WILLIAM

GOLANGCO
CONSTRUCTION
CORPORATION vs. PHILIPPINE COMMERCIAL
INTERNATIONAL BANK

the work. The CONTRACTOR shall leave the work in

perfect order upon completion and present the final
certificate to the ENGINEER promptly.

William Golangco Construction Corporation (WGCC) and

the Philippine Commercial International Bank (PCIB)
entered into a contract for the construction of the
extension of PCIB Tower II (denominated as PCIB Tower
II, Extension Project [project])2 on October 20, 1989. The
project included, among others, the application of a
granitite wash-out finish3 on the exterior walls of the
building.

If in the opinion of the OWNER and ENGINEER, the

CONTRACTOR has failed to act promptly in rectifying
any defect in the work which appears within the period
mentioned above, the OWNER and the ENGINEER may,
at their own discretion, using the Guarantee Bond amount
for corrections, have the work done by another contractor
at the expense of the CONTRACTOR or his bondsmen.

PCIB, with the concurrence of its consultant TCGI

Engineers (TCGI), accepted the turnover of the completed
work by WGCC in a letter dated June 1, 1992. To answer
for any defect arising within a period of one year, WGCC
submitted a guarantee bond dated July 1, 1992 issued by
Malayan Insurance Company, Inc. in compliance with the
construction contract.4
The controversy arose when portions of the granitite
wash-out finish of the exterior of the building began
peeling off and falling from the walls in 1993. WGCC
made minor repairs after PCIB requested it to rectify the
construction defects. In 1994, PCIB entered into another
contract with Brains and Brawn Construction and
Development Corporation to re-do the entire granitite
wash-out finish after WGCC manifested that it was "not in
a position to do the new finishing work," though it was
willing to share part of the cost. PCIB incurred expenses
amounting toP11,665,000 for the repair work.
PCIB filed a request for arbitration with the Construction
Industry Arbitration Commission (CIAC) for the
reimbursement of its expenses for the repairs made by
another contractor. It complained of WGCCs alleged
non-compliance with their contractual terms on materials
and workmanship. WGCC interposed a counterclaim
forP5,777,157.84 for material cost adjustment.
The CIAC declared WGCC liable for the construction
defects in the project.5 WGCC filed a petition for review
with the Court of Appeals (CA) which dismissed it for
lack of merit.6 Its motion for reconsideration was
similarly denied.7
In this petition for review on certiorari, WGCC raises this
main question of law: whether or not petitioner WGCC is
liable for defects in the granitite wash-out finish that
occurred after the lapse of the one-year defects liability
period provided in Art. XI of the construction contract.8
We rule in favor of WGCC.
The controversy pivots on a provision in the construction
contract referred to as the defects liability period:
ARTICLE XI GUARANTEE
Unless otherwise specified for specific works, and without
prejudice to the rights and causes of action of the OWNER
under Article 1723 of the Civil Code, the
CONTRACTOR hereby guarantees the work
stipulated in this Contract, and shall make good any
defect in materials and workmanship which [becomes]
evident within one (1) year after the final acceptance of

However, nothing in this section shall in any way affect

or relieve the CONTRACTORS responsibility to the
OWNER. On the completion of the [w]orks, the
CONTRACTOR shall clear away and remove from the
site all constructional plant, surplus materials, rubbish and
temporary works of every kind, and leave the whole of the
[s]ite and [w]orks clean and in a workmanlike condition to
the
satisfaction
of
the
ENGINEER
and
OWNER.9(emphasis ours)
Although both parties based their arguments on the same
stipulations, they reached conflicting conclusions. A
careful reading of the stipulations, however, leads us to
the conclusion that WGCCs arguments are more tenable.
Autonomy of contracts
The autonomous nature of contracts is enunciated in
Article 1306 of the Civil Code.
Article 1306. The contracting parties may establish such
stipulations, clauses, terms and conditions as they may
deem convenient, provided they are not contrary to law,
morals, good customs, public order, or public policy.
Obligations arising from contracts have the force of law
between the parties and should be complied with in good
faith.10 In characterizing the contract as having the force
of law between the parties, the law stresses the obligatory
nature of a binding and valid agreement.
The provision in the construction contract providing for a
defects liability period was not shown as contrary to law,
morals, good customs, pubic order or public policy. By the
nature of the obligation in such contract, the provision
limiting liability for defects and fixing specific guaranty
periods was not only fair and equitable; it was also
necessary. Without such limitation, the contractor would
be expected to make a perpetual guarantee on all materials
and workmanship.
The adoption of a one-year guarantee, as done by WGCC
and PCIB, is established usage in the Philippines for
private and government construction contracts.11 The
contract did not specify a different period for defects in
the granitite wash-out finish; hence, any defect therein
should have been brought to WGCCs attention within the
one-year defects liability period in the contract.
We cannot countenance an interpretation that undermines
a contractual stipulation freely and validly agreed upon.
The courts will not relieve a party from the effects of an
unwise or unfavorable contract freely entered into.12

[T]he inclusion in a written contract for a piece of work [,]

such as the one in question, of a provision defining a
warranty period against defects, is not uncommon. This
kind of a stipulation is of particular importance to the
contractor, for as a general rule, after the lapse of the
period agreed upon therein, he may no longer be held
accountable for whatever defects, deficiencies or
imperfections that may be discovered in the work
executed by him.13
Interpretation of contracts
To challenge the guarantee period provided in Article XI
of the contract, PCIB calls our attention to Article 62.2
which provides:
62.2 Unfulfilled Obligations
Notwithstanding the issue of the Defects Liability
Certificate[,] the Contractor and the Owner shall
remain liable for the fulfillment of any obligation[,]
incurred under the provisions of the Contract prior to
the issue of the Defects Liability Certificate[,] which
remains unperformed at the time such Defects
Liability Certificate is issued[. And] for the purpose of
determining the nature and extent of any such obligation,
the Contract shall be deemed to remain in force between
the parties of the Contract. (emphasis ours)
The defects in the granitite wash-out finish were not the
"obligation" contemplated in Article 62.2. It was not an
obligation that remained unperformed or unfulfilled at the
time the defects liability certificate was issued. The
alleged defects occurred more than a year from the final
acceptance by PCIB.
An examination of Article 1719 of the Civil Code is
enlightening:
Art. 1719. Acceptance of the work by the employer
relieves the contractor of liability for any defect in the
work, unless:
(1) The defect is hidden and the employer is not,
by his special knowledge, expected to recognize
the same; or
(2) The employer expressly reserves his rights
against the contractor by reason of the defect.
The lower courts conjectured that the peeling off of the
granitite wash-out finish was probably due to "defective
materials and workmanship." This they characterized as
hidden or latent defects. We, however, do not agree with
the conclusion that the alleged defects were hidden.
First, PCIBs team of experts14 (who were specifically
employed to detect such defects early on) supervised
WGCCs workmanship. Second, WGCC regularly
submitted progress reports and photographs. Third,
WGCC worked under fair and transparent circumstances.
PCIB had access to the site and it exercised reasonable
supervision over WGCCs work. Fourth, PCIB issued
several "punch lists" for WGCCs compliance before the
issuance of PCIBs final certificate of acceptance. Fifth,
PCIB supplied the materials for the granitite wash-out

finish. And finally, PCIBs team of experts gave their

concurrence to the turnover of the project.
The purpose of the defects liability period was precisely to
give PCIB additional, albeit limited, opportunity to oblige
WGCC to make good any defect, hidden or otherwise,
discovered within one year.
Contrary to the CAs conclusion, the first sentence of the
third paragraph of Article XI on guarantee previously
quoted did not operate as a blanket exception to the oneyear guarantee period under the first paragraph. Neither
did it modify, extend, nullify or supersede the categorical
terms of the defects liability period.
Under the circumstances, there were no hidden defects for
which WGCC could be held liable. Neither was there any
other defect for which PCIB made any express reservation
of its rights against WGCC. Indeed, the contract should
not be interpreted to favor the one who caused the
confusion, if any. The contract was prepared by TCGI for
PCIB.15
WHEREFORE, the petition is hereby GRANTED. The
decision of the Court of Appeals in CA-G.R. SP No.
41152 is ANNULED and SET ASIDE.

SPOUSES FLORENTINO T. MALLARI and AUREA

V. MALLARI, vs.PRUDENTIAL BANK (now BPI)

above those stipulated. Petitioners asked the court to

restrain respondent bank from proceeding with the
scheduled foreclosure sale.

The antecedent facts are as follows:

On December 11, 1984, petitioner Florentino T. Mallari
(Florentino) obtained from respondent Prudential BankTarlac Branch (respondent bank), a loan in the amount
of P300,000.00 as evidenced by Promissory Note (PN)
No. BD 84-055.3 Under the promissory note, the loan was
subject to an interest rate of 21% per annum (p.a.),
attorney's fees equivalent to 15% of the total amount due
but not less than P200.00 and, in case of default, a penalty
and collection charges of 12% p.a. of the total amount
due. The loan had a maturity date of January 10, 1985, but
was renewed up to February 17, 1985. Petitioner
Florentino executed a Deed of Assignment4 wherein he
authorized the respondent bank to pay his loan with his
time deposit with the latter in the amount ofP300,000.00.
On December 22, 1989, petitioners spouses Florentino and
Aurea Mallari (petitioners) obtained again from
respondent bank another loan of P1.7 million as evidenced
by PN No. BDS 606-895 with a maturity date of March
22, 1990. They stipulated that the loan will bear 23%
interest p.a., attorney's fees equivalent to 15% p.a. of the
total amount due, but not less than P200.00, and penalty
and collection charges of 12% p.a. Petitioners executed a
Deed of Real Estate Mortgage6 in favor of respondent
bank covering petitioners' property under Transfer
Certificate of Title (TCT) No. T-215175 of the Register of
Deeds of Tarlac to answer for the said loan.
Petitioners failed to settle their loan obligations with
respondent bank, thus, the latter, through its lawyer, sent a
demand letter to the former for them to pay their
obligations, which when computed up to January 31,
1992, amounted to P571,218.54 for PN No. BD 84-055
and P2,991,294.82 for PN No. BDS 606-89.
On February 25, 1992, respondent bank filed with the
Regional Trial Court (RTC) of Tarlac, a petition for the
extrajudicial foreclosure of petitioners' mortgaged
property for the satisfaction of the latter's obligation
ofP1,700,000.00 secured by such mortgage, thus, the
auction sale was set by the Provincial Sheriff on April 23,
1992.7
On April 10, 1992, respondent bank's Assistant Manager
sent petitioners two (2) separate Statements of Account as
of April 23, 1992, i.e., the loan of P300,000.00 was
increased to P594,043.54, while the P1,700,000.00 loan
was already P3,171,836.18.
On April 20, 1992, petitioners filed a complaint for
annulment of mortgage, deeds, injunction, preliminary
injunction, temporary restraining order and damages
claiming, among others, that: (1) the P300,000.00 loan
obligation should have been considered paid, because the
time deposit with the same amount under Certificate of
Time Deposit No. 284051 had already been assigned to
respondent bank; (2) respondent bank still added
theP300,000.00 loan to the P1.7 million loan obligation
for purposes of applying the proceeds of the auction sale;
and (3) they realized that there were onerous terms and
conditions imposed by respondent bank when it tried to
unilaterally increase the charges and interest over and

Respondent bank filed its Answer with counterclaim

arguing that: (1) the interest rates were clearly provided in
the promissory notes, which were used in computing for
interest charges; (2) as early as January 1986, petitioners'
time deposit was made to apply for the payment of interest
of their P300,000.00 loan; and (3) the statement of
account as of April 10, 1992 provided for a computation
of interest and penalty charges only from May 26, 1989,
since the proceeds of petitioners' time deposit was applied
to the payment of interest and penalty charges for the
preceding period. Respondent bank also claimed that
petitioners were fully apprised of the bank's terms and
conditions; and that the extrajudicial foreclosure was
sought for the satisfaction of the second loan in the
amount of P1.7 million covered by PN No. BDS 606-89
and the real estate mortgage, and not the P300,000.00 loan
covered by another PN No. 84-055.
In an Order8 dated November 10, 1992, the RTC denied
the Application for a Writ of Preliminary Injunction.
However, in petitioners' Supplemental Motion for
Issuance of a Restraining Order and/or Preliminary
Injunction to enjoin respondent bank and the Provincial
Sheriff from effecting or conducting the auction sale, the
RTC reversed itself and issued the restraining order in its
Order9 dated January 14, 1993.
Respondent bank filed its Motion to Lift Restraining
Order, which the RTC granted in its Order10 dated March
9, 1993. Respondent bank then proceeded with the
extrajudicial foreclosure of the mortgaged property. On
July 7, 1993, a Certificate of Sale was issued to
respondent bank being the highest bidder in the amount
ofP3,500,000.00.
Subsequently, respondent bank filed a Motion to Dismiss
Complaint11 for failure to prosecute action for
unreasonable length of time to which petitioners filed their
Opposition.12 On November 19, 1998, the RTC issued its
Order13 denying respondent bank's Motion to Dismiss
Complaint.
Trial thereafter ensued. Petitioner Florentino was
presented as the lone witness for the plaintiffs.
Subsequently, respondent bank filed a Demurrer to
Evidence.
On November 15, 1999, the RTC issued its
Order14 granting respondent's demurrer to evidence, the
dispositive portion of which reads:
WHEREFORE, this case is hereby ordered DISMISSED.
Considering there is no evidence of bad faith, the Court
need not order the plaintiffs to pay damages under the
general concept that there should be no premium on the
right to litigate.
NO COSTS. SO ORDERED.15
The RTC
petitioners
deposit in
respondent

found that as to the P300,000.00 loan,

had assigned petitioner Florentino's time
the amount of P300,000.00 in favor of
bank, which maturity coincided with

petitioners' loan maturity. Thus, if the loan was unpaid,

which was later extended to February 17, 1985,
respondent bank should had just applied the time deposit
to the loan. However, respondent bank did not, and
allowed the loan interest to accumulate reaching the
amount of P594,043.54 as of April 10, 1992, hence, the
amount of P292,600.00 as penalty charges was unjust and
without basis.
As to the P1.7 million loan which petitioners obtained
from respondent bank after the P300,000.00 loan, it had
reached the amount of P3,171,836.18 per Statement of
Account dated April 27, 1993, which was computed based
on the 23% interest rate and 12% penalty charge agreed
upon by the parties; and that contrary to petitioners' claim,
respondent bank did not add the P300,000.00 loan to
the P1.7 million loan obligation for purposes of applying
the proceeds of the auction sale.
The RTC found no legal basis for petitioners' claim that
since the total obligation was P1.7 million and respondent
bank's bid price was P3.5 million, the latter should return
to petitioners the difference of P1.8 million. It found that
since petitioners' obligation had reached P2,991,294.82 as
of January 31, 1992, but the certificate of sale was
executed by the sheriff only on July 7, 1993, after the
restraining order was lifted, the stipulated interest and
penalty charges from January 31, 1992 to July 7, 1993
added to the loan already amounted to P3.5 million as of
the auction sale.
The RTC found that the 23% interest rate p.a., which was
then the prevailing loan rate of interest could not be
considered unconscionable, since banks are not hospitable
or equitable institutions but are entities formed primarily
for profit. It also found that Article 1229 of the Civil Code
invoked by petitioners for the reduction of the interest was
not applicable, since petitioners had not paid any single
centavo of the P1.7 million loan which showed they had
not complied with any part of the obligation.
Petitioners appealed the RTC decision to the CA. A
Comment was filed by respondent bank and petitioners
filed their Reply thereto.
On June 17, 2010, the CA issued its assailed Decision, the
dispositive portion of which reads:
WHEREFORE, the instant appeal is hereby DENIED. The
Order dated November 15, 1999 issued by the Regional
Trial Court (RTC), Branch 64, Tarlac City, in Civil Case
No. 7550 is hereby AFFIRMED.16
The CA found that the time deposit of P300,000.00 was
equivalent only to the principal amount of the loan
ofP300,000.00 and would not be sufficient to cover the
interest, penalty, collection charges and attorney's fees
agreed upon, thus, in the Statement of Account dated
April 10, 1992, the outstanding balance of petitioners' loan
was P594,043.54. It also found not persuasive petitioners'
claim that the P300,000.00 loan was added to the P1.7
million loan. The CA, likewise, found that the interest
rates and penalty charges imposed were not
unconscionable and adopted in toto the findings of the
RTC on the matter.

Petitioners filed their Motion for Reconsideration, which

the CA denied in a Resolution dated July 20, 2011.
Hence, petitioners filed this petition for review arguing
that:
THE HON. COURT OF APPEALS ERRED IN
AFFIRMING THE ORDER OF THE RTC-BRANCH 64,
TARLAC CITY, DATED NOVEMBER 15, 1999,
DESPITE THE FACT THAT THE SAME IS
CONTRARY TO SETTLED JURISPRUDENCE ON
THE MATTER.17
The issue for resolution is whether the 23% p.a. interest
rate and the 12% p.a. penalty charge on
petitioners'P1,700,000.00 loan to which they agreed upon
is excessive or unconscionable under the circumstances.
Parties are free to enter into agreements and stipulate as to
the terms and conditions of their contract, but such
freedom is not absolute. As Article 1306 of the Civil Code
provides, "The contracting parties may establish such
stipulations, clauses, terms and conditions as they may
deem convenient, provided they are not contrary to law,
morals, good customs, public order, or public policy."
Hence, if the stipulations in the contract are valid, the
parties thereto are bound to comply with them, since such
contract is the law between the parties. In this case,
petitioners and respondent bank agreed upon on a 23%
p.a. interest rate on the P1.7 million loan. However,
petitioners now contend that the interest rate of 23% p.a.
imposed by respondent bank is excessive or
unconscionable, invoking our ruling in Medel v. Court of
Appeals,18 Toring v. Spouses Ganzon-Olan,19 and Chua v.
Timan.20
We are not persuaded.
In Medel v. Court of Appeals,21 we found the stipulated
interest rate of 66% p.a. or a 5.5% per month on
aP500,000.00 loan excessive, unconscionable and
exorbitant, hence, contrary to morals if not against the law
and declared such stipulation void. In Toring v. Spouses
Ganzon-Olan,22 the stipulated interest rates involved were
3% and 3.81% per month on a P10 million loan, which we
find under the circumstances excessive and reduced the
same to 1% per month. While in Chua v. Timan,23 where
the stipulated interest rates were 7% and 5% a month,
which are equivalent to 84% and 60% p.a., respectively,
we had reduced the same to 1% per month or 12% p.a. We
said that we need not unsettle the principle we had
affirmed in a plethora of cases that stipulated interest rates
of 3% per month and higher are excessive, unconscionable
and exorbitant, hence, the stipulation was void for being
contrary to morals.24
In this case, the interest rate agreed upon by the parties
was only 23% p.a., or less than 2% per month, which are
much lower than those interest rates agreed upon by the
parties in the above-mentioned cases. Thus, there is no
similarity of factual milieu for the application of those
cases.
We do not consider the interest rate of 23% p.a. agreed
upon by petitioners and respondent bank to be
unconscionable.

In Villanueva v. Court of Appeals,25 where the issue raised

was whether the 24% p.a. stipulated interest rate is
unreasonable under the circumstances, we answered in the
negative and held:
In Spouses Zacarias Bacolor and Catherine Bacolor v.
Banco Filipino Savings and Mortgage Bank, Dagupan
City Branch, this Court held that the interest rate of 24%
per annum on a loan of P244,000.00, agreed upon by the
parties, may not be considered as unconscionable and
excessive. As such, the Court ruled that the borrowers
cannot renege on their obligation to comply with what is
incumbent upon them under the contract of loan as the
said contract is the law between the parties and they are
bound by its stipulations.
Also, in Garcia v. Court of Appeals, this Court sustained
the agreement of the parties to a 24% per annum interest
on an P8,649,250.00 loan finding the same to be
reasonable and clearly evidenced by the amended credit
line agreement entered into by the parties as well as two
promissory notes executed by the borrower in favor of the
lender.
Based on the above jurisprudence, the Court finds that the
24% per annum interest rate, provided for in the subject
mortgage contracts for a loan of P225,000.00, may not be
considered unconscionable. Moreover, considering that
the mortgage agreement was freely entered into by both
parties, the same is the law between them and they are
bound to comply with the provisions contained therein.26
Clearly, jurisprudence establish that the 24% p.a.
stipulated interest rate was not considered unconscionable,
thus, the 23% p.a. interest rate imposed on petitioners'
loan in this case can by no means be considered excessive
or unconscionable.
We also do not find the stipulated 12% p.a. penalty charge
excessive or unconscionable.
In Ruiz v. CA,27 we held:
The 1% surcharge on the principal loan for every month of
default is valid.1wphi1 This surcharge or penalty
stipulated in a loan agreement in case of default partakes
of the nature of liquidated damages under Art. 2227 of the
New Civil Code, and is separate and distinct from interest
payment. Also referred to as a penalty clause, it is
expressly recognized by law. It is an accessory
undertaking to assume greater liability on the part of an
obligor in case of breach of an obligation. The obligor
would then be bound to pay the stipulated amount of
indemnity without the necessity of proof on the existence
and on the measure of damages caused by the breach. x x
x28 And in Development Bank of the Philippines v. Family
Foods Manufacturing Co., Ltd.,29 we held that:
x x x The enforcement of the penalty can be demanded by
the creditor only when the non-performance is due to the
fault or fraud of the debtor. The non-performance gives
rise to the presumption of fault; in order to avoid the
payment of the penalty, the debtor has the burden of
proving an excuse - the failure of the performance was due
to either force majeure or the acts of the creditor himself.30

Here, petitioners defaulted in the payment of their loan

obligation with respondent bank and their contract
provided for the payment of 12% p.a. penalty charge, and
since there was no showing that petitioners' failure to
perform their obligation was due to force majeure or to
respondent bank's acts, petitioners cannot now back out on
their obligation to pay the penalty charge. A contract is the
law between the parties and they are bound by the
stipulations therein.
WHEREFORE, the petition for review is DENIED. The
Decision dated June 17, 2010 and the Resolution dated
July 20, 2011 of the Court of Appeals are hereby
AFFIRMED.

HEIRS OF MANUEL UY EK LIONG, represented by

BELEN
LIM
VDA.
DE
UY, Petitioners,
vs.
MAURICIA MEER CASTILLO, HEIRS OF
BUENAFLOR C. UMALI, represented by NANCY
UMALI, VICTORIA H. CASTILLO, BERTILLA C.
RADA, MARIETTA C. CAVANEZ, LEOVINA C.
JALBUENA and PHILIP M. CASTILLO

Uy Ek Liong who, as financier, agreed to underwrite the

litigation expenses entailed by the case. In exchange, it
was stipulated in the notarized Agreement that, in the
event of a favorable decision in Civil Case No. 8085, Atty.
Zepeda and Manuel would be entitled to "a share of forty
(40%) percent of all the realties and/or monetary benefits,
gratuities or damages" which may be adjudicated in favor
of respondents.6

Assailed in this Petition for Review on Certiorari filed

pursuant to Rule 45 of the Rules of Court is the
Decision1dated 23 January 2007 rendered by the Fifteenth
Division of the Court of Appeals in CA-G.R. CV No.
84687,2 the dispositive portion of which states:

On the same date, respondents and Buenaflor entered into

another notarized agreement denominated as a Kasunduan
whereby they agreed to sell their remaining sixty (60%)
percent share in the subject parcels in favor of Manuel for
the sum of P180,000.00. The parties stipulated that
Manuel would pay a downpayment in the sum
ofP1,000.00 upon the execution of the Kasunduan and that
respondents and Buenaflor would retain and remain the
owners of a 1,750-square meter portion of said real
properties. It was likewise agreed that any party violating
the Kasunduan would pay the aggrieved party a penalty
fixed in the sum of P50,000.00, together with the
attorneys fees and litigation expenses incurred should a
case be subsequently filed in court. The parties likewise
agreed to further enter into such other stipulations as
would be necessary to ensure that the sale would push
through and/or in the event of illegality or impossibility of
any part of the Kasunduan.7

WHEREFORE, premises considered, the assailed January

27, 2005 Decision of the Regional Trial Court of Lucena
City, Branch 59, in Civil Case No. 93-176, is hereby
REVERSED and SET ASIDE and a new one entered
declaring the AGREEMENT and the KASUNDUAN void
ab initio for being contrary to law and public policy,
without prejudice to the attorneys filing a proper action
for collection of reasonable attorneys fees based on
quantum meruit and without prejudice also to
administrative charges being filed against counsel for
counsels openly entering into such an illegal
AGREEMENT in violation of the Canons of Professional
Responsibility which action may be instituted with the
Supreme Court which has exclusive jurisdiction to impose
such penalties on members of the bar.
No pronouncement as to costs.
SO ORDERED.3 (Italics and Underscore Ours)
The Facts
Alongside her husband, Felipe Castillo, respondent
Mauricia Meer Castillo was the owner of four parcels of
land with an aggregate area of 53,307 square meters,
situated in Silangan Mayao, Lucena City and registered in
their names under Transfer Certificate of Title (TCT) Nos.
T-42104, T-32227, T-31752 and T-42103. With the death
of Felipe, a deed of extrajudicial partition over his estate
was executed by his heirs, namely, Mauricia, Buenaflor
Umali and respondents Victoria Castillo, Bertilla Rada,
Marietta Cavanez, Leovina Jalbuena and Philip Castillo.
Utilized as security for the payment of a tractor purchased
by Mauricias nephew, Santiago Rivera, from Bormaheco,
Inc., it appears, however, that the subject properties were
subsequently sold at a public auction where Insurance
Corporation of the Philippines (ICP) tendered the highest
bid. Having consolidated its title, ICP likewise sold said
parcels in favor of Philippine Machinery Parts
Manufacturing Co., Inc. (PMPMCI) which, in turn, caused
the same to be titled in its name.4
On 29 September 1976, respondents and Buenaflor
instituted Civil Case No. 8085 before the then Court of
First Instance (CFI) of Quezon, for the purpose of seeking
the annulment of the transactions and/or proceedings
involving the subject parcels, as well as the TCTs
procured by PMPMCI.5 Encountering financial difficulties
in the prosecution of Civil Case No. 8085, respondents
and Buenaflor entered into an Agreement dated 20
September 1978 whereby they procured the legal services
of Atty. Edmundo Zepeda and the assistance of Manuel

With his death on 19 August 1989,8 Manuel was survived

by petitioners, Heirs of Manuel Uy Ek Liong, who were
later represented in the negotiations regarding the subject
parcels and in this suit by petitioner BelenLim Vda. de
Uy. The record also shows that the proceedings in Civil
Case No. 8085 culminated in this Courts rendition of a 13
September 1990 Decision in G.R. No. 895619 in favor of
respondents and Buenaflor.10 Subsequent to the finality of
the Courts Decision,11 it appears that the subject parcels
were subdivided in accordance with the Agreement, with
sixty (60%) percent thereof consisting of 31,983 square
meters equally apportioned among and registered in the
names of respondents and Buenaflor under TCT Nos. T72027, T-72028, T-72029, T-72030, T-72031, T-72032
and T-72033.12 Consisting of 21,324 square meters, the
remaining forty (40%) percent was, in turn, registered in
the names of petitioners and Atty. Zepeda under TCT No.
T-72026.13
Supposedly acting on the advice of Atty. Zepeda,
respondents wrote petitioners a letter dated 22 March
1993, essentially informing petitioners that respondents
were willing to sell their sixty (60%) percent share in the
subject parcels for the consideration of P500.00 per square
meter.14 Insisting on the price agreed upon in the
Kasunduan, however, petitioners sent a letter dated 19
May 1993, requesting respondents to execute within 15
days from notice the necessary Deed of Absolute Sale
over their 60% share as aforesaid, excluding the 1,750square meter portion specified in their agreement with
Manuel. Informed that petitioners were ready to pay the
remainingP179,000.00
balance
of
the
agreed
price,15 respondents wrote a 28 May 1993 reply,
reminding the former of their purported refusal of earlier
offers to sell the shares of Leovina and of Buenaflor who
had, in the meantime, died.16In a letter dated 1 June 1993,
respondents also called petitioners attention to the fact,
among others, that their right to ask for an additional

consideration for the sale was recognized under the

Kasunduan.17

WHEREFORE, premises considered, the Court finds for

the petitioners and hereby:

On 6 October 1993, petitioners commenced the instant

suit with the filing of their complaint for specific
performance and damages against the respondents and
respondent Heirs of Buenaflor, as then represented by
Menardo Umali. Faulting respondents with unjustified
refusal to comply with their obligation under the
Kasunduan, petitioners prayed that the former be ordered
to execute the necessary Deed of Absolute Sale over their
shares in the subject parcels, with indemnities for moral
and exemplary damages, as well as attorneys fees,
litigation expenses and the costs of the suit.18 Served with
summons, respondents filed their Answer with
Counterclaim and Motion to File Third Party Complaint
on 3 December 1993. Maintaining that the Agreement and
the Kasunduan were illegal for being unconscionable and
contrary to public policy, respondents averred that Atty.
Zepeda was an indispensable party to the case. Together
with the dismissal of the complaint and the annulment of
said contracts and TCT No. T-72026, respondents sought
the grant of their counterclaims for moral and exemplary
damages, as well as attorneys fees and litigation
expenses.19

1. Orders the respondents to execute and deliver a

Deed of Conveyance in favor of the petitioners
covering the 60% of the properties formerly
covered by Transfer Certificates of Title Nos. T3175, 42104, T-42103, T-32227 and T-42104
which are now covered by Transfer Certificates of
Title Nos. T-72027, T-72028, T-72029, T-72030,
T-72031, T-72032, T-72033 and T-72026, all of
the Registry of Deeds of Lucena City, for and in
consideration of the amount of P180,000.00 in
accordance with the provisions of the
KASUNDUAN, and

The issues thereby joined, the Regional Trial Court

(RTC), Branch 54, Lucena City, proveeded to conduct the
mandatory preliminary conference in the case.20 After
initially granting respondents motion to file a third party
complaint against Atty. Zepeda,21 the RTC, upon
petitioners motion for reconsideration,22 went on to issue
the 18 July 1997 Order disallowing the filing of said
pleading on the ground that the validity of the Agreement
and the cause of action against Atty. Zepeda, whose
whereabouts were then unknown, would be better threshed
out in a separate action.23 The denial24 of their motion for
reconsideration of the foregoing order25 prompted
respondents to file a notice of appeal26 which was,
however, denied due course by the RTC on the ground
that the orders sought to be appealed were nonappealable.27 On 14 December 1997, Menardo died28 and
was substituted by his daughter Nancy as representative of
respondent Heirs of Buenaflor.29
In the ensuing trial of the case on the merits, petitioners
called to the witness stand Samuel Lim Uy Ek
Liong30whose testimony was refuted by Philip31 and
Leovina32 during the presentation of the defense evidence.
On 27 January 2005, the RTC rendered a decision finding
the Kasunduan valid and binding between respondents and
petitioners who had the right to demand its fulfillment as
Manuels successors-in-interest. Brushing aside Philips
testimony that respondents were forced to sign the
Kasunduan, the RTC ruled that said contract became
effective upon the finality of this Courts 13 September
1990 Decision in G.R. No. 89561 which served as a
suspensive condition therefor. Having benefited from the
legal services rendered by Atty. Zepeda and the financial
assistance extended by Manuel, respondents were also
declared estopped from questioning the validity of the
Agreement, Kasunduan and TCT No. T-72026. With the
Kasunduan upheld as the law between the contracting
parties and their privies,33 the RTC disposed of the case in
the following wise:

2. Orders the petitioners to pay and deliver to the

respondents upon the latters execution of the
Deed of Conveyance mentioned in the preceding
paragraph,
the
amount
of P179,000.00
representing the balance of the purchase price as
provided in the KASUNDUAN, and
3. Orders the respondents to pay the petitioners
the following amounts:
a). P50,000.00 as and for moral damages;
b). P50,000.00 as and for exemplary
damages; and
c). P50,000.00 as and for attorneys fees.
and to pay the costs.
SO ORDERED.34
Dissatisfied
with
the
RTCs
decision,
both
petitioners35 and
respondents
perfected
their
appeals36 which were docketed before the CA as CA-G.R.
CV No. 84687. While petitioners prayed for the increase
of the monetary awards adjudicated a quo, as well as the
further grant of liquidated damages in their
favor,37 respondents sought the complete reversal of the
appealed decision on the ground that the Agreement and
the Kasunduan were null and void.38 On 23 January 2007,
the CA rendered the herein assailed decision, setting aside
the RTCs decision, upon the following findings and
conclusions, to wit: (a) the Agreement and Kasunduan are
byproducts of the partnership between Atty. Zepeda and
Manuel who, as a non-lawyer, was not authorized to
practice law; (b) the Agreement is void under Article 1491
(5) of the Civil Code of the Philippines which prohibits
lawyers from acquiring properties which are the objects of
the litigation in which they have taken part; (c) jointly
designed to completely deprive respondents of the subject
parcels, the Agreement and the Kasunduan are invalid and
unconscionable; and (d) without prejudice to his liability
for violation of the Canons of Professional Responsibility,
Atty. Zepeda can file an action to collect attorneys fees
based on quantum meruit.39
The Issue
Petitioners seek the reversal of the CAs decision on the
following issue:

WHETHER OR NOT THE HONORABLE COURT OF

APPEALS, FIFTEENTH DIVISION, COMITTED A
REVERSIBLE ERROR WHEN IT REVERSED AND
SET ASIDE THE DECISION OF THE RTC BRANCH
59, LUCENA CITY, IN CIVIL CASE NO. 93-176
DECLARING THE AGREEMENT AND KASUNDUAN
VOID AB INITIO FOR BEING CONTRARY TO LAW
AND PUBLIC POLICY FOR BEING VIOLATIVE OF
ART. 1491 OF THE NEW CIVIL CODE AND THE
CANONS OF PROFESSIONAL RESPONSIBILITY.40
The Courts Ruling
We find the petition impressed with partial merit.
At the outset, it bears pointing out that the complaint for
specific performance filed before the RTC sought only the
enforcement of petitioners rights and respondents
obligation under the Kasunduan. Although the answer
filed by respondents also assailed the validity of the
Agreement and TCT No. T-72026, the record shows that
the RTC, in its order dated 18 July 1997, disallowed the
filing of a third-party complaint against Atty. Zepeda on
the ground that the causes of action in respect to said
contract and title would be better threshed out in a
separate action. As Atty. Zepedas whereabouts were then
unknown, the RTC also ruled that, far from contributing to
the expeditious settlement of the case, the grant of
respondents motion to file a third-party complaint would
only delay the proceedings in the case.41 With the 1
October 1998 denial of their motion for reconsideration of
the foregoing order, respondents subsequently filed a
notice of appeal which was, however, denied due course
on the ground that the orders denying their motion to file a
third-party complaint and their motion for reconsideration
were interlocutory and non-appealable.42
Absent a showing that the RTCs ruling on the foregoing
issues was reversed and set aside, we find that the CA
reversibly erred in ruling on the validity of the Agreement
which respondents executed not only with petitioners
predecessor-in-interest, Manuel, but also with Atty.
Zepeda. Since it is generally accepted that no man shall be
affected by any proceeding to which he is a stranger,43 the
rule is settled that a court must first acquire jurisdiction
over a party either through valid service of summons or
voluntary appearance for the latter to be bound by a
court decision.44 The fact that Atty. Zepeda was not
properly impleaded in the suit and given a chance to
present his side of the controversy before the RTC should
have dissuaded the CA from invalidating the Agreement
and holding that attorneys fees should, instead, be
computed on a quantum meruit basis. Admittedly, Article
1491 (5)45 of the Civil Code prohibits lawyers from
acquiring by purchase or assignment the property or rights
involved which are the object of the litigation in which
they intervene by virtue of their profession. The CA lost
sight of the fact, however, that the prohibition applies only
during the pendency of the suit46 and generally does not
cover contracts for contingent fees where the transfer
takes effect only after the finality of a favorable
judgment.47
Although executed on the same day, it cannot likewise be
gainsaid that the Agreement and the Kasunduan are
independent contracts, with parties, objects and causes
different from that of the other. Defined as a meeting of

the minds between two persons whereby one binds

himself, with respect to the other to give something or to
render some service,48 a contract requires the concurrence
of the following requisites: (a) consent of the contracting
parties; (b) object certain which is the subject matter of the
contract; and, (c) cause of the obligation which is
established.49 Executed in exchange for the legal services
of Atty. Zepeda and the financial assistance to be extended
by Manuel, the Agreement concerned respondents
transfer of 40% of the avails of the suit, in the event of a
favorable judgment in Civil Case No. 8085. While
concededly subject to the same suspensive condition, the
Kasunduan was, in contrast, concluded by respondents
with Manuel alone, for the purpose of selling in favor of
the latter 60% of their share in the subject parcels for the
agreed price of P180,000.00. Given these clear
distinctions, petitioners correctly argue that the CA
reversibly erred in not determining the validity of the
Kasunduan independent from that of the Agreement.
Viewed in the light of the autonomous nature of contracts
enunciated under Article 130650 of the Civil Code, on the
other hand, we find that the Kasunduan was correctly
found by the RTC to be a valid and binding contract
between the parties. Already partially executed with
respondents receipt of P1,000.00 from Manuel upon the
execution thereof, the Kasunduan simply concerned the
sale of the formers 60% share in the subject parcel, less
the 1,750-square meter portion to be retained, for the
agreed consideration of P180,000.00. As a notarized
document that carries the evidentiary weight conferred
upon it with respect to its due execution,51 the Kasunduan
was shown to have been signed by respondents with full
knowledge of its contents, as may be gleaned from the
testimonies elicited from Philip52 and Leovina.53
Although Philip had repeatedly claimed that respondents
had been forced to sign the Agreement and the
Kasunduan, his testimony does not show such vitiation of
consent as would warrant the avoidance of the contract.
He simply meant that respondents felt constrained to
accede to the stipulations insisted upon by Atty. Zepeda
and Manuel who were not otherwise willing to push
through with said contracts.54
At any rate, our perusal of the record shows that
respondents main objection to the enforcement of the
Kasunduan was the perceived inadequacy of
the P180,000.00 which the parties had fixed as
consideration for 60% of the subject parcels. Rather than
claiming vitiation of their consent in the answer they filed
a quo, respondents, in fact, distinctly averred that the
Kasunduan was tantamount to unjust enrichment and "a
clear source of speculative profit" at their expense since
their remaining share in said properties had "a current
market value of P9,594,900.00, more or less."55 In their 22
March 1993 letter to petitioners, respondents also cited
prices then prevailing for the sale of properties in the area
and offered to sell their 60% share for the price of P500.00
per square meter56 or a total of P15,991,500.00. In
response to petitioners insistence on the price originally
agreed upon by the parties,57 respondents even invoked the
last paragraph58 of the Kasunduan to the effect that the
parties agreed to enter into such other stipulations as
would be necessary to ensure the fruition of the sale.59

In the absence of any showing, however, that the parties

were able to agree on new stipulations that would modify
their agreement, we find that petitioners and respondents
are bound by the original terms embodied in the
Kasunduan. Obligations arising from contracts, after all,
have the force of law between the contracting parties60who
are expected to abide in good faith with their contractual
commitments, not weasel out of them.61 Moreover, when
the terms of the contract are clear and leave no doubt as to
the intention of the contracting parties, the rule is settled
that the literal meaning of its stipulations should govern.
In such cases, courts have no authority to alter a contract
by construction or to make a new contract for the parties.
Since their duty is confined to the interpretation of the one
which the parties have made for themselves without
regard to its wisdom or folly, it has been ruled that courts
cannot supply material stipulations or read into the
contract words it does not contain.62Indeed, courts will not
relieve a party from the adverse effects of an unwise or
unfavorable contract freely entered into.63
Our perusal of the Kasunduan also shows that it contains a
penal clause64 which provides that a party who violates
any of its provisions shall be liable to pay the aggrieved
party a penalty fixed at P50,000.00, together with the
attorneys fees and litigation expenses incurred by the
latter should judicial resolution of the matter becomes
necessary.65 An accessory undertaking to assume greater
liability on the part of the obligor in case of breach of an
obligation, the foregoing stipulation is a penal clause
which serves to strengthen the coercive force of the
obligation and provides for liquidated damages for such
breach.66 "The obligor would then be bound to pay the
stipulated indemnity without the necessity of proof of the
existence and the measure of damages caused by the
breach."67 Articles 1226 and 1227 of the Civil Code state:
Art. 1226. In obligations with a penal clause, the penalty
shall substitute the indemnity for damages and the
payment of interests in case of noncompliance, if there is
no stipulation to the contrary. Nevertheless, damages shall
be paid if the obligor refuses to pay the penalty or is guilty
of fraud in the fulfillment of the obligation.
The penalty may be enforced only when it is demandable
in accordance with the provisions of this Code.
Art. 1227. The debtor cannot exempt himself from the
performance of the obligation by paying the penalty, save
in the case where this right has been expressly reserved for
him. Neither can the creditor demand the fulfillment of the
obligation and the satisfaction of the penalty at the same
time, unless this right has been clearly granted to him.
However, if after the creditor has decided to require the
fulfillment of the obligation, the performance thereof
should become impossible without his fault, the penalty
may be enforced."
In the absence of a showing that they expressly reserved
the right to pay the penalty in lieu of the performance of
their obligation under the Kasunduan, respondents were
correctly ordered by the RTC to execute and deliver a
deed of conveyance over their 60% share in the subject
parcels in favor of petitiOners. Considering that the
Kasunduan stipulated that respondents would retain a
portion of their share consisting of 1,750 square meters,
said disposition should, however, be modified to give full

effect to the intention of the contracting parties. Since the

parties also fixed liquidated damages in the sum
of P50,000.00 in case of breach, we find that said amount
should suffice as petitioners' indemnity, without further
need of compensation for moral and exemplary damages.
In obligations with a penal clause, the penalty generally
substitutes the indemnity for damages and the payment of
interests
in
case
of
non-compliance.68 Usually
incorporated to create an effective deterrent against breach
of the obligation by making the consequences of such
breach as onerous as it may be possible, the rule is settled
that a penal clause is not limited to actual and
compensatory damages69
The RTC's award of attorney's fees in the sum
of P50,000.00 is, however, proper.1wphi1 Aside from the
fact that the penal clause included a liability for said
award in the event of litigation over a breach of the
Kasunduan, petitioners were able to prove that they
incurred said sum in engaging the services of their lawyer
to pursue their rights and protect their interests.70
WHEREFORE, premises considered, the Court of
Appeals' assailed 23 January 2007 Decision is
REVERSED and SET ASIDE. In lieu thereof, the RTC's
27 January 2005 Decision is REINSTATED subject to the
following MODIFICATIONS: (a) the exclusion of a
1,750-square meter portion from the 60% share in the
subject parcel respondents were ordered to convey in
favor of petitioners; and (b) the deletion of the awards of
moral and exemplary damages. The rights of the parties
under the Agreement may be determined in a separate
litigation.

PHILIPPINE
NATIONAL
BANK, petitioner,
vs. CA, REMEDIOS JAYME-FERNANDEZ and
AMADO FERNANDEZ
Petitioner bank seeks the review of the decision, dated
October 15, 1992, of the Court of Appeals 1 in CA G.R.
CV No. 27195, the dispositive portion of which reads as
follows:
WHEREFORE, the judgment appealed from is hereby
SET ASIDE and a new one is entered ordering defendantappellee PNB to re-apply the interest rate of 12% per
annum to plaintiffs-appellants' (referring to herein private
respondents) indebtedness and to accordingly take the
appropriate charges from plaintiffs-appellants' (private
respondents') payment of P81,000.00 made on December
26, 1985. Any balance on the indebtedness should,
likewise, be charged interest at the rate of 12% per annum.
SO ORDERED.
The parties do not dispute the facts as laid down by
respondent court in its impugned decision, viz.:
On April 7, 1982, (private respondents) as owners of a
NACIDA-registered enterprise, obtained a loan under the
Cottage Industry Guaranty Loan Fund (CIGLF) from the
Philippine National Bank (PNB) in the amount of Fifty
Thousand (P50,000.00) Pesos, as evidenced by a Credit
Agreement. Under the Promissory Note covering the loan,
the loan was to be amortized over a period of three (3)
years to end on March 29, 1985, at twelve (12%) percent
interest annually.
To secure the loan, (private respondents) executed a Real
Estate Mortgage over a 1.5542-hectare parcel of
unregistered agricultural land located at Cambang-ug,
Toledo City, which was appraised by the PNB at
P1,062.52 and given a loan value of P531.26 by the Bank.
In addition, (private respondents) executed a Chattel
Mortgage over a thermo plastic-forming machine, which
had an appraisal value of P8,800 and a loan value of
P4,400.00.
The Credit Agreement provided inter alia, that
(a) The BANK reserves the right to increase the interest
rate within the limits allowed by law at any time
depending on whatever policy it may adopt in the
future; Provided, that the interest rate on this
accommodation shall be correspondingly decreased in the
event that the applicable maximum interest is reduced by
law or by the Monetary Board. In either case, the
adjustment in the interest rate agreed upon shall take
effect on the effectivity date of the increase or decrease in
the maximum interest rate.
The Promissory Note, in turn, authorized the PNB to raise
the rate of interest, at any time without notice, beyond the
stipulated rate of 12% but only "within the limits allowed
by law."
The Real Estate Mortgage contract likewise provided that

(k) INCREASE OF INTEREST RATE: The rate of

interest charged on the obligation secured by this

mortgage as well as the interest on the amount which may

have been advanced by the MORTGAGE, in accordance
with the provision hereof, shall be subject during the life
of this contract to such an increase within the rate allowed
by law, as the Board of Directors of the MORTGAGEE
may prescribe for its debtors.
On February 17, 1983, (private respondents) were granted
an additional NACIDA loan of Fifty Thousand
(P50,000.00) Pesos by the PNB, for which (private
respondents) executed another Promissory Note, which
was to mature on April 1, 1985. Other than the date of
maturity, the second promissory note contained the same
terms and stipulations as the previous note. The parties
likewise executed a new Credit Agreement, changing the
amount of the loan from P50,000.00 to P100,000.00, but
otherwise preserving the stipulations contained in the
original agreement.
As additional security for the loan, (private respondents)
constituted another real estate mortgage over 2 parcels of
registered land, with a combined area of 311 square
meters, located at Guadalupe, Cebu City. The land, upon
which several buildings are standing, was appraised by the
PNB to have a value of P40,000.00 and a loan value of
P28,000.00.
In a letter dated August 1, 1984, the PNB informed
(private respondents) "that the interest rate of your CIGLF
loan account with us is now 25% per annum plus a
penalty of 6% per annum on past dues." The PNB further
increased this interest rate to 30% on October 15, 1984;
and to 42% on October 25, 1984.
The records show that as of December 1985, (private
respondents) had an outstanding principal account of
P81,000.00 of which P18,523.14 was credited to the
principal, P57,488.89 to the interest, and the rest to
penalty and other charges. Thus, as of said date, the
unpaid principal obligation of (private respondent)
amounted to P62,830.32.
Thereafter, (private respondents) exerted efforts to get the
PNB to re-adopt the 12% interest and to condone the
present interest and penalties due; but to no
avail. 2 (Citations omitted.)
On December 15, 1987, private respondents filed a suit for
specific performance against petitioner PNB and the
NACIDA. It was docketed as Civil Case No. CEB-5610,
and raffled to the Regional Trial Court, 7th Judicial
Region, Cebu City, Br. 7. 3 Private respondents prayed the
trial court to order:
1. The PNB and NACIDA to issue in (private
respondents') favor, a release of mortgage;
2. The PNB to pay pecuniary consequential damages for
the destruction of (private respondents') enterprise;
3. The PNB to pay moral and exemplary damages as well
as the costs of suit; and
4. Granting (private respondents') such other relief as may
be found just and equitable in the premises. 4

On February 26, 1990, the trial court dismissed private

respondents' complaint in Civil Case No. CEB-5610. On
October 15, 1992, the Court of Appeals reversed the
dismissal with respect to petitioner bank, and disallowed
the increases in interest rates.
Petitioner bank now contends that "respondent Court of
Appeals committed grave error when it ruled (1) that the
increase in interest rates are unauthorized; (2) that the
Credit Agreement and the Promissory Notes are not the
law between the parties; (3) that CB Circular No. 773 and
CB
Circular
No. 905 are not applicable; and (4) that private
respondents are not estopped from questioning the
increase of rate interest made by petitioner." 5

charges, on any loan, or forbearance of any money, goods

or credits, regardless of maturity and whether secured or
unsecured, shall not be subject to any ceiling prescribed
under or pursuant to the Usury Law, as amended.
P.D. No. 1684 and C.B. Circular No. 905 no more than
allow contracting parties to stipulate freely regarding any
subsequent adjustment in the interest rate that shall accrue
on a loan or forbearance of money, goods or credits. In
fine, they can agree to adjust, upward or downward, the
interest previously stipulated. However, contrary to the
stubborn insistence of petitioner bank, the said law and
circular did not authorize either party to unilaterally raise
the interest rate without the other's consent.

In making the unilateral increases in interest rates,

petitioner bank relied on the escalation clause contained in
their credit agreement which provides, as follows:

It is basic that there can be no contract in the true sense in

the absence of the element of agreement, or of mutual
assent of the parties. If this assent is wanting on the part of
the one who contracts, his act has no more efficacy than if
it had been done under duress or by a person of unsound
mind. 6

The Bank reserves the right to increase the interest rate

within the limits allowed by law at any time depending on
whatever policy it may adopt in the future and provided,
that, the interest rate on this accommodation shall be
correspondingly decreased in the event that the applicable
maximum interest rate is reduced by law or by the
Monetary Board. In either case, the adjustment in the
interest rate agreed upon shall take effect on the effectivity
date of the increase or decrease in maximum interest rate.

Similarly, contract changes must be made with the consent

of the contracting parties. The minds of all the parties
must meet as to the proposed modification, especially
when it affects an important aspect of the agreement. In
the case of loan contracts, it cannot be gainsaid that the
rate of interest is always a vital component, for it can
make or break a capital venture. Thus, any change must
be mutually agreed upon, otherwise, it is bereft of any
binding effect.

This clause is authorized by Section 2 of Presidential

Decree
(P.D.)
No. 1684 which further amended Act No. 2655 ("The
Usury Law"), as amended, thus:

We cannot countenance petitioner bank's posturing that

the escalation clause at bench gives it unbridled right
tounilaterally upwardly adjust the interest on private
respondents' loan. That would completely take away from
private respondents the right to assent to an important
modification in their agreement, and would negate the
element of mutuality in contracts. In Philippine National
Bank v. Court of Appeals, et al., 196 SCRA 536, 544-545
(1991) we held

The petition is bereft of merit.

Section 2. The same Act is hereby amended by adding a

new section after Section 7, to read as follows:
Sec. 7-a. Parties to an agreement pertaining to a loan or
forbearance of money, goods or credits may stipulate that
the rate of interest agreed upon may be increased in the
event that the applicable maximum rate of interest is
increased by law or by the Monetary Board; Provided,
That such stipulation shall be valid only if there is also a
stipulation in the agreement that the rate of interest agreed
upon shall be reduced in the event that the applicable
maximum rate of interest is reduced by law or by the
Monetary Board; Provided further, That the adjustment in
the rate of interest agreed upon shall take effect on or after
the effectivity of the increase or decrease in the maximum
rate of interest.
Section 1 of P.D. No. 1684 also empowered the Central
Bank's Monetary Board to prescribe the maximum rates of
interest for loans and certain forbearances. Pursuant to
such authority, the Monetary Board issued Central Bank
(C.B.) Circular No. 905, series of 1982, Section 5 of
which provides:
Sec. 5. Section 1303 of the Manual of Regulations (for
Banks and Other Financial Intermediaries) is hereby
amended to read as follows:
Sec. 1303. Interest and Other Charges. The rate of
interest, including commissions, premiums, fees and other

. . . The unilateral action of the PNB in increasing the

interest rate on the private respondent's loan violated the
mutuality of contracts ordained in Article 1308 of the
Civil Code:
Art. 1308. The contract must bind both contracting parties;
its validity or compliance cannot be left to the will of one
of them.
In order that obligations arising from contracts may have
the force or law between the parties, there must
be mutuality between the parties based on their essential
equality. A contract containing a condition which makes
its fulfillment dependent exclusively upon the
uncontrolled will of one of the contracting parties, is void .
.
.
.
Hence,
even
assuming
that
the . . . loan agreement between the PNB and the private
respondent gave the PNB a license (although in fact there
was none) to increase the interest rate at will during the
term of the loan, that license would have been null and
void for being violative of the principle of mutuality
essential in contracts. It would have invested the loan
agreement with the character of a contract of adhesion,
where the parties do not bargain on equal footing, the
weaker party's (the debtor) participation being reduced to

the alternative "to take it or leave it" . . . . Such a contract

is a veritable trap for the weaker party whom the courts of
justice must protect against abuse and imposition.
(Citation omitted.)
Private respondents are not also estopped from assailing
the unilateral increases in interest rate made by petitioner
bank. No one receiving a proposal to change a contract to
which he is a party, is obliged to answer the proposal, and
his silence per se cannot be construed as an
acceptance. 7 In the case at bench, the circumstances do
not show that private respondents implicitly agreed to the
proposed increases in interest rate which by any standard
were too sudden and too stiff.
IN VIEW THEREOF, the instant petition is DENIED for
lack of merit, and the decision of the Court of Appeals in
CA-G.R. CV No. 27195, dated October 15, 1992, is
AFFIRMED. Costs against petitioner.

ALLIED BANKING CORPORATION, petitioner,

vs.
COURT OF APPEALS , HON. JOSE C. DE
GUZMAN, OSCAR D. TAN-QUECO, LUCIA D.
TANQUECO-MATIAS, RUBEN D. TANQUECO and
NESTOR D. TANQUECO,
There are two (2) main issues in this petition for review:
namely, (a) whether a stipulation in a contract of lease to
the effect that the contract "may be renewed for a like
term at the option of the lessee" is void for being
potestative or violative of the principle of mutuality of
contracts under Art. 1308 of the Civil Code and,
corollarily, what is the meaning of the clause "may be
renewed for a like term at the option of the lessee;" and,
(b) whether a lessee has the legal personality to assail the
validity of a deed of donation executed by the lessor over
the leased premises.
Spouses Filemon Tanqueco and Lucia DomingoTanqueco owned a 512-square meter lot located at No. 2
Sarmiento Street corner Quirino Highway, Novaliches,
Quezon City, covered by TCT No. 136779 in their name.
On 30 June 1978 they leased the property to petitioner
Allied Banking Corporation (ALLIED) for a monthly
rental of P1,000.00 for the first three (3) years, adjustable
by 25% every three (3) years thereafter. 1 The lease
contract specifically states in its Provision No. 1 that "the
term of this lease shall be fourteen (14) years commencing
from April 1, 1978 and may be renewed for a like term at
the option of the lessee."
Pursuant to their lease agreement, ALLIED introduced an
improvement on the property consisting of a concrete
building with a floor area of 340-square meters which it
used as a branch office. As stipulated, the ownership of
the building would be transferred to the lessors upon the
expiration of the original term of the lease.
Sometime in February 1988 the Tanqueco spouses
executed a deed of donation over the subject property in
favor of their four (4) children, namely, private
respondents herein Oscar D. Tanqueco, Lucia TanquecoMatias, Ruben D. Tanqueco and Nestor D. Tanqueco, who
accepted the donation in the same public instrument.
On 13 February 1991, a year before the expiration of the
contract of lease, the Tanquecos notified petitioner
ALLIED that they were no longer interested in renewing
the lease. 2 ALLIED replied that it was exercising its
option to renew their lease under the same terms with
additional proposals. 3 Respondent Ruben D. Tanqueco,
acting in behalf of all the donee-lessors, made a counterproposal. 4 ALLIED however rejected the counterproposal and insisted on Provision No. 1 of their lease
contract.
When the lease contract expired in 1992 private
respondents demanded that ALLIED vacate the premises.
But the latter asserted its sole option to renew the lease
and enclosed in its reply letter a cashier's check in the
amount of P68,400.00 representing the advance rental
payments for six (6) months taking into account the
escalation clause. Private respondents however returned
the check to ALLIED, prompting the latter to consign the
amount in court.

An action for ejectment was commenced before the

Metropolitan Trial Court of Quezon City. After trial, the
MeTC-Br. 33 declared Provision No. 1 of the lease
contract void for being violative of Art. 1308 of the Civil
Code thus
. . . but such provision [in the lease
contract], to the mind of the Court, does
not add luster to defendant's cause nor
constitutes as an unbridled or unlimited
license or sanctuary of the defendants to
perpetuate its occupancy on the subject
property. The basic intention of the law in
any contract is mutuality and equality. In
other words, the validity of a contract
cannot be left at (sic) the will of one of
the contracting parties. Otherwise, it
infringes (upon) Article 1308 of the New
Civil Code, which provides: The contract
must bind both contracting parties; its
validity or compliance cannot be left to
the will of one of them . . . Using the
principle laid down in the case of Garcia
v. Legarda as cornerstone, it is evident
that the renewal of the lease in this case
cannot be left at the sole option or will of
the defendant notwithstanding provision
no. 1 of their expired contract. For that
would amount to a situation where the
continuance and effectivity of a contract
will depend only upon the sole will or
power of the lessee, which is repugnant to
the very spirit envisioned under Article
1308 of the New Civil Code . . . . the
theory adopted by this Court in the case at
bar finds ample affirmation from the
principle echoed by the Supreme Court in
the case of Lao Lim v. CA, 191 SCRA
150, 154, 155.
On appeal to the Regional Trial Court, and later to the
Court of Appeals, the assailed decision was affirmed. 5
On 20 February 1993, while the case was pending in the
Court of Appeals ALLIED vacated the leased premises by
reason of the controversy. 6
ALLIED insists before us that Provision No. 1 of the lease
contract was mutually agreed upon hence valid and
binding on both parties, and the exercise by petitioner of
its option to renew the contract was part of their
agreement and in pursuance thereof.
We agree with petitioner. Article 1308 of the Civil Code
expresses what is known in law as the principle of
mutuality of contracts. It provides that "the contract must
bind both the contracting parties; its validity or
compliance cannot be left to the will of one of them." This
binding effect of a contract on both parties is based on the
principle that the obligations arising from the contracts
have the force of law between the contracting parties, and
there must be mutuality between them based essentially on
their equality under which it is repugnant to have one
party bound by the contract while leaving the other free
therefrom. The ultimate purpose is to render void a
contract containing a condition which makes its

fulfillment dependent solely upon the uncontrolled will of

one of the contracting parties.
An express agreement which gives the lessee the sole
option to renew the lease is frequent and subject to
statutory restrictions, valid and binding on the parties.
This option, which is provided in the same lease
agreement, is fundamentally part of the consideration in
the contract and is no different from any other provision of
the lease carrying an undertaking on the part of the lessor
to act conditioned on the performance by the lessee. It is a
purely executory contract and at most confers a right to
obtain a renewal if there is compliance with the conditions
on which the rights is made to depend. The right of
renewal constitutes a part of the lessee's interest in the
land and forms a substantial and integral part of the
agreement.
The fact that such option is binding only on the lessor and
can be exercised only by the lessee does not render it void
for lack of mutuality. After all, the lessor is free to give or
not to give the option to the lessee. And while the lessee
has a right to elect whether to continue with the lease or
not, once he exercises his option to continue and the lessor
accepts, both parties are thereafter bound by the new lease
agreement. Their rights and obligations become mutually
fixed, and the lessee is entitled to retain possession of the
property for the duration of the new lease, and the lessor
may hold him liable for the rent therefor. The lessee
cannot thereafter escape liability even if he should
subsequently decide to abandon the premises. Mutuality
obtains in such a contract and equality exists between the
lessor and the lessee since they remain with the same
faculties in respect to fulfillment. 7
The case of Lao Lim v. Court of Appeals 8 relied upon by
the trial court is not applicable here. In that case, the
stipulation in the disputed compromise agreement was to
the effect that the lessee would be allowed to stay in the
premises "as long as he needs it and can pay the rents." In
the present case, the questioned provision states that the
lease "may be renewed for a like term at the option of the
lessee." The lessor is bound by the option he has conceded
to the lessee. The lessee likewise becomes bound only
when he exercises his option and the lessor cannot
thereafter be executed from performing his part of the
agreement.
Likewise, reliance by the trial court on the 1967 case
of Garcia v. Rita Legarda, Inc., 9 is misplaced. In that
case, what was involved was a contract to sell involving
residential lots, which gave the vendor the right to declare
the contract called and of no effect upon the failure of the
vendee to fulfill any of the conditions therein set forth. In
the instant case, we are dealing with a contract of lease
which gives the lessee the right to renew the same.
With respect to the meaning of the clause "may be
renewed for a like term at the option of the lessee," we
sustain petitioner's contention that its exercise of the
option resulted in the automatic extension of the contract
of lease under the same terms and conditions. The subject
contract simply provides that "the term of this lease shall
be fourteen (14) years and may be renewed for a like term
at the option of the lessee." As we see it, the only term on
which there has been a clear agreement is the period of the
new contract, i.e., fourteen (14) years, which is evident

from the clause "may be renewed for a like term at the

option of the lessee," the phrase "for a like term"referring
to the period. It is silent as to what the specific terms and
conditions of the renewed lease shall be. Shall it be the
same terms and conditions as in the original contract, or
shall it be under the terms and conditions as may be
mutually agreed upon by the parties after the expiration of
the existing lease?
In Ledesma v. Javellana 10 this Court was confronted with
a similar problem. In the case the lessee was given the sole
option to renew the lease, but the contract failed to specify
the terms and conditions that would govern the new
contract. When the lease expired, the lessee demanded an
extension under the same terms and conditions. The lessor
expressed conformity to the renewal of the contract but
refused to accede to the claim of the lessee that the
renewal should be under the same terms and conditions as
the original contract. In sustaining the lessee, this Court
made the following pronouncement:
. . . in the case of Hicks v. Manila Hotel
Company, a similar issue was resolved by
this Court. It was held that "such a clause
relates to the very contract in which it is
placed, and does not permit the defendant
upon the renewal of the contract in which
the clause is found, to insist upon
different terms and those embraced in the
contract to be renewed;" and that "a
stipulation to renew always relates to the
contract in which it is found and the rights
granted thereunder, unless it expressly
provides for variations in the terms of the
contract to be renewed."
The same principle is upheld in American
Law regarding the renewal of lease
contracts. In 50 Am. Jur. 2d, Sec. 1159, at
p. 45, we find the following citations:
"The rule is well-established that a
general covenant to renew or extend a
lease which makes no provision as to the
terms of a renewal or extension implies a
renewal or extension upon the same terms
as provided in the original lease."
In the lease contract under consideration,
there is no provision to indicate that the
renewal will be subject to new terms and
conditions that the parties may yet agree
upon. It is to renewal provisions of lease
contracts of the kind presently considered
that the principles stated above squarely
apply. We do not agree with the
contention of the appellants that if it was
intended by the parties to renew the
contract under the same terms and
conditions stipulated in the contract of
lease, such should have expressly so
stated in the contract itself. The same
argument could easily be interposed by
the appellee who could likewise contend
that if the intention was to renew the
contract of lease under such new terms
and conditions that the parties may agree
upon, the contract should have so

specified. Between the two assertions,

there is more logic in the latter.
The settled rule is that in case of
uncertainty as to the meaning of a
provision granting extension to a contract
of lease, the tenant is the one favored and
not the landlord. "As a general rule, in
construing provisions relating to renewals
or extensions, where there is any
uncertainty, the tenants is favored, and not
the landlord, because the latter, having the
power of stipulating in his own favor, has
neglected to do so; and also upon the
principle that every man's grant is to be
taken most strongly against himself (50
Am Jur. 2d, Sec. 1162, p. 48; see also 51
C.J.S. 599).
Besides, if we were to adopt the contrary theory that the
terms and conditions to be embodied in the renewed
contract were still subject to mutual agreement by and
between the parties, then the option which is an
integral part of the consideration for the contract would
be rendered worthless. For then, the lessor could easily
defeat the lessee's right of renewal by simply imposing
unreasonable and onerous conditions to prevent the parties
from reaching an agreement, as in the case at bar. As in a
statute no word, clause, sentence, provision or part of a
contract shall be considered surplusage or superfluous,
meaningless, void, insignificant or nugatory, if that can be
reasonably avoided. To this end, a construction which will
render every word operative is to be preferred over that
which would make some words idle and nugatory. 11
Fortunately for respondent lessors, ALLIED vacated the
premises on 20 February 1993 indicating its abandonment
of whatever rights it had under the renewal clause.
Consequently, what remains to be done is for ALLIED to
pay rentals for the continued use of premises until it
vacated the same, computed from the expiration of the
original term of the contract on 31 March 1992 to the time
it actually left the premises on 20 February 1993,
deducting therefrom the amount of P68,400.00 consigned
in court by ALLIED and any other amount which it may
have deposited or advanced in connection with the lease.
Since the old lease contract was deemed renewed under
the same terms and conditions upon the exercise by
ALLIED of its option, the basis of the computation of
rentals should be the rental rate provided for in the
existing contract.
Finally, ALLIED cannot assail the validity of the deed of
donation, not being a party thereto. A person who is not
principally or subsidiarily bound has no legal capacity to
challenge the validity of the contract. 12 He must first have
an interest in it. "Interest" within the meaning of the term
means material interest, an interest to be affected by the
deed, as distinguished from a mere incidental interest.
Hence, a person who is not a party to a contract and for
whose benefit it was not expressly made cannot maintain
an action on it, even if the contract, if performed by the
parties thereto would incidentally affect him, 13 except
when he is prejudiced in his rights with respect to one of
the contracting parties and can show the detriment which
could positively result to him from the contract in which
he had no intervention. 14 We find none in the instant case.

WHEREFORE, the Decision of the Court of Appeals is

REVERSED and SET ASIDE. Considering that petitioner
ALLIED BANKING CORPORATION already vacated
the leased premises as of 20 February 1993, the renewed
lease contract is deemed terminated as of that date.
However, petitioner is required to pay rentals to
respondent lessors at the rate provided in their existing
contract, subject to computation in view of the
consignment in court of P68,400.00 by petitioner, and of
such other amounts it may have deposited or advanced in
connection with the lease.

SPOUSES IGNACIO F. JUICO and ALICE P. JUICO

vs. CHINA BANKING CORPORATION
Before us is a petition for review on certiorari under Rule
45 of the 1997 Rules of Civil Procedure, as amended,
assailing the February 20, 2009 Decision1 and April 27,
2009 Resolution2 of the Court of Appeals (CA) in CA
G.R. CV No. 80338. The CA affirmed the April 14, 2003
Decision3 of the Regional Trial Court (RTC) of Makati
City, Branch 147.
The factual antecedents:
Spouses Ignacio F. Juico and Alice P. Juico (petitioners)
obtained a loan from China Banking Corporation
(respondent) as evidenced by two Promissory Notes both
dated October 6, 1998 and numbered 507-001051-34and
507-001052-0,5 for the sums of !!6,216,000 and P4,
139,000, respectively. The loan was secured by a Real
Estate Mortgage (REM) over petitioners property located
at 49 Greensville St., White Plains, Quezon City covered
by Transfer Certificate of Title (TCT) No. RT-103568
(167394) PR-412086 of the Register of Deeds of Quezon
City.
When petitioners failed to pay the monthly amortizations
due, respondent demanded the full payment of the
outstanding balance with accrued monthly interests. On
September 5, 2000, petitioners received respondents last
demand letter7 dated August 29, 2000.
As of February 23, 2001, the amount due on the two
promissory notes totaled P19,201,776.63 representing the
principal, interests, penalties and attorneys fees. On the
same day, the mortgaged property was sold at public
auction, with respondent as highest bidder for the amount
of P10,300,000.
On May 8, 2001, petitioners received8 a demand
letter9 dated May 2, 2001 from respondent for the payment
ofP8,901,776.63, the amount of deficiency after applying
the proceeds of the foreclosure sale to the mortgage debt.
As its demand remained unheeded, respondent filed a
collection suit in the trial court. In its
Complaint,10respondent prayed that judgment be rendered
ordering the petitioners to pay jointly and severally:
(1)P8,901,776.63 representing the amount of deficiency,
plus interests at the legal rate, from February 23, 2001
until fully paid; (2) an additional amount equivalent to
1/10 of 1% per day of the total amount, until fully paid, as
penalty; (3) an amount equivalent to 10% of the foregoing
amounts as attorneys fees; and (4) expenses of litigation
and costs of suit.
In their Answer,11 petitioners admitted the existence of the
debt but interposed, by way of special and affirmative
defense, that the complaint states no cause of action
considering that the principal of the loan was already paid
when the mortgaged property was extrajudicially
foreclosed and sold for P10,300,000. Petitioners
contended that should they be held liable for any
deficiency, it should be only for P55,000 representing the
difference between the total outstanding obligation
of P10,355,000 and the bid price of P10,300,000.
Petitioners also argued that even assuming there is a cause
of action, such deficiency cannot be enforced by
respondent because it consists only of the penalty and/or

compounded interest on the accrued interest which

generally not favored under the Civil Code. By way
counterclaim, petitioners prayed that respondent
ordered to pay P100,000 in attorneys fees and costs
suit.

is
of
be
of

At the trial, respondent presented Ms. Annabelle Cokai

Yu, its Senior Loans Assistant, as witness. She testified
that she handled the account of petitioners and assisted
them in processing their loan application. She called them
monthly to inform them of the prevailing rates to be used
in computing interest due on their loan. As of the date of
the public auction, petitioners outstanding balance
was P19,201,776.6312 based on the following statement of
account which she prepared:
STATEMENT
OF
As
of
FEBRUARY
IGNACIO F. JUICO

23,

ACCOUNT
2001

PN# 507-0010520 due on 04-07-2004

Principal balance of PN# 5070010520.
.............
4,139,000.00
Interest on P4,139,000.00 fr. 04-Nov99
04-Nov-2000 366 days @ 15.00%. . . .
.............
622,550.96
Interest on P4,139,000.00 fr. 04-Nov2000
04-Dec-2000 30 days @ 24.50%. . . . .
.............
83,346.99
Interest on P4,139,000.00 fr. 04-Dec2000
04-Jan-2001 31 days @ 21.50%. . . . . .
.............
75,579.27
Interest on P4,139,000.00 fr. 04-Jan2001
04-Feb-2001 31 days @ 19.50%. . . . . .
............
68,548.64
Interest on P4,139,000.00 fr. 04-Feb2001
23-Feb-2001 19 days @ 18.00%. . . . . .
............
38,781.86
Penalty charge @ 1/10 of 1% of the
total
amount
due
(P4,139,000.00 from 11-04-99 to 0223-2001
@
1/10 of 1% per day). . . . . . . . . . . . . . . .
.
1,974,303.00
Sub-total. . . . . . . . . . . . . . . . . . . . . . . .
........
7,002,110.73
PN# 507-0010513 due on 04-07-2004
Principal balance of PN# 5070010513.
.............
6,216,000.00
Interest on P6,216,000.00 fr. 06-Oct99
04-Nov-2000 395 days @ 15.00%. . . . 1,009,035.62

note and was informed that the interest rate on the loan
will be based on prevailing market rates. Every month,
respondent informs him by telephone of the prevailing
interest rate. At first, he was able to pay his monthly
amortizations but when he started to incur delay in his
payments due to the financial crisis, respondent pressured
him to pay in full, including charges and interests for the
delay. His property was eventually foreclosed and was
sold at public auction.18

.............
Interest on P6,216,000.00 fr. 04-Nov2000
04-Dec-2000 30 days @ 24.50%. . . . .
.............
125,171.51
Interest on P6,216,000.00 fr. 04-Dec2000
04-Jan-2001 31 days @ 21.50%. . . . . .
.............
113,505.86

On cross-examination, petitioner testified that he is a

Doctor of Medicine and also engaged in the business of
distributing medical supplies. He admitted having read the
promissory notes and that he is aware of his obligation
under them before he signed the same.19

Interest on P6,216,000.00 fr. 04-Jan2001

04-Feb-2001 31 days @ 19.50%. . . . . .
............
102,947.18
Interest on P6,216,000.00 fr. 04-Feb2001
23-Feb-2001 19 days @ 18.00%. . . . . .
............
58,243.07

In its decision, the RTC ruled in favor of respondent. The

fallo of the RTC decision reads:
WHEREFORE, premises considered, the Complaint is
hereby sustained, and Judgment is rendered ordering
herein defendants to pay jointly and severally to plaintiff,
the following:

Penalty charge @ 1/10 of 1% of the

total
amount
due
(P6,216,000.00 from 10-06-99 to 0223-2001
@
1/10 of 1% per day). . . . . . . . . . . . . . . .
.
3,145,296.00

1. P8,901,776.63 representing the amount of the

deficiency owing to the plaintiff, plus interest
thereon at the legal rate after February 23, 2001;

Subtotal. . . . . . . . . . . . . . . . . . . . . . . . . 10,770,199.2
.......
3
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . 17,772,309.9
........
6

2. An amount equivalent to 10% of the total

amount due as and for attorneys fees, there being
stipulation therefor in the promissory notes;

Less: A/P applied to balance of

principal
(55,000.00)

3. Costs of suit.

Less: Accounts payable L & D 17,456,160.5

(261,149.39)
7

SO ORDERED.20

Add: 10% Attorneys Fee

1,745,616.06

Total amount due

19,201,776.6
3

Less: Bid Price

10,300,000.0
0

The trial court agreed with respondent that when the

mortgaged property was sold at public auction on
February 23, 2001 for P10,300,000 there remained a
balance of P8,901,776.63 since before foreclosure, the
total amount due on the two promissory notes aggregated
to P19,201,776.63 inclusive of principal, interests,
penalties and attorneys fees. It ruled that the amount
realized at the auction sale was applied to the interest,
conformably with Article 1253 of the Civil Code which
provides that if the debt produces interest, payment of the
principal shall not be deemed to have been made until the
interests have been covered. This being the case,
petitioners principal obligation subsists but at a reduced
amount of P8,901,776.63.

TOTAL DEFICIENCY AMOUNT AS

OF
FEB. 23, 2001
8,901,776.63

13

Petitioners thereafter received a demand letter14 dated May

2, 2001 from respondents counsel for the deficiency
amount of P8,901,776.63. Ms. Yu further testified that
based on the Statement of Account15 dated March 15,
2002 which she prepared, the outstanding balance of
petitioners was P15,190,961.48.16
On cross-examination, Ms. Yu reiterated that the interest
rate changes every month based on the prevailing market
rate and she notified petitioners of the prevailing rate by
calling them monthly before their account becomes past
due. When asked if there was any written authority from
petitioners for respondent to increase the interest rate
unilaterally, she answered that petitioners signed a
promissory note indicating that they agreed to pay interest
at the prevailing rate.17
Petitioner Ignacio F. Juico testified that prior to the release
of the loan, he was required to sign a blank promissory

The trial court further held that Ignacios claim that he

signed the promissory notes in blank cannot negate or
mitigate his liability since he admitted reading the
promissory notes before signing them. It also ruled that
considering the substantial amount involved, it is
unbelievable that petitioners threw all caution to the wind
and simply signed the documents without reading and
understanding the contents thereof. It noted that the
promissory notes, including the terms and conditions, are
pro forma and what appears to have been left in blank
were the promissory note number, date of the instrument,
due date, amount of loan, and condition that interest will
be at the prevailing rates. All of these details, the trial
court added, were within the knowledge of the petitioners.

When the case was elevated to the CA, the latter affirmed
the trial courts decision. The CA recognized respondents
right to claim the deficiency from the debtor where the
proceeds of the sale in an extrajudicial foreclosure of
mortgage are insufficient to cover the amount of the debt.
Also, it found as valid the stipulation in the promissory
notes that interest will be based on the prevailing rate. It
noted that the parties agreed on the interest rate which was
not unilaterally imposed by the bank but was the rate
offered daily by all commercial banks as approved by the
Monetary Board. Having signed the promissory notes, the
CA ruled that petitioners are bound by the stipulations
contained therein.

term contracts.22 Hence, such stipulations are not void per

se.23

Petitioners are now before this Court raising the sole issue
of whether the interest rates imposed upon them by
respondent are valid. Petitioners contend that the interest
rates imposed by respondent are not valid as they were not
by virtue of any law or Bangko Sentral ng Pilipinas (BSP)
regulation or any regulation that was passed by an
appropriate government entity. They insist that the interest
rates were unilaterally imposed by the bank and thus
violate the principle of mutuality of contracts. They argue
that the escalation clause in the promissory notes does not
give respondent the unbridled authority to increase the
interest rate unilaterally. Any change must be mutually
agreed upon.

In Banco Filipino Savings & Mortgage Bank v.

Navarro,26 the escalation clause stated: "I/We hereby
authorize Banco Filipino to correspondingly increase the
interest rate stipulated in this contract without advance
notice to me/us in the event a law should be enacted
increasing the lawful rates of interest that may be charged
on this particular kind of loan." While escalation clauses
in general are considered valid, we ruled that Banco
Filipino may not increase the interest on respondent
borrowers loan, pursuant to Circular No. 494 issued by
the Monetary Board on January 2, 1976, because said
circular is not a law although it has the force and effect of
law and the escalation clause has no provision for
reduction of the stipulated interest "in the event that the
applicable maximum rate of interest is reduced by law or
by the Monetary Board" (de-escalation clause).

Respondent, for its part, points out that petitioners failed

to show that their case falls under any of the exceptions
wherein findings of fact of the CA may be reviewed by
this Court. It contends that an inquiry as to whether the
interest rates imposed on the loans of petitioners were
supported by appropriate regulations from a government
agency or the Central Bank requires a reevaluation of the
evidence on records. Thus, the Court would in effect, be
confronted with a factual and not a legal issue.
The appeal is partly meritorious.
The principle of mutuality of contracts is expressed in
Article 1308 of the Civil Code, which provides:
Article 1308. The contract must bind both contracting
parties; its validity or compliance cannot be left to the will
of one of them. Article 1956 of the Civil Code likewise
ordains that "no interest shall be due unless it has been
expressly stipulated in writing."
The binding effect of any agreement between parties to a
contract is premised on two settled principles: (1) that any
obligation arising from contract has the force of law
between the parties; and (2) that there must be mutuality
between the parties based on their essential equality. Any
contract which appears to be heavily weighed in favor of
one of the parties so as to lead to an unconscionable result
is void. Any stipulation regarding the validity or
compliance of the contract which is left solely to the will
of one of the parties, is likewise, invalid.21
Escalation clauses refer to stipulations allowing an
increase in the interest rate agreed upon by the contracting
parties. This Court has long recognized that there is
nothing inherently wrong with escalation clauses which
are valid stipulations in commercial contracts to maintain
fiscal stability and to retain the value of money in long

Nevertheless, an escalation clause "which grants the

creditor an unbridled right to adjust the interest
independently and upwardly, completely depriving the
debtor of the right to assent to an important modification
in the agreement" is void. A stipulation of such nature
violates the principle of mutuality of contracts.24 Thus,
this Court has previously nullified the unilateral
determination and imposition by creditor banks of
increases in the rate of interest provided in loan
contracts.25

Subsequently, in Insular Bank of Asia and America v.

Spouses Salazar27 we reiterated that escalation clauses are
valid stipulations but their enforceability are subject to
certain conditions. The increase of interest rate from 19%
to 21% per annum made by petitioner bank was
disallowed because it did not comply with the guidelines
adopted by the Monetary Board to govern interest rate
adjustments by banks and non-banks performing quasibanking functions.
In the 1991 case of Philippine National Bank v. Court of
Appeals,28 the promissory notes authorized PNB to
increase the stipulated interest per annum "within the
limits allowed by law at any time depending on whatever
policy PNB may adopt in the future; Provided, that, the
interest rate on this note shall be correspondingly
decreased in the event that the applicable maximum
interest rate is reduced by law or by the Monetary Board."
This Court declared the increases (from 18% to 32%, then
to 41% and then to 48%) unilaterally imposed by PNB to
be in violation of the principle of mutuality essential in
contracts.29
A similar ruling was made in a 1994 case30 also involving
PNB where the credit agreement provided that "PNB
reserves the right to increase the interest rate within the
limits allowed by law at any time depending on whatever
policy it may adopt in the future: Provided, that the
interest rate on this accommodation shall be
correspondingly decreased in the event that the applicable
maximum interest is reduced by law or by the Monetary
Board x x x".
Again, in 1996, the Court invalidated escalation clauses
authorizing PNB to raise the stipulated interest rate at any
time without notice, within the limits allowed by law. The

Court observed that there was no attempt made by PNB to

secure the conformity of respondent borrower to the
successive increases in the interest rate. The borrowers
assent to the increases cannot be implied from their lack of
response to the letters sent by PNB, informing them of the
increases.31
In the more recent case of Philippine Savings Bank v.
Castillo,32 we sustained the CA in declaring as
unreasonable the following escalation clause: "The rate of
interest and/or bank charges herein stipulated, during the
terms of this promissory note, its extensions, renewals or
other modifications, may be increased, decreased or
otherwise changed from time to time within the rate of
interest and charges allowed under present or future law(s)
and/or government regulation(s) as the PSBank may
prescribe for its debtors." Clearly, the increase or decrease
of interest rates under such clause hinges solely on the
discretion of petitioner as it does not require the
conformity of the maker before a new interest rate could
be enforced. We also said that respondents assent to the
modifications in the interest rates cannot be implied from
their lack of response to the memos sent by petitioner,
informing them of the amendments, nor from the letters
requesting for reduction of the rates. Thus:
the validity of the escalation clause did not give
petitioner the unbridled right to unilaterally adjust interest
rates. The adjustment should have still been subjected to
the mutual agreement of the contracting parties. In light of
the absence of consent on the part of respondents to the
modifications in the interest rates, the adjusted rates
cannot bind them notwithstanding the inclusion of a deescalation clause in the loan agreement.33
It is now settled that an escalation clause is void where the
creditor unilaterally determines and imposes an increase in
the stipulated rate of interest without the express
conformity of the debtor. Such unbridled right given to
creditors to adjust the interest independently and upwardly
would completely take away from the debtors the right to
assent to an important modification in their agreement and
would also negate the element of mutuality in their
contracts.34 While a ceiling on interest rates under the
Usury Law was already lifted under Central Bank Circular
No. 905, nothing therein "grants lenders carte blanche
authority to raise interest rates to levels which will either
enslave their borrowers or lead to a hemorrhaging of their
assets."35

from time to time the rate of interest and/or bank charges

"without advance notice" to petitioner, "in the event of
change in the interest rate prescribed by law or the
Monetary Board of the Central Bank of the Philippines,"
does not give respondent bank unrestrained freedom to
charge any rate other than that which was agreed upon.
Here, the monthly upward/downward adjustment of
interest rate is left to the will of respondent bank alone. It
violates the essence of mutuality of the contract.38
More recently in Solidbank Corporation v. Permanent
Homes, Incorporated,39 we upheld as valid an escalation
clause which required a written notice to and conformity
by the borrower to the increased interest rate. Thus:
The Usury Law had been rendered legally ineffective by
Resolution No. 224 dated 3 December 1982 of the
Monetary Board of the Central Bank, and later by Central
Bank Circular No. 905 which took effect on 1 January
1983. These circulars removed the ceiling on interest rates
for secured and unsecured loans regardless of maturity.
The effect of these circulars is to allow the parties to agree
on any interest that may be charged on a loan. The virtual
repeal of the Usury Law is within the range of judicial
notice which courts are bound to take into account.
Although interest rates are no longer subject to a ceiling,
the lender still does not have an unbridled license to
impose increased interest rates. The lender and the
borrower should agree on the imposed rate, and such
imposed rate should be in writing.
The three promissory notes between Solidbank and
Permanent all contain the following provisions:
"5. We/I irrevocably authorize Solidbank to increase or
decrease at any time the interest rate agreed in this Note or
Loan on the basis of, among others, prevailing rates in the
local or international capital markets. For this purpose,
We/I authorize Solidbank to debit any deposit or
placement account with Solidbank belonging to any one of
us. The adjustment of the interest rate shall be effective
from the date indicated in the written notice sent to us by
the bank, or if no date is indicated, from the time the
notice was sent.
6. Should We/I disagree to the interest rate adjustment,
We/I shall prepay all amounts due under this Note or Loan
within thirty (30) days from the receipt by anyone of us of
the written notice. Otherwise, We/I shall be deemed to
have given our consent to the interest rate adjustment."

The two promissory notes signed by petitioners provide:

Such escalation clause is similar to that involved in the

case of Floirendo, Jr. v. Metropolitan Bank and Trust
Company37 where this Court ruled:

The stipulations on interest rate repricing are valid

because (1) the parties mutually agreed on said
stipulations; (2) repricing takes effect only upon
Solidbanks written notice to Permanent of the new
interest rate; and (3) Permanent has the option to prepay
its loan if Permanent and Solidbank do not agree on the
new interest rate. The phrases "irrevocably authorize," "at
any time" and "adjustment of the interest rate shall be
effective from the date indicated in the written notice sent
to us by the bank, or if no date is indicated, from the time
the notice was sent," emphasize that Permanent should
receive a written notice from Solidbank as a condition for
the adjustment of the interest rates. (Emphasis supplied.)

The provision in the promissory note authorizing

respondent bank to increase, decrease or otherwise change

In this case, the trial and appellate courts, in upholding the

validity of the escalation clause, underscored the fact that

I/We hereby authorize the CHINA BANKING

CORPORATION to increase or decrease as the case may
be, the interest rate/service charge presently stipulated in
this note without any advance notice to me/us in the event
a law or Central Bank regulation is passed or promulgated
by the Central Bank of the Philippines or appropriate
government entities, increasing or decreasing such interest
rate or service charge.36

there was actually no fixed rate of interest stipulated in the

promissory notes as this was made dependent on
prevailing rates in the market. The subject promissory
notes contained the following condition written after the
first paragraph:
With one year grace period on principal and thereafter
payable in 54 equal monthly instalments to start on the
second year. Interest at the prevailing rates payable
quarterly in arrears.40
In Polotan, Sr. v. CA (Eleventh Div.),41 petitioner
cardholder assailed the trial and appellate courts in ruling
for the validity of the escalation clause in the Cardholders
Agreement. On petitioners contention that the interest
rate was unilaterally imposed and based on the standards
and rate formulated solely by respondent credit card
company, we held:
The contractual provision in question states that "if there
occurs any change in the prevailing market rates, the new
interest rate shall be the guiding rate in computing the
interest due on the outstanding obligation without need of
serving notice to the Cardholder other than the required
posting on the monthly statement served to the
Cardholder." This could not be considered an escalation
clause for the reason that it neither states an increase nor a
decrease in interest rate. Said clause simply states that the
interest rate should be based on the prevailing market rate.
Interpreting it differently, while said clause does not
expressly stipulate a reduction in interest rate, it
nevertheless provides a leeway for the interest rate to be
reduced in case the prevailing market rates dictate its
reduction.
Admittedly, the second paragraph of the questioned
proviso which provides that "the Cardholder hereby
authorizes Security Diners to correspondingly increase the
rate of such interest in the event of changes in prevailing
market rates x x x" is an escalation clause. However, it
cannot be said to be dependent solely on the will of
private respondent as it is also dependent on the prevailing
market rates.
Escalation clauses are not basically wrong or legally
objectionable as long as they are not solely potestative but
based on reasonable and valid grounds. Obviously, the
fluctuation in the market rates is beyond the control of
private respondent.42 (Emphasis supplied.)
In interpreting a contract, its provisions should not be read
in isolation but in relation to each other and in their
entirety so as to render them effective, having in mind the
intention of the parties and the purpose to be achieved.
The various stipulations of a contract shall be interpreted
together, attributing to the doubtful ones that sense which
may result from all of them taken jointly.43
Here, the escalation clause in the promissory notes
authorizing the respondent to adjust the rate of interest on
the basis of a law or regulation issued by the Central Bank
of the Philippines, should be read together with the
statement after the first paragraph where no rate of interest
was fixed as it would be based on prevailing market rates.
While the latter is not strictly an escalation clause, its clear
import was that interest rates would vary as determined by

prevailing market rates. Evidently, the parties intended the

interest on petitioners loan, including any upward or
downward adjustment, to be determined by the prevailing
market rates and not dictated by respondents policy. It
may also be mentioned that since the deregulation of bank
rates in 1983, the Central Bank has shifted to a marketoriented interest rate policy.44
There is no indication that petitioners were coerced into
agreeing with the foregoing provisions of the promissory
notes. In fact, petitioner Ignacio, a physician engaged in
the medical supply business, admitted having understood
his obligations before signing them. At no time did
petitioners protest the new rates imposed on their loan
even when their property was foreclosed by respondent.
This notwithstanding, we hold that the escalation clause is
still void because it grants respondent the power to impose
an increased rate of interest without a written notice to
petitioners and their written consent. Respondents
monthly telephone calls to petitioners advising them of the
prevailing interest rates would not suffice. A detailed
billing statement based on the new imposed interest with
corresponding computation of the total debt should have
been provided by the respondent to enable petitioners to
make an informed decision. An appropriate form must
also be signed by the petitioners to indicate their
conformity to the new rates. Compliance with these
requisites is essential to preserve the mutuality of
contracts. For indeed, one-sided impositions do not have
the force of law between the parties, because such
impositions are not based on the parties essential
equality.45
Modifications in the rate of interest for loans pursuant to
an escalation clause must be the result of an agreement
between the parties. Unless such important change in the
contract terms is mutually agreed upon, it has no binding
effect.46 In the absence of consent on the part of the
petitioners to the modifications in the interest rates, the
adjusted rates cannot bind them. Hence, we consider as
invalid the interest rates in excess of 15%, the rate charged
for the first year.
Based on the August 29, 2000 demand letter of China
Bank, petitioners total principal obligation under the two
promissory notes which they failed to settle
is P10,355,000. However, due to China Banks unilateral
increases in the interest rates from 15% to as high as
24.50% and penalty charge of 1/10 of 1% per day or
36.5% per annum for the period November 4, 1999 to
February 23, 2001, petitioners balance ballooned
to P19,201,776.63. Note that the original amount of
principal loan almost doubled in only 16 months. The
Court also finds the penalty charges imposed excessive
and arbitrary, hence the same is hereby reduced to 1% per
month or 12% per annum.1wphi1
Petitioners Statement of Account, as of February 23,
2001, the date of the foreclosure proceedings, should thus
be modified as follows:
Principal

P10,355,000.00

Interest
at
15%
per
annum
P10,355,000 x .15 x 477 days/365 days 2,029,863.70

Penalty at 12% per annum

1,623 ,890. 96

P10,355,000 x .12 x 477days/365 days

Sub-Total

14,008,754.66

Less: A/P applied to balance of principal (55,000.00)

Less: Accounts payable L & D

(261,149.39)
13,692,605.27

Add: Attorney's Fees

1,369,260.53

Total Amount Due

15,061,865.79

Less: Bid Price

10,300,000.00

TOTAL DEFICIENCY AMOUNT

4,761,865.79

WHEREFORE, the petition for review on certiorari is

PARTLY GRANTED. The February 20, 2009 Decision
and April 27, 2009 Resolution of the Court of Appeals in
CA G.R. CV No. 80338 are hereby MODIFIED.
Petitioners Spouses Ignacio F. Juico and Alice P. Juico are
hereby ORDERED to pay jointly and severally respondent
China Banking Corporation P4, 7 61 ,865. 79 representing
the amount of deficiency inclusive of interest, penalty
charge and attorney's fees. Said amount shall bear interest
at 12% per annum, reckoned from the time of the filing of
the complaint until its full satisfaction.

PHILIPPINE
NATIONAL
BANK, Petitioner,
vs.
SPOUSES ENRIQUE MANALO & ROSALINDA
JACINTO, ARNOLD J. MANALO, ARNEL J.
MANALO, and ARMA J. MANALO, Respondents.
Although banks are free to determine the rate of interest
they could impose on their borrowers, they can do so only
reasonably, not arbitrarily. They may not take advantage
of the ordinary borrowers' lack of familiarity with banking
procedures and jargon. Hence, any stipulation on interest
unilaterally imposed and increased by them shall be struck
down as violative of the principle of mutuality of
contracts.

property had been sold; and that PNB did not comply with
Section 3 of Act No. 3135, as amended.6
PNB and Antoninus Yuvienco countered that
the P1,000,000.00 loan obtained by the Spouses Manalo
from Benito Tan had been credited to their account; that
they did not make any assurances on the restructuring and
conversion of the Spouses Manalos loan into a long-term
one;7 that PNBs right to foreclose the mortgage had been
clear especially because the Spouses Manalo had not
assailed the validity of the loans and of the mortgage; and
that the Spouses Manalo did not allege having fully paid
their indebtedness.8
Ruling ofthe RTC

Antecedents
Respondent Spouses Enrique Manalo and Rosalinda
Jacinto (Spouses Manalo) applied for an All-Purpose
Credit Facility in the amount of P1,000,000.00 with
Philippine National Bank (PNB) to finance the
construction of their house. After PNB granted their
application, they executed a Real Estate Mortgage on
November 3, 1993 in favor of PNB over their property
covered by Transfer Certificate of Title No. S- 23191 as
security for the loan.1 The credit facility was renewed and
increased several times over the years. On September 20,
1996, the credit facility was again renewed
for P7,000,000.00. As a consequence, the parties executed
a Supplement to and Amendment of Existing Real Estate
Mortgage whereby the property covered by TCT No.
171859 was added as security for the loan.
The additional security was registered in the names of
respondents Arnold, Arnel, Anthony, and Arma, all
surnamed Manalo, who were their children.2
It was agreed upon that the Spouses Manalo would make
monthly payments on the interest. However, PNB claimed
that their last recorded payment was made on December,
1997. Thus, PNB sent a demand letter to them on their
overdue account and required them to settle the account.
PNB sent another demand letter because they failed to
heed the first demand.3
After the Spouses Manalo still failed to settle their unpaid
account despite the two demand letters, PNB foreclose the
mortgage. During the foreclosure sale, PNB was the
highest bidder for P15,127,000.00 of the mortgaged
properties of the Spouses Manalo. The sheriff issued to
PNB the Certificate of Sale dated November 13, 2000.4
After more than a year after the Certificate of Sale had
been issued to PNB, the Spouses Manalo instituted this
action for the nullification of the foreclosure proceedings
and damages. They alleged that they had obtained a loan
for P1,000,000.00 from a certain Benito Tan upon
arrangements made by Antoninus Yuvienco, then the
General Manager of PNBs Bangkal Branch where they
had transacted; that they had been made to understand and
had been assured that the P1,000,000.00 would be used to
update their account, and that their loan would be
restructured and converted into a long-term loan;5 that
they had been surprised to learn, therefore, that had been
declared in default of their obligations, and that the
mortgage on their property had been foreclosed and their

After trial, the RTC rendered its decision in favor of PNB,

holding thusly:
In resolving this present case, one of the most significant
matters the court has noted is that while during the pretrial held on 8 September 2003, plaintiff-spouses Manalo
with the assistance counsel had agreed to stipulate that
defendants had the right to foreclose upon the subject
properties and that the plaintiffs[] main thrust was to
prove that the foreclosure proceedings were invalid, in the
course of the presentation of their evidence, they modified
their position and claimed [that] the loan document
executed were contracts of adhesion which were null and
void because they were prepared entirely under the
defendant banks supervision. They also questioned the
interest rates and penalty charges imposed arguing that
these were iniquitous, unconscionable and therefore
likewise void.
Not having raised the foregoing matters as issues during
the pre-trial, plaintiff-spouses are presumably estopped
from allowing these matters to serve as part of their
evidence, more so because at the pre-trial they expressly
recognized the defendant banks right to foreclose upon
the subject property (See Order, pp. 193-195).
However, considering that the defendant bank did not
interpose any objection to these matters being made part
of plaintiffs evidence so much so that their memorandum
contained discussions rebutting plaintiff spouses
arguments on these issues, the court must necessarily
include these matters in the resolution of the present case.9
The RTC held, however, that the Spouses Manalos
"contract of adhesion" argument was unfounded because
they had still accepted the terms and conditions of their
credit agreement with PNB and had exerted efforts to pay
their obligation;10 that the Spouses Manalo were now
estopped from questioning the interest rates unilaterally
imposed by PNB because they had paid at those rates for
three years without protest;11 and that their allegation
about PNB violating the notice and publication
requirements during the foreclosure proceedings was
untenable because personal notice to the mortgagee was
not required under Act No. 3135.12
The Spouses Manalo appealed to the CA by assigning a
singular error, as follows:
THE COURT A QUO SERIOUSLY ERRED IN
DISMISSING
PLAINTIFF-APPELLANTS

COMPLAINT FOR BEING (sic) LACK OF MERIT

NOTWITHSTANDING THE FACT THAT IT WAS
CLEARLY SHOWN THAT THE FORECLOSURE
PROCEEDINGS WAS INVALID AND ILLEGAL.13
The Spouses Manalo reiterated their arguments, insisting
that: (1) the credit agreements they entered into with PNB
were contracts of adhesion;14 (2) no interest was due from
them because their credit agreements with PNB did not
specify the interest rate, and PNB could not unilaterally
increase the interest rate without first informing
them;15 and (3) PNB did not comply with the notice and
publication requirements under Section 3 of Act
3135.16 On the other hand, PNB and Yuvienco did not file
their briefs despite notice.17

that the notarized Affidavit of Publication presented by

Sheriff Magsajo was prima facie proof of the publication
of the notice; and that the Affidavit of Publication enjoyed
the presumption of regularity, such that the Spouses
Manalos bare allegation of non-publication without other
proof did not overcome the presumption.
On August 29, 2006, the CA denied the Spouses Manalos
Motion for Reconsideration and PNBs Partial Motion for
Reconsideration.20
Issues
In its Memorandum,21 PNB raises the following issues:
I

Ruling ofthe CA
In its decision promulgated on March 28, 2006,18 the CA
affirmed the decision of the RTC insofar as it upheld the
validity of the foreclosure proceedings initiated by PNB,
but modified the Spouses Manalos liability for interest. It
directed the RTC to see to the recomputation of their
indebtedness, and ordered that should the recomputed
amount be less than the winning bid in the foreclosure
sale, the difference should be immediately returned to the
Spouses Manalo.
The CA found it necessary to pass upon the issues of
PNBs failure to specify the applicable interest and the
lack of mutuality in the execution of the credit agreements
considering the earlier cited observation made by the trial
court in its decision. Applying Article 1956 of the Civil
Code, the CA held that PNBs failure to indicate the rate
of interest in the credit agreements would not excuse the
Spouses Manalo from their contractual obligation to pay
interest to PNB because of the express agreement to pay
interest in the credit agreements. Nevertheless, the CA
ruled that PNBs inadvertence to specify the interest rate
should be construed against it because the credit
agreements were clearly contracts of adhesion due to their
having been prepared solely by PNB.
The CA further held that PNB could not unilaterally
increase the rate of interest considering that the credit
agreements specifically provided that prior notice was
required before an increase in interest rate could be
effected. It found that PNB did not adduce proof showing
that the Spouses Manalo had been notified before the
increased interest rates were imposed; and that PNBs
unilateral imposition of the increased interest rate was null
and void for being violative of the principle of mutuality
of contracts enshrined in Article 1308 of the Civil Code.
Reinforcing its "contract of adhesion" conclusion, it added
that the Spouses Manalos being in dire need of money
rendered them to be not on an equal footing with PNB.
Consequently, the CA, relying on Eastern Shipping Lines,
v. Court of Appeals,19 fixed the interest rate to be paid by
the Spouses Manalo at 12% per annum, computed from
their default.
The CA deemed to be untenable the Spouses Manalos
allegation that PNB had failed to comply with the
requirements for notice and posting under Section 3 of Act
3135. The CA stated that Sheriff Norberto Magsajos
testimony was sufficient proof of his posting of the
required Notice of Sheriffs Sale in three public places;

WHETHER OR NOT THE COURT OF APPEALS WAS

CORRECT IN NULLIFYING THE INTEREST RATES
IMPOSED ON RESPONDENT SPOUSES LOAN AND
IN FIXING THE SAME AT TWELVE PERCENT (12%)
FROM DEFAULT, DESPITE THE FACT THAT (i) THE
SAME WAS RAISED BY THE RESPONDENTS ONLY
FOR THE FIRST TIME ON APPEAL (ii) IT WAS
NEVER PART OF THEIR COMPLAINT (iii) WAS
EXLUDED AS AN ISSUE DURING PRE-TRIAL, AND
WORSE, (iv) THERE WAS NO FORMALLY OFFERED
PERTAINING TO THE SAME DURING TRIAL.
II
WHETHER OR NOT THE COURT OF APPEALS
CORRECTLY RULED THAT THERE WAS NO
MUTUALITY OF CONSENT IN THE IMPOSITION OF
INTEREST RATES ON THE RESPONDENT
SPOUSES LOAN DESPITE THE EXISTENCE OF
FACTS
AND
CIRCUMSTANCES
CLEARLY
SHOWING RESPONDENTS ASSENT TO THE
RATES OF INTEREST SO IMPOSED BY PNB ON THE
LOAN.
Anent the first issue, PNB argues that by passing upon the
issue of the validity of the interest rates, and in nullifying
the rates imposed on the Spouses Manalo, the CA decided
the case in a manner not in accord with Section 15, Rule
44 of the Rules of Court, which states that only questions
of law or fact raised in the trial court could be assigned as
errors on appeal; that to allow the Spouses Manalo to raise
an issue for the first time on appeal would "offend the
basic rules of fair play, justice and due process;"22 that the
resolution of the CA was limited to the issues agreed upon
by the parties during pre-trial;23 that the CA erred in
passing upon the validity of the interest rates inasmuch as
the Spouses Manalo did not present evidence thereon; and
that the Judicial Affidavit of Enrique Manalo, on which
the CA relied for its finding, was not offered to prove the
invalidity of the interest rates and was, therefore,
inadmissible for that purpose.24
As to the substantive issues, PNB claims that the Spouses
Manalos continuous payment of interest without protest
indicated their assent to the interest rates imposed, as well
as to the subsequent increases of the rates; and that the CA
erred in declaring that the interest rates and subsequent
increases were invalid for lack of mutuality between the
contracting parties.

Ruling
The appeal lacks merit.
1.
Procedural Issue
Contrary to PNBs argument, the validity of the interest
rates and of the increases, and on the lack of mutuality
between the parties were not raised by the Spouses
Manalos for the first time on appeal. Rather, the issues
were impliedly raised during the trial itself, and PNBs
lack of vigilance in voicing out a timely objection made
that possible.
It appears that Enrique Manalos Judicial Affidavit
introduced the issues of the validity of the interest rates
and the increases, and the lack of mutuality between the
parties in the following manner, to wit:
5. True to his words, defendant Yuvienco, after
several days, sent us a document through a
personnel of defendant PNB, Bangkal, Makati
City Branch, who required me and my wife to
affix our signature on the said document;
6. When the document was handed over me, I was
able to know that it was a Promissory Note which
was in ready made form and prepared solely by
the defendant PNB;
xxxx
21. As above-noted, the rates of interest imposed
by the defendant bank were never the subject of
any stipulation between us mortgagors and the
defendant PNB as mortgagee;
22. The truth of the matter is that defendant bank
imposed rate of interest which ranges from 19% to
as high as 28% and which changes from time to
time;
23. The irregularity, much less the invalidity of
the imposition of iniquitous rates of interest was
aggravated by the fact that we were not informed,
notified, nor the same had our prior consent and
acquiescence therefor. x x x25
PNB cross-examined Enrique Manalo upon his Judicial
Affidavit. There is no showing that PNB raised any
objection
in
the
course
of
the
cross
examination.26 Consequently, the RTC rightly passed
upon such issues in deciding the case, and its having done
so was in total accord with Section 5, Rule 10 of the Rules
of Court, which states:
Section 5. Amendment to conform to or authorize
presentation of evidence. When issues not raised by the
pleadings are tried with the express or implied consent of
the parties, they shall be treated in all respects as if they
had been raised in the pleadings. Such amendment of the
pleadings as may be necessary to cause them to conform
to the evidence and to raise these issues may be made
upon motion of any party at any time, even after
judgment; but failure to amend does not affect the result of
the trial of these issues. If evidence is objected to at the

trial on the ground that it is not within the issues made by

the pleadings, the court may allow the pleadings to be
amended and shall do so with liberality if the presentation
of the merits of the action and the ends of substantial
justice will be subserved thereby. The court may grant a
continuance to enable the amendment to be made.
In Bernardo Sr. v. Court of Appeals,27 we held that:
It is settled that even if the complaint be defective, but the
parties go to trial thereon, and the plaintiff, without
objection, introduces sufficient evidence to constitute the
particular cause of action which it intended to allege in the
original complaint, and the defendant voluntarily produces
witnesses to meet the cause of action thus established, an
issue is joined as fully and as effectively as if it had been
previously joined by the most perfect pleadings. Likewise,
when issues not raised by the pleadings are tried by
express or implied consent of the parties, they shall be
treated in all respects as if they had been raised in the
pleadings.
The RTC did not need to direct the amendment of the
complaint by the Spouses Manalo. Section 5, Rule 10 of
the Rules of Court specifically declares that the "failure to
amend does not affect the result of the trial of these
issues." According to Talisay-Silay Milling Co., Inc. v.
Asociacion de Agricultores de Talisay-Silay, Inc.:28
The failure of a party to amend a pleading to conform to
the evidence adduced during trial does not preclude an
adjudication by the court on the basis of such evidence
which may embody new issues not raised in the pleadings,
or serve as a basis for a higher award of damages.
Although the pleading may not have been amended to
conform to the evidence submitted during trial, judgment
may nonetheless be rendered, not simply on the basis of
the issues alleged but also on the basis of issues discussed
and the assertions of fact proved in the course of
trial.1wphi1The court may treat the pleading as if it had
been amended to conform to the evidence, although it had
not been actually so amended. Former Chief Justice
Moran put the matter in this way:
When evidence is presented by one party, with the
expressed or implied consent of the adverse party, as to
issues not alleged in the pleadings, judgment may be
rendered validly as regards those issues, which shall be
considered as if they have been raised in the pleadings.
There is implied, consent to the evidence thus presented
when the adverse party fails to object thereto." (Emphasis
supplied)
Clearly, a court may rule and render judgment on the basis
of the evidence before it even though the relevant pleading
had not been previously amended, so long as no surprise
or prejudice is thereby caused to the adverse party. Put a
little differently, so long as the basic requirements of fair
play had been met, as where litigants were given full
opportunity to support their respective contentions and to
object to or refute each other's evidence, the court may
validly treat the pleadings as if they had been amended to
conform to the evidence and proceed to adjudicate on the
basis of all the evidence before it.
There is also no merit in PNBs contention that the CA
should not have considered and ruled on the issue of the

validity of the interest rates because the Judicial Affidavit

of Enrique Manalo had not been offered to prove the same
but only "for the purpose of identifying his affidavit."29 As
such, the affidavit was inadmissible to prove the nullity of
the interest rates.
We do not agree.
Section 5, Rule 10 of the Rules of Court is applicable in
two situations.1wphi1 The first is when evidence is
introduced on an issue not alleged in the pleadings and no
objection is interposed by the adverse party. The second is
when evidence is offered on an issue not alleged in the
pleadings but an objection is raised against the
offer.30 This case comes under the first situation. Enrique
Manalos Judicial Affidavit would introduce the very
issues that PNB is now assailing. The question of whether
the evidence on such issues was admissible to prove the
nullity of the interest rates is an entirely different matter.
The RTC accorded credence to PNBs evidence showing
that the Spouses Manalo had been paying the interest
imposed upon them without protest. On the other hand,
the CAs nullification of the interest rates was based on
the credit agreements that the Spouses Manalo and PNB
had themselves submitted.
Based on the foregoing, the validity of the interest rates
and their increases, and the lack of mutuality between the
parties were issues validly raised in the RTC, giving the
Spouses Manalo every right to raise them in their appeal
to the CA. PNBs contention was based on its wrong
appreciation of what transpired during the trial. It is also
interesting to note that PNB did not itself assail the RTCs
ruling on the issues obviously because the RTC had
decided in its favor. In fact, PNB did not even submit its
appellees brief despite notice from the CA.
2.
Substantive Issue
The credit agreement executed succinctly stipulated that
the loan would be subjected to interest at a rate
"determined by the Bank to be its prime rate plus
applicable spread, prevailing at the current month."31 This
stipulation was carried over to or adopted by the
subsequent renewals of the credit agreement. PNB thereby
arrogated unto itself the sole prerogative to determine and
increase the interest rates imposed on the Spouses Manalo.
Such a unilateral determination of the interest rates
contravened the principle of mutuality of contracts
embodied in Article 1308 of the Civil Code.32
The Court has declared that a contract where there is no
mutuality between the parties partakes of the nature of a
contract of adhesion,33 and any obscurity will be construed
against the party who prepared the contract, the latter
being presumed the stronger party to the agreement, and
who caused the obscurity.34 PNB should then suffer the
consequences of its failure to specifically indicate the rates
of interest in the credit agreement. We spoke clearly on
this in Philippine Savings Bank v. Castillo,35 to wit:
The unilateral determination and imposition of the
increased rates is violative of the principle of mutuality of
contracts under Article 1308 of the Civil Code, which
provides that [t]he contract must bind both contracting
parties; its validity or compliance cannot be left to the will

of one of them. A perusal of the Promissory Note will

readily show that the increase or decrease of interest rates
hinges solely on the discretion of petitioner. It does not
require the conformity of the maker before a new interest
rate could be enforced. Any contract which appears to be
heavily weighed in favor of one of the parties so as to lead
to an unconscionable result, thus partaking of the nature of
a contract of adhesion, is void. Any stipulation regarding
the validity or compliance of the contract left solely to the
will of one of the parties is likewise invalid. (Emphasis
supplied)
PNB could not also justify the increases it had effected on
the interest rates by citing the fact that the Spouses
Manalo had paid the interests without protest, and had
renewed the loan several times. We rule that the CA,
citing Philippine National Bank v. Court of
Appeals,36 rightly concluded that "a borrower is not
estopped from assailing the unilateral increase in the
interest made by the lender since no one who receives a
proposal to change a contract, to which he is a party, is
obliged to answer the same and said partys silence cannot
be construed as an acceptance thereof."37
Lastly, the CA observed, and properly so, that the credit
agreements had explicitly provided that prior notice would
be necessary before PNB could increase the interest rates.
In failing to notify the Spouses Manalo before imposing
the increased rates of interest, therefore, PNB violated the
stipulations of the very contract that it had prepared.
Hence, the varying interest rates imposed by PNB have to
be vacated and declared null and void, and in their place
an interest rate of 12% per annum computed from their
default is fixed pursuant to the ruling in Eastern Shipping
Lines, Inc. v. Court of Appeals.38
The CAs directive to PNB (a) to recompute the Spouses
Manalos indebtedness under the oversight of the RTC;
and (b) to refund to them any excess of the winning bid
submitted during the foreclosure sale over their
recomputed indebtedness was warranted and equitable.
Equally warranted and equitable was to make the amount
to be refunded, if any, bear legal interest, to be reckoned
from the promulgation of the CAs decision on March 28,
2006.39 Indeed, the Court said in Eastern Shipping Lines,
Inc. v. Court of Appeals40 that interest should be computed
from the time of the judicial or extrajudicial demand.
However, this case presents a peculiar situation, the
peculiarity being that the Spouses Manalo did not demand
interest either judicially or extrajudicially. In the RTC,
they specifically sought as the main reliefs the
nullification of the foreclosure proceedings brought by
PNB, accounting of the payments they had made to PNB,
and the conversion of their loan into a long term one.41 In
its judgment, the RTC even upheld the validity of the
interest rates imposed by PNB.42 In their appellants brief,
the Spouses Manalo again sought the nullification of the
foreclosure proceedings as the main relief.43 It is evident,
therefore, that the Spouses Manalo made no judicial or
extrajudicial demand from which to reckon the interest on
any amount to be refunded to them. Such demand could
only be reckoned from the promulgation of the CAs
decision because it was there that the right to the refund
was first judicially recognized. Nevertheless, pursuant to
Eastern Shipping Lines, Inc. v. Court of Appeals,44 the
amount to be refunded and the interest thereon should earn

interest to be computed from the finality of the judgment

until the full refund has been made.
Anent the correct rates of interest to be applied on the
amount to be refunded by PNB, the Court, in Nacar v.
Gallery Frames45 and S.C. Megaworld Construction v.
Parada,46 already applied Monetary Board Circular No.
799 by reducing the interest rates allowed in judgments
from 12% per annum to 6% per annum.47 According to
Nacar v. Gallery Frames, MB Circular No. 799 is applied
prospectively, and judgments that became final and
executory prior to its effectivity on July 1, 2013 are not to
be disturbed but continue to be implemented applying the
old legal rate of 12% per annum. Hence, the old legal rate
of 12% per annum applied to judgments becoming final
and executory prior to July 1, 2013, but the new rate of
6% per annum applies to judgments becoming final and
executory after said dater.
Conformably with Nacar v. Gallery Frames and S.C.
Megaworld Construction v. Parada, therefore, the proper
interest rates to be imposed in the present case are as
follows:
1. Any amount to be refunded to the Spouses
Manalo shall bear interest of 12% per annum
computed from March 28, 2006, the date of the
promulgation of the CA decision, until June 30,
2013; and 6% per annum computed from July 1,
2013 until finality of this decision; and
2. The amount to be refunded and its accrued
interest shall earn interest of 6% per annum until
full refund.
WHEREFORE, the Court AFFIRMS the decision
promulgated by the Court of Appeals on March 28, 2006
in CA-G.R. CV No. 84396, subject to the
MODIFICATION that any amount to be refunded to the
respondents shall bear interest of 12% per annum
computed from March 28, 2006 until June 30, 2013, and
6% per annum computed from July 1, 2013 until finality
hereof; that the amount to be refunded and its accrued
interest shall earn interest at 6o/o per annum until full
refund; and DIRECTS the petitioner to pay the costs of
suit.

TIMOTEO BALUYOT, JAIME BENITO, BENIGNO

EUGENIO, ROLANDO GONZALES, FORTUNATO
FULGENCIO and CRUZ-NA-LIGAS HOMESITE
ASSOCIATION,
INC., petitioners,
vs.
THE HONORABLE COURT OF APPEALS, THE
QUEZON CITY GOVERNMENT and UNIVERSITY
OF THE PHILIPPINES, respondents.
This is a petition for review of the decision of the Court of
Appeals, dated November 24, 1995, setting aside an order
of the Regional Trial Court of Quezon City, Branch 89,
and dismissing the complaint filed by petitioners against
private respondents University of the Philippines and the
Quezon City government.

Cruz-na-Ligas to the parcel of land they

have been possessing or occupying as
originally found and recommended in that
Brief dated November 2, 1972 and
Recommendation dated November 7,
1972, copies of which are made integral
parts hereof as Annexes "F" and "G";
7. That defendant UP, pursuant to the said
Indorsement (Annex E) from the Office of
the President of the Republic of the
Philippines,
issued
that
Reply
Indorsement dated September 19, 1984, a
copy of which is herein attached as Annex
"H", pertinent portion of which is quoted
as follows:

The facts are as follows:

Petitioners Timoteo Baluyot, Jaime Benito, Benigno
Eugenio, Rolando Gonzales, and Fortunato Fulgencio are
residents of Barangay Cruz-na-Ligas, 1 Diliman, Quezon
City. The Cruz-na-Ligas Homesite Association, Inc. is a
non-stock corporation of which petitioners and other
residents of Barangay Cruz-na-Ligas are members. On
March 13, 1992, petitioners filed a complaint for specific
performance and damages against, private respondent
University of the Philippines before the Regional Trial
Court of Quezon City, docketed as Civil Case No. 4-9211663. The complaint was later on amended to include
private respondent Quezon City government as defendant.
As amended, the complaint alleges: 2
5. That plaintiffs and their ascendants
have been in open, peaceful, adverse and
continuous possession in the concept of
an owner since memory can no longer
recall of that parcel of riceland known
[as] Sitio Libis, Barrio Cruz-na-Ligas,
Quezon City (now Diliman, Quezon
City), as delineated in the Plan herein
attached as Annex "B" while the members
of the plaintiff Association and their
ascendants have possessed since time
immemorial
openly,
adversely,
continuously and also in the concept of an
owner, the rest of the area embraced by
and within the Barrio Cruz-na-Ligas,
Diliman, Quezon City as shown in that
Plan herein attached as Annex "C" in all
consisting of at least forty (42) hectares;
6. That since October 1972, the claims of
the plaintiffs and/or members of plaintiff
Association have been the subject of
quasi-judicial
proceedings
and
administrative investigations in the
different branches of the government
penultimately resulting in the issuance of
that Indorsement dated May 7, 1975 by
the Bureau of Lands, a copy of which is
made an integral pan of Annex "D", and
ultimately, in the issuance of the
Indorsement of February 12, 1985, by the
office of the President of the Republic of
the Philippines, a copy of which is herein
attached as Annex "E" confirming the
rights of the bonafide residents of Barrio

2.
In
1979,
the
U.P. Board of Regents
approved the donation of
about 9.2 hectares of the
site, directly to the
residents of Brgy. Krus
Na Ligas. After several
negotiations with the
residents, the area was
increased to 15.8 hectares
(158,379 square meters);
(emphasis
supplied).1wphi1.nt
3. Notwithstanding the
willingness of U.P. to
proceed
with
the
donation, Execution of
the legal instrument to
formalize
it
failed
because
of
the
unreasonable demand of
the residents for an area
bigger than 15.8 hectares.
8. That upon advise of counsel and close
study of the said offer of defendant UP to
Donate 15.8379 hectares, plaintiff
Association proposed to accept and the
defendant UP manifested in writing [its]
consent to the intended donation directly
to the plaintiff Association for the benefit
of the bonafide residents of Barrio Cruzna-Ligas and plaintiffs' Association have
agreed to comply with the terms and
conditions of the donation;
9. That, however, defendant UP backedout from the arrangement to Donate
directly to the plaintiff Association for the
benefit of the qualified residents and highhandedly resumed to negotiate the
donation thru the defendant Quezon City
Government
under
the
terms
disadvantageous or contrary to the rights
of the bonafide residents of the Barrio as
shown in the Draft of Deed of Donation
herein attached as Annex "I";

10. That plaintiff Association forthwith amended [its]

petition in the pending case LRC No. 3151 before Branch
100 of the Regional Trial Court of Quezon City by adding
the additional cause of action for specific performance
aside from the exclusion from the technical description of
certificate of title of defendant UP the area embraced in
the Barrio Cruz-na-Ligas, consisting of at least forty-two
(42) hectares, more or less, and praying in the said
Amended Petition for a writ of preliminary injunction to
restrain defendant UP from donating the area to the
defendant Quezon City Government, a copy of the said
Amended Petition is herein attached as Annex "J";
11. That, after due notice and hearing, the application for
writ of injunction as well as the opposition of defendant
UP, the Order dared January 24, 1986 granting the writ of
preliminary injunction was issued, a copy of which is
herein attached as Annex "K";
12. That in the hearing of the Motion for Reconsideration
filed by defendant UP. Reconsideration is herein copy of
the said Motion for attached as Annex "L", plaintiff
Association finally agreed to the lifting of the said Order
(Annex K) granting the injunction after defendant UP
made an assurance in their said Motion for
Reconsideration that the donation to the defendant Quezon
City Government will be for the benefit of the residents of
Cruz-Na-Ligas as shown in the following:
6. The execution of the Deed of Donation in favor of the
Quezon City government will not work any injustice to
the petitioners.
As well stated in Respondent's Opposition to the Prayer
for Issuance of a Writ of Preliminary Injunction, it is to
the best interest of the Petitioners that such a deed be
executed.
The plan to Donate said property to the residents of Bgy.
Krus-na-Ligas, that is, throughthe Quezon City
government, is to their best interests. Left alone, the
present land and physical development of the area leaves
much to be desired. Road and drainage networks have to
be constructed, water and electric facilities installed, and
garbage collection provided for. The residents, even
collectively, do not have the means and resources to
provide for themselves such basis facilities which are
necessary if only to upgrade their living condition.
Should the proposed donation push through, the residents
would be the first to benefit.
thus, Branch 100 of this Honorable Court issued that
Order dated April 2, 1986, lifting the injunction, a copy of
which is hereby attached as Annex "M";
13. That, however, defendant UP took exception to the
aforesaid Order lifting the Order of Injunction and insisted
[on] the dismissal of the case; thus, it was stated that:
2. Respondent has consistently taken the position that
efforts to expedite the formalization of a Deed of
Donation for the benefit of the residents of Barangay
Kruz-na-Ligas should not only be pre-conditioned on the
lifting of the Writ of Preliminary Injunction, but also the
dismissal of the Petition;

in defendant UP's Motion for Reconsideration of the Order

dated April 2, 1986, a copy of the said Motion is herein
attached as Annex "N";
14. That plaintiff Association in [its] "Comment" on the
Motion for Reconsideration of the Order dated April 2,
1986, filed on June 2, 1986, manifested [its] willingness to
the dismissal of the case, aside from [its] previous consent
to the lifting of the preliminary injunction; provided, that
the area to be Donated thru the defendant Quezon City
government be subdivided into lots to be given to the
qualified residents together with the certificate of titles,
without cost, a copy of the said Comment is hereby
attached as Annex "O";
15. That, that was why, in the hearing re-scheduled on
June 13, 1986 of defendant UP's Motion for
Reconsideration of the Order dated April 2, 1986 (Annex
N), the Order dated June 13, 1986, was issued, the full text
of which is quoted as follows:
After hearing the manifestation of Atty. Angeles for the
petitioners and Atty. Raval for the respondent University
of the Philippines, since the petitioners' counsel was the
first to make a manifestation that this case which is now
filed before this court should be dismissed first without
prejudice but because of the vehement objection of the
University of the Philippines, thru counsel, that a
dismissal without prejudice creates a cloud on the title of
the University of the Philippines and even with or without
this case filed, the University of the Philippines has
already decided to have the property subject of litigation
Donated to the residents of Cruz-na-ligas with, of course,
the conditions set therein, let this case be DISMISSED
without pronouncement as to cost.
As to the charging lien filed by Petitioners thru counsel, it
will be a sole litigation between the petitioners and the
oppositors both represented by counsel, with the
University of the Philippines being neutral in this case.
and a copy of the said Order is herein attached as Annex
"P";
16. That, true to [its] commitment stated in the aforesaid
Order of June 13, 1986, defendant UP executed that Deed
of Donation on August 5, 1986, in favor of the defendant
Quezon City Government for the benefit of the qualified
residents of Cruz-na-Ligas; however, neither the plaintiffs
herein nor plaintiff Association officers had participated in
any capacity in the act of execution of the said deed of
donation, a copy of the said executed Deed of Donation is
herein attached as Annex "Q";
17. That under the said deed of donation, the 15.8379
hectares were ceded, transferred and conveyed and the
defendant Quezon City Government accepted the
Donation under the terms and conditions, pertinent
portions of which are quoted as follows:
This donation is subject to the following conditions:
xxx xxx xxx
2. The DONEE shall, within eighteen (18) months from
the signing hereof, undertake at its expense the following:

a. Cause the removal of structures built on the boundaries

of the Donated lot;
b. Relocate inside the Donated lot all families who are
presently outside of the Donated lot;
c. Relocate all families who cannot be relocated within the
boundaries of the Donated lot to a site outside of the
University of the Philippines campus in Diliman, Quezon
City;
d. Construct a fence on the boundaries adjoining Kruz-naLigas and the University.
In the construction of the fence, the DONEE shall
establish a ten-meter setback in the area adjacent to Pook
Amorsolo and the Peripheral Road (C.P. Garcia Street);
e. Construct a drainage canal within the area Donated
along the boundary line between Kruz- na-ligas and Pook
Amorsolo.
In the construction of the fence and the drainage canal, the
DONEE shall conform to the plans and specifications
prescribed by the DONOR.
xxx xxx xxx
5. The DONEE shall, after the lapse of three (3) years,
transfer to the qualified residents by way of donation the
individual lots occupied by each of them, subject to
whatever conditions the DONEE may wish to impose on
said donation;
6. Transfer of the use of any lot in the property Donated
during the period of three (3) years referred to in Item 4
above, shall be allowed only in these cases where transfer
is to be effected to immediate members of the family in
the ascending and descending line and said Transfer shall
be made known to the DONOR. Transfer shall be affected
by the Donee;
7. The costs incidental to this Deed, including the
registration of the property Donated shall be at the
expense of the DONEE.
The Donee shall also be responsible for any other
legitimate obligation in favor of any third person arising
out of, in connection with, or by reason of, this donation.
18. That the defendant Quezon City Government
immediately prepared the groundworks in compliance
with the afore-quoted terms and conditions; however,
defendant UP under the officer-in-charge then and even
under the incumbent President, Mr. Jose Abueva, had
failed to deliver the certificate of title covering the
property to be Donated to enable the defendant Quezon
City Government to register the said Deed of Donation so
that corresponding certificate of title be issued under its
name;
19. That defendant UP had continuously and unlawfully
refused, despite requests and several conferences made, to
comply with their reciprocal duty, to deliver the certificate
of title to enable the Donee, the defendant Quezon City
Government, to register the ownership so that the

defendant Quezon City Government can legally and fully

comply with their obligations under the said deed of
donation;
20. That upon expiration of the period of eighteen (18)
[months], for alleged non-compliance of the defendant
Quezon City Government with terms and conditions
quoted in par. 16 hereof, defendant UP thru its President,
Mr. Jose Abueva, unilaterally, capriciously, whimsically
and unlawfully issued that Administrative Order No. 21
declaring the deed of donation revoked and the Donated
property be reverted to defendant UP;
21. That the said revocation and reversion without judicial
declaration is illegal and prejudicial to the rights of the
plaintiffs who are the bonafide residents or who represent
the bonafide residents of the Barrio Cruz-na-Ligas
because: firstly, they were not made bound to comply with
the terms and conditions of the said donation allegedly
violated
by
the
defendant
Quezon
City
Government;secondly, defendant UP, as averred in the
preceding paragraphs 9 and 11, was the one who insisted
that the donation be coursed through the defendant
Quezon City Government; and the said revocation or
reversion are likewise pre-judicial to third parties who
acquired rights therefrom;
22. That, as it apparently turned out, the plaintiff
Association, who duly represented the qualified or
bonafide resident of Barrio Cruz-na-Ligas, was deceived
into consenting to the lifting of the injunction in said LRC
Case No. Q-3151 and in agreeing to the dismissal of the
said LRC Case No. Q-3151 when defendant unjustifiably
revoked the donation which they undertook as a condition
to the dismissal of LRC Case No. 3151;
23. That by reason of the deception, the herein plaintiffs
hereby reiterate their claims and the claims of the bonafide
residents and resident/farmers of Barrio Cruz-na-Ligas
[to] the ownership of forty-two (42) hectares area they and
their predecessors-in-interest have occupied and
possessed; parenthetically, the said 42 hectares portion are
included in the tax declaration under the name of
defendant UP who is exempted from paying real estate
tax; hence, there is no assessment available;
24. That by reason of bad faith and deceit by defendant
UP in the execution and in compliance with [its]
obligations under the said Deed of Donation (Annex Q
hereof) plaintiffs have suffered moral damages in the
amount of at least P300,000.00;
25. That because of wanton and fraudulent acts of
defendant UP in refusing to comply with what is
incumbent upon [it] under the Deed of Donation (Annex
Q) and in whimsically and oppressively declaring the
revocation of the said deed of donation and the reversion
of the 15.8 hectares Donated, [it] should be made liable to
pay exemplary damages in the sum of P50,000.00 to serve
as example in the interest of public good;
26. That because of said defendant UP's unlawful acts,
plaintiffs have been compelled to retain the services of
their attorneys to prosecute this case with whom they
agreed to pay the sum of Fifty Thousand Pesos
(P50,000.00) as attorney's fees; and by way of:

APPLICATION FOR WRIT OF

PRELIMINARY INJUNCTION

3. Ordering defendant UP to pay for plaintiffs' moral

damages of P300,000.00, exemplary damages of
P50,000.00, and costs of suit;

(a) Plaintiffs hereby reallege and reproduce herein by

reference all the material and relevant allegations in the
preceding paragraphs;

4. Enjoining defendant UP to pay professional fees of

P50,000.00 of the undersigned attorneys for the plaintiffs;
and

(b) Having legally established and duly recognized rights

on the said parcel of lands as shown in the documents
marked herein as Annexes "D"; E; F; G; and M, plaintiffs
have the rights to be protected by an injunctive writ or at
least a restraining order to restrain and to order defendant
UP from:

Plaintiffs further respectfully pray for other just and

equitable reliefs.
Earlier, on May 15, 1992, the trial court denied petitioners'
application for preliminary injunction. Its order stated: 3
ORDER

1) Ejecting the plaintiffs-farmers and from demolishing

the improvements in the parcel of riceland or farmlands
situated at Sitio Libis of Barrio Cruz-na-Ligas, embraced
in the claims of the plaintiffs as shown in these
photographs herein attached as Annexes "R" to "R-3";
2) Executing another deed of donation with different terms
and conditions in favor of another and for the benefit of
additional occupants who are not bonafide residents of the
Barrio or Barangay Cruz-na-Ligas;
(c) Defendant UP has already started ejecting the plaintiffs
and demolishing their improvements on the said riceland
and farmlands in order to utilize the same for the
residential house project to the irreparable damages and
injuries to the plaintiffs-farmers, unless restrained or
enjoined to desist, plaintiffs will continue to suffer
irreparable damages and injuries;
(d) Plaintiffs are ready and willing to file the injunctive
bond in such amount that may be reasonably fixed;
PRAYER
WHEREFORE, it is respectfully prayed to this Honorable
Court that before the conduct of the proper proceedings, a
writ of preliminary injunction or at least a temporary
restraining order be issued, ordering defendant UP to
observe status quo; thereafter, after due notice and
hearing, a writ of preliminary injunction be issued; (a) to
restrain defendant UP or to their representative from
ejecting the plaintiffs from and demolishing their
improvements on the riceland or farmland situated at Sitio
Libis; (b) to order defendant UP to refrain from executing
another deed of donation in favor another person or entity
and in favor of non-bonafide residents of Barrio Cruz-naLigas different from the Deed of Donation (Annex Q
hereof), and after trial on the merits, judgment be
rendered:
1. Declaring the Deed of Donation (Annex Q) as valid and
subsisting and ordering the defendant UP to abide by the
terms and conditions thereof;
2. Adjudging the defendant University of the Philippines
to segregate the riceland or farmlands as additional area
embraced by the Barrio Cruz-na-Ligas, pursuant to the
First Indorsement of August 10, 1984 (Annex E) and
pursuant to Findings, Reports and Recommendation
(Annex G) of the Bureau of Lands with an estimated
assessed value of P700,000.00;

Acting on plaintiffs' application for the issuance of a

temporary restraining order/preliminary injunction and the
opposition thereto of the defendant filed on April 3, 1992,
as well as plaintiffs' reply therewith filed on April 23,
1992, considered in the light of the affidavit executed on
April 23, 1992 by Timoteo Baluyot, Sr. and by Jaime
Benito, Benigno Eugenio, Rolando Gonzales and
Fortunato Fulgencio executed on April 21, 1929, for the
plaintiffs; and, the affidavit of merit executed on April 28,
1992, by Atty. Carmelita Yadao-Guno, for the defendant,
it appearing that the principal action in this case is one for
the specific performance, apparently, of the Deed of
Donation executed on August 8, 1986, by defendant
University of the Philippines in favor of the Quezon City
Government, involving the land in question, in virtue of
which, it is clear that the plaintiffs are not parties to the
said deed of donation, by reason of which, consequently,
there has not been established by the plaintiffs a clear
legal right to the enforcement of the said deed of donation,
especially as the said deed was already validly revoked by
the University of the Philippines, thru its president, Jose
Abueva, in his Administrative Order No. 21, for which
reason the same could no longer be enforced, plaintiffs'
prayer for the issuance of a temporary restraining
order/writ of preliminary injunction, is DENIED.
SO ORDERED.
Petitioners moved for a reconsideration of the above
order. Without resolving petitioners' motion, the trial court
ordered petitioners to amend their complaint to implead
respondent Quezon City government as defendant. 4Hence,
the amended complaint was filed on June 10, 1992, in
which it is alleged:
4. That the Quezon City Government . . . which should be
joined as party plaintiff is instead impleaded herein as
party defendant, because its consent can not be secured
within a reasonable time;
On July 27, 1992, respondent city government filed its
Answer to the Amended Complaint with CrossClaim. 5However, on November 29, 1993, it moved to
withdraw its cross-claim against UP 6 on the ground that,
after conferring with university officials, the city
government had recognized "the propriety, validity and
legality of the revocation of the Deed of Donation." 7
The motion was granted by the trial court in its order,
dated December 22, 1994. 8 On the same day, a Joint
Motion to Dismiss was filed by UP and the Quezon City

government on the ground that the complaint fails to state

a cause of action. 9 Petitioners opposed the motion.
On April 26, 1995, the trial court denied respondents'
motion to dismiss on the ground that "a perusal of
[petitioners'] amended complaint, specifically paragraph 5
thereof, . . . shows that it necessarily alleges facts entitling
[petitioners] to acquire ownership over the land in
question, by reason of laches, which cannot be disposed of
and resolved at this stage without a trial on the
merits." 10 The trial court, however, reiterated its ruling
that petitioners did not have a cause of action for specific
performance on the ground that the deed of donation had
already been revoked as stated in its order denying
injunction.
On August 14, 1995, respondents filed a petition
for certiorari with the Court of Appeals, charging the trial
court with grave abuse of discretion in refusing to dismiss
the complaint filed by petitioners. Respondents contended
that
1. Respondent Judge himself had declared that
[petitioners] clearly are not parties to the deed of donation
sought to be enforced thus they had not shown clear legal
right to the enforcement of said deed of donation which is
their principal cause of action; and
2. Under the factual circumstances obtaining, the
respondent judge gravely erred in denying the joint motion
to dismiss and declaring that [petitioners] are entitled to
acquire ownership over the land in question by reason of
laches through a trial on the merits; such constitutes a
collateral attack on [respondent UP's] title in the same suit
for specific performance.
On November 24, 1995, the appellate court rendered a
decision setting aside the trial court's order of April 26,
1995 and ordering the dismissal of Civil Case No. 4-9211663. The appellate court ruled that
1. Petitioners' complaint did not allege any claim for the
annulment of UP's title over the portion of land concerned
or the reconveyance thereof to petitioners;
2. The alleged cause of action based on ownership of the
land by petitioners was tantamount to a collateral attack
on the title of UP which is not allowed under the law; and
3. There is no acquisition of ownership by laches.
Hence, this petition for review on certiorari based on the
following grounds:
I. THE RESPONDENT COURT OF APPEALS WAS IN
ERROR IN CONCLUDING THAT THE TRIAL COURT
ACTED WITH GRAVE ABUSE OF DISCRETION IN
DENYING THE JOINT MOTION TO DISMISS.
II. IN DISMISSING THE AMENDED COMPLAINT,
THE RESPONDENT APPELLATE COURT HAS
ACTED IN EXCESS [OF] JURISDICTION WHEN IT
MADE [THE] FINDING AND CONCLUSION THAT
THE REVOCATION OF THE DONATION IS VALID
WHEN
THAT
IS
THE
PRIMARY
AND
CONTROVERTED ISSUE INVOLVING VARIED
QUESTIONS OF FACTS.

Petitioners argue that, on its face, their amended complaint

alleges facts constituting a cause of action which must be
fully explored during trial. They cite paragraphs 18, 19,
and 20 of their complaint questioning the validity of the
revocation of the donation and seek the enforcement of the
donation through specific performance. 11
On the other hand, respondents contend that by seeking
specific performance of the deed of donation as their
primary cause of action, petitioners cannot at the same
time claim ownership over the property subject of the
donation by virtue of laches or acquisitive prescription.
Petitioners cannot base their case on inconsistent causes of
action. Moreover, as the trial court already found the deed
to have been validly revoked, the primary cause of action
was already thereby declared in existent. Hence, according
to respondents, the Court of Appeals correctly dismissed
the complaint. 12
First. The question is whether the complaint states a cause
of action. The trial court held that inasmuch as the
donation made by UP to the Quezon City government had
already been revoked, petitioners, for whose benefit the
donation had been made, had no cause of action for
specific performance. Nevertheless, it denied respondents'
joint motion to dismiss petitioners' action on the ground
that respondent UP was barred from contesting petitioners'
right to remain in possession on the ground of laches.
This is error. While prescription does not run against
registered lands, nonetheless a registered owner's action to
recover possession of his land may be barred by laches.
As held in Mejia de Lucas v. Gamponia: 13
[W]hile no legal defense to the action lies, an equitable
one lies in favor of the defendant and that is, the equitable
defense of laches. No hold that the defense of prescription
or adverse possession in derogation of the title of the
registered owner Domingo Mejia does not lie, but that of
the equitable defense of laches. Otherwise stated, we hold
that while defendant may not be considered as having
acquired title by virtue of his and his predecessors' long
continued possession for 37 years, the original owner's
right to recover back the possession of the property and
the title thereto from the defendant has, by the long period
of 37 years and by patentee's inaction and neglect, been
converted into a stale demand.
Thus, laches is a defense against a registered owner suing
to recover possession of the land registered in its name.
But UP is not suing in this case. It is petitioners who are,
and their suit is mainly to seek enforcement of the deed of
donation made by UP in favor of the Quezon City
government. The appellate court therefore correctly
overruled the trial court on this point. Indeed, petitioners
do not invoke laches. What they allege in their complaint
is that they have been occupying the land in question from
time immemorial, adversely, and continuously in the
concept of owner, but they are not invoking laches. If at
all, they are claiming ownership by prescription which, as
already stated, is untenable considering that the land in
question is a registered land. Nor can petitioners question
the validity of UP's title to the land. For as the Court of
Appeals correctly held, this constitutes a collateral attack
on registered title which is not permitted.

On the other hand, we think that the Court of Appeals

erred in dismissing petitioners' complaint for failure to
state a cause of action.

2. The same paragraph, that this stipulation is part of

conditions and obligations imposed by UP, as donor, upon
the Quezon City government, as donee;

A cause of action exists if the following elements are

present, namely: (1) a right in favor of the plaintiff by
whatever means and under whatever law it arises or is
created; (2) an obligation on the part of the defendant to
respect or not to violate such right; and (3) an act or
omission on the part of such defendant in violation of the
right of the plaintiff or constituting a breach of the
obligations of the defendant to the plaintiff for which the
latter may maintain an action for recovery of damages. 14

3. Paragraphs 15 and 16, that the intent of the parties to

the deed of donation was to confer a favor upon
petitioners by transferring to the latter the lots occupied by
them;

We find all the elements of a cause of action contained in

the amended complaint of petitioners. While, admittedly,
petitioners were not parties to the deed of donation, they
anchor their right to seek its enforcement upon their
allegation that they are intended beneficiaries of the
donation to the Quezon City government. Art. 1311,
second paragraph, of the Civil Code provides:

4. Paragraph 19, that conferences were held between the

parties to convince UP to surrender the certificates of title
to the city government, implying that the donation had
been accepted by petitioners by demanding fulfillment
thereof 16 and that private respondents were aware of such
acceptance; and
5. All the allegations considered together from which it
can be fairly inferred that neither of private respondents
acted in representation of the other; each of the private
respondents had its own obligations, in view of conferring
a favor upon petitioners.

If a contract should contain some

stipulation in favor of a third person, he
may demand its fulfillment provided he
communicated his acceptance to the
obliger before its revocation. A mere
incidental benefit or interest of a person is
not sufficient. The contracting parties
must have clearly and deliberately
conferred a favor upon a third person.

The amended complaint further alleges that respondent

UP has an obligation to transfer the subject parcel of land
to the city government so that the latter can in turn comply
with its obligations to make improvements on the land and
thereafter transfer the same to petitioners but that, in
breach of this obligation, UP failed to deliver the title to
the land to the city government and then revoked the deed
of donation after the latter failed to fulfill its obligations
within the time allowed in the contract.

Under this provision of the Civil Code, the following

requisites must be present in order to have a
stipulation pour autrui: 15

For the purpose of determining the sufficiency of

petitioners' cause of action, these allegations of the
amended complaint must be deemed to be hypothetically
true. So assuming the truth of the allegations, we hold that
petitioners have a cause of action against UP. Thus,
in Kauffman v. National Bank, 17 where the facts were

(1) there must be a stipulation in favor of

a third person;
(2) the stipulation must be a part, not the
whole of the contract;
(3) the contracting parties must have
clearly and deliberately conferred a favor
upon a third person, not a mere incidental
benefit or interest;
(4) the third person must have
communicated his acceptance to the
obliger before its revocation; and
(5) neither of the contracting parties bears
the legal representation or authorization
of the third party.
The allegations in the following paragraphs of the
amended complaint are sufficient to bring petitioners'
action within the purview of the second paragraph of Art.
1311 on stipulations pour autrui:
1. Paragraph 17, that the deed of donation contains a
stipulation that the Quezon City government, as donee, is
required to transfer to qualified residents of Cruz-naLigas, by way of donations, the lots occupied by them;

Stated in bare simplicity the admitted

facts show that the defendant bank for a
valuable consideration paid by the
Philippine Fiber and Produce Company
agreed on October 9, 1918, to cause a sum
of money to be paid to the plaintiff in
New York City; and the question is
whether the plaintiff can maintain an
action against the bank for the non
performance of said undertaking. In other
words, is the lack of privity with the
contract on the part of the plaintiff fatal to
the maintenance of an action by him? 18
it was held:
In the light of the conclusions thus stated,
the right of the plaintiff to maintain the
present action is clear enough; for it is
undeniable that the bank's promise to
cause a definite sum of money to be paid
to the plaintiff in New York City is a
stipulation in his favor within the meaning
of the paragraph above quoted; and the
circumstances under which that promise
was given disclose an evident intention on
the part of the contracting parties that the
plaintiff should have that money upon

demand in New York City. The

recognition of this unqualified right in the
plaintiff to receive the money implies in
our opinion the right in him to maintain
an action to recover it; and indeed if the
provision in question were not applicable
to the facts now before us, it would be
difficult to conceive of a case arising
under it.
It will be noted that under the paragraph
cited a third person seeking to enforce
compliance with a stipulation in his favor
must signify his acceptance before it has
been revoked. In this case the plaintiff
clearly signified his acceptance to the
bank by demanding payment; and
although the Philippine National Bank
had already directed its New York agency
to withhold payment when this demand
was made, the rights of the plaintiff
cannot be considered to have been
prejudiced by that fact. The word
"revoked," as there used, must be
understood to imply revocation by the
mutual consent of the contracting parties,
or at least by direction of the party
purchasing the exchange. 19
It is hardly necessary to state that our conclusion that
petitioners' complaint states a cause of action against
respondents is in no wise a ruling on the merits. That is for
the trial court to determine in light of respondent UP's
defense that the donation to the Quezon City government,
upon which petitioners rely, has been validly revoked.
Respondents contend, however, that the trial court has
already found that the donation (on which petitioners base
their action) has already been revoked. This contention
has no merit. The trial court's ruling on this point was
made in connection with petitioners' application for a writ
of preliminary injunction to stop respondent UP from
ejecting petitioners. The trial court denied injunction on
the ground that the donation had already been revoked and
therefore petitioners had no clear legal right to be
protected. It is evident that the trial court's ruling on this
question was only tentative, without prejudice to the final
resolution of the question after the presentation by the
parties
of
their
evidence. 20
Second. It is further contended that the amended
complaint alleges inconsistent causes of action for specific
performance of the deed of donation. Respondents make
much of the fact that while petitioners claim to be the
beneficiaries-donees of 15.8 hectares subject of the
deed, 21 they at the same time seek recovery/delivery of
title to the 42 hectares of land included in UP's certificate
of title. 22
These are not inconsistent but, rather, alternative causes of
action which Rule 8, 2 of the Rules of Court allows:
Alternative causes of action or defenses.
A party may set forth two or more
statements of a claim or defense
alternatively or hypothetically, either in

one cause of action or defense or in

separate causes of action or defenses.
When two or more statements are made in
the alternative and one of them if made
independently would be sufficient, the
pleading is not made insufficient by the
insufficiency of one or more of the
alternative statements.
Thus, the parties are allowed to plead as many
separate claims as they may have, regardless of
consistency, provided that no rules regarding
venue and joinder of parties are violated. 23
Moreover, the subjects of these claims are not exactly and
entirely the same parcel of land; petitioners' causes of
action consist of two definite and distinct claims. The rule
is that a trial court judge cannot dismiss a complaint which
contained two or more causes of action where one of them
clearly states a sufficient cause of action against the
defendant. 24
WHEREFORE, the decision of the Court of Appeals is
REVERSED and the case is REMANDED to the Regional
Trial Court of Quezon City, Branch 89, for trial on the
merits.

INTEGRATED PACKAGING CORP., petitioner,

vs.
COURT OF APPEALS and FIL-ANCHOR PAPER
CO., INC., respondents.

1978; Book VII, on or before November 1979 and; Book

VIII, on or before November 1980, with a minimum of
300,000 copies at a price of P10.00 per copy or a total cost
of P3,000,000.00.

QUISUMBING, J.:

As of July 30, 1979, private respondent had delivered to

petitioner 1,097 reams of printing paper out of the total
3,450 reams stated in the agreement. Petitioner alleged it
wrote private respondent to immediately deliver the
balance because further delay would greatly prejudice
petitioner. From June 5, 1980 and until July 23, 1981,
private respondent delivered again to petitioner various
quantities of printing paper amounting to P766,101.70.
However, petitioner encountered difficulties paying
private respondent said amount. Accordingly, private
respondent made a formal demand upon petitioner to settle
the outstanding account. On July 23 and 31, 1981 and
August 27, 1981, petitioner made partial payments
totalling P97,200.00 which was applied to its back
accounts covered by delivery invoices dated September
29-30, 1980 and October 1-2, 1980.3

This is a petition to review the decision of the Court of

Appeals rendered on April 20, 1994 reversing the
judgment of the Regional Trial Court of Caloocan City in
an action for recovery of sum of money filed by private
respondent against petitioner. In said decision, the
appellate court decreed:
WHEREFORE, in view of all the foregoing, the
appealed judgment is hereby REVERSED and
SET ASIDE. Appellee [petitioner herein] is
hereby ordered to pay appellant [private
respondent herein] the sum of P763,101.70, with
legal interest thereon, from the date of the filing of
the Complaint, until fully paid.
SO ORDERED.1
The RTC judgment reversed by the Court of Appeals had
disposed of the complain as follows:
WHEREFORE, judgment is hereby rendered:
Ordering plaintiff [herein private respondent] to
pay defendant [herein petitioner] the sum of
P27,222.60 as compensatory and actual damages
after deducting P763,101.70 (value of materials
received by defendant) from P790,324.30
representing
compensatory
damages
as
defendant's unrealized profits;
Ordering plaintiff to pay defendant the sum of
P100,000.00 as moral damages;
Ordering plaintiff to pay the sum of P30,000.00
for attorney's fees; and to pay the costs of suit.
SO ORDERED.2
The facts, as culled from the records, are as follows:
Petitioner and private respondent executed on May 5,
1978, an order agreement whereby private respondent
bound itself to deliver to petitioner 3,450 reams of printing
paper, coated, 2 sides basis, 80 lbs., 38" x 23", short grain,
worth P1,040,060.00 under the following schedule: May
and June 1978 450 reams at P290.00/ream; August and
September 1978 700 reams at P290/ream; January
1979 575 reams at P307.20/ream; March 1979 575
reams at P307.20/ream; July 1979 575 reams at
307.20/ream; and October 1979 575 reams at
P307.20/ream. In accordance with the standard operating
practice of the parties, the materials were to be paid within
a minimum of thirty days and maximum of ninety days
from delivery.
Later, on June 7, 1978, petitioner entered into a contract
with Philippine Appliance Corporation (Philacor) to print
three volumes of "Philacor Cultural Books" for delivery
on the following dates: Book VI, on or before November

Meanwhile, petitioner entered into an additional printing

contract with Philacor. Unfortunately, petitioner failed to
fully comply with its contract with Philacor for the
printing of books VIII, IX, X and XI. Thus, Philacor
demanded compensation from petitioner for the delay and
damage it suffered on account of petitioner's failure.
On August 14, 1981, private respondent filed with the
Regional Trial Court of Caloocan City a collection suit
against petitioner for the sum of P766,101.70, representing
the unpaid purchase price of printing paper bought by
petitioner on credit.
In its answer, petitioner denied the material allegations of
the complaint. By way of counterclaim, petitioner alleged
that private respondent was able to deliver only 1,097
reams of printing paper which was short of 2,875 reams,
in total disregard of their agreement; that private
respondent failed to deliver the balance of the printing
paper despite demand therefor, hence, petitioner suffered
actual damages and failed to realize expected profits; and
that petitioner's complaint was prematurely filed.
After filing its reply and answer to the counterclaim,
private respondent moved for admission of its
supplemental complaint, which was granted. In said
supplemental complaint, private respondent alleged that
subsequent to the enumerated purchase invoices in the
original complaint, petitioner made additional purchases
of printing paper on credit amounting to P94,200.00.
Private respondent also averred that petitioner failed and
refused to pay its outstanding obligation although it made
partial payments in the amount of P97,200.00 which was
applied to back accounts, thus, reducing petitioner's
indebtedness to P763,101.70.
On July 5, 1990, the trial court rendered judgment
declaring that petitioner should pay private respondent the
sum of P763,101.70 representing the value of printing
paper delivered by private respondent from June 5, 1980
to July 23, 1981. However, the lower court also found
petitioner's counterclaim meritorious. It ruled that were it
not for the failure or delay of private respondent to deliver
printing paper, petitioner could have sold books to
Philacor and realized profit of P790,324.30 from the sale.

It further ruled that petitioner suffered a dislocation of

business on account of loss of contracts and goodwill as a
result of private respondent's violation of its obligation,
for which the award of moral damages was justified.
On appeal, the respondent Court of Appeals reversed and
set aside the judgment of the trial court. The appellate
court ordered petitioner to pay private respondent the sum
of P763,101.70 representing the amount of unpaid printing
paper delivered by private respondent to petitioner, with
legal interest thereon from the date of the filing of the
complaint until fully paid.4 However, the appellate court
deleted the award of P790,324.30 as compensatory
damages as well as the award of moral damages and
attorney's fees, for lack of factual and legal basis.
Expectedly, petitioner filed this instant petition contending
that the appellate court's judgment is based on erroneous
conclusions of facts and law. In this recourse, petitioner
assigns the following errors:
[I]
THE COURT OF APPEALS ERRED IN
CONCLUDING
THAT
PRIVATE
RESPONDENT DID NOT VIOLATE THE
ORDER AGREEMENT.
[II]
THE COURT OF APPEALS ERRED IN
CONCLUDING THAT RESPONDENT IS NOT
LIABLE FOR PETITIONER'S BREACH OF
CONTRACT WITH PHILACOR.
[III]
THE COURT OF APPEALS ERRED IN
CONCLUDING THAT PETITIONER IS NOT
ENTITLED
TO
DAMAGES
AGAINST
PRIVATE RESPONDENT. 5
In our view, the crucial issues for resolution in this case
are as follows:

the other. Reciprocal obligations are to be performed

simultaneously, so that the performance of one is
conditioned upon the simultaneous fulfillment of the
other.8Thus, private respondent undertakes to deliver
printing paper of various quantities subject to petitioner's
corresponding obligation to pay, on a maximum 90-day
credit, for these materials. Note that in the contract,
petitioner is not even required to make any deposit, down
payment or advance payment, hence, the undertaking of
private respondent to deliver the materials is conditional
upon payment by petitioner within the prescribed period.
Clearly, petitioner did not fulfill its side of the contract as
its last payment in August 1981 could cover only
materials covered by delivery invoices dated September
and October 1980.
There is no dispute that the agreement provides for the
delivery of printing paper on different dates and a separate
price has been agreed upon for each delivery. It is also
admitted that it is the standard practice of the parties that
the materials be paid within a minimum period of thirty
(30) days and a maximum of ninety (90) days from each
delivery.9 Accordingly,
the
private
respondent's
suspension of its deliveries to petitioner whenever the
latter failed to pay on time, as in this case, is legally
justified under the second paragraph of Article 1583 of the
Civil Code which provides that:
When there is a contract of sale of goods to be
delivered by stated installments, which are to be
separately paid for, and the seller makes defective
deliveries in respect of one or more installments,
or the buyer neglects or refuses without just cause
to take delivery of or pay for one or more
installments, it depends in each case on the terms
of the contract and the circumstances of the case,
whether the breach of contract is so material as to
justify the injured party in refusing to proceed
further and suing for damages for breach of the
entire contract, or whether the breach is severable,
giving rise to a claim for compensation but not to
a right to treat the whole contract as broken.
(Emphasis supplied)

Petitioner's contention lacks factual and legal basis, hence,

bereft of merit.

In this case, as found a quo petitioner's evidence failed to

establish that it had paid for the printing paper covered by
the delivery invoices on time. Consequently, private
respondent has the right to cease making further delivery,
hence the private respondent did not violate the order
agreement. On the contrary, it was petitioner which
breached the agreement as it failed to pay on time the
materials delivered by private respondent. Respondent
appellate court correctly ruled that private respondent did
not violate the order agreement.

Petitioner contends, firstly, that private respondent

violated the order agreement when the latter failed to
deliver the balance of the printing paper on the dates
agreed upon.

On the second assigned error, petitioner contends that

private respondent should be held liable for petitioner's
breach of contract with Philacor. This claim is manifestly
devoid of merit.

The transaction between the parties is a contract of sale

whereby private respondent (seller) obligates itself to
deliver printing paper to petitioner (buyer) which, in turn,
binds itself to pay therefor a sum of money or its
equivalent (price).6 Both parties concede that the order
agreement gives rise to a reciprocal obligations7 such that
the obligation of one is dependent upon the obligation of

As correctly held by the appellate court, private

respondent cannot be held liable under the contracts
entered into by petitioner with Philacor. Private
respondent is not a party to said agreements. It is also not
a contract pour autrui. Aforesaid contracts could not
affect third persons like private respondent because of the
basic civil law principle of relativity of contracts which

(1) Whether or not private respondent violated the

order agreement, and;
(2) Whether or not private respondent is liable for
petitioner's breach of contract with Philacor.

provides that contracts can only bind the parties who

entered into it, and it cannot favor or prejudice a third
person, 10 even if he is aware of such contract and has
acted with knowledge thereof. 11
Indeed, the order agreement entered into by petitioner and
private respondent has not been shown as having a direct
bearing on the contracts of petitioner with Philacor. As
pointed out by private respondent and not refuted by
petitioner, the paper specified in the order agreement
between petitioner and private respondent are markedly
different from the paper involved in the contracts of
petitioner with Philacor. 12 Furthermore, the demand made
by Philacor upon petitioner for the latter to comply with
its printing contract is dated February 15, 1984, which is
clearly made long after private respondent had filed its
complaint on August 14, 1981. This demand relates to
contracts with Philacor dated April 12, 1983 and May 13,
1983, which were entered into by petitioner after private
respondent filed the instant case.lawphi1
To recapitulate, private respondent did not violate the
order agreement it had with petitioner. Likewise, private
respondent could not be held liable for petitioner's breach
of contract with Philacor. It follows that there is no basis
to hold private respondent liable for damages.
Accordingly, the appellate court did not err in deleting the
damages awarded by the trial court to petitioner.
The rule on compensatory damages is well established.
True, indemnification for damages comprehends not only
the loss suffered, that is to say actual damages (damnum
emergens), but also profits which the obligee failed to
obtain, referred to as compensatory damages (lucrum
cessans). However, to justify a grant of actual or
compensatory damages, it is necessary to prove with a
reasonable degree of certainty, premised upon competent
proof and on the best evidence obtainable by the injured
party, the actual amount of loss. 13 In the case at bar, the
trial court erroneously concluded that petitioner could
have sold books to Philacor at the quoted selling price of
P1,850,750.55 and by deducting the production cost of
P1,060,426.20, petitioner could have earned profit of
P790,324.30. Admittedly, the evidence relied upon by the
trial court in arriving at the amount are mere estimates
prepared by petitioner. 14 Said evidence is highly
speculative and manifestly hypothetical. It could not
provide sufficient legal and factual basis for the award of
P790,324.30 as compensatory damages representing
petitioner's self-serving claim of unrealized profit.
Further, the deletion of the award of moral damages is
proper, since private respondent could not be held liable
for breach of contract. Moral damages may be awarded
when in a breach of contract the defendant acted in bad
faith, or was guilty of gross negligence amounting to bad
faith, or in wanton disregard of his contractual
obligation.15 Finally, since the award of moral damages is
eliminated, so must the award for attorney's fees be also
deleted.16
WHEREFORE, the instant petition is DENIED. The
decision of the Court of Appeals is AFFIRMED. Costs
against petitioner.

A & C MINIMART CORPORATION, petitioner,

vs.
PATRICIA S. VILLAREAL, TRICIA ANN
VILLAREAL
and
CLAIRE
HOPE
VILLAREAL, respondents.
DECISION
CHICO-NAZARIO, J.:
This is a Petition for Review on Certiorari under Rule 45
of the Rules of Court, assailing the Decision1 dated 13
October 2004, rendered by the Court of Appeals in CAG.R. SP No. 81875, modifying the Order2 dated 29
December 2003, of Branch 194 of the Regional Trial
Court (RTC) of Paraaque City. The appellate court
ordered petitioner A & C Minimart Corporation to pay
respondents Patricia Villareal, Tricia Ann Villareal and
Claire Hope Villareal, a monthly interest of 3% on the
total amount of rental and other charges not paid on time,
in addition to the unpaid rental and other charges which
the trial court ordered petitioner to pay.
The subject property is a one-storey commercial building
constructed on a parcel of land located at Aguirre St., BF
Homes, Paraaque, Metro Manila. Petitioner leased the six
stalls/units of the subject property from Joaquin Bonifacio,
under a lease agreement dated 3 August 1992, and which
expired on 3 August 1997.3 A Lease Contract, dated 22
January 1998, was executed between petitioner and
Teresita Bonifacio renewing the earlier contract for
another five years.4
However, ownership of the subject property is under
dispute. Respondents and spouses Joaquin and Teresita
Bonifacio (spouses Bonifacio) claim ownership over the
subject property.
The respondents claim ownership based on a sale of
property on execution pending appeal in a separate case.
Civil Case No. 16194 is an independent action for
damages filed by respondents against spouses Eliseo and
Erna Sevilla (spouses Sevilla), original owners of the
disputed property, arising from the murder of Jose
Villareal, the husband of respondent Patricia Villareal and
father of respondents Tricia Ann and Claire Hope
Villareal. In its Decision dated 2 April 1990, Branch 132
of the RTC of Makati awarded damages to respondents in
the amount ofP10,882,040.00.5 Thereafter, the Makati
RTC, Branch 132, issued a writ of execution pending
appeal. Deputy Sheriff Eulalio Juanson levied on two
parcels of land registered under the name of the Sevillas
covered by Transfer Certificates of Title (TCT) No. 41338
and No. 41339, issued by the Register of Deeds of
Paraaque City, and a one-storey commercial building
built thereon. On 17 September 1990, Deputy Sheriff
Juanson sold the subject property at a public auction to
respondent Patricia Villareal, the sole and highest bidder
therein. The Certificate of Sale, dated 17 September 1990,
was registered and annotated in TCT No. 41338 and No.
41339 as Entry 6621 on 18 September 1990.6 The spouses
Sevilla filed an appeal questioning the damages awarded
and execution orders issued by the Makati RTC, Branch
132 in Civil Case No. 16194, which is now pending before
the Supreme Court and docketed as G.R. No. 150824.

On the other hand, the spouses Bonifacio claim to have

purchased the property from the spouses Sevilla. Twice
they challenged the Villareals ownership of the property.
The first was on 12 September 1990, when they filed Civil
Case No. 90-2551 against respondent Patricia Villareal
before Branch 58, later unloaded to Branch 63, of the
Makati RTC, for declaration of nullity of levy on real
property, damages and injunction with prayer for issuance
of a temporary restraining order against the sheriff of the
Makati RTC, Branch 132. They allegedly bought the
property from the spouses Sevilla on 17 June 1986, but
were unable to transfer the titles to their names when they
discovered that notice of levy on execution was already
annotated in the TCTs.7 On 8 November 1994, the Makati
RTC, Branch 63, declared that the Deed of Sale in favor
of the Bonifacios was null and void and thus dismissed the
complaint filed by the spouses Bonifacio for lack of merit.
The spouses Bonifacio filed an appeal, docketed as C.A.
G.R. CV No. 48478, which was dismissed by the Court of
Appeals. The dismissal of the said case became final and
executory on 27 December 1997.8
Despite the final and executory decision dismissing the
claim of the Bonifacios, the latter, for the second time
filed on 25 January 1999, Civil Case No. 99-037 against
respondent Patricia Villareal for Declaration of
Ownership, Annulment and Cancellation of Attachment,
Notice of Levy, and Execution Sale with Damages at
Branch 257 of the Paraaque RTC, which was dismissed
in an Order dated 8 November 1999.9 They filed an appeal
of the dismissal with the Court of Appeals, docketed as
CA-G.R. SP No. 60176, which was likewise dismissed in
a Decision, dated 22 October 2004.10 An appeal was filed
before the Supreme Court, docketed as G.R. No. 175857,
but the same was denied in a Resolution dated 14 March
2007.11
Meanwhile, upon learning that the spouses Bonifacios
claim of ownership over the subject property had been
seriously challenged and denied in the Decision dated 8
November 1994 of the Makati RTC, Branch 63, in Civil
Case No. 90-2551, petitioner stopped paying its rentals on
the subject property on 2 March 1999, in violation of the
renewed Lease Contract dated 22 January 1998.12
On 19 July 1999, respondents filed a case for Unlawful
Detainer with Damages, against the petitioner before
Branch 78 of the Metropolitan Trial Court (MTC) of
Paraaque City. Respondents also filed a case against the
spouses Bonifacio for the recovery of the advanced rentals
paid to the latter by the petitioner. The spouses Bonifacio
also filed a separate case against the petitioner for
Unlawful Detainer. The cases were consolidated and heard
by the Paraaque MTC, Branch 78, docketed as Civil
Cases No. 11200, 11201, and 11262. The Paraaque
MTC, Branch 78, dismissed the cases on the ground that
the issue of possession in this case was intertwined with
the issue of ownership, and that it lacked the jurisdiction
to determine the issue of ownership.13
Respondents appealed before Branch 194 of the
Paraaque RTC, the dismissal ordered by the Paraaque
MTC, Branch 78, in Civil Cases No. 11200, 11201, and
11262. The cases were docketed as Civil Cases No. 020538 to 40. The Paraaque RTC, Branch 194, affirmed the
decision of the Paraaque MTC, Branch 78, as to its lack
of jurisdiction, and then treated the complaint as if it were

originally filed with the RTC, in accordance with Section

8, Rule 40 of the Rules of Court.14 Thereafter, in its
Decision dated 25 June 2003, the Paraaque RTC, Branch
194, found that the spouses Bonifacio did not acquire
ownership over the subject property. It further ruled that
the petitioner had the obligation to pay the rentals for use
of the subject property and directed the petitioner to
deposit its rental payments to a Land Bank account
established by the Makati RTC, Branch 132, where the
rentals accruing on the subject property will be held in
trust for the rightful owners, whether it be the respondents
or the spouses Sevilla, pending the final determination of
G.R. No. 150824. The Decision of the Paraaque RTC,
Branch 194, in Civil Case Nos. 02-0538 to 40 reads:
WHEREFORE foregoing considered, judgment is
hereby ordered:
1. Directing and ordering defendant Spouses
Bonifacios (sic) to deposit the amount
of P315,000.00 paid by A & C Minimart to
Account No. 1831-0166-91, with the Land Bank
of the Philippines, J.P. Rizal Branch, Makati City.
2. Ordering defendant A & C Minimart to deposit
with Account No. 1831-0166-91, Land Bank of
the Philippines, J.P. Rizal Branch, Makati City,
the monthly rentals due from the premises form
(sic) the last rental payment consigned with the
Clerk of Court, Metropolitan Trial Court,
Paraaque City.
3. Ordering defendant A & C Minimart to furnish
the Villareals copies of the Lease Contract it
entered into with the Bonifacios.
4. And for convenience, ordering the Clerk of
Court, Metropolitan Trial Court, Paraaque City
to transfer and deposit the rental payments made
by A & C Minimart together with the accrued
interest to Account No. 1831-0166-91 with Land
Bank of the Philippines, J.P. Rizal Branch, Makati
City.
No pronouncement as to costs, attorneys fees and
damages.15
On 1 October 2003, upon petitioners Motion for Partial
Reconsideration, the Paraaque RTC, Branch 194,
modified its decision. It ruled that the rental should accrue
in favor of the respondents only after the turnover of the
possession of the subject property to them sometime on 2
March 1999. Moreover, it found that petitioner did not act
in bad faith when it refused to pay rentals and, thus,
should not be liable for damages. Additionally, it also
ordered the petitioner to pay 12% interest per annum on
the monthly rentals due from its receipt of the
respondents demand letter on 25 June 1999, until full
payment; to pay respondents attorneys fees in the
amount of P100,000.00 and the costs of suit; and to vacate
the subject property, to wit:
1. [O]rdering defendant A & C Minimart to
deposit with account no. 1831-0166-91 of the
Land Bank of the Philippines, J.P. Rizal Branch[,]
Makati City, the monthly rentals due from March
2, 1999, in accordance with the Lease Contract

until it delivers possession thereof to the

Villareals plus 12% interest per annum from the
date of receipt of the demand letter in 25 June
1999 until full satisfaction less the rental payment
consigned to the Clerk of Court, Metropolitan
Trial Court, Paraaque City.
2. [F]or convenience, ordering the Clerk of Court,
Metropolitan Trial Court, Paraaque City to
transfer and deposit the rental payments made by
A & C Minimart together with the accrued interest
to Account No. 1831-0166-91 with the Land Bank
of the Philippines, J. P. Rizal Branch, Makati
City.
3. [D]irecting and ordering defendant A & C
Minimart to pay the Plaintiff Attorneys fees in
the amount of ONE HUNDRED THOUSAND
PESOS (P100,000.00) and the cost of suit.
4. [O]rdering defendant A & C Minimart Corp. to
vacate the portion of the building located at 340
Aguirre Avenue, BF Homes, Paraaque City
where it conducts its business of a grocery store
and other activities, and deliver the same
peacefully and in good condition to the
Villareals.16
On 27 October 2003, upon motion of the respondents, the
Paraaque RTC, Branch 194, issued a Writ of Execution
requiring petitioner to deposit in Land Bank Account No.
1831-0166-91 the amount of P3,186,154.68, plus 12%
yearly interest, computed from the date of petitioners
receipt of the demand letter on 25 June 1999.17
On 4 November 2003, respondents filed a Motion for
Recomputation of the amount of rentals as the writ of
execution allegedly did not conform to the Decision dated
1 October 2003. Respondents claimed that the
computation should include a monthly interest of 3% on
the total amount of rental and other charges not paid on
time, in accordance with paragraph 6(g) of the Contract of
Lease, dated 22 January 1998, between petitioner and
Teresita Bonifacio, to wit:
g) To pay the LESSOR three (3%) percent interest
per month on the total amount of rental and other
charges not paid on time under this contract with
said amount accruing automatically upon default
without necessity of any demand.18
Respondents anchored their claim on the Amended
Decision dated 1 October 2003, and the Writ of Execution
dated 27 October 2003, in Civil Cases No. 02-0538 to 40,
which both used the phrase "in accordance with the Lease
Contract," when referring to the monthly rentals due and
were to be deposited in the bank by the petitioner.
In an Order dated 29 December 2003, the Paraaque RTC,
Branch 194, denied respondents claim for interest penalty
at the rate of 3% per month on the total amount of rent in
default.19
Respondents filed a Petition for Certiorari under Rule 65,
before the Court of Appeals, which ruled in favor of the
respondents. In the assailed Decision, the appellate court
found that petitioner consigned the rental payments after

they fell due and, thus, it ruled that the 3% interest

stipulated in the Contract of Lease dated 22 January 1998
should be imposed. The dispositive part of the assailed
Decision,20 dated 13 October 2004, reads:
WHEREFORE, there being merit in the petition,
it is GRANTED. The assailed Order is
MODIFIED in that respondent A and C Minimart
is additionally DIRECTED to pay a monthly
interest of 3% on the total amount of rental and
other charges not paid on time pursuant to the
contract of lease. This case is REMANDED to the
court of origin for proper computation and
execution.
Petitioner filed a Motion for Reconsideration of the
foregoing Decision, which the Court of Appeals denied in
a Resolution dated 27 March 2006.
Hence, the present Petition, where petitioner raises the
following issues:
I
THE HONORABLE COURT OF APPEALS
ERRED IN NOT DISMISSING VILLAREALS
PETITION FOR CERTIORARI CONSIDERING
THAT APPEAL IS THE PROPER AND
ADEQUATE REMEDY TO QUESTION THE
DECISION OF THE RTC (BRANCH 194) OF
PARAAQUE CITY.
II
THE HONORABLE COURT OF APPEALS
ERRED IN SUSTAINING THE CLAIM OF THE
VILLAREALS THAT THEY ARE ENTITLED
TO THE BENEFITS (RENTALS AND
INTERESTS) OF THE CONTRACT OF LEASE
ENTERED INTO BETEWEN "A & C
MINIMART
CORP."
AND
TERESITA
BONIFACIO.
III
THE HONRABLE COURT OF APPEALS
ERRED IN NOT DISMISSING THE PETITION
FOR CERTIORARI (SPECIAL CIVIL ACTION)
FILED BY THE VILLAREALS CONSIDERING
THAT THE LATTER HAVE NO RIGHTS AND
INTEREST OVER THE CONTRACT OF
LEASE
BETWEEN
THE
SPOUSES
BONIFACIOS (sic) AND THE "A & C
MINIMART CORP."
IV
THE HONORABLE COURT OF APPEALS
ERRED IN NOT DISMISSING C.A.-G.R. SP
NO. 81875 CONSIDERING THAT THE
VILLAREALS CLAIM OF OWNERSHIP
OVER THE PROPERTY IS STILL THE
SUBJECT OF A PENDING CASE WHICH PRO
TANTO RENDERED THE EJECTMENT SUIT
FILED BY THE VILLAREALS AGAINST THE
PETITIONER OBVIOUSLY PREMATURE.

V
THE HONORABLE COURT OF APPEALS
ERRED IN NOT OVERRULLING THE RTC OF
PARANAQUE (BR. 194) WHICH REVERSED
THE DECISION OF THE MTC OF
PARANAQUE CITY DISMISSING THE
CONSOLIDATED EJECTMENT CASES (020538; 02-0539; 02-540) FOR LACK OF
JURISDICTION CONSIDERING THAT THE
FUNDAMENTAL
ISSUE
INVOLVED
IS OWNERSHIP OF THE SUBJECT PREMISES
WHICH ISSUE REQUIRES FULL-BLOWN
TRIAL IN A DIRECT ACTION BEFORE A
COURT OF GENERAL JURISDICTION FOR
FULL DETERMINATION.21

whenever the petitioner incurs delay in the payment of its

rentals. This argument is well-taken.
It is a well-known rule that a contractual obligation or
liability, or an action ex-contractu, must be founded upon
a contract, oral or written, either express or implied. If
there is no contract, there is no corresponding liability and
no cause of action may arise therefrom.22 This is provided
for in Article 1311 of the Civil Code:
Article 1311. Contracts take effect only between
the parties, their assigns and heirs, except in case
where the rights and obligations arising from the
contract are not transmissible by their nature, or
by stipulation or by provision of law. The heir is
not liable beyond the value of the property he
received from the decedent.

The petition is partly meritorious.

Petitioner avers that the respondents should have filed
with the Court of Appeals an ordinary appeal instead of a
special civil action for certiorari, when it questioned the
computation made by the Paraaque RTC, Branch 194, of
the rentals due the owner of the subject property.
Such contention runs counter to Section 1, Rule 41 of the
Rules of Court, which provides:
Section 1. Subject of appeal. An appeal may be
taken from a judgment or final order that
completely disposes of the case, or of a particular
matter therein when declared by these Rules to be
appealable.
No appeal may be taken from:
xxxx
(f) an order of execution;
xxxx
In all the above instances where the judgment or
final order is not appealable, the aggrieved party
may file an appropriate special civil action under
Rule 65.
It is explicit from the afore-quoted provision that no
appeal may be taken from an order of execution; instead,
such order may be challenged by the aggrieved party via a
special civil action for certiorari under Rule 65 of the
Rules of Court. Respondents filed the petition in CA-G.R.
SP No. 81875, to question the Writ of Execution dated 27
October 2003, issued by the Paraaque RTC, Branch 194,
which computed the rentals to be paid by the petitioner to
whoever is declared the owner of the subject property,
without including the 3% penalty interest stipulated in the
Lease Contract dated 22 January 2002. Contrary to the
position taken by the petitioner, respondents recourse to
an appeal would have been unavailing under Section 1,
Rule 41, of the Rules of Court. The filing of a special civil
action for certiorari under Rule 65 of the Rules of Court
was the proper remedy questioning an order of execution.
Petitioner argues that respondents are not entitled to the
3% penalty stipulated under the Lease Contract dated 22
January 1998, which becomes payable to the lessor

The Lease Contract dated 22 January 1998, was executed

between the spouses Bonifacio and petitioner. It is
undisputed that none of the respondents had taken part,
directly or indirectly, in the contract in question.
Respondents also did not enter into contract with either
the lessee or the lessor, as to an assignment of any right
under the Lease Contract in question. The Lease Contract,
including the stipulation for the 3% penalty interest, was
bilateral between petitioner and Teresita Bonifacio.
Respondents claim ownership over the subject property,
but not as a successor-in-interest of the spouses
Bonifacios. They purchased the property in an execution
sale from the spouses Sevilla. Thus, respondents cannot
succeed to any contractual rights which may accrue to the
spouses Bonifacio.
Contracts produce an effect as between the parties who
execute them. A contract cannot be binding upon and
cannot be enforced by one who is not party to it. Although
the respondents were adjudged to be entitled to rentals
accruing from 2 March 1999, until the time the petitioner
vacated the premises, the obligation to pay rent was not
derived from the Lease Contract dated 22 January 1998,
but from a quasi-contract. Article 2142 of the Civil Code
reads:
Art. 2142. Certain lawful, voluntary and unilateral
acts give rise to the juridical relation of quasicontract to the end that no one shall be unjustly
enriched or benefited at the expense of another.
In the present case, the spouses Bonifacio, who were
named as the lessors in the Lease Contracts, dated 3
August 1992 and 22 January 1998, are already adjudged
not to be the real owners of the subject property. In Civil
Case No. 90-2551, Branch 63 of the Makati RTC declared
that the Deed of Sale, executed on 17 June 1986, between
the spouses Bonifacio and the spouses Sevilla was a
forgery and, hence, did not validly transfer ownership to
the spouses Bonifacio. At present, there is a pending
appeal before the Supreme Court docketed as G.R. No.
150824, which would determine who between the
respondents and the spouses Sevilla are the rightful
owners of the property.
Since the spouses Bonifacio are not the owners of the
subject property, they cannot unjustly benefit from it by
collecting rent which should accrue to the rightful owners
of the same. Hence, the Makati RTC, Branch 132, had set

up a bank account where the rent due on the subject

property should be deposited and kept in trust for the real
owners thereto.
The last two issues raised by the petitioner on whether the
Paraaque RTC, Branch 194, should have dismissed the
case for being premature or for any other ground cannot
be raised in this petition. Such issues should be, and were,
in fact, raised by petitioner in CA- G.R. No. 86157, which
was an appeal of the Amended Decision dated 1 October
2003, rendered by the Paraaque RTC, Branch 194, in
Civil Cases No. 02-0538 to 40. Pending the resolution of
the said case by the Court of Appeals, this Court refrains
from ruling thereon. What is on appeal in the present
petition is the Decision rendered by the Court of Appeals
in CA-G.R. SP No. 81875, where the sole issue raised was
the correctness of the computation made during the
execution of the Amended Decision dated 1 October 2003
of the Paraaque RTC, Branch 194.
IN VIEW OF THE FOREGOING, the instant Petition is
partially GRANTED. The assailed Decision of the Court
of Appeals in CA-G.R. SP No. 81875, promulgated on 13
October 2004, is REVERSED and SET ASIDE. The
petitioner A & C Minimart Corporation is not obligated to
pay the penalty interest of 3% per month on the total
amount of rental and other charges not paid on time
pursuant to the Contract of Lease dated 22 January 1998.
This Court AFFIRMS the computation of the rent and
interest due from petitioner A&C Minimart Corporation in
the Writ of Execution dated 27 October 2003, issued by
Branch 194 of the Paraaque Regional Trial Court, in
Civil Cases No. 02-0538 to 40.

SPS.
NESTOR
AND
MA.
NONA
BORROMEO, Petitioners,
vs.
HONORABLE COURT OF APPEALS and
EQUITABLE SAVINGS BANK, Respondents.
DECISION
CHICO-NAZARIO, J.:
This is a Petition for Review on Certiorari under Rule 45
of the Rules of Court, assailing the Decision,1 dated 29
April 2005, thereafter, upheld in a Resolution2 dated 16
September 2005, both rendered by the Court of Appeals in
CA-G.R. SP No. 85114. The Court of Appeals, in its
assailed Decision, reversed the Order dated 3 March 2004
of Branch 215 of the Regional Trial Court (RTC) of
Quezon City in Civil Case No. Q-03-51184, and denied
the issuance of a Writ of Preliminary Injunction enjoining
respondent Equitable Savings Bank (ESB) from executing
the extra-judicial foreclosure of the mortgaged property
owned by petitioners, Spouses Nestor and Nona
Borromeo.
Respondent is a domestic savings bank corporation with
principal office and place of business at EPCIB Tower 2,
Makati Avenue, Salcedo Village, Makati City.3 At the
time the dispute began, it was a subsidiary of Equitable
PCI Bank (EPCIB), a domestic universal banking
corporation with principal office at Makati Avenue,
Salcedo Village, Makati City. After the merger of EPCIB
and Banco De Oro (BDO), they have adopted the
corporate name "Banco De Oro."4
Petitioners were client-depositors of EPCIB for more than
12 years. Petitioners alleged that sometime in mid-1999,
the branch manager of EPCIB, J.P. Rizal Branch, offered
a loan to the petitioners under its "Own-a-Home Loan
Program." Petitioners applied for a loan of P4,000,000.00
and were informed of the approval of their loan
application sometime in October 1999. It was in the early
part of 2000 that petitioners signed blank loan documents
consisting of the Loan Agreement, Promissory Notes, a
Real Estate Mortgage (REM) and Disclosure Statements.5
To secure the payment of the loan, petitioners executed an
REM over their land, registered under Transfer Certificate
of Title (TCT) No. N-203923, located at Loyola Grand
Villas, Quezon City, consisting of 303 square meters; and
the proposed house that was to be built
thereon.6 Petitioners asserted that even if the loan
documents were signed in blank, it was understood that
they executed the REM in favor of EPCIB.7
From April 2001 to September 2002, respondent released
a total amount of P3,600,000.00 in four installments,
while the balance of P400,000.00 was not drawn by
petitioners.8 On the other hand, petitioners started to pay
their monthly amortizations on 21 April 2001.9
Petitioners made repeated verbal requests to EPCIB to
furnish them their copies of the loan documents.10 On 6
August 2003, they sent the president of EPCIB a
letter11 which reiterated their request for copies of the loan
documents. In addition, petitioners stated that the interest
rate of 14% to 17% that was charged against them was
more than the interest rate of 11% or 11.5% that the

parties agreed upon. They further claimed that they

purposely did not draw the remaining balance of the loan
in the amount of P400,000.00 and stopped paying their
loan amortizations to protest EPCIBs continued failure to
provide them copies of the loan documents and its
imposition of an interest rate higher than that agreed upon.
From the time petitioners began paying their monthly
amortizations on 21 April 2001 until the time they
stopped, petitioners made total payments of
approximatelyP500,000.00.12
In reply to the petitioners letter dated 6 August 2003, the
Vice President of EPCIB, Gary Vargas, sent to the
petitioners a letter13 dated 27 August 2003 explaining that
as a matter of practice, their clients were given original
copies of the loan documents only upon full release of the
amount loaned. EPCIB clarified that since petitioners
loan had not been fully released, the original documents
were not yet sent to them. Petitioners were also informed
that the applicable interest rate was set at the time the loan
was released, not at the time the loan was approved, and
that the prevailing interest when the first four installments
of the loan were released ranged from 9.5% to 16%.
In the meantime, on 13 August 2003, respondent, through
counsel, also sent a letter14 to the petitioners demanding
payment for their obligation, which, as of 15 August 2003,
amounted to P4,097,261.04, inclusive of interest and other
charges. Respondent informed petitioners that failure to
pay their obligation would result in its pursuing legal
action against petitioners, including foreclosure
proceedings on their REM.
In a letter dated 18 September 2003,15 respondent, through
counsel, reiterated to petitioners its demand for the full
settlement of their obligation on or before 30 September
2003.
Finally, on 3 October 2003, petitioners received copies of
the loan documents which they had earlier signed in
blank.16 According to petitioners, they were surprised to
find out that the Loan Agreement and REM designated
respondent ESB as lender and mortgagor, instead of
EPCIB with whom they allegedly entered into the
agreement. However, in contrast to the Loan Agreement
and the REM, the four Promissory Notes designated
EPCIB as the lender. Petitioners also alleged that instead
of the prevailing interest rates of 8% to 10% annually,
which the parties agreed upon,17 the four Promissory
Notes were set at the following interest rates:18
DATE

AMOUNT

INTEREST
RATE
25 April 2001 P1,200,000.00 16%
18 January 2002 P 800,000.00 14.0%
29 June 2001
P 800,000.00 15%
19
September P 800,000.00 9.0%
2002
When the petitioners failed to pay for the loan in full by
30 September 2003, respondent sought to extra-judicially
foreclose the REM. Upon the respondents petition for
foreclosure, the Office of the Ex-Officio Sheriff of
Quezon City issued a Notice of Extrajudicial Sale dated
16 October 2003, wherein the mortgage debt was set
atP5,114,601.00.19 The Extrajudicial Sale was set to take

place on 26 November 2003. On 14 November 2003,

petitioners received Notice of Extrajudicial Sale of their
property.20
On 20 November 2003, petitioners filed with the RTC a
Complaint for Injunction, Annulment of Mortgage with
Damages and with Prayer for Temporary Restraining
Order and Preliminary and Mandatory Injunction against
EPCIB and respondent, docketed as Civil Case No. Q-0351184. In their Complaint, petitioners alleged that the loan
documents failed to reflect the true agreement between the
parties. Firstly, the agreement was between the petitioners
and EPCIB and, consequently, respondent had no interest
in the REM. Secondly, the interest rates reflected in the
Promissory Notes were not the interest rates on which the
parties had settled. They also averred in their Complaint
that EPCIB committed a breach of contract when it failed
to release the fifth and last installment of the loan to
petitioners. 21
Petitioners sought to prevent the Extrajudicial Sale from
taking place on 26 November 2003. Petitioners maintained
that EPCIB acted in bad faith when it foreclosed the
subject property simply because petitioners complained
that the interest rates unilaterally imposed by EPCIB were
excessive. It further averred that their deposit accounts
with EPCIB were more than sufficient to pay for the
amortizations due on the housing loan.22
The scheduled date for the Extrajudicial Foreclosure,
namely, 26 November 2003, fell on the holiday Eid-elFitr, and as a result, it did not push through. In an Order
dated 5 December 2003, the RTC determined that there
was no longer any need to issue a temporary restraining
order (TRO) and/or preliminary injunction.23
On 14 December 2003, respondent re-filed its petition for
extrajudicial foreclosure of the REM. The Ex-Officio
Sheriff of Quezon City set the auction sale on 14 January
2004.
Petitioners reacted by filing with the RTC a Motion for
Reconsideration of its Order dated 5 December 2003,
again praying for the issuance of a TRO and/or
preliminary injunction to forestall the extrajudicial sale of
their property scheduled for 14 January 2004.24
On 3 March 2004, the RTC granted petitioners motion for
reconsideration and ordered the issuance of a preliminary
injunction after declaring that the validity of the REM was
yet to be determined. It found that petitioners were bound
to suffer grave injustice if they were deprived of their
property before the RTC could rule on the validity of the
REM constituted on the same. On the other hand, it held
that respondents interest was amply protected, since
petitioners
mortgaged
property
was
valued
at P12,000,000.00, which was more than sufficient to
answer
for
petitioners
obligation
pegged
at P4,097,261.00, and respondents REM over said
property remained in effect. Moreover, petitioners posted
a bond in the amount of P3,500,000.00 to cover their
unpaid liabilities.25 In its Order dated 3 March 2004, the
RTC ordered that26:
With all the foregoing disquisitions and finding merit in
plaintiffs application, the same [is] hereby GRANTED.
Let a writ of preliminary injunction issue upon plaintiffs

posting of a bond in the amount of three million five

hundred thousand (P3,500,000.00) pesos.
Respondent filed a Motion for Reconsideration of the
afore-quoted Order, which was denied for lack of merit by
the RTC in an Order dated 29 April 2004.
Thereafter, respondent filed on 14 July 2004 a Special
Civil Action for Certiorari before the Court of Appeals,
docketed as CA-G.R. SP No. 85114.
During the proceedings before the Court of Appeals,
petitioner presented a letter dated 19 December 2002, with
supporting documents, written and compiled by EPCIB
for Home Guaranty Corporation, wherein EPCIB included
petitioners loan among its housing loans for which it
sought insurance coverage.27
In reversing the RTC Order dated 3 March 2004, the
Court of Appeals decreed that pending the RTCs
determination of the validity of the REM, its validity
should be presumed. It further ruled that the intended
foreclosure of the mortgage by respondent was a proper
exercise of its right after petitioners admittedly stopped
paying their loan amortizations. Moreover, it held that the
foreclosure of the REM would not result in any grave and
irreparable damage to the petitioners since petitioners, as
mortgagors, may redeem the subject property or avail
themselves of the remedy of claiming damages or
nullifying the sale.28 The dispositive portion of the Court
of Appeals Decision, dated 29 April 2005, reads:29
WHEREFORE, in view of the foregoing, the assailed
Orders dated March 3, 2004 and April 29, 2004 issued by
the Regional Trial Court of Quezon City, Branch 215 in
Civil Case No. Q-03-51184 are hereby ANNULLED and
SET ASIDE.
Petitioners filed a Motion for Reconsideration of the
foregoing Decision, which the Court of Appeals denied in
a Resolution dated 16 September 2005.30
Hence, the present Petition, in which the following issues
are raised31:
I
WHETHER OR NOT THE PRIVATE
RESPONDENT SAVINGS BANK IS THE
REAL PARTY-IN-INTEREST.
II
WHETHER OR NOT PETITIONERS ARE
ENTITLED TO THE RELIEF DEMANDED,
THAT THE FORECLOSURE AND PUBLIC
AUCTION OF THE PROPERTY BELONGING
TO PETITIONERS DURING THE LITIGATION
PROCEEDINGS IN THE LOWER COURT
WOULD PROBABLY WORK INJUSTICE TO
THEM SUCH THAT THE JUDGMENT WHICH
MAY BE ISSUED BY THE SAID COURT
WILL BE RENDERED INEFFECTUAL BY
SUCH
FORECLOSURE
AND
PUBLIC
AUCTION OF SAID PROPERTY.
III

WHETHER OR NOT THE LOWER COURT

WAS CORRECT IN GRANTING THE WRIT
OF PRELIMINARY INJUNCTION, ALL
REQUISITES BEING PRESENT
The petition is meritorious.
The only issue that needs to be determined in this case is
whether or not a writ of preliminary injunction should be
issued to enjoin the foreclosure and public auction of
petitioners property during the proceedings and pending
determination of the main cause of action for annulment
of the REM on said property. By no means is this a final
determination of the merits of the main case still before
the RTC.32
Section 3, Rule 58 of the Rules of Court provides that:
SEC. 3. Grounds for issuance of preliminary
injunctions.A preliminary injunction may be granted
when it is established:
(a) That the applicant is entitled to the relief
demanded, and the whole or part of such relief
consists in restraining the commission or
continuance of the act or acts complained of, or in
requiring the performance of an act or acts, either
for a limited period or perpetually;
(b) That the commission, continuance or nonperformance of the act or acts complained of
during the litigation would probably work
injustice to the applicant; or
(c) That a party, court, agency or a person is
doing, threatening, or is attempting to do, or is
procuring or suffering to be done, some act or acts
probably in violation of the rights of the applicant
respecting the subject of the action or proceeding,
and tending to render the judgment ineffectual.
As such, a writ of preliminary injunction may be issued
only upon clear showing of an actual existing right to be
protected during the pendency of the principal action. The
twin requirements of a valid injunction are the existence
of a right and its actual or threatened violations. Thus, to
be entitled to an injunctive writ, the right to be protected
and the violation against that right must be shown.33
In this case, petitioners rights to their property is
restricted by the REM they executed over it. Upon their
default on the mortgage debt, the right to foreclose the
property would be vested upon the creditormortgagee.34Nevertheless, the right of foreclosure cannot
be exercised against the petitioners by any person other
than the creditor-mortgagee or its assigns. According to
the pertinent provisions of the Civil Code:
Art. 1311. Contracts take effect only between the parties,
their assigns and heirs, except in case where the rights
and obligations arising from the contract are not
transmissible by their nature, or by stipulation or by
provision of law. The heir is not liable beyond the value of
the property he received from the decedent.
If a contract should contain some stipulation in favor of a
third person, he may demand its fulfillment provided he

communicated his acceptance to the obligor before its

revocation. A mere incidental benefit or interest of a
person is not sufficient. The contracting parties must have
clearly and deliberately conferred a favor upon a third
person. (Emphasis ours.)1avvphi1

property even after default, since this right can only be

claimed by the creditor-mortgagor, EPCIB; and,
consequently, the extrajudicial foreclosure of the REM by
respondent would be in violation of petitioners property
rights.

An extrajudicial foreclosure instituted by a third party to

the Loan Agreement and the REM would, therefore, be a
violation of petitioners rights over their property.

This Court takes note of the fact that in several cases45 the
Court denied the application for a Writ of Preliminary
Injunction that would enjoin an extrajudicial foreclosure
of a mortgage, and declared that foreclosure is proper
when the debtors are in default of the payment of their
obligation. Where the parties stipulated in their credit
agreements, mortgage contracts and promissory notes that
the mortgagee is authorized to foreclose the mortgaged
properties in case of default by the mortgagors, the
mortgagee has a clear right to foreclosure in case of
default, making the issuance of a Writ of Preliminary
Injunction improper. However, the doctrine in these cases
is not applicable to the case at bar where the identity of the
creditor-mortgagor is highly disputable.

It is clear that under Article 1311 of the Civil Code,

contracts take effect only between the parties who execute
them.35 Where there is no privity of contract, there is
likewise no obligation or liability to speak about.36 The
civil law principle of relativity of contracts provides that
contracts can only bind the parties who entered into it, and
it cannot favor or prejudice a third person, even if he is
aware of such contract and has acted with knowledge
thereof.37 Since a contract may be violated only by the
parties thereto as against each other, a party who has not
taken part in it cannot sue for performance, unless he
shows that he has a real interest affected thereby.38
In the instant case, petitioners assert that their creditormortgagee is EPCIB and not respondent. While ESB
claims that petitioners have had transactions with it,
particularly the five check payments made in the name of
ESB, it fails to categorically state that ESB and not EPCIB
is the real creditor-mortgagor in this loan and mortgage
transaction. This Court finds the position taken by the
petitioners to be more credible. The four Promissory
Notes designate EPCIB as the "lender."39 In a letter dated
19 December 2002, addressed to Home Guaranty
Corporation, EPCIB Vice President Gary Vargas even
specified petitioners loan as one of its housing loans for
which it sought insurance coverage.40 Records also show
that petitioners repeatedly dealt with EPCIB. When the
petitioners complained of not receiving the loan
documents and the allegedly excessive interest charges,
they addressed their letter dated 3 August 2003 to the
president of EPCIB.41 The response, which explained the
loan transactions in detail in a letter dated 27 August
2003, was written by Gary Vargas, EPCIB Vice
President.42 Of almost three years amortizations, the
checks were issued by petitioners in the name of EPCIB,
except only for five checks which were issued in
respondents name.43
Respondent, although a wholly-owned subsidiary of
EPCIB, has an independent and separate juridical
personality from its parent company. The fact that a
corporation owns all of the stocks of another corporation,
taken alone, is not sufficient to justify their being treated
as one entity. If used to perform legitimate functions, a
subsidiarys separate existence shall be respected, and the
liability of the parent corporation, as well as the
subsidiary, shall be confined to those arising from their
respective businesses. A corporation has a separate
personality distinct from its stockholders and other
corporations to which it may be conducted.44 Any claim or
suit of the parent corporation cannot be pursued by the
subsidiary based solely on the reason that the former owns
the majority or even the entire stock of the latter.
From a perusal of the records, petitioners did not enter
into a Loan Agreement and REM with respondent.
Respondent, therefore, has no right to foreclose the subject

This Court emphasizes that the determination of who is

the creditor-mortgagee is only for purposes of determining
the propriety of issuing a writ of preliminary injunction,
based on the evidence presented before the hearing for the
issuance of a preliminary injunction. It will not bar the
RTC from making its own determination as to who is the
true creditor-mortgagee after trial and presentation of
evidence on the main case. To establish the essential
requisites for a preliminary injunction, the evidence
submitted by the plaintiff need not be conclusive and
complete. The plaintiffs are only required to show that
they have an ostensible right to the final relief prayed for
in their complaint.46 In Urbanes, Jr. v. Court of Appeals,
this Court expounded that:
A writ of preliminary injunction is generally based solely
on initial and incomplete evidence. The evidence
submitted during the hearing on an application for a writ
of preliminary injunction is not conclusive or
completefor only a sampling is needed to give the trial
court an idea of the justification for the preliminary
injunction pending the decision of the case on the merits.
As such, the findings of fact and opinion of a court when
issuing
the
writ
of
preliminary
injunction
are interlocutory in nature and made even before the trial
on the merits is commenced or terminated. There are vital
facts that have yet to be presented during the trial which
may not be obtained or presented during the hearing on
the application for the injunctive writ. The trial court
needs to conduct substantial proceedings in order to put
the main controversy to rest. It does not necessarily
proceed that when a writ of preliminary injunction is
issued, a final injunction will follow.47 (Emphasis
provided.)
The extrajudicial foreclosure of the petitioners property
pending the final determination by the RTC of their
complaint for annulment of the REM and claim for
damages would result in an injustice to the petitioners. If
the RTC would subsequently declare that respondent was
entitled to have petitioners property foreclosed, it may
still foreclose the subject property which is valued
at P12,000,000.00,48 to answer for the debt which is
estimated
atP5,000,000.00,
and
further
claim
the P3,500,000.00 surety bond posted by petitioners with
the RTC. On the other hand, if the RTC later finds that

respondent is not the creditor-mortgagee and, therefore,

the foreclosure of the property is invalid, petitioners
would be placed in an oppressively unjust situation where
they will be tied up in litigation for the recovery of their
property while their debt to the real creditor-mortgagee,
EPCIB, would remain unpaid and continue to accrue
interest and other charges.
The sole object of a preliminary injunction is to maintain
the status quo until the merits can be heard. A preliminary
injunction is an order granted at any stage of an action
prior to judgment of final order, requiring a party, court,
agency, or person to refrain from a particular act or acts. It
is a preservative remedy to ensure the protection of a
partys substantive rights or interests pending the final
judgment on the principal action. A plea for an injunctive
writ lies upon the existence of a claimed emergency or
extraordinary situation which should be avoided for,
otherwise, the outcome of a litigation would be useless as
far as the party applying for the writ is concerned.49
IN VIEW OF THE FOREGOING, the instant Petition is
GRANTED. This Court REVERSES the assailed Decision
dated 29 April 2005 of the Court of Appeals in CA-G.R.
SP No. 85114, and REINSTATES the Order dated 3
March 2004 of Branch 215 of the Regional Trial Court of
Quezon City in Civil Case No. Q-03-51184 ordering the
issuance of a Writ of Preliminary Injunction.

ESTATE
OF
ORLANDO
LLENADO
and
WENIFREDA T. LLENADO, in her capacity as (a)
Administratrix of the Estate of Orlando A. Llenado
and (b) Judicial Guardian of the Minor children of
Orlando A. Llenado, and (c) in her Own behalf as the
Surviving Spouse and Legal Heir of Orlando A.
Llenado, Petitioners,
vs.
EDUARDO
LLENADO,
JORGE
LLENADO,
FELIZA GALLARDO VDA. DE LLENADO and
REGISTER OF DEEDS of Valenzuela City, Metro
Manila, Respondents.
DECISION
YNARES-SANTIAGO, J.:
This petition for review on certiorari assails the May 30,
2000 Decision1 of the Court of Appeals in CA-G.R. CV
No. 58911 which reversed the May 5, 1997 Decision2 of
the Regional Trial Court of Valenzuela City, Branch 75 in
Civil Case No. 4248-V-93, and the October 6, 2000
Resolution3 which denied the motion for reconsideration.
The appellate court dismissed for lack of merit the
complaint for annulment of deed of conveyance, title and
damages filed by petitioner against herein respondents.
The subject of this controversy is a parcel of land
denominated as Lot 249-D-1 (subject lot) consisting of
1,554 square meters located in Barrio Malinta,
Valenzuela, Metro Manila and registered in the names of
Eduardo Llenado (Eduardo) and Jorge Llenado (Jorge)
under Transfer of Certificate of Title (TCT) No. V1689.4 The subject lot once formed part of Lot 249-D
owned by and registered in the name of their father,
Cornelio Llenado (Cornelio), under TCT No. T-16810.
On December 2, 1975, Cornelio leased Lot 249-D-1 to his
nephew, Romeo Llenado (Romeo), for a period of five
years, renewable for another five years at the option of
Cornelio. On March 31, 1978, Cornelio, Romeo and the
latters cousin Orlando Llenado (Orlando) executed an
Agreement5 whereby Romeo assigned all his rights to
Orlando over the unexpired portion of the aforesaid lease
contract. The parties further agreed that Orlando shall
have the option to renew the lease contract for another
three years commencing from December 3, 1980, up to
December 2, 1983, renewable for another four years or up
to December 2, 1987, and that "during the period that [this
agreement] is enforced, the x x x property cannot be sold,
transferred, alienated or conveyed in whatever manner to
any third party."
Shortly thereafter or on June 24, 1978, Cornelio and
Orlando
entered
into
a
Supplementary
Agreement6 amending the March 31, 1978 Agreement.
Under the Supplementary Agreement, Orlando was given
an additional option to renew the lease contract for an
aggregate period of 10 years at five-year intervals, that is,
from December 3, 1987 to December 2, 1992 and from
December 3, 1992 to December 2, 1997. The said
provision was inserted in order to comply with the
requirements of Mobil Philippines, Inc. for the operation
of a gasoline station which was subsequently built on the
subject lot.

Upon the death of Orlando on November 7, 1983, his

wife, Wenifreda Llenado (Wenifreda), took over the
operation of the gasoline station. Meanwhile, on January
29, 1987, Cornelio sold Lot 249-D to his children, namely,
Eduardo, Jorge, Virginia and Cornelio, Jr., through a deed
of sale, denominated as "Kasulatan sa Ganap Na
Bilihan,"7 for the sum of P160,000.00. As stated earlier,
the subject lot, which forms part of Lot 249-D, was sold to
Eduardo and Jorge, and titled in their names under TCT
No. V-1689. Several months thereafter or on September 7,
1987, Cornelio passed away.
Sometime in 1993, Eduardo informed Wenifreda of his
desire to take over the subject lot. However, the latter
refused to vacate the premises despite repeated demands.
Thus, on September 24, 1993, Eduardo filed a complaint
for unlawful detainer before the Metropolitan Trial Court
of Valenzuela, Metro Manila against Wenifreda, which
was docketed as Civil Civil Case No. 6074.
On July 22, 1996, the Metropolitan Trial Court rendered
its Decision in favor of Eduardo and ordered Wenifreda
to: (1) vacate the leased premises; (2) pay Eduardo
reasonable compensation for the use and occupation of the
premises plus attorneys fees, and (3) pay the costs of the
suit.
Wenifreda appealed to the Regional Trial Court of
Valenzuela, Metro Manila, which reversed the decision of
the court a quo. Thus, Eduardo appealed to the Court of
Appeals which rendered a Decision8 on March 31, 1998
reversing the decision of the Regional Trial Court and
reinstating the decision of the Metropolitan Trial Court. It
also increased the amount of reasonable compensation
awarded to Eduardo for the use of the leased premises.
Wenifredas appeal to this Court, docketed as G.R. No.
135001, was dismissed in a Resolution9 dated December
2, 1998. Accordingly, an Entry of Judgment10 was made in
due course on July 8, 1999.
Previously, after Eduardo instituted the aforesaid unlawful
detainer case on September 24, 1993, herein petitioner
Wenifreda, in her capacity as administratrix of the estate
of Orlando Llenado, judicial guardian of their minor
children, and surviving spouse and legal heir of Orlando,
commenced the subject Complaint,11 later amended, on
November 10, 1993 for annulment of deed of conveyance,
title and damages against herein respondents Eduardo,
Jorge, Feliza Llenado (mother of the Llenado brothers),
and the Register of Deeds of Valenzuela, Metro Manila.
The case was docketed as Civil Case No. 4248-V-93 and
raffled to Branch 75 of the Regional Trial Court of
Valenzuela, Metro Manila.
Petitioner alleged that the transfer and conveyance of the
subject lot by Cornelio in favor of respondents Eduardo
and Jorge, was fraudulent and in bad faith considering that
the March 31, 1978 Agreement provided that while the
lease is in force, the subject lot cannot be sold, transferred
or conveyed to any third party; that the period of the lease
was until December 3, 1987 with the option to renew
granted to Orlando; that the subject lot was transferred and
conveyed to respondents Eduardo and Jorge on January
29, 1987 when the lease was in full force and effect
making the sale null and void; that Cornelio verbally
promised Orlando that in case he (Cornelio) decides to sell
the subject lot, Orlando or his heirs shall have first priority

or option to buy the subject lot so as not to prejudice

Orlandos business and because Orlando is the owner of
the property adjacent to the subject lot; and that this
promise was wantonly disregarded when Cornelio sold the
said lot to respondents Jorge and Eduardo.
In their Answer,12 respondents Eduardo and Jorge claimed
that they bought the subject lot from their father, Cornelio,
for value and in good faith; that the lease agreement and
its supplement were not annotated at the back of the
mother title of the subject lot and do not bind them; that
said agreements are personal only to Cornelio and
Orlando; that the lease expired upon the death of Orlando
on November 7, 1983; that they were not aware of any
verbal promise to sell the subject lot granted by Cornelio
to Orlando and, even if there was, said option to buy is
unenforceable under the statute of frauds.
After the parties presented their respective evidence, the
Regional Trial Court rendered judgment on May 5, 1997
in favor of petitioner, viz:
WHEREFORE, PREMISES CONSIDERED, this Court
finds the [petitioners] civil action duly established by
preponderance
of
evidence,
renders
judgment
(adjudicates) in favor of the [petitioner], Estate of Orlando
Llenado represented by Wenifreda Llenado, and against
[respondents] e.g. Jorge, Eduardo, Felisa Gallardo, all
surnamed Llenado, and the Register of Deeds of
Valenzuela, Metro Manila, as follows:
1) It hereby judicially declare as non-existence
(sic) and null and void, the following:
a) The Kasulatan Sa Ganap na Kasunduan
or Deed of Sale;
b) TCT- Transfer Certificate of Title No.
V-9440, in the name of [respondent]
Eduardo Llenado, TCT- Transfer
Certificate of Title No. V-1689, in the
name of Jorge Llenado, and Eduardo
Llenado, and all deeds, documents or
proceedings leading to the issuance of
said title, and all subsequent title issued
therefrom and likewise whatever deeds,
documents or proceedings leading to the
issuance of said subsequent titles;
2) It hereby orders the reconveyance of the said
properties embraced in the said TCTs-Transfer
Certificate of Title Nos. V-9440 and V-1689 to
the [petitioner] for the same consideration, or
purchase price, paid by [respondents] Eduardo
Llenado and Jorge Llenado for the same
properties;
3) It hereby orders [respondent], Register of
Deeds of Valenzuela, Metro Manila, to cause the
issuance of new transfer certificates of title over
the said property in the name of the [petitioner];
4) And, because this Court is not only a court of
law, but of equity, it hereby rendered the
following damages to be paid by the
[respondents], as the [respondents] litigated under

bonafide assertions that they have meritorious

defense, viz:
a) P400,000.00 as moral damages;
b) 10,000.00 as nominal damages;
c) 10,000.00 as temperate damages;
d) 10,000.00 as exemplary damages;
e) 10,000.00 attorneys fees on the basis
of quantum merit; and
f) costs of suit.
SO ORDERED.13
The Regional Trial Court found that upon the death of
Orlando on November 7, 1983, his rights under the lease
contract were transmitted to his heirs; that since the lease
was in full force and effect at the time the subject lot was
sold by Cornelio to his sons, the sale violated the
prohibitory clause in the said lease contract. Further,
Cornelios promise to sell the subject lot to Orlando may
be established by parole evidence since an option to buy is
not covered by the statute of frauds. Hence, the same is
binding on Cornelio and his heirs.
Respondents appealed before the Court of Appeals which
rendered the assailed May 30, 2000 Decision reversing the
judgment of the Regional Trial Court and dismissing the
Complaint. The appellate court held that the death of
Orlando did not extinguish the lease agreement and had
the effect of transmitting his lease rights to his heirs.
However, the breach of the non-alienation clause of the
said agreement did not nullify the sale between Cornelio
and his sons because the heirs of Orlando are mere lessees
on the subject lot and can never claim a superior right of
ownership over said lot as against the registered owners
thereof. It further ruled that petitioner failed to establish
by a preponderance of evidence that Cornelio made a
verbal promise to Orlando granting the latter the right of
first refusal if and when the subject lot was sold.
Upon the denial of its motion for reconsideration,
petitioner is now before this Court on the following
assignment of errors:
[T]he Court of Appeals erred:
1.- In finding and concluding that there is no legal
basis to annul the deed of conveyance involved in
the case and in not applying R.A. No. 3516,
further amending R.A. No. 1162; and
2.- In not finding and holding as null and void the
subject deed of conveyance, the same having been
executed in direct violation of an expressed
covenant in said deed and in total disregard of the
pre-emptive, or preferential rights of the herein
petitioners to buy the property subject of their
lease contract under said R.A. No. 3516, further
amending R.A. No. 1162.14
The petition lacks merit.

Petitioner contends that the heirs of Orlando are entitled to

the rights of a tenant under Republic Act (R.A.) No.
1162,15 as amended by R.A. No. 3516.16 The right of first
refusal or preferential right to buy the leased premises is
invoked pursuant to Section 517 of said law and this
Courts ruling in Mataas Na Lupa Tenants Association,
Inc. v. Dimayuga.18

commercial use are not covered by said law.28 Thus,

considering that petitioner failed to prove that a
proclamation has been issued by the President declaring
the subject lot as within the urban land reform zone and
considering further that the subject lot was leased for the
commercial purpose of operating a gasoline station, P.D.
No. 1517 cannot be applied to this case.

This issue is being raised for the first time on appeal.

True, in Mataas Na Lupa Tenants Association, Inc., the
Court explained that Section 1 of R.A. No. 1162, as
amended by R.A. No. 3516, authorizes the expropriation
of any piece of land in the City of Manila, Quezon City
and suburbs which have been and are actually being
leased to tenants for at least 10 years, provided said lands
have at least 40 families of tenants thereon.19 Prior to and
pending the expropriation, the tenant shall have a right of
first refusal or preferential right to buy the leased premises
should the landowner sell the same. However, compliance
with the conditions for the application of the aforesaid law
as well as the qualifications of the heirs of Orlando to be
beneficiaries thereunder were never raised before the trial
court, or even the Court of Appeals, because petitioner
solely anchored its claim of ownership over the subject lot
on the alleged violation of the prohibitory clause in the
lease contract between Cornelio and Orlando, and the
alleged non-performance of the right of first refusal given
by Cornelio to Orlando. The rule is settled, impelled by
basic requirements of due process, that points of law,
theories, issues and arguments not adequately brought to
the attention of the lower court will not be ordinarily
considered by a reviewing court as they cannot be raised
for the first time on appeal.20 As the issue of the
applicability of R.A. No. 1162, as amended, was neither
averred in the pleadings nor raised during the trial below,
the same cannot be raised for the first time on appeal.

In fine, the only issue for our determination is whether the

sale of the subject lot by Cornelio to his sons, respondents
Eduardo and Jorge, is invalid for (1) violating the
prohibitory clause in the lease agreement between
Cornelio, as lessor-owner, and Orlando, as lessee; and (2)
contravening the right of first refusal of Orlando over the
subject lot.

At any rate, the allegations in the Complaint and the

evidence presented during the trial below do not establish
that Orlando or his heirs are covered by R.A. No. 1162, as
amended. It was not alleged nor shown that the subject lot
is part of the landed estate or haciendas in the City of
Manila which were authorized to be expropriated under
said law; that the Solicitor General has instituted the
requisite expropriation proceedings pursuant to Section
221 thereof; that the subject lot has been actually leased for
a period of at least ten (10) years; and that the subject lot
has at least forty (40) families of tenants thereon. Instead,
what was merely established during the trial is that the
subject lot was leased by Cornelio to Orlando for the
operation of a gasoline station, thus, negating petitioners
claim that the subject lot is covered by the aforesaid law.
In Mataas Na Lupa Tenants Association, Inc., the Court
further explained that R.A. No. 1162, as amended, has
been superseded by Presidential Decree (P.D.) No.
151722 entitled "Proclaiming Urban Land Reform in the
Philippines and Providing for the Implementing
Machinery Thereof."23 However, as held in Tagbilaran
Integrated Settlers Association Incorporated v. Court of
Appeals,24 P.D. No. 1517 is applicable only in specific
areas declared, through presidential proclamation,25 to be
located within the so-called urban zones.26 Further, only
legitimate tenants who have resided on the land for ten
years or more who have built their homes on the land and
residents who have legally occupied the lands by contract,
continuously for the last ten years, are given the right of
first refusal to purchase the land within a reasonable
time.27 Consequently, those lease contracts entered into for

It is not disputed that the lease agreement contained an

option to renew and a prohibition on the sale of the subject
lot in favor of third persons while the lease is in force.
Petitioner claims that when Cornelio sold the subject lot to
respondents Eduardo and Jorge the lease was in full force
and effect, thus, the sale violated the prohibitory clause
rendering it invalid. In resolving this issue, it is necessary
to determine whether the lease agreement was in force at
the time of the subject sale and, if it was in force, whether
the violation of the prohibitory clause invalidated the sale.
Under Article 1311 of the Civil Code, the heirs are bound
by the contracts entered into by their predecessors-ininterest except when the rights and obligations therein are
not transmissible by their nature, by stipulation or by
provision of law. A contract of lease is, therefore,
generally transmissible to the heirs of the lessor or lessee.
It involves a property right and, as such, the death of a
party does not excuse non-performance of the
contract.29The rights and obligations pass to the heirs of
the deceased and the heir of the deceased lessor is bound
to respect the period of the lease.30 The same principle
applies to the option to renew the lease. As a general rule,
covenants to renew a lease are not personal but will run
with the land.31 Consequently, the successors-in-interest of
the lessee are entitled to the benefits, while that of the
lessor are burdened with the duties and obligations, which
said covenants conferred and imposed on the original
parties.
The foregoing principles apply with greater force in this
case because the parties expressly stipulated in the March
31, 1978 Agreement that Romeo, as lessee, shall transfer
all his rights and interests under the lease contract with
option to renew "in favor of the party of the Third Part
(Orlando), the latters
heirs, successors and
assigns"32indicating the clear intent to allow the
transmissibility of all the rights and interests of Orlando
under the lease contract unto his heirs, successors or
assigns. Accordingly, the rights and obligations under the
lease contract with option to renew were transmitted from
Orlando to his heirs upon his death on November 7, 1983.
It does not follow, however, that the lease subsisted at the
time of the sale of the subject lot on January 29, 1987.
When Orlando died on November 7, 1983, the lease
contract was set to expire 26 days later or on December 3,
1983, unless renewed by Orlandos heirs for another four
years. While the option to renew is an enforceable right, it
must necessarily be first exercised to be given effect.33 As

the Court explained in Dioquino v. Intermediate Appellate

Court:34
A clause found in an agreement relative to the renewal of
the lease agreement at the option of the lessee gives the
latter an enforceable right to renew the contract in which
the clause is found for such time as provided for. The
agreement is understood as being in favor of the lessee,
and the latter is authorized to renew the contract and to
continue to occupy the leased property after notifying the
lessor to that effect. A lessors covenant or agreement to
renew gives a privilege to the tenant, but is nevertheless
an executory contract, and until the tenant has exercised
the privilege by way of some affirmative act, he cannot be
held for the additional term. In the absence of a stipulation
in the lease requiring notice of the exercise of an option or
an election to renew to be given within a certain time
before the expiration of the lease, which of course, the
lessee must comply with, the general rule is that a lessee
must exercise an option or election to renew his lease
and notify the lessor thereof before, or at least at the time
of the expiration of his original term, unless there is a
waiver or special circumstances warranting equitable
relief.1avvphi1.zw+
There is no dispute that in the instant case, the lessees
(private respondents) were granted the option to renew the
lease for another five (5) years after the termination of the
original period of fifteen years. Yet, there was never any
positive act on the part of private respondents before or
after the termination of the original period to show their
exercise of such option. The silence of the lessees after the
termination of the original period cannot be taken to mean
that they opted to renew the contract by virtue of the
promise by the lessor, as stated in the original contract of
lease, to allow them to renew. Neither can the exercise of
the option to renew be inferred from their persistence to
remain in the premises despite petitioners demand for
them to vacate. x x x.35
Similarly, the election of the option to renew the lease in
this case cannot be inferred from petitioner Wenifredas
continued possession of the subject lot and operation of
the gasoline station even after the death of Orlando on
November 7, 1983 and the expiration of the lease contract
on December 3, 1983. In the unlawful detainer case
against petitioner Wenifreda and in the subject complaint
for annulment of conveyance, respondents consistently
maintained that after the death of Orlando, the lease was
terminated and that they permitted petitioner Wenifreda
and her children to remain in possession of the subject
property out of tolerance and respect for the close blood
relationship between Cornelio and Orlando. It was
incumbent, therefore, upon petitioner as the plaintiff with
the burden of proof during the trial below to establish by
some positive act that Orlando or his heirs exercised the
option to renew the lease. After going over the records of
this case, we find no evidence, testimonial or
documentary, of such nature was presented before the trial
court to prove that Orlando or his heirs exercised the
option to renew prior to or at the time of the expiration of
the lease on December 3, 1983. In particular, the
testimony of petitioner Wenifreda is wanting in detail as
to the events surrounding the implementation of the
subject lease agreement after the death of Orlando and any
overt acts to establish the renewal of said lease.

Given the foregoing, it becomes unnecessary to resolve

the issue on whether the violation of the prohibitory clause
invalidated the sale and conferred ownership over the
subject lot to Orlandos heirs, who are mere lessees,
considering that at the time of said sale on January 29,
1987 the lease agreement had long been terminated for
failure of Orlando or his heirs to validly renew the same.
As a result, there was no obstacle to the sale of the subject
lot by Cornelio to respondents Eduardo and Jorge as the
prohibitory clause under the lease contract was no longer
in force.
Petitioner also anchors its claim over the subject lot on the
alleged verbal promise of Cornelio to Orlando that should
he (Cornelio) sell the same, Orlando would be given the
first opportunity to purchase said property. According to
petitioner, this amounted to a right of first refusal in favor
of Orlando which may be proved by parole evidence
because it is not one of the contracts covered by the statute
of frauds. Considering that Cornelio sold the subject lot to
respondents Eduardo and Jorge without first offering the
same to Orlandos heirs, petitioner argues that the sale is
in violation of the latters right of first refusal and is, thus,
rescissible.
The question as to whether a right of first refusal may be
proved by parole evidence has been answered in the
affirmative by this Court in Rosencor Development
Corporation v. Inquing:36
We have previously held that not all agreements "affecting
land" must be put into writing to attain enforceability.
Thus, we have held that the setting up of boundaries, the
oral partition of real property, and an agreement creating a
right of way are not covered by the provisions of the
statute of frauds. The reason simply is that these
agreements are not among those enumerated in Article
1403 of the New Civil Code.
A right of first refusal is not among those listed as
unenforceable under the statute of frauds. Furthermore,
the application of Article 1403, par. 2(e) of the New Civil
Code presupposes the existence of a perfected, albeit
unwritten, contract of sale. A right of first refusal, such as
the one involved in the instant case, is not by any means a
perfected contract of sale of real property. At best, it is a
contractual grant, not of the sale of the real property
involved, but of the right of first refusal over the property
sought to be sold.
It is thus evident that the statute of frauds does not
contemplate cases involving a right of first refusal. As
such, a right of first refusal need not be written to be
enforceable and may be proven by oral evidence.37
In the instant case, the Regional Trial Court ruled that the
right of first refusal was proved by oral evidence while the
Court of Appeals disagreed by ruling that petitioner
merely relied on the allegations in its Complaint to
establish said right. We have reviewed the records and
find that no testimonial evidence was presented to prove
the existence of said right. The testimony of petitioner
Wenifreda made no mention of the alleged verbal promise
given by Cornelio to Orlando. The two remaining
witnesses for the plaintiff, Michael Goco and Renato
Malindog, were representatives from the Register of
Deeds of Caloocan City who naturally were not privy to

this alleged promise. Neither was it established that

respondents Eduardo and Jorge were aware of said
promise prior to or at the time of the sale of the subject lot.
On the contrary, in their answer to the Complaint,
respondents denied the existence of said promise for lack
of knowledge thereof.38 Within these parameters,
petitioners allegations in its Complaint cannot substitute
for competent proof on such a crucial factual issue.
Necessarily, petitioners claims based on this alleged right
of first refusal cannot be sustained for its existence has not
been duly established.
WHEREFORE, the petition is DENIED. The May 30,
2000 Decision of the Court of Appeals in CA-G.R. CV
No. 58911 dismissing the complaint for annulment of
deed of conveyance, title and damages, and the October 6,
2000 Resolution denying the motion for reconsideration,
are AFFIRMED.

PHILIPPINE
NATIONAL
BANK, Petitioner,
vs.
TERESITA TAN DEE, ANTIPOLO PROPERTIES,
INC., (now PRIME EAST PROPERTIES, INC.) and
AFP-RSBS, INC., Respondents.
DECISION
REYES, J.:
This is a Petition for Review1 under Rule 45 of the Rules
of Court, assailing the Decision2 dated August 13, 2007
and Resolution3 dated March 13, 2008 rendered by the
Court of Appeals (CA) in CA-G.R. SP No. 86033, which
affirmed the Decision4 dated August 4, 2004 of the Office
of the President (OP) in O.P. Case No. 04-D-182 (HLURB
Case No. REM-A-030724-0186).
Facts of the Case
Some time in July 1994, respondent Teresita Tan Dee
(Dee) bought from respondent Prime East Properties
Inc.5(PEPI) on an installment basis a residential lot located
in Binangonan, Rizal, with an area of 204 square
meters6and covered by Transfer Certificate of Title (TCT)
No. 619608. Subsequently, PEPI assigned its rights over a
213,093-sq m property on August 1996 to respondent
Armed Forces of the Philippines-Retirement and
Separation Benefits System, Inc. (AFP-RSBS), which
included the property purchased by Dee.
Thereafter, or on September 10, 1996, PEPI obtained
a P205,000,000.00 loan from petitioner Philippine
National Bank (petitioner), secured by a mortgage over
several properties, including Dees property. The
mortgage was cleared by the Housing and Land Use
Regulatory Board (HLURB) on September 18, 1996.7
After Dees full payment of the purchase price, a deed of
sale was executed by respondents PEPI and AFP-RSBS on
July 1998 in Dees favor. Consequently, Dee sought from
the petitioner the delivery of the owners duplicate title
over the property, to no avail. Thus, she filed with the
HLURB a complaint for specific performance to compel
delivery of TCT No. 619608 by the petitioner, PEPI and
AFP-RSBS, among others. In its Decision8 dated May 21,
2003, the HLURB ruled in favor of Dee and disposed as
follows:
WHEREFORE, premises considered, judgment is hereby
rendered as follows:
1. Directing [the petitioner] to cancel/release the
mortgage on Lot 12, Block 21-A, Village East
Executive Homes covered by Transfer Certificate
of Title No. -619608-(TCT No. -619608-), and
accordingly, surrender/release the title thereof to
[Dee];
2. Immediately upon receipt by [Dee] of the
owners duplicate of Transfer Certificate of Title
No. -619608- (TCT No. -619608-), respondents
PEPI and AFP-RSBS are hereby ordered to
deliver the title of the subject lot in the name of
[Dee] free from all liens and encumbrances;

3. Directing respondents PEPI and AFP-RSBS to

pay [the petitioner] the redemption value of Lot
12, Block 21-A, Village East Executive Homes
covered by Transfer Certificate of Title No. 619608- (TCT No. -619608-) as agreed upon by
them in their Real Estate Mortgage within six (6)
months from the time the owners duplicate of
Transfer Certificate of Title No. -619608- (TCT
No. -619608-) is actually surrendered and released
by [the petitioner] to [Dee];
4. In the alternative, in case of legal and physical
impossibility on the part of [PEPI, AFP-RSBS,
and the petitioner] to comply and perform their
respective obligation/s, as above-mentioned,
respondents PEPI and AFP-RSBS are hereby
ordered to jointly and severally pay to [Dee] the
amount of FIVE HUNDRED TWENTY
THOUSAND PESOS ([P]520,000.00) plus twelve
percent (12%) interest to be computed from the
filing of complaint on April 24, 2002 until fully
paid; and
5. Ordering [PEPI, AFP-RSBS, and the petitioner]
to pay jointly and severally [Dee] the following
sums:
a) The amount of TWENTY FIVE
THOUSAND PESOS ([P]25,000.00) as
attorneys fees;
b) The cost of litigation[;] and
c) An administrative fine of TEN
THOUSAND PESOS ([P]10,000.00)
payable to this Office fifteen (15) days
upon receipt of this decision, for violation
of Section 18 in relation to Section 38 of
PD 957.
SO ORDERED.9
The HLURB decision was affirmed by its Board of
Commissioners per Decision dated March 15, 2004, with
modification as to the rate of interest.10
On appeal, the Board of Commissioners decision was
affirmed by the OP in its Decision dated August 4, 2004,
with modification as to the monetary award.11
Hence, the petitioner filed a petition for review with the
CA, which, in turn, issued the assailed Decision dated
August 13, 2007, affirming the OP decision. The
dispositive portion of the decision reads:
WHEREFORE, in view of the foregoing, the petition is
DENIED. The Decision dated August 4, 2004 rendered by
the Office of the President in O. P. Case No. 04-D-182
(HLURB Case No. REM-A-030724-0186) is hereby
AFFIRMED.
SO ORDERED.12
Its motion for reconsideration having been denied by the
CA in the Resolution dated March 13, 2008, the petitioner
filed the present petition for review on the following
grounds:

I. THE HONORABLE COURT OF APPEALS

ERRED IN ORDERING OUTRIGHT RELEASE
OF TCT NO. 619608 DESPITE PNBS DULY
REGISTERED AND HLURB[-] APPROVED
MORTGAGE ON TCT NO. 619608.
II. THE HONORABLE COURT OF APPEALS
ERRED IN ORDERING CANCELLATION OF
MORTGAGE/RELEASE OF TITLE IN FAVOR
OF RESPONDENT DEE DESPITE THE LACK
OF PAYMENT OR SETTLEMENT BY THE
MORTGAGOR (API/PEPI and AFP-RSBS) OF
ITS EXISTING LOAN OBLIGATION TO PNB,
OR THE PRIOR EXERCISE OF RIGHT OF
REDEMPTION BY THE MORTGAGOR AS
MANDATED BY SECTION 25 OF PD 957 OR
DIRECT PAYMENT MADE BY RESPONDENT
DEE TO PNB PURSUANT TO THE DEED OF
UNDERTAKING WHICH WOULD WARRANT
RELEASE OF THE SAME.13
The petitioner claims that it has a valid mortgage over
Dees property, which was part of the property mortgaged
by PEPI to it to secure its loan obligation, and that Dee
and PEPI are bound by such mortgage. The petitioner also
argues that it is not privy to the transactions between the
subdivision project buyers and PEPI, and has no
obligation to perform any of their respective undertakings
under their contract.14
The petitioner also maintains that Presidential Decree
(P.D.) No. 95715 cannot nullify the subsisting agreement
between it and PEPI, and that the petitioners rights over
the mortgaged properties are protected by Act 313516. If at
all, the petitioner can be compelled to release or cancel the
mortgage only after the provisions of P.D. No. 957 on
redemption of the mortgage by the owner/developer
(Section 25) are complied with. The petitioner also objects
to the denomination by the CA of the provisions in the
Affidavit of Undertaking as stipulations pour
autrui,17arguing that the release of the title was
conditioned on Dees direct payment to it.18
Respondent AFP-RSBS, meanwhile, contends that it
cannot be compelled to pay or settle the obligation under
the mortgage contract between PEPI and the petitioner as
it is merely an investor in the subdivision project and is
not privy to the mortgage.19
Respondent PEPI, on the other hand, claims that the title
over the subject property is one of the properties due for
release by the petitioner as it has already been the subject
of a Memorandum of Agreement and dacion en pago
entered into between them.20 The agreement was reached
after PEPI filed a petition for rehabilitation, and contained
the stipulation that the petitioner agreed to release the
mortgage lien on fully paid mortgaged properties upon the
issuance of the certificates of title over the dacioned
properties.21
For her part, respondent Dee adopts the arguments of the
CA in support of her prayer for the denial of the petition
for review.22
Ruling of the Court
The petition must be DENIED.

The petitioner is correct in arguing that it is not obliged to

perform any of the undertaking of respondent PEPI and
AFP-RSBS in its transactions with Dee because it is not a
privy thereto. The basic principle of relativity of contracts
is that contracts can only bind the parties who entered into
it,23 and cannot favor or prejudice a third person, even if
he is aware of such contract and has acted with knowledge
thereof.24 "Where there is no privity of contract, there is
likewise no obligation or liability to speak about."25
The petitioner, however, is not being tasked to undertake
the obligations of PEPI and AFP-RSBS.1avvphi1 In this
case, there are two phases involved in the transactions
between respondents PEPI and Dee the first phase is the
contract to sell, which eventually became the second
phase, the absolute sale, after Dees full payment of the
purchase price. In a contract of sale, the parties
obligations are plain and simple. The law obliges the
vendor to transfer the ownership of and to deliver the
thing that is the object of sale.26 On the other hand, the
principal obligation of a vendee is to pay the full purchase
price at the agreed time.27 Based on the final contract of
sale between them, the obligation of PEPI, as owners and
vendors of Lot 12, Block 21-A, Village East Executive
Homes, is to transfer the ownership of and to deliver Lot
12, Block 21-A to Dee, who, in turn, shall pay, and has in
fact paid, the full purchase price of the property. There is
nothing in the decision of the HLURB, as affirmed by the
OP and the CA, which shows that the petitioner is being
ordered to assume the obligation of any of the
respondents. There is also nothing in the HLURB
decision, which validates the petitioners claim that the
mortgage has been nullified. The order of
cancellation/release of the mortgage is simply a
consequence of Dees full payment of the purchase price,
as mandated by Section 25 of P.D. No. 957, to wit:
Sec. 25. Issuance of Title. The owner or developer shall
deliver the title of the lot or unit to the buyer upon full
payment of the lot or unit. No fee, except those required
for the registration of the deed of sale in the Registry of
Deeds, shall be collected for the issuance of such title. In
the event a mortgage over the lot or unit is outstanding at
the time of the issuance of the title to the buyer, the owner
or developer shall redeem the mortgage or the
corresponding portion thereof within six months from
such issuance in order that the title over any fully paid lot
or unit may be secured and delivered to the buyer in
accordance herewith.
It must be stressed that the mortgage contract between
PEPI and the petitioner is merely an accessory contract to
the principal three-year loan takeout from the petitioner by
PEPI for its expansion project. It need not be belaboured
that "[a] mortgage is an accessory undertaking to secure
the fulfillment of a principal obligation,"28 and it does not
affect the ownership of the property as it is nothing more
than a lien thereon serving as security for a debt.29
Note that at the time PEPI mortgaged the property to the
petitioner, the prevailing contract between respondents
PEPI and Dee was still the Contract to Sell, as Dee was
yet to fully pay the purchase price of the property. On this
point, PEPI was acting fully well within its right when it
mortgaged the property to the petitioner, for in a contract
to sell, ownership is retained by the seller and is not to
pass until full payment of the purchase price.30 In other

words, at the time of the mortgage, PEPI was still the

owner of the property. Thus, in China Banking
Corporation v. Spouses Lozada,31 the Court affirmed the
right of the owner/developer to mortgage the property
subject of development, to wit: "[P.D.] No. 957 cannot
totally prevent the owner or developer from mortgaging
the subdivision lot or condominium unit when the title
thereto still resides in the owner or developer awaiting the
full payment of the purchase price by the installment
buyer."32 Moreover, the mortgage bore the clearance of
the HLURB, in compliance with Section 18 of P.D. No.
957, which provides that "[n]o mortgage on any unit or lot
shall be made by the owner or developer without prior
written approval of the [HLURB]."
Nevertheless, despite the apparent validity of the mortgage
between the petitioner and PEPI, the former is still bound
to respect the transactions between respondents PEPI and
Dee. The petitioner was well aware that the properties
mortgaged by PEPI were also the subject of existing
contracts to sell with other buyers. While it may be that
the petitioner is protected by Act No. 3135, as amended, it
cannot claim any superior right as against the installment
buyers. This is because the contract between the
respondents is protected by P.D. No. 957, a social justice
measure enacted primarily to protect innocent lot
buyers.33 Thus, in Luzon Development Bank v.
Enriquez,34the Court reiterated the rule that a bank dealing
with a property that is already subject of a contract to sell
and is protected by the provisions of P.D. No. 957, is
bound by the contract to sell.35
However, the transferee BANK is bound by the Contract
to Sell and has to respect Enriquezs rights thereunder.
This is because the Contract to Sell, involving a
subdivision lot, is covered and protected by PD 957.
x x x.
xxxx
x x x Under these circumstances, the BANK knew or
should have known of the possibility and risk that the
assigned properties were already covered by existing
contracts to sell in favor of subdivision lot buyers. As
observed by the Court in another case involving a bank
regarding a subdivision lot that was already subject of a
contract to sell with a third party:
"[The Bank] should have considered that it was dealing
with a property subject of a real estate development
project. A reasonable person, particularly a financial
institution x x x, should have been aware that, to finance
the project, funds other than those obtained from the loan
could have been used to serve the purpose, albeit partially.
Hence, there was a need to verify whether any part of the
property was already intended to be the subject of any
other contract involving buyers or potential buyers. In
granting the loan, [the Bank] should not have been content
merely with a clean title, considering the presence of
circumstances indicating the need for a thorough
investigation of the existence of buyers x x x. Wanting in
care and prudence, the [Bank] cannot be deemed to be an
innocent mortgagee. x x x"36 (Citation omitted)
More so in this case where the contract to sell has already
ripened into a contract of absolute sale.1wphi1

Moreover, PEPI brought to the attention of the Court the

subsequent execution of a Memorandum of Agreement
dated November 22, 2006 by PEPI and the petitioner. Said
agreement was executed pursuant to an Order dated
February 23, 2004 by the Regional Trial Court (RTC) of
Makati City, Branch 142, in SP No. 02-1219, a petition for
Rehabilitation under the Interim Rules of Procedure on
Corporate Rehabilitation filed by PEPI. The RTC order
approved PEPIs modified Rehabilitation Plan, which
included the settlement of the latters unpaid obligations to
its creditors by way of dacion of real properties. In said
order, the RTC also incorporated certain measures that
were not included in PEPIs plan, one of which is that
"[t]itles to the lots which have been fully paid shall be
released to the purchasers within 90 days after the dacion
to
the
secured
creditors
has
been
37
completed." Consequently, the agreement stipulated that
as partial settlement of PEPIs obligation with the
petitioner, the former absolutely and irrevocably conveys
by way of "dacion en pago" the properties listed
therein,38 which included the lot purchased by Dee. The
petitioner also committed to
[R]elease its mortgage lien on fully paid Mortgaged
Properties upon issuance of the certificates of title over the
Dacioned Properties in the name of the [petitioner]. The
request for release of a Mortgaged Property shall be
accompanied with: (i) proof of full payment by the buyer,
together with a certificate of full payment issued by the
Borrower x x x. The [petitioner] hereby undertakes to
cause the transfer of the certificates of title over the
Dacioned Properties and the release of the Mortgaged
Properties with reasonable dispatch.39
Dacion en pago or dation in payment is the delivery and
transmission of ownership of a thing by the debtor to the
creditor as an accepted equivalent of the performance of
the obligation.40 It is a mode of extinguishing an existing
obligation41 and partakes the nature of sale as the creditor
is really buying the thing or property of the debtor, the
payment for which is to be charged against the debtors
debt.42 Dation in payment extinguishes the obligation to
the extent of the value of the thing delivered, either as
agreed upon by the parties or as may be proved, unless the
parties by agreement express or implied, or by their
silence consider the thing as equivalent to the obligation,
in which case the obligation is totally extinguished.43
There is nothing on record showing that the Memorandum
of Agreement has been nullified or is the subject of
pending litigation; hence, it carries with it the presumption
of validity.44 Consequently, the execution of the dation in
payment effectively extinguished respondent PEPIs loan
obligation to the petitioner insofar as it covers the value of
the property purchased by Dee. This negates the
petitioners claim that PEPI must first redeem the property
before it can cancel or release the mortgage. As it now
stands, the petitioner already stepped into the shoes of
PEPI and there is no more reason for the petitioner to
refuse the cancellation or release of the mortgage, for, as
stated by the Court in Luzon Development Bank, in
accepting the assigned properties as payment of the
obligation, "[the bank] has assumed the risk that some of
the assigned properties are covered by contracts to sell
which must be honored under PD 957."45 Whatever claims
the petitioner has against PEPI and AFP-RSBS, monetary
or otherwise, should not prejudice the rights and interests

of Dee over the property, which she has already fully paid
for.
As between these small lot buyers and the gigantic
financial institutions which the developers deal with, it is
obvious that the lawas an instrument of social justice
must favor the weak.46 (Emphasis omitted)
Finally, the Court will not dwell on the arguments of AFPRSBS given the finding of the OP that "[b]y its nonpayment of the appeal fee, AFP-RSBS is deemed to have
abandoned its appeal and accepts the decision of the
HLURB."47 As such, the HLURB decision had long been
final and executory as regards AFP-RSBS and can no
longer be altered or modified.48
WHEREFORE, the petition for review is DENIED for
lack of merit. Consequently, the Decision dated August
13, 2007 and Resolution dated March 13, 2008 of the
Court of Appeals in CA-G.R. SP No. 86033 are
AFFIRMED.
Petitioner Philippine National Bank and respondents
Prime East Properties Inc. and Armed Forces of the
Philippines-Retirement and Separation Benefits System,
Inc. are hereby ENJOINED to strictly comply with the
Housing and Land Use Regulatory Board Decision dated
May 21, 2003, as modified by its Board of Commissioners
Decision dated March 15, 2004 and Office of the
President Decision dated August 4, 2004.

JARDINE
DAVIES
INC., petitioner,
vs.
COURT OF APPEALS and FAR EAST MILLS
SUPPLY CORPORATION, respondents.

equivalent to twenty percent (20%) of the contract

price. The Guarantee Bond shall be valid for one
(1) year from completion and acceptance of
project. The contract price includes future
increase/s in costs of materials and labor;

x - - - - - - - - - - - - - - - - - - - - - - -x
G.R. No. 128069
PURE
FOODS
CORPORATION, petitioner,
vs.
COURT OF APPEALS and FAR EAST MILLS
SUPPLY CORPORATION, respondents.
BELLOSILLO, J.:
This is rather a simple case for specific performance with
damages which could have been resolved through
mediation and conciliation during its infancy stage had the
parties been earnest in expediting the disposal of this case.
They opted however to resort to full court proceedings and
denied themselves the benefits of alternative dispute
resolution, thus making the process more arduous and
long-drawn.
The controversy started in 1992 at the height of the power
crisis which the country was then experiencing. To
remedy and curtail further losses due to the series of
power
failures,
petitioner
PURE
FOODS
CORPORATION (hereafter PUREFOODS) decided to
install two (2) 1500 KW generators in its food processing
plant in San Roque, Marikina City.
Sometime in November 1992 a bidding for the supply and
installation of the generators was held. Several suppliers
and dealers were invited to attend a pre-bidding
conference to discuss the conditions, propose scheme and
specifications that would best suit the needs of
PUREFOODS. Out of the eight (8) prospective bidders
who attended the pre-bidding conference, only three (3)
bidders, namely, respondent FAR EAST MILLS SUPPLY
CORPORATION (hereafter FEMSCO), MONARK and
ADVANCE POWER submitted bid proposals and gave
bid bonds equivalent to 5% of their respective bids, as
required.
Thereafter, in a letter dated 12 December 1992 addressed
to FEMSCO President Alfonso Po, PUREFOODS
confirmed the award of the contract to FEMSCO
Gentlemen:
This will confirm that Pure Foods Corporation has
awarded to your firm the project: Supply and Installation
of two (2) units of 1500 KW/unit Generator Sets at the
Processed Meats Plant, Bo. San Roque, Marikina, based
on your proposal number PC 28-92 dated November 20,
1992, subject to the following basic terms and conditions:
1. Lump sum contract of P6,137,293.00 (VAT
included), for the supply of materials and labor for
the local portion and the labor for the imported
materials, payable by progress billing twice a
month, with ten percent (10%) retention. The
retained amount shall be released thirty (30) days
after acceptance of the completed project and
upon posting of Guarantee Bond in an amount

2. The projects shall be undertaken pursuant to the

attached specifications. It is understood that any
item required to complete the project, and those
not included in the list of items shall be deemed
included and covered and shall be performed;
3. All materials shall be brand new;
4. The project shall commence immediately and
must be completed within twenty (20) working
days after the delivery of Generator Set to
Marikina Plant, penalty equivalent to 1/10 of 1%
of the purchase price for every day of delay;
5. The Contractor shall put up Performance Bond
equivalent to thirty (30%) of the contract price,
and shall procure All Risk Insurance equivalent to
the contract price upon commencement of the
project. The All Risk Insurance Policy shall be
endorsed in favor of and shall be delivered to Pure
Foods Corporation;
6. Warranty of one (1) year against defective
material and/or workmanship.
Once finalized, we shall ask you to sign the formal
contract embodying the foregoing terms and conditions.
Immediately, FEMSCO submitted the required
performance bond in the amount of P1,841,187.90 and
contractor's all-risk insurance policy in the amount of
P6,137,293.00 which PUREFOODS through its Vice
President Benedicto G. Tope acknowledged in a letter
dated 18 December 1992. FEMSCO also made
arrangements with its principal and started the
PUREFOODS project by purchasing the necessary
materials. PUREFOODS on the other hand returned
FEMSCO's Bidder's Bond in the amount of
P1,000,000.00, as requested.
Later, however, in a letter dated 22 December 1992,
PUREFOODS through its Senior Vice President Teodoro
L. Dimayuga unilaterally canceled the award as
"significant factors were uncovered and brought to (their)
attention which dictate (the) cancellation and warrant a
total review and re-bid of (the) project." Consequently,
FEMSCO protested the cancellation of the award and
sought a meeting with PUREFOODS. However, on 26
March 1993, before the matter could be resolved,
PUREFOODS already awarded the project and entered
into a contract with JARDINE NELL, a division of
Jardine Davies, Inc. (hereafter JARDINE), which
incidentally was not one of the bidders.1wphi1.nt
FEMSCO thus wrote PUREFOODS to honor its contract
with the former, and to JARDINE to cease and desist from
delivering and installing the two (2) generators at
PUREFOODS. Its demand letters unheeded, FEMSCO
sued both PUREFOODS and JARDINE: PUREFOODS
for reneging on its contract, and JARDINE for its
unwarranted interference and inducement. Trial ensued.

After FEMSCO presented its evidence, JARDINE filed a

Demurrer to Evidence.

when it dealt with FEMSCO. Hence moral and exemplary

damages should not have been awarded.

On 27 June 1994 the Regional Trial Court of Pasig, Br.

68, 1 granted JARDINE's Demurrer to Evidence. The trial
court concluded that "[w]hile it may seem to the plaintiff
that by the actions of the two defendants there is
something underhanded going on, this is all a matter of
perception, and unsupported by hard evidence, mere
suspicions and suppositions would not stand up very well
in a court of law." 2 Meanwhile trial proceeded as regards
the case against PUREFOODS.

Corollarily, JARDINE asserts that the records are bereft of

any showing that it had prior knowledge of the supposed
contract between PUREFOODS and FEMSCO, and that it
induced PUREFOODS to violate the latter's alleged
contract with FEMSCO. Moreover, JARDINE reasons
that FEMSCO, an artificial person, is not entitled to moral
damages. But granting arguendo that the award of moral
damages is proper, P2,000,000.00 is extremely excessive.

On 28 July 1994 the trial court rendered a decision

ordering PUREFOODS: (a) to indemnify FEMSCO the
sum of P2,300,000.00 representing the value of
engineering services it rendered; (b) to pay FEMSCO the
sum of US$14,000.00 or its peso equivalent, and
P900,000.00 representing contractor's mark-up on
installation work, considering that it would be impossible
to compel PUREFOODS to honor, perform and fulfill its
contractual obligations in view of PUREFOOD's contract
with JARDINE and noting that construction had already
started thereon; (c) to pay attorney's fees in an amount
equivalent to 20% of the total amount due; and, (d) to pay
the costs. The trial court dismissed the counterclaim filed
by PUREFOODS for lack of factual and legal basis.
Both FEMSCO and PUREFOODS appealed to the Court
of Appeals. FEMSCO appealed the 27 June 1994
Resolution of the trial court which granted the Demurrer
to Evidence filed by JARDINE resulting in the dismissal
of the complaint against it, while PUREFOODS appealed
the 28 July 1994 Decision of the same court which
ordered it to pay FEMSCO.
On 14 August 1996 the Court of Appeals affirmed in
toto the 28 July 1994 Decision of the trial court. 3 It also
reversed the 27 June 1994 Resolution of the lower court
and ordered JARDINE to pay FEMSCO damages for
inducing PUREFOODS to violate the latter's contract with
FEMSCO. As such, JARDINE was ordered to pay
FEMSCO P2,000,000.00 for moral damages. In addition,
PUREFOODS was also directed to pay FEMSCO
P2,000,000.00 as moral damages and P1,000,000.00 as
exemplary damages as well as 20% of the total amount
due as attorney's fees.
On 31 January 1997 the Court of Appeals denied for lack
of merit the separate motions for reconsideration filed by
PUREFOODS and JARDINE. Hence, these two (2)
petitions for review filed by PUREFOODS and JARDINE
which were subsequently consolidated.
PUREFOODS maintains that the conclusions of both the
trial court and the appellate court are premised on a
misapprehension of facts. It argues that its 12 December
1992 letter to FEMSCO was not an acceptance of the
latter's bid proposal and award of the project but more of a
qualified acceptance constituting a counter-offer which
required
FEMSCO's
express conforme.
Since
PUREFOODS never received FEMSCO's conforme,
PUREFOODS was very well within reason to revoke its
qualified acceptance or counter-offer. Hence, no contract
was perfected between PUREFOODS and FEMSCO.
PUREFOODS also contends that it was never in bad faith

In the main, these consolidated cases present two (2)

issues: first, whether there existed a perfected contract
between PUREFOODS and FEMSCO; and second,
granting there existed a perfected contract, whether there
is any showing that JARDINE induced or connived with
PUREFOODS to violate the latter's contract with
FEMSCO.
A contract is defined as "a juridical convention manifested
in legal form, by virtue of which one or more persons bind
themselves in favor of another or others, or reciprocally,
to the fulfillment of a prestation to give, to do, or not to
do." 4 There can be no contract unless the following
requisites concur: (a) consent of the contracting parties;
(b) object certain which is the subject matter of the
contract; and, (c) cause of the obligation which is
established. 5 A contract binds both contracting parties and
has the force of law between them.
Contracts are perfected by mere consent, upon the
acceptance by the offeree of the offer made by the offeror.
From that moment, 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. 6 To
produce a contract, the acceptance must not qualify the
terms of the offer. However, the acceptance may be
express or implied. 7 For a contract to arise, the acceptance
must be made known to the offeror. Accordingly, the
acceptance can be withdrawn or revoked before it is made
known to the offeror.
In the instant case, there is no issue as regards the subject
matter of the contract and the cause of the obligation. The
controversy lies in the consent whether there was an
acceptance of the offer, and if so, if it was communicated,
thereby perfecting the contract.
To resolve the dispute, there is a need to determine what
constituted the offer and the acceptance. Since petitioner
PUREFOODS started the process of entering into the
contract by conducting a bidding, Art. 1326 of the Civil
Code, which provides that "[a]dvertisements for bidders
are simply invitations to make proposals," applies.
Accordingly, the Terms and Conditions of the Bidding
disseminated by petitioner PUREFOODS constitutes the
"advertisement" to bid on the project. The bid proposals or
quotations submitted by the prospective suppliers
including respondent FEMSCO, are the offers. And, the
reply of petitioner PUREFOODS, the acceptance or
rejection of the respective offers.
Quite obviously, the 12 December 1992 letter of
petitioner. PUREFOODS to FEMSCO constituted
acceptance of respondent FEMSCO's offer as

contemplated by law. The tenor of the letter, i.e., "This

will confirm that Pure Foods has awarded to your firm
(FEMSCO) the project," could not be more categorical.
While the same letter enumerated certain "basic terms and
conditions," these conditions were imposed on the
performance of the obligation rather than on the perfection
of the contract. Thus, the first "condition" was merely a
reiteration of the contract price and billing scheme based
on the Terms and Conditions of Bidding and the bid or
previous offer of respondent FEMSCO. The second and
third "conditions" were nothing more than general
statements that all items and materials including those
excluded in the list but necessary to complete the project
shall be deemed included and should be brand new. The
fourth "condition" concerned the completion of the work
to be done, i.e., within twenty (20) days from the delivery
of the generator set, the purchase of which was part of the
contract. The fifth "condition" had to do with the putting
up of a performance bond and an all-risk insurance, both
of which should be given upon commencement of the
project. The sixth "condition" related to the standard
warranty of one (1) year. In fine, the enumerated "basic
terms and conditions" were prescriptions on how the
obligation was to be performed and implemented. They
were far from being conditions imposed on the perfection
of the contract.
In Babasa v. Court of Appeals 8 we distinguished between
a condition imposed on the perfection of a contract and a
condition imposed merely on the performance of an
obligation. While failure to comply with the first condition
results in the failure of a contract, failure to comply with
the second merely gives the other party options and/or
remedies to protect his interests.
We thus agree with the conclusion of respondent appellate
court which affirmed the trial court
As can be inferred from the actual phrase used in
the first portion of the letter, the decision to award
the contract has already been made. The letter
only serves as a confirmation of such decision.
Hence, to the Court's mind, there is already an
acceptance made of the offer received by
Purefoods. Notwithstanding the terms and
conditions enumerated therein, the offer has been
accepted and/or amplified the details of the terms
and conditions contained in the Terms and
Conditions of Bidding given out by Purefoods to
prospective bidders. 9
But even granting arguendo that the 12 December 1992
letter of petitioner PUREFOODS constituted a
"conditional counter-offer," respondent FEMCO's
submission of the performance bond and contractor's allrisk insurance was an implied acceptance, if not a clear
indication of its acquiescence to, the "conditional counteroffer," which expressly stated that the performance bond
and the contractor's all-risk insurance should be given
upon the commencement of the contract. Corollarily, the
acknowledgment thereof by petitioner PUREFOODS, not
to mention its return of FEMSCO's bidder's bond, was a
concrete manifestation of its knowledge that respondent
FEMSCO indeed consented to the "conditional counteroffer." After all, as earlier adverted to, an acceptance may
either be express or implied, 10 and this can be inferred

from the contemporaneous and subsequent acts of the

contracting parties.
Accordingly, for all intents and purposes, the contract at
that point has been perfected, and respondent
FEMSCO'sconforme would only be a mere surplusage.
The discussion of the price of the project two (2) months
after the 12 December 1992 letter can be deemed as
nothing more than a pressure being exerted by petitioner
PUREFOODS on respondent FEMSCO to lower the price
even after the contract had been perfected. Indeed from
the facts, it can easily be surmised that petitioner
PUREFOODS was haggling for a lower price even after
agreeing to the earlier quotation, and was threatening to
unilaterally cancel the contract, which it eventually did.
Petitioner PUREFOODS also makes an issue out of the
absence of a purchase order (PO). Suffice it to say that
purchase orders or POs do not make or break a contract.
Thus, even the tenor of the subsequent letter of petitioner
PUREFOODS, i.e., "Pure Foods Corporation is hereby
canceling the award to your company of the project,"
presupposes that the contract has been perfected. For,
there can be no cancellation if the contract was not
perfected in the first place.
Petitioner PUREFOODS also argues that it was never in
bad faith.1avvphi1 On the contrary, it believed in good
faith that no such contract was perfected. We are not
convinced. We subscribe to the factual findings and
conclusions of the trial court which were affirmed by the
appellate court
Hence, by the unilateral cancellation of the
contract, the defendant (petitioner PURE FOODS)
has acted with bad faith and this was further
aggravated by the subsequent inking of a contract
between defendant Purefoods and erstwhile codefendant Jardine. It is very evident that
Purefoods thought that by the expedient means of
merely writing a letter would automatically cancel
or nullify the existing contract entered into by
both parties after a process of bidding. This, to the
Court's mind, is a flagrant violation of the express
provisions of the law and is contrary to fair and
just dealings to which every man is due. 11
This Court has awarded in the past moral damages to a
corporation whose reputation has been besmirched. 12 In
the instant case, respondent FEMSCO has sufficiently
shown that its reputation was tarnished after it
immediately ordered equipment from its suppliers on
account of the urgency of the project, only to be canceled
later. We thus sustain respondent appellate court's award
of moral damages. We however reduce the award from
P2,000,000.00 to P1,000,000.00, as moral damages are
never intended to enrich the recipient. Likewise, the award
of exemplary damages by way of example for the public
good is excessive and should be reduced to P100,000.00.
Petitioner JARDINE maintains on the other hand that
respondent appellate court erred in ordering it to pay
moral damages to respondent FEMSCO as it supposedly
induced PUREFOODS to violate the contract with
FEMSCO. We agree. While it may seem that petitioners
PUREFOODS and JARDINE connived to deceive
respondent FEMSCO, we find no specific evidence on
record to support such perception. Likewise, there is no

showing whatsoever that petitioner JARDINE induced

petitioner PUREFOODS. The similarity in the design
submitted to petitioner PUREFOODS by both petitioner
JARDINE and respondent FEMSCO, and the tender of a
lower quotation by petitioner JARDINE are insufficient to
show that petitioner JARDINE indeed induced petitioner
PUREFOODS to violate its contract with respondent
FEMSCO.
WHEREFORE, judgment is hereby rendered as follows:
(a) The petition in G.R. No. 128066 is
GRANTED. The assailed Decision of the Court of
Appeals reversing the 27 June 1994 resolution of
the trial court and ordering petitioner JARDINE
DAVIES, INC., to pay private respondent FAR
EAST MILLS SUPPLY CORPORATION
P2,000,000.00 as moral damages is REVERSED
and SET ASIDE for insufficiency of evidence;
and
(b) The petition in G.R. No. 128069 is DENIED.
The assailed Decision of the Court of Appeals
ordering
petitioner
PUREFOODS
CORPORATION to pay private respondent FAR
EAST MILLS SUPPLY CORPORATION the
sum of P2,300,000.00 representing the value of
engineering services it rendered, US$14,000.00 or
its peso equivalent, and P900,000.00 representing
the contractor's mark-up on installation work, as
well as attorney's fees equivalent to twenty
percent (20%) of the total amount due, is
AFFIRMED. In addition, petitioner PURE
FOODS CORPORATION is ordered to pay
private respondent FAR EAST MILLS SUPPLY
CORPORATION moral damages in the amount of
P1,000,000.00 and exemplary damages in the
amount of P1,000,000.00. Costs against petitioner.

JASMIN
SOLER, petitioner,
vs.
COURT OF APPEALS, COMMERCIAL BANK OF
MANILA, and NIDA LOPEZ, respondents.
PARDO, J.:
Appeal via certiorari from a decision of the Court of
Appeals,1 declaring that there was no perfected contract
between petitioner Jazmin Soler and The Commercial
Bank of Manila (COMBANK FOR BREVITY, formerly
Boston Bank of the Philippines) for the renovation of its
Ermita Branch, thereby denying her claim for payment of
professional fees for services rendered.
The antecedent facts are as follows:
Petitioner Jazmin Soler is a Fine Arts graduate of the
University of Sto. Tomas, Manila. She is a well known
licensed professional interior designer. In November 1986,
her friend Rosario Pardo asked her to talk to Nida Lopez,
who was manager of the COMBANK Ermita Branch for
they were planning to renovate the branch offices.2
Even prior to November 1986, petitioner and Nida Lopez
knew each other because of Rosario Pardo, the latter's
sister. During their meeting, petitioner was hesitant to
accept the job because of her many out of town
commitments, and also considering that Ms. Lopez was
asking that the designs be submitted by December 1986,
which was such a short notice. Ms. Lopez insisted,
however, because she really wanted petitioner to do the
design for renovation. Petitioner acceded to the request.
Ms. Lopez assured her that she would be compensated for
her services. Petitioner even told Ms. Lopez that her
professional fee was ten thousand pesos (P10,000.00), to
which Ms. Lopez acceded.3
During the November 1986 meeting between petitioner
and Ms. Lopez, there were discussions as to what was to
be renovated, which included a provision for a conference
room, a change in the carpeting and wall paper, provisions
for bookshelves, a clerical area in the second floor,
dressing up the kitchen, change of the ceiling and
renovation of the tellers booth. Ms. Lopez again assured
petitioner that the bank would pay her fees.4
After a few days, petitioner requested for the blueprint of
the building so that the proper design, plans and
specifications could be given to Ms. Lopez in time for the
board meeting in December 1986. Petitioner then asked
her draftsman Jackie Barcelon to go to the jobsite to make
the proper measurements using the blue print. Petitioner
also did her research on the designs and individual
drawings of what the bank wanted. Petitioner hired
Engineer Ortanez to make the electrical layout, architects
Frison Cruz and De Mesa to do the drafting. For the
services rendered by these individuals, petitioner paid the
engineer P4,000.00, architects Cruz and de Mesa
P5,000.00 and architect Barcelon P6,000.00. Petitioner
also contacted the suppliers of the wallpaper and the sash
makers for their quotation. So come December 1986, the
lay out and the design were submitted to Ms. Lopez. She
even told petitioner that she liked the designs.5
Subsequently, petitioner repeatedly demanded payment
for her services but Ms. Lopez just ignored the demands.

In February 1987, by chance petitioner and Ms. Lopez

saw each other in a concert at the Cultural Center of the
Philippines. Petitioner inquired about the payment for her
services, Ms. Lopez curtly replied that she was not entitled
to it because her designs did not conform to the bank's
policy of having a standard design, and that there was no
agreement between her and the bank.6

"After going over the record of this case,

including the transcribed notes taken during the
course of the trial, We are convinced that the
question here is not really whether the alleged
contract purportedly entered into between the
plaintiff and defendant Lopez is enforceable, but
whether a contract even exists between the parties.

To settle the controversy, petitioner referred the matter to

her lawyers, who wrote Ms. Lopez on May 20, 1987,
demanding payment for her professional fees in the
amount of P10,000.00 which Ms. Lopez ignored. Hence,
on June 18, 1987, the lawyers wrote Ms. Lopez once again
demanding the return of the blueprint copies petitioner
submitted which Ms. Lopez refused to return.7

"Article 1318 of the Civil Code provides that

there is no contract unless the following requisites
concur:

On October 13, 1987, petitioner filed at the Regional Trial

Court of Pasig, Branch 153 a complaint against
COMBANK and Ms. Lopez for collection of professional
fees and damages.8

"(1) consent of the contracting parties;

"(2) object certain which is the subject matter of
the contract;
"(3) cause of the obligation which is established.
xxx

In its answer, COMBANK stated that there was no

contract between COMBANK and petitioner;9 that Ms.
Lopez merely invited petitioner to participate in a bid for
the renovation of the COMBANK Ermita Branch; that any
proposal was still subject to the approval of the
COMBANK's head office.10

"The defendant bank never gave its imprimatur or

consent to the contract considering that the
bidding or the question of renovating the ceiling
of the branch office of defendant bank was
deferred because the commercial bank is for sale.
It is under privatization. xxx

After due trial, on November 19, 1990, the trial court

rendered a decision, the dispositive portion of which
reads:

"At any rate, we find that the appellee failed to

prove the allegations in her complaint. xxx

"WHEREFORE, premises considered, judgment

is hereby rendered in favor of plaintiff and against
defendants, ordering defendants jointly and
severally, to pay plaintiff the following, to wit:

"WHEREFORE, premises considered, the

appealed decision (dated November 19, 1990) of
the Regional Trial Court (Branch 153) in Pasig
(now 55238, is hereby REVERSED. No
pronouncement as to costs.

"1. P15,000.00 representing the actual and

compensatory damages or at least a reasonable
compensation for the services rendered based on a
quantum meruit;
"2. P5,000.00 as attorney's fees, and P2,000.00 as
litigation expenses;
"3. P5,000.00 as exemplary damages; and
"4. The cost of suit.
"SO ORDERED."11
On November 29, 1990, COMBANK, and Ms. Nida
Lopez, filed their notice of appeal.12 On December 5,
1990, the trial court ordered13 the records of the case
elevated to the Court of Appeals.14
In the appeal, COMBANK reiterated that there was no
contract between petitioner, Nida Lopez and the
bank.15Whereas, petitioner maintained that there was a
perfected contract between her and the bank which was
facilitated through Nida Lopez. According to petitioner
there was an offer and an acceptance of the service she
rendered to the bank.16
On October 26, 1995, the Court of Appeals rendered its
decision the relevant portions of which state:

"SO ORDERED."17
Hence, this petition.18
Petitioner forwards the argument that:
1. The Court of Appeals erred in ruling that there
was no contract between petitioner and
respondents, in the absence of the element of
consent;
2. The Court of Appeals erred in ruling that
respondents merely invited petitioner to present
her proposal;
3. The Court of Appeals erred in ruling that
petitioner knew that her proposal was still subject
to bidding and approval of the board of directors
of the bank;
4. The Court of Appeals erred in reversing the
decision of the trial court.
We find the petition meritorious.
We see that the issues raised boil down to whether or not
there was a perfected contract between petitioner Jazmin
Soler and respondents COMBANK and Nida Lopez, and

whether or not Nida Lopez, the manager of the bank

branch, had authority to bind the bank in the transaction.
The discussions between petitioner and Ms. Lopez was to
the effect that she had authority to engage the services of
petitioner. During their meeting, she even gave petitioner
specifications as to what was to be renovated in the branch
premises and when petitioners requested for the blueprints
of the building, Ms. Lopez supplied the same.

Also, petitioner may be paid on the basis of quantum

meruit. "It is essential for the proper operation of the
principle that there is an acceptance of the benefits by one
sought to be charged for the services rendered under
circumstances as reasonably to notify him that the lawyer
performing the task was expecting to be paid
compensation therefor. The doctrine of quantum meruit is
a device to prevent undue enrichment based on the
equitable postulate that it is unjust for a person to retain
benefit without paying for it."22

Ms. Lopez was aware that petitioner hired the services of

people to help her come up with the designs for the
December, 1986 board meeting of the bank. Ms. Lopez
even insisted that the designs be rushed in time for
presentation to the bank. With all these discussion and
transactions, it was apparent to petitioner that Ms. Lopez
indeed had authority to engage the services of
petitioner.1wphi1.nt

We note that the designs petitioner submitted to Ms.

Lopez were not returned. Ms. Lopez, an officer of the
bank as branch manager used such designs for
presentation to the board of the bank. Thus, the designs
were in fact useful to Ms. Lopez for she did not appear to
the board without any designs at the time of the deadline
set by the board.

The next issue is whether there was a perfected contract

between petitioner and the Bank.

IN VIEW WHEREOF, the decision appealed from

is REVERSED and SET ASIDE.

"A contract is a meeting of the minds between two

persons whereby one binds himself to give something or
to render some service to bind himself to give something
to render some service to another for consideration. There
is no contract unless the following requisites concur: 1.
Consent of the contracting parties; 2. Object certain which
is the subject matter of the contract; and 3. Cause of the
obligation which is established.19

The decision of the trial court23 is REVIVED,

REINSTATED and AFFIRMED.

"A contract undergoes three stages:

"(a) preparation, conception, or generation, which
is the period of negotiation and bargaining, ending
at the moment of agreement of the parties;
"(b) perfection or birth of the contract, which is
the moment when the parties come to agree on the
terms of the contract; and
"(c) consummation or death, which is the
fulfillment or performance of the terms agreed
upon in the contract."20
In the case at bar, there was a perfected oral contract.
When Ms. Lopez and petitioner met in November 1986,
and discussed the details of the work, the first stage of the
contract commenced. When they agreed to the payment of
the ten thousand pesos (P10,000.00) as professional fees
of petitioner and that she should give the designs before
the December 1986 board meeting of the bank, the second
stage of the contract proceeded, and when finally
petitioner gave the designs to Ms. Lopez, the contract was
consummated.
Petitioner believed that once she submitted the designs she
would be paid her professional fees. Ms. Lopez assured
petitioner that she would be paid.
It is familiar doctrine that if a corporation knowingly
permits one of its officers, or any other agent, to act within
the scope of an apparent authority, it holds him out to the
public as possessing the power to do those acts; and thus,
the corporation will, as against anyone who has in good
faith dealt with it through such agent, be estopped from
denying the agent's authority.21

PROVINCE
OF
CEBU, petitioner,
vs.
HEIRS OF RUFINA MORALES, NAMELY:
FELOMINA V. PANOPIO, NENITA VILLANUEVA,
ERLINDA V. ADRIANO and CATALINA V.
QUESADA, respondents.
DECISION
YNARES-SANTIAGO, J.:
This is a petition for review on certiorari of the
Decision1 of the Court of Appeals dated March 29, 2005
in CA-G.R. CV No. 53632, which affirmed in toto the
Decision2 of the Regional Trial Court of Cebu City,
Branch 6, in Civil Case No. CEB-11140 for specific
performance and reconveyance of property. Also assailed
is the Resolution3dated August 31, 2005 denying the
motion for reconsideration.
On September 27, 1961, petitioner Province of Cebu
leased4 in favor of Rufina Morales a 210-square meter lot
which formed part of Lot No. 646-A of the Banilad Estate.
Subsequently or sometime in 1964, petitioner donated
several parcels of land to the City of Cebu. Among those
donated was Lot No. 646-A which the City of Cebu
divided into sub-lots. The area occupied by Morales was
thereafter denominated as Lot No. 646-A-3, for which
Transfer Certificate of Title (TCT) No. 308835 was issued
in favor of the City of Cebu.
On July 19, 1965, the city sold Lot No. 646-A-3 as well as
the other donated lots at public auction in order to raise
money for infrastructure projects. The highest bidder for
Lot No. 646-A-3 was Hever Bascon but Morales was
allowed to match the highest bid since she had a
preferential right to the lot as actual occupant
thereof.6 Morales thus paid the required deposit and partial
payment for the lot.7
In the meantime, petitioner filed an action for reversion of
donation against the City of Cebu docketed as Civil Case
No. 238-BC before Branch 7 of the then Court of First
Instance of Cebu. On May 7, 1974, petitioner and the City
of Cebu entered into a compromise agreement which the
court approved on July 17, 1974.8 The agreement provided
for the return of the donated lots to petitioner except those
that have already been utilized by the City of Cebu.
Pursuant thereto, Lot No. 646-A-3 was returned to
petitioner and registered in its name under TCT No.
104310.9
Morales died on February 20, 1969 during the pendency
of Civil Case No. 238-BC.10 Apart from the deposit and
down payment, she was not able to make any other
payments on the balance of the purchase price for the lot.
On March 11, 1983, one of the nieces of Morales,
respondent Catalina V. Quesada, wrote to then Cebu
Governor Eduardo R. Gullas asking for the formal
conveyance of Lot No. 646-A-3 to Morales surviving
heirs, in accordance with the award earlier made by the
City of Cebu.11 This was followed by another letter of the
same tenor dated October 10, 1986 addressed to Governor
Osmundo G. Rama.12

The requests remained unheeded thus, Quesada, together

with the other nieces of Morales namely, respondents
Nenita Villanueva and Erlinda V. Adriano, as well as
Morales sister, Felomina V. Panopio, filed an action for
specific performance and reconveyance of property
against petitioner, which was docketed as Civil Case No.
CEB-11140 before Branch 6 of the Regional Trial Court
of Cebu City.13 They also consigned with the court the
amount of P13,450.00 representing the balance of the
purchase price which petitioner allegedly refused to
accept.14
Panopio died shortly after the complaint was filed.15

respect. Rufina Morales had a vested right over

the property. The plaintiffs being the heirs or
successors-in-interest of Rufina Morales, have the
right to ask for the conveyance of the property to
them. While it may be true that the title of the
property still remained in the name of the City of
Cebu until full payment is made, and this could be
the reason why the lot in question was among
those reverted to the Province, the sellers
obligation under the contract was, for all legal
purposes, transferred to, and assumed by, the
defendant Province of Cebu. It is then bound by
such contract.19

Respondents averred that the award at public auction of

the lot to Morales was a valid and binding contract entered
into by the City of Cebu and that the lot was inadvertently
returned to petitioner under the compromise judgment in
Civil Case No. 238-BC. They alleged that they could not
pay the balance of the purchase price during the pendency
of said case due to confusion as to whom and where
payment should be made. They thus prayed that judgment
be rendered ordering petitioner to execute a final deed of
absolute sale in their favor, and that TCT No. 104310 in
the name of petitioner be cancelled.16

Petitioner appealed to the Court of Appeals which

affirmed the decision of the trial court in toto. Upon denial
of its motion for reconsideration, petitioner filed the
instant petition under Rule 45 of the Rules of Court,
alleging that the appellate court erred in:

Petitioner filed its answer but failed to present evidence

despite several opportunities given thus, it was deemed to
have waived its right to present evidence.17

FINDING THAT WITH THE DEPOSIT AND

PARTIAL PAYMENT MADE BY RUFINA
MORALES, THE SALE WAS IN EFFECT
CLOSED FOR ALL LEGAL PURPOSES, AND
THAT
THE
TRANSACTION
WAS
PERFECTED AND CONSUMMATED;

On March 6, 1996, the trial court rendered judgment, the

dispositive part of which reads:
WHEREFORE, judgment is rendered in favor of
the plaintiffs and against the defendant Province
of Cebu, hereby directing the latter to convey Lot
646-A-3 to the plaintiffs as heirs of Rufina
Morales, and in this connection, to execute the
necessary deed in favor of said plaintiffs.
No pronouncement as to costs.
SO ORDERED.18
In ruling for the respondents, the trial court held thus:
[T]he Court is convinced that there was already a
consummated sale between the City of Cebu and
Rufina Morales. There was the offer to sell in that
public auction sale. It was accepted by Rufina
Morales with her bid and was granted the award
for which she paid the agreed downpayment. It
cannot be gainsaid that at that time the owner of
the property was the City of Cebu. It has the
absolute right to dispose of it thru that public
auction sale. The donation by the defendant
Province of Cebu to Cebu City was not voided in
that Civil Case No. 238-BC. The compromise
agreement between the parties therein on the basis
of which judgment was rendered did not provide
nullification of the sales or disposition made by
the City of Cebu. Being virtually successor-ininterest of City of Cebu, the defendant is bound by
the contract lawfully entered into by the former.
Defendant did not initiate any move to invalidate
the sale for one reason or another. Hence, it stands
as a perfectly valid contract which defendant must

FINDING THAT RUFINA MORALES AND

RESPONDENTS, AS HER HEIRS, HAVE THE
RIGHT TO EQUAL THE BID OF THE
HIGHEST BIDDER OF THE SUBJECT
PROPERTY AS LESSEES THEREOF;

FINDING
THAT
LACHES
AND/OR
PRESCRIPTION ARE NOT APPLICABLE
AGAINST RESPONDENTS;
FINDING THAT DUE TO THE PENDENCY OF
CIVIL CASE NO. 238-BC, PLAINTIFFS WERE
NOT ABLE TO PAY THE AGREED
INSTALLMENTS;
AFFIRMING THE DECISION OF THE TRIAL
COURT IN FAVOR OF THE RESPONDENTS
AND AGAINST THE PETITIONERS.20
The petition lacks merit.
The appellate court correctly ruled that petitioner, as
successor-in-interest of the City of Cebu, is bound to
respect the contract of sale entered into by the latter
pertaining to Lot No. 646-A-3. The City of Cebu was the
owner of the lot when it awarded the same to respondents
predecessor-in-interest, Morales, who later became its
owner before the same was erroneously returned to
petitioner under the compromise judgment. The award is
tantamount to a perfected contract of sale between
Morales and the City of Cebu, while partial payment of
the purchase price and actual occupation of the property
by Morales and respondents effectively transferred
ownership of the lot to the latter. This is true
notwithstanding the failure of Morales and respondents to
pay the balance of the purchase price.
Petitioner can no longer assail the award of the lot to
Morales on the ground that she had no right to match the
highest bid during the public auction. Whether Morales, as

actual occupant and/or lessee of the lot, was qualified and

had the right to match the highest bid is a foregone matter
that could have been questioned when the award was
made. When the City of Cebu awarded the lot to Morales,
it is assumed that she met all qualifications to match the
highest bid. The subject lot was auctioned in 1965 or more
than four decades ago and was never questioned. Thus, it
is safe to assume, as the appellate court did, that all
requirements for a valid public auction sale were complied
with.
A sale by public auction is perfected "when the auctioneer
announces its perfection by the fall of the hammer or in
other customary manner".21 It does not matter that
Morales merely matched the bid of the highest bidder at
the said auction sale. The contract of sale was nevertheless
perfected as to Morales, since she merely stepped into the
shoes of the highest bidder.
Consequently, there was a meeting of minds between the
City of Cebu and Morales as to the lot sold and its price,
such that each party could reciprocally demand
performance of the contract from the other.22 A contract of
sale is a consensual contract and 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 provisions of the law
governing the form of contracts. The elements of a valid
contract of sale under Article 1458 of the Civil Code are:
(1) consent or meeting of the minds; (2) determinate
subject matter; and (3) price certain in money or its
equivalent.23 All these elements were present in the
transaction between the City of Cebu and Morales.
There is no merit in petitioners assertion that there was no
perfected contract of sale because no "Contract of
Purchase and Sale" was ever executed by the parties. As
previously stated, a contract of sale is a consensual
contract that is perfected upon a meeting of minds as to
the object of the contract and its price. Subject to the
provisions of the Statute of Frauds, a formal document is
not necessary for the sale transaction to acquire binding
effect.24 For as long as the essential elements of a contract
of sale are proved to exist in a given transaction, the
contract is deemed perfected regardless of the absence of a
formal deed evidencing the same.
Similarly, petitioner erroneously contends that the failure
of Morales to pay the balance of the purchase price is
evidence that there was really no contract of sale over the
lot between Morales and the City of Cebu. On the
contrary, the fact that there was an agreed price for the lot
proves that a contract of sale was indeed perfected
between the parties. Failure to pay the balance of the
purchase price did not render the sale inexistent or invalid,
but merely gave rise to a right in favor of the vendor to
either demand specific performance or rescission of the
contract of sale.25 It did not abolish the contract of sale or
result in its automatic invalidation.
As correctly found by the appellate court, the contract of
sale between the City of Cebu and Morales was also
partially consummated. The latter had paid the deposit and
downpayment for the lot in accordance with the terms of
the bid award. She first occupied the property as a lessee
in 1961, built a house thereon and was continuously in

possession of the lot as its owner until her death in 1969.

Respondents, on the other hand, who are all surviving
heirs of Morales, likewise occupied the property during
the latters lifetime and continue to reside on the property
to this day.26
The stages of a contract of sale are as follows:
(1) negotiation, covering the period from the time the
prospective contracting parties indicate interest in the
contract to the time the contract is perfected;
(2) perfection, which takes place upon the concurrence of
the essential elements of the sale which are the meeting of
the minds of the parties as to the object of the contract and
upon the price; and (3) consummation, which begins when
the parties perform their respective undertakings under the
contract of sale, culminating in the extinguishment
thereof.27 In this case, respondents predecessor had
undoubtedly commenced performing her obligation by
making a down payment on the purchase price.
Unfortunately, however, she was not able to complete the
payments due to legal complications between petitioner
and the city.
Thus, the City of Cebu could no longer dispose of the lot
in question when it was included as among those returned
to petitioner pursuant to the compromise agreement in
Civil Case No. 238-BC. The City of Cebu had sold the
property to Morales even though there remained a balance
on the purchase price and a formal contract of sale had yet
to be executed. Incidentally, the failure of respondents to
pay the balance on the purchase price and the nonexecution of a formal agreement was sufficiently
explained by the fact that the trial court, in Civil Case No.
238-BC, issued a writ of preliminary injunction enjoining
the city from further disposing the donated lots. According
to respondents, there was confusion as to the
circumstances of payment considering that both the city
and petitioner had refused to accept payment by virtue of
the injunction.28 It appears that the parties simply mistook
Lot 646-A-3 as among those not yet sold by the city.
The City of Cebu was no longer the owner of Lot 646-A-3
when it ceded the same to petitioner under the
compromise agreement in Civil Case No. 238-BC. At that
time, the city merely retained rights as an unpaid seller but
had effectively transferred ownership of the lot to
Morales. As successor-in-interest of the city, petitioner
could only acquire rights that its predecessor had over the
lot. These rights include the right to seek rescission or
fulfillment of the terms of the contract and the right to
damages in either case.29
In this regard, the records show that respondent Quesada
wrote to then Cebu Governor Eduardo R. Gullas on March
11, 1983, asking for the formal conveyance of Lot 646-A3 pursuant to the award and sale earlier made by the City
of Cebu. On October 10, 1986, she again wrote to
Governor Osmundo G. Rama reiterating her previous
request. This means that petitioner had known, at least as
far back as 1983, that the city sold the lot to respondents
predecessor and that the latter had paid the deposit and the
required down payment. Despite this knowledge,
however, petitioner did not avail of any rightful recourse
to resolve the matter.
Article 1592 of the Civil Code pertinently provides:

Article 1592. In the sale of immovable property,

even though it may have been stipulated that upon
failure to pay the price at the time agreed upon the
rescission of the contract shall of right take
place, the vendee may 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. After the
demand, the court may not grant him a new term.
(Underscoring supplied)
Thus, respondents could still tender payment of the full
purchase price as no demand for rescission had been made
upon them, either judicially or through notarial act. While
it is true that it took a long time for respondents to bring
suit for specific performance and consign the balance of
the purchase price, it is equally true that petitioner or its
predecessor did not take any action to have the contract of
sale rescinded. Article 1592 allows the vendee to pay as
long as no demand for rescission has been made.30 The
consignation of the balance of the purchase price before
the trial court thus operated as full payment, which
resulted in the extinguishment of respondents obligation
under the contract of sale.
Finally, petitioner cannot raise the issue of prescription
and laches at this stage of the proceedings. Contrary to
petitioners assignment of errors, the appellate court made
no findings on the issue because petitioner never raised
the matter of prescription and laches either before the trial
court or Court of Appeals. It is basic that defenses and
issues not raised below cannot be considered on
appeal.31 Thus, petitioner cannot plead the matter for the
first time before this Court.
WHEREFORE, in view of the foregoing, the petition is
hereby DENIED and the decision and resolution of the
Court of Appeals in CA-G.R. CV No. 53632
are AFFIRMED.

ALI AKANG vs. MUNICIPALITY OF ISULAN,

SULTAN KUDARA T PROVINCE, represented by its
MUNICIPAL MAYOR AND MUNICIPAL VICE
MAYOR
AND
MUNICIPAL
COUNCILORS/KAGAWADS, Respondent.
This case was originally filed as a petition for certiorari
under Rule 65 of the Rules of Court. In the Court's
Resolution dated March 9, 2009, however, the petition
was treated as one for review under Rule.45.1 Assailed is
the Decision2 dated April 25, 2008 and Resolution3 dated
October 29, 2008 of the Court of Appeals Mindanao
Station (CA) in CA-G.R. CV No. 00156, which reversed
the Judgment4 dated January 14, 2004 of the Regional
Trial Court (RTC) of Isulan, Sultan Kudarat, Branch 19 in
Civil Case No. 1007 for Recovery of Possession of
Subject Property and/or Quieting of Title thereon and
Damages.
The Facts
Ali Akang (petitioner) is a member of the national and
cultural community belonging to the Maguindanaon tribe
of Isulan, Province of Sultan Kudarat and the registered
owner of Lot 5-B-2-B-14-F (LRC) Psd 1100183 located at
Kalawag III, Isulan, Sultan Kudarat, covered by Transfer
Certificate of Title (TCT) No. T-3653,5 with an area of
20,030 square meters.6
Sometime in 1962, a two-hectare portion of the property
was sold by the petitioner to the Municipality of Isulan,
Province of Sultan Kudarat (respondent) through then
Isulan Mayor Datu Ampatuan under a Deed of Sale
executed on July 18, 1962, which states:
"That for and in consideration of the sum of THREE
THOUSAND PESOS ([P]3,000.00), Philippine Currency,
value to be paid and deliver to me, and of which receipt of
which shall be acknowledged by me to my full satisfaction
by the MUNICIPAL GOVERNMENT OF ISULAN,
represented by the Municipal Mayor, Datu Sama
Ampatuan, hereinafter referred to as the VENDEE, I
hereby sell, transfer, cede, convey and assign as by these
presents do have sold, transferred, ceded, conveyed and
assigned, an area of TWO (2) hectares, more or less, to
and in favor of the MUNICIPAL GOVERNMENT OF
ISULAN, her (sic) heirs, assigns and administrators to
have and to hold forevery (sic) and definitely, which
portion shall be utilized purposely and exclusively as a
GOVERNMENT CENTER SITE x x x."7
The respondent immediately took possession of the
property and began construction of the municipal
building.8
Thirty-nine (39) years later or on October 26, 2001, the
petitioner, together with his wife, Patao Talipasan, filed a
civil action for Recovery of Possession of Subject
Property and/or Quieting of Title thereon and Damages
against the respondent, represented by its Municipal
Mayor, et al.9
In his complaint, the petitioner alleged, among others, that
the agreement was one to sell, which was not
consummated as the purchase price was not paid.10

In its answer, the respondent denied the petitioners

allegations, claiming, among others: that the petitioners
cause of action was already barred by laches; that the
Deed of Sale was valid; and that it has been in open,
continuous and exclusive possession of the property for
forty (40) years.11
After trial, the RTC rendered judgment in favor of the
petitioner. The RTC construed the Deed of Sale as a
contract to sell, based on the wording of the contract,
which allegedly showed that the consideration was still to
be paid and delivered on some future date a
characteristic of a contract to sell.12 In addition, the RTC
observed that the Deed of Sale was not determinate as to
its object since it merely indicated two (2) hectares of the
97,163 sq m lot, which is an undivided portion of the
entire property owned by the petitioner. The RTC found
that segregation must first be made to identify the parcel
of land indicated in the Deed of Sale and it is only then
that the petitioner could execute a final deed of absolute
sale in favor of the respondent.13
As regards the payment of the purchase price, the RTC
found the same to have not been made by the respondent.
According to the RTC, the Municipal Voucher is not a
competent documentary proof of payment but is merely
evidence of admission by the respondent that on the date
of the execution of the Deed of Sale, the consideration
stipulated therein had not yet been paid. The RTC also
ruled that the Municipal Vouchers validity and
evidentiary value is in question as it suffers infirmities,
that is, it was neither duly recorded, numbered, signed by
the Municipal Treasurer nor was it pre-audited.14
The RTC also ruled that the Deed of Sale was not
approved pursuant to Section 145 of the Administrative
Code for Mindanao and Sulu or Section 120 of the Public
Land Act (PLA), as amended. Resolution No. 70,15 which
was issued by the respondent, appropriating the amount
of P3,000.00 as payment for the property, and Resolution
No. 644 of the Provincial Board of Cotabato, which
approved Resolution No. 70, cannot be considered proof
of the sale as said Deed of Sale was not presented for
examination and approval
of
the
Provincial
Board.16 Further, since the respondents possession of the
property was not in the concept of an owner, laches cannot
be a valid defense for claiming ownership of the property,
which has been registered in the petitioners name under
the Torrens System.17
The dispositive portion of the RTC Decision18 dated
January 14, 2004 reads:
WHEREFORE, upon all the foregoing considerations,
judgment is hereby rendered:
a. Declaring the contract entered into between the
plaintiffs and the defendant, Municipal
Government of Isulan, Cotabato (now Sultan
Kudarat), represented by its former Mayor, Datu
Suma Ampatuan, dated July 18, 1962, as a
contract to sell, without its stipulated
consideration having been paid; and for having
been entered into between plaintiff Ali Akang, an
illiterate non-Christian, and the defendant,
Municipal Government of Isulan, in violation of
Section 120 of C.A. No. 141, said

contract/agreement is hereby declared null and

void;
b. Declaring the Deed of Sale (Exh. "1"-"E")
dated July 18, 1962, null and void ab initio, for
having been executed in violation of Section 145
of the Administrative Code of Mindanao and
Sulu, and of Section 120 of the Public Land Law,
as amended by R.A. No. 3872;
c. Ordering the defendants to pay plaintiffs, the
value of the lot in question, Lot No. 5-B-2-B-14-F
(LRC) Psd 110183, containing an area of 20,030
Square Meters, at the prevailing market value, as
may be reflected in its Tax Declaration, or in the
alternative, to agree on the payment of monthly
back rentals, retroactive to 1996, until defendants
should decide to buy and pay the value of said lot
as aforestated, with legal interest in both cases;
d. Ordering the defendant, Municipal Government
of Isulan, Sultan Kudarat, to pay plaintiffs, by
way of attorneys fee, the equivalent of 30% of
the value that defendants would pay the plaintiffs
for the lot in question; and to pay plaintiffs the
further sum of P100,000.00, by way of moral and
exemplary damages;
e. Ordering the defendants, members of the
Sangguniang Bayan of Isulan, Sultan Kudarat, to
pass a resolution/ordinance for the appropriation
of funds for the payment of the value of plaintiffs
Lot 5-B-2-B-14-F (LRC) Psd-110183, and of the
damages herein awarded to the plaintiffs; and

held that the doctrines of estoppel and laches must apply

against the petitioner for the reasons that: (1) the petitioner
adopted inconsistent positions when, on one hand, he
invoked the interpretation of the Deed of Sale as a contract
to sell but still demanded payment, and called for the
application of Sections 145 and 146 of the Administrative
Code for Mindanao and Sulu, on the other; and (2) the
petitioner did not raise at the earliest opportunity the
nullity of the sale and remained passive for 39 years, as it
was raised only in 2001.22
The CA also ruled that the Deed of Sale is not a mere
contract to sell but a perfected contract of sale. There was
no express reservation of ownership of title by the
petitioner and the fact that there was yet no payment at the
time of the sale does not affect the validity or prevent the
perfection of the sale.23
As regards the issue of whether payment of the price was
made, the CA ruled that there was actual payment, as
evidenced by the Municipal Voucher, which the petitioner
himself prepared and signed despite the lack of approval
of the Municipal Treasurer. Even if he was not paid the
consideration, it does not affect the validity of the contract
of sale for it is not the fact of payment of the price that
determines its validity.24
In addition, the CA noted that there was an erroneous
cancellation of the certificate of title in the name of the
respondent and the registration of the same property in the
name of the petitioner in Miscellaneous Case No. 866.
According to the CA, this does not affect in any way the
ownership of the respondent over the subject property
because registration or issuance of a certificate of title is
not one of the modes of acquiring ownership.25

f. Ordering the defendants to pay the costs of suit.

For lack of merit, the counterclaims of the defendants
should be, as it is hereby, dismissed.

The petitioner sought reconsideration of the CA Decision,

which was denied by the CA in its Resolution26 dated
October 29, 2008.

IT IS SO ORDERED.19

Hence, this petition.

By virtue of said RTC decision, proceedings for the

Cancellation of Certificate of Title No. T-49349 registered
under the name of the respondent was instituted by the
petitioner under Miscellaneous Case No. 866 and as a
result, the respondents title over the property was
cancelled and a new one issued in the name of the
petitioner.

Issue

The respondent appealed the RTC Decision dated January

14, 2004 and in the Decision20 dated April 25, 2008, the
CA reversed the ruling of the RTC and upheld the validity
of the sale. The dispositive portion of the CA Decision
provides:
WHEREFORE, the assailed decision dated January 14,
2004 is hereby REVERSED and a new one entered,
upholding the contract of sale executed on July 18, 1962
between the parties.
SO ORDERED.21
The CA sustained the respondents arguments and ruled
that the petitioner is not entitled to recover ownership and
possession of the property as the Deed of Sale already
transferred ownership thereof to the respondent. The CA

WHETHER THE PETITIONER IS ENTITLED TO

RECOVER OWNERSHIP AND POSSESSION OF THE
PROPERTY IN DISPUTE.
Resolution of the above follows determination of these
questions: (1) whether the Deed of Sale dated July 18,
1962 is a valid and perfected contract of sale; (2) whether
there was payment of consideration by the respondent; and
(3) whether the petitioners claim is barred by laches.
The petitioner claims that the acquisition of the respondent
was null and void because: (1) he is an illiterate nonChristian who only knows how to sign his name in Arabic
and knows how to read the Quran but can neither read nor
write in both Arabic and English; (2) the respondent has
not paid the price for the property; (3) the Municipal
Voucher is not admissible in evidence as proof of
payment; (4) the Deed of Sale was not duly approved in
accordance with Sections 145 and 146 of the
Administrative Code of Mindanao and Sulu, and Section
120 of the PLA, as amended; and (4) the property is a
registered land covered by a TCT and cannot be acquired
by prescription or adverse possession.27 The petitioner

also explained that the delayed filing of the civil action

with the RTC was due to Martial Law and the IlagaBlackshirt Troubles in the then Province of Cotabato.28
The respondent, however, counters that: (1) the petitioner
is not an illiterate non-Christian and he, in fact, was able
to execute, sign in Arabic, and understand the terms and
conditions of the Special Power of Attorney dated July 23,
1996 issued in favor of Baikong Akang (Baikong); (2) the
Deed of Sale is valid as its terms and conditions were
reviewed by the Municipal Council of Isulan and the
Provincial Board of Cotabato; and (3) the Deed of Sale is
a contract of sale and not a contract to sell.29
Ruling of the Court
The Court finds the petition devoid of merit.
Issue
Raised
for
the
on Appeal is Barred by Estoppel

First

Time

The petitioner asserts that the Deed of Sale was notarized

by Atty. Gualberto B. Baclig who was not authorized to
administer the same, hence, null and void. This argument
must be rejected as it is being raised for the first time only
in this petition. In his arguments before the RTC and the
CA, the petitioner focused mainly on the validity and the
nature of the Deed of Sale, and whether there was
payment of the purchase price. The rule is settled that
issues raised for the first time on appeal and not raised in
the proceedings in the lower court are barred by estoppel.
To consider the alleged facts and arguments raised
belatedly would amount to trampling on the basic
principles
of
fair
play,
justice,
and
due
process.30 Accordingly, thepetitioners attack on the
validity of the Deed of Sale vis--vis its compliance with
the 2004 New Notarial Law must be disregarded.31
The Deed of Sale is a Valid Contract of Sale
The petitioner alleges that the Deed of Sale is merely an
agreement to sell, which was not perfected due to nonpayment of the stipulated consideration.32 The respondent,
meanwhile, claims that the Deed of Sale is a valid and
perfected contract of absolute sale.33
A contract of sale is defined under Article 1458 of the
Civil Code:
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 therefore
a price certain in money or its equivalent.
The elements of a contract of sale are: (a) consent or
meeting of the minds, that is, consent to transfer
ownership in exchange for the price; (b) determinate
subject matter; and (c) price certain in money or its
equivalent.34
A contract to sell, on the other hand, is defined by Article
1479 of the Civil Code:
A bilateral contract whereby the prospective seller, while
expressly reserving the ownership of the subject property
despite delivery thereof to the prospective buyer, binds
himself to sell the said property exclusively to the

prospective buyer upon fulfillment of the condition agreed

upon, that is, full payment of the purchase price.
In a contract of sale, the title to the property passes to the
buyer upon the delivery of the thing sold, whereas in a
contract to sell, the ownership is, by agreement, retained
by the seller and is not to pass to the vendee until full
payment of the purchase price.35
The Deed of Sale executed by the petitioner and the
respondent is a perfected contract of sale, all its elements
being present. There was mutual agreement between them
to enter into the sale, as shown by their free and voluntary
signing of the contract. There was also an absolute transfer
of ownership of the property by the petitioner to the
respondent as shown in the stipulation: "x x x I petitioner
hereby sell, transfer, cede, convey and assign as by these
presents do have sold, transferred, ceded, conveyed and
assigned, x x x."36 There was also a determine subject
matter, that is, the two-hectare parcel of land as described
in the Deed of Sale. Lastly, the price or consideration is at
Three Thousand Pesos (P3,000.00), which was to be paid
after the execution of the contract. The fact that no express
reservation of ownership or title to the property can be
found in the Deed of Sale bolsters the absence of such
intent, and the contract, therefore, could not be one to sell.
Had the intention of the petitioner been otherwise, he
could have: (1) immediately sought judicial recourse to
prevent further construction of the municipal building; or
(2) taken legal action to contest the agreement.37 The
petitioner did not opt to undertake any of such recourses.
Payment of consideration or purchase price
The petitioners allegation of non-payment is of no
consequence taking into account the Municipal Voucher
presented before the RTC, which proves payment by the
respondent of Three Thousand Pesos (P3,000.00). The
petitioner, notwithstanding the lack of the Municipal
Treasurers approval, admitted that the signature
appearing on the Municipal Voucher was his and he is
now estopped from disclaiming payment.
Even assuming, arguendo, that the petitioner was not paid,
such non payment is immaterial and has no effect on the
validity of the contract of sale. A contract of sale is a
consensual contract and what is required is the meeting of
the minds on the object and the price for its perfection and
validity.38 In this case, the contract was perfected the
moment the petitioner and the respondent agreed on the
object of the sale the two-hectare parcel of land, and the
price Three Thousand Pesos (P3,000.00). Non-payment
of the purchase price merely gave rise to a right in favor of
the petitioner to either demand specific performance or
rescission of the contract of sale.39
Sections 145 and 146 of the Administrative Code of
Mindanao and Sulu, and Section 120 of the PLA, as
amended, are not applicable
The petitioner relies on the foregoing laws in assailing the
validity of the Deed of Sale, claiming that the contract
lacks executive approval and that he is an illiterate nonChristian to whom the benefits of Sections 145 and 146 of
the Administrative Code of Mindanao and Sulu should
apply.

Section 145 of the Administrative Code of Mindanao and

Sulu essentially provides for the requisites of the contracts
entered into by a person with any Moro or other nonChristian
inhabitants.40 Section
146,41 meanwhile,
provides that contracts entered into in violation of Section
145 are void. These provisions aim to safeguard the
patrimony of the less developed ethnic groups in the
Philippines by shielding them against imposition and
fraud when they enter into agreements dealing with
realty.42
Section 120 of the PLA (Commonwealth Act No. 141)
affords the same protection.43 R.A. No. No.
387244 likewise provides that conveyances and
encumbrances made by illiterate non-Christian or literate
non-Christians where the instrument of conveyance or
encumbrance is in a language not understood by said
literate non-Christians shall not be valid unless duly
approved by the Chairman of the Commission on National
Integration.
In Jandoc-Gatdula v. Dimalanta,45 however, the Court
categorically stated that while the purpose of Sections 145
and 146 of the Administrative Code of Mindanao and Sulu
in requiring executive approval of contracts entered into
by cultural minorities is indeed to protect them, the Court
cannot blindly apply that law without considering how the
parties exercised their rights and obligations. In this case,
Municipality Resolution No. 70, which approved the
appropriation of P3,000.00, was, in fact, accepted by the
Provincial Board of Cotabato. In approving the
appropriation of P3,000.00, the Municipal Council of
Isulan and the Provincial Board of Cotabato, necessarily,
scrutinized the Deed of Sale containing the terms and
conditions of the sale. Moreover, there is nothing on
record that proves that the petitioner was duped into
signing the contract, that he was taken advantage of by the
respondent and that his rights were not protected.
The courts duty to protect the native vendor, however,
should not be carried out to such an extent as to deny
justice to the vendee when truth and justice happen to be
on the latters side. The law cannot be used to shield the
enrichment of one at the expense of another. More
important, the law will not be applied so stringently as to
render ineffective a contract that is otherwise valid, except
for want of approval by the CNI. This principle holds,
especially when the evils sought to be avoided are not
obtaining.46
The Court must also reject the petitioners claim that he
did
not
understand
the
import
of
the
agreement.1wphi1 He alleged that he signed in Arabic
the Deed of Sale, the Joint Affidavit and the Municipal
Voucher, which were all in English, and that he was not
able to comprehend its contents. Records show the
contrary. The petitioner, in fact, was able to execute in
favor of Baikong a Special Power of Attorney (SPA)
dated July 23, 1996, which was written in English albeit
signed by the petitioner in Arabic. Said SPA authorized
Baikong, the petitioners sister, to follow-up the payment
of the purchase price. This raises doubt on the veracity of
the petitioners allegation that he does not understand the
language as he would not have been able to execute the
SPA or he would have prevented its enforcement.

The Petitioners Claim for Recovery of Possession and

Ownership is Barred by Laches
Laches has been defined as the 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.47 It should be stressed that laches is not
concerned only with the mere lapse of time.48
As a general rule, an action to recover registered land
covered by the Torrens System may not be barred by
laches.49 Neither can laches be set up to resist the
enforcement of an imprescriptible legal right.50 In
exceptional cases, however, the Court allowed laches as a
bar to recover a titled property. Thus, in Romero v.
Natividad,51the Court ruled that laches will bar recovery of
the property even if the mode of transfer was invalid.
Likewise, in Vda. de Cabrera v. CA,52 the Court ruled:
In our jurisdiction, it is an enshrined rule that even a
registered owners of property may be barred from
recovering possession of property by virtue of laches.
Under the Land Registration Act (now the Property
Registration Decree), no title to registered land in
derogation to that of the registered owner shall be
acquired by prescription or adverse possession. The same
is not true with regard to laches. x x x.53 (Citation omitted
and emphasis supplied)
More particularly, laches will bar recovery of a property,
even if the mode of transfer used by an alleged member of
a cultural minority lacks executive approval.54 Thus, in
Heirs of Dicman v. Cario,55 the Court upheld the Deed of
Conveyance of Part Rights and Interests in Agricultural
Land executed by Ting-el Dicman in favor of Sioco
Cario despite lack of executive approval. The Court
stated that "despite the judicial pronouncement that the
sale of real property by illiterate ethnic minorities is null
and void for lack of approval of competent authorities, the
right to recover possession has nonetheless been barred
through the operation of the equitable doctrine of
laches."56Similarly in this case, while the respondent may
not be considered as having acquired ownership by virtue
of its long and continued possession, nevertheless, the
petitioners right to recover has been converted into a stale
demand due to the respondents long period of possession
and by the petitioners own inaction and neglect.57 The
Court cannot accept the petitioners explanation that his
delayed filing and assertion of rights was due to Martial
Law and the Cotabato Ilaga-Black Shirt Troubles. The
Martial Law regime was from 1972 to 1986, while the
Ilaga-Black Shirt Troubles were from the 1970s to the
1980s. The petitioner could have sought judicial relief, or
at the very least made his demands to the respondent, as
early as the third quarter of 1962 after the execution of the
Deed of Sale and before the advent of these events.
Moreover, even if, as the petitioner claims, access to
courts were restricted during these times, he could have
immediately filed his claim after Martial Law and after the
Cotabato conflict has ended. The petitioner's reliance on
the Court's treatment of Martial Law as force majeure that
suspended the running of prescription in Development
Bank of the Philippines v. Pundogar58 is inapplicable
because the Court's ruling therein pertained to prescription
and not laches. Consequently, the petitioner's lengthy
inaction sufficiently warrants the conclusion that he
acquiesced or conformed to the sale.

Vigilantibus sed non dormientibus jura subverniunt. The

law aids the vigilant, not those who sleep on their rights.
This legal percept finds application in the petitioner's case.
WHEREFORE, the appeal is DENIED. The Decision
dated April 25, 2008 and Resolution dated October 29,
2008 of the Court of Appeals Mindanao Station in CAG.R. CV No. 00156 are AFFIRMED.

HEIRS OF CAYETANO PANGAN and CONSUELO

PANGAN,* Petitioners,
vs.
SPOUSES ROGELIO PERRERAS and PRISCILLA
PERRERAS, Respondents.
DECISION
BRION, J.:
The heirs1 of spouses Cayetano and Consuelo Pangan
(petitioners-heirs) seek the reversal of the Court of
Appeals (CA) decision2 of June 26, 2002, as well its
resolution of February 20, 2003, in CA-G.R. CV Case No.
56590 through the present petition for review on
certiorari.3 The CA decision affirmed the Regional Trial
Courts (RTC) ruling4 which granted the complaint for
specific performance filed by spouses Rogelio and
Priscilla Perreras (respondents) against the petitionersheirs, and dismissed the complaint for consignation
instituted by Consuelo Pangan (Consuelo) against the
respondents.
THE FACTUAL ANTECEDENTS
The spouses Pangan were the owners of the lot and twodoor apartment (subject properties) located at 1142
Casaas St., Sampaloc, Manila.5 On June 2, 1989,
Consuelo agreed to sell to the respondents the subject
properties for the price of P540,000.00. On the same day,
Consuelo received P20,000.00 from the respondents as
earnest money, evidenced by a receipt (June 2, 1989
receipt)6 that also included the terms of the parties
agreement.
Three days later, or on June 5, 1989, the parties agreed to
increase
the
purchase
price
from P540,000.00
toP580,000.00.
In compliance with the agreement, the respondents issued
two Far East Bank and Trust Company checks payable to
Consuelo
in
the
amounts
of P200,000.00
and P250,000.00 on June 15, 1989. Consuelo, however,
refused to accept the checks. She justified her refusal by
saying that her children (the petitioners-heirs) co-owners
of the subject properties did not want to sell the subject
properties. For the same reason, Consuelo offered to
return the P20,000.00 earnest money she received from
the respondents, but the latter rejected it. Thus, Consuelo
filed a complaint for consignation against the respondents
on September 5, 1989, docketed as Civil Case No. 8950258, before the RTC of Manila, Branch 28.
The respondents, who insisted on enforcing the
agreement, in turn instituted an action for specific
performance against Consuelo before the same court on
September 26, 1989. This case was docketed as Civil Case
No. 89-50259. They sought to compel Consuelo and the
petitioners-heirs (who were subsequently impleaded as codefendants) to execute a Deed of Absolute Sale over the
subject properties.
In her Answer, Consuelo claimed that she was justified in
backing out from the agreement on the ground that the
sale was subject to the consent of the petitioners-heirs who
became co-owners of the property upon the death of her
husband, Cayetano. Since the
petitioners-heirs

disapproved of the sale, Consuelo claimed that the

contract became ineffective for lack of the requisite
consent. She nevertheless expressed her willingness to
return theP20,000.00 earnest money she received from the
respondents.
The RTC ruled in the respondents favor; it upheld the
existence of a perfected contract of sale, at least insofar as
the sale involved Consuelos conjugal and hereditary
shares in the subject properties. The trial court found that
Consuelos receipt of the P20,000.00 earnest money was
an "eloquent manifestation of the perfection of the
contract." Moreover, nothing in the June 2, 1989 receipt
showed that the agreement was conditioned on the consent
of the petitioners-heirs. Even so, the RTC declared that the
sale is valid and can be enforced against Consuelo; as a
co-owner, she had full-ownership of the part pertaining to
her share which she can alienate, assign, or mortgage. The
petitioners-heirs, however, could not be compelled to
transfer and deliver their shares in the subject properties,
as they were not parties to the agreement between
Consuelo and the respondents. Thus, the trial court
ordered Consuelo to convey one-half (representing
Consuelos conjugal share) plus one-sixth (representing
Consuelos hereditary share) of the subject properties, and
to pay P10,000.00 as attorneys fees to the respondents.
Corollarily, it dismissed Consuelos consignation
complaint.

Even assuming that the agreement amounted to a

perfected contract, the petitioners-heirs posed the question
of the agreements proper characterization whether it is
a contract of sale or a contract to sell. The petitioners-heirs
posit that the agreement involves a contract to sell, and the
respondents belated payment of part of the purchase
price, i.e., one day after the June 14, 1989 due date,
amounted to the non-fulfillment of a positive suspensive
condition that prevented the contract from acquiring
obligatory force. In support of this contention, the
petitioners-heirs cite the Courts ruling in the case
of Adelfa Rivera, et al. v. Fidela del Rosario, et al.: 7
In a contract of sale, the title to the property passes to the
vendee upon the delivery of the thing sold; while 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. In a contract to sell, the
payment of the purchase price is a positive suspensive
condition, the failure of which is not a breach, casual
or serious, but a situation that prevents the obligation
of the vendor to convey title from acquiring an
obligatory force.
[Rivera], however, failed to complete payment of the
second installment. The non-fulfillment of the condition
rendered the contract to sell ineffective and without force
and effect. [Emphasis in the original.]

Consuelo and the petitioners-heirs appealed the RTC

decision to the CA claiming that the trial court erred in not
finding that the agreement was subject to a suspensive
condition the consent of the petitioners-heirs to the
agreement. The CA, however, resolved to dismiss the
appeal and, therefore, affirmed the RTC decision. As the
RTC did, the CA found that the payment and receipt of
earnest money was the operative act that gave rise to a
perfected contract, and that there was nothing in the
parties agreement that would indicate that it was subject
to a suspensive condition. It declared:

From these contentions, we simplify the basic issues for

resolution to three questions:

Nowhere in the agreement of the parties, as contained in

the June 2, 1989 receipt issued by [Consuelo] xxx,
indicates that [Consuelo] reserved titled on [sic] the
property, nor does it contain any provision subjecting the
sale to a positive suspensive condition.

THE COURTS RULING

Unconvinced by the correctness of both the RTC and the

CA rulings, the petitioners-heirs filed the present appeal
by certiorari alleging reversible errors committed by the
appellate court.
THE PETITION
The petitioners-heirs primarily contest the finding that
there was a perfected contract executed by the parties.
They allege that other than the finding that Consuelo
received P20,000.00 from the respondents as earnest
money, no other evidence supported the conclusion that
there was a perfected contract between the parties; they
insist that Consuelo specifically informed the respondents
that the sale still required the petitioners-heirs consent as
co-owners. The refusal of the petitioners-heirs to sell the
subject properties purportedly amounted to the absence of
the requisite element of consent.

1. Was there a perfected contract between the

parties?
2. What is the nature of the contract between
them? and
3. What is the effect of the respondents belated
payment on their contract?

There was a perfected contract between the parties since

all the essential requisites of a contract were present
Article 1318 of the Civil Code declares that no contract
exists unless the following requisites concur: (1) consent
of the contracting parties; (2) object certain which is the
subject matter of the contract; and (3) cause of the
obligation established. Since the object of the parties
agreement involves properties co-owned by Consuelo and
her children, the petitioners-heirs insist that their approval
of the sale initiated by their mother, Consuelo, was
essential to its perfection. Accordingly, their refusal
amounted to the absence of the required element of
consent.
That a thing is sold without the consent of all the coowners does not invalidate the sale or render it void.
Article 493 of the Civil Code8 recognizes the absolute
right of a co-owner to freely dispose of his pro
indiviso share as well as the fruits and other benefits
arising from that share, independently of the other coowners. Thus, when Consuelo agreed to sell to the
respondents the subject properties, what she in fact sold
was her undivided interest that, as quantified by the RTC,

consisted of one-half interest, representing her conjugal

share, and one-sixth interest, representing her hereditary
share.
The petitioners-heirs nevertheless argue that Consuelos
consent was predicated on their consent to the sale, and
that their disapproval resulted in the withdrawal of
Consuelos consent. Yet, we find nothing in the parties
agreement or even conduct save Consuelos self-serving
testimony that would indicate or from which we can
infer that Consuelos consent depended on her childrens
approval of the sale. The explicit terms of the June 8, 1989
receipt9 provide no occasion for any reading that the
agreement is subject to the petitioners-heirs favorable
consent to the sale.
The presence of Consuelos consent and, corollarily, the
existence of a perfected contract between the parties are
further evidenced by the payment and receipt
of P20,000.00, an earnest money by the contracting
parties common usage. The law on sales, specifically
Article 1482 of the Civil Code, provides that whenever
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. Although the presumption is
not conclusive, as the parties may treat the earnest money
differently, there is nothing alleged in the present case that
would give rise to a contrary presumption. In cases where
the Court reached a conclusion contrary to the
presumption declared in Article 1482, we found that the
money initially paid was given to guarantee that the buyer
would not back out from the sale, considering thatthe
parties to the sale have yet to arrive at a definite
agreement as to its terms that is, a situation where the
contract has not yet been perfected.10 These situations do
not obtain in the present case, as neither of the parties
claimed that the P20,000.00 was given merely as
guarantee by the respondents, as vendees, that they would
not back out from the sale. As we have pointed out, the
terms of the parties agreement are clear and explicit;
indeed, all the essential elements of a perfected contract
are present in this case. While the respondents required
that the occupants vacate the subject properties prior to the
payment of the second installment, the stipulation does not
affect the perfection of the contract, but only its execution.
In sum, the case contains no element, factual or legal, that
negates the existence of a perfected contract between the
parties.
The characterization of the contract can be considered
irrelevant in this case in light of Article 1592 and the
Maceda Law, and the petitioners-heirs payment
The petitioners-heirs posit that the proper characterization
of the contract entered into by the parties is significant in
order to determine the effect of the respondents breach of
the contract (which purportedly consisted of a one-day
delay in the payment of part of the purchase price) and the
remedies to which they, as the non-defaulting party, are
entitled.
The question of characterization of the contract involved
here would necessarily call for a thorough analysis of the
parties agreement as embodied in the June 2, 1989
receipt, their contemporaneous acts, and the circumstances
surrounding the contracts perfection and execution.

Unfortunately, the lower courts factual findings provide

insufficient detail for the purpose. A stipulation reserving
ownership in the vendor until full payment of the price is,
under case law, typical in a contract to sell.11 In this case,
the vendor made no reservation on the ownership of the
subject properties. From this perspective, the parties
agreement may be considered a contract of sale. On the
other hand, jurisprudence has similarly established that the
need to execute a deed of absolute sale upon completion
of payment of the price generally indicates that it is a
contract to sell, as it implies the reservation of title in the
vendor until the vendee has completed the payment of the
price. When the respondents instituted the action for
specific performance before the RTC, they prayed that
Consuelo be ordered to execute a Deed of Absolute Sale;
this act may be taken to conclude that the parties only
entered into a contract to sell.
Admittedly, the given facts, as found by the lower courts,
and in the absence of additional details, can be interpreted
to support two conflicting conclusions. The failure of the
lower courts to pry into these matters may understandably
be explained by the issues raised before them, which did
not require the additional details. Thus, they found the
question of the contracts characterization immaterial in
their discussion of the facts and the law of the case.
Besides, the petitioners-heirs raised the question of the
contracts characterization and the effect of the breach for
the first time through the present Rule 45 petition.
Points of law, theories, issues and arguments not brought
to the attention of the lower court need not be, and
ordinarily will not be, considered by the reviewing court,
as they cannot be raised for the first time at the appellate
review stage. Basic considerations of fairness and due
process require this rule.12
At any rate, we do not find the question of
characterization significant to fully pass upon the question
of default due to the respondents breach; ultimately, the
breach was cured and the contract revived by the
respondents payment a day after the due date.1avvphi1
In cases of breach due to nonpayment, the vendor may
avail of the remedy of rescission in a contract of sale.
Nevertheless, the defaulting vendee may defeat the
vendors right to rescind the contract of sale if he pays the
amount due before he receives a demand for rescission,
either judicially or by a notarial act, from the vendor. This
right is provided under Article 1592 of the Civil Code:
Article 1592. In the sale of immovable property, even
though it may have been stipulated that upon failure to pay
the price at the time agreed upon the rescission of the
contract shall of right take place, the vendee may 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 a notarial act. After the
demand, the court may not grant him a new term.
[Emphasis supplied.]
Nonpayment of the purchase price in contracts to sell,
however, does not constitute a breach; rather, nonpayment
is a condition that prevents the obligation from acquiring
obligatory force and results in its cancellation. We stated
in Ong v. CA13 that:

In a contract to sell, the payment of the purchase price is a

positive suspensive condition, the failure of which is not a
breach, casual or serious, but a situation that prevents the
obligation of the vendor to convey title from acquiring
obligatory force. The non-fulfillment of the condition of
full payment rendered the contract to sell ineffective and
without force and effect. [Emphasis supplied.]
As in the rescission of a contract of sale for nonpayment
of the price, the defaulting vendee in a contract to sell may
defeat the vendors right to cancel by invoking the rights
granted to him under Republic Act No. 6552 or the Realty
Installment Buyer Protection Act (also known as the
Maceda Law); this law provides for a 60-day grace period
within which the defaulting vendee (who has paid less
than two years of installments) may still pay the
installments due. Only after the lapse of the grace period
with continued nonpayment of the amounts due can the
actual cancellation of the contract take place. The
pertinent provisions of the Maceda Law provide:
xxxx
Section 2. It is hereby declared a public policy to protect
buyers of real estate on installment payments against
onerous and oppressive conditions.
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 Numbered Thirty-eight hundred fortyfour 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:
xxxx
Section 4. In case where less than two years of
installments were paid, the seller shall give the buyer a
grace period of not less than 60 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 the
receipt by the buyer of the notice of cancellation or the
demand for rescission of the contract by notarial act.
[Emphasis supplied.]
Significantly, the Court has consistently held that the
Maceda Law covers not only sales on installments of real
estate, but also financing of such acquisition; its Section 3
is comprehensive enough to include both contracts of sale
and contracts to sell, provided that the terms on payment
of the price require at least two installments. The contract
entered into by the parties herein can very well fall under
the Maceda Law.
Based on the above discussion, we conclude that the
respondents payment on June 15, 1989 of the installment
due on June 14, 1989 effectively defeated the petitionersheirs right to have the contract rescinded or cancelled.
Whether the parties agreement is characterized as one of
sale or to sell is not relevant in light of the respondents
payment within the grace period provided under Article
1592 of the Civil Code and Section 4 of the Maceda Law.

The petitioners-heirs obligation to accept the payment of

the price and to convey Consuelos conjugal and
hereditary shares in the subject properties subsists.
WHEREFORE, we DENY the petitioners-heirs petition
for review on certiorari, and AFFIRM the decision of the
Court of Appeals dated June 24, 2002 and its resolution
dated February 20, 2003 in CA-G.R. CV Case No. 56590.
Costs against the petitioners-heirs.

ANG YU ASUNCION, ARTHUR GO AND KEH

TIONG, petitioners,
vs.
THE HON. COURT OF APPEALS and BUEN
REALTY
DEVELOPMENT
CORPORATION, respondents.
Assailed, in this petition for review, is the decision of the
Court of Appeals, dated 04 December 1991, in CA-G.R.
SP No. 26345 setting aside and declaring without force
and effect the orders of execution of the trial court, dated
30 August 1991 and 27 September 1991, in Civil Case No.
87-41058.
The antecedents are recited in good detail by the appellate
court thusly:
On July 29, 1987 a Second Amended Complaint for
Specific Performance was filed by Ang Yu Asuncion and
Keh Tiong, et al., against Bobby Cu Unjieng, Rose Cu
Unjieng and Jose Tan before the Regional Trial Court,
Branch 31, Manila in Civil Case No. 87-41058, alleging,
among others, that plaintiffs are tenants or lessees of
residential and commercial spaces owned by defendants
described as Nos. 630-638 Ongpin Street, Binondo,
Manila; that they have occupied said spaces since 1935
and have been religiously paying the rental and complying
with all the conditions of the lease contract; that on several
occasions before October 9, 1986, defendants informed
plaintiffs that they are offering to sell the premises and are
giving them priority to acquire the same; that during the
negotiations, Bobby Cu Unjieng offered a price of P6million while plaintiffs made a counter offer of P5million; that plaintiffs thereafter asked the defendants to
put their offer in writing to which request defendants
acceded; that in reply to defendant's letter, plaintiffs wrote
them on October 24, 1986 asking that they specify the
terms and conditions of the offer to sell; that when
plaintiffs did not receive any reply, they sent another letter
dated January 28, 1987 with the same request; that since
defendants failed to specify the terms and conditions of
the offer to sell and because of information received that
defendants were about to sell the property, plaintiffs were
compelled to file the complaint to compel defendants to
sell the property to them.
Defendants filed their answer denying the material
allegations of the complaint and interposing a special
defense of lack of cause of action.
After the issues were joined, defendants filed a motion for
summary judgment which was granted by the lower court.
The trial court found that defendants' offer to sell was
never accepted by the plaintiffs for the reason that the
parties did not agree upon the terms and conditions of the
proposed sale, hence, there was no contract of sale at all.
Nonetheless, the lower court ruled that should the
defendants subsequently offer their property for sale at a
price of P11-million or below, plaintiffs will have the right
of first refusal. Thus the dispositive portion of the decision
states:
WHEREFORE, judgment is hereby rendered in favor of
the defendants and against the plaintiffs summarily
dismissing the complaint subject to the aforementioned
condition that if the defendants subsequently decide to
offer their property for sale for a purchase price of Eleven

Million Pesos or lower, then the plaintiffs has the option

to purchase the property or of first refusal, otherwise,
defendants need not offer the property to the plaintiffs if
the purchase price is higher than Eleven Million Pesos.
SO ORDERED.
Aggrieved by the decision, plaintiffs appealed to this
Court
in
CA-G.R. CV No. 21123. In a decision promulgated on
September 21, 1990 (penned by Justice Segundino G.
Chua and concurred in by Justices Vicente V. Mendoza
and Fernando A. Santiago), this Court affirmed with
modification the lower court's judgment, holding:
In resume, there was no meeting of the minds between the
parties concerning the sale of the property. Absent such
requirement, the claim for specific performance will not
lie. Appellants' demand for actual, moral and exemplary
damages will likewise fail as there exists no justifiable
ground for its award. Summary judgment for defendants
was properly granted. Courts may render summary
judgment when there is no genuine issue as to any
material fact and the moving party is entitled to a
judgment as a matter of law (Garcia vs. Court of Appeals,
176 SCRA 815). All requisites obtaining, the decision of
the court a quo is legally justifiable.
WHEREFORE, finding the appeal unmeritorious, the
judgment appealed from is hereby AFFIRMED, but
subject to the following modification: The court a quo in
the aforestated decision gave the plaintiffs-appellants the
right of first refusal only if the property is sold for a
purchase price of Eleven Million pesos or lower; however,
considering the mercurial and uncertain forces in our
market economy today. We find no reason not to grant the
same right of first refusal to herein appellants in the event
that the subject property is sold for a price in excess of
Eleven Million pesos. No pronouncement as to costs.
SO ORDERED.
The decision of this Court was brought to the Supreme
Court by petition for review on certiorari. The Supreme
Court denied the appeal on May 6, 1991 "for insufficiency
in form and substances" (Annex H, Petition).
On November 15, 1990, while CA-G.R. CV No. 21123
was pending consideration by this Court, the Cu Unjieng
spouses executed a Deed of Sale (Annex D, Petition)
transferring the property in question to herein petitioner
Buen Realty and Development Corporation, subject to the
following terms and conditions:
1. That for and in consideration of the sum of FIFTEEN
MILLION PESOS (P15,000,000.00), receipt of which in
full is hereby acknowledged, the VENDORS hereby sells,
transfers and conveys for and in favor of the VENDEE,
his heirs, executors, administrators or assigns, the abovedescribed property with all the improvements found
therein including all the rights and interest in the said
property free from all liens and encumbrances of whatever
nature, except the pending ejectment proceeding;
2. That the VENDEE shall pay the Documentary Stamp
Tax, registration fees for the transfer of title in his favor
and other expenses incidental to the sale of above-

described property including capital gains tax and accrued

real estate taxes.
As a consequence of the sale, TCT No. 105254/T-881 in
the name of the Cu Unjieng spouses was cancelled and, in
lieu thereof, TCT No. 195816 was issued in the name of
petitioner on December 3, 1990.
On July 1, 1991, petitioner as the new owner of the
subject property wrote a letter to the lessees demanding
that the latter vacate the premises.
On July 16, 1991, the lessees wrote a reply to petitioner
stating that petitioner brought the property subject to the
notice of lis pendens regarding Civil Case No. 87-41058
annotated on TCT No. 105254/T-881 in the name of the
Cu Unjiengs.
The lessees filed a Motion for Execution dated August 27,
1991 of the Decision in Civil Case No. 87-41058 as
modified by the Court of Appeals in CA-G.R. CV No.
21123.
On August 30, 1991, respondent Judge issued an order
(Annex A, Petition) quoted as follows:
Presented before the Court is a Motion for Execution filed
by plaintiff represented by Atty. Antonio Albano. Both
defendants Bobby Cu Unjieng and Rose Cu Unjieng
represented by Atty. Vicente Sison and Atty. Anacleto
Magno respectively were duly notified in today's
consideration of the motion as evidenced by the rubber
stamp and signatures upon the copy of the Motion for
Execution.
The gist of the motion is that the Decision of the Court
dated September 21, 1990 as modified by the Court of
Appeals in its decision in CA G.R. CV-21123, and
elevated to the Supreme Court upon the petition for
review and that the same was denied by the highest
tribunal in its resolution dated May 6, 1991 in G.R. No.
L-97276, had now become final and executory. As a
consequence, there was an Entry of Judgment by the
Supreme Court as of June 6, 1991, stating that the
aforesaid modified decision had already become final and
executory.
It is the observation of the Court that this property in
dispute was the subject of theNotice of Lis Pendens and
that the modified decision of this Court promulgated by
the Court of Appeals which had become final to the effect
that should the defendants decide to offer the property for
sale for a price of P11 Million or lower, and considering
the mercurial and uncertain forces in our market economy
today, the same right of first refusal to herein
plaintiffs/appellants in the event that the subject property
is sold for a price in excess of Eleven Million pesos or
more.
WHEREFORE, defendants are hereby ordered to execute
the necessary Deed of Sale of the property in litigation in
favor of plaintiffs Ang Yu Asuncion, Keh Tiong and
Arthur Go for the consideration of P15 Million pesos in
recognition of plaintiffs' right of first refusal and that a
new Transfer Certificate of Title be issued in favor of the
buyer.

All previous transactions involving the same property

notwithstanding the issuance of another title to Buen
Realty Corporation, is hereby set aside as having been
executed in bad faith.
SO ORDERED.
On September 22, 1991 respondent Judge issued another
order, the dispositive portion of which reads:
WHEREFORE, let there be Writ of Execution issue in the
above-entitled case directing the Deputy Sheriff Ramon
Enriquez of this Court to implement said Writ of
Execution ordering the defendants among others to
comply with the aforesaid Order of this Court within a
period of one (1) week from receipt of this Order and for
defendants to execute the necessary Deed of Sale of the
property in litigation in favor of the plaintiffs Ang Yu
Asuncion, Keh Tiong and Arthur Go for the consideration
of P15,000,000.00 and ordering the Register of Deeds of
the City of Manila, to cancel and set aside the title already
issued in favor of Buen Realty Corporation which was
previously executed between the latter and defendants and
to register the new title in favor of the aforesaid plaintiffs
Ang Yu Asuncion, Keh Tiong and Arthur Go.
SO ORDERED.
On the same day, September 27, 1991 the corresponding
writ of execution (Annex C, Petition) was issued. 1
On 04 December 1991, the appellate court, on appeal to it
by private respondent, set aside and declared without force
and effect the above questioned orders of the court a quo.
In this petition for review on certiorari, petitioners
contend that Buen Realty can be held bound by the writ of
execution by virtue of the notice of lis pendens, carried
over on TCT No. 195816 issued in the name of Buen
Realty, at the time of the latter's purchase of the property
on 15 November 1991 from the Cu Unjiengs.
We affirm the decision of the appellate court.
A not too recent development in real estate transactions is
the adoption of such arrangements as the right of first
refusal, a purchase option and a contract to sell. For ready
reference, we might point out some fundamental precepts
that may find some relevance to this discussion.
An obligation is a juridical necessity to give, to do or not
to do (Art. 1156, Civil Code). The obligation is constituted
upon the concurrence of the essential elements
thereof, viz: (a) The vinculum juris or juridical tie which is
the efficient cause established by the various sources of
obligations (law, contracts, quasi-contracts, delicts and
quasi-delicts); (b) the object which is the prestation or
conduct; required to be observed (to give, to do or not to
do); and (c) the subject-persons who, viewed from the
demandability of the obligation, are the active (obligee)
and the passive (obligor) subjects.
Among the sources of an obligation is a contract (Art.
1157, Civil Code), which is a meeting of minds between
two persons whereby one binds himself, with respect to
the other, to give something or to render some service
(Art. 1305, Civil Code). A contract undergoes various

stages that include its negotiation or preparation, its

perfection
and,
finally,
its
consummation. Negotiation covers the period from the
time the prospective contracting parties indicate interest in
the contract to the time the contract is concluded
(perfected). The perfection of the contract takes place
upon the concurrence of the essential elements thereof. A
contract which is consensual as to perfection is so
established upon a mere meeting of minds, i.e., the
concurrence of offer and acceptance, on the object and on
the cause thereof. A contract which requires, in addition to
the above, the delivery of the object of the agreement, as
in a pledge or commodatum, is commonly referred to as
a real contract. In a solemn contract, compliance with
certain formalities prescribed by law, such as in a donation
of real property, is essential in order to make the act valid,
the prescribed form being thereby an essential element
thereof. The stage of consummationbegins when the
parties perform their respective undertakings under the
contract culminating in the extinguishment thereof.
Until the contract is perfected, it cannot, as an independent
source of obligation, serve as a binding juridical relation.
In sales, particularly, to which the topic for discussion
about the case at bench belongs, the contract is perfected
when a person, called the seller, obligates himself, for a
price certain, to deliver and to transfer ownership of a
thing or right to another, called the buyer, over which the
latter agrees. Article 1458 of the Civil Code provides:
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.
A contract of sale may be absolute or conditional.
When the sale is not absolute but conditional, such as in a
"Contract to Sell" where invariably the ownership of the
thing sold is retained until the fulfillment of a positive
suspensive condition (normally, the full payment of the
purchase price), the breach of the condition will prevent
the obligation to convey title from acquiring an obligatory
force. 2 In Dignos vs. Court of Appeals (158 SCRA 375),
we have said that, although denominated a "Deed of
Conditional Sale," a sale is still absolute where the
contract is devoid of any proviso that title is reserved or
the right to unilaterally rescind is stipulated, e.g., until or
unless the price is paid. Ownership will then be transferred
to the buyer upon actual or constructive delivery (e.g., by
the execution of a public document) of the property sold.
Where the condition is imposed upon the perfection of the
contract itself, the failure of the condition would prevent
such perfection.3 If the condition is imposed on the
obligation of a party which is not fulfilled, the other party
may either waive the condition or refuse to proceed with
the sale (Art. 1545, Civil Code). 4
An unconditional mutual promise to buy and sell, as long
as the object is made determinate and the price is fixed,
can be obligatory on the parties, and compliance therewith
may accordingly be exacted. 5
An accepted unilateral promise which specifies the thing
to be sold and the price to be paid, when coupled with a
valuable consideration distinct and separate from the
price, is what may properly be termed a perfected contract

ofoption. This contract is legally binding, and in sales, it

conforms with the second paragraph of Article 1479 of the
Civil Code, viz:
Art. 1479. . . .
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. (1451a) 6
Observe, however, that the option is not the contract of
sale itself. 7 The optionee has the right, but not the
obligation, to buy. Once the option is exercised timely,
i.e., the offer is accepted before a breach of the option, a
bilateral promise to sell and to buy ensues and both parties
are then reciprocally bound to comply with their
respective undertakings. 8
Let us elucidate a little. A negotiation is formally initiated
by an offer. An imperfect promise (policitacion) is merely
an offer. Public advertisements or solicitations and the like
are ordinarily construed as mere invitations to make offers
or only as proposals. These relations, until a contract is
perfected, are not considered binding commitments. Thus,
at any time prior to the perfection of the contract, either
negotiating party may stop the negotiation. The offer, at
this stage, may be withdrawn; the withdrawal is effective
immediately after its manifestation, such as by its mailing
and not necessarily when the offeree learns of the
withdrawal (Laudico vs. Arias, 43 Phil. 270). Where a
period is given to the offeree within which to accept the
offer, the following rules generally govern:
(1) If the period is not itself founded upon or supported by
a consideration, the offeror is still free and has the right to
withdraw the offer before its acceptance, or, if an
acceptance has been made, before the offeror's coming to
know of such fact, by communicating that withdrawal to
the offeree (see Art. 1324, Civil Code; see also Atkins,
Kroll & Co. vs. Cua, 102 Phil. 948, holding that this rule
is applicable to a unilateral promise to sell under Art.
1479, modifying the previous decision in South Western
Sugar vs. Atlantic Gulf, 97 Phil. 249; see also Art. 1319,
Civil Code; Rural Bank of Paraaque, Inc., vs. Remolado,
135 SCRA 409; Sanchez vs. Rigos, 45 SCRA 368). The
right to withdraw, however, must not be exercised
whimsically or arbitrarily; otherwise, it could give rise to a
damage claim under Article 19 of the Civil Code which
ordains that "every person must, in the exercise of his
rights and in the performance of his duties, act with
justice, give everyone his due, and observe honesty and
good faith."
(2) If the period has a separate consideration, a contract of
"option" is deemed perfected, and it would be a breach of
that contract to withdraw the offer during the agreed
period. The option, however, is an independent contract
by itself, and it is to be distinguished from the projected
main agreement (subject matter of the option) which is
obviously yet to be concluded. If, in fact, the optionerofferor withdraws the offer before its acceptance (exercise
of the option) by the optionee-offeree, the latter may not
sue for specific performance on the proposed contract
("object" of the option) since it has failed to reach its own
stage of perfection. The optioner-offeror, however,
renders himself liable for damages for breach of the

option. In these cases, care should be taken of the real

nature of the consideration given, for if, in fact, it has
been intended to be part of the consideration for the main
contract with a right of withdrawal on the part of the
optionee, the main contract could be deemed perfected; a
similar instance would be an "earnest money" in a contract
of sale that can evidence its perfection (Art. 1482, Civil
Code).
In the law on sales, the so-called "right of first refusal" is
an innovative juridical relation. Needless to point out, it
cannot be deemed a perfected contract of sale under
Article 1458 of the Civil Code. Neither can the right of
first refusal, understood in its normal concept, per se be
brought within the purview of an option under the second
paragraph of Article 1479, aforequoted, or possibly of an
offer under Article 1319 9 of the same Code. An option or
an offer would require, among other things, 10 a clear
certainty on both the object and the cause or consideration
of the envisioned contract. In a right of first refusal, while
the object might be made determinate, the exercise of the
right, however, would be dependent not only on the
grantor's eventual intention to enter into a binding juridical
relation with another but also on terms, including the
price, that obviously are yet to be later firmed up. Prior
thereto, it can at best be so described as merely belonging
to a class of preparatory juridical relations governed not
by contracts (since the essential elements to establish
the vinculum juris would still be indefinite and
inconclusive) but by, among other laws of general
application, the pertinent scattered provisions of the Civil
Code on human conduct.
Even on the premise that such right of first refusal has
been decreed under a final judgment, like here, its breach
cannot justify correspondingly an issuance of a writ of
execution under a judgment that merely recognizes its
existence, nor would it sanction an action for specific
performance without thereby negating the indispensable
element of consensuality in the perfection of
contracts. 11 It is not to say, however, that the right of first
refusal would be inconsequential for, such as already
intimated above, an unjustified disregard thereof, given,
for instance, the circumstances expressed in Article
19 12 of the Civil Code, can warrant a recovery for
damages.
The final judgment in Civil Case No. 87-41058, it must be
stressed, has merely accorded a "right of first refusal" in
favor of petitioners. The consequence of such a
declaration entails no more than what has heretofore been
said. In fine, if, as it is here so conveyed to us, petitioners
are aggrieved by the failure of private respondents to
honor the right of first refusal, the remedy is not a writ of
execution on the judgment, since there is none to execute,
but an action for damages in a proper forum for the
purpose.
Furthermore, whether private respondent Buen Realty
Development Corporation, the alleged purchaser of the
property, has acted in good faith or bad faith and whether
or not it should, in any case, be considered bound to
respect the registration of the lis pendens in Civil Case
No. 87-41058 are matters that must be independently
addressed in appropriate proceedings. Buen Realty, not
having been impleaded in Civil Case No. 87-41058,
cannot be held subject to the writ of execution issued by

respondent Judge, let alone ousted from the ownership and

possession of the property, without first being duly
afforded its day in court.
We are also unable to agree with petitioners that the Court
of Appeals has erred in holding that the writ of execution
varies the terms of the judgment in Civil Case No. 8741058, later affirmed in CA-G.R. CV-21123. The Court of
Appeals, in this regard, has observed:
Finally, the questioned writ of execution is in variance
with the decision of the trial court as modified by this
Court. As already stated, there was nothing in said
decision 13 that decreed the execution of a deed of sale
between the Cu Unjiengs and respondent lessees, or the
fixing of the price of the sale, or the cancellation of title in
the name of petitioner (Limpin vs. IAC, 147 SCRA 516;
Pamantasan ng Lungsod ng Maynila vs. IAC, 143 SCRA
311; De Guzman vs. CA, 137 SCRA 730; Pastor vs. CA,
122 SCRA 885).
It is likewise quite obvious to us that the decision in Civil
Case No. 87-41058 could not have decreed at the time the
execution of any deed of sale between the Cu Unjiengs
and petitioners.
WHEREFORE, we UPHOLD the Court of Appeals in
ultimately setting aside the questioned Orders, dated 30
August 1991 and 27 September 1991, of the court a quo.
Costs against petitioners.

LOURDES
ONG
LIMSON, petitioner,
vs.
COURT OF APPEALS, SPOUSES LORENZO DE
VERA and ASUNCION SANTOS-DE VERA, TOMAS
CUENCA,
JR.
and
SUNVAR
REALTY
DEVELOPMENT CORPORATION, respondents.
BELLOSILLO, J.:
Filed under Rule 45 of the Rules of Court this Petition for
Review on Certiorari seeks to review, reverse and set
aside the Decision1 of the Court of Appeals dated 18 May
1998 reversing that of the Regional Trial Court dated 30
June
1993.
The
petitioner
likewise
assails
the Resolution2 of the appellate court of 19 October 1998
denying petitioners Motion for Reconsideration.
Petitioner Lourdes Ong Limson, in her 14 may
1979 Complaint filed before the trial court,3 alleged that in
July 1978 respondent spouses Lorenzo de Vera and
Asuncion Santos-de Vera, through their agent Marcosa
Sanchez, offered to sell to petitioner a parcel of land
consisting of 48, 260 square meters, more or less, situated
in Barrio San Dionisio, Paraaque, Metro Manila; that
respondent spouses informed her that they were the
owners of the subject property; that on 31 July 1978 she
agreed to buy the property at the price of P34.00 per
square meter and gave the sum of P20,000.00 to
respondent spouses as "earnest money;" that respondent
spouses signed a receipt therefor and gave her a 10-day
option period to purchase the property; that respondent
Lorenzo de Vera then informed her that the subject
property was mortgaged to Emilio Ramos and Isidro
Ramos; that respondent Lorenzo de Vera asked her to pay
the balance of the purchase price to enable him and his
wife
to
settle
their
obligation
with
the
Ramoses.1wphi1.nt
Petitioner also averred that she agreed to meet respondent
spouses and the Ramoses on 5 August 1978 at the Office
of the Registry of deeds of Makati, Metro Manila, to
consummate the transaction but due to the failure of
respondent Asuncion Santos-de Vera and the Ramoses to
appear, no transaction was formalized. In a second
meeting scheduled on 11 August 1978 she claimed that
she was willing and ready to pay the balance of the
purchase price but the transaction again did not
materialize as respondent spouses failed to pay the back
taxes of subject property. Subsequently, on 23 August
1978 petitioner allegedly gave respondent Lorenzo de
Vera three (3) checks in the total amount of P36, 170.00
for the settlement of the back taxes of the property and for
the payment of the quitclaims of the three (3) tenants of
subject land. The amount was purportedly considered part
of purchase price and respondent Lorenzo de Vera signed
the receipts therefor.
Petitioner alleged that on 5 September 1978 she was
surprised to learn from the agent of respondent spouses
that the property was the subject of a negotiation for the
sale to respondent Sunvar Realty Development
Corporation (SUNVAR) represented by respondent
Tomas Cuenca, Jr. On 15 September 1978 petitioner
discovered that although respondent spouses purchased
the property from the Ramoses on 20 March 1970 it was
only on 15 September 1978 that TCT No. S-72946
covering the property was issued to respondent spouses.

As a consequence, she file on the same day an affidavit of

Adverse Claim with the Office of the Registry of Deeds of
Makati, Metro, which was annotated on TCT No. S72946. She also claimed that on the same day she
informed respondent Cuenca of her "contract" to purchase
the property.
The Deed of Sale between respondent spouses and
respondent SUNVAR was executed on 15 September
1978 and TCT N0. S-72377 was issued in favor of the
latter on 26 September 1978 with the adverse Claim of
petitioner annotated thereon. Petitioner claimed that when
respondent spouses sold the property in dispute to
SUNVAR, her valid and legal right to purchase it was
ignored if not violated. Moreover, she maintained that
SUNVAR was in bad faith, as it knew of her "contract" to
purchase the subject property fro respondent spouse.
Finally, for the alleged unlawful and unjust acts of
respondent spouses, which caused her damage, prejudice
and injury, petitioner claimed that the Deed of
Sale, should be annuled and TCT No. S-72377 in the
name of respondent SUNVAR canceled and TCT No. S72946 restored. She also insisted that a Deed of
Sale between her an respondent spouses be now executed
upon her payment of the balance of the purchase price
agreed upon, plus damages and attorneys fees.
In their Answer4 respondent spouses maintained that
petitioner had no sufficient cause of action against them;
that she was not the real party in interest; that the option to
buy the property had long expired; that there was no
perfected contract to sell between them; and, that
petitioner had no legal capacity to sue. Additionally,
respondent spouses claimed actual, moral and exemplary
damages, and attorneys fees against petitioner.
On the other hand, respondents SUNVAR and Cuenca, in
their Answer5 alleged that petitioner was not the proper
party in interest and/or had no cause of action against
them. But, even assuming that petitioner was the proper
party in interest, they claimed that she could only be
entitled to the return of any amount received by
respondent spouses. In the alternative, they argued that
petitioner had lost her option to buy the property for
failure to comply with the terms and conditions of the
agreement as embodied in the receipt issued therefor.
Moreover, they contended that at the time of the execution
of the Deed of Sale and the payment of consideration to
respondent spouses, they "did not know nor was
informed" of petitioners interest or claim over the subject
property. They claimed furthermore that it was only after
the signing of the Deed of Sale and the payment of the
corresponding amounts to respondent spouses that they
came to know of the claim of petitioner as it was only then
that they were furnished copy to the title to the properly
where the Adverse Claim of petitioner was annotated.
Consequently, they also instituted a Cross-Claim against
respondent spouses for bad faith in encouraging the
negotiations between them without telling them of the
claim of petitioner. The same respondents maintained that
had they known of the claim of petitioner, they would not
have initiated negotiations with respondent spouses for the
purchase of the property. Thus, they prayed for
reimbursement of all amounts and monies received from
them by respondent spouses, attorneys fees and expenses
for litigation in the event that the trial court should annul

the Deed of Sale and deprive them of their ownership and

possessio of the subject land.
In their Answer to the Cross-Claim6 of respondents
SUNVAR and Cuenca, respondent spouses insisted that
they negotiated with the former only after expiration of
the option period given to petitioner and her failure with
her commitments thereunder. Respondent spouses
contended that they acted legally and validly, in all
honesty and good faith. According to them, respondent
SUNVAR made a verification of the title with the office
of the register of Deeds of Metro Manila District IV
before the execution of the Deed of Absolute Sale. Also,
they claimed that theCross-Claim was written executed by
respondent SUNVAR in their favor. Thus, respondent
spouses prayed for actual damages for the unjustified
filling of the Cross-Claim, moral damages for the mental
anguish and similar injuries they suffered by reason
thereof, exemplary damages "to prevent others from
emulation the bad example" of respondents SUNVAR and
Cuenca, plus attorneys fees.
After a protracted trial and reconstitution of the court
records due to the fire that razed the Pasay City Hall on 18
January 1992, the Regional Trial Court rendered its 30
June 1993 Decision7 in favor of petitioner. It ordered (a)
the annulment and rescission of the Deed of Absolute Sale
executed on 15 September 1978 by respondent spouses in
favor of respondent SUNVAR; (b) the cancellation and
revocation of TCT No. S-75377 of the Registry of Deeds,
Makati, Metro Manila, issued in the name of respondent
Sunvar Realty Development Corporation, and the
restoration or reinstatement of TCT No. S-72946 of the
same Registry issued in the name of respondent spouses;
(c) respondent spouses to execute a deed of sale
conveying ownership of the property covered by TCT No.
S-72946 in favor of petitioner upon her payment of the
balance of the purchase price agreed upon; and, (d)
respondent spouses to pay petitioner P50,000.00 as and for
attorneys fees, and to pay the costs.
On appeal, the Court of Appeals completely reversed the
decision of the trial court. It ordered (a) the Register of
Deeds of Makati City to lift the Adverse Claim and such
other encumbrances petitioner might have filed or caused
to be annotated on TCT No. S-75377; and, (b) petitioner
to pay (1) respondent SUNVAR P50,000.00 as nominal
damages, P30,000.00 as exemplary damages and P20,000
as attorneys fees; (2) respondent spouses, P15,000.00 as
nominal damages, P10,000.00 as exemplary damages and
P10,000.00 as attorneys fees; and, (3) the costs.
Petitioner timely filed a Motion for Reconsideration which
was denied by the Court of Appeals on 19 October 1998.
Hence, this petition.
At issue for resolution by the Court is the nature of the
contract entered into between petitioner Lourdes Ong
Limson on one hand, and respondent spouses Lorenzo de
Vera and Asuncion Santos-de Vera on the other.
The main argument of petitioner is that there was a
perfected contract to sell between her and respondent
spouses. On the other hand, respondent spouses and
respondents SUNVAR and Cuenca argue that what was
perfected between petitioner and respondent spouses was
a mere option.

A scrutiny of the facts as well as the evidence of the

parties overwhelmingly leads to the conclusion that the
agreement between the parties was a contract of
option and not a contract to sell.
An option, as used in the law of sales, is a continuing offer
or contract by which the owner sitpulates with another that
the latter shall have the right to buy the property at a fixed
price within a time certain, 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 itself a purchase, but merely secures the privilege to
buy.8 It is not a sale of property but a sale of right to
purchase.9 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 not sell something, i.e., the right or
privilege to buy at the election or option of the other
party.10 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 the property gives the
optionee the right or privilege of accepting the offer and
buying the property on certain terms.11
On the other hand, a contract, like a contract to sell,
involves the meeting of minds between two persons
whereby one binds himself, with respect to the other, to
give something or to render some service.12 Contracts, in
general, are perfected by mere consent,13 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.14
The Receipt15 that contains the contract between petitioner
and respondent spouses provides
Received from Lourdes Limson the sum of Twenty
Thousand Peso (P20,000.00) under Check No.
22391 dated July 31, 1978 as earnest money with
option to purchase a parcel of land owned by
Lorenzo de Vera located at Barrio San Dionisio,
Municipality of Paraaque, Province of Rizal with
an area of forty eight thousand two hundred sixty
square meters more or less at the price of Thirty
Four Pesos (34.00)16 cash subject to the condition
and stipulation that have been agreed upon by the
buyer and me which will form part of the receipt.
Should the transaction of the property not
materialize not on the fault of the buyer, I obligate
myself to return the full amount of P20,000.00
earnest money with option to buy or forfeit on the
fault of the buyer. I guarantee to notify the buyer
Lourdes Limson or her representative and get her
conformity should I sell or encumber this property
to a third person. This option to buy is good
within ten (10) days until the absolute deed of sale
is finally signed by the parties or the failure of the
buyer to comply with the terms of the option to
buy as herein attached.

In the interpretation of contracts, the ascertainment of the

intention of the contracting parties is to be discharged by
looking to the words they used to project that intention in
their contracts, all the words standing alone.17 The
above Receipt readily shows that respondent spouses and
petitioner only entered into a contract of option; a contract
by which respondent spouses agreed with petitioner that
the latter shall have the right to buy the former's property
at a fixed price of P34.00 per square meter within ten (10)
days from 31 July 1978. Respondent spouses did not sell
their property; they did not also agree to sell it; but they
sold something, i.e., the privilege to buy at the election or
option of petitioner. The agreement imposed no binding
obligation on petitioner, aside from the consideration for
the offer.
The consideration of P20,000.00 paid by petitioner to
respondent spouses was referred to as "earnest money."
However, a careful examination of the words used
indicated that the money is not earnest money but option
money. "Earnest money" and "option money" are not the
same but distinguished thus; (a) earnest money is part of
the purchase price, while option money is the money
given as a distinct consideration for an option contract; (b)
earnest money 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,18 but may even
forfeit it depending on the terms of the option.
There is nothing in the Receipt which indicates that the
P20,000.00 was part of the purchase price. Moreover, it
was not shown that there was a perfected sale between the
parties where earnest money was given. Finally, when
petitioner gave the "earnest money" the Receipt did not
reveal that she was bound to pay the balance of the
purchase price. In fact, she could even forfeit the money
given if the terms of the option were not met. Thus, the
P20,000.00 could only be money given as consideration
for the option contract. That the contract between the
parties is one of option is buttressed by the provision
therein that should the transaction of the provision therein
that should the transaction of the property not materialize
without fault of petitioner as buyer, respondent Lorenzo
de Vera obligates himself to return the full amount of
P20,000.00 "earnest money" with option to buy or
forfeit the same on the fault of petitioner. It is further
bolstered by the provision therein that guarantees
petitioner that she or her representative would be notified
in case the subject property was sold or encumbered to a
third person. Finally, the Receipt provided for a period
within which the option to buy was to be exercised, i.e.,
"within ten (10) days" from 31 July 1978.
Doubtless, the agreement between respondent spouses and
petitioner was an "option contract" or what is sometimes
called an "unaccepted offer." During the option period the
agreement was not converted into a bilateral promise to
sell and to buy where both respondent spouses and
petitioner were then reciprocally bound to comply with
their respective undertakings as petitioner did not timely,
affirmatively and clearly accept the offer of respondent
spouses.
The rule is that except where a formal acceptance is not
required, although the acceptance must be affirmatively

and clearly made and 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 by the accepting party that clearly
manifest a present intention or determination to accept the
offer to buy the property of respondent spouses within the
10-day option period. The only occasion within the option
period when petitioner could have demonstrated her
acceptance was on 5 August 1978 when, according to her,
she agreed to meet respondent spouses and the Ramoses at
the Office of the Registrar of Deeds of Makati.
Petitioners agreement to meet with respondent spouses
presupposes an invitation from the latter, which only
emphasizes their persistence in offering the property to the
former. But whether that showed acceptance by petitioner
of the offer is hazy and dubious.
On or before 10 August 1978, the last day of the option
period, no affirmative or clear manifestation was made by
petitioner to accept the offer. Certainly, there was no
concurrence of private respondent spouses offer and
petitioners acceptance thereof within the option period.
Consequently, there was no perfected contract to sell
between the parties.
On 11 August 1978 the option period expired and the
exclusive right of petitioner to buy the property of
respondent spouses ceased. The subsequent meetings and
negotiations, specifically on 11 and 23 August 1978,
between the parties only showed the desire of respondent
spouses to sell their property to petitioner. Also, on 14
September 1978 when respondent spouses sent a telegram
to petitioner demanding full payment of the purchase price
on even date simply demonstrated an inclination to give
her preference to buy subject property. Collectively, these
instances did not indicate that petitioner still had the
exclusive right to purchase subject property. Verily, the
commencement of negotiations between respondent
spouses and respondent SUNVAR clearly manifested that
their offer to sell subject property to petitioner was no
longer exclusive to her.
We cannot subscribe to the argument of petitioner that
respondent spouses extended the option period when they
extended the authority of their until 31 August 1978. The
extension of the contract of agency could not operate to
extend the option period between the parties in the instant
case. The extension must not be implied but categorical
and must show the clear intention of the
parties.1wphi1.nt
As to whether respondent spouses were at fault for the
non-consummation of their contract with petitioner, we
agree with the appellate court that they were not to be
blammed. First, within the option period, or on 4 August
1978, it was respondent spouses and not petitioner who
initiated the meeting at the Office of The Register of
Deeds of Makati. Second, that the Ramoses filed to appear
on 4 August 1978 was beyond the control of respondent
spouses. Third, the succeeding meetings that transpired to
consummate the contract were all beyond the option
period and, as declared by the Court of Appeals, the
question of who was at fault was already
immaterial. Fourth, even assuming that the meetings were
within the option period, the presence of petitioner was
not enough as she was not even prepared to pay the
purchase price in cash as agreed upon. Finally, even

without the presence of the Ramoses, petitioner could

have easily made the necessary payment in cash as the
price of the property was already set at P34.00 per square
meter and payment of the mortgage could every well be
left to respondent spouses.
Petitioner further claims that when respondent spouses
sent her a telegram demanding full payment of the
purchase price on 14 September 1978 it was an
acknowledgment of their contract to sell, thus denying
them the right to claim otherwise.
We do not agree. As explained above, there was no
contract to sell between petitioner and respondent spouses
to speak of. Verily, the telegram could not operate to estop
them from claiming that there was such contract between
them and petitioner. Neither could it mean that respondent
spouses extended the option period. The telegram only
showed that respondent spouses were willing to give
petitioner a chance to buy subject property even if it no
longer exclusive.
The option period having expired and acceptance was not
effectively made by petitioner, the purchase of subject
property by respondent SUNVAR was perfectly valid and
entered into in good faith. Petitioner claims that in August
1978 Hermigildo Sanchez, the son of respondent spouses
agent, Marcosa Snachez, informed Marixi Prieto, a
member of the Board of Directors of respondent
SUNVAR, that the property was already sold to petitioner.
Also, petitioner maintains that on 5 September 1978
respondent Cuenca met with her and offered to buy the
property from her at P45.00 per square meter. Petitioner
contends that these incidents, including the annotation of
her Adverse Claim on the title of subject property on 15
September 1978 show that respondent SUNVAR was
aware of the perfected sale between her and respondent
spouses, thus making respondent SUNVAR a buyer in bad
faith.
Petitioner is not correct. The dates mentioned, at least 5
and 15 September 1978, are immaterial as they were
beyond the option period given to petitioner. On the other
hand, the referral to sometime in August 1978 in the
testimony of Hermigildo Sanchez as emphasized by
petitioner in her petition is very vague. It could be within
or beyond the option period. Clearly then, even assuming
that the meeting with Marixi Prieto actually transpired, it
could not necessarily mean that she knew of the
agreement between petitioner and respondent spouses for
the purchase of subject property as the meeting could have
occurred beyond the option period. In which case, no bad
faith could be attributed to respondent SUNVAR. If, on
the other hand, the meeting was within the option period,
petitioner was remiss in her duty to prove so. Necessarily,
we are left with the conclusion that respondent SUNVAR
bought subject property from respondent spouses in good
faith, for value and without knowledge of any flaw or
defect in its title.
The appellate court awarded nominal and exemplary
damages plus attorneys fees to respondent spouses and
respondent SUNVAR. But nominal damages are
adjudicated to vindicate or recognize the right of the
plaintiff that has been violated or invaded by the
defendant.19 In the instant case, the Court recognizes the
rights of all the parties and finds no violation or invasion

of the rights of respondents by petitioner. Petitioner, in

filing her complaint, only seeks relief, in good faith, for
what she believes she was entitled to and should not be
awarded to respondents as they are imposed only by way
of example or correction for the public good and only in
addition tothe moral, temperate, liquidated or
compensatory damages.20 No such kinds of damages were
awarded by the Court of Appeals, only nominal, which
was not justified in this case. Finally, attorneys fees could
not also be recovered as the Court does not deem it just
and equitable under the circumtances.
WHEREFORE, the petition is DENIED. The decision of
the Court of Appeals ordering the Register of Deeds of
Makati City to lift the adverse claim and such other
encumbrances petitioners Lourdes Ong Limson may have
filed or caused to be annotated on TCT No. S-75377
is AFFIRMED, with the MODIFICATION that the
award of nominal and exemplary damages as well as
attorneys fees is DELETED.

HERMINIO
TAYAG, petitioner,
vs.
AMANCIA
LACSON,
ROSENDO
LACSON,
ANTONIO LACSON, JUAN LACSON, TEODISIA
LACSON-ESPINOSA and THE COURT OF
APPEALS, respondents.
DECISION
CALLEJO, SR., J.:
Before us is a petition for review on certiorari of the
Decision1 and the Resolution2 of respondent Court of
Appeals in CA-G.R. SP No. 44883.
The Case for the Petitioner
Respondents Angelica Tiotuyco Vda. de Lacson,3 and her
children Amancia, Antonio, Juan, and Teodosia, all
surnamed Lacson, were the registered owners of three
parcels of land located in Mabalacat, Pampanga, covered
by Transfer Certificates of Title (TCT) Nos. 35922-R,
35923-R, and 35925-R, registered in the Register of Deeds
of San Fernando, Pampanga. The properties, which were
tenanted agricultural lands,4 were administered by Renato
Espinosa for the owner.
On March 17, 1996, a group of original farmers/tillers,
namely, Julio Tiamson, Renato Gozun, Rosita Hernandez,
Bienvenido Tongol, Alfonso Flores, Norma Quiambao,
Rosita Tolentino, Jose Sosa, Francisco Tolentino, Sr.,
Emiliano Laxamana, Ruben Torres, Meliton Allanigue,
Dominga Laxamana, Felicencia de Leon, Emiliano
Ramos, and another group, namely, Felino G. Tolentino,
Rica Gozun, Perla Gozun, Benigno Tolentino, Rodolfo
Quiambao, Roman Laxamana, Eddie San Luis, Ricardo
Hernandez, Nicenciana Miranda, Jose Gozun, Alfredo
Sosa, Jose Tiamson, Augusto Tolentino, Sixto Hernandez,
Alex Quiambao, Isidro Tolentino, Ceferino de Leon,
Alberto Hernandez, Orlando Flores, and Aurelio
Flores,5 individually executed in favor of the petitioner
separate Deeds of Assignment6 in which the assignees
assigned to the petitioner their respective rights as
tenants/tillers of the landholdings possessed and tilled by
them for and in consideration of P50.00 per square meter.
The said amount was made payable "when the legal
impediments to the sale of the property to the petitioner no
longer existed." The petitioner was also granted the
exclusive right to buy the property if and when the
respondents, with the concurrence of the defendantstenants, agreed to sell the property. In the interim, the
petitioner gave varied sums of money to the tenants as
partial payments, and the latter issued receipts for the said
amounts.
On July 24, 1996, the petitioner called a meeting of the
defendants-tenants to work out the implementation of the
terms of their separate agreements.7 However, on August
8, 1996, the defendants-tenants, through Joven Mariano,
wrote the petitioner stating that they were not attending
the meeting and instead gave notice of their collective
decision to sell all their rights and interests, as
tenants/lessees,
over
the
landholding
to
the
8
respondents. Explaining their reasons for their collective
decision, they wrote as follows:

Kami ay nagtiwala sa inyo, naging tapat at nanindigan sa

lahat ng ating napagkasunduan, hindi tumanggap ng ibang
buyer o ahente, pero sinira ninyo ang aming pagtitiwala sa
pamamagitan ng demanda ninyo at pagbibigay ng
problema sa amin na hindi naman nagbenta ng lupa.
Kaya kami ay nagpulong at nagpasya na ibenta na lang
ang aming karapatan o ang aming lupang sinasaka sa
landowner o sa mga pamilyang Lacson, dahil ayaw
naming magkaroon ng problema.
Kaya kung ang sasabihin ninyong itoy katangahan, lalo
sigurong magiging katangahan kung ibebenta pa namin sa
inyo ang aming lupang sinasaka, kaya pasensya na lang
Mister Tayag. Dahil sinira ninyo ang aming pagtitiwala at
katapatan.9
On August 19, 1996, the petitioner filed a complaint with
the Regional Trial Court of San Fernando, Pampanga,
Branch 44, against the defendants-tenants, as well as the
respondents, for the court to fix a period within which to
pay the agreed purchase price of P50.00 per square meter
to the defendants, as provided for in the Deeds of
Assignment. The petitioner also prayed for a writ of
preliminary injunction against the defendants and the
respondents therein.10 The case was docketed as Civil
Case No. 10910.
In his complaint, the petitioner alleged, inter alia, the
following:
4. That defendants Julio Tiamson, Renato Gozun,
Rosita Hernandez, Bienvenido Tongol, Alfonso
Flores, Norma Quiambao, Rosita Tolentino, Jose
Sosa, Francisco Tolentino, Sr., Emiliano
Laxamana, Ruben Torres, Meliton Allanigue,
Dominga Laxamana, Felicencia de Leon,
Emiliano Ramos are original farmers or direct
tillers of landholdings over parcels of lands
covered by Transfer Certificate of Title Nos.
35922-R, 35923-R and 35925-R which are
registered in the names of defendants LACSONS;
while defendants Felino G. Tolentino, Rica
Gozun, Perla Gozun, Benigno Tolentino, Rodolfo
Quiambao, Roman Laxamana, Eddie San Luis,
Alfredo Gozun, Jose Tiamson, Augusto Tolentino,
Sixto Hernandez, Alex Quiambao, Isidro
Tolentino, Ceferino de Leon, Alberto Hernandez,
and Aurelio Flores are sub-tenants over the same
parcel of land.
5. That on March 17, 1996 the defendants
TIAMSON, et al., entered into Deeds of
Assignment with the plaintiff by which the
defendants assigned all their rights and interests
on their landholdings to the plaintiff and that on
the same date (March 17, 1996), the defendants
received from the plaintiff partial payments in the
amounts corresponding to their names.
Subsequent payments were also received:
1st
2nd
CHE
PAYME PAYME CK
NT
NT
NO.
1.Julio
P
Tiamson 20,000

TOTAL

P
23128 P
10,621.5 1
30,621.

------

54

2.
P
Renato 10,000
Gozun - - - - [son of
Felix
Gozun
(decease
d)]

96,000

106,000
.00

3. Rosita
Hernand P 5,000
ez - - - -

P
14,374.2 23127
19,374.
4
4
24

4.
P
Bienveni 10,000
do
Tongol [Son of
Abundio
Tongol
(decease
d)]

14,465.9 23128 24,465.9

0
5
0

5.
Alfonso P
Flores - 30,000
-----

26,648.4 23127 56,648.4

0
1
0

6.
Norma
Quiamb
ao - - - -

P
10,000

41,501.1 23127 51,501.1

0
9
0

7. Rosita
P
Tolentin
10,000
o-----

22,126.0 23128 32,126.0

8
4
8

8. Jose
P
Sosa - - 10,000
------

14,861.3 23129 24,861.3

1
1
1

9.
Francisc
P
o
10,000
Tolentin
o, Sr.

24,237.6 23128 34,237.6

2
3
2

10.
Emilian
o
Laxama
na - -

------

P
10,000

------

------

11.
Ruben
Torres - - - - P
[Son of
10,000
Mariano
Torres
(decease
d)]

P
33,587.3 -----1

12.
Meliton P
Allanigu 10,000
e

P
12,944.7 23126
22,944.7
7
9
7

P
43,587.3
1

13.
Doming
a
Laxama
na

P 5,000

22,269.0 23127 27,269.0

2
5
2

14.
Felicenc
10,000
ia
de
Leon

------

15.
Emilian 5,000
o Ramos

18,869.6 23128 23,869.6

0
0
0

16.
Felino
G.
10,000
Tolentin
o

------

17. Rica
5,000
Gozun

------

18. Perla
10,000
Gozun

------

------

------

-----------

------

------

-----------

19.
Benigno
10,000
Tolentin
o

------

------

------

20.
Rodolfo
Quiamb
ao

10,000

------

------

------

21.
Roman
Laxama
na

10,000

------

------

------

22.
Eddie
10,000
San Luis

------

------

------

23.
Ricardo
10,000
Hernand
ez

------

------

------

24.
Nicencia
10,000
na
Miranda

------

------

------

25. Jose
10,000
Gozun

------

------

------

26.
Alfredo
Sosa

------

------

------

27. Jose
10,000
Tiamson

------

------

------

28.
Augusto
5,000
Tolentin
o

------

------

------

29. Sixto
Hernand 10,000
ez

------

------

------

5,000

30. Alex
Quiamb 10,000
ao

------

------

------

31.
Isidro
10,000
Tolentin
o

------

------

------

32.
Ceferino -----de Leon

11,378.7 23127
-----0
0

33.
Alberto
10,000
Hernand
ez

------

------

------

34.
Orlando
Florez

10,000

------

------

------

35.
Aurelio
Flores

10,000

------

------

------

6. That on July 24, 1996, the plaintiff wrote the

defendants TIAMSON, et al., inviting them for a
meeting
regarding
the
negotiations/implementations of the terms of their
Deeds of Assignment;
7. That on August 8, 1996, the defendants
TIAMSON, et al., through Joven Mariano, replied
that they are no longer willing to pursue with the
negotiations, and instead they gave notice to the
plaintiff that they will sell all their rights and
interests to the registered owners (defendants
LACSONS).
A copy of the letter is hereto attached as Annex
"A" etc.;
8. That the defendants TIAMSON, et. al., have no
right to deal with the defendants LACSON or with
any third persons while their contracts with the
plaintiff are subsisting; defendants LACSONS are
inducing or have induced the defendants
TIAMSON, et. al., to violate their contracts with
the plaintiff;
9. That by reason of the malicious acts of all the
defendants, plaintiff suffered moral damages in
the forms of mental anguish, mental torture and
serious anxiety which in the sum of P500,000.00
for which defendants should be held liable jointly
and severally.11
In support of his plea for injunctive relief, the
petitioner, as plaintiff, also alleged the following
in his complaint:
11. That to maintain the status quo, the defendants
TIAMSON, et al., should be restrained from
rescinding their contracts with the plaintiff, and
the defendants LACSONS should also be
restrained from accepting any offer of sale or
alienation with the defendants TIAMSON, et al.,

in whatever form, the latters rights and interests

in the properties mentioned in paragraph 4 hereof;
further, the LACSONS should be restrained from
encumbering/alienating the subject properties
covered by TCT No. 35922-R, 35923-R and TCT
No. 35925-R, Registry of Deeds of San Fernando,
Pampanga;
12. That the defendants TIAMSON, et al.,
threaten to rescind their contracts with the
plaintiff and are also bent on selling/alienating
their rights and interests over the subject
properties to their co-defendants (LACSONS) or
any other persons to the damage and prejudice of
the plaintiff who already invested much money,
efforts and time in the said transactions;

from rescinding their contracts with the plaintiff

and from alienating the subject properties to the
defendants LACSONS or any third persons;
further, restraining and enjoining the defendants
LACSONS from encumbering/selling the
properties covered by TCT Nos. 35922-R, 35923R, and 35925-R of the Registry of Deeds of San
Fernando, Pampanga.
3. Fixing the period within which plaintiff shall
pay the balance of the purchase price to the
defendants TIAMSON, et al., after the lapse of
legal impediment, if any.
4. Making the Writ of Preliminary Injunction
permanent;

13. That the plaintiff is entitled to the reliefs being

demanded in the complaint;

5. Ordering the defendants to pay the plaintiff the

sum of P500,000.00 as moral damages;

14. That to prevent irreparable damages and

prejudice to the plaintiff, as the latter has no
speedy and adequate remedy under the ordinary
course of law, it is essential that a Writ of
Preliminary Injunction be issued enjoining and
restraining the defendants TIAMSON, et al., from
rescinding their contracts with the plaintiff and
from selling/alienating their properties to the
LACSONS or other persons;

6. Ordering the defendants to pay the plaintiff

attorneys fees in the sum of P100,000.00 plus
litigation expenses of P50,000.00;

15. That the plaintiff is willing and able to put up

a reasonable bond to answer for the damages
which the defendants would suffer should the
injunction prayed for and granted be found
without basis.12
The petitioner prayed, that after the proceedings, judgment
be rendered as follows:
1. Pending the hearing, a Writ of Preliminary
Injunction be issued prohibiting, enjoining and
restraining defendants Julio Tiamson, Renato
Gozun, Rosita Hernandez, Bienvenido Tongol,
Alfonso Flores, Norma Quiambao, Rosita
Tolentino, Jose Sosa, Francisco Tolentino Sr.,
Emiliano Laxamana, Ruben Torres, Meliton
Allanigue, Dominga Laxamana, Felicencia de
Leon, Emiliano Ramos, Felino G. Tolentino, Rica
Gozun, Perla Gozun, Benigno Tolentino, Rodolfo
Quiambao, Roman Laxamana, Eddie San Luis,
Ricardo Hernandez, Nicenciana Miranda, Jose
Gozun, Alfredo Sosa, Jose Tiamson, Augusto
Tolentino, Ceferino de Leon, Alberto Hernandez,
Orlando Flores, and Aurelio Flores from
rescinding their contracts with the plaintiff and
from alienating their rights and interest over the
aforementioned properties in favor of defendants
LACSONS or any other third persons; and
prohibiting the defendants LACSONS from
encumbering/alienating TCT Nos. 35922-R,
35923-R and 35925-R of the Registry of Deeds of
San Fernando, Pampanga.
2. And pending the hearing of the Prayer for a
Writ of Preliminary Injunction, it is prayed that a
restraining order be issued restraining the
aforementioned defendants (TIAMSON, et al.)

Plaintiff prays for such other relief as may be just and

equitable under the premises.13
In their answer to the complaint, the respondents as
defendants asserted that (a) the defendant Angelica Vda.
de Lacson had died on April 24, 1993; (b) twelve of the
defendants were tenants/lessees of respondents, but the
tenancy status of the rest of the defendants was uncertain;
(c) they never induced the defendants Tiamson to violate
their contracts with the petitioner; and, (d) being merely
tenants-tillers, the defendants-tenants had no right to enter
into any transactions involving their properties without
their knowledge and consent. They also averred that the
transfers or assignments of leasehold rights made by the
defendants-tenants to the petitioner is contrary to
Presidential Decree (P.D.) No. 27 and Republic Act No.
6657, the Comprehensive Agrarian Reform Program
(CARP).14 The respondents interposed counterclaims for
damages against the petitioner as plaintiff.
The defendants-tenants Tiamson, et al., alleged in their
answer with counterclaim for damages, that the money
each of them received from the petitioner were in the form
of loans, and that they were deceived into signing the
deeds of assignment:
a) That all the foregoing allegations in the Answer
are hereby repleaded and incorporated in so far as
they are material and relevant herein;
b) That the defendants Tiamson, et al., in so far as
the Deeds of Assignment are concern[ed] never
knew that what they did sign is a Deed of
Assignment. What they knew was that they were
made to sign a document that will serve as a
receipt for the loan granted [to] them by the
plaintiff;
c) That the Deeds of Assignment were signed
through the employment of fraud, deceit and false
pretenses of plaintiff and made the defendants
believe that what they sign[ed] was a mere receipt
for amounts received by way of loans;

d) That the documents signed in blank were filled

up and completed after the defendants Tiamson, et
al., signed the documents and their completion
and accomplishment was done in the absence of
said defendants and, worst of all, defendants were
not provided a copy thereof;
e) That as completed, the Deeds of Assignment
reflected that the defendants Tiamson, et al., did
assign all their rights and interests in the
properties or landholdings they were tilling in
favor of the plaintiff. That if this is so, assuming
arguendo that the documents were voluntarily
executed, the defendants Tiamson, et al., do not
have any right to transfer their interest in the
landholdings they are tilling as they have no right
whatsoever in the landholdings, the landholdings
belong to their co-defendants, Lacson, et al., and
therefore, the contract is null and void;
f) That while it is admitted that the defendants
Tiamson, et al., received sums of money from
plaintiffs, the same were received as approved
loans granted by plaintiff to the defendants
Tiamson, et al., and not as part consideration of
the alleged Deeds of Assignment; and by way
of:15
At the hearing of the petitioners plea for a writ of
preliminary injunction, the respondents counsel failed to
appear. In support of his plea for a writ of preliminary
injunction, the petitioner adduced in evidence the Deeds
of Assignment,16 the receipts17 issued by the defendantstenants for the amounts they received from him; and the
letter18 the petitioner received from the defendants-tenants.
The petitioner then rested his case.
The respondents, thereafter, filed a Comment/Motion to
dismiss/deny the petitioners plea for injunctive relief on
the following grounds: (a) the Deeds of Assignment
executed by the defendants-tenants were contrary to
public policy and P.D. No. 27 and Rep. Act No. 6657; (b)
the petitioner failed to prove that the respondents induced
the defendants-tenants to renege on their obligations under
the "Deeds of Assignment;" (c) not being privy to the said
deeds, the respondents are not bound by the said deeds;
and, (d) the respondents had the absolute right to sell and
dispose of their property and to encumber the same and
cannot be enjoined from doing so by the trial court.
The petitioner opposed the motion, contending that it was
premature for the trial court to resolve his plea for
injunctive relief, before the respondents and the
defendants-tenants adduced evidence in opposition
thereto, to afford the petitioner a chance to adduce rebuttal
evidence and prove his entitlement to a writ of preliminary
injunction. The respondents replied that it was the burden
of the petitioner to establish the requisites of a writ of
preliminary injunction without any evidence on their part,
and that they were not bound to adduce any evidence in
opposition to the petitioners plea for a writ of preliminary
injunction.
On February 13, 1997, the court issued an Order19 denying
the motion of the respondents for being premature. It
directed the hearing to proceed for the respondents to
adduce their evidence. The court ruled that the petitioner,

on the basis of the material allegations of the complaint,

was entitled to injunctive relief. It also held that before the
court could resolve the petitioners plea for injunctive
relief, there was need for a hearing to enable the
respondents and the defendants-tenants to adduce
evidence to controvert that of the petitioner. The
respondents filed a motion for reconsideration, which the
court denied in its Order dated April 16, 1997. The trial
court ruled that on the face of the averments of the
complaint, the pleadings of the parties and the evidence
adduced by the petitioner, the latter was entitled to
injunctive relief unless the respondents and the
defendants-tenants adduced controverting evidence.
The respondents, the petitioners therein, filed a petition for
certiorari in the Court of Appeals for the nullification of
the February 13, 1997 and April 16, 1997 Orders of the
trial court. The case was docketed as CA-G.R. SP No.
44883. The petitioners therein prayed in their petition that:
1. An order be issued declaring the orders of
respondent court dated February 13, 1997 and
April 16, 1997 as null and void;
2. An order be issued directing the respondent
court to issue an order denying the application of
respondent Herminio Tayag for the issuance of a
Writ of Preliminary Injunction and/or restraining
order.
3. In the meantime, a Writ of Preliminary
Injunction be issued against the respondent court,
prohibiting it from issuing its own writ of
injunction against Petitioners, and thereafter
making said injunction to be issued by this Court
permanent.
Such other orders as may be deemed just & equitable
under the premises also prayed for.20
The respondents asserted that the Deeds of Assignment
executed by the assignees in favor of the petitioner were
contrary to paragraph 13 of P.D. No. 27 and the second
paragraph of Section 70 of Rep. Act No. 6657, and, as
such, could not be enforced by the petitioner for being null
and void. The respondents also claimed that the
enforcement of the deeds of assignment was subject to a
supervening condition:
3. That this exclusive and absolute right given to the
assignee shall be exercised only when no legal
impediments exist to the lot to effect the smooth transfer
of lawful ownership of the lot/property in the name of the
ASSIGNEE.21
The respondents argued that until such condition took
place, the petitioner would not acquire any right to enforce
the deeds by injunctive relief. Furthermore, the
petitioners plea in his complaint before the trial court, to
fix a period within which to pay the balance of the
amounts due to the tenants under said deeds after the
"lapse" of any legal impediment, assumed that the deeds
were valid, when, in fact and in law, they were not.
According to the respondents, they were not parties to the
deeds of assignment; hence, they were not bound by the
said deeds. The issuance of a writ of preliminary
injunction would restrict and impede the exercise of their

right to dispose of their property, as provided for in

Article 428 of the New Civil Code. They asserted that the
petitioner had no cause of action against them and the
defendants-tenants.

THAT THE TENANTS ARE NOT YET "AWARDEES

OF THE LAND REFORM.26

On April 17, 1998, the Court of Appeals rendered its

decision against the petitioner, annulling and setting aside
the assailed orders of the trial court; and permanently
enjoining the said trial court from proceeding with Civil
Case No. 10901. The decretal portion of the decision reads
as follows:

THE COURT OF APPEALS CANNOT CAUSE THE

PERMANENT STOPPAGE OF THE ENTIRE
PROCEEDINGS BELOW INCLUDING THE TRIAL
ON THE MERITS OF THE CASE CONSIDERING
THAT THE ISSUE INVOLVED ONLY THE
PROPRIETY OF MAINTAINING THE STATUS
QUO.27

However, even if private respondent is denied of the

injunctive relief he demands in the lower court still he
could avail of other course of action in order to protect his
interest such as the institution of a simple civil case of
collection of money against TIAMSON, et al.
For all the foregoing considerations, the orders dated 13
February 1997 and 16 April 1997 are hereby NULLIFIED
and ordered SET ASIDE for having been issued with
grave abuse of discretion amounting to lack or excess of
jurisdiction. Accordingly, public respondent is
permanently enjoined from proceeding with the case
designated as Civil Case No. 10901.22

IV

V
THE COURT OF APPEALS CANNOT INCLUDE IN
ITS DECISION THE CASE OF THE OTHER 35
TENANTS WHO DO NOT QUESTION THE
JURISDICTION OF THE LOWER COURT (RTC)
OVER THE CASE AND WHO ARE IN FACT STILL
PRESENTING THEIR EVIDENCE TO OPPOSE THE
INJUNCTION PRAYED FOR, AND TO PROVE AT
THE SAME TIME THE COUNTER-CLAIMS THEY
FILED AGAINST THE PETITIONER.28
VI

The CA ruled that the respondents could not be enjoined

from alienating or even encumbering their property,
especially so since they were not privies to the deeds of
assignment executed by the defendants-tenants. The
defendants-tenants were not yet owners of the portions of
the landholdings respectively tilled by them; as such, they
had nothing to assign to the petitioner. Finally, the CA
ruled that the deeds of assignment executed by the
defendants-tenants were contrary to P.D. No. 27 and Rep.
Act No. 6657.
On August 4, 1998, the CA issued a Resolution denying
the petitioners motion for reconsideration.23
Hence, the petitioner filed his petition for review on
certiorari before this Court, contending as follows:
I
A MERE ALLEGATION IN THE ANSWER OF THE
TENANTS COULD NOT BE USED AS EVIDENCE OR
BASIS FOR ANY CONCLUSION, AS THIS
ALLEGATION, IS STILL THE SUBJECT OF TRIAL IN
THE LOWER COURT (RTC).24
II
THE COURT OF APPEALS CANNOT ENJOIN THE
HEARING OF A PETITION FOR PRELIMINARY
INJUNCTION AT A TIME WHEN THE LOWER
COURT (RTC) IS STILL RECEIVING EVIDENCE
PRECISELY TO DETERMINE WHETHER OR NOT
THE WRIT OF PRELIMINARY INJUNCTION BEING
PRAYED FOR BY TAYAG SHOULD BE GRANTED
OR NOT.25
III
THE COURT OF APPEALS CANNOT USE "FACTS"
NOT IN EVIDENCE, TO SUPPORT ITS CONCLUSION

THE LOWER COURT (RTC) HAS JURISDICTION

OVER THE CASE FILED BY TAYAG FOR "FIXING
OF PERIOD" UNDER ART. 1197 OF THE NEW CIVIL
CODE AND FOR "DAMAGES" AGAINST THE
LACSONS UNDER ART. 1314 OF THE SAME CODE.
THIS CASE CANNOT BE SUPPRESSED OR
RENDERED NUGATORY UNCEREMONIOUSLY.29
The petitioner faults the Court of Appeals for permanently
enjoining the trial court from proceeding with Civil Case
No. 10910. He opines that the same was too drastic,
tantamount to a dismissal of the case. He argues that at
that stage, it was premature for the appellate court to
determine the merits of the case since no evidentiary
hearing thereon was conducted by the trial court. This, the
Court of Appeals cannot do, since neither party moved for
the dismissal of Civil Case No. 10910. The petitioner
points out that the Court of Appeals, in making its
findings, went beyond the issue raised by the private
respondents, namely, whether or not the trial court
committed a grave abuse of discretion amounting to
excess or lack of jurisdiction when it denied the
respondents motion for the denial/dismissal of the
petitioners plea for a writ of preliminary injunction. He,
likewise, points out that the appellate court erroneously
presumed that the leaseholders were not DAR awardees
and that the deeds of assignment were contrary to law. He
contends that leasehold tenants are not prohibited from
conveying or waiving their leasehold rights in his favor.
He insists that there is nothing illegal with his contracts
with the leaseholders, since the same shall be effected
only when there are no more "legal impediments."
At bottom, the petitioner contends that, at that stage, it
was premature for the appellate court to determine the
merits of his case since no evidentiary hearing on the
merits of his complaint had yet been conducted by the trial
court.

The
Comment/Motion
Respondents
to
Petitioners
Plea
for
of
Preliminary
Was Not Premature.

of
the
Dismiss/Deny
a
Writ
Injunction

Contrary to the ruling of the trial court, the motion of the

respondents to dismiss/deny the petitioners plea for a writ
of preliminary injunction after the petitioner had adduced
his evidence, testimonial and documentary, and had rested
his case on the incident, was proper and timely. It bears
stressing that the petitioner had the burden to prove his
right to a writ of preliminary injunction. He may rely
solely on the material allegations of his complaint or
adduce evidence in support thereof. The petitioner
adduced his evidence to support his plea for a writ of
preliminary injunction against the respondents and the
defendants-tenants and rested his case on the said incident.
The respondents then had three options: (a) file a motion
to deny/dismiss the motion on the ground that the
petitioner failed to discharge his burden to prove the
factual and legal basis for his plea for a writ of
preliminary injunction and, if the trial court denies his
motion, for them to adduce evidence in opposition to the
petitioners plea; (b) forgo their motion and adduce
testimonial and/or documentary evidence in opposition to
the petitioners plea for a writ of preliminary injunction;
or, (c) waive their right to adduce evidence and submit the
incident for consideration on the basis of the pleadings of
the parties and the evidence of the petitioner. The
respondents opted not to adduce any evidence, and instead
filed a motion to deny or dismiss the petitioners plea for a
writ of preliminary injunction against them, on their claim
that the petitioner failed to prove his entitlement thereto.
The trial court cannot compel the respondents to adduce
evidence in opposition to the petitioners plea if the
respondents opt to waive their right to adduce such
evidence. Thus, the trial court should have resolved the
respondents motion even without the latters opposition
and the presentation of evidence thereon.
The
RTC
Committed
Abuse
of
Discretion
to
Excess
or
Lack
of
in
Issuing
its
February
and April 16, 1997 Orders

Grave
Amounting
Jurisdiction
13,
1997

In its February 13, 1997 Order, the trial court ruled that
the petitioner was entitled to a writ of preliminary
injunction against the respondents on the basis of the
material averments of the complaint. In its April 16, 1997
Order, the trial court denied the respondents motion for
reconsideration of the previous order, on its finding that
the petitioner was entitled to a writ of preliminary
injunction based on the material allegations of his
complaint, the evidence on record, the pleadings of the
parties, as well as the applicable laws:
For the record, the Court denied the LACSONS
COMMENT/MOTION on the basis of the facts culled
from the evidence presented, the pleadings and the law
applicable unswayed by the partisan or personal interests,
public opinion or fear of criticism (Canon 3, Rule 3.02,
Code of Judicial Ethics).30

Section 3, Rule 58 of the Rules of Court, as amended,

enumerates the grounds for the issuance of a writ of
preliminary injunction, thus:
(a) That the applicant is entitled to the relief
demanded, and the whole or part of such relief
consists in restraining the commission or
continuance of the act or acts complained of, or in
requiring the performance of an act or acts, either
for a limited period or perpetually;
(b) That the commission, continuance or nonperformance of the act or acts complained of
during the litigation would probably work
injustice to the applicant; or
(c) That a party, court, agency or a person is
doing, threatening, or is attempting to do, or is
procuring or suffering to be done, some act or acts
probably in violation of the rights of the applicant
respecting the subject of the action or proceeding,
and tending to render the judgment ineffectual.
A preliminary injunction is an extraordinary event
calculated to preserve or maintain the status quo of things
ante litem and is generally availed of to prevent actual or
threatened acts, until the merits of the case can be heard.
Injunction is accepted as the strong arm of equity or a
transcendent remedy.31 While generally the grant of a writ
of preliminary injunction rests on the sound discretion of
the trial court taking cognizance of the case, extreme
caution must be observed in the exercise of such
discretion.32 Indeed, in Olalia v. Hizon,33 we held:
It has been consistently held that there is no power the
exercise of which is more delicate, which requires greater
caution, deliberation and sound discretion, or more
dangerous in a doubtful case, than the issuance of an
injunction. It is the strong arm of equity that should never
be extended unless to cases of great injury, where courts
of law cannot afford an adequate or commensurate remedy
in damages.
Every court should remember that an injunction is a
limitation upon the freedom of action of the defendant and
should not be granted lightly or precipitately. It should be
granted only when the court is fully satisfied that the law
permits it and the emergency demands it.34
The very foundation of the jurisdiction to issue writ of
injunction rests in the existence of a cause of action and in
the probability of irreparable injury, inadequacy of
pecuniary compensation and the prevention of the
multiplicity of suits. Where facts are not shown to bring
the case within these conditions, the relief of injunction
should be refused.35
For the court to issue a writ of preliminary injunction, the
petitioner was burdened to establish the following: (1) a
right in esse or a clear and unmistakable right to be
protected; (2) a violation of that right; (3) that there is an
urgent and permanent act and urgent necessity for the writ
to prevent serious damage.36 Thus, in the absence of a
clear legal right, the issuance of the injunctive writ
constitutes a grave abuse of discretion. Where the
complainants right is doubtful or disputed, injunction is
not proper. Injunction is a preservative remedy aimed at

protecting substantial rights and interests. It is not

designed to protect contingent or future rights. The
possibility of irreparable damage without proof of
adequate existing rights is not a ground for injunction.37
We have reviewed the pleadings of the parties and found
that, as contended by the respondents, the petitioner failed
to establish the essential requisites for the issuance of a
writ of preliminary injunction. Hence, the trial court
committed a grave abuse of its discretion amounting to
excess or lack of jurisdiction in denying the respondents
comment/motion as well as their motion for
reconsideration.
First. The trial court cannot enjoin the respondents, at the
instance of the petitioner, from selling, disposing of and
encumbering their property. As the registered owners of
the property, the respondents have the right to enjoy and
dispose of their property without any other limitations
than those established by law, in accordance with Article
428 of the Civil Code. The right to dispose of the property
is the power of the owner to sell, encumber, transfer, and
even destroy the property. Ownership also includes the
right to recover the possession of the property from any
other person to whom the owner has not transmitted such
property, by the appropriate action for restitution, with the
fruits, and for indemnification for damages.38 The right of
ownership of the respondents is not, of course, absolute. It
is limited by those set forth by law, such as the agrarian
reform laws. Under Article 1306 of the New Civil Code,
the respondents may enter into contracts covering their
property with another under such terms and conditions as
they may deem beneficial provided they are not contrary
to law, morals, good conduct, public order or public
policy.
The respondents cannot be enjoined from selling or
encumbering their property simply and merely because
they had executed Deeds of Assignment in favor of the
petitioner, obliging themselves to assign and transfer their
rights or interests as agricultural farmers/laborers/subtenants over the landholding, and granting the petitioner
the exclusive right to buy the property subject to the
occurrence of certain conditions. The respondents were
not parties to the said deeds. There is no evidence that the
respondents agreed, expressly or impliedly, to the said
deeds or to the terms and conditions set forth therein.
Indeed, they assailed the validity of the said deeds on their
claim that the same were contrary to the letter and spirit of
P.D. No. 27 and Rep. Act No. 6657. The petitioner even
admitted when he testified that he did not know any of the
respondents, and that he had not met any of them before
he filed his complaint in the RTC. He did not even know
that one of those whom he had impleaded as defendant,
Angelica Vda. de Lacson, was already dead.
Q: But you have not met any of these Lacsons?

A: I am aware of that, sir.39

We are one with the Court of Appeals in its ruling that:
We cannot see our way clear on how or why injunction
should lie against petitioners. As owners of the lands
being tilled by TIAMSON, et al., petitioners, under the
law, have the right to enjoy and dispose of the same. Thus,
they have the right to possess the lands, as well as the
right to encumber or alienate them. This principle of law
notwithstanding, private respondent in the lower court
sought to restrain the petitioners from encumbering and/or
alienating the properties covered by TCT No. 35922-R,
35923-R and TCT No. 35925-R of the Registry of Deeds
of San Fernando, Pampanga. This cannot be allowed to
prosper since it would constitute a limitation or restriction,
not otherwise established by law on their right of
ownership, more so considering that petitioners were not
even privy to the alleged transaction between private
respondent and TIAMSON, et al.40
Second. A reading the averments of the complaint will
show that the petitioner clearly has no cause of action
against the respondents for the principal relief prayed for
therein, for the trial court to fix a period within which to
pay to each of the defendants-tenants the balance of the
P50.00 per square meter, the consideration under the
Deeds of Assignment executed by the defendants-tenants.
The respondents are not parties or privies to the deeds of
assignment. The matter of the period for the petitioner to
pay the balance of the said amount to each of the
defendants-tenants is an issue between them, the parties to
the deed.
Third. On the face of the complaint, the action of the
petitioner against the respondents and the defendantstenants has no legal basis. Under the Deeds of
Assignment, the obligation of the petitioner to pay to each
of the defendants-tenants the balance of the purchase price
was conditioned on the occurrence of the following
events: (a) the respondents agree to sell their property to
the petitioner; (b) the legal impediments to the sale of the
landholding to the petitioner no longer exist; and, (c) the
petitioner decides to buy the property. When he testified,
the petitioner admitted that the legal impediments referred
to in the deeds were (a) the respondents refusal to sell
their property; and, (b) the lack of approval of the
Department of Agrarian Reform:
Q : There is no specific agreement prior to the
execution of those documents as when they will
pay?
A : We agreed to that, that I will pay them when
there are no legal impediment, sir.

A: I do not know, sir.

Q : Many of the documents are unlattered (sic)

and you want to convey to this Honorable Court
that prior to the execution of these documents you
have those tentative agreement for instance that
the amount or the cost of the price is to be paid
when there are no legal impediment, you are using
the word "legal impediment," do you know the
meaning of that?

Q: You do not know also that Angela Tiotuvie

(sic) Vda. de Lacson had already been dead?

A : When there are (sic) no more legal

impediment exist, sir.

A: Not yet, sir.

Q: Do you know that two (2) of the defendants are
residents of the United States?

Q : Did you make how (sic) to the effect that the

meaning of that phrase that you used the
unlettered defendants?
A : We have agreed to that, sir.
ATTY. OCAMPO:
May I ask, Your Honor, that the witness please
answer my question not to answer in the way he
wanted it.
COURT:
Just answer the question, Mr. Tayag.
WITNESS:
Yes, Your Honor.
ATTY. OCAMPO:
Q : Did you explain to them?
A : Yes, sir.
Q : What did you tell them?
A : I explain[ed] to them, sir, that the legal
impediment then especially if the Lacsons will not
agree to sell their shares to me or to us it would be
hard to (sic) me to pay them in full. And those
covered by DAR. I explain[ed] to them and it was
clearly stated in the title that there is [a] prohibited
period of time before you can sell the property. I
explained every detail to them.41
It is only upon the occurrence of the foregoing conditions
that the petitioner would be obliged to pay to the
defendants-tenants the balance of the P50.00 per square
meter under the deeds of assignment. Thus:
2. That in case the ASSIGNOR and
LANDOWNER will mutually agree to sell the
said lot to the ASSIGNEE, who is given an
exclusive and absolute right to buy the lot, the
ASSIGNOR shall receive the sum of FIFTY
PESOS (P50.00) per square meter as
consideration of the total area actually tilled and
possessed by the ASSIGNOR, less whatever
amount received by the ASSIGNOR including
commissions, taxes and all allowable deductions
relative to the sale of the subject properties.
3. That this exclusive and absolute right given to
the ASSIGNEE shall be exercised only when no
legal impediments exist to the lot to effect the
smooth transfer of lawful ownership of the
lot/property in the name of the ASSIGNEE;
4. That the ASSIGNOR will remain in peaceful
possession over the said property and shall enjoy
the fruits/earnings and/or harvest of the said lot
until such time that full payment of the agreed
purchase price had been made by the
ASSIGNEE.42

There is no showing in the petitioners complaint that the

respondents had agreed to sell their property, and that the
legal impediments to the agreement no longer existed. The
petitioner and the defendants-tenants had yet to submit the
Deeds of Assignment to the Department of Agrarian
Reform which, in turn, had to act on and approve or
disapprove the same. In fact, as alleged by the petitioner in
his complaint, he was yet to meet with the defendantstenants to discuss the implementation of the deeds of
assignment. Unless and until the Department of Agrarian
Reform approved the said deeds, if at all, the petitioner
had no right to enforce the same in a court of law by
asking the trial court to fix a period within which to pay
the balance of the purchase price and praying for
injunctive relief.
We do not agree with the contention of the petitioner that
the deeds of assignment executed by the defendantstenants are perfected option contracts.43 An option is a
contract by which the owner of the property agrees with
another person that he shall have the right to buy his
property at a fixed price within a certain time. It is a
condition offered 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 imposes no binding obligation on
the person holding the option, aside from the
consideration for the offer. Until accepted, it is not,
properly speaking, treated as a contract.44 The second
party gets in praesenti, not lands, not an agreement that he
shall have the lands, but the right to call for and receive
lands if he elects.45 An option contract is a separate and
distinct contract from which the parties may enter into
upon the conjunction of the option.46
In this case, the defendants-tenants-subtenants, under the
deeds of assignment, granted to the petitioner not only an
option but the exclusive right to buy the landholding. But
the grantors were merely the defendants-tenants, and not
the respondents, the registered owners of the property. Not
being the registered owners of the property, the
defendants-tenants could not legally grant to the petitioner
the option, much less the "exclusive right" to buy the
property. As the Latin saying goes, "NEMO DAT QUOD
NON HABET."
Fourth. The petitioner impleaded the respondents as
parties-defendants solely on his allegation that the latter
induced or are inducing the defendants-tenants to violate
the deeds of assignment, contrary to the provisions of
Article 1314 of the New Civil Code which reads:
Art. 1314. Any third person who induces another to
violate his contract shall be liable for damages to the other
contracting party.
In So Ping Bun v. Court of Appeals,47 we held that for the
said law to apply, the pleader is burdened to prove the
following: (1) the existence of a valid contract; (2)
knowledge by the third person of the existence of the
contract; and (3) interference by the third person in the
contractual relation without legal justification.
Where there was no malice in the interference of a
contract, and the impulse behind ones conduct lies in a

proper business interest rather than in wrongful motives, a

party cannot be a malicious interferer. Where the alleged
interferer is financially interested, and such interest
motivates his conduct, it cannot be said that he is an
officious or malicious intermeddler.48
In fine, one who is not a party to a contract and who
interferes thereon is not necessarily an officious or
malicious intermeddler. The only evidence adduced by the
petitioner to prove his claim is the letter from the
defendants-tenants informing him that they had decided to
sell their rights and interests over the landholding to the
respondents, instead of honoring their obligation under the
deeds of assignment because, according to them, the
petitioner harassed those tenants who did not want to
execute deeds of assignment in his favor, and because the
said defendants-tenants did not want to have any problem
with the respondents who could cause their eviction for
executing with the petitioner the deeds of assignment as
the said deeds are in violation of P.D. No. 27 and Rep. Act
No. 6657.49 The defendants-tenants did not allege therein
that the respondents induced them to breach their contracts
with the petitioner. The petitioner himself admitted when
he testified that his claim that the respondents induced the
defendants-assignees to violate contracts with him was
based merely on what "he heard," thus:
Q: Going to your last statement that the Lacsons
induces (sic) the defendants, did you see that the
Lacsons were inducing the defendants?
A: I heard and sometime in [the] first week of
August, sir, they went in the barrio (sic). As a
matter of fact, that is the reason why they sent me
letter that they will sell it to the Lacsons.
Q: Incidentally, do you knew (sic) these Lacsons
individually?
A: No, sir, it was only Mr. Espinosa who I knew
(sic) personally, the alleged negotiator and has the
authority to sell the property.50
Even if the respondents received an offer from the
defendants-tenants to assign and transfer their rights and
interests on the landholding, the respondents cannot be
enjoined from entertaining the said offer, or even
negotiating with the defendants-tenants. The respondents
could not even be expected to warn the defendants-tenants
for executing the said deeds in violation of P.D. No. 27
and Rep. Act No. 6657. Under Section 22 of the latter law,
beneficiaries under P.D. No. 27 who have culpably sold,
disposed of, or abandoned their land, are disqualified from
becoming beneficiaries.
From the pleadings of the petitioner, it is quite evident that
his purpose in having the defendants-tenants execute the
Deeds of Assignment in his favor was to acquire the
landholding without any tenants thereon, in the event that
the respondents agreed to sell the property to him. The
petitioner knew that under Section 11 of Rep. Act No.
3844, if the respondents agreed to sell the property, the
defendants-tenants shall have preferential right to buy the
same under reasonable terms and conditions:
SECTION 11. Lessees Right of Pre-emption. In case
the agricultural lessor desires to sell the landholding, the

agricultural lessee shall have the preferential right to buy

the same under reasonable terms and conditions: Provided,
That the entire landholding offered for sale must be preempted by the Land Authority if the landowner so desires,
unless the majority of the lessees object to such
acquisition: Provided, further, That where there are two or
more agricultural lessees, each shall be entitled to said
preferential right only to the extent of the area actually
cultivated by him. 51
Under Section 12 of the law, if the property was sold to a
third person without the knowledge of the tenants thereon,
the latter shall have the right to redeem the same at a
reasonable price and consideration. By assigning their
rights and interests on the landholding under the deeds of
assignment in favor of the petitioner, the defendantstenants thereby waived, in favor of the petitioner, who is
not a beneficiary under Section 22 of Rep. Act No. 6657,
their rights of preemption or redemption under Rep. Act
No. 3844. The defendants-tenants would then have to
vacate the property in favor of the petitioner upon full
payment of the purchase price. Instead of acquiring
ownership of the portions of the landholding respectively
tilled by them, the defendants-tenants would again become
landless for a measly sum of P50.00 per square meter. The
petitioners scheme is subversive, not only of public
policy, but also of the letter and spirit of the agrarian laws.
That the scheme of the petitioner had yet to take effect in
the future or ten years hence is not a justification. The
respondents may well argue that the agrarian laws had
been violated by the defendants-tenants and the petitioner
by the mere execution of the deeds of assignment. In fact,
the petitioner has implemented the deeds by paying the
defendants-tenants amounts of money and even sought
their immediate implementation by setting a meeting with
the defendants-tenants. In fine, the petitioner would not
wait for ten years to evict the defendants-tenants. For him,
time is of the essence.
The
Appellate
Court
In
Permanently
The
Regional
Trial
From
Continuing
with
Proceedings in Civil Case No. 10910.

Erred
Enjoining
Court
the

We agree with the petitioners contention that the

appellate court erred when it permanently enjoined the
RTC from continuing with the proceedings in Civil Case
No. 10910. The only issue before the appellate court was
whether or not the trial court committed a grave abuse of
discretion amounting to excess or lack of jurisdiction in
denying the respondents motion to deny or dismiss the
petitioners plea for a writ of preliminary injunction. Not
one of the parties prayed to permanently enjoin the trial
court from further proceeding with Civil Case No. 10910
or to dismiss the complaint. It bears stressing that the
petitioner may still amend his complaint, and the
respondents and the defendants-tenants may file motions
to dismiss the complaint. By permanently enjoining the
trial court from proceeding with Civil Case No. 10910, the
appellate court acted arbitrarily and effectively dismissed
the complaint motu proprio, including the counterclaims
of the respondents and that of the defendants-tenants. The
defendants-tenants were even deprived of their right to
prove their special and affirmative defenses.

IN LIGHT OF ALL THE FOREGOING, the petition is

PARTIALLY GRANTED. The Decision of the Court of
Appeals nullifying the February 13, 1996 and April 16,
1997 Orders of the RTC is AFFIRMED. The writ of
injunction issued by the Court of Appeals permanently
enjoining the RTC from further proceeding with Civil
Case No. 10910 is hereby LIFTED and SET ASIDE. The
Regional Trial Court of Mabalacat, Pampanga, Branch 44,
is ORDERED to continue with the proceedings in Civil
Case No. 10910 as provided for by the Rules of Court, as
amended.

ENRICO
S.
vs.
SPOUSES
CLEMENTE
APELES, Respondents.

EULOGIO, Petitioner,
APELES1 and

LUZ

DECISION
CHICO-NAZARIO, J.:
Petitioner Enrico S. Eulogio (Enrico) filed this instant
Petition for Review on Certiorari under Rule 45 of the
Revised Rules of Court assailing the Decision2 dated 20
December 2004 of the Court of Appeals in CA-G.R. CV
No. 76933 which reversed the Decision3 dated 8 October
2002 of the Regional Trial Court (RTC) of Quezon City,
Branch 215, in Civil Case No. Q-99-36834. The RTC
directed respondents, spouses Clemente and Luz Apeles
(spouses Apeles) to execute a Deed of Sale over a piece of
real property in favor of Enrico after the latters payment
of full consideration therefor.
The factual and procedural antecedents of the present case
are as follows:
The real property in question consists of a house and lot
situated at No. 87 Timog Avenue, Quezon City (subject
property). The lot has an area of 360.60 square meters,
covered by Transfer Certificate of Title No. 253990 issued
by the Registry of Deeds of Quezon City in the names of
the spouses Apeles.4
In 1979, the spouses Apeles leased the subject property to
Arturo Eulogio (Arturo), Enricos father. Upon Arturos
death, his son Enrico succeeded as lessor of the subject
property. Enrico used the subject property as his residence
and place of business. Enrico was engaged in the business
of buying and selling imported cars.5
On 6 January 1987, the spouses Apeles and Enrico
allegedly entered into a Contract of Lease6 with Option to
Purchase involving the subject property. According to the
said lease contract, Luz Apeles was authorized to enter
into the same as the attorney-in-fact of her husband,
Clemente, pursuant to a Special Power of Attorney
executed by the latter in favor of the former on 24 January
1979. The contract purportedly afforded Enrico, before the
expiration of the three-year lease period, the option to
purchase the subject property for a price not
exceedingP1.5 Million. The pertinent provisions of the
Contract of Lease are reproduced below:
3. That this Contract shall be effective
commencing from January 26, 1987 and shall
remain valid and binding for THREE (3) YEARS
from the said date. The LESSOR hereby gives the
LESSEE under this Contract of Lease the right
and option to buy the subject house and lot within
the said 3-year lease period.
4. That the purchase price or total consideration of
the house and lot subject of this Contract of Lease
shall, should the LESSEE exercise his option to
buy it on or before the expiration of the 3-year
lease period, be fixed or agreed upon by the
LESSOR and the LESSEE, Provided, that the said
purchase price, as it is hereby agreed, shall not be
more than ONE MILLION FIVE HUNDRED

THOUSAND PESOS (P1,500,000.00) and,

provided further, that the monthly rentals paid by
the LESSEE to the LESSOR during the 3-year
lease period shall form part of or be deducted
from the purchase price or total consideration as
may hereafter be mutually fixed or agreed upon
by the LESSOR and the LESSEE.
5. That if the LESSEE shall give oral or written
notice to the LESSOR on or before the expiry date
of the 3-year lease period stipulated herein of his
desire to exercise his option to buy or purchase
the house and lot herein leased, the LESSOR upon
receipt of the purchase price/total consideration as
fixed or agreed upon less the total amount of
monthly rentals paid the LESSEE during the 3year lease period shall execute the appropriate
Deed to SELL, TRANSFER and CONVEY the
house and lot subject of this Contract in favor of
the LESSEE, his heirs, successors and assigns,
together with all the fixtures and accessories
therein, free from all liens and encumbrances.
Before the expiration of the three-year lease period
provided in the lease contract, Enrico exercised his option
to purchase the subject property by communicating
verbally and in writing to Luz his willingness to pay the
agreed purchase price, but the spouses Apeles supposedly
ignored Enricos manifestation. This prompted Enrico to
seek recourse from the barangay for the enforcement of
his right to purchase the subject property, but despite
several notices, the spouses Apeles failed to appear before
the barangay for
settlement
proceedings.
Hence,
thebarangay issued to Enrico a Certificate to File Action.7
In a letter dated 26 January 1997 to Enrico, the spouses
Apeles demanded that he pay his rental arrears from
January 1991 to December 1996 and he vacate the subject
property since it would be needed by the spouses Apeles
themselves.
Without heeding the demand of the spouses Apeles,
Enrico instituted on 23 February 1999 a Complaint for
Specific Performance with Damages against the spouses
Apeles before the RTC, docketed as Civil Case No. Q-9936834. Enricos cause of action is founded on paragraph 5
of the Contract of Lease with Option to Purchase vesting
him with the right to acquire ownership of the subject
property after paying the agreed amount of consideration.
Following the pre-trial conference, trial on the merits
ensued before the RTC.
Enrico himself testified as the sole witness for his side. He
narrated that he and Luz entered into the Contract of Lease
with Option to Purchase on 26 January 1987, with Luz
signing the said Contract at Enricos office in Timog
Avenue, Quezon City. The Contract was notarized on the
same day as evidenced by the Certification on the Notary
Publics Report issued by the Clerk of Court of the RTC
of Manila.8
On the other hand, the spouses Apeles denied that Luz
signed the Contract of Lease with Option to Purchase, and
posited that Luzs signature thereon was a forgery. To
buttress their contention, the spouses Apeles offered as
evidence Luzs Philippine Passport which showed that on

26 January 1987, the date when Luz allegedly signed the

said Contract, she was in the United States of America.
The spouses Apeles likewise presented several official
documents bearing her genuine signatures to reveal their
remarkable discrepancy from the signature appearing in
the disputed lease contract. The spouses Apeles
maintained that they did not intend to sell the subject
property.9
After the spouses Apeles established by documentary
evidence that Luz was not in the country at the time the
Contract of Lease with Option to Purchase was executed,
Enrico, in rebuttal, retracted his prior declaration that the
said Contract was signed by Luz on 26 January 1996.
Instead, Enrico averred that Luz signed the Contract after
she arrived in the Philippines on 30 May 1987. Enrico
further related that after Luz signed the lease contract, she
took it with her for notarization, and by the time the
document was returned to him, it was already notarized.10
On 8 October 2002, the RTC rendered a Decision in Civil
Case No. Q-99-36834 in favor of Enrico. Since none of
the parties presented a handwriting expert, the RTC relied
on its own examination of the specimen signatures
submitted to resolve the issue of forgery. The RTC found
striking similarity between Luzs genuine signatures in the
documents presented by the spouses Apeles themselves
and her purportedly forged signature in the Contract of
Lease with Option to Purchase. Absent any finding of
forgery, the RTC bound the parties to the clear and
unequivocal stipulations they made in the lease contract.
Accordingly, the RTC ordered the spouses Apeles to
execute a Deed of Sale in favor of Enrico upon the latters
payment of the agreed amount of consideration.
Thefallo of the RTC Decision reads:
WHEREFORE, this Court finds [Enricos] complaint to
be substantiated by preponderance of evidence and
accordingly orders
(1) [The spouses Apeles] to comply with the
provisions of the Contract of Lease with Option to
Purchase; and upon payment of total consideration
as stipulated in the said CONTRACT for [the
spouses Apeles] to execute a Deed of Absolute
Sale in favor of [Enrico], over the parcel of land
and the improvements existing thereon located at
No. 87 Timog Avenue, Quezon City.
(2) [The spouses Apeles] to pay [Enrico] moral
and exemplary damages in the respective amounts
ofP100,000.00 and P50,000.00.
(3) [The spouses Apeles] to pay attorneys fees
of P50,000.00 and costs of the suit.11
The spouses Apeles challenged the adverse RTC Decision
before the Court of Appeals and urged the appellate court
to nullify the assailed Contract of Lease with Option to
Purchase since Luzs signature thereon was clearly a
forgery. The spouses Apeles argued that it was physically
impossible for Luz to sign the said Contract on 26 January
1987 since she was not in the Philippines on that date and
returned five months thereafter. The spouses Apeles called
attention to Enricos inconsistent declarations as to
material details involving the execution of the lease
contract, thereby casting doubt on Enricos credibility, as

well as on the presumed regularity of the contract as a

notarized document.
On 20 December 2004, the Court of Appeals rendered a
Decision in CA-G.R. CV No. 76933 granting the appeal of
the spouses Apeles and overturning the judgment of the
RTC. In arriving at its assailed decision, the appellate
court noted that the Notary Public did not observe utmost
care in certifying the due execution of the Contract of
Lease with Option to Purchase. The Court of Appeals
chose not to accord the disputed Contract full faith and
credence. The Court of Appeals held, thus:
WHEREFORE, the foregoing premises considered, the
appealed decision dated October 8, 2002 of the Regional
Trial Court of Quezon City, Branch 215 in Civil Case No.
Q-99-36834 for specific performance with damages is
hereby REVERSED and a new is one entered dismissing
[Enricos] complaint.12
Enricos Motion for Reconsideration was denied by the
Court of Appeals in a Resolution13 dated 25 April 2005.
Enrico is presently before this Court seeking the reversal
of the unfavorable judgment of the Court of Appeals,
assigning the following errors thereto:
I.
THE COURT OF APPEALS COMMITTED (sic)
REVERSIBLE ERROR WHEN IT BRUSHED ASIDE
THE RULING OF THE COURT A QUO UPHOLDING
THE VALIDITY OF THE CONTRACT OF LEASE
WITH OPTION TO PURCHASE AND IN LIEU
THEREOF RULED THAT THE SAID CONTRACT OF
LEASE WAS A FORGERY AND THUS, NULL AND
VOID.
II.
THE COURT OF APPEALS COMMITTED (sic)
REVERSIBLE ERROR WHEN CONTRARY TO THE
FINDINGS OF THE COURT A QUO IT RULED THAT
THE
DEFENSE
OF
FORGERY
WAS
SUBSTANTIALLY AND CONVINCINGLY PROVEN
BY COMPETENT EVIDENCE.
Simply, Enrico faults the Court of Appeals for disturbing
the factual findings of the RTC in disregard of the legal
aphorism that the factual findings of the trial court should
be accorded great weight and respect on appeal.
We do not agree.
Enricos insistence on the infallibility of the findings of
the RTC seriously impairs the discretion of the appellate
tribunal to make independent determination of the merits
of the case appealed before it. Certainly, the Court of
Appeals cannot swallow hook, line, and sinker the factual
conclusions of the trial court without crippling the very
office of review. Although we have indeed held that the
factual findings of the trial courts are to be accorded great
weight and respect, they are not absolutely conclusive
upon the appellate court.14
The reliance of appellate tribunals on the factual findings
of the trial court is based on the postulate that the latter

had firsthand opportunity to hear the witnesses and to

observe their conduct and demeanor during the
proceedings. However, when such findings are not
anchored on their credibility and their testimonies, but on
the assessment of documents that are available to appellate
magistrates and subject to their scrutiny, reliance on the
trial court finds no application.15
Moreover, appeal by writ of error to the Court of Appeals
under Rule 41 of the Revised Rules of Court, the parties
may raise both questions of fact and/or of law. In fact, it is
imperative for the Court of Appeals to review the findings
of fact made by the trial court. The Court of Appeals even
has the power to try cases and conduct hearings, receive
evidence and perform any and all acts necessary to resolve
factual issues raised in cases falling within its original and
appellate jurisdiction.16
Enrico assiduously prays before this Court to sustain the
validity of the Contract of Lease with Option to Purchase.
Enrico asserts that the said Contract was voluntarily
entered into and signed by Luz who had it notarized
herself. The spouses Apeles should be obliged to respect
the terms of the agreement, and not be allowed to renege
on their commitment thereunder and frustrate the sanctity
of contracts.
Again, we are not persuaded. We agree with the Court of
Appeals that in ruling out forgery, the RTC heavily relied
on the testimony proffered by Enrico during the trial,
ignoring blatant contradictions that destroy his credibility
and the veracity of his claims. On direct examination,
Enrico testified that Luz signed the Contract of Lease with
Option to Purchase on 26 January 1987 in his
presence,17 but he recanted his testimony on the matter
after the spouses Apeles established by clear and
convincing evidence that Luz was not in the Philippines
on that date.18In rebuttal, Enrico made a complete
turnabout and claimed that Luz signed the Contract in
question on 30 May 1987 after her arrival in the
country.19 The inconsistencies in Enricos version of
events have seriously impaired the probative value of his
testimony and cast serious doubt on his credibility. His
contradictory statements on important details simply
eroded the integrity of his testimony.
While it is true that a notarized document carries the
evidentiary weight conferred upon it with respect to its
due execution, and has in its favor the presumption of
regularity, this presumption, however, is not absolute. It
may be rebutted by clear and convincing evidence to the
contrary.20 Enrico himself admitted that Luz took the
document and had it notarized without his presence. Such
fact alone overcomes the presumption of regularity since a
notary public is enjoined not to notarize a document
unless the persons who signed the same are the very same
persons who executed and personally appeared before the
said notary public to attest to the contents and truth of
what are stated therein.
Although there is no direct evidence to prove forgery,
preponderance of evidence inarguably favors the spouses
Apeles. In civil cases, the party having the burden of proof
must establish his case by a preponderance of evidence.
Preponderance of evidence is the weight, credit, and value
of the aggregate evidence on either side and is usually
considered to be synonymous with the term "greater

weight of the evidence" or "greater weight of the credible

evidence." Preponderance of evidence is a phrase which,
in the last analysis, means probability of the truth. It is
evidence which is more convincing to the court as
worthier of belief than that which is offered in opposition
thereto.21 In the case at bar, the spouses Apeles were able
to overcome the burden of proof and prove by
preponderant evidence in disputing the authenticity and
due execution of the Contract of Lease with Option to
Purchase. In contrast, Enrico seemed to rely only on his
own self-serving declarations, without asserting any proof
of corroborating testimony or circumstantial evidence to
buttress his claim.

In the landmark case of Southwestern Sugar and Molasses

Company v. Atlantic Gulf and Pacific Co.,25 we declared
that for an option contract to bind the promissor, it must
be supported by consideration:

Even assuming for the sake of argument that we agree

with Enrico that Luz voluntarily entered into the Contract
of Lease with Option to Purchase and personally affixed
her signature to the said document, the provision on the
option to purchase the subject property incorporated in
said Contract still remains unenforceable.

There is no question that under Article 1479 of the new

Civil Code "an option to sell," or "a promise to buy or to
sell," as used in said article, to be valid must be "supported
by a consideration distinct from the price." This is clearly
inferred from the context of said article that a unilateral
promise to buy or to sell, even if accepted, is only binding
if supported by a consideration. In other words, "an
accepted unilateral promise" can only have a binding
effect if supported by a consideration, which means
that the option can still be withdrawn, even if accepted,
if the same is not supported by any consideration. Here
it is not disputed that the option is without
consideration. It can therefore be withdrawn
notwithstanding the acceptance made of it by
appellee. (Emphasis supplied.)

There is no dispute that what Enrico sought to enforce in

Civil Case No. Q-99-36834 was his purported right to
acquire ownership of the subject property in the exercise
of his option to purchase the same under the Contract of
Lease with Option to Purchase. He ultimately wants to
compel the spouses Apeles to already execute the Deed of
Sale over the subject property in his favor.

The doctrine requiring the payment of consideration in an

option contract enunciated in Southwestern Sugar is
resonated in subsequent cases and remains controlling to
this day. Without consideration that is separate and
distinct from the purchase price, an option contract cannot
be enforced; that holds true even if the unilateral promise
is already accepted by the optionee.

An option is a contract by which the owner of the property

agrees with another person that the latter shall have the
right to buy the formers property at a fixed price within a
certain time. It is a condition offered 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.22 An option is
not of itself a purchase, but merely secures the privilege to
buy. It is not a sale of property but a sale of the right to
purchase. It is simply a contract by which the owner of the
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, i.e., the right or
privilege to buy at the election or option of the other party.
Its distinguishing characteristic is that it imposes no
binding obligation on the person holding the option, aside
from the consideration for the offer.23

The consideration is "the why of the contracts, the

essential reason which moves the contracting parties to
enter into the contract." This definition illustrates that the
consideration contemplated to support an option contract
need not be monetary. Actual cash need not be exchanged
for the option. However, by the very nature of an option
contract, as defined in Article 1479, the same is an
onerous contract for which the consideration must be
something of value, although its kind may vary.26

It is also sometimes called an "unaccepted offer" and is

sanctioned by Article 1479 of the Civil Code:
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.
The second paragraph of Article 1479 provides for the
definition and consequent rights and obligations under an
option contract. For an option contract to be valid and
enforceable against the promissor, there must be a
separate and distinct consideration that supports it.24

We have painstakingly examined the Contract of Lease

with Option to Purchase, as well as the pleadings
submitted by the parties, and their testimonies in open
court, for any direct evidence or evidence aliunde to prove
the existence of consideration for the option contract, but
we have found none. The only consideration agreed upon
by the parties in the said Contract is the supposed
purchase price for the subject property in the amount not
exceeding P1.5 Million, which could not be deemed to be
the same consideration for the option contract since the
law and jurisprudence explicitly dictate that for the option
contract to be valid, it must be supported by a
consideration separate and distinct from the price.
In Bible Baptist Church v. Court of Appeals,27 we stressed
that an option contract needs to be supported by a separate
consideration. The consideration need not be monetary but
could consist of other things or undertakings. However, if
the consideration is not monetary, these must be things or
undertakings of value, in view of the onerous nature of the
option contract. Furthermore, when a consideration for an
option contract is not monetary, said consideration must
be clearly specified as such in the option contract or
clause.
In the present case, it is indubitable that no consideration
was given by Enrico to the spouses Apeles for the option
contract. The absence of monetary or any material

consideration keeps this Court from enforcing the rights of

the parties under said option contract.
WHEREFORE, in view of the foregoing, the instant
Petition is DENIED. The Decision dated 20 December
2004 and Resolution dated 25 April 2005 of the Court of
Appeals
in
CA-G.R.
CV
No.
76933
are
hereby AFFIRMED. No costs.

JOAQUIN
VILLEGAS
and
EMMA
VILLEGAS, Petitioners,
vs.
RURAL BANK OF TANJAY, INC., Respondent.

M.

DECISION
NACHURA, J.:
This petition for review on certiorari under Rule 45 of the
Rules of Court assails the Court of Appeals (CA)
Decision1 in CA-G.R. CV No. 40613 which affirmed with
modification the Regional Trial Court (RTC) Decision in
Civil Case No. 9570.2
The facts, as summarized by the CA, follow.
Sometime in June, 1982, [petitioners], spouses Joaquin
and Emma Villegas, obtained an agricultural loan
ofP350,000.00 from [respondent] Rural Bank of Tanjay,
Inc. The loan was secured by a real estate mortgage on
[petitioners] residential house and 5,229 sq.m. lot
situated in Barrio Bantayan, Dumaguete City and covered
by TCT No. 12389.
For failure of [petitioners] to pay the loan upon maturity,
the mortgage was extrajudicially foreclosed. At the
foreclosure sale, [respondent], being the highest bidder,
purchased the foreclosed properties for P367,596.16.
Thereafter, the Sheriff executed in favor of [respondent] a
certificate of sale, which was subsequently registered with
the Registry of Deeds of Dumaguete City.
[Petitioners] failed to redeem the properties within the
one-year redemption period.
In May, 1987, [respondent] and [petitioner] Joaquin
Villegas, through his attorney-in-fact[,] Marilen
Victoriano, entered into an agreement denominated as
"Promise to Sell," whereby [respondent] promised to sell
to [petitioners] the foreclosed properties for a total price
of P713,312.72, payable within a period of five (5) years.
The agreement reads in part:
PROMISE TO SELL
xxxx
WITNESSETH:
xxxx
2) That for and in consideration of SEVEN
HUNDRED THIRTEEN THOUSAND AND
THREE HUNDRED TWELVE & 72/100 PESOS
(P713,312.72), the VENDOR do hereby promise
to sell, transfer, and convey unto the VENDEE,
their heirs, successors and assigns, all its rights,
interests and participations over the above parcel
of land with all the improvements thereon and a
residential house.
3) That upon signing of this Promise To Sell, the
VENDEE shall agree to make payment
of P250,000.00 (Philippine Currency) and the
balance of P463,312.72 payable in equal yearly

installments plus interest based on the prevailing

rate counting from the date of signing this
Promise to Sell for a period of five (5) years.
xxxx

(2) The Court of Appeals erred in not holding that,

by reason of the fact that the loan and mortgage
contracts are null and void ab initio for being
against public policy, the doctrine of estoppel
does not apply in this case;

5) Provided further, that in case of a delay in any

yearly installment for a period of ninety (90) days,
this sale will become null and void and no further
effect or validity; and provided further, that
payments made shall be reimbursed (returned) to
the VENDEE less interest on the account plus
additional 15% liquidated damages and charges.

(3) The Court of Appeals erred in not finding that

the addendum on the promissory notes containing
an escalation clause is null and void ab initio for
not being signed by petitioner Emma M. Villegas,
wife of petitioner Joaquin Villegas, there being a
showing that the companion real estate mortgage
involves conjugal property. x x x.

Upon the signing of the agreement, [petitioners] gave

[respondent] the sum of P250,000.00 as down payment.
[Petitioners], however, failed to pay the first yearly
installment, prompting [respondent] to consolidate its
ownership over the properties. Accordingly, TCT No.
12389 was cancelled and a new one, TCT No. 19042,
(Exh. 14) was issued in [respondents] name on November
8, 1989. Thereafter, [respondent] took possession of the
properties. Hence, the action by [petitioners for
declaration of nullity of loan and mortgage contracts,
recovery of possession of real property, accounting and
damages and, in the alternative, repurchase of real estate]
commenced on January 15, 1990.

(4) The Court of Appeals erred in not finding that

the addendum on the promissory notes containing
an escalation clause is null and void ab initio for
being so worded that the implementation thereof
would deprive petitioners due process guaranteed
by [the] constitution, the petitioners not having
been notified beforehand of said implementation.5

In resisting the complaint, [respondent] averred that

[petitioners] have absolutely no cause of action against it,
and that the complaint was filed only to force it to allow
[petitioners] to reacquire the foreclosed properties under
conditions unilaterally favorable to them.
xxxx
After trial on the merits, the [RTC] rendered a Decision
dismissing the complaint, disposing as follows:
"In the light of the foregoing, it is considered opinion of
this Court, that [petitioners] failed to prove by
preponderance of evidence their case and therefore the
herein complaint is ordered dismissed. [Petitioners] are
ordered to pay [respondent] the sum of P3,000.00 as
attorneys fees and to pay costs without pronouncement as
to counterclaim.
SO ORDERED."3
On appeal by both parties, the CA affirmed with
modification the RTCs ruling, thus:
WHEREFORE, the appealed Decision is hereby
MODIFIED by (a) ORDERING [respondent] to reimburse
[petitioners] their down payment of P250,000.00 and (b)
DELETING the award of attorneys fees to [respondent].
SO ORDERED.

Hence, this appeal by certiorari raising the following

issues:
(1) The Court of Appeals erred in not holding that
the loan and mortgage contracts are null and void
ab initio for being against public policy;

Notwithstanding petitioners formulation of the issues, the

core issue for our resolution is whether petitioners may
recover possession of the mortgaged properties.
The petition deserves scant consideration and ought to
have been dismissed outright. Petitioners are precluded
from seeking a declaration of nullity of the loan and
mortgage contracts; they are likewise barred from
recovering possession of the subject property.lavvphil
Petitioners insist on the nullity of the loan and mortgage
contracts. Unabashedly, petitioners admit that the loan
(and mortgage) contracts were made to appear as several
sugar crop loans not exceeding P50,000.00 each even if
they were not just so the respondent rural bank could
grant and approve the same pursuant to Republic Act
(R.A.) No. 720, the Rural Banks Act. Petitioners boldly
enumerate the following circumstances that show that
these loans were obtained in clear contravention of R.A.
No. 720:
(a) The petitioners never planted sugar cane on
any parcel of agricultural land;
(b) The mortgaged real estate is residential, with a
house, located in the heart of Dumaguete City,
with an area of only one-half (1/2) hectare;
(c) Petitioners never planted any sugar cane on
this one-half (1/2) hectare parcel of land;
(d) Petitioners were never required to execute any
chattel mortgage on standing crops;
(e) To make it appear that the petitioners were
entitled to avail themselves of loan benefits under
Republic Act No. 720, Rural Banks Act,
respondent made them sign promissory notes
for P350,000.00
in
split
amounts
not
exceeding P50,000.00 each.6
In short, petitioners aver that the sugar crop loans were
merely simulated contracts and, therefore, without any
force and effect.

Articles 1345 and 1346 of the Civil Code are the

applicable laws, and they unmistakably provide:
Art. 1345. Simulation of a contract may be absolute or
relative. The former takes place when the parties do not
intend to be bound at all; the latter, when the parties
conceal their true agreement.
Art. 1346. An absolutely simulated or fictitious contract is
void. A relative simulation, when it does not prejudice a
third person and is not intended for any purpose contrary
to law, morals, good customs, public order or public
policy binds the parties to their real agreement.
Given the factual antecedents of this case, it is obvious
that the sugar crop loans were relatively simulated
contracts and that both parties intended to be bound
thereby. There are two juridical acts involved in relative
simulation the ostensible act and the hidden act.7 The
ostensible act is the contract that the parties pretend to
have executed while the hidden act is the true agreement
between the parties.8 To determine the enforceability of
the actual agreement between the parties, we must discern
whether the concealed or hidden act is lawful and the
essential requisites of a valid contract are present.
In this case, the juridical act which binds the parties are
the loan and mortgage contracts, i.e., petitioners
procurement of a loan from respondent. Although these
loan and mortgage contracts were concealed and made to
appear as sugar crop loans to make them fall within the
purview of the Rural Banks Act, all the essential requisites
of a contract9 were present. However, the purpose thereof
is illicit, intended to circumvent the Rural Banks Act
requirement in the procurement of loans.10 Consequently,
while the parties intended to be bound thereby, the
agreement is void and inexistent under Article 140911 of
the Civil Code.
In arguing that the loan and mortgage contracts are null
and void, petitioners would impute all fault therefor to
respondent. Yet, petitioners averments evince an obvious
knowledge and voluntariness on their part to enter into the
simulated contracts. We find that fault for the nullity of
the contract does not lie at respondents feet alone, but at
petitioners as well. Accordingly, neither party can
maintain an action against the other, as provided in Article
1412 of the Civil Code:
Art. 1412. If the act in which the unlawful or forbidden
cause consists does not constitute a criminal offense, the
following rules shall be observed:
(1) When the fault is on the part of both
contracting parties, neither may recover what he
has given by virtue of the contract, or demand the
performance of the others undertaking;
(2) When only one of the contracting parties is at
fault, he cannot recover what he has given by
reason of the contract, or ask for the fulfillment of
what has been promised him. The other, who is
not at fault, may demand the return of what he has
given without any obligation to comply with his
promise.

Petitioners did not come to court with clean hands. They

admit that they never planted sugarcane on any property,
much less on the mortgaged property. Yet, they eagerly
accepted the proceeds of the simulated sugar crop loans.
Petitioners readily participated in the ploy to circumvent
the Rural Banks Act and offered no objection when their
original loan of P350,000.00 was divided into small
separate loans not exceeding P50,000.00 each. Clearly,
both petitioners and respondent are in pari delicto, and
neither should be accorded affirmative relief as against the
other.
In Tala Realty Services Corp. v. Banco Filipino Savings
and Mortgage Bank,12 we held that when the parties are in
pari delicto, neither will obtain relief from the court, thus:
The Bank should not be allowed to dispute the sale of its
lands to Tala nor should Tala be allowed to further collect
rent from the Bank. The clean hands doctrine will not
allow the creation or the use of a juridical relation such as
a trust to subvert, directly or indirectly, the law. Neither
the bank nor Tala came to court with clean hands; neither
will obtain relief from the court as one who seeks equity
and justice must come to court with clean hands. By not
allowing Tala to collect from the Bank rent for the period
during which the latter was arbitrarily closed, both Tala
and the Bank will be left where they are, each paying the
price for its deception.13
Petitioners stubbornly insist that respondent cannot invoke
the pari delicto doctrine, ostensibly because of our obiter
in Enrique T. Yuchengco, Inc., et al. v. Velayo.14
In Yuchengco, appellant sold 70% of the subscribed and
outstanding capital stock of a Philippine corporation, duly
licensed as a tourist operator, to appellees without the
required prior notice and approval of the Department of
Tourism (DOT). Consequently, the DOT cancelled the
corporations Local Tour Operators License. In turn,
appellees asked for a rescission of the sale and demanded
the return of the purchase price.
We specifically ruled therein that the pari delicto doctrine
is not applicable, because:
The obligation to secure prior Department of Tourism
approval devolved upon the defendant (herein appellant)
for it was he as the owner vendor who had the duty to give
clear title to the properties he was conveying. It was he
alone who was charged with knowing about rules
attendant to a sale of the assets or shares of his touristoriented organization. He should have known that under
said rules and regulations, on pain of nullity, shares of
stock in his company could not be transferred without
prior approval from the Department of Tourism. The
failure to secure this approval is attributable to him
alone.15
Thus, we declared that even assuming both parties were
guilty of the violation, it does not always follow that both
parties, being in pari delicto, should be left where they are.
We recognized as an exception a situation when courts
must interfere and grant relief to one of the parties because
public policy requires their intervention, even if it will
result in a benefit derived by a plaintiff who is in equal
guilt with defendant.16

In stark contrast to Yuchengco, the factual milieu of the

present case does not compel us to grant relief to a party
who is in pari delicto. The public policy requiring rural
banks to give preference to bona fide small farmers in the
grant of loans will not be served if a party, such as
petitioners, who had equal participation and equal guilt in
the circumvention of the Rural Banks Act, will be allowed
to recover the subject property.
The following circumstances reveal the utter poverty of
petitioners arguments and militate against their bid to
recover the subject property:
1. As previously adverted to, petitioners readily
and voluntarily accepted the proceeds of the loan,
divided into small loans, without question.
2. After failing to redeem the mortgaged subject
property, thereby allowing respondent to
consolidate title thereto,17 petitioners then entered
into a Promise to Sell and made a down payment
of P250,000.00.
3. Failing anew to comply with the terms of the
Promise to Sell and pay the first yearly
installment, only then did petitioners invoke the
nullity of the loan and mortgage contracts.
In all, petitioners explicitly recognized respondents
ownership over the subject property and merely resorted
to the void contract argument after they had failed to
reacquire the property and a new title thereto in
respondents name was issued.
We are not unmindful of the fact that the Promise to Sell
ultimately allows petitioners to recover the subject
property which they were estopped from recovering under
the void loan and mortgage contracts. However, the
Promise to Sell, although it involves the same parties and
subject matter, is a separate and independent contract from
that of the void loan and mortgage contracts.
To reiterate, under the void loan and mortgage contracts,
the parties, being in pari delicto, cannot recover what they
each has given by virtue of the contract.18 Neither can the
parties demand performance of the contract. No remedy or
affirmative relief can be afforded the parties because of
their presumptive knowledge that the transaction was
tainted with illegality.19 The courts will not aid either
party to an illegal agreement and will instead leave the
parties where they find them.20
Consequently, the parties having no cause of action
against the other based on a void contract, and possession
and ownership of the subject property being ultimately
vested in respondent, the latter can enter into a separate
and distinct contract for its alienation. Petitioners
recognized respondents ownership of the subject property
by entering into a Promise to Sell, which expressly
designates respondent as the vendor and petitioners as the
vendees. At this point, petitioners, originally co-owners
and mortgagors of the subject property, unequivocally
acquiesced to their new status as buyers thereof. In fact,
the Promise to Sell makes no reference whatsoever to
petitioners previous ownership of the subject property
and to the void loan and mortgage contracts.21 On the
whole, the Promise to Sell, an independent contract, did

not purport to ratify the void loan and mortgage

contracts.lawphi1
By its very terms, the Promise to Sell simply intended to
alienate to petitioners the subject property according to the
terms and conditions contained therein. Article 1370 of
the Civil Code reads:
Art. 1370. If 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.
If the words appear to be contrary to the evident intention
of the parties, the latter shall prevail over the former.
Thus, the terms and conditions of the Promise to Sell are
controlling.
Paragraph 5 of the Promise to Sell provides:
5) Provided further, that in case of a delay in any yearly
installment for a period of ninety (90) days, this sale will
become null and void [without] further effect or validity;
and provided further, that payments made shall be
reimbursed (returned to the VENDEE less interest on the
account plus additional 15% liquidated damages and
charges.22
As stipulated in the Promise to Sell, petitioners are entitled
to reimbursement of the P250,000.00 down payment. We
agree with the CAs holding on this score:
We note, however, that there is no basis for the imposition
of interest and additional 15% liquidated damages and
charges on the amount to be thus reimbursed. The
"Promise to Sell" is separate and distinct from the loan
and mortgage contracts earlier executed by the parties.
Obviously, after the foreclosure, there is no more loan or
account to speak of to justify the said imposition.23
Finally, contrary to petitioners contention, the CA, in
denying petitioners appeal, did not commit an error; it did
not ratify a void contract because void contracts cannot be
ratified. The CA simply refused to grant the specific relief
of recovering the subject property prayed for by
petitioners. Nonetheless, it ordered respondent to
reimburse petitioners for their down payment
of P250,000.00 and disallowed respondents claim for
actual, moral and exemplary damages and attorneys fees.
WHEREFORE, premises considered, the petition is
hereby DENIED. The Decision of the Court of Appeals in
CA-G.R. CV No. 40613 is hereby AFFIRMED. Costs
against petitioners.

SPOUSES JOSE and MILAGROS VILLACERAN

and
FAR
EAST
BANK
&
TRUST
COMPANY, Petitioners,
vs.
JOSEPHINE DE GUZMAN, Respondent.
DECISION
VILLARAMA, JR., J.:
Before us is a petition for review on certiorari assailing the
November 26, 2004 Decision1 and June 29, 2005
Resolution2 of the Court of Appeals (CA) in CA-G.R. CV
No. 71831. The CA had affirmed with modification the
Decision3 of the Regional Trial Court (RTC), Branch 24,
of Echague, Isabela, in Civil Case No. 24-0495 entitled
"Josephine De Guzman vs. Spouses Jose and Milagros
Villaceran, et al."
The antecedent facts follow:
Josephine De Guzman filed a Complaint4 with the RTC of
Echague, Isabela against the spouses Jose and Milagros
Villaceran and Far East Bank & Trust Company
(FEBTC), Santiago City Branch, for declaration of nullity
of sale, reconveyance, redemption of mortgage and
damages with preliminary injunction. The complaint was
later amended to include annulment of foreclosure and
Sheriffs Certificate of Sale.
In her Amended Complaint,5 De Guzman alleged that she
is the registered owner of a parcel of land covered by
Transfer Certificate of Title (TCT) No. T-236168,6 located
in Echague, Isabela, having an area of 971 square meters
and described as Lot 8412-B of the Subdivision Plan Psd93948. On April 17, 1995, she mortgaged the lot to the
Philippine National Bank (PNB) of Santiago City to
secure a loan of P600,000. In order to secure a bigger loan
to finance a business venture, De Guzman asked Milagros
Villaceran to obtain an additional loan on her behalf. She
executed a Special Power of Attorney in favor of
Milagros. Considering De Guzmans unsatisfactory loan
record with the PNB, Milagros suggested that the title of
the property be transferred to her and Jose Villaceran and
they would obtain a bigger loan as they have a credit line
of up to P5,000,000 with the bank.
On June 19, 1996, De Guzman executed a simulated Deed
of Absolute Sale7 in favor of the spouses Villaceran. On
the same day, they went to the PNB and paid the amount
of P721,891.67 using the money of the spouses
Villaceran. The spouses Villaceran registered the Deed of
Sale and secured TCT No. T-2574168 in their names.
Thereafter, they mortgaged the property with FEBTC
Santiago City to secure a loan of P1,485,000. However,
the spouses Villaceran concealed the loan release from De
Guzman. Later, when De Guzman learned of the loan
release, she asked for the loan proceeds less the amount
advanced by the spouses Villaceran to pay the PNB loan.
However, the spouses Villaceran refused to give the
money stating that they are already the registered owners
of the property and that they would reconvey the property
to De Guzman once she returns theP721,891.67 they paid
to PNB.9
De Guzman offered to pay P350,000 provided that the
spouses Villaceran would execute a deed of reconveyance

of the property. In view of the simulated character of their

transaction, the spouses Villaceran executed a Deed of
Absolute Sale10 dated September 6, 1996 in favor of De
Guzman. They also promised to pay their mortgage debt
with FEBTC to avoid exposing the property to possible
foreclosure and auction sale. However, the spouses
Villaceran failed to settle the loan and subsequently the
property was extrajudicially foreclosed. A Sheriffs
Certificate of Sale was issued in favor of FEBTC for the
amount of P3,594,000. De Guzman asserted that the
spouses Villaceran should be compelled to redeem their
mortgage so as not to prejudice her as the real owner of
the property.11
On the other hand, the spouses Villaceran and FEBTC, in
their Amended Answer,12 averred that in 1996 De Guzman
was introduced to Milagros by a certain Digna Maranan.
Not long afterwards, De Guzman requested Milagros to
help her relative who had a loan obligation with the PNB
in the amount of P300,000. As a consideration for the
accommodation, De Guzman would convey her property
located at Maligaya, Echague, Isabela which was then
being held in trust by her cousin, Raul Sison. Because of
this agreement, Milagros paid De Guzmans obligation
with the PNB in the amount of P300,000.
When Milagros asked for the title of the lot, De Guzman
explained that her cousin would not part with the property
unless he is reimbursed the amount of P200,000
representing the amount he spent tilling the land. Milagros
advanced the amount of P200,000 but De Guzmans
cousin still refused to reconvey the property. In order for
De Guzman to settle her obligation, she offered to sell her
house and lot in Echague, Isabela. At first, Milagros
signified her non-interest in acquiring the same because
she knew that it was mortgaged with the PNB Santiago
for P600,000. De Guzman proposed that they will just
secure a bigger loan from another bank using her house
and lot as security. The additional amount will be used in
settling De Guzmans obligation with PNB. Later, De
Guzman proposed that she borrow an additional amount
from Milagros which she will use to settle her loan with
PNB. To this request, Milagros acceded. Hence, they went
to the PNB and paid in full De Guzmans outstanding
obligation with PNB which already reached P880,000.13

The RTC ruled that the Deed of Sale dated June 19, 1996
executed by De Guzman in favor of the spouses
Villaceran covering the property located in Echague,
Isabela was valid and binding on the parties. The RTC
ruled that the said contract was a relatively simulated
contract, simulated only as to the purchase price, but
nonetheless binding upon the parties insofar as their true
agreement is concerned. The RTC ruled that De Guzman
executed the Deed of Absolute Sale dated June 19, 1996
so that the spouses Villaceran may use the property
located in Echague, Isabela as collateral for a loan in view
of De Guzmans need for additional capital to finance her
business venture. The true consideration for the sale,
according to the RTC, was the P300,000 the spouses
Villaceran gave to De Guzman plus the P721,891.67 they
paid to PNB in order that the title to the subject property
may be released and used to secure a bigger loan in
another bank.
The RTC also found that although the spouses Villaceran
had already mortgaged the subject property with FEBTC
and the title was already in the possession of FEBTC -which facts were known to De Guzman who even knew
that the loan proceeds amounting to P1,485,000 had been
released -- the spouses Villaceran were nonetheless still
able to convince De Guzman that they could still reconvey
the subject property to her if she pays the amount they had
paid to PNB. The RTC found that the Deed of Sale dated
September 6, 1996 was actually signed by the spouses
Villaceran although De Guzman was able to pay
only P350,000, which amount was stated in said deed of
sale as the purchase price. The RTC additionally said that
the spouses Villaceran deceived De Guzman when the
spouses Villaceran mortgaged the subject property with
the understanding that the proceeds would go to De
Guzman less the amounts the spouses had paid to PNB.
Hence, according to the RTC, the spouses Villaceran
should return to De Guzman (1) the P350,000 which she
paid to them in consideration of the September 6, 1996
Deed of Sale, which sale did not materialize because the
title was in the possession of FEBTC; and (2) the amount
of P763,108.33 which is the net proceeds of the loan after
deducting the P721,891.67 that the spouses paid to PNB.
Thus, the decretal portion of the RTC decision reads:
WHEREFORE, judgment is hereby rendered as follows:

Since De Guzmans total obligation already

reached P1,380,000, the spouses Villaceran requested her
to execute a deed of absolute sale over the subject
property in their favor. Thus, the Deed of Absolute Sale is
supported by a valuable consideration, and the spouses
Villaceran became the lawful owners of the property as
evidenced by TCT No. 257416 issued by the Office of the
Register of Deeds of Isabela. Later, they mortgaged the
property to FEBTC for P1,485,000.
The spouses Villaceran denied having executed a deed of
conveyance in favor of De Guzman relative to the subject
property and asserted that the signatures appearing on the
September 6, 1996 Deed of Sale, which purported to sell
the subject property back to De Guzman, are not genuine
but mere forgeries.14
After due proceedings, the trial court rendered its decision
on September 27, 2000.

a) declaring the Deed of Sale, dated June 1996

(Exhibit "B") as valid and binding;
b) ordering defendants Villaceran to pay to
plaintiff the amount of P763,108.33 and
P350,000.00 or the total amount of P1,113,108.33
plus the legal rate of interest starting from the date
of the filing of this case;
c) declaring the Extrajudicial Foreclosure and the
Certificate of Sale as valid;
d) ordering defendants Villaceran to pay
attorneys fees in the amount of P20,000.00 and to
pay the costs of suit.
SO ORDERED.15
Aggrieved, the spouses Villaceran appealed to the CA
arguing that the trial court erred in declaring the June 19,

1996 Deed of Sale as a simulated contract and ordering

them to pay De Guzman P1,113,108.33 plus legal rate of
interest and attorneys fees.16
On November 26, 2004, the CA rendered its Decision, the
dispositive portion of which reads as follows:
IN VIEW OF ALL THE FOREGOING, the judgment
appealed
from
is
hereby
AFFIRMED
with
MODIFICATION, to read as follows:
WHEREFORE, judgment is hereby rendered as follows:
1. Declaring the Deed of Sale dated June 16,
1996 (Exh. "B") and September 6, 1996, as not
reflective of the true intention of the parties, as the
same were merely executed for the purpose of the
loan accommodation in favor of the plaintiffappellee by the defendants-appellants;
2. Ordering defendants-appellants Villaceran to
pay plaintiff-appellee the difference between
the FEBTCloan
of P1,485,000.00
less P721,891.67 (used to redeem the PNB loan),
plus legal interest thereon starting from the date of
the filing of this case;
3. Declaring the extrajudicial foreclosure and
certificate of sale in favor of FEBTC, as valid; and
4. For the appellants to pay the costs of the suit.
SO ORDERED.17
The CA ruled that the RTC was correct in declaring that
there was relative simulation of contract because the deeds
of sale did not reflect the true intention of the parties. It
found that the evidence established that the documents
were executed for the purpose of an agency to secure a
higher loan whereby the spouses Villaceran only
accommodated De Guzman. However, the CA did not find
any evidence to prove that De Guzman actually parted
away with the P350,000 as consideration of the
reconveyance of the property. Thus, it held the trial court
erred in ordering the spouses Villaceran to return
the P350,000 to De Guzman.
Furthermore, the CA observed that the spouses Villaceran
were the ones who redeemed the property from the
mortgage with PNB by paying P721,891.67 so that De
Guzmans title could be released. Once registered in their
name, the spouses Villaceran mortgaged the property with
FEBTC for P1,485,000. With the loan proceeds
ofP1,485,000, there was no need for the spouses
Villaceran to demand for the return of the P721,891.67
they paid in releasing the PNB loan before the property is
reconveyed to De Guzman. All they had to do was to
deduct the amount of P721,891.67 from the P1,485,000
FEBTC loan proceeds. Hence, the CA ruled that only the
balance of the P1,485,000 loan proceeds from FEBTC
minus the P721,891.67 used to redeem the PNB loan
should be paid by the spouses Villaceran to De Guzman.
The CA also deleted the grant of attorneys fees for lack
of factual, legal or equitable justification.
On December 22, 2004, the spouses Villaceran filed a
motion for reconsideration of the foregoing decision. Said

motion, however, was denied for lack of merit by the CA

in its Resolution dated June 29, 2005. Hence, this appeal.
In their petition for review on certiorari, the spouses
Villaceran allege that:
1. THE RESPONDENT COURT OF APPEALS
ERRED AND GRAVELY ABUSED ITS
DISCRETION IN DECLARING THE DEED OF
SALE DATED JUNE 19, 1996 AS SIMULATED
AND THAT THE SAME WAS MERELY
EXECUTED FOR THE PURPOSE OF THE
LOAN ACCOMODATION OF PETITIONERS
VILLACERAN
IN
FAVOR
OF
THE
RESPONDENT DE GUZMAN INSTEAD OF
DECLARING SAID DEED AS A VALID DEED
OF ABSOLUTE SALE, THE CONTENTS OF
WHICH ARE CLEARLY REFLECTIVE OF
THEIR TRUE INTENTION TO ENTER INTO A
CONTRACT
OF
SALE
AND
NOT
OTHERWISE, IN DIRECT CONTRAVENTION
OF THE RULES ON EVIDENCE AND OF THE
ADMISSIONS OF THE PARTIES AND THE
HONORABLE COURTS RULINGS OR
JURISPRUDENCE ON THE MATTER; AND
2. THE RESPONDENT COURT OF APPEALS
ERRED AND GRAVELY ABUSED ITS
DISCRETION IN ORDERING PETITIONERS
VILLACERAN TO PAY RESPONDENT DE
GUZMAN THE DIFFERENCE BETWEEN THE
FAR EAST BANK AND TRUST COMPANY
(FEBTC) LOAN OF PHP1,485,000.00 LESS
P721,891.67 (USED TO PAY THE PHILIPPINE
NATIONAL BANK [PNB] LOAN) PLUS
LEGAL INTEREST THEREON AND TO PAY
THE COSTS OF SUIT.18
Essentially, the issue for our resolution is whether the CA
erred in ruling that the Deed of Sale dated June 19, 1996 is
a simulated contract and not a true sale of the subject
property.
Petitioners contend that the previous loans they extended
to De Guzman in the amounts of P300,000, P600,000
and P200,000 should have been considered by the CA.
When added to the P721,891.67 used to settle the PNB
loan, De Guzmans total loan obtained from them would
amount to P1,821,891.67. Thus, it would clearly show that
the Deed of Sale dated June 19, 1996, being supported by
a valuable consideration, is not a simulated contract.
We do not agree.
Article 134519 of the Civil Code provides that the
simulation of a contract may either be absolute or relative.
In absolute simulation, there is a colorable contract but it
has no substance as the parties have no intention to be
bound by it. The main characteristic of an absolute
simulation is that the apparent contract is not really
desired or intended to produce legal effect or in any way
alter the juridical situation of the parties.20 As a result, an
absolutely simulated or fictitious contract is void, and the
parties may recover from each other what they may have
given under the contract. However, if the parties state a
false cause in the contract to conceal their real agreement,
the contract is only relatively simulated and the parties are

still bound by their real agreement. Hence, where the

essential requisites of a contract are present and the
simulation refers only to the content or terms of the
contract, the agreement is absolutely binding and
enforceable between the parties and their successors in
interest.21
The primary consideration in determining the true nature
of a contract is the intention of the parties. If the words of
a contract appear to contravene the evident intention of the
parties, the latter shall prevail. Such intention is
determined not only from the express terms of their
agreement, but also from the contemporaneous and
subsequent acts of the parties.22 In the case at bar, there is
a relative simulation of contract as the Deed of Absolute
Sale dated June 19, 1996 executed by De Guzman in favor
of petitioners did not reflect the true intention of the
parties.
It is worthy to note that both the RTC and the CA found
that the evidence established that the aforesaid document
of sale was executed only to enable petitioners to use the
property as collateral for a bigger loan, by way of
accommodating De Guzman. Thus, the parties have
agreed to transfer title over the property in the name of
petitioners who had a good credit line with the bank. The
CA found it inconceivable for De Guzman to sell the
property for P75,000 as stated in the June 19, 1996 Deed
of Sale when petitioners were able to mortgage the
property with FEBTC for P1,485,000. Another indication
of the lack of intention to sell the property is when a few
months later, on September 6, 1996, the same property,
this time already registered in the name of petitioners, was
reconveyed to De Guzman allegedly for P350,000.
As regards petitioners assertion that De Guzmans
previous loans should have been considered to prove that
there was an actual sale, the Court finds the same to be
without merit. Petitioners failed to present any evidence to
prove that they indeed extended loans to De Guzman in
the amounts of P300,000, P600,000 and P200,000. We
note that petitioners tried to explain that on account of
their close friendship and trust, they did not ask for any
promissory note, receipts or documents to evidence the
loan. But in view of the substantial amounts of the loans,
they should have been duly covered by receipts or any
document evidencing the transaction. Consequently, no
error was committed by the CA in holding that the June
19, 1996 Deed of Absolute Sale was a simulated contract.
The issue of the genuineness of a deed of sale is
essentially a question of fact.1wphi1 It is settled that this
Court is not duty-bound to analyze and weigh again the
evidence considered in the proceedings below. This is
especially true where the trial courts factual findings are
adopted and affirmed by the CA as in the present case.
Factual findings of the trial court, affirmed by the CA, are
final and conclusive and may not be reviewed on appeal.23
The Court has time and again ruled that conclusions and
findings of fact of the trial court are entitled to great
weight and should not be disturbed on appeal, unless
strong and cogent reasons dictate otherwise. This is
because the trial court is in a better position to examine
the real evidence, as well as to observe the demeanor of
the witnesses while testifying in the case.24 In sum, the

Court finds that there exists no reason to disturb the

findings of the CA.
WHEREFORE, the petition for review on certiorari is
DENIED. The Decision dated November 26, 2004 and
Resolution dated June 29, 2005 of the Court of Appeals in
CA-G.R. CV No. 71831 are AFFIRMED.

MILAGROS DE BELEN VDA. DE CABALU,

MELITON CABALU, SPS. ANGELA CABALU and
RODOLFO
TALAVERA,
and
PATRICIO
ABUS, Petitioners,
vs.
SPS. RENATO DOLORES TABU and LAXAMANA,
Municipal Trial Court in Cities, Tarlac City, Branch
II,Respondents.
DECISION
MENDOZA, J.:
This is a "Petition for Review on Certiorari (under Rule
45)" of the Rules of Court assailing the June 16, 2009
Decision1 of the Court of Appeals (CA) in CA-GR. CV
No. 81469 entitled "Milagros De Belen Vda de Cabalu v.
Renato Tabu."
The Facts
The property subject of the controversy is a 9,000 square
meter lot situated in Mariwalo, Tarlac, which was a
portion of a property registered in the name of the late
Faustina Maslum (Faustina) under Transfer Certificate of
Title (TCT) No. 16776 with a total area of 140,211 square
meters.2
On December 8, 1941, Faustina died without any children.
She left a holographic will, dated July 27, 1939, assigning
and distributing her property to her nephews and nieces.
The said holographic will, however, was not probated.
One of the heirs was the father of Domingo Laxamana
(Domingo), Benjamin Laxamana, who died in 1960. On
March 5, 1975, Domingo allegedly executed a Deed of
Sale of Undivided Parcel of Land disposing of his 9,000
square meter share of the land to Laureano Cabalu.3
On August 1, 1994, to give effect to the holographic will,
the forced and legitimate heirs of Faustina executed a
Deed of Extra-Judicial Succession with Partition. The said
deed imparted 9,000 square meters of the land covered by
TCT No. 16776 to Domingo. Thereafter, on December 14,
1995, Domingo sold 4,500 square meters of the 9,000
square meters to his nephew, Eleazar Tabamo. The
document was captioned Deed of Sale of a Portion of
Land. On May 7, 1996, the remaining 4,500 square meters
of Domingos share in the partition was registered under
his name under TCT No. 281353.4

Perez, Arthur Dizon, and all persons claiming rights under

them. The heirs claimed that the defendants were merely
allowed to occupy the subject lot by their late father,
Domingo, but, when asked to vacate the property, they
refused to do so. The case was ruled in favor of
Domingos heirs and a writ of execution was subsequently
issued.6
On February 4, 2002, petitioners Milagros de Belen Vda.
De Cabalu, Meliton Cabalu, Spouses Angela Cabalu and
Rodolfo Talavera, and Patricio Abus (petitioners), filed a
case for Declaration of Nullity of Deed of Absolute Sale,
Joint Affidavit of Nullity of Transfer Certificate of Title
Nos. 291338 and 291339, Quieting of Title,
Reconveyance, Application for Restraining Order,
Injunction and Damages (Civil Case No. 9290) against
respondent spouses before the Regional Trial Court,
Branch 63, Tarlac City (RTC).7
In their complaint, petitioners claimed that they were the
lawful owners of the subject property because it was sold
to their father, Laureano Cabalu, by Domingo, through a
Deed of Absolute Sale, dated March 5, 1975. Hence,
being the rightful owners by way of succession, they could
not be ejected from the subject property.8
In their Answer, respondent spouses countered that the
deed of sale from which the petitioners anchored their
right over the 9,000 square meter property was null and
void because in 1975, Domingo was not yet the owner of
the property, as the same was still registered in the name
of Faustina. Domingo became the owner of the property
only on August 1, 1994, by virtue of the Deed of ExtraJudicial Succession with Partition executed by the forced
heirs of Faustina. In addition, they averred that Domingo
was of unsound mind having been confined in a mental
institution for a time.9
On September 30, 2003, the RTC dismissed the complaint
as it found the Deed of Absolute Sale, dated March 5,
1975, null and void for lack of capacity to sell on the part
of Domingo. Likewise, the Deed of Absolute Sale, dated
October 8, 1996, covering the remaining 4,500 square
meters of the subject property was declared ineffective
having been executed by Domingo two months after his
death on August 4, 1996. The fallo of the Decision10reads:
WHEREFORE, in view of the foregoing, the complaint is
hereby DISMISSED, and the decision is hereby rendered
by way of:

On August 4, 1996, Domingo passed away.

On October 8, 1996, two months after his death, Domingo
purportedly executed a Deed of Absolute Sale of TCT No.
281353 in favor of respondent Renato Tabu (Tabu). The
resultant transfer of title was registered as TCT No.
286484. Subsequently, Tabu and his wife, Dolores
Laxamana (respondent spouses), subdivided the said lot
into two which resulted into TCT Nos. 291338 and
291339.5
On January 15, 1999, respondent Dolores LaxamanaTabu, together with Julieta Tubilan-Laxamana, Teresita
Laxamana, Erlita Laxamana, and Gretel Laxamana, the
heirs of Domingo, filed an unlawful detainer action,
docketed as Civil Case No. 7106, against Meliton Cabalu,
Patricio Abus, Roger Talavera, Jesus Villar, Marcos

1. declaring null and void the Deed of Absolute

Sale dated March 5, 1975, executed by Domingo
Laxamana in favor of Laureano Cabalu;
2. declaring null and void the Deed of Absolute
Sale dated October 8, 1996, executed by Domingo
Laxamana in favor of Renato Tabu, and that TCT
Nos. 293338 and 291339, both registered in the
name of Renato Tabu, married to Dolores
Laxamana be cancelled;
3. restoring to its former validity, TCT No. 16770
in the name of Faustina Maslum subject to
partition by her lawful heirs.
Costs de oficio.

SO ORDERED.11
Not in conformity, both parties appealed to the CA.
Petitioners contended that the RTC erred in declaring void
the Deed of Absolute Sale, dated March 5, 1975. They
claimed that Domingo owned the property, when it was
sold to Laureano Cabalu, because he inherited it from his
father, Benjamin, who was one of the heirs of Faustina.
Being a co-owner of the property left by Benjamin,
Domingo could dispose of the portion he owned,
notwithstanding the will of Faustina not being probated.

The CA further held that the RTC erred in canceling TCT

No. 266583 in the name of Domingo and in ordering the
restoration of TCT No. 16770, registered in the name of
Faustina, to its former validity, Domingo being an
undisputed heir of Faustina.
Hence, petitioners interpose the present petition before
this Court anchored on the following:
GROUNDS
(A)

Respondent spouses, on the other hand, asserted that the

Deed of Sale, dated March 5, 1975, was spurious and
simulated as the signature, PTR and the document number
of the Notary Public were different from the latters
notarized documents. They added that the deed was
without consent, Domingo being of unsound mind at the
time of its execution. Further, they claimed that the RTC
erred in canceling TCT No. 266583 and insisted that the
same should be restored to its validity because Benjamin
and Domingo were declared heirs of Faustina.

THE DEED OF SALE OF UNDIVIDED

PARCEL OF LAND EXECUTED ON MARCH
5, 1975 BY DOMINGO LAXAMANA IN
FAVOR OF LAUREANO CABALU IS VALID
BECAUSE IT SHOULD BE ACCORDED THE
PRESUMPTION OF REGULARITY AND
DECLARED VALID FOR ALL PURPOSES
AND INTENTS.
(B)

On June 16, 2009, the CA rendered its decision and

disposed as follows:
WHEREFORE, in the light of the foregoing, the instant
appeal is partially GRANTED in that the decision of the
trial court is AFFIRMED WITH MODIFICATION that
sub-paragraphs 2 & 3 of the disposition, which reads:
"2. declaring null and void the Deed of Absolute Sale
dated October 8, 1996, executed by Domingo Laxamana
in favor of Renato Tabu, and that TCT Nos. 291338 and
291339, both registered in the name of Renato Tabu,
married to Dolores Laxamana be cancelled;
3. restoring to its former validity, TCT No. 16776 in the
name of Faustina Maslum subject to partition by her
lawful heirs," are DELETED.
IT IS SO ORDERED.12
In finding Domingo as one of the heirs of Faustina, the
CA explained as follows:
It appears from the records that Domingo was a son of
Benjamin as apparent in his Marriage Contract and
Benjamin was a nephew of Faustina as stated in the
holographic will and deed of succession with partition. By
representation, when Benjamin died in 1960, Domingo
took the place of his father in succession. In the same
vein, the holographic will of Faustina mentioned
Benjamin as one of her heirs to whom Faustina imparted
9,000 square meters of her property. Likewise, the
signatories to the Deed of Extra-judicial Succession with
Partition, heirs of Faustina, particularly declared Domingo
as their co-heir in the succession and partition thereto.
Furthermore, the parties in this case admitted that the
relationship was not an issue.13
Although the CA found Domingo to be of sound mind at
the time of the sale on March 5, 1975, it sustained the
RTCs declaration of nullity of the sale on the ground that
the deed of sale was simulated.

THE SUBPARAGRAPH NO. 2 OF THE

DECISION OF THE REGIONAL TRIAL
COURT SHOULD STAY BECAUSE THE
HONORABLE COURT OF APPEALS DID NOT
DISCUSS THE ISSUE AND DID NOT STATE
THE LEGAL BASIS WHY SAID PARAGRAPH
SHOULD BE DELETED FROM THE
SEPTEMBER 30, 2003 DECISION OF THE
REGIONAL TRIAL COURT.14
The core issues to be resolved are 1) whether the Deed of
Sale of Undivided Parcel of Land covering the 9,000
square meter property executed by Domingo in favor of
Laureano Cabalu on March 5, 1975, is valid; and 2)
whether the Deed of Sale, dated October 8, 1996, covering
the 4,500 square meter portion of the 9,000 square meter
property, executed by Domingo in favor of Renato Tabu,
is null and void.
Petitioners contend that the Deed of Absolute Sale
executed by Domingo in favor of Laureano Cabalu on
March 5, 1975 should have been declared valid because it
enjoyed the presumption of regularity. According to them,
the subject deed, being a public document, had in its favor
the presumption of regularity, and to contradict the same,
there must be clear, convincing and more than
preponderant evidence, otherwise, the document should be
upheld. They insist that the sale transferred rights of
ownership in favor of the heirs of Laureano Cabalu.
They further argue that the CA, in modifying the decision
of the RTC, should not have deleted the portion declaring
null and void the Deed of Absolute Sale, dated October 8,
1996, executed by Domingo in favor of Renato Tabu,
because at the time of execution of the said deed of sale,
the seller, Domingo was already dead. Being a void
document, the titles originating from the said instrument
were also void and should be cancelled.
Respondent
spouses,
in
their
Comment15 and
Memorandum,16 counter that the issues raised are not
questions of law and call for another calibration of the
whole evidence already passed upon by the RTC and the

CA. Yet, they argue that petitioners reliance on the

validity of the March 5, 1975 Deed of Sale of Undivided
Parcel of Land, based on presumption of regularity, was
misplaced because both the RTC and the CA, in the
appreciation of evidence on record, had found said deed as
simulated.
It is well to note that both the RTC and the CA found that
the evidence established that the March 5, 1975 Deed of
Sale of Undivided Parcel of Land executed by Domingo in
favor of Laureano Cabalu was a fictitious and simulated
document. As expounded by the CA, viz:
Nevertheless, since there are discrepancies in the signature
of the notary public, his PTR and the document number on
the lower-most portion of the document, as well as the
said deed of sale being found only after the plaintiffsappellants were ejected by the defendants-appellants; that
they were allegedly not aware that the said property was
bought by their father, and that they never questioned the
other half of the property not occupied by them, it is
apparent that the sale dated March 5, 1975 had the
earmarks of a simulated deed written all over it. The lower
court did not err in pronouncing that it be declared null
and void.17
Petitioners, in support of their claim of validity of the said
document of deed, again invoke the legal presumption of
regularity. To reiterate, the RTC and later the CA had
ruled that the sale, dated March 5, 1975, had the earmarks
of a simulated deed, hence, the presumption was already
rebutted. Verily and as aptly noted by the respondent
spouses, such presumption of regularity cannot prevail
over the facts proven and already established in the
records of this case.
Even on the assumption that the March 5, 1975 deed was
not simulated, still the sale cannot be deemed valid
because, at that time, Domingo was not yet the owner of
the property. There is no dispute that the original and
registered owner of the subject property covered by TCT
No. 16776, from which the subject 9,000 square meter lot
came from, was Faustina, who during her lifetime had
executed a will, dated July 27, 1939. In the said will, the
name of Benjamin, father of Domingo, appeared as one of
the heirs. Thus, and as correctly found by the RTC, even if
Benjamin died sometime in 1960, Domingo in 1975 could
not yet validly dispose of the whole or even a portion
thereof for the reason that he was not the sole heir of
Benjamin, as his mother only died sometime in 1980.
Besides, under Article 1347 of the Civil Code, "No
contract may be entered into upon future inheritance
except in cases expressly authorized by law." Paragraph 2
of Article 1347, characterizes a contract entered into upon
future inheritance as void. The law applies when the
following requisites concur: (1) the succession has not yet
been opened; (2) the object of the contract forms part of
the inheritance; and (3) the promissor has, with respect to
the object, an expectancy of a right which is purely
hereditary in nature.18
In this case, at the time the deed was executed, Faustinas
will was not yet probated; the object of the contract, the
9,000 square meter property, still formed part of the
inheritance of his father from the estate of Faustina; and

Domingo had a
therein.1wphi1

mere

inchoate

hereditary

right

Domingo became the owner of the said property only on

August 1, 1994, the time of execution of the Deed of
Extrajudicial Succession with Partition by the heirs of
Faustina, when the 9,000 square meter lot was adjudicated
to him.
The CA, therefore, did not err in declaring the March 5,
1975 Deed of Sale null and void.
Domingos status as an heir of Faustina by right of
representation being undisputed, the RTC should have
maintained the validity of TCT No. 266583 covering the
9,000 square meter subject property. As correctly
concluded by the CA, this served as the inheritance of
Domingo from Faustina.
Regarding the deed of sale covering the remaining 4,500
square meters of the subject property executed in favor of
Renato Tabu, it is evidently null and void. The document
itself, the Deed of Absolute Sale, dated October 8, 1996,
readily shows that it was executed on August 4, 1996
more than two months after the death of Domingo.
Contracting parties must be juristic entities at the time of
the consummation of the contract. Stated otherwise, to
form a valid and legal agreement it is necessary that there
be a party capable of contracting and a party capable of
being contracted with. Hence, if any one party to a
supposed contract was already dead at the time of its
execution, such contract is undoubtedly simulated and
false and, therefore, null and void by reason of its having
been made after the death of the party who appears as one
of the contracting parties therein. The death of a person
terminates contractual capacity.19
The contract being null and void, the sale to Renato Tabu
produced no legal effects and transmitted no rights
whatsoever. Consequently, TCT No. 286484 issued to
Tabu by virtue of the October 8, 1996 Deed of Sale, as
well as its derivative titles, TCT Nos. 291338 and 291339,
both registered in the name of Rena to Tabu, married to
Dolores Laxamana, are likewise void.
The CA erred in deleting that portion in the RTC decision
declaring the Deed of Absolute Sale, dated October 8,
1996, null and void and canceling TCT Nos. 291338 and
291339.
WHEREFORE, the petition is partially GRANTED. The
decretal portion of the June 16, 2009 Decision of the
Court of Appeals is hereby MODIFIED to read as follows:
1. The Deed of Absolute Sale, dated March 5,
1975, executed by Domingo Laxamana in favor of
Laureano Cabalu, is hereby declared as null and
void.
2. The Deed of Absolute Sale, dated October 8,
1996, executed by Domingo Laxamana in favor of
Renato Tabu, and TCT No. 286484 as well as the
derivative titles TCT Nos. 291338 and 291339,
both registered in the name of Renato Tabu,
married to Dolores Laxamana, are hereby
declared null and void and cancelled.

3. TCT No. 281353 in the name of Domingo

Laxamana is hereby ordered restored subject to
the partition by his lawful heirs.

HEIRS OF DR. MARIO S. INTAC and ANGELINA

MENDOZA-INTAC, Petitioners,
vs.
COURT OF APPEALS and SPOUSES MARCELO
ROY, JR. and JOSEFINA MENDOZA-ROY and
SPOUSES DOMINADOR LOZADA and MARTINA
MENDOZA-LOZADA, Respondents.
This is a Petition for Review on Certiorari under Rule 45
assailing the February 16, 2006 Decision1 of the Court of
Appeals (CA), in CA G.R. CV No. 75982, which modified
the April 30, 2002 Decision2 of the Regional Trial Court,
Branch 220, Quezon City ( RTC), in Civil Case No. Q-9419452, an action for cancellation of transfer certificate of
title and reconveyance of property.
The Facts
From the records, it appears that Ireneo Mendoza (Ireneo),
married to Salvacion Fermin (Salvacion), was the owner
of the subject property, presently covered by TCT No.
242655 of the Registry of Deeds of Quezon City and
situated at No. 36, Road 8, Bagong Pag-asa, Quezon City,
which he purchased in 1954. Ireneo had two children:
respondents Josefina and Martina (respondents), Salvacion
being their stepmother. When he was still alive, Ireneo,
also took care of his niece, Angelina, since she was three
years old until she got married. The property was then
covered by TCT No. 106530 of the Registry of Deeds of
Quezon City. On October 25, 1977, Ireneo, with the
consent of Salvacion, executed a deed of absolute sale of
the property in favor of Angelina and her husband, Mario
(Spouses Intac). Despite the sale, Ireneo and his family,
including the respondents, continued staying in the
premises and paying the realty taxes. After Ireneo died
intestate in 1982, his widow and the respondents remained
in the premises.3 After Salvacion died, respondents still
maintained their residence there. Up to the present, they
are in the premises, paying the real estate taxes thereon,
leasing out portions of the property, and collecting the
rentals.4
The Dispute
The controversy arose when respondents sought the
cancellation of TCT No. 242655, claiming that the sale
was only simulated and, therefore, void. Spouses Intac
resisted, claiming that it was a valid sale for a
consideration.
On February 22, 1994, respondents filed the Complaint for
Cancellation of Transfer Certificate of Title (TCT) No.
2426555 against Spouses Intac before the RTC. The
complaint prayed not only for the cancellation of the title,
but also for its reconveyance to them. Pending litigation,
Mario died on May 20, 1995 and was substituted by his
heirs, his surviving spouse, Angelina, and their children,
namely, Rafael, Kristina, Ma. Tricia Margarita, Mario,
and Pocholo, all surnamed Intac (petitioners).

of Spouses Intac, they objected because the title would be

placed in the names of said spouses and it would then
appear that the couple owned the property; that Ireneo,
however, tried to appease them, telling them not to worry
because Angelina would not take advantage of the
situation considering that he took care of her for a very
long time; that during his lifetime, he informed them that
the subject property would be equally divided among them
after his death; and that respondents were the ones paying
the real estate taxes over said property.
It was further alleged that after the death of Ireneo in
1982, a conference among relatives was held wherein both
parties were present including the widow of Ireneo,
Salvacion; his nephew, Marietto Mendoza (Marietto); and
his brother, Aurelio Mendoza (Aurelio). In the said
conference, it was said that Aurelio informed all of them
that it was Ireneos wish to have the property divided
among his heirs; that Spouses Intac never raised any
objection; and that neither did they inform all those
present on that occasion that the property was already sold
to them in 1977.6
Respondents further alleged that sometime in 1993, after
the death of Salvacion, rumors spread in the neighborhood
that the subject property had been registered in the names
of Spouses Intac; that upon verification with the Office of
the Register of Deeds of Quezon City, respondents were
surprised to find out that TCT No. 106530 had indeed
been cancelled by virtue of the deed of absolute sale
executed by Ireneo in favor of Spouses Intac, and as a
result, TCT No. 242655 was issued in their names; that the
cancellation of TCT No. 106530 and the subsequent
issuance of TCT No. 242655 were null and void and had
no legal effect whatsoever because the deed of absolute
sale was a fictitious or simulated document; that the
Spouses Intac were guilty of fraud and bad faith when said
document was executed; that Spouses Intac never
informed respondents that they were already the registered
owners of the subject property although they had never
taken possession thereof; and that the respondents had
been in possession of the subject property in the concept
of an owner during Ireneos lifetime up to the present.
In their Answer,7 Spouses Intac countered, among others,
that the subject property had been transferred to them
based on a valid deed of absolute sale and for a valuable
consideration; that the action to annul the deed of absolute
sale had already prescribed; that the stay of respondents in
the subject premises was only by tolerance during Ireneos
lifetime because they were not yet in need of it at that
time; and that despite respondents knowledge about the
sale that took place on October 25, 1977, respondents still
filed an action against them.
Ruling of the RTC
On April 30, 2002, the RTC rendered judgment in favor of
respondents and against Spouses Intac. The dispositive
portion of its Decision reads:

Averments of the Parties

In their Complaint, respondents alleged, among others,
that when Ireneo was still alive, Spouses Intac borrowed
the title of the property (TCT No. 106530) from him to be
used as collateral for a loan from a financing institution;
that when Ireneo informed respondents about the request

WHEREFORE, premises considered, judgment is hereby

rendered:
(1) Declaring the Deed of Absolute Sale executed
by Ireneo Mendoza in favor of Mario and

Angelina Intac dated October 25, 1977 as an

equitable mortgage;
(2) Ordering the Register of Deeds of Quezon
City to cancel Transfer Certificate Title No.
242655 and, in lieu thereof, issue a new Transfer
Certificate of Title in the name of Ireneo
Mendoza; and
(3) Ordering defendants to pay plaintiffs the
amount of Thirty Thousand Pesos (Php30,000.00)
as and for attorneys fees.
The other claims for damages are hereby denied for lack
of merit.
SO ORDERED.8
The RTC ruled, among others, that the sale between
Ireneo and Salvacion, on one hand, and Spouses Intac was
null and void for being a simulated one considering that
the said parties had no intention of binding themselves at
all. It explained that the questioned deed did not reflect the
true intention of the parties and construed the said
document to be an equitable mortgage on the following
grounds: 1 the signed document did not express the real
intention of the contracting parties because Ireneo signed
the said document only because he was in urgent need of
funds; 2 the amount of 60,000.00 in 1977 was too
inadequate for a purchase price of a 240-square meter lot
located in Quezon City; 3 Josefina and Martina continued
to be in possession of the subject property from 1954 and
even after the alleged sale took place in 1977 until this
case was filed in 1994; and 4 the Spouses Intac started
paying real estate taxes only in 1999. The RTC added that
the Spouses Intac were guilty of fraud because they
effected the registration of the subject property even
though the execution of the deed was not really intended
to transfer the ownership of the subject property.
Ruling of the CA
On appeal, the CA modified the decision of the RTC. The
CA ruled that the RTC erred in first declaring the deed of
absolute sale as null and void and then interpreting it to be
an equitable mortgage. The CA believed that Ireneo
agreed to have the title transferred in the name of the
Spouses Intac to enable them to facilitate the processing of
the mortgage and to obtain a loan. This was the exact
reason why the deed of absolute sale was executed.
Marietto testified that Ireneo never intended to sell the
subject property to the Spouses Intac and that the deed of
sale was executed to enable them to borrow from a bank.
This fact was confirmed by Angelina herself when she
testified that she and her husband mortgaged the subject
property sometime in July 1978 to finance the
construction of a small hospital in Sta. Cruz, Laguna.
The CA further observed that the conduct of Spouses Intac
belied their claim of ownership. When the deed of
absolute sale was executed, Spouses Intac never asserted
their ownership over the subject property, either by
collecting rents, by informing respondents of their
ownership or by demanding possession of the land from
its occupants. It was not disputed that it was respondents
who were in possession of the subject property, leasing the
same and collecting rentals. Spouses Intac waited until

Ireneo and Salvacion passed away before they disclosed

the transfer of the title to respondents. Hence, the CA was
of the view that the veracity of their claim of ownership
was suspicious.
Moreover, wrote the CA, although Spouses Intac claimed
that the purchase of the subject property was for a
valuable consideration (P60,000.00), they admitted that
they did not have any proof of payment. Marietto, whose
testimony was assessed by the RTC to be credible,
testified that there was no such payment because Ireneo
never sold the subject property as he had no intention of
conveying its ownership and that his only purpose in
lending the title was to help Spouses Intac secure a loan.
Thus, the CA concluded that the deed of absolute sale was
a simulated document and had no legal effect.
Finally, the CA stated that even assuming that there was
consent, the sale was still null and void because of lack of
consideration. The decretal portion of the CA Decision
reads:
WHEREFORE, in view of the foregoing premises, the
decision of the Regional Trial Court of Quezon City,
Branch 220, is AFFIRMED with modifications, as
follows:
1. The Deed of Absolute Sale dated October 25,
1977 executed by Ireneo Mendoza and Salvacion
Fermen in favor of Spouses Mario and Angelina
Intac is hereby declared NULL AND VOID;
2. the Register of Deed[s] of Quezon City is
ordered to cancel TCT No. 242655 and, in lieu
thereof, issue a new one and reinstate Ireneo
Mendoza as the registered owner;
3. The defendant appellants are hereby ordered to
pay the plaintiff appellees the amount of thirty
thousand pesos (Php30,000.00) as and for
attorneys fees; and
4. The other claims for damages are denied for
lack of merit.
SO ORDERED.9
Not in conformity, petitioners filed this petition for review
anchored on the following
ASSIGNMENT OF ERRORS
I
THE HONORABLE COURT OF APPEALS
GRAVELY ERRED WHEN IT AFFIRMED THE
DECISION OF THE REGIONAL TRIAL
COURT DATED FEBRUARY 16, 2006 WHICH
WAS CONTRARY TO THE APPLICABLE
LAWS AND EXISTING JURISPRUDENCE.
II
THE HONORABLE COURT OF APPEALS
GRAVELY ERRED WHEN IT CLEARLY
OVERLOOKED, MISUNDERSTOOD AND/OR

MISAPPLIED THE EVIDENCE PRESENTED

IN THE COURT A QUO.10
Petitioners position
Petitioners primarily argue that the subject deed of sale
was a valid and binding contract between the parties. They
claim that all the elements of a valid contract of sale were
present, to wit: [a] consent or meeting of the minds, that
is, consent to transfer ownership in exchange of price; [b]
determinate subject matter; and [c] price certain in money
or its equivalent.
Petitioners claim that respondents have validly gave their
consent to the questioned sale of the subject property. In
fact, it was Ireneo and Salvacion who approached them
regarding their intention to sell the subject property.
Ireneo and Salvacion affixed their signatures on the
questioned deed and never brought any action to
invalidate it during their lifetime. They had all the right to
sell the subject property without having to inform their
children of their intention to sell the same. Ordinary
human experience dictates that a party would not affix his
or her signature on any written instrument which would
result in deprivation of ones property right if there was
really no intention to be bound by it. A party would not
keep silent for several years regarding the validity and due
execution of a document if there was an issue on the real
intention of the vendors. The signatures of Ireneo and
Salvacion meant that they had knowingly and willfully
entered into such agreement and that they were prepared
for the consequences of their act.
Respondents Position
Respondents are of the position that the RTC and the CA
were correct in ruling that the questioned deed of absolute
sale was a simulated one considering that Ireneo and
Salvacion had no intention of selling the subject property.
The true intention rather was that Spouses Intac would just
borrow the title of the subject property and offer it as a
collateral to secure a loan. No money actually changed
hands.
According to respondents, there were several
circumstances which put in doubt the validity of the deed
of absolute sale. First, the parties were not on equal
footing because Angelina was a doctor by profession
while Ireneo and Salvacion were less educated people who
were just motivated by their trust, love and affection for
her whom they considered as their own child. Second, if
there was really a valid sale, it was just and proper for
Spouses Intac to divulge the conveyance to respondents,
being compulsory heirs, but they did not. Third, Ireneo
and Salvacion did nothing to protect their interest because
they banked on the representation of Spouses Intac that
the title would only be used to facilitate a loan with a
bank. Fourth, Ireneo and Salvacion remained in
possession of the subject property without being disturbed
by Spouses Intac. Fifth, the price of the sale was
inadequate and inequitable for a prime property located in
Pag-asa, Quezon City. Sixth, Ireneo and Salvacion had no
intention of selling the subject property because they had
heirs who would inherit the same. Seventh, the Spouses
Intac abused the trust and affection of Ireneo and
Salvacion by arrogating unto themselves the ownership of

the subject property to the prejudice of his own children,

Josefina and Martina.
Finally, petitioners could not present a witness to rebut
Mariettos testimony which was straightforward and
truthful.
The Courts Ruling
Basically, the Court is being asked to resolve the issue of
whether the Deed of Absolute Sale,11 dated October 25,
1977, executed by and between Ireneo Mendoza and
Salvacion Fermin, as vendors, and Mario Intac and
Angelina Intac, as vendees, involving the subject real
property in Pagasa, Quezon City, was a simulated contract
or a valid agreement.
The Court finds no merit in the petition.
A contract, as defined in the Civil Code, is a meeting of
minds, with respect to the other, to give something or to
render some service. Article 1318 provides:
Art. 1318. There is no contract unless the following
requisites concur:
(1) Consent of the contracting parties;
(2) Object certain which is the subject matter of
the contract;
(3) Cause of the obligation which is established.
Accordingly, for a contract to be valid, it must have three
essential elements: (1) consent of the contracting parties;
(2) object certain which is the subject matter of the
contract; and (3) cause of the obligation which is
established.12
All these elements must be present to constitute a valid
contract. Consent is essential to the existence of a
contract; and where it is wanting, the contract is nonexistent. In a contract of sale, its perfection is
consummated at the moment there is a meeting of the
minds upon the thing that is the object of the contract and
upon the price. Consent is manifested by the meeting of
the offer and the acceptance of the thing and the cause,
which are to constitute the contract.
In this case, the CA ruled that the deed of sale executed by
Ireneo and Salvacion was absolutely simulated for lack of
consideration and cause and, therefore, void. Articles 1345
and 1346 of the Civil Code provide:
Art. 1345. Simulation of a contract may be absolute or
relative. The former takes place when the parties do not
intend to be bound at all; the latter, when the parties
conceal their true agreement.
Art. 1346. An absolutely simulated or fictitious contract is
void. A relative simulation, when it does not prejudice a
third person and is not intended for any purpose contrary
to law, morals, good customs, public order or public
policy binds the parties to their real agreement.

If the parties state a false cause in the contract to conceal

their real agreement, the contract is only relatively
simulated and the parties are still bound by their real
agreement. Hence, where the essential requisites of a
contract are present and the simulation refers only to the
content or terms of the contract, the agreement is
absolutely binding and enforceable between the parties
and their successors in interest.13
In absolute simulation, there is a colorable contract but it
has no substance as the parties have no intention to be
bound by it. "The main characteristic of an absolute
simulation is that the apparent contract is not really
desired or intended to produce legal effect or in any way
alter the juridical situation of the parties."14 "As a result,
an absolutely simulated or fictitious contract is void, and
the parties may recover from each other what they may
have given under the contract."15
In the case at bench, the Court is one with the courts
below that no valid sale of the subject property actually
took place between the alleged vendors, Ireneo and
Salvacion; and the alleged vendees, Spouses Intac. There
was simply no consideration and no intent to sell it.
Critical is the testimony of Marietto, a witness to the
execution of the subject absolute deed of sale. He testified
that Ireneo personally told him that he was going to
execute a document of sale because Spouses Intac needed
to borrow the title to the property and use it as collateral
for their loan application. Ireneo and Salvacion never
intended to sell or permanently transfer the full ownership
of the subject property to Spouses Intac. Marietto was
characterized by the RTC as a credible witness.
Aside from their plain denial, petitioners failed to present
any concrete evidence to disprove Mariettos testimony.
They claimed that they actually paid P150,000.00 for the
subject property. They, however, failed to adduce proof,
even by circumstantial evidence, that they did, in fact, pay
it. Even for the consideration of P60,000.00 as stated in
the contract, petitioners could not show any tangible
evidence of any payment therefor. Their failure to prove
their payment only strengthened Mariettos story that
there was no payment made because Ireneo had no
intention to sell the subject property.
Angelinas story, except on the consideration, was
consistent with that of Marietto. Angelina testified that she
and her husband mortgaged the subject property sometime
in July 1978 to finance the construction of a small hospital
in Sta. Cruz, Laguna. Angelina claimed that Ireneo offered
the property as he was in deep financial need.
Granting that Ireneo was in financial straits, it does not
prove that he intended to sell the property to Angelina.
Petitioners could not adduce any proof that they lent
money to Ireneo or that he shared in the proceeds of the
loan they had obtained. And, if their intention was to build
a hospital, could they still afford to lend money to Ireneo?
And if Ireneo needed money, why would he lend the title
to Spouses Intac when he himself could use it to borrow
money for his needs? If Spouses Intac took care of him
when he was terminally ill, it was not surprising for
Angelina to reciprocate as he took care of her since she
was three (3) years old until she got married. Their caring
acts for him, while they are deemed services of value,

cannot be considered as consideration for the subject

property for lack of quantification and the Filipino culture
of taking care of their elders.
Thus, the Court agrees with the courts below that the
questioned contract of sale was only for the purpose of
lending the title of the property to Spouses Intac to enable
them to secure a loan. Their arrangement was only
temporary and could not give rise to a valid sale. Where
there is no consideration, the sale is null and void ab
initio. In the case of Lequin v. Vizconde,16 the Court
wrote:
There can be no doubt that the contract of sale or
Kasulatan lacked the essential element of consideration. It
is a well-entrenched rule that where the deed of sale states
that the purchase price has been paid but in fact has never
been paid, the deed of sale is null and void ab initio for
lack of consideration. Moreover, Art. 1471 of the Civil
Code, which provides that "if the price is simulated, the
sale is void," also applies to the instant case, since the
price purportedly paid as indicated in the contract of sale
was simulated for no payment was actually made.
Consideration and consent are essential elements in a
contract of sale.1wphi1 Where a partys consent to a
contract of sale is vitiated or where there is lack of
consideration due to a simulated price, the contract is null
and void ab initio. [Emphases supplied]
More importantly, Ireneo and his family continued to be in
physical possession of the subject property after the sale in
1977 and up to the present. They even went as far as
leasing the same and collecting rentals. If Spouses Intac
really purchased the subject property and claimed to be its
true owners, why did they not assert their ownership
immediately after the alleged sale took place? Why did
they have to assert their ownership of it only after the
death of Ireneo and Salvacion? One of the most striking
badges of absolute simulation is the complete absence of
any attempt on the part of a vendee to assert his right of
dominion over the property.17
On another aspect, Spouses Intac failed to show that they
had been paying the real estate taxes of the subject
property. They admitted that they started paying the real
estate taxes on the property for the years 1996 and 1997
only in 1999. They could only show two (2) tax receipts
(Real Property Tax Receipt No. 361105, dated April 21,
1999, and Real Property Tax Receipt No. 361101, dated
April 21, 1999).18 Noticeably, petitioners tax payment
was just an afterthought. The non-payment of taxes was
also taken against the alleged vendees in the case of Lucia
Carlos Alio v. Heirs of Angelica A. Lorenzo.19 Thus,
Furthermore, Lucia religiously paid the realty taxes on the
subject lot from 1980 to 1987.While tax receipts and
declarations of ownership for taxation purposes are not, in
themselves, incontrovertible evidence of ownership, they
constitute at least proof that the holder has a claim of title
over the property, particularly when accompanied by
proof of actual possession. They are good indicia of the
possession in the concept of owner, for no one in his right
mind would be paying taxes for a property that is not in
his actual or at least constructive possession. The
voluntary declaration of a piece of property for taxation
purposes manifests not only one's sincere and honest

desire to obtain title to the property and announces his

adverse claim against the State and all other interested
parties, but also the intention to contribute needed
revenues to the Government. Such an act strengthens one's
bona fide claim of acquisition of ownership.

The lower courts fault Lucia for allegedly not taking

concrete steps to recover the subject lot, demanding its
return only after 10 years from the registration of the title.
They, however, failed to consider that Lucia was in actual
possession of the property.

On the other hand, respondent heirs failed to present

evidence that Angelica, during her lifetime, paid the realty
taxes on the subject lot. They presented only two tax
receipts showing that Servillano, Sr. belatedly paid taxes
due on the subject lot for the years 1980-1981 and part of
year 1982 on September 8, 1989, or about a month after
the institution of the complaint on August 3, 1989, a clear
indication that payment was made as an afterthought to
give the semblance of truth to their claim.

It is well-settled that an action for reconveyance prescribes

in 10 years, the reckoning point of which is the date of
registration of the deed or the date of issuance of the
certificate of title over the property. In an action for
reconveyance, the decree of registration is highly regarded
as incontrovertible. What is sought instead is the transfer
of the property or its title, which has been erroneously or
wrongfully registered in another person's name, to its
rightful or legal owner or to one who has a better right.

Thus, the subsequent acts of the parties belie the intent to

be bound by the deed of sale. [Emphases supplied]

However, in a number of cases in the past, the Court has

consistently ruled that if the person claiming to he the
owner of the property is in actual possession thereof, the
right to seek reconveyance, which in effect seeks to quiet
title to the property, does not prescribe. The reason for this
is that one who is in actual possession of a piece of land
claiming to be the owner thereof may wait until his
possession is disturbed or his title is attacked before taking
steps to vindicate his right. The reason being, that his
undisturbed possession gives him the continuing right to
seek the aid of a court of equity to ascertain the nature of
the adverse claim of a third party and its effect on his title,
which right can be claimed only by one who is in
possession. Thus, considering that Lucia continuously
possessed the subject lot, her right to institute a suit to
clear the cloud over her title cannot he barred by the
statute of limitations.:24[Emphases supplied]

The primary consideration in determining the true nature

of a contract is the intention of the parties. If the words of
a contract appear to contravene the evident intention of the
parties, the latter shall prevail. Such intention is
determined not only from the express terms of their
agreement, but also from the contemporaneous and
subsequent acts of the parties.20 As heretofore shown, the
contemporaneous and subsequent acts of both parties in
this case, point to the fact that the intention of Ireneo was
just to lend the title to the Spouses Intac to enable them to
borrow money and put up a hospital in Sta. Cruz, Laguna.
Clearly, the subject contract was absolutely simulated and,
therefore, void.
In view of the foregoing, the Court finds it hard to believe
the claim of the Spouses Intac that the stay of Ireneo and
his family in the subject premises was by their mere
tolerance as they were not yet in need of it. As earlier
pointed out, no convincing evidence, written or
testimonial, was ever presented by petitioners regarding
this matter. It is also of no moment that TCT No. 106530
covering the subject property was cancelled and a new
TCT (TCT No. 242655)21 was issued in their names. The
Spouses Intac never became the owners of the property
despite its registration in their names. After all,
registration does not vest title.
As a logical consequence, petitioners did not become the
owners of the subject property even after a TCT had been
issued in their names. After all, registration does not vest
title. Certificates of title merely confirm or record title
already existing and vested. They cannot be used to
protect a usurper from the true owner, nor can they be
used as a shield for the commission of fraud, or to permit
one to enrich oneself at the expense of others. Hence,
reconveyance of the subject property is warranted.22
The Court does not find acceptable either the argument of
the Spouses Intac that respondents action for cancellation
of TCT No. 242655 and the reconveyance of the subject
property is already barred by the Statute of Limitations.
The reason is that the respondents are still in actual
possession of the subject property. It is a well-settled
doctrine that "if the person claiming to be the owner of the
property is in actual possession thereof, the right to seek
reconveyance, which in effect seeks to quiet title to the
property, does not prescribe."23 In Lucia Carlos Alio, it
was also written:

PHILIPPINE
BANKING
CORPORATION, Petitioner,
vs.
ARTURO DY, BERNARDO DY, JOSE DELGADO
AND CIPRIANA DELGADO, Respondents.
This Petition for Review on Certiorari assails the January
30, 2008 Decision1 of the Court of Appeals (CA) in CAG.R. CV No. 51672, which set aside the October 5, 1994
Decision2 of the Regional Trial Court of Cebu City,
Branch 22 (RTC) and directed the Register of Deeds of
Cebu City to cancel Transfer Certificate of Title (TCT)
Nos. 517683 and 519014 in the names of respondents
Arturo Dy and Bernardo Dy (Dys) and to issue the
corresponding TCTs in the name of respondent Cipriana
Delgado (Cipriana).
The Factual Antecedents
Cipriana was the registered owner of a 58,129-square
meter (sq.m.) lot, denominated as Lot No. 6966, situated
in Barrio Tongkil, Minglanilla, Cebu, covered by TCT No.
18568. She and her husband, respondent Jose Delgado
(Jose), entered into an agreement with a certain Cecilia
Tan (buyer) for the sale of the said property for a
consideration of P10.00/sq.m. It was agreed that the buyer
shall make partial payments from time to time and pay the
balance when Cipriana and Jose (Sps. Delgado) are ready
to execute the deed of sale and transfer the title to her.
At the time of sale, the buyer was already occupying a
portion of the property where she operates a noodle
(bihon) factory while the rest was occupied by tenants
which Sps. Delgado undertook to clear prior to full
payment. After paying the total sum of P147,000.00 and
being then ready to pay the balance, the buyer demanded
the execution of the deed, which was refused. Eventually,
the buyer learned of the sale of the property to the Dys and
its subsequent mortgage to petitioner Philippine Banking
Corporation (Philbank), prompting the filing of the
Complaint5 for annulment of certificate of title, specific
performance and/or reconveyance with damages against
Sps. Delgado, the Dys and Philbank.
In their Answer, Sps. Delgado, while admitting receipt of
the partial payments made by the buyer, claimed that there
was no perfected sale because the latter was not willing to
pay their asking price of P17.00/sq.m. They also
interposed a cross-claim against the Dys averring that the
deeds of absolute sale in their favor dated June 28,
19826 and June 30, 19827 covering Lot No. 6966 and the
adjoining Lot No. 4100-A (on which Sps. Delgado's house
stands), were fictitious and merely intended to enable
them (the Dys) to use the said properties as collateral for
their loan application with Philbank and thereafter, pay the
true consideration of P17.00/sq.m. for Lot No. 6966.
However, after receiving the loan proceeds, the Dys
reneged on their agreement, prompting Sps. Delgado to
cause the annotation of an adverse claim on the Dys' titles
and to inform Philbank of the simulation of the sale. Sps.
Delgado, thus, prayed for the dismissal of the complaint,
with a counterclaim for damages and a cross-claim against
the Dys for the payment of the balance of the purchase
price plus damages.
For their part, the Dys denied knowledge of the alleged
transaction between cross-claimants Sps. Delgado and

buyer. They claimed to have validly acquired the subject

property from Sps. Delgado and paid the full
consideration therefor as the latter even withdrew their
adverse claim and never demanded for the payment of any
unpaid balance.
On the other hand, Philbank filed its Answer8 asserting
that it is an innocent mortgagee for value without notice of
the defect in the title of the Dys. It filed a cross-claim
against Sps. Delgado and the Dys for all the damages that
may be adjudged against it in the event they are declared
seller and purchaser in bad faith, respectively.
In answer to the cross-claim, Sps. Delgado insisted that
Philbank was not a mortgagee in good faith for having
granted the loan and accepted the mortgage despite
knowledge of the simulation of the sale to the Dys and for
failure to verify the nature of the buyers physical
possession of a portion of Lot No. 6966. They thereby
prayed for the cancellation of the mortgage in Philbank's
favor.
Subsequently, Sps. Delgado amended their cross-claim
against the Dys to include a prayer for the nullification of
the deeds of absolute sale in the latter's favor and the
corresponding certificates of title, and for the consequent
reinstatement of Ciprianas title.9

void, rendering the subsequent mortgage of the lots

likewise void.
The CA also declared Philbank not to be a mortgagee in
good faith for its failure to ascertain how the Dys acquired
the properties and to exercise greater care when it
conducted an ocular inspection thereof. It thereby
canceled the mortgage over the two lots.
The Petition
In the present petition, Philbank insists that it is a
mortgagee in good faith. It further contends that Sps.
Delgado are estopped from denying the validity of the
mortgage constituted over the two lots since they
participated in inducing Philbank to grant a loan to the
Dys.
On the other hand, Sps. Delgado maintain that Philbank
was not an innocent mortgagee for value for failure to
exercise due diligence in transacting with the Dys and
may not invoke the equitable doctrine of estoppel to
conceal its own lack of diligence.

The complaints against the Dys and Philbank were

subsequently withdrawn. On the other hand, both the
buyer and Sps. Delgado never presented any evidence in
support of their respective claims. Hence, the RTC limited
itself to the resolution of the claims of Sps. Delgado,
Philbank and the Dys against one another.

For his part, Arturo Dy filed a Petition-inIntervention13 arguing that while the deeds of absolute sale
over the two properties were admittedly simulated, the
simulation was only a relative one involving a false
statement of the price. Hence, the parties are still bound by
their true agreement. The same was opposed/objected to
by both Philbank14 and Sps. Delgado15 as improper,
considering that the CA judgment had long become final
and executory as to the Dys who neither moved for
reconsideration nor appealed the CA Decision.

The RTC Ruling

The Ruling of the Court

In the Decision10 dated October 5, 1994, the RTC

dismissed the cross-claims of Sps. Delgado against the
Dys and Philbank. It noted that other than Sps. Delgado's
bare allegation of the Dys' supposed non-payment of the
full consideration for Lot Nos. 6966 and 4100-A, they
failed to adduce competent evidence to support their
claim. On the other hand, the Dys presented a cash
voucher11 dated April 6, 1983 duly signed by Sps.
Delgado acknowledging receipt of the total consideration
for the two lots.

The petition is meritorious.

The RTC also observed that Sps. Delgado notified

Philbank of the purported simulation of the sale to the Dys
only after the execution of the loan and mortgage
documents and the release of the loan proceeds to the
latter, negating their claim of bad faith. Moreover, they
subsequently notified the bank of the Dys' full payment
for the two lots mortgaged to it.
The CA Ruling
However, on appeal, the CA set aside12 the RTC's decision
and ordered the cancellation of the Dys' certificates of title
and the reinstatement of Cipriana's title. It ruled that there
were no perfected contracts of sale between Sps. Delgado
and the Dys in view of the latter's admission that the deeds
of sale were purposely executed to facilitate the latter's
loan application with Philbank and that the prices
indicated therein were not the true consideration. Being
merely simulated, the contracts of sale were, thus, null and

At the outset, the Court takes note of the fact that the CA
Decision nullifying the questioned contracts of sale
between Sps. Delgado and the Dys had become final and
executory. Accordingly, the Petition-in-Intervention filed
by Arturo Dy, which seeks to maintain the subject
contracts' validity, can no longer be entertained. The
cancellation of the Dys' certificates of title over the
disputed properties and the issuance of new TCTs in favor
of Cipriana must therefore be upheld.
However, Philbank's mortgage rights over the subject
properties shall be maintained. While it is settled that a
simulated deed of sale is null and void and therefore, does
not convey any right that could ripen into a valid title,16 it
has been equally ruled that, for reasons of public
policy,17 the subsequent nullification of title to a property
is not a ground to annul the contractual right which may
have been derived by a purchaser, mortgagee or other
transferee who acted in good faith.18
The ascertainment of good faith or lack of it, and the
determination of whether due diligence and prudence were
exercised or not, are questions of fact19 which are
generally improper in a petition for review on certiorari
under Rule 45 of the Rules of Court (Rules) where only
questions of law may be raised. A recognized exception to
the rule is when there are conflicting findings of fact by
the CA and the RTC,20 as in this case.

Primarily, it bears noting that the doctrine of "mortgagee

in good faith" is based on the rule that all persons dealing
with property covered by a Torrens Certificate of Title are
not required to go beyond what appears on the face of the
title. This is in deference to the public interest in
upholding the indefeasibility of a certificate of title as
evidence of lawful ownership of the land or of any
encumbrance thereon.21 In the case of banks and other
financial institutions, however, greater care and due
diligence are required since they are imbued with public
interest, failing which renders the mortgagees in bad faith.
Thus, before approving a loan application, it is a standard
operating practice for these institutions to conduct an
ocular inspection of the property offered for mortgage and
to verify the genuineness of the title to determine the real
owner(s) thereof.22 The apparent purpose of an ocular
inspection is to protect the "true owner" of the property as
well as innocent third parties with a right, interest or claim
thereon from a usurper who may have acquired a
fraudulent certificate of title thereto.23
In this case, while Philbank failed to exercise greater care
in conducting the ocular inspection of the properties
offered for mortgage,24 its omission did not prejudice any
innocent third parties. In particular, the buyer did not
pursue her cause and abandoned her claim on the property.
On the other hand, Sps. Delgado were parties to the
simulated sale in favor of the Dys which was intended to
mislead Philbank into granting the loan application. Thus,
no amount of diligence in the conduct of the ocular
inspection could have led to the discovery of the
complicity between the ostensible mortgagors (the Dys)
and the true owners (Sps. Delgado).1wphi1 In fine,
Philbank can hardly be deemed negligent under the
premises since the ultimate cause of the mortgagors' (the
Dys') defective title was the simulated sale to which Sps.
Delgado were privies.
Indeed, a finding of negligence must always be
contextualized in line with the attendant circumstances of
a particular case. As aptly held in Philippine National
Bank v. Heirs of Estanislao Militar,25 "the diligence with
which the law requires the individual or a corporation at
all times to govern a particular conduct varies with the
nature of the situation in which one is placed, and the
importance of the act which is to be performed."26 Thus,
without diminishing the time-honored principle that
nothing short of extraordinary diligence is required of
banks whose business is impressed with public interest,
Philbank's inconsequential oversight should not and
cannot serve as a bastion for fraud and deceit.
To be sure, fraud comprises "anything calculated to
deceive, including all acts, omissions, and concealment
involving a breach of legal duty or equitable duty, trust, or
confidence justly reposed, resulting in damage to another,
or by which an undue and unconscientious advantage is
taken of another."27 In this light, the Dys' and Sps.
Delgado's deliberate simulation of the sale intended to
obtain loan proceeds from and to prejudice Philbank
clearly constitutes fraudulent conduct. As such, Sps.
Delgado cannot now be allowed to deny the validity of the
mortgage executed by the Dys in favor of Philbank as to
hold otherwise would effectively sanction their blatant bad
faith to Philbank's detriment.

Accordingly, in the interest of public policy, fair dealing,

good faith and justice, the Court accords Philbank the
rights of a mortgagee in good faith whose lien to the
securities posted must be respected and protected. In this
regard, Philbank is entitled to have its mortgage carried
over or annotated on the titles of Cipriana Delgado over
the said properties.
WHERFORE, the assailed January 30, 2008 Decision of
the Court of Appeals in CA-G.R. CV No. 51672 is hereby
AFFIRMED with MODIFICATION upholding the
mortgage rights of petitioner Philippine Banking
Corporation over the subject properties.

REV.
FR.
DANTE
MARTINEZ, petitioner,
vs.
HONORABLE
COURT
OF
APPEALS, HONORABLE
JUDGE
JOHNSON
BALLUTAY, PRESIDING JUDGE, BRANCH 25,
REGIONAL TRIAL COURT OF CABANA TUAN
CITY, HONORABLE JUDGE ADRIANO TUAZON,
JR., PRESIDING JUDGE, BRANCH 28, REGIONAL
TRIAL COURT OF CABANATUAN CITY,
SPOUSES REYNALDO VENERACION and SUSAN
VENERACION, SPOUSES MAXIMO HIPOLITO
and MANUELA DE LA PAZ and GODOFREDO DE
LA PAZ, respondents.

1
8
3
Ang halaga ng Lupa sa Villa Fe Subdivision na
ipinagbili kay Fr. Dante Martinez ay P15,000.00
na pinangangako namin na ibibigay ang Deed of
Sale sa ika-25 ng Febrero 1983.
[
S
G
D
.]
M
E
T
R
I
N
G

MENDOZA, J.:
This is a petition for review on certiorari of the decision,
dated 7, 1995, and resolution, dated January 31, 1996, of
the Court of Appeals, which affirmed the decisions of the
Regional Trial Court, Branches 251 and 28,2Cabanatuan
City, finding private respondents spouses Reynaldo and
Susan Veneracion owners of the land in dispute, subject to
petitioner's rights as a builder in good faith.

H
I
P
O
L
I
T
O

The facts are as follows:

Sometime in February 1981, private respondents
Godofredo De la Paz and his sister Manuela De la Paz,
married to Maximo Hipolito, entered into an oral contract
with petitioner Rev. Fr. Dante Martinez, then Assistant
parish priest of Cabanatuan City, for the sale of Lot No.
1337-A-3 at the Villa Fe Subdivision in Cabanatuan City
for the sum of P15,000.00. The lot is located along
Maharlika Road near the Municipal Hall of Cabanatuan
City. At the time of the sale, the lot was still registered in
the name of Claudia De la Paz, mother of private
respondents, although the latter had already sold it to
private respondent Manuela de la Paz by virtue of a Deed
of Absolute Sale dated May 26, 1976 (Exh. N/Exh. 2Veneracion).3 Private respondent Manuela subsequently
registered the sale in her name on October 22, 1981 and
was issued TCT No. T-40496 (Exh. 9).4 When the land
was offered for sale to petitioner, private respondents De
la Paz were accompanied by their mother, since petitioner
dealt ' with the De la Fazes as a family and not
individually. He was assured by them that the lot belonged
to Manuela De la Paz. It was agreed that petitioner would
give a downpayment of P3,000.00 to private respondents
De la Paz and that the balance would be payable by
installment. After giving the P3,000.00 downpayment,
petitioner started the construction of a house on the lot
after securing a building permit from the City Engineer's
Office on April 23, 1981, with the written consent of the
then registered owner, Claudia de la Paz (Exh. B/Exh,
1).5 Petitioner likewise began paying the real estate taxes
on said property (Exh. D, D-l, D-2).6 Construction on the
house was completed on October 6, 1981 (Exh. V).7 Since
then, petitioner and his family have maintained their
residence there.8
On January 31, 1983, petitioner completed payment of the
lot for which private respondents De la Paz executed two
documents. The first document (Exh. A) read:
1
3

[
S
G
D
.]
J
O
S
E
G
O
D
O
F
R
E
D
O
D
E
L
A
P
A
Z
9

The second writing (Exh. O) read:

C
a
b
a

n
a
t
u
a
n
C
it
y
M
a
r
c
h
1
9
,
1
9
8
6
TO WHOM IT MAY CONCERN:
This is to certify that Freddie dela Paz has agreed
to sign tomorrow (March 20) the affidavit of sale
of lot located at Villa Fe Subdivision sold to Fr.
Dante Martinez.
[
S
g
d
.]
F
r
e
d
d
i
e
d
e
l
a
P
a
z
F
R
E
D
D
I
E
D
E
L
A
P
A
Z
10

However, private respondents De la Paz never delivered

the Deed of Sale they promised to petitioner.
In the meantime, in a Deed of. Absolute Sale with Right to
Repurchase dated October 28, 1981 (Exh. 10),11private
respondents De la Paz sold three lots with right to
repurchase the same within one year to private
respondents spouses Reynaldo and Susan Veneracion for
the sum of P150,000.00. One of the lots sold was the lot
previously sold to petitioner.12
Reynaldo Veneracion had been a resident of Cabanatuan
City since birth. He used to pass along Maharlika
Highway in going to the Municipal Hall or in going to and
from Manila. Two of the lots subject of the sale were
located along Maharlika Highway, one of which was the
lot sold earlier by the De la Pazes to petitioner. The third
lot (hereinafter referred to as the Melencio lot) was
occupied by private respondents De la Paz. Private
respondents Veneracion never took actual possession of
any of these lots during the period of redemption, but all
titles to the lots were given to him.13
Before the expiration of the one year period, private
respondent Godofredo De la Paz informed private
respondent Reynaldo Veneracion that he was selling the
three lots to another person for P200,000.00. Indeed,
private respondent Veneracion received a call from a Mr.
Tecson verifying if he had the titles to the properties, as
private respondents De la Paz were offering to sell the two
lots along Maharlika Highway to him (Mr. Tecson) for
P180,000.00 The offer included the lot purchased by
petitioner in February, 1981. Private respondent
Veneracion offered to purchase the same two lots from the
De la razes for the same amount, The offer was accepted
by private respondents De la Paz. Accordingly, on June 2,
1983, a Deed of Absolute Sale was executed over the two
lots (Exh. I/Exh. 5-Veneracion).14 Sometime in January,
1984, private respondent Reynaldo Veneracion asked a
certain Renato Reyes, petitioner's neighbor, who the
owner of the building erected on the subject lot was.
Reyes told him that it was Feliza Martinez, petitioner's
mother, who was in possession of the property. Reynaldo
Veneracion told private respondent Godofredo about the
matter and was assured that Godofredo would talk to
Feliza. Based on that assurance, private respondents
Veneracion registered the lots with the Register of Deeds
of Cabanatuan on March 5, 1984. The lot in dispute was
registered under TCT No. T-44612 (Exh. L/Exh. 4Veneracion).15
Petitioner discovered that the lot he was occupying with
his family had been sold to the spouses Veneracion after
receiving a letter, (Exh. P/Exh. 6-Veneracion) from
private respondent Reynaldo Veneracion on March 19,
1986, claiming ownership of the land and demanding that
they vacate the property and remove their improvements
thereon.16 Petitioner, in turn, demanded through counsel
the execution of the deed of sale from private respondents
De la Paz and informed Reynaldo Veneracion that he was
the owner of the property as he had previously purchased
the same from private respondents De la Paz.17
The matter was then referred to the Katarungang
Pambarangay of San Juan, Cabanatuan City for
conciliation, but the parties failed to reach an agreement
(Exh. M/Exh. 13).18 As a consequence, on May 12, 1986,

private respondent Reynaldo Veneracion brought an

action for ejectment in the Municipal Trial Court, Branch
III, Cabanatuan City against petitioner and his mother
(Exh. 14).19
On the other hand, on June 10, 1986, petitioner caused a
notice of lis pendens to be recorded on TCT No. T-44612
with the Register of Deeds of Cabanatuan City (Exh. U).20
During the pre-trial conference, the parties agreed to have
the case decided under the Rules on Summary Procedure
and defined the issues as follows:
1. Whether of not defendant (now petitioner) may
be judicially ejected.
2. Whether or not the main issue in this case is
ownership.
3. Whether or not damages may be awarded.21
On January 29, 1987, the trial court rendered its decision,
pertinent portions of which are quoted as follows:
With the foregoing findings of the Court,
defendants [petitioner Rev. Fr. Dante Martinez
and his mother] are the rightful possessors and in
good faith and in concept of owner, thus cannot be
ejected from the land in question. Since the main
issue is ownership, the better remedy of the
plaintiff [herein private respondents Veneracion]
is Accion Publiciana in the Regional Trial Court,
having jurisdiction to adjudicate on ownership.
Defendants' counterclaim will not be acted upon it
being more than P20,000.00 is beyond this Court's
power to adjudge.
WHEREFORE, judgment is hereby rendered,
dismissing plaintiff's complaint and ordering
plaintiff to pay Attorney's fee of P5,000.00 and
cost of suit.
SO ORDERED.22
On March 3, 1987, private respondents Veneracion filed a
notice of appeal with the Regional Trial Court, but failed
to pay the docket fee. On June 6, 1989, or over two years
after the filing of the notice of appeal, petitioner filed a
Motion for Execution of the Judgment, alleging finality of
judgment for failure of private respondents Veneracion to
perfect their appeal and failure to prosecute the appeal for
an unreasonable length of time.
Upon objection of private respondents Veneracion, the
trial court denied on June 28, 1989 the motion for
execution and ordered the records of the case to be
forwarded to the appropriate Regional Trial Court. On
July 11, 1989, petitioner appealed from this order. The
appeal of private respondents Veneracion from the
decision of the MTC and the appeal of petitioner from the
order denying petitioner's motion for execution were
forwarded to the Regional Trial Court, Branch 28,
Cabanatuan City. The cases were thereafter consolidated
under Civil Case No. 670-AF.

On February 20, 1991, the Regional Trial Court rendered

its decision finding private respondents Veneracion as the
true owners of the lot in dispute by virtue of their prior
registration with the Register of Deeds, subject to
petitioner's rights as builder in good faith, and ordering
petitioner and his privies to Vacate the lot after receipt of
the cost of the construction of the house, as well as to pay
the sum of P5,000.00 as attorney's fees and the costs of the
suit. It, however, failed to rule on petitioner's appeal of the
Municipal Trial Court's order denying their Motion for
Execution of Judgment.
Meanwhile, on May 30, 1986, while the ejectment case
was pending before the Municipal Trial Court, petitioner
Martinez filed a complaint for annulment of sale with
damages against the Veneracions and De la Pazes with the
Regional Trial Court, Branch 25, Cabanatuan City. On
March 5, 1990, the trial court rendered its decision finding
private respondents Veneracion owners of the land in
dispute, subject to the rights of petitioner as a builder in
good faith, and ordering private respondents De la Paz to
pay petitioner the sum of P50,000.00 as moral damages
and P10,000.00 as attorney's fees, and for private
respondents to pay the costs of the suit.
On March 20, 1991, petitioner then filed a petition for
review with the Court of Appeals of the RTC's decision in
Civil Case No. 670-AF (for ejectment). Likewise, on April
2, 1991, petitioner appealed the trial court's decision in
Civil Case No. 44-[AF]-8642-R (for annulment of sale
and damages) to the Court of Appeals. The cases were
designated as CA G.R. SP. No. 24477 and CA G.R. CY
No. 27791, respectively, and were subsequently
consolidated. The Court of Appeals affirmed the trial
courts' decisions, without ruling on petitioner's appeal
from the Municipal Trial Court's order denying his Motion
for Execution of Judgment. It declared the Veneracions to
be owners of the lot in dispute as they were the first
registrants in good faith, in accordance with Art. 1544 of
the Civil Code. Petitioner Martinez failed to overcome the
presumption of good faith for the following reasons:
1. when private respondent Veneracion discovered
the construction on the lot, he immediately
informed private respondent Godofredo about it
and relied on the latter's assurance that he will
take care of the matter.
2. the sale between petitioner Martinez and private
respondents De la Paz was not notarized, as
required by Arts. 1357 and 1358 of the Civil
Code, thus it cannot be said that the private
respondents Veneracion had knowledge of the
first sale.23
Petitioner's motion for reconsideration was likewise
denied in a resolution dated January 31, 1996.24 Hence this
petition for review. Petitioner raises the following
assignment of errors:
I THE PUBLIC RESPONDENTS HONORABLE
COURT OF APPEALS AND REGIONAL
TRIAL
COURT
JUDGES
JOHNSON
BALLUTAY AND ADRIANO TUAZON
ERRED IN HOLDING THAT PRIVATE
RESPONDENTS REYNALDO VENERACION
AND
WIFE
ARE
BUYERS
AND

REGISTRANTS IN GOOD FAITH IN

RESOLVING THE ISSUE OF OWNERSHIP
AND POSSESSION OF THE LAND IN
DISPUTE.
II THAT PUBLIC RESPONDENTS ERRED IN
NOT RESOLVING AND DECIDING THE
APPLICABILITY OF THE DECISION OF THIS
HONORABLE COURT IN THE CASES OF
SALVORO VS. TANEGA, ET AL., G. R. NO. L
32988 AND IN ARCENAS VS. DEL ROSARIO,
67 PHIL 238, BY TOTALLY IGNORING THE
SAID DECISIONS OF THIS HONORABLE
COURT IN THE ASSAILED DECISIONS OF
THE PUBLIC RESPONDENTS.
III THAT THE HONORABLE COURT OF
APPEALS ERRED IN NOT GIVING DUE
COURSE TO THE PETITION FOR REVIEW IN
CA G. R. SP. NO. 24477.
IV THAT THE HONORABLE COURT OF
APPEALS IN DENYING PETITIONER'S
PETITION FOR REVIEW AFORECITED
INEVITABLY
SANCTIONED
AND/OR
WOULD ALLOW A VIOLATION OF LAW
AND DEPARTURE FROM THE USUAL
COURSE OF JUDICIAL PROCEEDINGS BY
PUBLIC RESPONDENT HONORABLE JUDGE
ADRIANO TUAZON WHEN THE LATTER
RENDERED A DECISION IN CIVIL CASE NO.
670-AF [ANNEX "D"] REVERSING THE
DECISION OF THE MUNICIPAL TRIAL
COURT JUDGE SENDON DELIZO IN CIVIL
CASE NO. 9523 [ANNEX "C"] AND IN NOT
RESOLVING IN THE SAME CASE THE
APPEAL INTERPOSED BY DEFENDANTS ON
THE ORDER OF THE SAME COURT
DENYING THE MOTION FOR EXECUTION.
V THAT THE RESOLUTION [ANNEX "B"]
(OF THE COURT OF APPEALS) DENYING
PETITIONER'S
MOTION
FOR
RECONSIDERATION [ANNEX "1"] WITHOUT
STATING CLEARLY THE FACTS AND THE
LAW ON WHICH SAID RESOLUTION WAS
BASED, (IS ERRONEOUS).
These assignment of errors raise the following issues:
1. Whether or not private respondents Veneracion
are buyers in good faith of the lot in dispute as to
make them the absolute owners thereof in
accordance with Art. 1544 of the Civil Code on
double sale of immovable property.
2. Whether or not payment of the appellate docket
fee within the period to appeal is not necessary for
the perfection of the appeal after a notice of
appeal has been filed within such period.
3. Whether or not the resolution of the Court of
Appeals denying petitioner's motion for
reconsideration is contrary to the constitutional
requirement that a denial of a motion for
reconsideration must state the legal reasons on
which it is based.

First. It is apparent from the first and second assignment

of errors that petitioner is assailing the findings of fact and
the appreciation of the evidence made by the trial courts
and later affirmed by the respondent court. While, as a
general rule, only questions of law may be raised in a
petition for review under Rule 45 of the Rules of Court,
review may nevertheless be granted under certain
exceptions, namely: (a) when the conclusion is a finding
grounded entirely on speculation, surmises, or conjectures;
(b) when the inference made is manifestly mistaken,
absurd, or impossible; (c) where there is a grave abuse of
discretion; (d) when the judgment is based on a
misapprehension of facts; (e) when the findings of fact are
conflicting; (f) when the Court of Appeals, in making its
findings, went beyond the issue of the case and the same is
contrary to the admissions of both appellant and appellee;
(g) when the findings of the Court of Appeals are contrary
to those of the trial court; (h) when the findings of fact are
conclusions without citation of specific evidence on which
they are based; (I) when the facts set forth in the petition
as well as in the petitioner's main and reply briefs are not
disputed by the respondents; (j) when the finding of fact of
the Court of Appeals is premised on the supposed absence
of evidence but is contradicted by the evidence on record;
and (k) when the Court of Appeals manifestly overlooked
certain relevant facts not disputed by the parties and
which, if properly considered, would justify a different
conclusion.25
In this case, the Court of Appeals based its ruling that
private respondents Veneracion are the owners of the
disputed lot on their reliance on private respondent
Godofredo De la Paz's assurance that he would take care
of the matter concerning petitioner's occupancy of the
disputed lot as constituting good faith. This case, however,
involves double sale and, on this matter, Art. 1544 of the
Civil Code provides that where immovable property is the
subject of a double sale, ownership shall be transferred (1)
to the person acquiring it who in good faith first recorded
it to 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.26 The requirement of the law, where title to the
property is recorded in the Register of Deeds, is two-fold:
acquisition in good faith and recording in good faith. To
be entitled to priority, the second purchaser must not only
prove prior recording of his title but that he acted in good
faith, i.e., without knowledge or notice of a prior sale to
another. The presence of good faith should be ascertained
from the circumstances surrounding the purchase of the
land.27
1. With regard to the first sale to private respondents
Veneracion, private respondent Reynaldo Veneracion
testified that on October 10, 1981, 18 days before the
execution of the first Deed of Sale with Right to
Repurchase, he inspected the premises and found it
vacant.28 However, this is belied by the testimony of Engr.
Felix D. Minor, then building inspector of the Department
of Public Works and Highways, that he conducted on
October 6, 1981 an ocular inspection of the lot in dispute
in the performance of his duties as a building inspector to
monitor the progress of the construction of the building
subject of the building permit issued in favor of petitioner
on April 23, 1981, and that he found it 100 % completed
(Exh. V).29 In the absence of contrary evidence, he is to be
presumed to have regularly performed his official
duty.30 Thus, as early as October, 1981, private

respondents Veneracion already knew that there was

construction being made on the property they purchased.
2. The Court of Appeals failed to determine the nature of
the first contract of sale between the private respondents
by considering their contemporaneous and subsequent
acts.31 More specifically, it overlooked the fact that the
first contract of sale between the private respondents
shows that it is in fact an equitable mortgage.
The requisites for considering a contract of sale with a
right of repurchase as an equitable mortgage are (1) that
the parties entered into a contract denominated as a
contract of sale and (2) that their intention was to secure
an existing debt by way of mortgage.32 A contract of sale
with right to repurchase gives rise to the presumption that
it is an equitable mortgage in any of the following cases:
(1) when the price of a sale with a 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 purchaser 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
secure the payment of a debt or the performance of any
other obligation.33 In case of doubt, a contract purporting
to be a sale with right to repurchase shall be construed as
an equitable mortgage.34
In this case, the following circumstances indicate that the
private respondents intended the transaction to be an
equitable mortgage and not a contract of sale: (1) Private
respondents Veneracion never took actual possession of
the three lots; (2) Private respondents De la Paz remained
in possession of the Melencio lot which was co-owned by
them and where they resided; (3) During the period
between the first sale and the second sale to private
respondents Veneracion, they never made any effort to
take possession of the properties; and (4) when the period
of redemption had expired and private respondents
Veneracion were informed by the De la Pazes that they are
offering the lots for sale to another person for
P200,000.00, they never objected. To the contrary, they
offered to purchase the two lots for P180,000.00 when
they found that a certain Mr. Tecson was prepared to
purchase it for the same amount. Thus, it is clear from
these circumstances that both private respondents never
intended the first sale to be a contract of sale, but merely
that of mortgage to secure a debt of P150,000.00.
With regard to the second sale, which is the true contract
of sale between the parties, it should be noted that this
Court in several cases,35 has ruled that a purchaser who is
aware of facts which should put a reasonable man upon
his guard cannot turn a blind eye and later claim that he
acted in good faith. Private respondent Reynaldo himself
admitted during the pre-trial conference in the MTC in
Civil Case No. 9523 (for ejectment) that petitioner was
already in possession of the property in dispute at the time
the second Deed of Sale was executed on June 1, 1983 and
registered on March 4, 1984. He, therefore, knew that
there were already occupants on the property as early as
1981. The fact that there are persons, other than the
vendors, in actual possession of the disputed lot should

have put private respondents on inquiry as to the nature of

petitioner's right over the property. But he never talked to
petitioner to verify the nature of his right. He merely
relied on the assurance of private respondent Godofredo
De la Paz, who was not even the owner of the lot in
question, that he would take care of the matter. This does
not meet the standard of good faith.
3. The appellate court's reliance on Arts. 1357 and 1358 of
the Civil Code to determine private respondents
Veneracion's lack of knowledge of petitioner's ownership
of the disputed lot is erroneous.
Art. 135736 and Art. 1358,37 in relation to Art. 1403(2)38 of
the Civil Code, requires that the sale of real property must
be in writing for it to be enforceable. It need not be
notarized. If the sale has not been put in writing, either of
the contracting parties can compel the other to observe
such requirement.39 This is what petitioner did when he
repeatedly demanded that a Deed of Absolute Sale be
executed in his favor by private respondents De la Paz.
There is nothing in the above provisions which require
that a contract of sale of realty must be executed in a
public document. In any event, it has been shown that
private respondents Veneracion had knowledge of facts
which would put them on inquiry as to the nature of
petitioner's occupancy of the disputed lot.
Second. Petitioner contends that the MTC in Civil Case
No. 9523 (for ejectment) erred in denying petitioner's
Motion for Execution of the Judgment, which the latter
filed on June 6, 1989, two years after private respondents
Veneracion filed a notice of appeal with the MTC on
March 3, 1987 without paying the appellate docket fee. He
avers that the trial court's denial of his motion is contrary
to this Court's ruling in the cases of Republic v. Director
of Lands,40 and Aranas v. Endona41 in which it was held
that where the appellate docket fee is not paid in full
within the reglementary period, the decision of the MTC
becomes final and unappealable as the payment of docket
fee is not only a mandatory but also a jurisdictional
requirement.
Petitioner's contention has no merit. The case
of Republic v. Director of Lands deals with the
requirement for appeals from the Courts of First Instance,
the Social Security Commission, and the Court of
Agrarian Relations to the Court of Appeals. The case
of Aranas v. Endona, on the other hand, was decided
under the 1964 Rules of Court and prior to the enactment
of the Judiciary Reorganization Act of 1981 (B. P. Blg.
129) and the issuance of its Interim Rules and Guidelines
by this Court on January 11, 1983. Hence, these cases are
not applicable to the matter at issue.1wphi1.nt
On the other hand, in Santos v. Court of Appeals,42 it was
held that although an appeal fee is required to be paid in
case of an appeal taken from the municipal trial court to
the regional trial court, it is not a prerequisite for the
perfection of an appeal under 2043 and 2344 of the
Interim Rules and Guidelines issued by this Court on
January 11, 1983 implementing the Judiciary
Reorganization Act of 1981 (B.P. Blg. 129). Under these
sections, there are only two requirements for the
perfection of an appeal, to wit: (a) the filing of a notice of
appeal within the reglementary period; and (b) the
expiration of the last day to appeal by any party. Even in

the procedure for appeal to the regional trial

courts,45 nothing is mentioned about the payment of
appellate docket fees.
Indeed, this Court has ruled that, in appealed cases, the
failure to pay the appellate docket fee does not
automatically result in the dismissal of the appeal, the
dismissal being discretionary on the part of the appellate
court.46 Thus, private respondents Veneracions' failure to
pay the appellate docket fee is not fatal to their appeal.
Third. Petitioner contends that the resolution of the Court
of Appeals denying his motion for reconsideration was
rendered in violation of the Constitution because it does
not state the legal basis thereof.
This contention is likewise without merit.
Art. VIII, Sec. 14 of the Constitution provides that "No
petition for review or motion for reconsideration of a
decision of the court shall be refused due course or denied
without stating the basis therefor." This requirement was
fully complied with when the Court of Appeals, in
denying. reconsideration of its decision, stated in its
resolution that it found no reason to change its ruling
because petitioner had not raised anything new.47 Thus, its
resolution denying petitioner's motion for reconsideration
states:
For resolution is the Motion for Reconsideration
of Our Decision filed by the petitioners.
Evidently, the motion poses nothing new. The
points and arguments raised by the movants have
been considered and passed upon in the Decision
sought to be reconsidered. Thus, We find no
reason to disturb the same.
WHEREFORE, the motion is hereby DENIED.
SO ORDERED.48
Attorney's. fees should be awarded as petitioner was
compelled to litigate to protect his interest due to private
respondents' act or omission.49
WHEREFORE, the decision of the Court of Appeals is
REVERSED and a new one is RENDERED:
(1) declaring as null and void the deed of sale
executed by private respondents Godofredo and
Manuela De la Paz in favor of private respondents
spouses Reynaldo and Susan Veneracion;
(2) ordering private respondents Godofredo and
Manuela De la Paz to execute a deed of absolute
sale in favor of petitioner Rev. Fr. Dante
Martinez;
(3) ordering private respondents Godofredo and
Manuela De la Paz to reimburse private
respondents spouses Veneracion the amount the
latter may have paid to the former;
(4) ordering the Register of Deeds of Cabanatuan
City to cancel TCT No. T-44612 and issue a new

one in the name of petitioner Rev. Fr. Dante

Martinez; and
(5) ordering private respondents to pay petitioner
jointly and severally the sum of P20,000.00 as
attorney's fees and to pay the costs of the suit.

BIENVENIDO C. TEOCO and JUAN C. TEOCO,

JR., petitioners,
vs.
METROPOLITAN
BANK
AND
TRUST
COMPANY, respondent.
DECISION
REYES, R.T., J.:
REAL creditors are rarely unwilling to receive their debts
from any hand which will pay them.1 Ang tunay na may
pautang ay bihirang tumanggi sa kabayaran mula
kaninuman.
This is a petition for review on certiorari seeking the
reversal of the Decision2 of the Court of Appeals (CA) in
CA-G.R. CV No. 58891 dated February 20, 2004 which
annulled and set aside the decision of the Regional Trial
Court (RTC) of Catbalogan, Samar on July 22, 1997 in
Cadastral Record No. 1378. The RTC originally dismissed
the petition for writ of possession filed by respondent
Metropolitan Bank and Trust Company (Metrobank) on
the ground that intervenors and present petitioners, the
brothers Bienvenido Teoco and Juan Teoco, Jr. (the
brothers Teoco), have redeemed the subject property. The
CA reversed this dismissal and ordered the issuance of a
writ of possession in favor of respondent Metrobank.
Culled from the records, the facts are as follows:
Lydia T. Co, married to Ramon Co, was the registered
owner of two parcels of land situated in Poblacion,
Municipality of Catbalogan, Province of Samar under
Transfer Certificate of Title (TCT) Nos. T-6220 and T6910.3Ramon Co mortgaged the said parcels of land to
Metrobank for a sum of P200,000.00.
On February 14, 1991, the properties were sold to
Metrobank in an extrajudicial foreclosure sale under Act
No. 3135. One year after the registration of the
Certificates of Sale, the titles to the properties were
consolidated in the name of Metrobank for failure of
Ramon Co to redeem the same within the one year period
provided for by law. TCT Nos. T-6220 and T-6910 were
cancelled and TCT Nos. T-8482 and T-8493 were issued
in the name of Metrobank.
On November 29, 1993, Metrobank filed a petition for the
issuance of a writ of possession against Ramon Co and
Lydia Co (the spouses Co). However, since the spouses
Co were no longer residing in the Philippines at the time
the petition was filed, the trial court ordered Metrobank,
on January 12, 1994 and again on January 26, 1994 to
effect summons by publication against the spouses Co.
On May 17, 1994, the brothers Teoco filed an answer-inintervention alleging that they are the successors-ininterest of the spouses Co, and that they had duly and
validly redeemed the subject properties within the
reglementary period provided by law. The brothers Teoco
thus prayed for the dismissal of Metrobanks petition for a
writ of possession, and for the nullification of the TCTs
issued in the name of Metrobank. The brothers Teoco
further prayed for the issuance in their name of new
certificates of title.

Metrobank, in its reply, alleged that the amount deposited

by the brothers Teoco as redemption price was not
sufficient, not being in accordance with Section 78 of the
General Banking Act. Metrobank also said the assignment
of the right of redemption by the spouses Co in favor of
the brothers Teoco was not properly executed, as it lacks
the necessary authentication from the Philippine Embassy.

the subject properties from Metrobank. This redemption

amount is a fair and reasonable price and is in keeping
with the letter and spirit of Section 78 of the General
Banking Act because Metrobank purchased the mortgaged
properties from the sheriff of the same court for
onlyP316,916.29. In debunking the argument that the
amount tendered was insufficient, the RTC held:

On February 24, 1995, the trial court was informed that

the brothers Teoco had deposited the amount
ofP356,297.57 to the clerk of court of the RTC in
Catbalogan, Samar. The trial court ordered Metrobank to
disclose whether it is allowing the brothers Teoco to
redeem the subject properties. Metrobank refused to
accept the amount deposited by the brothers Teoco,
alleging that they are obligated to pay the spouses Cos
subsequent obligations to Metrobank as well. The brothers
Teoco claimed that they are not bound to pay all the
obligations of the spouses Co, but only the value of the
property sold during the public auction.

It is contended for Metrobank that the redemption

money deposited by Juan C. Teoco, Jr., is
insufficient and ineffective because the spouses
Ramon Co and Lydia T. Co owe it the total
amount of P6,856,125 excluding interest and other
charges and the mortgage contract executed by
them in favor of Metrobank in 1985 and 1986
(Exh. A and B) are not only security for payment
of their obligation in the amount ofP200,000 but
also for those obligations that may have been
previously and later extended to the Co couple
including interest and other charges as appears in
the accounts, books and records of the bank.

On February 26, 1997, the trial court reiterated its earlier

order directing Metrobank to effect summons by
publication to the spouses Co. Metrobank complied with
said order by submitting documents showing that it caused
the publication of summons against the spouses Co. The
brothers Teoco challenged this summons by publication,
arguing that the newspaper where the summons by
publication was published, the Samar Reporter, was not a
newspaper of general circulation in the Philippines. The
brothers Teoco furthermore argued that Metrobank did not
present witnesses to identify the documents to prove
summons by publication.
RTC Disposition
On July 22, 1997, the RTC rendered its decision in favor
of the brothers Teoco, to wit:
WHEREFORE, judgment is hereby rendered
dismissing the petition for a writ of possession
under Section 7 of Act 3135 it appearing that
intervenor Atty. Juan C. Teoco, Jr. and his brother
Atty. Bienvenido C. Teoco have legally and
effectively redeemed Lot 61 and 67 of Psd-66654,
Catbalogan, Cadastre, from the petitioner
Metropolitan Bank and Trust Company.
Accordingly, Metrobank may now withdraw the
aforesaid redemption money of P356,297.57
deposited by Juan C. Teoco, Jr., on February 10,
1992 with the clerk of court and it is ordered that
the Transfer Certificate of Title Nos. T-8492 and
T-8493 of Metropolitan Bank and Trust Company
be and are cancelled and in their place new
transfer certificates of title be issued in favor of
Intervenors Attys. Bienvenido C. Teoco and Juan
C. Teoco, Jr., of legal age, married, and residents
of Calbiga, Samar, Philippines, upon payment of
the prescribed fees therefore. No pronouncement
as to costs.4
According to the RTC, the case filed by Metrobank should
be dismissed since intervenor Juan C. Teoco, Jr., by his
tender of P356,297.57 to Metrobank on February 10,
1992, within the reglementary period of redemption of the
foreclosed property, had legally and effectively redeemed

Metrobank cites the case of Mojica v. Court of

Appeals, 201 SCRA 517 (1991) where the
Supreme Court held that mortgages given to
secure future advancements are valid and legal
contracts; that the amounts named as
consideration in said contract do not limit the
amount for which the mortgage may stand as
security; that a mortgage given to secure the
advancements is a continuing security and is not
discharged by repayment of the amount named in
the mortgage until the full amount of the
advancements are paid. In the opinion of this
court, it is not fair and just to apply this rule to the
case at bar. There is no evidence offered by
Metrobank that these other obligations of Ramon
Co and his wife were not secured by real estate
mortgages of other lands. If the other indebtedness
of the Co couple to Metrobank are secured by a
mortgage on their other lands or properties the
obligation can be enforced by foreclosure which
the court assumes Metrobank has already done.
There is no proof that Metrobank asked for a
deficiency judgment for these unpaid loans.
The Supreme Court in the Mojica case was
dealing with the rights of the mortgagee under a
mortgage from an owner of the land. It
determined the security covered by the mortgage
the intention of the parties and the equities of the
case. What was held in that case was hedged
about so as to limit the decision to the particular
facts. It must be apparent that the Mojica ruling
cannot be construed to give countenance or
approval to the theory that in all cases without
exception mortgages given to secure past and
future advancements are valid and legal contracts.
In construing a contract between the bank and a
borrower such a construction as would be more
favorable to the borrower should be adopted since
the alleged past and future indebtedness of Ramon
Co to the bank was not described and specified
therein and that the addendum was made because
the mortgage given therefore were not sufficient
or that these past and future advancements were

unsecured. That being the case the mortgage

contracts, Exh. A and B should be interpreted
against Metrobank which drew said contracts. A
written contract should, in case of doubt, be
interpreted against the party who has drawn the
contract (6 R.C.L. 854; H.E. Heackock Co. vs.
Macondray & Co., 42 Phil. 205). Here, the
mortgage contracts are in printed form prepared
by Metrobank and therefore ambiguities therein
should be construed against the party causing it
(Yatco vs. El Hogar Filipino, 67 Phil. 610;
Hodges vs. Tazaro, CA, 57 O.G. 6970).5
The RTC added that there is another reason for dismissing
Metrobanks petition: the RTC failed to acquire
jurisdiction over the spouses Co. The RTC noted that
Metrobank published its petition for writ of possession,
but did not publish the writ of summons issued by said
court on February 16, 1994. According to the RTC:
A petition for a writ of possession of foreclosed
property is in reality a possession suit. That
Metrobank prayed for a writ of possession in an
independent special proceeding does not alter the
nature of the case as a possessory suit (Cabrera v.
Sinoy, L.-12648, 23 November 1959).
The defendant or owner of the property foreclosed
by the petitioner should be summoned to answer
the petition. Accordingly, the publication made by
the petitioner is fatally flawed and defective and
on that basis alone this court acquired no
jurisdiction over the person of respondents Ramon
Co and his wife (Mapa vs. Court of Appeals, G.R.
No. 79394, October 2, 1992; Lopez vs. Philippine
National Bank, L-34223, December 10, 1982).6
Metrobank appealed to the CA. In its appeal, Metrobank
claimed that the RTC erred in finding that the publication
made by it is fatally flawed, and that the brothers Teoco
had effectively redeemed the properties in question.

the best proof of ownership of the parcel of land is a

certificate of title.8
The CA also held that the issue of the validity of summons
to the spouses Co is unimportant considering that the
properties in question were mortgaged to Metrobank and
were subsequently sold to the same bank after the spouses
Co failed to satisfy the principal obligation. Hence, the
applicable law is Act No. 3135,9 as amended by Act No.
4118. Section 7 of said Act No. 3135 states that a petition
for the issuance of a writ of possession filed by the
purchaser of a property in an extrajudicial foreclosure sale
may be done ex parte. It is the ministerial duty of the trial
court to grant such writ of possession. No discretion is left
to the trial court. Any question regarding the cancellation
of the writ, or with respect to the validity and regularity of
the public sale should be determined in a subsequent
proceeding as outlined in Section 9 of Act No. 3135.10
Further, the CA held that the brothers Teoco were not able
to effectively redeem the subject properties, because the
amount tendered was insufficient, and the brothers Teoco
have not sufficiently shown that the spouses Cos right of
redemption was properly transferred to them.
Issues
In this Rule 45 petition, the brothers Teoco impute to the
CA the following errors:
I
THE HONORABLE COURT OF APPEALS
COMMITTED
SERIOUS
ERROR
OF
JUDGMENT IN
HOLDING
THAT
PETITIONERS FAILED TO REDEEM THE
SUBJECT
PROPERTIES
WITHIN
THE
REGLEMENTARY PERIOD OF ONE YEAR
AND THAT THE REDEMPTION PRICE
TENDERED IS INSUFFICIENT.
II

CA Disposition
On February 20, 2004, the CA decided the appeal in favor
of Metrobank, with the following disposition:
WHEREFORE, the appeal is hereby GRANTED.
The assailed Decision dated July 22, 1997
rendered by the Regional Trial Court of
Catbalogan, Samar Branch 29 in Cadastral Record
No. 1378 is hereby ANNULLED and SET
ASIDE. Accordingly, let a writ of possession in
favor of petitioner-appellant METROPOLITAN
BANK AND TRUST COMPANY be issued over
the properties and improvements covered by
Transfer Certificates of Title Nos. T-8492 and T8493 of the Registry of Deeds of Western Samar.
SO ORDERED.7
As regards the question of jurisdiction, the CA ruled that
since the parcels of land in question were already
registered in the name of Metrobank at the time the
petition was filed, and since the certificates of title of the
spouses Co were already cancelled, there is no more need
to issue summons to the spouses Co. The CA noted that

THE HONORABLE COURT OF APPEALS

COMMITTED
SERIOUS
ERROR
OF
JUDGMENT IN HOLDING PETITIONERS TO
PAY NOT ONLY THE P200,000 PRINCIPAL
OBLIGATION
BUT
ALSO
THAT
PREVIOUSLY
EXTENDED,
WHETHER
DIRECT OR INDIRECT, PRINCIPAL OR
SECONDARY AS APPEARS IN THE
ACCOUNTS, BOOKS AND RECORDS.
III
THE HONORABLE COURT OF APPEALS
ERRED IN
HOLDING
THAT
THE
PETITIONERS HAVE NOT SUFFICIENTLY
SHOW(N)
THAT
THE
RIGHT
OF
REDEMPTION
WAS
PROPERLY
TRANSFERRED TO THEM.
IV
THE HONORABLE COURT OF APPEALS
ERRED IN REVERSING THE DECISION OF
THE REGIONAL TRIAL COURT, BRANCH

29, AND GRANTING THE WRIT OF

POSSESSION
TO
THE
RESPONDENT.11(Underscoring supplied)
Our Ruling
Sufficiency of Amount Tendered
We find that neither petitioners, the brothers Teoco, nor
respondent, Metrobank, were able to present sufficient
evidence to prove whether the additional loans granted to
the spouses Co by Metrobank were covered by the
mortgage agreement between them. The brothers Teoco
failed to present any evidence of the supposed trust receipt
agreement between Metrobank and the spouses Co, or an
evidence of the supposed payment by the spouses Co of
the other loans extended by Metrobank. Metrobank, on the
other hand, merely relied on the stipulation on the
mortgage deed that the mortgage was intended to secure
"the payment of the same (P200,000.00 loan) and those
that may hereafter be obtained."12 However, there was no
mention whatsoever of the mortgage agreement in the
succeeding loans entered into by the spouses Co.
While we agree with Metrobank that mortgages intended
to secure future advancements are valid and legal
contracts,13 entering into such mortgage contracts does not
necessarily put within its coverage all loan agreements
that may be subsequently entered into by the parties. If
Metrobank wishes to apply the mortgage contract in order
to satisfy loan obligations not stated on the face of such
contract, Metrobank should prove by a preponderance of
evidence that such subsequent obligations are secured by
said mortgage contract and not by any other form of
security.

the property which said third person possesses, in

the terms and with the formalities which the law
establishes.
The mortgage directly and immediately subjects the
property upon which it is imposed, whoever the possessor
may be to the fulfillment of the obligation for whose
security it was constituted. Otherwise stated, a mortgage
creates a real right which is enforceable against the whole
world. Hence, even if the mortgage property is sold or its
possession transferred to another, the property remains
subject to the fulfillment of the obligation for whose
security it was constituted.14
Thus, the redemption by the brothers Teoco shall be
without prejudice to the subsequent foreclosure of same
properties by Metrobank in order to satisfy other
obligations covered by the Real Estate Mortgage.
Transfer of Right of Redemption
The CA held that the brothers Teoco have not sufficiently
shown that the spouses Cos right of redemption was
properly transferred to them. The assignment of the right
of redemption only stated that the spouses Co are
transferring the right of redemption to their parents,
brothers, and sisters, but did not specifically include the
brothers Teoco, who are just brothers-in-law of Ramon
Co. Furthermore, the spouses Co no longer reside in the
Philippines, and the assignment of the right of redemption
was not properly executed and/or authenticated.
The alleged transfer of the right of redemption is couched
in the following language:
KNOW ALL MEN BY THESE PRESENTS:

In order to prevent any injustice to, or unjust enrichment

of, any of the parties, this Court holds that the fairest
resolution is to allow the brothers Teoco to redeem the
foreclosed properties based on the amount for which it
was foreclosed (P255,441.14 plus interest). This is
subject, however, to the right of Metrobank to foreclose
the same property anew in order to satisfy the succeeding
loans entered into by the spouses Co, if they were, indeed,
covered by the mortgage contract. The right of Metrobank
to foreclose the mortgage would not be hampered by the
transfer of the properties to the brothers Teoco as a result
of this decision, since Article 2127 of the Civil Code
provides:
Art. 2127. The mortgage extends to the natural
accessions, to the improvements, growing fruits,
and the rents or income not yet received when the
obligation becomes due, and to the amount of the
indemnity granted or owing to the proprietor from
the insurers of the property mortgaged, or in
virtue of expropriation for public use, with the
declarations, amplifications and limitations
established by law, whether the estate remains in
the possession of the mortgagor, or it passes into
the hands of a third person. (Emphasis supplied)
Further, Article 2129 of the Civil Code provides:
Art. 2129. The creditor may claim from a third
person in possession of the mortgaged property,
the payment of the part of the credit secured by

That we, RAMON CO and LYDIA CO,

of legal ages, for and in consideration of
preserving the continuous ownership and
possession of family owned properties, by
these presents, hereby cede, transfer and
convey in favor of my parents, brothers
and sisters, the right to redeem the
properties under TCT Nos. T-6910 and T6220, located in Patag district,
Catbalogan, Samar, sold by public auction
sale on February 14, 1991 to the
Metropolitan Bank and Trust Company.
Furthermore, we waived whatever rights
we may have over the properties in favor
of the successor-in-interest including that
of transferring the title to whoever may
redeem the aforesaid properties.
IN WITNESS WHEREOF, we have hereunto
affixed our signatures this 10th day of January,
1992 at Vancouver, Canada.15
The brothers Teoco may be brothers-in-law only of
Ramon Co, but they are also the brothers of Lydia Teoco
Co, who is actually the registered owner of the properties
covered by TCT Nos. T-6910 and T-6220. Clearly, the
brothers Teoco are two of the persons referred to in the
above transfer of the right of redemption executed by the
spouses Co.

Anent the CA observation that the assignment of the right

of redemption was not properly executed and/or
authenticated, Lopez v. Court of Appeals16 is instructive.
In Lopez, this Court ruled that a special power of attorney
executed in a foreign country is generally not admissible
in evidence as a public document in our courts. The Court
there held:
Is the special power of attorney relied upon by
Mrs. Ty a public document? We find that it is. It
has been notarized by a notary public or by a
competent public official with all the solemnities
required by law of a public document. When
executed and acknowledged in the Philippines,
such a public document or a certified true copy
thereof is admissible in evidence. Its due
execution and authentication need not be proven
unlike a private writing.
Section 25, Rule 132 of the Rules of Court
provides
Sec. 25. Proof of public or official record.
An official record or an entry therein,
when admissible for any purpose, may be
evidenced by an official publication
thereof or by a copy attested by the officer
having the legal custody of the record, or
by his deputy, and accompanied, if the
record is not kept in the Philippines, with
a certificate that such officer has the
custody. If the office in which the record
is kept is in a foreign country, the
certificate may be made by a secretary of
embassy or legation consul general,
consul, vice consul, or consular agent or
by any officer in the foreign service of the
Philippines stationed in the foreign
country in which the record is kept, and
authenticated by the seal of his office.
From the foregoing provision, when the special
power of attorney is executed and acknowledged
before a notary public or other competent official
in a foreign country, it cannot be admitted in
evidence unless it is certified as such in
accordance with the foregoing provision of the
rules by a secretary of embassy or legation, consul
general, consul, vice consul, or consular agent or
by any officer in the foreign service of the
Philippines stationed in the foreign country in
which the record is kept of said public document
and authenticated by the seal of his office. A city
judge-notary who notarized the document, as in
this case, cannot issue such certification.17
Verily, the assignment of right of redemption is not
admissible in evidence as a public document in our courts.
However, this does not necessarily mean that such
document has no probative value.
There are generally three reasons for the necessity of the
presentation of public documents. First, public documents
are prima facie evidence of the facts stated in them, as
provided for in Section 23, Rule 132 of the Rules of
Court:

SEC. 23. Public documents as evidence.

Documents consisting of entries in public records
made in the performance of a duty by a public
officer are prima facie evidence of the facts
therein stated. All other public documents are
evidence, even against a third person, of the fact
which gave rise to their execution and of the date
of the latter. (Underscoring supplied)
Second, the presentation of a public document dispenses
with the need to prove a documents due execution and
authenticity, which is required under Section 20, Rule 132
of the Rules of Court for the admissibility of private
documents offered as authentic:
SEC. 20. Proof of private document. Before any
private document offered as authentic is received
in evidence, its due execution and authenticity
must be proved either:
(a) By anyone who saw the document
executed or written; or
(b) By evidence of the genuineness of the
signature or handwriting of the maker.
Any other private document need only be
identified as that which it is claimed to be.
(Underscoring supplied)
In the presentation of public documents as evidence, on
the other hand, due execution and authenticity are already
presumed:
SEC. 23. Public documents are evidence.
Documents consisting of entries in public records
made in the performance of a duty by a public
officer are prima facie evidence of the facts
therein stated. All other public documents are
evidence, even against a third person, of the fact
which gave rise to their execution and of the date
of the latter. (Underscoring supplied)
SEC. 30. Proof of notarial documents. Every
instrument duly acknowledged or proved and
certified as provided by law, may be presented in
evidence without further proof, the certificate of
acknowledgment being prima facie evidence of
the execution of the instrument or document
involved. (Underscoring supplied)
Third, the law may require that certain transactions appear
in public instruments, such as Articles 1358 and 1625 of
the Civil Code, which respectively provide:
Art. 1358. The following must appear in a public
document:
(1) Acts and contracts which have for their object
the creation, transmission, modification or
extinguishment of real rights over immovable
property; sales of real property or of an interest
therein governed by Articles 1403, No. 2, and
1405;

(2) The cession, repudiation or renunciation of

hereditary rights or of those of the conjugal
partnership of gains;

perfected. This right may be exercised

simultaneously with the action upon the
contract."21

(3) The power to administer property, or any other

power which has for its object an act appearing or
which should appear in a public document, or
should prejudice a third person;

On the other hand, Article 1625 of the Civil Code

provides that "[a]n assignment of a credit, right or
action shall produce no effect as against third person,
unless it appears in a public instrument, or the instrument
is recorded in the Registry of Property in case the
assignment involves real property."

(4) The cession of actions or rights proceeding

from an act appearing in a public document.
All other contracts where the amount involved
exceeds five hundred pesos must appear in
writing, even a private one. But sales of goods,
chattels or things in action are governed by
Articles 1403, No. 2, and 1405.
Art. 1625. An assignment of a credit, right or
action shall produce no effect as against third
person, unless it appears in a public instrument, or
the instrument is recorded in the Registry of
Property in case the assignment involves real
property. (Underscoring supplied)
Would the exercise by the brothers Teoco of the right to
redeem the properties in question be precluded by the fact
that the assignment of right of redemption was not
contained in a public document? We rule in the negative.
Metrobank never challenged either the content, the due
execution, or the genuineness of the assignment of the
right of redemption. Consequently, Metrobank is deemed
to have admitted the same. Having impliedly admitted the
content of the assignment of the right of redemption, there
is no necessity for a prima facie evidence of the facts there
stated. In the same manner, since Metrobank has impliedly
admitted the due execution and genuineness of the
assignment of the right of redemption, a private document
evidencing the same is admissible in evidence.18
True it is that the Civil Code requires certain transactions
to appear in public documents. However, the necessity of
a public document for contracts which transmit or
extinguish real rights over immovable property, as
mandated by Article 1358 of the Civil Code, is only
for convenience; it is not essential for validity or
enforceability.19 Thus, in Cenido v. Apacionado,20 this
Court ruled that the only effect of noncompliance with the
provisions of Article 1358 of the Civil Code is that a party
to such a contract embodied in a private document may be
compelled to execute a public document:
Article 1358 does not require the accomplishment
of the acts or contracts in a public instrument in
order to validate the act or contract but only to
insure its efficacy, so that after the existence of
said contract has been admitted, the party bound
may be compelled to execute the proper
document. This is clear from Article 1357, viz.:
"Art. 1357. If the law requires a document
or other special form, as in the acts and
contracts enumerated in the following
article (Article 1358), the contracting
parties may compel each other to observe
that form, once the contract has been

In Co v. Philippine National Bank,22 the Court interpreted

the phrase "effect as against a third person" to bedamage
or prejudice to such third person, thus:
x x x In Lichauco vs. Olegario, et al., 43 Phil.
540, this Court held that "whether or not x x x an
execution debtor was legally authorized to sell his
right of redemption, is a question already decided
by this Court in the affirmative in numerous
decisions on the precepts of Sections 463 and 464
and other sections related thereto, of the Code of
Civil Procedure." (The mentioned provisions are
carried over in Rule 39 of the Revised Rules of
Court.) That the transfers or conveyances in
question were not registered is of miniscule
significance, there being no showing that PNB
was damaged or could be damaged by such
omission. When CITADEL made its tender on
May 5, 1976, PNB did not question the
personality of CITADEL at all. It is now too late
and purely technical to raise such innocuous
failure to comply with Article 1625 of the Civil
Code.23
In Ansaldo v. Court of Appeals,24 the Court held:
In its Decision, the First Division of the Appellate
Tribunal, speaking through the Presiding Justice
at the time, Hon. Magno S. Gatmaitan, held as
regards Arnaldos contentions, that
xxxx
2) there was no need that the assignment
be in a public document this being
required only "to produce x x x effect as
against third persons" (Article 1625, Civil
Code), i.e., "to adversely affect 3rd
persons," i.e., "a 3rd person with a right
against original creditor, for example, an
original creditor of creditor, against
whom surely such an assignment by his
debtor (creditor in the credit assigned)
would be prejudicial, because he, creditor
of assigning creditor, would thus be
deprived of an attachable asset of his
debtor x x x;
xxxx
Except for the question of the claimed lack of
authority on the part of TFCs president to execute
the assignment of credit in favor of PCIB
improperly raised for the first time on appeal, as
observed by the Court of Appeals the issues
raised by Ansaldo were set up by him in, and after

analysis and assessment rejected by, both the Trial

Court and the Appellate Tribunal. This court sees
no error whatever in the appreciation of the facts
by either Court or their application of the relevant
law and jurisprudence to those facts, inclusive of
the question posed anew by Ansaldo relative to
the alleged absence of authority on the part of
TFCs president to assign the corporations credit
to PCIB.25

PROCESO
QUIROS
and
LEONARDA
VILLEGAS, petitioners,
vs.
MARCELO ARJONA, TERESITA BALARBAR,
JOSEPHINE
ARJONA,
and
CONCHITA
ARJONA, respondents.
DECISION
YNARES-SANTIAGO, J.:

In the case at bar, Metrobank would not be prejudiced by

the assignment by the spouses Co of their right of
redemption in favor of the brothers Teoco. As conceded
by Metrobank, the assignees, the brothers Teoco, would
merely step into the shoes of the assignors, the spouses
Co. The brothers Teoco would have to comply with all the
requirements imposed by law on the spouses Co.
Metrobank would not lose any security for the satisfaction
of any loan obtained from it by the spouses Co. In fact, the
assignment would even prove to be beneficial to
Metrobank, as it can foreclose on the subject properties
anew, provided it proves that the subsequent loans entered
into by the spouses Co are covered by the mortgage
contract.
WHEREFORE, the decision of the Court of Appeals
is SET ASIDE. The decision of the Regional Trial Court
in Catbalogan, Samar is REINSTATED with the
following MODIFICATION:
the
redemption by
Bienvenido C. Teoco and Juan C. Teoco, Jr. of the
properties covered by TCT Nos. T-6910 and T-6220 shall
be without prejudice to the subsequent foreclosure of same
properties by Metropolitan Bank and Trust Company to
satisfy other loans covered by the Real Estate Mortgage.

Assailed in this petition for review is the decision of the

Court
of
Appeals
in
an
action
for
the
execution/enforcement of amicable settlement between
petitioners Proceso Quiros and Leonarda Villegas and
respondent Marcelo Arjona. Appellate court reversed the
decision of the Regional Trial Court of Dagupan CityBranch 44 and reinstated the decision of the Municipal
Trial Court of San Fabian-San Jacinto, Pangasinan.
On December 19, 1996, petitioners Proceso Quiros and
Leonarda Villegas filed with the office of the barangay
captain of Labney, San Jacinto, Pangasinan, a complaint
for recovery of ownership and possession of a parcel of
land located at Labney, San Jacinto, Pangasinan.
Petitioners sought to recover from their uncle Marcelo
Arjona, one of the respondents herein, their lawful share
of the inheritance from their late grandmother Rosa
Arjona Quiros alias Doza, the same to be segregated from
the following parcels of land:
a) A parcel of land (Lot 1, plan Psu-189983, L.R.
Case No. D-614, LRC Record No. N- 22630),
situated in the Barrio of Labney, Torud,
Municipality of San Jacinto, Province of
Pangasinan x x x Containing an area of Forty Four
Thousand Five Hundred and Twenty (44,520)
square meters, more or less, covered by Tax Decl.
No. 607;
b) A parcel of Unirrig. riceland situated at Brgy.
Labney, San Jacinto, San Jacinto, Pangasinan with
an area of 6450 sq. meters, more or less declared
under Tax Decl. No. 2066 of the land records of
San Jacinto, Pangasinan assessed at P2390.00 x x
x;
c) A parcel of Unirrig. riceland situated at Brgy.
Labney, San Jacinto, Pangasinan with an area of
6450 sq. meters, more or less, declared under Tax
Declaration No. 2047 of the land records of San
Jacinto, Pangasinan assessed at P1700.00 x x x
d) A parcel of Unirrig. riceland situated at Brgy.
Labney, San Jacinto, Pangasinan assessed at
P5610.00 x x x;
e) A parcel of Cogon land situated at Brgy.
Labney, San Jacinto, Pangasinan, with an area of
14133 sq. meters, more or less declared under Tax
Declaration No. 14 of the land records of San
Jacinto, Pangasinan assessed at P2830.00 x x x.1
On January 5, 1997, an amicable settlement was reached
between the parties. By reason thereof, respondent Arjona
executed a document denominated as "PAKNAAN"
("Agreement", in Pangasinan dialect), which reads:

AGREEMENT

because the subject property cannot be determined with

certainty.

I, MARCELO ARJONA, of legal age, resident of

Barangay Sapang, Buho, Palayan City, Nueva Ecija, have
a land consisting of more or less one (1) hectare which I
gave to Proceso Quiros and Leonarda Villegas, this land
was inherited by Doza that is why I am giving the said
land to them for it is in my name, I am affixing my
signature on this document for this is our agreement
besides there are witnesses on the 5th day (Sunday) of
January 1997.
Signed in the presence of:

The Regional Trial Court reversed the decision of the

municipal court on appeal and ordered the issuance of the
writ of execution.
Respondents appealed to the Court of Appeals, which
reversed the decision of the Regional Trial Court and
reinstated the decision of the Municipal Circuit Trial
Court.2
Hence, this petition on the following errors:

(Sgd) Avelino N. De la Masa, Jr.

(Sgd) Marcelo Arjona

1) (Sgd.) Teresita Balarbar

THE PAKNAAN BEING A FINAL AND EXECUTORY

JUDGMENT UNDER THE LAW IS AN IMMUTABLE
JUDGMENT CAN NOT BE ALTERED, MODIFIED OR
CHANGED BY THE COURT INCLUDING THE
HIGHEST COURT; and

2) (Sgd.) Josephine Arjona

II

3) (Sgd.) Conchita Arjona

THE SECOND PAKNAAN ALLEGEDLY EXECUTED

IN CONJUNCTION WITH THE FIRST PAKNAAN
WAS NEVER ADDUCED AS EVIDENCE BY EITHER
OF THE PARTIES, SO IT IS ERROR OF
JURISDICTION TO CONSIDER THE SAME IN THE
DECISION MAKING.

Witnesses:

On the same date, another "PAKNAAN" was executed by

Jose Banda, as follows:
AGREEMENT
I, JOSE BANDA, married to Cecilia L. Banda, of legal
age, and resident of Sitio Torrod, Barangay Labney, San
Jacinto, Pangasinan. There is a land in which they
entrusted to me and the same land is situated in Sitio
Torrod, Brgy. Labney, San Jacinto, Pangasinan, land of
Arjona family.
I am cultivating/tilling this land but if ever Leonarda
Villegas and Proceso Quiros would like to get this land, I
will voluntarily surrender it to them.
In order to attest to the veracity and truthfulness of this
agreement, I affixed (sic) my signature voluntarily below
this document this 5th day (Sunday) of January 1997.
(Sgd.) Jose Banda
Signed in the presence of:
(Sgd) Avelino N.
Barangay
Brgy.
Labney,
Pangasinan

de

la
San

Masa, Sr.
Captain
Jacinto

Witnesses:
1) Irene Banda
(sgd.)
2) Jose (illegible) x x x
Petitioners filed a complaint with the Municipal Circuit
Trial Court with prayer for the issuance of a writ of
execution of the compromise agreement which was denied

The pivotal issue is the validity and enforceability of the

amicable settlement between the parties and corollary to
this, whether a writ of execution may issue on the basis
thereof.
In support of their stance, petitioners rely on Section 416
of the Local Government Code which provides that an
amicable settlement shall have the force and effect of a
final judgment upon the expiration of 10 days from the
date thereof, unless repudiated or nullified by the proper
court. They argue that since no such repudiation or action
to nullify has been initiated, the municipal court has no
discretion but to execute the agreement which has become
final and executory.
Petitioners likewise contend that despite the failure of the
Paknaan to describe with certainty the object of the
contract, the evidence will show that after the execution of
the agreement, respondent Marcelo Arjona accompanied
them to the actual site of the properties at Sitio Torod,
Labney, San Jacinto, Pangasinan and pointed to them the
1 hectare property referred to in the said agreement.
In their Comment, respondents insist that respondent
Arjona could not have accompanied petitioners to the
subject land at Torrod, Labney because he was physically
incapacitated and there was no motorized vehicle to
transport him to the said place.
The Civil Code contains salutary provisions that
encourage and favor compromises and do not even require
judicial approval. Thus, under Article 2029 of the Civil
Code, the courts must endeavor to persuade the litigants in
a civil case to agree upon some fair compromise. Pursuant
to Article 2037 of the Civil Code, a compromise has upon
the parties the effect and authority of res judicata, and this

is true even if the compromise is not judicially approved.

Articles 2039 and 2031 thereof also provide for the
suspension of pending actions and mitigation of damages
to the losing party who has shown a sincere desire for a
compromise, in keeping with the Codes policy of
encouraging amicable settlements.3
Cognizant of the beneficial effects of amicable
settlements, the Katarungang Pambarangay Law (P.D.
1508) and later the Local Government Code provide for a
mechanism for conciliation where party-litigants can enter
into an agreement in the barangay level to reduce the
deterioration of the quality of justice due to indiscriminate
filing of court cases. Thus, under Section 416 of the said
Code, an amicable settlement shall have the force and
effect of a final judgment of the court upon the expiration
of 10 days from the date thereof, unless repudiation of the
settlement has been made or a petition to nullify the award
has been filed before the proper court
Petitioners submit that since the amicable settlement had
not been repudiated or impugned before the court within
the 10-day prescriptive period in accordance with Section
416 of the Local Government Code, the enforcement of
the same must be done as a matter of course and a writ of
execution must accordingly be issued by the court.

annulment of ordinary contracts, there is a need to

ascertain whether the Paknaan in question has sufficiently
complied with the requisites of validity in accordance with
Article 1318 of the Civil Code.5
There is no question that there was meeting of the minds
between the contracting parties. In executing the Paknaan,
the respondent undertook to convey 1 hectare of land to
petitioners who accepted. It appears that while the
Paknaan was prepared and signed by respondent Arjona,
petitioners acceded to the terms thereof by not disputing
its contents and are in fact now seeking its enforcement.
The object is a 1-hectare parcel of land representing
petitioners inheritance from their deceased grandmother.
The cause of the contract is the delivery of petitioners
share in the inheritance. The inability of the municipal
court to identify the exact location of the inherited
property did not negate the principal object of the contract.
This is an error occasioned by the failure of the parties to
describe the subject property, which is correctible by
reformation and does not indicate the absence of the
principal object as to render the contract void. It cannot be
disputed that the object is determinable as to its kind, i.e.1
hectare of land as inheritance, and can be determined
without need of a new contract or agreement.6Clearly, the
Paknaan has all the earmarks of a valid contract.

Generally, the rule is that where no repudiation was made

during the 10-day period, the amicable settlement attains
the status of finality and it becomes the ministerial duty of
the court to implement and enforce it. However, such rule
is not inflexible for it admits of certain exceptions. In
Santos v. Judge Isidro,4 the Court observed that special
and exceptional circumstances, the imperatives of
substantial justice, or facts that may have transpired after
the finality of judgment which would render its execution
unjust, may warrant the suspension of execution of a
decision that has become final and executory. In the case
at bar, the ends of justice would be frustrated if a writ of
execution is issued considering the uncertainty of the
object of the agreement. To do so would open the
possibility of error and future litigations.

Although both parties agreed to transfer one-hectare real

property, they failed to include in the written document a
sufficient description of the property to convey. This error
is not one for nullification of the instrument but only for
reformation.

The Paknaan executed by respondent Marcelo Arjona

purports to convey a parcel of land consisting of more or
less 1 hectare to petitioners Quiros and Villegas. Another
Paknaan, prepared on the same date, and executed by one
Jose Banda who signified his intention to vacate the parcel
of land he was tilling located at Torrod, Brgy. Labney,
San Jacinto, Pangasinan, for and in behalf of the Arjona
family. On ocular inspection however, the municipal trial
court found that the land referred to in the second Paknaan
was different from the land being occupied by petitioners.
Hence, no writ of execution could be issued for failure to
determine with certainty what parcel of land respondent
intended to convey.

If mistake, fraud, inequitable conduct, or accident has

prevented a meeting of the minds of the parties, the proper
remedy is not reformation of the instrument but annulment
of the contract.

In denying the issuance of the writ of execution, the

appellate court ruled that the contract is null and void for
its failure to describe with certainty the object thereof.
While we agree that no writ of execution may issue, we
take exception to the appellate courts reason for its
denial.
Since an amicable settlement, which partakes of the nature
of a contract, is subject to the same legal provisions
providing for the validity, enforcement, rescission or

Article 1359 of the Civil Code provides:

When, there having been a meeting of the minds of the
parties to a contract, their true intention is not expressed in
the instrument purporting to embody the agreement by
reason of mistake, fraud, inequitable conduct or accident,
one of the parties may ask for the reformation of the
instrument to the end that such true intention may be
expressed.

Reformation is a remedy in equity whereby a written

instrument is made or construed so as to express or
conform to the real intention of the parties where some
error or mistake has been committed.7 In granting
reformation, the remedy in equity is not making a new
contract for the parties, but establishing and perpetuating
the real contract between the parties which, under the
technical rules of law, could not be enforced but for such
reformation.
In order that an action for reformation of instrument as
provided in Article 1359 of the Civil Code may prosper,
the following requisites must concur: (1) there must have
been a meeting of the minds of the parties to the contract;
(2) the instrument does not express the true intention of
the parties; and (3) the failure of the instrument to express
the true intention of the parties is due to mistake, fraud,
inequitable conduct or accident.8

When the terms of an agreement have been reduced to

writing, it is considered as containing all the terms agreed
upon and there can be, between the parties and their
successors in interest, no evidence of such terms other
than the contents of the written agreement, except when it
fails to express the true intent and agreement of the parties
thereto, in which case, one of the parties may bring an
action for the reformation of the instrument to the end that
such true intention may be expressed.9
Both parties acknowledge that petitioners are entitled to
their inheritance, hence, the remedy of nullification, which
invalidates the Paknaan, would prejudice petitioners and
deprive them of their just share of the inheritance.
Respondent can not, as an afterthought, be allowed to
renege on his legal obligation to transfer the property to its
rightful heirs. A refusal to reform the Paknaan under such
circumstances would have the effect of penalizing one
party for negligent conduct, and at the same time
permitting the other party to escape the consequences of
his negligence and profit thereby. No person shall be
unjustly enriched at the expense of another.
WHEREFORE, in view of the foregoing, the petition is
DENIED. The Decision dated March 21, 2003 of the
Court of Appeals, which reversed the decision of the
Regional Trial Court and reinstated the decision of the
Municipal Trial Court, is AFFIRMED. This is without
prejudice to the filing by either party of an action for
reformation of the Paknaan executed on January 5, 1997.

SPOUSES
LEHNER
MARTIRES, Petitioners,
vs.
MENELIA CHUA, Respondent.

and

LUDY

DECISION
PERALTA, J.:
Before the Court is a petition for review on certiorari
under Rule 45 of the Rules of Court seeking to reverse and
set aside the Amended Decision,1 as well as the
Resolutions2 of the Court of Appeals (CA), dated
September 30, 2005, July 5, 2006 and August 28, 2006,
respectively, in CA-G.R. CV No. 76388. The assailed
Decision of the CA reversed and set aside its earlier
Decision, dated April 30, 2004, in favor of petitioners.
The July 5, 2006 Resolution denied petitioners' Motion for
Reconsideration, while the August 28, 2006 Resolution
denied petitioners' Second Motion for Reconsideration.
The factual and procedural antecedents of the case are as
follows:
Subject of the instant controversy are twenty-four
memorial lots located at the Holy Cross Memorial Park in
Barangay Bagbag, Novaliches, Quezon City. The
property, more particularly described as "Lot: 24 lots,
Block 213, Section: Plaza of Heritage-Reg.," is covered by
Transfer Certificate of Title (TCT) No. 342914.
Respondent, together with her mother, Florencia R.
Calagos, own the disputed property. Their co-ownership is
evidenced by a Deed of Sale and Certificate of Perpetual
Care, denominated as Contract No. 31760, which was
executed on June 4, 1992.3
On December 18, 1995, respondent borrowed from
petitioner spouses the amount of P150,000.00. The loan
was secured by a real estate mortgage over the
abovementioned property. Respondent committed to pay a
monthly interest of 8% and an additional 10% monthly
interest in case of default.4
Respondent failed to fully settle her obligation.
Subsequently, without foreclosure of the mortgage,
ownership of the subject lots were transferred in the name
of petitioners via a Deed of Transfer.5
On June 23, 1997, respondent filed with the Regional
Trial Court (RTC) of Quezon City a Complaint against
petitioners, Manila Memorial Park Inc., the company
which owns the Holy Cross Memorial Park, and the
Register of Deeds of Quezon City, praying for the
annulment of the contract of mortgage between her and
petitioners on the ground that the interest rates imposed
are unjust and exorbitant. Respondent also sought
accounting to determine her liability under the law. She
likewise prayed that the Register of Deeds of Quezon City
and Manila Memorial Park, Inc. be directed to reconvey
the disputed property to her.6
On November 20, 1998, respondent moved for the
amendment of her complaint to include the allegation that
she later discovered that ownership of the subject lots was
transferred in the name of petitioners by virtue of a forged
Deed of Transfer and Affidavit of Warranty. Respondent

prayed that the Deed of Transfer and Affidavit of

Warranty be annulled.7 In their Manifestation dated
January 25, 1999, petitioners did not oppose respondent's
motion.8 Trial ensued.
After trial, the RTC of Quezon City rendered a Decision
in favor of petitioners, the dispositive portion of which
reads, thus:
Wherefore, premises considered, judgment is hereby
rendered against Menelia R. Chua and in favor of the Sps.
Lehner Martires and Ludy Martires; and Manila Memorial
Park Cemetery, Inc. as follows:
1. The Complaint is denied and dismissed for lack
of merit;

(1) The assailed decision dated August 3, 2002 of the

Regional Trial Court of Quezon City Branch 221 in Civil
Case No. Q-97-31408 is hereby Reversed with the
following MODIFICATIONS, to wit:
(1) The Deed of Transfer dated July 3, 1996, as
well as the Affidavit of Warranty, are hereby
declared void ab initio;
(2) The loan of P150,000.00 is hereby subject to
an interest of 12% per annum.

2. The counterclaims are granted as follows:

a. Menelia R. Chua is ordered to pay the
Sps. Martires the amount of P100,000.00
as moral damages; the amount
of P50,000.00 as exemplary damages; and
the amount of P30,000.00 as reasonable
attorneys fees plus costs of suit.
b. Menelia R. Chua is ordered to pay
Manila Memorial Park Cemetery, Inc. the
amount of P30,000.00 as reasonable
attorney's fees plus costs of suit.
SO ORDERED.9
On appeal, the CA affirmed, with modification, the
judgment of the RTC, disposing as follows:
WHEREFORE, premises considered, the instant appeal is
hereby DENIED for lack of merit, and the decision of the
trial court dated 03 August 2002 is hereby AFFIRMED
with MODIFICATION as to the amount of moral and
exemplary damages, and attorney's fees. Plaintiffappellant Menelia R. Chua is hereby ordered to pay the
defendant-appellees Spouses Martires the amount
of P30,000.00 as moral damages; P20,000.00 as
exemplary damages; and attorney's fees of P10,000.00
plus costs of suit.
Insofar as defendant-appellee Manila Memorial Park
Cemetery, Inc. is concerned, the attorney's fees awarded is
reduced to P10,000.00 plus costs of suit.
SO ORDERED.10
The CA ruled that respondent voluntarily entered into a
contract of loan and that the execution of the Deed of
Transfer is sufficient evidence of petitioners' acquisition
of ownership of the subject property.
Respondent
filed
a
Motion
Reconsideration.11 Petitioners opposed it.12

Accordingly, the decision of this Court dated April 30,

2004 in CA-G.R. CV No. 76388, which had affirmed the
judgment of the Regional Trial Court of Quezon City,
Branch 221, in Civil Case No. Q-97-31408, is
REVERSED and SET ASIDE, and it is hereby declared
that:

for

On September 30, 2005, the CA promulgated its assailed

Amended Decision with the following dispositive portion:
WHEREFORE, the Court grants the movant's Motion for
Reconsideration.

(3) The Manila Memorial Park Cemetery, Inc. and

the Register of Deeds of Quezon City [are] hereby
directed to cancel the registration or annotation of
ownership of the spouses Martires on Lot: 24 lots,
Block 213, Section: Plaza Heritage Regular,
Holy Cross Memorial Park, being a portion of
Transfer Certificate of Title No. 342914 issued by
the Register of Deeds of Quezon City, and revert
registration of ownership over the same in the
name of appellant Menelia R. Chua, and Florencia
R. Calagos.
(4) The movant, Menelia R. Chua, is hereby
ordered to pay the spouses Martires the amount
ofP150,000.00 plus interest of 12% per annum
computed from December 18, 1995 up to the time
of full payment thereof and, after deducting
payments made in the total amount of P80,000.00,
the same shall be paid within ninety (90) days
from the finality of this decision. In case of failure
to pay the aforesaid amount and the accrued
interests from the period hereinstated, the property
shall be sold at public auction to satisfy the
mortgage debt and costs, and if there is an excess,
the same is to be given to the owner.
No costs.
SO ORDERED.13
The CA reconsidered its findings and concluded that the
Deed of Transfer which, on its face, transfers ownership
of the subject property to petitioners, is, in fact, an
equitable mortgage. The CA held that the true intention of
respondent was merely to provide security for her loan
and not to transfer ownership of the property to
petitioners. The CA so ruled on the basis of its findings
that: (1) the consideration, amounting to P150,000.00, for
the alleged Deed of Transfer is unusually inadequate,
considering that the subject property consists of 24
memorial lots; (2) the Deed of Transfer was executed by
reason of the same loan extended by petitioners to
respondent; (3) the Deed of Transfer is incomplete and
defective; and (4) the lots subject of the Deed of Transfer
are one and the same property used to secure
respondent's P150,000.00 loan from petitioners.

Petitioners filed a Motion for Reconsideration,14 but the

CA denied it in its Resolution dated July 5, 2006.
On July 26, 2006, petitioners filed a Second Motion for
Reconsideration,15 but again, the CA denied it via its
Resolution dated August 28, 2006.
Hence, the present petition based on the following
grounds:
A. THE COURT OF APPEALS PATENTLY ERRED IN
NOT UPHOLDING THE DEED OF TRANSFER
EXECUTED BY THE RESPONDENT IN FAVOR OF
THE PETITIONERS BY RULING THAT:
1. The Deed of Transfer executed by respondent
in favor of petitioners over the subject property
was not entered in the Notarial Book of Atty.
Francisco Talampas and reported in the Notarial
Section of the Regional Trial Court of Makati
City.
2. The Deed of Transfer was not duly notarized by
Atty. Francisco Talampas inasmuch as there was
no convincing proof that respondent appeared
before Notary Public Atty. Talampas.
B. THE COURT OF APPEALS PATENTLY ERRED IN
RULING THAT THE DEED OF TRANSFER
EXECUTED BETWEEN THE RESPONDENT AND
THE PETITIONERS CONSTITUTED AN EQUITABLE
MORTGAGE CONSIDERING THAT:
1. Said issue was not raised in any pleading in the
appellate and trial courts.1wphi1
2. Respondent herself admitted that a separate
mortgage was executed to secure the loan.16
The petition lacks merit.
At the outset, the instant petition should be denied for
being filed out of time. Petitioners admit in the instant
petition that: (1) on July 18, 2006, they received a copy of
the July 5, 2006 Resolution of the CA which denied their
Motion for Reconsideration of the assailed Amended
Decision; (2) on July 26, 2006, they filed a Motion to
Admit Second Motion for Reconsideration attaching
thereto the said Second Motion for Reconsideration; (3)
on September 5, 2006, they received a copy of the August
28, 2006 Resolution of the CA which denied their Motion
to Admit as well as their Second Motion for
Reconsideration; and (4) they filed the instant petition on
October 20, 2006.
Section 2, Rule 45 of the Rules of Court provides that a
petition for review on certiorari under the said Rule "shall
be filed within fifteen (15) days from notice of the
judgment or final order or resolution appealed from or of
the denial of the petitioner's motion for new trial or
reconsideration filed in due time after notice of the
judgment." Relative thereto, Section 2, Rule 52 of the
same Rules provides that "no second motion for
reconsideration of a judgment or final resolution by the
same party shall be entertained." Based on the
abovementioned dates, the start f the 15-day period for the
filing of this petition should have been reckoned from July

18, 2006, the time of petitioners' receipt of the CA

Resolution denying their Motion for Reconsideration, and
not on September 5, 2006, the date when they received the
CA Resolution denying their Second Motion for
Reconsideration. Thus, petitioners should have filed the
instant petition not later than August 2, 2006. It is wrong
for petitioners to reckon the 15-day period for the filing of
the instant petition from the date when they received the
copy of the CA Resolution denying their Second Motion
for Reconsideration. Since a second motion for
reconsideration is not allowed, then unavoidably, its filing
did not toll the running of the period to file an appeal by
certiorari.17Petitioners made a critical mistake in waiting
for the CA to resolve their second motion for
reconsideration before pursuing an appeal.
Perfection of an appeal within the reglementary period is
not only mandatory but also jurisdictional.18 For this
reason, petitioners' failure to file this petition within the
15-day period rendered the assailed Amended CA
Decision and Resolutions final and executory, thus,
depriving this Court of jurisdiction to entertain an appeal
therefrom.19On this ground alone, the instant petition
should be dismissed.
In any case, even granting, arguendo, that the present
petition is timely filed, the Court finds no cogent reason to
depart from the findings and conclusions of the CA in its
disputed Amended Decision.
Anent the first assigned error, petitioners are correct in
pointing out that notarized documents carry evidentiary
weight conferred upon them with respect to their due
execution and enjoy the presumption of regularity which
may only be rebutted by evidence so clear, strong and
convincing as to exclude all controversy as to
falsity.20 However, the presumptions that attach to
notarized documents can be affirmed only so long as it is
beyond dispute that the notarization was regular.21 A
defective notarization will strip the document of its public
character
and
reduce
it
to
a
private
instrument.22 Consequently, when there is a defect in the
notarization of a document, the clear and convincing
evidentiary standard normally attached to a duly-notarized
document is dispensed with, and the measure to test the
validity of such document is preponderance of evidence.23
In the present case, the CA has clearly pointed out the
dubious circumstances and irregularities attendant in the
alleged notarization of the subject Deed of Transfer, to
wit: (1) the Certification24 issued by the Clerk of Court of
the Notarial Section of the RTC of Makati City which
supposedly attested that a copy of the subject Deed of
Transfer is on file with the said court, was contradicted by
the Certification25 issued by the Administrative Officer of
the Notarial Section of the same office as well as by the
testimony of the court employee who prepared the
Certification issued by the Clerk of Court, to the effect
that the subject Deed of Transfer cannot, in fact, be found
in their files; (2) respondent's categorical denial that she
executed the subject Deed of Transfer; and (3) the subject
document did not state the date of execution and lacks the
marital consent of respondent's husband.
Indeed, petitioners' heavy reliance on the Certification
issued by the notary public who supposedly notarized the
said deed, as well as the Certification issued by the Clerk

of Court of the Notarial Section of the RTC of Makati

City, is misplaced for the following reasons: first, the
persons who issued these Certifications were not
presented as witnesses and, as such, they could not be
cross-examined with respect to the truthfulness of the
contents of their Certifications; second, as mentioned
above, these Certifications were contradicted by the
Certification issued by the Administrative Officer of the
Notarial Section of the RTC of Makati City as well as by
the admission, on cross-examination, of the clerk who
prepared the Certification of the Clerk of Court, that their
office cannot, in fact, find a copy of the subject Deed of
Transfer in their files;26 and third, the further admission of
the said clerk that the Certification, which was issued by
the clerk of court and relied upon by petitioners, was not
based on documents existing in their files, but was simply
based on the Certification issued by the notary public who
allegedly notarized the said Deed of Transfer.27
Assuming further that the notarization of the disputed
Deed of Transfer was regular, the Court, nonetheless, is
not persuaded by petitioners' argument that such Deed is a
sufficient evidence of the validity of the agreement
between petitioners and respondent.
While indeed a notarized document enjoys the
presumption of regularity, the fact that a deed is notarized
is not a guarantee of the validity of its contents.28 The
presumption is not absolute and may be rebutted by clear
and convincing evidence to the contrary.29 In the present
case, the presumption cannot be made to apply, because
aside from the regularity of its notarization, the validity of
the contents and execution of the subject Deed of Transfer
was challenged in the proceedings below where its prima
facie validity was subsequently overthrown by the
questionable circumstances attendant in its supposed
execution. These circumstances include: (1) the alleged
agreement between the parties that the ownership of the
subject property be simply assigned to petitioners instead
of foreclosure of the contract of mortgage which was
earlier entered into by them; (2) the Deed of Transfer was
executed by reason of the loan extended by petitioners to
respondent, the amount of the latter's outstanding
obligation being the same as the amount of the
consideration for the assignment of ownership over the
subject property; (3) the inadequacy of the consideration;
and (4) the claim of respondent that she had no intention
of transferring ownership of the subject property to
petitioners.
Based on the foregoing, the Court finds no cogent reason
to depart from the findings of the CA that the agreement
between petitioners and respondent is, in fact, an equitable
mortgage.
An equitable mortgage has been defined as one which,
although lacking in some formality, or form or words, or
other requisites demanded by a statute, nevertheless
reveals the intention of the parties to charge real property
as security for a debt, there being no impossibility nor
anything contrary to law in this intent.30
One of the circumstances provided for under Article 1602
of the Civil Code, where a contract shall be presumed to
be an equitable mortgage, is "where it may be fairly
inferred that the real intention of the parties is that the
transaction shall secure the payment of a debt or the

performance of any other obligation." In the instant case,

it has been established that the intent of both petitioners
and respondent is that the subject property shall serve as
security for the latter's obligation to the former. As
correctly pointed out by the CA, the circumstances
surrounding the execution of the disputed Deed of
Transfer would show that the said document was executed
to circumvent the terms of the original agreement and
deprive respondent of her mortgaged property without the
requisite foreclosure.
With respect to the foregoing discussions, it bears to point
out that in Misena v. Rongavilla,31 a case which involves a
factual background similar to the present case, this Court
arrived at the same ruling. In the said case, the respondent
mortgaged a parcel of land to the petitioner as security for
the loan which the former obtained from the latter.
Subsequently, ownership of the property was conveyed to
the petitioner via a Deed of Absolute Sale. Applying
Article 1602 of the Civil Code, this Court ruled in favor of
the respondent holding that the supposed sale of the
property was, in fact, an equitable mortgage as the real
intention of the respondent was to provide security for the
loan and not to transfer ownership over the property.
Since the original transaction between the parties was a
mortgage, the subsequent assignment of ownership of the
subject lots to petitioners without the benefit of
foreclosure proceedings, partakes of the nature of a
pactum commissorium, as provided for under Article 2088
of the Civil Code.
Pactum commissorium is a stipulation empowering the
creditor to appropriate the thing given as guaranty for the
fulfillment of the obligation in the event the obligor fails
to live up to his undertakings, without further formality,
such as foreclosure proceedings, and a public sale.32
In the instant case, evidence points to the fact that the sale
of the subject property, as proven by the disputed Deed of
Transfer, was simulated to cover up the automatic transfer
of ownership in petitioners' favor. While there was no
stipulation in the mortgage contract which provides for
petitioners' automatic appropriation of the subject
mortgaged property in the event that respondent fails to
pay her obligation, the subsequent acts of the parties and
the circumstances surrounding such acts point to no other
conclusion than that petitioners were empowered to
acquire ownership of the disputed property without need
of any foreclosure.
Indeed, the Court agrees with the CA in not giving
credence to petitioners' contention in their Answer filed
with the RTC that respondent offered to transfer
ownership of the subject property in their name as
payment for her outstanding obligation. As this Court has
held, all persons in need of money are liable to enter into
contractual relationships whatever the condition if only to
alleviate their financial burden albeit temporarily.33
Hence, courts are duty-bound to exercise caution in the
interpretation and resolution of contracts lest the lenders
devour the borrowers like vultures do with their
prey.34 Aside from this aforementioned reason, the Court
cannot fathom why respondent would agree to transfer
ownership of the subject property, whose value is much
higher than her outstanding obligation to petitioners.

Considering that the disputed property was mortgaged to

secure the payment of her obligation, the most logical and
practical thing that she could have done, if she is unable to
pay her debt, is to wait for it to be foreclosed. She stands
to lose less of the value of the subject property if the same
is foreclosed, rather than if the title thereto is directly
transferred to petitioners. This is so because in
foreclosure, unlike in the present case where ownership of
the property was assigned to petitioners, respondent can
still claim the balance from the proceeds of the foreclosure
sale, if there be any. In such a case, she could still recover
a portion of the value of the subject property rather than
losing it completely by assigning its ownership to
petitioners.
As to the second assigned error, the Court is not persuaded
by petitioners' contention that the issue of whether or not
the subject Deed of Transfer is, in fact, an equitable
mortgage was not raised by the latter either in the RTC or
the CA.
It is true that, as a rule, no issue may be raised on appeal
unless it has been brought before the lower tribunal for its
consideration.35 Higher courts are precluded from
entertaining matters neither alleged in the pleadings nor
raised during the proceedings below, but ventilated for the
first time only in a motion for reconsideration or on
appeal.36 However, as with most procedural rules, this
maxim is subject to exceptions.37 In this regard, the
Court's ruling in Mendoza v. Bautista38 is instructive, to
wit:
x x x Indeed, our rules recognize the broad discretionary
power of an appellate court to waive the lack of proper
assignment of errors and to consider errors not assigned.
Section 8 of Rule 51 of the Rules of Court provides:
SEC. 8 Questions that may be decided. - No error which
does not affect the jurisdiction over the subject matter or
the validity of the judgment appealed from or the
proceedings therein will be considered, unless stated in the
assignment of errors, or closely related to or dependent on
an assigned error and properly argued in the brief, save as
the court may pass upon plain errors and clerical errors.
Thus, an appellate court is clothed with ample authority to
review rulings even if they are not assigned as errors in
the appeal in these instances: (a) grounds not assigned as
errors but affecting jurisdiction over the subject matter; (b)
matters not assigned as errors on appeal but are evidently
plain or clerical errors within contemplation of law; (c)
matters not assigned as errors on appeal but consideration
of which is necessary in arriving at a just decision and
complete resolution of the case or to serve the interests of
justice or to avoid dispensing piecemeal justice; (d)
matters not specifically assigned as errors on appeal but
raised in the trial court and are matters of record having
some bearing on the issue submitted which the parties
failed to raise or which the lower court ignored; (e)
matters not assigned as errors on appeal but closely related
to an error assigned; and (f) matters not assigned as errors
on appeal but upon which the determination of a question
properly assigned, is dependent.39
In the present case, petitioners must be reminded that one
of the main issues raised by respondent in her appeal with
the CA is the validity and due execution of the Deed of

Transfer which she supposedly executed in petitioners'

favor. The Court agrees with respondent that, under the
factual circumstances obtaining in the instant case, the
determination of the validity of the subject Deed of
Transfer would necessarily entail or involve an
examination of the true nature of the said agreement. In
other words, the matter of validity of the disputed Deed of
Transfer and the question of whether the agreement
evidenced by such Deed was, in fact, an equitable
mortgage are issues which are closely related, which can,
thus, be resolved jointly by the CA.
WHEREFORE, the instant petition is DENIED. The
assailed Amended Decision and Resolutions of the Court
of Appeals, dated September 30, 2005, July 5, 2006 and
August 28, 2006, respectively, in CA-G.R. CV No. 76388,
are AFFIRMED.

SECURITY BANK CORPORATION, Petitioner,

vs.
HON.
COURT
OF
APPEALS,
LIBERTY
INSURANCE CORPORATION and PHILIPPINE
INDUSTRIAL
SECURITY
AGENCY
CORPORATION, Respondents.
DECISION
PUNO, CJ:
Before us is a petition for review on certiorari under Rule
45 of the Rules of Court to set aside the Decision dated
August 31, 1999 and the Resolution dated January 31,
2000 of the Court of Appeals in CA-G.R. CV No.
45259,1which affirmed the Order dated July 12, 1993 of
the Regional Trial Court (RTC), dismissing the complaint
of petitioner Security Bank Corporation (SBC) pro tanto
as against respondent Philippine Industrial Security
Agency Corporation (PISA). 2
On October 23, 1991, SBC and PISA entered into a
"Contract of Security Services" (CSS)3 wherein PISA
undertook to secure, guard, and protect the personnel and
property of SBC through the deployment of qualified and
properly equipped guards in SBCs premises and
branches. Paragraph 9 of the CSS provides:
[PISA] shall be liable for any loss, damage or injury
suffered by [SBC], its officers, employees, clients, guests,
visitors and other persons allowed entry into [SBCs]
premises where such loss, damage or injury is due to the
negligence or willful act of the guards or representatives
of [PISA]. If such loss, damage or injury is caused by a
party other than the guards or representatives of [PISA],
[PISA] shall be jointly and severally liable with said party
if [PISA] failed to exercise due [diligence] in preventing
such loss, damage or injury. 4
Paragraph 12 of the CSS also provides:
12. [SBC] obliges itself to inform [PISA] in writing
through [the] Guard-in-Charge assigned to the former, the
existence of any loss or damage to [SBCs] properties
within Forty-Eight (48) hours after its discovery by
[SBC]; otherwise, [SBC] shall be considered to have
waived its right to proceed against [PISA] by reason of
such loss or damage. Such written notice is not required if
[PISA] took part in the investigation of the loss or damage
or in case the loss or damage is caused by [PISAs]
guard/s or representative/s, in which case [SBC] may
assert the claim for reimbursement at any time. x x
x 5 (Emphasis added)
On March 12, 1992, the Taytay Branch Office of SBC was
robbed PHP12,927,628.01. Among the suspects in the
robbery were two regular security guards of PISA. 6
At the time, SBC Taytay Branch was covered by a
"Money, Securities and Payroll Robbery Policy" with
Liberty Insurance Corporation (LIC), wherein the latter
endeavored to indemnify the former against "loss of
money, payroll and securities that may result from robbery
or any attempt thereof within the premises of SBCs
Taytay Branch Office, up to the maximum amount of
PHP9,900,000.00." 7 The insurance policy provided,
however, that LIC would not be liable if the loss was

caused by any dishonest, fraudulent or criminal act of

SBC officers, employees or by its authorized
representative.8
On June 23, 1992, SBC and PISA entered into a PostRobbery Agreement (PRA) whereby PISA paid
PHP3,027,728.01, which was the difference between the
total amount lost and the maximum amount insured.9PISA
made the payment in the interest of maintaining good
relations, without necessarily admitting its liability for the
loss suffered by SBC by reason of the Taytay robbery. 10
Paragraph 5 of the PRA specifically states that PISAs
payment was subject to express terms and conditions, one
of which was the following:
(e) The parties hereto further agree that this agreement
and/or payment of the whole amount of P3,027,728.01,
shall not affect or prejudice, directly or indirectly,
whatever cause of action SBC may have against PISA and
whatever claim or defense the latter may have against
SBC, if the maximum recoverable proceeds of the
insurance covering the loss suffered by SBC could not be
recovered from the insurer. Further, it is agreed that
should Security Guards Wilson Taca and Ernesto Mariano
be absolved from the charge of robbery in band and/or are
found by the proper court not to have been involved at all
in the alleged conspiracy, and that it is duly established
through legal action before the competent court that their
failure to prevent the robbery was not due to their, or their
PISA co-guards negligence and/or willful act, whatever
installments may have been paid by PISA under this
Agreement shall be reimbursed with legal interest to be
computed from the time of actual payment, the same to be
amortized in eighteen (18) equally monthly installments,
with the interest thereto being based on the diminishing
balance. 11 (Emphasis added)
SBC filed a claim with LIC based on its existing insurance
policy. LIC denied the claim for indemnification on
August 5, 1992, on the ground that the loss suffered by
SBC fell under the general exceptions to the policy, in
view of the alleged involvement of PISAs two security
guards. 12
In its letter dated August 28, 1992, SBC informed PISA of
the denial of the formers insurance claim with LIC and
thereafter sought indemnification of the unrecovered
amount of PHP9,900,000.00.13 PISA denied the claim in a
letter written by its counsel, dated September 17, 1992, to
wit: 14
We have advised our client that your letter of demand
appears to be premature, in light of the following
circumstances:
(a) precisely under par. 5(e) of the [PRA], upon
which your demand letter is based, it is too early
in the day to impute to our client any
responsibility for the loss suffered by the bank.
(b) The mere rejection by the insurer of the
Banks claim does not really seal the fate of said
claim, for the Bank can very ably show that the
insurer erred in rejecting the claim.

(c) In any case, the question of criminal

involvement of PISAs guards has not been
resolved as yet by a competent court as called for
by par. 5(e) of the [PRA], let alone with any
degree of finality. 15
On November 16, 1992, SBC filed a complaint for a sum
of money against LIC based on the "Money, Securities
and Payroll Robbery Policy," and against PISA as an
alternative defendant based on the CSS. SBC prayed that
it be indemnified by either one of the defendants for
PHP9,900,000.00 plus 15% as attorneys fees and cost of
suit.16
Instead of filing an answer, PISA filed a motion to
dismiss, on the ground that the complaint failed to state a
cause of action and/or the supposed cause of action was
premature.17 PISA, noting that it was being sued by SBC
under an alternative cause of action, invoked paragraph
5(e) of the PRA and claimed that SBCs right of action
against PISA was subject to at least two suspensive
conditions. First, SBC could not recover the PHP9.9million from the insurer, defendant LIC; and second, the
two security guards facing criminal prosecution for
robbery in band must first be convicted and found to have
been involved in the robbery or otherwise found by a
competent court to have been negligent. According to
PISA, SBCs complaint made no averment that (a) there
had been a final judgment rejecting SBCs claim against
the insurer; or (b) that the two PISA guards had been
convicted of the charge of robbery in band, or had been
found by a competent court to have been involved in the
alleged conspiracy or to have been negligent in connection
with the robbery. Hence, PISA concluded that SBCs
complaint against it was premature and should be
dismissed. 18
SBC opposed PISAs motion to dismiss, arguing that the
latters
interpretation
of
the
PRA
was
erroneous.19According to SBC, the CSS was expressly
made an integral part of the PRA, so their provisions
"should be used hand in hand" in determining the
respective rights and obligations of the parties. Thus, the
PRA "does not, to the exclusion of [the CSS], control or
govern the determination of the right or accrual of the
right" of SBC to sue PISA.20 Invoking paragraph 12 of the
CSS, SBC asserted that it could pursue its claim for
reimbursement against PISA at any time, without regard
to the fulfillment or non-fulfillment of the supposed
suspensive conditions.
SBC also denied that the PRA had suspensive conditions.
It claimed that the interim non-recovery of the insured
amount may only be an occasion for SBC to suspend the
collection of PISAs liability, but does not operate to
prevent SBC from pursuing its claim against PISA
anytime. SBC pointed out that the insurance contract was
not intended for PISAs benefit, as the latter was not privy
to the contract and hence, could not avail itself of the
benefits thereby given to SBC. As for the second alleged
suspensive condition, SBC disagreed that the conviction
or acquittal of the guards (from the robbery charge) would
preclude SBC from recovering against PISA, as the
former could still prove the other security guards
negligence, for which PISA may be made liable. SBC then
stressed that the main issue in the criminal case was the
guilt of the accused guards, whereas the issue in its civil

complaint pertains to the negligence of the same, or that of

the other guards of PISA, and PISAs liability therefor.
SBC thus posits that it was not necessary for it to make
averments as to the fulfillment of these two alleged
suspensive conditions.
The RTC granted PISAs motion, and dismissed the case
pro tanto as against PISA.21 The trial court sustained
PISAs interpretation of the PRA, i.e., that the latters
liability to SBC for the losses incurred from the March 12,
1992 robbery was dependent upon the occurrence of two
events: (1) SBCs claim for indemnity against LIC is
resolved by final judgment against the bank; and (2) the
two security guards of PISA facing criminal charges for
robbery are found guilty, or declared to have been
negligent in the performance of their guard duties. Since
SBCs complaint made no averment as to the fulfillment
of these suspensive conditions, the RTC held that the suit
by SBC against PISA was premature.22
The RTC likewise
reconsideration. 23

denied

SBCs

motion

for

On appeal, the Court of Appeals affirmed the

dismissal. 24 Although it ruled that SBCs right of action
against PISA was not subject to the condition that the two
security guards of PISA facing criminal charges for
robbery should have been found guilty, or declared to
have been negligent in the performance of their guard
duties, the appellate court held that SBCs right of action
against PISA was subject to a condition precedent, i.e.,
that there first be a final adjudication of SBCs case
against LIC, denying SBCs claim for indemnification.
According to the Court of Appeals, the PRA takes
precedence over the CSS in respect of PISAs liability for
the robbery.
Unsatisfied, SBC comes now before this Court, on the
grounds that the Court of Appeals erred in declaring:
(1) A suspensive condition exists in paragraph 5
of the PRA which bars SBC from impleading
PISA as an alternative defendant in civil case No.
92-337 until after the final adjudication of the suit
instituted by SBC against LIC for payment of
indemnity; and
(2) The PRA takes precedence over the CSS.
We grant the petition.
At the outset, it should be noted that at the heart of this
controversy is the proper interpretation of paragraph 5(e)
of the PRA, which provides:
The parties hereto further agree that this agreement and/or
payment of the whole amount of P3,027,728.01, shall not
affect or prejudice, directly or indirectly, whatever cause
of action SBC may have against PISA and whatever claim
or defense the latter may have against SBC, if the
maximum recoverable proceeds of the insurance covering
the loss suffered by SBC could not be recovered from the
insurer. x x x
Prior to the robbery, the right of SBC to claim indemnity
from PISA for the damage done by the willful or negligent
acts of the formers guards could be asserted at any time,

under paragraphs 9 and 12 of the CSS. But after the

robbery and the execution of the PRA, the question now
raised is whether SBCs right of action against PISA
accrues only upon the non-recovery of indemnity from
LIC; and if so, whether the non-recovery should be the
result of a final adjudication by a court.
It is the thrust of PISAs arguments that while the CSS
governs generally the question of PISAs liability to SBC
(for the loss, damage or injury that is due to the negligence
or willful act of PISAs guards or representatives), SBCs
complaint deals with a specific situation arising from a
distinct, particular event of robbery, for which PISA and
SBC have executed a new special "Agreement" (the PRA)
to govern their rights and obligations. Invoking the maxim
generalia specialibus non derogant (general provisions do
not derogate special or specific ones), PISA asserts that
the PRA precisely governs the question of whether SBCs
right to sue PISA for an alleged liability arising from
robbery has accrued and become enforceable. Thus, it is
alleged that SBCs right to sue PISA is no longer
unrestricted, as the clear import of paragraph 5(e) of the
PRA is that recovery of the insurance proceeds would
affect or prejudice SBCs claim against PISA. PISA
argues, therefore, that it is only upon the failure of SBC to
recover from the insurance proceeds, by final judgment,
that the latter would have recourse against PISA.
SBC, on the other hand, argues that the legal effect of a
contract (the PRA) is not to be determined alone by any
particular provision taken separately and independently
from other provisions thereof. The contract must be taken
as a whole, inclusive of all annexes that have been made
an integral part. SBC argues that there was no intention to
make the PRA a separate and independent agreement that
would take precedence over other agreements between the
parties because of the following reasons:
(a) paragraph 1 of the PRA explicitly states that
"the respective rights and obligations of the
parties x x x with respect to the security services
being performed by PISA is embodied in x x x the
Contract of Security Services;"
(b) the contract of security services was explicitly
attached and made an integral part of the PRA;
and
(c) it is in paragraph 9 of the CSS that PISAs
liability is determined for the loss, damage or
injury due to the negligence or willful act of the
guards or representative of PISA, or when such
loss, damage or injury is caused by another party
if PISA failed to exercise due diligence in
preventing such loss, damage or injury.
SBC, therefore, denies that paragraph 5(e) made the nonrecovery from LIC a condition precedent before SBC
could file a case against PISA.
SBC also asserts that even if it could be argued that the
PRA governs the liability of PISA as to the robbery, this
liability would only be for the amount of
PHP3,027,728.01 which the latter has paid, and not the
PHP9,900,000.00, which is the balance of the loss
suffered by SBC from the robbery. This balance, SBC said

it could pursue against PISA at any time, pursuant to the

CSS.
SBC also objects to the interpretation of paragraph 5(e)
that there must be a finality of denial by LIC before SBC
can pursue its claim against PISA. SBC argues that this
paragraph only provides the availability of recourse
against PISA in the event of non-recovery from LIC, and
is not a suspensive condition.
Finally, SBC claims that nowhere in the PRA is the
liability of PISA made dependent on and subsidiary to
LIC, and points out that PISA and LIC have no privity of
contract between them. According to SBC, the sole reason
for impleading PISA in the civil suit was pursuant to Rule
3 of the Rules of Court on alternative defendants. SBC
thus stresses that inasmuch as the liabilities of LIC and
PISA are primary under their respective contracts, and
both have denied the claim of SBC, the latter has properly
impleaded LIC and PISA in order to be afforded complete
relief in one instance.
To start with, we agree with the Court of Appeals that
SBCs right of action against PISA was modified by the
PRA, insofar as the PISAs liability for the Taytay robbery
is concerned, particularly through paragraph 5(e). The
Court of Appeals stated:25
While it cannot be gainsaid that the terms and conditions
in the Contract of Security Services (CSS) were
incorporated to the PRA (sic) as integral parts thereof,
nevertheless, We conform to the finding of the court of
origin that the 2nd contract (PRA) precisely and
particularly dealt with the mode of resolving PISAs
liability resulting, if any, from [the] March 12, 1992
robbery. (Order dated July 12, 1993, p.1; Records, p.113).
It distinctively provides a clear cut manner by which the
right of action against PISA may be exercised by [SBC]
pertaining to a specific robbery incidenta matter visibly
non-existent in the CSS. Indeed, this special provision
controls and prevails over the general terms and
conditions extant on the CSS. (Yatco v. El Hogar Filipino,
67 Phil. 610) When a general and a particular provision
are inconsistent, the latter is paramount to the former.
Ergo, a particular intent, as in this case reflected in letter e,
paragraph 5 of the PRA will control a general intent
embodied in paragraph 9 of the Contract of Security
Services. (Section 12, Rule 130, Revised Rules of Court)
Thus, the PRA is paramount to and prevails over the terms
and stipulations in the first contract (CSS) on matters
relevant and material to PISAs liability relating to the
robbery. 26
Indeed, the clear import of paragraph 5(e) of the PRA is
that recovery of the insurance proceeds would affect or
prejudice SBCs claim against PISA. If LIC had granted
SBCs claim for indemnity, then SBC could no longer
claim the same amount from PISA. As a corollary, it is
only upon LICs denial of SBCs claim that SBCs right of
action against PISA could accrue. To rule otherwise
would be to countenance SBCs double recovery from its
loss and lead to its unjust enrichment.
The more important question is whether the written letter
of LIC, rejecting SBCs claim for indemnity, satisfied this
condition.

PISA claims that the condition "could not be recovered

from the insurer" requires a final judgment against SBCs
claim for indemnity against LIC, because only then would
the non-recovery be "a final, immutable fact." Since SBC
has only just filed a case against LIC, and recovery is still
possible, the action against PISA is allegedly premature as
the fact of non-recovery is not yet in esse. 27 That SBC
may be able to prove the negligence of the other security
guards of PISA in the event of the acquittal of the two
accused security guards is of no moment; PISA posits that
the condition requires that recovery from the insurer be
impossible, i.e., upon a final adjudication by a court, and
not merely a denial by LIC of the claim. Only in such
event may suit be brought and proof of the other guards
negligence adduced, otherwise, paragraph 5(e) of the PRA
would be rendered nugatory.28
We hold that reading the clause as requiring a final
judgment is a strained interpretation and contrary to
settled rules of interpretation of contracts. Paragraph 5(e)
only requires that the proceeds "could not be recovered
from the insurer," and does not state that it should be so
declared by a court, or even with finality. In determining
the signification of terms, words are presumed to have
been used in their primary and general acceptance, and
there was no evidence presented to show that the words
used signified a judicial adjudication.29 Indeed, if the
parties had intended the non-recovery to be through a
judicial and final adjudication, they should have stated so.
In its primary and general meaning, paragraph 5(e) would
cover LICs extrajudicial denial of SBCs claim.
In sustaining PISA, the Court of Appeals relied on the
argument that paragraph 5(e) of the PRA was intended to
benefit PISA. The appellate court held that the phrase
"could not be recovered from the insurer" gives rise to
doubt as to the intention of the parties, as it is capable of
two interpretations: either (1) the insurer rejects the
written demand for indemnification by the insured; or (2)
a court adjudges that the insurer is not liable under the
policy. The Court of Appeals then interpreted the
antecedent circumstances prior to the institution of Civil
Case No. 92-3337 as manifesting SBCs agreement to
suspend the filing of the suit against PISA until after the
case against LIC has been decisively terminated.30
We have gone over the records and are unable to agree
with the Court of Appeals findings on this matter. Even if
we are to agree with the Court of Appeals that paragraph
5(e) is susceptible of two interpretations, the stipulations
in the PRA and the parties acts contemporaneous with
and subsequent to the execution of the PRA31 belie any
intent of SBC to delay its suit against PISA until a judicial
declaration of non-recovery against LIC.
It should be noted that the PRA was entered into as a
result of the robbery, in which two of PISAs security
guards were implicated. The PRA expressly stated that the
agreement was entered into with respect to certain facts,
among which were that (a) PISA was providing security
guards for SBC pursuant to the CSS, the said contract
being attached to the PRA and forming an integral part
thereof; 32 and (b) pursuant to paragraph nine (9) of the
CSS, PISA "shall be liable for any loss, damage or injury
suffered by [SBC], its officers, employees, clients, guests,
visitors and other persons allowed entry into [SBCs]
premises where such loss, damage or injury is due to the

negligence or willful act of the guards or representatives

of [PISA]." Moreover, "if such loss, damage or injury is
caused by a party other than the guards or representatives
of [PISA], [PISA] shall be jointly and severally liable with
said party if [PISA] failed to exercise due diligence in
preventing such loss, damage or injury." 33

together, attributing to the doubtful ones that sense which

may result from all of them taken jointly. 35 When it is
impossible to settle doubts by the rules established in the
preceding articles, and the doubts refer to incidental
circumstances of an onerous contract, the doubt shall be
settled in favor of the greatest reciprocity of interests. 36

The express inclusion of these provisionsparticularly

those relating to the liability of PISA for the willful or
negligent acts of its guards, or its failure to exercise
diligence, and the right of SBC to hold PISA liable
speaks of SBCs diligence in ensuring that
notwithstanding the PRA and the partial payment by
PISA, SBCs right of action against PISA for its liabilities
under the CSS is preserved. SBC may have agreed to
delay the suit against PISA until after the formers claim
for indemnity against LIC has been decided, but it is farfetched to believe that SBC agreed to hold such right of
action in abeyance until after a legal claim against LIC
had been adjudicated. This conclusion is further bolstered
by the following material events:

We therefore hold that SBCs suit against PISA was not

premature, and the dismissal of the action as against PISA
was improper.

1. The Taytay robbery was committed on March

12, 1992.
2. SBC made a written demand on April 10, 1992
against PISA for the losses sustained by SBC
from the robbery.
3. SBC and PISA executed the PRA on June 23,
1992.1awphi1.net
4. LIC rejected SBCs claim for indemnity under
the insurance on August 5, 1992.
5. SBC protested the LIC rejection in a letter
dated August 28, 1992.
6. On the same date, August 28, 1992, SBC
informed PISA of the denial by LIC of SBCs
insurance claim, and demanded from PISA
indemnification based on paragraph 5(e) of the
PRA.
7. On September 17, 1992, PISA denied the letter
of demand of SBC.
8. On November 16, 1992, SBC sued LIC and
PISA.
From the above events, it seems clear that SBCs suit
against LIC was not a mere afterthought after LIC had
rejected its claim. Rather, SBC exercised its right of action
against PISA pursuant to paragraph 5(e) of the PRA. This
interpretion is consistent with settled canons of contract
interpretation, has the import that would make SBCs right
of action effectual, and would yield the greatest
reciprocity of interests. Indeed, we agree with SBC that
PISAs interpretation of the clause would lead to an
effective waiver of SBCs right of action, because to await
the judicial determination of the LIC suit may lead to the
prescription of SBCs right of action against PISA.
If some stipulations of any contract should admit of
several meanings, it shall be understood as bearing that
import which is most adequate to render it effectual.34 The
various stipulations of a contract shall be interpreted

IN VIEW WHEREOF, the petition is GRANTED. The

assailed Decision of the Court of Appeals in CA-G.R. CV
No. 45259, dated August 31, 1999, as well as its
Resolution dated January 31, 2000, is REVERSED. Civil
Case No. 92337 is REMANDED to the RTC, NCJR,
Makati City for further proceedings.

FORTUNE
MEDICARE,
INC., Petitioner,
vs.
DAVID ROBERT U. AMORIN, Respondent.
DECISION
REYES, J.:
This is a petition for review on certiorari1 under Rule 45 of
the Rules of Court, which challenges the Decision2dated
September 27, 2010 and Resolution3 dated February 24,
2011 of the Court of Appeals (CA) in CA-G.R. CV No.
87255.
The Facts
David Robert U. Amorin (Amorin) was a
cardholder/member of Fortune Medicare, Inc. (Fortune
Care), a corporation engaged in providing health
maintenance services to its members. The terms of
Amorin's medical coverage were provided in a Corporate
Health Program Contract4 (Health Care Contract) which
was executed on January 6, 2000 by Fortune Care and the
House of Representatives, where Amorin was a permanent
employee.

1. Whether as an in-patient or out-patient, FortuneCare

shall reimburse the total hospitalization cost including the
professional fee (based on the total approved charges) to a
member who receives emergency care in a non-accredited
hospital. The above coverage applies only to Emergency
confinement within Philippine Territory. However, if the
emergency confinement occurs in a foreign territory,
Fortune Care will be obligated to reimburse or pay eighty
(80%) percent of the approved standard charges which
shall cover the hospitalization costs and professional fees.
x x x6
Still, Fortune Care denied Amorins request, prompting
the latter to file a complaint7 for breach of contract with
damages with the Regional Trial Court (RTC) of Makati
City.
For its part, Fortune Care argued that the Health Care
Contract did not cover hospitalization costs and
professional fees incurred in foreign countries, as the
contracts operation was confined to Philippine
territory.8Further, it argued that its liability to Amorin was
extinguished upon the latters acceptance from the
company of the amount of P12,151.36.
The RTC Ruling

While on vacation in Honolulu, Hawaii, United States of

America (U.S.A.) in May 1999, Amorin underwent an
emergency surgery, specifically appendectomy, at the St.
Francis Medical Center, causing him to incur professional
and hospitalization expenses of US$7,242.35 and
US$1,777.79, respectively. He attempted to recover from
Fortune Care the full amount thereof upon his return to
Manila, but the company merely approved a
reimbursement of P12,151.36, an amount that was based
on the average cost of appendectomy, net of medicare
deduction, if the procedure were performed in an
accredited hospital in Metro Manila.5 Amorin received
under protest the approved amount, but asked for its
adjustment to cover the total amount of professional fees
which he had paid, and eighty percent (80%) of the
approved standard charges based on "American standard",
considering that the emergency procedure occurred in the
U.S.A. To support his claim, Amorin cited Section 3,
Article V on Benefits and Coverages of the Health Care
Contract, to wit:
A. EMERGENCY CARE IN ACCREDITED
HOSPITAL. Whether as an in-patient or outpatient, the member shall be entitled to full
coverage under the benefits provisions of the
Contract at any FortuneCare accredited hospitals
subject only to the pertinent provision of Article
VII
(Exclusions/Limitations)
hereof.
For
emergency care attended by non affiliated
physician (MSU), the member shall be reimbursed
80% of the professional fee which should have
been paid, had the member been treated by an
affiliated physician. The availment of emergency
care from an unaffiliated physician shall not
invalidate or diminish any claim if it shall be
shown to have been reasonably impossible to
obtain such emergency care from an affiliated
physician.
B.
EMERGENCY
CARE
ACCREDITED HOSPITAL

IN

NON-

On May 8, 2006, the RTC of Makati, Branch 66 rendered

its Decision9 dismissing Amorins complaint. Citing
Section 3, Article V of the Health Care Contract, the RTC
explained:
Taking the contract as a whole, the Court is convinced that
the parties intended to use the Philippine standard as basis.
Section 3 of the Corporate Health Care Program Contract
provides that:
xxxx
On the basis of the clause providing for reimbursement
equivalent to 80% of the professional fee which should
have been paid, had the member been treated by an
affiliated physician, the Court concludes that the basis for
reimbursement shall be Philippine rates. That provision,
taken with Article V of the health program contract, which
identifies affiliated hospitals as only those accredited
clinics, hospitals and medical centers located "nationwide"
only point to the Philippine standard as basis for
reimbursement.
The clause providing for reimbursement in case of
emergency operation in a foreign territory equivalent to
80% of the approved standard charges which shall cover
hospitalization costs and professional fees, can only be
reasonably construed in connection with the preceding
clause on professional fees to give meaning to a somewhat
vague clause. A particular clause should not be studied as
a detached and isolated expression, but the whole and
every part of the contract must be considered in fixing the
meaning of its parts.10
In the absence of evidence to the contrary, the trial court
considered the amount of P12,151.36 already paid by
Fortune Care to Amorin as equivalent to 80% of the
hospitalization and professional fees payable to the latter
had he been treated in an affiliated hospital.11

Dissatisfied, Amorin appealed the RTC decision to the

CA.
The CA Ruling
On September 27, 2010, the CA rendered its
Decision12 granting the appeal. Thus, the dispositive
portion of its decision reads:
WHEREFORE, all the foregoing premises considered, the
instant appeal is hereby GRANTED. The May 8, 2006
assailed Decision of the Regional Trial Court (RTC) of
Makati City, Branch 66 is hereby REVERSED and SET
ASIDE, and a new one entered ordering Fortune
Medicare, Inc. to reimburse [Amorin] 80% of the total
amount of the actual hospitalization expenses of $7,242.35
and professional fee of $1,777.79 paid by him to St.
Francis Medical Center pursuant to Section 3, Article V of
the Corporate Health Care Program Contract, or their peso
equivalent at the time the amounts became due, less the
[P]12,151.36 already paid by Fortunecare.
SO ORDERED.13
In so ruling, the appellate court pointed out that, first,
health care agreements such as the subject Health Care
Contract, being like insurance contracts, must be liberally
construed in favor of the subscriber. In case its provisions
are doubtful or reasonably susceptible of two
interpretations, the construction conferring coverage is to
be adopted and exclusionary clauses of doubtful import
should be strictly construed against the provider.14 Second,
the CA explained that there was nothing under Article V
of the Health Care Contract which provided that the
Philippine standard should be used even in the event of an
emergency confinement in a foreign territory.15
Fortune Cares motion for reconsideration was denied in a
Resolution16 dated February 24, 2011. Hence, the filing of
the present petition for review on certiorari.
The Present Petition
Fortune Care cites the following grounds to support its
petition:
I. The CA gravely erred in concluding that the
phrase "approved standard charges" is subject to
interpretation, and that it did not automatically
mean "Philippine Standard"; and
II. The CA gravely erred in denying Fortune
Cares motion for reconsideration, which in effect
affirmed its decision that the American Standard
Cost shall be applied in the payment of medical
and hospitalization expenses and professional fees
incurred by the respondent.17
The Courts Ruling
The petition is bereft of merit.
The Court finds no cogent reason to disturb the CAs
finding that Fortune Cares liability to Amorin under the
subject Health Care Contract should be based on the
expenses for hospital and professional fees which he

actually incurred, and should not be limited by the amount

that he would have incurred had his emergency treatment
been performed in an accredited hospital in the
Philippines.
We emphasize that for purposes of determining the
liability of a health care provider to its members,
jurisprudence holds that a health care agreement is in the
nature of non-life insurance, which is primarily a contract
of indemnity. Once the member incurs hospital, medical
or any other expense arising from sickness, injury or other
stipulated contingent, the health care provider must pay
for the same to the extent agreed upon under the
contract.18
To aid in the interpretation of health care agreements, the
Court laid down the following guidelines in Philamcare
Health Systems v. CA19:
When the terms of insurance contract contain limitations
on liability, courts should construe them in such a way as
to preclude the insurer from non-compliance with his
obligation. Being a contract of adhesion, the terms of an
insurance contract are to be construed strictly against the
party which prepared the contract the insurer. By reason
of the exclusive control of the insurance company over the
terms and phraseology of the insurance contract,
ambiguity must be strictly interpreted against the insurer
and liberally in favor of the insured, especially to avoid
forfeiture. This is equally applicable to Health Care
Agreements. The phraseology used in medical or hospital
service contracts, such as the one at bar, must be liberally
construed in favor of the subscriber, and if doubtful or
reasonably susceptible of two interpretations the
construction conferring coverage is to be adopted, and
exclusionary clauses of doubtful import should be strictly
construed against the provider.20 (Citations omitted and
emphasis ours)
Consistent with the foregoing, we reiterated in Blue Cross
Health Care, Inc. v. Spouses Olivares21:
In Philamcare Health Systems, Inc. v. CA, we ruled that a
health care agreement is in the nature of a non-life
insurance. It is an established rule in insurance contracts
that when their terms contain limitations on liability, they
should be construed strictly against the insurer. These are
contracts of adhesion the terms of which must be
interpreted and enforced stringently against the insurer
which prepared the contract. This doctrine is equally
applicable to health care agreements.
xxxx
x x x [L]imitations of liability on the part of the insurer or
health care provider must be construed in such a way as to
preclude it from evading its obligations. Accordingly, they
should be scrutinized by the courts with "extreme
jealousy" and "care" and with a "jaundiced eye." x x
x.22 (Citations omitted and emphasis supplied)
In the instant case, the extent of Fortune Cares liability to
Amorin under the attendant circumstances was governed
by Section 3(B), Article V of the subject Health Care
Contract, considering that the appendectomy which the
member had to undergo qualified as an emergency care,
but the treatment was performed at St. Francis Medical

Center in Honolulu, Hawaii, U.S.A., a non-accredited

hospital. We restate the pertinent portions of Section 3(B):
B. EMERGENCY CARE IN NON-ACCREDITED
HOSPITAL
1. Whether as an in-patient or out-patient, FortuneCare
shall reimburse the total hospitalization cost including the
professional fee (based on the total approved charges) to a
member who receives emergency care in a non-accredited
hospital. The above coverage applies only to Emergency
confinement within Philippine Territory. However, if the
emergency confinement occurs in foreign territory,
Fortune Care will be obligated to reimburse or pay eighty
(80%) percent of the approved standard charges which
shall cover the hospitalization costs and professional fees.
x x x23 (Emphasis supplied)
The point of dispute now concerns the proper
interpretation of the phrase "approved standard charges",
which shall be the base for the allowable 80% benefit. The
trial court ruled that the phrase should be interpreted in
light of the provisions of Section 3(A), i.e., to the extent
that may be allowed for treatments performed by
accredited physicians in accredited hospitals. As the
appellate court however held, this must be interpreted in
its literal sense, guided by the rule that any ambiguity
shall be strictly construed against Fortune Care, and
liberally in favor of Amorin.
The Court agrees with the CA. As may be gleaned from
the Health Care Contract, the parties thereto contemplated
the possibility of emergency care in a foreign country. As
the contract recognized Fortune Cares liability for
emergency treatments even in foreign territories, it
expressly limited its liability only insofar as the
percentage of hospitalization and professional fees that
must be paid or reimbursed was concerned, pegged at a
mere 80% of the approved standard charges.
The word "standard" as used in the cited stipulation was
vague and ambiguous, as it could be susceptible of
different meanings. Plainly, the term "standard charges"
could be read as referring to the "hospitalization costs and
professional fees" which were specifically cited as
compensable even when incurred in a foreign country.
Contrary to Fortune Cares argument, from nowhere in the
Health Care Contract could it be reasonably deduced that
these "standard charges" referred to the "Philippine
standard", or that cost which would have been incurred if
the medical services were performed in an accredited
hospital situated in the Philippines. The RTC ruling that
the use of the "Philippine standard" could be inferred from
the provisions of Section 3(A), which covered emergency
care in an accredited hospital, was misplaced. Evidently,
the parties to the Health Care Contract made a clear
distinction between emergency care in an accredited
hospital, and that obtained from a non-accredited
hospital.1wphi1 The limitation on payment based on
"Philippine standard" for services of accredited physicians
was expressly made applicable only in the case of an
emergency care in an accredited hospital.
The proper interpretation of the phrase "standard charges"
could instead be correlated with and reasonably inferred
from the other provisions of Section 3(B), considering that
Amorins case fell under the second case, i.e., emergency

care in a non-accredited hospital. Rather than a

determination of Philippine or American standards, the
first part of the provision speaks of the full reimbursement
of "the total hospitalization cost including the professional
fee (based on the total approved charges) to a member
who receives emergency care in a non-accredited hospital"
within the Philippines. Thus, for emergency care in nonaccredited hospitals, this cited clause declared the standard
in the determination of the amount to be paid, without any
reference to and regardless of the amounts that would
have been payable if the treatment was done by an
affiliated physician or in an affiliated hospital. For
treatments in foreign territories, the only qualification was
only as to the percentage, or 80% of that payable for
treatments performed in non-accredited hospital.
All told, in the absence of any qualifying word that clearly
limited Fortune Care's liability to costs that are applicable
in the Philippines, the amount payable by Fortune Care
should not be limited to the cost of treatment in the
Philippines, as to do so would result in the clear
disadvantage of its member. If, as Fortune Care argued,
the premium and other charges in the Health Care
Contract were merely computed on assumption and risk
under Philippine cost and, that the American cost standard
or any foreign country's cost was never considered, such
limitations should have been distinctly specified and
clearly reflected in the extent of coverage which the
company voluntarily assumed. This was what Fortune
Care found appropriate when in its new health care
agreement with the House of Representatives, particularly
in their 2006 agreement, the provision on emergency care
in non-accredited hospitals was modified to read as
follows:
However, if the emergency confinement occurs in a
foreign territory, Fortunecare will be obligated to
reimburse or pay one hundred (100%) percent under
approved Philippine Standard covered charges for
hospitalization costs and professional fees but not to
exceed maximum allowable coverage, payable in pesos at
prevailing currency exchange rate at the time of availment
in said territory where he/she is confined. x x x24
Settled is the rule that ambiguities in a contract are
interpreted against the party that caused the ambiguity.
"Any ambiguity in a contract whose terms are susceptible
of different interpretations must be read against the party
who drafted it."25
WHEREFORE, the petition is DENIED. The Decision
dated September 27, 2010 and Resolution dated February
24, 2011 of the Court of Appeals in CA-G.R. CV No.
87255 are AFFIRMED.

CERILA
J.
CALANASAN,
represented
by
TEODORA J. CALANASAN as Attorney-inFact, Petitioner,
vs.
SPOUSES VIRGILIO DOLORITO and EVELYN C.
DOLORITO, Respondents.

In its September 29, 2005 decision,6 the CA affirmed the

RTC ruling but on a different legal ground. The CA, after
legal analysis, found that the donation was inter vivos and
onerous. Therefore, the deed of donation must be treated
as an ordinary contract and Article 765 of the New Civil
Code finds no relevance.

DECISION

On March 8, 2006, the CA rejected the petitioners motion

for reconsideration.

BRION, J.:
THE PARTIES ARGUMENTS
1

Through a petition for review on certiorari, filed under

Rule 45 of the Rules of Court, petitioner Cerila J.
Calanasan seeks the reversal of the decision2 dated
September 29, 2005, and the resolution3 dated March 8
2006 of the Court of Appeals CA) in CA-G.R. CV No.
84031.
THE FACTS
The petitioner, Cerila J. Calanasan Cerila), took care of
her orphan niece, respondent Evelyn C. Dolorita, since the
latter was a child. In 1982, when Evelyn was already
married to respondent Virgilio Dolorita, the petitioner
donated to Evelyn a parcel of land which had earlier been
mortgaged for Pl5,000.00. The donation was conditional:
Evelyn must redeem the land and the petitioner was
entitled to possess and enjoy the property as long as she
lived. Evelyn signified her acceptance of the donation and
its terms in the same deed. Soon thereafter, Evelyn
redeemed the property, had the title of the land transferred
to her name, and granted the petitioner usufructuary rights
over the donated land.
On August 15, 2002, the petitioner, assisted by her sister
Teodora J. Calanasan, complained with the Regional Trial
Court (RTC) that Evelyn had committed acts of
ingratitude against her. She prayed that her donation in
favor of her niece be revoked; in their answer, the
respondents denied the commission of any act of
ingratitude.

The petitioner filed the present petition for review on

certiorari with this Court to challenge the CA rulings. The
petitioner insists that Evelyn committed acts of ingratitude
against her. She argues that, if the donation was indeed
onerous and was subject to the rules of contracts, then
greater reason exists to revoke it. According to the
petitioner, Evelyn violated all the terms of the contract,
especially the provision enjoining the latter from acquiring
ownership over the property during the lifetime of the
donor.
The respondents, for their part, point out that the petitioner
raises factual issues that a petition under Rule 45 of the
Rules of Court does not allow. Furthermore, the petitioner
misleads the Court in claiming that the deed of donation
prohibited Evelyn from acquiring ownership of the land.
In fact, the deed of donation confined the donation to only
two conditions: 1) redemption of the mortgage; and 2) the
petitioners usufruct over the land as long as she lived.
The respondents complied with these conditions. The
respondents likewise remind the Court that issues not
advanced before the lower courts should not be
entertained the objective that Teodora is now trying to
accomplish. Finally, the respondents applaud the CA in
finding that the donation, being inter vivos and onerous, is
irrevocable under Article 765 of the New Civil Code.
THE COURTS RULING
We resolve to deny the petition for lack of merit.

The petitioner died while the case was pending with the
RTC. Her sisters, Teodora and Dolores J. Calanasan,
substituted for her.
After the petitioner had rested her case, the respondents
filed a demurrer to evidence. According to them, the
petitioner failed to prove that it was Evelyn who
committed acts of ingratitude against the petitioner; thus,
Article 7654 of the New Civil Code found no application
in the case.
THE RTCS RULING
In its September 3, 2004 order,5 the RTC granted the
demurrer to evidence and dismissed the complaint. Article
765 of the New Civil Code did not apply because the
ungrateful acts were committed against Teodora, the
donors sister, and not against the donor, the petitioner.
Equally important, the perpetrator of the ungrateful acts
was not Evelyn, but her husband Virgilio.
THE CAS RULING
The petitioner challenged the RTCs ruling before the CA.

The petitioner may not raise factual issues; arguments not

raised before the lower courts may not be introduced on
appeal.
Teodora insists that Evelyn perpetrated ungrateful acts
against the petitioner. Moreover, the donation never
materialized because Evelyn violated a suspensive
condition of the donation when she had the property title
transferred to her name during the petitioners lifetime.
As correctly raised by the respondents, these allegations
are factual issues which are not proper for the present
action. The Court is not a trier of facts.7 The Court cannot
re-examine, review or re-evaluate the evidence and the
factual review made by the lower courts.8 In the absence
of compelling reasons, the Court will not deviate from the
rule that factual findings of the lower tribunals are final
and binding on this Court.
It has not escaped the Courts attention that this is the only
time the petitioner raised the arguments that donation
never materialized because the donee violated a condition
of the donation when she had the title of the property
transferred to her name. The petitioner never raised this

issue before the lower courts. It cant be emphasized

enough that the Court will not revisit the evidence
presented below as well as any evidence introduced for
the first time on appeal.9 Aside from being a factual issue
that is not proper for the present action, the Court
dismisses this new argument for being procedurally infirm
and violative of due process. As we have held in the past:
"points of law, theories, issues and arguments not brought
to the attention of the trial court will not be and ought not
to be considered by a reviewing court, as these cannot be
raised for the first time on appeal. Basic consideration of
due process impels this rule."10
Rules of contract govern the onerous portion of donation;
rules of donation only apply to the excess, if any.
We now come to the appreciation of the legal incidents of
the donation vis--vis the alleged ungrateful acts.
In Republic of the Phils. v. Silim,11 we classified
donations according to purpose. A pure/simple donation is
the truest form of donation as it is based on pure gratuity.
The remuneratory/compensatory type has for its purpose
the rewarding of the donee for past services, which
services do not amount to a demandable debt. A
conditional/modal donation, on the other hand, is a
consideration for future services; it also occurs where the
donor imposes certain conditions, limitations or charges
upon the donee, whose value is inferior to the donation
given. Lastly, an onerous donation imposes upon the
donee a reciprocal obligation; this is made for a valuable
consideration whose cost is equal to or more than the thing
donated.12
In De Luna v. Judge Abrigo,13 we recognized the distinct,
albeit old, characterization of onerous donations when we
declared: Under the old Civil Code, it is a settled rule that
donations with an onerous cause are governed not by the
law on donations but by the rules on contracts, as held in
the cases of Carlos v. Ramil L-6736, September 5, 1911,
20 Phil. 183, Manalo vs. de Mesa L-9449, February 12,
1915, 29 Phil. 495."14 In the same case, we emphasized
the retention of the treatment of onerous types of donation,
thus: "The same rules apply under the New Civil Code as
provided in Article 733 thereof which provides:
Article 733. Donations with an onerous cause shall be
governed by the rules on contracts, and remuneratory
donations by the provisions of the present Title as regards
that portion which exceeds the value of the burden
imposed."15
We agree with the CA that since the donation imposed on
the donee the burden of redeeming the property
forP15,000.00, the donation was onerous. As an
endowment for a valuable consideration, it partakes of the
nature of an ordinary contract; hence, the rules of contract
will govern and Article 765 of the New Civil Code finds
no application with respect to the onerous portion of the
donation.
Insofar as the value of the land exceeds the redemption
price paid for by the donee, a donation exists, and the
legal provisions on donation apply. Nevertheless, despite
the applicability of the provisions on donation to the
gratuitous portion, the petitioner may not dissolve the
donation. She has no factual and legal basis for its

revocation, as aptly established by the RTC. First, the

ungrateful acts were committed not by the donee; it was
her husband who committed them. Second, the ungrateful
acts were perpetrated not against the donor; it was the
petitioner's sister who received the alleged ill treatments.
These twin considerations place the case out of the
purview of Article 765 of the New Civil Code.
WHEREFORE, premises considered, the Court DENIES
the petition for review on certiorari. The decision dated
September 29, 2005, and the resolution dated March 8,
2006, of the Court of Appeals in CA-G.R. CV No. 84031
are hereby AFFIRMED. Costs against Cerila J. Calanasan,
represented by Teodora J. Calanasan as Attorney-in-Fact.