiago, Isabela, with an area of 512
and 15,000 square meters, covered by Transfer Certificates of Title (TCT)
Nos. 72705 and 72707, respectively. On October 25, 1975, they
mortgaged both lots with the Development Bank of the Philippines (DBP)
as collateral for a loan of P14,000.00.3
Five years thereafter or on September 1, 1980, spouses Mabanta sold the
lots to Susana Soriano by way of a "Deed of Sale of Parcels of Land With
Assumption of Mortgage."4 Included in the Deed is an agreement that they
could repurchase the lots within a period of two (2) years.
Spouses Mabanta failed to repurchase the lots. But sometime in 1984,
they were able to convince Alejandro Gabriel to purchase the lots from
Susana Soriano. As consideration, Alejandro delivered to Susana a 500square meter residential lot with an actual value of P40,000.00 and paid
spouses Mabanta the sum of P5,000.00. On May 15, 1984, spouses

Mabanta executed a "Deed of Sale with Assumption of Mortgage" 5 in favor

of Alejandro. For her part, Susana executed a document entitled
"Cancellation of Contract"6 whereby she transferred to Alejandro all her
rights over the two lots.
Alejandro and his son Alfredo cultivated the lots. They also caused the
restructuring of spouses Mabantas loan with the DBP. 7 However, when
they were ready to pay the entire loan, they found that spouses Benito
and Pura Tan had paid it and that the mortgage was already cancelled. 8
On August 18, 1985, Benito Tan and Alejandro Tridanio, a barangay official,
approached Alejandro to refund to him the P5,000.00 he paid to spouses
Mabanta. Alejandro refused because Tan was unwilling to return the
formers 500-square meter lot delivered to Susana as purchase price for
the lots. Thereafter, spouses Tan tried to eject Alejandro from the lot
covered by TCT No. 72707.
On September 17, 1985, Alejandro and Alfredo filed with the Regional Trial
Court, Branch 21, Santiago, Isabela a complaint (involving the lot covered
by TCT No. 72707) for specific performance, reconveyance and damages
with an application for a preliminary injunction against spouses Mabanta,
spouses Tan, the DBP and barangay officials Dominador Maylem and
Alejandro Tridanio. In due time, these defendants filed their respective
answers.
During the proceedings, it turned out that it was spouses Tans daughter,
Zenaida Tan-Reyes who bought one of the lots (covered by TCT No.
72707) from spouses Mabanta on August 21, 1985. Not having been
impleaded as a party-defendant, she filed an answer-in-intervention
alleging that she is the registered owner of the lot covered by TCT No.
72707; that she purchased it from spouses Mabanta "in good faith and for
value"; that she paid their loan with the DBP in the amounts of P17,580.88
and P16,845.17 per Official Receipts Nos. 1749539 and 1749540,
respectively; that the mortgage with the DBP was cancelled and spouses
Mabanta executed a "Deed of Absolute Sale" 9 in her favor; and that TCT
No. T-72707 was cancelled and in lieu thereof, TCT No. T-160391 was
issued in her name.
On April 12, 1991, the trial court rendered its Decision sustaining the right
of Alejandro and Alfredo Gabriel over the lot covered by TCT No. 72707
(now TCT No. T-160391), thus:

"WHEREFORE, in the light

judgment is hereby rendered:

of

the

foregoing

considerations

1. DECLARING Exhibit "A", the deed of sale with assumption of mortgage

executed by the spouses Pablo Mabanta and Escolastica Colobong (in favor
of Alejandro and Alfredo Gabriel) valid and subsisting.
2. ORDERING the plaintiff Alejandro Gabriel to pay to the spouses Pablo
Mabanta and Escolastica Colobong the sums of P5,000.00 plus P34,426.05
(representing the loan with the DBP which plaintiff assumed) within 30 days
from receipt hereof.
3. DECLARING the deed of sale executed by the spouses Pablo Mabanta
and Escolastica Colobong in favor of Zenaida Tan Reyes as null and void.
4. ORDERING the intervenor Zenaida Tan-Reyes to reconvey the land
covered by T.C.T. No. T-160391 in favor of Alejandro Gabriel.

already was appraised of the status of the land by her father

Benito Tan. For reasons known only to her, she decided to buy the
land just the same.
xxx

xxx

xxx

"Zenaida Tan therefore is not a purchaser in good faith and she

cannot seek refuge behind her certificate of title. True, Article
1544 of the Civil Code provides that should immovable property
be sold to different vendees, the ownership shall belong to the
person who in good faith first recorded it in the registry of
property. Unfortunately, the registration made by Zenaida (Tan)
Reyes of her deed of sale was not in good faith. For this reason in
accordance with the same Article 1544, the land shall pertain to
the person who in good faith was first in possession. There is no
question that it is the Gabriels who are in possession of the land."

"SO ORDERED."

In declaring null and void the "Deed of Absolute Sale" (or second
sale) of the lot covered by TCT No. 72707 between spouses
Mabanta and Zenaida Tan-Reyes, the trial court ratiocinated as
follows:
"But Zenaida (Tan) Reyes professes that she is a buyer in good
faith and for value. In her testimony she said that the spouses
Mabanta offered to sell the land to her on August 19, 1985. She
was informed that the land was mortgaged in the DBP. She readily
agreed to buy the land on that same day. She did not inquire
further into the status of the land. She did not go and see the land
first. What she did was to immediately go to the DBP the following
day and paid the mortgage obligation in the amount of P16,845.17
and P17,580.88 (Exhibits "1" and "2"). The following day August
21, a deed of sale in her favor was prepared and on October 17,
1985 she secured a certificate of title (Exhibit "5"). Under the
above circumstances, it cannot be said that she is a purchaser in
good faith. She should have first made a thorough investigation of
the status of the land. Had she inquired, she should have been
informed that the land was previously sold to at least two persons
Susana Soriano and Alejandro Gabriel. She should also have first
visited the land she was buying. Had she done so she should have
discovered that the land was being cultivated by the Gabriels who
would have informed her that they already bought the land from
the Mabantas. The reason why she did not do this is because she

Unsatisfied, spouses Mabanta and Zenaida Tan-Reyes interposed an

appeal to the Court of Appeals.
On March 30, 1999, the Court of Appeals rendered a Decision modifying
the trial courts Decision, declaring as valid the second sale of the lot
covered by TCT No. 72707 between spouses Mabanta and Zenaida TanReyes on the ground that a person dealing with registered land may
simply rely on the correctness of the certificate of title and, in the absence
of anything to engender suspicion, he is under no obligation to look
beyond it. The dispositive portion of the Appellate Courts Decision reads:
"Wherefore the appealed judgment is AFFIRMED with the following modification:
1. DECLARING Exhibit "A", the deed of sale with assumption of mortgage executed by
the defendants-appellants spouses Pablo Mabanta and Escolastica Colobong over lots
covered by TCT Nos. T-72705 and T-72707 valid and subsisting;
2. Ordering spouses Pablo Mabanta and Escolastica Colobong to surrender TCT No.
72705 to plaintiff-appellee Alejandro Gabriel;
3. Declaring the deed of sale executed over lot with TCT No. 72707 (now T-160391)
by spouses Pablo Mabanta and Escolastica Colobong in favor of intervenor-appellant
Zenaida Tan Reyes as valid;
4. Ordering plaintiffs-appellees and any all persons claiming rights under them to
vacate Lot 3651-A now covered by TCT No. T-160391 and to deliver to intervenorappellant Zenaida Tan-Reyes the possession thereof;

5. Dismissing the case against defendants-appellants Benito Tan and Purita Masa;
6. No pronouncement as to costs.
"SO ORDERED."

In the instant petition for review on certiorari, petitioners Alejandro and

Alfredo Gabriel raise this lone issue:
WHETHER OR NOT THE COURT OF APPEALS ERRED IN DECLARING THE
SECOND SALE OF THE DISPUTED LOT EXECUTED BY SPOUSES MABANTA IN
FAVOR OF ZENAIDA TAN-REYES VALID UNDER ARTICLE 1544 OF THE CIVIL
CODE.
Petitioners contend that respondent Reyes is not a purchaser in good faith
since she bought the disputed lot with the knowledge that petitioner
Alejandro is claiming it in a previous sale.
In her comment on the petition, respondent Reyes maintains that the
Court of Appeals factual finding that she is a purchaser in good faith and
for value is final and conclusive. Meeting the issue head on, she claims
that there is no evidence that prior to August 21, 1985, when she
purchased the lot from respondent spouses Mabanta, she had knowledge
of any previous lien or encumbrance on the property.
For its part, respondent DBP avers that it acted in utmost good faith in
releasing the mortgaged lots to respondent spouses Mabanta who had the
loan restructured and paid the same. Also, it did not transact business
with spouses Tan.
With respect to respondent spouses Mabanta, this Courts Resolution
dated June 14, 2000 requiring them to file comment on the present
petition was returned unserved. Thus, in its Resolution dated January 22,
2001, this Court resolved to consider the Resolution of June 14, 2000
"deemed served" upon them.10
The petition is impressed with merit.
The issue for our resolution is whether or not respondent Zenaida TanReyes acted in good faith when she purchased the subject lot and had the
sale registered.

Settled is the principle that this Court is not a trier of facts. In the exercise
of its power of review, the findings of fact of the Court of Appeals are
conclusive and binding and consequently, it is not our function to analyze
or weigh evidence all over again. 11 This rule, however, is not an iron-clad
rule.12 In Floro vs. Llenado,13 we enumerated the various exceptions and
one which finds application to the present case is when the findings of the
Court of Appeals are contrary to those of the trial court.
We start first with the applicable law.
Article 1544 of the Civil Code provides:
"ART. 1544. If the same thing should have been sold to different
vendees, the ownership shall be transferred to the person who
may have first possession thereof in good faith, if it should be
movable property.
"Should it be immovable property, the ownership shall belong to
the person acquiring it who in good faith first recorded it in the
Registry of Property.
"Should there be no inscription, the ownership shall pertain to the
person who in good faith was first in possession; and, in the
absence thereof; to the person who presents the oldest title,
provided there is good faith."
Otherwise stated, where it is an immovable property that is the
subject of a double sale, ownership shall be transferred (1) to the
person acquiring it who in good faith first recorded it in the
Registry of Property; (2) in default thereof, to the person who in
good faith was first in possession; and (3) in default thereof, to the
person who presents the oldest title, provided there is good
faith.14 The requirement of the law then is two-fold: acquisition in
good faith and registration in good faith.15 The rationale behind
this is well-expounded inUraca vs. Court of Appeals,16 where this
Court held:
"Under the foregoing, the prior registration of the disputed
property by the second buyer does not by itself confer ownership
or a better right over the property. Article 1544 requires that such
registration must be coupled with good faith. Jurisprudence
teaches us that "(t)he governing principle is primus tempore,

potior jure (first in time, stronger in right). Knowledge gained by

the first buyer of the second sale cannot defeat the first buyers
right except where the second buyer registers in good faith the
second sale ahead of the first, as provided by the Civil Code. Such
knowledge of the first buyer does not bar her from availing of her
rights under the law, among them, to register first her purchase as
against the second buyer. But in converso, knowledge gained by
the second buyer of the first sale defeats his right even if he is
first to register the second sale, since such knowledge taints his
prior registration with bad faith. This is the price exacted by Article
1544 of the Civil Code for the second buyer being able to displace
the first buyer, that before the second buyer can obtain priority
over the first, he must show that he acted in good faith
throughout (i.e. in ignorance of the first sale and of the first
buyers right) from the time of acquisition until the title is
transferred to him by registration or failing registration, by
delivery of possession." (Emphasis supplied)
In the case at bar, certain pieces of evidence, put together, would prove
that respondent Reyes is not a buyer in good faith. The records show that
on August 18, 1985, spouses Mabanta offered to her for sale the disputed
lot. They told her it was mortgaged with respondent DBP and that she had
to pay the loan if she wanted to buy it. 17 She readily agreed to such a
condition. The following day, her father Benito Tan, accompanied by
barangay official Tridanio, went to petitioner Alejandros house offering to
return to him the P5,000.00 he had paid to spouses Mabanta. Tan did not
suggest to return the 500-square meter lot petitioner delivered to Susana
Soriano.18 For this reason, petitioner refused Tans offer and even
prohibited him from going to respondent DBP. We quote the following
testimony of petitioner who, despite his blindness as shown by the
records, testified to assert his right, thus:
"ATTY. CHANGALE:
Q

What can you say to that statement?

That is their mistake, sir.

Why do you say that is their mistake?

A
Because her husband and Tridanio went at home offering to
return the money but I did not accept, sir.

Who is this Benito Tan you are referring to?

The husband of Pura Masa, sir.

What is the relationship with the intervenor Zenaida Tan?

The daughter, sir.

Q
When did Benito Tan together with Councilman
Tridanio came?
A
Before they went to the Development Bank of the
Philippines they came at home and I prohibit them, sir.
Q

How did you prohibit them?

A
No, I said please I am just waiting for the Bank to inspect
then I will pay my obligation.
xxx

xxx

xxx

Q
You stated earlier that you will just pay the payments.
What are those payments you are referring to?
A
The payment I have given to Colobong and to the Bank, sir.
They do not want to return the payment I have given to Susana
Soriano and that is the beginning of our quarrel."19
We are thus convinced that respondent Reyes had knowledge that
petitioner previously bought the disputed lot from respondent spouses
Mabanta. Why should her father approach petitioner and offer to return to
him the money he paid spouses Mabanta? Obviously, aware of the
previous sale to petitioner, respondent Reyes informed her father about it.
At this juncture, it is reasonable to conclude that what prompted him to go
to petitioners house was his desire to facilitate his daughters acquisition
of the lot, i.e., to prevent petitioner Alejandro from contesting it. He did
not foresee then that petitioner would insist he has a prior right over the
lot.
Now respondent Reyes claims that she is a purchaser in good faith. This is
preposterous. Good faith is something internal. Actually, it is a question of

intention. In ascertaining ones intention, this Court must rely on the

evidence of ones conduct and outward acts. From her actuations as
specified above, respondent Reyes cannot be considered to be in good
faith when she bought the lot.
Moreover, it bears noting that on September 16, 1985, both petitioners
filed with the trial court their complaint involving the lot in question
against respondents. After a month, or on October 17, 1985, respondent
Reyes had the "Deed of Absolute Sale" registered with the Registry of
Property. Evidently, she wanted to be the first one to effect its registration
to the prejudice of petitioners who, although in possession, have not
registered the same. This is another indicum of bad faith.
We have consistently held that "in cases of double sale of immovables,
what finds relevance and materiality is not whether or not the second
buyer was a buyer in good faith but whether or not said second buyer
registers such second sale in good faith, that is, without knowledge of any
defect in the title of the property sold."20 In Salvoro vs. Tanega,21 we had
the occasion to rule that:
"If a vendee in a double sale registers the sale after he has
acquired knowledge that there was a previous sale of the same
property to a third party or that another person claims said
property in a previous sale, the registration will constitute a
registration in bad faith and will not confer upon him any right."
Mere registration of title is not enough, good faith must concur with the
registration. To be entitled to priority, the second purchaser must not only
establish prior recording of his deed, but must have acted in good faith,
without knowledge of the existence of another alienation by the vendor to
the other.22 In the old case of Leung Yee vs. F. L. Strong Machinery, Co. and
Williamson, this Court ruled:
"One who purchases a real estate with knowledge of a defect of
title in his vendor cannot claim that he has acquired title thereto
in good faith as against the true owner of the land or of an interest
therein; and the same rule must be applied to one who has
knowledge of facts which should have put him upon such inquiry
and investigation as might be necessary to acquaint him with the
defects in the title of his vendor. A purchaser cannot close his eyes
to facts which should put a reasonable man upon his guard, and
then claim that he acted in good faith under the belief that there

was no defect in the title of the vendor. His mere refusal to believe
that such a defect exists, or his willful closing of his eyes to the
possibility of the existence of a defect in his vendors title will not
make him an innocent purchaser for value, if it afterwards
develops that the title was in fact defective, and it appears that he
had such notice of the defect as would have led to its discovery
had he acted with that measure of precaution which may
reasonably be required of a prudent man in a like situation. x x x
"23
In fine, we hold that respondent Zenaida Tan-Reyes did not act in good
faith when she bought the lot and had the sale registered.
WHEREFORE, the assailed Decision of the Court of Appeals is REVERSED
and SET ASIDE. The Decision of the trial court is hereby reinstated.
SO ORDERED.

[G.R. No. 151212. September 10, 2003]

TEN FORTY REALTY AND DEVELOPMENT CORP., Represented by its
President, VERONICA G. LORENZANA, petitioner, vs.
MARINA CRUZ,respondent.
DECISION
PANGANIBAN, J.:
In an ejectment suit, the question of ownership may be provisionally
ruled upon for the sole purpose of determining who is entitled to
possession de facto. In the present case, both parties base their alleged
right to possess on their right to own. Hence, the Court of Appeals did not
err in passing upon the question of ownership to be able to decide who
was entitled to physical possession of the disputed land.
The Case
Before us is a Petition for Review [1] under Rule 45 of the Rules of
Court, seeking to nullify the August 31, 2001 Decision [2] and December 19,
2001 Resolution[3] of the Court of Appeals (CA) in CA- GR SP No.
64861. The dispositive portion of the assailed Decision is as follows:
WHEREFORE, premises considered, the petition is hereby DISMISSED and
the Decision dated May 4, 2001 is hereby AFFIRMED. [4]
The
assailed
Reconsideration.

Resolution

denied

petitioner's

Motion

for

The Facts
The facts of the case are narrated by the CA as follows:
A complaint for ejectment was filed by [Petitioner Ten Forty Realty and
Development Corporation] against x x x [Respondent Marina Cruz] before
the Municipal Trial Court in Cities (MTCC) of Olongapo City, docketed as
Civil Case 4269, which alleged that: petitioner is the true and absolute
owner of a parcel of lot and residential house situated in #71 18th Street,
E.B.B. Olongapo City, particularly described as:

A parcel of residential house and lot situated in the above-mentioned

address containing an area of 324 square meters more or less bounded on
the Northeast by 041 (Lot 255, Ts-308); on the Southeast by 044 (Lot 255,
Ts-308); on the Southwest by 043 (Lot 226-A & 18th street) and on the
Northwest by 045 (Lot 227, Ts-308) and declared for taxation purposes in
the name of [petitioner] under T.D. No. 002-4595-R and 002-4596.
having acquired the same on December 5, 1996 from Barbara Galino by
virtue of a Deed of Absolute Sale; the sale was acknowledged by said
Barbara Galino through a 'Katunayan'; payment of the capital gains tax for
the transfer of the property was evidenced by a Certification Authorizing
Registration issued by the Bureau of Internal Revenue; petitioner came to
know that Barbara Galino sold the same property on April 24, 1998 to
Cruz, who immediately occupied the property and which occupation was
merely tolerated by petitioner; on October 16, 1998, a complaint for
ejectment was filed with the Barangay East Bajac-Bajac, Olongapo City but
for failure to arrive at an amicable settlement, a Certificate to File Action
was issued; on April 12, 1999 a demand letter was sent to [respondent] to
vacate and pay reasonable amount for the use and occupation of the
same, but was ignored by the latter; and due to the refusal of
[respondent] to vacate the premises, petitioner was constrained to secure
the services of a counsel for an agreed fee of P5,000.00 as attorneys fee
and P500.00 as appearance fee and incurred an expense of P5,000.00 for
litigation.
In respondents Answer with Counterclaim, it was alleged that: petitioner is
not qualified to own the residential lot in dispute, being a public land;
according to Barbara Galino, she did not sell her house and lot to
petitioner but merely obtained a loan from Veronica Lorenzana; the
payment of the capital gains tax does not necessarily show that the Deed
of Absolute Sale was at that time already in existence; the court has no
jurisdiction over the subject matter because the complaint was filed
beyond the one (1) year period after the alleged unlawful deprivation of
possession; there is no allegation that petitioner had been in prior
possession of the premises and the same was lost thru force, stealth or
violence; evidence will show that it was Barbara Galino who was in
possession at the time of the sale and vacated the property in favor of
respondent; never was there an occasion when petitioner occupied a
portion of the premises, before respondent occupied the lot in April 1998,
she caused the cancellation of the tax declaration in the name of Barbara
Galino and a new one issued in respondents name; petitioner obtained its
tax declaration over the same property on November 3, 1998, seven (7)

months [after] the respondent [obtained hers]; at the time the house and
lot [were] bought by respondent, the house was not habitable, the power
and water connections were disconnected; being a public land, respondent
filed a miscellaneous sales application with the Community Environment
and Natural Resources Office in Olongapo City; and the action for
ejectment cannot succeed where it appears that respondent had been in
possession of the property prior to the petitioner.[5]
In a Decision[6] dated October 30, 2000, the Municipal Trial Court in
Cities (MTCC) ordered respondent to vacate the property and surrender to
petitioner possession thereof. It also directed her to pay, as damages for
its continued unlawful use, P500 a month from April 24, 1999 until the
property was vacated, P5,000 as attorneys fees, and the costs of the suit.
On appeal, the Regional Trial Court[7] (RTC) of Olongapo City (Branch
72) reversed the MTCC. The RTC ruled as follows: 1) respondents entry into
the property was not by mere tolerance of petitioner, but by virtue of a
Waiver and Transfer of Possessory Rights and Deed of Sale in her favor; 2)
the execution of the Deed of Sale without actual transfer of the physical
possession did not have the effect of making petitioner the owner of the
property, because there was no delivery of the object of the sale as
provided for in Article 1428 of the Civil Code; and 3) being a corporation,
petitioner was disqualified from acquiring the property, which was public
land.
Ruling of the Court of Appeals
Sustaining the RTC, the CA held that petitioner had failed to make a
case for unlawful detainer, because no contract -- express or implied -had been entered into by the parties with regard to possession of the
property. It ruled that the action should have been for forcible entry, in
which prior physical possession was indispensable -- a circumstance
petitioner had not shown either.
The appellate court also held that petitioner had challenged the RTCs
ruling on the question of ownership for the purpose of compensating for
the latters failure to counter such ruling.The RTC had held that, as a
corporation, petitioner had no right to acquire the property which was
alienable public land.
Hence, this Petition.[8]

Issues
Petitioner submits the following issues for our consideration:
1. The Honorable Court of Appeals had clearly erred in not
holding that [r]espondents occupation or possession of the
property in question was merely through the tolerance or
permission of the herein [p]etitioner;
[2.] The Honorable Court of Appeals had likewise erred in holding
that the ejectment case should have been a forcible entry
case where prior physical possession is indispensable; and
[3.] The Honorable Court of Appeals had also erred when it ruled
that the herein [r]espondents possession or occupation of
the said property is in the nature of an exercise of
ownership which should put the herein [p]etitioner on
guard.[9]
The Courts Ruling
The Petition has no merit.
First Issue:
Alleged Occupation by Tolerance
Petitioner faults the CA for not holding that the former merely
tolerated respondents occupation of the subject property. By raising this
issue, petitioner is in effect asking this Court to reassess factual
findings. As a general rule, this kind of reassessment cannot be done
through a petition for review on certiorari under Rule 45 of the Rules of
Court, because this Court is not a trier of facts; it reviews only questions of
law.[10] Petitioner has not given us ample reasons to depart from the
general rule.
On the basis of the facts found by the CA and the RTC, we find that
petitioner failed to substantiate its case for unlawful detainer. Admittedly,
no express contract existed between the parties. Not shown either was the
corporations alleged tolerance of respondents possession.

While possession by tolerance may initially be lawful, it ceases to be

so upon the owners demand that the possessor by tolerance vacate the
property.[11] To justify an action for unlawful detainer, the permission or
tolerance must have been present at the beginning of the possession.
[12]
Otherwise, if the possession was unlawful from the start, an action for
unlawful detainer would be
an improper
remedy. Sarona
v.
Villegas[13] elucidates thus:
A close assessment of the law and the concept of the word tolerance
confirms our view heretofore expressed that such tolerance must be
present right from the start of possession sought to be recovered, to
categorize a cause of action as one of unlawful detainer not of forcible
entry. Indeed, to hold otherwise would espouse a dangerous doctrine. And
for two reasons. First. Forcible entry into the land is an open challenge to
the right of the possessor. Violation of that right authorizes the speedy
redress in the inferior court provided for in the rules. If one year from the
forcible entry is allowed to lapse before suit is filed, then the remedy
ceases to be speedy; and the possessor is deemed to have waived his
right to seek relief in the inferior court. Second, if a forcible entry action in
the inferior court is allowed after the lapse of a number of years, then the
result may well be that no action for forcible entry can really prescribe. No
matter how long such defendant is in physical possession, plaintiff will
merely make a demand, bring suit in the inferior court upon a plea of
tolerance to prevent prescription to set in and summarily throw him out of
the land. Such a conclusion is unreasonable. Especially if we bear in mind
the postulates that proceedings of forcible entry and unlawful detainer are
summary in nature, and that the one year time bar to suit is but in
pursuance of the summary nature of the action.[14]
In this case, the Complaint and the other pleadings do not recite
any averment of fact that would substantiate the claim of petitioner that it
permitted or tolerated the occupation of the property by Respondent
Cruz. The Complaint contains only bare allegations that 1) respondent
immediately occupied the subject property after its sale to her, an action
merely tolerated by petitioner;[15] and 2) her allegedly illegal occupation of
the premises was by mere tolerance.[16]
These allegations contradict, rather than support, petitioners theory
that its cause of action is for unlawful detainer. First, these arguments
advance the view that respondents occupation of the property was
unlawful at its inception. Second, they counter the essential requirement
in unlawful detainer cases that petitioners supposed act of sufferance or

tolerance must be present right from the start of a possession that is later
sought to be recovered.[17]
As the bare allegation of petitioners tolerance of respondents
occupation of the premises has not been proven, the possession should be
deemed illegal from the beginning. Thus, the CA correctly ruled that the
ejectment case should have been for forcible entry -- an action that had
already prescribed, however, when the Complaint was filed on May 12,
1999. The prescriptive period of one year for forcible entry cases is
reckoned from the date of respondents actual entry into the land, which in
this case was on April 24, 1998.
Second Issue:
Nature of the Case
Much of the difficulty in the present controversy stems from the legal
characterization
of
the
ejectment
Complaint
filed
by
petitioner. Specifically, was it for unlawful detainer or for forcible entry?
The answer is given in Section 1 of Rule 70 of the Rules of Court,
which we reproduce as follows:
SECTION 1. Who may institute proceedings, and when. - Subject to the
provisions of the next succeeding section, a person deprived of the
possession of any land or building by force, intimidation, threat, strategy,
or stealth, or a lessor, vendor, vendee, or other person against whom the
possession of any land or building is unlawfully withheld after the
expiration or termination of the right to hold possession, by virtue of any
contract, express or implied, or the legal representatives or assigns of any
such lessor, vendor, vendee, or other person, may, at any time within one
(1) year after such unlawful deprivation or withholding of possession, bring
an action in the proper Municipal Trial Court against the person or persons
unlawfully withholding or depriving of possession, or any person or
persons claiming under them, for the restitution of such possession,
together with damages and costs.
While both causes of action deal only with the sole issue of physical
or de facto possession,[18] the two cases are really separate and distinct, as
explained below:

x x x. In forcible entry, one is deprived of physical possession of land or

building by means of force, intimidation, threat, strategy, or stealth. In
unlawful detainer, one unlawfully withholds possession thereof after the
expiration or termination of his right to hold possession under any
contract, express or implied. In forcible entry, the possession is illegal from
the beginning and the basic inquiry centers on who has the prior
possession de facto. In unlawful detainer, the possession was originally
lawful but became unlawful by the expiration or termination of the right to
possess, hence the issue of rightful possession is decisive for, in such
action, the defendant is in actual possession and the plaintiffs cause of
action is the termination of the defendants right to continue in possession.

was for forcible entry, which had already prescribed. Consequently, the
MTCC had no more jurisdiction over the action.

What determines the cause of action is the nature of defendants entry into
the land. If the entry is illegal, then the action which may be filed against
the intruder within one year therefrom is forcible entry. If, on the other
hand, the entry is legal but the possession thereafter became illegal, the
case is one of unlawful detainer which must be filed within one year from
the date of the last demand.[19]

Alleged Acts of Ownership

It is axiomatic that what determines the nature of an action as well as

which court has jurisdiction over it are the allegations in the
complaint[20] and the character of the relief sought.[21]
In its Complaint, petitioner alleged that, having acquired the subject
property from Barbara Galino on December 5, 1996, [22] it was the true and
absolute owner[23] thereof; that Galino had sold the property to Respondent
Cruz on April 24, 1998;[24] that after the sale, the latter immediately
occupied the property, an action that was merely tolerated by petitioner;
[25]
and that, in a letter given to respondent on April 12, 1999, [26] petitioner
had demanded that the former vacate the property, but that she refused
to do so.[27] Petitioner thereupon prayed for judgment ordering her to
vacate the property and to pay reasonable rentals for the use of the
premises, attorneys fees and the costs of the suit.[28]
The above allegations appeared to show the elements of unlawful
detainer. They also conferred initiatory jurisdiction on the MTCC, because
the case was filed a month after the last demand to vacate -- hence,
within the one-year prescriptive period.
However, what was actually proven by petitioner was that possession
by respondent had been illegal from the beginning. While the Complaint
was crafted to be an unlawful detainer suit, petitioners real cause of action

The appellate court, therefore, did not err when it ruled that
petitioners Complaint for unlawful detainer was a mere subterfuge or a
disguised substitute action for forcible entry, which had already
prescribed. To repeat, to maintain a viable action for forcible entry, plaintiff
must have been in prior physical possession of the property; this is an
essential element of the suit.[29]
Third Issue:

Petitioner next questions the CAs pronouncement that respondents

occupation of the property was an exercise of a right flowing from a claim
of ownership. It submits that the appellate court should not have passed
upon the issue of ownership, because the only question for resolution in
an ejectment suit is that of possession de facto.
Clearly, each of the parties claimed the right to possess the disputed
property because of alleged ownership of it. Hence, no error could have
been imputed to the appellate court when it passed upon the issue of
ownership only for the purpose of resolving the issue of possession de
facto.[30] The CAs holding is moreover in accord with jurisprudence and the
law.
Execution of a Deed of Sale
Not Sufficient as Delivery
In a contract of sale, the buyer acquires the thing sold only upon its
delivery in any of the ways specified in Articles 1497 to 1501, or in any
other manner signifying an agreement that the possession is transferred
from the vendor to the vendee.[31] With respect to incorporeal property,
Article 1498 lays down the general rule: the execution of a public
instrument shall be equivalent to the delivery of the thing that is the
object of the contract if, from the deed, the contrary does not appear or
cannot be clearly inferred.
However, ownership is transferred not by contract but by tradition or
delivery.[32] Nowhere in the Civil Code is it provided that the execution of a

Deed of Sale is a conclusive presumption of delivery of possession of a

piece of real estate.[33]
This Court has held that the execution of a public instrument gives
rise only to a prima facie presumption of delivery. Such presumption is
destroyed when the delivery is not effected because of a legal
impediment.[34] Pasagui v. Villablanca[35] had earlier ruled that such
constructive or symbolic delivery, being merely presumptive, was deemed
negated by the failure of the vendee to take actual possession of the land
sold.
It is undisputed that petitioner did not occupy the property from the
time it was allegedly sold to it on December 5, 1996 or at any time
thereafter. Nonetheless, it maintains that Galinos continued stay in the
premises from the time of the sale up to the time respondents occupation
of the same on April 24, 1998, was possession held on its behalf and had
the effect of delivery under the law.[36]
Both the RTC and the CA disagreed. According to the RTC, petitioner
did not gain control and possession of the property, because Galino had
continued to exercise ownership rights over the realty. That is, she had
remained in possession, continued to declare it as her property for tax
purposes and sold it to respondent in 1998.
For its part, the CA found it highly unbelievable that petitioner -which claims to be the owner of the disputed property -- would tolerate
possession of the property by respondent from April 24, 1998 up to
October 16, 1998. How could it have been so tolerant despite its
knowledge that the property had been sold to her, and that it was by
virtue of that sale that she had undertaken major repairs and
improvements on it?
Petitioner should have likewise been put on guard by respondents
declaration of the property for tax purposes on April 23, 1998, [37] as
annotated in the tax certificate filed seven months later.[38] Verily, the tax
declaration represented an adverse claim over the unregistered property
and was inimical to the right of petitioner.
Indeed, the above circumstances derogated its claim of control and
possession of the property.
Order of Preference in Double

Sale of Immovable Property

The ownership of immovable property sold to two different buyers at
different times is governed by Article 1544 of the Civil Code, which reads
as follows:
Article 1544. x x xShould it be immovable property, the ownership shall
belong to the person acquiring it who in good faith first recorded it in the
Registry of Property.
Should there be no inscription, the ownership shall pertain to the person
who in good faith was first in possession; and, in the absence thereof, to
the person who presents the oldest title, provided there is good faith.
Galino allegedly sold the property in question to petitioner on
December 5, 1996 and, subsequently, to respondent on April 24,
1998. Petitioner thus argues that being the first buyer, it has a better right
to own the realty. However, it has not been able to establish that its Deed
of Sale was recorded in the Registry of Deeds of Olongapo City. [39] Its claim
of an unattested and unverified notation on its Deed of Absolute Sale [40] is
not equivalent to registration. It admits that, indeed, the sale has not been
recorded in the Registry of Deeds.[41]
In the absence of the required inscription, the law gives preferential
right to the buyer who in good faith is first in possession. In determining
the question of who is first in possession, certain basic parameters have
been established by jurisprudence.
First, the possession mentioned in Article 1544 includes not only
material but also symbolic possession. [42] Second, possessors in good faith
are those who are not aware of any flaw in their title or mode of
acquisition.[43] Third, buyers of real property that is in the possession of
persons other than the seller must be wary -- they must investigate the
rights of the possessors. [44] Fourth, good faith is always presumed; upon
those who allege bad faith on the part of the possessors rests the burden
of proof.[45]
Earlier, we ruled that the subject property had not been delivered to
petitioner; hence, it did not acquire possession either materially or
symbolically. As between the two buyers, therefore, respondent was first in
actual possession of the property.

Petitioner has not proven that respondent was aware that her mode
of acquiring the property was defective at the time she acquired it from
Galino. At the time, the property -- which was public land -- had not been
registered in the name of Galino; thus, respondent relied on the tax
declarations thereon. As shown, the formers name appeared on the tax
declarations for the property until its sale to the latter in 1998. Galino was
in fact occupying the realty when respondent took over possession. Thus,
there was no circumstance that could have placed the latter upon inquiry
or required her to further investigate petitioners right of ownership.

that alienable and disposable land of the public domain held and occupied
by a possessor -- personally or through predecessors-in-interest, openly,
continuously, and exclusively for 30 years -- is ipso jure converted to
private property by the mere lapse of time.[49]
In view of the foregoing, we affirm the appellate courts ruling that
respondent is entitled to possession de facto. This determination,
however, is only provisional in nature.[50] Well-settled is the rule that an
award of possession de facto over a piece of property does not
constitute res judicata as to the issue of its ownership.[51]

Disqualification from Ownership

of Alienable Public Land
Private corporations are disqualified from acquiring lands of the public
domain, as provided under Section 3 of Article XII of the Constitution,
which we quote:
Sec. 3. Lands of the public domain are classified into agricultural, forest or
timber, mineral lands, and national parks. Agricultural lands of the public
domain may be further classified by law according to the uses to which
they may be devoted. Alienable lands of the public domain shall be limited
to agricultural lands. Private corporations or associations may not hold
such alienable lands of the public domain except by lease, for a period not
exceeding twenty-five years, and not to exceed one thousand hectares in
area. Citizens of the Philippines may not lease not more than five hundred
hectares, or acquire not more than twelve hectares thereof by purchase,
homestead, or grant. x x x. (Italics supplied)
While corporations cannot acquire land of the public domain, they can
however acquire private land. [46] Hence, the next issue that needs to be
resolved is the determination of whether the disputed property is private
land or of the public domain.
According to the certification by the City Planning and Development
Office of Olongapo City, the contested property in this case is alienable
and disposable public land.[47] It was for this reason that respondent filed a
miscellaneous sales application to acquire it.[48]
On the other hand, petitioner has not presented proof that, at the
time it purchased the property from Galino, the property had ceased to be
of the public domain and was already private land. The established rule is

WHEREFORE,
this
Petition
is DENIED and
Decision AFFIRMED. Costs against petitioner.

the

assailed

G.R. No. 115158 September 5, 1997

EMILLA M. URACA, CONCORDIA D. CHING and ONG SENG,
represented by ENEDINO H. FERRER,petitioners,
vs.
COURT OF APPEALS, JACINTO VELEZ, JR., CARMEN VELEZ TING,
AVENUE MERCHANDISING, INC., FELIX TING AND ALFREDO
GO, respondents.
PANGANIBAN, J.:
Novation is never presumed; it must be sufficiently established that a valid
new agreement or obligation has extinguished or changed an existing one.
The registration of a later sale must be done in good faith to entitle the
registrant to priority in ownership over the vendee in an earlier sale.
Statement of the Case
These doctrines are stressed by this Court as it resolves the instant
petition challenging the December 28, 1993 Decision 1 of Respondent
Court of Appeals 2 in CA-G.R. SP No. 33307, which reversed and set aside
the judgment of the Regional Trial Court of Cebu City, Branch 19, and
entered a new one dismissing the petitioners' complaint. The dispositive
portion of the RTC decision reads: 3
WHEREFORE, judgment is hereby rendered:
1) declaring as null and void the three (3) deeds of sale executed
by the Velezes to Felix C. Ting, Manuel Ting and Alfredo Go;
2) ordering Carmen Velez Ting and Jacinto M. Velez, Jr. to execute
a deed of absolute sale in favor of Concordia D. Ching and Emilia
M. Uraca for the properties in question for P1,400,000.00, which
sum must be delivered by the plaintiffs to the Velezes
immediately after the execution of said contract;
3) ordering Carmen Velez Ting and Jacinto M. Velez, Jr. to
reimburse Felix C. Ting, Manuel C. Ting and Alfredo Go whatever
amount the latter had paid to the former;
4) ordering Felix C. Ting, Manuel C. Ting and Alfredo Go to deliver
the properties in question to the plaintiffs within fifteen (15) days
from receipt of a copy of this decision;

5) ordering all the defendants to pay, jointly and severally, the

plaintiffs the sum of P20,000.00 as attorney's fees.
SO ORDERED.

The Antecedent Facts

The facts narrated by the Court of Appeals are as follows: 4
The Velezes (herein private respondents) were the owners
of the lot and commercial building in question located at
Progreso and M.C. Briones Streets in Cebu City.
Herein (petitioners) were the lessees of said commercial
building. 5
On July 8, 1985, the Velezes through Carmen Velez Ting
wrote a letter to herein (petitioners) offering to sell the
subject property for P1,050,000.00 and at the same time
requesting (herein petitioners) to reply in three days.
On July 10, 1985, (herein petitioners) through Atty.
Escolastico Daitol sent a reply-letter to the Velezes
accepting the aforesaid offer to sell.
On July 11, 1985, (herein petitioner) Emilia Uraca went to
see Carmen Ting about the offer to sell but she was told by
the latter that the price was P1,400,000.00 in cash or
manager's check and not P1,050,000.00 as erroneously
stated in their letter-offer after some haggling. Emilia
Uraca agreed to the price of P1,400,000.00 but counterproposed that payment be paid in installments with a
down payment of P1,000,000.00 and the balance of
P400,000 to be paid in 30 days. Carmen Velez Ting did not
accept the said counter-offer of Emilia Uraca although this
fact is disputed by Uraca.
No payment was made by (herein petitioners) to the
Velezes on July 12, 1985 and July 13, 1985.
On July 13, 1985, the Velezes sold the subject lot and
commercial building to the Avenue Group (Private

Respondent Avenue Merchandising Inc.) for P1,050,000.00

net of taxes, registration fees, and expenses of the sale.
At the time the Avenue Group purchased subject property
on July 13, 1985 from the Velezes, the certificate of title of
the said property was clean and free of any annotation of
adverse claims or lis pendens.
On July 31, 1985 as aforestated, herein (petitioners) filed
the instant complaint against the Velezes.
On August 1, 1985, (herein petitioners) registered a notice
of lis pendens over the property in question with the Office
of the Register of Deeds. 6
On October 30, 1985, the Avenue Group filed an ejectment
case against (herein petitioners) ordering the latter to
vacate the commercial building standing on the lot in
question.
Thereafter, herein (petitioners) filed an amended
complaint impleading the Avenue Group as new
defendants (after about 4 years after the filing of the
original complaint).
The trial court found two perfected contracts of sale between the Velezes
and the petitioners involving the real property in question. The first sale
was for P1,050,000.00 and the second was for P1,400,000.00. In respect
to the first sale, the trial court held that "[d]ue to the unqualified
acceptance by the plaintiffs within the period set by the Velezes, there
consequently came about a meeting of the minds of the parties not only
as to the object certain but also as to the definite consideration or cause
of the contract." 7 And even assuming arguendo that the second sale was
not perfected, the trial court ruled that the same still constituted a mere
modificatory novation which did not extinguish the first sale. Hence, the
trial court held that "the Velezes were not free to sell the properties to the
Avenue Group." 8 It also found that the Avenue Group purchased the
property in bad faith. 9
Private respondents appealed to the Court of Appeals. As noted earlier,
the CA found the appeal meritorious. Like the trial court, the public
respondent held that there was a perfected contract of sale of the

property for P1,050,000.00 between the Velezes and herein petitioners. It

added, however, that such perfected contract of sale was subsequently
novated. Thus, it ruled: "Evidence shows that that was the original
contract. However, the same was mutually withdrawn, cancelled and
rescinded by novation, and was therefore abandoned by the parties when
Carmen Velez Ting raised the consideration of the contract [by]
P350,000.00, thus making the price P1,400,000.00 instead of the original
price of P1,050,000.00. Since there was no agreement as to the 'second'
price offered, there was likewise no meeting of minds between the parties,
hence, no contract of sale was perfected." 10 The Court of Appeals added
that, assuming there was agreement as to the price and a second contract
was perfected, the later contract would be unenforceable under the
Statute of Frauds. It further held that such second agreement, if there was
one, constituted a mere promise to sell which was not binding for lack of
acceptance or a separate consideration. 11
The Issues
Petitioners allege the following "errors" in the Decision of Respondent
Court:
I
Since it ruled in its decision that there was no meeting of
the minds on the "second" price offered (P1,400,000.00),
hence no contract of sale was perfected, the Court of
Appeals erred in not holding that the original written
contract to buy and sell for P1,050,000.00 the Velezes
property continued to be valid and enforceable pursuant
to Art. 1279 in relation with Art. 1479, first paragraph, and
Art. 1403, subparagraph 2 (e) of the Civil Code.
II
The Court of Appeals erred in not ruling that petitioners
have better rights to buy and own the Velezes' property for
registering their notice of lis pendens ahead of the Avenue
Group's registration of their deeds of sale taking into
account Art. 1544, 2nd paragraph, of the Civil Code. 12
The Court's Ruling

The petition is meritorious.

First Issue: No Extinctive Novation
The lynchpin of the assailed Decision is the public respondent's conclusion
that the sale of the real property in controversy, by the Velezes to
petitioners for P1,050,000.00, was extinguished by novation after the said
parties negotiated to increase the price to P1,400,000.00. Since there was
no agreement on the sale at the increased price, then there was no
perfected contract to enforce. We disagree.
The Court notes that the petitioners accepted in writing and without
qualification the Velezes' written offer to sell at P1,050,000.00 within the
three-day period stipulated therein. Hence, from the moment of
acceptance on July 10, 1985, a contract of sale was perfected since
undisputedly the contractual elements of consent, object certain and
cause concurred. 13 Thus, this question is posed for our resolution: Was
there a novation of this perfected contract?
Article 1600 of the Civil Code provides that "(s)ales are extinguished by
the same causes as all other obligations, . . . ." Article 1231 of the same
Code states that novation is one of the ways to wipe out an obligation.
Extinctive novation requires: (1) the existence of a previous valid
obligation; (2) the agreement of all the parties to the new contract; (3) the
extinguishment of the old obligation or contract; and (4) the validity of the
new one. 14 The foregoing clearly show that novation is effected only when
a new contract has extinguished an earlier contract between the same
parties. In this light, novation is never presumed; it must be proven as a
fact either by express stipulation of the parties or by implication derived
from an irreconcilable incompatibility between old and new obligations or
contracts. 15 After a thorough review of the records, we find this element
lacking in the case at bar.
As aptly found by the Court of Appeals, the petitioners and the Velezes did
not reach an agreement on the new price of P1,400,000.00 demanded by
the latter. In this case, the petitioners and the Velezes clearly did not
perfect a new contract because the essential requisite of consent was
absent, the parties having failed to agree on the terms of the payment.
True, petitioners made a qualified acceptance of this offer by proposing
that the payment of this higher sale price be made by installment, with
P1,000,000.00 as down payment and the balance of P400,000.00 payable
thirty days thereafter. Under Article 1319 of the Civil Code, 16 such

qualified acceptance constitutes a counter-offer and has the ineludible

effect of rejecting the Velezes' offer. 17 Indeed, petitioners' counter-offer
was not accepted by the Velezes. It is well-settled that "(a)n offer must be
clear and definite, while an acceptance must be unconditional and
unbounded, in order that their concurrence can give rise to a perfected
contract." 18 In line with this basic postulate of contract law, "a definite
agreement on the manner of payment of the price is an essential element
in the formation of a binding and enforceable contract of sale." 19 Since the
parties failed to enter into a new contract that could have extinguished
their previously perfected contract of sale, there can be no novation of the
latter. Consequently, the first sale of the property in controversy, by the
Velezes to petitioners for P1,050,000.00, remained valid and existing.
In view of the validity and subsistence of their original contract of sale as
previously discussed, it is unnecessary to discuss public respondent's
theses that the second agreement is unenforceable under the Statute of
Frauds and that the agreement constitutes a mere promise to sell.
Second Issue: Double Sale of an Immovable
The foregoing holding would have been simple and straightforward. But
Respondent Velezes complicated the matter by selling the same property
to the other private respondents who were referred to in the assailed
Decision as the Avenue Group.
Before us therefore is a classic case of a double sale first, to the
petitioner; second, to the Avenue Group. Thus, the Court is now called
upon to determine which of the two groups of buyers has a better right to
said property.
Article 1544 of the Civil Code provides the statutory solution:
xxx xxx xxx
Should it be immovable property, the ownership shall
belong to the person acquiring it who in good faith first
recorded it in the Registry of Property.
Should there be no inscription, the ownership shall pertain
to the person who in good faith was first in the possession;
and, in the absence thereof, to the person who presents
the oldest title, provided there is good faith.

Under the foregoing, the prior registration of the disputed property by the
second buyer does not by itself confer ownership or a better right over the
property. Article 1544 requires that such registration must be coupled with
good faith. Jurisprudence teaches us that "(t)he governing principle
is primus tempore, potior jure (first in time, stronger in right). Knowledge
gained by the first buyer of the second sale cannot defeat the first buyer's
rights except where the second buyer registers in good faith the second
sale ahead of the first, as provided by the Civil Code. Such knowledge of
the first buyer does not bar her from availing of her rights under the law,
among them, to register firsther purchase as against the second buyer.
But in converso, knowledge gained by the second buyer of the first sale
defeats his rights even if he is first to register the second sale, since such
knowledge taints his prior registration with bad faith. This is the price
exacted by Article 1544 of the Civil Code for the second buyer being able
to displace the first buyer; that before the second buyer can obtain priority
over the first, he must show that he acted in good faith throughout (i.e, in
ignorance of the first sale and of the first buyer's rights) from the time
of acquisition until the title is transferred to him by registration or failing
registration, by delivery of possession." 20 (Emphasis supplied)
After a thorough scrutiny of the records of the instant case, the Court finds
that bad faith tainted the Avenue Group's purchase on July 13, 1985 of the
Velezes' real property subject of this case, and the subsequent registration
thereof on August 1, 1995. The Avenue Group had actual knowledge of the
Velezes' prior sale of the same property to the petitioners, a fact
antithetical to good faith. For a second buyer like the Avenue Group to
successfully invoke the second paragraph, Article 1544 of the Civil Code, it
must possess good faith from the time of the sale in its favor until the
registration of the same. This requirement of good faith the Avenue Group
sorely failed to meet. That it had knowledge of the prior sale, a fact
undisputed by the Court of Appeals, is explained by the trial court thus:
The Avenue Group, whose store is close to the properties
in question, had known the plaintiffs to be the lesseeoccupants thereof for quite a time. Felix Ting admitted to
have a talk with Ong Seng in 1983 or 1984 about the
properties. In the cross-examination, Manuel Ting also
admitted that about a month after Ester Borromeo
allegedly offered the sale of the properties Felix Ting went
to see Ong Seng again. If these were so, it can be safely
assumed that Ong Seng had consequently told Felix about
plaintiffs' offer on January 11, 1985 to buy the properties

for P1,000,000.00 and of their timely acceptance on July

10, 1985 to buy the same at P1,050,000.00.
The two aforesaid admissions by the Tings, considered
together with Uraca's positive assertion that Felix Ting met
with her on July 11th and who was told by her that the
plaintiffs had transmitted already to the Velezes their
decision to buy the properties at P1,050,000.00, clinches
the proof that the Avenue Group had prior knowledge of
plaintiffs' interest. Hence, the Avenue Group defendants,
earlier forewarned of the plaintiffs' prior contract with the
Velezes, were guilty of bad faith when they proceeded to
buy the properties to the prejudice of the plaintiffs. 21
The testimony of Petitioner Emilia Uraca supports this finding of the trial
court. The salient portions of her testimony follow:
BY ATTY. BORROMEO: (To witness)
Q According to Manuel Ting in his testimony,
even if they know, referring to the Avenue
Group, that you were tenants of the property in
question and they were neighbors to you, he did
not inquire from you whether you were
interested in buying the property, what can you
say about that?
A It was Felix Ting who approached me and
asked whether I will buy the property, both the
house and the land and that was on July 10,
1985.
ATTY BORROMEO: (To witness)
Q What was your reply, if any?
A Yes, sir, I said we are going to buy this
property because we have stayed for a long
time there already and we have a letter from
Carmen Ting asking us whether we are going to
buy the property and we have already given our
answer that we are willing to buy.
COURT: (To witness)

Q What do you mean by that, you mean you

told Felix Ting and you showed him that letter of
Carmen Ting?
WITNESS:
A We have a letter of Carmen Ting where she
offered to us for sale the house and lot and I
told him that I have already agreed with
Concordia Ching, Ong Seng and my self that we
buy the land. We want to buy the land and the
building. 22

We see no reason to disturb the factual finding of the trial court that the
Avenue Group, prior to the registration of the property in the Registry of
Property, already knew of the first sale to petitioners. It is hornbook
doctrine that "findings of facts of the trial court, particularly when affirmed
by the Court of Appeals, are binding upon this Court" 23save for
exceptional
circumstances 24 which we do not find in the factual milieu of the present
case. True, this doctrine does not apply where there is a variance in the
factual findings of the trial court and the Court of Appeals. In the present
case, the Court of Appeals did not explicitly sustain this particular holding
of the trial court, but neither did it controvert the same. Therefore,
because the registration by the Avenue Group was in bad faith, it
amounted to no "inscription" at all. Hence, the third and not the second
paragraph of Article 1544 should be applied to this case. Under this
provision, petitioners are entitled to the ownership of the property
because they were first in actual possession, having been the property's
lessees and possessors for decades prior to the sale.
Having already ruled that petitioners' actual knowledge of the first sale
tainted their registration, we find no more reason to pass upon the issue of
whether the annotation of lis pendens automatically negated good faith in
such registration.
WHEREFORE, the petition is GRANTED. The assailed Decision of the Court
of Appeals is hereby SET ASIDE and the dispositive portion of the trial
court's decision dated October 19, 1990 is REVIVED with the following
MODIFICATION the consideration to be paid under par. 2 of the
disposition is P1,050,000.00 and not P1,400,000.00. No Costs.
SO ORDERED.

G.R. No. 118347

October 24, 1996

VICENTE LIM and MICHAEL, LIM, petitioners,

vs.
COURT OF APPEALS and LIBERTY H. LUNA, respondents.

MENDOZA, J.:p
Private respondent Liberty Luna is the owner of a piece of land located at
the corner of G. Araneta Avenue and Quezon Avenue in Quezon City. The
land, consisting of 1,013.6 square meters, is covered by TCT No. 193230 of
Registry of Deeds of Quezon City. On September 2, 1988 private
respondent sold the land to petitioners Vicente and Michael Lim for
P3,547,600.00. As prepared by petitioners' broker, Atty. Rustico Zapata of
the Zapata Realty Company, the receipt embodying the agreement 1 read
as follows:
RECEIPT
RECEIVED from ZAPATA REALTY CO. INC., through Mr. Edmundo Kaimo of
101 Building, Metrobank Cashier's Check No. 020583, Dasmarias branch,
in the sum of TWO HUNDRED THOUSAND (P200,000.00) PESOS, as earnest
money for the purchase of a parcel of land at the corner of G. Araneta
Avenue and Quezon Avenue, Quezon City, with an area of 1,013.6 sq. m.
covered by TCT 193230, Registry of Deeds for Quezon City, at the price of
P3,547,600.00, subject to the following conditions:
1.

This sum of P200,000.00 shall form part of the purchase price;

2.
The balance of P3,347,600.00 shall be paid in full after the
squatters/occupants have totally vacated the premises;
3.
The
seller
assumes
full
responsibility
to
eject
the
squatters/occupants within said period of sixty (60) days, from the date of
receipt of the earnest money; and in case the seller shall fail in her
commitment to ejct the squatters/occupants within said period, the seller
shall refund to the buyer this sum of P200,000.00[plus another sum of
ONE HUNDRED THOUSAND (P100,000.00) PESOS as liquidated damages];
however, if the buyer shall fail to pay the balance after the seller has
ejected the squatters/occupants, this sum of P200,000.00 shall be
forfeited by the seller;
4.
Capital gains tax, documentary stamps tax and broker's
commission shall be for seller's account while transfer and registration
fees shall be for buyer's account.
5.
That Zapata Realty Co. Inc. and Edmundo F. Kaimo are the
exclusive brokers of the buyers Vicente & Michael Lim.

6.
Buyer assumes responsibility of the premises immediately upon
eviction of the squatters.
Quezon City, September 2, 1988.
(SGD.) LIBERTY H. LUNA
(Seller)
WITNESSED BY:
(SGD.) EDMUNDO KAIMO
However, when private respondent signed the receipt, she crossed out the
bracketed portion in paragraph 3 providing for the payment by private
respondent of the amount of P100,000.00 as liquidated damages in the
event she failed to eject the squatter sixty (60) days after the signing of
the agreement. Thereafter, a check for P200,000.00 was given to private
respondent as earnest money, leaving a balance of P3,347,600 to be paid
in full after the squatters are ejected.
Private respondent Luna failed to eject the squatters from the land despite
her alleged efforts to do so. It appears that private respondent asked the
help of a building official and a city engineer to effect ejectment. 2
Nonetheless, petitioners did not demand the return of their earnest
money.
On January 17, 1989, the parties met at the office of Edmundo Kaimo to
negotiate a price increase to facilitate the ejectment of the squatters. The
parties agreed to an increase of P500.00 per square meter, by rounding off
the total purchase price to P4,000,000.00, with the remaining 13.6 square
meters of the 1,013.6 square meters given as a discount. Less the
P200,000.00 given as earnest money, the balance to be paid by
petitioners was P3,800,000.00.
After a few days, private respondent tried to return the earnest money
alleging her failure to eject the squatters. She claimed that as a result of
her failure to remove the squatters from the land, the contract of sale
ceased to exist and she no longer hand the obligation to sell and deliver
her property to petitioners. As petitioners had refused to accept the refund
of the earnest money, private respondent wrote them of February 22,
1989 that the amount would be deposited in court by consignation. On
March 10, 1989, private respondent filed a complaint for consignation
against petitioners.
Private respondent alleged that it was her obligation to return the earnest
money under paragraph 3 of the receipt since the condition of ejecting the
squatters had not been fulfilled but petitioners unjustly refused to accept
the refund. She claimed that although she tried her best to eject the
squatters, she failed in her efforts.

Petitioners, on other hand, argued in their answer that the legal requisites
for a valid consignation were not present and, therefore, the consignation
was improper. They claimed that private respondent never really intended
to eject the squatters as, evidenced by the absence of a case for
ejectment. Petitioners charged that private respondent had used her own
failure as an excuse to get out of her contract.

3.
Plaintiff is ordered to pay the defendants the sum of P500,000.00
as moral damages.
4.
Plaintiff to pay defendants the sum of P50,000.00 by way of
attorney's fees.
5.

Private respondent testified that she had wanted to return the earnest
money after realizing that she could not successfully eject the squatters
but that she was not able to do so because petitioners' broker, Zapata
Realty Company, refused to give her petitioners' address. 3 In her cross
examination, she claimed that the primary reason for the January 17, 1989
meeting was for her to return the money and to withdraw from the sale
and that the idea of increasing the price came from petitioners to convince
her to continue with the sale. 4 She later admitted, however, that the price
increase and decision to proceed with the sale were mutually agreed upon
by her and petitioner Vicente Lim. 5 Her admission was confirmed by her
broker, Edmundo Kaimo, who testified 6 that the purpose of the meeting
was to discuss ways of carrying out the sale, considering that private
respondent was having difficulty ejecting the squatters and that what he
and private respondent proposed to petitioners was to increase the
purchase price to facilitate the ejectment.
Testifying in their turn, petitioner Vicente Lim denied that the January 17,
1989 meeting was held at their instance. 7 He said that he was reluctant
to agree to the price increase but was prevailed upon to do so by his
broker, Zapata Realty Company, and by Edmundo Kaimo. This testimony
was corroborated by Atty. Rustico Zapata and Francisco Zapata of the
Zapata Realty Company.
On December 28, 1992 the trial court 8 rendered a decision holding that
there was a perfected contract of sale between the parties and that
pursuant to Art. 1545 of the Civil Code, although the failure of private
respondent to eject the squatters was a breach of warranty, the
performance of warranty could be waived by the buyer, as petitioners did
in this case. It found private respondent to have acted in bad faith by not
exerting earnest efforts to eject the squatters, in order to get out of the
contract. The dispositive portion of its decision reads:
WHEREFORE, under cool reflection and prescinding from the foregoing,
judgment is rendered in favor of the defendants and against plaintiff:
1.

The complaint is dismissed.

2.
Perforce, plaintiff is ordered to comply with the Receipt Agreement
dated September 02, 1988 regarding the sale to the defendants of the
property covered by Transfer Certificate of Title No. T-193230 of the
Registry of Deeds of Quezon City, upon payment by the defendants of the
balance of P3,800,000.00.

Plaintiff to pay the cost.

SO ORDERED.
The private respondent appealed to the Court of Appeals, which
reversed 9 the trial court and allowed the complaint for consigantion. It
held that as a result of the non-fulfillment of the condition of ejecting the
squatters, petitioners lost the right to demand from the private respondent
the sale of the land to them. The appellate court described the sale in this
case as a "contract with a condition obligation" whereby the private
respondent's obligation to sell and deliver and the petitioners' obligation
to pay the balance of the purchase price depended on the fulfillment of
the condition that the squatters be removed within 60 days.
The Court of Appeals held:
Under such condition, upon the ejectment of the squatters plaintiff would
acquire the right to demand that defendants proceed with the sale and
pay the balance of the purchase price; and, on the hand, should the event
not happen, defendants would lose the right they had acquired by giving
the earnest money to plaintiff to demand that the latter sell said land to
them.
It also ruled that consignation was proper as the obligation to refund
earnest money was a clear debt and that contrary to the finding of the
trial court, the facts show that private respondent exerted earnest efforts
to eject the squatters and was, therefore, not in bad faith.
The petitioners filed this petition for review on the following grounds:
I.
THE RULING OF THE COURT OF APPEALS THAT "THE NONFULFILLMENT OF THE CONDITION OF EJECTING THE SQUATTERS RESULTED
IN DEFENDANTS' LOSING THE RIGHT (ACQUIRED BY VIRTUE OF THE
EARNEST MONEY) TO DEMAND THAT PLAINTIFF SELL THE LAND TO THEM"
IS PATENTLY AGAINST THE SPECIFIC LAW ON SALES, AND IS A DISTORTED
AND CLEARLY ERRONEOUS APPLICATION OF THE GENERAL PROVISIONS OF
THE LAW ON OBLIGATIONS AND CONTRACTS.
II.
THE RULING OF THE COURT OF APPEALS IS A DISTORTION OF THE
CONTRACT BETWEEN THE PARTIES, WAY OF JUSTICE ITSELF BECAUSE IT
REWARDS RATHER THAN SANCTIONS THE NON-PERFORMANCE OF A
CONTRACTED OBLIGATION.

III.
THE QUESTION OF WHETHER OR NOT RESPONDENT LUNA
EXERTED EARNEST EFFORTS TO EJECT THE SQUATTERS DOES NOT
PERTAIN TO THE ISSUE OF THE PROPRIETY OF CONSIGNATION BUT REFERS
TO THE MATTER OF WHETHER OR NOT RESPONDENT LUNA WAS IN BAD
FAITH AND IS THEREFORE LIABLE FOR DAMAGES INFLICTED UPON THE
PETITIONERS; AND THE RULING THAT SUCH EARNEST EFFORTS WAS
PRESENT IS CONTRARY TO UNCONTRADICTED EVIDENCE.
The petition is well, taken. The first question is whether as a result of
private respondent's failure to eject the squatters from the land,
petitioners, as the Court of Appeals ruled, lost the right to demand that
the land be sold to them. we hold that they did not and that the appellate
court erred in holding otherwise. The agreement, as quoted above, shows
a perfected contract of sale. Under Art. 1475 of the Civil Code, there is a
perfected contract of sale if there is a meeting of the minds on the subject
and the price. A sale is a consensual contract requiring only the consent of
the parties on these two points. In this case, the parties agreed on the
subject the 1,013.6 square meter lot and on the purchase price of
P4,000,000.00. No particular form is required for the validity of their
contract and, therefore, upon its perfection, the parties can reciprocally
demand performance of their respective obligations. 10
Indeed, the earnest money given is proof of the perfection of the contract.
As Art. 1482 of the Civil Code states, "Whenever earnest money is given in
a contract of sale, it shall be considered as part of the price and as proof
of the perfection of the contract." This perfected contract imposed
reciprocal obligations on the parties. Petitioners' obligation was to pay the
balance of the price, while private respondent's obligation was to deliver
the property to petitioners upon payment of the price. I is true that private
respondent undertook to eject the squatters before delivery of the
property within a certain period and that for her failure to carry out her
obligation she could be obliged to do so depends on petitioners who can
waive the condition and opt to proceed with the sale instead.
Private respondent Luna contends that as condition of ejecting the
squatters was not met, she no longer has an obligation to proceed with
the sale of her lot. This contention is erroneous. Private respondent fails to
distinguish between a condition imposed on the perfection of the contract
and a condition imposed on the performance of an obligation. Failure to
comply with first condition results in the failure of a contract, while failure
to comply with the second condition only gives the other party the option
either to refuse to proceed with the sale or to waive the condition. Thus,
Art. 1545 of the Civil Code states:
Art. 1545.
Where the obligation of either party to a contract of sale is
subject to any condition which is not performed, such party may refuse to
proceed with the contract or her may waiver performance of the condition.
If the other party has promised that the condition should happen or be
performed, such first mentioned party may also treat the nonperformance
of the condition as a breach of warranty.

Where the ownership in the things has not passed, the buyer may treat
the fulfillment by the seller of his obligation to deliver the same as
described and as warranted expressly or by implication in the contract of
sale as a condition of the obligation of the buyer to perform his promise to
accept and pay for the thing. (Emphasis added)
In this case, there is already a perfected contract. The condition was
imposed only on the performance of the obligation. Hence, petitioners
have the right to choose whether to demand the return of P200,000.00
which they have paid as earnest money or to proceed with the sale. They
have chosen to proceed with the sale and private respondent cannot
refuse to do so.
Indeed, private respondent is not the injured party. She cannot rescind the
contract without violating the principle of mutuality of contracts, which
prohibits allowing the validity and performance of contracts to be left to
the will of one of the parties. 11 Thus in a case 12 on all fours with this
case, this Court held:
Under the agreement, private respondent is obligated to evict the
squatters on the property. The ejectment of the squatters is a condition
the operative act of which sets into motion the period of compliance by
petitioner of his own obligation, i.e., to pay the balance of the purchase
price. Private respondent's failure "to remove the squatters from the
property" within the stipulated period gives petitioner the right to either
refuse to proceed with the agreement or waive that condition in
consonance with Article 1545 of the Civil Code. This option clearly belongs
to petitioner and not to private respondent. 13
....
In any case, private respondent's action for rescission is not warranted.
She is not the injured party. The right of resolution of a party to an
obligation under Article 1191 of the Civil Code is predicated on a breach of
faith by the other party that violates the reciprocity between them. It is
private respondent who has failed in her obligation under the
contract. 14
The second question is whether private respondent is liable for damages
to petitioners. The trial court correctly found private respondent guilty of
breach of contract and awarding moral damages and attorney's fees to
petitioners. The court held:
The failure of the plaintiff (Luna) to eject the squatters which is her "full
responsibility" and "commitment" under the contract of sale, aggravated
by her persistence in evading the obligation to deliver the property on the
basis of her very own failure, the persistence culminating in the instant
case for consignation, show not just a breach of contract but a breach in
bad faith. . . .

The Court finds that the defendant may be awarded moral damages in the
amount they prayed for, which is P500,000.00 considering that it was the
same amount which the parties have determined as the cost of the
removal of the squatters. The clear absence of merit of plaintiff's position,
which at [the] bottom is an attempt to profit from one's own breach,
compels this court to award attorney's fees, defendants having been
unnecessarily dragged into a litigation.
Indeed, the evidence shows that private respondent made little more than
token effort to seek the ejectment of squatters from the land, revealing
her real intention to be finding a way of getting out of her contract. Her
failure to eject the squatters despite sufficient time and funds given to her
by petitioners, her offer to return the earnest money only a month after
their meeting on January 17, 1989 in which she agreed to proceed with the
sale in consideration of which the purchase price was increased by almost
P500,000.00 and her consignation of the earnest money despite
petitioners' insistence that the sale should go on even if she had failed to
eject the squatters all these betray private respondent's failure to
comply with her obligation. Private respondent's lack of intention to really
comply with her obligation under the contract is underscored by her failure
to seek the assistance of courts in ejecting the squatters. It might be
granted that, at first, she thought going to the city engineer's office was
the expedient way of ejecting the squatters. However, having seen the
futility of such recourse and having been given money, private respondent
had no excuse for filing the action bellow. Her failure to make use of her
resources and her insistence on rescinding the sale shows quite clearly
that she was indeed just looking for a way to get out of her contractual
obligation by pointing to her own abject failure to rid the land of squatters.
The Court of Appeals erred in holding that private respondent had made
earnest efforts in discharging her obligation, relying for this purpose on
the testimony of Domingo Tapay, Building Official of Quezon City. Edgardo
C. Julian, Civil Engineer in charge of demolition ion the Office of the
Building Official of Quezon City, testified that though a request for
demolition had been made by private respondent Luna, no demolition
actually took place and that the attempt to do so was made only
sometime in mid-1989. 15 This confirms the letter dated April 24, 1989 of
the City Engineer's Office of Quezon City to petitioner that as of that date
there was no record in that office of any request for the ejectment of
squatters from the land. 16
The trial court awarded P500,000.00 to petitioners as moral damages for
suffering, delay and inconvenience they experienced as a result of private
respondent's failure in bad faith to proceed under the contract. This
amount corresponds to the price increase agreed to be paid to private
respondent to facilitate the ejectment of the squatters.
The award of moral damages is in accordance with Art. 2220 of the Civil
Code which provides that moral damages may be awarded in case of a

breach of contract where the defendant acted fraudulently or in bad faith.

However, the amount awarded is in our opinion excessive. To be sure the
amount to be awarded depends upon the discretion of the court based on
the circumstances of each case but, having regard for the purpose for
awarding such damages, we think that fixing the amount equivalent to the
increase given to private respondent would be contrary to the rule that
moral damages are not intended to enrich the complainant at the expense
of the defendant 17 or to penalize the defendant. 18 Under the
circumstance an award of P100,000.00 would be fair and reasonable.
This Court also agrees with the award of attorney's fees by the trial court.
As found by the trial court, there was clear absence of merit in private
respondent's position thus unnecessarily forcing petitioners to litigate.
Under Art. 2208(4)(5) of the Civil Code, attorney's fees may be recovered
when the civil action or processing against the plaintiff is clearly
unfounded and where defendant acted in gross and evident bad faith in
refusing to satisfy the plaintiff's claim.
WHEREFORE, the decision of the Court of Appeals is REVERSED and that of
the Regional Trial Court is REINSTATED, with the MODIFICATION that
private respondent is ordered to pay the sum of P100,000.00 as moral
damages and P50,000.00 as attorney's fees to petitioners.
SO ORDERED.

G.R. No. 107207 November 23, 1995

This Contract, made and executed in the Municipality of Makati,

Philippines this 9th day of June, 1988 by and between:

VIRGILIO R. ROMERO, petitioner,

vs.
HON. COURT OF APPEALS and ENRIQUETA CHUA VDA. DE
ONGSIONG, respondents.

ENRIQUETA CHUA VDA. DE ONGSIONG, of legal age, widow, Filipino and

residing at 105 Simoun St., Quezon City, Metro Manila, hereinafter referred
to as the VENDOR;

VITUG, J.:

-and-

The parties pose this question: May the vendor demand the rescission of a
contract for the sale of a parcel of land for a cause traceable to his own
failure to have the squatters on the subject property evicted within the
contractually-stipulated period?

VIRGILIO R. ROMERO, married to Severina L. Lat, of Legal age, Filipino, and

residing at 110 San Miguel St., Plainview Subd., Mandaluyong Metro
Manila, hereinafter referred to as the VENDEE:
W I T N E S S E T H : That

Petitioner Virgilio R. Romero, a civil engineer, was engaged in the business

of production, manufacture and exportation of perlite filter aids, permalite
insulation and processed perlite ore. In 1988, petitioner and his foreign
partners decided to put up a central warehouse in Metro Manila on a land
area of approximately 2,000 square meters. The project was made known
to several freelance real estate brokers.
A day or so after the announcement, Alfonso Flores and his wife,
accompanied by a broker, offered a parcel of land measuring 1,952 square
meters. Located in Barangay San Dionisio, Paraaque, Metro Manila, the
lot was covered by TCT No. 361402 in the name of private respondent
Enriqueta Chua vda. de Ongsiong. Petitioner visited the property and,
except for the presence of squatters in the area, he found the place
suitable for a central warehouse.
Later, the Flores spouses called on petitioner with a proposal that should
he advance the amount of P50,000.00 which could be used in taking up an
ejectment case against the squatters, private respondent would agree to
sell the property for only P800.00 per square meter. Petitioner expressed
his concurrence. On 09 June 1988, a contract, denominated "Deed of
Conditional Sale," was executed between petitioner and private
respondent. The simply-drawn contract read:
DEED OF CONDITIONAL SALE
KNOW ALL MEN BY THESE PRESENTS:

WHEREAS, the VENDOR is the owner of One (1) parcel of land with a total
area of ONE THOUSAND NINE HUNDRED FIFTY TWO (1,952) SQUARE
METERS, more or less, located in Barrio San Dionisio, Municipality of
Paraaque, Province of Rizal, covered by TCT No. 361402 issued by the
Registry of Deeds of Pasig and more particularly described as follows:
xxx xxx xxx
WHEREAS, the VENDEE, for (sic) has offered to buy a
parcel of land and the VENDOR has accepted the offer,
subject to the terms and conditions hereinafter stipulated:
NOW, THEREFORE, for and in consideration of the sum of
ONE MILLION FIVE HUNDRED SIXTY ONE THOUSAND SIX
HUNDRED PESOS (P1,561,600.00) ONLY, Philippine
Currency, payable by VENDEE to in to (sic) manner set
forth, the VENDOR agrees to sell to the VENDEE, their
heirs, successors, administrators, executors, assign, all her
rights, titles and interest in and to the property mentioned
in the FIRST WHEREAS CLAUSE, subject to the following
terms and conditions:
1. That the sum of FIFTY THOUSAND
PESOS
(P50,000.00)
ONLY Philippine
Currency, is to be paid upon signing and
execution of this instrument.

2. The balance of the purchase price in the

amount of ONE MILLION FIVE HUNDRED
ELEVEN THOUSAND SIX HUNDRED PESOS
(P1,511,600.00) ONLY shall be paid 45
days after the removal of all squatters
from the above described property.

(Sgd.) (Sgd.)

3. Upon full payment of the overall

purchase price as aforesaid, VENDOR
without necessity of demand shall
immediately sign, execute, acknowledged
(sic) and deliver the corresponding deed of
absolute sale in favor of the VENDEE free
from all liens and encumbrances and all
Real Estate taxes are all paid and updated.

Vendee Vendor

It is hereby agreed, covenanted and stipulated by and

between the parties hereto that if after 60 days from the
date of the signing of this contract the VENDOR shall not
be able to remove the squatters from the property being
purchased, the downpayment made by the buyer shall be
returned/reimbursed by the VENDOR to the VENDEE.
That in the event that the VENDEE shall not be able to pay
the VENDOR the balance of the purchase price of ONE
MILLION FIVE HUNDRED ELEVEN THOUSAND SIX HUNDRED
PESOS (P1,511,600.00) ONLY after 45 days from written
notification to the VENDEE of the removal of the squatters
from the property being purchased, the FIFTY THOUSAND
PESOS (P50,000.00) previously paid as downpayment shall
be forfeited in favor of the VENDOR.
Expenses for the registration such as registration fees,
documentary stamp, transfer fee, assurances and such
other fees and expenses as may be necessary to transfer
the title to the name of the VENDEE shall be for the
account of the VENDEE while capital gains tax shall be
paid by the VENDOR.
IN WITNESS WHEREOF, the parties hereunto signed those
(sic) presents in the City of Makati MM, Philippines on this
9th day of June, 1988.

VIRGILIO R. ROMERO ENRIQUETA CHUA

VDA.
DE ONGSIONG

SIGNED IN THE PRESENCE OF:

(Sgd.) (Sgd.)
Rowena C. Ongsiong Jack M. Cruz 1
Alfonso Flores, in behalf of private respondent, forthwith received
and acknowledged a check for P50,000.002 from petitioner. 3
Pursuant to the agreement, private respondent filed a complaint for
ejectment (Civil Case No. 7579) against Melchor Musa and 29 other
squatter families with the Metropolitan Trial Court of Paraaque. A few
months later, or on 21 February 1989, judgment was rendered ordering
the defendants to vacate the premises. The decision was handed down
beyond the 60-day period (expiring 09 August 1988) stipulated in the
contract. The writ of execution of the judgment was issued, still later, on
30 March 1989.
In a letter, dated 07 April 1989, private respondent sought to return the
P50,000.00 she received from petitioner since, she said, she could not "get
rid of the squatters" on the lot. Atty. Sergio A.F. Apostol, counsel for
petitioner, in his reply of 17 April 1989, refused the tender and stated:.
Our client believes that with the exercise of reasonable
diligence considering the favorable decision rendered by
the Court and the writ of execution issued pursuant
thereto, it is now possible to eject the squatters from the
premises of the subject property, for which reason, he
proposes that he shall take it upon himself to eject the
squatters, provided, that expenses which shall be incurred
by reason thereof shall be chargeable to the purchase
price of the land. 4

Meanwhile, the Presidential Commission for the Urban Poor ("PCUD"),

through its Regional Director for Luzon, Farley O. Viloria, asked the
Metropolitan Trial Court of Paraaque for a grace period of 45 days from 21
April 1989 within which to relocate and transfer the squatter families.
Acting favorably on the request, the court suspended the enforcement of
the writ of execution accordingly.
On 08 June 1989, Atty. Apostol reminded private respondent on the expiry
of the 45-day grace period and his client's willingness to "underwrite the
expenses for the execution of the judgment and ejectment of the
occupants." 5
In his letter of 19 June 1989, Atty. Joaquin Yuseco, Jr., counsel for private
respondent, advised Atty. Apostol that the Deed of Conditional Sale had
been rendered null and void by virtue of his client's failure to evict the
squatters from the premises within the agreed 60-day period. He added
that private respondent had "decided to retain the property." 6
On 23 June 1989, Atty. Apostol wrote back to explain:
The contract of sale between the parties was perfected
from the very moment that there was a meeting of the
minds of the parties upon the subject lot and the price in
the amount of P1,561,600.00. Moreover, the contract had
already been partially fulfilled and executed upon receipt
of the downpayment of your client. Ms. Ongsiong is
precluded from rejecting its binding effects relying upon
her inability to eject the squatters from the premises of
subject property during the agreed period. Suffice it to
state that, the provision of the Deed of Conditional Sale do
not grant her the option or prerogative to rescind the
contract and to retain the property should she fail to
comply with the obligation she has assumed under the
contract. In fact, a perusal of the terms and conditions of
the contract clearly shows that the right to rescind the
contract and to demand the return/reimbursement of the
downpayment is granted to our client for his protection.
Instead, however, of availing himself of the power to
rescind
the
contract
and
demand
the
return,
reimbursement of the downpayment, our client had opted
to take it upon himself to eject the squatters from the

premises. Precisely, we refer you to our letters addressed

to your client dated April 17, 1989 and June 8, 1989.
Moreover, it is basic under the law on contracts that the
power to rescind is given to the injured party.
Undoubtedly, under the circumstances, our client is the
injured party.
Furthermore, your client has not complied with her
obligation under their contract in good faith. It is
undeniable that Ms. Ongsiong deliberately refused to exert
efforts to eject the squatters from the premises of the
subject property and her decision to retain the property
was brought about by the sudden increase in the value of
realties in the surrounding areas.
Please consider this letter as a tender of payment to your
client and a demand to execute the absolute Deed of
Sale. 7
A few days later (or on 27 June 1989), private respondent, prompted by
petitioner's continued refusal to accept the return of the P50,000.00
advance payment, filed with the Regional Trial Court of Makati, Branch
133, Civil Case No. 89-4394 for rescission of the deed of "conditional" sale,
plus damages, and for the consignation of P50,000.00 cash.
Meanwhile, on 25 August 1989, the Metropolitan Trial Court issued
an alias writ of execution in Civil Case No. 7579 on motion of private
respondent but the squatters apparently still stayed on.
Back to Civil Case No. 89-4394, on 26 June 1990, the Regional Trial Court
of Makati 8 rendered decision holding that private respondent had no right
to rescind the contract since it was she who "violated her obligation to
eject the squatters from the subject property" and that petitioner, being
the injured party, was the party who could, under Article 1191 of the Civil
Code, rescind the agreement. The court ruled that the provisions in the
contract relating to (a) the return/reimbursement of the P50,000.00 if the
vendor were to fail in her obligation to free the property from squatters
within the stipulated period or (b), upon the other hand, the sum's
forfeiture by the vendor if the vendee were to fail in paying the agreed
purchase price, amounted to "penalty clauses". The court added:

This Court is not convinced of the ground relied upon by

the plaintiff in seeking the rescission, namely: (1) he (sic)
is afraid of the squatters; and (2) she has spent so much
to eject them from the premises (p. 6, tsn, ses. Jan. 3,
1990). Militating against her profession of good faith is
plaintiffs conduct which is not in accord with the rules of
fair play and justice. Notably, she caused the issuance of
an alias writ of execution on August 25, 1989 (Exh. 6) in
the ejectment suit which was almost two months after she
filed the complaint before this Court on June 27, 1989. If
she were really afraid of the squatters, then she should not
have pursued the issuance of an alias writ of execution.
Besides, she did not even report to the police the alleged
phone threats from the squatters. To the mind of the
Court, the so-called squatter factor is simply factuitous
(sic). 9

Failing to obtain a reconsideration, petitioner filed this petition for review

on certiorari raising issues that, in fine, center on the nature of the
contract adverted to and the P50,000.00 remittance made by petitioner.

The lower court, accordingly, dismissed the complaint and

ordered, instead, private respondent to eject or cause the
ejectment of the squatters from the property and to execute the
absolute deed of conveyance upon payment of the full purchase
price by petitioner.

In determining the real character of the contract, the title given to it by

the parties is not as much significant as its substance. For example, a
deed of sale, although denominated as a deed of conditional sale, may be
treated as absolute in nature, if title to the property sold is not reserved in
the vendor or if the vendor is not granted the right to unilaterally rescind
the
contract
predicated
on the fulfillment or non-fulfillment, as the case may be, of the prescribed
condition. 14

Private respondent appealed to the Court of Appeals. On 29 May 1992, the

appellate court rendered its decision. 10It opined that the contract entered
into by the parties was subject to a resolutory condition, i.e., the
ejectment of the squatters from the land, the non-occurrence of which
resulted in the failure of the object of the contract; that private respondent
substantially complied with her obligation to evict the squatters; that it
was petitioner who was not ready to pay the purchase price and fulfill his
part of the contract, and that the provision requiring a mandatory
return/reimbursement of the P50,000.00 in case private respondent would
fail to eject the squatters within the 60-day period was not a penal clause.
Thus, it concluded.
WHEREFORE, the decision appealed from is REVERSED and
SET ASIDE, and a new one entered declaring the contract
of conditional sale dated June 9, 1988 cancelled and
ordering the defendant-appellee to accept the return of
the downpayment in the amount of P50,000.00 which was
deposited in the court below. No pronouncement as to
costs. 11

A perfected contract of sale may either be absolute or

conditional 12 depending on whether the agreement is devoid of, or subject
to, any condition imposed on the passing of title of the thing to be
conveyed or on the obligation of a party thereto. When ownership is
retained until the fulfillment of a positive condition the breach of the
condition will simply prevent the duty to convey title from acquiring
an obligatory force. If the condition is imposed on an obligation of a party
which is not complied with, the other party may either refuse to proceed
or waive said condition (Art. 1545, Civil Code). Where, of course, the
condition is imposed upon the perfection of the contract itself, the failure
of such condition would prevent the juridical relation itself from coming
into existence. 13

The term "condition" in the context of a perfected contract of sale

pertains, in reality, to the compliance by one party of an undertaking the
fulfillment of which would beckon, in turn, the demandability of the
reciprocal prestation of the other party. The reciprocal obligations referred
to would normally be, in the case of vendee, the payment of the agreed
purchase price and, in the case of the vendor, the fulfillment of certain
express warranties (which, in the case at bench is the timely eviction of
the squatters on the property).
It would be futile to challenge the agreement here in question as not being
a duly perfected contract. A sale is at once perfected when a person (the
seller) obligates himself, for a price certain, to deliver and to transfer
ownership of a specified thing or right to another (the buyer) over which
the latter agrees. 15

The object of the sale, in the case before us, was specifically identified to
be a 1,952-square meter lot in San Dionisio, Paraaque, Rizal, covered by
Transfer Certificate of Title No. 361402 of the Registry of Deeds for Pasig
and therein technically described. The purchase price was fixed at
P1,561,600.00, of which P50,000.00 was to be paid upon the execution of
the document of sale and the balance of P1,511,600.00 payable "45 days
after the removal of all squatters from the above described property."
From the moment the contract is perfected, the parties are bound not only
to the fulfillment of what has been expressly stipulated but also to all the
consequences which, according to their nature, may be in keeping with
good faith, usage and law. Under the agreement, private respondent is
obligated to evict the squatters on the property. The ejectment of the
squatters is a condition the operative act of which sets into motion the
period of compliance by petitioner of his own obligation, i.e., to pay the
balance of the purchase price. Private respondent's failure "to remove the
squatters from the property" within the stipulated period gives petitioner
the right to either refuse to proceed with the agreement or waive that
condition in consonance with Article 1545 of the Civil Code. 16 This option
clearly belongs to petitioner and not to private respondent.
We share the opinion of the appellate court that the undertaking required
of private respondent does not constitute a "potestative condition
dependent solely on his will" that might, otherwise, be void in accordance
with Article 1182 of the Civil Code 17 but a "mixed" condition "dependent
not on the will of the vendor alone but also of third persons like the
squatters and government agencies and personnel concerned." 18 We must
hasten to add, however, that where the so-called "potestative condition" is
imposed not on the birth of the obligation but on its fulfillment, only the
obligation is avoided, leaving unaffected the obligation itself. 19
In contracts of sale particularly, Article 1545 of the Civil Code,
aforementioned, allows the obligee to choose between proceeding with
the agreement or waiving the performance of the condition. It is this
provision which is the pertinent rule in the case at bench. Here, evidently,
petitioner has waived the performance of the condition imposed on private
respondent to free the property from squatters. 20
In any case, private respondent's action for rescission is not warranted.
She is not the injured party. 21 The right of resolution of a party to an
obligation under Article 1191 of the Civil Code is predicated on a breach of
faith by the other party that violates the reciprocity between them. 22 It is
private respondent who has failed in her obligation under the contract.

Petitioner did not breach the agreement. He has agreed, in fact, to

shoulder the expenses of the execution of the judgment in the ejectment
case and to make arrangements with the sheriff to effect such execution.
In his letter of 23 June 1989, counsel for petitioner has tendered payment
and demanded forthwith the execution of the deed of absolute sale.
Parenthetically, this offer to pay, having been made prior to the demand
for rescission, assuming for the sake of argument that such a demand is
proper under Article 1592 23 of the Civil Code, would likewise suffice to
defeat private respondent's prerogative to rescind thereunder.
There is no need to still belabor the question of whether the P50,000.00
advance payment is reimbursable to petitioner or forfeitable by private
respondent, since, on the basis of our foregoing conclusions, the matter
has ceased to be an issue. Suffice it to say that petitioner having opted to
proceed with the sale, neither may petitioner demand its reimbursement
from private respondent nor may private respondent subject it to
forfeiture.
WHEREFORE, the questioned decision of the Court of Appeals is hereby
REVERSED AND SET ASIDE, and another is entered ordering petitioner to
pay private respondent the balance of the purchase price and the latter to
execute the deed of absolute sale in favor of petitioner. No costs.
SO ORDERED.

G.R. No. 154554 November 9, 2005

The CA narrated the antecedents of the case as follows:

GOODYEAR PHILIPPINES, INC., Petitioner,

vs.
ANTHONY SY and JOSE L. LEE, Respondents.

"The subject of this case involves a motor vehicle, particularly described

as:
MAKE: 1984 Isuzu JCR 6-Wheeler

DECISION
PLATE NUMBER: PEL 685
PANGANIBAN, J.:
MOTOR NO.: 6BD1-371305
complaint must contain a concise statement of the ultimate facts
constituting the plaintiffs cause of action. To determine whether a cause
of action is stated, the test is as follows: admitting arguendo the truth of
the facts alleged, can the court render a
_____________________
* On official leave.

SERIAL NO.: JCR500BOF-21184

"The vehicle was originally owned by Goodyear Philippines, Inc.
([Goodyear]) which it purchased from Industrial and Transport Equipment,
Inc. in 1983. It had since been in the service of [Goodyear] until April 30,
1986 when it was hijacked. This hijacking was reported to the Philippine
National Police (PNP) which issued out an alert alarm on the said vehicle
as a stolen one. It was later on recovered also in 1986.

** On medical leave.
valid judgment in accordance with the prayer? If the answer is "no," the
complaint does not state a cause of action and should be dismissed
forthwith. If "yes," then it does and must be given due course.
The Case
Before us is a Petition for Review 1 under Rule 45 of the Rules of Court,
assailing the June 5, 2002 Decision 2 and the August 8, 2002 Resolution 3 of
the Court of Appeals (CA) in CA-GR CV No. 61229. The dispositive portion
of the challenged Decision reads as follows:
"WHEREFORE, the instant appeal is GRANTED. The Order dated May 27,
1998 of the Regional Trial Court of Legazpi City, Branch 9, is hereby
REVERSED and the case is remanded to the court a quo for the
appropriate further proceedings."4
The assailed Resolution denied petitioners Motion for Reconsideration.
The Antecedents

"The vehicle was used by [Goodyear] until 1996, when it sold it to Anthony
Sy on September 12, 1996.
"Sy, in turn, sold it to Jose L. Lee on January 29, 1997. But the latter on
December 4, 1997, filed an action for rescission of contract with damages
against Sy[,] because he could not register the vehicle in his name due to
the certification from the PNP Regional Traffic Management Office in
Legazpi City that it was a stolen vehicle and the alarm covering the same
was not lifted. Instead, the PNP in Legazpi City impounded the vehicle and
charged Lee criminally.
"Upon being informed by Sy of the denial of the registration of the vehicle
in Lees name, [Goodyear] requested on July 10, 1997 the PNP to lift the
stolen vehicle alarm status. This notwithstanding, [Goodyear] was
impleaded as third-party defendant in the third-party complaint filed by Sy
on January 9, 1998.
"A motion to dismiss was filed by [Goodyear] on March 24, 1998 on the
twin grounds that the third-party complaint failed to state a cause of
action and even if it did, such cause of action was already extinguished.
An opposition thereto was interposed by Sy on April 17, 1998.

"The Regional Trial Court [(RTC)] resolved to dismiss the third-party

complaint on the basis of the first proffered ground in its challenged Order
dated May 27, 1998. It ratiocinated:
A perusal of the third party complaint does not expressly show any act or
omission committed by the third party defendant which violates a right of
the third party complainant. The third party complaint failed to show that
the vehicle in question belongs to a person other than the third party
defendant at the time the said motor vehicle was sold by the third party
defendant to the third party plaintiff. On the contrary[,] the third party
defendant has not denied having sold to the third party plaintiff the said
motor vehicle which had been in its possession as owner from 1986 to
1996. The fact that the said motor vehicle was included by the PNP in its
alert status as stolen vehicle[,] resulted only following the report by the
third party defendant that it was hijacked in 1986. But when the said
motor vehicle was recovered, the third party defendant informed the PNP
about the said recovery and requested the lifting of the alert status on it
as stolen vehicle.
If the PNP has not removed the said vehicle from its alert status as a
stolen vehicle, [then] that does not make [Goodyear] not the owner
thereof. Hence, [Goodyear], the third party defendant, is not guilty of any
breach resulting from any flaw in the title over the said vehicle. This is
confirmed by the allegation of the third party plaintiff as answering
defendant in paragraph 6 of its Answer with Counterclaim and Affirmative
Defenses dated January 9, 1998, hereunder quoted as follows:
"6. Defendant specifically denies the allegations contained in paragraph 9
of [p]laintiffs complaint, the truth of the matter is that [d]efendant
help[ed] plaintiff in removing the impediments in the registration and
transfer of ownership and that defendant ha[d] no knowledge of any flaw
[in] the title of Goodyear Philippines, Inc."

In granting the appeal, the CA reasoned that the Third-Party Complaint

had stated a cause of action. First, petitioner did not make good its
warranty in the Deed of Sale: to convey the vehicle to Respondent
Anthony Sy free from all liens, encumbrances and legal impediments. The
reported hijacking of the vehicle was a legal impediment that prevented
its subsequent sale.
Second, Respondent Sy had a right to protect and a warranty to enforce,
while petitioner had the corresponding obligation to honor that warranty.
The latter caused the impairment of that right, though, when the vehicle it
had sold to him was refused registration, because of the non-lifting of the
alert status issued at its instance. That petitioner had to execute all
documents necessary to confer a perfect title to him before he could seek
recourse to the courts was deemed a ludicrous condition precedent,
because it could easily refuse to fulfill that condition in order to obviate
the filing of a case against it.
Hence, this Petition.6
The Issues
Petitioner raises the following issues for the Courts consideration:
"I.
Whether or not the Court of Appeals erred in reversing and setting aside
the decision of the Regional Trial Court, dismissing the complaint against
petitioner for lack of a cause of action.
"II.

Under Rules 16, a motion to dismiss may be made on any of the following
grounds:

Whether or not the Court of Appeals erred in failing to find that petitioner
did not breach any warranty in the absence of proof that at the time it sold
the subject vehicle to Sy, petitioner was not the owner thereof.

"g) That the pleading asserting the claim states no cause of action."

"III.

WHEREFORE, for failure of the third party complaint to state a cause of

action, the same is hereby ordered DISMISSED."5

Whether or not the Court of Appeals erred in failing to find that the cause
of action, if ever it existed, was already extinguished." 7

Ruling of the Court of Appeals

The foregoing issues actually point to one main question: did the ThirdParty Complaint state a cause of action against petitioner?

considered.15 The court may consider -- in addition to the complaint -- the

appended annexes or documents, other pleadings of the plaintiff, or
admissions in the records.16

The Courts Ruling

No Cause of Action
The Petition has merit.
Against Petitioner
Main Issue:
Whether a Cause of Action
Was Stated in the Third-Party Complaint
A cause of action is a formal statement of the operative facts that give rise
to a remedial right.8 The question of whether the complaint states a cause
of action is determined by its averments regarding the acts committed by
the defendant.9 Thus, it "must contain a concise statement of the ultimate
or essential facts constituting the plaintiffs cause of action." 10 Failure to
make
a
sufficient allegation of a cause of action in the complaint "warrants its
dismissal."11
Elements of a
Cause of Action
A cause of action, which is an act or omission by which a party violates the
right of another,12 has these elements:
"1) the legal right of the plaintiff;
"2) the correlative obligation of the defendant to respect that legal right;
and

In the present case, the third element is missing. The Third-Party

Complaint filed by Sy is inadequate, because it did not allege any act or
omission that petitioner had committed in violation of his right to the
subject vehicle. The Complaint capitalized merely on the fact that the
vehicle -- according to the records of the PNP, which was a stranger to the
case -- was "a stolen vehicle." The pleading did not contain "sufficient
notice of the cause of action"17against petitioner.
Without even going into the veracity of its material allegations, the
Complaint is insufficient on its face.18 No connection was laid out between
the owners sale of the vehicle and its impounding by the PNP. That the
police did not lift the alert status did not make petitioner less of an owner.
The Deed of Sale between petitioner and Respondent Sy was attached as
Annex A19 to the Third-Party Complaint filed by the latter against the
former. The Deed stated that petitioner was the absolute owner of the
subject vehicle. No contrary assertion was made in the Complaint. Hence,
the trial court correctly observed that the Complaint had failed to show
that, at the time of its sale to Respondent Sy, the vehicle belonged to a
person other than petitioner.20
To reiterate, the Third-Party Complaint absolutely failed to state an act or
omission of petitioner that had proximately caused injury or prejudice to
Sy. Indeed, based on that pleading alone, the latters claim for relief
against petitioner does not appear to exist.

"3) an act or omission of the defendant that violates such right." 13

In determining whether an initiatory pleading states a cause of action,
"the test is as follows: admitting the truth of the facts alleged, can the
court render a valid judgment in accordance with the prayer?" 14 To be
taken into account are only the material allegations in the complaint;
extraneous facts and circumstances or other matters aliunde are not

Warranties Passed On
By the Vendor to the Vendee
In a contract of sale, the vendor is bound to transfer the ownership of and
to deliver the thing that is the object of the sale. 21 Moreover, the implied

warranties are as follows: first, the vendor has a right to sell the thing at
the time that its ownership is to pass to the vendee, as a result of which
the latter shall from then on have and enjoy the legal and peaceful
possession of the thing;22 and, second, the thing shall be free from any
charge or encumbrance not declared or known to the vendee. 23
Upon the execution of the Deed of Sale, petitioner did transfer ownership
of and deliver the vehicle to Respondent Sy. 24 No other owner or possessor
of the vehicle had been alleged, and the ownership and possession rights
of petitioner over it had never been contested. The Deed of Sale executed
on September 12, 1996 showed that petitioner was the absolute owner.
Therefore, at the time that ownership passed to Sy, petitioner alone had
the right to sell the vehicle.
In the same manner, when he sold the same truck to Jose L.
Lee,25 Respondent Sy was exercising his right as absolute owner.
Unfortunately, though, from the time Respondent Lee attempted to
register the truck in his name, he could not have or enjoy the legal and
peaceful possession of the vehicle, because it had been impounded by the
PNP, which also opposed its registration.
The impoundment of the vehicle and the failure to register it were clearly
acts that were not deliberately caused by petitioner, but that resulted
solely from the failure of the PNP to lift the latters own alarm over the
vehicle. Pursuant to Republic Act 6975, 26 these matters were purely
administrative and governmental in nature. Petitioner had no authority,
much less power, over the PNP. Hence, the former did not breach its
obligation as a vendor to Respondent Sy; neither did it violate his right for
which he could maintain an action for the recovery of damages. Without
this crucial allegation of a breach or violation, no cause of action exists. 27
A warranty is an affirmation of fact or any promise made by a vendor in
relation to the thing sold. As such, a warranty has a natural tendency to
induce the vendee -- relying on that affirmation or promise -- to purchase
the thing.28 The vendor impliedly warrants that that which is being sold is
free from any charge or encumbrance not declared or known to the
vendee. The decisive test is whether the vendor assumes to assert a fact
of which the vendee is ignorant.29

No Lien or Breach
of Warranty
In the present case, petitioner did not breach the implied warranty against
hidden encumbrances. The subject vehicle that had earlier been stolen by
a third party was subsequently recovered by the authorities and restored
to petitioner, its rightful owner. Whether Sy had knowledge of the loss and
subsequent recovery, the fact remained that the vehicle continued to be
owned by petitioner, free from any charge or encumbrance whatsoever.
A lien is "a legal right or interest that a creditor has in anothers property,
lasting usually until a debt or duty that it secures is satisfied." 30 An
encumbrance is "a claim or liability that is attached to property or some
other right and that may lessen its value, such as a lien or mortgage." 31 A
legal impediment is a legal "hindrance or obstruction."32
The Third-Party Complaint did not allege that petitioner had a creditor with
a legal right to or interest in the subject vehicle. There was no indication
either of any debt that was secured by the vehicle. In fact, there was not
even any claim, liability or some other right attached to the vehicle that
would lessen its value. Its impoundment, as well as the refusal of its
registration, was not the hindrance or obstruction in the contemplation of
law that the vendor warranted against. Neither of those instances arose
from any liability or obligation that could be satisfied by a legal claim or
charge on, or property right to -- other than an ownership interest in -- the
subject vehicle.33
No Notice of Any
Breach of Warranty
Gratia argumenti that there was a breach of the implied warranty against
hidden encumbrances, notice of the breach was not given to petitioner
within a reasonable time. Article 1586 of the Civil Code requires that
notice be given after the breach, of which Sy ought to have known. In his
Third-Party Complaint against petitioner, there was no allegation at all that
respondent had given petitioner the requisite notice.34
More important, an action for damages for a breach of implied warranties
must be brought within six months from the delivery of the thing
sold.35 The vehicle was understood to have been delivered to Sy when it

was placed in his control or possession.36 Upon execution of the Deed of

Sale on September 12, 1996, control and possession of the vehicle was
transferred to respondent. That the vehicle had been delivered is
bolstered by the fact that no contrary allegation was raised in the ThirdParty Complaint. Whether the period should be reckoned from
the actual or from the constructive delivery through a public instrument,
more than six months had lapsed before the filing of the Third-Party
Complaint.
Finally, the argument that there was a breach of the implied warranty
against eviction does not hold water, for there was never any final
judgment based on either a right prior to the sale; or an act that could be
imputed37 to petitioner and deprive Sy of ownership or possession of the
vehicle purchased.
WHEREFORE, the Petition is hereby GRANTED, and the assailed Decision
and Resolution are REVERSED. The May 27, 1998 Order of the Regional
Trial Court is REINSTATED. No costs.
SO ORDERED.

G.R. No. L-65922 December 3, 1991

LAURETA TRINIDAD, petitioner,
vs.
INTERMEDIATE APPELLATE COURT and VICENTE J.
FRANCISCO, respondent.
Ramon A. Gonzales for petitioner.
Raymundo T. Francisco for R.J. Francisco.
Siquia Law Offices for respondents Trinidad J. Francisco & Rosario F.
Kelemen.
CRUZ, J.:p
The house looked beautiful in summer but not when the waters came.
Then it was flooded five feet deep and leas than prepossessing, let alone
livable. Disenchanted, the buyer sued the seller for the annulment of the
sale and damages, alleging fraud.
The house was Bungalow No. 17, situated at Commonwealth Village in
Quezon City, and belonged to the late Vicente J. Francisco. Sometime in
early 1969, Laureta Trinidad, the petitioner herein, approached him and
offered to buy the property. Francisco was willing to sell. Trinidad inspected
the house and lot and examined a vicinity map which indicated drainage
canals along the property. The purchase price was P70,000.00 with a down
payment of P17,500.00. The balance was to be paid in five equal annual
installments not later than July 1 of each year at 12% interest per annum.
On March 29, 1969, Trinidad paid Francisco P5,000.00 as earnest money
and entered into the possession of the house. However, as she relates it,
she subsequently heard from her new neighbors that two buyers had
previously vacated the property because it was subject to flooding. She
says she talked to Francisco about this matter and that he told her
everything had been fixed and the house would never be flooded again.
Thus assured, she gave him P12,500.00 to complete the down payment.
They signed the Contract of Conditional Sale on August 8, 1969. 1
Trinidad paid the installment for 1970 and 1971 on time but asked
Francisco for an extension of 60 days to pay the installment due on July 1,

1972. However, she says she eventually decided not to continue paying
the amortizations because the house was flooded again on July 18, 21, and
30, 1972, the waters rising to as high as five feet on July 21. Upon her
return from the United States on October 11, 1972, she wrote the City
Engineer's office of Quezon City and requested an inspection of the
subject premises to determine the cause of the flooding. The finding of
City Engineer Pantaleon P. Tabora was that "the lot is low and is a
narrowed portion of the creek."
On January 10, 1973, the petitioner filed her complaint against Francisco
alleging that she was induced to enter into the contract of sale because of
his misrepresentations. She asked that the agreement be annulled and her
payments refunded to her, together with the actual expenses she had
incurred for the "annexes and decorations" she had made on the house.
She also demanded the actual cost of the losses she had suffered as a
result of the floods, moral and exemplary damages in the sum of
P200,000.00,
and
P10,000.00
attomey's
fees. 2
In his answer and amended answer, the defendant denied the charge of
misrepresentation and stressed that the plaintiff had thoroughly inspected
the property before she decided to buy it. The claimed creek was a
drainage lot, and the floods complained of were not uncommon in the
village and indeed even in the Greater Manila area if not the entire Luzon.
In any event, the floods were fortuitous events not imputable to him. He
asked for the rescission of the contract and the forfeiture of payments
made by the plaintiff plus monthly rentals with interest of P700.00 for the
property from July 2, 1972, until the actual vacation of the property by the
plaintiff. He also claimed litigation expenses, including attorney's fees. 3
In his decision dated June 17, 1975, Judge Sergio F. Apostol of the then
Court of First Instance of Rizal held in favor of the plaintiff and disposed as follows:
WHEREFORE, premises considered, judgment is hereby rendered:
a) ordering the annulment of the contract of conditional sale entered into
by the parties;
b) ordering defendant's representatives to pay to the plaintiff the amount of
P49,840.00 with interest from the time of the filing of the complaint;

c) ordering the defendant's representatives to pay the amount of

P39,800.00 representing the value of the improvements and the losses she
incurred by virtue of the flood;
d) ordering plaintiff to return to the defendant's representatives the house
and lot in question;
e) ordering defendant's representatives to pay the amount of P5,000.00 as
and by way of attomey's fees.
WITH COSTS AGAINST THE DEFENDANT.

2. The Intermediate Appellate Court palpably erred in finding that

there was no fraud prior to the sale that induced petitioner to
enter into the said sale.
3. The Intermediate Appellate Court palpably erred in cancelling
the complaint for non-payment of the installments and declaring
previous installments forfeited.
4. The Intermediate Appellate Court erred in not granting moral
damages and attorney's fees to petitioner.

Upon separate motions for reconsideration filed by both parties, Judge

Apostol ordered and held a new trial, resulting in a new decision dated
April 13, 1976, reiterating his original dispositions.

The basic issue in this controversy is whether or not, under the established
facts, there was misrepresentation on the part of Francisco to justify the
rescission of the sale and the award damages to the petitioner.

Both parties appealed to the respondent court, which reversed the trial
court in a decision promulgated on May 31, 1983. 4 The dispositive
portion read as follows:

The pertinent provisions of the Civil Code on fraud are the following:

WHEREFORE, the appeal of plaintiff is hereby dismissed. With respect to the

appeal of defendant, the decision of the lower court is hereby reversed and
set aside and another one is rendered dimissing the complaint and, upon
the counterclaim, sustaining the cancellation of the contract of conditional
sale (Exh. B) and the forfeiture of any and all sums of money paid by
plaintiff to the defendant on account of the contract to be treated as rentals
for the use and occupation of the property and ordering the plaintiff to
vacate the property. No special pronouncement as to costs.

This Court gave due course to the herein petition for review on certiorari of
the said decision and required the parties to submit their respective
memoranda. Pendente lite, Vicente J. Francisco died and was eventually
substituted by his heirs, 5 two of whom, Trinidad J. Francisco and Rosario F.
Kelemen, filed their own joint memorandum. 6 The Court has deliberated
on the issues and the arguments of the parties and is now ready to act on
the motions filed by the petitioner and the private respondents for the
resolution of this case.
The petitioner faults the respondent court on the following grounds:
1. The Intermediate Appellate Court palpably erred in not finding
that the lot on which the house in question stands is a portion of a
creek, hence outside the commerce of man.

Art. 1338. There is fraud when, through insidious words or

machinations of one of the contracting parties, the other is
induced to enter into a contract which, without them, he would
not have agreed to.
Art. 1339. Failure to disclose facts, when there is a duty to reveal
them, as when the parties are bound by confidential relations,
constitutes fraud.
Art. 1340. The usual exaggerations in trade, when the other party
had an opportunity to know the facts, are not in themselves
fraudulent.

Fraud is never lightly inferred; it is good faith that is. Under the Rules of
Court, it is presumed that "a person is innocent of crime or wrong" 7 and
that "private transactions have been fair and regular." 8 While disputable,
these presumptions can be overcome only by clear and preponderant
evidence.
Our finding is that the fraud alleged by the petitioner has not been
satisfactorily established to call for the annulment of the contract. This
finding is based on the following considerations.
First, it was the petitioner who admittedly approached the private
respondent, who never advertised the property nor offered it for sale to
her.

Second, the petitioner had full opportunity to inspect the premises,

including the drainage canals indicated in the vicinity map that was
furnished her, before she entered into the contract of conditional sale.

The law allows considerable latitude to seller's statements,

or dealer's talk, and experience teaches that it is
exceedingly risky to accept it at it at face value. . . .

Third, it is assumed that she made her appraisal of the property not with
the untrained eye of the ordinary prospective buyer but with the
experience and even expertise of the licensed real estate broker that she
was. 9 If she minimized the presence of the drainage canals, she has only
her own negligence to blame.

Assertions concerning the property which is the subject of

a contract of sale, or in regard to its qualities and
characteristics, are the usual and ordinary means used by
sellers to obtain a high price and are always understood as
affording to buyers no ground for omitting to make
inquiries. A man who relies upon such an affirmation made
by a person whose interest might so readily prompt him to
exaggerate the value of his property does so at his peril,
and must take the consequences of his own imprudence.

Fourth, seeing that the lot was depressed and there was a drainage lot
abutting it, she cannot say she was not forewarned of the possibility that
the place might be flooded. Notwithstanding the obvious condition of the
property, she still decided to buy it.
Fifth, there is no evidence except her own testimony that two previous
owners of the property had vacated it because of the floods and that
Francisco assured her that the house would not be flooded again. The
supposed previous owners were not presented as witnesses and neither
were the neighbors. Francisco himself denied having made the alleged
assurance.
Sixth, the petitioner paid the 1970 and 1971 amortizations even if,
according to her Complaint, "since 1969 said lot had been under floods of
about one (1) foot deep," 10 and despite the floods of September and
November 1970.
Seventh, it is also curious that notwithstanding the said floods, the
petitioner still "made annexes and decorations on the house," 11 all of a
permanent nature, for which she now claims reimbursement from the
private respondent.
To repeat, it has not been satisfactorily established that the private
respondent inveigled the petitioner through false representation to buy
the subject property. Assuming that he did make such representations, as
the petitioner contends, she is deemed to have accepted them at her own
risk and must therefore be responsible for the consequences of her
careless credulousness. In the case of Songco v. Sellner, 12 the Court
said:

We have also held that "one who contracts for the purchase of real estate
in reliance on the representations and statements of the vendor as to its
character and value, but after he has visited and examined it for himself
and has had the means and opportunity of verifying such statements,
cannot avoid the contract on the ground that they were false and
exaggerated." 13
''The Court must also reject the petitioner's contention that the lot on
which the house stands is a portion of a creek and therefore outside the
commerce of man as part of the public domain.
The said property is covered by TCT No. 102167 of the Registry of Deeds
of Quezon City. Under the Land Registration Act, title to the property
covered by a Torrens certificate becomes indefeasible after the expiration
of one year from the entry of the decree of registration. Such decree of
registration is incontrovertible and is binding on all persons whether or not
they were notified of or participated in the registration proceedings.
If such title is to be challenged, it may not be done collaterally as in the
present case, because the judicial action required is a direct attack.
Section 48 of the Property Registration Decree expressly provides that a
certificate of title cannot be subject collateral attack and can be altered,
modified or cancelled only in a direct proceeding in accordance with law.
This was the same rule under Act 496. 14 Moreover, the right of reversion
belongs to the State and may be invoked on its behalf only by the Solicitor
General. 15

It is true, as the private respondents have insisted and the respondent

court has found, that the Contract of Conditional Sale contains the
following condition:
(d) That should the SECOND PARTY fail to make any of the
payments referred to in the aforesaid paragraphs 2(a) and
(b), of this contract of conditional sale, shall be considered
automatically rescinded and cancelled without the
necessity of notice to the SECOND PARTY, or of any judicial
declaration to that effect, and any and all sums paid by
the SECOND PARTY shall be considered rents and
liquidated damages for the breach of this contract, and the
SECOND PARTY shall forthwith vacate the foresaid property
peacefully.
Nevertheless, we cannot say that the petitioner was, strictly speaking, in
default in the payment of the remaining amortizations in the sense
contemplated in that stipulation. She was not simply unable to make the
required payments. The fact is she refused to make such payments. If she
suspended her payments, it was because she felt she was justified in
doing so in view of the defects she found in the property. It is noteworthy
that it was she who sued the private respondent, not the other way round,
and that it was she who argued that the seller was not entitled to the
additional installments because of his violation of the contract. If she
asked for the annulment of the contract and the refund to her of the
payments she had already made, plus damages, it was because she felt
she had the right to do so.
Given such circumstances, the Court feels and so holds that the abovequoted stipulation should not be strictly enforced, to justify the rescission
of the contract. To make her forfeit the payments already made by her and
at the same time return the property to the private respondents for
standing up to what she considered her right would, in our view, be unfair
and unconsionable. Justice demands that we moderate the harsh effects of
the stipulation. Accordingly, in the exercise of our equity jurisdiction, we
hereby rule that the Contract of Conditional Sale shall be maintained
between the parties except that the petitioner shall not return the house
to the private respondents. However, she will have to pay them the
balance of the purchase price in the sum of P52,500.00, ** with 12%
annual interest from July 1, 1972, until full payment.
Obviously, rejection of the petitioner's claim for moral and exemplary
damages must also be sustained.

What we see here is a bad bargain, not an illegal transaction vitiated by

fraud. While we may commiserate with the petitioner for a purchase that
has proved unwise, we can only echo what Mr. Justice Moreland observed
in Vales v.Villa, 16 thus:
. . . Courts cannot follow one every step of his life and extricate
him from bad bargains, protect him from unwise investments,
relieve him from one-sided contracts, or annul the effects of
foolish acts. Courts cannot constitute themselves guardians of
persons who are not legally incompetent. Courts operate not
because one person has been defeated or overcome by another,
but because he has been defeated or overcome illegally. Men may
do foolish things, make ridiculous contracts, use miserable
judgment, and lose money by them indeed, all they have in the
world; but not for that alone can the law intervene and restore.
There must be, in addition, a violation of law, the commission of
what the law knows as an actionable wrong, before the courts are
authorized to lay hold of the situation and remedy it.
WHEREFORE, the appealed decision is AFFIRMED as above modified, with no
pronouncement as to costs. It is so ordered.

[G.R. No. 148332. September 30, 2003]

NATIONAL DEVELOPMENT COMPANY, petitioner, vs.
WAN HAI LINES CORPORATION, respondent.

MADRIGAL

DECISION
SANDOVAL-GUTIERREZ, J.:
Before us is a petition for review on certiorari assailing the Decision
of the Court of Appeals dated May 21, 2001 in CA-G.R. CV No. 66026,
affirming with modification the Decision dated August 6, 1999 of the
Regional Trial Court, Branch 62, Makati City, in Civil Case No. 96-558 for
sum of money and damages.
[1]

The factual antecedents are:

The National Development Company, petitioner, is a governmentowned and controlled corporation created and existing under
Commonwealth Act No. 182, as amended by Presidential Decree No.
1648. The National Shipping Corporation of the Philippines (NSCP) is a
wholly-owned subsidiary of petitioner offering shipping services for
containerized cargo between the Far East ports and the U.S. West Coast. [2]
On March 1, 1993, petitioners Board of Directors approved the
privatization plan of the NSCP. [3] In May 1993, the Board offered for sale to
the public its one hundred percent (100%) stock ownership in NSCP
worth P150,000.00, as well as its three (3) ocean-going vessels (M/V
National Honor, M/V National Pride and M/V National Dignity).[4]
Consequently, petitioner released to the public an Information
Package[5] containing NSCPs background, assets, operational and
financial status. Attached thereto is NSCPs Financial Statements covering
the period from December 1990 up to 1992.

The Information Package likewise contained the Negotiated Sale

Guidelines which embodied the terms and conditions of the
proposed sale. Attached thereto is a Proposal Letter Form[6] wherein
bidders were advised to submit their bids to be specified in the same
form. Petitioners desired price for the NSCP shares of stock and the
vessels was Twenty-Six Million Seven Hundred Fifty Thousand US Dollars
($26,750,000.00).[7]
During the public bidding on May 7, 1993, the lone bidder was herein
respondent, Madrigal Wan Hai Lines Corporation, a domestic private
corporation duly organized and existing under the Philippine laws with
principal office in Manila. Mr. Willie J. Uy, respondents Consultant,
submitted a bid of $15 million through the Proposal Letter Form. [8]
The respondents bid was rejected by petitioner and the Commission
on Audit.
But since there was no other bidder, petitioner entered into a
negotiated sale with respondent. [9] After several negotiations, respondent
increased its offer to $18.5 million which was accepted by petitioner. The
negotiated sale was then approved by petitioners Board of Directors on
August 26, 1993, the President of the Philippines on September 28, 1993,
the Committee on Privatization on October 7, 1993, and the Commission
on Audit on February 2, 1994.[10]
Accordingly, on February 11, 1994, petitioner issued a Notice of
Award to respondent of the sale of the NSCP shares and vessels for $18.5
million.[11] On March 14, 1994, petitioner and respondent executed
the corresponding Contract of Sale,[12] and the latter acquired
NSCP, its assets, personnel, records and its three (3) vessels.[13]
On September 22, 1994, respondent was surprised to receive
from the US Department of Treasury, Internal Revenue Service
(US IRS), a Notice of Final Assessment against NSCP for deficiency
taxes on gross transportation income derived from US sources for
the years ending 1990, 1991 and 1992.[14] The tax assessment was
based on Section 887 of the US Internal Revenue Code imposing a 4% tax
on gross transportation income of any foreign corporation derived from US
sources.[15]

Anxious that the delay in the payment of the deficiency taxes may
hamper its shipping operations overseas, respondent, on October 14,
1994, assumed and paid petitioners tax liabilities, including the
tax due for the year 1993, in the total amount of
$671,653.00. These taxes were incurred prior to respondents
take-over of NSCPs management.[16]Respondent likewise paid the
additional amount of $16,533.10 as penalty for late payment.[17]
Eventually, respondent demanded from petitioner reimbursement for
the amounts it paid to the US IRS. But petitioner refused despite repeated
demands. Hence, on March 20, 1996, respondent filed with the Regional
Trial Court (RTC), Branch 62, Makati City a complaint [18] against petitioner
for reimbursement and damages, docketed as Civil Case No. 96-558.
On August 6, 1999, the RTC rendered a Decision [19] in favor of
respondent and against petitioner. The trial court found, among others,
that even before the sale, petitioner knew that NSCP had tax liabilities
with the US IRS, yet it did not inform respondent about it. The dispositive
portion of the RTC Decision reads:
WHEREFORE, premises considered, judgment is hereby rendered as
follows:
(1) defendant (now petitioner) to pay plaintiff (now respondent), to wit:
a. US $671,653, US $14,415.87, and US $2,117.23 or their
peso equivalent at the time of payment;
b. 6% interest of the above-mentioned amounts per annum
from the time of the filing of the complaint until
the same shall have been fully paid;
c. P100,000.00 as exemplary damages;
d. P100,000.00 as attorneys fees;
(2) The Counterclaims of the defendant dated August 20, 1996 is
DISMISSED.[20]
Upon appeal, the Court of Appeals rendered a Decision [21] on May 21,
2001 affirming the trial courts judgment with modification, thus:

WHEREFORE, upon the premises, the Decision appealed from

is AFFIRMED with the MODIFICATION that the award of exemplary
damages
is DELETED and
the
award
of
attorneys
fees
isREDUCED to P20,000.00.
SO ORDERED.[22]
The Court of Appeals held:
We concur with the trial court in ordering defendant-appellant (now
petitioner) to reimburse plaintiff-appellee (now respondent) the deficiency
taxes it paid to the US IRS, and quote with favor its well-written
ratiocination as follows:
In its effort to extricate itself from liability, defendant further argues that
the sale with the plaintiff was on CASH, AS-WHERE-IS basis and that
plaintiff, as an offeror, was responsible for informing itself with respect to
any and all conditions regarding the NSCP shares and vessels which may
in any manner affect the offer price or the nature of offerors proposal
(Exhs. 8, 8-A to A-B).
The above-mentioned contracts form part of the NSCPs Negotiated Sale
Guidelines dated March 1993 prepared by NSCP and required by NDC (now
petitioner) to be attached with the Proposal Letter Form, which was also
prepared by NSCP, and submitted to NDC by bidders. These contracts are
ready-made form of contracts, the preparation of which was left entirely to
the NSCP. Their nature is that of a contract of adhesion. A contract of
adhesion may be struck down as void and unenforceable, for being
subversive of public policy, when the weaker party is imposed upon in
dealing with the dominant bargaining party and is reduced to the
alternative of taking it or leaving it, completely deprived of the opportunity
to bargain on equal footing (Saludo, Jr. vs. Court of Appeals, 207 SCRA 498
[1992]). In the case at bar, the acceptance of the Negotiated Sale
Guidelines and submission thereof together with the Proposal Letter Form
by a prospective buyer is a required formality of the bidding. Under the
circumstance, the plaintiff, in taking such contracts, may not be deemed
to have been given the opportunity to bargain on equal footing. [23]
Petitioner now comes to us via the instant petition, ascribing to the
Court of Appeals the following error:

THE COURT OF APPEALS ERRED IN CONCURRING WITH THE TRIAL COURT

IN ORDERING HEREIN PETITIONER TO REIMBURSE RESPONDENT THE
DEFICIENCY TAXES IT PAID TO THE US IRS. [24]
Petitioner contends that contrary to the findings of both lower courts,
the Negotiated Sale Guidelines and the Proposal Letter Form are mere
invitations to bid. As such, they are not contracts and should be treated as
mere offer or proposal to prospective buyers of the NSCP shares and
marine vessels.[25]
Petitioner further stresses that the sale was on an AS IS, WHERE IS
basis.[26] By accepting the terms and conditions of the sale, respondent, in
effect, accepted the risk of an AS IS, WHERE IS arrangement wherein the
latter is charged with caution under the principle of caveat emptor.
[27]
Pursuant to the Negotiated Sale Guidelines and the Proposal Letter
Form, respondent should have apprised itself of the financial status and
liabilities of NSCP and its marine vessels. Therefore, for its predicament,
respondent should not fault petitioner. [28]
For its part, respondent maintains that the Court of Appeals did not
commit any error in its challenged Decision. The Negotiated Sale
Guidelines and the Proposal Letter Form constitute a contract of adhesion
because the buyer was required to submit its bid through a proforma proposal letter.[29] The offer to bidders was on a take it, or leave it
basis, leaving no room for argument or negotiation, except as to the price.
[30]
Being a contract of adhesion, it should be strictly construed against the
seller, herein petitioner.[31]
Respondent also contends that under Articles 19, [32] 20[33] and 21[34] of
the Civil Code, petitioner had then the legal duty to disclose its tax
liabilities. Records show that respondent repeatedly inquired from
petitioner about such matter. [35] Instead of telling the truth, petitioner
made several assurances that the NSCP was a clean, lien-free going
concern and profitable entity. [36] In fact, under Section 7.01 of the
Negotiated Sale Guidelines, petitioner made a warranty against any lien or
encumbrance.[37]
In this petition, the issues for our resolution are:
(1) Whether the Negotiated Sale Guidelines and the Proposal Letter Form
constitute a contract of adhesion; and

(2) Whether petitioner is legally bound to reimburse respondent for the

amounts it paid corresponding to the formers tax liabilities to the US IRS.
On the first issue, we agree with both lower courts that the
Negotiated Sale Guidelines and the Proposal Letter Form constitute a
contract of adhesion.
A contract of adhesion is one in which one of the parties imposes a
ready-made form of contract, which the other party may accept or reject,
but which the latter cannot modify. In other words, in such contract, the
terms therein are fixed by one party, and the other party has merely to
take it, or leave it.[38] Thus, it can be struck down as void and
unenforceable for being subversive of public policy, especially when the
will of the dominant party is imposed upon the weaker party and the latter
is denied the opportunity to bargain on equal footing.[39]
It must be stressed, however, that contracts of adhesion are not
strictly against the law. In Ong Yiu vs. Court of Appeals[40] and Pan
American World Airways, Inc. vs. Intermediate Appellate Court,[41] we held
that contracts of adhesion wherein one party imposes a ready-made form
of contract on the other are not entirely prohibited. The other party is free
to reject it entirely; if he adheres, he gives his consent.
Nevertheless, the inequality of bargaining positions and the resulting
impairment of the other partys freedom to contract necessarily call upon
us to exercise our mandate as a court of justice and equity. Indeed, we
have ruled that contracts of such nature obviously call for greater
strictness and vigilance on the part of the courts of justice with a view to
protecting the weaker party from abuses and imposition and prevent their
becoming traps for the unwary.[42]
In the case at bar, the Negotiated Sale Guidelines and Proposal Letter
Form fit the characteristics of a contract of adhesion. On their very face,
these documents show that petitioner NDC had control over the terms and
conditions of the sale. The Negotiated Sale Guidelines provides:
4.0 PREPARATION OF OFFERS
4.01 Offerors shall use the Proposal Letter Form for
Sale of NSCP and Vessels provided herein.

4.02 All offers should be accompanied by: x x x (b)

the Negotiated Sale Guidelines duly signed
by the offeror or authorized representative
in every page thereof x x x.
xxxxxxxxx

xxxxxxxxx
5. We represent and warrant that: (i) we have examined and understood
the Information Package, (ii) we accept the conditions of the March,
1993 Negotiated Sale Guidelines, including the right of NDC and
APT to reject any and all offers without thereby creating any
liability in our favor x x x.[44] (Underscoring ours)

14.0 OTHER PROVISIONS

14.01 NDC and APT reserve the right in their discretion to
reject any and all offers, to waive any formality
therein and of these guidelines, and to
consider only such offer as may be advantageous
to the National Government.
NDC and APT may, at their discretion require
additional information and/or documents from any
offeror.
14.02 NDC and APT reserve the right to amend the
Guidelines prior to the submission of offers x
x x.
xxxxxxxxx
14.05 Violation of any of these terms and conditions
shall cause the cancellation of the award and
the automatic forfeiture of the deposit.
[43]
(Underscoring ours)
The Proposal Letter Form provides that the bidder is bound by the
Negotiated Sale Guidelines, thus:
It is understood that:
1. We accept and undertake without any reservations whatsoever
that, if this offer to purchase the vessels and NSCP shares is
accepted, we shall be subjected to all the terms and conditions
issued by the NDC and APT including those outlined in the March,
1993 Information Memorandum and the Negotiated Sale
Guidelines for the sale of NSCP and the three vessels.

Clearly, respondent had hardly any say in the terms and conditions
expressed in the Negotiated Sale Guidelines. Other than the price of the
offer, respondent was left with little or no alternative at all but to comply
with its terms. Thus, the trial court correctly found:
The above-mentioned contracts form part of NSCPs Negotiated Sale
Guidelines dated March 1993 prepared by NSCP and required by NDC to
be attached with the Proposal Letter Form, which was also prepared by
NSCP, and submitted to NDC by bidders. These contracts are readymade form of contracts, the preparation of which was left entirely
to the NSCP. Their nature is that of a contract of adhesion. x x x. In
the case at bar, the acceptance of the Negotiated Sale Guidelines and
submission thereof together with the Proposal Letter Form by a
prospective buyer is a required formality of the bidding. Under this
circumstance, the plaintiff, in taking such contracts, may not be deemed
to have been given the opportunity to bargain on equal footing.
[45]
(Underscoring ours)
Being a contract of adhesion, we reiterate that it is our duty to apply
a strict construction of its terms upon the party who made the same [46] and
to construe any ambiguity in such contract against its author. [47] It is public
policy to protect a party (herein respondent) against oppressive and
onerous conditions.[48]
We are not impressed by petitioners argument that the Negotiated
Sale Guidelines was a mere invitation to bid. [49] On the contrary, the
Contract of Sale itself provides that it is an integral part or applicable to
this Contract, thus:
8. All of the terms and conditions of (a) the March 1993 NDC
Information Memorandum and Negotiated Sale Guidelines,
including the amendments thereto, more particularly those contained in
NDCs letter to A. P. Madrigal Steamship Co. Inc. dated May 4, 1993, and
(b) the Notice of Award dated February 11, 1993 are hereby

incorporated herein by reference and shall insofar as they are not

inconsistent with the terms and conditions hereof, be applicable
to this Contract.[50] (Underscoring ours)
We now determine whether petitioner is obliged under the law and
the contract to reimburse respondent for the amounts it paid
corresponding to the formers US tax liabilities. We quote with approval the
trial courts findings affirmed by the Court of Appeals, thus:
From the foregoing facts, there is no doubt that during the negotiation for
the sale of defendants (now petitioners) shares of stocks and three (3)
ocean-going vessels, NSCP was already aware of an impending
assessment by the US government on NSCPs gross transportation income
derived from US sources. The exchanges of communications (Exhibits
D, E, F, G, H and I) between NSCP and US IRS are glaring proof of
NSCPs prior knowledge of a possible assessment or additional
taxes. Moreover, in the Partial Printout of NSCPs Unaudited
Financial Statements for the Year ending December 31, 1993
(Exhibit V), NSCP made provisions for US taxes as follows: for the
year ending 1993, US $3,919,018.81 (Exh. V-2), and for the years ending
1990-1992, US $11,736,192.64 (Exh. V-3). Exhibit V is a clear indication
that, indeed, NSCP had prior knowledge of such deficiency taxes, and in
fact, recognized the same even though there was no final assessment yet
from the US IRS.[51]
xxxxxxxxx
The Partial Printout of NSCPs Unaudited Financial Statements for the Year
ending December 1993 (Exhs. 2, 2-A to 2-B or Exhs. V, V-2 to V-3), true to
the word of the defendant (now petitioner), carries provisions for US
taxes. The problem, however, with this evidence is there is no
showing that this had been furnished the plaintiff (now
respondent). On the contrary, plaintiff vehemently asserts having been
denied by defendant access to the latters accounting books and financial
statements. Basic in the law of evidence that he who asserts the
affirmative of the allegation has the burden of proving it (Geraldez vs. CA,
230 SCRA 320). The defendant has failed to prove that the
pertinent statement made in this document or the document itself
had been disclosed to the plaintiff.
The Unaudited Financial Statements of NSCP (Exhs. 3, 3-A and 3-B), which
allegedly includes the subject US taxes among NSCPs Trade Payable and

Accrued Expenses and Dividends, does not clearly indicate the said
taxes. The Trade Payable and Accrued Expenses and Dividends as
including the said taxes is vague or unequivocal on the matter. By
mere reading of it, one would not have the slightest inkling or
suspicion that such taxes exist as among NSCPs liabilities.
[52]
(Underscoring ours)
There is no dispute that petitioner was aware of its US tax liabilities
considering its numerous communications with the agents of the United
States Internal Revenue Service, just prior to the sale of NSCP and the
marine vessels to respondent.[53] The NSCP itself made an ambiguous
contingent provision in its Unaudited Financial Statements for the year
ending December 1993, thereby indicating its awareness of a possible US
tax assessment.[54] It bears stressing that petitioner did not convey such
information to respondent despite its inquiries. [55]Obviously, such
concealment constitutes bad faith on its part. Bad faith implies a
conscious and intentional design to do a wrongful act for a dishonest
purpose or moral obliquity; it x x x contemplates a state of mind
affirmatively operating with furtive design or ill will.[56]
We see no reason to disturb the factual findings of both the trial court
and Court of Appeals which petitioner does not dispute. Absent any
showing that such findings were reached arbitrarily or without sufficient
basis, the same must be respected and binding upon us. [57]
That petitioner has the obligation to reimburse respondent is likewise
clear under the Negotiated Sale Guidelines, which provides:
7.0 OFFERORS RESPONSIBILITY
7.01 x x x. Seller gives no warranty regarding the sale of
the shares and assets except for a warranty on
ownership and against any liens or encumbrances,
and the offeror shall not be relieved of his obligation to
make the aforesaid examinations and verifications.
[58]
(Underscoring ours)
The terms of the parties contract are clear and unequivocal. The
seller (petitioner NDC) gives a warranty as to the ownership of the object
of sale and against any lien and encumbrance. A tax liability of
$688,186.10 was then a potential lien upon NSCPs marine vessels. Being
in bad faith for having failed to inform the buyer, herein respondent, of

such potential lien, petitioner breached its warranty and should, therefore,
be held liable for the resulting damage, i.e., reimbursement for the
amounts paid by petitioner to the US IRS.

Justice and equity thus oblige that petitioner be held liable for NSCPs
tax liabilities and reimburse respondent for the amounts it paid. It would
be unjust enrichment on the part of petitioner to be relieved of that
obligation.

The Negotiated Sale Guidelines further provides:

2.0 TERMS OF SALE
2.01 The sale of the NSCP and the three vessels shall be
strictly on CASH, AS IS-WHERE IS basis.
[59]
(Underscoring ours)
In Hian vs. Court of Tax Appeals,[60] we had the occasion to construe the
phrase as is, where is basis, thus:
We cannot accept the contention in the Governments Memorandum of
March 31, 1976 that Condition No. 5 in the Notice of Sale to the effect that
The above-mentioned articles (the tobacco) are offered for sale AS IS and
the Bureau of Customs gives no warranty as to their condition relieves the
Bureau of Customs of liability for the storage fees in dispute. As we
understand said Condition No. 5, it refers to thephysical condition of
the tobacco and not to the legal situation in which it was at the
time of the sale, as could be implied from the right of inspection to
prospective bidders under Condition No. 1. x x x. (Underscoring ours)
The phrase as is, where is basis pertains solely to
the physical condition of the thing sold, not to its legal situation. In the
case at bar, the US tax liabilities constitute a potential lien which applies
to NSCPs legal situation, not to its physical aspect. Thus, respondent as a
buyer, has no obligation to shoulder the same.
The case at bar calls to mind the principle of unjust enrichment Nemo
cum alterius detrimento locupletari potest. No person shall be allowed to
enrich himself unjustly at the expense of others. This principle of equity
has been enshrined in our Civil Code, Article 22 of which provides:
Art. 22. Every person who through an act or performance by another or by
any other means, acquires or comes into possession of something at the
expense of the latter without just or legal ground, shall return the same to
him.

The deletion of the award of exemplary damages and reduction of the

attorneys fees by the Court of Appeals are not challenged by either of the
parties. At any rate, we find no error in its ruling quoted hereunder:
However, we find no basis for the grant of exemplary damages which can
be granted only in addition to moral, temperate, liquidated or
compensatory damages (Art. 2229, Civil Code of the Philippines), none of
which was awarded or deserved in this case. The trial court merely
granted plaintiffs prayer in its main cause of action for reimbursement of
taxes plaintiff paid to the U.S. Since no actual or moral damages was
awarded, there is no legal basis for the award of exemplary damages
which may only be granted in addition thereto (Scott Consultants and
Resources Development Corp. Inc. vs. CA, 242 SCRA 393).
Anent the award of attorneys fees, we find it excessive, considering that
the instant case is a simple action for reimbursement and did not involve
extensive litigation. Nothing precludes the appellate courts from reducing
the award of attorneys fees when it is found to be unconscionable or
excessive under the circumstances (Brahm Industries Inc. vs. NLRC, 280
SCRA 828). Thus, the award of attorneys fees is reduced to P20,000.00.[61]
WHEREFORE, the petition is DENIED and the assailed Decision of the
Court of Appeals is AFFIRMED.

G.R. No. 73913 January 31, 1989

JERRY T. MOLES, petitioner,
vs.
INTERMEDIATE APPELLATE COURT and MARIANO M.
DIOLOSA, respondents.
Zoilo V. De la Cruz, Jr., Kenneth Barredo, Romeo Sabig and Natalio V. Sitjao
for petitioners.
Rolando N. Medalla and Jose G. Guinez, Jr., for private respondents.
REGALADO, J.:
This petition for review on certiorari assails the decision of the then
Intermediate Appellate Court 1 dismissing the complaint filed by herein
petitioner against the herein private respondent in the former Court of
First Instance of Negros Occidental in Civil Case No. 13821 thereof. 2
The factual backdrop of this controversy, as culled from the
records, 3 shows that on May 17, 1978, petitioner Jerry T. Moles
commenced a suit against private respondent Mariano M. Diolosa in the
aforesaid trial court, Branch IV in Bacolod City, for rescission of contract
with damages. Private respondent moved to dismiss on the ground of
improper venue, invoking therefor Sales Invoice No. 075A executed
between petitioner and private respondent on April 23, 1977 which
provides that all judicial actions arising from this contract shall be
instituted in the City of Iloilo. 4 This was opposed by petitioner who
averred that there is no formal document evidencing the sale which is
substantially verbal in character. In an order dated June 23, 1978, the trial
court denied the motion to dismiss, holding that the question of venue
could not be resolved at said stage of the case. The subsequent motion for
reconsideration was likewise denied.
Consequently, private respondent, invoking the aforesaid venue
stipulation, preceeded to this Court on a petition for prohibition with
preliminary injunction in G.R. No. 49078, questioning the validity of the
order denying his aforesaid two motions and seeking to enjoin the trial
court from further proceeding with the case. This petition was dismissed
for lack of merit in a resolution of the Court, dated February 7, 1979, and
which became final on March 15, 1979. Thereafter, private respondent
filed his answer and proceeded to trial.

The aforecited records establish that sometime in 1977, petitioner needed

a linotype printing machine for his printing business, The LM Press at
Bacolod City, and applied for an industrial loan with the Development
Bank of the Philippines. (hereinafter, DBP) for the purchase thereof. An
agent of Smith, Bell and Co. who is a friend of petitioner introduced the
latter to private respondent, owner of the Diolosa Publishing House in Iloilo
City, who had two available machines. Thereafter, petitioner went to Iloilo
City to inspect the two machines offered for sale and was informed that
the same were secondhand but functional.
On his second visit to the Diolosa Publishing House, petitioner together
with Rogelio Yusay, a letter press machine operator, decided to buy the
linotype machine, Model 14. The transaction was basically verbal in nature
but to facilitate the loan application with the DBP, a pro forma invoice,
dated April 23, 1977 and reflecting the amount of P50,000.00 as the
consideration of the sale, was signed by petitioner with an addendum that
payment had not yet been made but that he promised to pay the full
amount upon the release of his loan from the aforementioned bank on or
before the end of the month. 5 Although the agreed selling price was only
P40,000.00, the amount on the invoice was increased by P10,000.00, said
increase being intended for the purchase of new matrices for said
machine.
Sometime between April and May, 1977, the machine was delivered to
petitioner's publishing house at Tangub, Bacolod City where it was
installed by one Crispino Escurido, an employee of respondent Diolosa.
Another employee of the Diolosa Publishing House, Tomas Plondaya,
stayed at petitioners house for almost a month to train the latter's cousin
in operating the machine. 6
Under date of August 29, 1977, private respondent issued a certification
wherein he warranted that the machine sold was in A-1 condition, together
with other express warranties. 7
Prior to the release of the loan, a representative from the DBP, Bacolod,
supposedly inspected the machine but he merely looked at it to see that it
was there . 8 The inspector's recommendation was favorable and,
thereafter, petitioner's loan of P50,000.00 was granted and released.
However, before payment was made to private respondent, petitioner
required the former, in a letter dated September 30, 1977, to accomplish
the following, with the explanations indicated by him:

1.) Crossed check for P15,407.10 representing.

a) P 10,000.00-Overprice in the machine:
b) P203.00-Freight and handling of the machine;
c) P203.00-Share in the electric repair; and
d) P5,000.00- Insurance that Crispin will come back and
repair the linotype machine at seller's account as provided
in the contract; after Crispin has put everything in order
when he goes home on Sunday he will return the check of
P15,000.00.
2) Official receipt in the amount of P 50,000.00 as full
payment of the linotype machine.
These were immediately complied with by private respondent and on the
same day, September 30,1977, he received the DBP check for
P50,000.00. 9
It is to be noted that the aforesaid official receipt No. 0451, dated
September 30, 1977 and prepared and signed by private respondent,
expressly states that he received from the petitioner the DBP check for
P50,000.00 issued in our favor in full payment of one (1) Unit Model 14
Linotype Machine as per Pro forma Invoice dated April 23, 1977. 10
On November 29, 1977, petitioner wrote private respondent that the
machine was not functioning properly as it needed a new distributor bar.
In the same letter, petitioner unburdened himself of his grievances and
sentiments in this wise.
We bought this machine in good faith because we trusted
you very much being our elder brother in printing and
publishing business. We did not hire anybody to look over
the machine, much more ask for a rebate in your price of
P40,000.00 and believed what your trusted two men,
Tomas and Crispin, said although they were hiding the real
and actual condition of the machine for your business
protection.

Until last week, we found out the worst ever to happen to

us. We have been cheated because the expert of the
Linotype machine from Manila says, that the most he will
buy your machine is at P5,000.00 only. ... 11
Private respondent made no reply to said letter, so petitioner engaged the
services of other technicians. Later, after several telephone calls regarding
the defects in the machine, private respondent sent two technicians to
make the necessary repairs but they failed to put the machine in running
condition. In fact, since then petitioner was never able to use the
machine. 12
On February 18, 1978, not having received from private respondent the
action requested in his preceding letter as herein before stated, petitioner
again wrote private respondent, this time with the warning that he would
be forced to seek legal remedies to protect his interest. 13
Obviously in response to the foregoing letter, private respondent decided
to purchase a new distributor bar and, on March 16, 1978, private
respondent delivered this spare part to petitioner through one Pedro
Candido. However, when thereafter petitioner asked private respondent to
pay for the price of the distributor bar, the latter asked petitioner to share
the cost with him. Petitioner thus finally decided to indorse the matter to
his lawyer.
An expert witness for the petitioner, one Gil Legaspina, declared that he
inspected the linotype machine involved in this case at the instance of
petitioner. In his inspection thereof, he found the following defects: (1) the
vertical automatic stop lever in the casting division was worn out; (2) the
justification lever had a slight breach (balana in the dialect); (3) the
distributor bar was worn out; (4) the partition at the entrance channel had
a tear; (5) there was no "pie stacker" tube entrance; and (6) the slouch
arm lever in the driving division was worn out.
It turned out that the said linotype machine was the same machine that
witness Legaspina had previously inspected for Sy Brothers, a firm which
also wanted to buy a linotype machine for their printing establishment.
Having found defects in said machine, the witness informed Sy Brother
about his findings, hence the purchase was aborted. In his opinion, major
repairs were needed to put the machine back in good running condition. 14

After trial, the court a quo rendered a decision the dispositive portion of
which reads:
IN VIEW OF THE FOREGOING CONSIDERATIONS, judgment
is hereby rendered as follows:
(1) Decreeing the rescission of the contract of sale
involving one linotype machine No. 14 between the
defendant as seller and the plaintiff as buyer;
(2) Ordering the plaintiff to return to the defendant at the
latter's place of business in Iloilo City the linotype machine
aforementioned together with all accessories that
originally were delivered to the plaintiff;
(3) Ordering the defendant to return to the plaintiff the
sum of Forty Thousand Pesos (P40,000.00) representing
the price of the linotype machine, plus interest at the legal
rate counted from May 17, 1978 when this action was
instituted, until fully paid;
(4) Ordering the defendant to indemnify the plaintiff the
sum of Four Thousand Five Hundred Pesos (P4,500.00)
representing unearned income or actual damages;
(5) Ordering the defendant to pay the plaintiff the sum of
One Thousand Pesos (Pl,000.00) for attorney's fees.
Costs against the defendant. 15
From this decision, private respondent appealed to the Intermediate
Appellate Court which reversed the judgment of the lower court and
dismissed petitioner's complaint, hence the present petition.
We find merit in petitioner's cause.
On the matter of venue, private respondent relies on the aforementioned
Sales Invoice No. 076A which allegedly requires that the proper venue
should be Iloilo City and not Bacolod City. We agree with petitioner that
said document is not the contract evidencing the sale of the linotype
machine, it being merely a preliminary memorandum of a proposal to buy
one linotype machine, using for such purpose a printed form used for

printing job orders in private respondent's printing business. As

hereinbefore explained, this issue on venue was brought to Us by private
respondent in a special civil action for prohibition with preliminary
injunction in G.R. No. 49078. After considering the allegations contained,
the issues raised and the arguments adduced in said petition, as well as
the comments thereto, the Court dismissed the petition for lack of merit.
Respondent court erred in reopening the same issue on appeal, with a
contrary ruling.
Furthermore, it was error for the respondent court, after adopting the
factual findings of the lower court, to reverse the latter's holding that the
sales invoice is merely a pro forma memorandum. The records do not
show that this finding is grounded entirely on speculation, surmises or
conjectures as to warrant a reversal thereof. 16 In fact, as hereinbefore
stated, private respondent expressly admitted in his official receipt No.
0451, dated September 30, 1977, that the said sales invoice was merely
a pro forma invoice. Consequently, the printed provisions therein,
especially since the printed form used was for purposes of other types of
transactions, could not have been intended by the parties to govern their
transaction on the printing machine. It is obvious that a venue stipulation,
in order to bind the parties, must have been intelligently and deliberately
intended by them to exclude their case from the reglementary rules on
venue. Yet, even such intended variance may not necessarily be given
judicial approval, as, for instance, where there are no restrictive or
qualifying words in the agreement indicating that venue cannot be laid in
any place other than that agreed upon by the parties, 17 and in contracts
of adhesion. 18
Now, when an article is sold as a secondhand item, a question arises as to
whether there is an implied warranty of its quality or fitness. It is generally
held that in the sale of a designated and specific article sold as
secondhand, there is no implied warranty as to its quality or fitness for the
purpose intended, at least where it is subject to inspection at the time of
the sale. On the other hand, there is also authority to the effect that in a
sale of a secondhand articles there may be, under some circumstances, an
implied warranty of fitness for the ordinary purpose of the article sold or
for the particular purpose of the buyer. 19
In a line of decisions rendered by the United States Supreme Court, it had
theretofore been held that there is no implied warranty as to the condition,
adaptation, fitness, or suitability for the purpose for which made, or the
quality, of an article sold as and for a secondhand article. 20

Thus, in finding for private respondent, the respondent court cited the
ruling in Sison vs. Ago, et al. 21 to the effect that unless goods are sold as
to raise an implied warranty, as a general rule there is no implied warranty
in the sale of secondhand articles. 22

Furthermore, and of a more determinative role in this case, a perusal of

past American decisions 24 likewise reveals a uniform pattern of rulings to
the effect that an express warranty can be made by and also be binding
on the seller even in the sale of a secondhand article.

Said general rule, however, is not without exceptions. Article 1562 of our
Civil Code, which was taken from the Uniform Sales Act, provides:

In the aforecited case of Markman vs. Hallbeck, while holding that there
was an express warranty in the sale of a secondhand engine, the court
said that it was not error to refuse an instruction that upon the sale of
secondhand goods no warranty was implied, since secondhand goods
might be sold under such circumstances as to raise an implied warranty.

Art. 1562. In a sale of goods, there is an implied warranty

or condition as to the quality or fitness of the goods, as
follows:
(1) Where the buyer, expressly or by implication, makes
known to the seller the particular purpose for which the
goods are acquired, and it appears that the buyer relies on
the seller's skill or judgment (whether he be the grower or
manufacturer or not), there is an implied warranty that the
goods shall be reasonably fit for such purpose;
xxx
In Drumar Mining Co. vs. Morris Ravine Mining Co., 23 the District Court of
Appeals, 3rd District, California, in applying a similar provision of law,
ruled:
'There is nothing in the Uniform Sales Act declaring there
is no implied warranty in the sale of secondhand goods.
Section 1735 of the Civil Code declares there is no implied
warranty or condition as to the quality or fitness for any
particular purpose, of goods supplied under a contract to
sell or a sale, except (this general statement is followed by
an enumeration of several exceptions). It would seem that
the legislature intended this section to apply to all sales of
goods, whether new or secondhand. In subdivision 1 of
this section, this language is used: where the buyer ...
makes known to the seller the particular purpose for which
the goods are required, and it appears that the buyer
relies on the seller's skill or judgment ... there is an implied
warranty that the goods shall be reasonably fit for such
purpose.'

To repeat, in the case before Us, a certification to the effect that the
linotype machine bought by petitioner was in A-1 condition was issued by
private respondent in favor of the former. This cannot but be considered as
an express warranty. However, it is private respondent's submission, that
the same is not binding on him, not being a part of the contract of sale
between them. This contention is bereft of substance.
It must be remembered that the certification was a condition sine qua
non for the release of petitioner's loan which was to be used as payment
for the purchase price of the machine. Private respondent failed to refute
this material fact. Neither does he explain why he made that express
warranty on the condition of the machine if he had not intended to be
bound by it. In fact, the respondent court, in declaring that petitioner
should have availed of the remedy of requiring repairs as provided for in
said certification, thereby considered the same as part and parcel of the
verbal contract between the parties.
On the basis of the foregoing circumstances, the inescapable conclusion is
that private respondent is indeed bound by the express warranty he
executed in favor of herein petitioner.
We disagree with respondent court that private respondents express
warranty as to the A-1 condition of the machine was merely dealer's talk.
Private respondent was not a dealer of printing or linotype machines to
whom could be ascribed the supposed resort to the usual exaggerations of
trade in said items. His certification as to the condition of the machine was
not made to induce petitioner to purchase it but to confirm in writing for
purposes of the financing aspect of the transaction his representations
thereon. Ordinarily, what does not appear on the face of the written
instrument should be regarded as dealer's or trader's talk; 25 conversely,

what is specifically represented as true in said document, as in the instant

case, cannot be considered as mere dealer's talk.
On the question as to whether the hidden defects in the machine is
sufficient to warrant a rescission of the contract between the parties, we
have to consider the rule on redhibitory defects contemplated in Article
1561 of the Civil Code. A redhibitory defect must be an imperfection or
defect of such nature as to engender a certain degree of importance. An
imperfection or defect of little consequence does not come within the
category of being redhibitory.26
As already narrated, an expert witness for the petitioner categorically
established that the machine required major repairs before it could be
used. This, plus the fact that petitioner never made appropriate use of the
machine from the time of purchase until an action was filed, attest to the
major defects in said machine, by reason of which the rescission of the
contract of sale is sought. The factual finding, therefore, of the trial court
that the machine is not reasonably fit for the particular purpose for which
it was intended must be upheld, there being ample evidence to sustain
the same.
At a belated stage of this appeal, private respondent came up for the first
time with the contention that the action for rescission is barred by
prescription. While it is true that Article 1571 of the Civil Code provides for
a prescriptive period of six months for a redhibitory action a cursory
reading of the ten preceding articles to which it refers will reveal that said
rule may be applied only in case of implied warranties. The present case
involves one with and express warranty. Consequently, the general rule on
rescission of contract, which is four years 27 shall apply. Considering that
the original case for rescission was filed only one year after the delivery of
the subject machine, the same is well within the prescriptive period. This
is aside from the doctrinal rule that the defense of prescription is waived
and cannot be considered on appeal if not raised in the trial court, 28 and
this case does not have the features for an exception to said rule.
WHEREFORE, the judgment of dismissal of the respondent court is hereby
REVERSED and SET ASIDE, and the decision of the court a quo is hereby
REINSTATED.
SO ORDERED.

G.R. No. L-42636 August 1, 1985

MARIA LUISA DE LEON ESCALER and ERNESTO ESCALER, CECILIA J.
ROXAS and PEDRO ROXAS,petitioners,
vs.
COURT OF APPEALS, JOSE L. REYNOSO, now deceased, to be
substituted by his heirs or legal representatives and AFRICA V.
REYNOSO, respondents.
Avancea Law Office for petitioners.
Bauza, Ampil, Suarez, and Paredes Law Office for respondent Africa V.
Reynoso.
CUEVAS, J.:
This is a Petition for Review on certiorari of the Decision of the then Court
of Appeals (now the Intermediate Appellate Court) and of its Resolution
denying petitioners' Motion for Reconsideration, in CA G.R. No. 41953-R,
which was an appeal from the judgment of the Court of First Instance of
Rizal in Civil Case No. 9014 entitled "Maria Luisa de Leon Escaler, et al vs.
Jose L. Reynoso and Africa Reynoso."
The following are the pertinent background facts:
On March 7, 1958, the spouses Africa V. Reynoso and Jose L, Reynoso sold
to petitioners several others, a parcel of land, situated in Antipolo, Rizal
with an area of 239,479 square meters and covered by TCT No. 57400 of
the Register of Deeds of the Province of Rizal. The Deed of
Sale 1 contained the following covenant against eviction, to wit:
That the VENDOR is the absolute owner of a parcel of
land ... the ownership thereof being evidenced by an
absolute deed of sale executed in her favor by registered
owner ANGELINA C. REYNOSO, ...;
That the VENDOR warrants valid title to and ownership of
said parcel of land and further, warrant to defend the
property herein sold and conveyed, unto the VENDEES,
their heirs, and assignees, from any and all claims of any
persons whatsoever.

On April 21, 1961, the Register of Deeds of Rizal and A. Doronilla

Resources Development, Inc. filed Case No. 4252 before the Court of First
Instance of Rizal for the cancellation of OCT No. 1526 issued in the name
of Angelina C. Reynoso (predecessor-in-interest of private respondentsvendors) on February 26, 1958 under Decree No. 62373, LRC Record No.
N-13783, on the ground that the property covered by said title is already
previously registered under Transfer Certificate of Title No. 42999 issued in
the name of A. Doronilla Development, Inc. Petitioners as vendees filed
their opposition to the said petition.
On June 10, 1964, an Order
portion of which reads:

was issued in the said case, the dispositive

IN VIEW OF THE ABOVE CONSIDERATIONS, this Court is

constrained to set aside Decree No. 62373 issued in LRC.
Rec. No. N-13783 and the Register of Deeds of Rizal is
directed to cancel OCT No. 1526 of his office and all
Transfer Certificates of Title issued subsequently thereafter
to purchaser of said property or portions thereof, the same
being null and void, the expenses for such cancellation to
be charged to spouses Angelina Reynoso and Floro
Reynoso. The owner's duplicates in the possession of the
transferees of the property covered by OCT No. 1526 are
declared null and void and said transferees are directed to
surrender to the Register of Deeds of Rizal, said owner's
duplicates for cancellation.
The other reliefs sought for by the party oppositors are
denied the same not falling within the jurisdiction of this
Court under this proceeding.
SO ORDERED.
On August 31, 1965, herein petitioners, spouses Maria de Leon Escaler
and Ernesto Escaler and spouses Cecilia J. Roxas and Pedro Roxas, filed
Civil Case No. 9014 before the Court of First Instance of Rizal against their
vendors, herein private respondents, spouses Jose L. Reynoso and Africa
Reynoso for the recovery of the value of the property sold to them plus
damages on the ground that the latter have violated the vendors'
"warranty against eviction."

The complaint among others, alleged that the Order issued in Case No.
4252 which cancelled the title of Angelina C. Reynoso and all subsequent
Transfer Certificates of Title derived and/or emanating therefrom and
which includes the titles of petitioners, is now final, and by reason thereof
petitioners lost their right over the property sold; and that in said Case No.
4252, the respondents were summoned and/or given their day in court at
the instance of the petitioners. 3
The respondents, as defendants, filed their answer alleging, among others,
by way of affirmative defenses that "the cause of action, if any, of
plaintiffs against defendants have been fully adjudicated in Case No. 4252
when plaintiffs failed to file a third-party complaint against defendants." 4
On August 18, 1967, petitioners, as plaintiffs, filed a Motion for Summary
Judgment, alleging the facts already averred in the complaint, and further
alleging that the defendants were summoned and were given their day in
court at the instance of plaintiffs in Case No. 4252. In support of their said
motion, the plaintiffs attached the affidavit of Atty. Alberto R. Avancea
who had represented the plaintiffs in Case No. 4252 and had filed a joint
opposition in behalf of all the vendees. The pertinent portion of that
affidavit, states
4. That he has furnished a copy of said joint opposition to
Africa Reynoso, wife of Jose L. Reynoso, at her given
address at c/o Antipolo Enterprises, Antipolo, Rizal and the
latter had received the same, as evidenced by the
photostatic copy of the Registry Return Receipt thereto
affixed as Annex "C-l";
xxx xxx xxx
6. That he hereby executed this Affidavit to prove that said
defendants Africa Reynoso and Jose L. Reynoso were given
their day in Court and/or were afforded their opportunity
to be heard in Case No. 4252 aforecited.
On September 27, 1967, judgment was rendered by the trial court, the
pertinent portion of which reads
Considering the foregoing motion for summary judgment
and it appearing that the defendants under a Deed of
Absolute Sale (Annex "C") have expressly warranted their

valid title and ownership of the said parcel of land and

further warranted to defend said property from any and all
claims of any persons whomever in favor of plaintiffs; that
the said warranties were violated when on June 10, 1964,
an Order was promulgated by the Court of First Instance of
Rizal in Case No. 4252 (Related to LRC Case No. 1559, LRC
Record No. N13293). In Re: Petition for Cancellation of
Original Registration, etc., covering the parcel of land in
question; that said order of June 10, 1964 has become
final and executory there being no appeal interposed
thereto and defendants were summoned and were given a
day in court at the instance of the plaintiffs in Case No.
4252, the Court hereby grants the motion for summary
judgment, and hereby orders the defendants to jointly and
severally return to the plaintiffs Maria Luisa de Leon
Escaler and Ernesto Escaler, Cecilia J. Roxas and Pedro
Roxas, the value of the property sold to them at the time
of eviction which is not to be less than P5,500.00 to
reimburse to each one of the plaintiffs the expenses of
contract and litigation and the amount of P2,250.00 to pay
the attorney's fees of P1,000.00 plus the costs of suit.
SO ORDERED.
Private respondents appealed the aforesaid decision to the then Court of
Appeals 5 assigning as sole errorthat the lower court erred in finding that
they were summoned and were given their day in court at the instance of
petitioners-plaintiffs in Case No. 4252.
In reversing the decision of the trial court and dismissing the case, the
then Court of Appeals found and so ruled that petitioners as vendees had
not given private respondents-vendors, formal notice of the eviction case
as mandated by Arts. 1558 and 1559 of the New Civil Code.
Hence, the instant recourse, petitioners contending
1) that the Court of Appeals erred in applying strictly to
the instant case the provisions of Articles 1558 and 1559
of the new Civil Code; and

2) that the decision of the Court of First Instance of Rizal

should have been affirmed by the Court of Appeals or at
least, the, Court of Appeals should have remanded the
case to the trial court, for hearing on the merits.
The petition is devoid of merit. Consequently, it must be dismissed.
Article 1548, in relation to Articles 1558. and 1559 of the New Civil Code
reads as follows:
Art. 1548, Eviction shall take place whenever by a final
judgment based on a right prior to the sale or an act
imputable to the vendor, the vendee is deprived of the
whole or of a part of the thing purchased.

notice prescribed by the aforequoted Articles 1558 and 1559 of the New
Civil Code. The term "unless he is summoned in the suit for eviction at the
instance of the vendee" means that the respondents as vendor/s should
be made parties to the suit at the instance of petitioners-vendees, either
by way of asking that the former be made a co-defendant or by the filing
of a third-party complaint against said vendors. Nothing of that sort
appeared to have been done by the petitioners in the instant case.
IN VIEW OF THE FOREGOING CONSIDERATIONS, the petition is DISMISSED
and the appealed decision of the then Court of Appeals is AFFIRMED.
No pronouncement as to costs.
SO ORDERED.

The vendor shall answer for the eviction even though

nothing has been said in the contract on the subject.

Concepcion, Jr., Abad Santos, Plana, Escolin, Relova, Gutierrez, Jr. and De
la Fuente, JJ., concur.

The contracting parties, however, may increase, diminish,

or suppress this legal obligation of the vendor.

Separate Opinions
AQUINO, J., dissenting:

Art. 1558. The vendor shall not be obliged to make good

the proper warranty, unless he is summoned in the suit for
eviction at the instance of the vendee. (emphasis
supplied)
Art. 1559. The defendant vendee shall ask, within the time
fixed in the Rules of Court for answering the complaint
that the vendor be made as co-defendant.
In order that a vendor's liability for eviction may be enforced, the following
requisites must concura) there must be a final judgment; b) the
purchaser has been deprived of the whole or part of the thing sold; c) said
deprivation was by virtue of a right prior to the sale made by the vendor;
and d) the vendor has been summoned and made co-defendant in the suit
for eviction at the instance of the vendee. 6
In the case at bar, the fourth requisitethat of being summoned in the
suit for eviction (Case No. 4252) at the instance of the vendeeis not
present. All that the petitioners did, per their very admission, was to
furnish respondents, by registered mail, with a copy of the opposition they
(petitioners filed in the eviction suit. Decidedly, this is not the kind of

In 1958 Cecilia Roxas and Maria Luisa de Leon Escaler and ten other persons bought for P12,000
from Africa V Reynoso, 23.9 hectares of land located at Barrio San Isidro, Antipolo, Rizal covered
by OCT No. 1526 in the name of Angelina C. Reynoso. Africa had purchased the land from
Angelina (9-12, Record on Appeal). Escaler and Roxas obtained TCT Nos. 58389 and 58393,
respectively.
On April 21, 1961 the register of deeds of Rizal in Civil Case No. 4252, LRC Case No. 1559, Rec.
No. 13793, filed a petition for the cancellation of Decree No. N-62373 and OCT No. 1526 issued
in the name of Angelina C. Reynoso because the 23.9 hectare land covered by said decree and
title had been previously registered in the name of A. Doronilla Resources Development, Inc.
since February 20, 1956. Angelina was furnished a copy of the petition by registered mail,
Registry Receipt No. 6883. The petition was set for hearing on May 20, 1961.
It was alleged in paragraph 5 of the petition that Angelina transferred to Africa V. Reynoso the
said land. Among the 20 persons furnished copies of the petition for cancellation were Escaler
and Roxas. Escaler and Roxas filed a joint opposition to the petition for cancellation. Their
lawyer, Alberto P. Avancea, furnished Africa Reynoso and A Angelina C. Reynoso by registered
mail with copies of said opposition sent at their common Postal address, care of Antipolo
Enterprises, Antipolo, Rizal, as shown in Registry Receipts Nos. 58558 and 58559 dated June 24,
1961 (p. 85, Record of Civil Case No. 4252).
In said joint opposition, it was alleged that Escaler and Roxas were innocent purchasers for
value, that the court, as a land registration court, had no jurisdiction over the controversy and
that should the titles of Escaler and Roxas be nullified, they are entitled to relief from the
Assurance Fund.

After hearing, which lasted for three years, Judge Muoz Palma in her order of June 10, 1964
found that the land covered by Angelina Reynoso's title, OCT No. 1526, had been previously
registered in 1907 under OCT No. 301, which was cancelled by subsequent transfer certificates
of title, the latest of which is TCT No. 42999 in the name of A. Doronilla Resources Development,
Inc.
She declared void Decree No. 62373 and Angelina Reynoso's title and those derived therefrom,
like the titles of Escaler and Roxas, in accordance with the rule that the prior registration
prevails over the later registration (Legarda and Prieto vs. Saleeby, 31 Phil. 590).
The titles of Angelina and Africa (maybe relatives by affinity) were void because they were
issued for lands already registered. The titles of Angelina and Africa may be regarded as a form
of land-grabbing. The purchasers were speculators in Antipolo lots.
More than a year later, or on August 31, 1965, Escaler and Roxas in Civil Case No. 9014 sued
Africa Reynoso to enforce the warranty against eviction contained in the deed of sale executed
by Africa in 1958 in their favor. They prayed for the return to each of the plaintiffs of P5,500 as
the value of the land and P4,750 as reimbursement of "expenses of contract", attorney's fees
and litigation expenses.
Africa Reynoso in her answer alleged that Escaler and Roxas failed to file a third- party
complaint against her when the latter were sued in Civil Case No. 4252, that their action had
prescribed, that they should claim from Angelina C. Reynoso reimbursement for the expenses of
cancellation of title and that their claim is against the Assurance Fund.
Africa Reynoso filed a third-party complaint against Angelina C. Reynoso. No summons was
issued. Escaler and Roxas filed a motion for summary judgment.
On September 27, 1967, Judge Navarro ordered the spouses Africa Reynoso and Jose Reynoso to
return solidarity to the Escalers and the Roxases the value of the land amounting to P5,500, to
reimburse to each one of the plaintiffs the "expenses of contract" and litigation in the sum of
P2,250 and attorney's fees of P1,000 (61, Record on Appeal).
The Reynoso spouses appealed to the Court of Appeals which reversed the trial court's decision.
The Appellate Court held that because Escaler and Roxas did not make Africa Reynoso a codefendant in the eviction case, as required in articles 1558 and 1559 of the Civil Code, they
could not later on enforce the warranty against Africa. Escaler and Roxas appealed to this Court.
In my opinion, it was not possible for Escaler and Roxas to comply strictly with articles 1558 and
1559. The eviction took place, not in an ordinary suit wherein the vendor can be made a codefendant, but as an incident in the cancellation of title in a land registration proceeding.
In such a case, the furnishing of the vendor with a copy of the opposition was a substantial
compliance with articles 1558 and 1559. It was a notice to the vendor. Africa's vendor, Angelina,
was first notified of the cancellation proceeding.
At least, Escaler and Roxas complied with article 1481 of the old Civil Code which requires
notice to the vendor. It was not the fault of the petitioners that the eviction case assumed the
shape of a mere incident in the land registration proceeding and not that of an ordinary
contentious civil action. Africa Reynoso could not be made a co- defendant in that incident for
cancellation of title, a summary proceeding.

A contrary view would enable Africa Reynoso to enrich herself unjustly at the expense of the
petitioners.
Makasiar, C.J., Teehankee, Melencio-Herrera, Alampay, JJ., concur.
Separate Opinions
AQUINO, J., dissenting:
In 1958 Cecilia Roxas and Maria Luisa de Leon Escaler and ten other persons bought for P12,000
from Africa V Reynoso, 23.9 hectares of land located at Barrio San Isidro, Antipolo, Rizal covered
by OCT No. 1526 in the name of Angelina C. Reynoso. Africa had purchased the land from
Angelina (9-12, Record on Appeal). Escaler and Roxas obtained TCT Nos. 58389 and 58393,
respectively.
On April 21, 1961 the register of deeds of Rizal in Civil Case No. 4252, LRC Case No. 1559, Rec.
No. 13793, filed a petition for the cancellation of Decree No. N-62373 and OCT No. 1526 issued
in the name of Angelina C. Reynoso because the 23.9 hectare land covered by said decree and
title had been previously registered in the name of A. Doronilla Resources Development, Inc.
since February 20, 1956. Angelina was furnished a copy of the petition by registered mail,
Registry Receipt No. 6883. The petition was set for hearing on May 20, 1961.
It was alleged in paragraph 5 of the petition that Angelina transferred to Africa V. Reynoso the
said land. Among the 20 persons furnished copies of the petition for cancellation were Escaler
and Roxas. Escaler and Roxas filed a joint opposition to the petition for cancellation. Their
lawyer, Alberto P. Avancea, furnished Africa Reynoso and A Angelina C. Reynoso by registered
mail with copies of said opposition sent at their common Postal address, care of Antipolo
Enterprises, Antipolo, Rizal, as shown in Registry Receipts Nos. 58558 and 58559 dated June 24,
1961 (p. 85, Record of Civil Case No. 4252).
In said joint opposition, it was alleged that Escaler and Roxas were innocent purchasers for
value, that the court, as a land registration court, had no jurisdiction over the controversy and
that should the titles of Escaler and Roxas be nullified, they are entitled to relief from the
Assurance Fund.
After hearing, which lasted for three years, Judge Muoz Palma in her order of June 10, 1964
found that the land covered by Angelina Reynoso's title, OCT No. 1526, had been previously
registered in 1907 under OCT No. 301, which was cancelled by subsequent transfer certificates
of title, the latest of which is TCT No. 42999 in the name of A. Doronilla Resources Development,
Inc.
She declared void Decree No. 62373 and Angelina Reynoso's title and those derived therefrom,
like the titles of Escaler and Roxas, in accordance with the rule that the prior registration
prevails over the later registration (Legarda and Prieto vs. Saleeby, 31 Phil. 590).
The titles of Angelina and Africa (maybe relatives by affinity) were void because they were
issued for lands already registered. The titles of Angelina and Africa may be regarded as a form
of land-grabbing. The purchasers were speculators in Antipolo lots.

More than a year later, or on August 31, 1965, Escaler and Roxas in Civil Case No. 9014 sued
Africa Reynoso to enforce the warranty against eviction contained in the deed of sale executed
by Africa in 1958 in their favor. They prayed for the return to each of the plaintiffs of P5,500 as
the value of the land and P4,750 as reimbursement of "expenses of contract", attorney's fees
and litigation expenses.
Africa Reynoso in her answer alleged that Escaler and Roxas failed to file a third- party
complaint against her when the latter were sued in Civil Case No. 4252, that their action had
prescribed, that they should claim from Angelina C. Reynoso reimbursement for the expenses of
cancellation of title and that their claim is against the Assurance Fund.
Africa Reynoso filed a third-party complaint against Angelina C. Reynoso. No summons was
issued. Escaler and Roxas filed a motion for summary judgment.
On September 27, 1967, Judge Navarro ordered the spouses Africa Reynoso and Jose Reynoso to
return solidarity to the Escalers and the Roxases the value of the land amounting to P5,500, to
reimburse to each one of the plaintiffs the "expenses of contract" and litigation in the sum of
P2,250 and attorney's fees of P1,000 (61, Record on Appeal).
The Reynoso spouses appealed to the Court of Appeals which reversed the trial court's decision.
The Appellate Court held that because Escaler and R xas did not make Africa Reynoso a codefendant in the eviction case, as required in articles 1558 and 1559 of the Civil Code, they
could not later on enforce the warranty against Africa. Escaler and Roxas appealed to this Court.
In my opinion, it was not possible for Escaler and Roxas to comply strictly with articles 1558 and
1559. The eviction took place, not in an ordinary suit wherein the vendor can be made a codefendant, but as an incident in the cancellation of title in a land registration proceeding.
In such a case, the furnishing of the vendor with a copy of the opposition was a substantial
compliance with articles 1558 and 1559. It was a notice to the vendor. Africa's vendor, Angelina,
was first notified of the cancellation proceeding.
At least, Escaler and Roxas complied with article 1481 of the old Civil Code which requires
notice to the vendor. It was not the fault of the petitioners that the eviction case assumed the
shape of a mere incident in the land registration proceeding and not that of an ordinary
contentious civil action. Africa Reynoso could not be made a co- defendant in that incident for
cancellation of title, a summary proceeding.
A contrary view would enable Africa Reynoso to enrich herself unjustly at the expense of the
petitioners.

G.R. No. L-41233 November 21, 1979

J.M. TUASON & CO., INC., petitioner,
vs.
HON. COURT OF APPEALS, ALFONSO DE LEON and ROSARIO G. DE
LEON, respondents.
Araneta, Mendoza & Papa for petitioner.
Martin B. Laurea for private respondents.
DE CASTRO, J.:
Appeal by certiorari from the decision of respondent Court of Appeals (CAG.R. No. 54695-R) affirming with modification the decision of the Court of
First Instance of Manila in Civil Case No. 89119, which is an action based
on warranty against eviction, and to recover the value of a subdivision lot
at the time of eviction, plus damages.
The following facts may be regarded as without any dispute:
On January 31, 1952, petitioner J.M. Tuason & Co., Inc. executed, in favor
of Ricardo de Leon, a contract to sell Lot No. 15, Block 460 of the Sta.
Mesa Heights Subdivision containing an area of 1,703.6 square meters
with the agreed price of P24.60 per square meter or a total of P41,908.56.
At the execution of the contract, Ricardo de Leon paid the down-payment
of P4,190.86 and agreed to pay the balance in the monthly installment of
P498.63 including the agreed annual interest of 10% (Exhibit A).
Meanwhile, on April 10, 1953, petitioner signed a compromise agreement
with the Deudors (in another Civil Case No. Q-135, captioned Florencio
Deudor, et al. vs. J.M. Tuason, et al.).
On July 19, 1965 with the consent of the petitioner, Ricardo de Leon
transferred all his rights to the lot in favor of his parents, herein private
respondents Alfonso and Rosario de Leon (exhibit B). On the same date,
private respondents paid the outstanding balance of the purchase price
(Exhibit 1-B). On August 5, 1965 petitioner executed in favor of private
respondents the deed of sale over the lot (Exhibit C) and upon its
registration, the Register of Deeds issued to the respondents the Transfer
Certificate of Title No. 96143 (Exhibit 3; Annex B, Rollo, 39-40).

At the time of the execution of the contract to sell, the contracting parties
knew that a portion of the lot in question was actually occupied by Ramon
Rivera. However, it was their understanding that the latter will be ejected
by the petitioner from the premises (Annex B, Id).
On May 13, 1958, herein petitioner filed a complaint of ejectment against
Ramon Rivera before the Court of First Instance of Rizal (Civil Case No. Q2989) and later petitioner petitioner Ricardo de Leon and respondents
Alfonso and Rosario de Leon as necessary parties. In this Civil Case No. Q2989, the decision of the lower court, principally based on the compromise
agreement executed in another Civil Case No. Q-135 entitled Florencio
Deudor, et al. vs. J.M. Tuason, et al. has the following dispositive portion:
WHEREFORE, the complaint against the defendant Ramon Rivera is hereby
DISMISSSED ordering the plaintiff to enter into an agreement with Ramon
Rivera allowing said defendant to purchase 1,050 square meters to
land now covered by Lot 15, Block 460 of the Sta. Mesa Heights
Subdivision to be priced at the prevailing cost in the year 1958 which is
placed by this Court to be P60.00 per square meters; to pay attorney's fees
of P3,000.00 to defendant Ramon Rivera, with costs against the plaintiff ...
(Emphasis supplied)

The Court of Appeals wholly affirmed this decision with costs against
plaintiff-appellant J.M. Tuason & Co., Inc. (CA-G.R. No. 38212-R), and
denied the motion for reconsideration filed by the other plaintiffsappellants Alfonso and Rosario de Leon, stating among others: ... We
believe, however, that these questions should be properly ventilated in the
proper action which the plaintiffs- appellants, the De Leons, may file
against the plaintiff-appellant (J.M. Tuason & Co., Inc.) for failure of the
latter to deliver to them the possession of the whole of Lot 15, Block 460
of the Sta. Mesa Heights Subdivision ... (Annex E, 4-5).
This decision of the Court of Appeals became final and executory in
September, 1971 when the De Leons were evicted from the premises in
question (Annex E, 6).
Pursuing the step as suggested by the Court of Appeals advising herein
private respondents to file the proper action the latter instituted on
December 5,1972 before the Court of First Instance of Manila, Branch
XXIX, Civil Case No. 89119, an action against J.M. Tuason & Co., Inc. to
enforce the vendor's warranty against eviction or to recover the value of
the land amounting to P315,000.00, plus damages.

The lower court decided the case against herein petitioner J.M. & Co., Inc.
(defendant below) disposing as follows:
WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and
against the defendant:
(1) Ordering defendant to pay plaintiffs the sum of TWO HUNDRED TEN
THOUSAND (P210,000.00) PESOS representing the value of the 1,050
square meters at P200.00 per square meter, from which the latter were
evicted, with legal interest from December 5, 1972, the date of filing of the
complaint;
(2) Ordering defendant to pay plaintiffs the sum of TWENTY FIVE
THOUSAND (P25,000.00) PESOS, by lay of moral damages, TEN THOUSAND
(P10,000.00) PESOS, by way of exemplary damages, and FIFTEEN
THOUSAND (P15,000.00) PESOS, for and as attorney's fees; and
(3) For costs of this suit.

This decision of the lower court was appealed to herein respondent Court
of Appeals (CA-G.R. No. 54695-R), which on July 2, 1975 affirmed it with
the sole modification on the reduction of the awarded moral damages
from P25,000.00 to P5,000.00 (Annex B, Rollo, p. 52).
Hence, this petition before Us with the prayer that the decision of
respondent court be reversed and another rendered, 'dismissing the
complaint and ordering respondents De Leons to accept from petitioner
J.M. Tuason & Co., Inc. the sum of P60.00 per square meter for the 1,050
square meters which the petitioner was ordered to sell to Ramon Rivera,
and to pay petitioner P30,000.00 as attorney's fees plus costs.
Petitioner J. M. Tuason & Co., Inc. alleges that dent court erred: (1) in
holding that the compromise agreement was the proximate cause of its
failure to comply with its contract to self in favor of Ricardo de Leon; (2) in
holding that it entered into the compromise agreement without the
knowledge and behind the back of Ricardo de Leon and thereafter
continued the collection of the installments until the purchase price was
fully paid and thus it wilfully committed fraud against him; (3) in not
considering that Ricardo de Leon was guilty of bad faith in entering into
the contract to sell and therefore he is not entitled to the warranty against
eviction; and (4) in granting moral and exemplary damages.
The real point in issue is whether respondents De Leon are entitled to the
vendor's warranty against eviction and damages.

The appellate court, in this action of warranty against eviction, found that
petitioner J.M. Tuason & Co., Inc. failed to comply with its obligation to
transfer ownership over the lot to the De Leons due to the compromise
agreement it entered with the Deudors, and that petitioner is guilty of
"wilful deception, intentional forsaking of one to whom defendant was
bound in a contract to convey, and worse yet, even at that, after the
compromise, defendant still continued to collect installments from
buyer ...
Contrary to these findings, this Court holds that it was not petitioner's own
making that it executed the compromise agreement with the Deudors.
This agreement was sanctioned by the court after the Deudors filed an
action against petitioner in Civil Case No. Q-135 entitled "Florencio
Deudor, et al. vs. J.M. Tuason et al." The prior right of Ramon Rivera to
purchase the lot in litigation was based more on his prior occupancy to the
same since 1949, about which fact respondents De Leon were informed by
petitioner at the time of the execution of the contract to sell. The
execution of the compromise agreement merely recognized this prior
right, under the condition as stipulated in said agreement, that it was
possible to do so.
Petitioner claims, without having been contradicted, that it executed the
compromise agreement with the Deudors in the honest belief that the lots
it already sold. like the lot in question, were excluded from the coverage of
the agreement. This claim finds support in paragraph "SEVENTH" of the
compromise agreement which reads ... It shall be the joint and solidary
obligation of the Deudors to make the buyers of the lots purportedly sold
by them recognize the title of the OWNERS over the property purportedly
bought by them, and to make them sign, whenever possible, new
contracts of purchase for the said property at the current prices and terms
specified by the OWNERS in their sales of lots in their subdivision known
as Sta. Mesa Heights Subdivision ... " (Annex C, Rollo, p. 55). In fact, in
their brief as appellants in CA-G.R. No. 38212-R, private respondents
stated that "as correctly pointed out in the brief for plaintiff-appellant, it
was not the intention of the signatories of the Compromise Agreement to
include within its coverage those parcels of land already sold by plaintiffappellant (petitioner herein) to third parties," and "We reproduce herein by
way of reference the arguments in pp. 1-2 to 39 of plaintiffs- appellants'
brief." (See Annex C, Petition, pp. 3-4). Private respondents should not be
allowed to turn back from what they stated in their brief in CA-G.R. No.
38212-R, to impute "wilful deception" as the respondent court said in its
decision under review.

This particular stipulation in the compromise agreement discloses an

understanding between the petitioner and the Deudors that the buyers of
lots from the Deudors, like Ramon Rivera, may, acquire lots from the
subdivision being sold by petitioner and sign new contracts of purchase
with the latter 6 whenever possible", or only when said lots have not
already been sold to third 'parties. Relying on the above-quoted provision,
petitioner believed in good faith that said lot sold to the De Leons would
not be adversely affected. Nonetheless, with the inevitable and admitted
fact that Ramon Rivera was a prior occupant thereof, petitioner was
compelled by judicial fiat in Civil Case No. 2989 of the Court of First
Instance of Rizal, to recognize the preferential right of Rivera to rightfully
purchase the lot. This fact is not of itself a proof under the circumstance
just cited, of bad faith on the part of the petitioner or that it is guilty of
committing fraud and deception upon the respondents as the respondent
court found. Its good faith in with Ricardo de Leon who was the one
branded as a "buyer in bad faith" by the Court of Appeals in its decision
affirming of the Court of First Instance of Rizal in CA-G.R. No. No. 38212-R
seems beyond question.
If petitioner continued the collection of the outstanding monthly after the
execution of the compromise agreement on April 10,1953 pursuant to the
agreements embodied in the contract to sell (Exhibit A), its act only
proved its honest belief that it found no barrier against the enforceability
of the contract to sell, the terms of which have the force of law between
the parties and must be complied with in good faith (Lazo vs. Republic
Surety & Insurance Co., Inc., 311 SCRA 329; Ramos vs. Central Bank of the
Philippines, 41 SCRA 565; Enriquez vs. Ramos, 73 SCRA 116; De Cortes vs,
Venturanza, 79 SCRA 709). The collection of the monthly installment
payments terminated upon the fun payment of the purchase price on July
19, 1965, long before the ejectment case against Ramon Rivera was finally
resolved by the appellate court in September, 1971 (Civil Case No. Q2989; CA-G.R. No. 38212-R). As properly claimed by the petitioner, it had
the right to hopefully expect to win the ejectment case. It was not exactly
its fault that it lost the case. Private respondents joined in a common
cause with it.
The subsequent execution of a deed of sale upon the total payment of the
purchase price in favor of herein respondents on August 5, 1965 in lieu of
the previous contract to sell made in favor of Ricardo de Leon, through
which deed of sale the respondents acquired a transfer certificate of title
over the questioned lot, is further evidence of the honesty and good faith
of petitioner in dealing with private respondents. Petitioner owns vast
tracts of land, with the lot in question possibly put an insignificant part in

terms of value, and it would be much too difficult to make the serious
imputations made to petitioner.
In fulfillment of the assurance made to eject the occupant from the lot, petitioner,
on May 13, 1958, later joined by Ricardo de Leon and respondents Alfonso and
Rosario de Leon, instituted a complaint of ejectment against Ramon Rivera in Civil
Case No. Q- 2989. Unfortunately, however, the decision of the lower court
dismissing the complaint of ejectment was affirmed by the appellate court in CAG.R. No. 38212-R, which decision, of the latter upon its finality in September, 1971
resulted in the eviction of herein respondents from the lot. It is meet, at this
juncture, to repeat that in its decision, the Court of Appeals branded Ricardo de
Leon as a buyer in bad faith.
In manifesting its desire to compensate respondents, as disclosed by prayer in the
instant petition in the sum of P60.00 per square meter for the 1,050 meters which it
was ordered by the courts, in Civil Case No. Q-2989 and CA-G.R. No. 38212-R, to sell
to Ramon Rivera, again reveals how fair petitioner would want to be to private
respondents, not to defraud them as the respondent court would ascribe such base
intent to petitioner, which is by no means not a disreputable but a respectable,
corporation.
For all the foregoing circumstances, We have no hesitation to give to petitioner the
benefit of the doubt of its having acted in good faith, which is always presumed,,
without any intention of taking advantage of the other party dealing with it. "Good
faith consists in an honest intention to abstain from taking any unconscientious
advantage of another. Good faith is an opposite of fraud and of bad faith and its
non-existence must be established by competent proof." (Leung Yee vs. Strong
Machinery Company, 37 PhiL 645; Cui vs. Henson, 51 Phil. 606, 612; Fule vs. De
Legare, 7 SCRA 351).
Moreover, at the time of the execution of the contract to sell it is an admitted fact
that Ricardo de Leon knew that a third party was occupying a part of the lot subject
of the sale. Ricardo de Leon ought to have known that he was buying a property
with the distinct possibility of not being able to possess and own the land due to the
occupancy of another person on the same. So there had to be an understanding
between him and the petitioner for the latter to eject the occupant, something
which, by the facts then obtaining and the law relevant thereto, would make the
ejectment more speculative than certain. Nonetheless, Ricardo de Leon knowingly
assumed the risk when he bought the, land, and was even called a vendee in bad
faith by the Court of Appeals in doing so, clearly not an innocent purchaser in good
faith. If petitioner that it would eject Ramon Rivera, he did so, not knowing that the
compromise agreement would stand on the way, as it had thought, in all good faith,
that paragraph 7 of the compromise agreement excluded the lot in question, having
been already sold to Ricardo de Leon before the agreement was executed in court.
This Court is impelled to declare that private respondents were lacking in good faith
for knowing beforehand, at the time of the sale, the presence of an obstacle to their

taking over the possession of the land, which, in effect, would amount to eviction
from said land, and still they bought the land without first removing that obstacle.
(Angelo vs. Pacheco, 56 Phil. 70; Andaya vs. Manansala, 107 Phil 1151).
One who purchases real estate with knowledge of a defect or lack of title in his
vendor cannot claim that he has acquired title thereto in good faith, as against the
true owner of the land or of an interest therein; and the same rule must be applied
to one who has knowledge of facts which should have put him upon such inquiry
and investigation as might be necessary to acquaint him with the defects in the
title of his vendor. A purchaser cannot close his eyes to facts which should put a
reasonable man upon his guard and then claim that he acted in good faith under
the belief that there was no defect in the title of the vendor (Leung Yee vs. Strong
Machinery Company, supra; Manancop Jr. vs. Cansino, 1 SCRA 572; Paylago vs.
Jarabe, 22-SCRA 1247; Barrios vs. Court of Appeals, 78 SCRA 427; Emphasis
supplied).
Without being shown to be vendees in good faith, herein respondents are not
entitled to the warranty against eviction nor are they On titled to recover damages
(Article 1555 of the Civil Code). However, for justice and equity sake, and in
consonance with the salutary principle of non-enrichment at another's expense,
herein petitioner J.M. Tuason & Co., Inc. should compensate respondents De Leons
in the total sum of ONE HUNDRED TWENTY SIX THOUSAND (P126,000.00) PESOS,
representing the aggregate value of the 1,050 square meters (which petitioner was
judicially ordered to sell to Ramon Rivera at the year 1958 prevailing rate of P60.00
per square meter) at the value of P120.00 per square meter, doubling the price of
P60.00 per square meter which amount petitioner voluntarily offered to pay herein
respondents following how indemnity for death had been raised from P6,000.00 to
P12,060.00 (People vs. Pantoja, 25 SCRA 468, 474 [1968]) based on grounds of
equity, due to the reduced purchasing power of the peso, with the legal rate of
interest from December 5, 1972, the date respondents filed their complaint, until
the said total sum is fully paid.
WHEREFORE, the judgment of respondent court is hereby modified by ordering
petitioner J.M. Tuason & Co., Inc. to pay the respondents the amount of ONE
HUNDRED TWENTY-SIX THOUSAND (Pl26,000.00) PESOS plus the legal rate of
interest from December 5, 1972, the date of filing the complaint until the s aid total
sum is fully paid. No costs.

SO ORDERED.

G.R. No. 152219

October 25, 2004
NUTRIMIX FEEDS CORPORATION, petitioner,
vs.
COURT OF APPEALS and SPOUSES EFREN AND MAURA
EVANGELISTA, respondents.
DECISION
CALLEJO, SR., J.:
For review on certiorari is the Decision1 of the Court of Appeals in CA-G.R.
CV No. 59615 modifying, on appeal, the Joint Decision 2 of the Regional Trial
Court of Malolos, Bulacan, Branch 9, in Civil Case No. 1026-M-93 3 for sum
of money and damages with prayer for issuance of writ of preliminary
attachment, and Civil Case No. 49-M-94 4 for damages. The trial court
dismissed the complaint of the respondents, ordering them to pay the
petitioner the unpaid value of the assorted animal feeds delivered to the
former by the latter, with legal interest thereon from the filing of the
complaint, including attorneys fees.
The Factual Antecedents
On April 5, 1993, the Spouses Efren and Maura Evangelista, the
respondents herein, started to directly procure various kinds of animal
feeds from petitioner Nutrimix Feeds Corporation. The petitioner gave the
respondents a credit period of thirty to forty-five days to postdate checks
to be issued in payment for the delivery of the feeds. The accommodation
was made apparently because of the company presidents close friendship
with Eugenio Evangelista, the brother of respondent Efren Evangelista. The
various animal feeds were paid and covered by checks with due dates
from July 1993 to September 1993. Initially, the respondents were good
paying customers. In some instances, however, they failed to issue checks
despite the deliveries of animal feeds which were appropriately covered
by sales invoices. Consequently, the
Sales
Number

Invoice

Date

Amount

21334

June 23, 1993

P 7,260.00

21420

June 26, 1993

6,990.00

21437

June 28, 1993

41,510.00

21722

July 12, 1993

45,185.00

22048

July 26, 1993

44,540.00

22054

July 27, 1993

45,246.00

22186

August 2, 1993

84,900.00

Total:

P275,631.00
===========

respondents incurred an aggregate unsettled account with the petitioner

in the amount of P766,151.00. The breakdown of the unpaid obligation is
as follows:
Bank

Check Number

Due Date

Amount

United Coconut Planters Bank

BTS052084

July 30, 1993

P 47,760.00

-do-

BTS052087

July 30, 1993

131,340.00

-do-

BTS052091

July 30, 1993

59,700.00

-do-

BTS062721

August 4, 1993

47,860.00

-do-

BTS062720

August 5, 1993

43,780.00

-do-

BTS062774

August 6, 1993

15,000.00

-do-

BTS062748

September 11, 1993

47,180.00

-do-

BTS062763

September 11, 1993

48,440.00

-do-

BTS062766

September 18, 1993

49,460.00

Total:

P490,520.00
========
==

When the above-mentioned checks were deposited at the petitioners

depository bank, the same were, consequently, dishonored because
respondent Maura Evangelista had already closed her account. The
petitioner made several demands for the respondents to settle their
unpaid obligation, but the latter failed and refused to pay their remaining
balance with the petitioner.
On December 15, 1993, the petitioner filed with the Regional Trial Court of
Malolos, Bulacan, a complaint, docketed as Civil Case No. 1026-M-93,
against the respondents for sum of money and damages with a prayer for
issuance of writ of preliminary attachment. In their answer with
counterclaim, the respondents admitted their unpaid obligation but
impugned their liability to the petitioner. They asserted that the nine
checks issued by respondent Maura Evangelista were made to guarantee
the payment of the purchases, which was previously determined to be
procured from the expected proceeds in the sale of their broilers and hogs.
They contended that inasmuch as the sudden and massive death of their
animals was caused by the contaminated products of the petitioner, the
nonpayment of their obligation was based on a just and legal ground.
On January 19, 1994, the respondents also lodged a complaint for
damages against the petitioner, docketed as Civil Case No. 49-M-94, for
the untimely and unforeseen death of their animals supposedly effected
by the adulterated animal feeds the petitioner sold to them. Within the
period to file an answer, the petitioner moved to dismiss the respondents
complaint on the ground of litis pendentia. The trial court denied the same
in a Resolution5 dated April 26, 1994, and ordered the consolidation of the
case with Civil Case No. 1026-M-93. On May 13, 1994, the petitioner filed
its Answer with Counterclaim, alleging that the death of the respondents
animals was due to the widespread pestilence in their farm. The petitioner,
likewise, maintained that it received information that the respondents
were in an unstable financial condition and even sold their animals to
settle their obligations from other enraged and insistent creditors. It,

moreover, theorized that it was the respondents who mixed poison to its
feeds to make it appear that the feeds were contaminated.
A joint trial thereafter ensued.
During the hearing, the petitioner presented Rufino Arenas, Nutrimix
Assistant Manager, as its lone witness. He testified that on the first week
of August 1993, Nutrimix President Efren Bartolome met the respondents
to discuss the possible settlement of their unpaid account. The said
respondents still pleaded to the petitioner to continue to supply them with
animal feeds because their livestock were supposedly suffering from a
disease.6
For her part, respondent Maura Evangelista testified that as direct buyers
of animal feeds from the petitioner, Mr. Bartolome, the company president,
gave them a discount of P12.00 per bag and a credit term of forty-five to
seventy-five days.7 For the operation of the respondents poultry and
piggery farm, the assorted animal feeds sold by the petitioner were
delivered in their residence and stored in an adjacent bodega made of
concrete wall and galvanized iron sheet roofing with monolithic flooring. 8
It appears that in the morning of July 26, 1993, three various kinds of
animal feeds, numbering 130 bags, were delivered to the residence of the
respondents in Sta. Rosa, Marilao, Bulacan. The deliveries came at about
10:00 a.m. and were fed to the animals at approximately 1:30 p.m. at the
respondents farm in Balasing, Sta. Maria, Bulacan. At about 8:30 p.m.,
respondent Maura Evangelista received a radio message from a worker in
her farm, warning her that the chickens were dying at rapid intervals.
When the respondents arrived at their farm, they witnessed the death of
18,000 broilers, averaging 1.7 kilos in weight, approximately forty-one to
forty-five days old. The broilers then had a prevailing market price
of P46.00 per kilo.9
On July 27, 1993, the respondents received another delivery of 160 bags
of animal feeds from the petitioner, some of which were distributed to the
contract growers of the respondents. At that time, respondent Maura
Evangelista requested the representative of the petitioner to notify Mr.
Bartolome of the fact that their broilers died after having been fed with the
animal feeds delivered by the petitioner the previous day. She, likewise,
asked that a technician or veterinarian be sent to oversee the untoward
occurrence. Nevertheless, the various feeds delivered on that day were
still fed to the animals. On July 27, 1993, the witness recounted that all of
the chickens and hogs died.10 Efren Evangelista suffered from a heart
attack and was hospitalized as a consequence of the massive death of
their animals in the farm. On August 2, 1993, another set of animal feeds
were delivered to the respondents, but the same were not returned as the
latter were not yet cognizant of the fact that the cause of the death of
their animals was the polluted feeds of the petitioner. 11
When respondent Maura Evangelista eventually met with Mr. Bartolome on
an undisclosed date, she attributed the improbable incident to the animal
feeds supplied by the petitioner, and asked Mr. Bartolome for indemnity
for the massive death of her livestock. Mr. Bartolome disavowed liability
thereon and, thereafter, filed a case against the respondents. 12
After the meeting with Mr. Bartolome, respondent Maura Evangelista
requested Dr. Rolando Sanchez, a veterinarian, to conduct an inspection in

the respondents poultry. On October 20, 1993, the respondents took

ample amounts remaining from the feeds sold by the petitioner and
furnished the same to various government agencies for laboratory
examination.
Dr. Juliana G. Garcia, a doctor of veterinary medicine and the Supervising
Agriculturist of the Bureau of Animal Industry, testified that on October 20,
1993, sample feeds for chickens contained in a pail were presented to her
for examination by respondent Efren Evangelista and a certain
veterinarian.13 The Clinical Laboratory Report revealed that the feeds were
negative of salmonella14 and that the very high aflatoxin level15 found
therein would not cause instantaneous death if taken orally by birds.
Dr. Rodrigo Diaz, the veterinarian who accompanied Efren at the Bureau of
Animal Industry, testified that sometime in October 1993, Efren sought for
his advice regarding the death of the respondents chickens. He suggested
that the remaining feeds from their warehouse be brought to a laboratory
for examination. The witness claimed that the feeds brought to the
laboratory came from one bag of sealed Nutrimix feeds which was covered
with a sack.
Dr. Florencio Isagani S. Medina III, Chief Scientist Research Specialist of the
Philippine Nuclear Research Institute, informed the trial court that
respondent Maura Evangelista and Dr. Garcia brought sample feeds and
four live and healthy chickens to him for laboratory examination. In his
Cytogenetic Analysis,16 Dr. Medina reported that he divided the chickens
into two categories, which he separately fed at 6:00 a.m. with the animal
feeds of a different commercial brand and with the sample feeds
supposedly supplied by the petitioner. At noon of the same day, one of the
chickens which had been fed with the Nutrimix feeds died, and a second
chicken died at 5:45 p.m. of the same day. Samples of blood and bone
marrow were taken for chromosome analysis, which showed pulverized
chromosomes both from bone marrow and blood chromosomes. On crossexamination, the witness admitted that the feeds brought to him were
merely placed in a small unmarked plastic bag and that he had no way of
ascertaining whether the feeds were indeed manufactured by the
petitioner.
Another witness for the respondents, Aida Viloria Magsipoc, Forensic
Chemist III of the Forensic Chemist Division of the National Bureau of
Investigation, affirmed that she performed a chemical analysis 17 of the
animal feeds, submitted to her by respondent Maura Evangelista and Dr.
Garcia in a sealed plastic bag, to determine the presence of poison in the
said specimen. The witness verified that the sample feeds yielded positive
results to the tests for COUMATETRALYL Compound, 18 the active
component of RACUMIN, a brand name for a commercially known rat
poison.19 According to the witness, the presence of the compound in the
chicken feeds would be fatal to internal organs of the chickens, as it would
give a delayed blood clotting effect and eventually lead to internal
hemorrhage, culminating in their inevitable death.
Paz Austria, the Chief of the Pesticide Analytical Section of the Bureau of
Plants Industry, conducted a laboratory examination to determine the
presence of pesticide residue in the animal feeds submitted by respondent
Maura Evangelista and Dr. Garcia. The tests disclosed that no pesticide

residue was detected in the samples received 20but it was discovered that
the animal feeds were positive for Warfarin, a rodenticide (anticoagulant),
which is the chemical family of Coumarin.21
After due consideration of the evidence presented, the trial court ruled in
favor of the petitioner. The dispositive portion of the decision reads:
WHEREFORE, in light of the evidence on record and the
laws/jurisprudence applicable thereon, judgment is hereby
rendered:
1) in Civil Case No. 1026-M-93, ordering defendant
spouses Efren and Maura Evangelista to pay unto plaintiff
Nutrimix Feeds Corporation the amount of P766,151.00
representing the unpaid value of assorted animal feeds
delivered by the latter to and received by the former, with
legal interest thereon from the filing of the complaint on
December 15, 1993 until the same shall have been paid in
full, and the amount of P50,000.00 as attorneys fees.
Costs against the aforenamed defendants; and
2) dismissing the complaint as well as counterclaims
in Civil Case No. 49-M-94 for inadequacy of evidence to
sustain the same. No pronouncement as to costs.
SO ORDERED.22
In finding for the petitioner, the trial court ratiocinated as follows:
On the strength of the foregoing disquisition, the Court cannot
sustain the Evangelistas contention that Nutrimix is liable under
Articles 1561 and 1566 of the Civil Code governing "hidden
defects" of commodities sold. As already explained, the Court is
predisposed to believe that the subject feeds were contaminated
sometime between their storage at the bodega of the Evangelistas
and their consumption by the poultry and hogs fed therewith, and
that the contamination was perpetrated by unidentified or
unidentifiable ill-meaning mischief-maker(s) over whom Nutrimix
had no control in whichever way.
All told, the Court finds and so holds that for inadequacy of proof
to the contrary, Nutrimix was not responsible at all for the
contamination or poisoning of the feeds supplied by it to the
Evangelistas which precipitated the mass death of the latters
chickens and hogs. By no means and under no circumstance,
therefore, may Nutrimix be held liable for the sundry damages
prayed for by the Evangelistas in their complaint in Civil Case No.
49-M-94 and answer in Civil Case No. 1026-M-93. In fine, Civil Case
No. 49-M-94 deserves dismissal.
Parenthetically, vis--vis the fulminations of the Evangelistas in
this specific regard, the Court does not perceive any act or
omission on the part of Nutrimix constitutive of "abuse of rights"
as would render said corporation liable for damages under Arts. 19
and 21 of the Civil Code. The alleged "callous attitude and lack of
concern of Nutrimix" have not been established with more
definitiveness.
As regards Civil Case No. 1026-M-93, on the other hand, the Court
is perfectly convinced that the deliveries of animal feeds by

Nutrimix to the Evangelistas constituted a simple contract of sale,

albeit on a continuing basis and on terms or installment
payments.23
Undaunted, the respondents sought a review of the trial courts decision to
the Court of Appeals (CA), principally arguing that the trial court erred in
holding that they failed to prove that their broilers and hogs died as a
result of consuming the petitioners feeds.
On February 12, 2002, the CA modified the decision of the trial court. The
fallo of the decision reads:
WHEREFORE, premises considered, the appealed decision is
hereby MODIFIED such that the complaint in Civil Case No. 1026M-93 is dismissed for lack of merit.
So ordered.24
In dismissing the complaint in Civil Case No. 1026-M-93, the CA ruled that
the respondents were not obligated to pay their outstanding obligation to
the petitioner in view of its breach of warranty against hidden defects. The
CA gave much credence to the testimony of Dr. Rodrigo Diaz, who attested
that the sample feeds distributed to the various governmental agencies
for laboratory examination were taken from a sealed sack bearing the
brand name Nutrimix. The CA further argued that the declarations of Dr.
Diaz were not effectively impugned during cross-examination, nor was
there any contrary evidence adduced to destroy his damning allegations.
On March 7, 2002, the petitioner filed with this Court the instant petition
for review on the sole ground that
THE HONORABLE COURT OF APPEALS ERRED IN CONCLUDING
THAT THE CLAIMS OF HEREIN PETITIONER FOR COLLECTION OF
SUM OF MONEY AGAINST PRIVATE RESPONDENTS MUST BE
DENIED BECAUSE OF HIDDEN DEFECTS.
The Present Petition
The petitioner resolutely avers that the testimony of Dr. Diaz can hardly be
considered as conclusive evidence of hidden defects that can be
attributed to the petitioner. Parenthetically, the petitioner asserts,
assuming that the sample feeds were taken from a sealed sack bearing
the brand name Nutrimix, it cannot decisively be presumed that these
were the same feeds brought to the respondents farm and given to their
chickens and hogs for consumption.
It is the contention of the respondents that the appellate court correctly
ordered the dismissal of the complaint in Civil Case No. 1026-M-93. They
further add that there was sufficient basis for the CA to hold the petitioner
guilty of breach of warranty thereby releasing the respondents from
paying their outstanding obligation.
The Ruling of the Court
Oft repeated is the rule that the Supreme Court reviews only errors of law
in petitions for review on certiorari under Rule 45. However, this rule is not
absolute. The Court may review the factual findings of the CA should they
be contrary to those of the trial court. Conformably, this Court may review
findings of facts when the judgment of the CA is premised on a
misapprehension of facts.25
The threshold issue is whether or not there is sufficient evidence to hold
the petitioner guilty of breach of warranty due to hidden defects.

The petition is meritorious.

The provisions on warranty against hidden defects are found in Articles
1561 and 1566 of the New Civil Code of the Philippines, which read as
follows:
Art. 1561. The vendor shall be responsible for warranty against
hidden defects which the thing sold may have, should they render
it unfit for the use for which it is intended, or should they diminish
its fitness for such use to such an extent that, had the vendee
been aware thereof, he would not have acquired it or would have
given a lower price for it; but said vendor shall not be answerable
for patent defects or those which may be visible, or for those
which are not visible if the vendee is an expert who, by reason of
his trade or profession, should have known them.
Art. 1566. The vendor is responsible to the vendee for any hidden
faults or defects in the thing sold, even though he was not aware
thereof.
This provision shall not apply if the contrary has been stipulated, and the
vendor was not aware of the hidden faults or defects in the thing sold.
A hidden defect is one which is unknown or could not have been known to
the vendee.26 Under the law, the requisites to recover on account of
hidden defects are as follows:
(a) the defect must be hidden;
(b) the defect must exist at the time the sale was made;
(c) the defect must ordinarily have been excluded from the
contract;
(d) the defect, must be important (renders thing UNFIT or
considerably decreases FITNESS);
(e) the action must be instituted within the statute of limitations. 27
In the sale of animal feeds, there is an implied warranty that it is
reasonably fit and suitable to be used for the purpose which both parties
contemplated.28 To be able to prove liability on the basis of breach of
implied warranty, three things must be established by the respondents.
The first is that they sustained injury because of the product; the second is
that the injury occurred because the product was defective or
unreasonably unsafe; and finally, the defect existed when the product left
the hands of the petitioner. 29 A manufacturer or seller of a product cannot
be held liable for any damage allegedly caused by the product in the
absence of any proof that the product in question was defective. 30 The
defect must be present upon the delivery or manufacture of the
product;31 or when the product left the sellers or manufacturers
control;32 or when the product was sold to the purchaser; 33 or the product
must have reached the user or consumer without substantial change in
the condition it was sold. Tracing the defect to the petitioner requires
some evidence that there was no tampering with, or changing of the
animal feeds. The nature of the animal feeds makes it necessarily difficult
for the respondents to prove that the defect was existing when the
product left the premises of the petitioner.
A review of the facts of the case would reveal that the petitioner delivered
the animal feeds, allegedly containing rat poison, on July 26, 1993; but it is
astonishing that the respondents had the animal feeds examined only on

October 20, 1993, or barely three months after their broilers and hogs had
died. On cross-examination, respondent Maura Evangelista testified in this
manner:
Atty. Cruz:
Q Madam Witness, you said in the last hearing that believing that
the 250 bags of feeds delivered to (sic) the Nutrimix Feeds
Corporation on August 2, 1993 were poison (sic), allegedly your
husband Efren Evangelista burned the same with the chicken[s], is
that right?
A Yes, Sir. Some, Sir.
Q And is it not a fact, Madam Witness, that you did not, as
according to you, used (sic) any of these deliveries made on
August 2, 1993?
A We were able to feed (sic) some of those deliveries because we
did not know yet during that time that it is the cause of the death
of our chicks (sic), Sir.
Q But according to you, the previous deliveries were not used by
you because you believe (sic) that they were poison (sic)?
A Which previous deliveries, Sir[?]
Q Those delivered on July 26 and 22 (sic), 1993?
A Those were fed to the chickens, Sir. This is the cause of the
death of the chickens.
Q And you stated that this last delivery on August 2 were poison
(sic) also and you did not use them, is that right?
Atty. Roxas:
That is misleading.
Atty. Cruz:
She stated that.
Atty. Roxas:
She said some were fed because they did not know yet of the
poisoning.
Court:
And when the chickens died, they stopped naturally feeding it to
the chickens.
Atty. Cruz:
Q You mean to say, Madam Witness, that although you believe
(sic) that the chickens were allegedly poisoned, you used the
same for feeding your animals?
A We did not know yet during that time that the feeds contained
poison, only during that time when we learned about the same
after the analysis.
Q Therefore you have known only of the alleged poison in the
Nutrimix Feeds only after you have caused the analysis of the
same?
A Yes, Sir.
Q When was that, Madam Witness?
A I cannot be sure about the exact time but it is within the months
of October to November, Sir.

Q So, before this analysis of about October and November, you

were not aware that the feeds of Nutrimix Feeds Corporation were,
according to you, with poison?
A We did not know yet that it contained poison but we were sure
that the feeds were the cause of the death of our animals. 34
We find it difficult to believe that the feeds delivered on July 26 and 27,
1993 and fed to the broilers and hogs contained poison at the time they
reached the respondents. A difference of approximately three months
enfeebles the respondents theory that the petitioner is guilty of breach of
warranty by virtue of hidden defects. In a span of three months, the feeds
could have already been contaminated by outside factors and subjected to
many conditions unquestionably beyond the control of the petitioner. In
fact, Dr. Garcia, one of the witnesses for the respondents, testified that the
animal feeds submitted to her for laboratory examination contained very
high level of aflatoxin, possibly caused by mold (aspergillus flavus). 35 We
agree with the contention of the petitioner that there is no evidence on
record to prove that the animal feeds taken to the various governmental
agencies for laboratory examination were the same animal feeds given to
the respondents broilers and hogs for their consumption. Moreover, Dr.
Diaz even admitted that the feeds that were submitted for analysis came
from a sealed bag. There is simply no evidence to show that the feeds
given to the animals on July 26 and 27, 1993 were identical to those
submitted to the expert witnesses in October 1993.
It bears stressing, too, that the chickens brought to the Philippine Nuclear
Research Institute for laboratory tests were healthy animals, and were not
the ones that were ostensibly poisoned. There was even no attempt to
have the dead fowls examined. Neither was there any analysis of the
stomach of the dead chickens to determine whether the petitioners feeds
really caused their sudden death. Mere sickness and death of the chickens
is not satisfactory evidence in itself to establish a prima facie case of
breach of warranty.36
Likewise, there was evidence tending to show that the respondents
combined different kinds of animal feeds and that the mixture was given
to the animals. Respondent Maura Evangelista testified that it was
common practice among chicken and hog raisers to mix animal feeds. The
testimonies of respondent Maura Evangelista may be thus summarized:
Cross-Examination
Atty. Cruz:
Q Because, Madam Witness, you ordered chicken booster mash
from Nutrimix Feeds Corporation because in July 1993 you were
taking care of many chickens, as a matter of fact, majority of the
chickens you were taking care [of] were chicks and not chickens
which are marketable?
A What I can remember was that I ordered chicken booster mash
on that month of July 1993 because we have some chicks which
have to be fed with chicken booster mash and I now remember
that on the particular month of July 1993 we ordered several bags
of chicken booster mash for the consumption also of our chicken in
our other poultry and at the same time they were also used to be
mixed with the feeds that were given to the hogs.

Q You mean to say [that], as a practice, you are mixing chicken

booster mash which is specifically made for chick feeds you are
feeding the same to the hogs, is that what you want the Court to
believe?
A Yes, Sir, because when you mix chicken booster mash in the
feeds of hogs there is a better result, Sir, in raising hogs. 37

Re-Direct Examination
Atty. Roxas:
Q Now, you mentioned that shortly before July 26 and 27, 1993,
various types of Nutrimix feeds were delivered to you like chicks
booster mash, broiler starter mash and hog finisher or hog grower
mash. What is the reason for simultaneous deliveries of various
types of feeds?
A Because we used to mix all those together in one feeding, Sir.
Q And what is the reason for mixing the chick booster mash with
broiler starter mash?
A So that the chickens will get fat, Sir.

Re-Cross Examination
Atty. Cruz:
Q Madam Witness, is it not a fact that the mixing of these feeds by
you is your own concuction (sic) and without the advice of a
veterinarian expert to do so?
A That is common practice among raisers to mix two feeds, Sir.
Q By yourself, Madam Witness, who advised you to do the mixing
of these two types of feeds for feeding your chickens?
A That is common practice of chicken raisers, Sir. 38
Even more surprising is the fact that during the meeting with Nutrimix
President Mr. Bartolome, the respondents claimed that their animals were
plagued by disease, and that they needed more time to settle their
obligations with the petitioner. It was only after a few months that the
respondents changed their justification for not paying their unsettled
accounts, claiming anew that their animals were poisoned with the animal
feeds supplied by the petitioner. The volte-face of the respondents
deserves scant consideration for having been conjured as a mere
afterthought.
In essence, we hold that the respondents failed to prove that the
petitioner is guilty of breach of warranty due to hidden defects. It is,
likewise, rudimentary that common law places upon the buyer of the
product the burden of proving that the seller of the product breached its
warranty.39 The bevy of expert evidence adduced by the respondents is too
shaky and utterly insufficient to prove that the Nutrimix feeds caused the
death of their animals. For these reasons, the expert testimonies lack
probative weight. The respondents case of breach of implied warranty
was fundamentally based upon the circumstantial evidence that the
chickens and hogs sickened, stunted, and died after eating Nutrimix feeds;
but this was not enough to raise a reasonable supposition that the
unwholesome feeds were the proximate cause of the death with that
degree of certainty and probability required. 40 The rule is well-settled that

if there be no evidence, or if evidence be so slight as not reasonably to

warrant inference of the fact in issue or furnish more than materials for a
mere conjecture, the court will not hesitate to strike down the evidence
and rule in favor of the other party. 41 This rule is both fair and sound. Any
other interpretation of the law would unloose the courts to meander
aimlessly in the arena of speculation.42
It must be stressed, however, that the remedy against violations of
warranty against hidden defects is either to withdraw from the contract
(accion redhibitoria) or to demand a proportionate reduction of the price
(accion quanti minoris), with damages in either case. 43 In any case, the
respondents have already admitted, both in their testimonies and
pleadings submitted, that they are indeed indebted to the petitioner for
the unpaid animal feeds delivered to them. For this reason alone, they
should be held liable for their unsettled obligations to the petitioner.
WHEREFORE, in light of all the foregoing, the petition is GRANTED. The
assailed Decision of the Court of Appeals, dated February 12, 2002,
is REVERSED and SET ASIDE. The Decision of the Regional Trial Court of
Malolos, Bulacan, Branch 9, dated January 12, 1998, is REINSTATED. No
costs.
SO ORDERED.

G.R. No. 136586

November 22, 2001
JON AND MARISSA DE YSASI, petitioners,
vs.
ARTURO AND ESTELA ARCEO, respondents.
MENDOZA, J.:
This is a petition for review of the decision, 1 dated August 31, 1998, of the
Court of Appeals, affirming the decision of the Regional Trial Court, Branch
67, Pasig City, which dismissed petitioners' amended complaint for
damages and ordered them instead to pay respondents back rentals and
attorney's fees, as well as the appeals court's resolution, 2 dated November
27, 1998, denying petitioners' motion for reconsideration.
The antecedent facts are as follows:
On October 1, 1988, petitioner spouses Jon and Marissa de Ysasi leased
from spouses Arturo and Estela Arceo, respondents herein, the latter's
premises located at No. 91 East Capitol Drive, Barrio Kapitolyo, Pasig,
Metro Manila in order to carry on their business of handpainting and
finishing services. Petitioners paid P5,000.00 as goodwill money and
P15,000.00 as deposit for three months.
It appears that due to heavy rains, the roof of the building leaked and the
premises were flooded, as a result of which the schedule of the delivery of
handpainted mouldings to petitioners' customers was disrupted. Although
petitioners asked respondents to make the necessary repairs, the latter
repaired only a portion of the leased premises. Consequently, petitioners
stopped paying rent as well as their share of the electric, water, and
telephone bills from December 1988 up to the time they vacated the
leased premises in June 1989.
Respondents in turn filed an ejectment suit against petitioners in the
Metropolitan Trial Court, Branch 71, Pasig City. In its decision, the MeTC,
while ruling that petitioners were justified in suspending the payment of
rent, ordered the deposits made by them to be applied to the payment of
rentals up to June 1989 and directed them to pay them electric and water
bills.3 On appeal to the Regional Trial Court, Branch 156, Pasig City, the
decision was modified inasmuch as petitioners were ordered to pay
P20,000.00 as balance of their rentals up to the time they vacated the
premises.4
Petitioners then filed a complaint in the Regional Trial Court, Branch 67,
Pasig City, for specific performance or rescission of contract with
damages, which they subsequently changed to a claim for damages in
view of the expiration of the lease contract.5 The trial court, however,
dismissed the complaint and ordered petitioners to pay respondents the
sums of P5,000.00 as attorney's fees and P20,000.00 as back rentals, with
interest at the legal rate.6 On appeal to the Court of Appeals, the decision
was affirmed. Petitioners' motion for reconsideration was subsequently
denied. Hence this appeal.
Petitioners contend that:
I. THE HONORABLE COURT OF APPEALS COMMITTED A CLEAR
ERROR IN INTERPRETING THAT UNDER THE CONTRACT OF LEASE
DATED 1 OCTOBER 1988 THERE WAS AN IMPLIED WAIVER OF
REPAIRS INCLUDING REPAIRS FOR HIDDEN AND UNKNOWN
DEFECTS.

II. THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT

PRIVATE RESPONDENTS ARE NOT LIABLE TO PAY DAMAGES TO
PETITIONERS INASMUCH AS THE FAILURE OF THE FORMER TO
MAKE THE NECESSARY REPAIRS ON THE SUBJECT PREMISES WAS
NOT THE DIRECT AND PROXIMATE CAUSE OF THE DAMAGES
SUSTAINED BY THE LATTER.
III. THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT
PETITIONERS SHOULD BE HELD LIABLE TO PAY DAMAGES TO
PRIVATE RESPONDENT PARTICULARLY THE SUM OF TWENTY
THOUSAND (P20,000.00) PESOS REPRESENTING THE ALLEGED
UNPAID RENTALS.7
After reviewing the records of this case, we affirm the decision of the Court
of Appeals dismissing petitioners' amended complaint for damages and
ordering the payment of attorney's fees to respondents. However, the
order for payment of unpaid rentals with interest to respondents should be
deleted.
First. Petitioners anchor their complaint for damages on respondents'
failure, as lessors, to make the necessary repairs on the leased premises
as provided in Art. 1654(2) of the Civil Code. 8 The Court of Appeals held
that under the contract of lease of the parties, there was an implied
waiver of right to demand repairs to be made by the lessee. 9
The records show that respondent Mrs. Arceo caused certain repairs to be
done on the leased premises at the request of petitioners, 10 although the
latter alleged that the repairs made were inadequate. 11 This fact indicates
that there was no implied waiver of repairs on the part of the lessee. For
Art. 1371 of the Civil Code provides that "In order to judge the intention of
the contracting parties, their contemporaneous and subsequent acts
should be principally considered."
Petitioners contend that respondents were liable for hidden defects and,
for this purpose, cite the following provisions of the Civil Code:
Art. 1566. The vendor is responsible to the vendee for any hidden
faults or defects in the thing sold, even though he was not aware
thereof.
This provision shall not apply if the contrary has been stipulated,
and the vendor was not aware of the hidden faults or defects in
the thing sold.
Art. 1653. The provisions governing warranty, contained in the
Title on Sales, shall be applicable to the contract of lease.
Petitioners' contention is without merit. Petitioner Jon de Ysasi admitted on
cross-examination that he inspected the premises three or four times
before signing the lease contract.12 During his inspection, he noticed the
rotten plywood on the ceiling which in his opinion was caused by leaking
water or "anay" (termites). Yet, he decided to go through with the lease
agreement.13 Hence, respondents cannot be held liable for the alleged
warranty against hidden defects. What we said in Coca-Cola Bottlers
Philippines, Inc. v. Court of Appeals 14 applies mutatis mutandis to this
case:
Considering that the representatives of the petitioner were given
every opportunity to visit and inspect the premises prior to the
execution of the contract of lease, we cannot impute bad faith on

the part of respondents for having allegedly withheld the

information that the leased land was a former fishpond.
xxx
xxx
xxx
Accordingly, private respondents cannot be held liable for the
alleged warranty against defects under Art. 1561 of the Civil Code.
Under Arts. 1561 and 1653 of the Civil Code, the lessor is responsible for
warranty against hidden defects, but he is not answerable for patent
defects or those which are visible. Such appears to be the case here.
Second. Petitioners contend that respondents' obligation to make the
necessary repairs on the premises was fixed in the decision both of the
Metropolitan Trial Court (MeTC) and the Regional Trial Court (RTC) in the
ejectment case and that such is now conclusive on the parties. 15
We disagree. Although the MeTC held respondents responsible for repairs,
it does not appear that the RTC affirmed the same on appeal. The RTC in
fact decided the case in favor of respondents. Instead of holding
petitioners justified in refusing to pay rentals because of respondents'
alleged failure to comply with their obligation to make repairs, the RTC in
fact ordered them to pay respondents the sum of P20,000.00,
representing the balance of the rentals from the time they withheld
payment up to the time they vacated the leased premises in June 1989. 16
Nor is there any basis for petitioners' claim of P41,007.35 as damages for
improvements allegedly made, consisting of tables and chairs, considering
that the said pieces of furniture were removed by them when they
transferred to another place.17 As regards the business losses allegedly
incurred by petitioners as a result of the cancellation of job orders in the
amount of P100,000.00, such damages have not been sufficiently
established by them as attributable to respondents' fault or neglect. 18
It has not been duly proven in the case that respondents failed to fulfill
their obligations as lessors or that they acted with fraud or bad faith. As
heretofore mentioned, respondents did cause repairs to be made on the
leased premises upon petitioners' request, but the latter claimed that the
repairs made were inadequate.
For the foregoing reasons, there is no basis for petitioners' claim for
actual, moral, and exemplary damages and attorney's fees.
Third. Petitioners deny that they are liable for unpaid rentals to
respondents in the amount of P20,000.00.19
We find merit in this contention. The appeals court erred in affirming the
ruling of the trial court which went beyond its jurisdiction in ordering
petitioners to pay unpaid rentals to respondents. The trial court held:
In the case at bar, there is no evidence to show that the
defendants were liable to repair the roof and ceiling of the leased
premises. They [are] also not liable for the alleged damages
sustained by the plaintiffs. On the other hand, defendants had not
sufficiently established that they sustained damages to warrant
the award for moral and exemplary damages. However, it is
unfortunate that the plaintiffs had filed the instant action for which
they should pay attorney's fees to the defendants in the amount of
P5,000.00. Plaintiffs should also pay the sum of P20,000.00
representing the balance of their rentals up to the time they

vacated the leased premises in June 1989 with interest at the legal
rate starting from January 1991.20
This ruling is based on the final judgment of the MeTC in the ejectment
case which ordered thus:
WHEREFORE, the Court hereby renders judgment modifying the
judgment of the lower court in the sense that defendants are
adjudged to pay plaintiffs the amount of P20,000.00 representing
the balance of their rentals up to the time they vacated the leased
premises in June, 1989.21
It would seem that the judgment in the ejectment case, particularly the
payment of unpaid rentals, had not yet been enforced. 22 Consequently, the
proper remedy of respondents herein was to file a motion for issuance of a
writ of execution within five years from date of entry, or, after five years,
to file an action for revival of judgment, pursuant to Rule 39, 6 of the
1997 Rules on Civil Procedure.
Thus, when the trial court ordered the payment of unpaid rentals, it
decided an issue which had already been adjudicated with finality by
another court. It had no jurisdiction to do so. As correctly pointed out by
petitioners, respondent did not claim payment of unpaid rentals in their
"Answer with Counterclaim" dated October 23, 1989. 23 The ruling of this
Court in Lazo v Republic Surety & Insurance Co., Inc.24 is apropos:
The actuation of the trial court was not legally permissible,
especially because the theory on which it proceeded involved
factual considerations neither touched upon the pleadings nor
made the subject of evidence at the trial. Rule 6, Section 1, is
quite explicit in providing that "pleadings are the written
allegations of the parties of their respective claims and defenses
submitted to the court for trial and judgment." This rule has been
consistently applied and adhered to by the courts.
"The subject matter of any given case is determined . x x x by the
nature and character of the pleadings submitted by the parties to
the court for trial and judgment." Belandres vs. Lopez Sugar
Central Mill Co., Inc., 97 Phil. 100, 103.
"It is a fundamental principle that judgments must conform to both
the pleadings and the proof, and must be in accordance with the
theory of the action upon which the pleadings were framed and
the case was tried; that a party can no more succeed upon a case
proved, but not alleged, than upon one alleged but not proved."
(Ramon v. Ortuzar, 89 Phil. 730, 742).
"It is a well-known principle in procedure that courts of justice
have no jurisdiction or power to decide a question not in issue."
(Lim Toco vs. Go Fay, 80 Phil. 166)
"A judgment going outside the issues and purporting to adjudicate
something upon which the parties were not heard, is not merely
irregular, but extrajudicial and invalid" (Salvante v. Cruz, 88 Phil.
236, 244.)
Fourth. Petitioners contend that there is no basis for the award of
attorney's fees. This matter, however, was not raised by them in the Court
of Appeals. Consequently, they cannot now raise it for the first time on
appeal.25

WHEREFORE, the decision of the Court of Appeals is AFFIRMED with the

MODIFICATION that the order for payment of unpaid rentals with interest
to respondents is deleted.
SO ORDERED.

G.R. No. 83113 May 19, 1992

RAFAEL S. BELTRAN and MA. VIOLETA BELTRAN, petitioners,
vs.
PAIC FINANCE CORPORATION, SERVICE EQUIPMENT SPECIALISTS
CO., INC., RODRIGO REYES and IRAIDA REYES, respondents.
G.R. No. 83256 May 19, 1992
PAIC FINANCE CORPORATION, petitioner,
vs.
SPOUSES RAFAEL BELTRAN and MARIA VIOLETA BELTRAN, SERVICE
EQUIPMENT SPECIALIST CO., INC., RODRIGO REYES and IRAIDA G.
REYES and COURT OF APPEALS, respondents.
Goo Law Office for petitioner in 83256.
Cesar Villanueva for respondents in 83113.
FELICIANO, J.:
The consolidated Petitions here before the Court compel us to consider the
nature and at least some of the legal effects of a "financing lease" or
"financial lease." Such an instrument must seem an exotic creation in the
eyes of many civil law jurists; for a financial lease does not fit neatly into
the tight and orderly categories of the Civil Code. But financial leases are
quite commonplace in today's commercial and financial world and the law
must take account of developments and practice in that world.
On 15 July 1980, the Beltran spouses purchased from Service Equipment
Specialists Co. ("SESCO") one unit of Infra-Red Performance Analyzer with
Serial No. 19B2870, SUN 1115, FOR P137,000.00. Upon delivery of the unit
on the same day, the Beltrans returned to SESCO a Performance Analyzer
SUN 1011 previously purchased from SESCO, and the payments made
thereon, plus two (2) other checks made out by the Beltrans in the name
of SESCO, were applied as downpayment on the new Performance
Analyzer SUN 1115. Further, SESCO agreed with the Beltrans that the
balance of the purchase price of the new SUN 1115 would be placed under
a financing arrangement which SESCO was to enter into with PAIC. 1
On 3 September 1980, the Beltrans issued another check in favor of
SESCO in the amount of P3,780.00. On the same date, SESCO assigned
the sales invoice it issued to the Beltran spouses to PAIC; the
documentation dated 3 September 1980 stated that the Performance
Analyzer SUN 1115 with Serial No. 19B2870 was delivered to PAIC. At the
same time, PAIC executed a contract of lease over the SUN 1115 with the
spouses Beltran as lessees for a term of 36 months at a monthly rental of
P3,903.52 commencing on 2 September 1980 and ending on 2 October
1983. On 19 September 1980, SESCO executed in favor of PAIC a surety
undertaking under which SESCO guaranteed solidarily the faithful
performance of all obligations of the Beltran lessees to PAIC.
Sometime in October 1980, the SUN 1115 malfunctioned. The Beltrans
sought the assistance of SESCO which in turn promised to repair the
equipment. The repairs made on the SUN 1115 were, however, found to
be unsatisfactory by the Beltrans who thereupon decided to return the unit
and discontinued the monthly rental payments to PAIC.
When the spouses Beltran failed to pay four (4) succeeding monthly
payments, PAIC sent them a letter demanding payment of the rentals in
arrears. When the spouses Beltran failed to pay the arrearages, PAIC, on

23 February 1981, filed a complaint for a sum of money against the

spouses. On 31 March 1981, the spouses Beltran filed an answer with
counterclaim and a third-party complaint against SESCO. SESCO
eventually filed an answer to the third-party complaint as required by the
trial court.
On 16 October 1985, the trial court rendered a decision in favor of the
spouses Beltran. The trial court held that the transaction between PAIC
and the spouses Beltran was one of lease and dismissed the complaint of
PAIC, as well as the Beltrans' counterclaim against PAIC and their third
party complaint against SESCO. The trial court held:
Under the terms of the lease, in case of fault of the lessee
(defendant Beltran), the plaintiff may declare any and all
sums due and to become due and payable and in addition
the lessor shall be entitled to take possession of the leased
equipment and to recover as damages an amount equal to
the difference of the rent for the unexpired term of the
lease and aggregate rental value of the leased equipment.
Categorizing the transaction had between plaintiff and
defendant Rafael S. Beltran as one of lease, which binds
the plaintiff; we are constrained to dismiss the plaintiff's
case.
Under Article 1654 of the Civil Code, the lessor is obliged
to deliver the object of the lease in such condition as to
render it fit for the use intended; to make on the same
during the lease all the necessary repairs in order to keep
it suitable for the use to which it has been devoted and to
maintain the lessee in the peaceful enjoyment of the lease
during the contract.
Defendants Beltran's evidence, without contradiction is
that the performance analyzer became unfit for the use
intended soon after delivery. Plaintiff [PAIC] has not
repaired such defect in order to keep the equipment
suitable for the use to which it is devoted.
Consequently, the lease must be deemed extinguished
because the thing leased was totally unfit for the purposes
of the lease. 2 (Emphasis and brackets supplied)
The Beltran spouses filed a notice of appeal dated 12 April 1986 with the
trial court in view of the failure of the trial court to rule on the liability of
SESCO on its contract of sale. The notice of appeal was, however, denied
due course by the trial court for having been filed late. The motion for
reconsideration filed by the spouses Beltran was denied on the ground
that the period for appeal is jurisdictional. A second motion for
reconsideration was filed with, but was not acted upon by, the trial court.
Instead, the trial court transmitted the records of the case to the Court of
Appeals since PAIC had filed its own appeal in a timely manner. Upon such
transmittal, the Court of Appeals assumed jurisdiction of the appealed
case.
The judgment of the trial court was affirmed by the Court of Appeals in a
decision dated 30 June 1987. In that decision, however, the Court of

Appeals held the transaction between the Beltrans and PAIC to be one
of salerather than a lease:
We agree with the contention of the defendants-appellees.
An examination of the records shows that indeed
the Contract of lease "is but a scheme to simulate the real
agreement between the parties which is a financing
arrangement for the defendants Beltran to pay the unpaid
price of the performance analyzer with Serial No. SUN
1115 to the plaintiff." (p. 251, Record). The equipment in
question was sold to defendant-appellee Rafael S. Beltran
on July 15, 1980 by Service Equipment Specialist Co., Inc.
(SESCO) as evidenced by Sales Invoice No. 050 (p. 10,
Folder of Exhibits), by Warranty Certificate dated July 15,
1980 (p. 11, Folder of Exhibits), and by a letter of SESCO
addressed to defendant appellee dated October 21, 1980
(p. 13, Folder of Exhibits).
Plaintiff-appellant's
evidence
shows
some
glaring
inconsistencies. The contract of lease covers the
equipment in question which was already sold and
delivered to defendant-appellee. The date of the contract
of lease is July 31, 1980 but the subject of the lease was
"sold" to plaintiff-appellant only on September 3, 1980 (p.
4, Folder of Exhibits). The original of Sales Invoice No. 050
reflect both plaintiff-appellant and defendant-appellee
Rafael S. Beltran as vendees of the equipment in question
but the contract of lease shows that defendant-appellee is
the lessee and the plaintiff-appellant is the lessor. The
delivery receipts show that the equipment in question was
delivered to defendant-appellee on July 15, 1980 (p.10,
Folder of Exhibits) by SESCO, on September 2, 1980 by
plaintiff-appellant, and on September 3, 1980 by SESCO
(pp. 5-6, Folder of Exhibits). Exhibit D shows that the
equipment in question was delivered to both plaintiffappellant and defendant-appellee on September 3, 1980
by SESCO (p. 6, Folder of Exhibits). These inconsistencies
belie plaintiff-appellant's contention that the contract of
lease
is
not
a "scheme
to
simulate
real
agreement between the parties which is a financing
arrangement."
Defendants-appellees [Beltrans] cannot be held liable for
the breakdown of the equipment in question pursuant to
the Warranty Certificate of SESCO dated July 15, 1980 (p.
11, Folder of Exhibits). It is admitted that the cause of the
breakdown was when one of SESCO's technicians
"accidentally damaged the PCB of the equipment" (p. 13
Folder of Exhibits). When the equipment was not repaired
despite SESCO's assurance, defendants-appellees decided
to return the equipment and discontinued amortization
payments (pp. 12-13, Folder of Exhibits). As found by the
trial court:

Defendant Beltran's evidence, without

contradiction is that the performance
analyzer became unfit for the use intended
soon after delivery. Plaintiff has pot
repaired such defect in order to keep the
equipment suitable for the use it is
devoted. (p. 252, Record).
Defendants-appellees seek a rescission of the contract of
sale pursuant to Article 1599 of the Civil Code which
provides for such a remedy when there is a breach of
warranty by the seller. Since the records show that the
equipment in question became unfit for the use it is
intended, defendants-appellees are entitled to rescission
of the contract of sale with SESCO or its (SESCO's) assigns.
xxx xxx xxx 3
(Emphasis supplied)
Both PAIC and the Beltrans moved for reconsideration of the Court of
Appeals' decision. In a resolution dated 28 April 1988, the Court of Appeals
rejected both motions and ruled that the Beltrans, not having perfected
any appeal from the decision of the trial court, could not seek modification
of that decision.
A Petition for Review on Certiorari was then filed by the Beltran spouses
with this Court and docketed as G.R. No. 83113, assailing the Court of
Appeals' refusal to entertain their appeal. In a Resolution dated 4 January
1989, the Court dismissed the petition of the Beltran spouses for
"insufficiency in form and substance and for lack of merit." The Beltrans
moved for reconsideration, without success. A second motion for
reconsideration was filed by the Beltrans.
Meantime, PAIC also filed a Petition for Review on certiorari before this
Court, docketed as G.R. No. 83256. On 25 January 1989, the Court issued a
Resolution in G.R. No. 83256, granting the motion of the spouses Beltran
for consolidation of G.R. No. 83256 with G.R. No. 83113, in effect
reconsidering the previous dismissal of the petition in G.R. No. 83113.
PAIC, in its petition, mainly alleges that the Court of Appeals erred in
applying the provisions of the Civil Code in the construction of its contract
with the Beltran spouses. PAIC maintains that the Court of Appeals should
have applied instead the provisions of R.A. No. 5980 entitled "An Act
Regulating the Organization and Operation of Financing Companies," in
characterizing the relationship between PAIC and the spouses Beltran. It is
argued that the contract of lease is actually a financial lease governed by
Section 3 (a) of R.A. No. 5980; that under such scheme, PAIC under took
no warranty as to the fitness, design or condition of, or as to the quality or
capacity of the equipment.
The threshold problem relates to characterization of the relationships
between the three (3) parties: PAIC, the Beltrans and SESCO.
Characterization of these relationships requires us to examine the real
nature of the commercial transactions entered into by these parties inter
se, and in doing so, we need to look through the forms of the agreements
and related documents and to examine the effective intent of the parties

as well as the economic facts and circumstances which existed at the time
of establishment of such agreements. 4
We begin by summarizing the claims asserted by each of the parties
against the others.
The Beltrans asserted against PAIC and against SESCO two (2) principal
claims. The first claim was for rescission of the lease agreement with PAIC,
which had obligated the Beltrans to make monthly payments to PAIC, for
failure of PAIC to render the SUN 1115 fit for the purpose for which the
Beltrans wanted it in the first place. The second was a claim to recover the
downpayment that the Beltrans had made to SESCO on the purchase price
of the SUN 1115.
The principal claim of PAIC was asserted against the Beltrans under the
lease agreement. That claim was for specific performance of the Beltrans'
obligations under the lease agreement, i.e., payment of the specified
monthly payments all of which had become due and payable in view of the
default on the part of the Beltrans. The aggregate of those monthly
payments in effect represented the payment which PAIC had previously
made to SESCO for the balance of the purchase price (remaining after the
Beltrans' downpayment) of the SUN 1115, plus financing charges which
included PAIC's profit. PAIC also had a cause of action against SESCO
under the suretyship agreement which SESCO had signed guaranteeing
solidarily with the Beltrans payment of the amounts due from the Beltrans
under the lease agreement. PAIC did not originally implead SESCO as a
defendant in the complaint against the Beltrans. SESCO was originally
brought in as a party-litigant through the medium of the third-party
complaint filed by the Beltrans against SESCO before the trial court. Later,
PAIC amended its complaint, this time bringing in SESCO as a defendant;
the amended complaint was admitted and SESCO in due time filed an
answer.
SESCO sought to defend itself against PAIC's claims by asserting that
PAIC's remedies were against the Beltrans under their lease contract; that
by entering into the lease with the Beltrans, PAIC had waived any rights it
had as a buyer from SESCO; that SESCO's solidary guarantee in favor of
PAIC had been extinguished or prescribed; that the Beltrans had prevented
SESCO from complying with its warranty on the SUN 1115; and that any
defect of the SUN 1115 was due to the acts and negligence of the
users, i.e., the Beltrans. SESCO did not appeal from the trial court's
decision but was, of course, a party to the proceedings before the Court of
Appeals and is a party to the two (2)Petitions for Review. In each of the
Petitions for Review (G.R. Nos. 83113 and 83256) now consolidated before
our Court, SESCO was served with a copy of the Petition. Clearly,
therefore, the Supreme Court has jurisdiction over the person of SESCO.
We turn to the important circumstances constituting and attending the
transactions between SESCO, PAIC and the Beltrans:
1. Initially, SESCO sold the Performance Analyzer SUN 1115 to the Beltran
spouses as evidenced by SESCO's Sales Invoice No. 050 dated 15 July
1980. 5 Accompanying this Sales Invoices was a Certificate of Warranty
issued by SESCO in favor of the Beltrans, also dated 15 July
1980. 6 Thereupon, delivery of the Performance Analyzer was made to the
Beltrans, as indicated in the Sales Invoice and in the delivery receipt dated

15 July 1980. 7 As downpayment fort his purchase, the Beltrans paid

SESCO the total amount of P29,672.11.
2. Next, SESCO sold to PAIC the same equipment it had earlier sold to the
Beltran spouses. The sale to PAIC is evidenced by SESCO's Sales Invoice
No. 050 dated 3 September 1980 and issued in the name of both PAIC and
the Beltrans as vendees. For this transaction, PAIC paid SESCO the amount
of P91,751.60. A delivery receipt covering the SUN 1115 and dated 3
September 1980 was issued in the name of both PAIC and the Beltrans. A
close examination of the records will, however, show that PAIC never took
physical possession of the SUN 1115, since on the stated date of delivery
to PAIC, the SUN 1115 was already physically in the hands of the Beltrans.
3. Shortly after the transaction between SESCO and PAIC, a lease contract
dated 19 September 1990 was entered into between PAIC and the
Beltrans. The lease agreement provided for a fixed monthly rental
payment for a period of thirty-six (36) months. It is important to note that
under this lease contract, the lessor PAIC undertook no warranty of the
fitness, design and condition of, or of the quality or capacity of, the leased
Performance Analyzer SUN 1115. The relevant provision of the lease
agreement reads as follows:
2.1. Warranties; Negation Lessor not being the manufacturer
of the Equipment, nor manufacturer's agent, makes no warranty
or representation, either expressed or implied, as to the fitness,
design or condition of, or as to the quality or capacity of the
material, equipment or workmanship in the Equipment, nor any
warranty that the equipment will satisfy the requirements of any
law, rule, specification or contract which provides for specific
machinery or operation, or special methods, it being agreed that
all such risks as between the Lessor and the Lessee are to be
borne by the Lessee at its sole risk and expense. No oral
agreement, guaranty, promise, condition, representation or
warranty shall be binding; all prior conversations, agreements, or
representations related hereto and/or to the Equipment are
integrated herein, and no modification hereof shall be binding
unless in writing signed by Lessor. All repairs, parts, supplies,
accessories, equipment and device, furnished or added to any
Equipment under lease shall become the property of the
Lessor.The Lessee also agrees that each Equipment under lease is
of a design, capacity and size selected and approved by the
Lessee, and the Lessee is satisfied that the same is suitable for its
purposes. The Lessor shall not be liable to the Lessee for any loss,
damage or expense of any kind or nature, caused directly or
indirectly, by any Equipment under lease, or the use or
maintenance thereof, or the repairs, servicing or adjustments
thereto, or by any delay or failure to provide the same, or by any
interruption of service or loss of use thereof or for any loss of
business or damage whatever and however the same may have
been caused. (Emphasis supplied)

The lease contract also provided that "the lessee shall have no option to
purchase or otherwise acquire title or ownership of any of the leased
equipment and shall have only he right to use the same under and subject
to the terms and conditions of [the] lease."
4. Pursuant to the lease agreement, another delivery receipt was issued,
this time in the name of the Beltrans by PAIC, and dated 2 September

1980. It may be noted that this delivery receipt dated 2 September 1980
was in fact dated a day earlier than the date when SESCO, per its own
documentation, delivered the equipment to PAIC.
5. Since the Beltrans were in possession of the SUN 1115 before PAIC, per
SESCO's documentation, purchased the same from SESCO, it necessarily
follows that the Beltrans, rather than PAIC, had selected and inspected the
equipment.
6. The amount paid by PAIC to SESCO represented the discounted value of
the total amount receivable by SESCO from the Beltrans. 8 At the time of
the sale by SESCO to PAIC, the amount receivable by SESCO from the
Beltrans (i.e., the balance of the purchase price of the equipment
remaining after application of the downpayment) was P107,327.89
(P137,000.00 - P29,672.11 = P107,327.89).
7. The rental payments stipulated in the lease contract between PAIC and
the Beltrans were so computed as to cover the amount paid by PAIC to
SESCO plus the financing charges. 9
8. Although the lease contract gave no option to the Beltrans to purchase
or to acquire the SUN 1115, the declarations of the parties in their
different pleadings 10 afford clear indication that the parties had
contemplated that the ownership of the SUN 1115 would pass to the
Beltrans after the end of the lease period. It was not, therefore,
anticipated by the parties that the SUN 1115 would be returned to the
lessor PAIC. PAIC was not in the business of leasing out machinery or
equipment and did not maintain a warehouse or workshop nor service and
maintenance personnel for the repair and servicing of machinery or
equipment.
It will be recalled that the trial court concluded that the contract between
PAIC and the Beltrans was a real lease or a "civil law lease" and held that
the lease was extinguished because the thing leased was or had become
totally unfit for the purposes of the lease, in accordance with the
provisions of Article 1654 of the Civil Code. It will also be recalled that the
Court of Appeals had concluded after examination of the above
circumstances that the contract of lease was "a scheme to simulate the
real agreement between the parties" which "real agreement" was a
composite of a contract of sale between the Beltrans as vendees and
SESCO (or SESCO's assigns [PAIC]) as vendor, and a "financing
arrangement."
We believe that the Court of Appeals was substantially correct in holding
that the principal transactions were two-fold: firstly, a sale of the SUN No.
1115 from SESCO to PAIC/the Beltrans and, secondly, a financing
arrangementthat would permit the ultimate users of the SUN 1115 the
Beltrans to use that equipment and pay for it by installments, spread
out over thirty-six (36) months. Their consistencies in the details of the
documentation of the transactions may be seen to be due, not so much to
"simulation" of the "real agreement of the parties" but rather to the fact
that the financing company was chosen and the financing arrangement
concluded sometime after the original sale transaction between SESCO
and the Beltrans. That original transaction was in effect remodelled or
restructured to conform with the financing arrangement, which took the
form of a financial lease. A financial lessor, like all lessors, is legal owner

of the thing leased. Accordingly, SESCO documented a sale to PAIC;

because the SUN 1115 had earlier been sold to the Beltrans, the SESCO
invoice was modified and made out to both PAIC and the Beltrans. The
possession originally held by the Beltrans in concept of owner, was
transmuted into possession by the Beltrans in concept of lessee.
In this jurisdiction, financial leases as a species of secured financing are of
fairly recent vintage. Financial leases, while they are complex
arrangements, cannot be casually dismissed as "simulated contracts." To
the contrary, they are genuine or legitimate contracts which have been
accorded statutory and administrative recognition. Section 3 (a) of
Republic Act No. 5980, as amended by Presidential Decrees Nos. 1454 and
1793, known as the "Financing Company Act," defines financing
companies in the following manner:
Financing companies, hereinafter called companies,
are corporations, or partnerships, except those regulated
by the Central Bank of the Philippines, the Insurance
Commissioner and the Cooperatives Administration
Office, which are primarily organized for the purpose of
extending credit facilities toconsumers and to industrial,
commercial,
or
agricultural enterprises,
either
by
discounting or factoring commercial papers or accounts
receivables, or by buying and selling contracts, leases,
chattel mortgages, or other evidences of indebtedness,
or by
leasing motor
vehicles, heavy
equipment and industrial
machinery,
business
and
office machines and equipment, appliances andother
movable property. 11 (Emphasis supplied)
Section 1, paragraph 1 of the Revised Rules and Regulations Implementing
the Provisions of the Financing Company Act, as amended, adopted jointly
by the Securities and Exchange Commission and the Monetary Board of
the Central Bank of the Philippines, defines leasing in the following terms:
1. "LEASING" shall refer to financial leasing which is a
mode of extending credit through a non-cancellable
contract under which the lessor purchases or acquires at
the instance of the lesseeheavy equipment, motor
vehicles, industrial machinery, appliances, business and
office machines, and other movable property in
consideration of the periodic payment by the lessee of a
fixed amount of money sufficient to amortize at least 70%
of the purchase price or acquisition cost, including
anyincidental expenses and a margin of profit, over the
lease period. The contract shall extend over an obligatory
period during which the lessee has the right to hold and
use the leased property and shall bear the cost of repairs,
maintenance, insurance and preservation thereof, but
with no obligation or option on the part of the lessee to
purchase the leased property at the end of the lease
contract. (Emphasis supplied)
The tax treatment of lease agreements, as distinguished from conditional
sales contracts, is governed by Revenue Regulations No. 19-86,

promulgated by the Department of Finance on 1 January 1987. These

Revenue Regulations recognize two (2) types of leases. The first type,
denominated an "operating lease", is defined as
. . . a contract under which the asset is not wholly
amortized during the primary period of the lease,
and where the lessor does not rely solely on the rentals
during the primary period for his profits, but looks for the
recovery of the balance of his costs and for the rest of his
profits from the sale or re-lease of the returned asset at
the end of the primary lease period. (Emphasis supplied)
The second type of recognized lease is designated as a "finance
lease" and defined in the Revenue Regulations in the following
manner:
. . . "Finance lease," or "Full payout lease" is a contract involving
payment over an obligatory period(also called primary or basic
period) of specified rental amount for the use of a lessor's
property, sufficient in total to amortize the capital outlay of lessor
and to provide for the lessor's borrowing costs and profits. The
obligatory period refers to the primary or basic non-cancellable
period of the lease which in no case shall be less than 730
days. The lessee, not the lessor, exercises the choice of the asset
and is normally responsible for maintenance, insurance and such
other expenses pertinent to the use, preservation and operation
of the asset. Finance leases may be extended, after the expiration
of the primary period, by non-cancellable secondary or
subsequent periods with the rentals significantly reduced. The
residual value shall in no instance be less than five per cent (5%)
of the lessor's acquisition cost of the leased asset. (Emphasis
supplied)

The basic purpose of a financial leasing transaction is to enable the

prospective buyer of equipment, who is unable to pay for such equipment
in cash in one lump sum, to lease such equipment in the meantime for his
use, at a fixed rental sufficient to amortize at least 70% of the acquisition
cost (including the expenses and a margin of profit for the financial lessor)
with the expectation that at the end of the lease period, the
buyer/financial lessee will be able to pay any remaining balance of the
purchase price. 12 Generally speaking, a financing company is not a buyer
or seller of goods; it is not a trading company. Neither is it an ordinary
leasing company; it does not make its profit by buying equipment and
repeatedly leasing out such equipment to different users thereof. But a
financial lease must be preceded by a purchase and sale contract covering
the equipment which becomes the subject matter of the financial lease.
The financial lessor takes the role of the buyer of equipment leased. And
so the formal or documentary tie between the seller and the real buyer of
the equipment, i.e., the financial lessee, is apparently severed. In
economic reality, however, that relationship remains. The sale of the
equipment by the supplier thereof to the financial lessor and the latter's
legal ownership thereof are intended to secure the repayment over time of
the purchase price of the equipment, plus financing charges, through the
payment of lease rentals; that legal title is the upfront security held by the

financial lessor, a security probably superior in some instances to a chattel

mortgagee's lien.
A financing lease may be seen to be a contract sui generis, possessing
some but not necessarily all of the elements of an ordinary or civil law
lease. Thus, legal title to the equipment leased is lodged in the financial
lessor. The financial lessee is entitled to the possession and use of the
leased equipment. At the same time, the financial lessee is obligated to
make periodic payments denominated as lease rentals, which enable the
financial lessor to recover the purchase price of the equipment which had
been paid to the supplier thereof. However, the financial lessor, being a
financing company, i.e., an extender of credit rather than an ordinary
equipment rental company, does not extend a warranty of the fitness of
the equipment for any particular use. In the instant case, the contract of
lease between PAIC and the Beltrans, in addition to expressly disclaiming
any obligation on the part of PAIC to warrant the fitness of the SUN 1115
for any particular use, had specified that the equipment warranty, issued
by SESCO the supplier of the equipment, "shall be passed on by [PAIC] to
the lessee." In fact, as noted, SESCO issued a Certificate of Warranty to
the Beltrans. Thus, the financial lessee was precisely in a position to
enforce such warranty directly against the supplier of the equipment and
not against the financial lessor. We find nothingcontra legem or contrary to
public policy in such a contractual arrangement.
Considering all the circumstances listed earlier, and bearing in mind the
economic and legal nature and objectives of a financing lease, we
conclude and so hold that the financial lease between PAIC and the
Beltrans was a valid and enforceable contract as between the two (2)
contracting parties. The Beltrans are therefore bound to pay to PAIC all the
rental payments which accrued and are due and payable under that
contract.
At the same time, PAIC is entitled to require SESCO to respond under its
solidary guarantee of the obligations of the Beltrans under the lease
contract. PAIC may thus opt to recover from either the Beltrans or SESCO
alone, or from both the Beltrans and SESCO solidarily at the same time.
Should PAIC recover fully or partially the amounts due from the Beltrans,
we believe and so hold that the Beltrans are entitled to reimbursement
from SESCO of such amounts as they shall have been compelled to pay
PAIC. In addition, the Beltrans are entitled to recover from SESCO the
downpayment they had previously made to SESCO on the SUN 1115, and
as well to require SESCO to take back that equipment. These rights of the
Beltrans flow from their rescission of the contract of sale covering the SUN
1115 for failure of SESCO to make good on its warranty against defects in
materials and workmanship set out in its "Warranty Certificate," and on its
warranty against hidden defects which render the thing sold "unfit for the
use of which it is intended" under the general law on sales. 13
It is clear to the Court that it is SESCO who must bear the legal
consequences of its failure to make good on the warranty it had given as
vendor of the SUN 1115. SESCO received the full value of the SUN 1115:
(a) the downpayment from the Beltrans; and (b) the balance of the
purchase price from PAIC. The record shows that PAIC had not breached
any of its undertakings to the Beltrans under the financial lease. Upon the

other hand, the Beltrans, because of failure of the equipment warranty

given by SESCO, could not benefit either from the purchase of the
equipment or from the financial lease. Clearly, it would be inequitable and
unconscionable to permit SESCO to hold on to the purchase price and to
shift the burden of its own failure either to the ultimate buyers or to the
company which financed the bulk of the purchase price.
The Court is aware that the Beltrans were unable to file a timely appeal from the
ruling of the trial court which had dismissed their claim against SESCO. However,
guided by the principle that technicality should not be allowed to stand in the way
of equitably and completely resolving the rights and obligations of the parties, 14 ,
this Court now resolves to treat the Beltrans' appeal as having been seasonably
filed so as to permit complete resolution of this trilateral controversy on the merits.
IN VIEW OF THE ALL THE FOREGOING, the Decision of the Court of Appeals dated 30
June 1987 in C.A.-G.R. CV No. 10078 and the decision of the Regional Trial Court of
Manila dated 16 October 1985 in Civil Case No. 138233, are hereby SET ASIDE, and
a new judgment is hereby ENTERED providing as follows:
1. The spouses Beltran and SESCO are hereby ORDERED to pay, jointly and
severally, to PAIC the rental payments accrued and remaining unpaid under the
lease agreement, with interest at six percent (6%) per annumstarting from 16
October 1985 and until full payment thereof.
2. SESCO is also hereby ORDERED to reimburse the spouses Beltran any amount
that they are actually compelled to pay to PAIC under paragraph 1 of the dispositive
portion of this Decision, with interest thereon at six percent (6%) per
annum counting from the date of payment by the Beltran spouses and until full
reimbursement thereof.
3. The spouses Beltran are hereby REQUIRED to return the Infra-Red Performance
Analyzer SUN 1115 to SESCO, at the expense of SESCO. SESCO is in turn hereby
ORDERED to accept that equipment.
4. SESCO is, finally, hereby ORDERED to return to the spouses Beltran the
downpayment of P29,672.11 made on the SUN 1115, with interest thereon at six
percent (6%) per annum counting from 16 October 1985 and until full payment
thereof.
No pronouncement as to costs. This Decision is immediately executory.
SO ORDERED.

G.R. No. L-67929 October 27, 1987

LEDA DINO GRAGEDA and TERESITA MONTILLA, petitioners,
vs.
HONORABLE INTERMEDIATE APPELLATE COURT and FRANCISCO
MONTALLANA, JR., respondents.
PARAS, J.:
This is a petition to review and reverse the Resolution dated May 23, 1984
of respondent Intermediate Appellate Court (now Court of Appeals) in AC
G.R. No. CV-64223, which reversed its previous decision 1 for the
petitioners and affirmed the decision 2 of the Municipal Trial Court of
Daraga, Albay in Civil Case No. 362, the dispositive portion of which reads:
... In view of aH the foregoing considerations, the Court
has come to the conclusion that the plaintiff had proven
and established not only by preponderance of evidence
but by adequate evidence as well that he is entitled to the
relief prayed for in accordance with the aforecited
pertinent provisions of law and judgement is hereby
rendered, ordering defendants to pay jointly and sevemuy
unto the plaintiff the sum of P4,300.00 and P50.00 as
litigation expenses and to pay the costs. No other
pronouncement is made as to other claims for damages
for reasons of equity. The compulsory counterclaim is
hereby denied and dismissd for lack of merit ... (p. 51,
Rollo)
The facts of the case are briefly as follows:
Petitioner Grageda is the owner and manager of the Sorsogon Home
Enterprises while private respodent is a seller of abaca finished products.
On March 26, 1975, Grageda ordered from private respondent 500 sets
ofrectangular ("bacbac") pyrex trays and 500 sets of square ("bacbac")
pyrex trays with 3 measurements per sample with handle, at P4.50 per
set. (E xh. "A", "A-1", "A-2", "A-3")
Prior to April 27, 1975, private respondent delivered some of the items
ordered but they were outrightly rejected. After making the proper
corrections, private respondent made subsequent deliveries, to wit:
April 27, 1975

(a) 79 sets of pyrex trays "bacbac" with a total value of P750.00;

April 30, 1975

(a) 70 sets of rectangular trays "bacbac" valued at P315.00;

May 1, 1975

(a) 100 sets of rectangular trays "bacbac" and

(b) 100 sets of square trays "bacbac" with a total value of P900.00;

May 3, 1975

(a) 270setsofrectangulartrays"bacbac"and
(b) 4 sets of square trays "bacbac" valued at P846.00; and

May 12,1975

188 sets square trays;

May 27, 1975

136 sets of square trays "bacbac" valued at P612.00(p. 36, Rollo)

Said items were all received and duly receipted for by Grageda's
caretaker, herein co-petitioner Montilla.
On several occasions, private respondent demanded payment for the total
value of the deliveries but Grageda requested for extensions of time within
which to pay. Finally, on June 13, 1975, private respondent sought the
assistance of the Albay PC Command and a confrontation was conducted
between Grageda and private respondent. When pressed for payment,
Grageda ultimately said that she rejected the items delivered by private
respondent because they were defective. Subsequently, Grageda sent a
letter dated June 20, 1975 to private respondent, to which a Nacida
certification dated June 23, 1975 was annexed (Exh. "6"), informing
private respondent of her rejection of the items delivered, and requesting
for their withdrawal from,her bodega. In view of the foregoing, private
respondent filed a Complaint for Sum of Money against the petitioners
before the Municipal Trial Court of Daraga, Albay.
Grageda, on the other hand, claimed that the rectangular and square
"bacbac" pyrex trays delivered by the private respondent from April 27,
1975 until May 25, 1975 were not in accordance with the sample agreed
upon by and between them, which is that the edging or "pleje" should be
made of steel; that as early as May, 1975, she advised private respondent
of her rejection of the said items because their edgings were made of tin
plates or of inferior quality; that she demanded their withdrawal from
her bodega but despite repeated requests, private respondent refused to
withdraw the same; that she likewise informed private respondent of her
rejection of the said items at the confrontation with the police on June 13,
1975 and in her letter dated June 20, 1975 (Exhs. "E ", "E-1 ") to which a
certification of the Nacida dated June 23, 1975 was annexed (Exh. "6"),
stating therein that said items are inferior and cannot be exported. In
addition, Grageda presented two (2) disinterested witnesses who testified
that the items delivered by private respondent were different from the
samples desired by her. (pp. 7-8, Rollo)
On February 25, 1977, the Metropolitan Trial Court rendered a decision in
private respondent's favor holding the petitioner civilly liable to the private
respondent for having impliedly accepted the deliveries, pursuant to
Article 1585 of the Civil Code. Said decision was reversed by the Court of
First Instance of Albay (now Regional Trial Court). Private respondent
appealed to the Court of Appeals, which affirmed the decision 3 of the
Regional Trial Court. On motion for reconsideration, however, the Court of
Appeals reverse its previous decision and affirmed the decision of the
Metropolitan Trial Court.
Hence, this petition, raising the issue of whether or not there was an
acceptance of the deliveries made, or otherwise stated, whether or not
there was a rejection seasonably made.
The petition is devoid of merit.
While it is true that Article 1584 of the Civil Code accords Grageda (as
buyer) the right to a reasonable opportunity to examine the abaca
"bacbac" goods to ascertain whether they are in conformity with the
contract, such opportunity to examine should be availed of within a
reasonable time in order that private respondent (as the seller) may not
be subjected to undue delay or prejudice in the payment of his raw

materials, workers and other damages which may be incurred due to the
deterioration of his products.
In this regard, the trial court found that the delay in the advice or notice of
rejection was almost two (2) months after receipt, hence, was rather too
late. In its decision dated February 25, 1977, the Municipal Trial Court said:
... There is no clear, convincing and competent evidence
that defendant Grageda (petitioner herein) advised or
informed plaintiff (private respondent herein) even one or
two weeks after the date of delivery, so that the Court
entertains grave and serious doubts as to whether
defendant Grageda really advised or informed plaintiff that
the latter's deliveries from April 27 are rejected, within the
month of May, 1975 as alleged by her, in view of plaintiff's
vehement
denial.
Moreover,
said
allegation
is
uncorroborated and not substantiated by her caretaker,
co-defendant Montilla, as to lead the Court to believe that
it was only on June 13, 1975 and on June 20, 1975, (Exhibit
"E") that she really informed and advised, with certainty
that his plaintiff's deliveries of 500 rectangular "bacbac"
trays and 500 square "bacbac" trays were rejected. ... (pp.
48-49, Rollo)
We agree with the trial court's observations and conclusions that:
... The provisions of Article 1585 (New Civil Code) which
provides, among others, that "the buyer is deemed to
have accepted them," ... "when, after the lapse of a
reasonable time, he retains the goods without intimating
to the seller that he has rejected them" is applicable in the
instant case. The evidence clearly and unmistakably
shows that the defendants retained possession of the
abaca goods, subject matter in this case, for practically a
month and almost two (2) manths on June 20, 1975 or
until this case was filed on June 27, 1975, without
intimating their rejection to the supplier or seller, within a
reasonable time ... for which reason such retention of the
abaca "bacbac" goods for a month or more already
amounts to a waiver of defendants' right to reject
acceptance and payment of the plaintiffs' abaca "bacbac"
goods ... . (p. 50, Rollo)
Well settled is the rule that the findings of fact of the trial judge are
generally respected on appeal and We find no cogent reason to disturb the
same.
Premises considered, the petition is hereby DENIED and the decision of the
Intermediate Appellate Court is hereby AFFIRMED.
SO ORDERED.

G.R. No. 111238 January 25, 1995

ADELFA PROPERTIES, INC., petitioner,
vs.
COURT OF APPEALS, ROSARIO JIMENEZ-CASTAEDA and SALUD
JIMENEZ, respondents.
REGALADO, J.:
The main issues presented for resolution in this petition for review
on certiorari of the judgment of respondent Court of appeals, dated April
6, 1993, in CA-G.R. CV No. 34767 1 are (1) whether of not the "Exclusive
Option to Purchase" executed between petitioner Adelfa Properties, Inc.
and private respondents Rosario Jimenez-Castaeda and Salud Jimenez is
an option contract; and (2) whether or not there was a valid suspension of
payment of the purchase price by said petitioner, and the legal effects
thereof on the contractual relations of the parties.
The records disclose the following antecedent facts which culminated in
the present appellate review, to wit:
1. Herein private respondents and their brothers, Jose and Dominador
Jimenez, were the registered co-owners of a parcel of land consisting of
17,710 square meters, covered by Transfer Certificate of Title (TCT) No.
309773, 2situated in Barrio Culasi, Las Pias, Metro Manila.
2. On July 28, 1988, Jose and Dominador Jimenez sold their share
consisting of one-half of said parcel of land, specifically the eastern portion
thereof, to herein petitioner pursuant to a "Kasulatan sa Bilihan ng
Lupa." 3Subsequently,
a
"Confirmatory
Extrajudicial
Partition
Agreement" 4 was executed by the Jimenezes, wherein the eastern portion
of the subject lot, with an area of 8,855 square meters was adjudicated to
Jose and Dominador Jimenez, while the western portion was allocated to
herein private respondents.
3. Thereafter, herein petitioner expressed interest in buying the western
portion of the property from private respondents. Accordingly, on
November 25, 1989, an "Exclusive Option to Purchase" 5 was executed
between petitioner and private respondents, under the following terms
and conditions:
1. The selling price of said 8,655 square meters of the subject property is
TWO MILLION EIGHT HUNDRED FIFTY SIX THOUSAND ONE HUNDRED FIFTY
PESOS ONLY (P2,856,150.00)
2. The sum of P50,000.00 which we received from ADELFA PROPERTIES,
INC. as an option money shall be credited as partial payment upon the
consummation of the sale and the balance in the sum of TWO MILLION
EIGHT HUNDRED SIX THOUSAND ONE HUNDRED FIFTY PESOS
(P2,806,150.00) to be paid on or before November 30, 1989;
3. In case of default on the part of ADELFA PROPERTIES, INC. to pay said
balance in accordance with paragraph 2 hereof, this option shall be
cancelled and 50% of the option money to be forfeited in our favor and we
will refund the remaining 50% of said money upon the sale of said property
to a third party;
4. All expenses including the corresponding capital gains tax, cost of
documentary stamps are for the account of the VENDORS, and expenses
for the registration of the deed of sale in the Registry of Deeds are for the
account of ADELFA PROPERTIES, INC.

Considering, however, that the owner's copy of the certificate of title

issued to respondent Salud Jimenez had been lost, a petition for the reissuance of a new owner's copy of said certificate of title was filed in court

through Atty. Bayani L. Bernardo, who acted as private respondents'

counsel. Eventually, a new owner's copy of the certificate of title was
issued but it remained in the possession of Atty. Bernardo until he turned it
over to petitioner Adelfa Properties, Inc.
4. Before petitioner could make payment, it received summons 6 on
November 29, 1989, together with a copy of a complaint filed by the
nephews and nieces of private respondents against the latter, Jose and
Dominador Jimenez, and herein petitioner in the Regional Trial Court of
Makati, docketed as Civil Case No. 89-5541, for annulment of the deed of
sale in favor of Household Corporation and recovery of ownership of the
property covered by TCT No. 309773. 7
5. As a consequence, in a letter dated November 29, 1989, petitioner
informed private respondents that it would hold payment of the full
purchase price and suggested that private respondents settle the case
with their nephews and nieces, adding that ". . . if possible, although
November 30, 1989 is a holiday, we will be waiting for you and said
plaintiffs at our office up to 7:00 p.m." 8 Another letter of the same tenor
and of even date was sent by petitioner to Jose and Dominador
Jimenez. 9 Respondent Salud Jimenez refused to heed the suggestion of
petitioner and attributed the suspension of payment of the purchase price
to "lack of word of honor."
6. On December 7, 1989, petitioner caused to be annotated on the title of
the lot its option contract with private respondents, and its contract of sale
with Jose and Dominador Jimenez, as Entry No. 1437-4 and entry No.
1438-4, respectively.
7. On December 14, 1989, private respondents sent Francisca Jimenez to
see Atty. Bernardo, in his capacity as petitioner's counsel, and to inform
the latter that they were cancelling the transaction. In turn, Atty. Bernardo
offered to pay the purchase price provided that P500,000.00 be deducted
therefrom for the settlement of the civil case. This was rejected by private
respondents. On December 22, 1989, Atty. Bernardo wrote private
respondents on the same matter but this time reducing the amount from
P500,000.00 to P300,000.00, and this was also rejected by the latter.
8. On February 23, 1990, the Regional Trial Court of Makati dismissed Civil
Case No. 89-5541. Thus, on February 28, 1990, petitioner caused to be
annotated anew on TCT No. 309773 the exclusive option to purchase as
Entry No. 4442-4.
9. On the same day, February 28, 1990, private respondents executed a
Deed of Conditional Sale 10 in favor of Emylene Chua over the same parcel
of land for P3,029,250, of which P1,500,000.00 was paid to private
respondents on said date, with the balance to be paid upon the transfer of
title to the specified one-half portion.
10. On April 16, 1990, Atty. Bernardo wrote private respondents informing
the latter that in view of the dismissal of the case against them, petitioner
was willing to pay the purchase price, and he requested that the
corresponding deed of absolute sale be executed. 11 This was ignored by
private respondents.
11. On July 27, 1990, private respondents' counsel sent a letter to
petitioner enclosing therein a check for P25,000.00 representing the
refund of fifty percent of the option money paid under the exclusive option

to purchase. Private respondents then requested petitioner to return the

owner's duplicate copy of the certificate of title of respondent Salud
Jimenez. 12 Petitioner failed to surrender the certificate of title, hence
private respondents filed Civil Case No. 7532 in the Regional Trial Court of
Pasay City, Branch 113, for annulment of contract with damages, praying,
among others, that the exclusive option to purchase be declared null and
void; that defendant, herein petitioner, be ordered to return the owner's
duplicate certificate of title; and that the annotation of the option contract
on TCT No. 309773 be cancelled. Emylene Chua, the subsequent
purchaser of the lot, filed a complaint in intervention.
12. The trial court rendered judgment 13 therein on September 5, 1991
holding that the agreement entered into by the parties was merely an
option contract, and declaring that the suspension of payment by herein
petitioner constituted a counter-offer which, therefore, was tantamount to
a rejection of the option. It likewise ruled that herein petitioner could not
validly suspend payment in favor of private respondents on the ground
that the vindicatory action filed by the latter's kin did not involve the
western portion of the land covered by the contract between petitioner
and private respondents, but the eastern portion thereof which was the
subject of the sale between petitioner and the brothers Jose and
Dominador Jimenez. The trial court then directed the cancellation of the
exclusive option to purchase, declared the sale to intervenor Emylene
Chua as valid and binding, and ordered petitioner to pay damages and
attorney's fees to private respondents, with costs.
13. On appeal, respondent Court of appeals affirmed in toto the decision of
the court a quo and held that the failure of petitioner to pay the purchase
price within the period agreed upon was tantamount to an election by
petitioner not to buy the property; that the suspension of payment
constituted an imposition of a condition which was actually a counter-offer
amounting to a rejection of the option; and that Article 1590 of the Civil
Code on suspension of payments applies only to a contract of sale or a
contract to sell, but not to an option contract which it opined was the
nature of the document subject of the case at bar. Said appellate court
similarly upheld the validity of the deed of conditional sale executed by
private respondents in favor of intervenor Emylene Chua.
In the present petition, the following assignment of errors are raised:
1. Respondent court of appeals acted with grave abuse of discretion in
making its finding that the agreement entered into by petitioner and
private respondents was strictly an option contract;
2. Granting arguendo that the agreement was an option contract,
respondent court of Appeals acted with grave abuse of discretion in
grievously failing to consider that while the option period had not lapsed,
private respondents could not unilaterally and prematurely terminate the
option period;
3. Respondent Court of Appeals acted with grave abuse of discretion in
failing to appreciate fully the attendant facts and circumstances when it
made the conclusion of law that Article 1590 does not apply; and
4. Respondent Court of Appeals acted with grave abuse of discretion in
conforming with the sale in favor of appellee Ma. Emylene Chua and the

award of damages and attorney's fees which are not only excessive, but
also without in fact and in law. 14
An analysis of the facts obtaining in this case, as well as the evidence
presented by the parties, irresistibly leads to the conclusion that the
agreement between the parties is a contract to sell, and not an option
contract or a contract of sale.
I
1. In view of the extended disquisition thereon by respondent court, it
would be worthwhile at this juncture to briefly discourse on the rationale
behind our treatment of the alleged option contract as a contract to sell,
rather than a contract of sale. The distinction between the two is
important for in contract of sale, the title passes to the vendee upon the
delivery of the thing sold; whereas in a contract to sell, by agreement the
ownership is reserved in the vendor and is not to pass until the full
payment of the price. In a contract of sale, the vendor has lost and cannot
recover ownership until and unless the contract is resolved or rescinded;
whereas in a contract to sell, title is retained by the vendor until the full
payment of the price, such payment being a positive suspensive condition
and failure of which is not a breach but an event that prevents the
obligation of the vendor to convey title from becoming effective. Thus, a
deed of sale is considered absolute in nature where there is neither a
stipulation in the deed that title to the property sold is reserved in the
seller until the full payment of the price, nor one giving the vendor the
right to unilaterally resolve the contract the moment the buyer fails to pay
within a fixed period. 15
There are two features which convince us that the parties never intended
to transfer ownership to petitioner except upon the full payment of the
purchase price. Firstly, the exclusive option to purchase, although it
provided for automatic rescission of the contract and partial forfeiture of
the amount already paid in case of default, does not mention that
petitioner is obliged to return possession or ownership of the property as a
consequence of non-payment. There is no stipulation anent reversion or
reconveyance of the property to herein private respondents in the event
that petitioner does not comply with its obligation. With the absence of
such a stipulation, although there is a provision on the remedies available
to the parties in case of breach, it may legally be inferred that the parties
never intended to transfer ownership to the petitioner to completion of
payment of the purchase price.
In effect, there was an implied agreement that ownership shall not pass to
the purchaser until he had fully paid the price. Article 1478 of the civil
code does not require that such a stipulation be expressly made.
Consequently, an implied stipulation to that effect is considered valid and,
therefore, binding and enforceable between the parties. It should be noted
that under the law and jurisprudence, a contract which contains this kind
of stipulation is considered a contract to sell.
Moreover, that the parties really intended to execute a contract to sell,
and not a contract of sale, is bolstered by the fact that the deed of
absolute sale would have been issued only upon the payment of the
balance of the purchase price, as may be gleaned from petitioner's letter
dated April 16, 1990 16 wherein it informed private respondents that it "is

now ready and willing to pay you simultaneously with the execution of the
corresponding deed of absolute sale."
Secondly, it has not been shown there was delivery of the property, actual
or constructive, made to herein petitioner. The exclusive option to
purchase is not contained in a public instrument the execution of which
would have been considered equivalent to delivery. 17 Neither did
petitioner take actual, physical possession of the property at any given
time. It is true that after the reconstitution of private respondents'
certificate of title, it remained in the possession of petitioner's counsel,
Atty. Bayani L. Bernardo, who thereafter delivered the same to herein
petitioner. Normally, under the law, such possession by the vendee is to
be understood as a delivery. 18 However, private respondents explained
that there was really no intention on their part to deliver the title to herein
petitioner with the purpose of transferring ownership to it. They claim that
Atty. Bernardo had possession of the title only because he was their
counsel in the petition for reconstitution. We have no reason not to believe
this explanation of private respondents, aside from the fact that such
contention was never refuted or contradicted by petitioner.
2. Irrefragably, the controverted document should legally be considered as
a perfected contract to sell. On this particular point, therefore, we reject
the position and ratiocination of respondent Court of Appeals which, while
awarding the correct relief to private respondents, categorized the
instrument as "strictly an option contract."
The important task in contract interpretation is always the ascertainment
of the intention of the contracting parties and that task is, of course, to be
discharged by looking to the words they used to project that intention in
their contract, all the words not just a particular word or two, and words in
context not words standing alone. 19Moreover, judging from the
subsequent acts of the parties which will hereinafter be discussed, it is
undeniable that the intention of the parties was to enter into a contract to
sell. 20 In addition, the title of a contract does not necessarily determine its
true nature. 21 Hence, the fact that the document under discussion is
entitled "Exclusive Option to Purchase" is not controlling where the text
thereof shows that it is a contract to sell.
An option, as used in the law on sales, is a continuing offer or contract by
which the owner stipulates with another that the latter shall have the right
to buy the property at a fixed price within a certain time, or under, or in
compliance with, certain terms and conditions, or which gives to the
owner of the property the right to sell or demand a sale. It is also
sometimes called an "unaccepted offer." An option is not of itself a
purchase, but merely secures the privilege to buy. 22 It is not a sale of
property but a sale of property but a sale of the right to purchase. 23 It is
simply a contract by which the owner of property agrees with another
person that he shall have the right to buy his property at a fixed price
within a certain time. He does not sell his land; he does not then agree to
sell it; but he does sell something, that it is, the right or privilege to buy at
the election or option of the other party. 24 Its distinguishing characteristic
is that it imposes no binding obligation on the person holding the option,
aside from the consideration for the offer. Until acceptance, it is not,
properly speaking, a contract, and does not vest, transfer, or agree to

transfer, any title to, or any interest or right in the subject matter, but is
merely a contract by which the owner of property gives the optionee the
right or privilege of accepting the offer and buying the property on certain
terms. 25
On the other hand, a contract, like a contract to sell, involves a meeting of
minds two persons whereby one binds himself, with respect to the other,
to give something or to render some service. 26 Contracts, in general, are
perfected by mere consent, 27 which is manifested by the meeting of the
offer and the acceptance upon the thing and the cause which are to
constitute the contract. The offer must be certain and the acceptance
absolute. 28
The distinction between an "option" and a contract of sale is that an
option is an unaccepted offer. It states the terms and conditions on which
the owner is willing to sell the land, if the holder elects to accept them
within the time limited. If the holder does so elect, he must give notice to
the other party, and the accepted offer thereupon becomes a valid and
binding contract. If an acceptance is not made within the time fixed, the
owner is no longer bound by his offer, and the option is at an end. A
contract of sale, on the other hand, fixes definitely the relative rights and
obligations of both parties at the time of its execution. The offer and the
acceptance are concurrent, since the minds of the contracting parties
meet in the terms of the agreement. 29
A perusal of the contract in this case, as well as the oral and documentary
evidence presented by the parties, readily shows that there is indeed a
concurrence of petitioner's offer to buy and private respondents'
acceptance thereof. The rule is that except where a formal acceptance is
so required, although the acceptance must be affirmatively and clearly
made and must be evidenced by some acts or conduct communicated to
the offeror, it may be made either in a formal or an informal manner, and
may be shown by acts, conduct, or words of the accepting party that
clearly manifest a present intention or determination to accept the offer to
buy or sell. Thus, acceptance may be shown by the acts, conduct, or
words of a party recognizing the existence of the contract of sale. 30
The records also show that private respondents accepted the offer of
petitioner to buy their property under the terms of their contract. At the
time petitioner made its offer, private respondents suggested that their
transfer certificate of title be first reconstituted, to which petitioner
agreed. As a matter of fact, it was petitioner's counsel, Atty. Bayani L.
Bernardo, who assisted private respondents in filing a petition for
reconstitution. After the title was reconstituted, the parties agreed that
petitioner would pay either in cash or manager's check the amount of
P2,856,150.00 for the lot. Petitioner was supposed to pay the same on
November 25, 1989, but it later offered to make a down payment of
P50,000.00, with the balance of P2,806,150.00 to be paid on or before
November 30, 1989. Private respondents agreed to the counter-offer made
by petitioner. 31 As a result, the so-called exclusive option to purchase was
prepared by petitioner and was subsequently signed by private
respondents, thereby creating a perfected contract to sell between them.
It cannot be gainsaid that the offer to buy a specific piece of land was
definite and certain, while the acceptance thereof was absolute and

without any condition or qualification. The agreement as to the object, the

price of the property, and the terms of payment was clear and welldefined. No other significance could be given to such acts that than they
were meant to finalize and perfect the transaction. The parties even went
beyond the basic requirements of the law by stipulating that "all expenses
including the corresponding capital gains tax, cost of documentary stamps
are for the account of the vendors, and expenses for the registration of the
deed of sale in the Registry of Deeds are for the account of Adelfa
properties, Inc." Hence, there was nothing left to be done except the
performance of the respective obligations of the parties.
We do not subscribe to private respondents' submission, which was upheld
by both the trial court and respondent court of appeals, that the offer of
petitioner to deduct P500,000.00, (later reduced to P300,000.00) from the
purchase price for the settlement of the civil case was tantamount to a
counter-offer. It must be stressed that there already existed a perfected
contract between the parties at the time the alleged counter-offer was
made. Thus, any new offer by a party becomes binding only when it is
accepted by the other. In the case of private respondents, they actually
refused to concur in said offer of petitioner, by reason of which the original
terms of the contract continued to be enforceable.
At any rate, the same cannot be considered a counter-offer for the simple
reason that petitioner's sole purpose was to settle the civil case in order
that it could already comply with its obligation. In fact, it was even
indicative of a desire by petitioner to immediately comply therewith,
except that it was being prevented from doing so because of the filing of
the civil case which, it believed in good faith, rendered compliance
improbable at that time. In addition, no inference can be drawn from that
suggestion given by petitioner that it was totally abandoning the original
contract.
More importantly, it will be noted that the failure of petitioner to pay the
balance of the purchase price within the agreed period was attributed by
private respondents to "lack of word of honor" on the part of the former.
The reason of "lack of word of honor" is to us a clear indication that private
respondents considered petitioner already bound by its obligation to pay
the balance of the consideration. In effect, private respondents were
demanding or exacting fulfillment of the obligation from herein petitioner.
with the arrival of the period agreed upon by the parties, petitioner was
supposed to comply with the obligation incumbent upon it to perform, not
merely to exercise an option or a right to buy the property.
The obligation of petitioner on November 30, 1993 consisted of an
obligation to give something, that is, the payment of the purchase price.
The contract did not simply give petitioner the discretion to pay for the
property. 32It will be noted that there is nothing in the said contract to
show that petitioner was merely given a certain period within which to
exercise its privilege to buy. The agreed period was intended to give time
to herein petitioner within which to fulfill and comply with its obligation,
that is, to pay the balance of the purchase price. No evidence was
presented by private respondents to prove otherwise.
The test in determining whether a contract is a "contract of sale or
purchase" or a mere "option" is whether or not the agreement could be

specifically enforced. 33 There is no doubt that the obligation of petitioner

to pay the purchase price is specific, definite and certain, and
consequently binding and enforceable. Had private respondents chosen to
enforce the contract, they could have specifically compelled petitioner to
pay the balance of P2,806,150.00. This is distinctly made manifest in the
contract itself as an integral stipulation, compliance with which could
legally and definitely be demanded from petitioner as a consequence.
This is not a case where no right is as yet created nor an obligation
declared, as where something further remains to be done before the buyer
and seller obligate themselves. 34 An agreement is only an "option" when
no obligation rests on the party to make any payment except such as may
be agreed on between the parties as consideration to support the option
until he has made up his mind within the time specified. 35 An option, and
not a contract to purchase, is effected by an agreement to sell real estate
for payments to be made within specified time and providing forfeiture of
money paid upon failure to make payment, where the purchaser does not
agree to purchase, to make payment, or to bind himself in any way other
than the forfeiture of the payments made. 36 As hereinbefore discussed,
this is not the situation obtaining in the case at bar.
While there is jurisprudence to the effect that a contract which provides
that the initial payment shall be totally forfeited in case of default in
payment is to be considered as an option contract, 37 still we are not
inclined to conform with the findings of respondent court and the court a
quo that the contract executed between the parties is an option contract,
for the reason that the parties were already contemplating the payment of
the balance of the purchase price, and were not merely quoting an agreed
value for the property. The term "balance," connotes a remainder or
something remaining from the original total sum already agreed upon.
In other words, the alleged option money of P50,000.00 was actually
earnest money which was intended to form part of the purchase price. The
amount of P50,000.00 was not distinct from the cause or consideration for
the sale of the property, but was itself a part thereof. It is a statutory rule
that whenever earnest money is given in a contract of sale, it shall be
considered as part of the price and as proof of the perfection of the
contract. 38 It constitutes an advance payment and must, therefore, be
deducted from the total price. Also, earnest money is given by the buyer
to the seller to bind the bargain.
There are clear distinctions between earnest money and option
money, viz.: (a) earnest money is part of the purchase price, while option
money ids the money given as a distinct consideration for an option
contract; (b) earnest money is given only where there is already a sale,
while option money applies to a sale not yet perfected; and (c) when
earnest money is given, the buyer is bound to pay the balance, while
when the would-be buyer gives option money, he is not required to buy. 39
The aforequoted characteristics of earnest money are apparent in the socalled option contract under review, even though it was called "option
money" by the parties. In addition, private respondents failed to show that
the payment of the balance of the purchase price was only a condition
precedent to the acceptance of the offer or to the exercise of the right to
buy. On the contrary, it has been sufficiently established that such

payment was but an element of the performance of petitioner's obligation

under the contract to sell. 40
II
1. This brings us to the second issue as to whether or not there was valid
suspension of payment of the purchase price by petitioner and the legal
consequences thereof. To justify its failure to pay the purchase price within
the agreed period, petitioner invokes Article 1590 of the civil Code which
provides:

Art. 1590. Should the vendee be disturbed in the possession or ownership of the thing acquired,
or should he have reasonable grounds to fear such disturbance, by a vindicatory action or a
foreclosure of mortgage, he may suspend the payment of the price until the vendor has caused
the disturbance or danger to cease, unless the latter gives security for the return of the price in
a proper case, or it has been stipulated that, notwithstanding any such contingency, the vendee
shall be bound to make the payment. A mere act of trespass shall not authorize the suspension
of the payment of the price. Respondent court refused to apply the aforequoted

provision of law on the erroneous assumption that the true agreement

between the parties was a contract of option. As we have hereinbefore
discussed, it was not an option contract but a perfected contract to sell.
Verily, therefore, Article 1590 would properly apply.
Both lower courts, however, are in accord that since Civil Case No. 895541 filed against the parties herein involved only the eastern half of the
land subject of the deed of sale between petitioner and the Jimenez
brothers, it did not, therefore, have any adverse effect on private
respondents' title and ownership over the western half of the land which is
covered by the contract subject of the present case. We have gone over
the complaint for recovery of ownership filed in said case 41 and we are not
persuaded by the factual findings made by said courts. At a glance, it is
easily discernible that, although the complaint prayed for the annulment
only of the contract of sale executed between petitioner and the Jimenez
brothers, the same likewise prayed for the recovery of therein plaintiffs'
share in that parcel of land specifically covered by TCT No. 309773. In
other words, the plaintiffs therein were claiming to be co-owners of the
entire parcel of land described in TCT No. 309773, and not only of a
portion thereof nor, as incorrectly interpreted by the lower courts, did their
claim pertain exclusively to the eastern half adjudicated to the Jimenez
brothers.
Such being the case, petitioner was justified in suspending payment of the
balance of the purchase price by reason of the aforesaid vindicatory action
filed against it. The assurance made by private respondents that petitioner
did not have to worry about the case because it was pure and simple
harassment 42 is not the kind of guaranty contemplated under the
exceptive clause in Article 1590 wherein the vendor is bound to make
payment even with the existence of a vindicatory action if the vendee
should give a security for the return of the price.
2. Be that as it may, and the validity of the suspension of payment
notwithstanding, we find and hold that private respondents may no longer
be compelled to sell and deliver the subject property to petitioner for two
reasons, that is, petitioner's failure to duly effect the consignation of the
purchase price after the disturbance had ceased; and, secondarily, the
fact that the contract to sell had been validly rescinded by private
respondents.

The records of this case reveal that as early as February 28, 1990 when
petitioner caused its exclusive option to be annotated anew on the
certificate of title, it already knew of the dismissal of civil Case No. 895541. However, it was only on April 16, 1990 that petitioner, through its
counsel, wrote private respondents expressing its willingness to pay the
balance of the purchase price upon the execution of the corresponding
deed of absolute sale. At most, that was merely a notice to pay. There was
no proper tender of payment nor consignation in this case as required by
law.
The mere sending of a letter by the vendee expressing the intention to
pay, without the accompanying payment, is not considered a valid tender
of payment. 43 Besides, a mere tender of payment is not sufficient to
compel private respondents to deliver the property and execute the deed
of absolute sale. It is consignation which is essential in order to extinguish
petitioner's obligation to pay the balance of the purchase price. 44 The rule
is different in case of an option contract 45 or in legal redemption or in a
sale with right to repurchase, 46 wherein consignation is not necessary
because these cases involve an exercise of a right or privilege (to buy,
redeem or repurchase) rather than the discharge of an obligation, hence
tender of payment would be sufficient to preserve the right or privilege.
This is because the provisions on consignation are not applicable when
there is no obligation to pay. 47 A contract to sell, as in the case before us,
involves the performance of an obligation, not merely the exercise of a
privilege of a right. consequently, performance or payment may be
effected not by tender of payment alone but by both tender and
consignation.
Furthermore, petitioner no longer had the right to suspend payment after
the disturbance ceased with the dismissal of the civil case filed against it.
Necessarily, therefore, its obligation to pay the balance again arose and
resumed after it received notice of such dismissal. Unfortunately,
petitioner failed to seasonably make payment, as in fact it has deposit the
money with the trial court when this case was originally filed therein.
By reason of petitioner's failure to comply with its obligation, private
respondents elected to resort to and did announce the rescission of the
contract through its letter to petitioner dated July 27, 1990. That written
notice of rescission is deemed sufficient under the circumstances. Article
1592 of the Civil Code which requires rescission either by judicial action or
notarial act is not applicable to a contract to sell. 48 Furthermore, judicial
action for rescission of a contract is not necessary where the contract
provides for automatic rescission in case of breach, 49 as in the contract
involved in the present controversy.
We are not unaware of the ruling in University of the Philippines vs. De los
Angeles, etc. 50 that the right to rescind is not absolute, being ever subject
to scrutiny and review by the proper court. It is our considered view,
however, that this rule applies to a situation where the extrajudicial
rescission is contested by the defaulting party. In other words, resolution
of reciprocal contracts may be made extrajudicially unless successfully
impugned in court. If the debtor impugns the declaration, it shall be
subject to judicial determination 51 otherwise, if said party does not oppose
it, the extrajudicial rescission shall have legal effect. 52

In the case at bar, it has been shown that although petitioner was duly
furnished and did receive a written notice of rescission which specified the
grounds therefore, it failed to reply thereto or protest against it. Its silence
thereon suggests an admission of the veracity and validity of private
respondents' claim. 53 Furthermore, the initiative of instituting suit was
transferred from the rescinder to the defaulter by virtue of the automatic
rescission clause in the contract. 54 But then, the records bear out the fact
that aside from the lackadaisical manner with which petitioner treated
private respondents' latter of cancellation, it utterly failed to seriously
seek redress from the court for the enforcement of its alleged rights under
the contract. If private respondents had not taken the initiative of filing
Civil Case No. 7532, evidently petitioner had no intention to take any legal
action to compel specific performance from the former. By such cavalier
disregard, it has been effectively estopped from seeking the affirmative
relief it now desires but which it had theretofore disdained.
WHEREFORE, on the foregoing modificatory premises, and considering
that the same result has been reached by respondent Court of Appeals
with respect to the relief awarded to private respondents by the court a
quo which we find to be correct, its assailed judgment in CA-G.R. CV No.
34767 is hereby AFFIRMED.

G.R. No. L-51824 February 7, 1992

PERCELINO DIAMANTE, petitioner,
vs.
HON. COURT OF APPEALS and GERARDO DEYPALUBUS, respondents.
Hernandez, Velicaria, Vibar & Santiago for petitioner.
Amancio B. Sorongon for private respondent.
DAVIDE, JR., J.:
Assailed in this petition for review is the Resolution of the respondent
Court of Appeals dated 21 March 1979 in C.A.-G.R. No. SP-04866 setting
aside its earlier decision therein, promulgated on 6 December 1978, which
reversed the decision of the then Court of First Instance (now Regional
Trial Court) of Iloilo City. The latter nullified the Orders of the Secretary of
the Department of Agriculture and Natural Resources (DANR) dated 29
August 1969, 20 November 1969 and 21 April 1970, declared binding the
Fishpond Lease Agreement (FLA) issued to private respondent and
disallowed petitioner from repurchasing from private respondent a portion
of the fishery lot located at Dumangas, Iloilo, covered by the FLA.
The pleadings of the parties and the decision of the respondent Court
disclose the factual antecedents of this case.
A fishery lot, encompassing an area of 9.4 hectares and designated as Lot
No. 518-A of the Cadastral Survey of Dumangas, Iloilo, was previously
covered by Fishpond Permit No. F-2021 issued in the name of Anecita
Dionio. Upon Anecita's death, her heirs, petitioner Diamante and Primitivo
Dafeliz, inherited the property which they later divided between
themselves; petitioner got 4.4. hectares while Dafeliz got 5 hectares. It is
the petitioner's share that is the subject of the present controversy.
Primitivo Dafeliz later sold his share to private respondent.
On 21 May 1959, petitioner sold to private respondent his leasehold rights
over the property in question for P8,000.00 with the right to repurchase
the same within three (3) years from said date.
On 16 August 1960, private respondent filed an application with the
Bureau of Fisheries, dated 12 July 1960, for a fishpond permit and a
fishpond lease agreement over the entire lot, submitting therewith the
deeds of sale executed by Dafeliz and the petitioner.
Pressed by urgent financial needs, petitioner, on 17 October 1960, sold all
his remaining rights over the property in question to the private
respondent for P4,000.00.
On 25 October 1960, private respondent, with his wife's consent, executed
in favor of the petitioner an Option to Repurchase the property in question
within ten (10) years from said date, with a ten-year grace period.
Private respondent submitted to the Bureau of Fisheries the definite deed
of sale; he did not, however, submit the Option to Repurchase.
Thereafter, on 2 August 1961, the Bureau of Fisheries issued to private
respondent Fishpond Permit No. 4953-Q; on 17 December 1962, it
approved FLA No. 1372 in the latter's favor.
On 11 December 1963, petitioner, contending that he has a valid twentyyear option to repurchase the subject property, requested the Bureau of
Fisheries to nullify FLA No. 1372 insofar as the said property is concerned.
On 18 December 1964, his letter-complaint was dismissed. Petitioner then

sought a reconsideration of the dismissal; the same was denied on 29

April 1965. His appeal to the Secretary of the DANR was likewise dismissed
on 30 October 1968. Again, on 20 November 1968, petitioner sought for a
reconsideration; this time, however, he was successful. On 29 August
1969, the DANR Secretary granted his motion in an Order cancelling FLA
No. 1372 and stating, inter alia, that:
Evidently, the application as originally filed, could not be
favorably acted upon by reason of the existing right of a third
party over a portion thereof. It was only the submission of the
deed of absolute sale which could eliminate the stumbling block
to the approval of the transfer and the issuance of a permit or
lease agreement. It was on the basis of this deed of sale, in fact,
the one entitled "option to repurchase" executed barely a week
from the execution of the deed of absolute sale, (which) reverted,
in effect, the status of the land in question to what it was after the
execution of the deed of sale with right to repurchase; that is, the
land was again placed under an encumbrance in favor of a third
party. Circumstantially, there is a ground (sic) to believe that the
deed of absolute sale was executed merely with the end in view of
circumventing the requirements for the approval of the transfer of
leasehold rights of Diamante in favor of Deypalubos; and the
subsequent execution of the "Option to Repurchase" was made to
assure the maintenance of a vendor a retro's rights in favor of
Diamante. There was, therefore, a misrepresentation of an
essential or material fact committed by the lessee-appellee
(Deypalubos) in his application for the permit and the lease
agreement, without which the same could not have been issued. 1

The Secretary based his action on Section 20 of Fisheries Administrative

Order No. 60, the second paragraph of which reads:

Any and all of the statements made in the corresponding

application shall be considered as essential conditions and parts
of the permit or lease granted. Any false statements in the
application of facts or any alteration, change or modification of
any or all terms and conditions made therein shall ipso factocause
the cancellation of the permit or lease.

Private respondent moved for a reconsideration of this last Order arguing

that the DANR Secretary's previous Order of 30 October 1968 dismissing
petitioner's letter-complaint had already become final on the ground that
he (private respondent) was not served a copy of petitioner's 20
November 1968 motion for reconsideration. On 20 November 1969,
private respondent's motion for reconsideration was denied; a second
motion for reconsideration was likewise denied on 20 April 1970.
On 5 May 1970, private respondent filed with the Court of First Instance of
Iloilo City a special civil action forcertiorari with preliminary injunction
(docketed as Civil Case No. 8209), seeking to annul the Secretary's Orders
of 20 April 1970, 20 November 1969 and 29 August 1969 on the ground
that the Secretary: (1) gravely abused his discretion in not giving him the
opportunity to be heard on the question of whether or not the Option to
Repurchase was forged; and (2) has no jurisdiction to set aside FLA No.
1372 as the Order of the Bureau of Fisheries dismissing petitioner's 11
December 1963 letter-complaint had already become final.
After issuing a temporary restraining order and a writ of preliminary
injunction, the lower court tried the case jointly with Criminal Case No. 520

wherein both the petitioner and a certain Atty. Agustin Dioquino, the
Notary Public who notarized the 25 October 1960 Option to Repurchase,
were charged with falsification of a public document.
After due trial, the lower court acquitted the accused in the criminal case
and decided in favor of the private respondent in Civil Case No. 8209; the
court ruled that: (1) the DANR Secretary abused his discretion in issuing
the questioned Orders, (2) petitioner cannot repurchase the property in
question as the Option to Repurchase is of doubtful validity, and (3) FLA
No. 1372 in the name of private respondent is valid and binding.
Petitioner appealed to the respondent Court which, on 6 December 1978,
reversed the decision of the trial court 2on the ground that no grave abuse
of discretion was committed by respondent Secretary inasmuch as private
respondent was given the opportunity to be heard on his claim that the
Option to Repurchase is spurious, and that the trial court merely indulged
in conjectures in not upholding its validity. Said the respondent Court:
With all the foregoing arguments appellee had
exhaustively adduced to show the spuriousness of the
deed of "Option to Repurchase", appellee can hardly
complain of not having been given an opportunity to be
heard, which is all that is necessary in relation to the
requirement of notice and hearing in administrative
proceedings. Moreover, appellee never asked for a formal
hearing at the first opportunity that he had to do so, as
when he filed his first motion for reconsideration. He asked
for a formal hearing only in his second motion for
reconsideration evidently as a mere afterthought, upon
realizing that his arguments were futile without proofs to
support them.
The only remaining question, therefore, is whether the
Secretary acted with grave abuse of discretion in giving
weight to the alleged execution by appellee of the deed of
Option to Repurchase, on the basis of the xerox copy of
said deed as certified by the Notary Public, Agustin
Dioquino.
With such documentary evidence duly certified by the
Notary Public, which is in effect an affirmation of the
existence of the deed of "Option of Repurchase" (sic) and
its due execution, the Secretary may not be said to have
gravely abused his discretion in giving the document
enough evidentiary weight to justify his action in applying
the aforequoted provisions of Fisheries Adm. Order No. 60.
This piece of evidence may be considered substantial
enough to support the conclusion reached by the
respondent Secretary, which is all that is necessary to
sustain an administrative finding of fact (Ortua vs.
Encarnacion, 59 Phil. 635; Ang Tibay vs. CIR, 69 Phil. 635;
Ramos vs. The Sec. of Agriculture and Natural Resources,
et al. L-29097, Jan. 28, 1974, 55 SCRA 330). Reviewing
courts do not re-examine the sufficiency of the evidence in
an administrative case, if originally instituted as such, nor

are they authorized to receive additional evidence that

was not submitted to the administrative agency
concerned. For common sense dictates that the question
of whether the administrative agency abused its discretion
in weighing evidence should be resolved solely on the
basis of the proof that the administrative authorities had
before them and no other (Timbancaya vs. Vicente, L19100, Dec. 27, 1963, 9 SCRA 852). In the instant case the
evidence presented for the first time before the court a
quo could be considered only for the criminal case heard
jointly with this case.
The lower court's action of acquitting the notary public,
Agustin Dioquino, and appellant Diamante in Criminal
Case No. 520 for falsification of public document is in itself
a finding that the alleged forgery has not been
conclusively established. This finding is quite correct
considering the admission of the NBI handwriting expert
that admission of the NBI handwriting expert that he
cannot make any finding on the question of whether
appellee's signature on the deed of "Option to
Repurchase" is forged or not, because of the lack of (sic)
specimen signature of appellee for comparative
examination. The Secretary may have such signature in
the application papers of appellee on file with the former's
office upon which to satisfy himself of (sic) the
genuineness of appellee's signature. It would be strange,
indeed, that appellee had not provided the NBI expert with
a specimen of his signature when his purpose was to have
an expert opinion that his signature on the questioned
document is forged.
On the other hand, as to the signature of his wife, the
latter herself admitted the same to be her own. Thus
Q There is a signature below
the typewritten words "with
my marital consent" and
above the name Edelina Duyo,
whose signature is this?
A That is my signature. (T.s.n.,
Crim. Case No. 520, April 5,
1971, p. 14).

In not finding in favor of the perfect validity of the "Option

to Repurchase," the court a quo merely indulged in
conjectures. Thus, believing the testimony of appellee that
the later (sic) could not have executed the deed of option
to repurchase after spending allegedly P12,000.00, and
that if there was really a verbal agreement upon the
execution of the deed of absolute sale, as alleged by
appellant, that appellant's right to repurchase, as was
stipulated in the earlier deed of sale, shall be preserved,
such agreement should have been embodied in the deed

of sale of October 17, 1960 (Exh. D), the court doubted the
genuineness of the deed of Option to Repurchase (sic).
It is highly doubtful if appellee had spent P12,000.00
during the period from October 17, 1960 to October 25,
1960 when the deed of option was executed. Likewise, the
right to repurchase could not have been embodied in the
deed of absolute sale since, as the Secretary of DANR
found, the purpose of the deed of absolute sale is to
circumvent the law and insure the approval of appellee's
application, as with his right to 4.4 hectares appearing to
be subject to an encumbrance, his application would not
have been given favorable action.
Above all, the speculation and conjectures as indulged in
by the court a quo cannot outweigh the probative effect of
the document itself, a certified xerox copy thereof as
issued by the Notary Public, the non-presentation of the
original having been explained by its loss, as was the
testimony of the same Notary Public, who justly won
acquittal when charged with falsification of public
document at the instance of appellee. The fact that the
spaces for the document number, page and book numbers
were not filled up in the photostatic copy presented by the
representative of the Bureau of Records Management does
not militate against the genuineness of the document. It
simply means that the copy sent to the said Bureau
happens to have those spaces unfilled up (sic). But the
sending of a copy of the document to the Bureau of
Records Management attests strongly to the existence of
such document, the original of which was duly executed,
complete with the aforesaid data duly indicated thereon,
as shown by the xerox copy certified true by the Notary
Public.
Indeed, in the absence of positive and convincing proof of
forgery, a public instrument executed with the intervention
of a Notary Public must be held in high respect and
accorded full integrity, if only upon the presumption of the
regularity of official functions as in the nature of those
upon the presumption of the regularity of official functions
as in the nature of those of a notary public (Bautista vs. Dy
Bun Chin, 49 OG 179; El Hogar Filipino vs. Olviga, 60 Phil.
17).
Subsequently, the respondent Court, acting on private respondent's
motion for reconsideration, promulgated on 21 March 1979 the challenged
Resolution 3 setting aside the earlier decision and affirmed, in toto, the
ruling of the trial court, thus:
. . . the respondent (DANR) Secretary had gone beyond his
statutory authority and had clearly acted in abuse of
discretion in giving due weight to the alleged option to
repurchase whose (sic) genuiness (sic) and due execution
had been impugned and denied by petitioner-appellee

(Deypalubos). While the certified true copy of the option to

repurchase may have been the basis of the respondent
Secretary in resolving the motion for reconsideration, the
Court believes that he should have first ordered the
presentation of evidence to resolve this factual issue
considering the conflicting claims of the parties. As earlier
pointed out, all that was submitted to the Bureau of
Fisheries and consequently to the respondent Secretary,
was a xerox copy of the questioned document which was
certified to by a notary public to be a copy of a deed found
in his notarial file which did not bear any specimen of the
signatures of the contracting parties. And assuming that a
certification made by a notary public as to the existence of
a document should be deemed an affirmation that such
document actually exists. Nevertheless, (sic) when such
claim is impugned, the one who assails the existence of a
document should be afforded the opportunity to prove
such claim, because, at most, the presumption of
regularity in the performance of official duties is merely
disputable and can be rebutted by convincing and positive
evidence to the contrary.
His motion for reconsideration having been denied, the petitioner filed the
instant petition for review.
Petitioner contends that the Rules of Court should not be strictly applied to
administrative proceedings and that the findings of fact of administrative
bodies, absent a showing of arbitrariness, should be accorded respect.
While the petition has merit, petitioner's victory is hollow and illusory for,
as shall hereafter be shown, even as We reverse the assailed resolution of
the respondent Court of Appeals, the questioned decision of the Secretary
must, nevertheless, be set aside on the basis of an erroneous conclusion
of law with respect to the Option to Repurchase.
The respondent Court correctly held in its decision of 6 December 1978
that the respondent Secretary provided the private respondent sufficient
opportunity to question the authenticity of the Option to Repurchase and
committed no grave abuse of discretion in holding that the same was in
fact executed by private respondent. We thus find no sufficient legal and
factual moorings for respondent Court's sudden turnabout in its resolution
of 21 March 1979. That private respondent and his wife executed the
Option to Repurchase in favor of petitioner on 25 October 1960 is beyond
dispute. As determined by the respondent Court in its decision of 6
December 1978, private respondent's wife, Edelina Duyo, admitted having
affixed her signature to the said document. Besides, the trial court itself in
Criminal Case No. 520 which was jointly tried with the civil case, acquitted
both the petitioners and the notary public, before whom the Option to
Repurchase was acknowledged, of the crime of falsification of said
document.
We hold, however, that the respondent Secretary gravely erred in holding
that private respondent's non-disclosure and suppression of the fact that
4.4 hectares of the area subject of the application is burdened with or
encumbered by the Option to Repurchase constituted a falsehood or a

misrepresentation of an essential or material fact which, under the second

paragraph of Section 29 of Fisheries Administrative Order No. 60 earlier
quoted, "shall ipso facto cause the cancellation of the permit or lease." In
short, the Secretary was of the opinion that the Option to Repurchase was
an encumbrance on the property which affected the absolute and
exclusive character of private respondent's ownership over the 4.4
hectares sold to him by petitioner. This is a clear case of a misapplication
of the law on conventional redemption and a misunderstanding of the
effects of a right to repurchase granted subsequently in an instrument
different from the original document of sale.
Article 1601 of the Civil Code provides:
Conventional redemption shall take place when the vendor
reserves the right to repurchase the thing sold, with the obligation
to comply with the provisions of article 1616 and other
stipulations which may have been agreed upon.

In Villarica, et al. vs. Court of Appeals, et al., 4 decided on 29 November

1968, or barely seven (7) days before the respondent Court promulgated
its decision in this case, this Court, interpreting the above Article, held:
The right of repurchase is not a right granted the vendor by the
vendee in a subsequent instrument, but is a right reserved by the
vendor in the same instrument of sale as one of the stipulations of
the contract. Once the instrument of absolute sale is executed,
the vendor can no longer reserve the right to repurchase, and any
right thereafter granted the vendor by the vendee in a separate
instrument cannot be a right of repurchase but some other right
like the option to buy in the instant case. . . .

In the earlier case of Ramos, et al. vs. Icasiano, et al., 5 decided in 1927,
this Court had already ruled that "an agreement to repurchase becomes a
promise to sell when made after the sale, because when the sale is made
without such an agreement, the purchaser acquires the thing sold
absolutely, and if he afterwards grants the vendor the right to repurchase,
it is a new contract entered into by the purchaser, as absolute owner
already of the object. In that case the vendor has not reserved to himself
the right to repurchase."
In Vda. de Cruzo, et al. vs. Carriaga, et al., 6 this Court found another
occasion to apply the foregoing principle.
Hence, the Option to Repurchase executed by private respondent in the
present case, was merely a promise to sell, which must be governed by
Article 1479 of the Civil Code which reads as follows:
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
promissor if the promise is supported by a consideration
distinct from the price.
A copy of the so-called Option to Repurchase is neither attached to the records nor
quoted in any of the pleadings of the parties. This Court cannot, therefore, properly
rule on whether the promise was accepted and a consideration distinct from the
price, supports the option. Undoubtedly, in the absence of either or both
acceptance and separate consideration, the promise to sell is not binding upon the
promissor (private respondent).

A unilateral promise to buy or sell is a mere offer, which is not

converted into a contract except at the moment it is accepted.
Acceptance is the act that gives life to a juridical obligation,
because, before the promise is accepted, the promissor may
withdraw it at any time. Upon acceptance, however, a bilateral
contract to sell and to buy is created, and the offeree ipso
facto assumes the obligations of a purchaser; the offeror, on the
other hand, would be liable for damages if he fails to deliver the
thing he had offered for sale.
xxx xxx xxx
. . . The contract of option is a separate and distinct contract from
the contract which the parties may enter into upon the
consummation of the option, and a consideration for an optional
contract is just as important as the consideration for any other
kind of contract. Thus, a distinction should be drawn between the
consideration for the option to repurchase, and the consideration
for the contract of repurchase itself. 7
Even if the promise was accepted, private respondent was not bound thereby in the
absence of a distinct consideration. 8
It may be true that the foregoing issues were not squarely raised by the parties.
Being, however, intertwined with the issue of the correctness of the decision of the
respondent Secretary and, considering further that the determination of said issues
is essential and indispensable for the rendition of a just decision in this case, this
Court does not hesitate to rule on them.

In Hernandez vs. Andal, 9 this Court held:

If the appellants' assignment of error be not considered a direct
challenge to the decision of the court below, we still believe that
the objection takes a narrow view of practice and procedure
contrary to the liberal spirit which pervades the Rules of Court.
The first injunction of the new Rules (Rule 1, section 2) is that
they "shall be liberally construed in order to promote their object
and to assist the parties in obtaining just, speedy, and
inexpensive determination of every action and proceeding." In
line with the modern trends of procedure, we are told that, "while
an assignment of error which is required by law or rule of court
has been held essential to appellate review, and only those
assigned will be considered, there are a number of cases which
appear to accord to the appellate court a broad discretionary
power to waive the lack of proper assignment of errors and
consider errors not assigned. And an unassigned error closely
related to an error properly assigned, or upon which the
determination of the question raised by the error properly
assigned is dependent, will be considered by the appellate court
notwithstanding the failure to assign it as error." (4 C.J.S., 1734; 3
C.J., 1341, footnote 77). At the least, the assignment of error,
viewed in this light, authorizes us to examine and pass upon the
decision of the court below.
In Insular Life Assurance Co., Ltd. Employees Association-NATU vs. Insular Life
Assurance Co., Ltd., 10 this Court ruled:
. . . (t)he Supreme Court has ample authority to review and
resolve matter not assigned and specified as errors by either of
the parties in the appeal if it finds the consideration and
determination of the same essential and indispensable in order to
arrive at a just decision in the case. 11 This Court, thus, has the
authority to waive the lack of proper assignment of errors if the
unassigned errors closely relate to errors properly pinpointed out

or if the unassigned errors refer to matters upon which the

determination of the questions raised by the errors properly
assigned depend. 12
The same also applies to issues not specifically raised by the
parties. The Supreme Court, likewise, has broad discretionary
power, in the resolution of a controversy, to take into
consideration matters on record which the parties fail to submit to
the Court as specific questions for determination. 13 Where the
issues already raised also rest on other issues not specifically
presented, as long as the latter issues bear relevance and close
relation to the former and as long as they arise from matters on
record, the Court has the authority to include them in its
discussion of the controversy as well as to pass upon them. In
brief, in those cases wherein questions not particularly raised by
the parties surface as necessary for the complete adjudication of
the rights and obligations of the parties and such questions fall
within the issues already framed by the parties, the interests of
justice dictate that the Court consider and resolve them.
WHEREFORE, the instant petition is GRANTED. The Resolution of respondent Court
of Appeals of 21 March 1979 in C.A.-G.R. No. SP-04866 and the Decision of the trial
court in Civil Case No. 8209, insofar as they declare, for the reasons therein given,
Fishpond Lease Agreement No. 1372, valid and binding, are hereby REVERSED and
SET ASIDE. The challenged Orders of the respondent Secretary of Agriculture and
Natural Resources of 29 August 1969, 20 November 1969 and 21 April 1970 are
likewise REVERSED and SET ASIDE and Fishpond Lease Agreement No. 1372 is
ordered REINSTATED.
No pronouncement as to costs.
IT IS SO ORDERED.

G.R. Nos. 75109-10 June 28, 1989

BIENVENIDA MACHOCA ARCADIO VDA. DE CRUZO, ELENA
MACHOCA ARCADIO VDA. DE PINTON, INOCENTA MACHOCA
ARCADIO VDA. DE PLIEGO, ISIDORA MACHOCA ARCADIO DE
PLIEGO (Deceased) represented by daughter Natividad Pliego de
Ceballos and ARISTON "RICARDO" MACHOCA ARCADIO (Deceased)
represented by daughter Virginia Arcadio de Evangelista:
Represented by INOCENTA MACHOCA ARCADIO VDA. DE
PLIEGO, petitioners,
vs.
HON. GLICERIO V. CARRIAGA, JR., FRANKLIN ANG and MELECIO
SUAREZ (Deceased) represented by the surviving spouse, Pilar de
los Reyes, respondents.
Placidtrank B. Osorio for petitioners.
Donatilo C. Macamay for respondents.
REGALADO, J.:
This is an appeal from the order 1 of respondent Judge Glicerio V. Carriaga,
Jr., dated February 26, 1986, dismissing petitioners' complaint in Special
Civil Action No. OZ-0751 of the Regional Trial Court, Branch XV, Ozamiz
City, on the ground of res judicata.
Lot No. 1131 of the Misamis Cadastre, subject matter of this case, was
originally registered in the name of Gabina Machoca, as her paraphernal
property, under Original Certificate of Title No. 682. 2 Petitioners herein are
the children of the late spouses Leonardo Arcadio and said Gabina
Machoca.
On February 4, 1954, Gabina Machoca mortgaged Lot No. 1131 for P
425.00 to private respondent Franklin Ang and delivered to him her
aforesaid certificate of title in connection therewith.
On October 4, 1954, Gabina again borrowed an additional sum of P 175.00
from Ang as a result of which her total obligation to the latter was in the
sum of P 600.00. Petitioners claim that on the same date, Ang caused the
preparation of a deed of sale over the subject lot to which document
Gabina Machoca, being illiterate, affixed her thumb-mark in the belief that
this second instrument was similar to the deed of mortgage executed by
her on February 4, 1954. When Gabina went home, her children, herein
petitioners, informed her that the second document was not a deed of
mortgage but a contract of sale.
On the following day, October 5, 1954, Gabina went back to Ang and
demanded the reformation of the aforesaid instrument. Franklin Ang,
instead
of
reforming
the
instrument,
prepared
a
deed
of
agreements 3 which, by reason of its importance, is herein quoted in full:
City of Ozamiz October 5, 1954
DEED OF AGREEMENT KNOW ALL MEN BY THESE PRESENTS:
That I, FRANKLIN ANG, of legal age, married and with
residence and postal address at Gango, City of Ozamiz,
Philippines, VENDEE in the Deed of Sale executed by the
Vendor, GAVINA MACHOCA, as recorded by Notary Public
Manuel C. Manago in Doc. No. 284, Page No. 58, Book No.
1, Series of 1954, hereby grants and obligates himself (sic)
to resell the property therein sold within a period of three

(3) years from and after the date of the said instrument,
for the same price of SIX HUNDRED PESOS ( P 600.00 ),
Philippine Currency, to the said VENDOR: PROVIDED,
however, That if the Vendor shall fail to exercise her right
to redeem as herein granted within the stipulated period,
then this conveyance shall be deemed to be absolute and
irrevocable.
IN WITNESS WHEREOF, the party herein hereto have (sic)
set his hands (sic) at Ozamiz City, Philippines, on this 5th
day of October, 1954.
G
Pursuant to the provisions of said deed of agreement, Gabina's right to
repurchase the property was to expire on October 4, 1957, that is, three
years from October 4, 1954 when the deed of sale was executed.
As early as June 10, 1955, however, Ang caused the registration of the
deed of sale, resulting in the subsequent cancellation of Original
Certificate of Title No. 682 and the consequent issuance of Transfer
Certificate of Title No. T-161 for the same property in the name of Franklin
Ang. 4
On June 24, 1963, no redemption having been made, Ang sold said Lot No.
1131 to herein private respondent Melecio Suarez who then obtained
Transfer Certificate of Title No. T-945 therefore in his name. 5 Gabina
Machoca died on April 21, 1966 leaving herein petitioners as her only
heirs.
It appears that petitioners remained in possession of the disputed land
until March 14, 1977 when herein private respondents Melecio Suarez and
Pilar de los Reyes filed an action against Pedro, Inocenta and Lazaro, all
surnamed Pliego before the City Court of the City of Ozamiz, docketed as
Civil Case No. C-1 6 thereof, for unlawful detainer with damages. On July
21, 1978, the city court rendered a decision 7 declaring the plaintiffs
therein to be the real owners of Lot No. 1131 and ordering the defendants
to vacate the premises and pay the costs. 8 The appeal from said decision
by the defendants therein to the Court of Appeals in CA-G.R. No. 66511-R
was dismissed, which dismissal became final and executory, hence
judgment was entered by the Court of Appeals on July 10,
1981. 9 Consequently, a writ of execution and an order of
demolition 10 were issued by the city court on September 17, 1981 and
October 12, 1983, respectively, in Civil Case No. C-1
Disgressing backward in time from the foregoing incidents, the records
reveal that during the pendency of the aforesaid unlawful detainer case
(Civil Case No. C-1), herein petitioners filed on September 6, 1977 a
petition for prohibition, Civil Case No. OZ-665 of the erstwhile Court of First
Instance of Mizamis Occidental, Branch II, Ozamiz City, against City Court
Judge Ceferino Ong and herein private respondents to restrain Judge Ong
from further proceeding with the trial in Civil Case No. C-1 for alleged lack
of jurisdiction. The petition was dismissed on March 15, 1978 and no
appeal was taken by said petitioners. 11
It further appears that likewise during the pendency of Civil Case No. C-1,
petitioners filed a complaint, dated June 7, 1977, with the same Court of
First Instance, Branch II, at Ozamiz City, involving Lot No. 1131 and

docketed as Civil Case No. OZ-648, against Franklin Ang, Bonifacio

Longayan, Melecio Suarez and Pilar de los Reyes, for "removal of clouds of
title and declaring title of defendants as null and void or cancelled, or
reconveyance and damages." 12 On December 18, 1984, the complaint
was dismissed for failure to prosecute. 13 Petitioners moved for the
reconsideration of the order but the motion was denied. A second motion
for reconsideration was likewise denied. 14 No appeal having been made,
the order of dismissal became final.
Finally, on December 14, 1985, the same petitioners filed Special Civil
Case No. OZ-0751 with the Regional Trial Court, Branch XV, Ozamiz City,
for conventional redemption and damages against herein private
respondents over the same subject lot. Upon motion of the defendants
therein, 15 the complaint was dismissed by the court on February 26, 1986
on the ground of res judicata. 16
Hence, this petition assailing said dismissal order.
The main substantive issue posed for resolution is whether or not the
petitioners can still exercise the right to redeem Lot No. 1131. A corollary
issue is whether or not the private deed of agreement has converted the
deed of sale into an equitable mortgage.
Petitioners submit that the deed of sale, in relation to the deed of
agreement executed on October 4, 1954, should be considered as an
equitable mortgage because (a) the petitioners have been in continuous
possession of the subject lot up to the present time; and (b) the price of P
600.00 is unusually inadequate considering that the land is along the road
going to the airport of Ozamiz City, is only about three kilometers from the
center of the city, and has an area of 3,408 square meters. It is likewise
contended that petitioners have the right to redeem the property, there
have been no foreclosure proceedings as yet, aside from the fact that
private respondent Ang acted in evident bad faith and with fraud when he
obtained title to the lot in his name prior to the expiration of the stipulated
redemption period.
On the other hand, private respondents maintain that the action for
conventional redemption (Civil Case No. OZ-0751) is already barred by the
order of dismissal rendered in the action for removal of clouds on the title
(Civil Case No. OZ-648), since both cases involved the same subject
matter and raised the same issues between the same parties; and,
further, that petitioners may no longer redeem the property for failure to
exercise the right within the stipulated period.
We shall first resolve the procedural objections, which auspiciously present
the necessity to clarify the doctrine ofres judicata 17 and its implications.
The principle of res judicata in actions in personam is found in Section 49
(b) and (c), Rule 39 of the Rules of Court which provides:
Sec. 49. Effect of judgments. The effect of a judgment or final order
rendered by a court or judge of the Philippines, having jurisdiction to
pronounce the judgment or order, may be as follows:
(b) In other cases the judgment or order is, with respect to the matter
directly adjudged or as to any other matter that could have been raised in
relation thereto, conclusive between the parties and their successors in
interest by title subsequent to the commencement of the action or special

proceeding, litigating for the same thing and under the same title and in
the same capacity;
(c) In any other litigation between the same parties or their successors in
interest, that only is deemed to have been adjudged in a former judgment
which appears upon its face to have been so adjudged, or which was
actually and necessarily included therein or necessary thereto.
The doctrine of res judicata thus lays down two main rules which may be
stated as follows: (1) The judgment or decree of a court of competent
jurisdiction on the merits concludes the parties and their privies to the
litigation and constitutes a bar to a new action or suit involving the same
cause of action either before the same or any other tribunal; and (2) Any
right, fact, or matter in issue directly adjudicated or necessarily involved in
the determination of an action before a competent court in which a
judgment or decree is rendered on the merits is conclusively settled by the
judgment therein and cannot again be litigated between the parties and
their privies whether or not the claim or demand, purpose, or subject
matter of the two suits is the same. These two main rules mark the
distinction between the principles governing the two typical cases in which
a judgment may operate as evidence. In speaking of these cases, the first
general rule above stated, and which corresponds to the aforequoted
paragraph (b) of Section 49, is referred to as "bar by former judgment"
while the second general rule, which is embodied in paragraph (c) of the
same section, is known as "conclusiveness of judgment. 18
Stated otherwise, when we speak of resjudicata in its concept as a "bar by
former judgment," the judgment rendered in the first case is an absolute
bar to the subsequent action since said judgment is conclusive not only as
to the matters offered and received to sustain that judgment but also as to
any other matter which might have been offered for that purpose and
which could have been adjudged therein. This is the concept in which the
termres judicata is more commonly and generally used and in which it is
understood as the bar by prior judgment constituting a ground for a
motion to dismiss in civil cases. 19
On the other hand, the less familiar concept or less terminological usage
of res judicata as a rule on conclusiveness of judgment refers to the
situation where the judgment in the prior action operates as an estoppel
only as to the matters actually determined therein or which were
necessarily included therein. Consequently, since other admissible and
relevant matters which the parties in the second action could properly
offer are not concluded by the said judgment, the same is not a bar to or a
ground for dismissal of the second action.
At bottom, the other elements being virtually the same, the fundamental
difference between the rule of res judicataas a bar by former judgment
and as merely a rule on the conclusiveness of judgment is that, in the first,
there is an identity in the cause of action in both cases involved whereas,
in the second, the cause of action in the first case is different from that in
the second case.
The diversity in results, in the instances where there is identity of cause of
action in the two cases and those wherein there is no such identity, is not
a caprice of mere mechanistic considerations or taxonomic niceties. In the
latter situation, where the second case is based on a cause of action

different from the first, the constituent elements of the second cause of
action, the specie of proof necessary to establish the same, and the relief
which may be granted in such second action are consequently at variance
with those obtaining or sought in the first action. As a logical and rational
consequence, therefore, only the findings in the first judgment are
conclusive and deemed established if raised in and for purposes of the
second action which, therefore, may proceed independently of the anterior
case. However, where the same cause of action is involved in both cases,
the foregoing considerations cannot apply since discrete facts and results
would not generally arise from the same procedural and evidentiary
foundations which inhere in the same cause of action. Even if diverse
reliefs should be awarded due to contingencies in the results of proof, the
judgment in the first action bars the second since the defendant
admittedly committed one and the same wrong for which he should not be
twice tried under the time-honored rule of non bis in idem.
Now, it has been a consistent rule, to cite just a few representative
cases, 20 that the following requisites must concur in order that a prior
judgment may bar a subsequent action, viz: (1) the former judgment or
order must be final; (2) it must be a judgment or order on the merits, that
is, it was rendered after a consideration of the evidence or stipulations
submitted by the parties at the trial of the case; (3) it must have been
rendered by a court having jurisdiction over the subject matter and the
parties; and (4) there must be, between the first and second actions,
identity of parties, of subject matter and of cause of action.
There is no question that the order of dismissal rendered in the prior
action, Civil Case No. OZ-648, had become final for failure of herein
petitioners to appeal the same after their motions for reconsideration were
denied. Furthermore, while the dismissal was for failure to prosecute, it
had the effect of an adjudication on the merits, and operates as res
judicata, 21 since the court did not direct that the dismissal was without
prejudice. 22
The fact remains that Civil Case No. OZ-648 for removal of clouds on title
has, as parties, the same set of plaintiffs and defendants as Special Civil
Case No. OZ-0751 for conventional redemption and damages, and both
cases involve Lot No. 1131 only.
Petitioners submit, however, that res judicata will nevertheless not apply
since there is no identity of causes of action. It is their theory that since
the issue of redemption was not raised in Civil Case No. OZ-648, it is
paragraph (c) of Section 49, Rule 39 that applies, that is, the rule on
conclusiveness of judgment, hence the dismissal of said former action
does not constitute res judicata to bar Special Civil Case No. OZ-0751. We
find no merit in such submission.
Petitioners appear to labor under an erroneous conceptualization of what
constitutes a cause of action. They postulate that the causes of action in
the cases involved are not identical, thus: "In Civil Case C-1, the cause of
action is physical possession. In Civil Case OZ-648, the cause of action is
removal of clouds of title. In Civil Case OZ-0751, the cause of action is
conventional redemption ...." 23
It is elementary that, in adjective law, a cause of action is the delict or the
wrongful act or omission committed by the defendant in violation of the

primary rights of the plaintiff. 24 In all these cases, petitioners have

imputed to private respondents and their predecessor in interest the same
alleged wrongful act, that is, acts of evident bad faith and fraud which
supposedly divested petitioner's mother of her rights and title to the
property in dispute. There is, consequently, an identical cause of action
claimed by petitioners in these cases.
A well-entrenched rule declares that a party cannot, by varying the form of
action or adopting a different method of presenting his case, escape the
operation of the principle that one and the same cause of action shall not
be twice litigated. 25 In fact, authorities tend to widen rather than to
restrict the doctrine of res judicata on the ground that public interest, as
well as private interest, demand the ending of suits by requiring the
parties to sue once and for all in the same case all the special proceedings
and remedies to which they are entitled. 26
In determining whether causes of action are identical so as to warrant
application of the rule of res judicata, the test most commonly stated is to
ascertain whether the same evidence which is necessary to sustain the
second action would have been sufficient to authorize a recovery in the
first, 27 even if the forms or nature of the two actions be different. 28 If the
same facts or evidence would sustain both, the two actions are considered
the same within the rule that the judgment in the former is a bar to the
subsequent action; otherwise it is not. It has been said that this method is
the best and most accurate test as to whether a former judgment is a bar
in subsequent proceedings between the same parties, and it has even
been designated as infallible. 29
In their motion to dismiss filed in Special Civil Case No. OZ-0751, private
respondents made a comparative analysis of the reliefs prayed for therein
and those in Civil Case No. OZ-648 which became the criterion in the
court's order of dismissal. A perusal thereof reveals that both actions seek
to have the deed of agreement of October 5, 1954 considered as a mere
equitable mortgage and to have the titles issued in the name of private
respondents declared null and void on the ground of fraud. Although
ostensibly of different forms, the inescapable conclusion is that the parties
are in effect litigating for the same thing and seeking the same relief, that
is, to recover possession and ownership of Lot No. 1131. It is of no
moment that the later remedy is for conventional redemption while the
former case was for removal of clouds on the title, since both actions are
anchored on exactly the same cause of action, are based on identical
facts, and even claim the same relief. The present petition is, therefore,
although presented in a different form, barred by the former decision in
the case for removal of clouds on the title.
We do not intend, however, to have the adjudication of this case go off
purely on procedural points. Even assuming that res judicata would not
bar Special Civil Case No. OZ-0751, the instant petition will nevertheless
not prosper.
It must be remembered that after the execution of the deed of sale on
October 4, 1954, a second document was made wherein Franklin Ang
undertook to resell the property, if Gabina Machoca elects to redeem the
same, within three years from the date of the deed of sale. With respect,
therefore, to the last transaction entered into by the parties, there were

two documents involved, one of which is the deed of sale and the other,
the right to repurchase. However, We find and so hold that there is
no pacto de retro sale in this case, within the contemplation of the Civil
Code which provides:
Art. 1601. Conventional redemption shall take place when the vendor
reserves the right to repurchase the thing sold, with the obligation to
comply with the provisions of Article 1616 and other stipulations which
may been agreed upon.
In Villarica, et al. vs. The Court of appeals, et al., 30 We had the occasion to
interpret this provision of law, to wit: The right of repurchase is not a right
granted the vendor by the vendee in a subsequent instrument, but is a
right reserved by the vendor in the same instrument of sale as one of the
stipulations of the contract. Once the instrument of absolute sale is
executed, the vendor can no longer reserve the right to repurchase, and
any right thereafter granted the vendor by the vendee in a separate
instrument cannot be a right of repurchase but some other right like the
option to buy in the instant case.
We have similarly held in a prior case that an agreement to repurchase
becomes a promise to sell when made after an absolute sale because
where the sale is made without such an agreement, the purchaser
acquires the thing sold absolutely. 31
Clearly, therefore, an option to buy or a promise to sell is different and
distinct from the right of repurchase which must be reserved by the
vendor, by stipulation to that effect, in the contract of sale.
Hence, there having been an absolute sale of the land, respondent Ang
was acting well within the ambit of his now inviolable right to register the
land in his own name, notwithstanding the unexpired stipulated period of
redemption in the deed of agreement.
Granting, for the sake of argument, that the transaction actually involves a
pacto de retro sale. petitioners failure to exercise their right of redemption
within the stipulated period dictates that the instant petition must
necessarily fail. The averment that petitioners were forestalled by
respondent Ang from redeeming the property appears to be a frivolous
afterthought since the former were not without recourse. There were
several legal remedies available to them which, if duly resorted to, could
have worked favorably for their cause. As it is, their silent acquiescence
for an inexplicable length of time worked greatly to their disadvantage.
Not only did petitioners fail to repurchase the property within the
stipulated period but they continued to sleep on their rights even beyond
the allowable statutory period for the enforcement of such right of
redemption. They are now barred by laches. Laches, in a general sense, is
failure or neglect, for an unreasonable and unexplained length of time, to
do that which, by exercising due diligence, could or should have been
done earlier; it is negligence or omission to assert a right within a
reasonable time, warranting a presumption that the party entitled to
assert it either has abandoned it or declined to assert it. 32
Petitioners' feigned ignorance regarding the registration of the property in
the name of respondent spouses, even disregarding the constructive
notice thereof to them under the law, is belied by the fact that petitioner
Inocenta Pliego and Pedro Pliego signed a written commitment that "if

Pilar Suarez will use their land for the construction of their house, we are
ready and agreed (sic) to transfer our house to another place." 33 This
instrument was never refuted, aside from the categorical admission of the
petitioners during the trial of the ejectment case that private respondents
were already enjoying the fruits of the land since 1963. 34 If petitioners
were not disturbed in their possession until the ejectment case was filed, it
could only have been out of sheer generosity and tolerance of private
respondent spouses.
Treading on the same supposition that there existed such a right to
repurchase, petitioners insist that the pacto de retro sale is, for all intents
and purposes, an equitable mortage on the pretext that they have been in
continuous possession of the land from the time of the execution of the
document. This again is a result of the distorted notion that petitioners'
possession is in the concept of that of an owner. Petitioners cannot be
credited with good faith in insinuating that their mother, Gabina Machoca,
was deceived into believing that the deed of agreement was a mortgage
contract similar to the first document she executed. As earlier explained,
after the second deed was executed and Gabina Machoca showed the
same to herein petitioners, it was the latter who advised her that the
contract be reformed, as a consequence of which the separate deed of
agreement of October 5, 1954 was executed. It would be safe to conclude
then that petitioners had approved of and consented to the provisions of
both contracts. It will readily be noted that the deed of agreement
specifically provided: "That if the Vendor shall fail to exercise her right to
redeem as herein granted within the stipulated period, then this
conveyance shall be deemed to be absolute and irrevocable." The
contract, not being contrary to law, morals and public policy, is binding
and enforceable against Gabina Machoca and her successors in interest.
Petitioners cannot now be heard to claim otherwise after having been
remiss in their obligations. They are further estopped from asserting that
the parties intended differently, contrary to what the written contracts
provide, in violation of the parol evidence rule.
Furthermore, the inadequacy of the price does not on that account alone
support the conclusion that the land was not sold to private respondent
Ang, since the parties entered into a conventional, and not a forced, sale
of the property and both parties were in a position to form an independent
judgment of the transaction. 35 From the legal viewpoint, even if the
property was sold for a comparatively low price, but the seller did nothing
about it for a number of years, the contract of sale is not
invalid. 36 Besides, in a contract of sale with right of repurchase, the price
is usually less than in absolute sales since in the former the vendor
expects to reacquire or redeem the property sold, 37 hence the inadequacy
of the price is not an overriding determinant to set aside the sale. 38 The
same rationale obtains where, as in this case, there was a separate
agreement to resell the property to the original vendor.
Anent the imputation of evident bad faith and fraud to respondent Ang for
obtaining title to the land in his own name prior to the expiration of the
agreed period, the records do not yield the requisite proof that he was so
motivated or had deliberately resorted to fraudulent deception. In the
absence of concrete evidence of bad faith or fraud, neither of which can

be presumed, We cannot hold otherwise. Besides, it is of essence of a

contract of sale with pacto de retro that the vendee shall immediately
acquire title to and possession of the land sold, subject only to the
vendor's right of redemption. With much more reason does this hold true
where a deed of absolute sale was merely complemented by a
subsequently executed and separate agreement of resale.
WHEREFORE, the order appealed from is hereby AFFIRMED. The temporary
restraining order issued pursuant to the resolution of August 3, 1987 is
hereby LIFTED and SET ASIDE.
SO ORDERED.

G.R. No. L-55350 March 28, 1983

OLIMPIA FERNANDEZ Vda. de ZULUETA (Substituted by JOSEFINA,
LIBERTY and GREGORIO all surnamed ZULUETA) petitioners,
vs.
ISAURO B. OCTAVIANO and AURELIO B. OCTAVIANO, respondents.
Ty, Gesmundo, Fernandez and Gesmundo for petitioners.
Nicolas P. Sonalan for respondents.
MELENCIO-HERRERA, J.:
Appeal by certiorari seeking a review of the Decision of respondent Court
of Appeals 1 promulgated on 22 April 1980, which reversed the judgment
of the Trial Court rendered on 30 June 1975 in favor of petitioners' mother
as plaintiff in Civil Case No. 8809 lodged before the Court of First Instance
of Iloilo, Branch III.
On 25 November 1952, Olimpia Fernandez Vda. de Zulueta (Olimpia, for
brevity), the registered owner of 5.5 hectares of riceland, covered by
Transfer Certificate of Title No. T-7428, sold the lot to private respondent
Aurelio B. Octaviano (Aurelio, for short), for P8,600.00 subject to the
following terms and conditions, to wit:
That for and in consideration of the sum of EIGHT
THOUSAND SIX HUNDRED AND 00/100 (P8,600.00) PESOS,
Philippine currency, the VENDOR, her heirs, assigns,
executors and administrators sells, transfers, and conveys
as it is hereby SOLD, TRANSFERRED AND CONVEYED by
way of ABSOLUTE AND DEFINITE SALE the aforementioned
described property in favor of the VENDEE, his heirs,
assigns, executors and administrators, the manner of
payment of the aforementioned amount is to be made as
follows:
That upon the execution of this instrument, VENDEE will
pay unto the VENDOR the amount of TWO THOUSAND
AND 00/100 (P2,000.00) PESOS, Philippine Currency, and
the VENDOR, has, by virtue of this instrument
acknowledged receipt of said payment;
That the remaining balance of SIX THOUSAND SIX
HUNDRED AND 001/100 (P6,600.00) PESOS, Philippine
Currency, should be paid by the VENDOR to the following
person, to wit:
That on May 31st, 1955, the VENDEE shall pay unto one
MAXIMINO GUMAYAN of Leganes, Iloilo, the sum of FIVE
THOUSAND AND 00/100 (P5,000.00) PESOS, Philippine
Currency, representing the redemption price of the land
aforementioned by virtue of a DEED OF SALE WITH PACTO
DE RETRO the VENDOR has executed in favor of said
Maximino Gumayan on May 21, 1949, ratified before
Notary Public Tirso Espeleta and entered in his Notarial
Register as Doe. No. 270; Page No. 56; Book No. IV; Series
of 1949, the option of the VENDOR to redeem the
aforementioned parcel of land pursuant to said Pacto de
Retro Sale will be May 21, 1955;

That the VENDEE will pay unto one MAXIMINO GUMAYAN of

Leganes, Iloilo, the sum of ONE THOUSAND SIX HUNDRED
AND 00/100 (Pl,600.00) PESOS, Philippine Currency,
representing the redemption price of the land
aforementioned by virtue of a DEED OF MORTGAGE the
VENDOR has executed in favor of said Maximino Gumayan
on May 8, 1950, ratified before Notary Public Felix Ravena
and entered in his Notarial Register as Doc. No. 404; Page
No. 24; Book No. VII; series of 1950, the said Mortgage
could be redeemed on or before May 21, 1955, by the
herein VENDOR. In other words, the VENDEE, upon the
execution of this instrument shall take the responsibility of
redeeming the land aforementioned from one Maximino
Gumayan for the sum of P5,000.00 in so far as the Deed of
Pacto de Retro Sale is concerned to be due on May 21,
1955 and for another sum also in favor of said Maximino
Gumayan for the amount of Pl,600.00 in so far as the Deed
of Mortgage is concerned to be due on or before May 21,
1955;
That upon the redemption of the land aforementioned by
the VENDEE from one Maximino Gumayan on May 21,
1955, then this instrument shall be considered for all legal
purposes, a DEED OF ABSOLUTE AND DEFINITE SALE by
the VENDOR in favor of the VENDEE, his heirs, assigns,
executors and administrators, and the Register of Deeds
for the City and Province of Iloilo is hereby authorized to
cancel Transfer Certificate of Title No. 7428 and to issue a
new Transfer Certificate of Title in favor of the VENDEE;
That upon the execution of this instrument, the VENDOR,
her heirs, assigns, executors and administrators, has no
more rights, interests or participations over the parcel of
land aforementioned. (Exhibit "E") (Emphasis supplied).
Exhibit "E" was registered in the Office of the Register of
Deeds of Iloilo under Entry No. 43082 and annotated in the
Memorandum of Encumbrances of Transfer Certificate of
Title No. T-7428.
On the same date, 25 November 1952, the vendee,
Aurelio, signed another document (Exhibit "F") giving the
vendor, Olimpia, the "option to repurchase" the property
"at any time after May 1958 but not later than May 1960."
The full text of that document reads:
This is to certify that as per instrument of Definite Sale of
Lot No. 9234-B of the subdivision plan Psu-26187, being a
portion of Lot No. 9234 of the Cadastral Survey of Sta.
Barbara, covered by Transfer Certificate of Title No. T7428, executed by Olimpia Fernandez in my favor, ratified
before Notary Public Eugenio G. Gemarino, and entered in
his Notarial Register as Doc. No. 119; Page No. 25; Book
No. IV; Series of 1952, although same is a Deed of Definite
Sale, however, I am giving the said Vendor, Olimpia

Fernandez the option to repurchase the aforesaid property

from me at any time after May, 1958 but not later than
May, 1960. Should she fail to redeem the aforesaid
property by paying me back the sum of EIGHT THOUSAND
SIX HUNDRED AND 00/100 (P8,600.00) PESOS, Philippine
Currency within the period of time stated above, then she
will lose all the right to repurchase the land from me.
(SGD.) AURELIO B. OCTAVIANO
Unlike the deed of sale, this document was not registered.
Aurelio took possession of the land after the sale.
Sometime in May, 1953, Aurelio tried to get the certificate of title covering
the subject land from Olimpia for the purpose of registering the deed of
absolute sale (Exhibit "E"), but was told that the same was in the
possession of Maximino Gumayan, who, in turn, informed him that the title
had been deposited with the Philippine National Bank. Consequently, on
January 7, 1953, Aurelio filed Civil Case No. 2660 (Aurelio Octaviano vs.
Olimpio Fernandez, Maximino Gumayan & PNB) to compel them to deliver
the title. Aurelio also caused the annotation of a notice of lis pendens. Four
months after the filing of the above Complaint, Aurelio again approached
Gumayan for the same purpose, but the latter refused to release the
certificate of title unless Aurelio would first pay him the"pagare " receipts
representing additional sums of money in the total amount of P1,486.00
borrowed by Olimpia from Gumayan in 1951, 1952 and 1953, which
amounts were not included in the mortgage obligation of Olimpia assumed
by Aurelio. Aurelio confronted Olimpia about these receipts contending
that she had already agreed to sell the property for P8,600.00. To avoid
further trouble, Aurelio offered Olimpia the option to repurchase the
property. Olimpia did not accept the offer alleging that she had no money
at that time to buy back the land. In fact, Olimpia even suggested to
Aurelio that he better sell the land to anybody and simply disregard the
option to repurchase. 2
Relying on the express consent of Olimpia to sell the land and believing
that she had renounced the option granted her to repurchase the same,
Aurelio negotiated with his own brother, respondent Isauro, for the sale of
the property sometime in 1954. Isauro agreed to buy the property, and
paid Aurelio P10,500.00. Out of this amount, Aurelio paid Gumayan on 8
August 1954 the amount of P6,600.00 representing the obligation of
Olimpia that was assumed by Aurelio under the deed of definite sale
(Exhibit "E"). This payment was evidenced by certificate of payment
annotated as Entry No. 43083 at the back of TCT No. 7428. Additionally,
Aurelio also paid Gumayan Pl,486.00 covering the "pagare" receipts
representing the additional sums of money borrowed by Olimpia from
Gumayan, as evidenced by Exhibit "4-Aurelio". The total amount paid by
Aurelio for the property, therefore, was P10,086.00, compared to
P8,600.00 contracted for in the deed of sale, Exhibit "E".
On 8 September 1954, Aurelio executed an Affidavit stating that since the
defendants in Civil Case No. 2260 had surrendered the title to him, he was
causing the cancellation of the notice of lis pendens.
On the same date of 8 September 1954, Aurelio executed in favor of his
brother, Isauro, a deed of absolute sale (Exhibit "B"), reflecting a price of

P2,000.00 only, allegedly in order to reduce the notarial and registration

expenses. Thereafter, TCT No. 7428 in the name of Olimpia was cancelled
and TCT No. 16882 was issued, in the name of respondent Isauro
Octaviano.
On 16 February 1962 (or about two years after the deadline of May, 1960)
Olimpia, through her lawyer, desired to "repurchase" the land and wrote
Isauro a letter asking him if he was willing to resell the land as she had the
money already to buy it back (Exhibit "1"). Isauro was initially receptive as
shown by his reply letter of March 26, 1962 (Exhibit "G" and "2" - Isauro).
Olimpia herself also wrote Isauro an undated letter offering to repurchase
the property for (P12,000.00, with the request that Isauro lend her the title
which she would use as a collateral for a loan that she was intending to
secure from a bank to cover the repurchase price (Exhibit "3-A").
Apparently, Isauro eventually refused to allow "repurchase" except
allegedly according to Olimpia, for P40,000.00
Olimpia contends that since 1958, she was looking for Aurelio to tell him of
her desire to "repurchase" the property but that Aurelio could nowhere be
found. 3
On 4 October 1971, Olimpia commenced suit for recovery of ownership
and possession of the subject land against the Octaviano brothers, both
respondents herein. The case was docketed in the Court of First Instance
of Iloilo, Branch III, as Civil Case No. 8809. The Complaint averred, inter
alia, that Aurelio expressly allowed her in writing to repurchase the land at
any time after May, 1958, but not later than May, 1960; that Aurelio
fraudulently sold the said land to his brother Isauro without first having
consolidated his ownership pursuant to Article 1607 of the Civil Code; that
plaintiff could not have exercised her option to repurchase because Aurelio
sold the property to his brother, who, being aware of her option to
repurchase, cannot be considered an innocent purchaser; that in 1962,
Isauro refused to recognize the plaintiff's option to repurchase, but,
instead, offered to sell the property at the prevailing price; and, that
despite repeated demands made by Olimpia, the Octavianos refused to
allow her to redeem the land. It was then prayed that the certificate of title
issued in the name of Isauro Octaviano be annulled, and that plaintiff be
allowed to repurchase the land.
The Octavianos separately filed their Answers with counterclaims. For his
part, Aurelio traversed the material allegations of the Complaint and
specifically denied the assertion that, through fraud and with evident
intent to deceive Olimpia he sold the lot to his brother without
consolidating ownership unto himself. As special and affirmative defenses,
Aurelio alleged that the document (Exhibit "F"), purportedly an option to
repurchase, was not an express grant to Olimpia of her right to
repurchase, but rather, a unilateral offer of Aurelio to resell the property to
the said vendor, which offer was not accepted by her; that neither consent
nor written authority, nor waiver of Olimpia was necessary for the sale of
the land in question for there was no acceptance of his unilateral offer to
sell; nor was there any necessity for the consolidation of ownership
pursuant to Article 1607 of the New Civil Code, for, as admitted by
Olimpia, what was executed by her was a deed of definite sale and that

Olimpia is estopped from alleging fraud for the reason that she herself
admitted in her Complaint the existence of that deed of sale.
For his part, respondent Isauro interposed the special defenses that he
purchased the land in dispute in good faith; that he took possession
thereof upon a just title, free from any liens and encumbrances; that he
possessed the land in the concept of owner, continuously, openly and
adversely for more than 17 years since 8 September 1954; that he was
not privy to the alleged option given to Olimpia by Aurelio; neither had he
(Isauro) any knowledge of the said option which Olimpia should have
asserted without delay, within the statutory limitation; that more than ten
(10) years had elapsed since the alleged violation by Aurelio of the
supposed option to resell, without Olimpia having taken any action
thereon. As counterclaim, Isauro claimed moral damages and attorney's
fees.
After trial on the merits, the Court a quo rendered a Decision on 30 June
1975, finding for Olimpia, the decretal portion of which reads:
WHEREFORE, decision is hereby rendered in favor of the plaintiff, ordering
the defendants:
1) To execute the sale of the property in favor of the
plaintiff upon the payment of P8,600.00 representing the
repurchase price pursuant to their agreement;
2) To declare null and void the registration and transfer
certificate of title in favor of Isauro B. Octaviano of Lot
9234-B in 1954, the same having been made without the
seller having been legally and lawfully entitled to the
property being registered in his name at the time when
such sale was executed in 1954, no consolidation of
ownership pursuant to law having been made; and
3) To return immediately Lot No. 9234-B to the plaintiff
plus damages equal to the produce from 1958 until return
is complied with.
Without pronouncement as to costs.
SO ORDERED. 4
On appeal by the Octaviano brothers to the then Court of Appeals, that
Tribunal reversed the findings of the Trial Court that the contract was a
sale with right of repurchase, ruled instead that the transaction between
Olimpia and Aurelio was an absolute sale, and declared Isauro the lawful
and absolute owner of the lot in question. Olimpia moved for
reconsideration but the same was denied for lack of merit.
In the meantime, Olimpia died, and was substituted by her heirs, Josefina,
Liberty and Gregorio, all surnamed Zulueta.
The Petition before us seeks a review of respondent Court's Decision.
We affirm.
1) The nature of the transaction between Olimpia and Aurelio, from the
context of Exhibit "E" is not a sale with right to repurchase. Conventional
redemption takes place "when the vendor reserves the right to repurchase
the thing sold, with the obligation to comply with the provisions of Article
1616 and other stipulations which may have been agreed upon". 5
In this case, there was no reservation made by the vendor, Olimpia, in the
document Exhibit "E". The "option to repurchase" was contained in a

subsequent document and was made by the vendee, Aurelio. Thus, it was
more of an option to buy or a mere promise on the part of the vendee,
Aurelio, to resell the property to the vendor, Olimpia. 6 As held in Villarica
vs. Court of Appeals: 7
The right of repurchase is not a right granted the vendor
by the vendee in a subsequent instrumentbut is a
right reserved by the vendor in the same instrument of
sale as one of the stipulations of the contract. Once the
instrument of absolute sale is executed, the vendor can no
longer reserve the right to repurchase, and any right
thereafter granted the vendor by the vendee in a separate
instrument cannot be a right of repurchase but some other
right like the option to buy in the instant case. ...
(Emphasis ours)
Neither is the contract between Olimpia and Aurelio one of the equitable
mortgage, which has been defined as "one in which although it lacks some
formality, form of words or other requisites, prescribed by a statute, show
the intention of the parties to charge a real property as security for a debt
and contain nothing impossible or contrary to law". 8 From the provisions
of the deed of sale, Exhibit "E", there is nothing therein from which it could
be inferred that the property was being utilized as security for a debt. The
document was labelled a deed of absolute and definite sale with the
vendee Aurelio assuming the payment of the mortgage obligations owing
by Olimpia to Maximino Gumayan, and specifically stipulating that upon
payment of that indebtedness, the transaction became a deed of definite
sale. The presumption that the contract was an equitable mortgage
neither arises because the price of the sale at the time it was executed in
1952 was not unusually inadequate; the vendor, Olimpia, did not remain in
possession as lessee or otherwise; nor did she bind herself to pay taxes on
the land. 9
Inasmuch as the contract was neither a sale with right of repurchase, nor
an equitable mortgage, neither can it be successfully alleged that it
partook of a "pactum commissorium " and was, therefore, void. "Pactum
commissorium " is a stipulation for automatic vesting of title over the
security in the creditor in case of the debtor's default. It bears reiterating,
however, that Olimpia was not a debtor, but a vendor. She was so
described in the document, Exhibit "E". Olimpia owed nothing to Aurelio,
and offered nothing to him as security for the payment of any
indebtedness,
It should also be recalled that, irked by the additional "pagares" incurred
by Olimpia from Maximino Gumayan, Aurelio had asked Olimpia to buy
back the property in 1954 but she demurred for lack of funds.
And what is of greater import is that petitioner waited for an unexplained
delay of about 19 years, from the date of the execution of the deed of sale
(Exhibit "E") in 1952 and the option to repurchase (Exhibit "F") in the same
year up to the time of filing of the Complaint in 1971, before she assailed
the nature of her transaction with Aurelio, claiming that the contract was a
sale with right of repurchase. If Olimpia really believed so, an action for
reformation of instrument was open to her. Likewise, it took her more than
17 years-from the time of registration of the sale to Isauro and the

subsequent issuance of a new certificate of title in the latter's name in

1954 up to the commencement of the action in 1971 for recovery of
possession and ownership-before she questioned the validity of the sale
by Aurelio to Isauro, contending that Aurelio was not yet the registered
owner when he sold the land to Isauro, hence, could not transfer
ownership thereof, and that he had sold the land without first
consolidating ownership in himself. In point of fact, however, there was no
need for Aurelio to consolidate ownership since the contract was one of
absolute sale and not a pacto de retro sale. It also took Olimpia nine years
from the time she sought to exercise her right of repurchase in 1962 up to
the institution of the suit for recovery in 1971. Petitioner's long inaction to
assert her alleged right should now be deemed barred by laches.
For a party to deserve the consideration of the courts, he
must not only show that he is entitled to the relief prayed
for, but must show also that he is not guilty of laches,
indifference, negligence or ignorance. 10
Again,
The defense of laches is an equitable one and does not
concern itself with the character of the defendant's title,
but only with whether or not by reason of the plaintiff's
long inaction or inexcusable neglect he should be barred
from asserting this claim at all, because to allow him to do
so would be inequitable and unjust to the defendant. 11
And even granting, arguendo that the sale was a pacto de retro sale, the
evidence shows that Olimpia, through her lawyer, opted to repurchase the
land only on 16 February 1962, approximately two years beyond the
stipulated period, that is, "not later than May, 1960".
If Olimpia could not locate Aurelio, as she contends, and based on her
allegation that the contract between her was one of sale with right to
repurchase, neither, however, did she tender the redemption price to
private respondent Isauro, but merely wrote him letters expressing her
readiness to repurchase the property.
It is clear that the mere sending of letters by the vendor expressing his
desire to repurchase the property without accompanying tender of the
redemption price fell short of the requirements of law. 12
Neither did petitioner make a judicial consignation of the repurchase price
within the agreed period.
In a contract of sale with a right of repurchase, the
redemptioner who may offer to make the repurchase on
the option date of redemption should deposit the full
amount in court. ... 13
To effectively exercise the right to repurchase the vendor a
retro must make an actual and simultaneous tender of
payment or consignation. 14
2) While it is true that Aurelio was not the registered owner of the property
at the time of the sale to his brother in 1954, it should be recalled that by
that time he had already complied with the conditions of the deed of sale
by redeeming the property from Maximino Gumayan and paying the latter
in full Aurelio may, therefore, be said to have had the right to transfer
ownership 15 as also shown by the fact that Maximino Gumayan had

rendered the certificate of title to him so that the authorization to the

Register of Deeds to cancel the same and issue a new one as stipulated in
the deed of sale became fully operative (Exhibit "E"). Aurelio was not duty
bound to wait for the expiration of the alleged redemption period before
he could dispose of or transfer ownership of the land for, as elsewhere
discussed, the sale was not a sale with right of repurchase.
It is true that by virtue of Exhibit "F", Olimpia could have "repurchased"
the property between 1958 and 1960. If she had done so, perhaps, her
rights would have been entitled to protection. She was remiss, however,
and only attempted to do so in 1962, or way beyond the period granted
her.
We might sympathize with her plight, but an individual is expected to take
ordinary care of his concerns and cannot expect the law to protect him all
the way. 16 To be noted also is the fact that her own lawyer prepared the
deed of sale and the separate document giving her the option to
"repurchase". 17
For his part, private respondent Isauro was an innocent purchaser for
value and in good faith. As heretofore stated, the instrument granting the
"option to repurchase" (Exhibit "F") was not registered nor annotated at
the back of the corresponding certificate of title. A purchaser need not
explore further than what the Torrens title on its face indicates.
A purchaser in good faith is one who buys property of
another, without notice that some other person has a right
to, or interest in such property and pays a full price for the
same, at the time of such purchase or before he has notice
of the claim or interest of some other persons in the
property. Good faith consists in an honest intention to
abstain from taking any unconscientious advantage of
another.18
Where there was nothing in the certificate of title to
indicate ... any encumbrance thereon, the purchaser is not
required to explore farther than what the Torrens title upon
its face indicates in quest for any hidden defect or
inchoate right that may subsequently defeat his right
thereto. If the rule were otherwise, the efficacy and
conclusiveness of the certificate of title which the Torrens
system seeks to insure would entirely be futile and
nugatory. 19
WHEREFORE, the decision of respondent Court of Appeals, being in
accordance with law and the evidence, is hereby affirmed, with costs
against petitioners.
SO ORDERED.

G.R. No. 156705 September 30, 2005

SOCORRO TAOPO BANGA, Petitioners,
vs.
Spouses JOSE and EMELINE BELLO, Respondent.
DECISION
CARPIO MORALES, J.:
Spouses Socorro Taopo Banga and Nelson Banga (Nelson) acquired,
among other things, a real property located at 459 Boni Avenue,
Mandaluyong City (the property) covered by Transfer Certificate of Title
(TCT) No. 62530.1
On June 19, 1987, Nelson, as mortgagor, with the consent of his wifeherein petitioner Socorro Taopo Banga, executed a Deed of Real Estate
Mortgage2 in favor of respondent Jose V. Bello V (Jose) over the property as
security for a loan in the amount of P200,000.00 extended by Jose to
Nelson.
On July 28, 1987, Nelson and Jose executed an "Amendment to the Real
Estate Mortgage"3 increasing the loan to P300,000.00.
Still later or on September 1, 1989, Nelson and Jose executed a "Second
Amendment of Real Estate [Mortgage]" 4 which further increased the loan
to P500,000.00.
It appears that a Deed of Absolute Sale 5 was executed by Nelson
purportedly on December 11, 1989 and with the marital consent of
petitioner, covering the property in favor of Jose for a consideration
of P300,000.00. TCT No. 62530 was later cancelled and in its stead TCT
No. 32946 was issued in the name of Jose.
The real estate mortgage, its two amendments, as well as the Deed of
Absolute Sale were notarized by one Teodorico L. Baltazar (Baltazar) in the
presence of two witnesses.
Petitioner later filed a complaint7 before the Regional Trial Court (RTC) of
Pasig, for declaration of nullity with damages against her husband Nelson
from whom she claims to have been separated since 1989 and herein
respondents spouses Jose and Emeline Bello, alleging that Nelson and
respondent Jose, "in criminal conspiracy with notary public [Baltazar] and
two (2) instrumental witnesses, criminally made it appear that . . .
[petitioner] consented to the absolute sale . . ."; that the signature in the
deed of sale appearing above the name "Socorro T. Banga" is not hers;
and that she never appeared before Baltazar on December 11, 1989 or
any date thereafter to acknowledge having participated in the execution of
the deed of absolute sale.
And petitioner questioned as "unconscionably low" the consideration
of P300,000.00 for the sale of the property which is situated in a
commercial district.
Petitioner thus prayed that judgment be rendered:
1. declaring void the "Deed of Absolute Sale" of December 11, 1989;
2. declaring void and/or canceling Transfer Certificate of Title No. 3294 (in
the names of [respondents]-spouses Bello) from the Registry of Deeds of
Mandaluyong, Metro Manila;
3. ordering . . . Nelson F. Banga, Jose V. Bello V and Emeline B. Bello
solidarily liable to pay in favor of herein [petitioner] the following sums of
money:

a. P500,000.00 as moral damages;

b. Exemplary damages, to be fixed by this Honorable Court, but no less
than P50,000.00;
c. P200,000.00, as and for attorneys fees;
d. P50,000.00, as litigation expenses;
e. Costs of suit.
xxx
(Underscoring supplied)
In their Answer with Counterclaim,8 herein respondents spouses Bello
alleged that petitioner has no cause of action against them; that the deed
of sale was personally and voluntarily executed by petitioner and her
husband in the presence of the witnesses before the notary public and her
signature appearing thereon is genuine and authentic; and that the
consideration for the sale is the fair and reasonable value of the property
as it is "not only based on the amount provided in the deed of sale but
[on] considerations in (sic) real estate mortgage and amendments
[thereto] . . .."
In Nelsons Answer with Counterclaim and Crossclaim 9 against Jose, he
claimed that, among other things, the deed of sale was actually a third
amendment to the mortgage which he and petitioner executed and was
actually an equitable mortgage for which no consideration was involved;
he had already paid in full their principal indebtedness to respondents in
the amount of P652,000.00, plus the amount of P187,500.00, in the form
of guarantee checks; and the cancellation of TCT No. 62530 was done
without his consent and against his actual and real agreement with
respondents.
In its Pre-Trial Order of November 28, 1990, 10 Branch 71 of the Pasig RTC
stated the issues of the case as follows:
1) Whether the deed of sale is binding, valid, effective and genuine;
2) Whether the said deed of sale expresses the true and real agreement of
the parties;
3) Whether the alleged consideration of P300,000.00 as appearing in the
deed of absolute sale covering a prime lot in Mandaluyong of 126 square
meters is adequate or not; and
4) Whether or not the signature of Socorro Banga in the deed of sale is
genuine or not.
In its Order11 of January 12, 1994, however, the trial court, noting that
petitioner "has not come forward with evidence to indicate that [her
signature on the deed of absolute sale] is a forgery . . . despite great lapse
of time," considered her to have waived the presentation of evidence of
falsification of her signature. It thus defined the remaining principal issue
to be whether the deed of absolute sale expresses the true intention of the
parties.
Upon the said "principal issue" then, the trial court, holding in the
negative, found that the true intent of the parties was to merely guarantee
the loan extended to Nelson.
The trial court arrived at its decision in light of the following observations:
A cursory glance at the duplicate original of the Deed of Absolute Sale
(Exhibits 1, 1-A-Bello) will readily show that on page 1 thereof, the date
"11th" (day of ) "Dec. 1989"; and the Residence Certificates of defendant

Nelson F. Banga, plaintiff and defendant Jose V. Bello for the year 1989,
such as: "RCNo. 63315794, Mand, MM, 1/17/89"; "RC NO. B63315794,
Mand, MM 1/17/89"; and "RC 09499689J, Mand, MM 3/6/89" on page 2
thereof, respectively, including the date "11th" (day of) December, 1989"
had been typed on two different dates. Defendant Bello admitted this fact.
Although defendant Bello contends that the Deed of Absolute Sale was
executed by the parties and notarized by Notary Public Teodorico L.
Baltazar on December 11, 1989, the Court believes that said Deed of
Absolute sale was prepared in 1987 and was signed by defendant Banga
on June 19, 1987 when he executed the Deed of Real Estate Mortgage
for P200,000.00 on June 19, 1987 also acknowledged before the same
Notary Public Teodorico L. Baltazar.
If the Deed of Absolute Sale were actually prepared and signed on
December 11, 1989, as defendant Bello insists, there is no need to type
the date "11th" (day of) "Dec. 1989" on page 1 and the date "11th" (day
of) "December, 1989" and the 1989 residence certificates on page 2 on
different dates. And, there is no point also in typing the residence
certificates of defendant Banga, plaintiff and defendant Bello which were
issued in 1987 including their tax account numbers or TAN. Besides, what
firmly convinces the Court to believe that the Deed of Absolute Sale was
prepared and executed on June 19, 1987 is the fact that in the
acknowledgment portion of the document found on page 2, the number
"7" in "Series of 1987", was superimposed with the number "9". And, the
name of the Notary Public "TEODORICO L. BALTAZAR", the date of his
notarial commission, "ptr" and "TAN" were all insertions which were typed
only on December 11, 1989.12
On respondents claim that the consideration for the sale of the property
was P300,000.00, the trial court found it "preposterous" in light of the
amount of P500,000.00 for which the property was mortgaged.
The trial court thus disposed:
WHEREFORE, the judgment is hereby rendered in favor of [petitioner] and
against [Nelson and respondents]:
1. Declaring the Deed of Absolute Sale dated December 11, 1989 as NULL
and VOID ab initio.
2. Canceling Transfer of Certificate of Title No. 3294, Registry of Deeds of
Mandaluyong, Metro Manila (now City of Mandaluyong).
3. Ordering [respondent] Jose V. Bello V to pay [petitioner] the amount of
P50,000.00 as exemplary damages.
4. Ordering [respondent] Jose V. Bello V and Nelson F. Banga to pay, jointly
and severally, [petitioner] the amount of P50,000.00 as and by way of
attorneys fees.
5. Ordering [respondent] Jose V. Bello V and Nelson F. Banga to pay, jointly
and severally, the costs of suit.
Counterclaims filed by [respondent] Jose V. Bello V and Nelson F. Banga
against [petitioner] are DISMISSED. Crossclaim filed by Banga against
[respondent] Bello is DISMISSED. (Underscoring supplied)
Respondents thereupon appealed to the Court of Appeals faulting the trial
court in:
I

. . . DECLARING VOID AB INITIO THE DEED OF SALE DATED DECEMBER 11,

1989.
II
. . . NOT ORDERING [PETITIONER] AND HER HUSBAND, NELSON BANGA, TO
PAY THEIR MORTGAGE INDEBTEDNESS TO [RESPONDENTS].
III
. . . HOLDING THAT [RESPONDENTS] ACTED WITH GROSS NEGLIGENCE
AMOUNTING TO BAD FAITH.
IV
. . . ORDERING [RESPONDENTS] TO PAY EXEMPLARY DAMAGES TO
[PETITIONER]13 (Underscoring supplied)
Nelson did not appeal the trial courts decision.
By Decision14 dated December 13, 2002, the appellate court granted the
appeal of respondents, it holding that:
The document denominated as Deed of Absolute Sale dated December 11,
1989 executed between [respondent] Bello and Banga, with the marital
consent of the latters wife Socorro, indicates in certain terms, the object,
the cause and the consideration of the contract of sale. The instrument
was duly notarized and signed in the presence of two (2) witnesses. As the
language of the written contract of sale between the parties is clear and
unambiguous, it must be taken to mean that which, on its face, it purports
to mean. And unless some good reason can be assigned to show that the
words used should be understood in a different sense, the contract must
stand.
Moreover, the deed of sale involved in the instant controversy is a
notarized document. Being a public instrument, it has in its favor the
presumption of regularity, and to contradict the same, there must be
evidence that is clear, convincing and more than
merely
preponderant. Other than the bare allegations of [petitioner] that the deed
of sale is fictitious, no convincing proof was adduced to overcome the
presumption of validity as to its authenticity and due execution. As
complainant, plaintiff had the burden of proving that contrary to the recital
in the deed of sale, she never appeared before the notary public and
acknowledged the deed to be her voluntary act. It is worth mentioning
that the deed of sale and the real estate mortgage previously executed
between the parties was notarized by the same notary public, Atty.
Teodorico Baltazar, further supporting the validity of the deed of sale.
Likewise, the allegation of forgery of the signature of [petitioner] was not
sufficiently proven during trial. No expert witness was even presented to
make an examination of petitioners signatures in the deed of sale to
ascertain whether or not the same are fictitious when compared with her
specimen signatures. The prevailing rule in our jurisdiction is that whoever
alleges forgery has the burden of proving the same, for forgery cannot be
presumed but should be proved by clear and convincing evidence.
Our courts have consistently denied relief to a party who seeks to avoid
the performance of an obligation voluntarily assumed because they turned
out to be disastrous or unwise contracts, even if there was a mistake of
law or fact. The claim of the [petitioner] that the consideration for the sale
is grossly inadequate and therefore passes no title to [respondent] does
not suffice to render the contract void. While [petitioner] testified during

the April 4, 1991 hearing that the prevailing market value of the property
is ten to fifteen thousand per square meter, no evidence was presented,
such as that of an independent real estate appraiser, to substantiate her
claim.Consonant with the rule that gross inadequacy of price would not
nullify the sale, the deed of sale subject of the instant controversy must be
upheld.
To support [respondent] Bellos right to the property arising from the
contract of sale between the parties, TCT No. 3294 was issued by the
Register of Deeds of Mandaluyong in his favor on March 7, 1990. In
addition, he had the property declared in his name for taxation purposes,
and paid the corresponding real property taxes thereon. Absent any
showing of irregularity in the issuance of the title, the public office who
issued the same enjoys the presumption of having acted regularly in the
performance of his functions.
As to the claim that the residence certificate number used by
[respondents] in the deed of sale is fictitious as the same did not appear in
the list retained by the Office of the City Treasurer of Mandaluyong, suffice
it to state that the object of the law in the issuance of a residence
certificate is to establish the true and correct identity of the person to
whom it is issued. A residence certificate, being a receipt issued upon
receipt of money for public purposes, is a public instrument and as such
presentation of the same document would suffice to prove its contents.
We are thus inclined to agree with [respondents], after a thorough
examination of the records of the case, that a valid contract of sale was
perfected between [Nelson] Banga, with his wifes marital consent on the
one hand, and Jose Bello on the other.
Moreover, if the trial court was convinced that the real intent of the parties
was one of mortgage, then the court should have ordered the payment of
the balance of the indebtedness. This, the court did not do so, bolstering
the validity of the document as of sale and not of mortgage.
Thus, the award of exemplary damages, attorneys fees and the costs of
suit in favor of [petitioner] is not justified under the circumstances.
xxx
(Citations omitted; Underscoring supplied)
The appellate court accordingly disposed:
WHEREFORE, in view of all the foregoing, the instant appeal
is GRANTED. The June 1, 1995 Decision of the Regional Trial Court of
Pasig City, Branch 71, is hereby REVERSED and SET ASIDE. Plaintiffappellee Socorro Taopo-Banga and defendant [Nelson] Banga are hereby
ordered to comply with their obligations under the contract of sale. Costs
against the plaintiff. (Emphasis in the original)
Hence, this petition filed by petitioner-wife of Nelson, raising as sole issue
whether the parties intended the deed of sale to be merely an equitable
mortgage.
The pertinent Civil Code provisions on equitable mortgage read:
Art. 1602. The contract shall be presumed to be an equitable
mortgage, in any of the following cases:
(1) When the price of a sale with right to repurchase is unusually
inadequate;

(2) When the vendor remains in possession as lessee or

otherwise;
(3) When upon or after the expiration of the right to repurchase another
instrument extending the period of redemption or granting a new period is
executed;
(4) When the purchase retains for himself a part of the purchase price;
(5) When the vendor binds himself to pay the taxes on the thing sold;
(6) In any other case where it may be fairly inferred that the real
intention of the parties is that the transaction shall ensure the
payment of a debt or the performance of any other obligation.
In any of the foregoing cases, any money, fruits, or other benefit to be
received by the vendee as rent or otherwise shall be considered as
interest shall be subject to the usury laws.
xxx
(Emphasis and underscoring supplied)
Art. 1604. The provisions of Article 1602 shall also apply to a
contract purporting to be an absolute sale.(Emphasis and
underscoring supplied)
In Aguirre v. Court of Appeals, this Court ruled:
x x x The presence of even one of the circumstances in Article 1602 is
sufficient basis to declare a contract as one of equitable mortgage. The
explicit provision of Article 1602 that any of those circumstances
would suffice to construe a contract of sale to be one of equitable
mortgage is in consonance with the rule that law favors the least
transmission of property rights. To stress, the existence of any
one of the conditions under Article 1602, not a concurrence, nor
an overwhelming number of such circumstances, suffices to give
rise to the presumption that the contract is an equitable
mortgage.15 (Emphasis and underscoring supplied)
The appeal is impressed with merit.
The observation of the trial court that the deed of absolute sale was
prepared in 1987, the same year that the original deed of real estate
mortgage was executed, is well taken. Why, indeed, were the residence
certificate numbers issued to the parties in 1987 appearing in the
acknowledgment portion of the real estate mortgage of1987 are the same
as those appearing in the acknowledgment portion of the deed of absolute
sale purportedly executed in 1989, respondents offered no explanation. In
fact, in the acknowledgment portion of the 1989 deed of absolute sale
whereon the phrase "Series of 1987" appears, the number "9" was
superimposed on the number "7", which this Court takes as a clear design
to make it appear that it was notarized in 1989.
And why, indeed, was the "purchase price" only P300,000.00 when the
loan granted to Nelson was P500,000.00 if the assailed document was
really one of sale?
Badges thus indeed exist showing that the deed of sale was accomplished
in 1987 as a part of the consideration in the grant of the loan.
But more revealing of the true intention of the parties is the undisputed
relationship of Nelson and respondents as debtor and creditors,
respectively, which, together with the circumstances mentioned above,
draws this Court to affirm the trial courts ruling that the deed of absolute

sale was executed to serve as additional security for the loan extended to
Nelson. As Reyes v. Court of Appeals instructs:16
In determining whether a deed absolute in form is a mortgage, the court is
not limited to the written memorials of the transaction. The decisive
factor in evaluating such agreement is the intention of the
parties, as shown not necessarily by the terminology used in the
contract but by all the surrounding circumstances, such as
the relative situation of the parties at that time, the attitude,
acts, conduct, declarations of the parties, the negotiations
between them leading to the deed, and generally, all pertinent
facts having a tendency to fix and determine the real nature of
their design and understanding. x x x (Emphasis and underscoring
supplied)
Debtors usually find themselves in an unequal position when bargaining
with their creditors, and will readily sign onerous contracts just to have the
money they need. Necessitous men are not always free, in that to answer
a pressing emergency, they will submit to any terms that the crafty may
impose on them. This is precisely the evil that the above-quoted provision
on equitable mortgage seeks to prevent.17
Lastly, if the parties really forged a contract of sale, why did not
respondents immediately demand the vacation by Nelson of the property?
They only served Nelson a notice to vacate four months after the
complaint subject of the present petition was filed, by letter 18 dated
August 17, 1990, which appears to be an afterthought.19
A word on the award to petitioner by the trial court of exemplary damages
against Jose in the amount ofP50,000.00 which respondents assailed,
among other things, before the appellate court as unfounded "bad faith or
gross negligence on the part of [Jose] . . . not [having] been established."
The pertinent provisions of the Civil Code read:
Art. 2229. Exemplary or corrective damages are imposed, by way of
example or correction for the public good, in addition to the moral ,
temperate, liquidated or compensatory damages.
xxx
Art. 2234. While the amount of exemplary damages need not be proved ,
the plaintiff must show that he is entitled to moral, temperate or
compensatory damages before the court may consider the
question of whether or not exemplary damages should be
awarded. x x x (Emphasis and underscoring supplied)
While petitioner did pray for the award of moral damages in her complaint
and even testified on her entitlement to it, the trial court made no such
award in its decision and petitioner did not assail the same by way of a
motion for reconsideration of the decision or by appeal before the
appellate court. There is thus no basis for the award of exemplary
damages.
Finally, the logical consequence of a finding that a deed of sale is actually
one of equitable mortgage is to decree the "vendor"-debtor to pay his
outstanding loan to the "vendee"-creditor.
As priorly mentioned, Nelson alleged in his Answer that he had paid his
mortgage obligation to respondents. The trial court, however, despite
ruling that the deed of sale was actually an equitable mortgage, did not

pass upon his claim. The trial courts judgment is thus incomplete,20 as in
fact in respondents appeal to the appellate court, they assigned as one of
the errors of the trial court its failure to order petitioner and her husband
Nelson to pay the loan.
A remand of the case to the trial court is thus in order, only for the
purpose of determining whether the mortgage obligation had indeed been
settled, and if not, how much should Nelson pay respondents to settle the
same.
WHEREFORE, the petition is GRANTED. The December 13, 2002 decision
of the Court of Appeals is REVERSEDand SET ASIDE and the June 1,
1995 decision of the Regional Trial Court of Pasig City, Branch 71 in Civil
Case No. 59384 is REINSTATED with the MODIFICATION that the award
of exemplary damages is DELETED.
The case is nevertheless remanded to the trial court for further
proceedings only for the purpose of determining whether Nelson has
settled his mortgage obligation to respondent and, if in the negative, to
determine the amount thereof and issue the necessary order or orders.
SO ORDERED.

G.R. No. 107439 July 20, 1995

MICHAEL T. UY, petitioner,
vs.
HON. COURT OF APPEALS, REGIONAL TRIAL COURT OF
VALENZUELA, BRANCH CLXXII and ROSA SAULER, respondents.
VITUG, J.:
The controversy (in the instant petition for review on certiorari) concerns a
parcel of land, with an area of 4,167 square meters, located along Pio
Valenzuela St., Barrio Pugad Baboy, Valenzuela, Metro Manila. The
property, also known as Lot No. 1551-C-1-J of Subdivision Plan (LRC) Psd167118, used to be covered by Transfer Certificate of Title numbered T170692 of the land records of Bulacan and then, after the town of
Valenzuela, Bulacan, had become a part of Metro Manila, renumbered (T170692) 9968 of the land records of Caloocan City, in the name of the
spouses Miriam Reyes and Numeriano Catador.
The Catador spouses offered to sell to private respondent Rosa Sauler the
whole parcel of land for P80.00 per square meter. The latter agreed and,
on
07 July 1977, she paid the spouses an initial amount of P45,000.00. In the
receipt signed by Numeriano Catador, the spouses promised to execute a
deed of sale "upon full payment of the balance" of the purchase price. 1
On 18 October 1978, the Catador spouses hypothecated the property to
the State Investment House, Inc. ("SIHI"), to "accommodate" their niece,
Angelina Cadieva-Lacson, who had secured a loan of P250,000.00 from
SIHI. The mortgage was registered with the Registry of Deeds in Bulacan
and annotated on the transfer certificate of title of the property. Upon
learning of the mortgage, private respondent met with the Catador
spouses in order to "renegotiate" their standing agreement. It would
appear that private respondent gave up a claim to get the entire property
and agreed to instead retain, with the conformity of the Catador spouses,
an area within the lot as the "katumbas" or as equivalent of the
downpayment of P45,000.00. 2 Private respondent opted for the 555square-meter area which she was then occupying and on which she had
theretofore made improvements. Her request for a survey and subdivision
of the property, as well as a separate title, could not, however, be granted
by the Catador spouses since the certificate of title over the whole lot was
by then already handed over to SIHI.
Angelina Cadieva-Lacson, the niece of the Catador spouses, defaulted on
her loan; whereupon, SIHI foreclosed on the security. At the extrajudicial
foreclosure sale, SIHI came out to be the highest bidder at P309,515.15.
The certificate of sale issued by the Provincial Sheriff of Bulacan was
registered in the Registry of Deeds and annotated at the back of the
certificate of title on 17 March 1980.
One year thereafter, or on 17 March 1981 (the expiry date of the one-year
redemption period under Act No. 3135), SIHI received a letter from private
respondent asserting her ownership over the 555 square meters of the
foreclosed land. The letter was followed, on 13 August 1981, by another
communication sent this time by private respondent's son, William Ang,
who offered to buy from SIHI one-half of the property for P225,000.00. SIHI
did not respond to both letters. In the meantime, or on 21 April 1981, SIHI

consolidated ownership over the property. On 19 October 1981, TCT No.

(170692) 9968 was canceled and replaced by TCT No. 48467 in SIHl's
name. 3
Two years later, petitioner Michael T. Uy bought the property from SIHI.
The deed of sale presented for registration before the land registration
authority 4 showed that petitioner obtained the property for P60,000.00 on
13 December 1983 (although another deed of sale, also dated 13
December 1983, indicated an additional purchase price of P300,000.00 5).
TCT No. 48467 in SIHI's name was cancelled and TCT No. 108486 was
issued to petitioner on 29 March 1984. 6
Alleging title over the portion of the property sold to her, private
respondent filed, on 11 July 1985, with the Regional Trial Court in
Valenzuela, Metro Manila, a complaint for legal redemption with damages
against Michael T. Uy and SIHI. Docketed Civil Case No. 2263-V-85, the
complaint stated that private respondent, being a part owner of the lot,
was entitled to a right of redemption when SIHI sold its part of the
property to petitioner Michael Uy, evidently invoking Article 1620, in
relation to Article 1623, of the Civil Code.
In his answer, petitioner averred, among other things, that he was
unaware of any contract between private respondent and the Catador
spouses and that, if there indeed was such a transaction, he could not be
bound by it for not being registered in the Registry of Deeds. In any event,
petitioner added, private respondent failed to exercise her right of
redemption
within
the
reglementary
30-day period from the time she acquired knowledge of the foreclosure
sale.
SIHI filed a separate answer asseverating, mainly, that private respondent
could not profess ignorance of the extrajudicial foreclosure sale because it
was published in a newspaper of general circulation for three consecutive
weeks, and that she should thereby be barred by estoppel from claiming
any right of redemption.
During the proceedings, private respondent consigned in court the sum of
P60,000.00. Petitioner refused to receive the tender. After several
renewals of the deposit, on 05 January 1988, private respondent ultimately
withdrew the amount.
On 30 May 1989, the trial court 7 rendered its decision (in Civil Case No.
2263-V-85) thusly:
WHEREFORE, judgment is hereby rendered in favor of
plaintiff and against the defendants:
1. Ordering the defendant Michael T. Uy to convey via
legal redemption and in favor of plaintiff, Lot No. 1551-C1-J of subdivision plan (LRC) Psd-167118, covered by T.C.T.
No. 108486, Book T.539 of the land records of Caloocan
City for a consideration of SIXTY THOUSAND PESOS
(P60,000.00) Philippine Currency;
2. Ordering both defendants, jointly and severally, to pay
the plaintiff for damages for their failed expansion
program in the amount of P100,000.00;
3. Ordering both defendants, jointly and severally, to pay
plaintiff moral damages of P30,000.00; exemplary

damages of P10,000.00; litigation expenses of P10,000.00;

attorney's fees of P50,000.00 plus P500.00 for each day of
actual appearance of counsel for the plaintiff; and to pay
the costs of suit.
SO ORDERED. 8
A motion for the reconsideration of the decision was denied by the court.
Both herein petitioner and SIHI then elevated the case to the Court of
Appeals.
On 05 June 1992, the Court of Appeals rendered judgment 9 affirming the
decision of the court a quo except for the award of damages which was
deleted. The attorney's fees were reduced.
The appellate court found the verbal agreement of sale between private
respondent and the Catador spouses, to have "long been executed and
consummated, even before the mortgage was constituted." It noted that
the private respondent promptly took possession of the 555-square-meter
area, filled up the area with "tambak," fenced it and caused to be repaired
the house thereon, thus rendering the agreement beyond the ambit of the
Statute of Frauds [Article 1403 (2) (e) of the Civil Code] that requires for
enforceability a written evidence of an agreement for the sale of real
property. Besides, it held, the receipt issued by the Catadors (Exhibit F)
served "as a ratification of the verbal transaction between the parties."
Being the "owner" of the 555-square-meter portion of the lot, private
respondent, the appellate court concluded, was entitled to redeem the
entire property "within thirty days from notice in writing by the prospective
vendor, or by the vendor." 10 Finding that when SIHI foreclosed the
mortgage on 28 February 1980, it never sent any notice of sale to private
respondent, the Court of Appeals said that since she learned from
petitioner's counsel of the foreclosure sale only on 22 June 1985 and then
lost no time in notifying petitioner of her intention to buy the 555-squaremeter portion, private respondent should be deemed to have timely
exercised the right of redemption.
The Court of Appeals ruled that petitioner was not an innocent purchaser
for value. It said that petitioner was "fully aware" of private respondent's
possession of the land since he was staying in a land adjacent to the
property in question, not to mention the fact that, on one occasion,
Numeriano Catador informed petitioner himself of private respondent's
interest in the latter's portion of land.
His motion for reconsideration of the appellate court's decision having
been denied, 11 petitioner has interposed the instant petition 12 with the
following assigned errors:
I
RESPONDENT COURT ERRED IN CONCLUDING THAT THE
ORAL
CONTRACT
OF
SALE
BETWEEN
PRIVATE
RESPONDENT AND THE CATADORS COVERING THE MIDDLE
PORTION (555 SQ. M.) OF THE SUBJECT PROPERTY GAVE
PRIVATE RESPONDENT SUPERIOR RIGHTS OVER THAT
MIDDLE PORTION, AS AGAINST THE PRIOR REGISTERED
RIGHTS OF SIHI AND PETITIONER OVER THE ENTIRE
SUBJECT PROPERTY (4,167 SQ. M.) INCLUDING THE MIDDLE
PORTION THEREOF.

A. RESPONDENT COURT'S FINDING THAT

THE ORAL CONTRACT OF SALE BETWEEN
PRIVATE
RESPONDENT
AND
THE
CATADORS HAD LONG BEEN EXECUTED OR
CONSUMMATED
EVEN
BEFORE
THE
MORTGAGE WAS CONSTITUTED IS
PATENTLY ERRONEOUS.
B. RESPONDENT COURT FAILED TO
CONSIDER THAT THE ORAL CONTRACT OF
SALE OF THE 555 SQ. M. MIDDLE PORTION
OF
THE
SUBJECT
PROPERTY
WAS
SUBORDINATE
TO
THE
REGISTERED
RIGHTS
OF
SIHI,
THE
INNOCENT
MORTGAGEE OVER THE ENTIRE SUBJECT
PROPERTY (4,167 SQ. M.) INCLUDING THE
MIDDLE PORTION THEREOF.
C. SIHI'S SUBSEQUENT SALE OF THE
SUBJECT
PROPERTY
TO
PETITIONER
TRANSFERRED TO THE LATTER ALL THE
RIGHTS AND INTEREST ACQUIRED BY THE
FORMER
AS
PURCHASER
AT
THE
FORECLOSURE SALE.
D. RESPONDENT COURT FAILED TO
CONSIDER
THAT
THE
ALLEGED
ENFORCEABILITY OF THE ORAL CONTRACT
OF SALE AS BETWEEN THE PARTIES TO IT
DID NOT GIVE PRIVATE RESPONDENT
BETTER RIGHTS OVER THE MIDDLE
PORTION OF SUBJECT PROPERTY THAN SIHI
AND PETITIONER.
II
ASSUMING ARGUENDO THAT
PRIVATE
RESPONDENT
ACQUIRED OWNERSHIP OVER THE MIDDLE PORTION OF
SUBJECT PROPERTY, RESPONDENT COURT ERRED IN
HOLDING THAT SHE WAS ENTITLED TO LEGAL
REDEMPTION OF THE ENTIRE SUBJECT PROPERTY.
There is partial merit in the petition.
The original agreement entered into by private respondent and the
Catador spouses covered the whole property. Initially, an amount of
P45,000.00 was paid to, and receipted for by, the spouses who then
undertook to execute the formal deed of conveyance upon full payment of
the purchase price. Private respondent thereupon took possession of a
portion of the property. In the meantime, the Catador spouses executed a
mortgage deed over the property in favor of SIHI. Upon learning of the
mortgage, private respondent gave up her interest to acquire the whole
property and settled for the confirmatory purchase of the 555-squaremeter portion which she was then actually occupying. In her complaint in
Civil Case No. 2263-V-85, private respondent so attested thusly:
. . . (she) sought a re-negotiation of her transaction with
her sellers and both sellers and herein plaintiff agreed that

the down payment of P45,000.00 was considered as full

payment for an equivalent smaller area within Lot 1551-C1-J and thereupon sellers allowed plaintiff to choose the
site consisting of 555 sqm., more or less, and plaintiff
immediately occupied the same in the concept of
owner, peaceful, open, public and adverse and said
occupancy in 1977, continued up to the present, and she
introduced improvements thereon; (Emphasis supplied.) 13
The facts that would indicate private respondent's rightful title to a
specific portion of the foreclosed asset, i.e., her being in possession of the
555-square-meter area, her repairing and improving the house standing
thereon, her enclosing the premises with concrete fence and a steel
gate, 14 installing drainage (pipes), as well as filling up the site with earth
("tambak") and her constructing a bodega for the raw materials and
supplies 15 of her "Kastiron Foundry & Machine Shop" business, 16 verily,
are the circumstances that negate, rather than bolster, her claim for legal
redemption over the entire property on the basis of Article 1620, 17 in
relation to Article 1623, 18 of the Civil Code. The exercise of a right of legal
redemption thereunder presupposes the existence of a co-ownership at
the time the conveyance is made by a co-owner and when it is demanded
by the other co-owner or co-owners. There is co-ownership when "the
ownership of anundivided thing or right belongs to different persons." 19
In De la Cruz v. Cruz, 20 where the northern half of a piece of registered
land had been sold by a couple to a person who, after the other half was
subsequently sold by the couple to another, sought to exercise the right of
legal redemption, the Court, speaking through Mr. Justice Jose B.L. Reyes,
ruled:
. . . Tested against the concept of co-ownership, as
authoritatively expressed by the commentators, appellant
is not a co-owner of the registered parcel of land, taken as
a unit or subject of co-ownership, since he and the
spouses do not "have a spiritual part of a thing which is
not physically divided" (3 Sanchez Roman 162), nor is
each of them an "owner of the whole, and over the whole
he exercises the right of dominion, but he is at the same
time the owner of a portion which is truly abstract . . ." (3
Manresa 405). The portions of appellant-plaintiff and of the
defendant spouses are concretely determined and
identifiable, for to the former belongs the northern half,
and to the latter belongs the remaining southern half, of
the land. That their respective portions are not technically
described, or that said portions are still embraced in one
and the same certificate of title, does not make said
portions
less
determinable
or
identifiable,
or
distinguishable, one from the other, nor that dominion
over each portion less exclusive, in their respective
owners. Hence, no right of redemption among co-owners
exists.
At no time in the case at bench has co-ownership over the entire lot ever
existed between private respondent and SIHI or, later, its successor

Michael Uy. Not being a co-owner of Lot No. 1551-C-1-J, private

respondent's plea to have her right of redemption upheld by us cannot be
sustained.
For his part, petitioner may not successfully pretend to be an innocent
purchaser for value of the disputed lot so as to warrant his sole ownership
over the entire property and thereby preclude private respondent from
asserting her prior purchase of the 555-square-meter portion thereof. The
Court of Appeals, the factual findings of which we cannot ignore, said:
We are not convinced that appellant Michael Uy can be
considered innocent purchaser for value. To be sure,
appellant Uy was fully aware of appellee's possession of
the portion of lot in question (Tsn., December 13, 1988, p.
9). Why not, when subject property is adjacent to the land
occupied by appellant Uy and his parents? Not only that;
as testified to by William Ang Tee, son of appellee, he and
Numeriano Catador met with appellant Uy and the latter's
father, Dionisio, and in that meeting, Numeriano Catador
informed Dionisio Uy that the appellee bought a 555square-meter portion of Lot 1551-C-1-J (Tsn., June 25,
1987, p. 6); a testimonial evidence appearing to be
unrebutted. Therefore, appellant UY cannot be categorized
a purchaser in good faith because he had knowledge of
the prior sale to appellee of the 555 square meters under
controversy. 21
Neither can SIHI, petitioner's predecessor-in-interest, claim to be an
innocent mortgagee. In Sunshine Finance and Investment Corporation v.
IAC, 22 the Court, after reciting the general rule that a mortgagee "is under
no obligation to look beyond the certificate and investigate the title of the
mortgagor appearing on the face of the certificate," has thenceforth
elaborated:
Nevertheless, we have to deviate from the general rule
because of the failure of the petitioner in this case to take
the necessary precautions to ascertain if there was any
flaw in the title of the Nolascos and to examine the
condition of the property they sought to mortgage. The
petitioner is an investment and financing corporation. We
presume it is experienced in its business. Ascertainment of
the status and condition of properties offered to it as
security for the loans it extends must be a standard and
indispensable part of its operations. Surely, it cannot
simply rely on an examination of a Torrens certificate to
determine what the subject property looks like as its
condition is not apparent in the document. The land might
be in a depressed area. There might be squatters on it. It
might be easily inundated. It might be an interior lot,
without convenient access. These and other similar factors
determine the value of the property and so should be of
practical concern to the petitioner.
Curiously, the petitioner merely relied on the certificate of
title to persuade it that the security offered was

acceptable. It would have been so simple for it to send one

of its trained investigators to make an ocular inspection of
the land which, after all, was not in some remote or
forbidding wilderness."
And in Crisostomo v. Court of Appeals, 23 we have reiterated:
It is a well-settled rule that a purchaser or mortgagee
cannot close his eyes to facts which should put a
reasonable man upon his guard, and then claim that he
acted in good faith under the belief that there was no
defect in the title of the vendor or mortgagor. His mere
refusal to believe that such defect exists, or his willful
closing of his eyes to the possibility of the existence of a
defect in the vendor's or mortgagor's title, will not make
him an innocent purchaser or mortgagee for value, if it
afterwards develops that the title was in fact defective,
and it appears that he had such notice of the defects as
would have led to its discovery had he acted with the
measure of precaution which may be required of a prudent
man in a like situation.
WHEREFORE, the decision appealed from, as well as that of the trial court
in Civil Case No. 2263-V-85, is SET ASIDE. Instead, a new one is RENDERED
(a) upholding the right of petitioner over the lot covered by Transfer
Certificate of Title No. 108486 excluding, however, the 555-square meter
area bought by private respondent which ownership is similarly hereby
DECLARED to be that of the latter and (b) denying the demand for legal
redemption by private respondent. No special pronouncement on costs.
SO ORDERED.

G.R. No. 122047

October 12, 2000
SPOUSES SERAFIN SI AND ANITA BONODE SI, petitioners,
vs.
COURT OF APPEALS, SPOUSES JOSE ARMADA and REMEDIOS
ALMANZOR (deceased, and substituted by heirs: Cynthia Armada,
Danilo Armada and Vicente Armada) respondents.
DECISION
QUISUMBING, J.:
This petition for certiorari under Rule 45 assails the Decision 1 dated March
25, 1994, of the Court of Appeals and its Resolutions 2 dated March 24,
1995 and September 6, 1995 in CA-G.R. CV No. 30727. The Court of
Appeals reversed the decision of the Regional Trial Court of Pasig City,
Branch 113, and nullified the sale of the subject lot by the spouses
Crisostomo and Cresenciana Armada to spouses Serafin and Anita Si. The
dispositive portion of the respondent court's decision reads:
"WHEREFORE, in view of the foregoing, the decision appealed from is
hereby REVERSED, and a new one is rendered:
1) Annulling and declaring as invalid the registration of the Deed
of Absolute Sale dated March 27, 1979 executed by Cresenciana V.
Alejo in favor of Anita Bonode Si.
2) Ordering the Register of Deeds of Pasay City to annul and
cancel Transfer Certificate of Title No. 24751, issued in the name
of Anita Bonode Si, married to Serafin D. Si., Jose R. Armada,
married to Remedios Almanzor and Dr. Severo R. Armada Jr.,
single.
3) Ordering the Register of Deeds of Pasay City to reconstitute and
revive Transfer Certificate of Title No. 16007 in the names of Jose,
Crisostomo and Severo, Jr.
4) That plaintiffs be allowed to repurchase or redeem the share
corresponding to the share of Crisostomo Armada within thirty (30)
days from notice in writing by Crisostomo Armada.
5) The defendants-appellees are jointly and severally ordered to
pay the plaintiffs-appellants the sum of P10,000.00 as moral
damages.
6) The defendants-appellees are jointly and severally ordered to
pay the plaintiff-appellants the sum of P10,000.00 as attorney's
fees and litigation expenses and costs of suit.
SO ORDERED."3
The factual background of the case is as follows:
The 340 square meters of land, situated in San Jose District, Pasay City,
the property in dispute, originally belonged to Escolastica, wife of Severo
Armada, Sr. This was covered by Transfer Certificate of Title (TCT) No.
(17345) 2460. During the lifetime of the spouses, the property was
transferred to their children and the Registry of Deeds, Pasay City, issued
TCT No. 16007 in the names of the three sons, as follows : "DR.
CRISOSTOMO R. ARMADA, married to Cresenciana V. Alejo, 113.34 Square
Meters; JOSE R. ARMADA, married to Remedios Almanzor, 113.33 Square
Meters; and DR. SEVERO R. ARMADA, Jr., single, all of legal age,
Filipinos."4Annotated also in the title is the total cancellation of said title
"... by virtue of the Deed of Sale, (P.E. 77952/T-24751), dated March 28,

1979, executed by CRESENCIANA V. ALEJO, as attorney-in-fact of

CRISOSTOMO R. ARMADA, conveying 113.34 square meters of the
property herein, in favor of ANITA BONODE SI, married to Serafin D. Si, for
the sum of P75,000.00, issuing in lieu thereof Transfer Certificate of Title
No. 24751, Reg. Book T-102. (Doc. No. 17, Page No. 5, Book No. 253 of
Notary Public of Pasay City, Manila, Julian Florentino)."5
On April 15, 1980, herein spouses Jose Armada and Remedios Almanzor,
filed a complaint for Annulment of Deed of Sale and Reconveyance of Title
with Damages, against herein petitioners Anita and Serafin Si and Conrado
Isada, brother-in-law of Cresenciana. Isada brokered the sale.
The complaint alleged that Conrado Isada sold Crisostomo's share by
making it appear that Cresenciana, the attorney-in-fact of her husband, is
a Filipino citizen, residing with Isada at No. 13-4th Camarilla Street,
Murphy, Cubao, Quezon City. By this time, Crisostomo and Cresenciana
had migrated and were already citizens of the United States of America. It
also stated that when petitioners registered the deed of absolute sale they
inserted the phrase "... and that the co-owners are not interested in
buying the same in spite of notice to them.", and that petitioners knew of
the misrepresentations of Conrado. Further, the complaint alleged that the
other owners, Jose and Severo, Jr., had no written notice of the sale; and
that all upon learning of the sale to the spouses Si, private respondents
filed a complaint for annulment of sale and reconveyance of title with
damages, claiming they had a right of redemption.
Petitioners, on the other hand, alleged that on October 2, 1954,
Escolastica, with the consent of her husband executed three separate
deeds of sale (Exhibits 1, 2, and 3)6 conveying 113.34 square meters of
the property to Severo, and 113.33 square meters each to Crisostomo and
Jose. The three deeds of sale particularly described the portion conveyed
to each son in metes and bounds. Petitioners contend that since the
property was already three distinct parcels of land, there was no longer
co-ownership among the brothers. Hence, Jose and Severo, Jr. had no right
of redemption when Crisostomo sold his share to the spouses Si.
Petitioners point out that it was only because the Armada brothers failed
to submit the necessary subdivision plan to the Office of the Register of
Deeds in Pasay City that separate titles were not issued and TCT No.
16007 was issued and registered in the names of Jose, Crisostomo, and
Severo, Jr.
After trial on the merits, the court ruled for petitioners:
"IN VIEW OF ALL THE FOREGOING, the complaint is hereby DISMISSED.
With costs against the plaintiffs."7
Private respondents appealed to the Court of Appeals. On March 25, 1994,
the appellate court issued the decision now assailed by petitioners. In
reversing the decision of the trial court and ruling for private respondents,
the Court of Appeals found that:
"A careful examination of TCT No. 16007 (Exh. 'A') shows that the portion
sold by virtue of the Deeds of Sale (Exh. 1, 2, & 3) to the Armada brothers
do not appear in the said title, neither does it indicate the particular area
sold. Moreover, no evidence was presented to show that the Register of
Deeds issued TCT No. 16007 (Exh. 'A') on the basis of the said deeds of
Sale. In fact, TCT No. 16007 (Exh. 'A') shows that the lot is co-owned by

Jose, Crisostomo and Severo, Jr. in the proportion of 113.33, 113.34 and
113.33 sq. m. respectively.
Furthermore, the evidence on record shows that the Deed of Absolute Sale
(Exh. 'B'), executed by Cresencia Armada in favor of defendants Si, stated
that the portion sold was the 'undivided one hundred thirteen & 34/100
(113.34) square meters' of the parcel of land covered by TCT NO. 16007 of
the Registry of Deeds for Pasay City, which means that what was sold to
defendants are still undetermined and unidentifiable, as the area sold
remains a portion of the whole.
Moreover, plaintiff Remedi[o]s Armada testified that on March 27, 1979,
Crisostomo Armada, thru his attorney-in-fact and co-defendant,
Cresenciana Alejo, sold his undivided 113.34 share to defendants, Sps. Si
as evidenced by a Deed of Absolute Sale (Exh. 'B'), and presented for
registration with the Register of Deeds (Exh. 'B-1') without notifying
plaintiffs of the sale (TSN, pp. 6-8, December 20, 1988). Instead, it
appears that the phrase 'and that the co-owners are not interested in
buying the same inspite of notice to them', was inserted in the Deed of
Sale (Exh. 'B').
xxx
Otherwise stated, the sale by a (sic) co-owner of his share in the undivided
property is not invalid, but shall not be recorded in the Registry Property,
unless accompanied by an affidavit of the Vendor that he has given
written notice thereof to all possible redemptioners." 8
On August 29, 1994, petitioners' counsel on record, Atty. Roberto B. Yam
received a copy of the CA decision. On October 14, 1994, he filed a motion
for reconsideration, but it was denied by the Court of Appeals on
November 21, 1994, for being filed out of time.
On December 5, 1994, petitioners filed their motion for new trial under
Section 1, Rule 53 of the Revised Rules of Court. 9 Petitioners presented
new evidence, TCT No. (17345) 2460, registered in the name of
Escolastica de la Rosa, married to Severo Armada, Sr., with annotation at
the back stating that the cancellation was by virtue of three deeds of sale
in favor of Escolastica's sons. On March 24, 1995, respondent court denied
the motion, reasoning that when the motion was filed, the reglementary
period had lapsed and the decision had become final and executory.
Petitioners' motion for reconsideration of said resolution was denied.
Hence, the present petition, alleging that:
"1. Respondent Court of Appeals committed a reversible error in
ruling that a co-ownership still existed.
"2. Respondent Court of Appeals committed a reversible error in
denying the Motion for Reconsideration of its Decision of 25 March
1994 on purely technical grounds.
"3. Respondent Court of Appeals committed a reversible error in
denying the Motion for New Trial.
"4. Respondent Court of Appeals committed a reversible error in
ordering petitioners to pay moral damages, attorney's fees,
litigation expenses and the costs of the suit." 10
In essence, this Court is asked to resolve: (1) whether respondent court
erred in denying petitioners' motion for reconsideration and/or the Motion
for New Trial; (2) whether private respondents are co-owners who are

legally entitled to redeem the lot under Article 1623 of the Civil
Code;11 and (3) whether the award of moral damages, attorney's fees and
costs of suit is correct.
The pivotal issue is whether private respondents may claim the right of
redemption under Art. 1623 of the Civil Code. The trial court found that
the disputed land was not part of an undivided estate. It held that the
three deedsof absolute sale12 technically described the portion sold to
each son. The portions belonging to the three sons were separately
declared for taxation purposes with the Assessor's Office of Pasay City on
September 21, 1970.13 Jose's testimony that the land was undivided was
contradicted by his wife when she said they had been receiving rent from
the property specifically allotted to Jose.14 More significantly, on January 9,
1995, the Registry of Deeds of Pasay City cancelled TCT 24751 and issued
three new titles as follows: (1) TCT 134594 15 in favor of Severo Armada, Jr.;
(2) TCT 13459516 under the name of Anita Bonode Si, married to Serafin Si;
and (3) TCT 13459617 owned by Jose Armada, married to Remedios
Almanzor. All these are on record.
However, the Court of Appeals' decision contradicted the trial court's
findings.18
In instances when the findings of fact of the Court of Appeals are at
variance with those of the trial court, or when the inference drawn by the
Court of Appeals from the facts is manifestly mistaken, this Court will not
hesitate to review the evidence in order to arrive at the correct factual
conclusion.19 This we have done in this case. It is our considered view now,
that the trial court is correct when it found that:
"Rightfully, as early as October 2, 1954, the lot in question had already
been partitioned when their parents executed three (3) deed of sales (sic)
in favor of Jose, Crisostomo and Severo, all surnamed Armada (Exh. 1, 2, &
3), which documents purports to have been registered with the Register of
Deeds of Pasay City, on September 18, 1970, and as a consequence TCT
No. 16007 (Exh. A) was issued. Notably, every portion conveyed and
transferred to the three sons was definitely described and segregated and
with the corresponding technical description (sic). In short, this is what we
call extrajudicial partition. Moreover, every portion belonging to the three
sons has been declared for taxation purposes with the Assessor's Office of
Pasay City on September 21, 1970. These are the unblinkable facts that
the portion sold to defendant spouses Si by defendants Crisostomo
Armada and Cresenciana Armada was concretely determined and
identifiable. The fact that the three portions are embraced in one
certificate of title does not make said portions less determinable or
identifiable or distinguishable, one from the other, nor that dominion over
each portion less exclusive, in their respective owners. Hence, no right of
redemption among co-owners exists."20 (citation omitted)
". . . [T]he herein plaintiffs cannot deny the fact that they did not have
knowledge about the impending sale of this portion. The truth of the
matter is that they were properly notified. Reacting to such knowledge and
notification they wrote defendant Dr. Crisostomo Armada on February 22,
1979, a portion of said letter is revealing: 'Well you are the king of
yourselves, and you can sell your share of Levereza." 21 (emphasis omitted)

After the physical division of the lot among the brothers, the community
ownership terminated, and the right of preemption or redemption for each
brother was no longer available.22
Under Art. 484 of the Civil Code, 23 there is co-ownership whenever the
ownership of an undivided thing or right belongs to different persons.
There is no co-ownership when the different portions owned by different
people are already concretely determined and separately identifiable,
even if not yet technically described.24 This situation makes inapplicable
the provision on the right of redemption of a co-owner in the Civil Code, as
follows:
"Art. 1623. The right of legal pre-emption or redemption shall not be
exercised except within thirty days from the notice in writing by the
prospective vendor, or by the vendor, as the case may be. The deed of
sale shall not be recorded in the Registry of Property, unless accompanied
by an affidavit of the vendor that he has given written notice thereof to all
possible redemptioners.
The right of redemption of co-owners excludes that of adjoining owners."
Moreover, we note that private respondent Jose Armada was well informed
of the impending sale of Crisostomo's share in the land. In a letter dated
February 22, 1979, Jose told his brother Crisostomo: "Well you are the king
of yourselves, and you can sell your share of Leveriza."25 Co-owners with
actual notice of the sale are not entitled to written notice. A written notice
is a formal requisite to make certain that the co-owners have actual notice
of the sale to enable them to exercise their right of redemption within the
limited period of thirty days. But where the co-owners had actual notice of
the sale at the time thereof and/or afterwards, a written notice of a fact
already known to them, would be superfluous. The statute does not
demand what is unnecessary.26
Considering that respondent Court of Appeals erred in holding that herein
private respondent could redeem the lot bought by petitioners, the issue
of whether the appellate court erred in denying petitioners' motions for
reconsideration and new trial need not be delved into.1wphi1 The same
is true with respect to the questioned award of damages and attorney's
fees. Petitioners filed their complaint in good faith and as repeatedly held,
we cannot put a premium on the right to litigate.
WHEREFORE, the petition is GRANTED, the Decision of the Court of Appeals dated
March 25, 1994 and its Resolutions dated March 24, 1995 and September 6, 1995 in
CA-G.R. CV No. 30727 are ANNULLED and SET ASIDE. Civil Case No. 8023-P is
DISMISSED for lack of merit. The decision of the Regional Trial Court of Pasay City,
Branch 113, promulgated on August 29, 1989, is REINSTATED.
SO ORDERED.

G.R. No. L-66101 November 21, 1984

SPOUSES JOSE FABIA and ANITA FABIA, petitioners,
vs.
INTERMEDIATE APPELLATE COURT, ANGEL MARARAC and
REMEDIOS ALEJANDRO, EUGENIO, GILDO and ROMEO, ALL
SURNAMED MARARAC, represented by their mother CARLINA
RAFANAN, respondents.
GUTIERREZ, JR., J.:
This is a petition for certiorari to review the decision of the respondent
Intermediate Appellate Court dated October 21, 1983, the dispositive
portion of which reads:
WHEREFORE, the decision appealed from is hereby reversed and
set aside and another one is rendered snowing plaintiffsappellants to redeem the property described in paragraph 3 of
their complaint within thirty (30) days from issuance of the order
of execution by depositing with the Court in the name of
defendants-appellees the sum of P8,000.00 as purchase price
after which the defendants-appellees shall execute a deed of sale
of the same land in favor of plaintiffs-appellants for the sum of
P8,000.00. No Costs.

Petitioners Jose and Anita Fabia were originally the defendants in a case
filed by the respondents with the Court of First Instance of Pangasinan,
Branch II. Respondents filed the case entitled "Angel Mararac, et al.,
plaintiffs versus Jose Fabia, et al., defendants" to exercise their right of
legal redemption under Article 1621 of the Civil Code over a parcel of land
sold to the petitioners. The Code provides:
The owners of adjoining lands shall also have the right of
redemption when a piece of rural land, the area of which
does not exceed one hectare, is alienated, unless the
grantee does not own any rural land.
This right is not applicable to adjacent lands which are
separated by brooks, drains, ravines, roads and other
apparent servitudes for the benefit of other estates.
xxx xxx xxx
The antecedent facts are summarized in the stipulation of facts submitted
by the parties during the pre-trial conference in the Court of First Instance,
to wit:
1. Plaintiffs reside on a lot east of the land in question and
adjacent to it;
2. The lot is owned by the plaintiffs in common;
3. The land in question formerly belonged to Hugo Mararac
who sold the same to the spouses Leonardo Mararac and
Monica Resuello;
4. Hugo Mararac sold the land in question to Leonardo
Mararac and Monica Resuello on March 27, 1971;
5. At that time, the lot now owned by plaintiffs was owned
by plaintiff Angel Mararac and Juanito Mararac, who was
the husband of plaintiff Carina Rafanan who died in 1976;
6. Leonardo Mararac and Monica Resuello sold to the
defendants the land in question on February 25, 1975;

7. At that time, the lot in eastern side of the land in

question was owned by Angel Mararac and his brother,
Juanita Mararac;
8. On April 8, 1975,defendants declared the land for tax
purposes;
9. At the time of sale of the land in question to the
defendants in 1975 there was no offer to exercise right of
legal redemption;
10. At the time of the sale of the land in question to
Leonardo Mararac and Monica Resuello in 1971, there was
no offer of legal redemption;
11. There was no legal redemption offered during the
period between the first and second sale;
12. The southern boundary of the lot in question is a barrio
road with approximate area of 10 meters wide;
13. The land in question in relation to plaintiffs' lot is not
separated by ravine, by brook, trait road or other servitude
for the benefit of others;
14. The land in question is fenced and was fenced even
before the first sale in March 27, 1971;
15. Defendants own rural lands other than the land in
question;
16. From Barangay Balogo, to Basing along the road
touching the southern bound of the land in question are
lines of houses on both sides;
17. House of plaintiffs is along the said road;
18. A portion of the land in question on the side farther
from the road, is used as a fishwell;
19. Plaintiffs offered to redeem the land in the amount
paid by the defendants as well as an amount for the return
of investment of the property and interest, and payments
of attorney's fees and are able and willing to make the
payment.
The trial court rendered a decision in favor of the petitioners stating inter
alia that:
Considering now the evidence presented by the plaintiffs,
the Court finds that they have not presented a
preponderance of evidence to support their claim for legal
redemption. This is so for their very own complaint which
is in effect a complaint for legal redemption of rural land
cites the very land itself as "residential land." Neither do
the plaintiffs show anywhere in their evidence that the
said land is rural. In fact, in the documents they presented,
Exhibits A and B, the land in question is clearly described
as "residential land." Nowhere in the testimony of
plaintiffs' witnesses is the Land in question described as
"rural land" and neither do they describe the land
adjoining the land in question, the ownership of which
adjoining land is the basis for their claim of legal
redemption, as rural land. Plaintiffs' testimony that they

reside on the adjoining land gives rise to the conclusion

that such land is also residential. In fact, the transcript of
the stenographic notes of the ocular inspection of the land
in question conducted on February 28, 1978 show that
opposite the land in question across the barangay road of
36 meters, is the Barangay Artesian Well, the concrete
house and poultry of Mr. Ciriaco Rellosa, the store of Arturo
Rellosa and along the same barangay road are lines of
concrete and semi-concrete and nipa houses and along
the same road are the Barangay Chapel and the Barangay
Elementary School of Balogo, Binmaley, Pangasinan.
However, behind the land in question, as in the case with
the other lots along the Barangay Road, are fishponds.
Hence, from the foregoing, it is clear that the land in
question is a residential area and is not rural or devoted to
agriculture. The fact that the lot is enclosed with a bamboo
fence and has 9 fruit bearing coconut trees, 45 coconut
trees not yet bearing fruit, about 120 banana plants, two
bamboo clumps, on its northern part a fishwell newly
constructed and on its eastern side hollow blocks and sand
and gravel do not militate against its being residential for
the ordinary Philippine residence is traditionally profuse
with trees and plants for home sufficiency, esthetic
appreciation and ecological balance. Hence, the lot in
question being satisfactorily shown to be residential,
Article 1621 of the Civil Code of the Philippines is
inapplicable for it applies only to rural lands. Neither can
plaintiff claim legal redemption under Article 1622 which
applies to urban lands, since his complaint does not allege
that the land is so small and so situated that a major
portion thereof cannot be used for any practical purpose
within a reasonable time, and having been bought merely
for speculative purposes (Ortega v. Orcino, et al., 38 SCRA
276).
On appeal, the respondent Intermediate Appellate Court reversed the
decision of the trial court holding that:
It is clear to Us that the focal or determining factor is generally
the location of the property. If it is in the city or town resembling a
city, meaning the "poblacion", it is urban property. If it is situated
in the sitios, barrios or barangays, other than a city or town
resembling a city, it is rural land, or one located in the
countryside.
The land described in the complaint, and sought to be redeemed,
is a piece of rural lands. It is situated in a barrio, or Barrio Balogo,
Binmaley, Pangasinan. It does not straddle the national highway
or provincial road, considering its adjoining boundaries. On the
land are agricultural improvements, namely, 9 fruit-bearing
coconut trees, 49 non- bearing coconut trees, about 120 banana
plants, and 2 bamboo clumps,
xxx xxx xxx

WHEREFORE, the decision appealed from is hereby reversed and

set aside and another one is rendered allowing plaintiffsappellants to redeem the property described in paragraph 3 of
their complaint within thirty (30) days from issuance of the order
of execution by depositing with the court in the name of
defendants-appellees the sum of P8,000.00 as purchase price
after which the defendants-appellees shall execute a deed of sale
of the same land in favor of plaintiffs-appellants for the sum of
P8,000.00. No costs.

This petition for certiorari was filed to finally determine the true character
of the land in question and to adjudicate the rights of the parties with
regard to the same. The issues are: (1) whether or not the land in question
may be considered rural for purposes of legal redemption under Section 2,
Chapter 7, Title VI, New Civil Code; and (2) if so, are respondents guilty of
laches so as to prevent them, nevertheless, from redeeming the property
in question?
Petitioners cite definitions by Castan of urban and rural lands to wit:

(1) Rural land defined (Product-ProducingLands)

(2) Regardless of site, if the principal purpose is to obtain
products from the soil, the lease is of rural lands. Hence, as used
here rural lands are those where the lessee principally is
interested in soil products (3 Castan 124).
(3) Urban Lands defined (Non-Product ProducingLands)
Lands leased principally for purposes of residence are called
urban lands (See 3 Castan 124).

Petitioners submit that the land, being primarily used for residential
purposes, is not subject to legal redemption under Article 1621 of the New
Civil Code. They point out that the complaint itself describes the land in
question as residential, which description is but a reproduction of the
description in the deed of absolute sale executed by Leonardo Mararac
and Monica Resuello in favor of the spouses Fabia. They rely on the rule
that admissions made in the complaint are judicial admissions, which must
bind the plaintiffs-respondents Sveriges Angfartygs Assurance Forening v.
Qua Chee Gan, 21 SCRA 12; Santiago v. delos Santos, 61 SCRA 146).
On the other hand, the respondents maintain that the land was utilized by
the petitioners exclusively for agricultural purposes from the time it was
purchased on February 25, 1975, up to the time the lower court conducted
its ocular inspection on February 28, 1978. The land is located in a barrio
Barrio Balogo, Binmaley, Pangasinan which is an agricultural district.
Its residents engage in rural pursuits. The respondents contend that this
being the case, the land should also be classified as rural following the
doctrine laid down in Enriquez v. Devanadera (62 O.G. March 3, 1956
citing Stees v. Bermeier 98 N.W. 648, 650, 91 Minn. 513); that the locality
should be considered rural when the persons occupying it are engaged in
rural pursuits.
It is not easy to fix, with such exactitude as to furnish a sure norm for all
cases, the line that separates the rural from the urban. The Code has
avoided, without doubt deliberately, any definition on this point.
(Francisco, Sales, 1955 Ed., p. 879, citing 10 Manresa 372).
stituting tenement in land adapted and used for agricultural or pastoral
purposes. It is one which, regardless of site, is principally used for the

purpose of obtaining products from the soil as opposed to urban lands

which are principally for the purpose of residence. (3 Castan 124).
However, the very same word has been defined as relating to, or
associated with, or typical of the country, the word being derived from the
Latin word "rural is" meaning country. It pertains to the country as
distinguished from a city or town. Thus, as is the belief of respondent
appellate court, "the focal or determining factor is generally the location of
the property."
Both definitions are undoubtedly correct insofar as the word is ordinarily
and commonly used or understood. However, it is the legal definition of
the word with which we are concerned. We are dealing here with the
exercise of a right based on a provision of law. It is the meaning intended
by the framers of the law which we must seek to uphold. (82 CJS 636). The
sense in which the words are used furnishes the rule of construction. (In
Re Winton Lumber Co., 63 P. 2d, p. 664) A sentence or paragraph in a
statute cannot be analyzed with respect to some preconceived pattern in
the reader's mind, but it must be analyzed with respect to that which the
author attempted to define. (State v. Brunswick, 47 N.E. 2d., 916) Thus, a
construction of the word "rural" that is in consonance with the legislative
purpose must be followed.
As expressed in Del Pilar v. Catindig (35 Phil. 263) the reason for the law in
question is to foster the development of agricultural areas by adjacent
owners who may desire the increase for the improvement of their own
land." The intention of the law in giving this right of redemption is to
protect agriculture, by the union of small agricultural lands and those
adjoining thereto under one single owner for their better exploitation.
(Tolentino, The Civil Code of the Philippines, Annotated, Volume V, 1959
Edition, p. 161)
In view of this legislative objective, the "use" of property for agricultural
purpose is essential in order that the same be characterized as rural land
for purposes of legal redemption under Article 1621 of the Civil Code. The
consideration of the use and destination of the lands and that of the
customs of each town will be the data that ought to be taken into account
in order to decide fitly the cases where the qualification appears doubtful
(10 Manresa 372). The small parcel of land one hectare or less in area,
must be dedicated to agriculture before the owners of adjoining lands may
claim a right of redemption under Article 1621 of the Civil Code.
Thus, rural lands are distinguished from urban tenements:
xxx xxx xxx
(2) By its purpose or being for agricultural, fishing or
timber exploitation, and not for dwelling, industry or
commerce.
xxx xxx xxx
(Sentencia of May 8, 1944).
The respondents have failed to satisfy the above criterion. The land in
question cannot be legally classified as rural land since it is principally
used for residential rather than agricultural purposes.
From the respondent's complaint alone, the land is admittedly residential
having been described as follows:

A parcel of residential land with a superficial area of 1120 square

meters, more or less. Bounded on the North by Saturnino
Fernandez; on the East by Joaquin Mararac; on the South by
Camino Vecinal; and on the West by Ciriaco Manlincon. Its visible
limits are earth dikes and bamboo fences on all sides. Declared in
the name of Leonardo Mararac under Tax Declaration No. 17620
with an assessment value of P2,020.00 for the current year. Not
registered under Act 496 or under the Spanish Mortgage Law.

We, therefore, apply Section 2, Rule 129 of the Rules of Court which
provides:
Admissions made by the parties in the pleadings, or in the course
of the trial or proceedings do not require proof and cannot be
contradicted unless previously shown to have been made through
palpable mistake.

No such palpable mistake has been shown. Evidence militates against the
respondents' contention that the above description does not bind them.
The description was merely copied from the deed of sale between the
property's original owners and the petitioners when the self-same
document was presented by the respondents as their own evidence,
marked as Exhibit B, of the petitioner's Declaration of Property for Tax
Purposes which contains the assessor's official finding and classification
that the land covered by the declaration is residential.
The character of the locality, the streets, the neighboring and surrounding
properties give a clear picture of a residential area. Lots, including the
disputed property, with residential houses line the streets. There are
concrete and semi-concrete houses, a chapel, an elementary school, and a
public artesian well. Evidence consisting of photographs of the petitioners'
land show a one-storey nipa and bamboo house. Trees and plants abound
on the petitioner's property, yet, the same do not, by their mere presence
make the lot agricultural. As correctly held by the lower court: "... the
ordinary Philippine residence is traditionally profuse with trees and plants
for home sufficiency, esthetic appreciation, and ecological balance." In
fact, the lots neighboring the land in question are likewise planted with
trees and plants and some even have fishwells. Truly a residential home
lot is not converted into agricultural land by the simple reservation of a
plot for the cultivation of garden crops or the planting of bananas and
some fruit trees. Nor can an orchard or agricultural land be considered
residential simply because a portion thereof has been criss-crossed with
asphalt and cement roads with buildings here and there (Republic of the
Philippines v. Lara, 50 O.G. 5778). We have to apply the rule of reason
based on the specific facts of each case. The land, subject matter of the
petition, being primarily residential, cannot be considered as rural for
purposes of legal redemption under the law.
A further requisite laid down by the law to enable legal redemption of
adjoining lands is that both the land of the one exercising the right and the
adjacent property sought to be redeemed should be rural or destined for
agricultural exploitation. If either, is urban or both are urban, there is no
right of redemption. Again, the intention of the law in providing for this
right of redemption must be home in mind. If the land adjacent to that
which is sought to be redeemed is not agricultural, then the redemption is
in vain,-it does not answer the purpose behind the law. So that, if one of

the tenements is urban, the right of legal redemption allowed under this
article cannot be invoked (Cortes v. Flores, 47 Phil. 992; Sentencia, May
12, 1902; Baltazar v. Court of Appeals, 104 SCRA 619).
Undeniably, the land adjoining that which is sought to be redeemed is a
piece of residential land on which the respondents live. The stipulation of
facts of the parties recites:
1. Plaintiffs reside on a lot east of the land in question and
adjacent to it
(Emphasis supplied)
xxx xxx xxx

Again, this is deemed an admission by the respondents of the residential

character of their own land thus disqualifying them from rightfully
redeeming the property in question.
Thus, the circumstances under which legal redemption may be exercised
not having been found present in the case at bar, the respondents have no
right to enforce against the petitioners.
WHEREFORE, IN VIEW OF THE FOREGOING, the petition is hereby
GRANTED. The decision of the respondent Intermediate Appellate Court is
REVERSED and SET ASIDE. The judgment of the former Court of First
Instance is REINSTATED.
SO ORDERED.