CHAPTER 2.

ESSENTIAL REQUISITES OF CONTRACTS

G.R. No. 109355 October 29, 1999

SERAFIN MODINA, petitioner,

vs.
COURT OF APPEALS AND ERNESTO HONTARCIEGO, PAUL FIGUEROA,
TEODORO HIPALLA AND RAMON CHIANG, MERLINDA CHIANG, respondents.

PURISIMA, J.:

At bar is a Petition for Review on Certiorari assailing the decision of the Court of
Appeals in CA G.R. CV No. 26051 affirming the decision of the trial court in the case,
entitled "Serafin Modina vs. Ernesto Hontarciego, Paulino Figueroa and Ramon Chiang
vs. Merlinda Plana Chiang, intervenors", which declared as void and inexistent the deed
of definite sale dated December 17, 1975 as well as the Certificates of Title Nos. T-
86912, T-86913, T-86914 in the name of Ramon Chiang.1âwphi1.nêt

The facts that matter are as follows:

The parcels of land in question are those under the name of Ramon Chiang (hereinafter
referred to as CHIANG) covered by TCT Nos. T-86912, T-86913, and T-86914. He
theorized that subject properties were sold to him by his wife, Merlinda Plana Chiang
(hereinafter referred to as MERLINDA), as evidenced by a Deed of Absolute Sale dated
December 17, 1975, 1 and were subsequently sold by CHIANG to the petitioner Serafin
Modina (MODINA), as shown by the Deeds of Sale, dated August 3, 1979 and August
24, 1979, respectively.

MODINA brought a Complaint for Recovery of Possession with Damages against the
private respondents, Ernesto Hontarciego, Paul Figueroa and Teodoro Hipalla,
docketed as Civil Case No. 13935 before the Regional Trial Court of Iloilo City.

Upon learning the institution of the said case, MERLINDA presented a Complaint-in-
intervention, seeking the declaration of nullity of the Deed of Sale between her husband
and MODINA on the ground that the titles of the parcels of land in dispute were never
legally transferred to her husband. Fraudulent acts were allegedly employed by him to
obtain a Torrens Title in his favor. However, she confirmed the validity of the lease
contracts with the other private respondents.

MERLINDA also admitted that the said parcels of land were those ordered sold by
Branch 2 of the then Court of First Instance of Iloilo in Special Proceeding No. 2469 in
"Intestate Estate of Nelson Plana" where she was appointed as the administratix, being
the widow of the deceased, her first husband. An Authority to Sell was issued by the
said Probate Court for the sale of the same properties. 2
After due hearing, the Trial Court decided in favor of MERLINDA, disposing thus:

WHEREFORE, judgment is hereby rendered (1) declaring as void and

inexistent the sale of Lots 10063, 10088, 10085 and 10089 of the
Cadastral Survey of Sta. Barbara by Merlinda Plana in favor of Ramon
Chiang as evidenced by the deed of definite sale dated December 17,
1975 (Exhibits "H"; "3"-Chiang; "9" Intervenor) as well as the Certificates
of Title Nos. T-86912, T-86913, T-86914 and T-86915 in the name of
Ramon Chiang; (2) declaring as void and inexistent the sale of the same
properties by Ramon Chiang in favor of Serafin Modina as evidenced by
the deeds of sale (Exhibits "A", "B", "6" — Chiang and "7" — Chiang)
dated August 3, and 24, 1979, as well as Certificates of Title Nos. T-
102631, 102630, 102632 and 102890 in the name of Serafin Modina; (3)
ordering the Register of Deeds of Iloilo to cancel said certificates of title in
the names of Ramon Chiang and Serafin Modina and to reinstate the
Certificates of Title Nos. T-57960, T-57962, T-57963 and T-57864 in the
name of Nelson Plana; (4) ordering Serafin Modina to vacate and restore
possession of the lots in question to Merlinda Plana Chiang; (5) ordering
Ramon Chiang to restitute and pay to Serafin Modina the sum of
P145,800.00 and; (6) ordering Serafin Modina to pay Ernesto Hontarciego
the sum of P44,500.00 as actual and compensatory damages plus the
sum of P5,000.00, for and as attorney's fees, with costs in favor of said
defendants against the plaintiff.

On appeal; the Court of Appeals affirmed the aforesaid decision in toto.

Dissatisfied therewith, petitioner found his way to this Court via the present Petition for
Review under the Rule 45 seeking to set aside the assailed decision of the Court of
Appeals.

Raised for resolution here are: (1) whether the sale of subject lots should be nullified,
(2) whether petitioner was not a purchaser in good faith, (3) whether the decision of the
trial court was tainted with excess of jurisdiction; and (4) whether or not only three-
fourths of subject lots should be returned to the private respondent.

Anent the first issue, petitioner theorizes that the sale in question is null and void for
being violative of Article 1490 3of the New Civil Code prohibiting sales between
spouses. Consequently, what is applicable is Article 1412 4 supraon the principle of in
pari delicto, which leaves both guilty parties where they are, and keeps undisturbed the
rights of third persons to whom the lots involved were sold; petitioner
stressed.1âwphi1.nêt

Petitioner anchors his submission on the following statements of the Trial Court which
the Court of Appeals upheld, to wit:
 Furthermore, under Art. 1490, husband and wife are prohibited to sell
properties to each other. And where, as in this case, the sale is inexistent
for lack of consideration, the principle of in pari delicto non oritur
actio does not apply. (Vasquez vs. Porta, 98 Phil 490), (Emphasis ours)
Thus, Art. 1490 provides:

Art. 1490. The husband and the wife cannot sell property to
each other, except:

(1) when a separation of propety was agreed upon in the

marriage settlements; or

(2) when there has been a judicial separation of property

under Art. 191.

The exception to the rule laid down in Art. 1490 of the New Civil Code not
having existed with respect to the property relations of Ramon Chiang and
Merlinda Plana Chiang, the sale by the latter in favor of the former of the
properties in question is invalid for being prohibited by law. Not being the
owner of subject properties, Ramon Chiang could not have validly sold the
same to plaintiff Serafin Modina. The sale by Ramon Chiang in favor of
Serafin Modina is, likewise, void and inexistent.

xxx xxx xxx

The Court of Appeals, on the other hand, adopted the following findings a quo: that
there is no sufficient evidence establishing fault on the part of MERLINDA, and
therefore, the principle of in pari delicto is inapplicable and the sale was void for want of
consideration. In effect, MERLINDA can recover the lots sold by her husband to
petitioner MODINA. However, the Court of Appeals ruled that the sale was void for
violating Article 1490 of the Civil Code, which prohibits sales between spouses.

The principle of in pari delicto non oritur actio 6 denies all recovery to the guilty
parties inter se. It applies to cases where the nullity arises from the illegality of the
consideration or the purpose of the contract. 7 When two persons are equally at fault,
the law does not relieve them. The exception to this general rule is when the principle is
invoked with respect to inexistent contracts. 8

In the petition under consideration, the Trial Court found that subject Deed of Sale was
a nullity for lack of any consideration. 9 This finding duly supported by evidence was
affirmed by the Court of Appeals. Well-settled is the rule that this Court will not disturb
such finding absent any evidence to the contrary. 10

Under Article 1409 11 of the New Civil Code, enumerating void contracts, a contract
without consideration is one such void contract. One of the characteristics of a void or
inexistent contract is that it produces no effect. So also, inexistent contracts can be
invoked by any person whenever juridical effects founded thereon are asserted against
him. A transferor can recover the object of such contract by accion reivindicatoria and
any possessor may refuse to deliver it to the transferee, who cannot enforce the
transfer. 12

Thus, petitioner's insistence that MERLINDA cannot attack subject contract of sale as
she was a guilty party thereto is equally unavailing.

But the pivot of inquiry here is whether MERLINDA is barred by the principle of in pari
delicto from questioning subject Deed of Sale.

It bears emphasizing that as the contracts under controversy are inexistent contracts
within legal contemplation. Articles 1411 and 1412 of the New Civil Code are
inapplicable. In pari delicto doctrine applies only to contracts with illegal consideration or
subject matter, whether the attendant facts constitute an offense or misdemeanor or
whether the consideration involved is merely rendered illegal. 13

The statement below that it is likewise null and void for being violative of Article 1490
should just be treated as a surplusage or an obiter dictum on the part of the Trial Court
as the issue of whether the parcels of land in dispute are conjugal in nature or they fall
under the exceptions provided for by law, was neither raised nor litigated upon before
the lower Court. Whether the said lots were ganancial properties was never brought to
the fore by the parties and it is too late to do so now.

Furthermore, if this line of argument be followed, the Trial Court could not have declared
subject contract as null and void because only the heirs and the creditors can question
its nullity and not the spouses themselves who executed the contract with full
knowledge of the prohibition. 14

Records show that in the complaint-in-intervention of MERLINDA, she did not aver the
same as a ground to nullify subject Deed of Sale. In fact, she denied the existence of
the Deed of Sale in favor of her husband. In the said Complaint, her allegations referred
to the want of consideration of such Deed of Sale. She did not put up the defense under
Article 1490, to nullify her sale to her husband CHIANG because such a defense would
be inconsistent with her claim that the same sale was inexistent.1âwphi1.nêt

The Trial Court debunked petitioner's theory that MERLINDA intentionally gave away
the bulk of her and her late husband's estate to defendant CHIANG as his exclusive
property, for want of evidentiary anchor. They insist on the Deed of Sale wherein
MERLINIDA made the misrepresentation that she was a widow and CHIANG was
single, when at the time of execution thereof, they were in fact already married.
Petitioner insists that this document conclusively established bad faith on the part of
MERLINDA and therefore, the principle of in pari delicto should have been applied.

These issues are factual in nature and it is not for this Court to appreciate and evaluate
the pieces of evidence introduced below. An appellate court defers to the factual
findings of the Trial Court, unless petitioner can show a glaring mistake in the
appreciation of relevant evidence.

Since one of the characteristics of a void or inexistent contract is that it does not
produce any effect, MERLINDA can recover the property from petitioner who never
acquired title thereover.

As to the second issue, petitioner stresses that his title should have been respected
since he is a purchaser in good faith and for value. The Court of Appeals, however,
opined that he (petitioner) is not a purchaser in good faith. It found that there were
circumstances known to MODINA which rendered their transaction fraudulent under the
attendant circumstances.

As a general rule, in a sale under the Torrens system, a void title cannot give rise to a
valid title. The exception is when the sale of a person with a void title is to a third person
who purchased it for value and in good faith.

A purchaser in good faith is one who buys the property of another without notice that
some other person has a right to or interest in such property and pays a full and fair
price at the time of the purchase or before he has notice of the claim or interest of some
other person in the property.

In the case under scrutiny, petitioner cannot claim that he was a purchaser in good faith.
There are circumstances which are indicia of bad faith on his part, to wit: (1) He asked
his nephew, Placido Matta, to investigate the origin of the property and the latter learned
that the same formed part of the properties of MERLINDA's first husband; (2) that the
said sale was between the spouses; (3) that when the property was inspected, MODINA
met all the lessees who informed that subject lands belong to MERLINDA and they had
no knowledge that the same lots were sold to the husband.

It is a well-settled rule that a purchaser cannot close his eyes to facts which would put a
reasonable man upon his guard to make the necessary inquiries, and then claim that he
acted in good faith. His mere refusal to believe that such defect exists, or his wilful
closing of his eyes to the possibility of the existence of a defect in his vendor's title, will
not make him an innocent purchaser for value, if it afterwards develops that the title was
in fact defective, and it appears that he had such notice of the defect as would have led
to its discovery had he acted with that measure of precaution which may reasonably be
required of a prudent man in a like situation. 15

Thus, petitioner cannot claim that the sale between him and MODINA falls under the
exception provided for by law.

With regard to the third issue posed by petitioner — whether the Trial Court's decision
allowing recovery on the part of Merlinda Chiang of subject properties was void —
petitioner's contention is untennable. It is theorized that as the sale by MERLINDA was
by virtue of an Order to Sell issued in the Intestate Estate Proceedings of her late
husband, Nelson Plana — to allow recovery will defeat the said order of the Probate
Court. Petitioner equated the aforesaid Order to Sell as a judgment, which another court
in a regular proceeding has no jurisdiction to reverse.

Petitioner is under the mistaken impression that as the Order to Sell had become a
judgment in itself as to the validity of the sale of the properties involved, any question as
to its nullity should have been brought before the Court of Appeals on appeal when the
said Order was issued.

It is a well-settled rule that a Court of First Instance (now Regional Trial Court) has
jurisdiction over a case brought to rescind a sale made upon prior authority of a Probate
Court. This does not constitute an interference or review of the order of a co-equal
Court since the Probate Court has no jurisdiction over the question of title to subject
properties. Consequently, a separate action may be brought to determine the question
of ownership. 16

Lastly, on the issue of whether only three-fourths of the property in question should
have been returned to MERLINDA, petitioner's stance is equally unsustainable. It is a
settled doctrine that an issue which was neither averred in the Complaint nor raised
during the trial before the lower court cannot be raised for the first time on appeal, as
such a recourse would be offensive to the basic rules of fair play, justice, and due
process. 17

The issue of whether only three-fourths of subject property will be returned was never
an issue before the lower court and therefore, the petitioner cannot do it now. A final
word. In a Petition for Review, only questions of law may be raised. It is perceived by
the Court that what petitioner is trying to, albeit subtly, is for the Court to examine the
probative value or evidentiary weight of the evidence presented below 18. The Court
cannot do that unless the appreciation of the pieces of evidence on hand is glaringly
erroneous. But this is where petitioner utterly failed.1âwphi1.nêt

WHEREFORE, the Petition is DENIED and the decision of the Court of Appeals, dated
September 30, 1992, in CA-G.R. CV No. 26051 AFFIRMED. No pronouncement as to
costs.

SO ORDERED.

G.R. No. 143361 February 9, 2006

PAULO BALLESTEROS, Petitioner,

vs.
ROLANDO ABION, Respondent.

DECISION
CORONA, J.:

Before us is a petition for review on certiorari under Rule 45 of the Rules of Court
assailing the July 15, 1999 decision1 of the Court of Appeals (CA) in CA-G.R. SP No.
46065 which affirmed the decision of the Regional Trial Court (RTC) of Iriga City,
Branch 37, in Civil Case No. 2917.

The property subject of this petition is a two-door, three-story commercial building and
the 229 sq.m. parcel of land on which it stands. The property was originally owned by
Ruperto Ensano, as evidenced by TCT No. 6178. Ownership was subsequently
transferred to the Development Bank of the Philippines (DBP) which, in turn, sold the
property to Dr. Rodolfo Vargas in a deed of absolute sale dated March 30, 1988.
Despite these transfers of ownership, however, the property was registered in the
names of DBP and Dr. Vargas (TCT Nos. 941 and 942, respectively) only on February
21, 1996.

Meanwhile, on March 14, 1991, petitioner entered into a contract of lease for one door
of the building with Ronald Vargas, son of Dr. Vargas, who represented himself as the
absolute owner of the property. Under the agreement (which was not registered in the
Register of Deeds), the lease was to run until April 1, 1996.

On September 27, 1995, Dr. Vargas sold the property to respondent. This was
evidenced by a deed of absolute sale of even date. TCT No. 949 in the name of the
respondent was subsequently issued on April 10, 1996.

In the meantime, on October 30, 1995, petitioner entered into a new contract of lease
with Ronald Vargas who again misrepresented himself as the absolute owner of the
property. This new agreement extended the term of the original contract of lease
between the parties and included the remaining door of the building in its coverage. It
was to be effective for a period of five years from November 1, 1995, or until November
1, 2000.

Since respondent had not yet taken possession of the building, petitioner immediately
occupied the additional door upon the execution of the new contract of lease. He made
advance payments for the rent of the two doors until June 1997. He also sought to
register the new contract of lease with the Register of Deeds of Iriga City. However, the
contract was entered only in the primary book because it could not be registered for
several reasons: (a) the requisite tax had not been paid (b) the contract lacked a
documentary stamp and (c) the tax declaration of the property was not in the name of
the lessor.2

On April 30, 1996, petitioner received respondent’s April 25, 1996 letter demanding that
he vacate the property and surrender its possession. On June 20, 1996, petitioner
received another letter from respondent’s counsel reiterating the demand for him to
vacate the property. All this notwithstanding, petitioner refused to vacate the premises.
On September 4, 1996, respondent filed a complaint for unlawful detainer with damages
against petitioner in the Municipal Trial Court in Cities (MTCC) of Iriga City, Branch 2. It
was, however, dismissed for failure to state a cause of action.

On appeal, the RTC of Iriga City, Branch 37, reversed the decision of the MTCC and
ordered petitioner to vacate the property and surrender its possession to respondent.
Petitioner was also ordered to pay respondent ₱50,000 as attorney’s fees and ₱7,000
per month as rental for the property from September 1995 until petitioner vacated the
premises. Petitioner moved for a reconsideration of the RTC decision but the motion
was denied.

On respondent’s motion, the RTC issued a writ of execution dated December 1,

1997.3 It was received on December 3, 1997 by petitioner’s wife. Petitioner filed an
urgent motion for time to vacate the premises4 and a supplemental motion for time to
vacate the property,5 praying for thirty days from December 5, 1997 (the deadline given
by the sheriff for petitioner to leave the premises) within which to vacate the property.
On December 9, 1997, the RTC denied petitioner’s motion and directed the sheriff to
immediately effect the restitution and delivery of the property to respondent.

The sheriff filed a manifestation with motion dated December 9, 1997 6 praying that the
use of force to implement the writ of execution be allowed in order to open the premises
and deliver its possession to respondent. On the other hand, petitioner moved for a
reconsideration of the December 9, 1997 order of the RTC as well as for the suspension
of the implementation of the writ of execution.

Acting on the sheriff’s manifestation with motion and the petitioner’s motion for
reconsideration and/or suspension of the implementation of the writ of execution, the
RTC, in an order dated December 11, 1997, denied petitioner’s motion and allowed the
sheriff to execute the writ pursuant to paragraph (c) of Rule 39, Section 10 of the Rules
of Court.

As authorized by the trial court, the sheriff forced open the main entrance of the building
and delivered possession of the property to respondent on December 15, 1997. 7

Petitioner filed a petition for review with the CA. It was docketed as CA-G.R. SP No.
46065. On July 15, 1999, the CA affirmed the RTC decision with modification. The CA
ruled that petitioner’s right of possession to the property was only by virtue of the
second lease contract dated October 30, 1995 between petitioner and Ronald Vargas. It
was clear, however, that Ronald Vargas was not the owner of the property and
therefore had no right to lease it out. Petitioner himself admitted respondent’s ownership
of the property. Neither was there any evidence that Ronald Vargas had been
authorized by respondent or even by Dr. Vargas himself to transact the second lease on
their behalf.
The CA held that petitioner’s possession of the property from the date of purchase by
respondent was merely by tolerance. Such possession became unlawful from the time
respondent made a demand on petitioner to vacate it.

The CA further ruled that petitioner could not pretend ignorance of the ownership of the
property when he entered into the second lease agreement. The property was
registered with the Register of Deeds and such registration constituted notice to the
whole world.

However, the CA reduced the award of attorney’s fees from ₱50,000 to ₱20,000 for lack
of factual basis. The CA also took the stipulation in petitioner’s lease agreement into
consideration and reduced the rent from ₱7,000 to ₱5,000 per month, and only for the
period covering July 1 to December 15, 1997.

Petitioner moved for a reconsideration of the CA decision but it was denied in a

resolution dated May 25, 2000.

Hence, this petition, which raises the following issues:

1. whether or not respondent could legally eject petitioner or terminate the lease;

2. whether or not respondent was able to establish a cause of action;

3. whether or not the trial court (MTCC of Iriga City, Br. 2) had jurisdiction to try
the case;

4. whether or not, as ruled by the [CA], there was pretended ignorance by

petitioner of the ownership of the property;

5. whether or not the [CA’s] award of attorney’s fees was justified;

6. whether or not the implementation of the writ of execution dated December 1,

1997 on December 15, 1997 was valid;

7. whether or not respondent and the sheriffs who implemented on December 15,
1997 the writ of execution dated December 1, 1997 (as reiterated by the RTC’s
order of December 11, 1997) should be held in contempt of court [and]

8. whether or not the [RTC had] the jurisdiction to issue a writ for the
implementation of the [CA’s] decision when the case was originally filed with the
[MTCC].8

Propriety of the Ejectment

Petitioner contends that respondent could not have legally ejected him from the
premises or terminated the lease. He claims that the two lease contracts he entered into
with Ronald Vargas were valid and that contracts validly entered into by a predecessor-
in-interest should be respected by, and be binding upon, his successor-in-interest.
According to petitioner, he was not unlawfully detaining the property because the action
was commenced by respondent while the second lease contract was still in force. He
insists that his good faith and honest belief that he was transacting with the true owner
should be considered in favor of the validity of the lease contracts entered into by him.

Petitioner also invokes our ruling in Garcia v. Court of Appeals9 that the owner’s
successor-in-interest must respect an existing contract of lease. Any attempt to eject the
lessee within the period of lease constitutes a breach of contract.

Petitioner further asserts that the second lease contract was "registered" with the
Register of Deeds of Iriga City, hence respondent had notice thereof and was bound to
respect it. We disagree.

The first premise of petitioner’s argument, that both lease agreements were valid, is
erroneous. As correctly observed by the RTC and the CA, Ronald Vargas was not the
owner of the property and had no authority to let it.

Although the lessor need not be the owner of the property being leased,10 he should
have a right (e.g., either as a usufructuary or a lessee) or at least an authority (e.g., as
an agent of the owner, usufructuary, or lessee) to lease it out. Here, Ronald Vargas had
neither the right nor the authority to grant petitioner the lease of the property.

Dr. Vargas is deemed to have ratified the first lease because he never objected to it and
in fact allowed petitioner to occupy the property for five years despite his knowledge of
his son Ronald’s misdeed. Thus, we consider the first lease valid. But the same cannot
be said of the second lease. Under the principle of relativity of contracts, the sale of the
property by Dr. Vargas to respondent bound Ronald Vargas as an heir of the seller.
Neither did respondent authorize him to enter into a new lease contract with petitioner.
Thus, Ronald Vargas could not have validly executed the second lease agreement upon
which petitioner now bases his right to the continued possession of the property.

The river cannot rise higher than its source. Where the purported lessor is bereft of any
right or authority to lease out the property, then his supposed lessee does not acquire
any right to the possession or enjoyment of the property.

Suffice it to say that the second lease contract was legally inexistent for lack of an
object certain. Under Arts. 1318 and 1409 (3) of the Civil Code, contracts the cause or
object of which did not exist at the time of the transaction are inexistent and void ab
initio.

Petitioner’s claim of good faith is of no moment. The good faith of a party in entering into
a contract is immaterial in determining whether it is valid or not. Good faith, not being an
essential element of a contract, has no bearing on its validity. No amount of good faith
can validate an agreement which is otherwise void. A contract which the law denounces
as void is necessarily no contract at all and no effort or act of the parties to create one
can bring about a change in its legal status.11

Any presumption of good faith on the part of petitioner disappeared after he learned
from the Register of Deeds that the property was already registered in the name of
another person. Possession in good faith ceases from the moment defects in the title
are made known to the possessor by extraneous evidence or by a suit for recovery of
the property by the true owner.12 Every possessor in good faith becomes a possessor in
bad faith from the moment he becomes aware that what he believed to be true is not
so.13

When petitioner presented the second lease contract to the Register of Deeds a day
after its execution, his attention was called to the fact that the "lessor" (Ronald Vargas)
whom he believed to be the owner of the property had no authority to lease it out. From
that moment, his possession ceased to be in good faith.1avvphil.net

Petitioner’s reliance on our ruling in the Garcia case is misplaced. Garcia involved the
lease of a residential unit and was governed by a special law, "An Act Regulating
Rentals of Dwelling Units or of Land on which Another’s Dwelling is Located and for
Other Purposes" (BP 25). In this case, the property involved is a commercial building,
not a residential unit. The Garcia case is therefore inapplicable.

Assuming arguendo that Garcia is applicable, petitioner’s argument would still be

untenable. We held in Garcia that, while a successor-in-interest would be in breach of
contract if he were to eject a lessee of his predecessor-in-interest during the existence
of the lease, "where the lease has expired, there is no more contract to breach." Since
the lease between petitioner and Ronald Vargas had expired on April 1, 1996, there
was no existing lease contract that could have been breached when respondent made a
demand on petitioner to vacate the property on April 30, 1996.

Registration of the Lease Contract

Petitioner’s third argument is likewise without merit. Whether the second lease contract
was registered or not was immaterial since it was void. Registration does not legitimize
a void contract.

Moreover, assuming for the sake of argument that the second contract could be
registered, the primary entry thereof did not produce the effect of registration. Petitioner
presented the second lease contract to the Register of Deeds of Iriga City for
registration on October 31, 1995, or a day after its execution. The contract was,
however, merely entered in the primary book. It was not registered because it lacked
certain requisites.

It is well settled that for the registration of voluntary instruments (e.g., deed of sale or
contract of lease), it is necessary not only to register the deed, instrument of
assignment, mortgage or lease in the entry book of the register of deeds but also for the
Register of Deeds to annotate a memorandum thereof on the owner’s duplicate
certificate and its original.14 In voluntary registration, if the owner’s duplicate certificate is
not surrendered and presented or if no payment of registration fees is made within
fifteen days, entry in the day book will not convey or affect the land sold, mortgaged or
leased.15

Entry alone produces the effect of registration, whether the transaction entered is
voluntary or involuntary, so long as the registrant has complied with all that is required
of him for purposes of entry and annotation, and nothing more remains to be done but a
duty incumbent solely on the Register of Deeds.16 Here, petitioner admits that the
second lease contract was refused registration by the Register of Deeds for his failure
to comply with certain conditions for registration. And since petitioner failed to comply
with all the requisites for entry and annotation, the entry in the primary book did not
ripen into registration.

Curiously, petitioner uses "registered" (that is, the word ‘registered’ in quotation marks)
to describe his act of presenting the lease contract to the register of deeds. This shows
that petitioner himself doubted whether he had actually fulfilled the requirements for the
registration of the lease.

Petitioner also anchors his arguments against the ejectment on the second contract of
lease which was inexistent and void ab initio. But even assuming that it was valid, it
already lapsed on November 1, 2000, in which case the question of the propriety of
petitioner’s ejectment would now be moot.1avvphil.net

Sufficiency of the Allegations in the Complaint to Confer Jurisdiction on the

MTCC and to Establish a Cause of Action

Petitioner asserts that the MTCC had no jurisdiction to try the case because the
complaint did not allege that he was withholding possession of the property beyond the
expiration of the lease period and that, in violation of Rule 70, Section 2 of the Rules of
Court, respondent failed to establish a cause of action by omitting to allege that demand
to vacate was made for failure to pay the rent or comply with the conditions of the
contract. We disagree.

What determine the nature of the action as well as the court which has jurisdiction over
the case are the allegations in the complaint.17 In Hilario v. Court of Appeals,18 we ruled:

The settled rule is that a complaint for unlawful detainer is sufficient if it contains the
allegation that the withholding of possession or the refusal to vacate is unlawful, without
necessarily employing the terminology of the law. The complaint must aver facts
showing that the inferior court has jurisdiction to try the case, such as how defendant’s
possession started or continued. Thus, the allegation in a complaint that the "plaintiff
verbally asked the defendants to remove their houses on the lot of the former but the
latter refused and still refuse to do so without just and lawful grounds" was held to be
more than sufficient compliance with the jurisdictional requirements. (citations omitted)
The complaint filed with the MTCC alleged that petitioner had been holding the property
by virtue of an expired lease contract with the son of respondent’s predecessor-in-
interest and that, despite demands made by respondent for him to vacate the property,
petitioner had "unjustifiably refused to heed [respondent’s] demand and continuously
and unlawfully occup[ied] and possess[ed] [respondent’s] property." 19 Nothing could be
clearer to confer jurisdiction on the MTCC and to establish a cause of action.

While possession by tolerance is lawful, such possession becomes illegal from the
moment a demand to vacate is made by the owner and the possessor refuses to
comply with such demand. 20 A person who occupies the land of another with the latter’s
tolerance or permission, without any contract between them, is necessarily bound by an
implied promise that he will vacate upon demand, failing which a summary action for
ejectment is the proper remedy against him.21

The CA correctly ruled that petitioner’s possession from the time the property was sold
to respondent was merely by tolerance. His lawful possession was interrupted when
respondent demanded that he vacate the property. His refusal to comply with the
demand made his continued possession unlawful, giving respondent the right to institute
an action for unlawful detainer.1avvphil.net

Furthermore, it is also worthy to note that, in his motion for reconsideration of the RTC
decision, petitioner explicitly prayed that the "MTCC decision be affirmed." Since he
actively participated in the proceedings before the MTCC and in fact later sought the
affirmation of its decision, he in effect recognized its jurisdiction and he should now be
estopped from questioning the jurisdiction of that court. In other words, petitioner cannot
now assail the jurisdiction of the MTCC after voluntarily submitting himself to its
proceedings.22 We have held that "while lack of jurisdiction may be assailed at any
stage, a party’s active participation in the proceedings before a court without jurisdiction
will estop such party from assailing such lack of jurisdiction."23

Correctness of the Award of Attorney’s Fees

Petitioner argues that the award of attorney’s fees was improper because it was
touched upon only in the dispositive portion of the RTC decision, hence, the CA should
not have merely reduced the award of attorney’s fees but should have deleted it
entirely. We agree.

The award of attorney’s fees is the exception, not the general rule. It is not sound public
policy to place a penalty on the right to litigate; nor should attorney’s fees be awarded
every time a party wins a lawsuit.24 It is necessary for the court to make express
findings of facts and law that would bring the case within the exception and justify the
grant of such award.25

The CA correctly noted that the decisions of both the MTCC and the RTC do not state
any factual basis for an award of attorney’s fees. In particular, the award of attorney’s
fees was mentioned only in the dispositive portion of the RTC decision. Nonetheless,
instead of deleting the award of attorney’s fees, the CA merely reduced the amount
thereof from ₱50,000 to ₱20,000 on the ground that attorney’s fees may be awarded "if
the court deems it just and equitable."

Article 2208 (11) of the Civil Code allows the recovery of counsel’s fees:

where the court deems it just and equitable that attorney’s fees and expenses of
litigation should be recovered.

However, the conclusion must be borne out by findings of facts and law. 26 The exercise
of judicial discretion in the award of attorney’s fees under Article 2208 (11) of the Civil
Code demands a factual, legal or equitable justification. Without such justification, the
award is a conclusion without a premise, its basis being improperly left to speculation
and conjecture.27

The matter of attorney’s fees cannot be dealt with only in the dispositive portion of the
decision. The text of the decision must state the reason behind the award of attorney’s
fees.28 Otherwise, its award is totally unjustified.

Propriety of the Issuance and Service of the Writ of Execution

Petitioner alleges that the writ of execution was implemented in violation of the Rules of
Court because it was implemented after only one working day from his receipt of a copy
of the order dated December 11, 1997 (denying his motion for reconsideration and/or
suspension of the implementation of the writ of execution) instead of threeworking days
as provided in Rule 39, Section 10 (c) of the Rules of Court. According to him, since the
implementation of the writ was not in accordance with the Rules of Court, the sheriffs
should have been cited in contempt by the CA.

Petitioner’s error was that he counted the three days from receipt of denial of his motion
for reconsideration and/or suspension of the implementation of the writ on December
12, 1997. He should have counted it from receipt by his wife of the copy of the writ of
execution on December 3, 1997.

Under Rule 39, Section 10 (c) of the Rules of Court,29 the

writ of execution is carried out by giving the defendant notice of such writ and making a
demand that the latter vacate the property within three working days from such notice.
Hence, the three-day period of implementation of the writ of execution should be
reckoned from the date petitioner was notified of the writ, that is, from December 3,
1997, the date his wife received the notice or writ.

The December 9, 1997 manifestation and motion filed by the sheriff and the December
16, 1997 sheriff’s report state that the sheriff served a copy of the writ on the wife of the
petitioner on December 3, 1997. Receipt of a copy of the writ by petitioner’s wife in their
office constituted constructive personal service on petitioner.30 Thus, the sheriff could
have lawfully ejected petitioner from the property as early as December 8, 1997,
the third working day from notice of the writ of execution to petitioner.

Besides, in his December 4, 1997 urgent motion for time to vacate the premises,
petitioner admitted that a writ had been issued by the RTC and a copy thereof received
by his wife. And in his December 8, 1997 supplemental motion for time to vacate the
property, petitioner alleged that the writ of execution issued by the trial court on
December 1, 1997 "[gave] the sheriff 30 days from [petitioner’s] receipt of the writ within
which to implement the same." These incidents indubitably show that petitioner had
notice of the issuance of the writ of execution within a sufficient period before the writ
was actually implemented on December 15, 1997. There was substantial compliance
with the requirement of service or notice when petitioner acquired knowledge of the writ
of execution.31

Since the writ of execution was properly issued, served and implemented, there was no
basis to hold the sheriffs in contempt.

Correctness of the RTC’s July 4, 2000 Order

Petitioner also questions the July 4, 2000 order of the RTC directing the issuance of a
writ to enforce the petitioner’s civil liability as determined by the CA. Petitioner insists
that it is either the MTCC where the case was originally filed or the CA itself which
should have issued the writ.

This particular issue was never brought to the attention of the CA. Moreover, a diligent
search of the entire records of this case failed to yield a copy of the alleged July 4, 2000
order. Except for the bare allegations of petitioner, there is therefore no way to
determine the nature and import of the challenged order.

WHEREFORE, the petition is hereby DENIED. The July 15, 1999 decision of the Court
of Appeals in CA-G.R. SP No. 46065 is AFFIRMED with the MODIFICATION that the
award of attorney’s fees is deleted.

Costs against petitioner.

SO ORDERED.

G.R. No. L-14070 March 29, 1961

MARIA GERVACIO BLAS, MANUEL GERVACIO BLAS, LEONCIO GERVACIO

BLAS and LODA GERVACIO BLAS, plaintiffs-appellants,
vs.
ROSALINA SANTOS, in her capacity as Special Administratrix of the Estate of the
deceased MAXIMA SANTOS VDA. DE BLAS, in Sp. Proc. No. 2524, Court of First
Instance of Rizal, defendants-appellants. MARTA GERVACIO BLAS and DR. JOSE
CHIVI, defendants-appellants.
Teofilo Sison and Nicanor Sison for plaintiffs-appellants.
De los Santos, Caluag, Pascal and Felizardo for defendants-appellees.

LABRADOR, J.:

This action was instituted by plaintiffs against the administration of the estate of Maxima
Santos, to secure a judicial declaration that one-half of the properties left by Maxima
Santos Vda. de Blas, the greater bulk of which are set forth and described in the project
of partition presented in the proceedings for the administration of the estate of the
deceased Simeon Blas, had been promised by the deceased Maxima Santos to be
delivered upon her death and in her will to the plaintiffs, and requesting that the said
properties so promised be adjudicated to the plaintiffs. The complaint also prays for
actual damages in the amount of P50,000. (Record on Appeal, pp. 1-65.) The alleged
promise of the deceased Maxima Santos is contained in a document executed by
Maxima Santos on December 26, 1936 attached to the complaint as Annex "H" and
introduced at the trial as Exhibit "A". (Ibid., pp. 258-259.) The complaint also alleges that
the plaintiffs are entitled to inherit certain properties enumerated in paragraph 3 thereof,
situated in Malabon, Rizal and Obando, Bulacan, but which properties have already
been in included in the inventory of the estate of the deceased Simeon Blas and
evidently partitioned and conveyed to his heirs in the proceedings for the administration
of his (Simeon Blas) estate.

Defendant, who is the administratrix of the estate of the deceased Maxima Santos Vda.
de Blas, filed an answer with a counterclaim, and later, an amended answer and a
counterclaim. The said amended answer admits the allegations of the complaint as to
her capacity as administratrix the death of Simeon Blas on January 3, 1937; the fact
that Simeon Blas and Marta Cruz begot three children only one of whom, namely,
Eulalio Blas, left legitimate descendants; that Simeon Blas contracted a second
marriage with Maxima Santos on June 28, 1898. She denies for lack of sufficient
information and belief, knowledge edge of the first marriage of Simeon Blas to Marta
Cruz, the averment that Simeon Blas and Marta Cruz acquired properties situated in
Obando, Bulacan, that said properties were utilized as capital, etc. As special defenses,
she alleges that the properties of the spouses Blas and Santos had been settled and
liquidated in the project of partition of the estate of said Simeon Blas; that pursuant to
the project of partition, plaintiffs and some defendants had already received the
respective properties adjudicated to them; that the plaintiffs and the defendants Marta
Geracio and Jose Chivi are estopped from impugning the validity of the project of
partition of the estate of the deceased Simeon Blas and from questioning the ownership
in the properties conveyed in the project of partition to Maxima Santos as her own
exclusive property; that the testament executed by Maxima Santos is valid, the plain
plaintiffs having no right to recover any portion of Maxima Santos' estate now under
administration by the court. A counterclaim for the amount of P50,000 as damages is
also included in the complaint, as also a cross-claim against Marta Gervacio Blas and
Jose Chivi.
Trial of the case was Conducted and, thereafter, the court, Hon. Gustave Victoriano,
presiding, rendered judgment dismissing the complaint, with costs against plaintiff, and
dismissing also the counterclaim and cross-claim decision ,the plaintiffs filed by the
defendants. From this district have appealed to this Court.

The facts essential to an understanding of the issues involved in the case may be briefly
summarized as follows: Simeon Blas contracted a first marriage with Marta Cruz
sometime before 1898. They had three children, only one of whom, Eulalio, left children,
namely, Maria Gervacio Blas, one of the plaintiffs, Marta Gervacio Blas, one of the
defendants, and Lazaro Gervacio Blas. Lazaro died in 1950, and is survived by three
legitimate children who are plaintiffs herein, namely, Manuel Gervacio Blas, Leoncio
Gervacio Blas and Loida Gervacio Blas. Marta Cruz died in 1898, and the following
year, Simeon Blas contracted a second marriage with Maxima Santos. At the time of
this second marriage, no liquidation of the properties required by Simeon Blas and
Marta Cruz was made. Three of the properties left are fishponds located in Obando,
Bulacan. Maxima Santos does not appear to have apported properties to her marriage
with Simeon Blas.

On December 26, 1936, only over a week before over a week before his death on
January 9, 1937, Simeon Blas executed a last will and testament. In the said testament
Simeon Blas makes the following declarations:

2. Sa panahon ng aking pangalawang asawa, MAXIMA SANTOS DE BLAS, ay

nagkaroon ako at nakatipon ng mga kayamanan (bienes) at pag-aari
(propriedades) na ang lahat ng lupa, palaisdaan at iba pang pag-aari ay umaabot
sa halagang ANIM NA RAAN PITONG PU'T WALONG DAAN LIBO WALONG
DAAN WALONG PUNG PISO (678,880-00) sang-ayon sa mga halaga sa
amillarimento (valor Amillarado.)

II

1. Ang kalahati ng lahat ng aming pag-aari, matapos mabayaran ang lahat ng

aking o aming pag-kakautang na mag-asawa, kung mayroon man, yayamang
ang lahat ng ito ay kita sa loob ng matrimonio (bienes ganaciales) ay bahagi ng
para sa aking asawa, MAXIMA SANTOS DE BLAS, sang-ayon sa batas. (Record
on Appeal, pp. 250-251.)

The above testamentary provisions may be translated as follows:

2. During my second marriage with Maxima Santos de Blas, I possessed and

acquired wealth and properties, consisting of lands, fishponds and other kinds of
properties, the total assessed value of which reached the amount P678,880.00.
 II

1. One-half of our properties, after the payment of my and our indebtedness, all
these properties having been acquired during marriage (conjugal properties),
constitutes the share of my wife Maxima Santos de Blas, according to the law.

At the time of the execution of said will, Andres Pascual a son-in-law of the testator, and
Avelina Pascual and others, were present. Andres Pascual had married a descendant
by the first marriage. The will was prepared by Andres Pascual, with the help of his
nephew Avelino Pascual. The testator asked Andres Pascual to prepare a document
which was presented in court as Exhibit "A", thus:

Q — Was there anybody who asked you to prepare this document?

A — Don Simeon Blas asked me to prepare this document (referring to Exhibit

"A"), (t.s.n., Sarmiento to, P. 24).

The reason why the testator ordered the preparation of Exhibit "A" was because the
properties that the testator had acquired during his first marriage with Marta Cruz had
not been liquidated and were not separated from those acquired during the second
marriage. Pascual's testimony is as follows:

Q — To whom do you refer with the word "they"?

A — Simeon Blas and his first wife, Marta Cruz. When Marta Cruz died they had
not made a liquidation of their conjugal properties and so all those properties
were included all in the assets of the second marriage, and that is the reason
why this document was prepared. (t.s.n., Sarmiento, p. 36.)

The above testimony is fully corroborated by that of Leoncio Gervacio, son-in-law of

Simeon Blas.

Q — Please state to the Court?

A — My children were claiming from their grandfather Simeon Blas the properties
left by their grandmother Marta Cruz in the year 1936.

Q — And what happened with that claim of your children against Simeon Blas
regarding the assets or properties of the first marriage that were left after the
death of Marta Cruz in 1936?

A — The claim was not pushed through because they reached into an agreement
whereby the parties Simeon Blas Maxima Santos, Maria Gervacio Bias, Marta
Gervacio Blas and Lazaro Gervacio Blas agreed that Simeon Blas and Maxima
Blas will give one-half of the estate of Simeon Blas. (t.s.n., Sarmiento, pp. 143-
144).
The document which was thus prepared and which is marked as Exhibit "A" reads in
Tagalog, thus:

MAUNAWA NG SINO MANG MAKABABASA:

Na akong si MAXIMA SANTOS DE BLAS, nasa hustong gulang, kasal kay

SIMEON BLAS, taga bayan ng Malabon, Rizal, Philippines, sa pamamagitan ng
kasulatang ito ay malaya kong ipinahahayag:

Na aking nabasa at naunawa ang testamento at huling kalooban na nilagdaan ng

aking asawa, SIMEON BLAS, at ipinahahayag ko sa ilalim ng aking karangalan
at sa harap ng aking asawa na igagalang at pagpipitaganan ang lahat at bawa't
isang bahagi ng nabanggit na testamento at ipinangangako ko pa sa
pamamagitan ng kasulatang ito na ang lahat ng maiiwang pag-aari at
kayamanan naming mag-asawa, na nauukol at bahaging para sa akin sa
paggawa ko naman ng aking testamento ay ipagkakaloob ko ang kalahati (½) sa
mga herederos at legatarios o pinamamanahan ng aking nabanggit na asawa,
SIMEON BLAS, sa kaniyang testamento, na ako'y makapipili o makahihirang na
kahit kangino sa kanila ng aking pagbibigyan at pamamanahan sang-ayon sa
paggalang, paglilingkod, at pakikisama ng gagawin sa akin.

SA KATUNAYAN NG LAHAT NG ITO ay nilagdaan ko ang kasulatang ito ngayon

ika 26 ng Diciembre ng taong 1936, dito sa San Francisco del Monte, San Juan,
Rizal, Philippines. (Exh. "A", pp. 29-30 — Appellant's brief).

(Fdo.) MAXIMA SANTOS DE BLAS

and which, translated into English, reads as follows:

KNOW ALL MEN BY THESE PRESENTS:

That I MAXIMA SANTOS DE BLAS, of legal age, married to SIMEON BLAS,

resident of Malabon, Rizal, Philippines, voluntarily state:

That I have read and knew the contents of the will signed by my husband,
SIMEON BLAS, (2) and I promise on my word of honor in the presence of my
husband that I will respect and obey all and every disposition of said will (3) and
furthermore, I promise in this document that all the properties my husband and I
will leave, the portion and share corresponding to me when I make my will, I will
give one-half (½) to the heirs and legatees or the beneficiaries named in the will
of my husband, (4) and that I can select or choose any of them, to whom I will
give depending upon the respect, service and treatment accorded to me.
 IN WITNESS WHEREOF, I signed this document this 26th day of December,
1936 at San Francisco del Monte, San Juan, Rizal, Philippines. (Exh. "A", pp. 30-
31, Appellant's brief).

(Sgd.) MAXIMA SANTOS DE BLAS

The court below held that said Exhibit "A" has not created any right in favor of plaintiffs
which can serve as basis for the complaint; that neither can it be considered as a valid
and enforceable contract for lack of consideration and because it deals with future
inheritance. The court also declared that Exhibit "A" is not a will because it does not
comply with the requisites for the execution of a will; nor could it be considered as a
donation, etc.

Both the court below in its decision and the appellees in their brief before us, argue
vehemently that the heirs of Simeon Blas and his wife Marta Cruz can no longer make
any claim for the unliquidated conjugal properties acquired during said first marriage,
because the same were already included in the mass of properties constituting the
estate of the deceased Simeon Blas and in the adjudications made by virtue of his will,
and that the action to recover the same has prescribed. This contention is correct. The
descendants of Marta Cruz can no longer claim the conjugal properties that she and her
husband may have required during their marriage although no liquidation of such
properties and delivery thereof to the heirs of Marta Cruz have been made, no action to
recover said propertied having been presented in the proceedings for the settlement of
the estate of Simeon Blas.

But the principal basis for the plaintiffs' action in the case at bar is the document Exhibit
"A". It is not disputed that this document was prepared at the instance of Simeon Blas
for the reason that the conjugal properties of me on Blas for the reason his first
marriage had not been liquidated; that it was prepared at the same time as the will of
Simeon Blas on December 26, 1936, at the instance of the latter himself. It is also not
disputed that the document was signed by Maxima Santos and one copy thereof, which
was presented in court as Exhibit "A", was kept by plaintiffs' witness Andres Pascual.

Plaintiffs-appellants argue before us that Exhibit "A" is both a trust agreement and a
contract in the nature of a compromise to avoid litigation. Defendants-appellees, in
answer, claim that it is neither a trust agreement nor a compromise a agreement.
Considering that the properties of the first marriage of Simeon Blas had not been
liquidated when Simeon Blas executed his will on December 26, 1936', and the further
fact such properties where actually , and the further fact that included as conjugal
properties acquired during the second marriage, we find, as contended by plaintiffs-
appellants that the preparation and execution of Exhibit "A" was ordered by Simeon
Blas evidently to prevent his heirs by his first marriage from contesting his will and
demanding liquidation of the conjugal properties acquired during the first marriage, and
an accounting of the fruits and proceeds thereof from the time of the death of his first
wife.
Exhibit "A", therefore, appears to be the compromise defined in Article 1809 of the Civil
Code of Spain, in force at the time of the execution of Exhibit "A", which provides as
follows:

Compromise is a contract by which each of the parties in interest, by

giving, promising, or retaining something avoids the provocation of a suitor
terminates one which has already the provocation been instituted. (Emphasis
supplied.)

Exhibit "A" states that the maker (Maxima Santos) had read and knew the contents of
the will of her husband read and knew the contents of the will Simeon Blas — she was
evidently referring to the declaration in the will(of Simeon Blas) that his properties are
conjugal properties and one-half thereof belongs to her (Maxima Santos) as her share
of the conjugal assets under the law. The agreement or promise that Maxima Santos
makes in Exhibit "A" is to hold one-half of her said share in the conjugal assets in trust
for the heirs and legatees of her husband in his will, with the obligation of conveying the
same to such of his heirs or legatees as she may choose in her last will and testament.
It is to be noted that the conjugal properties referred to are those that were actually
existing at that time, December 26, 1936. Simeon Blas died on January 9, 1937. On
June 2, 1937, an inventory of the properties left by him, all considered conjugal, was
submitted by Maxima Santos herself as administratrix of his estate. A list of said
properties is found in Annex "E", the complete inventory submitted by Maxima Santos
Vda. de Blas, is administratrix of the estate of her husband, dated March 10, 1939. The
properties which were given to Maxima Santos as her share in the conjugal properties
are also specified in the project of partition submitted by said Maxima Santos herself on
March 14, 1939. (Record on Appeal, pp. 195-241.) Under Exhibit "A", therefore, Maxima
Santos contracted the obligation and promised to give one-half of the above indicated
properties to the heirs and legatees of Simeon Blas.

Counsel for the defendant-appellee claims Exhibit "A" is a worthless piece of paper
because it is not a will nor a donation mortis causa nor a contract. As we have in
indicated above, it is a compromise and at the same time a contract with a sufficient
cause or consideration. It is also contended that it deals with future inheritance. We do
not think that Exhibit "A" is a contract on future inheritance. it is an obligation or promise
made by the maker to transmit one-half of her share in the conjugal properties acquired
with her husband, which properties are stated or declared to be conjugal properties in
the will of the husband. The conjugal properties were in existence at the time of the
execution of Exhibit "A" on December 26, 1936. As a matter of fact, Maxima Santos
included these properties in her inventory of her husband's estate of June 2, 1937. The
promise does not refer to any properties that the maker would inherit upon the death of
her husband, because it is her share in the conjugal assets. That the kind of agreement
or promise contained in Exhibit "A" is not void under Article 1271 of the old Civil Code,
has been decided by the Supreme Court of Spain in its decision of October 8, 19154,
thus:
 Que si bien el art. 1271 del Codigo civil dispone que sobre la herenciafutura no
se podra celebrar otros contratos que aquellos cuyo objecto seapracticar entre
vivos la division de un caudal, conforme al articulo 1056, esta prohibicion noes
aplicable al caso, porque la obligacion que contrajoel recurr en contrato privado
de otorgar testamento e instituir heredera a su subrina de los bienes que
adquirio en virtud de herencia, procedentes desu finada consorte que le
quedasen sobrantes despues de pagar las deudas, y del ganacial que se
expresa, asi como de reconocer, ademas, con alguna cosaa otros sobrinos, se
refiere a bienes conocidos y determinados existentes cuando tal compromisi se
otorgo, y no a la universalidad de una herencia que, sequn el art. 659 del citado
Codigo civil, as determina a muerte, constituyendola todos los bienes, derechos
y obligaciones que por ella no sehayan extinguido: ..." (Emphasis supplied.)

It will be noted that what is prohibited to be the subject matter of a contract under Article
1271 of the Civil Code is "future inheritance." To us future inheritance is any property or
right not in existence or capable of determination at the time of the contract, that a
person may in the future acquire by succession. The properties subject of the contract
Exhibit "A" are well defined properties, existing at the time of the agreement, which
Simeon Blas declares in his statement as belonging to his wife as her share in the
conjugal partnership. Certainly his wife's actual share in the conjugal properties may not
be considered as future inheritance because they were actually in existence at the time
Exhibit "A" was executed.

The trial court held that the plaintiffs-appellants in the case at bar are concluded by the
judgement rendered in the proceedings for the settlement of the estate of Simeon Blas
for the reason that the properties left by him belonged to himself and his wife Maxima
Santos; that the project of partition in the said case, adjudicating to Maxima Santos one-
half as her share in the conjugal properties, is a bar to another action on the same
subject matter, Maxima Santos having become absolute owner of the said properties
adjudicated in her favor. As already adverted to above, these contentions would be
correct if applied to the claim of the plaintiffs-appellants that said properties were
acquired with the first wife of Simeon Blas, Marta Cruz. But the main ground upon which
plaintiffs base their present action is the document Exhibit "A", already fully considered
above. As this private document contains the express promise made by Maxima Santos
to convey in her testament, upon her death, one-half of the conjugal properties she
would receive as her share in the conjugal properties, the action to enforce the said
promise did not arise until and after her death when it was found that she did not comply
with her above-mentioned promise. (Art. 1969, old Civil Code.) The argument that the
failure of the plaintiffs-appellants herein to oppose the project of partition in the
settlement of the estate of Simeon Blas, especially that portion of the project which
assigned to Maxima Santos one-half of all the conjugal properties bars their present
action, is, therefore, devoid of merit. It may be added that plaintiffs-appellants did not
question the validity of the project of partition precisely because of the promise made by
Maxima Santos in the compromise Exhibit "A"; they acquised in the approval of said
project of partition because they were relying on the promise made by Maxima Santos
in Exhibit "A", that she would transmit one-half of the conjugal properties that she was
going to receive as her share in the conjugal partnership upon her death and in her will,
to the heirs and legatees of her husband Simeon Blas.

Neither can the claim of prescription be considered in favor of the defendants. The right
of action arose at the time of the death of Maxima Santos on October 5,1956, when she
failed to comply with the promise made by her in Exhibit "A". The plaintiffs-appellants
immediately presented this action on December 27, 1956, upon learning of such failure
on the part of Maxima Santos to comply with said promise. This defense is, therefore,
also without merit.

It is next contended by the defendant-appellee that Maxima Santos complied with her
above-mentioned promise, — that Andres Pascual, Tomasa Avelino, Justo Garcia,
Ludovico Pimpin and Marta Gervacio Blas were given substancial legacies in the will
and testament of Maxima Santos. To determine whether she had actually complied with
the promise made in Exhibit "A", there is herein set forth a list only of the fishponds and
their respective areas as contained in the list of properties she acquired as her share in
the conjugal partnership, which list includes, besides many ricelands as well as
residential lots, thus:

31. Paco, Obando, Bulacan 5.8396 has.

32. Pangjolo, Obando 3.5857 "
34. Batang Pirasuan, Lubao,
Pampanga 11.9515 "
35. Calangian, Lubao, Pampanga 30.2059 "
38. Bakuling, Lubao, Pampanga 215.4325 "
39. Bakuling, Lubao, Pampanga 8.3763 "
40. Bangkal, Sinubli 23.0730 "
41. Tagulod, 6.8692 "
44. Bangkal Pugad (a) 34.2779 "
(b) 51.7919 "
(c) 2.5202 "
45. Magtapat Bangkal, Lubao,
Pampanga (a) 18.0024 "
(b) 7.3265 "
(c) 53.5180 "
46. Pinanganakan, Lubao,
Pampanga 159.0078 "
47. Emigdio Lingid, Lubao,
Pampanga 34.5229 "
48. Propios, Lubao, Pampanga 80.5382 "
 49. Batang Mabuanbuan,
Sexmoan, Pampanga 43.3350 "
50. Binatang Mabuanbuan,
Sexmoan, Pampanga 3.5069 "
51. Sapang Magtua, Sexmoan,
Pampanga 56,8242 "
52. Kay Limpin, Sexmoan,
Pampanga 5.0130 "
53. Calise Mabalumbum,
Sexmoan, Pampanga 23.8935 "
54. Messapinit Kineke, Sexmoan,
Pampanga (a) 5.2972 "
(b) 5.9230 "
(c) 1.4638 "
(d) 1.4638 "
(e) 2.8316 "
(f) 10.4412 "
(g) 3.9033 "
(h) 11.9263 "
(i) 6.0574 "
55. Dalang, Banga, Sexmoan,
Pampanga 23.3989 "
62. Alaminos, Pangasinan 147.1242 "
80. Mangasu Sexmoan,
Pampanga 10.000 "
81. Don Tomas, Sexmoan,
Pampanga 21.6435 "
82. Matikling, Lubao, Pampanga 16.0000 "
Total area
............................... 1045.7863 "
(See Record on
Record, pp. 195-241.)

In her will, Maxima Santos devised to Marta Gervacio Blas the 80-hectare fishpond
situated in Lubao, Pampanga. The fishpond devised is evidently that designated as
"Propios" in Lubao, Pampanga, item No. 8 in the list of properties adjudicated to her in
the project of partition. (Record on Appeal, p. 215.) Considering that the total area of the
fishponds amount to 1045.7863 hectares, the 80 hectares devised to Marta Gervacio
Blas is not even one-tenth of the total area of the fishponds. Add to this the fact that in
the will she imposed upon Marta Gervacio Blas de Chivi an existing obligation on said
fishponds, namely, its lease in 1957 and the duty to pay out of the rentals thereof an
obligation to the Rehabilitation Finance Corporation RFC (Ibid., pp. 262-263.) Angelina
Blas was given only a lot of 150 square meters in Hulong Duhat, Malabon, Rizal, and
Leony Blas, the sum of P300.00 (Ibid., p. 264.)

It is evident from a consideration of the above figures and facts that Maxima Santos did
not comply with her obligation to devise one-half of her conjugal properties to the heirs
and legatees of her husband. She does not state that she had complied with such
obligation in her will. If she intended to comply therewith by giving some of the heirs of
Simeon Blas the properties mentioned above, the most that can be considered in her
favor is to deduct the value of said properties from the total amount of properties which
she had undertaken to convey upon her death.

All the issues in the pleadings of the parties and in their respective briefs, have now
been fully discussed and considered. Reiterating what we have stated above, we
declare that by Exhibit "A", a compromise to avoid litigation, Maxima Santos promised
to devise to the heirs and legatees of her husband Simeon Blas, one-half of the
properties she received as her share in the conjugal partnership of herself and her
husband, which share is specified in the project of partition submitted by herself on
March 14, 1939 in the settlement of the estate of her husband, and which is found on
pages 195 to 240 of the record on appeal and on pages 27 to 46 of the project of
partition, submitted by Maxima Santos herself before the Court of First Instance of Rizal
in Civil Case No. 6707, entitled "Testamentaria del Finado Don Simeon Blas, Maxima
Santos Vda. de Bias, Administradora"; and that she failed to comply with her
aforementioned obligation. (Exhibit "A")

WHEREFORE, the judgment appealed from is hereby reversed and the defendant-
appellee, administratrix of the estate of Maxima Santos, is ordered to convey and
deliver one-half of the properties adjudicated o Maxima Santos as her share in the
conjugal properties in said Civil Case No. 6707, entitled "Testamentaria del Finado Don
Simeon Blas, Maxima Santos Vda. de Blas, Administradora", to the heirs and the
legatees of her husband Simeon Blas. Considering that all said heirs and legatees,
designated in the will of Simeon Blas as the persons for whose benefit Exhibit "A" had
been executed, have not appeared in these proceedings, the record is hereby
remanded to the court below, with instructions that, after the conveyance of the
properties hereinabove ordered had been effected, the said heirs and legatees (of
Simeon Blas) file adversary pleadings to determine the participation of each and every
one of them in said properties. Costs against the defendant- appellee Rosalina Santos.

Padilla, Parades and Dizon, JJ., concur.

Reyes, J.B.L. and Barrera, JJ., concur in a separate opinion.
Bengzon, C.J., reserves his vote.
Concepcion, J., took no part.

G.R. No. 116896 May 5, 1997

PHILIPPINE NATIONAL CONSTRUCTION CORPORATION, petitioner,
vs.
COURT OF APPEALS, MA. TERESA S. RAYMUNDO-ABARRA, JOSE S.
RAYMUNDO, ANTONIO S. RAYMUNDO, RENE S. RAYMUNDO, and AMADOR S.
RAYMUNDO, respondents.

DAVIDE, JR., J.:

This petition for review on certiorari has its roots in Civil Case No. 53444, which was
sparked by petitioner's refusal to pay the rentals as stipulated in the contract of
lease 1 on an undivided portion of 30,000 square meters of a parcel of land owned by
private respondents.

The lease contract, executed on 18 November 1985, reads in part as follows:

1. TERM OF LEASE — This lease shall be for a period of five (5) years,
commencing on the date of issuance of the industrial clearance by the
Ministry of Human Settlements, renewable for a like or other period at the
option of the LESSEE under the same terms and conditions.

2. RATE OF RENT — LESSEE shall pay to the LESSOR rent at the

monthly rate of TWENTY THOUSAND PESOS (P20,000.00), Philippine
Currency, in the manner set forth in Paragraph 3 below. This rate shall be
increased yearly by Five Percent (5%) based on the agreed monthly rate
of P20,000.00 as follows:

Monthly Rate Period Applicable

P21,000.00 Starting on the 2nd year

P22,000.00 Starting on the 3rd year

P23,000.00 Starting on the 4th year

P24,000.00 Starting on the 5th year

3. TERMS OF PAYMENT — The rent stipulated in Paragraph 2 above

shall be paid yearly in advance by the LESSEE. The first annual rent in
the amount of TWO HUNDRED FORTY THOUSAND PESOS
(P240,000.00), Philippine currency, shall be due and payable upon the
execution of this Agreement and the succeeding annual rents shall be
payable every twelve (12) months thereafter during the effectivity of this
Agreement.
 4. USE OF LEASED PROPERTY — It is understood that the Property
shall be used by the LESSEE as the site, grounds and premises of a rock
crushing plant and field office, sleeping quarters and canteen/mess hall.
The LESSORS hereby grant to the LESSEE the right to erect on the
Leased Property such structure(s) and/or improvement(s) necessary for or
incidental to the LESSEE's purposes.

xxx xxx xxx

11. TERMINATION OF LEASE — This Agreement may be terminated by

mutual agreement of the parties. Upon the termination or expiration of the
period of lease without the same being renewed, the LESSEE shall vacate
the Leased Property at its expense.

On 7 January 1986, petitioner obtained from the Ministry of Human Settlements a

Temporary Use Permit 2 for the proposed rock crushing project. The permit was to be
valid for two years unless sooner revoked by the Ministry.

On 16 January 1986, private respondents wrote petitioner requesting payment of the

first annual rental in the amount of P240,000 which was due and payable upon the
execution of the contract. They also assured the latter that they had already stopped
considering the proposals of other aggregates plants to lease the property because of
the existing contract with petitioner. 3

In its reply-letter, petitioner argued that under paragraph 1 of the lease contract,
payment of rental would commence on the date of the issuance of an industrial
clearance by the Ministry of Human Settlements, and not from the date of signing of the
contract. It then expressed its intention to terminate the contract, as it had decided to
cancel or discontinue with the rock crushing project "due to financial, as well as
technical, difficulties." 4

Private respondents refused to accede to petitioner's request for the pretermination of

the lease contract. They insisted on the performance of petitioner's obligation and
reiterated their demand for the payment of the first annual rental. 5

Petitioner objected to private respondents' claim and argued that it was "only obligated
to pay . . . the amount of P20,000.00 as rental payments for the one-month period of
lease, counted from 07 January 1986 when the Industrial Permit was issued by the
Ministry of Human Settlements up to 07 February 1986 when the Notice of Termination
was served" 6 on private respondents.

On 19 May 1986, private respondents instituted with the Regional Trial Court of Pasig
an action against petitioner for Specific Performance with Damages. 7 The case was
docketed as Civil Case No. 53444 at Branch 160 of the said court. After the filing by
petitioner of its Answer with Counterclaim, the case was set for trial on the merits.
What transpired next was summarized by the trial court in this wise:

Plaintiffs rested their case on September 7, 1987 (p. 87 rec.). Defendant

asked for postponement of the reception of its evidence scheduled on
August 10, 1988 and as prayed for, was reset to August 25, 1988 (p. 91
rec.) Counsel for defendant again asked for postponement, through
representative, as he was presently indisposed. The case was reset,
intransferable to September 15 and 26, 1988 (p. 94 rec.) On September 2,
1988, the office of the Government Corporate Counsel entered its
appearance for defendant (p. 95, rec.) and the original counsel later
withdrew his appearance. On September 15, 1988 the Government
Corporate Counsel asked for postponement, represented by Atty. Elpidio
de Vega, and with his conformity in open court, the hearing was reset,
intransferable to September 26 and October 17, 1988, (p. 98, rec.) On
September 26, 1988 during the hearing, defendant's counsel filed a
motion for postponement (urgent) as he had "sore eyes", a medical
certificate attached.

Counsel for plaintiffs objected to the postponement and the court

considered the evidence of the government terminated or waived. The
case was deemed submitted for decision upon the filing of the
memorandum. Plaintiffs filed their memorandum on October 26, 1988. (p.
111, rec.).

On October 18, 1988 in the meantime, the defendant filed a motion for
reconsideration of the order of the court on September 26, 1988 (p. 107,
rec.) The motion was not asked to be set for hearing (p. 110 rec.) There
was also no proof of notice and service to counsel for plaintiff . The court
in the interest of justice set the hearing on the motion on November 29,
1988. (p. 120, rec.) but despite notice, again defendant's counsel was
absent (p. 120-A, dorsal side, rec.) without reason. The court reset the
motion to December 16, 1988, in the interest of justice. The motion for
reconsideration was denied by the court. A second motion for
reconsideration was filed and counsel set for hearing the motion on
January 19, 1989. During the hearing, counsel for the government was
absent. The motion was deemed abandoned but the court at any rate,
after a review of the incidents and the grounds relied upon in the earlier
motion of defendant, found no reason to disturb its previous order. 8

On 12 April 1989, the trial court rendered a decision ordering petitioner to pay private
respondents the amount of P492,000 which represented the rentals for two years, with
legal interest from 7 January 1986 until the amount was fully paid, plus attorney's fees in
the amount of P20,000 and costs. 9
Petitioner then appealed to the Court of Appeals alleging that the trial court erred in
ordering it to pay private respondent the amount of P492,000 and in denying it the right
to be heard.

Upon the affirmance of the trial court's decision 10 and the denial of its motion for
reconsideration, petitioner came to this Court ascribing to respondent Court of Appeals
the same alleged errors and reiterating their arguments.

First. Petitioner invites the attention of this Court to paragraph 1 of the lease contract,
which reads: "This lease shall be for a period of five (5) years, commencing on the date
of issuance of the industrial clearance by the Ministry of Human Settlements. . . ." It then
submits that the issuance of an industrial clearance is a suspensive condition without
which the rights under the contract would not be acquired. The Temporary Use Permit is
not the industrial clearance referred to in the contract; for the said permit requires that a
clearance from the National Production Control Commission be first secured, and
besides, there is a finding in the permit that the proposed project does not conform to
the Zoning Ordinance of Rodriguez, (formerly Montalban), Rizal, where the leased
property is located. Without the industrial clearance the lease contract could not
become effective and petitioner could not be compelled to perform its obligation under
the contract.

Petitioner is now estopped from claiming that the Temporary Use Permit was not the
industrial clearance contemplated in the contract. In its letter dated 24 April 1986,
petitioner states:

We wish to reiterate PNCC Management's previous stand that it is only

obligated to pay your clients the amount of P20,000.00 as rental payments
for the one-month period of the lease, counted from 07 January 1986
when the Industrial Permit was issued by the Ministry of Human
Settlements up to 07 February 1986 when the Notice of Termination was
served on your clients. 11 (Emphasis Supplied).

The "Industrial Permit" mentioned in the said letter could only refer to the
Temporary Use Permit issued by the Ministry of Human Settlements on 7
January 1986. And it can be gleaned from this letter that petitioner has
considered the permit as industrial clearance; otherwise, petitioner could have
simply told private respondents that its obligation to pay rentals has not yet
arisen because the Temporary Use Permit is not the industrial clearance
contemplated by them. Instead, petitioner recognized its obligation to pay rentals
counted from the date the permit was issued.

Also worth noting is petitioner's earlier letter, thus:

[P]lease be advised of PNCC Management's decision to cancel or

discontinue with the rock crushing project due to financial as well as
technical difficulties. In view thereof, we would like to terminate our Lease
 Contract dated 18 November, 1985. Should you agree to the mutual
termination of our Lease Contract, kindly indicate your conformity hereto
by affixing your signature on the space provided below. May we likewise
request Messrs. Rene, Jose and Antonio, all surnamed Raymundo and
Mrs. Socorro A. Raymundo as Attorney-in-Fact of Amador S. Raymundo
to sign on the spaces indicated below. 12

It can be deduced from this letter that the suspensive condition — issuance of industrial
clearance — has already been fulfilled and that the lease contract has become
operative. Otherwise, petitioner did not have to solicit the conformity of private
respondents to the termination of the contract for the simple reason that no juridical
relation was created because of the non- fulfillment of the condition.

Moreover, the reason of petitioner in discontinuing with its project and in consequently
cancelling the lease contract was "financial as well as technical difficulties," not the
alleged insufficiency of the Temporary Use Permit.

Second. Invoking Article 1266 and the principle of rebus sic stantibus, petitioner asserts
that it should be released from the obligatory force of the contract of lease because the
purpose of the contract did not materialize due to unforeseen events and causes
beyond its control, i.e., due to the abrupt change in political climate after the EDSA
Revolution and financial difficulties.

It is a fundamental rule that contracts, once perfected, bind both contracting parties, and
obligations arising therefrom have the force of law between the parties and should be
complied with in good faith. 13 But the law recognizes exceptions to the principle of the
obligatory force of contracts. One exception is laid down in Article 1266 of the Civil
Code, which reads: "The debtor in obligations to do shall also be released when the
prestation becomes legally or physically impossible without the fault of the obligor."

Petitioner cannot, however, successfully take refuge in the said article, since it is
applicable only to obligations "to do," and not to obligations "to give." 14 An obligation "to
do" includes all kinds of work or service; while an obligation "to give" is a prestation
which consists in the delivery of a movable or an immovable thing in order to create a
real right, or for the use of the recipient, or for its simple possession, or in order to return
it to its owner. 15

The obligation to pay rentals 16 or deliver the thing in a contract of

lease 17 falls within the prestation "to give"; hence, it is not covered within the scope of
Article 1266. At any rate, the unforeseen event and causes mentioned by petitioner are
not the legal or physical impossibilities contemplated in the said article. Besides,
petitioner failed to state specifically the circumstances brought about by "the abrupt
change in the political climate in the country" except the alleged prevailing uncertainties
in government policies on infrastructure projects.
The principle of rebus sic stantibus 18 neither fits in with the facts of the case. Under this
theory, the parties stipulate in the light of certain prevailing conditions, and once these
conditions cease to exist, the contract also ceases to exist. 19 This theory is said to be
the basis of Article 1267 of the Civil Code, which provides:

Art. 1267. When the service has become so difficult as to be manifestly

beyond the contemplation of the parties, the obligor may also be released
therefrom, in whole or in part.

This article, which enunciates the doctrine of unforeseen events, is not, however, an
absolute application of the principle of rebus sic stantibus, which would endanger the
security of contractual relations. The parties to the contract must be presumed to have
assumed the risks of unfavorable developments. It is therefore only in absolutely
exceptional changes of circumstances that equity demands assistance for the debtor. 20

In this case, petitioner wants this Court to believe that the abrupt change in the political
climate of the country after the EDSA Revolution and its poor financial condition
"rendered the performance of the lease contract impractical and inimical to the
corporate survival of the petitioner."

This Court cannot subscribe to this argument. As pointed out by private respondents: 21

It is a matter of record that petitioner PNCC entered into a contract with

private respondents on November 18, 1985. Prior thereto, it is of judicial
notice that after the assassination of Senator Aquino on August 21, 1983,
the country has experienced political upheavals, turmoils, almost daily
mass demonstrations, unprecedented, inflation, peace and order
deterioration, the Aquino trial and many other things that brought about
the hatred of people even against crony corporations. On November 3,
1985, Pres. Marcos, being interviewed live on U.S. television announced
that there would be a snap election scheduled for February 7, 1986.

On November 18, 1985, notwithstanding the above, petitioner PNCC

entered into the contract of lease with private respondents with open eyes
of the deteriorating conditions of the country.

Anent petitioner's alleged poor financial condition, the same will neither release
petitioner from the binding effect of the contract of lease. As held in Central Bank
v. Court of Appeals, 22 cited by private respondents, mere pecuniary inability to fulfill an
engagement does not discharge a contractual obligation, nor does it constitute a
defense to an action for specific performance.

With regard to the non-materialization of petitioner's particular purpose in entering into

the contract of lease, i.e., to use the leased premises as a site of a rock crushing plant,
the same will not invalidate the contract. The cause or essential purpose in a contract of
lease is the use or enjoyment of a thing. 23 As a general principle, the motive or
particular purpose of a party in entering into a contract does not affect the validity nor
existence of the contract; an exception is when the realization of such motive or
particular purpose has been made a condition upon which the contract is made to
depend. 24 The exception does not apply here.

Third. According to petitioner, the award of P492,000.00 representing the rent for two
years is excessive, considering that it did not benefit from the property. Besides, the
temporary permit, conformably with the express provision therein, was deemed
automatically revoked for failure of petitioner to use the same within one year from the
issuance thereof. Hence, the rent payable should only be for one year.

Petitioner cannot be heard to complain that the award is excessive. The temporary
permit was valid for two years but was automatically revoked because of its non-use
within one year from its issuance. The non-use of the permit and the non-entry into the
property subject of the lease contract were both imputable to petitioner and cannot,
therefore, be taken advantage of in order to evade or lessen petitioner's monetary
obligation. The damage or prejudice to private respondents is beyond dispute. They
unquestionably suffered pecuniary losses because of their inability to use the leased
premises. Thus, in accordance with Article 1659 of the Civil Code, 25 they are entitled to
indemnification for damages; and the award of P492,000.00 is fair and just under the
circumstances of the case.

Finally, petitioner submits that the trial court gravely abused its discretion in denying
petitioner the right to be heard.

We disagree. The trial court was in fact liberal in granting several postponements 26 to
petitioner before it deemed terminated and waived the presentation of evidence in
petitioner's behalf.

It must be recalled that private respondents rested their case on 7 September 1987
yet. 27 Almost a year after, or on 10 August 1988 when it was petitioner's turn to present
evidence, petitioner's counsel asked for postponement of the hearing to 25 August 1988
due to conflict of schedules, 28 and this was granted. 29 At the rescheduled hearing,
petitioner's counsel, through a representative, moved anew for postponement, as he
was allegedly
indisposed. 30 The case was then reset "intransferable" to September 15 and 26,
1988. 31 On 2 September 1988, the Office of the Government Corporate Counsel,
through Atty. Elpidio J. Vega, entered its appearance for the
petitioner, 32 and later the original counsel withdrew his appearance. 33 On 15
September 1988, Atty. Vega requested for postponement to enable him to go over the
records of the case. 34 With his conformity, the hearing was reset "intransferable" to
September 26 and October 17, 1988. 35 In the morning of 26 September 1988, the court
received Atty. Vega's Urgent Motion for Postponement on the ground that he was
afflicted with conjunctivitis or sore eyes. 36 This time, private respondents objected; and
upon their motion, the court deemed terminated and waived the presentation of
evidence for the petitioner. 37 Nevertheless, before the court considered the case
submitted for decision, it required the parties to submit their respective memoranda
within thirty days. 38 But petitioner failed to comply.

Likewise, the court was liberal with respect to petitioner's motion for reconsideration.
Notwithstanding the lack of request for hearing and proof of notice and service to private
respondents, the court set the hearing of the said motion on 29 November
1988. 39 Upon the denial of the said motion for lack of merit, 40 petitioner filed a second
motion for reconsideration. But during the hearing of the motion on a date selected by
him, Atty. Vega was absent for no reason at all, despite due notice. 41

From the foregoing narration of procedural antecedents, it cannot be said that petitioner
was deprived of its day in court. The essence of due process is simply an opportunity to
he heard. 42 To be heard does not only mean oral arguments in court; one may be
heard also through pleadings. Where opportunity to be heard, either through oral
arguments or pleadings, is accorded, there is no denial of procedural due process. 43

WHEREFORE, the instant petition is DENIED and the challenge decision of the Court of
Appeals is AFFIRMED in toto.

No pronouncements as to costs.

SO ORDERED.

G.R. No. 199431, August 31, 2016

STA. FE REALTY, INC. AND VICTORIA SANDEJAS

FABREGAS, Petitioners, v. JESUS M. SISON, Respondent.

DECISION

REYES, J.:

Before the Court is a Petition for Review on Certiorari1 seeking to annul and set aside
the Decision2 dated July 18, 2011 and the Resolution3 dated November 23, 2011 of the
Court of Appeals (CA) in CA-G.R. CV No. 90855, which affirmed with modification the
Decision4 dated August 8, 2006 of the Regional Trial Court (RTC) of Calamba City,
Laguna, Branch 92, in Civil Case No. 2342-96-C.

The Facts and the Case

This case stemmed from a Complaint5 for reconveyance of property filed by Jesus M.
Sison (Sison) against Sta. Fe Realty, Inc. (SFRI), Victoria Sandejas Fabregas
(Fabregas) (collectively, the petitioners), Jose Orosa (Orosa) and Morninglow Realty,
Inc. (MRI) (collectively, the defendants).

The subject of this petition is a parcel of land with an area of 15,598 square meters,
designated as Lot 1-B-1 in the subdivision plan Psd-04-038233, located in Barrio
Bagong Kalsada, Calamba City, Laguna. The said tract of land is a portion of the land
covered by Transfer Certificate of Title (TCT) No. 61132, having a total area of 60,987
sq m originally owned by SFRI.6chanrobleslaw

The records showed that SFRI agreed to sell to Sison the south eastern portion of the
land covered by TCT No. 61132. On October 19, 1989, SFRI executed a Deed of Sale
over the subject property to Fabregas for the amount of P10,918.00. Fabregas, then,
executed another deed of sale in favor of Sison for the same amount. This sale was
authorized by SFRI in a Board Resolution dated April 30, 1989, and was then adopted
by its Board of Directors together with the corresponding Secretary's Certificate dated
October 11, 1989.7chanrobleslaw

Immediately thereafter, Sison caused the segregation of the corresponding 15,598 sq m

from the whole 60,987-sq-m land and was designated as Lot 1-B-1 in the subdivision
plan Psd-04-038233. He took possession of the subject property and introduced
improvements thereon, such as fencing the property, putting a no trespassing sign,
barbed wires and hedges of big tress. He also constructed a fishpond and a resort on
the subject property.8chanrobleslaw

However, Sison was not able to register the sale and secure a title in his name over the
subject property because the petitioners refused to pay realty taxes and capital gains
tax, as well as to tum over the owner's copy of TCT No. 61132 and the subdivision plan.
To protect his interest over the subject property, Sison was constrained to pay the said
taxes from 1979 to 1990. Nevertheless, the defendants still refused to surrender the
mother title and all other pertinent documents necessary to transfer the title of the
subject property in Sison's name.9chanrobleslaw

Meanwhile, on December 2, 1991, SFRI caused the subdivision of the entire property
covered by TCT No. 61132 into four lots, designated as: Lot 1-B-1, Lot 1-B-2, Lot 1-B-3
and Lot 1-B-4 under subdivision plan Psd-04-05414. After that, Lot 1-B-3 was further
subdivided into four lots designated as Lot 1-B-3-A, Lot 1-B-3-B, Lot 1-B-3-C, and Lot 1-
B-3-D, under subdivision plan Psd-0434-05-056810. As a result of the subdivision of Lot
1-B into new lots, TCT No. 61132 was cancelled and TCT No. T-255466 covering Lot 1-
:-B-3-C was issued in the name of SFRI with an area of 16,000 sq m and With an
annotation of the right of first refusal in favor of MRI.10chanrobleslaw

Subsequently, SFRI sold Lot 1-B-3-C to Orosa as evidenced by the Deed of Sale dated
March 1, 1994. Orosa was able to transfer the property in his name; thus, TCT No. T-
255466 was cancelled, and TCT No. T-297261 was issued in his name.11chanrobleslaw

Sison claimed that Lot 1-B-3-C is practically one and the same with Lot 1-B-1 which was
previously sold by SFRI to Fabregas, and which the latter sold to him except for the
excess of 402 sq m. Accordingly, when Sison learned about the subsequent sale of the
subject property that he bought, he tried to settle the matter amicably but the parties did
not reach an agreement. Hence, he instituted an action for reconveyance of property
against the defendants.12chanrobleslaw

For their part, the petitioners denied that they agreed to sell the 15,598 sq m of TCT No.
61132 to Sison. They claimed that Sison was aware of the subdivision caused by SFRI
and that Lot 1-B-3-C which is one of the several lots from the subdivision is not the
same with Lot 1-B-1 which Sison is claiming.13 They averred that Sison persuaded
Fabregas to sell to him a portion of Lot 1-B in exchange of P700,000.00 and Sison will
be the one to shoulder the expenses for the capital gains tax. They contended that they
merely accommodated Sison's request to sign another set of deeds of sale over the
subject property with a reduced price of P10,918.00 so that the capital gains tax would
be reduced.14 They also asserted that Sison did not pay the consideration agreed upon
for the sale of the subject property; thus, Fabregas rescinded the sale by sending a
notice to Sison who did not contest the rescission of the sale.15chanrobleslaw

For his part, Orosa claimed that he is a buyer in good faith as there is nothing annotated
in TCT No. T-255466 which would warn or alert him of any lien or encumbrance or
adverse claim on the property except for the right of first refusal granted to MRI. He
claimed that the lot he bought from SFRI was different from that which Sison was
claiming.16chanrobleslaw

On August 8, 2006, the RTC rendered its Decision17 in favor of Sison,

thus:ChanRoblesVirtualawlibrary
WHEREFORE, judgment is hereby rendered in favor of [Sison], as follows:

1. Declaring [Sison] the absolute owner of the lot described hereunder, free
from all liens and encumbrances, to wit:

chanRoblesvirtualLawlibraryx x x x

2. Ordering [Orosa] to reconvey the above-described lot to [Sison];

3. Ordering the Register of Deeds of Laguna, Calamba Branch to perform

the following: (a) to cancel TCT No. T-297261 issued in the name of
[Orosa] and all titles subsequent thereto, and (b) to cause the issuance of
the corresponding [TCT] in the name of [Sison] covering the above-
described property upon his submission of a duly approved subdivision
plan and technical description, free from Entry No. 357529 annotated on
TCT No. 297261 and all other liens and encumbrances;

4. Ordering [the petitioners] to pay [Sison], jointly and severally, the following
amounts:

chanRoblesvirtualLawlibrary a. P10,946.91 as actual damages;

b. P200,000.00 as moral damages;

c. P50,000.00 as exemplary damages;

 d. P200,000.00 as attorney's fees; and cralawlawlibrary

e. costs of suit.

SO ORDERED.18chanroblesvirtuallawlibrary
On appeal, the CA affirmed the findings of the RTC but reduced the award of moral
damages and attorney's fees to P50,000.00 and P100,000.00,
respectively.19chanrobleslaw

The petitioners filed a motion for reconsideration but it was denied. 20 Hence, this
petition.

The Issue Presented

WHETHER THE CA ERRED IN AFFIRMING THE DECISION OF THE RTC
RECONVEYING THE SUBJECT PROPERTY TO SISON.
Ruling of the Court

The petition lacks merit.

The Court has time and again ruled that factual findings of the CA are conclusive on the
parties and carry even more weight when the said court affirms the factual findings of
the trial court.21 But even if the Court were to re-evaluate the evidence presented in this
case, there is still no reason to depart from the lower courts' ruling that the
reconveyance is proper.

Essentially, the issues raised center on the core question of whether Sison is entitled to
reconveyance of the subject property. In resolving this issue, the pertinent point of
inquiry is whether the deed of absolute sale by and between SFRI and Fabregas, as
well as the deed of absolute sale between Fabregas and Sison are valid and
enforceable.

Sison anchors his cause of action upon the two deeds of sale and his possession and
occupation of the subject property.22 The petitioners, however, counter that: (1) the
deeds of sale were simulated; (2) Fabregas had unilaterally rescinded the sale; and (3)
the subject property is now registered in the hands of an innocent purchaser for value.

The petitioners mainly argues that the deeds of sale were simulated because of its
alleged failure to reflect the true purchase price of the sale which is P700,000.00 plus
the assignment by Sison and his wife of certain properties located in Lingayen and
Urdaneta, Pangasinan in favor of the petitioners. According to the petitioners, these
deeds were executed at the request of Sison in order to reduce the amount to be paid
as capital gains tax. They contend that there is an apparent gross disproportion
between the stipulated price and the value of the subject property which demonstrates
that the deeds stated a false consideration.
The Court, however, concurs with the disquisition of the lower courts that the evidence
on record established that the deeds of sale were executed freely and voluntarily. The
RTC noted that the petitioners admitted their intention to sell the subject property to
Sison, and they voluntarily executed the said deeds of sale which were duly
acknowledged before a notary public. These admissions that the deeds of sale were
signed and executed by them in due course bar them from questioning or denying their
acts.

In this case, all the elements for a contract to be valid are present. A perfected contract
of absolute sale exists between SFRI and Fabregas and then Fabregas and Sison.
There was meeting of the minds between the parties when they agreed on the sale of a
determinate subject matter, which is the south eastern portion of Lot 1-B with an area of
15,598 sq m, and the price is certain, without any condition or reservation of title on the
part of the petitioners.

To bolster their claim that the deeds of sale were void, the petitioners argue that there is
gross disproportion between the price and the value of the subject property. The Court,
however, ruled that gross inadequacy of price by itself will not result in a void contract.
Gross inadequacy of price does not even affect the validity of a contract of sale, unless
it signifies a defect in the consent or that the parties actually intended a donation or
some other contract. Inadequacy of cause will not invalidate a contract unless there has
been fraud, mistake or undue influence.23chanrobleslaw

The Court observed that the petitiOners are assailing the deeds of sale for being
absolutely simulated and for inadequacy of the price. However, these two grounds are
incompatible. If there exists an actual consideration for transfer evidenced by the
alleged act of sale, no matter how inadequate it be, the transaction could not be a
simulated sale.24chanrobleslaw

Nonetheless, the fact remains that the petitioners have failed to prove that the assailed
deeds of sale were simulated. The legal presumption is in favor of the validity of
contracts and the party who impugns its regularity has the burden of proving its
simulation.25cralawred Since the petitioners failed to discharge the burden of proving
their allegation that the deeds of sale were simulated, the presumption of regularity and
validity of the contract stands.

Considering that the Court finds the deed of sale between Fabregas and Sison to be
valid and not fictitious or simulated, the next question to be resolved is whether the
unilateral rescission made by Fabregas was valid and binding on Sison.

To begin with, this stance on the alleged unilateral rescission of the sale presupposes
an implied admission of the validity of the deed of sale which the petitioners were
claiming to be simulated. The remedy of rescission is based on the fulfilment of the
obligation by the party and it is not on the alleged lack of consideration of the contract.

Here, it appears that Fabregas failed to judicially rescind the contract. The Court had
already ruled that in the absence of a stipulation, a party cannot unilaterally and
extrajudicially rescind a contract. A judicial or notarial act is necessary before a valid
rescission can take place.26chanrobleslaw

The party entitled to rescind should apply to the court for a decree of rescission. The
right cannot be exercised solely on a party's own judgment that the other committed a
breach of the obligation. The operative act which produces thy resolution of the contract
is the decree of the court and not the mere act of the vendor.27 "In other words, the
party who deems the contract violated may consider it resolved or rescinded, and act
accordingly, without previous court action, but it proceeds at its own risk. For it is only
the final judgment of the corresponding court that will conclusively and finally settle
whether the action taken was or was not correct in law." 28chanrobleslaw

While the petitioners claim that Sison did not pay the pnce for the subject property, the
notice of rescission that Fabregas allegedly sent to Sison declaring her intention to
rescind the sale did not operate to validly rescind the contract because there is
absolutely no stipulation giving Fabregas the right to unilaterally rescind the contract in
case of non-payment. Consequently, the unilateral rescission she made is of no effect.

After finding that there was no valid rescission that took place, hence, the deeds of sale
are valid and binding, the next issue to be discussed is whether Sison is entitled to
reconveyance of the subject property which is now registered in the name of Orosa.
Consequently, the bone of contention is whether Orosa is a buyer in good faith and for
value.

The determination of whether Orosa is a buyer in good faith is a factual issue, which
generally is outside the province of this Court to determine in a petition for review.
Although this rule admits of exceptions, none of these applies to this case. There is no
conflict between the factual findings and legal conclusions of the RTC and the CA, both
of which found Orosa to be a buyer in bad faith. Moreso, Orosa's assertion that he was
an innocent purchaser for value was not proven by clear and convincing evidence since
his right to adduce evidence was validly waived by the trial court when his counsel failed
to appear at the scheduled date of hearing despite being duly notified
thereof.29chanrobleslaw

It was clearly established that the property sold to Orosa was practically the same to the
one sold to Sison. In the pre-trial order issued by the trial court, the following judicial
admission was made: that Lot 1-B-1 is within the property sold by SFRI to
Orosa.30 Such admission by the petitioners on the identity of the property covered by
the deeds of sale executed in favor of Sison is admissible in evidence against Orosa.
Furthermore, the written report and sketch plan of Geodetic Engineer Noel V. Sogueco
established the fact that the property sold to Sison was well within the area described in
TCT No. 297261 issued to Orosa. In short, the said documentary evidence proved that
the lot sold to Sison as Lot 1-B-1 coincided with Lot 1-B-3-C described in TCT No. T-
297261.31chanrobleslaw
The petitioners now contend that Orosa is a purchaser in good faith and for value. They
argue that SFRI's title was free from any liens or encumbrances that could have
triggered Orosa's suspicion. Orosa further argued that he acquired the subject property
in good faith and had it first recorded in the Registry of Property, since he was unaware
of the first sale.

In line with this, the Court had already ruled that, as in this case, the failure of buyer to
take the ordinary precautions which a prudent man would have taken under the circu
stances, especially in buying a piece of land in the actual, visible and public possession
of another person, other than the vendor, constitutes gross negligence amounting to
bad faith.32
When a piece of land is in the actual possession of persons other than the seller, the
buyer must be wary and should investigate the rights of those in possession. Without
making such inquiry, one cannot claim that he is a buyer in good faith. When a man
proposes to buy or deal with realty, his duty is to read the public manuscript, that is, to
look and see who is there upon it and what his rights are. A want of caution and
diligence, which an honest man of ordinary prudence is accustomed to exercise in
making purchases, is in contemplation of law, a want of good faith. The buyer who has
failed to know or discover that the land sold to him is in adverse possession of another
is a buyer in bad faith. x x x.33 (Citation omitted and italics in the original)
Applying this parameter, the Court is convinced that Orosa cannot be considered a
buyer and registrant in good faith and for value. It is apparent from the records of this
case that after Sison bought the subject property, he immediately took possession of it,
and introduced improvements thereon, such as fencing the property, putting a no
trespassing sign, barbed wires and hedges of big trees. Sison also constructed a
fishpond and a resort on the subject property.34chanrobleslaw

Evidently, the presence of these structures should have alerted Orosa to the possible
flaw in the title of SFRI. Hence, Orosa should have been aware of Sison's prior physical
possession and claim of ownership over the subject property. If Orosa had visited the
property, he would already know that someone else besides his seller has possession
over the same.

The fact that Orosa had the subject property first registered will not help his cause.
Orosa cannot rely on his TCT No. T-255466 as an incontrovertible evidence of his
ownership over the subject property. The fact that Orosa was able to secure a title in his
name does not operate to vest ownership upon him of the subject property.
"Registration of a piece of land under the Torrens System does not create or vest title,
because it is not a mode of acquiring ownership. A certificate of title is merely an
evidence of ownership or title over the particular property described therein. It cannot be
used to protect a usurper from the true owner; nor can it be used as a shield for the
commission of fraud; neither does it permit one to enrich himself at the expense of
others. Its issuance in favor of a particular person does not foreclose the possibility that
the real property may be co-owned with persons not named in the certificate, or that it
may be held in trust for another person by the registered owner." 35chanrobleslaw
It is clear from the admissions of the parties that Sison had been in actual possession
and occupation of the subject property at the time that it was sold by SFRI to Orosa.
Thus, Orosa did not acquire any right from SFRI over the subject property since the
latter was no longer the owner of the same at the time the sale was made to him. The
ownership over the subject property had already been vested to Sison prior to such
sale. Hence, reconveyance of the subject property to Sison is warranted.

Lastly, the Court sustains the award of damages to Sison as it is beyond cavil that Sison
was forced to institute the instant case to protect his interest. The surrounding
circumstances of this case and the evident bad faith on the part of Sison justify the grant
of compensatory, moral and exemplary damages and attorney's fees to Sison.

WHEREFORE, the petition is DENIED. The Decision dated July 18, 2011 and the
Resolution dated November 23, 2011 of the Court of Appeals in CA-G.R. CV No. 90855
are AFFIRMED.

SO ORDERED.chanRoblesvirtualLawlibrary

G.R. No. 111238 January 25, 1995

ADELFA PROPERTIES, INC., petitioner,

vs.
COURT OF APPEALS, ROSARIO JIMENEZ-CASTAÑEDA and SALUD
JIMENEZ, respondents.

REGALADO, J.:

The main issues presented for resolution in this petition for review on certiorari of the
judgment of respondent Court of appeals, dated April 6, 1993, in CA-G.R. CV No.
347671 are (1) whether of not the "Exclusive Option to Purchase" executed between
petitioner Adelfa Properties, Inc. and private respondents Rosario Jimenez-Castañeda
and Salud Jimenez is an option contract; and (2) whether or not there was a valid
suspension of payment of the purchase price by said petitioner, and the legal effects
thereof on the contractual relations of the parties.

The records disclose the following antecedent facts which culminated in the present
appellate review, to wit:

1. Herein private respondents and their brothers, Jose and Dominador Jimenez, were
the registered co-owners of a parcel of land consisting of 17,710 square meters,
covered by Transfer Certificate of Title (TCT) No. 309773,2situated in Barrio Culasi, Las
Piñas, Metro Manila.
2. On July 28, 1988, Jose and Dominador Jimenez sold their share consisting of one-
half of said parcel of land, specifically the eastern portion thereof, to herein petitioner
pursuant to a "Kasulatan sa Bilihan ng Lupa."3Subsequently, a "Confirmatory
Extrajudicial Partition Agreement"4 was executed by the Jimenezes, wherein the
eastern portion of the subject lot, with an area of 8,855 square meters was adjudicated
to Jose and Dominador Jimenez, while the western portion was allocated to herein
private respondents.

3. Thereafter, herein petitioner expressed interest in buying the western portion of the
property from private respondents. Accordingly, on November 25, 1989, an "Exclusive
Option to Purchase"5 was executed between petitioner and private respondents, under
the following terms and conditions:

1. The selling price of said 8,655 square meters of the subject property is
TWO MILLION EIGHT HUNDRED FIFTY SIX THOUSAND ONE
HUNDRED FIFTY PESOS ONLY (P2,856,150.00)

2. The sum of P50,000.00 which we received from ADELFA

PROPERTIES, INC. as an option money shall be credited as partial
payment upon the consummation of the sale and the balance in the sum
of TWO MILLION EIGHT HUNDRED SIX THOUSAND ONE HUNDRED
FIFTY PESOS (P2,806,150.00) to be paid on or before November 30,
1989;

3. In case of default on the part of ADELFA PROPERTIES, INC. to pay

said balance in accordance with paragraph 2 hereof, this option shall be
cancelled and 50% of the option money to be forfeited in our favor and we
will refund the remaining 50% of said money upon the sale of said
property to a third party;

4. All expenses including the corresponding capital gains tax, cost of

documentary stamps are for the account of the VENDORS, and expenses
for the registration of the deed of sale in the Registry of Deeds are for the
account of ADELFA PROPERTIES, INC.

Considering, however, that the owner's copy of the certificate of title issued to
respondent Salud Jimenez had been lost, a petition for the re-issuance of a new
owner's copy of said certificate of title was filed in court through Atty. Bayani L.
Bernardo, who acted as private respondents' counsel. Eventually, a new owner's copy
of the certificate of title was issued but it remained in the possession of Atty. Bernardo
until he turned it over to petitioner Adelfa Properties, Inc.

4. Before petitioner could make payment, it received summons6 on November 29, 1989,
together with a copy of a complaint filed by the nephews and nieces of private
respondents against the latter, Jose and Dominador Jimenez, and herein petitioner in
the Regional Trial Court of Makati, docketed as Civil Case No. 89-5541, for annulment
of the deed of sale in favor of Household Corporation and recovery of ownership of the
property covered by TCT No. 309773.7

5. As a consequence, in a letter dated November 29, 1989, petitioner informed private

respondents that it would hold payment of the full purchase price and suggested that
private respondents settle the case with their nephews and nieces, adding that ". . . if
possible, although November 30, 1989 is a holiday, we will be waiting for you and said
plaintiffs at our office up to 7:00 p.m."8 Another letter of the same tenor and of even date
was sent by petitioner to Jose and Dominador Jimenez.9 Respondent Salud Jimenez
refused to heed the suggestion of petitioner and attributed the suspension of payment of
the purchase price to "lack of word of honor."

6. On December 7, 1989, petitioner caused to be annotated on the title of the lot its
option contract with private respondents, and its contract of sale with Jose and
Dominador Jimenez, as Entry No. 1437-4 and entry No. 1438-4, respectively.

7. On December 14, 1989, private respondents sent Francisca Jimenez to see Atty.
Bernardo, in his capacity as petitioner's counsel, and to inform the latter that they were
cancelling the transaction. In turn, Atty. Bernardo offered to pay the purchase price
provided that P500,000.00 be deducted therefrom for the settlement of the civil case.
This was rejected by private respondents. On December 22, 1989, Atty. Bernardo wrote
private respondents on the same matter but this time reducing the amount from
P500,000.00 to P300,000.00, and this was also rejected by the latter.

8. On February 23, 1990, the Regional Trial Court of Makati dismissed Civil Case No.
89-5541. Thus, on February 28, 1990, petitioner caused to be annotated anew on TCT
No. 309773 the exclusive option to purchase as Entry No. 4442-4.

9. On the same day, February 28, 1990, private respondents executed a Deed of
Conditional Sale 10 in favor of Emylene Chua over the same parcel of land for
P3,029,250, of which P1,500,000.00 was paid to private respondents on said date, with
the balance to be paid upon the transfer of title to the specified one-half portion.

10. On April 16, 1990, Atty. Bernardo wrote private respondents informing the latter that
in view of the dismissal of the case against them, petitioner was willing to pay the
purchase price, and he requested that the corresponding deed of absolute sale be
executed. 11 This was ignored by private respondents.

11. On July 27, 1990, private respondents' counsel sent a letter to petitioner enclosing
therein a check for P25,000.00 representing the refund of fifty percent of the option
money paid under the exclusive option to purchase. Private respondents then requested
petitioner to return the owner's duplicate copy of the certificate of title of respondent
Salud Jimenez. 12 Petitioner failed to surrender the certificate of title, hence private
respondents filed Civil Case No. 7532 in the Regional Trial Court of Pasay City, Branch
113, for annulment of contract with damages, praying, among others, that the exclusive
option to purchase be declared null and void; that defendant, herein petitioner, be
ordered to return the owner's duplicate certificate of title; and that the annotation of the
option contract on TCT No. 309773 be cancelled. Emylene Chua, the subsequent
purchaser of the lot, filed a complaint in intervention.

12. The trial court rendered judgment 13 therein on September 5, 1991 holding that the
agreement entered into by the parties was merely an option contract, and declaring that
the suspension of payment by herein petitioner constituted a counter-offer which,
therefore, was tantamount to a rejection of the option. It likewise ruled that herein
petitioner could not validly suspend payment in favor of private respondents on the
ground that the vindicatory action filed by the latter's kin did not involve the western
portion of the land covered by the contract between petitioner and private respondents,
but the eastern portion thereof which was the subject of the sale between petitioner and
the brothers Jose and Dominador Jimenez. The trial court then directed the cancellation
of the exclusive option to purchase, declared the sale to intervenor Emylene Chua as
valid and binding, and ordered petitioner to pay damages and attorney's fees to private
respondents, with costs.

13. On appeal, respondent Court of appeals affirmed in toto the decision of the court a
quo and held that the failure of petitioner to pay the purchase price within the period
agreed upon was tantamount to an election by petitioner not to buy the property; that
the suspension of payment constituted an imposition of a condition which was actually a
counter-offer amounting to a rejection of the option; and that Article 1590 of the Civil
Code on suspension of payments applies only to a contract of sale or a contract to sell,
but not to an option contract which it opined was the nature of the document subject of
the case at bar. Said appellate court similarly upheld the validity of the deed of
conditional sale executed by private respondents in favor of intervenor Emylene Chua.

In the present petition, the following assignment of errors are raised:

1. Respondent court of appeals acted with grave abuse of discretion in making its
finding that the agreement entered into by petitioner and private respondents was
strictly an option contract;

2. Granting arguendo that the agreement was an option contract, respondent court of
Appeals acted with grave abuse of discretion in grievously failing to consider that while
the option period had not lapsed, private respondents could not unilaterally and
prematurely terminate the option period;

3. Respondent Court of Appeals acted with grave abuse of discretion in failing to

appreciate fully the attendant facts and circumstances when it made the conclusion of
law that Article 1590 does not apply; and

4. Respondent Court of Appeals acted with grave abuse of discretion in conforming with
the sale in favor of appellee Ma. Emylene Chua and the award of damages and
attorney's fees which are not only excessive, but also without in fact and in law. 14
An analysis of the facts obtaining in this case, as well as the evidence presented by the
parties, irresistibly leads to the conclusion that the agreement between the parties is a
contract to sell, and not an option contract or a contract of sale.

1. In view of the extended disquisition thereon by respondent court, it would be

worthwhile at this juncture to briefly discourse on the rationale behind our treatment of
the alleged option contract as a contract to sell, rather than a contract of sale. The
distinction between the two is important for in contract of sale, the title passes to the
vendee upon the delivery of the thing sold; whereas in a contract to sell, by agreement
the ownership is reserved in the vendor and is not to pass until the full payment of the
price. In a contract of sale, the vendor has lost and cannot recover ownership until and
unless the contract is resolved or rescinded; whereas in a contract to sell, title is
retained by the vendor until the full payment of the price, such payment being a positive
suspensive condition and failure of which is not a breach but an event that prevents the
obligation of the vendor to convey title from becoming effective. Thus, a deed of sale is
considered absolute in nature where there is neither a stipulation in the deed that title to
the property sold is reserved in the seller until the full payment of the price, nor one
giving the vendor the right to unilaterally resolve the contract the moment the buyer fails
to pay within a fixed period. 15

There are two features which convince us that the parties never intended to transfer
ownership to petitioner except upon the full payment of the purchase price. Firstly, the
exclusive option to purchase, although it provided for automatic rescission of the
contract and partial forfeiture of the amount already paid in case of default, does not
mention that petitioner is obliged to return possession or ownership of the property as a
consequence of non-payment. There is no stipulation anent reversion or reconveyance
of the property to herein private respondents in the event that petitioner does not
comply with its obligation. With the absence of such a stipulation, although there is a
provision on the remedies available to the parties in case of breach, it may legally be
inferred that the parties never intended to transfer ownership to the petitioner to
completion of payment of the purchase price.

In effect, there was an implied agreement that ownership shall not pass to the
purchaser until he had fully paid the price. Article 1478 of the civil code does not require
that such a stipulation be expressly made. Consequently, an implied stipulation to that
effect is considered valid and, therefore, binding and enforceable between the parties. It
should be noted that under the law and jurisprudence, a contract which contains this
kind of stipulation is considered a contract to sell.

Moreover, that the parties really intended to execute a contract to sell, and not a
contract of sale, is bolstered by the fact that the deed of absolute sale would have been
issued only upon the payment of the balance of the purchase price, as may be gleaned
from petitioner's letter dated April 16, 1990 16 wherein it informed private respondents
that it "is now ready and willing to pay you simultaneously with the execution of the
corresponding deed of absolute sale."

Secondly, it has not been shown there was delivery of the property, actual or
constructive, made to herein petitioner. The exclusive option to purchase is not
contained in a public instrument the execution of which would have been considered
equivalent to delivery. 17 Neither did petitioner take actual, physical possession of the
property at any given time. It is true that after the reconstitution of private respondents'
certificate of title, it remained in the possession of petitioner's counsel, Atty. Bayani L.
Bernardo, who thereafter delivered the same to herein petitioner. Normally, under the
law, such possession by the vendee is to be understood as a delivery. 18 However,
private respondents explained that there was really no intention on their part to deliver
the title to herein petitioner with the purpose of transferring ownership to it. They claim
that Atty. Bernardo had possession of the title only because he was their counsel in the
petition for reconstitution. We have no reason not to believe this explanation of private
respondents, aside from the fact that such contention was never refuted or contradicted
by petitioner.

2. Irrefragably, the controverted document should legally be considered as a perfected

contract to sell. On this particular point, therefore, we reject the position and
ratiocination of respondent Court of Appeals which, while awarding the correct relief to
private respondents, categorized the instrument as "strictly an option contract."

The important task in contract interpretation is always the ascertainment of the intention
of the contracting parties and that task is, of course, to be discharged by looking to the
words they used to project that intention in their contract, all the words not just a
particular word or two, and words in context not words standing alone. 19 Moreover,
judging from the subsequent acts of the parties which will hereinafter be discussed, it is
undeniable that the intention of the parties was to enter into a contract to sell. 20 In
addition, the title of a contract does not necessarily determine its true nature. 21 Hence,
the fact that the document under discussion is entitled "Exclusive Option to Purchase" is
not controlling where the text thereof shows that it is a contract to sell.

An option, as used in the law on sales, is a continuing offer or contract by which the
owner stipulates with another that the latter shall have the right to buy the property at a
fixed price within a certain time, or under, or in compliance with, certain terms and
conditions, or which gives to the owner of the property the right to sell or demand a sale.
It is also sometimes called an "unaccepted offer." An option is not of itself a purchase,
but merely secures the privilege to buy. 22 It is not a sale of property but a sale of
property but a sale of the right to purchase. 23 It is simply a contract by which the owner
of property agrees with another person that he shall have the right to buy his property at
a fixed price within a certain time. He does not sell his land; he does not then agree to
sell it; but he does sell something, that it is, the right or privilege to buy at the election or
option of the other party. 24 Its distinguishing characteristic is that it imposes no binding
obligation on the person holding the option, aside from the consideration for the offer.
Until acceptance, it is not, properly speaking, a contract, and does not vest, transfer, or
agree to transfer, any title to, or any interest or right in the subject matter, but is merely
a contract by which the owner of property gives the optionee the right or privilege of
accepting the offer and buying the property on certain terms. 25

On the other hand, a contract, like a contract to sell, involves a meeting of minds two
persons whereby one binds himself, with respect to the other, to give something or to
render some service. 26 Contracts, in general, are perfected by mere consent, 27 which
is manifested by the meeting of the offer and the acceptance upon the thing and the
cause which are to constitute the contract. The offer must be certain and the
acceptance absolute. 28

The distinction between an "option" and a contract of sale is that an option is an

unaccepted offer. It states the terms and conditions on which the owner is willing to sell
the land, if the holder elects to accept them within the time limited. If the holder does so
elect, he must give notice to the other party, and the accepted offer thereupon becomes
a valid and binding contract. If an acceptance is not made within the time fixed, the
owner is no longer bound by his offer, and the option is at an end. A contract of sale, on
the other hand, fixes definitely the relative rights and obligations of both parties at the
time of its execution. The offer and the acceptance are concurrent, since the minds of
the contracting parties meet in the terms of the agreement. 29

A perusal of the contract in this case, as well as the oral and documentary evidence
presented by the parties, readily shows that there is indeed a concurrence of petitioner's
offer to buy and private respondents' acceptance thereof. The rule is that except where
a formal acceptance is so required, although the acceptance must be affirmatively and
clearly made and must be evidenced by some acts or conduct communicated to the
offeror, it may be made either in a formal or an informal manner, and may be shown by
acts, conduct, or words of the accepting party that clearly manifest a present intention or
determination to accept the offer to buy or sell. Thus, acceptance may be shown by the
acts, conduct, or words of a party recognizing the existence of the contract of sale. 30

The records also show that private respondents accepted the offer of petitioner to buy
their property under the terms of their contract. At the time petitioner made its offer,
private respondents suggested that their transfer certificate of title be first reconstituted,
to which petitioner agreed. As a matter of fact, it was petitioner's counsel, Atty. Bayani
L. Bernardo, who assisted private respondents in filing a petition for reconstitution. After
the title was reconstituted, the parties agreed that petitioner would pay either in cash or
manager's check the amount of P2,856,150.00 for the lot. Petitioner was supposed to
pay the same on November 25, 1989, but it later offered to make a down payment of
P50,000.00, with the balance of P2,806,150.00 to be paid on or before November 30,
1989. Private respondents agreed to the counter-offer made by petitioner. 31 As a result,
the so-called exclusive option to purchase was prepared by petitioner and was
subsequently signed by private respondents, thereby creating a perfected contract to
sell between them.
It cannot be gainsaid that the offer to buy a specific piece of land was definite and
certain, while the acceptance thereof was absolute and without any condition or
qualification. The agreement as to the object, the price of the property, and the terms of
payment was clear and well-defined. No other significance could be given to such acts
that than they were meant to finalize and perfect the transaction. The parties even went
beyond the basic requirements of the law by stipulating that "all expenses including the
corresponding capital gains tax, cost of documentary stamps are for the account of the
vendors, and expenses for the registration of the deed of sale in the Registry of Deeds
are for the account of Adelfa properties, Inc." Hence, there was nothing left to be done
except the performance of the respective obligations of the parties.

We do not subscribe to private respondents' submission, which was upheld by both the
trial court and respondent court of appeals, that the offer of petitioner to deduct
P500,000.00, (later reduced to P300,000.00) from the purchase price for the settlement
of the civil case was tantamount to a counter-offer. It must be stressed that there
already existed a perfected contract between the parties at the time the alleged counter-
offer was made. Thus, any new offer by a party becomes binding only when it is
accepted by the other. In the case of private respondents, they actually refused to
concur in said offer of petitioner, by reason of which the original terms of the contract
continued to be enforceable.

At any rate, the same cannot be considered a counter-offer for the simple reason that
petitioner's sole purpose was to settle the civil case in order that it could already comply
with its obligation. In fact, it was even indicative of a desire by petitioner to immediately
comply therewith, except that it was being prevented from doing so because of the filing
of the civil case which, it believed in good faith, rendered compliance improbable at that
time. In addition, no inference can be drawn from that suggestion given by petitioner
that it was totally abandoning the original contract.

More importantly, it will be noted that the failure of petitioner to pay the balance of the
purchase price within the agreed period was attributed by private respondents to "lack
of word of honor" on the part of the former. The reason of "lack of word of honor" is to
us a clear indication that private respondents considered petitioner already bound by its
obligation to pay the balance of the consideration. In effect, private respondents were
demanding or exacting fulfillment of the obligation from herein petitioner. with the arrival
of the period agreed upon by the parties, petitioner was supposed to comply with the
obligation incumbent upon it to perform, not merely to exercise an option or a right to
buy the property.

The obligation of petitioner on November 30, 1993 consisted of an obligation to give

something, that is, the payment of the purchase price. The contract did not simply give
petitioner the discretion to pay for the property. 32 It will be noted that there is nothing in
the said contract to show that petitioner was merely given a certain period within which
to exercise its privilege to buy. The agreed period was intended to give time to herein
petitioner within which to fulfill and comply with its obligation, that is, to pay the balance
of the purchase price. No evidence was presented by private respondents to prove
otherwise.

The test in determining whether a contract is a "contract of sale or purchase" or a mere

"option" is whether or not the agreement could be specifically enforced. 33 There is no
doubt that the obligation of petitioner to pay the purchase price is specific, definite and
certain, and consequently binding and enforceable. Had private respondents chosen to
enforce the contract, they could have specifically compelled petitioner to pay the
balance of P2,806,150.00. This is distinctly made manifest in the contract itself as an
integral stipulation, compliance with which could legally and definitely be demanded
from petitioner as a consequence.

This is not a case where no right is as yet created nor an obligation declared, as where
something further remains to be done before the buyer and seller obligate
themselves. 34 An agreement is only an "option" when no obligation rests on the party to
make any payment except such as may be agreed on between the parties as
consideration to support the option until he has made up his mind within the time
specified. 35 An option, and not a contract to purchase, is effected by an agreement to
sell real estate for payments to be made within specified time and providing forfeiture of
money paid upon failure to make payment, where the purchaser does not agree to
purchase, to make payment, or to bind himself in any way other than the forfeiture of the
payments made. 36 As hereinbefore discussed, this is not the situation obtaining in the
case at bar.

While there is jurisprudence to the effect that a contract which provides that the initial
payment shall be totally forfeited in case of default in payment is to be considered as an
option contract, 37 still we are not inclined to conform with the findings of respondent
court and the court a quo that the contract executed between the parties is an option
contract, for the reason that the parties were already contemplating the payment of the
balance of the purchase price, and were not merely quoting an agreed value for the
property. The term "balance," connotes a remainder or something remaining from the
original total sum already agreed upon.

In other words, the alleged option money of P50,000.00 was actually earnest money
which was intended to form part of the purchase price. The amount of P50,000.00 was
not distinct from the cause or consideration for the sale of the property, but was itself a
part thereof. It is a statutory rule that whenever earnest money is given in a contract of
sale, it shall be considered as part of the price and as proof of the perfection of the
contract. 38 It constitutes an advance payment and must, therefore, be deducted from
the total price. Also, earnest money is given by the buyer to the seller to bind the
bargain.

There are clear distinctions between earnest money and option money, viz.: (a) earnest
money is part of the purchase price, while option money ids the money given as a
distinct consideration for an option contract; (b) earnest money is given only where
there is already a sale, while option money applies to a sale not yet perfected; and (c)
when earnest money is given, the buyer is bound to pay the balance, while when the
would-be buyer gives option money, he is not required to buy. 39

The aforequoted characteristics of earnest money are apparent in the so-called option
contract under review, even though it was called "option money" by the parties. In
addition, private respondents failed to show that the payment of the balance of the
purchase price was only a condition precedent to the acceptance of the offer or to the
exercise of the right to buy. On the contrary, it has been sufficiently established that
such payment was but an element of the performance of petitioner's obligation under
the contract to sell. 40

II

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

Art. 1590. Should the vendee be disturbed in the possession or ownership

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

Respondent court refused to apply the aforequoted provision of law on the erroneous
assumption that the true agreement between the parties was a contract of option. As we
have hereinbefore discussed, it was not an option contract but a perfected contract to
sell. Verily, therefore, Article 1590 would properly apply.

Both lower courts, however, are in accord that since Civil Case No. 89-5541 filed
against the parties herein involved only the eastern half of the land subject of the deed
of sale between petitioner and the Jimenez brothers, it did not, therefore, have any
adverse effect on private respondents' title and ownership over the western half of the
land which is covered by the contract subject of the present case. We have gone over
the complaint for recovery of ownership filed in said case 41 and we are not persuaded
by the factual findings made by said courts. At a glance, it is easily discernible that,
although the complaint prayed for the annulment only of the contract of sale executed
between petitioner and the Jimenez brothers, the same likewise prayed for the recovery
of therein plaintiffs' share in that parcel of land specifically covered by TCT No. 309773.
In other words, the plaintiffs therein were claiming to be co-owners of the entire parcel
of land described in TCT No. 309773, and not only of a portion thereof nor, as
incorrectly interpreted by the lower courts, did their claim pertain exclusively to the
eastern half adjudicated to the Jimenez brothers.

Such being the case, petitioner was justified in suspending payment of the balance of
the purchase price by reason of the aforesaid vindicatory action filed against it. The
assurance made by private respondents that petitioner did not have to worry about the
case because it was pure and simple harassment 42 is not the kind of guaranty
contemplated under the exceptive clause in Article 1590 wherein the vendor is bound to
make payment even with the existence of a vindicatory action if the vendee should give
a security for the return of the price.

2. Be that as it may, and the validity of the suspension of payment notwithstanding, we

find and hold that private respondents may no longer be compelled to sell and deliver
the subject property to petitioner for two reasons, that is, petitioner's failure to duly effect
the consignation of the purchase price after the disturbance had ceased; and,
secondarily, the fact that the contract to sell had been validly rescinded by private
respondents.

The records of this case reveal that as early as February 28, 1990 when petitioner
caused its exclusive option to be annotated anew on the certificate of title, it already
knew of the dismissal of civil Case No. 89-5541. However, it was only on April 16, 1990
that petitioner, through its counsel, wrote private respondents expressing its willingness
to pay the balance of the purchase price upon the execution of the corresponding deed
of absolute sale. At most, that was merely a notice to pay. There was no proper tender
of payment nor consignation in this case as required by law.

The mere sending of a letter by the vendee expressing the intention to

pay, without the accompanying payment, is not considered a valid tender of
payment. 43 Besides, a mere tender of payment is not sufficient to compel private
respondents to deliver the property and execute the deed of absolute sale. It is
consignation which is essential in order to extinguish petitioner's obligation to pay the
balance of the purchase price. 44 The rule is different in case of an option contract 45 or
in legal redemption or in a sale with right to repurchase, 46 wherein consignation is not
necessary because these cases involve an exercise of a right or privilege (to buy,
redeem or repurchase) rather than the discharge of an obligation, hence tender of
payment would be sufficient to preserve the right or privilege. This is because the
provisions on consignation are not applicable when there is no obligation to pay. 47 A
contract to sell, as in the case before us, involves the performance of an obligation, not
merely the exercise of a privilege of a right. consequently, performance or payment may
be effected not by tender of payment alone but by both tender and consignation.

Furthermore, petitioner no longer had the right to suspend payment after the
disturbance ceased with the dismissal of the civil case filed against it. Necessarily,
therefore, its obligation to pay the balance again arose and resumed after it received
notice of such dismissal. Unfortunately, petitioner failed to seasonably make payment,
as in fact it has deposit the money with the trial court when this case was originally filed
therein.

By reason of petitioner's failure to comply with its obligation, private respondents elected
to resort to and did announce the rescission of the contract through its letter to petitioner
dated July 27, 1990. That written notice of rescission is deemed sufficient under the
circumstances. Article 1592 of the Civil Code which requires rescission either by judicial
action or notarial act is not applicable to a contract to sell. 48 Furthermore, judicial action
for rescission of a contract is not necessary where the contract provides for automatic
rescission in case of breach,49 as in the contract involved in the present controversy.

We are not unaware of the ruling in University of the Philippines vs. De los Angeles,
etc. 50 that the right to rescind is not absolute, being ever subject to scrutiny and review
by the proper court. It is our considered view, however, that this rule applies to a
situation where the extrajudicial rescission is contested by the defaulting party. In other
words, resolution of reciprocal contracts may be made extrajudicially unless
successfully impugned in court. If the debtor impugns the declaration, it shall be subject
to judicial determination51 otherwise, if said party does not oppose it, the extrajudicial
rescission shall have legal effect. 52

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

WHEREFORE, on the foregoing modificatory premises, and considering that the same
result has been reached by respondent Court of Appeals with respect to the relief
awarded to private respondents by the court a quo which we find to be correct, its
assailed judgment in CA-G.R. CV No. 34767 is hereby AFFIRMED.

SO ORDERED.

G.R. No. 128066 June 19, 2000

JARDINE DAVIES INC., petitioner,

vs.
COURT OF APPEALS and FAR EAST MILLS SUPPLY
CORPORATION, respondents.

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 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;

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.1âwphi1.nêt

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.

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.

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 when it dealt
with FEMSCO. Hence moral and exemplary damages should not have been awarded.

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.

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." 4There 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 all-risk insurance was an implied
acceptance, if not a clear indication of its acquiescence to, the "conditional counter-
offer," 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 counter-offer." 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's conforme 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 co-
defendant 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.

SO ORDERED.

G.R. No. 109125 December 2, 1994

ANG YU ASUNCION, ARTHUR GO AND KEH TIONG, petitioners,

vs.
THE HON. COURT OF APPEALS and BUEN REALTY DEVELOPMENT
CORPORATION, respondents.

Antonio M. Albano for petitioners.

Umali, Soriano & Associates for private respondent.

VITUG, J.:

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 P6-million while plaintiffs
made a counter offer of P5-million; 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 above-described
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 the Notice 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 consummation begins 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 of option. 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 Parañaque, 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 optioner-offeror 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
1912 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. 87-
41058, 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.

SO ORDERED.

G.R. No. L-12471 April 13, 1959

ROSARIO L. DE BRAGANZA, ET AL., petitioners,

vs.
FERNANDO F. DE VILLA ABRILLE, respondent.
Oscar M. Herrera for petitioners.
R. P. Sarandi and F. Valdez Anama for respondents.

BENGZON, J.:

Rosario L. de Braganza and her sons Rodolfo and Guillermo petition for review of the
Court of Appeal's decision whereby they were required solidarily to pay Fernando F. de
Villa Abrille the sum of P10,000 plus 2 % interest from October 30, 1944.

The above petitioners, it appears, received from Villa Abrille, as a loan, on October 30,
1944 P70,000 in Japanese war notes and in consideration thereof, promised in writing
(Exhibit A) to pay him P10,000 "in legal currency of the P. I. two years after the
cessation of the present hostilities or as soon as International Exchange has been
established in the Philippines", plus 2 % per annum.

Because payment had not been made, Villa Abrille sued them in March 1949.

In their answer before the Manila court of first Instance, defendants claimed to have
received P40,000 only — instead of P70,000 as plaintiff asserted. They also averred
that Guillermo and Rodolfo were minors when they signed the promissory note Exhibit
A. After hearing the parties and their evidence, said court rendered judgment, which the
appellate court affirmed, in the terms above described.

There can be no question about the responsibility of Mrs. Rosario L. Braganza because
the minority of her consigners note release her from liability; since it is a personal
defense of the minors. However, such defense will benefit her to the extent of the
shares for which such minors may be responsible, (Art. 1148, Civil Code). It is not
denied that at the time of signing Exhibit A, Guillermo and Rodolfo Braganza were
minors-16 and 18 respectively. However, the Court of Appeals found them liable
pursuant to the following reasoning:

. . . . These two appellants did not make it appears in the promissory note that
they were not yet of legal age. If they were really to their creditor, they should
have appraised him on their incapacity, and if the former, in spite of the
information relative to their age, parted with his money, then he should be
contended with the consequence of his act. But, that was not the case. Perhaps
defendants in their desire to acquire much needed money, they readily and
willingly signed the promissory note, without disclosing the legal impediment with
respect to Guillermo and Rodolfo. When minor, like in the instant
case, pretended to be of legal age, in fact they were not, they will not later on be
permitted to excuse themselves from the fulfillment of the obligation contracted
by them or to have it annulled. (Mercado, et al. vs. Espiritu, 37 Phil., 215.)
[Emphasis Ours.]

We cannot agree to above conclusion. From the minors' failure to disclose their
minority in the same promissory note they signed, it does not follow as a legal
proposition, that they will not be permitted thereafter to assert it. They had no juridical
duty to disclose their inability. In fact, according to Corpuz Juris Secundum, 43 p. 206;

. . . . Some authorities consider that a false representation as to age including a

contract as part of the contract and accordingly hold that it cannot be the basis of
an action in tort. Other authorities hold that such misrepresentation may be the
basis of such an action, on the theory that such misrepresentation is not a part
of, and does not grow out of, the contract, or that the enforcement of liability for
such misrepresentation as tort does not constitute an indirect of enforcing liability
on the contract. In order to hold infant liable, however, the fraud must be actual
and not constructure. It has been held that his mere silence when making a
contract as to age does not constitute a fraud which can be made the basis of an
action of decit. (Emphasis Ours.)

The fraud of which an infant may be held liable to one who contracts with him in
the belief that he is of full age must be actual not constructive, and mere failure of
the infant to disclose his age is not sufficient. (27 American Jurisprudence, p.
819.)

The Mecado case1 cited in the decision under review is different because the document
signed therein by the minor specifically stated he was of age; here Exhibit A contained
no such statement. In other words, in the Mercado case, the minor was guilty of active
misrepresentation; whereas in this case, if the minors were guilty at all, which we doubt
it is of passive (or constructive) misrepresentation. Indeed, there is a growing sentiment
in favor of limiting the scope of the application of the Mercado ruling, what with the
consideration that the very minority which incapacitated from contracting should likewise
exempt them from the results of misrepresentation.

We hold, on this point, that being minors, Rodolfo and Guillermo Braganza could not be
legally bound by their signatures in Exhibit A.

It is argued, nevertheless, by respondent that inasmuch as this defense was interposed

only in 1951, and inasmuch as Rodolfo reached the age of majority in 1947, it was too
late to invoke it because more than 4 years had elapsed after he had become
emancipated upon reaching the age of majority. The provisions of Article 1301 of the
Civil Code are quoted to the effect that "an action to annul a contract by reason of
majority must be filed within 4 years" after the minor has reached majority age. The
parties do not specify the exact date of Rodolfo's birth. It is undenied, however, that in
October 1944, he was 18 years old. On the basis of such datum, it should be held that
in October 1947, he was 21 years old, and in October 1951, he was 25 years old. So
that when this defense was interposed in June 1951, four years had not yet completely
elapsed from October 1947.

Furthermore, there is reason to doubt the pertinency of the 4-years period fixed by
Article 1301 of the Civil Code where minority is set up only as a defense to an action,
without the minors asking for any positive relief from the contract. For one thing, they
have not filed in this case an action for annulment.2 They merely interposed an excuse
from liability.

Upon the other hand, these minors may not be entirely absolved from monetary
responsibility. In accordance with the provisions of Civil Code, even if their written
contact is unenforceable because of non-age, they shall make restitution to the extent
that they have profited by the money they received. (Art. 1340) There is testimony that
the funds delivered to them by Villa Abrille were used for their support during the
Japanese occupation. Such being the case, it is but fair to hold that they had profited to
the extent of the value of such money, which value has been authoritatively established
in the so-called Ballantine Schedule: in October 1944, P40.00 Japanese notes were
equivalent to P1 of current Philippine money.

Wherefore, as the share of these minors was 2/3 of P70,000 of P46,666.66, they should
now return P1,166.67.3Their promise to pay P10,000 in Philippine currency, (Exhibit A)
can not be enforced, as already stated, since they were minors incapable of binding
themselves. Their liability, to repeat, is presently declared without regard of said Exhibit
A, but solely in pursuance of Article 1304 of the Civil Code.

Accordingly, the appealed decision should be modified in the sense that Rosario
Braganza shall pay 1/3 of P10,000 i.e., P3,333.334 plus 2% interest from October 1944;
and Rodolfo and Guillermo Braganza shall pay jointly5 to the same creditor the total
amount of P1,166.67 plus 6% interest beginning March 7, 1949, when the complaint
was filed. No costs in this instance.

Paras, C.J., Padilla, Montemayor, Reyes, A., Bautista Angelo, Labrador, Concepcion
and Endencia, JJ., concur.

G.R. No. 123490 August 9, 2000

SPOUSES NENA ARRIOLA and FRANCISCO ADOLFO, GENEROSA CAWIT-

LUMAYNO, MANUEL LUMAYNO, TERESITA LUMAYNO-FLORES, ZENAIDA
LUMAYNO-JACILDO, MADELINE LUMAYNO-PRIEST, MA.VICTORIA LUMAYNO-
PETERSEN, and BEMELO MAHILUM, petitioners,
vs.
DEMETRIO, LOLITA, PEDRO, NENA, BRAULIO and DOMINGA, all surnamed
MAHILUM, and THE HONORABLE COURT OF APPEALS, 10th
DIVISION, respondents.

DECISION

PARDO, J.:

The case before the Court is an appeal from the decision of the Court of Appeals, the
dispositive portion of which reads:
"WHEREFORE, the decision appealed from is hereby REVERSED and set aside and
another one rendered declaring:

"1. plaintiffs-appellants as absolute owners of one-half of Lot. No. 1478-B of

Escalante Cadastre, less the portions owned by Ugtongan Elementary School
and Ricardo Mahilum;

"2. Ricardo Mahilum as the owner of that portion described in TCT No. 60561,
which was bought by his predecessor-in-interest Fausto Moncada from Simeon
Mahilum;

"3. the government as the owner of that portion sold by Simeon to Ugtongan
Elementary School;

"4. the reconstituted title OCT No. RO-1076 in the name of Eusebio Mahilum and
all the titles issued resulting from its partition as null and void.

"The heirs of Maximo Mahilum having failed to assert their right over the one-half
portion of the whole property, the partition and subsequent transfer of ownership as to
this portion stays.

"SO ORDERED."1

The facts, as found by the Court of Appeals, are as follows:

"The subject of the case at bench is a parcel of land known as Lot No. 1478-B of the
Escalante Cadastre, located at Ugtongan, Escalante, Negros Occidental, containing an
area of 11.1278 hectares.

"Lot No. 1478-B was originally owned by the spouses Eusebio Mahilum and Dionisia
Blase. On February 13, 1912, Eusebio and Dionisia sold the land to their son Simeon
Mahilum, who took possession thereof and enjoyed the fruits of the land in concept of
owner, openly, publicly and uninterruptedly except in 1972. He had the land declared in
his name for taxation purposes.

"On March 10, 1931, the Court of First Instance of Negros Occidental acting as a
cadastral court rendered judgment adjudicating the land to the spouses Simeon
Mahilum and Adriana Pabalate.

"In 1932, Simeon Mahilum sold one-half (1/2) of the property to his brother Maximo.

"Sometime thereafter, Simeon Mahilum sold 500 square meters of the property to
Fausto Moncada and another 500 sq. m., more or less to Ugtongan Elementary School.

"On July 2, 1969, at the instance of his sister Rosario Mahilum, Simeon, who is an
illiterate, affixed his thumbmark on a document denominated as an Extra-Judicial
Partition of Inherited Real Estates2 on the misrepresentation of Rosario Faustina that
Eusebio Mahilum's heirs would partition three other lots and did not include Simeon's
Lot 1478-B.

"On July 11, 1970, an inexistent title to the land in the names of Sps. Eusebio Mahilum
and Dionisia Blase was reconstituted on the strength of the technical description of the
land and an affidavit executed by Rosario Mahilum, and OCT No. RO-1076 was issued.

"The defendants-heirs of Eusebio Mahilum then partitioned the property among

themselves to the exclusion of Simeon Mahilum and on October 26, 1970, the following
titles3 were issued:

"Lot 1478-B-1 TCT#60557 – Joaquin Mahilum

B-3 60559 – Rosario Mahilum

B-4 60560 – Rosario Mahilum having bought Quirino Mahilum’s share

B-5 60561 – Fausto Moncada

B-6 60562 – Eusebio Mahilum and Dionisia Blase

B-7 60563 – Teresita Lumayno having bought Albina Mahilum’s share

B-8 60564 – Felipe Mahilum

B-9 60565 – Heirs of Juan Mahilum

B-10 60566 – Santiago Mahilum ½ and Maximo Mahilum ½

"Later, TCT NO. T-60564 was cancelled and TCT No. T-69709 was issued to defendant
spouses Nena Arriola Adolfo and Francisco Adolfo who bought Felipe Mahilum's share;
likewise TCT No. T-60561 in the name of Fausto Moncada was cancelled when he sold
his lot to spouses Ricardo Mahilum and Elena Bacuado.

"Generosa Cawit Lumayno and Braulio Lumayno later purchased Rosario Mahilum's
share and were substituted as party defendants.

"In 1972 Simeon Mahilum discovered that the inexistent title was reconstituted and the
property partitioned.

"On March 13, 1973, Simeon Mahilum and the heirs of Maximo Mahilum filed a
complaint for annulment of title with the then Court of First Instance of Negros
Occidental, alleging that the reconstituted OCT No. RO-1076 was null and void since
there was no prior title to be reconsituted in the name of Eusebio Mahilum and Dionisia
Blase;4 that Simeon Mahilum was the rightful owner of Lot 1478-B, the same having
been adjudicated to him by the CFI at the cadastral proceedings in 1931; that Simeon's
thumbmarks on the Extra-Judicial Partition were obtained thru fraudulent
misrepresentations. Consequently, all titles that flowed therefrom are null and void.

"In their answer, defendants contend that the property in question which was owned by
Eusebio Mahilum and Dionisia Blase never truly conveyed to Simeon Mahilum. When
cadastral proceedings in Escalante, Negros Occidental, went underway, Eusebio
Mahilum entrusted to his eldest son, Simeon the task of handling all matters pertaining
to the titling of the land inasmuch as he was too old to withstand the rigors attendant to
the case, traveling to Bacolod to find a lawyer and to attend the hearings and take care
of the other pertinent aspects of the registration proceedings. They assert their right of
dominion over their respective portions of the property by reason of inheritance from
their deceased parents/grandparents, Eusebio and Dionisia Mahilum.

"For their part, the other defendants profess to be purchasers in good faith not aware of
any flaw in their predecessors' titles.

"A second amended complaint was filed by plaintiffs minus the heirs of Maximo Mahilum
as "they are no longer interested because they have no more father and they have no
money to spend for the case."5

"After trial, the lower court rendered the assailed decision, the dispositive portion of
which reads:

"WHEREFORE, PREMISES CONSIDERED, the Court hereby:

"1. Orders the dismissal of this case;

"2. Orders the plaintiffs to pay jointly and severally defendants the sum of
P5,000.00 as attorney's fees;

"3. Orders respondents Francisco Mahilum and Rosela Mahilum to forthwith

surrender possession of the lands owned by defendants Generosa Lumayno and
Teresita Lumayno;

"4. Finds the respondent spouses Francisco Mahilum and Rosela Mahilum guilty
of contempt of court and sentences them to an imprisonment of TEN (10) days;

" 5. Orders the continued confinement of respondents beyond ten (10) days
should they still fail or refuse to restore said defendants-petitioners to the
possession of their lands.

" SO ORDERED."6

On May 17, 1991, respondents appealed to the Court of Appeals.7

After the parties had submitted their respective briefs, on September 14, 1995, the
Court of Appeals promulgated its decision reversing the appealed decision, the decretal
part of which is quoted in the opening paragraph of this decision.8

Hence, this appeal.9

The issues raised are (1) whether Simeon Mahilum acquired the subject property by
purchase from his parents, or by inheritance, and (2) whether the titles issued as a
result of partition of subject lot were void.

The issues raised are factual. We may not review the appellate court's findings of fact in
an appeal via certiorari.10The findings of fact of the Court of Appeals supported by
substantial evidence are conclusive and binding on the parties and are not reviewable
by this Court,11 unless the case falls under any of the exceptions to the rule, 12 such as
diverse factual findings of the lower courts13 or the findings are entirely grounded on
speculalations.14 Petitioner failed to prove that the case falls within the exceptions. 15

Thus, the question of whether the subject parcel of land, Lot 1478-B was sold by the
original owners, Eusebio Mahilum and Dionisia Blase to their son Simeon is a factual
issue. Nonetheless, the cadastral court in its decision rendered in 1931 declared the
land to be owned by Simeon. The ruling was uncontested until 1973, when Simeon filed
the complaint for annulment of reconstituted title in the name of Eusebio Mahilum and
Dionisia Blase.

We agree with the Court of Appeals that it was much too late for petitioners' claim.
Laches had set in.16

In like manner, we agree with the Court of Appeals that the partition of the same lot was
fraudulent.1âwphi1 Rosario knew there was no other way to obtain the partition of the
subject property than having her brother Simeon sign a deed of partition, making the
latter believe that the deed pertained to the three other lots. The scheme was
simple enough considering that Simeon was illiterate. The law, however, requires that in
case one of the parties to a contract is unable to read and fraud is alleged, the person
enforcing the contract must show that the terms thereof have been fully explained to the
former.17

We are not persuaded that Rosario clearly and fully explained the contents of the deed
of partition to her brother Simeon. Petitioners' allegations are negated by the fact that
Simeon not only strongly opposed the survey of the land in 1970 but also filed a
complaint for annulment of reconstituted title in 1973. Consent, having been obtained by
fraud, the deed entered into could be annulled.18 Hence, if the deed was null, the
reconsituted title and all transfer titles arising therefrom were also void. 19

IN VIEW WHEREOF, the Court DENIES the petition for review, hereby AFFIRMING the
decision of the Court of Appeals.
No costs.

SO ORDERED.

G.R. No. L-37159 November 29, 1977

LUISA RIVERO in substitution of her deceased mother, LUCIA ORIGEN, petitioner,

vs.
THE HON. COURT OF APPEALS (Special Division of Five Justices) and JAIME
RIVERO, respondents.

Pedro A. Bañez for petitioner.

Rosendo J. Tansinsin for private respondent.

FERNANDEZ, J.:

This is an appeal from the amended decision of the Court of appeals in CA-G.R. No.
44488-R, entitled "Lucia Origen vs. Jaime Rivero" the dispositive portion of which reads:

WHEREFORE, finding the motion for reconsideration meritorious, the

judgment dated November 27, 1972 is hereby SET ASIDE and another
entered, REVERSING the decision appealed from. The Deed of Sale,
Exh. A is hereby declared valid and subsisting and the property subject of
said deed of sale and covered by Transfer Certificate of Title No. T-56789
in the name of Jaime Rivero is hereby declared to be the rightful property
and possession of said Jaime Rivero. The complaint of Lucia Origen is
hereby DISMISSED. Motion for Reconsideration is GRANTED.

SO ORDERED.

(SGD) LOURDES P. SAN

DIEGO

WE CONCUR:

(SGD) RUPERTO G. MARTIN

(SGD) LUIS B. REYES 1

On May 3, 1965, Lucia Origen, together with Cipriano de la Cruz, Leocadia Rivero,
Domingo Rivero and Delfin Jusayan, instituted against Jaime Rivero in the Court of First
Instance of Bulacan Civil Case No. 136-V to declare null and void a contract of sale of a
parcel of land and Transfer Certificate of Title No. T-56789 of the Registry of Deeds of
Bulacan. 2

The complaint 3 stated that the deceased Ana Concepcion who died on April 18, 1965
was formerly the registered owner of a certain parcel of land situated at Barrio Tagalog,
Valenzuela, Bulacan, containing an area of 23,245 square meters and was embraced in
Transfer Certificate of Title No. T-55814; that the plaintiffs are some of the legal heirs of
the deceased, Ana Concepcion, who died intestate that on or about March 15, 1965.
during her last illness, the deceased decided to mortgage the abovementioned property
for P5,000.00 so that she could pay her existing obligation to one Filomena Jusayan in
the amount of P3,000.00 and to spend for her recovery from illness; that she entrusted
the title to her property to the defendant, Jaime Rivero, trusting that he would facilitate
the mortgage; that the defendant did not mortgage the property but instead, on or about
March 25, 1965, when Ana Concepcion was no longer in full possession of her
reasoning faculties, said defendant, through fraud and misrepresentation, manifesting
that certain documents were supposed to be deeds of mortgage of the abovenamed
property and also through violence and undue influence on Ana Concepcion, effected
the signing by the deceased of the documents which are in reality a deed of absolute
sale and an affidavit of alienation; that the defendant did not give any consideration to
Ana Concepcion and, in fact, the deceased died without paying her debt to Filomena
Jusayan, and said Ana Concepcion lacked proper medical treatment; that on or about
March 26, 1965, the defendant effected the registration of the property in question in his
name and Transfer Certificate of Title No. T-56789 was issued to him by virtue of the
documents signed through mistake, fraud and violence; that as a consequence of the
defendant's fraudulent acts and breach of trust, the plaintiffs suffered moral and
exemplary damages amounting to a total of not less than P40,000.00; and that the
plaintiffs were constrained to engage counsel for a fee of P5,000.00.

After his motion to dismiss was denied, the defendant, Jaime Rivero, filed on
September 14, 1965 an answer 4wherein he alleged as special and affirmative defenses
that the trial court has no jurisdiction over the subject matter of the action; that the
plaintiffs have no legal capacity to sue; that the claim on which the action is rounded is
unenforceable under the Statute of Frauds; that the complain states no cause of action;
that the suit is between members of the same family and no earnest effort towards a
compromise had been made; that the deed of absolute sale and affidavit of alienation
were executed by Ana Concepcion freely and voluntarily; and that the defendant has
fully paid the consideration of the said deed of absolute sale and affidavit of alienation.
The defendant interposed a counterclaim for damages and attorney's fees.

The trial court rendered its decision dated May 20, 1969, the dispositive part of which
reads:

WHEREFORE, judgment is hereby rendered: (1) declaring null and void

the deed of sale purportedly executed by Ana Concepcion on March 24,
1965, and acknowledged before notary public Irineo Guardiano and
entered in the latter's notarial register as Doe. No. 257, Page 53, Book X,
 Series of 1950, and the sworn affidavit executed by her on March 25,
1965 in connection with said alleged sale; (2) ordering the cancellation of
T.C.T. No. T-56789 and Tax Declaration No. 15219, both in the name of
Jaime Rivero, and the restitution of the previous certificate of title and tax
declaration in the name of Ana Concepcion; (3) declaring the land covered
by said certificate of title and tax declaration to be the property of the
estate of Ana Concepcion which should be settled in the appropriate
special proceedings; and (4) reserving the right to Jaime Rivero to file his
claim in said special proceedings for the amounts he paid to settle the
obligations of Ana Concepcion in favor of Filomeno Zamora and Crisanto
Origen. Costs against the defendant.

SO ORDERED.

Valenzuela Bulacan, May 20, 1969.

JUAN
DE
BORJ
A

J
u
d
g
e
5

The defendant appeals to the Court of Appeals where the case was docketed as CA-
G.R. No. 44488-R.

At first, the Court of Appeals promulgated a decision on November 27, 1972 written by
Acting Presiding Justice Juan P. Enriquez and concurred in by Justice Juan O. Reyes
and Justice Luis B. Reyes affirming in toto the decision of the trial court. 6 Justice
Lourdes P. San Diego and Justice Eloy B. Bello dissented in a separate opinion. 7

Upon a motion for reconsideration filed by the defendant., the Court of Appeals
promulgated on May 4, 1973 an amended decision written by Justice Lourdes P. San
Diego and concurred in by Justice Ruperto G. Martin and Justice Luis B. Reyes
reversing the decision of the trial court appealed from and declaring the deed of sale,
Exhibit A, valid and subsisting and the property covered by Transfer Certificate of Title
No. T-56789 as the rightful property of Jaime Rivero. 8 Acting Presiding Justice Juan P.
Enriquez dissented in a separate opinion concurred in by Justice Juan O. Reyes. 9
The present petitioner, Luisa Rivero, was substituted for her deceased mother, Lucia
Origen.

The petitioner assigns the following errors:

THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT

'THE ADMISSION BY PLAINTIFF-APPELLEE IN HER VERIFIED
COMPLAINT THAT THE SIGNATURE OF ANA CONCEPCION ON THE
DEED OF SALE AS WELL AS IN EXHIBIT 'B' or '5' IS GENUINE
PARTAKES OF THE NATURE OF A JUDICIAL ADMISSION WHICH,
UNDER THE PROVISION OF SEC. 2, RULE 129, CANNOT BE
CONTRADICTED AND ALL CONTRADICTORY PROOF SUBMITTED BY
THE PARTY MAKING SUCH JUDICIAL ADMISSION OR
INCONSISTENT THEREWITH MUST BE IGNORED BY THE COURTS
WHETHER OBJECTED TO OR NOT BY THE OPPOSING PARTY.

II

THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT

THE 'TESTIMONY OF MAJOR CATALINO F. FERNANDEZ, ALLEGED
HANDWRITING EXPERT, TO THE EFFECT THAT ANA CONCEPCION'S
SIGNATURE WAS FORGED, AND ON WHOSE TESTIMONY THE
LOWER COURT AND THE MAJORITY OF THIS DIVISION RELIED
UPON IN THEIR RESPECTIVE DECISIONS, CANNOT AND SHOULD
NOT HAVE BEEN CONSIDERED,'

III

THE HONORABLE COURT OF APPEALS ERRED IN HOLDING 'THAT

NEITHER SEC. 5 RULE 10 NOR THE MARELLA CASE CAN APPLY IN
THE CASE INASMUCH AS SAID SECTION CONTEMPLATES ONLY
EVIDENCE CONSISTENT WITH AND MADE TO SUPPORT THE
ALLEGATIONS OF A COMPLAINT AND DEFINITELY NOT EVIDENCE
CONTRADICTORY TO ALLEGATIONS STATED IN THE COMPLAINT.'

IV

THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT

'WE DO NOT FIND ANY PROOF NAY NOT EVEN THE SLIGHTEST
SUGGESTION ON THE PARTY OF- THE PLAINTIFF THAT THIS
PARTICULAR ALLEGATION IN THE COMPLAINT WAS MADE THRU
PALPABLE MISTAKE.

V
 THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT
'WE ARE OF THE CONSIDERED OPINION THAT THE REASONING
EVOLVED IN THE DISSENTING OPINION OF THE LATE JUSTICE E.
BELLO THOROUGHLY SUPPORTS THE VIEW THAT A PUBLIC
DOCUMENT ENJOYS IN ITS FAVOR THE PRESUMPTION THAT THE
CONTENTS THEREOF ARE TRUE AND THAT THE SAID PUBLIC
DOCUMENT HAS BEEN EXECUTED ACCORDING TO LAW, WHICH
PRESUMPTION, ALTHOUGH DISPUTABLE, WILL NOT BE
DISCARDED EXCEPT BY OVERWHELMING EVIDENCE TO THE
CONTRARY. THIS QUANTUM OF EVIDENCE WE DO NOT HIND IN
THE CASE UNDER CONSIDERATION.'

VI

FINALLY, THE HONORABLE COURT OF APPEALS ERRED IN

REVERSING THE DECISION OF THE LOWER COURT AND IN RULING
THAT THE DEED OF SALE EXHIBIT 'A' IS HEREBY DECLARED VALID
AND SUBSISTING AND THE PROPERTY SUBJECT OF SAID DEED OF
SALE AND COVERED BY TRANSFER CERTIFICATE NO. T-56789 IN
THE NAME OF JAIME RIVERO IS HEREBY DECLARED TO BE THE
RIGHTFUL PROPERTY AND POSSESSION OF SAID JAIME RIVERO. 10

Despite the number of errors assigned, the principal issue is the validity of the deed of
sale, Exhibit A.

The record discloses that Ana Concepcion was the only daughter of Vicente
Concepcion who died in 1934; that Ana Concepcion inherited from her father a parcel of
land which is the subject of the present controversy; that Ana Concepcion was afflicted
with pulmonary tuberculosis and as she needed money for her treatment, she requested
her nephew, Jaime Rivero, to work for the transfer of the title of the land in question to
her; that on January 20, 1965, through the efforts of Jaime Rivero, Transfer Certificate
of Title No. T-55814 embracing said land was issued in the name of Ana Concepcion;
that Transfer Certificate of Title No. T-55814 was never delivered by Jaime Rivero to
Ana Concepcion until she died; that not long after the death of Ana Concepcion on April
18, 1968, the relatives of the deceased discovered that the land of Ana Concepcion had
been registered in the name of Jaime Rivero who secured Transfer Certificate of Title
No. 56789 in his name from the Register of Deeds of Bulacan; and that a deed entitled
"Kasulatan Sa Ganap Na Bilihan" dated March 24, 1965, whereby it was made to
appear that Ana Concepcion had sold to Jaime Rivero the land in question, was
allegedly concocted by Jaime Rivero, taking advantage of his being in possession of the
certificate of title of Ana Concepcion.11

The evidence of the plaintiffs on the issue of forgery consisted of the testimony of Major
Catalino F. Hernandez who was presented as a handwriting expert. Major Hernandez
declared that he made a study of the authenticity and genuineness of the signature of
Ana Concepcion on the deed of sale, Exhibit A, by comparing it with the signatures of
Ana Concepcion appearing in four (4) documents admittedly signed by her. The
standards used by the handwriting expert are the sworn statement dated March 25,
1965, Exhibit B; the affidavit of adjudication dated January 20, 1965, Exhibit C; the
option to sell dated October 5, 1958; and the voter's affidavit and list of voters for the
election of 1955 which contain the signature of Ana Concepcion.

The testimony of Major Catalino F. Hernandez that the deed of e was a forgery was not
contradicted by evidence of the defendant. According to said handwriting expert, the
signature in the deed of sale Exhibit A, shows irregular, tremulous hesitating and
corrective strokes. It is written with a drawing movement, unlike the standard signatures
where the movement is fluent. The handwriting characteristics are dissimilar. Based on
these dissimilarities, Major Hernandez concluded that the signature on the deed of sale,
Exhibit A, was not written by Ana Concepcion. 12

The trial court, although desisting from calling the deed of sale, Exhibit A, a forgery,
found that the consent of Ana Concepcion was obtained through fraudulent
misrepresentation of Jaime Rivero because:

This Court, for one, is not infallible and will desist from calling Exhibit A a
forgery to avoid the risk of passing erroneous judgment on people who
might otherwise be innocent. But even on the assumption that the
document was in fact signed by Ana Concepcion, the Court finds that it
could not have been her intention to sell the land to Rivero.

Ana Concepcion was illiterate. She could sign her name with difficulty
Luisa Rivero, who attended her, studied only up to grade school, and the
two of them could not have understood the meaning and import of the
documents Ana Concepcion was made to sign. But the latter knew the
value of the her property as far back as 1958, for in that year she gave an
option to sell it for P4.50 per square meter (Exh. D), which, is more than
P100,000.00 for the whole area. She could readily have sold it for perhaps
less than that amount at any time. But instead of doing so she only
borrowed P2,623.00 from Filomena Zamora (Exh. 19) and P450.00 from
Crisanto Origen (Exh. 20). This can only mean that she did not want to sell
the property for less than its actual value. On March 25, 1965 she was
already gravely ill and in need of funds. Yet why should she be willing to
sell the land for P5,000.00, when she well knew that she could get
P100,000.00 for it? In this situation, it is not difficult to believe the
testimony of Luisa Rivero that what the old woman wanted was to
mortgage the property in order to pay off her debts and have ready funds.
By the same token she could not . have agreed to sell the land to Rivero
for P5,000.00. If she signed the deed of sale and subsequent affidavit, it
was under the false belief that she was only mortgaging the property. The
sale is therefore voidable, because the consent of Ana Concepcion was
obtained thru the fraudulent mispresentation of Rivero that the contract
she was signing was one of mortgage (Art. 1330, N.C.*C ).
 'In determining whether consent is vitiated by any of the
circumstances mentioned in this article, courts are given a
wide latitude in weighing the facts or circumstances in a
given case and in deciding in favor of what they believe to
have actually occurred, considering the age, physical
infirmity, intelligence, relationship, and the conduct of the
parties at the time of making the contract and subsequent
thereto, irrespective of whether the contract is in a public or
private writing.' (Trasporto vs. Beltran, C.A. 51 O.G. 1434.) 13

The undisputed facts of record support the finding of the trial court that the consent of
Ana Concepcion to the deed of sale was obtained through the fraudulent
misrepresentation of Jaime Rivero that the contract she was signing was one of
mortgage.

The land in question is located in the Municipality of Polo, Bulacan, very near Manila. It
has an area of 2 hectares, 32 ares and 45 centares. The consideration for the sale of
said land is only P5,000.00 which is not only grossly inadequate but shocking to the
conscience. The land in question was sold for less than P0.25 per square meter.

It appears that Ana Concepcion only wanted to mortgage the property so she could pay
her indebtedness of about P3,000.00. Considering the nature of the area of the
property, the same can be sold for about P100,000.00. In 1958 Ana Concepcion had
executed an option to sell the land in question for a price of P4.50 per square meter. It
appears from the description of the land in question that the same is a corner lot being
bounded on the south and west by a road 3 meters wide. 14

In view of the foregoing, we find that Ana Concepcion signed the alleged deed of sale,
Exhibit A, thinking that the same was merely a mortgage of the land in question.

WHEREFORE, the amended decision of the Court of Appeals promulgated on May 4,

1973 in CA-G.R. No. 44488-R is hereby reversed and the decision of the trial court is
affirmed in toto, with costs against the private respondent Jaime Rivero.

SO ORDERED.

G.R. No. L-32116 April 2l, 1981

RURAL BANK OF CALOOCAN, INC. and JOSE O. DESIDERIO, JR., petitioners,

vs.
THE COURT OF APPEALS and MAXIMA CASTRO, respondents.

DE CASTRO, * J.:
This is a petition for review by way of certiorari of the decision 1 of the Court of Appeals
in CA-G.R. No. 39760-R entitled "Maxima Castro, plaintiff-appellee, versus Severino
Valencia, et al., defendants; Rural Bank of Caloocan, Inc., Jose Desiderio, Jr. and
Arsenio Reyes, defendants-appellants," which affirmed in toto the decision of the Court
of First Instance of Manila in favor of plaintiff- appellee, the herein private respondent
Maxima Castro.

On December 7, 1959, respondent Maxima Castro, accompanied by Severino Valencia,

went to the Rural Bank of Caloocan to apply for an industrial loan. It was Severino
Valencia who arranged everything about the loan with the bank and who supplied to the
latter the personal data required for Castro's loan application. On December 11, 1959,
after the bank approved the loan for the amount of P3,000.00, Castro, accompanied by
the Valencia spouses, signed a promissory note corresponding to her loan in favor of
the bank.

On the same day, December 11, 1959, the Valencia spouses obtained from the bank an
equal amount of loan for P3,000.00. They signed a promissory note (Exhibit "2")
corresponding to their loan in favor of the bank and had Castro affixed thereon her
signature as co-maker.

The two loans were secured by a real-estate mortgage (Exhibit "6") on Castro's house
and lot of 150 square meters, covered by Transfer Certificate of Title No. 7419 of the
Office of the Register of Deeds of Manila.

On February 13, 1961, the sheriff of Manila, thru Acting Chief Deputy Sheriff Basilio
Magsambol, sent a notice of sheriff's sale addressed to Castro, announcing that her
property covered by T.C.T. No. 7419 would be sold at public auction on March 10, 1961
to satisfy the obligation covering the two promissory notes plus interest and attorney's
fees.

Upon request by Castro and the Valencias and with conformity of the bank, the auction
sale that was scheduled for March 10, 1961 was postponed for April 10, 1961. But when
April 10, 1961 was subsequently declared a special holiday, the sheriff of Manila sold
the property covered by T.C.T. No. 7419 at a public auction sale that was held on April
11, 1961, which was the next succeeding business day following the special holiday.

Castro alleged that it was only when she received the letter from the Acting Deputy
Sheriff on February 13, 1961, when she learned for the first time that the mortgage
contract (Exhibit "6") which was an encumbrance on her property was for P6.000.00
and not for P3,000.00 and that she was made to sign as co-maker of the promissory
note (Exhibit "2") without her being informed of this.

On April 4, 1961, Castro filed a suit denominated "Re: Sum of Money," against
petitioners Bank and Desiderio, the Spouses Valencia, Basilio Magsambol and Arsenio
Reyes as defendants in Civil Case No. 46698 before the Court of First Instance of
Manila upon the charge, amongst others, that thru mistake on her part or fraud on the
part of Valencias she was induced to sign as co-maker of a promissory note (Exhibit
"2") and to constitute a mortgage on her house and lot to secure the questioned note. At
the time of filing her complaint, respondent Castro deposited the amount of P3,383.00
with the court a quo in full payment of her personal loan plus interest.

In her amended complaint, Castro prayed, amongst other, for the annulment as far as
she is concerned of the promissory note (Exhibit "2") and mortgage (Exhibit "6") insofar
as it exceeds P3,000.00; for the discharge of her personal obligation with the bank by
reason of a deposit of P3,383.00 with the court a quo upon the filing of her complaint;
for the annulment of the foreclosure sale of her property covered by T.C.T. No. 7419 in
favor of Arsenio Reyes; and for the award in her favor of attorney's fees, damages and
cost.

In their answers, petitioners interposed counterclaims and prayed for the dismissal of
said complaint, with damages, attorney's fees and costs. 2

The pertinent facts arrived from the stipulation of facts entered into by the parties as
stated by respondent Court of Appeals are as follows:

Spawning the present litigation are the facts contained in the following
stipulation of facts submitted by the parties themselves:

1. That the capacity and addresses of all the parties in this case are
admitted .

2. That the plaintiff was the registered owner of a residential house and lot
located at Nos. 1268-1270 Carola Street, Sampaloc, Manila, containing an
area of one hundred fifty (150) square meters, more or less, covered by
T.C.T. No. 7419 of the Office of the Register of Deeds of Manila;

3. That the signatures of the plaintiff appearing on the following

documents are genuine:

a) Application for Industrial Loan with the Rural Bank of Caloocan, dated
December 7, 1959 in the amount of P3,000.00 attached as Annex A of this
partial stipulation of facts;

b) Promissory Note dated December 11, 1959 signed by the plaintiff in

favor of the Rural Bank of Caloocan for the amount of P3,000.00 as per
Annex B of this partial stipulation of facts;

c) Application for Industrial Loan with the Rural Bank of Caloocan, dated
December 11, 1959, signed only by the defendants, Severino Valencia
and Catalina Valencia, attached as Annex C, of this partial stipulation of
facts;
d) Promissory note in favor of the Rural Bank of Caloocan, dated
December 11, 1959 for the amount of P3000.00, signed by the spouses
Severino Valencia and Catalina Valencia as borrowers, and plaintiff
Maxima Castro, as a co-maker, attached as Annex D of this partial
stipulation of facts;

e) Real estate mortgage dated December 11, 1959 executed by plaintiff

Maxima Castro, in favor of the Rural Bank of Caloocan, to secure the
obligation of P6,000.00 attached herein as Annex E of this partial
stipulation of facts;

All the parties herein expressly reserved their right to present any
evidence they may desire on the circumstances regarding the execution of
the above-mentioned documents.

4. That the sheriff of Manila, thru Acting Chief Deputy Sheriff, Basilio
Magsambol, sent a notice of sheriff's sale, address to the plaintiff, dated
February 13, 1961, announcing that plaintiff's property covered by TCT
No. 7419 of the Register of Deeds of the City of Manila, would be sold at
public auction on March 10, 1961 to satisfy the total obligation of
P5,728.50, plus interest, attorney's fees, etc., as evidenced by the Notice
of Sheriff's Sale and Notice of Extrajudicial Auction Sale of the Mortgaged
property, attached herewith as Annexes F and F-1, respectively, of this
stipulation of facts;

5. That upon the request of the plaintiff and defendants-spouses Severino

Valencia and Catalina Valencia, and with the conformity of the Rural Bank
of Caloocan, the Sheriff of Manila postponed the auction sale scheduled
for March 10, 1961 for thirty (30) days and the sheriff re-set the auction
sale for April 10, 1961;

6. That April 10, 1961 was declared a special public holiday; (Note: No. 7
is omitted upon agreement of the parties.)

8. That on April 11, 1961, the Sheriff of Manila, sold at public auction
plaintiff's property covered by T.C.T. No. 7419 and defendant, Arsenio
Reyes, was the highest bidder and the corresponding certificate of sale
was issued to him as per Annex G of this partial stipulation of facts;

9. That on April 16, 1962, the defendant Arsenio Reyes, executed an

Affidavit of Consolidation of Ownership, a copy of which is hereto attached
as Annex H of this partial stipulation of facts;

10. That on May 9, 1962, the Rural Bank of Caloocan Incorporated

executed the final deed of sale in favor of the defendant, Arsenio Reyes,
 in the amount of P7,000.00, a copy of which is attached as Annex I of this
partial stipulation of facts;

11. That the Register of Deeds of the City of Manila issued the Transfer
Certificate of Title No. 67297 in favor of the defendant, Arsenio Reyes, in
lieu of Transfer Certificate of Title No. 7419 which was in the name of
plaintiff, Maxima Castro, which was cancelled;

12. That after defendant, Arsenio Reyes, had consolidated his title to the
property as per T.C.T. No. 67299, plaintiff filed a notice of lis pendens with
the Register of Deeds of Manila and the same was annotated in the back
of T.C.T. No. 67299 as per Annex J of this partial stipulation of facts; and

13. That the parties hereby reserved their rights to present additional
evidence on matters not covered by this partial stipulation of facts.

WHEREFORE, it is respectfully prayed that the foregoing partial

stipulation of facts be approved and admitted by this Honorable Court.

As for the evidence presented during the trial, We quote from the decision of the Court
of Appeals the statement thereof, as follows:

In addition to the foregoing stipulation of facts, plaintiff claims she is a 70-

year old widow who cannot read and write the English language; that she
can speak the Pampango dialect only; that she has only finished second
grade (t.s.n., p. 4, December 11, 1964); that in December 1959, she
needed money in the amount of P3,000.00 to invest in the business of the
defendant spouses Valencia, who accompanied her to the defendant bank
for the purpose of securing a loan of P3,000.00; that while at the
defendant bank, an employee handed to her several forms already
prepared which she was asked to sign on the places indicated, with no
one explaining to her the nature and contents of the documents; that she
did not even receive a copy thereof; that she was given a check in the
amount of P2,882.85 which she delivered to defendant spouses; that
sometime in February 1961, she received a letter from the Acting Deputy
Sheriff of Manila, regarding the extrajudicial foreclosure sale of her
property; that it was then when she learned for the first time that the
mortgage indebtedness secured by the mortgage on her property was
P6,000.00 and not P3,000.00; that upon investigation of her lawyer, it was
found that the papers she was made to sign were:

(a) Application for a loan of P3,000.00 dated December 7, 1959 (Exh. B-1
and Exh. 1);

(b) Promissory note dated December 11, 1959 for the said loan of
P3,000.00 (Exh- B-2);
 (c) Promissory note dated December 11, 1959 for P3,000.00 with the
defendants Valencia spouses as borrowers and appellee as co-maker
(Exh. B-4 or Exh. 2).

The auction sale set for March 10, 1961 was postponed co April 10, 1961
upon the request of defendant spouses Valencia who needed more time
within which to pay their loan of P3,000.00 with the defendant bank;
plaintiff claims that when she filed the complaint she deposited with the
Clerk of Court the sum of P3,383.00 in full payment of her loan of
P3,000.00 with the defendant bank, plus interest at the rate of 12% per
annum up to April 3, 1961 (Exh. D).

As additional evidence for the defendant bank, its manager declared that
sometime in December, 1959, plaintiff was brought to the Office of the
Bank by an employee- (t.s.n., p 4, January 27, 1966). She wept, there to
inquire if she could get a loan from the bank. The claims he asked the
amount and the purpose of the loan and the security to he given and
plaintiff said she would need P3.000.00 to be invested in a drugstore in
which she was a partner (t.s.n., p. 811. She offered as security for the loan
her lot and house at Carola St., Sampaloc, Manila, which was promptly
investigated by the defendant bank's inspector. Then a few days later,
plaintiff came back to the bank with the wife of defendant Valencia A date
was allegedly set for plaintiff and the defendant spouses for the
processing of their application, but on the day fixed, plaintiff came without
the defendant spouses. She signed the application and the other papers
pertinent to the loan after she was interviewed by the manager of the
defendant. After the application of plaintiff was made, defendant spouses
had their application for a loan also prepared and signed (see Exh. 13). In
his interview of plaintiff and defendant spouses, the manager of the bank
was able to gather that plaintiff was in joint venture with the defendant
spouses wherein she agreed to invest P3,000.00 as additional capital in
the laboratory owned by said spouses (t.s.n., pp. 16-17) 3

The Court of Appeals, upon evaluation of the evidence, affirmed in toto the decision of
the Court of First Instance of Manila, the dispositive portion of which reads:

FOR ALL THE FOREGOING CONSIDERATIONS, the Court renders

judgment and:

(1) Declares that the promissory note, Exhibit '2', is invalid as against
plaintiff herein;

(2) Declares that the contract of mortgage, Exhibit '6', is null and void, in
so far as the amount thereof exceeds the sum of P3,000.00 representing
the principal obligation of plaintiff, plus the interest thereon at 12% per
annum;
 (3) Annuls the extrajudicial foreclosure sale at public auction of the
mortgaged property held on April 11, 1961, as well as all the process and
actuations made in pursuance of or in implementation thereto;

(4) Holds that the total unpaid obligation of plaintiff to defendant Rural
Bank of Caloocan, Inc., is only the amount of P3,000.00, plus the interest
thereon at 12% per annum, as of April 3, 1961, and orders that plaintiff's
deposit of P3,383.00 in the Office of the Clerk of Court be applied to the
payment thereof;

(5) Orders defendant Rural Bank of Caloocan, Inc. to return to defendant

Arsenio Reyes the purchase price the latter paid for the mortgaged
property at the public auction, as well as reimburse him of all the
expenses he has incurred relative to the sale thereof;

(6) Orders defendants spouses Severino D. Valencia and Catalina

Valencia to pay defendant Rural Bank of Caloocan, Inc. the amount of
P3,000.00 plus the corresponding 12% interest thereon per annum from
December 11, 1960 until fully paid; and

Orders defendants Rural Bank of Caloocan, Inc., Jose Desiderio, Jr. and
spouses Severino D. Valencia and Catalina Valencia to pay plaintiff, jointly
and severally, the sum of P600.00 by way of attorney's fees, as well as
costs.

In view of the conclusion that the court has thus reached, the
counterclaims of defendant Rural Bank of Caloocan, Inc., Jose Desiderio,
Jr. and Arsenio Reyes are hereby dismissed, as a corollary

The Court further denies the motion of defendant Arsenio Reyes for an
Order requiring Maxima Castro to deposit rentals filed on November 16,
1963, resolution of which was held in abeyance pending final
determination of the case on the merits, also as a consequence of the
conclusion aforesaid. 4

Petitioners Bank and Jose Desiderio moved for the reconsideration 5 of respondent
court's decision. The motion having been denied, 6 they now come before this Court in
the instant petition, with the following Assignment of Errors, to wit:

THE COURT OF APPEALS ERRED IN UPHOLDING THE PARTIAL

ANNULMENT OF THE PROMISSORY NOTE, EXHIBIT 2, AND THE
MORTGAGE, EXHIBIT 6, INSOFAR AS THEY AFFECT RESPONDENT
MAXIMA CASTRO VIS-A-VIS PETITIONER BANK DESPITE THE TOTAL
ABSENCE OF EITHER ALLEGATION IN THE COMPLAINT OR
COMPETENT PROOF IN THE EVIDENCE OF ANY FRAUD OR OTHER
UNLAWFUL CONDUCT COMMITTED OR PARTICIPATED IN BY
PETITIONERS IN PROCURING THE EXECUTION OF SAID
CONTRACTS FROM RESPONDENT CASTRO.

II

THE COURT OF APPEALS ERRED IN IMPUTING UPON AND

CONSIDERING PREJUDICIALLY AGAINST PETITIONERS, AS BASIS
FOR THE PARTIAL ANNULMENT OF THE CONTRACTS AFORESAID
ITS FINDING OF FRAUD PERPETRATED BY THE VALENCIA
SPOUSES UPON RESPONDENT CASTRO IN UTTER VIOLATION OF
THE RES INTER ALIOS ACTA RULE.

III

THE COURT OF APPEAL ERRED IN NOT HOLDING THAT, UNDER

THE FACTS FOUND BY IT, RESPONDENT CASTRO IS UNDER
ESTOPPEL TO IMPUGN THE REGULARITY AND VALIDITY OF HER
QUESTIONED TRANSACTION WITH PETITIONER BANK.

IV

THE COURT OF APPEALS ERRED IN NOT FINDING THAT, BETWEEN

PETITIONERS AND RESPONDENT CASTRO, THE LATTER SHOULD
SUFFER THE CONSEQUENCES OF THE FRAUD PERPETRATED BY
THE VALENCIA SPOUSES, IN AS MUCH AS IT WAS THRU
RESPONDENT CASTRO'S NEGLIGENCE OR ACQUIESCENSE IF NOT
ACTUAL CONNIVANCE THAT THE PERPETRATION OF SAID FRAUD
WAS MADE POSSIBLE.

THE COURT OF APPEALS ERRED IN UPHOLDING THE VALIDITY OF

THE DEPOSIT BY RESPONDENT CASTRO OF P3,383.00 WITH THE
COURT BELOW AS A TENDER AND CONSIGNATION OF PAYMENT
SUFFICIENT TO DISCHARGE SAID RESPONDENT FROM HER
OBLIGATION WITH PETITIONER BANK.

VI

THE COURT OF APPEALS ERRED IN NOT DECLARING AS VALID

AND BINDING UPON RESPONDENT CASTRO THE HOLDING OF THE
SALE ON FORECLOSURE ON THE BUSINESS DAY NEXT
FOLLOWING THE ORIGINALLY SCHEDULED DATE THEREFOR
 WHICH WAS DECLARED A HOLIDAY WITHOUT NECESSITY OF
FURTHER NOTICE THEREOF.

The issue raised in the first three (3) assignment of errors is whether or not respondent
court correctly affirmed the lower court in declaring the promissory note (Exhibit 2)
invalid insofar as they affect respondent Castro vis-a-vis petitioner bank, and the
mortgage contract (Exhibit 6) valid up to the amount of P3,000.00 only.

Respondent court declared that the consent of Castro to the promissory note (Exhibit 2)
where she signed as co-maker with the Valencias as principal borrowers and her
acquiescence to the mortgage contract (Exhibit 6) where she encumbered her property
to secure the amount of P6,000.00 was obtained by fraud perpetrated on her by the
Valencias who had abused her confidence, taking advantage of her old age and
ignorance of her financial need. Respondent court added that "the mandate of fair play
decrees that she should be relieved of her obligation under the contract" pursuant to
Articles 24 7 and 1332 8 of the Civil Code.

The decision in effect relieved Castro of any liability to the promissory note (Exhibit 2)
and the mortgage contract (Exhibit 6) was deemed valid up to the amount of P3,000.00
only which was equivalent to her personal loan to the bank.

Petitioners argued that since the Valencias were solely declared in the decision to be
responsible for the fraud against Castro, in the light of the res inter alios acta rule, a
finding of fraud perpetrated by the spouses against Castro cannot be taken to operate
prejudicially against the bank. Petitioners concluded that respondent court erred in not
giving effect to the promissory note (Exhibit 2) insofar as they affect Castro and the
bank and in declaring that the mortgage contract (Exhibit 6) was valid only to the extent
of Castro's personal loan of P3,000.00.

The records of the case reveal that respondent court's findings of fraud against the
Valencias is well supported by evidence. Moreover, the findings of fact by respondent
court in the matter is deemed final. 9 The decision declared the Valencias solely
responsible for the defraudation of Castro. Petitioners' contention that the decision was
silent regarding the participation of the bank in the fraud is, therefore, correct.

We cannot agree with the contention of petitioners that the bank was defrauded by the
Valencias. For one, no claim was made on this in the lower court. For another,
petitioners did not submit proof to support its contention.

At any rate, We observe that while the Valencias defrauded Castro by making her sign
the promissory note (Exhibit 2) and the mortgage contract (Exhibit 6), they also
misrepresented to the bank Castro's personal qualifications in order to secure its
consent to the loan. This must be the reason which prompted the bank to contend that it
was defrauded by the Valencias. But to reiterate, We cannot agree with the contention
for reasons above-mentioned. However, if the contention deserves any consideration at
all, it is in indicating the admission of petitioners that the bank committed mistake in
giving its consent to the contracts.

Thus, as a result of the fraud upon Castro and the misrepresentation to the bank
inflicted by the Valencias both Castro and the bank committed mistake in giving their
consents to the contracts. In other words, substantial mistake vitiated their consents
given. For if Castro had been aware of what she signed and the bank of the true
qualifications of the loan applicants, it is evident that they would not have given their
consents to the contracts.

Pursuant to Article 1342 of the Civil Code which provides:

Art. 1342. Misrepresentation by a third person does not vitiate consent,

unless such misrepresentation has created substantial mistake and the
same is mutual.

We cannot declare the promissory note (Exhibit 2) valid between the bank and Castro
and the mortgage contract (Exhibit 6) binding on Castro beyond the amount of
P3,000.00, for while the contracts may not be invalidated insofar as they affect the bank
and Castro on the ground of fraud because the bank was not a participant thereto, such
may however be invalidated on the ground of substantial mistake mutually committed by
them as a consequence of the fraud and misrepresentation inflicted by the Valencias.
Thus, in the case of Hill vs. Veloso, 10 this Court declared that a contract may be
annulled on the ground of vitiated consent if deceit by a third person, even without
connivance or complicity with one of the contracting parties, resulted in mutual error on
the part of the parties to the contract.

Petitioners argued that the amended complaint fails to contain even a general averment
of fraud or mistake, and its mention in the prayer is definitely not a substantial
compliance with the requirement of Section 5, Rule 8 of the Rules of Court. The records
of the case, however, will show that the amended complaint contained a particular
averment of fraud against the Valencias in full compliance with the provision of the
Rules of Court. Although, the amended complaint made no mention of mistake being
incurred in by the bank and Castro, such mention is not essential in order that the
promissory note (Exhibit 2) may be declared of no binding effect between them and the
mortgage (Exhibit 6) valid up to the amount of P3,000.00 only. The reason is that the
mistake they mutually suffered was a mere consequence of the fraud perpetrated by the
Valencias against them. Thus, the fraud particularly averred in the complaint, having
been proven, is deemed sufficient basis for the declaration of the promissory note
(Exhibit 2) invalid insofar as it affects Castro vis-a-vis the bank, and the mortgage
contract (Exhibit 6) valid only up to the amount of P3,000.00.

The second issue raised in the fourth assignment of errors is who between Castro and
the bank should suffer the consequences of the fraud perpetrated by the Valencias.
In attributing to Castro an consequences of the loss, petitioners argue that it was her
negligence or acquiescence if not her actual connivance that made the fraud possible.

Petitioners' argument utterly disregards the findings of respondent Court of Appeals

wherein petitioners' negligence in the contracts has been aptly demonstrated, to wit:

A witness for the defendant bank, Rodolfo Desiderio claims he had

subjected the plaintiff-appellee to several interviews. If this were true why
is it that her age was placed at 61 instead of 70; why was she described in
the application (Exh. B-1-9) as drug manufacturer when in fact she was
not; why was it placed in the application that she has income of
P20,000.00 when according to plaintiff-appellee, she his not even given
such kind of information -the true fact being that she was being paid P1.20
per picul of the sugarcane production in her hacienda and 500 cavans on
the palay production. 11

From the foregoing, it is evident that the bank was as much , guilty as Castro was, of
negligence in giving its consent to the contracts. It apparently relied on representations
made by the Valencia spouses when it should have directly obtained the needed data
from Castro who was the acknowledged owner of the property offered as collateral.
Moreover, considering Castro's personal circumstances – her lack of education,
ignorance and old age – she cannot be considered utterly neglectful for having been
defrauded. On the contrary, it is demanded of petitioners to exercise the highest order
of care and prudence in its business dealings with the Valencias considering that it is
engaged in a banking business –a business affected with public interest. It should have
ascertained Castro's awareness of what she was signing or made her understand what
obligations she was assuming, considering that she was giving accommodation to,
without any consideration from the Valencia spouses.

Petitioners further argue that Castro's act of holding the Valencias as her agent led the
bank to believe that they were authorized to speak and bind her. She cannot now be
permitted to deny the authority of the Valencias to act as her agent for one who clothes
another with apparent authority as her agent is not permitted to deny such authority.

The authority of the Valencias was only to follow-up Castro's loan application with the
bank. They were not authorized to borrow for her. This is apparent from the fact that
Castro went to the Bank to sign the promissory note for her loan of P3,000.00. If her act
had been understood by the Bank to be a grant of an authority to the Valencia to borrow
in her behalf, it should have required a special power of attorney executed by Castro in
their favor. Since the bank did not, We can rightly assume that it did not entertain the
notion, that the Valencia spouses were in any manner acting as an agent of Castro.

When the Valencias borrowed from the Bank a personal loan of P3,000.00 evidenced
by a promissory note (Exhibit 2) and mortgaged (Exhibit 6) Castro's property to secure
said loan, the Valencias acted for their own behalf. Considering however that for the
loan in which the Valencias appeared as principal borrowers, it was the property of
Castro that was being mortgaged to secure said loan, the Bank should have exercised
due care and prudence by making proper inquiry if Castro's consent to the mortgage
was without any taint or defect. The possibility of her not knowing that she signed the
promissory note (Exhibit 2) as co-maker with the Valencias and that her property was
mortgaged to secure the two loans instead of her own personal loan only, in view of her
personal circumstances – ignorance, lack of education and old age – should have
placed the Bank on prudent inquiry to protect its interest and that of the public it serves.
With the recent occurrence of events that have supposedly affected adversely our
banking system, attributable to laxity in the conduct of bank business by its officials, the
need of extreme caution and prudence by said officials and employees in the discharge
of their functions cannot be over-emphasized.

Question is, likewise, raised as to the propriety of respondent court's decision which
declared that Castro's consignation in court of the amount of P3,383.00 was validly
made. It is contended that the consignation was made without prior offer or tender of
payment to the Bank, and it therefore, not valid. In holding that there is a substantial
compliance with the provision of Article 1256 of the Civil Code, respondent court
considered the fact that the Bank was holding Castro liable for the sum of P6,000.00
plus 12% interest per annum, while the amount consigned was only P3,000.00 plus
12% interest; that at the time of consignation, the Bank had long foreclosed the
mortgage extrajudicially and the sale of the mortgage property had already been
scheduled for April 10, 1961 for non-payment of the obligation, and that despite the fact
that the Bank already knew of the deposit made by Castro because the receipt of the
deposit was attached to the record of the case, said Bank had not made any claim of
such deposit, and that therefore, Castro was right in thinking that it was futile and
useless for her to make previous offer and tender of payment directly to the Bank only in
the aforesaid amount of P3,000.00 plus 12% interest. Under the foregoing
circumstances, the consignation made by Castro was valid. if not under the strict
provision of the law, under the more liberal considerations of equity.

The final issue raised is the validity or invalidity of the extrajudicial foreclosure sale at
public auction of the mortgaged property that was held on April 11, 1961.

Petitioners contended that the public auction sale that was held on April 11, 1961 which
was the next business day after the scheduled date of the sale on April 10, 1961, a
special public holiday, was permissible and valid pursuant to the provisions of Section
31 of the Revised Administrative Code which ordains:

Pretermission of holiday. – Where the day, or the last day, for doing any
act required or permitted by law falls on a holiday, the act may be done on
the next succeeding business day.

Respondent court ruled that the aforesaid sale is null and void, it not having been
carried out in accordance with Section 9 of Act No. 3135, which provides:
 Section 9. – Notice shall be given by posting notices of the sale for not
less than twenty days in at least three public places of the municipality or
city where the property is situated, and if such property is worth more than
four hundred pesos, such notice shall also be published once a week for
at least three consecutive weeks in a newspaper of general circulation in
the municipality or city.

We agree with respondent court. The pretermission of a holiday applies only "where the
day, or the last day for doing any act required or permitted by law falls on a holiday," or
when the last day of a given period for doing an act falls on a holiday. It does not apply
to a day fixed by an office or officer of the government for an act to be done, as
distinguished from a period of time within which an act should be done, which may be
on any day within that specified period. For example, if a party is required by law to file
his answer to a complaint within fifteen (15) days from receipt of the summons and the
last day falls on a holiday, the last day is deemed moved to the next succeeding
business day. But, if the court fixes the trial of a case on a certain day but the said date
is subsequently declared a public holiday, the trial thereof is not automatically
transferred to the next succeeding business day. Since April 10, 1961 was not the day
or the last day set by law for the extrajudicial foreclosure sale, nor the last day of a
given period but a date fixed by the deputy sheriff, the aforesaid sale cannot legally be
made on the next succeeding business day without the notices of the sale on that day
being posted as prescribed in Section 9, Act No. 3135.

WHEREFORE, finding no reversible error in the judgment under review, We affirm the
same in toto. No pronouncement as to cost.

SO ORDERED.

G.R. No. 171428 November 11, 2013

ALEJANDRO V. TANKEH, Petitioner,

vs.
DEVELOPMENT BANK OF THE PHILIPPINES, STERLING SHIPPING LINES, INC.,
RUPERTO V. TANKEH, VICENTE ARENAS, and ASSET PRIVATIZATION
TRUST, Respondents.

DECISION

LEONEN, J.:

This is a Petition for Review on Certiorari praying that the assailed October 25, 2005
Decision and the February 9, 2006 Resolution of the Court of Appeals1 be reversed,
and that the January 4, 1996 Decision of the Regional Trial Court of Manila Branch 32
be affirmed. Petitioner prays that this Court grant his claims for moral damages and
attorney’s fees, as proven by the evidence.
Respondent Ruperto V. Tankeh is the president of Sterling Shipping Lines, Inc. It was
incorporated on April 23, 1979 to operate ocean-going vessels engaged primarily in
foreign trade.2 Ruperto V. Tankeh applied for a $3.5 million loan from public respondent
Development Bank of the Philippines for the partial financing of an ocean-going vessel
named the M/V Golden Lilac. To authorize the loan, Development Bank of the
Philippines required that the following conditions be met:

1) A first mortgage must be obtained over the vessel, which by then had been renamed
the M/V Sterling Ace;

2) Ruperto V. Tankeh, petitioner Dr. Alejandro V. Tankeh, Jose Marie Vargas, as well
as respondents Sterling Shipping Lines, Inc. and Vicente Arenas should become liable
jointly and severally for the amount of the loan;

3) The future earnings of the mortgaged vessel, including proceeds of Charter and
Shipping Contracts, should be assigned to Development Bank of the Philippines; and

4) Development Bank of the Philippines should be assigned no less than 67% of the
total subscribed and outstanding voting shares of the company. The percentage of
shares assigned should be maintained at all times, and the assignment was to subsist
as long as the assignee, Development Bank of the Philippines, deemed it necessary
during the existence of the loan.3

According to petitioner Dr. Alejandro V. Tankeh, Ruperto V. Tankeh approached him

sometime in 1980.4 Ruperto informed petitioner that he was operating a new shipping
line business. Petitioner claimed that respondent, who is also petitioner’s younger
brother, had told him that petitioner would be given one thousand (1,000) shares to be a
director of the business. The shares were worth ₱1,000,000.00.5

On May 12, 1981, petitioner signed the Assignment of Shares of Stock with Voting
Rights.6 Petitioner then signed the May 12, 1981 promissory note in December 1981.
He was the last to sign this note as far as the other signatories were concerned. 7 The
loan was approved by respondent Development Bank of the Philippines on March 18,
1981. The vessel was acquired on September 29, 1981 for $5.3 million. 8 On December
3, 1981, respondent corporation Sterling Shipping Lines, Inc. through respondent
Ruperto V. Tankeh executed a Deed of Assignment in favor of Development Bank of
the Philippines. The deed stated that the assignor, Sterling Shipping Lines, Inc.:

x x x does hereby transfer and assign in favor of the ASSIGNEE (DBP), its successors
and assigns, future earnings of the mortgaged M/V "Sterling Ace," including proceeds of
charter and shipping contracts, it being understood that this assignment shall continue
to subsist for as long as the ASSIGNOR’S obligation with the herein ASSIGNEE
remains unpaid.9

On June 16, 1983, petitioner wrote a letter to respondent Ruperto V. Tankeh saying that
he was severing all ties and terminating his involvement with Sterling Shipping Lines,
Inc.10 He required that its board of directors pass a resolution releasing him from all
liabilities, particularly the loan contract with Development Bank of the Philippines. In
addition, petitioner asked that the private respondents notify Development Bank of the
Philippines that he had severed his ties with Sterling Shipping Lines, Inc. 11

The accounts of respondent Sterling Shipping Lines, Inc. in the Development Bank of
the Philippines were transferred to public respondent Asset Privatization Trust on June
30, 1986.12

Presently, respondent Asset Privatization Trust is known as the Privatization and

Management Office. Asset Privatization Trust was a government agency created
through Presidential Proclamation No. 50, issued in 1986. Through Administrative Order
No. 14, issued by former President Corazon Aquino dated February 3, 1987, assets
including loans in favor of Development Bank of the Philippines were ordered to be
transferred to the national government. In turn, the management and facilitation of these
assets were delegated to Asset Privatization Trust, pursuant to Presidential
Proclamation No. 50. In 1999, Republic Act No. 8758 was signed into law, and it
provided that the corporate term of Asset Privatization Trust would end on December
31, 2000. The same law empowered the President of the Philippines to determine which
office would facilitate the management of assets held by Asset Privatization Trust. Thus,
on December 6, 2000, former President Joseph E. Estrada signed Executive Order No.
323, creating the Privatization Management Office. Its present function is to identify
disposable assets, monitor the progress of privatization activities, and approve the sale
or divestment of assets with respect to price and buyer.13

On January 29, 1987, the M/V Sterling Ace was sold in Singapore for $350,000.00 by
Development Bank of the Philippines’ legal counsel Atty. Prospero N. Nograles. When
petitioner came to know of the sale, he wrote respondent Development Bank of the
Philippines to express that the final price was inadequate, and therefore, the transaction
was irregular. At this time, petitioner was still bound as a debtor because of the
promissory note dated May 12, 1981, which petitioner signed in December of 1981. The
promissory note subsisted despite Sterling Shipping Lines, Inc.’s assignment of all
future earnings of the mortgaged M/V Sterling Ace to Development Bank of the
Philippines. The loan also continued to bind petitioner despite Sterling Shipping Lines,
Inc.’s cash equity contribution of ₱13,663,200.00 which was used to cover part of the
acquisition cost of the vessel, pre-operating expenses, and initial working capital.14

Petitioner filed several Complaints15 against respondents, praying that the promissory
note be declared null and void and that he be absolved from any liability from the
mortgage of the vessel and the note in question.

In the Complaints, petitioner alleged that respondent Ruperto V. Tankeh, together with
Vicente L. Arenas, Jr. and Jose Maria Vargas, had exercised deceit and fraud in
causing petitioner to bind himself jointly and severally to pay respondent Development
Bank of the Philippines the amount of the mortgage loan.16 Although he had been made
a stockholder and director of the respondent corporation Sterling Shipping Lines, Inc.,
petitioner alleged that he had never invested any amount in the corporation and that he
had never been an actual member of the board of directors.17 He alleged that all the
money he had supposedly invested was provided by respondent Ruperto V.
Tankeh.18 He claimed that he only attended one meeting of the board. In that meeting,
he was introduced to two directors representing Development Bank of the Philippines,
namely, Mr. Jesus Macalinag and Mr. Gil Corpus. Other than that, he had never been
notified of another meeting of the board of directors.

Petitioner further claimed that he had been excluded deliberately from participating in
the affairs of the corporation and had never been compensated by Sterling Shipping
Lines, Inc. as a director and stockholder.19 According to petitioner, when Sterling
Shipping Lines, Inc. was organized, respondent Ruperto V. Tankeh had promised him
that he would become part of the administration staff and oversee company operations.
Respondent Ruperto V. Tankeh had also promised petitioner that the latter’s son would
be given a position in the company.20 However, after being designated as vice
president, petitioner had not been made an officer and had been alienated from taking
part in the respondent corporation.21

Petitioner also alleged that respondent Development Bank of the Philippines had been
inexcusably negligent in the performance of its duties.22 He alleged that Development
Bank of the Philippines must have been fully aware of Sterling Shipping Lines, Inc.’s
financial situation. Petitioner claimed that Sterling Shipping Lines, Inc. was controlled by
the Development Bank of the Philippines because 67% of voting shares had been
assigned to the latter.23Furthermore, the mortgage contracts had mandated that Sterling
Shipping Lines, Inc. "shall furnish the DBP with copies of the minutes of each meeting of
the Board of Directors within one week after the meeting. Sterling Shipping Lines Inc.
shall likewise furnish DBP its annual audited financial statements and other information
or data that may be needed by DBP as its accommodations [sic] with DBP are
outstanding."24 Petitioner further alleged that the Development Bank of the Philippines
had allowed "highly questionable acts"25 to take place, including the gross undervaluing
of the M/V Sterling Aces.26 Petitioner alleged that one day after Development Bank of
the Philippines’ Atty. Nograles sold the vessel, the ship was re-sold by its buyer for
double the amount that the ship had been bought.27

As for respondent Vicente L. Arenas, Jr., petitioner alleged that since Arenas had been
the treasurer of Sterling Shipping Lines, Inc. and later on had served as its vice
president, he was also responsible for the financial situation of Sterling Shipping Lines,
Inc.

Lastly, in the Amended Complaint dated April 16, 1991, petitioner impleaded
respondent Asset Privatization Trust for being the agent and assignee of the M/V
Sterling Ace.

In their Answers28 to the Complaints, respondents raised the following defenses against
petitioner: Respondent Development Bank of the Philippines categorically denied
receiving any amount from Sterling Shipping Lines, Inc.’s future earnings and from the
proceeds of the shipping contracts. It maintained that equity contributions could not be
deducted from the outstanding loan obligation that stood at ₱245.86 million as of
December 31, 1986. Development Bank of the Philippines also maintained that it is
immaterial to the case whether the petitioner is a "real stockholder" or merely a
"pseudo-stockholder" of the corporation.29 By affixing his signature to the loan
agreement, he was liable for the obligation. According to Development Bank of the
Philippines, he was in pari delicto and could not be discharged from his obligation.
Furthermore, petitioner had no cause of action against Development Bank of the
Philippines since this was a case between family members, and earnest efforts toward
compromise should have been complied with in accordance with Article 222 of the Civil
Code of the Philippines.30

Respondent Ruperto V. Tankeh stated that petitioner had voluntarily signed the
promissory note in favor of Development Bank of the Philippines and with full
knowledge of the consequences. Respondent Tankeh also alleged that he did not
employ any fraud or deceit to secure petitioner’s involvement in the company, and
petitioner had been fully aware of company operations. Also, all that petitioner had to do
to avoid liability had been to sell his shareholdings in the company. 31

Respondent Asset Privatization Trust raised that petitioner had no cause of action
against them since Asset Privatization Trust had been mandated under Proclamation
No. 50 to take title to and provisionally manage and dispose the assets identified for
privatization or deposition within the shortest possible period. Development Bank of the
Philippines had transferred and conveyed all its rights, titles, and interests in favor of the
national government in accordance with Administrative Order No. 14. In line with that,
Asset Privatization Trust was constituted as trustee of the assets transferred to the
national government to effect privatization of these assets, including respondent Sterling
Shipping Lines, Inc.32 Respondent Asset Privatization Trust also filed a compulsory
counterclaim against petitioner and its co-respondents Sterling Shipping Lines, Inc.,
Ruperto V. Tankeh, and Vicente L. Arenas, Jr. for the amount of ₱264,386,713.84.

Respondent Arenas did not file an Answer to any of the Complaints of petitioner but
filed a Motion to Dismiss that the Regional Trial Court denied. Respondent Asset
Privatization Trust filed a Cross Claim against Arenas. In his Answer 33 to Asset
Privatization Trust’s Cross Claim, Arenas claimed that he had been released from any
further obligation to Development Bank of the Philippines and its successor Asset
Privatization Trust because an extension had been granted by the Development Bank of
the Philippines to the debtors of Sterling Shipping Lines, Inc. and/or Ruperto V. Tankeh,
which had been secured without Arenas’ consent.

The trial proceeded with the petitioner serving as a sole witness for his case. In a
January 4, 1996 Decision,34 the Regional Trial Court ruled:

Here, we find –
1. Plaintiff being promised by his younger brother, Ruperto V. Tankeh, 1,000
shares with par value of ₱1 Million with all the perks and privileges of being
stockholder and director of SSLI, a new international shipping line;

2. That plaintiff will be part of the administration and operation of the business, so
with his son who is with the law firm Romulo Ozaeta Law Offices;

3. But this was merely the come-on or appetizer for the Real McCoy or the
primordial end of congregating the incorporators proposed - - that he sign the
promissory note (Exhibit "C"), the mortgage contract (Exhibit "A"), and deed of
assignment so SSLI could get the US $3.5 M loan from DBP to partially finance
the importation of vessel M.V. "Golden Lilac" renamed M.V. "Sterling ACE";

4. True it is, plaintiff was made a stockholder and director and Vice-President in
1979 but he was never notified of any meeting of the Board except only once,
and only to be introduced to the two (2) directors representing no less than 67%
of the total subscribed and outstanding voting shares of the company. Thereafter,
he was excluded from any board meeting, shorn of his powers and duties as
director or Vice-President, and was altogether deliberately demeaned as an
outsider.

5. What kind of a company is SSLI who treated one of their incorporators, one of
their Directors and their paper Vice-President in 1979 by preventing him access
to corporate books, to corporate earnings, or losses, and to any compensation or
remuneration whatsoever? Whose President and Treasurer did not submit the
required SEC yearly report? Who did not remit to DBP the proceeds on charter
mortgage contracts on M/V Sterling Ace?

6. The M/V Sterling Ace was already in the Davao Port when it was then diverted
to Singapore to be disposed on negotiated sale, and not by public bidding
contrary to COA Circular No. 86-264 and without COA’s approval. Sterling Ace
was seaworthy but was sold as scrap in Singapore. No foreclosure with public
bidding was made in contravention of the Promissory Note to recover any
deficiency should DBP seeks [sic] to recover it on the outstanding mortgage loan.
Moreover the sale was done after the account and asset (nay, now only a
liability) were transferred to APT. No approval of SSLI Board of Directors to the
negotiated sale was given.

7. Plaintiff’s letter to his brother President, Ruperto V. Tankeh, dated June 15,
1983 (Exhibit "D") his letter thru his lawyer to DBP (Exhibit "J") and another letter
to it (Exhibit "K") show no estoppel on his part as he consistently and
continuously assailed the several injurious acts of defendants while assailing the
Promissory Note itself x x x (Citations omitted) applying the maxim: Rencintiatio
non praesumitur. By this Dr. Tankeh never waived the right to question the
Promissory Note contract terms. He did not ratify, by concurring acts, express or
tacit, after the reasons had surfaced entitling him to render the contract voidable,
 defendants’ acts in implementing or not the conditions of the mortgage, the
promissory note, the deed of assignment, the lack of audit and accounting, and
the negotiated sale of MV Sterling Ace. He did not ratify defendants [sic]
defective acts (Art. 1396, New Civil Code (NCC).

The foregoing and the following essays, supported by evidence, the fraud committed by
plaintiff’s brother before the several documents were signed (SEC documents,
Promissory Note, Mortgage (MC) Contract, assignment (DA)), namely:

1. Ruperto V. Tankeh approaches his brother Alejandro to tell the latter of his
new shipping business. The project was good business proposal [sic].

2. Ruperto tells Alejandro he’s giving him shares worth ₱1 Million and he’s going
to be a Director.

3. He tells his brother that he will be part of the company’s Administration and
Operations and his eldest son will be in it, too.

4. Ruperto tells his brother they need a ship, they need to buy one for the
business, and they therefore need a loan, and they could secure a loan from
DBP with the vessel brought to have a first mortgage with DBP but anyway the
other two directors and comptroller will be from DBP with a 67% SSLI shares
voting rights.

Without these insidious, devastating and alluring words, without the machinations used
by defendant Ruperto V. Tankeh upon the doctor, without the inducement and promise
of ownership of shares and the exercise of administrative and operating functions, and
the partial financing by one of the best financial institutions, the DBP, plaintiff would not
have agreed to join his brother; and the safeguarding of the Bank’s interest by its
nominated two (2) directors in the Board added to his agreeing to the new shipping
business. His consent was vitiated by the fraud before the several contracts were
consummated.

This alone convenes [sic] this Court to annul the Promissory Note as it relates to plaintiff
himself.

Plaintiff also pleads annulment on ground of equity. Article 19, NCC, provides him the
way as it requires every person, in the exercise of his rights and performance of his
duties, to act with justice, give everyone his due, and observe honesty and good faith
(Velayo vs. Shell Co. of the Phils., G.R. L-7817, October 31, 1956). Not to release him
from the clutch of the Promissory Note when he was never made a part of the operation
of the SSLI, when he was not notified of the Board Meetings, when the corporation nary
remitted earnings of M/V Sterling Ace from charter or shipping contracts to DBP, when
the SSLI did not comply with the deed of assignment and mortgage contract, and when
the vessel was sold in Singapore (he, learning of the sale only from the newspapers) in
contravention of the Promissory Note, and which he questioned, will be an injustice,
inequitable, and even iniquitous to plaintiff. SSLI and the private defendants did not
observe honesty and good faith to one of their incorporators and directors. As to DBP,
the Court cannot put demerits on what plaintiff’s memorandum has pointed out:

While defendant DBP did not exercise the caution and prudence in the discharge of
their functions to protect its interest as expected of them and worst, allowed the
perpetuation of the illegal acts committed in contrast to the virtues they publicly profess,
namely: "palabra de honor, delicadeza, katapatan, kaayusan, pagkamasinop at
kagalingan" Where is the vision banking they have for our country?

Had DBP listened to a cry in the wilderness – that of the voice of the doctor – the doctor
would not have allowed the officers and board members to defraud DBP and he would
demand of them to hew and align themselves to the deed of assignment.

Prescinding from the above, plaintiff’s consent to be with SSLI was vitiated by fraud.
The fact that defendant Ruperto Tankeh has not questioned his liability to DBP or that
Jose Maria Vargas has been declared in default do not detract from the fact that there
was attendant fraud and that there was continuing fraud insofar as plaintiff is concerned.

Ipinaglaban lang ni Doctor ang karapatan niya. Kung wala siyang sense of righteous
indignation and fairness, tatahimik na lang siya, sira naman ang pinangangalagaan
niyang pangalan, honor and family prestige [sic] (Emphasis provided).35

xxxx

All of the defendants’ counterclaims and cross-claims x x x including plaintiff’s and the
other defendants’ prayer for damages are not, for the moment, sourced and proven by
substantial evidence, and must perforce be denied and dismissed.

WHEREFORE, this Court, finding and declaring the Promissory Note (Exhibit "C") and
the Mortgage Contract (Exhibit "A") null and void insofar as plaintiff DR. ALEJANDRO
V. TANKEH is concerned, hereby ANNULS and VOIDS those documents as to plaintiff,
and it is hereby further ordered that he be released from any obligation or liability arising
therefrom.

All the defendants’ counterclaims and cross-claims and plaintiff’s and defendants’
prayer for damages are hereby denied and dismissed, without prejudice.

SO ORDERED.36

Respondents Ruperto V. Tankeh, Asset Privatization Trust, and Arenas immediately

filed their respective Notices of Appeal with the Regional Trial Court. The petitioner filed
a Motion for Reconsideration with regard to the denial of his prayer for damages. After
this Motion had been denied, he then filed his own Notice of Appeal.
In a Decision37 promulgated on October 25, 2005, the Third Division of the Court of
Appeals reversed the trial court’s findings. The Court of Appeals held that petitioner had
no cause of action against public respondent Asset Privatization Trust. This was based
on the Court of Appeals’ assessment of the case records and its findings that Asset
Privatization Trust did not commit any act violative of the right of petitioner or
constituting a breach of Asset Privatization Trust’s obligations to petitioner. The Court of
Appeals found that petitioner’s claim for damages against Asset Privatization Trust was
based merely on his own self-serving allegations.38

As to the finding of fraud, the Court of Appeals held that:

xxxx

In all the complaints from the original through the first, second and third amendments,
the plaintiff imputes fraud only to defendant Ruperto, to wit:

4. That on May 12, 1981, due to the deceit and fraud exercised by Ruperto V. Tankeh,
plaintiff, together with Vicente L. Arenas, Jr. and Jose Maria Vargas signed a
promissory note in favor of the defendant, DBP, wherein plaintiff bound himself to jointly
and severally pay the DBP the amount of the mortgage loan. This document insofar as
plaintiff is concerned is a simulated document considering that plaintiff was never a real
stockholder of Sterling Shipping Lines, Inc. (Emphasis provided)

More allegations of deceit were added in the Second Amended Complaint, but they are
also attributed against Ruperto:

6. That THE DECEIT OF DEFENDANT RUPERTO V. TANKEH IS SHOWN BY THE

FACT THAT when the Sterling Shipping Lines, Inc. was organized in 1980, Ruperto V.
Tankeh promised plaintiff that he would be a part of the administration staff so that he
could oversee the operation of the company. He was also promised that his son, a
lawyer, would be given a position in the company. None of these promsies [sic] was
complied with. In fact he was not even allowed to find out the data about the income
and expenses of the company.

7. THAT THE DECEIT OF RUPERTO V. TANKEH IS ALSO SHOWN BY THE FACT

THAT PLAINTIFF WAS INVITED TO ATTEND THE BOARD MEETING OF THE
STERLING SHIPPING LINES INC. ONLY ONCE, WHICH WAS FOR THE SOLE
PURPOSE OF INTRODUCING HIM TO THE TWO DIRECTORS OF THE DBP IN THE
BOARD OF THE STERLING SHIPPING LINES, INC., NAMELY, MR. JESUS
MACALINAG AND MR. GIL CORPUS. THEREAFTER HE WAS NEVER INVITED
AGAIN. PLAINTIFF WAS NEVER COMPENSATED BY THE STERLING SHIPPING
LINES, INC. FOR HIS BEING A SO-CALLED DIRECTOR AND STOCKHOLDER.

xxxx
8-A THAT A WEEK AFTER SENDING THE ABOVE LETTER PLAINTIFF MADE
EARNEST EFFORTS TOWARDS A COMPROMISE BETWEEN HIM AND HIS
BROTHER RUPERTO V. TANKEH, WHICH EFFORTS WERE SPURNED BY
RUPERTO V. TANKEH, AND ALSO AFTER THE NEWS OF THE SALE OF THE
‘STERLING ACE’ WAS PUBLISHED AT THE NEWSPAPER, PLAINTIFF TRIED ALL
EFFORTS TO CONTACT RUPERTO V. TANKEH FOR THE PURPOSE OF ARRIVING
AT SOME COMPROMISE, BUT DEFENDANT RUPERTO V. TANKEH AVOIDED ALL
CONTACTS WITH THE PLAINTIFF UNTIL HE WAS FORCED TO SEEK LEGAL
ASSISTANCE FROM HIS LAWYER.

In the absence of any allegations of fraud and/or deceit against the other defendants,
namely, the DBP, Vicente Arenas, Sterling Shipping Lines, Inc., and the Asset
Privatization Trust, the plaintiff’s evidence thereon should only be against Ruperto,
since a plaintiff is bound to prove only the allegations of his complaint. In any case, no
evidence of fraud or deceit was ever presented against defendants DBP, Arenas, SSLI
and APT.

As to the evidence against Ruperto, the same consists only of the testimony of the
plaintiff. None of his documentary evidence would prove that Ruperto was guilty of fraud
or deceit in causing him to sign the subject promissory note.39

xxxx

Analyzing closely the foregoing statements, we find no evidence of fraud or deceit. The
mention of a new shipping lines business and the promise of a free 1,000-share and
directorship in the corporation do not amount to insidious words or machinations. In any
case, the shipping business was indeed established, with the plaintiff himself as one of
the incorporators and stockholders with a share of 4,000, worth ₱4,000,000.00 of which
₱1,000,000.00 was reportedly paid up. As such, he signed the Articles of Incorporation
and the corporation’s By-Laws which were registered with the Securities and Exchange
Commission in April 1979. It was not until May 12, 1981 that he signed the questioned
promissory note. From his own declaration at the witness stand, the plaintiff signed the
promissory note voluntarily. No pressure, force or intimidation was made to bear upon
him. In fact, according to him, only a messenger brought the paper to him for signature.
The promised shares of stock were given and recorded in the plaintiff’s name. He was
made a director and Vice-President of SSLI. Apparently, only the promise that his son
would be given a position in the company remained unfulfilled. However, the same
should have been threshed out between the plaintiff and his brother, defendant Ruperto,
and its non-fulfillment did not amount to fraud or deceit, but was only an unfulfilled
promise.

It should be pointed out that the plaintiff is a doctor of medicine and a seasoned
businessman. It cannot be said that he did not understand the import of the documents
he signed. Certainly he knew what he was signing. He should have known that being an
officer of SSLI, his signing of the promissory note together with the other officers of the
corporation was expected, as the other officers also did. It cannot therefore be said that
the promissory note was simulated. The same is a contract validly entered into, which
the parties are obliged to comply with.40 (Citations omitted)

The Court of Appeals ruled that in the absence of any competent proof, Ruperto V.
Tankeh did not commit any fraud. Petitioner Alejandro V. Tankeh was unable to prove
by a preponderance of evidence that fraud or deceit had been employed by Ruperto to
make him sign the promissory note. The Court of Appeals reasoned that:

Fraud is never presumed but must be proved by clear and convincing evidence, mere
preponderance of evidence not even being adequate. Contentions must be proved by
competent evidence and reliance must be had on the strength of the party’s evidence
and not upon the weakness of the opponent’s defense. The plaintiff clearly failed to
discharge such burden.41 (Citations omitted)

With that, the Court of Appeals reversed and set aside the judgment and ordered that
plaintiff’s Complaint be dismissed. Petitioner filed a Motion for Reconsideration dated
October 25, 2005 that was denied in a Resolution42promulgated on February 9, 2006.

Hence, this Petition was filed.

In this Petition, Alejandro V. Tankeh stated that the Court of Appeals seriously erred
and gravely abused its discretion in acting and deciding as if the evidence stated in the
Decision of the Regional Trial Court did not exist. He averred that the ruling of lack of
cause of action had no leg to stand on, and the Court of Appeals had unreasonably,
whimsically, and capriciously ignored the ample evidence on record proving the fraud
and deceit perpetrated on the petitioner by the respondent. He stated that the appellate
court failed to appreciate the findings of fact of the lower court, which are generally
binding on appellate courts. He also maintained that he is entitled to damages and
attorney's fees due to the deceit and machinations committed by the respondent.

In his Memorandum, respondent Ruperto V. Tankeh averred that petitioner had chosen
the wrong remedy. He ought to have filed a special civil action of certiorari and not a
Petition for Review. Petitioner raised questions of fact, and not questions of law, and
this required the review or evaluation of evidence. However, this is not the function of
this Court, as it is not a trier of facts. He also contended that petitioner had voluntarily
entered into the loan agreement and the position with Sterling Shipping Lines, Inc. and
that he did not fraudulently induce the petitioner to enter into the contract.

Respondents Development Bank of the Philippines and Asset Privatization Trust also
contended that petitioner's mode of appeal had been wrong, and he had actually sought
a special civil action of certiorari. This alone merited its dismissal.

The main issue in this case is whether the Court of Appeals erred in finding that
respondent Rupert V. Tankeh did not commit fraud against the petitioner.

The Petition is partly granted.

Before disposing of the main issue in this case, this Court needs to address a
procedural issue raised by respondents. Collectively, respondents argue that the
Petition is actually one of certiorari under Rule 65 of the Rules of Court43 and not a
Petition for Review on Certiorari under Rule 45.44 Thus, petitioner’s failure to show that
there was neither appeal nor any other plain, speedy or adequate remedy merited the
dismissal of the Complaint.

Contrary to respondent’s imputation, the remedy contemplated by petitioner is clearly

that of a Rule 45 Petition for Review. In Tagle v. Equitable PCI Bank, 45 this Court made
the distinction between a Rule 45 Petition for Review on Certiorari and a Rule 65
Petition for Certiorari:

Certiorari is a remedy designed for the correction of errors of jurisdiction, not errors of
judgment.1âwphi1 In Pure Foods Corporation v. NLRC, we explained the simple reason
for the rule in this light: When a court exercises its jurisdiction, an error committed while
so engaged does not deprive it of the jurisdiction being exercised when the error is
committed x x x. Consequently, an error of judgment that the court may commit in the
exercise of its jurisdiction is not correctable through the original civil action of certiorari.

xxxx

Even if the findings of the court are incorrect, as long as it has jurisdiction over the case,
such correction is normally beyond the province of certiorari. Where the error is not one
of jurisdiction, but of an error of law or fact a mistake of judgment, appeal is the remedy.

In this case, what petitioner seeks to rectify may be construed as errors of judgment of
the Court of Appeals. These errors pertain to the petitioner’s allegation that the
appellate court failed to uphold the findings of facts of the lower court. He does not
impute any error with respect to the Court of Appeals’ exercise of jurisdiction. As such,
this Petition is simply a continuation of the appellate process where a case is elevated
from the trial court of origin, to the Court of Appeals, and to this Court via Rule 45.

Contrary to respondents’ arguments, the allegations of petitioner that the Court of

Appeals "committed grave abuse of discretion"46 did not ipso facto render the intended
remedy that of certiorari under Rule 65 of the Rules of Court.47

In any case, even if the Petition is one for the special civil action of certiorari, this Court
has the discretion to treat a Rule 65 Petition for Certiorari as a Rule 45 Petition for
Review on Certiorari. This is allowed if (1) the Petition is filed within the reglementary
period for filing a Petition for review; (2) when errors of judgment are averred; and (3)
when there is sufficient reason to justify the relaxation of the rules. 48 When this Court
exercises this discretion, there is no need to comply with the requirements provided for
in Rule 65.

In this case, petitioner filed his Petition within the reglementary period of filing a Petition
for Review.49 His Petition assigns errors of judgment and appreciation of facts and law
on the part of the Court of Appeals. Thus, even if the Petition was designated as one
that sought the remedy of certiorari, this Court may exercise its discretion to treat it as a
Petition for Review in the interest of substantial justice.

We now proceed to the substantive issue, that of petitioner’s imputation of fraud on the
part of respondents. We are required by the circumstances of this case to review our
doctrines of fraud that are alleged to be present in contractual relations.

Types of Fraud in Contracts

Fraud is defined in Article 1338 of the Civil Code as:

x x x fraud when, through insidious words or machinations of one of the contracting

parties, the other is induced to enter into a contract which, without them, he would not
have agreed to.

This is followed by the articles which provide legal examples and illustrations of fraud.

Art. 1339. Failure to disclose facts, when there is a duty to reveal them, as when the
parties are bound by confidential relations, constitutes fraud. (n)

Art. 1340. The usual exaggerations in trade, when the other party had an opportunity to
know the facts, are not in themselves fraudulent. (n)

Art. 1341. A mere expression of an opinion does not signify fraud, unless made by an
expert and the other party has relied on the former's special knowledge. (n)

Art. 1342. Misrepresentation by a third person does not vitiate consent, unless such
misrepresentation has created substantial mistake and the same is mutual. (n)

Art. 1343. Misrepresentation made in good faith is not fraudulent but may constitute
error. (n)

The distinction between fraud as a ground for rendering a contract voidable or as basis
for an award of damages is provided in Article 1344:

In order that fraud may make a contract voidable, it should be serious and should not
have been employed by both contracting parties.

Incidental fraud only obliges the person employing it to pay damages. (1270)

There are two types of fraud contemplated in the performance of contracts: dolo
incidente or incidental fraud and dolo causante or fraud serious enough to render a
contract voidable.

In Geraldez v. Court of Appeals,50 this Court held that:

This fraud or dolo which is present or employed at the time of birth or perfection of a
contract may either be dolo causante or dolo incidente. The first, or causal fraud
referred to in Article 1338, are those deceptions or misrepresentations of a serious
character employed by one party and without which the other party would not have
entered into the contract. Dolo incidente, or incidental fraud which is referred to in
Article 1344, are those which are not serious in character and without which the other
party would still have entered into the contract. Dolo causante determines or is the
essential cause of the consent, while dolo incidente refers only to some particular or
accident of the obligation. The effects of dolo causante are the nullity of the contract and
the indemnification of damages, and dolo incidente also obliges the person employing it
to pay damages.51

In Solidbank Corporation v. Mindanao Ferroalloy Corporation, et al.,52 this Court

elaborated on the distinction between dolo causante and dolo incidente:

Fraud refers to all kinds of deception -- whether through insidious machination,

manipulation, concealment or misrepresentation -- that would lead an ordinarily prudent
person into error after taking the circumstances into account. In contracts, a fraud
known as dolo causante or causal fraud is basically a deception used by one party prior
to or simultaneous with the contract, in order to secure the consent of the other.
Needless to say, the deceit employed must be serious. In contradistinction, only some
particular or accident of the obligation is referred to by incidental fraud or dolo incidente,
or that which is not serious in character and without which the other party would have
entered into the contract anyway.53

Under Article 1344, the fraud must be serious to annul or avoid a contract and render it
voidable. This fraud or deception must be so material that had it not been present, the
defrauded party would not have entered into the contract. In the recent case of Spouses
Carmen S. Tongson and Jose C. Tongson, et al., v. Emergency Pawnshop Bula,
Inc.,54 this Court provided some examples of what constituted dolo causante or causal
fraud:

Some of the instances where this Court found the existence of causal fraud include: (1)
when the seller, who had no intention to part with her property, was "tricked into
believing" that what she signed were papers pertinent to her application for the
reconstitution of her burned certificate of title, not a deed of sale; (2) when the signature
of the authorized corporate officer was forged; or (3) when the seller was seriously ill,
and died a week after signing the deed of sale raising doubts on whether the seller
could have read, or fully understood, the contents of the documents he signed or of the
consequences of his act.55 (Citations omitted)

However, Article 1344 also provides that if fraud is incidental, it follows that this type of
fraud is not serious enough so as to render the original contract voidable.

A classic example of dolo incidente is Woodhouse v. Halili.56 In this case, the plaintiff
Charles Woodhouse entered into a written agreement with the defendant Fortunato
Halili to organize a partnership for the bottling and distribution of soft drinks. However,
the partnership did not come into fruition, and the plaintiff filed a Complaint in order to
execute the partnership. The defendant filed a Counterclaim, alleging that the plaintiff
had defrauded him because the latter was not actually the owner of the franchise of a
soft drink bottling operation. Thus, defendant sought the nullification of the contract to
enter into the partnership. This Court concluded that:

x x x from all the foregoing x x x plaintiff did actually represent to defendant that he was
the holder of the exclusive franchise. The defendant was made to believe, and he
actually believed, that plaintiff had the exclusive franchise. x x x The record abounds
with circumstances indicative that the fact that the principal consideration, the main
cause that induced defendant to enter into the partnership agreement with plaintiff, was
the ability of plaintiff to get the exclusive franchise to bottle and distribute for the
defendant or for the partnership. x x x The defendant was, therefore, led to the belief
that plaintiff had the exclusive franchise, but that the same was to be secured for or
transferred to the partnership. The plaintiff no longer had the exclusive franchise, or the
option thereto, at the time the contract was perfected. But while he had already lost his
option thereto (when the contract was entered into), the principal obligation that he
assumed or undertook was to secure said franchise for the partnership, as the bottler
and distributor for the Mission Dry Corporation. We declare, therefore, that if he was
guilty of a false representation, this was not the causal consideration, or the principal
inducement, that led plaintiff to enter into the partnership agreement.

But, on the other hand, this supposed ownership of an exclusive franchise was actually
the consideration or price plaintiff gave in exchange for the share of 30 percent granted
him in the net profits of the partnership business. Defendant agreed to give plaintiff 30
per cent share in the net profits because he was transferring his exclusive franchise to
the partnership. x x x.

Plaintiff had never been a bottler or a chemist; he never had experience in the
production or distribution of beverages. As a matter of fact, when the bottling plant being
built, all that he suggested was about the toilet facilities for the laborers.

We conclude from the above that while the representation that plaintiff had the exclusive
franchise did not vitiate defendant's consent to the contract, it was used by plaintiff to
get from defendant a share of 30 per cent of the net profits; in other words, by
pretending that he had the exclusive franchise and promising to transfer it to defendant,
he obtained the consent of the latter to give him (plaintiff) a big slice in the net profits.
This is the dolo incidente defined in article 1270 of the Spanish Civil Code, because it
was used to get the other party's consent to a big share in the profits, an incidental
matter in the agreement.57

Thus, this Court held that the original agreement may not be declared null and void.
This Court also said that the plaintiff had been entitled to damages because of the
refusal of the defendant to enter into the partnership. However, the plaintiff was also
held liable for damages to the defendant for the misrepresentation that the former had
the exclusive franchise to soft drink bottling operations.

To summarize, if there is fraud in the performance of the contract, then this fraud will
give rise to damages. If the fraud did not compel the imputing party to give his or her
consent, it may not serve as the basis to annul the contract, which exhibits dolo
causante. However, the party alleging the existence of fraud may prove the existence of
dolo incidente.

This may make the party against whom fraud is alleged liable for damages.

Quantum of Evidence to Prove the Existence of Fraud and the Liability of the Parties

The Civil Code, however, does not mandate the quantum of evidence required to prove
actionable fraud, either for purposes of annulling a contract (dolo causante) or rendering
a party liable for damages (dolo incidente). The definition of fraud is different from the
quantum of evidence needed to prove the existence of fraud. Article 1338 provides the
legal definition of fraud. Articles 1339 to 1343 constitute the behavior and actions that,
when in conformity with the legal provision, may constitute fraud.

Jurisprudence has shown that in order to constitute fraud that provides basis to annul
contracts, it must fulfill two conditions. First, the fraud must be dolo causante or it must
be fraud in obtaining the consent of the party. Second, this fraud must be proven by
clear and convincing evidence. In Viloria v. Continental Airlines,58 this Court held that:

Under Article 1338 of the Civil Code, there is fraud when, through insidious words or
machinations of one of the contracting parties, the other is induced to enter into a
contract which, without them, he would not have agreed to. In order that fraud may
vitiate consent, it must be the causal (dolo causante), not merely the incidental (dolo
incidente), inducement to the making of the contract. In Samson v. Court of Appeals,
causal fraud was defined as "a deception employed by one party prior to or
simultaneous to the contract in order to secure the consent of the other." Also, fraud
must be serious and its existence must be established by clear and convincing
evidence. (Citations omitted)59

In Viloria, this Court cited Sierra v. Court of Appeals60 stating that mere preponderance
of evidence will not suffice in proving fraud.

Fraud must also be discounted, for according to the Civil Code:

Art. 1338. There is fraud when, through insidious words or machinations of one of the
contracting parties, the other is induced to enter into a contract which without them, he
would not have agreed to.

Art. 1344. In order that fraud may make a contract voidable, it should be serious and
should not have been employed by both contracting parties.
To quote Tolentino again, the "misrepresentation constituting the fraud must be
established by full, clear, and convincing evidence, and not merely by a preponderance
thereof. The deceit must be serious. The fraud is serious when it is sufficient to impress,
or to lead an ordinarily prudent person into error; that which cannot deceive a prudent
person cannot be a ground for nullity. The circumstances of each case should be
considered, taking into account the personal conditions of the victim." 61

Thus, to annul a contract on the basis of dolo causante, the following must happen:
First, the deceit must be serious or sufficient to impress and lead an ordinarily prudent
person to error. If the allegedly fraudulent actions do not deceive a prudent person,
given the circumstances, the deceit here cannot be considered sufficient basis to nullify
the contract. In order for the deceit to be considered serious, it is necessary and
essential to obtain the consent of the party imputing fraud. To determine whether a
person may be sufficiently deceived, the personal conditions and other factual
circumstances need to be considered.

Second, the standard of proof required is clear and convincing evidence. This standard
of proof is derived from American common law. It is less than proof beyond reasonable
doubt (for criminal cases) but greater than preponderance of evidence (for civil cases).
The degree of believability is higher than that of an ordinary civil case. Civil cases only
require a preponderance of evidence to meet the required burden of proof. However,
when fraud is alleged in an ordinary civil case involving contractual relations, an entirely
different standard of proof needs to be satisfied. The imputation of fraud in a civil case
requires the presentation of clear and convincing evidence. Mere allegations will not
suffice to sustain the existence of fraud. The burden of evidence rests on the part of the
plaintiff or the party alleging fraud. The quantum of evidence is such that fraud must be
clearly and convincingly shown.

The Determination of the Existence of Fraud in the Present Case

We now determine the application of these doctrines regarding fraud to ascertain the
liability, if any, of the respondents.

Neither law nor jurisprudence distinguishes whether it is dolo incidente or dolo causante
that must be proven by clear and convincing evidence. It stands to reason that both dolo
incidente and dolo causante must be proven by clear and convincing evidence. The
only question is whether this fraud, when proven, may be the basis for making a
contract voidable (dolo causante), or for awarding damages (dolo incidente), or both.

Hence, there is a need to examine all the circumstances thoroughly and to assess the
personal circumstances of the party alleging fraud. This may require a review of the
case facts and the evidence on record.

In general, this Court is not a trier of facts. It makes its rulings based on applicable law
and on standing jurisprudence. The findings of the Court of Appeals are generally
binding on this Court provided that these are supported by the evidence on record. In
the recent case of Medina v. Court of Appeals,62 this Court held that:

It is axiomatic that a question of fact is not appropriate for a petition for review on
certiorari under Rule 45. This rule provides that the parties may raise only questions of
law, because the Supreme Court is not a trier of facts. Generally, we are not duty-bound
to analyze again and weigh the evidence introduced in and considered by the tribunals
below. When supported by substantial evidence, the findings of fact of the Court of
Appeals are conclusive and binding on the parties and are not reviewable by this Court,
unless the case falls under any of the following recognized exceptions: (1) When the
conclusion is a finding grounded entirely on speculation, surmises and conjectures; (2)
When the inference made is manifestly mistaken, absurd or impossible; (3) Where there
is a grave abuse of discretion; (4) When the judgment is based on a misapprehension of
facts; (5) When the findings of fact are conflicting; (6) When the Court of Appeals, in
making its findings, went beyond the issues of the case and the same is contrary to the
admissions of both appellant and appellee; (7) When the findings are contrary to those
of the trial court; (8) When the findings of fact are conclusions without citation of specific
evidence on which they are based; (9) When the facts set forth in the petition as well as
in the petitioner’s main and reply briefs are not disputed by the respondents; and (10)
When the findings of fact of the Court of Appeals are premised on the supposed
absence of evidence and contradicted by the evidence on record. (Emphasis
provided)63

The trial court and the Court of Appeals had appreciated the facts of this case
differently.

The Court of Appeals was not correct in saying that petitioner could only raise fraud as
a ground to annul his participation in the contract as against respondent Rupert V.
Tankeh, since the petitioner did not make any categorical allegation that respondents
Development Bank of the Philippines, Sterling Shipping Lines, Inc., and Asset
Privatization Trust had acted fraudulently. Admittedly, it was only in the Petition before
this Court that the petitioner had made the allegation of a "well-orchestrated fraud"64 by
the respondents. However, Rule 10, Section 5 of the Rules of Civil Procedure provides
that:

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 effect 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. (5a)
In this case, the commission of fraud was an issue that had been tried with the implied
consent of the respondents, particularly Sterling Shipping Lines, Inc., Asset Privatization
Trust, Development Bank of the Philippines, and Arenas. Hence, although there is a
lack of a categorical allegation in the pleading, the courts may still be allowed to
ascertain fraud.

The records will show why and how the petitioner agreed to enter into the contract with
respondent Ruperto V. Tankeh:

ATTY. VELAYO: How did you get involved in the business of the Sterling Shipping
Lines, Incorporated" [sic]

DR. TANKEH: Sometime in the year 1980, I was approached by Ruperto Tankeh
mentioning to me that he is operating a new shipping lines business and he is giving me
free one thousand shares (1,000) to be a director of this new business which is worth
one million pesos (₱1,000,000.00.),

ATTY. VELAYO: Are you related to Ruperto V. Tankeh?

DR. TANKEH: Yes, sir. He is my younger brother.

ATTY. VELAYO: Did you accept the offer?

DR. TANKEH: I accepted the offer based on his promise to me that I will be made a part
of the administration staff so that I can oversee the operation of the business plus my
son, the eldest one who is already a graduate lawyer with a couple of years of
experience in the law firm of Romulo Ozaeta Law Offices (TSN, April 28, 1988, pp. 10-
11.).65

The Second Amended Complaint of petitioner is substantially reproduced below to

ascertain the claim:

xxxx

2. That on May 12, 1981, due to the deceit and fraud exercised by Ruperto V.
Tankeh, plaintiff, together with Vicente L. Arenas, Jr. and Jose Maria Vargas,
signed a promissory note in favor of the defendant DBP, wherein plaintiff bound
himself to jointly and severally pay the DBP the amount of the mortgage loan.
This document insofar as plaintiff is concerned is a simulated document
considering that plaintiff was never a real stockholder of the Sterling Shipping
Lines, Inc.

3. That although plaintiff’s name appears in the records of Sterling Shipping

Lines, Inc. as one of its incorporators, the truth is that he had never invested any
amount in said corporation and that he had never been an actual member of said
corporation. All the money supposedly invested by him were put by defendant
Ruperto V. Tankeh. Thus, all the shares of stock under his name in fact belongs
to Ruperto V. Tankeh. Plaintiff was invited to attend the board meeting of the
Sterling Shipping Lines, Inc. only once, which was for the sole purpose of
introducing him to the two directors of the DBP, namely, Mr. Jesus Macalinag
and Mr. Gil Corpus. Thereafter he was never invited again. Plaintiff was never
compensated by the Sterling Shipping Lines, Inc. for his being a so-called
director and stockholder. It is clear therefore that the DBP knew all along that
plaintiff was not a true stockholder of the company.

4. That THE DECEIT OF DEFENDANT RUPERTO V. TANKEH IS SHOWN BY

THE FACT THAT when the Sterling Shipping Lines, Inc. was organized in 1980,
Ruperto V. Tankeh promised plaintiff that he would be a part of the administration
staff so that he could oversee the operation of the company. He was also
promised that his son, a lawyer, would be given a position in the company. None
of these promises was complied with. In fact, he was not even allowed to find out
the data about the income and expenses of the company.

5. THAT THE DECEIT OF RUPERTO V. TANKEH IS ALSO SHOWN BY THE

FACT THAT PLAINTIFF WAS INVITED TO ATTEND THE BOARD MEETING
OF THE STERLING SHIPPING LINES, INC. ONLY ONCE, WHICH WAS FOR
THE SOLE PUPOSE OF INTRODUCING HIM TO THE TWO DIRECTORS OF
THE DBP IN THE BOARD OF THE STERLING SHIPPING LINES, INC.,
NAMELY, MR. JESUS MACALINAG AND MR. GIL CORPUS. THEREAFTER
HE WAS NEVER INVITED AGAIN. PLAINTIFF WAS NEVER COMPENSATED
BY THE STERLING SHIPPING LINES, INC. FOR HIS BEING A SO-CALLED
DIRECTOR AND STOCKHOLDER.

6. That in 1983, upon realizing that he was only being made a tool to realize the
purposes of Ruperto V. Tankeh, plaintiff officially informed the company by
means of a letter dated June 15, 1983 addressed to the company that he has
severed his connection with the company, and demanded among others, that the
company board of directors pass a resolution releasing him from any liabilities
especially with reference to the loan mortgage contract with the DBP and to
notify the DBP of his severance from the Sterling Shipping Lines, Inc.

8-A. THAT A WEEK AFTER SENDING THE ABOVE LETTER, PLAINTIFF

MADE EARNEST EFFORTS TOWARDS A COMPROMISE BETWEEN HIM
AND HIS BROTHER RUPERTO V. TANKEH, WHICH EFFORTS WERE
SPURNED BY RUPERTO V. TANKEH, AND ALSO AFTER THE NEWS OF THE
SALE OF THE "STERLING ACE" WAS PUBLISHED AT THE NEWSPAPER
[sic], PLAINTIFF TRIED ALL EFFORTS TO CONTACT RUPERTO V. TANKEH
FOR THE PURPOSE OF ARRIVING AT SOME COMPROMISE, BUT
DEFENDANT RUPERTO V. TANKEH AVOIDED ALL CONTACTS [sic] WITH
THE PLAINTIFF UNTIL HE WAS FORCED TO SEEK LEGAL ASSISTANCE
FROM HIS LAWYER.66
In his Answer, respondent Ruperto V. Tankeh stated that:

COMES NOW defendant RUPERTO V. TANKEH, through the undersigned counsel,

and to the Honorable Court, most respectfully alleges:

xxxx

3. That paragraph 4 is admitted that herein answering defendant together with

the plaintiff signed the promissory note in favor of DBP but specifically denied
that the same was done through deceit and fraud of herein answering defendant
the truth being that plaintiff signed said promissory note voluntarily and with full
knowledge of the consequences thereof; it is further denied that said document is
a simulated document as plaintiff was never a real stockholder of the company,
the truth being those alleged in the special and affirmative defenses;

4. That paragraphs 5,6,7,8 and 8-A are specifically denied specially the
imputation of deceit and fraud against herein answering defendant, the truth
being those alleged in the special and affirmative defenses;

xxxx

SPECIAL AND AFFIRMATIVE DEFENSES x x x

8. The complaint states no cause of action as against herein answering

defendant;

9. The Sterling Shipping Lines, Inc. was a legitimate company organized in

accordance with the laws of the Republic of the Philippines with the plaintiff as
one of the incorporators;

10. Plaintiff as one of the incorporators and directors of the board was fully aware
of the by-laws of the company and if he attended the board meeting only once as
alleged, the reason thereof was known only to him;

11. The Sterling Shipping Lines, Inc. being a corporation acting through its board
of directors, herein answering defendant could not have promised plaintiff that he
would be a part of the administration staff;

12. As member of the board, plaintiff had all the access to the data and records
of the company; further, as alleged in the complaint, plaintiff has a son who is a
lawyer who could have advised him;

13. Assuming plaintiff wrote a letter to the company to sever his connection with
the company, he should have been aware that all he had to do was sell all his
holdings in the company;
 14. Herein answering defendant came to know only of plaintiff’s alleged
predicament when he received the summons and copy of the complaint; x x x. 67

An assessment of the allegations in the pleadings and the findings of fact of both the
trial court and appellate court based on the evidence on record led to the conclusion
that there had been no dolo causante committed against the petitioner by Ruperto V.
Tankeh.

The petitioner had given his consent to become a shareholder of the company without
contributing a single peso to pay for the shares of stock given to him by Ruperto V.
Tankeh. This fact was admitted by both petitioner and respondent in their respective
pleadings submitted to the lower court.

In his Amended Complaint,68 the petitioner admitted that "he had never invested any
amount in said corporation and that he had never been an actual member of said
corporation. All the money supposedly invested by him were put up by defendant
Ruperto V. Tankeh."69 This fact alone should have already alerted petitioner to the
gravity of the obligation that he would be undertaking as a member of the board of
directors and the attendant circumstances that this undertaking would entail. It also
does not add any evidentiary weight to strengthen petitioner’s claim of fraud. If anything,
it only strengthens the position that petitioner’s consent was not obtained through
insidious words or deceitful machinations.

Article 1340 of the Civil Code recognizes the reality of some exaggerations in trade
which negates fraud. It reads:

Art. 1340. The usual exaggerations in trade, when the other party had an opportunity to
know the facts, are not in themselves fraudulent.

Given the standing and stature of the petitioner, he was in a position to ascertain more
information about the contract.

Songco v. Sellner70 serves as one of the key guidelines in ascertaining whether a party
is guilty of fraud in obtaining the consent of the party claiming that fraud existed. The
plaintiff Lamberto Songco sought to recover earnings from a promissory note that
defendant George Sellner had made out to him for payment of Songco’s sugar cane
production. Sellner claimed that he had refused to pay because Songco had promised
that the crop would yield 3,000 piculs of sugar, when in fact, only 2,017 piculs of sugar
had been produced. This Court held that Sellner would still be liable to pay the
promissory note, as follows:

Notwithstanding the fact that Songco's statement as to the probable output of his crop
was disingenuous and uncandid, we nevertheless think that Sellner was bound and that
he must pay the price stipulated. The representation in question can only be considered
matter of opinion as the cane was still standing in the field, and the quantity of the sugar
it would produce could not be known with certainty until it should be harvested and
milled. Undoubtedly Songco had better experience and better information on which to
form an opinion on this question than Sellner. Nevertheless the latter could judge with
his own eyes as to the character of the cane, and it is shown that he measured the
fields and ascertained that they contained 96 1/2 hectares.

xxxx

The law allows considerable latitude to seller's statements, or dealer's talk; and
experience teaches that it is exceedingly risky to accept it at its face value. The refusal
of the seller to warrant his estimate should have admonished the purchaser that that
estimate was put forth as a mere opinion; and we will not now hold the seller to a liability
equal to that which would have been created by a warranty, if one had been given.

xxxx

It is not every false representation relating to the subject matter of a contract which will
render it void. It must be as to matters of fact substantially affecting the buyer's interest,
not as to matters of opinion, judgment, probability, or expectation. (Long vs. Woodman,
58 Me., 52; Hazard vs. Irwin, 18 Pick. [Mass.], 95; Gordon vs. Parmelee, 2 Allen
[Mass.], 212; Williamson vs. McFadden, 23 Fla., 143, 11 Am. St. Rep., 345.) When the
purchaser undertakes to make an investigation of his own, and the seller does nothing
to prevent this investigation from being as full as he chooses to make it, the purchaser
cannot afterwards allege that the seller made misrepresentations. (National Cash
Register Co. vs. Townsend, 137 N. C., 652, 70 L. R. A., 349; Williamson vs. Holt, 147
N. C., 515.)

We are aware that where one party to a contract, having special or expert knowledge,
takes advantage of the ignorance of another to impose upon him, the false
representation may afford ground for relief, though otherwise the injured party would be
bound. But we do not think that the fact that Songco was an experienced farmer, while
Sellner was, as he claims, a mere novice in the business, brings this case within that
exception.71

The following facts show that petitioner was fully aware of the magnitude of his
undertaking:

First, petitioner was fully aware of the financial reverses that Sterling Shipping Lines,
Inc. had been undergoing, and he took great pains to release himself from the
obligation.

Second, his background as a doctor, as a bank organizer, and as a businessman with

experience in the textile business and real estate should have apprised him of the
irregularity in the contract that he would be undertaking. This meant that at the time
petitioner gave his consent to become a part of the corporation, he had been fully aware
of the circumstances and the risks of his participation. Intent is determined by the acts.
Finally, the records showed that petitioner had been fully aware of the effect of his
signing the promissory note. The bare assertion that he was not privy to the records
cannot counteract the fact that petitioner himself had admitted that after he had severed
ties with his brother, he had written a letter seeking to reach an amicable settlement
with respondent Rupert V. Tankeh. Petitioner’s actions defied his claim of a complete
lack of awareness regarding the circumstances and the contract he had been entering.

The required standard of proof – clear and convincing evidence – was not met. There
was no dolo causante or fraud used to obtain the petitioner’s consent to enter into the
contract. Petitioner had the opportunity to become aware of the facts that attended the
signing of the promissory note. He even admitted that he has a lawyer-son who the
petitioner had hoped would assist him in the administration of Sterling Shipping Lines,
Inc. The totality of the facts on record belies petitioner’s claim that fraud was used to
obtain his consent to the contract given his personal circumstances and the applicable
law.

However, in refusing to allow petitioner to participate in the management of the

business, respondent Ruperto V. Tankeh was liable for the commission of incidental
fraud. In Geraldez, this Court defined incidental fraud as "those which are not serious in
character and without which the other party would still have entered into the contract."72

Although there was no fraud that had been undertaken to obtain petitioner’s consent,
there was fraud in the performance of the contract. The records showed that petitioner
had been unjustly excluded from participating in the management of the affairs of the
corporation. This exclusion from the management in the affairs of Sterling Shipping
Lines, Inc. constituted fraud incidental to the performance of the obligation.

This can be concluded from the following circumstances.

First, respondent raised in his Answer that petitioner "could not have promised plaintiff
that he would be a part of the administration staff"73 since petitioner had been fully
aware that, as a corporation, Sterling Shipping Lines, Inc. acted through its board of
directors. Respondent admitted that petitioner had been "an incorporator and member
of the board of directors"74 and that petitioner "was fully aware of the by-laws of the
company."75 It was incumbent upon respondent to act in good faith and to ensure that
petitioner would not be excluded from the affairs of Sterling Shipping Lines, Inc. After
all, respondent asserted that petitioner had entered into the contract voluntarily and with
full consent.

Second, respondent claimed that if petitioner was intent on severing his connection with
the company, all that petitioner had to do was to sell all his holdings in the company.
Clearly, the respondent did not consider the fact that the sale of the shares of stock
alone did not free petitioner from his liability to Development Bank of the Philippines or
Asset Privatization Trust, since the latter had signed the promissory and had still been
liable for the loan. A sale of petitioners’ shares of stock would not have negated the
petitioner’s responsibility to pay for the loan.
Third, respondent Ruperto V. Tankeh did not rebuff petitioner’s claim that the latter only
received news about the sale of the vessel M/V Sterling Ace through the media and not
as one of the board members or directors of Sterling Shipping Lines, Inc.

All in all, respondent Ruperto V. Tankeh’s bare assertion that petitioner had access to
the records cannot discredit the fact that the petitioner had been effectively deprived of
the opportunity to actually engage in the operations of Sterling Shipping Lines, Inc.
Petitioner had a reasonable expectation that the same level of engagement would be
present for the duration of their working relationship. This would include an undertaking
in good faith by respondent Ruperto V. Tankeh to be transparent with his brother that he
would not automatically be made part of the company’s administration.

However, this Court finds there is nothing to support the assertion that Sterling Shipping
Lines, Inc. and Arenas committed incidental fraud and must be held liable. Sterling
Shipping Lines, Inc. acted through its board of directors, and the liability of respondent
Tankeh cannot be imposed on Sterling Shipping Lines, Inc. The shipping line has a
separate and distinct personality from its officers, and petitioner’s assertion that the
corporation conspired with the respondent Ruperto V. Tankeh to defraud him is not
supported by the evidence and the records of the case.

As for Arenas, in Lim Tanhu v. Remolete,76 this Court held that:

In all instances where a common cause of action is alleged against several defendants,
some of whom answer and the others do not, the latter or those in default acquire a
vested right not only to own the defense interposed in the answer of their co-defendant
or co-defendants not in default but also to expect a result of the litigation totally common
with them in kind and in amount whether favorable or unfavorable. The substantive unity
of the plaintiffs’ cause against all the defendants is carried through to its adjective phase
as ineluctably demanded by the homogeneity and indivisibility of justice itself.77

As such, despite Arenas’ failure to submit his Answer to the Complaint or his declaration
of default, his liability or lack thereof is concomitant with the liability attributed to his co-
defendants or co-respondents. However, unlike respondent Ruperto V. Tankeh’s
liability, there is no action or series of actions that may be attributed to Arenas that may
lead to an inference that he was liable for incidental fraud. In so far as the required
evidence for both Sterling Shipping Lines, Inc. and Arenas is concerned, there is no
basis to justify the claim of incidental fraud.

In addition, respondents Development Bank of the Philippines and Asset Privatization

Trust or Privatization and Management Office cannot be held liable for fraud. Incidental
fraud cannot be attributed to the execution of their actions, which were undertaken
pursuant to their mandated functions under the law. "Absent convincing evidence to the
contrary, the presumption of regularity in the performance of official functions has to be
upheld."78

The Obligation to Pay Damages

As such, respondent Ruperto V. Tankeh is liable to his older brother, petitioner
Alejandro, for damages. The obligation to pay damages to petitioner is based on several
provisions of the Civil Code.

Article 1157 enumerates the sources of obligations.

Article 1157. Obligations arise from:

(1) Law;

(2) Contracts;

(3) Quasi-contracts;

(4) Acts or omissions punished by law; and

(5) Quasi-delicts. (1089a)

This enumeration does not preclude the possibility that a single action may serve as the
source of several obligations to pay damages in accordance with the Civil Code. Thus,
the liability of respondent Ruperto V. Tankeh is based on the law, under Article 1344,
which provides that the commission of incidental fraud obliges the person employing it
to pay damages.

In addition to this obligation as the result of the contract between petitioner and
respondents, there was also a patent abuse of right on the part of respondent Tankeh.
This abuse of right is included in Articles 19 and 21 of the Civil Code which provide that:

Article 19. 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.

Article 21. Any person who willfully causes loss or injury to another in manner that is
contrary to morals, good customs or public policy shall compensate the latter for the
damage.

Respondent Ruperto V. Tankeh abused his right to pursue undertakings in the interest
of his business operations. This is because of his failure to at least act in good faith and
be transparent with petitioner regarding Sterling Shipping Lines, Inc.’s daily operations.

In National Power Corporation v. Heirs of Macabangkit Sangkay,79 this Court held that:

When a right is exercised in a manner not conformable with the norms enshrined in
Article 19 and like provisions on human relations in the Civil Code, and the exercise
results to [sic] the damage of [sic] another, a legal wrong is committed and the
wrongdoer is held responsible.80
The damage, loss, and injury done to petitioner are shown by the following
circumstances.

First, petitioner was informed by Development Bank of the Philippines that it would still
pursue his liability for the payment of the promissory note. This would not have
happened if petitioner had allowed himself to be fully apprised of Sterling Shipping
Lines, Inc.’s financial straits and if he felt that he could still participate in the company’s
operations. There is no evidence that respondent Ruperto V. Tankeh showed an
earnest effort to at least allow the possibility of making petitioner part of the
administration a reality. The respondent was the brother of the petitioner and was also
the primary party that compelled petitioner Alejandro Tankeh to be solidarily bound to
the promissory note. Ruperto V. Tankeh should have done his best to ensure that he
had exerted the diligence to comply with the obligations attendant to the participation of
petitioner.

Second, respondent Ruperto V. Tankeh’s refusal to enter into an agreement or

settlement with petitioner after the latter’s discovery of the sale of the M/V Sterling Ace
was an action that constituted bad faith. Due to Ruperto’s refusal, his brother, petitioner
Alejandro, became solidarily liable for an obligation that the latter could have avoided if
he had been given an opportunity to participate in the operations of Sterling Shipping
Lines, Inc. The simple sale of all of petitioner’s shares would not have solved
petitioner’s problems, as it would not have negated his liability under the terms of the
promissory note.

Finally, petitioner is still bound to the creditors of Sterling Shipping Lines, Inc., namely,
public respondents Development Bank of the Philippines and Asset Privatization Trust.
This is an additional financial burden for petitioner. Nothing in the records suggested the
possibility that Development Bank of the Philippines or Asset Privatization Trust through
the Privatization Management Office will not pursue or is precluded from pursuing its
claim against the petitioner. Although petitioner Alejandro voluntarily signed the
promissory note and became a stockholder and board member, respondent should
have treated him with fairness, transparency, and consideration to minimize the risk of
incurring grave financial reverses.

In Francisco v. Ferrer,81 this Court ruled that moral damages may be awarded on the
following bases:

To recover moral damages in an action for breach of contract, the breach must be
palpably wanton, reckless, malicious, in bad faith, oppressive or abusive.

Under the provisions of this law, in culpa contractual or breach of contract, moral
damages may be recovered when the defendant acted in bad faith or was guilty of
gross negligence (amounting to bad faith) or in wanton disregard of his contractual
obligation and, exceptionally, when the act of breach of contract itself is constitutive of
tort resulting in physical injuries.
Moral damages may be awarded in breaches of contracts where the defendant acted
fraudulently or in bad faith.

Bad faith does not simply connote bad judgment or negligence, it imports a dishonest
purpose or some moral obliquity and conscious doing of a wrong, a breach of known
duty through some motive or interest or ill will that partakes of the nature of fraud.

xxxx

The person claiming moral damages must prove the existence of bad faith by clear and
convincing evidence for the law always presumes good faith. It is not enough that one
merely suffered sleepless nights, mental anguish, serious anxiety as the result of the
actuations of the other party. Invariably such action must be shown to have been
willfully done in bad faith or will ill motive. Mere allegations of besmirched reputation,
embarrassment and sleepless nights are insufficient to warrant an award for moral
damages. It must be shown that the proximate cause thereof was the unlawful act or
omission of the [private respondent] petitioners.

An award of moral damages would require certain conditions to be met, to wit: (1) first,
there must be an injury, whether physical, mental or psychological, clearly sustained by
the claimant; (2) second, there must be culpable act or omission factually established;
(3) third, the wrongful act or omission of the defendant is the proximate cause of the
injury sustained by the claimant; and (4) fourth, the award of damages is predicated on
any of the cases stated in Article 2219 of the Civil Code. (Citations omitted)82

In this case, the four elements cited in Francisco are present. First, petitioner suffered
an injury due to the mental duress of being bound to such an onerous debt to
Development Bank of the Philippines and Asset Privatization Trust. Second, the
wrongful acts of undue exclusion done by respondent Ruperto V. Tankeh clearly fulfilled
the same requirement. Third, the proximate cause of his injury was the failure of
respondent Ruperto V. Tankeh to comply with his obligation to allow petitioner to either
participate in the business or to fulfill his fiduciary responsibilities with candor and good
faith. Finally, Article 221983 of the Civil Code provides that moral damages may be
awarded in case of acts and actions referred to in Article 21, which, as stated, had been
found to be attributed to respondent Ruperto V. Tankeh.

In the Appellant’s Brief,84 petitioner asked the Court of Appeals to demand from
respondents, except from respondent Asset Privatization Trust, the amount of five
million pesos (₱5,000,000.00). This Court finds that the amount of five hundred
thousand pesos (₱500,000.00) is a sufficient amount of moral damages.

In addition to moral damages, this Court may also impose the payment of exemplary
damages.1âwphi1 Exemplary damages are discussed in Article 2229 of the Civil Code,
as follows:
ART. 2229. Exemplary or corrective damages are imposed, by way of example or
correction of the public good, in addition to moral, temperate, liquidated or
compensatory damages.

Exemplary damages are further discussed in Articles 2233 and 2234, particularly
regarding the pre-requisites of ascertaining moral damages and the fact that it is
discretionary upon this Court to award them or not:

ART. 2233. Exemplary damages cannot be recovered as a matter of right; the court will
decide whether or not they should be adjudicated.

ART. 2234. While the amount of the exemplary damages need not be proven, the
plaintiff must show that he is entitled to moral, temperate or compensatory damages
before the court may consider the question of whether or not exemplary damages
should be awarded x x x

The purpose of exemplary damages is to serve as a deterrent to future and subsequent

parties from the commission of a similar offense. The case of People v. Rante 85 citing
People v. Dalisay86 held that:

Also known as ‘punitive’ or ‘vindictive’ damages, exemplary or corrective damages are

intended to serve as a deterrent to serious wrong doings, and as a vindication of undue
sufferings and wanton invasion of the rights of an injured or a punishment for those
guilty of outrageous conduct. These terms are generally, but not always, used
interchangeably. In common law, there is preference in the use of exemplary damages
when the award is to account for injury to feelings and for the sense of indignity and
humiliation suffered by a person as a result of an injury that has been maliciously and
wantonly inflicted, the theory being that there should be compensation for the hurt
caused by the highly reprehensible conduct of the defendant—associated with such
circumstances as willfulness, wantonness, malice, gross negligence or recklessness,
oppression, insult or fraud or gross fraud—that intensifies the injury. The terms punitive
or vindictive damages are often used to refer to those species of damages that may be
awarded against a person to punish him for his outrageous conduct. In either case,
these damages are intended in good measure to deter the wrongdoer and others like
him from similar conduct in the future.87

To justify an award for exemplary damages, the wrongful act must be accompanied by
bad faith, and an award of damages would be allowed only if the guilty party acted in a
wanton, fraudulent, reckless or malevolent manner.88 In this case, this Court finds that
respondent Ruperto V. Tankeh acted in a fraudulent manner through the finding of dolo
incidente due to his failure to act in a manner consistent with propriety, good morals,
and prudence.

Since exemplary damages ensure that future litigants or parties are enjoined from
acting in a similarly malevolent manner, it is incumbent upon this Court to impose the
damages in such a way that will serve as a categorical warning and will show that
wanton actions will be dealt with in a similar manner. This Court finds that the amount of
two hundred thousand pesos (₱200,000.00) is sufficient for this purpose.

In sum, this Court must act in the best interests of all future litigants by establishing and
applying clearly defined standards and guidelines to ascertain the existence of fraud.

WHEREFORE, this Petition is PARTIALLY GRANTED. The Decision of the Court of

Appeals as to the assailed Decision in so far as the finding of fraud is SUSTAINED with
the MODIFICATION that respondent RUPERTO V. TANKEH be ordered to pay moral
damages in the amount of FIVE HUNDRED THOUSAND PESOS (₱500,000.00) and
the amount of TWO HUNDRED THOUSAND PESOS (₱200,000.00) by way of
exemplary damages.

SO ORDERED.

G.R. No. 167874 January 15, 2010

SPOUSES CARMEN S. TONGSON and JOSE C. TONGSON substituted by his

children namely: JOSE TONGSON, JR., RAUL TONGSON, TITA TONGSON,
GLORIA TONGSON ALMA TONGSON, Petitioners,
vs.
EMERGENCY PAWNSHOP BULA, INC. and DANILO R. NAPALA, Respondents.

DECISION

CARPIO, J.:

The Case

Before the Court is a petition for review1 of the 31 August 2004 Decision2 and 10 March
2005 Resolution3 of the Court of Appeals in CA-G.R. CV No. 58242. In the 31 August
2004 Decision, the Court of Appeals partially granted the appeal filed by Emergency
Pawnshop Bula, Inc. (EPBI) and Danilo R. Napala (Napala) by modifying the decision of
the trial court. In the 10 March 2005 Resolution, the Court of Appeals denied the motion
for partial reconsideration filed by the Spouses Jose C. Tongson and Carmen S.
Tongson (Spouses Tongson).

The Facts

In May 1992, Napala offered to purchase from the Spouses Tongson their 364-square
meter parcel of land, situated in Davao City and covered by Transfer Certificate of Title
(TCT) No. 143020, for ₱3,000,000. Finding the offer acceptable, the Spouses Tongson
executed with Napala a Memorandum of Agreement4 dated 8 May 1992.

On 2 December 1992, respondents’ lawyer Atty. Petronilo A. Raganas, Jr. prepared a

Deed of Absolute Sale5indicating the consideration as only ₱400,000. When Carmen
Tongson "noticed that the consideration was very low, she [complained] and called the
attention of Napala but the latter told her not to worry as he would be the one to pay for
the taxes and she would receive the net amount of ₱3,000,000."6

To conform with the consideration stated in the Deed of Absolute Sale, the parties
executed another Memorandum of Agreement, which allegedly replaced the first
Memorandum of Agreement,7 showing that the selling price of the land was only
₱400,000.8

Upon signing the Deed of Absolute Sale, Napala paid ₱200,000 in cash to the Spouses
Tongson and issued a postdated Philippine National Bank (PNB) check in the amount of
₱2,800,000,9 representing the remaining balance of the purchase price of the subject
property. Thereafter, TCT No. 143020 was cancelled and TCT No. T-186128 was
issued in the name of EPBI.10

When presented for payment, the PNB check was dishonored for the reason "Drawn
Against Insufficient Funds." Despite the Spouses Tongson's repeated demands to either
pay the full value of the check or to return the subject parcel of land, Napala failed to do
either. Left with no other recourse, the Spouses Tongson filed with the Regional Trial
Court, Branch 16, Davao City a Complaint for Annulment of Contract and Damages with
a Prayer for the Issuance of a Temporary Restraining Order and a Writ of Preliminary
Injunction.11

In their Answer, respondents countered that Napala had already delivered to the
Spouses Tongson the amount of ₱2,800,000 representing the face value of the PNB
check, as evidenced by a receipt issued by the Spouses Tongson. Respondents
pointed out that the Spouses Tongson never returned the PNB check claiming that it
was misplaced. Respondents asserted that the payment they made rendered the filing
of the complaint baseless.12

At the pre-trial, Napala admitted, among others, issuing the postdated PNB check in the
sum of ₱2,800,000.13 The Spouses Tongson, on the other hand, admitted issuing a
receipt which showed that they received the PNB check from Napala. Thereafter, trial
ensued.

The Ruling of the Trial Court

The trial court found that the purchase price of the subject property has not been fully
paid and that Napala’s assurance to the Spouses Tongson that the PNB check would
not bounce constituted fraud that induced the Spouses Tongson to enter into the sale.
Without such assurance, the Spouses Tongson would not have agreed to the contract
of sale. Accordingly, there was fraud within the ambit of Article 1338 of the Civil
Code,14 justifying the annulment of the contract of sale, the award of damages and
attorney’s fees, and payment of costs.

The dispositive portion of the 9 December 1996 Decision of the trial court reads:
WHEREFORE, judgment is hereby rendered –

I Annulling the contract entered into by the plaintiffs with the defendants;

II Declaring the writs of preliminary injunctions issued permanent;

III Ordering defendants to:

1) reconvey the property subject matter of the case to the plaintiffs;

2) pay plaintiffs:

a) ₱100,000 as moral damages;

b) ₱50,000 as exemplary damages;

c) ₱20,000 as attorney’s fees; and

d) ₱35,602.50 cost of suit broken down as follows:

₱70.00 bond fee

₱60.00 lis pendens fee

₱902.00 docket fee

₱390.00 docket fee

₱8.00 summons fee

₱12.00 SDF

₱178.50 Xerox

₱9,000 Sidcor Insurance Bond fee

₱25,000 Sidcor Insurance Bond fee

or the total sum of ₱205,602.50.

It is further ordered that the monetary award be offsetted [sic] to defendants’

downpayment of ₱200,000 thereby leaving a balance of ₱5,602.50. 15

Respondents appealed to the Court of Appeals.

The Ruling of the Court of Appeals

The Court of Appeals agreed with the trial court’s finding that Napala employed fraud
when he misrepresented to the Spouses Tongson that the PNB check in the amount of
₱2,800,000 would be properly funded at its maturity. However, the Court of Appeals
found that the issuance and delivery of the PNB check and fraudulent representation
made by Napala could not be considered as the determining cause for the sale of the
subject parcel of land. Hence, such fraud could not be made the basis for annulling the
contract of sale. Nevertheless, the fraud employed by Napala is a proper and valid basis
for the entitlement of the Spouses Tongson to the balance of the purchase price in the
amount of ₱2,800,000 plus interest at the legal rate of 6% per annum computed from
the date of filing of the complaint on 11 February 1993.

Finding the trial court’s award of damages unconscionable, the Court of Appeals
reduced the moral damages from ₱100,000 to ₱50,000 and the exemplary damages
from ₱50,000 to ₱25,000.

The dispositive portion of the 31 August 2004 Decision of the Court of Appeals reads:

WHEREFORE, the instant appeal is PARTIALLY GRANTED. The assailed decision of

the Regional Trial Court, 11th Judicial Region, Branch 16, Davao City, in Civil Case No.
21,858-93, is hereby MODIFIED, to read:

WHEREFORE, judgment is hereby rendered ordering defendants to pay plaintiffs:

a) the sum of ₱2,800,000.00 representing the balance of the purchase price of

the subject parcel of land, plus interest at the legal rate of 6% per annum
computed from the date of filing of the complaint on 11 February 1993, until the
finality of the assailed decision; thereafter, the interest due shall be at the legal
rate of 12% per annum until fully paid;

b) ₱50,000 as moral damages;

c) ₱25,000 as exemplary damages;

d) ₱20,000 as attorney’s fees; and

e) The costs of suit in the total amount of ₱35,602.50.

It is understood, however, that plaintiffs’ entitlement to items a to d, is subject to the

condition that they have not received the same or equivalent amounts in criminal case
for Violation of Batas Pambansa Bilang 22, docketed as Criminal Case No. 30508-93,
before the Regional Trial Court of Davao City, Branch 12, instituted against the
defendant Danilo R. Napala by plaintiff Carmen S. Tongson.

SO ORDERED.16
The Spouses Tongson filed a partial motion for reconsideration which was denied by
the Court of Appeals in its Resolution dated 10 March 2005.

The Issues

The Spouses Tongson raise the following issues:

1. WHETHER THE CONTRACT OF SALE CAN BE ANNULLED BASED ON

THE FRAUD EMPLOYED BY NAPALA; and

2. WHETHER THE COURT OF APPEALS ERRED IN REDUCING THE

AMOUNT OF DAMAGES AWARDED BY THE TRIAL COURT.

The Ruling of the Court

The petition has merit.

On the existence of fraud

A contract is a meeting of the minds between two persons, whereby one is bound to
give something or to render some service to the other.17 A valid contract requires the
concurrence of the following essential elements: (1) consent or meeting of the minds,
that is, consent to transfer ownership in exchange for the price; (2) determinate subject
matter; and (3) price certain in money or its equivalent.18

In the present case, there is no question that the subject matter of the sale is the 364-
square meter Davao lot owned by the Spouses Tongson and the selling price agreed
upon by the parties is ₱3,000,000. Thus, there is no dispute as regards the presence of
the two requisites for a valid sales contract, namely, (1) a determinate subject matter
and (2) a price certain in money.

The problem lies with the existence of the remaining element, which is consent of the
contracting parties, specifically, the consent of the Spouses Tongson to sell the property
to Napala. Claiming that their consent was vitiated, the Spouses Tongson point out that
Napala’s fraudulent representations of sufficient funds to pay for the property induced
them into signing the contract of sale. Such fraud, according to the Spouses Tongson,
renders the contract of sale void.

On the contrary, Napala insists that the Spouses Tongson willingly consented to the
sale of the subject property making the contract of sale valid. Napala maintains that no
fraud attended the execution of the sales contract.

The trial and appellate courts had conflicting findings on the question of whether the
consent of the Spouses Tongson was vitiated by fraud. While the Court of Appeals
agreed with the trial court’s finding that Napala employed fraud when he assured the
Spouses Tongson that the postdated PNB check was fully funded when it fact it was
not, the Court of Appeals disagreed with the trial court’s ruling that such fraud could be
the basis for the annulment of the contract of sale between the parties.

Under Article 1338 of the Civil Code, there is fraud when, through insidious words or
machinations of one of the contracting parties, the other is induced to enter into a
contract which, without them, he would not have agreed to. In order that fraud may
vitiate consent, it must be the causal (dolo causante), not merely the incidental (dolo
incidente), inducement to the making of the contract.19 Additionally, the fraud must be
serious.20

We find no causal fraud in this case to justify the annulment of the contract of sale
between the parties. It is clear from the records that the Spouses Tongson agreed to
sell their 364-square meter Davao property to Napala who offered to pay ₱3,000,000 as
purchase price therefor. Contrary to the Spouses Tongson’s belief that the fraud
employed by Napala was "already operational at the time of the perfection of the
contract of sale," the misrepresentation by Napala that the postdated PNB check would
not bounce on its maturity hardly equates to dolo causante. Napala’s assurance that the
check he issued was fully funded was not the principal inducement for the Spouses
Tongson to sign the Deed of Absolute Sale. Even before Napala issued the check, the
parties had already consented and agreed to the sale transaction. The Spouses
Tongson were never tricked into selling their property to Napala. On the contrary, they
willingly accepted Napala’s offer to purchase the property at ₱3,000,000. In short, there
was a meeting of the minds as to the object of the sale as well as the consideration
therefor.

Some of the instances where this Court found the existence of causal fraud include: (1)
when the seller, who had no intention to part with her property, was "tricked into
believing" that what she signed were papers pertinent to her application for the
reconstitution of her burned certificate of title, not a deed of sale;21 (2) when the
signature of the authorized corporate officer was forged;22 or (3) when the seller was
seriously ill, and died a week after signing the deed of sale raising doubts on whether
the seller could have read, or fully understood, the contents of the documents he signed
or of the consequences of his act.23 Suffice it to state that nothing analogous to these
badges of causal fraud exists in this case.

However, while no causal fraud attended the execution of the sales contract, there is
fraud in its general sense, which involves a false representation of a fact, 24 when
Napala inveigled the Spouses Tongson to accept the postdated PNB check on the
representation that the check would be sufficiently funded at its maturity. In other words,
the fraud surfaced when Napala issued the worthless check to the Spouses Tongson,
which is definitely not during the negotiation and perfection stages of the sale. Rather,
the fraud existed in the consummation stage of the sale when the parties are in the
process of performing their respective obligations under the perfected contract of sale.
In Swedish Match, AB v. Court of Appeals,25 the Court explained the three stages of a
contract, thus:
I n general, contracts undergo three distinct stages, to wit: negotiation; perfection or
birth; and consummation. Negotiation begins from the time the prospective contracting
parties manifest their interest in the contract and ends at the moment of agreement of
the parties. Perfection or birth of the contract takes place when the parties agree upon
the essential elements of the contract. Consummation occurs when the parties fulfill or
perform the terms agreed upon in the contract, culminating in the extinguishment
thereof.

Indisputably, the Spouses Tongson as the sellers had already performed their obligation
of executing the Deed of Sale, which led to the cancellation of their title in favor of EPBI.
Respondents as the buyers, on the other hand, failed to perform their correlative
obligation of paying the full amount of the contract price. While Napala paid ₱200,000
cash to the Spouses Tongson as partial payment, Napala issued an insufficiently
funded PNB check to pay the remaining balance of ₱2.8 million. Despite repeated
demands and the filing of the complaint, Napala failed to pay the ₱2.8 million until the
present. Clearly, respondents committed a substantial breach of their reciprocal
obligation, entitling the Spouses Tongson to the rescission of the sales contract. The
law grants this relief to the aggrieved party, thus:

Article 1191 of the Civil Code provides:

Article 1191. The power to rescind obligations is implied in reciprocal ones, in case one
of the obligors should not comply with what is incumbent upon him.

The injured party may choose between the fulfillment and the rescission of the
obligation, with payment of damages in either case. He may also seek rescission, even
after he has chosen fulfillment, if the latter should become impossible.

Article 1385 of the Civil Code provides the effects of rescission, viz:

ART. 1385. Rescission creates the obligation to return the things which were the object
of the contract, together with their fruits, and the price with its interest; consequently, it
can be carried out only when he who demands rescission can return whatever he may
be obliged to restore.

Neither shall rescission take place when the things which are the object of the contract
are legally in the possession of third persons who did not act in bad faith.

While they did not file an action for the rescission of the sales contract, the Spouses
Tongson specifically prayed in their complaint for the annulment of the sales contract,
for the immediate execution of a deed of reconveyance, and for the return of the subject
property to them.26 The Spouses Tongson likewise prayed "for such other reliefs which
may be deemed just and equitable in the premises." In view of such prayer, and
considering respondents’ substantial breach of their obligation under the sales contract,
the rescission of the sales contract is but proper and justified. Accordingly, respondents
must reconvey the subject property to the Spouses Tongson, who in turn shall refund
the initial payment of ₱200,000 less the costs of suit.

Napala’s claims that rescission is not proper and that he should be given more time to
pay for the unpaid remaining balance of ₱2,800,000 cannot be countenanced. Having
acted fraudulently in performing his obligation, Napala is not entitled to more time to pay
the remaining balance of ₱2,800,000, and thereby erase the default or breach that he
had deliberately incurred.27 To do otherwise would be to sanction a deliberate and
reiterated infringement of the contractual obligations incurred by Napala, an attitude
repugnant to the stability and obligatory force of contracts.28

The Court notes that the selling price indicated in the Deed of Absolute Sale was only
₱400,000, instead of the true purchase price of ₱3,000,000. The undervaluation of the
selling price operates to defraud the government of the taxes due on the basis of the
correct purchase price. Under the law,29 the sellers have the obligation to pay the capital
gains tax. In this case, Napala undertook to "advance" the capital gains tax, among
other fees, under the Memorandum of Agreement, thus:

ATTY. ALABASTRO:

Q Is it not a fact that you were the one who paid for the capital gains tax?

A No, I only advanced the money.

Q To whom?

A To BIR.

COURT:

Q You were the one who went to the BIR to pay the capital gains tax?

A It is embodied in the memorandum agreement.30

While Carmen Tongson protested against the "very low consideration," she
eventually agreed to the "reduced" selling price indicated in the Deed of Absolute
since Napala assured her not to worry about the taxes and expenses, as he had
allegedly made arrangements with the Bureau of Internal Revenue (BIR)
regarding the payment of the taxes, thus:

Q What is the amount in the Deed of Absolute Sale?

A It was only Four Hundred Thousand. And he told me not to worry because x x
x the BIR and not to worry because he will pay me what was agreed – the
amount of Three Million and he will be paying all these expenses so I was
thinking, if that is the case, anyway he paid me the Two Hundred Thousand cash
 and a subsequent Two Point Eight Million downpayment check so I really thought
that he was paying the whole amount.

COURT:

Proceed.

ATTY. LIZA:

Q So you eventually agreed that this consideration be reduced to Four Hundred

Thousand Pesos and to be reflected in the Deed of Absolute Sale?

A Yes, but when I was complaining to him why it is so because I was worried why
that was like that but Mr. Napala told me don’t worry because [he] can remedy
this. And I asked him how can [he] remedy this? And he told me we can make
another Memorandum of Agreement.

COURT:

Q Before you signed the Deed of Absolute Sale, you found out the amount?

A Yes, sir.

Q And you complained?

A Yes.31

Considering that the undervaluation of the selling price of the subject property, initiated
by Napala, operates to defraud the government of the correct amount of taxes due on
the sale, the BIR must therefore be informed of this Decision for its appropriate action.

On the award of damages

Citing Article 1338 of the Civil Code, the trial court awarded ₱100,000 moral damages
and ₱50,000 exemplary damages to the Spouses Tongson. While agreeing with the trial
court on the Spouses Tongson’s entitlement to moral and exemplary damages, the
Court of Appeals reduced such awards for being unconscionable. Thus, the moral
damages was reduced from ₱100,000 to ₱50,000, and the exemplary damages was
reduced from ₱50,000 to ₱25,000.

As discussed above, Napala defrauded the Spouses Tongson in his acts of issuing a
worthless check and representing to the Spouses Tongson that the check was funded,
committing in the process a substantial breach of his obligation as a buyer. For such
fraudulent acts, the law, specifically the Civil Code, awards moral damages to the
injured party, thus:
ART. 2220. Willful injury to property may be a legal ground for awarding moral damages
if the court should find that, under the circumstances, such damages are justly due. The
same rule applies to breaches of contract where the defendant acted fraudulently or in
bad faith. (Emphasis supplied)

Considering that the Spouses Tongson are entitled to moral damages, the Court may
also award exemplary damages, thus:

ART. 2232. In contracts and quasi-contracts, the court may award exemplary damages
if the defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent
manner.

Article 2234. When the amount of the exemplary damages need not be proved, the
plaintiff must show that he is entitled to moral, temperate or compensatory damages
before the court may consider the question of whether or not exemplary damages would
be awarded. In case liquidated damages have been agreed upon, although no proof of
loss is necessary in order that such liquidated damages may be recovered,
nevertheless, before the court may consider the question of granting exemplary in
addition to the liquidated damages, the plaintiff must show that he would be entitled to
moral, temperate or compensatory damages were it not for the stipulation for liquidated
damages. (Emphasis supplied)

Accordingly, we affirm the Court of Appeals’ awards of moral and exemplary damages,
which we find equitable under the circumstances in this case.

WHEREFORE, we PARTIALLY GRANT the petition. We SET ASIDE the 31 August

2004 Decision and 10 March 2005 Resolution of the Court of Appeals in CA-G.R. CV
No. 58242, except as to the award of moral and exemplary damages, and ORDER the
rescission of the contract of sale between the Spouses Tongson and Emergency
Pawnshop Bula, Inc.

Let a copy of this Decision be forwarded to the Bureau of Internal Revenue for its
appropriate action.

SO ORDERED.

G.R. No. 138774 March 8, 2001

REGINA FRANCISCO AND ZENAIDA PASCUAL, petitioners,

vs.
AIDA FRANCISCO-ALFONSO, respondent.

PARDO, J.:

May a legitimate daughter be deprived of her share in the estate of her deceased father
by a simulated contract transferring the property of her father to his illegitimate children?
The case before the Court is an appeal via certiorari from the decision of the Court of
Appeals1 declaring void the deed of sale of two parcels of land conveyed to petitioners
who are illegitimate children of the deceased to the exclusion of respondent, his sole
legitimate daughter.

The facts2 are:

Respondent Aida Francisco-Alfonso (hereafter Aida) is the only daughter of spouses

Gregorio Francisco and Cirila de la Cruz, who are now both deceased.

Petitioners, on the other hand, are daughters of the late Gregorio Francisco with his
common law wife Julia Mendoza, with whom he begot seven (7) children.

Gregorio Francisco (hereafter Gregorio) owned two parcels of residential land, situated
in Barangay Lolomboy, Bocaue, Bulacan, covered by TCT Nos. T-32740 and T-117160.
When Gregorio was confined in a hospital in 1990, he confided to his daughter Aida that
the certificates of title of his property were in the possession of Regina Francisco and
Zenaida Pascual.

After Gregorio died on July 20, 1990,3 Aida inquired about the certificates of title from
her half sisters. They informed her that Gregorio had sold the land to them on August
15, 1983. After verification, Aida learned that there was indeed a deed of absolute sale
in favor of Regina Francisco and Zenaida Pascual. Thus, on August 15, 1983, Gregorio
executed a "Kasulatan sa Ganap na Bilihan, whereby for P25,000.00, he sold the two
parcels of land to Regina Francisco and Zenaida Pascual. By virtue of the sale, the
Register of Deeds of Bulacan issued TCT No. T-59.585 to Regina Francisco and TCT
T-59.586 to Zenaida Pascual.4

On April 1, 1991, Aida filed with the Regional Trial Court, Bulacan a complaint against
petitioners for annulment of sale with damages.5 She alleged that the signature of her
late father, Gregorio Francisco, on the Kasulatan sa Ganap na Bilihan dated August 15,
1983, was a forgery.

In their joint answer to the complaint, petitioners denied the alleged forgery or simulation
of the deed of sale. After due proceedings, on July 21, 1994, the trial court rendered a
decision dismissing the complaint. The dispositive portion reads:

"WHEREFORE, on the basis of the evidence adduced and the law applicable
thereon, the Court hereby renders judgment:

"a) sustaining the validity of the "Kasulatan Sa Ganap Na Bilihan" (Exh."G")

executed on 15 August 1993 by the late Gregorio Francisco in favor of the
defendants;
 "b) affirming the validity of the Transfer Certificates of Title No. T-59.585 (Exh.
"I") issued to defendant Regina Francisco and No. T-59.386 (Exh. "H") issued to
defendant Zenaida Pascual; and

"c) dismissing the complaint as well as the defendants' counterclaim for damages
and attorney's fees for lack of merit." 6

In time7, respondent Alfonso appealed to the Court of Appeals.8

After due proceedings, on April 30, 1999, the Court of Appeals promulgated its decision
reversing that of the trial court, the dispositive portion of which reads:

"WHEREFORE, the Decision dated July 21, 1994 of the court a quo is
REVERSED and SET ASIDE and another rendered as follows:

"1. The Kasulatan Sa Ganap na Bilihan dated August 15, 1983 (Exhibit "G") is
declared null and void from the beginning and TCT Nos. T-59.585 (M) and T-59-
586 (M), both of the Registry of Deeds of Bulacan (Meycauayan Branch) in the
names of Regina Francisco and Zenaida Pascual, respectively, are annulled and
cancelled;

"2. The Register of Deeds of Bulacan (Meycauayan Branch) is ordered to cancel

the aforementioned TCT Nos. T-59.585 (M) and T-59.586 (M) and to reinstate
Transfer Certificates of Title Nos. T-132740 and T-117160 both in the name of
Gregorio Francisco.

"3. Defendants-appellees Regina Francisco and Zenaida Pascual jointly and

solidarily are ordered to pay plaintiff-appellant Alfonso the amount of P5,000.00
as moral damages, P5,000.00 as exemplary damages and P5,000.00 as
attorney's fees.

"4. The counterclaim of defendants-appellees is dismissed for lack of merit.

"Costs of suit against said defendants-appellees." 9

Hence, this petition.10

The main issue raised is whether the Supreme Court may review the factual findings of
the appellate court. The jurisdiction of this Court in cases brought before it from the
Court of Appeals under Rule 45 of the Revised Rules of Court is limited to review of
pure errors of law. It is not the function of this Court to analyze or weigh evidence all
over again, unless there is a showing that the findings of the lower court are totally
devoid of support or are glaringly erroneous as to constitute grave abuse of discretion. 11
The findings of fact of the Court of Appeals supported by substantial evidence are
conclusive and binding on the parties and are not reviewable by this Court,12 unless the
case falls under any of the recognized exceptions to the rule. 13

Petitioner has failed to prove that the case falls within the exceptions. 14

We affirm the decision of the Court of Appeals because:

First: The kasulatan was simulated. There was no consideration for the contract of sale.
Felicitas de la Cruz, a family friend of the Franciscos, testified that Zenaida Pascual and
Regina Francisco did not have any source of income in 1983, when they bought the
property, until the time when Felicitas testified in 1991.15

As proof of income, however, Zenaida Pascual testified that she was engaged in
operating a canteen, working as cashier in Mayon Night Club as well as buying and
selling RTW (Ready to Wear) items in August of 1983 and prior thereto.

Zenaida alleged that she paid her father the amount of P10,000.00. She did not
withdraw money from her bank account at the Rural Bank of Meycauayan, Bulacan, to
pay for the property. She had personal savings other than those deposited in the bank.
Her gross earnings from the RTW for three years was P9,000.00, and she earned
P50.00 a night at the club.16

Regina Francisco, on the other hand, was a market vendor, selling nilugaw, earning a
net income of P300.00 a day in 1983. She bought the property from the deceased for
P15,000.00.17 She had no other source of income.

We find it incredible that engaging in buy and sell could raise the amount of P10,000.00,
or that earnings in selling goto could save enough to pay P15,000.00, in cash for the
land.

The testimonies of petitioners were incredible considering their inconsistent statements

as to whether there was consideration for the sale and also as to whether the property
was bought below or above its supposed market value. They could not even present a
single witness to the kasulatan that would prove receipt of the purchase price.

Since there was no cause or consideration for the sale, the same was a simulation and
hence, null and void.18

Second: Even if the kasulatan was not simulated, it still violated the Civil
Code19 provisions insofar as the transaction affected respondent's legitime. The sale
was executed in 1983, when the applicable law was the Civil Code, not the Family
Code.

Obviously, the sale was Gregorio's way to transfer the property to his illegitimate
daughters20 at the expense of his legitimate daughter. The sale was executed to prevent
respondent Alfonso from claiming her legitime and rightful share in said property. Before
his death, Gregorio had a change of heart and informed his daughter about the titles to
the property.

According to Article 888, Civil Code:

"The legitime of legitimate children and descendants consists of one-half of the

hereditary estate of the father and of the mother.

"The latter may freely dispose of the remaining half subject to the rights of
illegitimate children and of the surviving spouse as hereinafter provided."

Gregorio Francisco did not own any other property. If indeed the parcels of land
involved were the only property left by their father, the sale in fact would deprive
respondent of her share in her father's estate. By law, she is entitled to half of the estate
of her father as his only legitimate child.21

The legal heirs of the late Gregorio Francisco must be determined in proper testate or
intestate proceedings for settlement of the estate. His compulsory heir can not be
deprived of her share in the estate save by disinheritance as prescribed by law. 22

WHEREFORE, the petition is hereby DENIED. The decision of the Court of Appeals in
CA-G. R. CV No. 48545 is AFFIRMED, in toto.

No costs.

SO ORDERED.

CHAPTER 7: VOIDABLE CONTRACTS

G.R. No. 108991 March 20, 2001

WILLIAM ALAIN MIAILHE, petitioner,

vs.
COURT OF APPEALS and REPUBLIC OF THE PHILIPPINES, respondents.

PANGANIBAN, J.:

Actions for the annulment of contracts prescribe in four years. If the ground for
annulment is vitiation of consent by intimidation, the four-year period starts from the
time such defect ceases. The running of this prescriptive period cannot be interrupted
by an extrajudicial demand made by the party whose consent was vitiated. If the facts
demonstrating the lapse of the prescriptive period are apparent from the records, the
complaint should be dismissed.

The Case
Before us is a Petition for Review on Certiorari under Rule 45 of the Rules of Court,
assailing the February 12, 1993 Decision1 of the Court of Appeals (CA) in CA-GR SP
No. 29327. The dispositive part of the assailed Decision reads:

"WHEREFORE, the Petition for Certiorari is hereby GRANTED. The Order dated
September 11, 1992 of the Regional Trial Court of Manila, Branch II in Civil Case
No. 90-52519 is ANNULLED and SET ASIDE and a new one is entered
dismissing the complaint on the ground of prescription.

SO ORDERED."2

The Facts

The undisputed facts are summarized by the appellate court as follows:

"On March 23, 1990, [Petitioner] William Alain Miailhe, on his own behalf and on
behalf of Victoria Desbarats-Miailhe, Monique Miailhe-Sichere and Elaine
Miailhe-Lencquesaing filed a Complaint for Annulment of Sale, Reconveyance
and Damages against [Respondent] Republic of the Philippines and defendant
Development Bank of the Philippines before the [trial] court. It was alleged, to wit:

xxx xxx xxx

4. That plaintiffs were the former registered owners of three parcels of

land located at J.P. Laurel St., San Miguel, Manila with an aggregate area
of 5,574.30 square meters, and a one (1) storey building erected thereon,
formerly covered by Transfer Certificate of Title No. 80645 of the Register
of Deeds of Manila;

5. That the above-mentioned properties had been owned by and in the

possession of plaintiffs and their family for over one hundred (100) years
until August 1, 1976;

6. That on August 1, 1976, during the height of the martial law regime of
the late President Ferdinand Marcos, [Respondent] Republic of the
Philippines, through its armed forces, forcibly and unlawfully took
possession of the aforesaid properties from defendants;

7. That [Respondent] Republic of the Philippines, through its armed

forces, continued its lawful and forcible occupation of the premises from
August 1, 1976 to August 19, 1977 without paying rentals, despite
plaintiffs' demands therefor;

8. That meanwhile, the Office of the President showed interest in the

subject properties and directed defendant DBP to acquire for the
government the subject properties from plaintiff;
 9. That on or about August 19, 1977, through threats and intimidation
employed by defendants, plaintiffs, under duress, were coerced into
selling the subject properties to defendant DBP for the grossly low price of
P2,376,805.00 or about P400.00 per square meter;

10. That defendant DBP, in turn, sold the subject properties to

[Respondent] Republic of the Philippines, through the Office of the
President, in 1982;

11. That the only factor which caused plaintiffs to sell their properties to
defendant DBP was the threats and intimidation employed upon them by
defendants;

12. That after the late President Marcos left the country on February 24,
[sic] 1986 after the EDSA revolution, plaintiffs made repeated extrajudicial
demands upon defendants for [the] return and reconveyance of subject
properties to them, the last being the demand letters dated 24 October
1989, copies of which are attached and made integral parts hereof as
Annexes 'A' and 'A-1';

13. That despite demands, defendants unjustifiably failed and refused,

and still unjustifiably fail and refuse, to return and reconvey the subject
properties to plaintiff;

xxx xxx xxx

(par. 4-13 of the Complaint, pp. 28-29, Rollo).

On May 25, 1990, [respondent] filed its Answer denying the substantial facts
alleged in the complaint and raising, as special and affirmative defenses, that
there was no forcible take-over of the subject properties and that the amount paid
to private respondents was fair and reasonable. Defendant DBP also filed its
Answer raising as Special and Affirmative Defense that [petitioner's] action had
already prescribed.

On August 3, 1990, the [trial] court issued an Order setting the pre-trial on
September 20, 1990. Petitioner and private respondents filed their respective
pre-trial briefs.

On March 5, 1992, [respondent] filed a Motion to Dismiss the complaint on the

ground that the action ha[d] prescribed pursuant to Article (1)391 in relation to
Article (1)390 of the Civil Code. Defendant DBP likewise filed a Motion for
Preliminary Hearing of the Affirmative Defense raising the same ground of
prescription as contained in the [respondent's] Motion to Dismiss.
 On September 11, 1992, the [trial court issued an Order, the dispositive portion
of which reads, as follows:

'WHEREFORE, the motion for a preliminary hearing is hereby denied and

the resolution of the motion to dismiss is deferred until trial x x x.' (pp. 23-
26, rollo)."3

Respondent herein thus filed a Petition for Certiorari with the appellate court.

Ruling of the Court of Appeals

The CA ruled that petitioner's action had prescribed. A suit to annul a voidable contract
may be filed within four (4) years from the time the defect ceases. As alleged in
paragraph 12 of the Complaint, there is a clear indication that the alleged threat and
intimidation employed against petitioner ceased when then President Ferdinand E.
Marcos left the country on February 24, 1986. From February 24, 1986 to March 23,
1990, when the Complaint for Annulment of Sale was filed, more than four (4) years had
elapsed. The CA also ruled that Article 1155 of the Civil Code, according to which a
written extrajudicial demand by the creditors would interrupt prescription, referred only
to a creditor-debtor relationship, which is not the case here.

Hence, this Petition.4

The Issues

These are the issues presented before us:

"Whether the Court of Appeals committed gross reversible error in finding that
the trial court acted with grave abuse of discretion tantamount to lack of
jurisdiction.

"Whether the Court of Appeals committed gross reversible error in setting aside
the trial court's order of 11 September 1992 and in finding that:

i. petitioner's action had prescribed; and,

ii. petitioner's extrajudicial demands did not interrupt prescription." 5

In the main, the Court will determine whether the action for the annulment of the
Contract of Sale has prescribed.

The Court's Ruling

The Petition has no merit.

 Main Issue:
Prescription

Section 3, Rule 16 of the Rules of Court which was in effect at the time, expressly
allowed the trial court to "defer the hearing and determination of the motion [to dismiss]
until the trial if the ground alleged therein does not appear to be indubitable." Under the
1997 Rules of Civil Procedure, the rule now reads as follows:

"Sec. 2. Hearing of motion. -- At the hearing of the motion, the parties shall
submit their arguments on the questions of law and their evidence on the
questions of fact involved except those not available at that time. Should the
case go to trial, the evidence presented during the hearing shall automatically be
part of the evidence of the party presenting the same.

"SEC. 3. Resolution of motion. -- After the hearing, the court may dismiss the
action or claim, deny the motion, or order the amendment of the pleading.

"The court shall not defer the resolution of the motion for the reason that the
ground relied upon is not indubitable.

"In every case, the resolution shall state clearly and distinctly the reasons
therefor. (3a)"

In the present case, the trial court deferred until trial the resolution of the Motion to
Dismiss, because it found that the Complaint did not show on its face that the action
had already prescribed. It deemed it better to allow the parties to present their evidence
in a full-blown trial.

We disagree. The CA correctly set aside the Order of the trial court. In Gicano v.
Gegato,6 this Court held that a complaint may be dismissed when the facts showing the
lapse of the prescriptive period are apparent from the records. In its words:

"x x x. We have ruled that trial courts have authority and discretion to dismiss an
action on the ground of prescription when the parties' pleadings or other facts on
record show it to be indeed time-barred; x x x and it may do so on the basis of a
motion to dismiss, or an answer which sets up such ground as an affirmative
defense; or even if the ground is alleged after judgment on the merits, as in a
motion for reconsideration; or even if the defense has not been asserted at all, as
where no statement thereof is found in the pleadings, or where a defendant has
been declared in default. What is essential only, to repeat, is that the facts
demonstrating the lapse of the prescriptive period, be otherwise sufficiently and
satisfactorily apparent on the record; either in the averments of the plaintiff's
complaint, or otherwise established by the evidence."

The records in this case indubitably show the lapse of the prescriptive period, thus
warranting the immediate dismissal of the Complaint.
The suit before the trial court was an action for the annulment of the Contract of Sale on
the alleged ground of vitiation of consent by intimidation. The reconveyance of the three
parcels of land, which the petitioner half-heartedly espouses as the real nature of the
action, can prosper only if and when the Contract of Sale covering the subject lots is
annulled. Thus, the reckoning period for prescription would be that pertaining to an
action for the annulment of contract; that is, four years from the time the defect in the
consent ceases.7

A perusal of the Complaint shows that the threat and intimidation ceased after then
President Marcos left the country on February 24, 1986. In fact, it was only then that
petitioner was allegedly able to muster the courage to make extrajudicial demands on
the Republic of the Philippines. Paragraph 12 of the Complaint states:

"12. That after the late president Marcos left the country on February 24, 1986
after the EDSA revolution, plaintiffs made repeated extrajudicial demands upon
defendants for [the] return and reconveyance of subject properties to them, the
last being the demand letters dated 24 October 1989, copies of which are
attached and made integral parts hereof as Annexes 'A' and 'A-1';"8

The foregoing was reiterated in the following statements in petitioner's Pretrial Brief: 9

"x x x. During the height of the martial law era, the late President Ferdinand E.
Marcos, through his armed forces, forcibly and unlawfully took possession of the
property and after a year, directed the defendant Development Bank of the
Philippines ("DBP") to buy the same from the plaintiffs. Plaintiffs were forced to
sell the property for the measly sum of P2,376,805.00, which [translated] to about
P400.00 per square meter. The property was later sold by defendant DBP to the
defendant Republic of the Philippines ["Republic"], acting through the Office of
the President. Plaintiffs pray the Honorable Court to declare their sale null and
void and to order reconveyance of the property."

Moreover, courts were functioning after Marcos left the country. There was no hiatus in
the judicial system. This is manifest in then Acting Chief Justice Claudio Teehankee's
Circular No. 2, which is reproduced hereunder:

"TO: ALL JUSTICES OF THE INTERMEDIATE APPELLATE COURT AND

SANDIGANBAYAN; AND ALL JUDGES OF THE COURT OF TAX APPEALS,
REGIONAL TRIAL COURTS, METROPOLITAN TRIAL COURTS IN CITIES,
MUNICIPAL TRIAL COURTS, MUNICIPAL CIRCUIT TRIAL COURTS AND
SHARI'A COURTS

"Reports have been received that some justices and judges have ceased or
suspended performing their duties pending action on the courtesy resignations
submitted by them in compliance with the call of the President of the Philippines.
 "Courts are expected to continue discharging their judicial functions without
interruption and delay in order to ensure the speedy disposition of their pending
cases. You are, therefore, directed to continue with your regular sessions and the
hearing and adjudication of cases and the proper discharge of your functions,
until further notice from this court.

"Strict compliance thereof is hereby enjoined.

(Sgd) CLAUDIO TEEHANKEE

Acting Chief Justice"

The foregoing clearly shows that the alleged threat and intimidation, which vitiated
petitioner's consent, ceased when Marcos left the country on February 24, 1986. Since
an action for the annulment of contracts must be filed within four years from the time the
cause of vitiation ceases, the suit before the trial court should have been filed anytime
on or before February 24, 1990. In this case, petitioner did so only on March 23, 1990.
Clearly, his action had prescribed by then.

Interruption of Prescription

Petitioner asserts that the extrajudical demands pleaded in paragraph 12 of the

Complaint legally interrupted prescription in accordance with Article 1155 of the Civil
Code, which states:

"ART. 1155. The prescription of actions is interrupted when they are filed before
the court, when there is extrajudicial demand by the creditors, and when there is
any written acknowledgment of the debt by the debtor."

In other words, petitioner claims that because he is covered by the term "creditor," the
above-quoted provision is applicable to him.

We are not persuaded. Petitioner himself avers that "the use of the terms 'creditor'
and/or 'debtor' in Article 1155 of the Civil Code must relate to the general definition of
obligations."10 He then asserts that "an obligation is a juridical relation whereby a person
(called the creditor) may demand from another (called the debtor) the observance of a
determinate conduct, and in case of breach, may obtain satisfaction from the assets of
the latter."11 He also defines "credit" as the right to demand the object of the obligation.
From his statements, it is clear that for there to be a creditor and a debtor to speak of,
an obligation must first exist.

In the present case, there is as yet no obligation in existence. Respondent has no

obligation to reconvey the subject lots because of the existing Contract of Sale.
Although allegedly voidable, it is binding unless annulled by a proper action in
court.12 Not being a determinate conduct that can be extrajudically demanded, it cannot
be considered as an obligation either. Since Article 1390 of the Civil Code states that
voidable "contracts are binding, unless they are annulled by a proper action in court," it
is clear that the defendants were not obligated to accede to any extrajudicial demand to
annul the Contract of Sale.13

In the absence of an existing obligation, petitioner cannot be considered a creditor, and

Article 1155 of the Civil Code cannot be applied to his action. Thus, any extrajudicial
demand he made did not, or will not, interrupt the prescription of his action for the
annulment of the Contract of Sale.

WHEREFORE, the Petition is DENIED and the assailed Decision of the Court of
Appeals AFFIRMED. Costs against petitioner.

SO ORDERED.

G.R. No. 188288 January 16, 2012

SPOUSES FERNANDO and LOURDES VILORIA, Petitioners,

vs.
CONTINENTAL AIRLINES, INC.,

DECISION

REYES, J.:

This is a petition for review under Rule 45 of the Rules of Court from the January 30,
2009 Decision1 of the Special Thirteenth Division of the Court of Appeals (CA) in CA-
G.R. CV No. 88586 entitled "Spouses Fernando and Lourdes Viloria v. Continental
Airlines, Inc.," the dispositive portion of which states:

WHEREFORE, the Decision of the Regional Trial Court, Branch 74, dated 03 April
2006, awarding US$800.00 or its peso equivalent at the time of payment, plus legal rate
of interest from 21 July 1997 until fully paid, [₱]100,000.00 as moral damages,
[₱]50,000.00 as exemplary damages, [₱]40,000.00 as attorney’s fees and costs of suit
to plaintiffs-appellees is hereby REVERSED and SET ASIDE.

Defendant-appellant’s counterclaim is DENIED.

Costs against plaintiffs-appellees.

SO ORDERED.2

On April 3, 2006, the Regional Trial Court of Antipolo City, Branch 74 (RTC) rendered a
Decision, giving due course to the complaint for sum of money and damages filed by
petitioners Fernando Viloria (Fernando) and Lourdes Viloria (Lourdes), collectively
called Spouses Viloria, against respondent Continental Airlines, Inc. (CAI). As culled
from the records, below are the facts giving rise to such complaint.

On or about July 21, 1997 and while in the United States, Fernando purchased for
himself and his wife, Lourdes, two (2) round trip airline tickets from San Diego,
California to Newark, New Jersey on board Continental Airlines. Fernando purchased
the tickets at US$400.00 each from a travel agency called "Holiday Travel" and was
attended to by a certain Margaret Mager (Mager). According to Spouses Viloria,
Fernando agreed to buy the said tickets after Mager informed them that there were no
available seats at Amtrak, an intercity passenger train service provider in the United
States. Per the tickets, Spouses Viloria were scheduled to leave for Newark on August
13, 1997 and return to San Diego on August 21, 1997.

Subsequently, Fernando requested Mager to reschedule their flight to Newark to an

earlier date or August 6, 1997. Mager informed him that flights to Newark via
Continental Airlines were already fully booked and offered the alternative of a round trip
flight via Frontier Air. Since flying with Frontier Air called for a higher fare of US$526.00
per passenger and would mean traveling by night, Fernando opted to request for a
refund. Mager, however, denied his request as the subject tickets are non-refundable
and the only option that Continental Airlines can offer is the re-issuance of new tickets
within one (1) year from the date the subject tickets were issued. Fernando decided to
reserve two (2) seats with Frontier Air.

As he was having second thoughts on traveling via Frontier Air, Fernando went to the
Greyhound Station where he saw an Amtrak station nearby. Fernando made inquiries
and was told that there are seats available and he can travel on Amtrak anytime and
any day he pleased. Fernando then purchased two (2) tickets for Washington, D.C.

From Amtrak, Fernando went to Holiday Travel and confronted Mager with the Amtrak
tickets, telling her that she had misled them into buying the Continental Airlines tickets
by misrepresenting that Amtrak was already fully booked. Fernando reiterated his
demand for a refund but Mager was firm in her position that the subject tickets are non-
refundable.

Upon returning to the Philippines, Fernando sent a letter to CAI on February 11, 1998,
demanding a refund and alleging that Mager had deluded them into purchasing the
subject tickets.3

In a letter dated February 24, 1998, Continental Micronesia informed Fernando that his
complaint had been referred to the Customer Refund Services of Continental Airlines at
Houston, Texas.4

In a letter dated March 24, 1998, Continental Micronesia denied Fernando’s request for
a refund and advised him that he may take the subject tickets to any Continental
ticketing location for the re-issuance of new tickets within two (2) years from the date
they were issued. Continental Micronesia informed Fernando that the subject tickets
may be used as a form of payment for the purchase of another Continental ticket, albeit
with a re-issuance fee.5

On June 17, 1999, Fernando went to Continental’s ticketing office at Ayala Avenue,
Makati City to have the subject tickets replaced by a single round trip ticket to Los
Angeles, California under his name. Therein, Fernando was informed that Lourdes’
ticket was non-transferable, thus, cannot be used for the purchase of a ticket in his
favor. He was also informed that a round trip ticket to Los Angeles was US$1,867.40 so
he would have to pay what will not be covered by the value of his San Diego to Newark
round trip ticket.

In a letter dated June 21, 1999, Fernando demanded for the refund of the subject tickets
as he no longer wished to have them replaced. In addition to the dubious circumstances
under which the subject tickets were issued, Fernando claimed that CAI’s act of
charging him with US$1,867.40 for a round trip ticket to Los Angeles, which other
airlines priced at US$856.00, and refusal to allow him to use Lourdes’ ticket, breached
its undertaking under its March 24, 1998 letter.6

On September 8, 2000, Spouses Viloria filed a complaint against CAI, praying that CAI
be ordered to refund the money they used in the purchase of the subject tickets with
legal interest from July 21, 1997 and to pay ₱1,000,000.00 as moral damages,
₱500,000.00 as exemplary damages and ₱250,000.00 as attorney’s fees. 7

CAI interposed the following defenses: (a) Spouses Viloria have no right to ask for a
refund as the subject tickets are non-refundable; (b) Fernando cannot insist on using
the ticket in Lourdes’ name for the purchase of a round trip ticket to Los Angeles since
the same is non-transferable; (c) as Mager is not a CAI employee, CAI is not liable for
any of her acts; (d) CAI, its employees and agents did not act in bad faith as to entitle
Spouses Viloria to moral and exemplary damages and attorney’s fees. CAI also invoked
the following clause printed on the subject tickets:

3. To the extent not in conflict with the foregoing carriage and other services performed
by each carrier are subject to: (i) provisions contained in this ticket, (ii) applicable tariffs,
(iii) carrier’s conditions of carriage and related regulations which are made part hereof
(and are available on application at the offices of carrier), except in transportation
between a place in the United States or Canada and any place outside thereof to which
tariffs in force in those countries apply.8

According to CAI, one of the conditions attached to their contract of carriage is the non-
transferability and non-refundability of the subject tickets.

The RTC’s Ruling

Following a full-blown trial, the RTC rendered its April 3, 2006 Decision, holding that
Spouses Viloria are entitled to a refund in view of Mager’s misrepresentation in
obtaining their consent in the purchase of the subject tickets. 9 The relevant portion of
the April 3, 2006 Decision states:

Continental Airlines agent Ms. Mager was in bad faith when she was less candid and
diligent in presenting to plaintiffs spouses their booking options. Plaintiff Fernando
clearly wanted to travel via AMTRAK, but defendant’s agent misled him into purchasing
Continental Airlines tickets instead on the fraudulent misrepresentation that Amtrak was
fully booked. In fact, defendant Airline did not specifically denied (sic) this allegation.

Plainly, plaintiffs spouses, particularly plaintiff Fernando, were tricked into buying
Continental Airline tickets on Ms. Mager’s misleading misrepresentations. Continental
Airlines agent Ms. Mager further relied on and exploited plaintiff Fernando’s need and
told him that they must book a flight immediately or risk not being able to travel at all on
the couple’s preferred date. Unfortunately, plaintiffs spouses fell prey to the airline’s and
its agent’s unethical tactics for baiting trusting customers."10

Citing Articles 1868 and 1869 of the Civil Code, the RTC ruled that Mager is CAI’s
agent, hence, bound by her bad faith and misrepresentation. As far as the RTC is
concerned, there is no issue as to whether Mager was CAI’s agent in view of CAI’s
implied recognition of her status as such in its March 24, 1998 letter.

The act of a travel agent or agency being involved here, the following are the pertinent
New Civil Code provisions on agency:

Art. 1868. By the contract of agency a person binds himself to render some service or to
do something in representation or on behalf of another, with the consent or authority of
the latter.

Art. 1869. Agency may be express, or implied from the acts of the principal, from his
silence or lack of action, or his failure to repudiate the agency, knowing that another
person is acting on his behalf without authority.

Agency may be oral, unless the law requires a specific form.

As its very name implies, a travel agency binds itself to render some service or to do
something in representation or on behalf of another, with the consent or authority of the
latter. This court takes judicial notice of the common services rendered by travel
agencies that represent themselves as such, specifically the reservation and booking of
local and foreign tours as well as the issuance of airline tickets for a commission or fee.

The services rendered by Ms. Mager of Holiday Travel agency to the plaintiff spouses
on July 21, 1997 were no different from those offered in any other travel agency.
Defendant airline impliedly if not expressly acknowledged its principal-agent relationship
with Ms. Mager by its offer in the letter dated March 24, 1998 – an obvious attempt to
assuage plaintiffs spouses’ hurt feelings.11
Furthermore, the RTC ruled that CAI acted in bad faith in reneging on its undertaking to
replace the subject tickets within two (2) years from their date of issue when it charged
Fernando with the amount of US$1,867.40 for a round trip ticket to Los Angeles and
when it refused to allow Fernando to use Lourdes’ ticket. Specifically:

Tickets may be reissued for up to two years from the original date of issue. When
defendant airline still charged plaintiffs spouses US$1,867.40 or more than double the
then going rate of US$856.00 for the unused tickets when the same were presented
within two (2) years from date of issue, defendant airline exhibited callous treatment of
passengers.12

The Appellate Court’s Ruling

On appeal, the CA reversed the RTC’s April 3, 2006 Decision, holding that CAI cannot
be held liable for Mager’s act in the absence of any proof that a principal-agent
relationship existed between CAI and Holiday Travel. According to the CA, Spouses
Viloria, who have the burden of proof to establish the fact of agency, failed to present
evidence demonstrating that Holiday Travel is CAI’s agent. Furthermore, contrary to
Spouses Viloria’s claim, the contractual relationship between Holiday Travel and CAI is
not an agency but that of a sale.

Plaintiffs-appellees assert that Mager was a sub-agent of Holiday Travel who was in
turn a ticketing agent of Holiday Travel who was in turn a ticketing agent of Continental
Airlines. Proceeding from this premise, they contend that Continental Airlines should be
held liable for the acts of Mager. The trial court held the same view.

We do not agree. By the contract of agency, a person binds him/herself to render some
service or to do something in representation or on behalf of another, with the consent or
authority of the latter. The elements of agency are: (1) consent, express or implied, of
the parties to establish the relationship; (2) the object is the execution of a juridical act in
relation to a third person; (3) the agent acts as a representative and not for him/herself;
and (4) the agent acts within the scope of his/her authority. As the basis of agency is
representation, there must be, on the part of the principal, an actual intention to appoint,
an intention naturally inferable from the principal’s words or actions. In the same
manner, there must be an intention on the part of the agent to accept the appointment
and act upon it. Absent such mutual intent, there is generally no agency. It is likewise a
settled rule that persons dealing with an assumed agent are bound at their peril, if they
would hold the principal liable, to ascertain not only the fact of agency but also the
nature and extent of authority, and in case either is controverted, the burden of proof is
upon them to establish it. Agency is never presumed, neither is it created by the mere
use of the word in a trade or business name. We have perused the evidence and
documents so far presented. We find nothing except bare allegations of plaintiffs-
appellees that Mager/Holiday Travel was acting in behalf of Continental Airlines. From
all sides of legal prism, the transaction in issue was simply a contract of sale, wherein
Holiday Travel buys airline tickets from Continental Airlines and then, through its
employees, Mager included, sells it at a premium to clients.13
The CA also ruled that refund is not available to Spouses Viloria as the word "non-
refundable" was clearly printed on the face of the subject tickets, which constitute their
contract with CAI. Therefore, the grant of their prayer for a refund would violate the
proscription against impairment of contracts.

Finally, the CA held that CAI did not act in bad faith when they charged Spouses Viloria
with the higher amount of US$1,867.40 for a round trip ticket to Los Angeles. According
to the CA, there is no compulsion for CAI to charge the lower amount of US$856.00,
which Spouses Viloria claim to be the fee charged by other airlines. The matter of fixing
the prices for its services is CAI’s prerogative, which Spouses Viloria cannot intervene.
In particular:

It is within the respective rights of persons owning and/or operating business entities to
peg the premium of the services and items which they provide at a price which they
deem fit, no matter how expensive or exhorbitant said price may seem vis-à-vis those of
the competing companies. The Spouses Viloria may not intervene with the business
judgment of Continental Airlines.14

The Petitioners’ Case

In this Petition, this Court is being asked to review the findings and conclusions of the
CA, as the latter’s reversal of the RTC’s April 3, 2006 Decision allegedly lacks factual
and legal bases. Spouses Viloria claim that CAI acted in bad faith when it required them
to pay a higher amount for a round trip ticket to Los Angeles considering CAI’s
undertaking to re-issue new tickets to them within the period stated in their March 24,
1998 letter. CAI likewise acted in bad faith when it disallowed Fernando to use Lourdes’
ticket to purchase a round trip to Los Angeles given that there is nothing in Lourdes’
ticket indicating that it is non-transferable. As a common carrier, it is CAI’s duty to inform
its passengers of the terms and conditions of their contract and passengers cannot be
bound by such terms and conditions which they are not made aware of. Also, the
subject contract of carriage is a contract of adhesion; therefore, any ambiguities should
be construed against CAI. Notably, the petitioners are no longer questioning the validity
of the subject contracts and limited its claim for a refund on CAI’s alleged breach of its
undertaking in its March 24, 1998 letter.

The Respondent’s Case

In its Comment, CAI claimed that Spouses Viloria’s allegation of bad faith is negated by
its willingness to issue new tickets to them and to credit the value of the subject tickets
against the value of the new ticket Fernando requested. CAI argued that Spouses
Viloria’s sole basis to claim that the price at which CAI was willing to issue the new
tickets is unconscionable is a piece of hearsay evidence – an advertisement appearing
on a newspaper stating that airfares from Manila to Los Angeles or San Francisco cost
US$818.00.15 Also, the advertisement pertains to airfares in September 2000 and not to
airfares prevailing in June 1999, the time when Fernando asked CAI to apply the value
of the subject tickets for the purchase of a new one.16 CAI likewise argued that it did not
undertake to protect Spouses Viloria from any changes or fluctuations in the prices of
airline tickets and its only obligation was to apply the value of the subject tickets to the
purchase of the newly issued tickets.

With respect to Spouses Viloria’s claim that they are not aware of CAI’s restrictions on
the subject tickets and that the terms and conditions that are printed on them are
ambiguous, CAI denies any ambiguity and alleged that its representative informed
Fernando that the subject tickets are non-transferable when he applied for the issuance
of a new ticket. On the other hand, the word "non-refundable" clearly appears on the
face of the subject tickets.

CAI also denies that it is bound by the acts of Holiday Travel and Mager and that no
principal-agency relationship exists between them. As an independent contractor,
Holiday Travel was without capacity to bind CAI.

Issues

To determine the propriety of disturbing the CA’s January 30, 2009 Decision and
whether Spouses Viloria have the right to the reliefs they prayed for, this Court deems it
necessary to resolve the following issues:

a. Does a principal-agent relationship exist between CAI and Holiday Travel?

b. Assuming that an agency relationship exists between CAI and Holiday Travel,
is CAI bound by the acts of Holiday Travel’s agents and employees such as
Mager?

c. Assuming that CAI is bound by the acts of Holiday Travel’s agents and
employees, can the representation of Mager as to unavailability of seats at
Amtrak be considered fraudulent as to vitiate the consent of Spouse Viloria in the
purchase of the subject tickets?

d. Is CAI justified in insisting that the subject tickets are non-transferable and
non-refundable?

e. Is CAI justified in pegging a different price for the round trip ticket to Los
Angeles requested by Fernando?

f. Alternatively, did CAI act in bad faith or renege its obligation to Spouses Viloria
to apply the value of the subject tickets in the purchase of new ones when it
refused to allow Fernando to use Lourdes’ ticket and in charging a higher price
for a round trip ticket to Los Angeles?

This Court’s Ruling

I. A principal-agent relationship exists between CAI and Holiday Travel.

With respect to the first issue, which is a question of fact that would require this Court to
review and re-examine the evidence presented by the parties below, this Court takes
exception to the general rule that the CA’s findings of fact are conclusive upon Us and
our jurisdiction is limited to the review of questions of law. It is well-settled to the point of
being axiomatic that this Court is authorized to resolve questions of fact if confronted
with contrasting factual findings of the trial court and appellate court and if the findings
of the CA are contradicted by the evidence on record.17

According to the CA, agency is never presumed and that he who alleges that it exists
has the burden of proof. Spouses Viloria, on whose shoulders such burden rests,
presented evidence that fell short of indubitably demonstrating the existence of such
agency.

We disagree. The CA failed to consider undisputed facts, discrediting CAI’s denial that
Holiday Travel is one of its agents. Furthermore, in erroneously characterizing the
contractual relationship between CAI and Holiday Travel as a contract of sale, the CA
failed to apply the fundamental civil law principles governing agency and differentiating
it from sale.

In Rallos v. Felix Go Chan & Sons Realty Corporation,18 this Court explained the nature
of an agency and spelled out the essential elements thereof:

Out of the above given principles, sprung the creation and acceptance of
the relationship of agencywhereby one party, called the principal (mandante),
authorizes another, called the agent (mandatario), to act for and in his behalf in
transactions with third persons. The essential elements of agency are: (1) there is
consent, express or implied of the parties to establish the relationship; (2) the object is
the execution of a juridical act in relation to a third person; (3) the agent acts as a
representative and not for himself, and (4) the agent acts within the scope of his
authority.1avvphi1

Agency is basically personal, representative, and derivative in nature. The authority of

the agent to act emanates from the powers granted to him by his principal; his act is the
act of the principal if done within the scope of the authority. Qui facit per alium facit se.
"He who acts through another acts himself."19

Contrary to the findings of the CA, all the elements of an agency exist in this case. The
first and second elements are present as CAI does not deny that it concluded an
agreement with Holiday Travel, whereby Holiday Travel would enter into contracts of
carriage with third persons on CAI’s behalf. The third element is also present as it is
undisputed that Holiday Travel merely acted in a representative capacity and it is CAI
and not Holiday Travel who is bound by the contracts of carriage entered into by
Holiday Travel on its behalf. The fourth element is also present considering that CAI has
not made any allegation that Holiday Travel exceeded the authority that was granted to
it. In fact, CAI consistently maintains the validity of the contracts of carriage that Holiday
Travel executed with Spouses Viloria and that Mager was not guilty of any fraudulent
misrepresentation. That CAI admits the authority of Holiday Travel to enter into
contracts of carriage on its behalf is easily discernible from its February 24, 1998 and
March 24, 1998 letters, where it impliedly recognized the validity of the contracts
entered into by Holiday Travel with Spouses Viloria. When Fernando informed CAI that
it was Holiday Travel who issued to them the subject tickets, CAI did not deny that
Holiday Travel is its authorized agent.

Prior to Spouses Viloria’s filing of a complaint against it, CAI never refuted that it gave
Holiday Travel the power and authority to conclude contracts of carriage on its behalf.
As clearly extant from the records, CAI recognized the validity of the contracts of
carriage that Holiday Travel entered into with Spouses Viloria and considered itself
bound with Spouses Viloria by the terms and conditions thereof; and this constitutes an
unequivocal testament to Holiday Travel’s authority to act as its agent. This Court
cannot therefore allow CAI to take an altogether different position and deny that Holiday
Travel is its agent without condoning or giving imprimatur to whatever damage or
prejudice that may result from such denial or retraction to Spouses Viloria, who relied on
good faith on CAI’s acts in recognition of Holiday Travel’s authority. Estoppel is primarily
based on the doctrine of good faith and the avoidance of harm that will befall an
innocent party due to its injurious reliance, the failure to apply it in this case would result
in gross travesty of justice.20 Estoppel bars CAI from making such denial.

As categorically provided under Article 1869 of the Civil Code, "[a]gency may be
express, or implied from the acts of the principal, from his silence or lack of action, or
his failure to repudiate the agency, knowing that another person is acting on his behalf
without authority."

Considering that the fundamental hallmarks of an agency are present, this Court finds it
rather peculiar that the CA had branded the contractual relationship between CAI and
Holiday Travel as one of sale. The distinctions between a sale and an agency are not
difficult to discern and this Court, as early as 1970, had already formulated the
guidelines that would aid in differentiating the two (2) contracts. In Commissioner of
Internal Revenue v. Constantino,21 this Court extrapolated that the primordial
differentiating consideration between the two (2) contracts is the transfer of ownership
or title over the property subject of the contract. In an agency, the principal retains
ownership and control over the property and the agent merely acts on the principal’s
behalf and under his instructions in furtherance of the objectives for which the agency
was established. On the other hand, the contract is clearly a sale if the parties intended
that the delivery of the property will effect a relinquishment of title, control and
ownership in such a way that the recipient may do with the property as he pleases.

Since the company retained ownership of the goods, even as it delivered possession
unto the dealer for resale to customers, the price and terms of which were subject to the
company's control, the relationship between the company and the dealer is one of
agency, tested under the following criterion:
"The difficulty in distinguishing between contracts of sale and the creation of an agency
to sell has led to the establishment of rules by the application of which this difficulty may
be solved. The decisions say the transfer of title or agreement to transfer it for a price
paid or promised is the essence of sale. If such transfer puts the transferee in the
attitude or position of an owner and makes him liable to the transferor as a debtor for
the agreed price, and not merely as an agent who must account for the proceeds of a
resale, the transaction is a sale; while the essence of an agency to sell is the delivery to
an agent, not as his property, but as the property of the principal, who remains the
owner and has the right to control sales, fix the price, and terms, demand and receive
the proceeds less the agent's commission upon sales made. 1 Mechem on Sales, Sec.
43; 1 Mechem on Agency, Sec. 48; Williston on Sales, 1; Tiedeman on Sales, 1."
(Salisbury v. Brooks, 94 SE 117, 118-119)22

As to how the CA have arrived at the conclusion that the contract between CAI and
Holiday Travel is a sale is certainly confounding, considering that CAI is the one bound
by the contracts of carriage embodied by the tickets being sold by Holiday Travel on its
behalf. It is undisputed that CAI and not Holiday Travel who is the party to the contracts
of carriage executed by Holiday Travel with third persons who desire to travel via
Continental Airlines, and this conclusively indicates the existence of a principal-agent
relationship. That the principal is bound by all the obligations contracted by the agent
within the scope of the authority granted to him is clearly provided under Article 1910 of
the Civil Code and this constitutes the very notion of agency.

II. In actions based on quasi-delict, a principal can only be held liable for the tort
committed by its agent’s employees if it has been established by preponderance
of evidence that the principal was also at fault or negligent or that the principal
exercise control and supervision over them.

Considering that Holiday Travel is CAI’s agent, does it necessarily follow that CAI is
liable for the fault or negligence of Holiday Travel’s employees? Citing China Air Lines,
Ltd. v. Court of Appeals, et al.,23CAI argues that it cannot be held liable for the actions
of the employee of its ticketing agent in the absence of an employer-employee
relationship.

An examination of this Court’s pronouncements in China Air Lines will reveal that an
airline company is not completely exonerated from any liability for the tort committed by
its agent’s employees. A prior determination of the nature of the passenger’s cause of
action is necessary. If the passenger’s cause of action against the airline company is
premised on culpa aquiliana or quasi-delict for a tort committed by the employee of the
airline company’s agent, there must be an independent showing that the airline
company was at fault or negligent or has contributed to the negligence or tortuous
conduct committed by the employee of its agent. The mere fact that the employee of the
airline company’s agent has committed a tort is not sufficient to hold the airline company
liable. There is no vinculum juris between the airline company and its agent’s
employees and the contractual relationship between the airline company and its agent
does not operate to create a juridical tie between the airline company and its agent’s
employees. Article 2180 of the Civil Code does not make the principal vicariously liable
for the tort committed by its agent’s employees and the principal-agency relationship per
se does not make the principal a party to such tort; hence, the need to prove the
principal’s own fault or negligence.

On the other hand, if the passenger’s cause of action for damages against the airline
company is based on contractual breach or culpa contractual, it is not necessary that
there be evidence of the airline company’s fault or negligence. As this Court previously
stated in China Air Lines and reiterated in Air France vs. Gillego,24 "in an action based
on a breach of contract of carriage, the aggrieved party does not have to prove that the
common carrier was at fault or was negligent. All that he has to prove is the existence of
the contract and the fact of its non-performance by the carrier."

Spouses Viloria’s cause of action on the basis of Mager’s alleged fraudulent

misrepresentation is clearly one of tort or quasi-delict, there being no pre-existing
contractual relationship between them. Therefore, it was incumbent upon Spouses
Viloria to prove that CAI was equally at fault.

However, the records are devoid of any evidence by which CAI’s alleged liability can be
substantiated. Apart from their claim that CAI must be held liable for Mager’s supposed
fraud because Holiday Travel is CAI’s agent, Spouses Viloria did not present evidence
that CAI was a party or had contributed to Mager’s complained act either by instructing
or authorizing Holiday Travel and Mager to issue the said misrepresentation.

It may seem unjust at first glance that CAI would consider Spouses Viloria bound by the
terms and conditions of the subject contracts, which Mager entered into with them on
CAI’s behalf, in order to deny Spouses Viloria’s request for a refund or Fernando’s use
of Lourdes’ ticket for the re-issuance of a new one, and simultaneously claim that they
are not bound by Mager’s supposed misrepresentation for purposes of avoiding
Spouses Viloria’s claim for damages and maintaining the validity of the subject
contracts. It may likewise be argued that CAI cannot deny liability as it benefited from
Mager’s acts, which were performed in compliance with Holiday Travel’s obligations as
CAI’s agent.

However, a person’s vicarious liability is anchored on his possession of control, whether

absolute or limited, on the tortfeasor. Without such control, there is nothing which could
justify extending the liability to a person other than the one who committed the tort. As
this Court explained in Cangco v. Manila Railroad Co.:25

With respect to extra-contractual obligation arising from negligence, whether of

act or omission, it is competent for the legislature to elect — and our Legislature has
so elected — to limit such liability to cases in which the person upon whom such an
obligation is imposed is morally culpable or, on the contrary, for reasons of public
policy, to extend that liability, without regard to the lack of moral culpability, so
as to include responsibility for the negligence of those persons whose acts or
omissions are imputable, by a legal fiction, to others who are in a position to
exercise an absolute or limited control over them. The legislature which adopted our
Civil Code has elected to limit extra-contractual liability — with certain well-defined
exceptions — to cases in which moral culpability can be directly imputed to the persons
to be charged. This moral responsibility may consist in having failed to exercise due
care in one's own acts, or in having failed to exercise due care in the selection and
control of one's agent or servants, or in the control of persons who, by reasons of their
status, occupy a position of dependency with respect to the person made liable for their
conduct.26(emphasis supplied)

It is incumbent upon Spouses Viloria to prove that CAI exercised control or supervision
over Mager by preponderant evidence. The existence of control or supervision cannot
be presumed and CAI is under no obligation to prove its denial or nugatory assertion.
Citing Belen v. Belen,27 this Court ruled in Jayme v. Apostol,28 that:

In Belen v. Belen, this Court ruled that it was enough for defendant to deny an alleged
employment relationship. The defendant is under no obligation to prove the negative
averment. This Court said:

"It is an old and well-settled rule of the courts that the burden of proving the action is
upon the plaintiff, and that if he fails satisfactorily to show the facts upon which he bases
his claim, the defendant is under no obligation to prove his exceptions. This [rule] is in
harmony with the provisions of Section 297 of the Code of Civil Procedure holding that
each party must prove his own affirmative allegations, etc." 29 (citations omitted)

Therefore, without a modicum of evidence that CAI exercised control over Holiday
Travel’s employees or that CAI was equally at fault, no liability can be imposed on CAI
for Mager’s supposed misrepresentation.

III. Even on the assumption that CAI may be held liable for the acts of Mager, still,
Spouses Viloria are not entitled to a refund. Mager’s statement cannot be
considered a causal fraud that would justify the annulment of the subject
contracts that would oblige CAI to indemnify Spouses Viloria and return the
money they paid for the subject tickets.

Article 1390, in relation to Article 1391 of the Civil Code, provides that if the consent of
the contracting parties was obtained through fraud, the contract is considered voidable
and may be annulled within four (4) years from the time of the discovery of the fraud.
Once a contract is annulled, the parties are obliged under Article 1398 of the same
Code to restore to each other the things subject matter of the contract, including their
fruits and interest.

On the basis of the foregoing and given the allegation of Spouses Viloria that
Fernando’s consent to the subject contracts was supposedly secured by Mager through
fraudulent means, it is plainly apparent that their demand for a refund is tantamount to
seeking for an annulment of the subject contracts on the ground of vitiated consent.
Whether the subject contracts are annullable, this Court is required to determine
whether Mager’s alleged misrepresentation constitutes causal fraud. Similar to the
dispute on the existence of an agency, whether fraud attended the execution of a
contract is factual in nature and this Court, as discussed above, may scrutinize the
records if the findings of the CA are contrary to those of the RTC.

Under Article 1338 of the Civil Code, there is fraud when, through insidious words or
machinations of one of the contracting parties, the other is induced to enter into a
contract which, without them, he would not have agreed to. In order that fraud may
vitiate consent, it must be the causal (dolo causante), not merely the incidental (dolo
incidente), inducement to the making of the contract.30 In Samson v. Court of
Appeals,31 causal fraud was defined as "a deception employed by one party prior to or
simultaneous to the contract in order to secure the consent of the other." 32

Also, fraud must be serious and its existence must be established by clear and
convincing evidence. As ruled by this Court in Sierra v. Hon. Court of Appeals, et
al.,33 mere preponderance of evidence is not adequate:

Fraud must also be discounted, for according to the Civil Code:

Art. 1338. There is fraud when, through insidious words or machinations of one of the
contracting parties, the other is induced to enter into a contract which without them, he
would not have agreed to.

Art. 1344. In order that fraud may make a contract voidable, it should be serious and
should not have been employed by both contracting parties.

To quote Tolentino again, the "misrepresentation constituting the fraud must be

established by full, clear, and convincing evidence, and not merely by a preponderance
thereof. The deceit must be serious. The fraud is serious when it is sufficient to impress,
or to lead an ordinarily prudent person into error; that which cannot deceive a prudent
person cannot be a ground for nullity. The circumstances of each case should be
considered, taking into account the personal conditions of the victim."34

After meticulously poring over the records, this Court finds that the fraud alleged by
Spouses Viloria has not been satisfactorily established as causal in nature to warrant
the annulment of the subject contracts. In fact, Spouses Viloria failed to prove by clear
and convincing evidence that Mager’s statement was fraudulent. Specifically, Spouses
Viloria failed to prove that (a) there were indeed available seats at Amtrak for a trip to
New Jersey on August 13, 1997 at the time they spoke with Mager on July 21, 1997; (b)
Mager knew about this; and (c) that she purposely informed them otherwise.

This Court finds the only proof of Mager’s alleged fraud, which is Fernando’s testimony
that an Amtrak had assured him of the perennial availability of seats at Amtrak, to be
wanting. As CAI correctly pointed out and as Fernando admitted, it was possible that
during the intervening period of three (3) weeks from the time Fernando purchased the
subject tickets to the time he talked to said Amtrak employee, other passengers may
have cancelled their bookings and reservations with Amtrak, making it possible for
Amtrak to accommodate them. Indeed, the existence of fraud cannot be proved by mere
speculations and conjectures. Fraud is never lightly inferred; it is good faith that is.
Under the Rules of Court, it is presumed that "a person is innocent of crime or wrong"
and that "private transactions have been fair and regular."35 Spouses Viloria failed to
overcome this presumption.

IV. Assuming the contrary, Spouses Viloria are nevertheless deemed to have
ratified the subject contracts.

Even assuming that Mager’s representation is causal fraud, the subject contracts have
been impliedly ratified when Spouses Viloria decided to exercise their right to use the
subject tickets for the purchase of new ones. Under Article 1392 of the Civil Code,
"ratification extinguishes the action to annul a voidable contract."

Ratification of a voidable contract is defined under Article 1393 of the Civil Code as
follows:

Art. 1393. Ratification may be effected expressly or tacitly. It is understood that there is
a tacit ratification if, with knowledge of the reason which renders the contract voidable
and such reason having ceased, the person who has a right to invoke it should execute
an act which necessarily implies an intention to waive his right.

Implied ratification may take diverse forms, such as by silence or acquiescence; by acts
showing approval or adoption of the contract; or by acceptance and retention of benefits
flowing therefrom.36

Simultaneous with their demand for a refund on the ground of Fernando’s vitiated
consent, Spouses Viloria likewise asked for a refund based on CAI’s supposed bad faith
in reneging on its undertaking to replace the subject tickets with a round trip ticket from
Manila to Los Angeles.

In doing so, Spouses Viloria are actually asking for a rescission of the subject contracts
based on contractual breach. Resolution, the action referred to in Article 1191, is based
on the defendant’s breach of faith, a violation of the reciprocity between the
parties37 and in Solar Harvest, Inc. v. Davao Corrugated Carton Corporation,38 this Court
ruled that a claim for a reimbursement in view of the other party’s failure to comply with
his obligations under the contract is one for rescission or resolution.

However, annulment under Article 1390 of the Civil Code and rescission under Article
1191 are two (2) inconsistent remedies. In resolution, all the elements to make the
contract valid are present; in annulment, one of the essential elements to a formation of
a contract, which is consent, is absent. In resolution, the defect is in the consummation
stage of the contract when the parties are in the process of performing their respective
obligations; in annulment, the defect is already present at the time of the negotiation
and perfection stages of the contract. Accordingly, by pursuing the remedy of rescission
under Article 1191, the Vilorias had impliedly admitted the validity of the subject
contracts, forfeiting their right to demand their annulment. A party cannot rely on the
contract and claim rights or obligations under it and at the same time impugn its
existence or validity. Indeed, litigants are enjoined from taking inconsistent positions. 39

V. Contracts cannot be rescinded for a slight or casual breach.

CAI cannot insist on the non-transferability of the subject tickets.

Considering that the subject contracts are not annullable on the ground of vitiated
consent, the next question is: "Do Spouses Viloria have the right to rescind the contract
on the ground of CAI’s supposed breach of its undertaking to issue new tickets upon
surrender of the subject tickets?"

Article 1191, as presently worded, states:

The power to rescind obligations is implied in reciprocal ones, in case one of the
obligors should not comply with what is incumbent upon him.

The injured party may choose between the fulfilment and the rescission of the
obligation, with the payment of damages in either case. He may also seek rescission,
even after he has chosen fulfillment, if the latter should become impossible.

The court shall decree the rescission claimed, unless there be just cause authorizing
the fixing of a period.

This is understood to be without prejudice to the rights of third persons who have
acquired the thing, in accordance with articles 1385 and 1388 and the Mortgage Law.

According to Spouses Viloria, CAI acted in bad faith and breached the subject contracts
when it refused to apply the value of Lourdes’ ticket for Fernando’s purchase of a round
trip ticket to Los Angeles and in requiring him to pay an amount higher than the price
fixed by other airline companies.

In its March 24, 1998 letter, CAI stated that "non-refundable tickets may be used as a
form of payment toward the purchase of another Continental ticket for $75.00, per ticket,
reissue fee ($50.00, per ticket, for tickets purchased prior to October 30, 1997)."

Clearly, there is nothing in the above-quoted section of CAI’s letter from which the
restriction on the non-transferability of the subject tickets can be inferred. In fact, the
words used by CAI in its letter supports the position of Spouses Viloria, that each of
them can use the ticket under their name for the purchase of new tickets whether for
themselves or for some other person.
Moreover, as CAI admitted, it was only when Fernando had expressed his interest to
use the subject tickets for the purchase of a round trip ticket between Manila and Los
Angeles that he was informed that he cannot use the ticket in Lourdes’ name as
payment.

Contrary to CAI’s claim, that the subject tickets are non-transferable cannot be implied
from a plain reading of the provision printed on the subject tickets stating that "[t]o the
extent not in conflict with the foregoing carriage and other services performed by each
carrier are subject to: (a) provisions contained in this ticket, x x x (iii) carrier’s conditions
of carriage and related regulations which are made part hereof (and are available on
application at the offices of carrier) x x x." As a common carrier whose business is
imbued with public interest, the exercise of extraordinary diligence requires CAI to
inform Spouses Viloria, or all of its passengers for that matter, of all the terms and
conditions governing their contract of carriage. CAI is proscribed from taking advantage
of any ambiguity in the contract of carriage to impute knowledge on its passengers of
and demand compliance with a certain condition or undertaking that is not clearly
stipulated. Since the prohibition on transferability is not written on the face of the subject
tickets and CAI failed to inform Spouses Viloria thereof, CAI cannot refuse to apply the
value of Lourdes’ ticket as payment for Fernando’s purchase of a new ticket.

CAI’s refusal to accept Lourdes’ ticket for the purchase of a new ticket for
Fernando is only a casual breach.

Nonetheless, the right to rescind a contract for non-performance of its stipulations is not
absolute. The general rule is that rescission of a contract will not be permitted for a
slight or casual breach, but only for such substantial and fundamental violations as
would defeat the very object of the parties in making the agreement.40 Whether a breach
is substantial is largely determined by the attendant circumstances.41

While CAI’s refusal to allow Fernando to use the value of Lourdes’ ticket as payment for
the purchase of a new ticket is unjustified as the non-transferability of the subject tickets
was not clearly stipulated, it cannot, however be considered substantial. The
endorsability of the subject tickets is not an essential part of the underlying contracts
and CAI’s failure to comply is not essential to its fulfillment of its undertaking to issue
new tickets upon Spouses Viloria’s surrender of the subject tickets. This Court takes
note of CAI’s willingness to perform its principal obligation and this is to apply the price
of the ticket in Fernando’s name to the price of the round trip ticket between Manila and
Los Angeles. CAI was likewise willing to accept the ticket in Lourdes’ name as full or
partial payment as the case may be for the purchase of any ticket, albeit under her
name and for her exclusive use. In other words, CAI’s willingness to comply with its
undertaking under its March 24, 1998 cannot be doubted, albeit tainted with its
erroneous insistence that Lourdes’ ticket is non-transferable.

Moreover, Spouses Viloria’s demand for rescission cannot prosper as CAI cannot be
solely faulted for the fact that their agreement failed to consummate and no new ticket
was issued to Fernando. Spouses Viloria have no right to insist that a single round trip
ticket between Manila and Los Angeles should be priced at around $856.00 and refuse
to pay the difference between the price of the subject tickets and the amount fixed by
CAI. The petitioners failed to allege, much less prove, that CAI had obliged itself to
issue to them tickets for any flight anywhere in the world upon their surrender of the
subject tickets. In its March 24, 1998 letter, it was clearly stated that "[n]on-refundable
tickets may be used as a form of payment toward the purchase of another Continental
ticket"42 and there is nothing in it suggesting that CAI had obliged itself to protect
Spouses Viloria from any fluctuation in the prices of tickets or that the surrender of the
subject tickets will be considered as full payment for any ticket that the petitioners intend
to buy regardless of actual price and destination. The CA was correct in holding that it is
CAI’s right and exclusive prerogative to fix the prices for its services and it may not be
compelled to observe and maintain the prices of other airline companies. 43

The conflict as to the endorsability of the subject tickets is an altogether different matter,
which does not preclude CAI from fixing the price of a round trip ticket between Manila
and Los Angeles in an amount it deems proper and which does not provide Spouses
Viloria an excuse not to pay such price, albeit subject to a reduction coming from the
value of the subject tickets. It cannot be denied that Spouses Viloria had the
concomitant obligation to pay whatever is not covered by the value of the subject tickets
whether or not the subject tickets are transferable or not.1avvphi1

There is also no showing that Spouses Viloria were discriminated against in bad faith by
being charged with a higher rate. The only evidence the petitioners presented to prove
that the price of a round trip ticket between Manila and Los Angeles at that time was
only $856.00 is a newspaper advertisement for another airline company, which is
inadmissible for being "hearsay evidence, twice removed." Newspaper clippings are
hearsay if they were offered for the purpose of proving the truth of the matter alleged.
As ruled in Feria v. Court of Appeals,:44

[N]ewspaper articles amount to "hearsay evidence, twice removed" and are therefore
not only inadmissible but without any probative value at all whether objected to or
not, unless offered for a purpose other than proving the truth of the matter asserted. In
this case, the news article is admissible only as evidence that such publication does
exist with the tenor of the news therein stated.45 (citations omitted)

The records of this case demonstrate that both parties were equally in default; hence,
none of them can seek judicial redress for the cancellation or resolution of the subject
contracts and they are therefore bound to their respective obligations thereunder. As the
1st sentence of Article 1192 provides:

Art. 1192. In case both parties have committed a breach of the obligation, the
liability of the first infractor shall be equitably tempered by the courts. If it cannot
be determined which of the parties first violated the contract, the same shall be deemed
extinguished, and each shall bear his own damages. (emphasis supplied)
Therefore, CAI’s liability for damages for its refusal to accept Lourdes’ ticket for the
purchase of Fernando’s round trip ticket is offset by Spouses Viloria’s liability for their
refusal to pay the amount, which is not covered by the subject tickets. Moreover, the
contract between them remains, hence, CAI is duty bound to issue new tickets for a
destination chosen by Spouses Viloria upon their surrender of the subject tickets and
Spouses Viloria are obliged to pay whatever amount is not covered by the value of the
subject tickets.

This Court made a similar ruling in Central Bank of the Philippines v. Court of
Appeals.46 Thus:

Since both parties were in default in the performance of their respective reciprocal
obligations, that is, Island Savings Bank failed to comply with its obligation to furnish the
entire loan and Sulpicio M. Tolentino failed to comply with his obligation to pay his
₱17,000.00 debt within 3 years as stipulated, they are both liable for damages.

Article 1192 of the Civil Code provides that in case both parties have committed a
breach of their reciprocal obligations, the liability of the first infractor shall be equitably
tempered by the courts. WE rule that the liability of Island Savings Bank for damages in
not furnishing the entire loan is offset by the liability of Sulpicio M. Tolentino for
damages, in the form of penalties and surcharges, for not paying his overdue
₱17,000.00 debt. x x x.47

Another consideration that militates against the propriety of holding CAI liable for moral
damages is the absence of a showing that the latter acted fraudulently and in bad faith.
Article 2220 of the Civil Code requires evidence of bad faith and fraud and moral
damages are generally not recoverable in culpa contractual except when bad faith had
been proven.48 The award of exemplary damages is likewise not warranted. Apart from
the requirement that the defendant acted in a wanton, oppressive and malevolent
manner, the claimant must prove his entitlement to moral damages.49

WHEREFORE, premises considered, the instant Petition is DENIED.

SO ORDERED.

G.R. No. L-30351 September 11, 1974

AUREA BAÑEZ and RAMON BAÑEZ Substituted by their legal heir, OSCAR
VIRATA BAÑEZ, petitioners,
vs.
COURT OF APPEALS and PIO ARCILLA, respondents.

Domingo A. Songalia for petitioners.

Arsenio R. Reyes for respondent.

ZALDIVAR, J.:p

A petition for review of the decision of the Court of Appeals in C.A. G.R. No. 36227-R
(Pio Arcilla, plaintiff-appellant, versus Aurea Bañez, Ramon Bañez and People's
Homesite and Housing Corporation, defendants-appellees).

The pertinent facts or the case are as follows: In 1956 respondent Pio Arcilla occupied a
parcel of land, later known as Lot 5, Block E-130 East Avenue Subdivision, Diliman,
Quezon City, owned by the People's Homesite and Housing Corporation (hereinafter
referred to as PHHC). He fenced the lot with wire, and erected a house and made some
plantings thereon. His moves to apply for the acquisition of the lot from the PHHC when
the same became available for disposition came to naught because the employees of
the PHHC whose help he sought merely regaled him with promises that the matter
would be attended to. Nevertheless, his occupancy was made a matter of record with
the PHHC in connection with a census of occupants and squatters taken some time
later.

Notwithstanding respondent Arcilla's occupancy, the lot was awarded, on May 20, 1960,
to Cristeta L. Laquihon pursuant to a conditional contract to sell executed by the PHHC,
subject to the standard resolutory conditions imposed upon grants of similar nature,
including the grantee's undertaking to eject trespassers, intruders or squatters on the
land, and to construct a residential house on the lot within a period of one year from the
signing of the contract, non-compliance with, which conditions would result in the
contract being "deemed annulled and cancelled". Respondent Arcilia had no notice of
this award, and neither did the grantee nor the PHHC take any step to oust him from the
premises occupied by him. It was only on April 29, 1963 that he was first required to
leave the area aforesaid.

Meanwhile, on May 9, 1962, grantee Cristeta L. Laquihon died, survived by her father,
Basilio Laquihon, who, on July 27, 1962, executed a deed of adjudication in his favor of
the rights and interests thus far acquired by his deceased daughter over the lot in
question. In said deed Basilio Laquihon also acknowledged an indebtedness of the
deceased to herein petitioner Aurea V. Bañez in the sum of P3,000.00 and agreed to
assign the rights thus adjudicated by way of payment of the debt. The corresponding
request for the transfer of the rights from Cristeta to Basilio L. Laquihon was made by
the latter to the PHHC on August 9, 1962, while an undated request for the approval of
the assignment of said land to Aurea V. Bañez as above stated was similarly filed with
the PHHC.

The PHHC referred the requests for transfer and for assignment to its Head Executive
Assistant, Olimpio N. Epis, for study. Mr. Epis. in his memorandum, opined that,
because the grantee failed, among others, to construct a residential house on the land
within the period provided in the conditional contract, the grantee's rights under the
contract were forfeited and, accordingly, she did not acquire any right which could be
transmitted upon her death to her alleged successor, Basilio Laquihon. Hence, he
recommended the disapproval of the petition for transfer. It appears, however, that the
unfavorable recommendation of Mr. Epis was not acted upon by the Board of the PHHC
but, instead, was returned by the General Manager to Mr. Epis with verbal instructions
to restudy the matter. After a restudy, Mr. Epis changed his opinion, and considered the
transfers from Cristeta L. Laquihon to Basilio Laquihon, and from the latter to Aurea V.
Bañez, to be proper and meritorious, and recommended the approval of the same. This
was in conformity with a previous recommendation made by PHHC's Homesite Sales
Supervisor, Roman Carreaga, to the PHHC's General Manager. On November 15,
1962, PHHC's Board of Directors adopted Resolution No. 200 approving the transfer of
rights from Basilio Laquihon to Aurea V. Bañez as a meritorious case. The transfer thus
approved, petitioner Aurea V. Bañez continued paying the installments on the purchase
price of the land.

Respondent Pio Arcilia did not know of the foregoing developments until sometime in
1963 when he was given notice to vacate the lot occupied by him. He then interposed a
protest against the award and transfer to petitioner Aurea V. Bañez, claiming that the
original awardee acquired no rights to the aforesaid lot and that the transferee was
disqualified from acquiring lots of the PHHC. Since the PHHC's Board of Directors had
theretofore approved the transfer objected to, the Administrative Investigating
Committee, to whom the protest was referred for resolution, considered itself without
any further power to review the action of the Board, and accordingly dismissed the
protest. In the meantime, petitioner Aurea V. Bañez completed the installment payments
on the land, and on October 29, 1964, the PHHC executed the corresponding deed of
sale over the lot in her favor.

Thus left without recourse before the PHHC, respondent Arcilla went to court with his
complaint to nullify the award of the lot in question in favor of petitioner Aurea V. Bañez
and to compel the PHHC to award the same to him, with prayer for attorney's fees and
costs. After trial on the merits, the court a quo found for petitioners and accordingly
decreed the dismissal of respondent's complaint, without costs.

Respondent Arcilla appealed to the Court of Appeals, which rendered the decision
sought to be reviewed, the dispositive portion of which decision reads thus:

WHEREFORE, the judgment appealed from is hereby reversed and, in

lieu thereof, another is hereby rendered declaring null and void the
transfer of rights over and award of lot 5, Block B-130, East Avenue
Subdivision of appellee PHHC, in favor of appellee Aurea Bañez and
ordering appellee People's Homesite and Housing Corporation to afford
appellant Pio Arcilla the opportunity, within thirty (30) days from the finality
of this decision, to perfect his preferential right to purchase said lot and
thereafter to execute and deliver such deed and documents necessary to
consummate the sale to said appellant.
Seeking a review of the decision, petitioners filed the instant petition. During its
pendency, petitioner Ramon Bañez died on March 30, 1972, and petitioner Aurea
Bañez also died on August 11, 1972, and the motion to have their heir, Oscar Virata
Bañez, substituted for them, was granted by this Court on October 9, 1972.

Petitioners in their Brief made assignments of error, as follows:

1. That the Court of Appeals erred in holding that the respondent Pio
Arcilla has the personality to seek the annulment of the award and sale, of
Lot 5, Block E-130, East Avenue Subdivision, Diliman, Quezon City,
belonging to the PHHC, to the applicant Cristela L. Laquihon on May 20,
1960, by PHHC, and the transfer of her rights over the lot by her father
Basilio Laquihon to the petitioner Aurea Bañez in payment of the
indebtedness of Cristeta L. Laquihon to the petitioner Aurea Bañez in the
amount of P3,000.00;

2. The Court of Appeals erred in holding that the respondent Pio Arcilla
has a preferential right to purchase the lot in question, lot 5, block E-130,
East Avenue Subdivision, Quezon City, of the People's Homesite and
Housing Corporation;

3. That the Court of Appeals erred in holding that the award of the lot in
question to Cristeta L. Laquihon, made on May 20, 1960 was null and
void, because said awardee failed to construct a house in the lot within a
period of one (1) year from the signing of the contract to sell and,
therefore, upon the death of Cristeta L. Laquihon on May 9, 1962, she
transferred no rights to her father Basilio Laquihon and said Basilio
Laquihon could not validly sell his rights of the lot in question to the
petitioners;

4. That the Court of Appeals erred in holding that the approval of the
transfer of rights of the late Cristeta L. Laquihon by her father Basilio
Laquihon to the petitioner Aurea Bañez was due to the intercession of the
then Senator Estanislao Fernandez; and

5. That the Court of Appeals erred in holding that the petitioners are not
qualified to acquire the lot in question for having allegedly a lot in San
Juan, Rizal.

1. Article 1397 of the Civil Code provides that the action for annulment of contracts may
be instituted by all who are thereby obliged principally or subsidiarily. Hence strangers
to the contract who are not bound thereby have neither the right nor the personality to
bring an action to annul such contract. It cannot be gainsaid that respondent Pio Arcilla
was a stranger to, and not bound principally or subsidiarily by, the conditional contract
to sell executed on May 20, 1960 by the PHHC in favor of Cristeta L. Laquihon, and the
transfer of rights over the same lot from Basilio Laquihon to Aurea V. Bañez. Hence
respondent Pio Arcilla could not bring an action to annul the same.

There is, however, an exception to the rule laid down in Article 1397. This Court,
in Teves vs. People's Homesite and Housing Corporation, L-21498, June 27,
19681 citing Ibañez vs. Hongkong and Shanghai Bank2 , held that "a person who is not
a partly obliged principally or subsidiarily in a contract may exercise an action for nullity
of the contract if he is prejudiced in his rights with respect to one of the contracting
parties, and can show the detriment which would positively result to him from the
contract in which he had no intervention." Pursuant to said doctrine, in order that
respondent Pio Arcilla might bring an action for the nullity of the contracts aforesaid, he
should have been not only prejudiced in his rights with respect to one of the contracting
parties, but must have also shown the detriment which he would positively suffer from
the contracts. It becomes, therefore, necessary to inquire, whether respondent Pio
Arcilla's rights were prejudiced by the aforesaid contracts, and as to what detriment, if
any, he suffered because of those contracts.

What rights of respondent Pio Arcilla were prejudiced? The Court of Appeals found that
Pio Arcilla "makes no pretense that he entered into and built his land upon appellee
PHHC's land with the consent of the latter." Pio Arcilia was, therefore, a trespasser, or a
squatter, he being a person who settled or located on land, in closed or uninclosed with
"no bona fide claim or color of title and without consent of the owner." 3 He began his
material possession of the lot in bad faith, knowing that he did not have a right thereto,
and it is presumed that his possession continued to be enjoyed in the same character in
which it was acquired, i.e. in bad faith until the contrary is proved.4 And what right can a
squatter have to the land into which he has intruded against the owner of the land? The
answer is not hard to find, A squatter can have no possessory rights whatsoever, and
his occupancy of the land is only at the owner's sufferance, his acts are merely tolerated
and cannot affect the owner's possession.5 The squatter is necessarily bound to an
implied promise, that he will vacate upon demand.

This Court, in Bernardo et al. vs. Bernardo and Court of Appeals6 , laid down the
doctrine that:

In carrying out its social re-adjustment policies, the government could not
simply lay aside moral standards, and aim to favor usurpers, squatters,
and intruders, unmindful of the lawful or unlawful origin and character of
their occupancy. Such a policy would perpetuate conflicts instead of
attaining their just solution.

Respondent Pio Arcilla, having no possessory rights whatsoever, what detriment could
be have suffered from the aforesaid contracts?

The Court of Appeals, however, held that respondent Pio Arcilia had a right to purchase
the lot occupied by him. The discussion of this alleged right brings us to the second
assignment of error.
2. We find merit in petitioners' second assignment of error. Relying on the decision of
the Court of Appeals, respondent Arcilia anchored his alleged preferential right to
purchase Lot 5, Block E-130 on Resolution No. 562 of PHHC's Board of Directors,
dated June 27, 1963, which reads as follows:

(1) No preference, advantage or benefit shall be given to squatters in the

allocation of PHHC residential lots by reason alone of their prior
occupancy thereof, but they shall be treated on the same footing as other
qualified applicants. Squatters who are found qualified and deserving shall
be given preferential awards only in PHHC resettlement projects, if they
voluntarily comply with PHHC rules and policies without waiting to be
evicted thru court proceedings.

and on Resolution No. 558, dated April 16, 1962, which approved the recommendations
of its Acting Legal Officer. The recommendations included the proposed "Application
Forms No. 6-D and No. 6-F" for non-occupants and occupants or squatters,
respectively, and provided, among others, that:

(6) The Sales and Management Department should have a ready and up-
to- date census of all lots occupied by squatters within PHHC subdivisions
open for sale or award, in order that lots occupied by squatters who are
not qualified to buy the same, or who do not merit an award shall not be
awarded to anybody until the PHHC has obtained a final court decision for
the eviction of such squatter. (Exhibit 1-B).

It should not be lost sight of, however, that according to the decision of the Court of
Appeals, "Time there may have been, perhaps, when occupancy of a lot without the
consent of said appellee was not recognized at all as basis for a claim to a right to
purchase said lot;" and that "on the face of the evidence presented before us in this
case, we note a clear shift in policy in the disposition of lots of appellee PHHC," and the
shift in policy was evidenced by the afore-quoted resolutions.

If the afore-quoted resolutions relied upon by respondent Arcilla were evidence of the
shift of policy, then, it stands to reason that before the adoption of said resolutions, the
policy of the PHHC was different; otherwise, there would have been no reason for a
change of policy. Resolution No. 562 was dated June 27, 1963. Hence the policy before
June 27, 1963 was different. In fact even the Court of Appeals noted that before said
date, "occupancy of a lot" was perhaps "not recognized at all as a basis for a claim of a
right to purchase said lot." Hence at the time Lot No. 5 was awarded to Cristeta L.
Laquihon on May 20, 1960, and at the time the PHHC approved the transfer of original
awardee's rights to herein petitioners on Nov. 15, 1962, it was not yet the policy of the
PHHC to recognize mere occupancy of a lot as giving a right to purchase the same, for
said Policy was adopted only later, i.e. on June 27, 1963.

Moreover, it is not stated expressly in the above-quoted resolutions, and neither can it
be necessarily implied therefrom, that the occupant was given a preferential right to
purchase the lot he occupied. In fact Resolution No. 562 explicitly states that although a
squatter shall be treated on the same footing as other qualified applicants, said
occupant has no preference at all by reason of said occupancy. In the instant case, it is
not even shown, although it was taken for granted, that respondent Pio Arcilia was a
qualified applicant who should be treated on the Same footing as others. The fact is that
said respondent never filed an application for the lot, so he cannot be a qualified
applicant. A squatter found to be qualified and deserving was to be given preferential
award, not necessarily to the same lot he occupies but only in PHHC resettlement
projects; and it does not appear that Lot 5, Block E-130, in question, is in a resettlement
project.

Furthermore, said preferential award in resettlement projects is granted only in case the
squatter is not evicted through court proceedings. In the instant case, respondent Arcilla
had been ejected from the lot through court proceedings in Civil Case No. IV-11691 of
the City Court of Quezon City. If a squatter was given a Preferential right to the lot he
occupies, how come that the same resolution No. 562 also provided that "No
administrative case shall be entertained on the basis alone of a squatter's claim of prior
or actual occupancy of PHHC lot?"

We hold that the claim, of respondent Pio Arcilla to the alleged preferential right to
purchase Lot 5, Block E-130, had not been substantiated.

3. Respondent Arcilla argues that the awardee of the lot, Cristeta L. Laquihon, did not
comply with the resolutory condition of building a house; so, she acquired no rights that
could be transmitted to her father.

This Court cannot sustain respondent's stand.

This Court of Appeals stated in its decision that the contract to sell, dated May 20, 1960,
executed by the PHHC in favor of Cristeta L. Laquihon was.

Subject to the standard resolutory conditions imposed upon grants of

similar nature, including the grantee's undertaking to eject trespassers,
intruders or squatters on the land and to 'construct a residential house on
the lot and shall complete the same within a period of (1) year from the
signing of this contract with no extension,' the non-compliance with which
results in the contract being 'deemed annulled and cancelled (Exhibit 7).

Because no residential house, continued the Court of Appeals, was ever erected by the
awardee on the premises — not even until she died on May 9, 1962, "she failed to
comply with a condition of the award, the non-compliance with which has a resolutory
effect upon the award," such that when Cristeta L. Laquihon died, she acquired no
vested right in the land, and she transmitted nothing to her father, Basilio Laquihon,
who, on his part, could not have transferred any right to petitioners Bañez.
It is granted that by virtue of the resolutory condition, the resolution of the contract took
place by force of law and that there was no need of judicial declaration to resolve the
contract. Civilists, however, are not agreed on whether the injured party retains the
option of demanding fulfillment or rescission of the obligation as provided in Article 1191
or not. Thus Collin y Capitant, Curson Elemental de Derecho Civil, Vol. III, p. 750 says:

En la hipotesis de una clausula del contrato que pronuncie una resolucion

eventual, hay que proclamar la validez de tal clausula en el Derecho
espanol siempre que no aparezca por sus circumstancias como contraria
a la ley o a las buenas costumbres.

El efecto de tal clausula sera que la resolucion se produzca de pleno

derecho, sin intervencion judicial; pero entendemos que, a pesar de ella el
acreedor conservara el derecho de opcion que le concede el art. 1124
[Art. 1191 of the Civil Code of the Philippines] a no ser que la clausula
misma resulte otra cosa.

Manresa, in Commentaries al Codigo Civil Espanol, 1967, Vol. VIII, p. 416, however,
says that the stipulated resolution of the contract in case one of the parties does not
comply with his undertaking is produced by force of law, but the option of the injured
party disappears.

If the creditor could still demand, in spite of the resolution ipso jure of the contract, then
the resolution would not be mandatory on the creditor and the resolution would produce
its effect when the creditor notified the debtor of his decision. (Tolentino, Civil Code of
the Philippines, Vol. IV, p. 175.)

It is certain, therefore, that the said contract to sell in the instant case was by virtue of
the stipulated resolutory conditions resolved by operation of law. But the Court of
Appeals overlooked in the instant case the express provision of the contract to sell
that said resolution becomes effective only from the date written notice thereof is sent
by the PHHC to the applicant. Thus paragraph 12 of the contract to sell (Exhibit 7)
provides:

12. Should the APPLICANT violate, refuse or fail to comply with any of the
terms and conditions stipulated herein or default in the payment of three
monthly installments as provided for in paragraph 1 hereof, this contract
shall be deemed annulled and cancelled and the CORPORATION shall be
at liberty to dispose of said property to any other person in the same
manner as if the contract had never been made ... The annulment and
cancellation and the right of the CORPORATION to repossess the
property shall become effective from the date written notice thereof is sent
by the CORPORATION to the APPLICANT at his last known post-office
address ...
The record does not show, and the decision of the Court of Appeals does not state, that
the PHHC ever notified in writing the awardee of the cancellation of the contract to sell.
Hence, the resolution of the contract never became effective. Consequently, whatever
rights the original awardee Cristeta Laquihon had over the disputed lot were transmitted
upon her death to her only legal and compulsory heir, her father Basilio (Art. 777, Civil
Code) which rights the latter could also convey to herein petitioners.

But even if it be assumed gratia argumenti, that the original awardee Cristeta Laquihon
acquired no vested right to the lot upon her death because of her failure to comply with
the resolutory condition of constructing a house on the lot, and the lot had to revert to
the PHHC, still it cannot be denied that the PHHC waived the effects of said resolutory
condition when its Board of Directors approved, on November 15, 1962, the transfer to
Aurea Bañez. In consenting to the transfer, the PHHC necessarily waived any right that
might have accrued to it by virtue of the resolution of the contract before the transfer.

Regarding the other resolutory condition mentioned by the decision sought to be

reviewed, and emphasized by private respondent, that the original awardee did not file
an action for ejectment, it is to be noted that the awardee was not obliged to file said
ejectment suit against respondent, the latter having squatted on the land since 1956
and the award to Cristeta Laquihon having been made only on May 20, 1960. On this
matter, the Constitutional Contract to Sell (Exhibit 7) explicitly provides that:

3. ... The applicant shall undertake the ejectment of any trespasser,

intruder or squatter who shall build on the lot or who shall deprive him of
the right to possess the same from the date of this contract.

The awardee was obliged to eject squatters 44 who shall build on the lot ... from the
date of this contract." Hence, respondent Arcilla having built his house or squatted on
the land very much before, i.e. 4 years before the land was awarded to awardee, the
latter was not under contractual obligation to eject him.

Resolution No. 558 does not require, furthermore, that the applicant for, or transferee of,
a PHHC lot should reside in Quezon City. What the Resolution requires is that he
should have his "permanent residence or principal place of work or business in Quezon
City, Manila or suburbs ..." San Juan, the address of petitioners herein, is certainly
included in the term "suburbs."

4. In support of their fourth assignment of error, that the Court of Appeals

erred in holding that the approval of the transfer of the rights to the lot to
petitioners was due to the intercession of the then Senator Estanislao
Fernandez, petitioners argued that the issue of whether the letter of
Senator Fernandez influenced the approval of the transfer was not
assigned as error in respondent Arcilla's brief in the Court of Appeals, and
neither was such influence alleged in the complaint, hence the Court of
Appeals could not decide said issue; and that the Board of Directors,
uninfluenced by politicians, used its discretion in approving the transfer.
Section 7 of Rule 51 of the Rules of Court provides that in order that a question may be
considered by the Court of Appeals, said question must be stated in the assignment of
errors and it must be properly argued in the brief. (Traders Insurance and Surety Co. vs.
Golangco, et al., 95 Phil. 824, 830; Tan Si Kick v. Tiacho, 79 Phil. 696, 698.) We note
that there were only two errors assigned in appellant's brief in the Court of Appeals,
namely: that the trial court erred in holding that (1) the claim of plaintiff that defendant
was disqualified to acquire lot 5 for she already owned lot in San Juan was not
substantiated, and (2) there was a valid perfected contract of sale between the PHHC
and the late Cristeta Laquihon, and between the PHHC and Aurea Bañez and Ramon
Bañez, and that they are bound by the terms and conditions thereof. Hence the alleged
intercession of the then Senator Estanislao Fernandez in the transfer of right by Basilio
Laquihon to petitioners, which was not stated in the assignment of errors and not
argued in the brief, should have not been considered by the Court of Appeals.

Moreover, the evidence on which the finding of the Court of Appeals that the PHHC
accommodated petitioners because of the intercession of whoever wrote "Exhibit C, has
no evidentiary basis, for Exhibit C was rejected by the trial court "for being immaterial,
irrelevant, impertinent and not properly identified (TSN, Nov. 4, 1964, p. 90)." The party
introducing it did not even ask permission from the Court that the same be attached to
the record so that the appellate court may review the ruling of the trial court (U.S. vs.
Cabaraban, 36 Phil. 251, 253-254; Velez vs. Chaves, 50 Phil. 676, 678-679). Evidence
ruled out at the trial of the case cannot be taken into consideration in the decision, for
that would infringe the constitutional right of the adverse party to due process of law
(Tinsay vs. Yusay and Yusay, 47 Phil. 639, 643). Documents forming no part of the
proofs before the appellate court will not be considered in disposing of the issues of an
action (De Castro v. Court of Appeals, 75 Phil., 824, 835, citing Dayrit v. Gonzalez, 7
Phil. 182; 5 Encyc. of Evidence, 469). Although said letter was written on stationery
bearing the letterhead of the then Senator Fernandez, it does not conclusively follow
that it was Senator Fernandez himself who wrote the letter. Even the signature of the
letter was "illegible".

But assuming that the letter was written by Senator Fernandez, it cannot be implied
from the facts of the case that the transfer of rights from Basilio Laquihon to petitioners
herein was approved solely on the strength of such letter, for the approval of the
transfer was recommended as "extremely meritorious" by the Head Executive Assistant
(Exh. "2"), and by the Homesite Sales Supervisor (Exh. F). Neither can it be said that
the approval of the transfer by the Board of Directors was vitiated by undue influence or
that it was illegal. That letter, even if it was written really by Senator Fernandez, could
not destroy the free agency of the PHHC Board of Directors, and it could not have
interfered with the exercise of Board's independent discretion. This Court has already
said that solicitation, importunity, argument and persuasion are not undue influence,
and a contract is not to be set aside merely because one party used these means to
obtain the consent of the others. Influence obtained by persuasion or argument or by
appeals to the affections is not prohibited either in law or morals, and i s not obnoxious
even in courts of equity. Such may be termed "due influence." (Martinez vs. Hongkong
and Shanghai Bank, 15 Phil. 252, 270.)
5. In support of their fifth assignment of error, petitioners argued that the Court of
Appeals erred in relying merely on the certification of the Municipal Treasurer of San
Juan to the effect that his office "has a record of real property holding of Ramon and
Aurea Bañez" consisting of a lot located at M. J. Paterno Street and assessed at
P31,190.00 under Tax Declaration No. 23804 of the land records of said municipality,
for a tax declaration is not evidence of title of property, and respondent Arcilla did not
present any other evidence to prove that petitioners are really owners of a lot in San
Juan, Rizal; that even granting that they are owners of a lot, still as maintained by the
PHHC, they are not disqualified to acquire the lot in question as they merely stepped
into the shoes of the original purchaser Cristeta Laquihon; that R. A. No. 498, relied
upon by respondent in his complaint in asserting that the award of the lot to petitioner
Aurea Bañez was null and void, is not applicable to the case and could not therefore
have been violated.

In the decision under review, the Court of Appeals said that to be an awardee of
PHHC's lots, one must not "already own or hold under a contract to buy residential lot or
lots in any subdivision situated in ... San Juan ... (Exhibits D-2 and Z)."

Paragraph 9 of the Conditional Contract to Sell (Exhibit 7) also provides that "any
transfer that may be authorized or permitted by the CORPORATION shall be under the
condition that the transferee is qualified to acquire a lot under the rules and regulations
of the CORPORATION ..."

The sole evidence submitted by respondent Arcilla to prove that petitioners herein were
disqualified to be transferees of the lot in question was the certification of the Treasurer
of San Juan (Exhibit I) that there is a tax declaration No. 23804 of the land records of
said municipality in the name of Ramon and Aurea Bañez. Said Tax declaration is
insufficient to prove ownership. It has been held anent this matter that —

Assessment alone is of little value as proof of title. Mere tax declaration

does not vest ownership of the property in the declarant" (Province of
Camarines Sur vs. Director of Lands, 64 Phil. 600, 613 citing Evangelista
vs. Tabayuyong, 7 Phil., 607; Casimiro vs. Fernandez, 9 Phil., 562;
Elumbaring vs. Elumbaring, 12 Phil. 384).

It is well-settled that neither tax receipts nor declaration of ownership for taxation
purposes are evidence of ownership or of the right to possess realty when not
supported by other effective proofs. (Elumbaring vs. Elumbaring, 12 Phil. 384, 388389).

It has not been proven, therefore, that petitioners herein are owners of a lot in San
Juan, and consequently disqualified to be transferees of the questioned lot.

R.A. No. 498, relied upon by herein respondent in his complaint, in asserting that the
award to petitioners was null and void, is not applicable to the instant case. Said Act
authorizes cities, municipalities and provinces to purchase and/or expropriate home
sites and landed estates and subdivide them for resale at cost, and provides in Section
3 that 14 no such lot shall be sold to any person, who already owns a residential lot, and
any sale made to such person shall be void." The PHHC not being a city, municipality,
or province, it is apparent that Act is not applicable to the instant case.

IN VIEW OF THE FOREGOING, the decision of the Court of Appeals, dated January 9,
1969, in CA-G. R. No. 36227-R, is set aside, and the decision of the Court of First
Instance of Quezon City in Civil Case No. Q-7679, is affirmed. Costs against
respondent Pio Arcilla.

IT IS SO ORDERED.

CHAPTER 9: VOID & INEXISTENT CONTRACTS

G.R. No. L-59952 August 31, 1984

RUBY H. GARDNER and FRANK GARDNER, JR., petitioners,

vs.
COURT OF APPEALS, DEOGRACIAS R. NATIVIDAD and JUANITA A.
SANCHEZ, respondents.

Mayor, Manalang, Reyes & Associates for petitioners.

Joanes Caacbay for private respondents.

MELENCIO-HERRERA, J.:

This is a Petition for the review of the Resolutions, dated April 24, 1980 and December
24, 1980, respectively, of the then Court of Appeals in CA-G.R. No. 52729-R
entitled "Ruby H. Gardner, et al. versus Deogracias R. Natividad, et al," whereby the
original Decision of said Court, promulgated on January 11, 1979, affirming in toto the
judgment of the Court of First Instance of Laguna, Branch I, Biñan in Civil Case No. B-
774, was reconsidered and the appealed judgment reversed in so far as private
respondents herein are concerned.

A chain of successive transfers of real property, five in all, is involved.

Petitioner Ruby H. GARDNER, married to Frank Gardner, Jr. an American (the

GARDNERS, for short), was the registered owner of two adjoining parcels of agricultural
land situated at Calamba, Laguna, designated as Lot No. 1426-new and Lot No. 4748-
new, with an aggregate area of 93,688 square meters more or less, and covered by
TCT Nos. T-20571 and T-20573, respectively, of the Registry of Property of Laguna
(Exhibits "A" & "B", Folio of Exhibits).
On November 27, 1961, the GARDNERS and the spouses Ariosto C. SANTOS and
Cirila Serrano (the SANTOSES) entered into an agreement for the subdivision of the
two parcels, with the SANTOSES binding themselves to advance to the GARDNERS
the amount of P93,000.00 in installments. For the protection of both parties they
executed the following documents all on the same date and referring to the same
parcels of land: (1) Absolute Deed of Sale in favor of the SANTOSES (the First
Transfer, considering the nature of the document); (2) Subdivision Joint Venture
Agreement; and (3) Supplemental Agreement (Exhibits "C", "D" and "E", Ibid.). Despite
the "sale,", the GARDNERS were still denominated in the Subdivision Joint Venture
Agreement and in the Supplemental Agreement as "owners" and Ariosto SANTOS
merely as "broker". It appears from the evidence that the sale to the SANTOSES was
one "in trust" for the protection of the SANTOSES who had obligated themselves to give
cash advances to the GARDNERS from time to time (Exhibits "E-2" to "E-88" incl.) On
December 5, 1961, new titles were issued in favor of the SANTOSES ( Exhibits " F " & "
G ", Ibid.).

Unknown to the GARDNERS, on June 10, 1964, the SANTOSES transferred Lot No.
1426-New to Jose Cuenca, married to Amanda Relova (the JOSE CUENCAS) (Exhibit
"H", Ibid.), and on June 15, 1964, Lot No. 4748-New to Juan Cuenca, married to
Soledad Advincula (the JUAN CUENCAS) (Exhibit "I", Ibid.) (jointly, the Second
Transfer). Titles were thereafter issued in their respective names (Exhibits "L" &
"M", Ibid.).

Upon learning of the Transfer of the properties to the CUENCAS, petitioner 'Ruby
GARDNER, caused the inscription of an Adverse Claim on the titles of the CUENCAS
with the Register of Deeds of Laguna on December 2, 1965, Her Affidavit stated in part:

2. My adverse claim arose from the facts that sometime in the middle part
of 1961, I and Mr. Ariosto Santos of 2162 Apolinario, Bangkal St., Makati,
Rizal had an understanding and have agreed that we would subdivide my
aforedescribed properties then covered by TCT Nos. T-20571 and T-
20573 for Lot No. 1426-New and 4748-New, respectively, under the
condition that he would advance to me a total amount of P93,000.00,
which I could withdraw little by little and from time to time; that he would
improve the aforesaid land by constructing paved roads sewers, water,
other facilities that may be required by the authorities concerned and other
requirements of the subdivision laws until he shall have invested for these
purposes the sum of P234,220.00; that he assured me that the
construction of these paved roads, etc. would commence immediately;

3. We (I and Mr. Ariosto Santos) have agreed that in order to protect his
(Mr. Santos) interest to the sum of P93,000.00, to be withdrawn by me
little by little and from time to time, I would transfer to his name my
aforementioned titles in trust;

xxx xxx xxx

 5. In the absolute Deed of Sale it was stated that I received from Mr.
Santos the sum of P70,266.00 and in consideration of said amount, I have
sold, transferred and conveyed my aforedescribed parcels of land to Mr.
Santos; but these statements were and are not true, that is why we have
the other two more documents the Subdivision Joint Venture Agreement
and the Supplemental Agreement. It is stated in the Subdivision Joint
Venture Agreement, which contains our true agreement that Mr. Ariosto
Santos is only my Broker, so far as the aforedescribed parcels of land are
concerned, as can be gleaned from Page 2, paragraphs 2 and 3 of the
said Subdivision Joint Venture Agreement, ...

On October 19, 1966 and November 4, 1966, the JUAN CUENCAS and the JOSE
CUENCAS, respectively, transferred the lots to Michael C. VERROYA (Exhibits "P"
& Ibid.) an office assistant of Ariosto SANTOS (the Third transfer). Titles were issued in
VERROYA's name with the adverse Claim carried over.

On March 29, 1967, VERROYA constituted a mortgage on both lots in favor of Anita
Nolasco and Rosario Dalina, which encumbrance was registered on the existing titles.

On June 29, 1967, VERROYA ARROYA executed a deed of transfer of the properties to
respondent Deogracias Natividad, married to Juanita Sanchez (the NATIVIDADS)
(Exhibits "V", "V-4", Ibid.) (the Fourth Transfer).

On September 30, 1967, the NATIVIDADS transferred the lots to Ignacio Bautista and
Encarnacion de los Santos (the BAUTISTAS) (Exhibits "14", "15" [Natividad], "JJ-2",
Ibid.) (the Fifth Transfer). No titles were issued to the BAUTISTAS.

It should be noted that from the titles of the CUENCAS (the Second Transferees) to the
titles of the NATIVIDADS (the Fourth Transferee), the Adverse Claim of the
GARDNERS continued to be carried, and that throughout the successive transfers, or
over a span of approximately six years, the GARDNERS continued to remain in
possession, cultivation and occupation of the disputed properties.

Aggrieved by the series of transfers, the GARDNERS filed suit on July 8, 1969 for
"Declaration of Nullity, Rescission and Damages" against the Five Transferees,
including the mortgagees, Anita Nolasco and Rosario Dalina, before the Court of First
Instance of Laguna, Branch I (Civil Case No. B-774), praying for the declaration of
nullity of all the Five Transfers and the cancellation of all titles issued pursuant thereto
on the ground that they were all simulated, fictitious, and without consideration.

In their Answer, the SANTOSES claimed, in brief, that the sale to them was conditional
in the sense that the properties were to be considered as the investment of the
GARDNERS in the subdivision venture and that in the event that this did not materialize
they were to reconvey the lots to the GARDNERS upon reimbursement by the latter of
all sums advanced to them; and that the deed of sale was to be registered for the
protection of the SANTOSES considering the moneys that the latter would be
advancing.

For their part, respondents NATIVIDADS contended that they were purchasers in good
faith notwithstanding the adverse claim as the titles were not shown to them by
VERROYA at the time of the sale, and that they had paid good and valuable
consideration.

The mortgagees, Anita Nolasco and Rosario Dalima, denied the allegations in the
Complaint and counterclaimed for damages, which the GARDNERS answered.

After the lifting of the Order of default against them, the CUENCAS filed their Answer
contending that their transfer to VERROYA of the properties in question was not
simulated and was supported by valuable consideration.

VERROYA, Juanita Sanchez (wife of Deogracias Natividad), and the BAUTISTAS were
declared in default for their failure to seasonably file their responsive pleadings. 1

The GARDNERS, aside from their documentary evidence, adduced in their favor the
testimonies of Ruby GARDNER herself, Jose Infante, an employee of the Register of
Deeds of Laguna, and defendant Ariosto SANTOS who was presented as an adverse
witness.

Of the eight answering defendants, only respondent Deogracias NATIVIDAD testified on

his behalf. Defendant Ariosto SANTOS merely adopted as his own evidence the
declaration he had given as an adverse witness. The JOSE CUENCAS and the JUAN
CUENCAS neither presented any testimonial evidence but just adopted the testimony of
Ariosto SANTOS. Defendants Anita Nolasco and Rosario Dalima, the mortgagees,
submitted their case after the genuineness of the deed of mortgage executed in their
favor by VERROYA was admitted by the parties. 2

On January 15, 1972, the Trial Court rendered judgment in favor of the GARDNERS
declaring as null and void the five Transfers; rescinding the Subdivision Joint Venture
Agreement (Exhibit "D") as well as the Supplemental Agreement (Exhibits "E"; ordering
the GARDNERS to reimburse the SANTOSES the total cash advances of P36,712.80
which theGARDNERS had received; authorizing the cancellation of the corresponding
titles issued pursuant to the deeds of sale and the issuance of new ones in favor of the
GARDNERS; ordering the deletion from the titles of the mortgage executed by
VERROYA; and requiring the Five Transferees but not mortgagees, Anita Nolasco and
Rosario Dalima, to pay the GARDNERS P90,000.00 actual damages, P5,000.00
exemplary damages, and to pay the costs.

The respondents NATIVIDADS appealed (notwithstanding that the wife was declared in
default) to the then Court of Appeals, which, on January 11, 1979 affirmed in toto the
judgment of the Trial Court. 3 The NATIVIDADS received the Decision of affirmance on
January 16, 1979. On January 29, 1979, the NATIVIDADS asked for a 30-day extension
from January 31, 1979 or up to March 2, 1979, within which to file a Motion for
Reconsideration, which was granted by respondent Court. 4 On March 2, 1979, the
NATIVIDADS filed their Motion for Reconsideration but the same was denied on
November 7, 1979. 5

On December 4, 1979, a "Very Urgent Manifestation and Motion for Leave to File a
Second Motion for Reconsideration" was filed by the NATIVIDADS. The pleading was
signed by Deogracias NATIVIDAD himself. Respondent Court denied leave on
December 28, 1979. 6 However, on the same date of December 28, 1979, the
NATIVIDADS filed their Second Motion for Reconsideration.

On April 24, 1980, respondent Court reconsidered its Resolution of "January 7, 1980"
denying respondents' "Motion for Leave to File Second Motion for Reconsideration', and
admitted said second Motion 7 (The resolution of January 7,1980 refers to the resolution
of December 28, 1979 which was released on January 7, 1980). On December 24,
1980, respondent Court 8 issued the questioned Resolution reversing its Decision of
January 11, 1979 insofar as the NATIVIDADS are concerned, declaring as valid the
sale of the land to them as well as the titles issued pursuant thereto. On January 20,
1981, the GARDNERS sought to set aside the questioned Resolution and moved for
entry of judgment averring that said Resolution was null and void for having been issued
without jurisdiction as the Decision of January 11, 1979 had already become final and
executory. The Motion was denied for lack of merit on March 4, 1982. 9

Petitioners now seek to set aside the Appellate Court's Resolutions of April 24, 1980
(granting leave to file a 2nd Motion for Reconsideration) and December 24, 1980
(reversing the original judgment), and assigning to respondent Court the following
errors:

The Court of Appeals erred in promulgating its resolution of April 24, 1980,
because it has already lost jurisdiction to act on the case since the
decision of January 11, 1979 had already become then final and
executory.

II

The Court of Appeals erred in promulgating its resolution of December 24,

1980, because it had already then lost jurisdiction to act on the case,
much more so, to reverse through its resolution of December 24, 1980 its
decision of January 11, 1979 that has already become final and executory.

III

Assuming arguendo that it has still jurisdiction to promulgate its resolution

of December 24, 1980, the Court of Appeals erred in not holding that the
 defendant-appellant Deogracias Natividad's second motion for
reconsideration, just like the first motion for reconsideration, is
unquestionably pro-forma, hence did not suspend the running of the
reglementary period of time.

IV

Assuming arguendo that it has still jurisdiction to promulgate its resolution

of December 24, 1980, the Court of Appeals erred in holding that the
testimonies of Ariosto Santos under oath on the witness stand cannot
prevail over the allegations in Santos' answer (not verified and only signed
by Ariosto Santos' counsel) and, regarding which there is no substantial
conflict or variance.

Assuming arguendo, it has still jurisdiction to promulgate its resolution of

December 24, 1980, the Court of Appeals erred in reversing absolutely
without valid justification, its findings in its decision of January 11, 1979
and resolution of November 7, 1979, both holding that defendant-appellant
Deogracias Natividad was not a buyer in good faith and for value.

VI

Assuming arguendo that it has still jurisdiction to promulgate its resolution

of December 24, 1980, the Court of Appeals erred in reversing, absolutely
without valid justification, its findings in its decision of January 11, 1979
and resolution of November 7, 1979 both holding that the sales of the
questioned properties from Ruby Gardner and spouse Frank Gardner, Jr.,
to Ariosto Santos and spouse Cirila Serrano, to Jose Cuenca and Juan
Cuenca and their spouses Amanda Relova and Soledad Advincula,
respectively, to Michael Verroya, to Deogracias Natividad and spouse
Juanita Sanchez, to Ignacio Bautista and spouse Encarnacion delos
Santos are null and void ab initio.

VII

The Court of Appeals erred in holding that it will not hesitate to consider
and hear defendant-appellant Deogracias Natividad's second motion for
reconsideration (even if it was received when the decision of January 11,
1979 was already final and executory) upon the groundless claim that
Deogracias Natividad was abandoned by his counsel, who received the
resolution denying Natividad's first motion for reconsideration.

Upon the facts and the evidence, we rule that respondent Court had lost jurisdiction to
entertain the second Motion for Reconsideration because its Decision of January 11,
1979 had already become final and executory as the following chronological data before
respondent Court will show:

Jan 16, 1979 Receipt by respondents of CA Decision dated Jan. 11, 1979.

Jan. 29, 1979 Private respondents filed motion for extension of 30 days
from Jan, 31, 1979 to file motion for reconsideration.

This was granted.

Due — Mar. 2, 1979.

Mar. 2, 1979 Motion for Reconsideration filed (on the last day).

Nov. 7, 1979 Reconsideration was denied.

Nov. 19, 1979 Receipt by private respondents of above resolution.

Dec. 28, 1979 Motion for Leave to file Second Motion for Reconsideration
denied.

Dec. 28, 1979 Second Motion for Reconsideration filed by private

respondent.

Jan. 8, 1980 Motion for Reconsideration of Resolution of Dec. 28, 1979

filed by private respondents.

April 24, 1980 Resolution reconsidering denial of Motion for Leave, and
Second Motion for Reconsideration admitted. This is one of the admitted.
This is one of the disputed Resolutions.

Dec. 24, 1980 Resolution reversing Decision of January 11, 1979. This is
other Resolution assailed.

Section 1, Rule 52 of the Rules of Court, provides:

Section 1. Motion for re-hearing. A motion for re- hearing or

reconsideration shall be made ex-parteand filed within fifteen (15) days
from notice of final order or judgment. No more than one motion for re-
hearing or reconsideration shall be filed without express leave of court. A
second motion for reconsideration may be presented within fifteen (15)
days from notice of the order or judgment deducting the time in which the
first motion has been pending.

Evidently, the Second Motion for Reconsideration was filed beyond the reglementary,
period. The NATIVIDADS erroneously thought that they had another 15-day period from
the date of receipt of denial of the first Motion for Reconsideration on November 7, 1979
within which to file a second Motion for Reconsideration. That would be the rule for
appeals by certiorari to the Supreme Court from an Appellate Court judgment pursuant
to Section 1 of Rule 45.10 However, under the aforequoted provision, which is the
applicable rule, the time in which the first Motion has been pending has to be deducted.
As it was, all of the fifteen days had been used up when the first Motion for
Reconsideration was filed on March 2, 1979. The Decision of January 11, 1979,
therefore, had already attained finality on March 3, 1979 so that respondent Court no
longer had jurisdiction to act on the "Very Urgent Motion for Leave to File Second
Motion for Reconsideration" submitted by the NATIVIDADS on November 28, 1979,
much less to grant the same.

It is well settled that once a Decision has become final and executory, it is removed
from the power and jurisdiction of the Court which rendered it to further alter or amend
it, much less to revoke it. The subsequent filing of a motion for reconsideration cannot
disturb the finality of the judgment, nor restore jurisdiction to the court. 11

Although the granting or denial of a motion for reconsideration involves the exercise of
discretion, 12 the same should not be exercise whimsically, capriciously or arbitrarily,
but prudently in conformity with law, justice, reason and equity.

We likewise find reversible error in the reversal of respondent Court's original Decision
of January 11, 1979. In its Resolution of reversal, dated December 24, 1980,
respondent Court had stated in part:

The presence of the adverse claim in appellant's (Deogracias Natividad)

title does not make him a buyer in bad faith The validity of the adverse
claim has to be determined by the Court. Until the validity of such claim is
determined judicially, the same cannot be considered as a flaw in his
vendor's title. The adverse claim first appearance in the titles of the
Cuencas, the second buyers. It was carried on to the titles of subsequent
transferees. The title of Santos appeared clean This makes the title of
Santos' vendee clean. The subsequent annotation of the adverse claim
therein would not make the Cuencas buyers in bad faith. If the Cuencas
were buyers in good faith, we do not see any reason why subsequent
buyers could not enjoy the same status. Good faith is presumed while bad
faith must be proved. ... 13

However, as set forth in the original Decision of the Appellate Court, upholding the
findings of the Trial Court, the evidence preponderantly shows that all Five Transfer
were null and void for having been simulated and fictitious.

The First Transfer in favor of the SANTOSES was "indubitably established" to have
been without consideration and is, therefore, void and inexistent. 14 That sale was
executed merely as a means of protection to the SANTOSES for their promised cash
advances to the GARDNERS in one year in the sum of P93,000.00. Added to this is the
admission against his own interest by Ariosto SANTOS that the GARDNERS did not
receive from him any consideration, 15 thereby corroborating the declarations of the
GARDNERS. The Subdivision Joint Venture Agreement (Exhibit "D") and the
Supplemental Agreement (Exhibit "E") eloquently express that the true and real nature
of the agreement between the GARDNERS and the SANTOSES was for a subdivision
and not a sale transaction.

The evidence also establishes that the Second Transfer to the CUENCAS was fictitious
and simulated for not having been supported with any consideration. By his own
admission, Ariosto SANTOS transferred to the CUENCAS, who are his "compadres",
the disputed properties, together with others that he owned, merely to conceal his
ownership and "to protect them from persons who had filed suits against him and were
running after the properties registered in his name." It was SANTOS who had caused
the execution of those deeds of sale (Exhibits "H" & "I") and had them notarized by his
own counsel. 16 No wonder then that the CUENCAS did not even dispute the validity of
the adverse claim pursuant to Section 110 of the Land Registration Act, and during the
trial they merely adopted SANTOS' testimony. Under the circumstances surrounding
their transaction they knew that their title was flawed and they were not, and cannot be
considered, buyers in good faith, having paid no consideration for the sale. The
subsequent registration of the adverse claim on their titles, therefore, could not but
serve as notice and warning to all subsequent buyers that someone was claiming an
interest in the properties or a better right than the registered owners.

The Third Transfer in favor of VERROYA was similarly without consideration and,
therefore, void ab initio. The evidence on record shows that Ariosto SANTOS himself
caused the execution of the deeds of sale (Exhibits "P" & "Q") in favor of VERROYA,
who is SANTOS' office manager in his brokerage business. The only purpose of the
transfer was to enable VERROYA to secure for SANTOS a loan with the Veterans Bank
so much so that when the documents of sale were signed by the CUENCAS in their
respective houses in favor of VERROYA, the latter was not even present. 17 Also
significant is the ' fact that Verroya was declared in default and had not even bothered
to resist the suit, which he would have done if the sale transaction were genuine.

On equal footing is the Fourth Transfer from VERROYA VERROYA to private

respondents NATIVIDADS. It was SANTOS who had caused the preparation of the
deed of sale in favor of the NATIVIDADS after sensing that VERROYA was not inclined
to return the title to the properties. Deogracias NATIVIDAD was SANTOS' close and
trusted I 6 compadre who agreed to put the titles in his (NATIVIDAD's) name because of
the pending cases against SANTOS. The amount of P 80,000.00 stated in the
document of sale was not actually paid by the NATIVIDADS to VERROYA, according to
SANTOS' own testimony. The latter further declared that VERROYA was only coerced
to sign the deeds (Exhibits "V" & ("V-4") after he was boxed by NATIVIDAD in SANTOS'
office at the Escolta. That coercion did exist is shown by VERROYA's telegram to the
Register of Deeds of Laguna to dishonor any transaction involving the subject
properties. 18
The Fifth Transfer to the BAUTISTAS partook of the same nature a simulated and
fictitious transaction, for being without consideration, as shown by the evidence. They
too, were declared in default and made no attempt to answer or dispute the allegations
in the Complaint against them.

The mortgage of the properties by VERROYA in favor of Anita Nolasco and Rosario
Dalima was executed after the inscription of the adverse claim on the titles so that they
can neither be considered as innocent mortgagees for value.

Added proof of the fictitiousness of the chain of transfers is that fact that,
notwithstanding the same, the GARDNERS remained in actual possession, cultivation
and occupation of the disputed lots throughout the entire series of transactions.

As concluded in the original Decision of respondent Court, all Five Transfers starting
from that of the SANTOSES down to the NATIVIDADS, were absolutely simulated and
fictitious and were, therefore, void ab initio and inexistent. 19 Contracts of sale are void
and produce no effect whatsoever where the price, which appears therein as paid, has,
in fact, never been paid by the purchaser to the vendor.20 Such sales are inexistent and
cannot be considered consummated. 21

In its Resolution reversing the original Decision, respondent Court discredited the
testimony of Ariosto SANTOS for being at variance with the allegations in his Answer.
The fact, however, that the allegations made by Ariosto SANTOS in his pleadings and in
his declarations in open Court differed win not militate against the findings herein made
nor support the reversal by respondent Court. As a general rule, facts alleged in a
party's pleading are deemed admissions of that party and binding upon it, but this is not
an absolute and inflexible rule. 22 An Answer is a mere statement of fact which the party
filing it expects to prove, but it is not evidence. 23 As Ariosto SANTOS himself, in open
Court, had repudiated the defenses he had raised in his Answer and against his own
interest, his testimony is deserving of weight and credence. Both the Trial Court and the
Appellate Court believed in his credibility and we find no reason to overturn their
findings thereon.

Lastly, the statement of respondent Court in its Resolution of reversal that "until the
validity of an adverse claim is determined judicially it cannot be considered a flaw in the
vendor's title, contradicts the very essence of adverse claims. The annotation of an
adverse claim is a measure designed to protect the interest of a person over a piece of
real property, and serves as a notice and warning to third parties dealing with said
property that someone is claiming an interest on the same or has a better right than the
registered owner thereof.24 A subsequent sale of the property cannot prevail over the
adverse claim which was previously annotated in the certificate of title of the property. 25

While one who buys from the registered owner need not have to look behind the
certificate of title, 26 he is nevertheless bound by the liens and encumbrances annotated
thereon.27 One who buys without checking the vendor's title takes all the risks and
losses consequent to such failure.28
WHEREFORE, the assailed Resolutions of respondent Court of Appeals (now the
Intermediate Appellate Court), dated April 24, 1980 and December 24, 1980,
respectively, are hereby REVERSED and SET ASIDE, and its Decision of January 11,
1979 affirming in toto the judgment of the then Court of First Instance of Laguna, Branch
1, in Civil Case No. B-774, is hereby reinstated. Costs against private respondents.

SO ORDERED.

G.R. No. L-66696 July 14, 1986

FRANCISCA ARSENAL and REMEDIO ARSENAL, petitioners,

vs.
THE INTERMEDIATE APPELLATE COURT, HEIRS OF TORCUATO SURALTA, and
SPOUSES FILOMENO PALAOS and MAHINA LAGWAS, respondents.

Ruben Gamolo for respondent Filomeno Palaos.

GUTIERREZ, JR., J.:

The question to be resolved in this case is who among the two alleged purchasers of a
four-hectare portion of land granted in homestead has acquired a valid title thereto.

The facts as stated by the trial court are:

On January 7, 1954, the defendant Filomeno Palaos secured OCT No. P-

290 (Exh. A) from the Register of Deeds of Bukidnon for Lot 81, Pls-112,
consisting of 87,829 sq. m. more or less, situated at former barrio of
Kitaotao now a municipality of Bukidnon, by virtue of Homestead Patent
No. V-23602 granted to him.

On September 10, 1957, said Filomeno Palaos and his wife Mahina
Lagwas executed in favor of the plaintiff, Torcuato Suralta, sold four (4)
hectares of the land embraced in his Torrens Certificate for the sum of P
890.00, Philippine Currency, by means of a deed of acknowledged before
a Notary (Exh. C). Plaintiff Suralta immediately took possession of the
four-hectare portion of Lot 81 above-mentioned cultivated and worked the
same openly, continuously and peacefully up to the present time in
concept of owner thereof. He built a house and introduced permanent
improvements thereon now valued at no less than P20,000.00.

Sometime in 1964, the defendant-spouses Francisca Arsenal and

Remedio Arsenal became tenants of an adjoining land owned by Eusebio
Pabualan that is separated from the land in question only by a public road.
They also came to know the plaintiff as their neighbor who became their
compadre later, and saw him very often working and cultivating the land in
question. In the course of their relationship the plaintiff came to know of
their intention to buy the remaining land of Filomeno Palaos (t.s.n., pp. 13-
14, 45-47).

On March 14, 1967, said Filomeno Palaos and his wife executed a notarial
Deed of Sale (Exh. 1 for the defendant) in consideration of the amount of
P800.00, Philippine Currency, supposedly for the remaining three (3)
hectares of their land without knowing that the document covered the
entirety of Lot 81 including the four-hectare portion previously deeded by
them to the plaintiff. The deed of sale was presented to the Office of the
Commission on National Integration at Malaybalay for approval because
Palaos and his wife belong to the cultural minorities and unlettered. The
field representative and inspector of that office subsequently approved the
same (Exh. K and Exh. 2) without inspecting the land to determine the
actual occupants thereon.

The defendants Arsenal took possession of the three-hectare portion of

Lot 81 after their purchase and have cultivated the same up to the present
time but they never disturbed the plaintiff's possession over the four-
hectare portion that he had purchased in 1957. On March 28, 1967,
Francisca Arsenal caused the tax declaration of the entire lot to be
transferred in her name (Exh. 6). The plaintiff learned of the transfer of the
tax declaration to Francisca Arsenal and because of their good relations at
the time, he agreed with Arsenal to contribute in the payment of the land
taxes and paid yearly from 1968 to 1973 the amount of P10.00
corresponding to his four-hectare portion to Francisca Arsenal (Exhs. F, F-
1, G, G-1, H, and H-1).

On July 11, 1973, the plaintiff presented his Sales Contract in the Office of
the Register of Deeds but it was refused registration for having been
executed within the prohibitive period of five years from the issuance of
the patent. In order to cure the defect, he caused Filomeno Palaos to sign
a new Sales Contract (Exh. D) in his favor before Deputy Clerk of Court
Florentina Villanueva covering the same four-hectare portion of Lot 81. In
August 1973, the plaintiff caused the segregation of his portion from the
rest of the land by Geodetic Engineer Benito P. Balbuena, who conducted
the subdivision survey without protest from Francisca Arsenal who was
notified thereof. The subdivision plan (Exh. E) was approved by the
Commissioner of Land Registration on April 18, 1974.

In December 1973, however, the plaintiff saw for the first time the Deed of
Sale embracing the whole Lot 81 signed by Filomeno Palaos in favor of
Francisca Arsenal. Immediately he asked Palaos for explanation but the
latter told him that he sold only three hectares to Arsenal. Plaintiff
approached Francisca Arsenal for a satisfactory arrangement but she
 insisted on abiding by her contract. Because of their disagreement,
Francisca Arsenal registered her Deed of Sale on December 6, 1973 and
obtained Transfer Certificate of Title No. T-7879 (Exh. E) for the entire Lot
81 without the knowledge of the plaintiff.

On January 7, 1974, the plaintiff sent a telegram (Exh. 1) to the Secretary

of Agriculture and Natural Resources requesting suspensions of the
approval of the sale executed by Filomeno Palaos in favor of Francisca
Arsenal, not knowing that the latter had already secured a transfer
certificate of title from the Register of Deeds.

In the middle part of said month of January 1974, plaintiff however learned
of the cancellation of the original certificate of title of Palaos and the
issuance of the Transfer Certificate to Arsenal so he sought the help of the
municipal authorities of Kitaotao to reach an amicable settlement with
Francisca Arsenal who, on the other hand, refused to entertain all overture
to that effect. ... .

On March 6, 1974, Torcuato Suralta filed a case against Filomeno Palaos, Mahina
Lagwas, Francisca Arsenal, Remedio Arsenal and the Register of Deeds of Bukidnon
for the annulment of Transfer Certificate of Title No. T-7879 issued to the Arsenals
insofar as it covers the four-hectare portion previously sold to him.

In answer to the complaint, the Arsenals denied previous knowledge of the sale to
Suralta of the land in question. As a special defense, they assailed the validity of the
purchase by Suralta in 1957, pointing to the prohibition contained in the Public Land
Law against its disposal within the period of five years from the issuance of the
homestead patent. They also questioned the legality of the sale made to Suralta in 1957
by Filomeno Palaos and Mahina Lagwas for not having been approved by the
Commission on National Integration despite the fact that Palaos and his wife belong to
the cultural minorities, are illiterates, and do not understand the English language in
which the deed of sale in favor of Suralta was written.

In their answer, the spouses Filomeno Palaos and Mahina Lagwas sustained the sale
made by them to Suralta. They alleged that they verbally sold one hectare to one
Tiburcio Tadena and sold the remaining 3.7829 hectares to the Arsenals. They stated
that they informed the Arsenals about the previous sale of four hectares to Suralta.
They also claimed that the Arsenals took undue advantage of their ignorance and
illiteracy and caused them to sign the document of sale so as to include the entire
87,829 sq. m.covered by their original title.

On May 4, 1976, the trial court rendered judgment in favor of Suralta. It imputed bad
faith to the Arsenals and declared them disqualified to avail of the protection afforded by
the provisions of the Civil Code to innocent purchasers although they registered their
purchase ahead of Suralta.
The court held that:

xxx xxx xxx

The defendants Arsenal could not also avail of the prohibition in the Public
Land Act against the disposal of any land granted to a citizen under that
law because the benefit of said prohibition does not inure to any third
party. Only the government could have filed the adequate proceedings for
confiscation of the land for violation of the condition of the grant by Palaos.
Moreover, a verbal sale of land is valid and effective as between the
parties to the agreement and Filomeno Palaos had reaffirmed the sale he
made in favor of the plaintiff in 1957 by executing another instrument in
1973 to cure whatever defects which may have affected their formal
contract.

Likewise, Francisca Arsenal cannot take advantage of the lack of approval

by the Commission on National Integration of the sale made by Filomeno
Palaos in favor of plaintiff Torcuato Suralta. Only the latter, in whose favor
the protection is afforded, could contest the document on the ground, as
Francisca Arsenal was not a party to said contract and even if she is also
a member of the cultural minority for being only half a native of Bukidnon
because she and her husband who is from Cebu are both literates.

On appeal to the Intermediate Appellate Court, the aforestated decision was affirmed in
toto on October 24, 1983. The Court maintained that:

The disquisition of the lower court having been made mainly upon
assessment of the facts as borne by the testimonies of witnesses
presented as resolved in a long line of decisions, this Court is loath to
overturn findings of facts of the court a quo, which is more in a position to
determine their truth or falsity, having heard the witnesses testify ... .

On March 20, 1984, the spouses Arsenal went to this Court in a petition for review on
certiorari assigning the following alleged errors of the court below:

THE INTERMEDIATE APPELLATE COURT ERRED IN NOT

DISMISSING THE APPEALED CASE FOR LACK OF CAUSE OF
ACTION.

II

THE INTERMEDIATE APPELLATE COURT ERRED IN AFFIRMING THE

TRIAL COURT'S ARGUMENT TO THE EFFECT THAT THE BENEFIT OF
THE PROHIBITION IN THE PUBLIC LAND LAW AGAINST THE
 DISPOSAL OF ANY LAND GRANTED TO A CITIZEN UNDER THAT
LAW DOES NOT INSURE TO ANY THIRD PARTY, HENCE,
PETITIONERS COULD NOT AVAIL OF THE SAID PROHIBITION.

III

THE INTERMEDIATE APPELLATE COURT ERRED IN AFFIRMING THE

TRIAL COURT'S ARGUMENT THAT THE PETITIONERS COULD NOT
TAKE ADVANTAGE OF THE LACK OF APPROVAL BY THE
COMMISSION ON NATIONAL INTEGRATION OF THE SALE MADE BY
RESPONDENT TORCUATO SURALTA.

IV

THE INTERMEDIATE APPELLATE COURT ERRED IN GIVING TOO

MUCH WEIGHT TO THE ALLEGED BAD FAITH OF PETITIONERS.

THE INTERMEDIATE APPELLATE COURT ERRED IN AFFIRMING THE

DECISION OF THE TRIAL COURT DECLARING RESPONDENT
TORCUATO SURALTA TO BE THE LEGITIMATE OWNER OF THE
DISPUTED LAND AND IN ORDERING THE REGISTER OF DEEDS OF
BUKIDNON TO CANCEL TCT NO. T-7879 AND ORDERING THE
ISSUANCE OF ANOTHER TITLE FOR THE PORTION DESIGNATED AS
LOT 8l-A OF THE SUBDIVISION PLAN LRC-PLD-198451.

VI

THE INTERMEDIATE APPELLATE COURT ERRED IN AFFIRMING THE

AWARD OF MORAL DAMAGES AND ATTORNEY's FEES TO PRIVATE
RESPONDENTS.

In resisting respondent Suralta's claim, the petitioners rely heavily on the nullity of the
contract of sale executed in 1957 between the respondents Palaos and Suralta. They
allege that because the previous sale was void from the beginning, it cannot be ratified
and "No amount of bad faith on the part of the petitioners could make it valid and
enforceable in the courts of law."

These arguments are impressed with merit.

The law on the matter which is the Public Land Act (Commonwealth Act No. 141, as
amended) provides:

Sec. 118. Except in favor, of the Government or any of its branches, units
or institutions, lands acquired under free patent or homestead provisions
 shall not be subject to encumbrance or alienation from the date of the
approval of the application and for a term of five years from and after the
date of issuance of the patent or grant nor shall they become liable to the
satisfaction of any debt contracted prior to the expiration of said period,
but the improvements or crops on the land may be mortgaged or pledged
to qualified persons, associations, or corporations.

No alienation, transfer, or conveyance of any homestead after five years

and before twenty-five years after issuance of title shall be valid without
the approval of the Secretary of Agriculture and Natural Resources, which
approval shall not be denied except on constitutional and legal ground (As
amended by Com. Act No. 456, approved June 8, 1939).

xxx xxx xxx

Sec. 120. Conveyance and encumbrance made by persons belonging to

the so-called 'non-Christian Filipinos' or national cultural minorities, when
proper, shall be valid if the person making the conveyance or
encumbrance is able to read and can understand the language in which
the instrument or conveyance or encumbrance is written. Conveyances
and encumbrances made by illiterate non-Christians or literate non-
Christians where the instrument of conveyance is in a language not
understood by the said literate non-Christian shall not be valid unless duly
approved by the Chairman of the Commission on National Integration. (As
amended by Rep. Act No. 3872, approved June 18, 1964).

xxx xxx xxx

Sec. 124. Any acquisition, conveyance, alienation, transfer, or other

contract made or executed in violation of any of the provisions of sections
one hundred and eighteen, one hundred and twenty, one hundred and
twenty-one, one hundred and twenty-two, and one hundred twenty-three
of this Act shall be unlawful and null and void from its execution and shall
produce the effect of annulling and cancelling the grant, title, patent, or
permit originally issued, recognized or confirmed, actually or
presumptively, and cause the reversion of the property and its
improvements to the State.

The above provisions of law are clear and explicit. A contract which purports of alienate,
transfer, convey or encumber any homestead within the prohibitory period of five years
from the date of the issuance of the patent is void from its execution. In a number of
cases, this Court has held that such provision is mandatory (De los Santos v. Roman
Catholic Church of Midsayap, 94 Phil. 405).
Under the provisions of the Civil Code, a void contract is inexistent from the beginning.
It cannot be ratified neither can the right to set up the defense of its illegality be waived.
(Art. 1409, Civil Code).

To further distinguish this contract from the other kinds of contract, a commentator has
stated that:

The right to set up the nullity of a void or non-existent contract is not

limited to the parties as in the case of annullable or voidable contracts; it is
extended to third persons who are directly affected by the contract.
(Tolentino, Civil Code of the Philippines, Vol. IV, p. 604, [1973]).

Any person may invoke the inexistence of the contract whenever juridical
effects founded thereon are asserted against him. (Id. p. 595).

Concededly, the contract of sale executed between the respondents Palaos and Suralta
in 1957 is void. It was entered into three (3) years and eight (8) months after the grant of
the homestead patent to the respondent Palaos in 1954.

Being void, the foregoing principles and rulings are applicable. Thus, it was erroneous
for the trial court to declare that the benefit of the prohibition in the Public Land Act
"does not inure to any third party." Such a sweeping declaration does not find support in
the law or in precedents. A third person who is directly affected by a void contract may
set up its nullity. In this case, it is precisely the petitioners' interest in the disputed land
which is in question.

As to whether or not the execution by the respondents Palaos and Suralta of another
instrument in 1973 cured the defects in their previous contract, we reiterate the rule that
an alienation or sale of a homestead executed within the five-year prohibitory period is
void and cannot be confirmed or ratified. This Court has on several occasions ruled on
the nature of a confirmatory sale and the public policy which proscribes it. In the case
of Menil v. Court of Appeals(84 SCRA 413), we stated that:

It cannot be claimed that there are two contracts: one which is

undisputably null and void, and another, having been executed after the
lapse of the 5-year prohibitory period, which is valid. The second contract
of sale executed on March 3, 1964 is admittedly a confirmatory deed of
sale. Even the petitioners concede this point. (Record on Appeal, pp. 55-
56). Inasmuch as the contract of sale executed on May 7, 1960 is void for
it is expressly prohibited or declared void by law (CA 141, Section 118), it
therefore cannot be confirmed nor ratified. ... .

xxx xxx xxx

Further, noteworthy is the fact that the second contract of sale over the
said homestead in favor of the same vendee, petitioner Potenciano Menil,
 is for the same price of P415.00. Clearly, the unvarying term of the said
contract is ample manifestation that the same is simulated and that no
object or consideration passed between the parties to the contract. It is
evident from the whole record of the case that the homestead had long
been in the possession of the vendees upon the execution of the first
contract of sale on May 7, 1960; likewise, the amount of P415.00 had long
been paid to Agueda Garan on that same occasion. ...

In another case, Manzano v. Ocampo (1 SCRA 691, 697), where the sale was perfected
during the prohibitory period but the formal deed of conveyance was executed after
such period, this Court ruled that:

xxx xxx xxx

... This execution of the formal deed after the expiration of the prohibitory
period did not and could not legalize a contract that was void from its
inception. Nor was this formal deed of sale 'a totally distinct transaction
from the promissory note and the deed of mortgage', as found by the
Court of Appeals, for it was executed only in compliance and fulfillment of
the vendor's previous promise, under the perfected sale of January 4,
1938, to execute in favor of his vendee the formal act of conveyance after
the lapse of the period of inhibition of five years from the date of the
homestead patent. What is more, the execution of the formal deed of
conveyance was postponed by the parties precisely to circumvent the
legal prohibition of their sale.

The law prohibiting any transfer or alienation of homestead land within five
years from the issuance of the patent does not distinguish between
executory and consummated sales; and it would hardly be in keeping with
the primordial aim of this prohibition to preserve and keep in the family of
the homesteader the piece of land that the State had gratuitously given to
them, (Pascua v. Talens, 45 O.G. No. 9 [Supp.] 413; De los Santos v.
Roman Catholic Church of .Midsayap, G.R. No. L-6088, Feb. 25, 1954.) to
hold valid a homestead sale actually perfected during the period of
prohibition but with the execution of the formal deed of conveyance and
the delivery of possession of the land sold to the buyer deferred until after
the expiration of the prohibitory period, purposely to circumvent the very
law that prohibits and declares invalid such transaction to protect the
homesteader and his family. To hold valid such arrangements would be to
throw the door wide open to all possible fraudulent subterfuges and
schemes that persons interested in land given to homesteaders may
devise to circumvent and defeat the legal provision prohibiting their
alienation within five years from the issuance of the homestead's patent.

The respondents Palaos and Suralta admitted that they executed the subsequent
contract of sole in 1973 in order to cure the defects of their previous contract. The terms
of the second contract corroborate this fact as it can easily be seen from its terms that
no new consideration passed between them. The second contract of sale being merely
confirmatory, it produces no effect and can not be binding.

Notwithstanding the above circumstances of the case, however, we still think that the
petitioners' claim to the land must fail.

The petitioner's view that the court erred in giving too much weight to their alleged bad
faith has no merit. The issue of bad faith constitutes the fundamental barrier to their
claim of ownership.

The finding of bad faith by the lower court is binding on us since it is not the function of
this Court to analyze and review evidence on this point all over again (Sweet Lines, Inc.
v. Court of Appeals, 121 SCRA 769) but only to determine its substantiality (Dela
Concepcion v. Mindanao Portland Cement Corporation, 127 SCRA 647).

In this case, there is substantial evidence to sustain the verdict of bad faith. We find
several significant findings of facts made by the courts below, which were not disputed
by the petitioners, crucial to its affirmance.

First of all, we agree with the lower court that it is unusual for the petitioners, who have,
been occupying the disputed land for four years with respondent Suralta to believe,
without first verifying the fact, that the latter was a mere mortgagee of the portion of the
land he occupies.

Second, it is unlikely that the entire 8.7879 hectares of land was sold to them for only
P800,00 in 1967 considering that in 1957, a four-hectare portion of the same was sold
to the respondent Suralta for P819.00. The increased value of real properties through
the years and the disparity of the land area show a price for the land too inadequate for
a sale allegedly done in good faith and for value.

Third, contrary to the usual conduct of good faith purchasers for value, the petitioners
actively encouraged the respondent Suralta to believe that they were co-owners of the
land. There was no dispute that the petitioners, without informing the respondent
Suralta of their title to the land, kept the latter in peaceful possession of the land he
occupies and received annual real estate tax contributions from him. It was only in 1973
when the respondent Suralta discovered the petitioners' title to the land and insisted on
a settlement of the adverse claim that the petitioners registered their deed of sale and
secured a transfer certificate of title in their favor.

Clearly, the petitioners were in bad faith in including the entire area of the land in their
deed of sale. They cannot be entitled to the four-hectare portion of the land for lack of
consideration. To uphold their claim of ownership over that portion of land would be
contrary to the well-entrenched principle against unjust enrichment consecrated in our
Civil Code to the end that in cases not foreseen by the lawmaker, no one may unjustly
benefit himself to the prejudice of another (Report of the Code Commission, p. 41).
Who then is entitled to the portion of the land which is under litigation?

The peculiar circumstances of the case seem to make a categorical pronouncement on

the case difficult.

At first blush, the equities of the case seem to lean in favor of the respondent Suralta
who, since 1957, has been in possession of the land which was almost acquired in an
underhanded manner by the petitioners. We cannot, however, gloss over the fact that
the respondent Suralta was himself guilty of transgressing the law by entering, in 1957,
into a transaction clearly prohibited by law. It is a long standing principle that equity
follows the law. Courts exercising equity jurisdiction are bound by rules of law and have
no arbitrary discretion to disregard them. Equitable reasons will not control against any
well-settled rule of law or public policy (McCurdy v. County of Shiawassee, 118 N.W.
625). Thus, equity cannot give validity to a void contract. If, on the basis of equity, we
uphold the respondent Suralta's claim over the land which is anchored on the contracts
previously executed we would in effect be giving life to a void contract.

There is another observation worthy of consideration. This Court has ruled in a number
of cases that the reversion of a public land grant to the government is effected only at
the instance of the Government itself (Gacayan v. Leano, 121 SCRA 260; Gonzalo
Puyat & Sons, Inc. v. De las Ama and Aliño, 74 Phil. 3). The reversion contemplated in
the Public Land Act is not automatic. The Government has to take action to cancel the
patent and the certificate of title in order that the land involved may be reverted to it
(Villacorta v. Ulanday, 73 Phil. 655). Considering that this is an ordinary civil action in
which the Government has not been included as a party and in view of the settled
jurisprudence, we rule against the automatic reversion of the land in question to the
State.

Lastly, in cases where the homestead has been the subject of void conveyances, the
law still regards the original owner as the rightful owner subject to escheat proceedings
by the State. In the Menil and Monzano cases earlier cited, this Court awarded the land
back to the original owner notwithstanding the fact that he was equally guilty with the
vendee in circumventing the law. This is so because this Court has consistently held
that "the pari delicto doctrine may not be invoked in a case of this kind since it would run
counter to an avowed fundamental policy of the State, that the forfeiture of a homestead
is a matter between the State and the grantee or his heirs, and that until the State had
taken steps to annul the grant and asserts title to the homestead the purchaser is, as
against the vendor or his heirs, no more entitled to keep the land than any intruder."
(Acierto et al. v. De los Santos, et al. 95 Phil. 887; de los Santos v. Roman Catholic
Church of Midsayap, et al., supra) We should stress that the vendors of the homestead
are unlettered members of a tribe belonging to the cultural minorities.

We see, however, a distinguishing factor in this case that sets it apart from the above
cases. The original owners in this case, the respondent Palaos and his wife, have never
disaffirmed the contracts executed between them and the respondent Suralta. More
than that, they expressly sustained the title of the latter in court and failed to show any
interest in recovering the land. Nonetheless, we apply our earlier rulings because we
believe that as in pari delicto may not be invoked to defeat the policy of the State neither
may the doctrine of estoppel give a validating effect to a void contract. Indeed, it is
generally considered that as between parties to a contract, validity cannot be given to it
by estoppel if it is prohibited by law or is against public policy (19 Am. Jur. 802). It is not
within the competence of any citizen to barter away what public policy by law seeks to
preserve (Gonzalo Puyat & Sons, Inc. v. De los Amas and Aliño, supra). Of course, this
pronouncement covers only the previous transactions between the respondents. We
cannot pass upon any new contract, between the same parties involving the same land
if this is their clear intention. Any new transaction, however, would be subject to
whatever steps the Government may take for the reversion of the property to it.

With the resolution of the principal issues and in view of our own conclusions of facts
and law, we hold untenable the lower court's award of moral damages, attorney's fees
and litigation expenses.

WHEREFORE, the decision of the Intermediate Appellate Court is REVERSED and

SET ASIDE. Judgment is hereby rendered:

(a) Declaring null and void the sale of the four-hectare portion of the homestead to
respondent Torcuato Suralta and his heirs;

(b) Declaring null and void the sale of the same portion of land to the petitioners
Francisca Arsenal and Remedio Arsenal:

(c) Ordering the Register of Deeds of Bukidnon to cancel Transfer Certificate of Title
No. T-7879 as to the disputed four-hectare portion and to reissue an Original Certificate
of Title for the portion designated as Lot 81-A of the Subdivision Plan LRC-PLD-198451
prepared by Geodetic Engineer Benito P. Balbuena and approved by the Commission
on Land Registration, in favor of the respondents Filomeno Palaos and Mahina Lagwas;

(d) Ordering the respondents Filomeno Palaos and Mahina Lagwas to reimburse the
heirs of the respondent Torcuato Suralta the sum of EIGHT HUNDRED NINETY
PESOS (P890.00), the price of the sale. The value of any improvements made on the
land and the interests on the purchase price are compensated by the fruits the
respondent Suralta and his heirs received from their long possession of the homestead.

This judgment is without prejudice to any appropriate action the Government may take
against the respondents Filomeno Palaos and Mahina Lagwas pursuant to Section 124
of Commonwealth Act No. 141, as amended.

SO ORDERED.

G.R. No. L-45255 November 14, 1986

HEIRS OF MARCIANA G. AVILA, petitioners,
vs.
HON. COURT OF APPEALS, and ALADINO CH. BACARRISAS, respondents.

Ruben M. Orteza for petitioner.

Abeto D. Salcedo for private respondent.

PARAS, J.:

This is a petition for review on certiorari of the October 6, 1976 Decision of the Court of
Appeals in CA-G.R. No. SP-05598 (Aladino Ch. Bacarrisas vs. Hon. Benjamin K.
Gorospe, et al), granting certiorari and setting aside the Order of respondent Judge
dated May 24, 1976.

In 1939, the Court of First Instance of Misamis Oriental, as a cadastral court,

adjudicated Lots 594 and 828 of the Cadastral Survey of Cagayan to Paz Chavez. But
because Paz Chavez failed to pay the property taxes of Lot 594, the government
offered the same for sale at a public auction. Marciana G. Avila, a teacher, wife of
Leonardo Avila and the mother of the herein petitioners, participated in and won the
bidding. Despite the provision of Section 579 of the Revised Administrative Code
prohibiting public school teachers from buying delinquent properties, nobody, not even
the government questioned her participation in said auction sale. In fact on February 20,
1940, after the expiration of the redemption period, the Provincial Treasurer executed in
her favor the final bill of sale. (Rollo, pp. 10-11).

Sometime in 1947, OCT Nos. 100 and 101, covering said Lots 594 and 828, were
issued in favor of Paz Chavez. In opposition thereto, private respondents filed a petition
for review of the decrees on August 25, 1947 at the Court of First Instance of Misamis
Oriental, Branch II, in Cadastral Case No. 17, Lot No. 594 entitled "The Director of
Lands, Applicant v. Atanacia Abalde, et al., Claimants in Re: Petition for Review of
Decree, Marciana G. Avila, Petitioner vs. Paz Chavez, Respondents." After hearing on
the merits, the Cadastral Court promulgated a Decision, the dispositive portion of which
reads:

WHEREFORE, judgment is hereby rendered SETTING ASIDE the

decision of this Court of December 13, 1940, which adjudicated the lots in
question in favor of respondent Paz Chavez, and declaring NULL and
VOID Decrees Nos. 433 and 434 issued by the Chief of Land Registration
Office on June 19, 1947 as well as the certification of title covering Lots
Nos. 594 and 828 of the Cadastral Survey of Cagayan issued by the
Register of Deeds. Judgment is also hereby rendered adjudicating said
Lot No. 594 to the heirs of the late Marciana G. Avila, namely: ..., all
 residents of Malaybalay, Bukidnon, and Lot 828 of the same cadastre to
Leonardo Avila, Sr., also of Malaybalay, subject to whatever RIGHTS OF
WAY or EASEMENTS which the government of the Philippines or any of
its instrumentalities may have acquire over said Lots.

The Clerk of Court is hereby directed to send copies of this decision to the
Chief of the Land Registration Commission, the Provincial Fiscal the
Provincial Treasurer, and the Director of Lands. Once this decision has
become final, the Chief of Land Registration Commission shall issue the
corresponding decrees and certificate of title in favor of the above-
mentioned heirs of Marciana G. Avila and in favor of Leonardo Avila, Sr.

Paz Chavez appealed the said decision with the Court of Appeals, docketed therein as
CA-G.R. No. 38129-R. The Court of Appeals rendered a Decision on March 20, 1974,
the pertinent portion of which, reads:

The legal prohibition cited, therefore, would taint the title of Marciana G.
Avila over Lot 594, with a flaw sufficient to make said title not proper for
registration, specially as against the government, who has not (sic)
impleaded in the proceedings, on the petition for review of the decree, to
be heard as to whether it would resist the registration of said lot in favor of
Marciana G. Avila.

In view of the foregoing, judgment is hereby rendered modifying the

decision appealed from by disallowing the registration of Lot No. 594 in
the name of Marciana G. Avila, but affirming said decision in all other
respects, with costs against appellant. Let a copy of this decision be
furnished the Solicitor General and the Provincial Fiscal of Misamis
Oriental for their information and guidance. (Rollo, pp. 11-12).

Upon remand of the records to the Court below, Avila moved for execution, and a writ of
possession which was opposed by Paz Chavez, who was succeeded by the herein
private respondent Aladino Ch. Bacarrisas on the alleged ground that he has the actual
and physical possession of Lot 594 where his residential house has stood since 1946.

Private respondent's Urgent Motion for Correction of Writ of Execution having been
denied, a certiorari and mandamus with preliminary injunction suit was filed with the
Court of Appeals, which was docketed therein as CA-SP-05598, alleging, among other
things, that inasmuch as the Court of Appeals in CA-G.R. No. 38129-R modified the trial
court's decision by disallowing the registration of Lot 594 in favor of the Avilas, the latter
have no interest, right, claims, title or participation in Lot No. 594 to which they could
claim possession. (Petitioner's Brief, Rollo, pp. 61-63). On said petition, the Court of
Appeals, in a Decision dated October 6, 1976, declared:

CONSIDERING: That decision of cadastral court adjudicating Lot 594 was

"disallowed" by this Court of Appeals, the fact that said decision had also
 annulled the decree and title of Chavez to the same in the petition for
review, in the mind of tills Court, did not produce the effect of adjudicating,
in categorical terms, the possession of Lot 594 in favor of Avila, there is
nothing in the dispositive part nor even in the body of the decision of this
CA-G.R. No. 38129-R that says that, and since the question here
presented is whether or not cadastral court should place Avila in
possession thru a writ of execution, and since the writ of execution is
nothing more, nothing less, than a writ of possession, and since that writ is
given only to the party in the land registration or cadastral case in whose
favor decree had been issued, Manlapas v. Liorente, 48 Phil. 298, or if not
a decree, at least, a judgment of confirmation of title, Director of Lands v.
CFI of Tarlac, 51 Phil. 806,-this must mean that when respondent Court
herein issued the writ of execution as to Lot 594, there really was no legal
basis for the same; for Avila had not secured a decree, nor a judgment of
confirmation of title over said Lot 594, since from the fact that this Court of
Appeals had affirmed the decision of cadastral court annulling Chavez
(Bacarrisas) to Lot 594, it would not follow that this Court of Appeals had
decreed, or in the least, adjudged, that it was Avila who was the owner
entitled to its possession, the conclusion can not follow from the premise;
therefore the writ of execution as to Lot 594 has to be ruled to have been
improvidently issued, and there being no other adequate relief available
unto Bacarrisas, the remedy of certiorari by him chosen was correct.

IN VIEW WHEREOF, this Court is constrained to grant as it now grants

certiorari, order sought to be annulled is set aside, with costs against
respondent Avila. (Rollo, pp. 27-28).

Petitioners filed a motion for reconsideration but the same was denied by the Court of
Appeals in a Resolution dated November 29, 1976.

Hence, this petition (Rollo, pp. 9-22).

Respondent filed his Comment on February 28, 1977 (Ibid, pp. 34-37) in compliance
with the resolution of the First Division of this Court dated January 31, 1977 (Ibid., p.
33).

In a Resolution dated March 7, 1977, the First Division of this Court resolved to give due
course to the petition (Ibid., p. 43).

On March 20, 1977, petitioners filed their Brief (Ibid., pp. 58-72) while respondent filed
his Brief on July 6, 1977 (Ibid., pp. 83-92) and petitioners their Reply Brief on August 17,
1977 (Ibid., pp. 100-107).

In a Resolution dated August 29, 1977, the First Division of this Court resolved to
declare this case submitted for decision (Ibid., p. 110.)
The petitioners assigned the following alleged errors of the Court of Appeals-

1. THE HON. COURT OF APPEALS IN CA-G.R. SP-05598, OCTOBER 6,

1976, THE QUESTIONED DECISION, ERRED BECAUSE, WHEREAS
SAID COURT PREVIOUSLY IN CA-G.R. No. L-38129-R, MARCH, 1974,
MODIFIED THE DECISION OF THE COURT OF FIRST INSTANCE OF
MISAMIS ORIENTAL BY DISALLOWING ONLY THE REGISTRATION
OF LOT 594 BUT AFFIRMED THE ADJUDICATION THEREOF TO THE
PETITIONERS, IN THE PRESENT QUESTIONED DECISION SAID
COURT VIRTUALLY MODIFIED FURTHER THE PREVIOUS DECISION
WHICH HAD LONG BECOME FINAL BY DISALLOWING BOTH THE
REGISTRATION AND ADJUDICATION OF LOT 594;

2. THE HON. COURT OF APPEALS ERRED IN HOLDING THAT THE

PETITIONERS ARE NOT ENTITLED TO POSSESSION OF LOT 594
BECAUSE, SINCE PETITIONERS' TITLE WAS RECOGNIZED BY SAID
COURT PREVIOUSLY IN CA-G.R. NO. L-38129-R, MARCH, 1974, IT
FOLLOWS THAT THEY ARE ENTITLED TO POSSESS LOT 594;

3. THE HON. COURT OF APPEALS ERRED IN THAT TO DENY

POSSESSION OF LOT 594 TO THE PETITIONERS WHO WON IN
CADASTRAL CASE NO. 17 OF THE COURT OF FIRST INSTANCE OF
MISAMIS ORIENTAL, IS TO MAKE THE LOSERS IN SAID CASE-THE
PREDECESSOR-IN-INTEREST OF PRIVATE RESPONDENT WHOSE
DECREES NOS. 433 and 434 COVERING LOTS 594 AND 828 WERE
ORDERED CANCELLED FOR BEING NULL AND VOID, AS THE
WINNER, A SITUATION MOST UNJUST AND UNFAIR; AND

4. THE HON COURT OF APPEALS ERRED IN HOLDING THAT

PRIVATE RESPONDENT CORRECTLY CHOSE THE REMEDY OF
certiorari FOR THE REASON THAT THERE IS NOTHING AT ALL IN THE
RECORDS TO SHOW AN EXERCISE OF GRAVE ABUSE OF
DISCRETION OR WHIMSICAL AND ARBITRARY EXERCISE THEREOF.

The pivotal issue in this case is who has the right of possession of the land in question.

Petitioners seek to distinguish between registration and adjudication of land under the
Torrens System, claiming that in the March 20, 1974 Decision of the Court of Appeals in
CA-G.R. No. 38129-R, registration of Lot No. 594 in favor of the late Marciana G. Avila
was disallowed, but the adjudication thereof in her favor, was affirmed. In effect, it is
their view that ownership and possession are separated in aforesaid decision, so that
they assert that they are entitled to the possession of Lot 594, although they are not
entitled to its registration in their names.

Such contention is without merit.

While it is true that Marciana Avila, their mother and predecessor-in-interest, purchased
the questioned property at a public auction conducted by the government; paid the
purchase price; and was issued a final bill of sale after the expiration of the redemption
period, it is however undisputed that such purchase was prohibited under Section 579
of the Revised Administrative Code, as amended, which provides:

Section 579. Inhibition against purchase of property at tax sale.-Official

and employees of the Government of the Republic of the Philippines are
prohibited from purchasing, directly or indirectly, from the Government,
any property sold by the Government for the non-payment of any public
tax. Any such purchase by a public official or employee shall be void.

Thus, the sale to her of Lot 594 is void.

On the other hand, under Article 1409 of the Civil Code, a void contract is inexistent
from the beginning. It cannot be ratified neither can the right to set up the defense of its
illegality be waived. (Arsenal, et al. vs, The Intermediate Appellate Court. et al., G.R.
No. 66696, July 14, 1986). Moreover, Marciana Avila was a party to an illegal
transaction, and therefore, under Art. 1412 of the Civil Code, she cannot recover what
she has given by reason of the contract or ask for the fulfillment of what has been
promised her.

Furthermore, in a registration case, the judgment confirming the title of the applicant
and ordering its registration in his name necessarily carries with it the delivery of
possession which is an inherent element of the right of ownership. (Abulocion et al. v.
CFI of Iloilo, et al., 100 Phil. 553 [1956]). Hence, a writ of possession may be issued not
only against the person who has been defeated in a registration case but also against
anyone unlawfully and adversely occupying the land or any portion thereof during the
land registration proceedings up to the issuance of the final decree. It is the duty of the
registration court to issue said writ when asked for by the successful claimant. (Demorar
v. Ibañez, etc., et al., 97 Phil. 72 [1955]; Abulocion et al v. CFI of Iloilo, et al., supra).

Under the circumstances, possession cannot be claimed by petitioners, because their

predecessor-in-interest besides being at fault is not the successful claimant in the
registration proceedings and hence not entitled to a writ of possession. As correctly
stated by the Court of Appeals when respondent Court issued the writ of execution as to
Lot 594, there really was no legal basis for the same, for Avila had not secured a
decree, nor a judgment of confirmation of title over said lot.

Much less can possession be claimed by private respondents as it is undisputed that

the land in question has been the subject of a tax sale of delinquent property with a final
bill of sale.

Neither did the government file any claim for possession; nor appear to be impleaded in
any of the actions or petitions before the Courts, Its only interest in the land in question
appears to be in the collection of taxes.
Consequently, the situation is evidently one of failure of ownership because of the
violation of Section 579 of the Administrative Code. Otherwise stated, the property
apparently has no owner.

Under the principle that the State is the ultimate proprietor of land within its jurisdiction,
subject land may be escheated in favor of the government upon filing of appropriate
actions for reversion or escheat under Section 5, Rule 91 of the Rules of Court relative
to properties alienated in violation of any statute.

As to the last issue, it has already been ruled that certiorari is proper where the trial
court has already issued a writ of execution of the questioned judgment, the issuance
being a question of law. (Vda. de Sayman vs. Court of Appeals, 121 SCRA 650).

PREMISES CONSIDERED, the October 6,1976 Decision of the Court of Appeals is

hereby AFFIRMED.

SO ORDERED.

G.R. No. L-23002 July 31, 1967

CONCEPCION FELIX VDA. DE RODRIGUEZ, plaintiff-appellant,

vs.
GERONIMO RODRIGUEZ., ET AL., defendants-appellees.

Ozaeta, Gibbs and Ozaeta for plaintiff-appellant.

Sycip, Salazar, Luna and Associates and Carolina C. Griño-Aquino for defendants-
appellees.

REYES, J.B.L., J.:

This is an appeal by Concepcion Felix Vda. de Rodriguez from the decision of the Court
of First Instance of Bulacan in Civil Case No. 2565, which she commenced on May 28,
1962, to secure declaration, of nullity of two contracts executed on January 24, 1934
and for recovery of certain properties.

The facts of this case may be briefly stated as follows:

Concepcion Felix, widow of the late Don Felipe Calderon and with whom she had one
living child, Concepcion Calderon, contracted a second marriage on June 20, 1929, with
Domingo Rodriguez, widower with four children by a previous marriage, named
Geronimo, Esmeragdo, Jose and Mauricio, all surnamed Rodriguez. There was no
issue in this second marriage.

Prior to her marriage to Rodriguez, Concepcion Felix was the registered owner of 2
fishponds located in the barrio of Babañgad, municipality of Bulacan, Bulacan province.
with a total area of 557,711 square meters covered by OCT Nos. 605 and 807. Under
date of January 24, 1934, Concepcion Felix appeared to have executed a deed of sale
conveying ownership of the aforesaid properties to her daughter, Concepcion Calderon,
for the sum of P2,500.00, which the latter in turn appeared to have transferred to her
mother and stepfather by means of a document dated January 27, 1934. Both deeds,
notarized by Notary Public Jose D. Mendoza, were registered in the office of the
Register of Deeds of Bulacan on January 29, 1934, as a consequence of which, the
original titles were cancelled and TCT Nos. 13815 and 13816 were issued in the names
of the spouses Domingo Rodriguez and Concepcion Felix.

On March 6, 1953, Domingo Rodriguez died intestate, survived by the widow,

Concepcion Felix, his children Geronimo Esmeragdo and Mauricio and grandchildren
Oscar, Juan and Ana, surnamed Rodriguez, children of a son, Jose, who had
predeceased him.

On March 16, 1953, the above-named widow, children and grandchildren of the
deceased entered into an extra-judicial settlement of his (Domingo's) estate, consisting
of one-half of the properties allegedly belonging to the conjugal partnership. Among the
properties listed as conjugal were the two parcels of land in Bulacan, Bulacan, which,
together with another piece of property, were divided among the heirs in this manner:

WHEREAS, the parties have furthermore agreed that the fishpond covered by
TCT Nos. 13815, 13816 and 24109 of the Office of the Register of Deeds of
Bulacan, containing an area of 557,971 sq. m., which is likewise the conjugal
property of the deceased and his surviving spouse; 1/2 of the same or 278,985.5
sq. m. belongs to said Concepcion Felix Vda. de Rodriguez, as her share in the
conjugal property; and 3/4 of the remaining half or 209,239.125 sq. m. are
transferred in full ownership to Geronimo Rodriguez, Esmeragdo Rodriguez and
Mauricio Rodriguez, share and share alike, while the other 1/4 or 69,746.375 sq.
m. of the said remaining half goes in equal shares to Oscar Rodriguez, Juan
Rodriguez and Ana Rodriguez.

As a result of this partition, TCT Nos. 13815 and 13816 were cancelled and TCT Nos.
T-11431 and T-14432 were issued in the names of the said heirs of the deceased.

On March 23, 1953, in a power of attorney executed by the children and grandchildren
of Domingo Rodriguez, Concepcion Felix Vda. de Rodriguez was named their attorney
in-fact, authorized to manage their shares in the fishponds (Exh. 4).

On July 2, 1954, the heirs ended their co-ownership by executing a deed of partition,
dividing and segregating their respective shares in the properties, pursuant to a
consolidation and subdivision plan (PCS-3702), in accordance with which, Concepcion
Felix Vda. de Rodriguez obtained TCT No. T-12910, for the portion pertaining to her
(Exh. L), while TCT No. T-12911 was issued to the other heirs, for their shares. This
latter title was subsequently replaced by TCT No. 16660 (Exh. M).
On October 12, 1954, the Rodriguez children executed another document granting unto
the widow lifetime usufruct over one-third of the fishpond which they received as
hereditary share in the estate of Domingo Rodriguez, which grant was accepted by
Concepcion Felix Vda. de Rodriguez.

Then, in a contract dated December 15, 1961, the widow appeared to have leased from
the Rodriguez children and grandchildren the fishpond (covered by TCT No. 16660) for
a period of 5 years commencing August 16, 1962, for an annual rental of P7,161.37
(Exh. 5).1äwphï1.ñët

At about this time, it seemed that the relationship between the widow and her
stepchildren had turned for the worse. Thus, when she failed to deliver to them the
balance of the earnings of the fishponds, in the amount of P3,000.00, her stepchildren
endorsed the matter to their lawyer who, on May 16, 1962, sent a letter of demand to
the widow for payment thereof. On, May 28, 1962, Concepcion Felix Vda. de Rodriguez
filed the present action in the Court of First Instance of Manila naming as defendants,
Geronimo Rodriguez, Esmeragdo Rodriguez, Oscar Rodriguez, Concepcion Bautista
Vda. de Rodriguez, as guardian of the minors Juan and Ana Rodriguez, and Antonio
Diaz de Rivera and Renato Diaz de Rivera, as guardians of the minors Maria Ana,
Mercedes, Margarita, Mauricio, Jr. and Domingo (Children of Mauricio Rodriguez who
had also died).

The action to declare null and void the deeds of transfer of plaintiff's properties to the
conjugal partnership was based on the alleged employment or exercise by plaintiff's
deceased husband of force and pressure on her; that the conveyances of the properties
— from plaintiff to her daughter and then to the conjugal partnership of plaintiff and her
husband — are both without consideration; that plaintiff participated in the extrajudicial
settlement of estate (of the deceased Domingo Rodriguez) and in other subsequent
deeds or instruments involving the properties in dispute, on the false assumption that
the said properties had become conjugal by reason of the execution of the deeds of
transfer in 1934; that laboring under the same false assumption, plaintiff delivered to
defendants, as income of the properties from 1956 to 1961, the total amount of
P56,976.58. As alternative cause of action, she contended that she would claim for her
share, as surviving widow, of 1/5 of the properties in controversy, should such
properties be adjudged as belonging to the conjugal partnership. Thus, plaintiff prayed
that the deeds of transfer mentioned in the complaint be declared fictitious and
simulated; that the "Extrajudicial Settlement of Estate" be also declared null and void;
that TCT No. 16660 of the Registry of Deeds of Bulacan be cancelled and another one
be issued in the name of plaintiff, Concepcion Felix Vda. de Felix; that defendants be
ordered to pay plaintiff the sum of P56,976.58, with legal interest thereon from the date
of the filing of the complaint, and for appropriate relief in connection with her alternative
cause of action.

In their separate answers, defendants not only denied the material allegations of the
complaint, but also set up as affirmative defenses lack of cause of action, prescription,
estoppel and laches. As counterclaim, they asked for payment by the plaintiff of the
unpaid balance of the earnings of the land up to August 15, 1962 in the sum of
P3,000.00, for attorney's fees and expenses of litigation.

On October 5, 1963, judgment was rendered for the defendants. In upholding the
validity of the contracts, the court found that although the two documents, Exhibits A
and B, were executed for the purpose of converting plaintiff's separate properties into
conjugal assets of the marriage with Domingo Rodriguez, the consent of the parties
thereto was voluntary, contrary to the allegations of plaintiff and her witness. The court
also ruled that having taken part in the questioned transactions, plaintiff was not the
proper party to plead lack of consideration to avoid the transfers; that contracts without
consideration are not inexistent, but are only voidable, following the ruling in the case
of Concepcion vs. Sta. Ana (87 Phil. 787); that there was ratification or confirmation by
the plaintiff of the transfer of her property, by her execution (with the other heirs) of the
extrajudicial settlement of estate; that being a voluntary party to the contracts, Exhibits
A and B, plaintiff cannot recover the properties she gave thereunder. Plaintiff's
alternative cause of action was also rejected on the ground that action for rescission of
the deed of extrajudicial settlement should have been filed within 4 years from its
execution (on March 16, 1953).

From the decision of the Court of First Instance, plaintiff duly appealed to this Court,
insisting that the conveyances in issue were obtained through duress, and were
inexistent, being simulated and without consideration.

We agree with the trial Court that the evidence is not convincing that the contracts of
transfer from Concepcion Felix to her daughter, and from the latter to her mother and
stepfather were executed through violence or intimidation. The charge is predicated
solely upon the improbable and biased testimony of appellant's daughter, Concepcion
C. Martelino, whom the trial court, refused to believe, considering that her version of
violence and harassment was contradicted by Bartolome Gualberto who had lived with
the Rodriguez spouses from 1917 to 1953, and by the improbability of Rodriguez
threatening his stepdaughter in front of the Notary Public who ratified her signature.
Furthermore, as pointed out by the appealed decision, the charge of duress should be
treated with caution considering that Rodriguez had already died when the suit was
brought, for duress, like fraud, is not to be lightly paid at the door of men already dead.
(Cf. Prevost vs. Gratz, 6 Wheat. [U.S.] 481, 498; Sinco vs. Longa, 51 Phil. 507).

What is more decisive is that duress being merely a vice or defect of consent, an action
based upon it must be brought within four years after it has ceased; 1 and the present
action was instituted only in 1962, twenty eight (28) years after the intimidation is
claimed to have occurred, and no less than nine (9) years after the supposed culprit
died (1953). On top of it, appellant entered into a series of subsequent transactions with
appellees that confirmed the contracts that she now tries to set aside. Therefore, this
cause of action is clearly barred.
Appellant's main stand in attacking the conveyances in question is that they are
simulated or fictitious, and inexistent for lack of consideration. We shall examine each
purported defect separately.

The charge of simulation is untenable, for the characteristic of simulation is the fact that
the apparent contract is not really desired or intended to produce legal effects or in way
alter the juridical situation of the parties. Thus, where a person, in order to place his
property beyond the reach of his creditors, simulates a transfer of it to another, he does
not really intend to divest himself of his title and control of the property; hence, the deed
of transfer is but a sham. But appellant contends that the sale by her to her daughter,
and the subsequent sale by the latter to appellant and her husband, the late Domingo
Rodriguez, were done for the purpose of converting the property from paraphernal to
conjugal, thereby vesting a half interest in Rodriguez, and evading the prohibition
against donations from one spouse to another during coverture (Civil Code of 1889, Art.
1334). If this is true, then the appellant and her daughter must have intended the two
conveyance to be real and effective; for appellant could not intend to keep the
ownership of the fishponds and at the same time vest half of them in her husband. The
two contracts of sale then could not have been simulated, but were real and intended to
be fully operative, being the means to achieve the result desired.

Nor does the intention of the parties to circumvent by these contracts the law against
donations between spouses make them simulated ones.

Ferrara, in his classic book, "La Simulacion de los Negocios Juridicos" (Sp. trans,
1926), pp. 95, 105, clearly explains the difference between simulated transactions and
transactions in fraudem legis:

Otra figura que debe distinguirse de la simulacion es el fraus legis. Tambien aqui
se da una gran confusion que persiste aun en la jurisprudencia, apegada
tenazmente a antiguos errores. Se debe a Bahr el haber defendido con vigor la
antitesis teorica que existe entre negocio fingido y negocio fraudulento y haber
atacado la doctrina comun que hacia una mescolanza con los dos conceptos.

Se confunde — dice (2) —, el negocio in fraudem legis con el negocio simulado;

aunque la naturaleza de ambos sea totalmente diversa. El negocio fraudulento
no es, en absolute, un negocio aparente. Es perfectamente serio: se quiere
realmente. Es mas, se quiere tal como se ha realizado, con todas las
consecuencias que correspondent a la forma juridica elegida. Muchas veces,
estas consecuencias con incomodas para una u otra de las partes, aunque
serian mucho mas incomodas las consecuencias que lievaria consigo el acto
prohibido.

xxx xxx xxx

El resultado de las precedentes investigaciones es el siguiente el negocio

simulado quiere producir una apariencia; el negocio fraudulente, una realidad;
 los negocios simulados son ficticios, no queridos; los negocios in fraudem son
serios, reales, y realizados en tal forma por las partes para consequir un
resultado prohibido: la simulacion nunca es un medio para eludir la ley sino para
ocultar su violation. La transgresion del contenido verbal e inmediato de la norma
se encubre bajo el manto de un negocio licito, lo cual no altera el caracter
del contra legem agere. Tan verdad es, que si se ha redactado una contra-
escritura que documentary y declara la verdadera naturaleza del negocio
realizado, no queda mas que aplicar pura y simplementela prohibicion.

Tambien el fraude quiere perjudicar la ley, pero emplea para ello medios
diversos y sigue distintos caminus. No oculta el acto exterior, sino que lo deja
claro y visible, tratando de huir sesgadamente de la aplicacion de la ley merced
a una artistica y sabia combinacion de varios medios juridicos no reprobados.

Appellant invokes our decision in Vasquez vs. Porta, 98 Phil. 490, but to no purpose.
The mortgage and foreclosure sale involved in that case were typical simulations merely
apparent but not really intended to produce legal effects, as approved by the Court's
finding that the alleged creditor and buyer at the foreclosure sale "Porta himself
ostensibly acknowledged by his inertia in allowing the doctor (alleged mortgagor debtor)
to exercise dominical power thereon without any protest on his part." (cas. cit., p. 495).
Not only this, but the mortgagor's wife, when her husband died, "found among his
papers Porta's cancellation of the mortgage in his favor and the draft of the complaint
for foreclosure." Plainly, the precedent cited is here inapplicable.

Were the two conveyances from appellant to her daughter and from the latter to the
spouses Rodriguez void ab initio or inexistent for lack of consideration? We do not find
them to be so. In the first transaction, the price of P2,500.00 is recited in the deed itself
(Exh. A); in the second (Exh. B), the consideration set forth is P3,000.00. Now, Article
1274 of the Civil Code of 1889 (in force when the deeds were executed) provided that
—

In onerous contracts the cause is understood to be, for each contracting party,
the prestation or promise of a thing or service by the other. (emphasis supplied.)

Since in each conveyance the buyer became obligated to pay a definite price in money,
such undertaking constituted in themselves actual causa or consideration for the
conveyance of the fishponds. That the prices were not paid (assuming ad arguendo that
Concepcion Martelino's testimony, to this effect is true) does not make the sales
inexistent for want of causa. As ruled in Enriquez de la Cavada vs. Diaz, 37 Phil. 982,
"the consideration (causa) need not pass from one (party) to the other at the time the
contract is entered into x x x . The consideration need not be paid at the time of the
promise. The one promise is a consideration for the other."

What would invalidate the conveyances now under scrutiny is the fact that they were
resorted to in order to circumvent the legal prohibition against donations between
spouses contained in Article 1334, paragraph 1, of the Civil Code of 1889, then
prevailing. That illegal purpose tainted the contracts, for as held by the Spanish Tribunal
Supreme in its decision of 2 April 1941.

ha de ser reputado ineficaz, por exigencias includibles del caracter social y moral
del Derecho, todo contrato que persiga un fin ilicito o immoral, sea cualquiera el
medio empleado por los contratantes para lograr esa finalidad, no justificada por
un interes digno de ser socialmente protegido.

The illicit purpose then becomes illegal causa within the terms of the old Civil Code, for
as declared by the same Spanish Court in its decision of 14 December 1940 —

toda vez que lo que caracteriza fundamentalmente la ilicitud de la causa es la

lesion de un interos general juridica 6 moral.

a ruling reiterated in the decision of 2 April 1941 when the Court ruled:

El concepto de la causa ilicita, tal como la desenvuelve y aplica con gran

amplitud y flexibilidad la doctrina moderna, permite cobijar, no solo las
convenciones ilicitas por razon de su objeto o de su motivo ... sino tambien
multiples convenciones que no encerrando en si ningun elemento de directa
antijuricidad son ilicitas por el matiz immoral que reviste la operation en su
conjunto x x x .

Unfortunately for herein appellant, in contracts invalidated by illegal subject matter or

illegal causa, Articles 1305 and 1306 of the Civil Code then in force apply rigorously the
rule in pari delicto non oritur action, denying all recovery to the guilty parties inter se.
And appellant is clearly as guilty as her husband in the attempt to evade the legal
interdiction of Article 1334 of the Code, already cited. Wherefore, her present action to
reivindicate the, conveyed properties was correctly repulsed by the Court below.

Art. 1306. If the act which constitutes the illicit consideration is neither a crime
nor a misdemeanor, the following rules shall be observed:

1. When both parties are guilty, neither of them can recover what he may have
given by virtue of the contract, or enforce the performance of the undertaking of
the other party;

xxx xxx xxx

That Article 1306 applies to cases where the nullity arises from the illegality of the
consideration or the purpose of the contract was expressly recognized by this Supreme
Court in Gustilo vs. Maravilla, 48 Phil. 449-450.2

Finally, it cannot be denied that plaintiff-appellant had knowledge of the nullity of the
contract for the transfer of her properties in 1934, because she was even a party
thereto. And yet, her present action was filed only on May 28, 1962 and after the
breaking up of friendly relations between her and defendants-appellees. Appellant's
inaction to enforce her right, for 28 years, cannot be justified by the lame excuse that
she assumed that the transfer was valid. Knowledge of the effect of that transaction
would have been obtained by the exercise of diligence. Ignorance which is the effect of
inexcusable negligence, it has been said, is no excuse for laches. (Go Chi Gun, etc., et
al. vs. Co Cho, et al., G.R. No. L-5208, Feb. 28, 1955). Even assuming for the sake of
argument that appellant held her peace, during the lifetime of her husband, out of
legitimate fear for her life, there is no justification for her future to bring the proper action
after his death in 1953. Instead, she entered into a series of agreements with herein
appellees, the children of her husband by a prior marriage, of partition, usufruct and
lease of their share in the fishponds, transactions that necessarily assumed that
Rodriguez had acquired one-half of the litigated fishponds. In the circumstances,
appellant's cause has become a stale demand and her conduct placed her in estoppel
to question the Validity of the transfer of her properties. (Manila, et al. vs. Galvan, et al.,
G.R. No. L-23507, May 24, 1967; Perez vs. Herranz, 7 Phil. 695-696).

In view of the foregoing, the decision appealed from is affirmed. Costs against appellant
Concepcion Felix Vda. de Rodriguez. So ordered.