Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION

On November 3, 1976 according to Reynoso, she notified the

private respondents by registered mail that she was selling the
leased premises for P600.000.00 less a mortgage loan of
P100,000.00, and was giving them 30 days from receipt of the
letter within which to exercise their right of first priority to purchase
the subject property. She said that in the event that they did not
exercise the said right, she would expect them to vacate the
property not later then March, 1977.

G.R. No. 86150 March 2, 1992

GUZMAN, BOCALING & CO., petitioner,
vs.
RAOUL S. V. BONNEVIE, respondent.
E. Voltaire Garcia for petitioner.
Guinto Law Office for private respondent.

CRUZ, J.:
The subject of the controversy is a parcel of land measuring six
hundred (600) square meters, more or less, with two buildings
constructed thereon, belonging to the Intestate Estate of Jose L.
Reynoso.
This property was leased to Raoul S. Bonnevie and Christopher
Bonnevie by the administratrix, Africa Valdez de Reynoso, for a
period of one year beginning August 8, 1976, at a monthly rental of
P4,000.00.
The Contract of lease contained the following stipulation:
20. In case the LESSOR desire or decides to sell
the lease property, the LESSEES shall be given a first
priority to purchase the same, all things and
considerations being equal.

On January 20, 1977, Reynoso sent another letter to private

respondents advising them that in view of their failure to exercise
their right of first priority, she had already sold the property.
Upon receipt of this letter, the private respondents wrote Reynoso
informing her that neither of them had received her letter dated
November 3, 1976; that they had advised her agent to inform them
officially should she decide to sell the property so negotiations
could be initiated; and that they were "constrained to refuse (her)
request for the termination of the lease.
On March 7, 1977, the leased premises were formally sold to
petitioner Guzman, Bocaling & Co. The Contract of Sale provided
for immediate payment of P137,500.00 on the purchase price, the
balance of P262,500.00 to be paid only when the premises were
vacated.
On April 12, 1977, Reynoso wrote a letter to the private
respondents demanding that they vacate the premises within 15
days for their failure to pay the rentals for four months. When they
refuse, Reynoso filed a complaint for ejectment against them which
was docketed as Civil Case No. 043851-CV in the then City Court of
Manila.
On September 25, 1979, the parties submitted a Compromise
Agreement, which provided inter alia that "the defendant Raoul S.V.
Bonnevie shall vacate the premises subject of the Lease Contract,
Voluntarily and Peacefully not later than October 31, 1979."
This agreement was approved by the City Court and became the
basis of its decision. However, as the private respondents failed to

comply with the above-qouted stipulation, Reynoso filed a motion

for execution of the judgment by compromise, which was granted
on November 8, 1979.
On November 12, 1979, private respondent Raoul S. Bonnevie filed
a motion to set aside the decision of the City Court as well as the
Compromise Agreement on the sole ground that Reynoso had not
delivered to him the "records of payments and receipts of all
rentals by or for the account of defendant ..." The motion was
denied and the case was elevated to the then Court of First
Instance. That Court remanded the case to the City Court of Manila
for trial on the merits after both parties had agreed to set aside the
Compromise Agreement.
On April 29, 1980, while the ejectment case was pending in the City
Court, the private respondents filed an action for annulment of the
sale between Reynoso and herein petitioner Guzman, Bocaling &
Co. and cancellation of the transfer certificate of title in the name
of the latter. They also asked that Reynoso be required to sell the
property to them under the same terms ands conditions agreed
upon in the Contract of Sale in favor of the petitioner This
complaint was docketed as Civil Case No. 131461 in the then Court
of First Instance of Manila.
On May 5, 1980, the City Court decided the ejectment case,
disposing as follows:
WHEREFORE, judgment is hereby rendered ordering
defendants and all persons holding under them to
vacate the premises at No. 658 Gen. Malvar Street,
Malate, Manila, subject of this action, and deliver
possession thereof to the plaintiff, and to pay to the
latter; (1) The sum of P4,000.00 a month from April
1, 1977 to August 8, 1977; (2) The sum of P7,000.00
a month, as reasonable compensation for the
continued unlawful use and occupation of said
premises, from August 9, 1977 and every month
thereafter until defendants actually vacate and
deliver possession thereof to the plaintiff; (3) The

sum of P1,000.00 as and for attorney's fees; and (4)

The costs of suit.
The decision was appealed to the then Court of First Instance of
Manila, docketed as Civil Case No. 132634 and consolidated with
Civil Case No. 131461. In due time, Judge Tomas P. Maddela, Jr.,
decided the two cases as follows:
WHEREFORE, premises considered, this Court in Civil
Case No. 132634 hereby modifies the decision of the
lower court as follows:
1 Ordering defendants Raoul S.V. Bonnevie and
Christopher Bonnevie and all persons holding under
them to vacate the premises at No. 658 Gen. Malvar
St., Malate, Manila subject of this action and deliver
possessions thereof to the plaintiff; and
2 To pay the latter the sum of P4,000.00 a month
from April 1, 1977 up to September 21, 1980 (when
possession of the premises was turned over to the
Sheriff) after deducting whatever payments were
made and accepted by Mrs. Africa Valdez Vda. de
Reynoso during said period, without pronouncement
as to costs.
As to Civil Case No. 131461, the Court hereby
renders judgment in favor of the plaintiff Raoul
Bonnevie as against the defendants Africa Valdez
Vda. de Reynoso and Guzman and Bocaling & Co.
declaring the deed of sale with mortgage executed
by defendant Africa Valdez Vda. de Reynoso in favor
of defendant Guzman and Bocaling null and void;
cancelling the Certificate of Title No. 125914 issued
by the Register of Deeds of Manila in the name of
Guzman and Bocaling & Co.,; the name of Guzman
and Bocaling & Co.,; ordering the defendant Africa
Valdez Vda. de Reynoso to execute favor of the
plaintiff Raoul Bonnevie a deed of sale with mortgage
over the property leased by him in the amount of

P400,000.00 under the same terms and conditions

should there be any other occupants or tenants in
the premises; ordering the defendants jointly and
severally to pay the plaintiff Raoul Bonnevie the
amount of P50,000.00 as temperate damages; to pay
the plaintiff jointly and severally the of P2,000.00 per
month from the time the property was sold to
defendant Guzman and Bocaling by defendant Africa
Valdez Vda de Reynoso on March 7, 1977, up to the
execution of a deed of sale of the property by
defendant Africa Valdez Vda. de Reynoso in favor of
plaintiff Bonnevie; to pay jointly and severally the
plaintiff Bonnevie the amount of P20,000.00 as
exemplary damages, for attorney's fees in the
amount of P10,000.00, and to pay the cost of suit.
Both Reynoso and the petitioner company filed with the Court of
Appeals a petition for review of this decision. The appeal was
eventually resolved against them in a decision promulgated on
March 16, 1988, where the respondent court substantially affirmed
the conclusions of the lower court but reduced the award of
damages. 1
Its motion for reconsideration having been denied on December 14,
1986, the petitioner has come to this Court asserting inter alia that
the respondent court erred in ruling that the grant of first priority to
purchase the subject properties by the judicial administratrix
needed no authority from the probate court; holding that the
Contract of Sale was not voidable but rescissible; considering the
petitioner as a buyer in bad faith ordering Reynoso to execute the
deed of sale in favor of the Bonnevie; and not passing upon the
counterclaim. Reynoso has not appealed.
The Court has examined the petitioner's contentions and finds
them to be untenable.
Reynoso claimed to have sent the November 3, 1976 letter by
registered mail, but the registry return card was not offered in
evidence. What she presented instead was a copy of the said letter
with a photocopy of only the face of a registry return card claimed

to refer to the said letter. A copy of the other side of the card
showing the signature of the person who received the letter and
the data of the receipt was not submitted. There is thus no
satisfactory proof that the letter was received by the Bonnevies.
Even if the letter had indeed been sent to and received by the
private respondent and they did not exercise their right of first
priority, Reynoso would still be guilty of violating Paragraph 20 of
the Contract of Lease which specifically stated that the private
respondents could exercise the right of first priority, "all things and
conditions being equal." The Court reads this mean that there
should be identity of the terms and conditions to be offered to the
Bonnevies and all other prospective buyers, with the Bonnevies to
enjoy the right of first priority.
The selling price qouted to the Bonnevies was P600,000.00, to be
fully paid in cash less only the mortgage lien of P100,000.00. 2 On
the other hand, the selling price offered to and accepted by the
petitioner was only P400,000.00 and only P137,500.00 was paid in
cash while the balance of P272,500.00 was to be paid "when the
property (was) cleared of tenants or occupants. 3
The fact that the Bonnevies had financial problems at that time was
no justification for denying them the first option to buy the subject
property. Even if the Bonnevies could not buy it at the price qouted,
Reynoso could not sell it to another for a lower price and under
more favorable terms and conditions. Only if the Bonnevies failed
to exercise their right of first priority could Reynoso lawfully sell the
subject property to others, and at that only under the same terms
and conditions offered to the Bonnevies.
The Court agrees with the respondent court that it was not
necessary to secure the approval by the probate court of the
Contract of Lease because it did not involve an alienation of real
property of the estate nor did the term of the lease exceed one
year so as top make it fall under Article 1878(8) of the Civil Code.
Only if Paragraph 20 of the Contract of Lease was activated and the
said property was intended to be sold would it be required of the
administratrix to secure the approval of the probate court pursuant
to Rule 89 of the Rules of Court.

As a strict legal proposition, no judgment of the probate court was

reviewed and eventually annuled collaterally by the respondent
court as contended by the petitioner. The order authorizing the sale
in its favor was duly issued by the probate court, which thereafter
approved the Contract of Sale resulting in the eventual issuance if
title in favor of the petitioner. That order was valid insofar as it
recognized the existence of all the essential elements of a valid
contract of sale, but without regard to the special provision in the
Contract of Lease giving another party the right of first priority.
Even if the order of the probate court was valid, the private
respondents still had a right to rescind the Contract of Sale because
of the failure of Reynoso to comply with her duty to give them the
first opportunity to purchase the subject property.
The petitioner argues that assuming the Contract of Sale to be
voidable, only the parties thereto could bring an action to annul it
pursuant to Article 1397 of the Civil Code. It is stressed that private
respondents are strangers to the agreement and therefore have no
personality to seek its annulment.
The respondent court correctly held that the Contract of Sale was
not voidable rescissible. Under Article 1380 to 1381 (3) of the Civil
Code, a contract otherwise valid may nonetheless be subsequently
rescinded by reason of injury to third persons, like creditors. The
status of creditors could be validly accorded the Bonnevies for they
had substantial interests that were prejudiced by the sale of the
subject property to the petitioner without recognizing their right of
first priority under the Contract of Lease.
According to Tolentino, rescission is a remedy granted by law to the
contracting parties and even to third persons, to secure reparation
for damages caused to them by a contract, even if this should be
valid, by means of the restoration of things to their condition at the
moment prior to the celebration of said contract. 4 It is a relief
allowed for the protection of one of the contracting parties and
even third persons from all injury and damage the contract may
cause, or to protect some incompatible and preferent right created
by the contract. 5 Recission implies a contract which, even if initially

valid, produces a lesion or pecuniary damage to someone that

justifies its invalidation for reasons of equity. 6
It is true that the acquisition by a third person of the property
subject of the contract is an obstacle to the action for its rescission
where it is shown that such third person is in lawful possession of
the subject of the contract and that he did not act in bad
faith. 7 However, this rule is not applicable in the case before us
because the petitioner is not considered a third party in relation to
the Contract of Sale nor may its possession of the subject property
be regarded as acquired lawfully and in good faith.
Indeed, Guzman, Bocaling and Co. was the vendee in the Contract
of Sale. Moreover, the petitioner cannot be deemed a purchaser in
good faith for the record shows that its categorically admitted it
was aware of the lease in favor of the Bonnevies, who were actually
occupying the subject property at the time it was sold to it.
Although the Contract of Lease was not annotated on the transfer
certificate of title in the name of the late Jose Reynoso and Africa
Reynoso, the petitioner cannot deny actual knowledge of such
lease which was equivalent to and indeed more binding than
presumed notice by registration.
A purchaser in good faith and for value 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 for
the same at the time of such purchase or before he has notice of
the claim or interest of some other person in the property. 8 Good
faith connotes an honest intention to abstain from taking
unconscientious advantage of another. 9 Tested by these principles,
the petitioner cannot tenably claim to be a buyer in good faith as it
had notice of the lease of the property by the Bonnevies and such
knowledge should have cautioned it to look deeper into the
agreement to determine if it involved stipulations that would
prejudice its own interests.
The petitioner insists that it was not aware of the right of first
priority granted by the Contract of Lease, Assuming this to be true,
we nevertherless agree with the observation of the respondent
court that:

If Guzman-Bocaling failed to inquire about the terms

of the Lease Contract, which includes Par. 20 on
priority right given to the Bonnevies, it had only itself
to blame. Having known that the property it was
buying was under lease, it behooved it as a prudent
person to have required Reynoso or the broker to
show to it the Contract of Lease in which Par. 20 is
contained.
Finally, the petitioner also cannot invoke the Compromise
Agreement which it says canceled the right of first priority granted
to the Bonnevies by the Contract of Lease. This agreement was set
side by the parties thereto, resulting in the restoration of the
original rights of the private respondents under the Contract of
Lease. The Joint Motion to Remand filed by Reynoso and the private
respondents clearly declared inter alia:
That without going into the merits of instant petition,
the parties have agreed to SET ASIDE the
compromise agreement, dated September 24, 1979
and remand Civil Case No. 043851 of the City Court
of Manila to Branch IX thereof for trial on the
merits. 10
We find, in sum, that the respondent court did not commit the
errors imputed to it by the petitioner. On the contrary, its decision
is conformable to the established facts and the applicable law and
jurisprudence and so must be sustained.

LORENZO SHIPPING CORP., petitioner,

INTERNATIONAL, INC., respondent.

SECOND DIVISION
[G.R. No. 145483. November 19, 2004]

MARTHEL

DECISION
CHICO-NAZARIO, J.:
This is a petition for review seeking to set aside the
Decision[1] of the Court of Appeals in CA-G.R. CV No. 54334 and its
Resolution denying petitioners motion for reconsideration.
The factual antecedents of this case are as follows:
Petitioner Lorenzo Shipping Corporation is a domestic
corporation engaged in coastwise shipping. It used to own the
cargo vessel M/V Dadiangas Express.
Upon the other hand, respondent BJ Marthel International, Inc.
is a business entity engaged in trading, marketing, and selling of
various industrial commodities. It is also an importer and
distributor of different brands of engines and spare parts.
From 1987 up to the institution of this case, respondent
supplied petitioner with spare parts for the latters marine engines.
Sometime in 1989, petitioner asked respondent for a quotation for
various machine parts. Acceding to this request, respondent
furnished petitioner with a formal quotation,[2] thus:
May 31, 1989

WHEREFORE, the petition in DENIED, with costs against the

petitioner. The challeged decision is AFFIRMED in toto. It is so
ordered.
Narvasa, C.J., Grio-Aquino and Medialdea, JJ., concur.

vs. BJ

MINQ-6093
LORENZO SHIPPING LINES
Pier 8, North Harbor
Manila
SUBJECT: PARTS FOR ENGINE MODEL

MITSUBISHI 6UET 52/60

(SGD) HENRY
PAJARILLO

Dear Mr. Go:

Sales
Manager

We are pleased to submit our offer for your above subject

requirements.
Description

Qty.

Unit Price

Nozzle Tip
33,120.00

6 pcs.

Plunger & Barrel

165,780.00

6 pcs.

Cylinder Head
2,070,000.00

2 pcs.

Total Price

P 5,520.00

Petitioner thereafter issued to respondent Purchase Order No.

13839,[3] dated 02 November 1989, for the procurement of one set
of cylinder liner, valued at P477,000, to be used for M/V Dadiangas
Express. The purchase order was co-signed by Jose Go, Jr.,
petitioners vice-president, and Henry Pajarillo. Quoted hereunder is
the pertinent portion of the purchase order:

27,630.00
Name of Description
CYL. LINER M/E

1,035,000.00

Qty.
1 SET

Amount
P477,000.00

NOTHING FOLLOW
Cylinder Liner
477,000.00

1 set
INV. #
TERM OF PAYMENT: 25% DOWN PAYMENT

TOTAL PRICE FOB

P2,745,900.00

5 BI-MONTHLY INSTALLMENT[S]
MANILA
___________
DELIVERY: Within 2 months after receipt of firm order.
TERMS: 25% upon delivery, balance payable in 5 bimonthly equal
Installment[s] not to exceed 90 days.
We trust you find our above offer acceptable and look forward to
your most valued order.
Very truly
yours,

Instead of paying the 25% down payment for the first cylinder
liner, petitioner issued in favor of respondent ten postdated
checks[4] to be drawn against the formers account with Allied
Banking Corporation. The checks were supposed to represent the
full payment of the aforementioned cylinder liner.
Subsequently, petitioner issued Purchase Order No. 14011,
dated 15 January 1990, for yet another unit of cylinder liner. This
purchase order stated the term of payment to be 25% upon
delivery, balance payable in 5 bi-monthly equal installment[s].
[6]
Like the purchase order of 02 November 1989, the second
purchase order did not state the date of the cylinder liners delivery.
[5]

On 26 January 1990, respondent deposited petitioners check

that was postdated 18 January 1990, however, the same was

dishonored by the drawee bank due to insufficiency of funds. The

remaining nine postdated checks were eventually returned by
respondent to petitioner.
The parties presented disparate accounts of what happened to
the check which was previously dishonored. Petitioner claimed that
it replaced said check with a good one, the proceeds of which were
applied to its other obligation to respondent. For its part,
respondent insisted that it returned said postdated check to
petitioner.
Respondent thereafter placed the order for the two cylinder
liners with its principal in Japan, Daiei Sangyo Co. Ltd., by opening a
letter of credit on 23 February 1990 under its own name with the
First Interstate Bank of Tokyo.
On 20 April 1990, Pajarillo delivered the two cylinder liners at
petitioners warehouse in North Harbor, Manila. The sales
invoices[7] evidencing the delivery of the cylinder liners both
contain the notation subject to verification under which the
signature of Eric Go, petitioners warehouseman, appeared.
Respondent thereafter sent a Statement of Account dated 15
November 1990[8] to petitioner. While the other items listed in said
statement of account were fully paid by petitioner, the two cylinder
liners delivered to petitioner on 20 April 1990 remained unsettled.
Consequently, Mr. Alejandro Kanaan, Jr., respondents vicepresident, sent a demand letter dated 02 January 1991[9] to
petitioner requiring the latter to pay the value of the cylinder liners
subjects of this case. Instead of heeding the demand of respondent
for the full payment of the value of the cylinder liners, petitioner
sent the former a letter dated 12 March 1991 [10] offering to pay only
P150,000 for the cylinder liners. In said letter, petitioner claimed
that as the cylinder liners were delivered late and due to the
scrapping of the M/V Dadiangas Express, it (petitioner) would have
to sell the cylinder liners in Singapore and pay the balance from the
proceeds of said sale.
Shortly thereafter, another demand letter dated 27 March
1991[11] was furnished petitioner by respondents counsel requiring

the former to settle its obligation to respondent together with

accrued interest and attorneys fees.
Due to the failure of the parties to settle the matter,
respondent filed an action for sum of money and damages before
the Regional Trial Court (RTC) of Makati City. In its complaint,
[12]
respondent (plaintiff below) alleged that despite its repeated
oral and written demands, petitioner obstinately refused to settle
its obligations. Respondent prayed that petitioner be ordered to
pay for the value of the cylinder liners plus accrued interest of
P111,300 as of May 1991 and additional interest of 14% per annum
to be reckoned from June 1991 until the full payment of the
principal; attorneys fees; costs of suits; exemplary damages; actual
damages; and compensatory damages.
On 25 July 1991, and prior to the filing of a responsive
pleading, respondent filed an amended complaint with preliminary
attachment pursuant to Sections 2 and 3, Rule 57 of the then Rules
of Court.[13] Aside from the prayer for the issuance of writ of
preliminary attachment, the amendments also pertained to the
issuance by petitioner of the postdated checks and the amounts of
damages claimed.
In an Order dated 25 July 1991,[14] the court a quo granted
respondents prayer for the issuance of a preliminary attachment.
On 09 August 1991, petitioner filed an Urgent Ex-Parte Motion to
Discharge Writ of Attachment[15] attaching thereto a counter-bond
as required by the Rules of Court. On even date, the trial court
issued an Order[16] lifting the levy on petitioners properties and the
garnishment of its bank accounts.
Petitioner afterwards filed its Answer [17] alleging therein that
time was of the essence in the delivery of the cylinder liners and
that the delivery on 20 April 1990 of said items was late as
respondent committed to deliver said items within two (2) months
after receipt of firm order [18] from petitioner. Petitioner likewise
sought counterclaims for moral damages, exemplary damages,
attorneys fees plus appearance fees, and expenses of litigation.

Subsequently, respondent filed a Second Amended Complaint

with Preliminary Attachment dated 25 October 1991. [19] The
amendment introduced dealt solely with the number of postdated
checks issued by petitioner as full payment for the first cylinder
liner it ordered from respondent. Whereas in the first amended
complaint, only nine postdated checks were involved, in its second
amended complaint, respondent claimed that petitioner actually
issued ten postdated checks. Despite the opposition by petitioner,
the trial court admitted respondents Second Amended Complaint
with Preliminary Attachment.[20]
Prior to the commencement of trial, petitioner filed a Motion
(For Leave To Sell Cylinder Liners)[21] alleging therein that [w]ith the
passage of time and with no definite end in sight to the present
litigation, the cylinder liners run the risk of obsolescence and
deterioration[22] to the prejudice of the parties to this case. Thus,
petitioner prayed that it be allowed to sell the cylinder liners at the
best possible price and to place the proceeds of said sale in
escrow. This motion, unopposed by respondent, was granted by
the trial court through the Order of 17 March 1991.[23]
After trial, the court a quo dismissed the action, the decretal
portion of the Decision stating:
WHEREFORE, the complaint is hereby dismissed, with costs against
the plaintiff, which is ordered to pay P50,000.00 to the defendant
as and by way of attorneys fees.[24]
The trial court held respondent bound to the quotation it
submitted to petitioner particularly with respect to the terms of
payment and delivery of the cylinder liners. It also declared that
respondent had agreed to the cancellation of the contract of sale
when it returned the postdated checks issued by petitioner.
Respondents
counterclaims
for
moral,
exemplary,
and
compensatory damages were dismissed for insufficiency of
evidence.
Respondent moved for the reconsideration of the trial courts
Decision but the motion was denied for lack of merit.[25]

Aggrieved by the findings of the trial court, respondent filed an

appeal with the Court of Appeals[26] which reversed and set aside
the Decision of the court a quo. The appellate court brushed aside
petitioners claim that time was of the essence in the contract of
sale between the parties herein considering the fact that a
significant period of time had lapsed between respondents offer
and the issuance by petitioner of its purchase orders. The
dispositive portion of the Decision of the appellate court states:
WHEREFORE, the decision of the lower court is REVERSED and SET
ASIDE. The appellee is hereby ORDERED to pay the appellant the
amount of P954,000.00, and accrued interest computed at 14% per
annum reckoned from May, 1991.[27]
The Court of Appeals also held that respondent could not have
incurred delay in the delivery of cylinder liners as no demand,
judicial or extrajudicial, was made by respondent upon petitioner in
contravention of the express provision of Article 1169 of the Civil
Code which provides:
Those obliged to deliver or to do something incur in delay from the
time the obligee judicially or extrajudicially demands from them the
fulfillment of their obligation.
Likewise, the appellate court concluded that there was no
evidence of the alleged cancellation of orders by petitioner and that
the delivery of the cylinder liners on 20 April 1990 was reasonable
under the circumstances.
On 22 May 2000, petitioner filed a motion for reconsideration
of the Decision of the Court of Appeals but this was denied through
the resolution of 06 October 2000. [28] Hence, this petition for review
which basically raises the issues of whether or not respondent
incurred delay in performing its obligation under the contract of
sale and whether or not said contract was validly rescinded by
petitioner.
That a contract of sale was entered into by the parties is not
disputed. Petitioner, however, maintains that its obligation to pay
fully the purchase price was extinguished because the adverted

contract was validly terminated due to respondents failure to

deliver the cylinder liners within the two-month period stated in the
formal quotation dated 31 May 1989.
The threshold question, then, is: Was there late delivery of the
subjects of the contract of sale to justify petitioner to disregard the
terms of the contract considering that time was of the essence
thereof?
In determining whether time is of the essence in a contract, the
ultimate criterion is the actual or apparent intention of the parties
and before time may be so regarded by a court, there must be a
sufficient manifestation, either in the contract itself or the
surrounding circumstances of that intention.[29] Petitioner insists
that although its purchase orders did not specify the dates when
the cylinder liners were supposed to be delivered, nevertheless,
respondent should abide by the term of delivery appearing on the
quotation it submitted to petitioner. [30] Petitioner theorizes that the
quotation embodied the offer from respondent while the purchase
order represented its (petitioners) acceptance of the proposed
terms of the contract of sale. [31] Thus, petitioner is of the view that
these two documents cannot be taken separately as if there were
two distinct contracts.[32] We do not agree.
It is a cardinal rule in interpretation of contracts that if the
terms thereof are clear and leave no doubt as to the intention of
the contracting parties, the literal meaning shall control.
[33]
However, in order to ascertain the intention of the parties, their
contemporaneous and subsequent acts should be considered.
[34]
While this Court recognizes the principle that contracts are
respected as the law between the contracting parties, this principle
is tempered by the rule that the intention of the parties is
primordial[35] and once the intention of the parties has been
ascertained, that element is deemed as an integral part of the
contract as though it has been originally expressed in unequivocal
terms.[36]
In the present case, we cannot subscribe to the position of
petitioner that the documents, by themselves, embody the terms of
the sale of the cylinder liners. One can easily glean the significant

differences in the terms as stated in the formal quotation and

Purchase Order No. 13839 with regard to the due date of the down
payment for the first cylinder liner and the date of its delivery as
well as Purchase Order No. 14011 with respect to the date of
delivery of the second cylinder liner. While the quotation provided
by respondent evidently stated that the cylinder liners were
supposed to be delivered within two months from receipt of the
firm order of petitioner and that the 25% down payment was due
upon the cylinder liners delivery, the purchase orders prepared by
petitioner clearly omitted these significant items. The petitioners
Purchase Order No. 13839 made no mention at all of the due dates
of delivery of the first cylinder liner and of the payment of 25%
down payment. Its Purchase Order No. 14011 likewise did not
indicate the due date of delivery of the second cylinder liner.
In the case of Bugatti v. Court of Appeals,[37] we reiterated the
principle that [a] contract undergoes three distinct stages
preparation or negotiation, its perfection, and finally, its
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. The perfection or birth
of the contract takes place when the parties agree upon the
essential elements of the contract.
The last stage is
the consummation of the contract wherein the parties fulfill or
perform the terms agreed upon in the contract, culminating in the
extinguishment thereof.
In the instant case, the formal quotation provided by
respondent represented the negotiation phase of the subject
contract of sale between the parties. As of that time, the parties
had not yet reached an agreement as regards the terms and
conditions of the contract of sale of the cylinder liners. Petitioner
could very well have ignored the offer or tendered a counter-offer
to respondent while the latter could have, under the pertinent
provision of the Civil Code,[38] withdrawn or modified the same. The
parties were at liberty to discuss the provisions of the contract of
sale prior to its perfection. In this connection, we turn to the
testimonies of Pajarillo and Kanaan, Jr., that the terms of the offer
were, indeed, renegotiated prior to the issuance of Purchase Order
No. 13839.

During the hearing of the case on 28 January 1993, Pajarillo

testified as follows:

A:

Q: You testified Mr. Witness, that you submitted a

quotation with defendant Lorenzo Shipping
Corporation dated rather marked as Exhibit A stating
the terms of payment and delivery of the cylinder
liner, did you not?
A:

Yes sir.

Q: I am showing to you the quotation which is marked as

Exhibit A there appears in the quotation that the
delivery of the cylinder liner will be made in two
months time from the time you received the
confirmation of the order. Is that correct?

Q: But were you able to confirm the order from your

Japanese supplier on June of that year?
A:

Yes sir.

Q: Now, after you made the formal quotation which is

Exhibit A how long a time did the defendant make a
confirmation of the order?

Yes sir.

After six months.

Q: And this is contained in the purchase order given to

you by Lorenzo Shipping Corporation?
A:

Because Lorenzo Shipping Corporation did not give us

the purchase order for that cylinder liner.

Q: And it was only on November 2, 1989 when they gave

you the purchase order?
A:

A:

No sir.

Q: Why? Will you tell the court why you were not able to
confirm your order with your Japanese supplier?
A:

A:

When Lorenzo Shipping Corporation inquired from us

for that cylinder liner, we have inquired [with] our
supplier in Japan to give us the price and delivery of
that item. When we received that quotation from our
supplier it is stated there that they can deliver within
two months but we have to get our confirmed order
within June.

Q: So upon receipt of the purchase order from Lorenzo

Shipping Lines in 1989 did you confirm the order with
your Japanese supplier after receiving the purchase
order dated November 2, 1989?

Yes sir.
A:

Q: Now, in the purchase order dated November 2, 1989

there appears only the date the terms of payment
which you required of them of 25% down payment,
now, it is stated in the purchase order the date of
delivery, will you explain to the court why the date of
delivery of the cylinder liner was not mentioned in the
purchase order which is the contract between you and
Lorenzo Shipping Corporation?

Only when Lorenzo Shipping Corporation will give us

the down payment of 25%.[39]

For his part, during the cross-examination conducted by

counsel for petitioner, Kanaan, Jr., testified in the following manner:
WITNESS: This term said 25% upon delivery.
Subsequently, in the final contract, what was agreed
upon by both parties was 25% down payment.
Q: When?

A:

Upon confirmation of the order.

...

Q: And when was the down payment supposed to be

paid?
A:

It was not stated when we were supposed to receive

that. Normally, we expect to receive at the earliest
possible time. Again, that would depend on the
customers. Even after receipt of the purchase order
which was what happened here, they re-negotiated
the terms and sometimes we do accept that.

Q: Was there a re-negotiation of this term?

A:

This offer, yes. We offered a final requirement of 25%

down payment upon delivery.

Q: What was the re-negotiated term?

A:

25% down payment

Q: To be paid when?
A:

Supposed to be paid upon order.[40]

The above declarations remain unassailed. Other than its bare

assertion that the subject contracts of sale did not undergo further
renegotiation, petitioner failed to proffer sufficient evidence to
refute the above testimonies of Pajarillo and Kanaan, Jr.
Notably, petitioner was the one who caused the preparation of
Purchase Orders No. 13839 and No. 14011 yet it utterly failed to
adduce any justification as to why said documents contained terms
which are at variance with those stated in the quotation provided
by respondent. The only plausible reason for such failure on the
part of petitioner is that the parties had, in fact, renegotiated the
proposed terms of the contract of sale. Moreover, as the obscurity
in the terms of the contract between respondent and petitioner was

caused by the latter when it omitted the date of delivery of the

cylinder liners in the purchase orders and varied the term with
respect to the due date of the down payment, [41] said obscurity
must be resolved against it.[42]
Relative to the above discussion, we find the case of Smith,
Bell & Co., Ltd. v. Matti,[43] instructive. There, we held that
When the time of delivery is not fixed or is stated in general and
indefinite terms, time is not of the essence of the contract. . . .
In such cases, the delivery must be made within a reasonable time.
The law implies, however, that if no time is fixed, delivery shall be
made within a reasonable time, in the absence of anything to show
that an immediate delivery intended. . . .
We also find significant the fact that while petitioner alleges
that the cylinder liners were to be used for dry dock repair and
maintenance of its M/V Dadiangas Express between the later part
of December 1989 to early January 1990, the record is bereft of any
indication that respondent was aware of such fact. The failure of
petitioner to notify respondent of said date is fatal to its claim that
time was of the essence in the subject contracts of sale.
In addition, we quote, with approval, the keen observation of
the Court of Appeals:
. . . It must be noted that in the purchase orders issued by the
appellee, dated November 2, 1989 and January 15, 1990, no
specific date of delivery was indicated therein. If time was really of
the essence as claimed by the appellee, they should have stated
the same in the said purchase orders, and not merely relied on the
quotation issued by the appellant considering the lapse of time
between the quotation issued by the appellant and the purchase
orders of the appellee.
In the instant case, the appellee should have provided for an
allowance of time and made the purchase order earlier if indeed
the said cylinder liner was necessary for the repair of the vessel

scheduled on the first week of January, 1990. In fact, the appellee

should have cancelled the first purchase order when the cylinder
liner was not delivered on the date it now says was necessary.
Instead it issued another purchase order for the second set of
cylinder liner. This fact negates appellees claim that time was
indeed of the essence in the consummation of the contract of sale
between the parties.[44]
Finally, the ten postdated checks issued in November 1989 by
petitioner and received by the respondent as full payment of the
purchase price of the first cylinder liner supposed to be delivered
on 02 January 1990 fail to impress. It is not an indication of failure
to honor a commitment on the part of the respondent. The earliest
maturity date of the checks was 18 January 1990. As delivery of
said checks could produce the effect of payment only when they
have been cashed,[45] respondents obligation to deliver the first
cylinder liner could not have arisen as early as 02 January 1990 as
claimed by petitioner since by that time, petitioner had yet to fulfill
its undertaking to fully pay for the value of the first cylinder liner.
As explained by respondent, it proceeded with the placement of the
order for the cylinder liners with its principal in Japan solely on the
basis of its previously harmonious business relationship with
petitioner.
As an aside, let it be underscored that [e]ven where time is of
the essence, a breach of the contract in that respect by one of the
parties may be waived by the other partys subsequently treating
the contract as still in force.[46] Petitioners receipt of the cylinder
liners when they were delivered to its warehouse on 20 April 1990
clearly indicates that it considered the contract of sale to be still
subsisting up to that time. Indeed, had the contract of sale been
cancelled already as claimed by petitioner, it no longer had any
business receiving the cylinder liners even if said receipt was
subject to verification. By accepting the cylinder liners when these
were delivered to its warehouse, petitioner indisputably waived the
claimed delay in the delivery of said items.
We, therefore, hold that in the subject contracts, time was not
of the essence. The delivery of the cylinder liners on 20 April 1990
was made within a reasonable period of time considering that

respondent had to place the order for the cylinder liners with its
principal in Japan and that the latter was, at that time, beset by
heavy volume of work.[47]
There having been no failure on the part of the respondent to
perform its obligation, the power to rescind the contract is
unavailing to the petitioner. Article 1191 of the New Civil Code runs
as follows:
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 law explicitly gives either party the right to rescind the
contract only upon the failure of the other to perform the obligation
assumed thereunder.[48] The right, however, is not an unbridled
one. This Court in the case of University of the Philippines v. De los
Angeles,[49] speaking through the eminent civilist Justice J.B.L.
Reyes, exhorts:
Of course, it must be understood that the act of a party in
treating a contract as cancelled or resolved on account of
infractions by the other contracting party must be made known to
the other and is always provisional, being ever subject to scrutiny
and review by the proper court. If the other party denied that
rescission is justified, it is free to resort to judicial action in its own
behalf, and bring the matter to court. Then, should the court, after
due hearing, decide that the resolution of the contract was not
warranted, the responsible party will be sentenced to damages; in
the contrary case, the resolution will be affirmed, and the
consequent indemnity awarded to the party prejudiced. (Emphasis
supplied)
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. But the law definitely does not require that the contracting
party who believes itself injured must first file suit and wait for a

judgment before taking extrajudicial steps to protect its interest.

Otherwise, the party injured by the others breach will have to
passively sit and watch its damages accumulate during the
pendency of the suit until the final judgment of rescission is
rendered when the law itself requires that he should exercise due
diligence to minimize its own damages.[50]
Here, there is no showing that petitioner notified respondent of
its intention to rescind the contract of sale between them. Quite
the contrary, respondents act of proceeding with the opening of an
irrevocable letter of credit on 23 February 1990 belies petitioners
claim that it notified respondent of the cancellation of the contract
of sale. Truly, no prudent businessman would pursue such action
knowing that the contract of sale, for which the letter of credit was
opened, was already rescinded by the other party.
WHEREFORE, premises considered, the instant Petition for
Review on Certiorari is DENIED. The Decision of the Court of
Appeals, dated 28 April 2000, and its Resolution, dated 06 October
2000, are hereby AFFIRMED. No costs.
SO ORDERED.

THIRD DIVISION
VALENTIN MOVIDO, G.R. No. 172279
substituted by MARGINITO
MOVIDO,
Petitioner, Present:
CORONA, J., Chairperson,
VELASCO, JR.,
- v e r s u s - NACHURA,
PERALTA and
MENDOZA, JJ.
LUIS REYES PASTOR,
Respondent.
Promulgated:
February 11, 2010
x--------------------------------------------------x
DECISION
CORONA, J.:

Respondent Luis Reyes Pastor filed a complaint for specific

performance in the Regional Trial Court (RTC) of Imus, Cavite,
praying that petitioner Valentin Movido[1] be compelled to cause the
survey of a parcel of land subject of their contract to sell.

In his complaint, respondent alleged that he and petitioner

executed a kasunduan sa bilihan ng lupa where the latter agreed to
sell a parcel of land located in Paliparan, Dasmarias, Cavite with an
area of some 21,000 sq. m. out of the 22,731 sq. m. covered by

sa petsa ng ikalimang
bayad;

Transfer Certificate of Title (TCT) No. 362995 at P400/sq. m. The

P1,000,

agreement read:
xxx
1. Na si MOVIDO ang tunay at ganap na mayari ng isang (1) parselang lupa sa Paliparan,
Dasmarias, Cavite, na ang nasabing lupa sakop
ng TRANSFER CERTIFICATE OF TITLE No. T362995, na ito ay lalong mailalarawan ng tulad ng
sumusunod:
xxx
2. Na ipinagkakasundo ni MOVIDO na ipagbili kay PASTOR
ang 21,000 metro cuadrado humigit-kumulang, ng
lupang nakalarawan sa dakong taas sa halagang
APAT NA RAANG PISO (P400.00) bawat metro
cuadrado o sa kabuuang halaga na WALONG MILYON
AT APAT NA RAANG LIBONG PISO (P8,400,000.00), na
ang nasabing halaga ay babayaran ni PASTOR kay
MOVIDO ng gaya ng sumusunod:
P500,000.00 babayaran sa paglagda ng kasulatang ito;
P500,000.00 babayaran sa loob ng tatlong
(3) buwan mula sa petsa
ng unang bayad;
P1,000,

000.00 babayaran sa loob ng

tatlong (3) buwan mula sa
petsa ng ikalawang bayad;

P1,000,

000.00 babayaran sa loob ng

tatlong (3) buwan mula sa
petsa ng ikatlong bayad;

P1,000,

000.00 babayaran sa loob ng

tatlong (3) buwan mula
sa petsa ng ikaapat na
bayad;

P1,000,

000.00 babayaran sa loob ng

tatlong (3) buwan mula

000.00 babayaran sa loob ng

tatlong (3) buwan mula
sa petsa ng ikaanim na
bayad;

P2,400,

000.00 babayaran sa loob ng

tatlong (3) buwan mula
sa petsa ng ikapitong
bayad;
____________
P8,400, 000.00 Kabuuan.
3. Na ang 1,731 metro cuadrado, humigit-kumulang, na
hindi kasama sa bilihang ito ay nasasakop ni
Leonardo Cuevas, na ito ay ipapasukat at
ipapahiwalay ni MOVIDO sa kabuuan ng nasabing
lupa bago matapos ang huling bayad ng bilihang ito;
4. Na si MOVIDO ang magbabayad ng lahat ng
gastos tungkol sa bilihang ito tulad ng capital gains
tax, selyo dokumentaryo, transfer tax, registration
fees, bayad sa nagsasaka ng nasabing lupa, sampu
ng komisyon ng mga ahente. Ang babayaran ni
MOVIDO na capital gains tax ay hanggang sa ISANG
DAANG PISO (P100.00) lamang;
5. Na kung si PASTOR ay hindi makabayad sa
balance sa takdang panahon, ang kalahati ng lahat
ng kanyang naibayad ay mapopornada sa
kapakanan ni MOVIDO at ang kasulatang ito ay
mawawalan ng bisa;
6. Na kasabay ng pagbabayad ng huling bayad, si MOVIDO
ay lalagda sa kaukulang kasulatan ng ganap na
bilihan (Deed of Absolute Sale) ng lupang dito ay
tinutukoy.[2]

Respondent further alleged that another kasunduan was later

Lastly, respondent alleged that he already paid petitioner P5 million

executed supplementing the kasunduan sa bilihan ng lupa. It

out of the original purchase price of P8.4 million stated in

provided that, if a Napocor power line traversed the subject lot, the

the kasunduan sa bilihan ng lupa. He was willing and ready to pay

purchase price would be lowered to P200/sq. m. beyond the

the balance of the purchase price but due to petitioners refusal to

distance of 15 meters on both sides from the center of the power

have the property surveyed despite incessant demands, his unpaid

line while the portion within a distance of 15 meters on both sides

balance could not be determined with certainty.

from the center of the power line would not be paid. In particular,
the kasunduan provided:

In his answer, petitioner alleged that the original negotiation for the
sale of his property involved the entire area of 22,731 sq. m.

xxx

1. Na ipinagkasundo ni
MOVIDO na
ipagbili
kay PASTOR ang kanyang lupa lupa sa Paliparan,
Dasmarias, Cavite na may sukat na 22731 metro
kwadrado at sakop ng Transfer Certificate of Title No.
T-362995.

However, as respondent was not sure whether a Napocor power

2. Na kanilang napagkasunduan na kung

sakali na ang lupang tinutukoy ay pumailalim sa
linya ng kuryente ng NAPOCOR, ang bahagi ng lupa
na hindi hihigit sa layo ng LABING LIMANG (15)
METRO mula sa kailaliman ng linya ng kuryente ay
hindi pababayaran ni MOVIDO kay PASTOR, at ang
bahagi ng lupa na pumakabila sa linya ng kuryente
mula sa Paliparan Road at hihigit ng LABING LIMANG
(15) METRO mula sa kailaliman ng linya ng kuryente
ay pababayaran ni MOVIDO kay PASTOR sa halagang
DALAWANG DAANG PISO bawat metro kwadrado.
[3]
(italics supplied)

agreementthe kasunduan sa bilihan ng lupawas executed where

line traversed the property, they then executed the kasunduan.

After

respondent

personally

inspected

the

property,

final

the area to be sold was 21,000 sq. m. for P400/sq. m. for a total
sum of P8.4 million. The final agreement also listed a schedule of
payments of the purchase price and included a penalty clause in
case of default.
Petitioner also charged respondent with delay in paying several
installments due and did not pay the 7 th installment in the amount

Respondent likewise claimed that petitioner undertook to cause the

survey of the property in order to determine the portion affected by
the Napocor power line.

of P1 million. This was allegedly a material breach because they

agreed that the survey of the property would only be done after
respondent would have paid the 7th installment. Due to respondents
failure to fulfill his obligations, petitioner claimed that he had no

choice except to rescind the kasunduan sa bilihan ng lupa. He,

Marginito Movidos motion for reconsideration did not have its

however, was willing to reimburse 50% of whatever respondent had

desired result.[6] Hence, this petition for review on certiorari,

paid him so far.

[7]

After hearing, the RTC[4] ruled in favor of petitioner and held that
the kasunduan preceded the kasunduan sa bilihan ng lupa. Thus,
the RTC dismissed the complaint of respondent for lack of merit
and/or

cause

of

action.

It

also

ordered

the

rescission

of

the kasunduan sa bilihan ng lupa as well as the forfeiture of 50% of

the amount already paid by respondent (but ordered petitioner to

where he insists that it was the kasunduan, not the kasunduan

sa bilihan ng lupa, which was first executed by the parties. He

likewise claims that the failure of respondent to pay the 7 th and
8th installments of the purchase price gave petitioner the right to
rescind the contract.

MISGUIDED SEARCH FOR PRIORITY

IN TIME

return to respondent 50% of the amount already paid). The RTC

also directed respondent to pay petitioner P50,000 attorneys fees
and costs of suit.

The issue of which of the two contracts was first executed by the
parties is immaterial to the resolution of this case. In the first
place, both contracts were executed and notarized on the same

On appeal, the Court of Appeals (CA)[5] reversed the RTC and held

day, December 6, 1993. More importantly, both contracts, even

that the kasunduan sa bilihan ng lupa was the first document

independent of the time of their execution but, taken together,

executed by the parties, not the kasunduan. Thus, the CA ordered

clearly spell out in full the respective rights and obligations of the

respondent to pay the heirs of petitioner the balance of the

parties.

purchase price in the amount of P2,796,400. The CA also ordered

that, upon complete payment by respondent, Marginito Movido (the
substitute of petitioner) should execute the necessary deed of
absolute sale in favor of respondent and comply with petitioners
other obligations under the kasunduan sa bilihan ng lupa.

Indeed, a reading of the kasunduan sa bilihan ng lupa and

the kasunduan would readily reveal that payment of the purchase
price does not depend on the survey of the property. In other
words, the purchase price should be paid whether or not the

property is surveyed. The survey of the property is important only

petitioner is obligated to conduct the survey on or before the due

insofar as the right of respondent to the reduction of the purchase

date of the last installment.

price is concerned.

Corollary to this, the CA erred when it proceeded to determine the

On the other hand, the survey of the property to determine the

metes and bounds of the 1,731 sq. m. portion that is excluded from
the

contract

as

well

as

the

portions

covered

by

the kasunduan which will be subject to reduction of the purchase

price, is also not conditioned on the payment of any installment.
Petitioner simply has to do it. In fact, under the kasunduan sa
bilihan ng lupa, the survey should be done before the date of the
last installment. Hence, the survey could have been done anytime
after the execution of the agreement.

remaining balance of respondent by applying a reduced rate on

certain portions of the property. In effect, the CA disregarded the
agreement of the parties that petitioner should first cause the
survey of the subject property in order to determine the area
excluded from the sale and the portion traversed by the Napocor
power line. Petitioner himself admitted that he had this obligation.
Thus, the CAs application of a reduced price in the absence of a
survey was without factual or legal basis. It unduly infringed on the
parties liberty to contract.
There are two options to resolve this impasse. First, respondent

If respondent pays a higher amount without the property being

may be ordered to pay his remaining balance in the kasunduan sa
surveyed first (compared to what he is liable to pay after the
bilihan ng lupa representing the 7th and 8th installments or the
survey of the property) it will not be a problem because the excess
amount of P3.4 million in which case Marginito will be ordered to
of the amount paid can easily be refunded to him. Such would be
immediately conduct the survey of the property and thereafter to
the plain application of the provisions of the kasunduan. On the
refund to respondent the excess of the amount paid. Second,
other hand, petitioner cannot successfully reject respondents
Marginito may be ordered to have the property surveyed first within
demand for petitioner to perform his obligation to have the
a reasonable period and thereafter respondent will have to pay his
property surveyed. Under the kasunduan sa bilihan ng lupa,
corresponding balance (which, naturally, will be less than P3.4
million).

Prudence dictates that the second option is better as it will prevent

further conflict between the parties. Thus, we adopt the second

Their

stipulations

must

therefore

be

interpreted

together,

attributing to the doubtful ones that sense that may result from all
of them taken jointly.[9] Their proper construction must be one that

option.
IMPROPRIETY OF RESCISSION

gives effect to all.[10]

Rescission is only allowed when the breach is so substantial and

fundamental as to defeat the object of the parties in entering into
the contract.[8] We find no such substantial or material breach.

In this connection, the kasunduan sa bilihan ng lupa contains the

general terms and conditions of the agreement of the parties. On
the other hand, the kasunduan refers to a particular or specific
matter, i.e., that portion of the land that is traversed by a Napocor

th

th

It is true that respondent failed to pay the 7 and 8 installments of

the purchase price. However, considering the circumstances of the
instant

case,

particularly

the

provisions

of

the kasunduan,

respondent cannot be deemed to have committed a serious breach.

In the first place, respondent was not in default as petitioner never
made a demand for payment.

power line. As thekasunduan pertains to a special area of the

agreement, it constitutes an exception to the general provisions of
the kasunduan sa bilihan ng lupa, particularly on the purchase price
for that portion. Specialibus derogat generalibus.
Under both the kasunduan sa bilihan ng lupa and the kasunduan,
petitioner undertook to cause the survey of the property in order to

lupa and

determine the portion excluded from the sale, as well as the portion

the kasunduan should both be given effect rather than be declared

traversed by the Napocor power line. Despite repeated demands by

conflicting, if there is a way of reconciling them. Petitioner and

respondent, however, petitioner failed to perform his obligation.

respondent would not have entered into either of the agreements if

Thus, considering that there was a breach on the part of petitioner

they did not intend to be bound or governed by them. Indeed,

(and no material breach on the part of respondent), he cannot

taken together, the two agreements actually constitute a single

properly invoke his right to rescind the contract.

Moreover,

the kasunduan

sa

bilihan

ng

contract pertaining to the sale of a land to respondent by petitioner.

WHEREFORE, the petition is hereby DENIED. The July 18,

2005 decision of the Court of Appeals in CA-G.R. CV No. 67207
Republic of the Philippines

is AFFIRMED with the MODIFICATION that Marginito Movido is

ordered to cause the survey of the subject lot within a period of

Supreme Court

three months in order to determine the excluded portion of the sale

Manila

and the portion traversed by the Napocor power line. If he fails to

do so, Luis Reyes Pastor is hereby authorized to have it done with
the cost of the survey charged to Marginito Movido.

FIRST DIVISION

Luis Reyes Pastor should thereafter pay the balance of the

purchase price, after which, Marginito should execute the kasulatan
ng ganap na bilihan ng lupa (deed of absolute sale) in favor of Luis
Reyes Pastor, reflecting as purchase price the amount actually paid
by the latter.

FONTANA RESORT AND COUNTRY

CLUB, INC. AND RN DEVELOPMENT
CORP.,

G.R. No. 154670

Petitioners,
Present:

Costs against petitioner.

SO ORDERED.

CORONA, C.J.,
- versus -

Chairperson,
LEONARDO-DE CASTRO,
BERSAMIN,
DEL CASTILLO, and

SPOUSES ROY S. TAN AND SUSAN C.

VILLARAMA, JR., JJ.

TAN,

Sometime in March 1997, respondent spouses Roy S. Tan

Promulgated:

Respondents.

and Susana C. Tan bought from petitioner RN Development

Corporation (RNDC) two class D shares of stock in petitioner

January 30, 2012

x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

Fontana Resort and Country Club, Inc. (FRCCI), worth P387,300.00,

enticed by the promises of petitioners sales agents that petitioner
FRCCI would construct a park with first-class leisure facilities in
Clark Field, Pampanga, to be called Fontana Leisure Park (FLP); that
FLP would be fully developed and operational by the first quarter of
1998; and that FRCCI class D shareholders would be admitted to

DECISION

one membership in the country club, which entitled them to use

park facilities and stay at a two-bedroom villa for five (5) ordinary
weekdays and two (2) weekends every year for free.[5]

LEONARDO-DE CASTRO, J.:

Two years later, in March 1999, respondents filed before the
SEC a Complaint[6] for refund of the P387,300.00 they spent to
For review under Rule 45 of the Rules of Court is the
Decision[1] dated May 30, 2002 and Resolution[2] dated August 12,
2002 of the Court Appeals in CA-G.R. SP No. 67816. The appellate
court affirmed with modification the Decision [3] dated July 6, 2001 of
the Securities and Exchange Commission (SEC) En Banc in SEC AC

purchase FRCCI shares of stock from petitioners. Respondents

alleged that they had been deceived into buying FRCCI shares
because of petitioners fraudulent misrepresentations. Construction
of FLP turned out to be still unfinished and the policies, rules, and
regulations of the country club were obscure.

Case No. 788 which, in turn, affirmed the Decision[4] dated April 28,
2000 of Hearing Officer Marciano S. Bacalla, Jr. (Bacalla) of the SEC
Securities Investigation and Clearing Department (SICD) in SEC
Case No. 04-99-6264.

Respondents narrated that they were able to book and avail

themselves of free accommodations at an FLP villa on September 5,
1998, a Saturday. They requested that an FLP villa again be
reserved for their free use on October 17, 1998, another Saturday,
for the celebration of their daughters 18th birthday, but were

refused by petitioners. Petitioners clarified that respondents were

only entitled to free accommodations at FLP for one week annually
consisting of five (5) ordinary days, one (1) Saturday and one (1)
Sunday[,] and that respondents had already exhausted their free

As a member of the Fontana Resort and

Country Club, you are entitled to 7 days stay
consisting of 5 weekdays, one Saturday and one
Sunday. A total of 544 elegantly furnished villas
available in two and three bedroom units. [8]

Saturday pass for the year. According to respondents, they were

not informed of said rule regarding their free accommodations at
FLP, and had they known about it, they would not have availed
themselves of the free accommodations on September 5, 1998. In
January 1999, respondents attempted once more to book and
reserve an FLP villa for their free use on April 1, 1999, a

Petitioners also cited provisions of the FRCCI Articles of

Incorporation and the By-Laws on class D shares of stock, to wit:

Thursday. Their reservation was confirmed by a certain Murphy

Magtoto. However, on March 3, 1999, another country club
employee named Shaye called respondents to say that their
reservation for April 1, 1999 was cancelled because the FLP was
already fully booked.

Petitioners filed their Answer[7] in which they asserted that

respondents had been duly informed of the privileges given to
them as shareholders of FRCCI class D shares of stock since these
were all explicitly provided in the promotional materials for the
country club, the Articles of Incorporation, and the By-Laws of
FRCCI. Petitioners called attention to the following paragraph in
their ads:

GUEST ROOMS

Class D shares may be sold to any person,

irrespective of nationality or Citizenship. Every
registered owner of a class D share may be admitted
to one (1) Membership in the Club and subject to the
Clubs rules and regulations, shall be entitled to use a
Two (2) Bedroom Multiplex Model Unit in the
residential villas provided by the Club for one week
annually consisting of five (5) ordinary days, one (1)
Saturday and one (1) Sunday. (Article Seventh,
Articles of Incorporation)

Class D shares which may be sold to any

person,
irrespective
of
nationality
or
Citizenship. Every registered owner of a class D share
may be admitted to one (1) Membership in the Club
and subject to the Clubs rules and regulations, shall
be entitled to use a Two (2) Bedroom Multiplex Model
Unit in the residential villas provided by the Club for
one week annually consisting of five (5) ordinary
days, one (1) Saturday and one (1) Sunday. [Section
2(a), Article II of the By-Laws.][9]

1999 that there were still no available villas for their

use because of full bookings.[10]

Petitioners further denied that they unjustly cancelled

respondents reservation for an FLP villa on April 1, 1999, explaining
that:

Lastly, petitioners averred that when respondents were first

accommodated at FLP, only minor or finishing construction works
were left to be done and that facilities of the country club were
6. There is also no truth to the claim of [herein
respondents] that they were given and had
confirmed reservations for April 1, 1998. There was
no reservation to cancel since there was no
confirmed reservations to speak of for the reason
that April 1, 1999, being Holy Thursday, all
reservations for the Holy Week were fully booked as
early as the start of the current year. The Holy Week
being a peak season for accommodations, all
reservations had to be made on a priority basis; and
as admitted by [respondents], they tried to make
their reservation only on January 4, 1999, a time
when all reservations have been fully booked. The
fact of [respondents] non-reservation can be attested
by the fact that no confirmation number was issued
in their favor.

If at all, [respondents] were wait-listed as of

January 4, 1999, meaning, they would be given
preference in the reservation in the event that any of
the confirmed members/guests were to cancel. The
diligence on the part of the [herein petitioners] to
inform [respondents] of the status of their
reservation can be manifested by the act of the Clubs
personnel when it advised [respondents] on March 3,

already operational.

SEC-SICD Hearing Officer Bacalla conducted preliminary

hearings and trial proper in the case. Respondents filed separate
sworn Question and Answer depositions. [11] Esther U. Lacuna, a
witness for respondents, also filed a sworn Question and Answer
deposition.[12]When petitioners twice defaulted, without any valid
excuse, to present evidence on the scheduled hearing dates,
Hearing Officer Bacalla deemed petitioners to have waived their
right to present evidence and considered the case submitted for
resolution.[13]

Based on the evidence presented by respondents, Hearing

Officer Bacalla made the following findings in his Decision dated
April 28, 2000:

To prove the merits of their case, both [herein

respondents] testified. Ms. Esther U. Lacuna likewise
testified in favor of [respondents].

As established by the testimonies of

[respondents] witnesses, Ms. Esther U. Lacuna, a
duly accredited sales agent of [herein petitioners]
who went to see [respondents] for the purpose of
inducing them to buy membership shares of Fontana
Resort and Country Club, Inc. with promises that the
park will provide its shareholders with first class
leisure facilities, showing them brochures (Exhibits V,
V-1 and V-2) of the future development of the park.

Indeed [respondents] bought two (2) class D

shares in Fontana Resort and Country Club, Inc.
paying P387,000.00 to [petitioners] as evidenced by
provisional and official receipts (Exhibits A to S), and
signing two (2) documents designated as Agreement
to Sell and Purchase Shares of Stock (Exhibits T to U2).

It is undisputed that many of the facilities

promised were not completed within the specified
date. Ms. Lacuna even testified that less than 50% of
what was promised were actually delivered.

What was really frustrating on the part of

[respondents] was when they made reservations for
the use of the Clubs facilities on the occasion of their
daughters 18th birthday on October 17, 1998 where
they were deprived of the clubs premises alleging

that the two (2) weekend stay which class D

shareholders are entitled should be on a Saturday
and on a Sunday. Since [respondents] have already
availed of one (1) weekend stay which was a
Saturday, they could no longer have the second
weekend stay also on a Saturday.

Another occasion was when [respondents]

were again denied the use of the clubs facilities
because they did not have a confirmation number
although their reservation was confirmed.

All these rules were never communicated to

[respondents] when they bought their membership
shares.

It would seem that [petitioners], through their

officers, would make up rules as they go along. A
clever ploy for [petitioners] to hide the lack of club
facilities to accommodate the needs of their
members.

[Petitioners] failure to finish the development

works at the Fontana Leisure Park within the period
they promised and their failure or refusal to
accommodate [respondents] for a reservation on
October 17, 1998 and April 1, 1999, constitute gross
misrepresentation detrimental not only to the
[respondents] but to the general public as well.

All these empty promises of [petitioners] may

well be part of a scheme to attract, and induce
[respondents] to buy shares because surely if
[petitioners] had told the truth about these matters,
[respondents] would never have bought shares in
their project in the first place.[14]

WHEREFORE, the instant appeal is hereby

DENIED and the Decision of Hearing Officer Marciano
S. Bacalla, Jr. dated April 28, 2000 is hereby
AFFIRMED.[16]

In an Order[17] dated September 19, 2001, the SEC en

Consequently, Hearing Officer Bacalla adjudged:

WHEREFORE, premises considered, judgment

is hereby rendered directing [herein petitioners] to
jointly and severally pay [herein respondents]:

banc denied petitioners Motion for Reconsideration for being a

prohibited pleading under the SEC Rules of Procedure.

Petitioners filed before the Court of Appeals a Petition for

Review under Rule 43 of the Rules of Court. Petitioners contend that
even on the sole basis of respondents evidence, the appealed
decisions of Hearing Officer Bacalla and the SEC en banc are

1)
The
amount
of P387,000.00 plus interest at the rate
of 21% per annum computed from
August 28, 1998 when demand was
first made, until such time as payment
is actually made.[15]

contrary to law and jurisprudence.

The Court of Appeals rendered a Decision on March 30,

2002, finding petitioners appeal to be partly meritorious.

Petitioners appealed the above-quoted ruling of Hearing

The Court of Appeals brushed aside the finding of the SEC

Officer Bacalla before the SEC en banc. In its Decision dated July 6,

that petitioners were guilty of fraudulent misrepresentation in

2001, the SEC en banc held:

inducing respondents to buy FRCCI shares of stock. Instead, the

appellate court declared that:

clarified that the sale of the FRCCI shares of stock by petitioners to

What seems clear rather is that in inducing the
respondents to buy the Fontana shares, RN
Development Corporation merely repeated to the
spouses the benefits promised to all holders of
Fontana Class D shares. These inducements were in
fact contained in Fontanas promotion brochures to
prospective subscribers which the spouses must
obviously have read.[18]

respondents partakes the nature of a forbearance of money, since

the amount paid by respondents for the shares was used by
petitioners to defray the construction of FLP; hence, the interest
rate of 12% per annum should be imposed on said amount from the
date of extrajudicial demand until its return to respondents. The
dispositive portion of the Court of Appeals judgment reads:

WHEREFORE,
premises
considered,
the
appealed judgment is MODIFIED: a) petitioner
Fontana Resort and Country Club is hereby ordered
to refund and pay to the respondents Spouses Roy S.
Tan and Susana C. Tan the amount of P387,000.00,
Philippine Currency, representing the price of two of
its Class D shares of stock, plus simple interest at the
rate of 12% per annum computed from August 28,
1998 when demand was first made, until payment is
completed; b) the respondent spouses are ordered to
surrender to petitioner Fontana Resort and Country
Club their two (2) Class D shares issued by said
petitioner upon receipt of the full refund with interest
as herein ordered.[20]

Nonetheless, the Court of Appeals agreed with the SEC that

the sale of the two FRCCI class D shares of stock by petitioners to
respondents should be rescinded. Petitioners defaulted on their
promises to respondents that FLP would be fully developed and
operational by the first quarter of 1998 and that as shareholders of
said shares, respondents were entitled to the free use of first-class
leisure facilities at FLP and free accommodations at a two-bedroom
villa for five (5) ordinary weekdays and two (2) weekends every
year.

The Court of Appeals modified the appealed SEC judgment

Petitioners filed a Motion for Reconsideration, but it was

by ordering respondents to return their certificates of shares of

stock to petitioners upon the latters refund of the price of said
shares since [t]he essence of the questioned [SEC] judgment was
really to declare as rescinded or annulled the sale or transfer of the
shares to the respondents.[19] The appellate court additionally

denied by the Court of Appeals in its Resolution dated August 12,

2002.

Hence, the instant Petition for Review.

between petitioners and respondents is inconsistent with Articles

1385 and 1398 of the Civil Code. The said SEC judgment did not
contain an express declaration that it involved the rescission or

Petitioners,

in

their

Memorandum,[21] submit

for

our

consideration the following issues:

annulment of contract or an explicit order for respondents to return

the thing sold. Petitioners also assert that respondents claim for
refund based on fraud or misrepresentation should have been
directed only against petitioner RNDC, the registered owner and
seller of the FRCCI class D shares of stock. Petitioner FRCCI was

a.
Was the
essence
of
the
judgment of the SEC which ordered the return of the
purchase price but not of the thing sold a declaration
of rescission or annulment of the contract of sale
between RNDC and respondents?

merely the issuer of the shares sold to respondents. Petitioners

lastly question the order of the Court of Appeals for petitioners to
pay 12% interest per annum, the same being devoid of legal basis
since their obligation does not constitute a loan or forbearance of
money.

b.
Was the order of the Court of
Appeals to FRCCI which was not the seller of the
thing sold (the seller was RNDC) to return the
purchase price to the buyers (the respondents) in
accordance with law?

In their Memorandum,[23] respondents chiefly argue that

petitioners have posited mere questions of fact and none of law,
precluding this Court to take cognizance of the instant Petition
under Rule 45 of the Rules of Court. Even so, respondents maintain

c.
Was the imposition of 12%
interest per annum from the date of extra-judicial
demand on an obligation which is not a loan or
forbearance of money in accordance with law?[22]

that the Court of Appeals did not err in ordering them to return the
certificates of shares of stock to petitioners upon the latters refund
of the price thereof as the essence of respondents claim for refund
is to rescind the sale of said shares. Furthermore, both petitioners
should be held liable since they are the owners and developers of
FLP. Petitioner FRCCI is primarily liable for respondents claim for
refund, and petitioner RNDC, at most, is only subsidiarily liable

Petitioners averred that the ruling of the Court of Appeals

that the essence of the SEC judgment is the rescission or
annulment of the contract of sale of the FRCCI shares of stock

considering that petitioner RNDC is a mere agent of petitioner

FRCCI. Respondents finally insist that the imposition of the interest
rate at 12% per annum, computed from the date of the

extrajudicial demand, is correct since the obligation of petitioners is

in the nature of a forbearance of money.

We find merit in the Petition.

We address the preliminary matter of the nature of

respondents Complaint against petitioners. Well-settled is the rule
that the allegations in the complaint determine the nature of the
action instituted.[24]

Respondents alleged in their Complaint that:

16. [Herein petitioners] failure to finish the

development works at the Fontana Leisure Park
within the time frame that they promised, and
[petitioners] failure/refusal to accom[m]odate [herein
respondents] request for reservations on 17 October
1998
and
1
April
1999,
constitute
gross
misrepresentation and a form of deception, not only
to the [respondents], but the general public as well.

17. [Petitioners] deliberately and maliciously

misrepresented that development works will be
completed when they knew fully well that it was
impossible to complete the development works by

the deadline. [Petitioners] also deliberately and

maliciously deceived [respondents] into believing
that they have the privilege to utilize Club facilities,
only for [respondents] to be later on denied such use
of Club facilities. All these acts are part of
[petitioners] scheme to attract, induce and convince
[respondents] to buy shares, knowing that had they
told the truth about these matters, [respondents]
would never have bought shares in their project.

18. On 28 August 1998, [respondents]

requested their lawyer to write [petitioner] Fontana
Resort and Country Club, Inc. a letter demanding for
the return of their payment. x x x.

19. [Petitioner] Fontana Resort and Country

Club, Inc. responded to this letter, with a letter of its
own
dated
10
September
1998,
denying
[respondents] request for a refund. x x x.

20. [Respondents] replied to [petitioner]

Fontana Resort and Country Clubs letter with a letter
dated 13 October 1998, x x x. But despite receipt of
this letter, [petitioners] failed/refused and continue
to fail /refuse to refund/return [respondents]
payments.

xxxx

22. [Petitioners] acted in bad faith when it

sold membership shares to [respondents], promising
development work will be completed by the first
quarter of 1998 when [petitioners] knew fully well
that they were in no position and had no intention to
complete development work within the time they
promised. [Petitioners]
also
were
maliciously
motivated when they promised [respondents] use of
Club facilities only to deny [respondents] such use
later on.

23. It is detrimental to the interest of

[respondents] and quite unfair that they will be made
to suffer from the delay in the completion of the
development work, while [petitioners] are already
enjoying the purchase price paid by [respondents].

xxxx

26. Apart from the refund of the amount

of P387,300.00, [respondents] are also entitled to be
paid reasonable interest from their money. Afterall,
[petitioners] have already benefitted from this
money, having been able to use it, if not for the
Fontana Leisure Park project, for their other projects
as well.And had [respondents] been able to deposit
the money in the bank, or invested it in some
worthwhile undertaking, they would have earned
interest on the money at the rate of at least 21% per
annum.[25]

The aforequoted allegations in respondents Complaint

sufficiently state a cause of action for the annulment of a voidable
contract of sale based on fraud under Article 1390, in relation to
Article 1398, of the Civil Code, and/or rescission of a reciprocal
obligation under Article 1191, in relation to Article 1385, of the
same Code. Said provisions of the Civil Code are reproduced below:

Article 1390. The following contracts are

voidable or annullable, even though there may have
been no damage to the contracting parties:

1.
Those where one of the parties
is incapable of giving consent to a contract;
2.
Those where the consent is
vitiated by mistake, violence, intimidation, undue
influence or fraud.

These contracts are binding, unless they are

annulled by a proper action in court. They are
susceptible of ratification.
Article 1398. An obligation having been
annulled, the contracting parties shall restore to each
other the things which have been the subject matter
of the contract, with their fruits, and the price with its
interest, except in cases provided by law.

In obligations to render service, the value

thereof shall be the basis for damages.
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.

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.

In this case, indemnity for damages may be

demanded from the person causing the loss.

The injured party may choose between the

fulfillment 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.

It does not matter that respondents, in their Complaint,

The court shall decree the rescission claimed,
unless there be just cause authorizing the fixing of a
period.

simply prayed for refund of the purchase price they had paid for
their

FRCCI

specifically

mentioning

the

annulment or rescission of the sale of said shares. The Court of

Appeals

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.

shares,[26] without

treated

respondents

Complaint

as

one

for

annulment/rescission of contract and, accordingly, it did not simply

order petitioners to refund to respondents the purchase price of the
FRCCI shares, but also directed respondents to comply with their
correlative obligation of surrendering their certificates of shares of
stock to petitioners.

Article
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 return.

Now the only issue left for us to determine whether or not

petitioners committed fraud or defaulted on their promises as
would justify the annulment or rescission of their contract of sale

with respondents requires us to reexamine evidence submitted by

of a contract, one party secures the consent of the other by using

the parties and review the factual findings by the SEC and the

deception, without which such consent would not have been given.

Court of Appeals.

[29]

Simply stated, the fraud must be the determining cause of the

contract, or must have caused the consent to be given.[30]

As a general rule, the remedy of appeal by certiorari under

Rule 45 of the Rules of Court contemplates only questions of law

[T]he general rule is that he who alleges fraud or mistake in

and not issues of fact. This rule, however, is inapplicable in cases x

a transaction must substantiate his allegation as the presumption is

x x where the factual findings complained of are absolutely devoid

that a person takes ordinary care for his concerns and that private

of support in the records or the assailed judgment of the appellate

dealings have been entered into fairly and regularly. [31] One who

court is based on a misapprehension of facts. [27] Another well-

alleges defect or lack of valid consent to a contract by reason of

recognized exception to the general rule is when the factual

fraud or undue influence must establish by full, clear and

findings of the administrative agency and the Court of Appeals are

convincing evidence such specific acts that vitiated a partys

contradictory.

[28]

The said exceptions are applicable to the case at

consent, otherwise, the latters presumed consent to the contract

prevails.[32]

bar.

There are contradictory findings below as to the existence of

In this case, respondents have miserably failed to prove how

fraud: while Hearing Officer Bacalla and the SEC en banc found that

petitioners employed fraud to induce respondents to buy FRCCI

there is fraud on the part of petitioners in selling the FRCCI shares

shares. It can only be expected that petitioners presented the FLP

to respondents, the Court of Appeals found none.

and the country club in the most positive light in order to attract
investor-members. There is no showing that in their sales talk to
respondents,

There is fraud when one party is induced by the other to

enter into a contract, through and solely because of the latters
insidious words or machinations. But not all forms of fraud can
vitiate consent. Under Article 1330, fraud refers to dolo causante or
causal fraud, in which, prior to or simultaneous with the execution

petitioners

actually

used

insidious

words

or

machinations, without which, respondents would not have bought

the FRCCI shares. Respondents appear to be literate and of aboveaverage means, who may not be so easily deceived into parting
with a substantial amount of money. What is apparent to us is that
respondents knowingly and willingly consented to buying FRCCI

shares, but were later on disappointed with the actual FLP facilities
and club membership benefits.

Yet, petitioners were able to satisfactorily explain, based on

clear

policies,

memberships,

rules,
why

and

they

regulations
rejected

governing

respondents

FLP

request

club
for

reservation on October 17, 1998. Respondents do not dispute that

Similarly, we find no evidence on record that petitioners
defaulted on any of their obligations that would have called for the
rescission of the sale of the FRCCI shares to respondents.

the Articles of Incorporation and the By-Laws of FRCCI, as well as

the promotional materials distributed by petitioners to the public
(copies of which respondents admitted receiving), expressly stated
that the subscribers of FRCCI class D shares of stock are entitled
free accommodation at an FLP two-bedroom villa only for one week
annually

consisting

of

five

(5)

ordinary

days, one

(1)

The right to rescind a contract arises once the other party

Saturday and one (1) Sunday. Thus, respondents cannot claim

defaults in the performance of his obligation.[33] Rescission of a

that they were totally ignorant of such rule or that petitioners have

contract will not be permitted for a slight or casual breach, but only

been changing the rules as they go along. Respondents had already

such substantial and fundamental breach as would defeat the very

availed themselves of free accommodations at an FLP villa

object of the parties in making the agreement. [34] In the same case

on September 5, 1998, a Saturday, so that there was basis for

as fraud, the burden of establishing the default of petitioners lies

petitioners to deny respondents subsequent request for reservation

upon respondents, but respondents once more failed to discharge

of an FLP villa for their free use on October 17, 1998, another

the same.

Saturday.

Neither can we rescind the contract because construction of

FLP facilities were still unfinished by 1998. Indeed, respondents
Respondents decry the alleged arbitrary and unreasonable

allegation

of

unfinished FLP facilities

was not

disputed

by

denial of their request for reservation at FLP and the obscure and

petitioners, but respondents themselves were not able to present

ever-changing

competent proof of the extent of such incompleteness. Without any

rules

of

the

country

club

accommodations for FRCCI class D shareholders.

as

regards

free

idea of how much of FLP and which particular FLP facilities remain
unfinished, there is no way for us to determine whether petitioners
were actually unable to deliver on their promise of a first class
leisure park and whether there is sufficient reason for us to grant

rescission or annulment of the sale of FRCCI shares. Apparently,

In Almeda v. Cario,[36] we have expounded on the propriety of

respondents were still able to enjoy their stay at FLP despite the

granting nominal damages as follows:

still ongoing construction works, enough for them to wish to return

and again reserve accommodations at the park.

Respondents

additionally

alleged

the

unreasonable

cancellation of their confirmed reservation for the free use of an

FLP villa on April

1, 1999. According to respondents,

their

reservation was confirmed by a Mr. Murphy Magtoto, only to be

cancelled later on by a certain Shaye. Petitioners countered that
April 1, 1999 was a Holy Thursday and FLP was already fullybooked. Petitioners, however, do not deny that Murphy Magtoto
and Shaye are FLP employees who dealt with respondents. The
absence of any confirmation number issued to respondents does

[N]ominal damages may be awarded to a plaintiff

whose right has been violated or invaded by the
defendant, for the purpose of vindicating or
recognizing that right, and not for indemnifying the
plaintiff for any loss suffered by him. Its award is thus
not for the purpose of indemnification for a loss but
for the recognition and vindication of a right. Indeed,
nominal damages are damages in name only and not
in fact. When granted by the courts, they are not
treated as an equivalent of a wrong inflicted but
simply a recognition of the existence of a technical
injury. A violation of the plaintiff's right, even if only
technical, is sufficient to support an award of nominal
damages. Conversely, so long as there is a showing
of a violation of the right of the plaintiff, an award of
nominal damages is proper.[37]

not also discount the possibility that the latters reservation was
mistakenly confirmed by Murphy Magtoto despite FLP being fullybooked. At most, we perceive a mix-up in the reservation process of
petitioners. This demonstrates a mere negligence on the part of
petitioners, but not willful intention to deprive respondents of their

It is also settled that the amount of such damages is addressed to

membership benefits. It does not constitute default that would call

the sound discretion of the court, taking into account the relevant

for rescission of the sale of FRCCI shares by petitioners to

circumstances.[38]

respondents. For

the

negligence

of

petitioners

as

regards

respondents reservation for April 1, 1999, respondents are at least

entitled to nominal damages in accordance with Articles 2221 and
2222 of the Civil Code.[35]

In this case, we deem that the respondents are entitled to an award

of P5,000.00 as nominal damages in recognition of their confirmed
reservation for the free use of an FLP villa on April 1, 1999 which
was inexcusably cancelled by petitioner on March 3, 1999.

In sum, the respondents Complaint sufficiently alleged a

cause of action for the annulment or rescission of the contract of
sale of FRCCI class D shares by petitioners to respondents;
however, respondents were unable to establish by preponderance
of evidence that they are entitled to said annulment or rescission.

SECOND DIVISION
[G.R. No. 140182. April 12, 2005]

WHEREFORE, in view of the foregoing, the Petition is

hereby GRANTED. The

Decision

dated

May

30,

2002

and

Resolution dated August 12, 2002 of the Court Appeals in CA-G.R.

SP

No.

67816

are REVERSED and SET

TANAY
RECREATION
CENTER
AND
CORP., petitioner,
vs. CATALINA
FAUSTO+ and
ANUNCIACION
PACUNAYEN, respondents.

DEVELOPMENT
MATIENZO
FAUSTO

ASIDE. Petitioners
DECISION

are ORDERED to pay respondents the amount of P5,000.00 as

nominal damages for their negligence as regards respondents

AUSTRIA-MARTINEZ, J.:

cancelled reservation for April 1, 1999, but respondents Complaint,

in so far as the annulment or rescission of the contract of sale of
the FRCCI class "D shares of stock is concerned, is DISMISSED for
lack of merit.

SO ORDERED.

Petitioner Tanay Recreation Center and Development Corp.

(TRCDC) is the lessee of a 3,090-square meter property located in
Sitio Gayas, Tanay, Rizal, owned by Catalina Matienzo Fausto,
[1]
under a Contract of Lease executed on August 1, 1971. On this
property stands the Tanay Coliseum Cockpit operated by petitioner.
The lease contract provided for a 20-year term, subject to renewal
within sixty days prior to its expiration. The contract also provided
that should Fausto decide to sell the property, petitioner shall have
the priority right to purchase the same.[2]
On June 17, 1991, petitioner wrote Fausto informing her of its
intention to renew the lease.[3] However, it was Faustos daughter,
respondent Anunciacion F. Pacunayen, who replied, asking that
petitioner remove the improvements built thereon, as she is now
the absolute owner of the property.[4] It appears that Fausto had
earlier sold the property to Pacunayen on August 8, 1990, for the
sum of P10,000.00 under a Kasulatan ng Bilihan Patuluyan ng

Lupa,[5] and title has already been transferred in her name under
Transfer Certificate of Title (TCT) No. M-35468.[6]
Despite efforts, the matter was not resolved. Hence, on
September 4, 1991, petitioner filed an Amended Complaint for
Annulment of Deed of Sale, Specific Performance with Damages,
and Injunction, docketed as Civil Case No. 372-M.[7]
In her Answer, respondent claimed that petitioner is estopped
from assailing the validity of the deed of sale as the latter
acknowledged her ownership when it merely asked for a renewal of
the lease. According to respondent, when they met to discuss the
matter, petitioner did not demand for the exercise of its option to
purchase the property, and it even asked for grace period to vacate
the premises.[8]

for the extended period of seven [7] years of the contract of lease).
In case it had not yet completed its deposit, to immediately pay the
remaining balance to Pacunayen.
4.0. To order TRCDC to PAY the amount of P10,000.00 as monthly
rental, with regard to its continued stay in the leased premises
even after the expiration of the extended period of seven (7) years,
computed from August 1, 1998, until it finally vacates therefrom.
SO ORDERED.[11]

On appeal, docketed as CA-G.R. CV No. 43770, the Court of

Appeals (CA) affirmed with modifications the trial courts judgment
per its Decision dated June 14, 1999. [10] The dispositive portion of
the decision reads:

In arriving at the assailed decision, the CA acknowledged the

priority right of TRCDC to purchase the property in question.
However, the CA interpreted such right to mean that it shall be
applicable only in case the property is sold to strangers and not to
Faustos relative. The CA stated that (T)o interpret it otherwise as to
comprehend all sales including those made to relatives and to the
compulsory heirs of the seller at that would be an absurdity, and
her (Faustos) only motive for such transfer was precisely one of
preserving the property within her bloodline and that someone
administer the property.[12] The CA also ruled that petitioner already
acknowledged the transfer of ownership and is deemed to have
waived its right to purchase the property. [13] The CA even further
went on to rule that even if the sale is annulled, petitioner could
not achieve anything because the property will be eventually
transferred to Pacunayen after Faustos death.[14]

WHEREFORE,
the
appealed decision
ACCORDINGLY MODIFIED AS DISCUSSED.

Petitioner filed a motion for reconsideration but it was denied

per Resolution dated September 14, 1999.[15]

After trial on the merits, the Regional Trial Court of Morong,

Rizal (Branch 78), rendered judgment extending the period of the
lease for another seven years from August 1, 1991 at a monthly
rental of P10,000.00, and dismissed petitioners claim for damages.
[9]

is

AFFIRMED

AND

Furthermore, we resolved:

Dissatisfied, petitioner elevated the case to this Court on

petition for review on certiorari, raising the following grounds:

1.0. That TRCDC VACATE the leased premises immediately;

2.0. To GRANT the motion of Pacunayen to allow her to withdraw
the amount of P320,000.00, deposited according to records, with
this court.
3.0. To order TRCDC to MAKE THE NECESSARY ACCOUNTING
regarding the amounts it had already deposited (for unpaid rentals

THE HONORABLE COURT OF APPEALS COMMITTED SERIOUS

REVERSIBLE ERROR IN HOLDING THAT THE CONTRACTUAL
STIPULATION GIVING PETITIONER THE PRIORITY RIGHT TO
PURCHASE THE LEASED PREMISES SHALL ONLY APPLY IF THE
LESSOR DECIDES TO SELL THE SAME TO STRANGERS;

THE HONORABLE COURT OF APPEALS COMMITTED SERIOUS

REVERSIBLE ERROR IN HOLDING THAT PETITIONERS PRIORITY
RIGHT TO PURCHASE THE LEASED PREMISES IS INCONSEQUENTIAL.
[16]

The principal bone of contention in this case refers to

petitioners priority right to purchase, also referred to as the right of
first refusal.
Petitioners right of first refusal in this case is expressly
provided for in the notarized Contract of Lease dated August 1,
1971, between Fausto and petitioner, to wit:
7. That should the LESSOR decide to sell the leased premises, the
LESSEE shall have the priority right to purchase the same;[17]
When a lease contract contains a right of first refusal, the
lessor is under a legal duty to the lessee not to sell to anybody at
any price until after he has made an offer to sell to the latter at a
certain price and the lessee has failed to accept it. The lessee has a
right that the lessor's first offer shall be in his favor. [18] Petitioners
right of first refusal is an integral and indivisible part of the contract
of lease and is inseparable from the whole contract. The
consideration for the lease includes the consideration for the right
of first refusal[19] and is built into the reciprocal obligations of the
parties.
It was erroneous for the CA to rule that the right of first refusal
does not apply when the property is sold to Faustos relative.
[20]
When the terms of an agreement have been reduced to writing,
it is considered as containing all the terms agreed upon. As such,
there can be, between the parties and their successors in interest,
no evidence of such terms other than the contents of the written
agreement, except when it fails to express the true intent and
agreement of the parties.[21] In this case, the wording of the
stipulation giving petitioner the right of first refusal is plain and
unambiguous, and leaves no room for interpretation. It simply
means that should Fausto decide to sell the leased property during
the term of the lease, such sale should first be offered to petitioner.
The stipulation does not provide for the qualification that such right

may be exercised only when the sale is made to strangers or

persons other than Faustos kin. Thus, under the terms of petitioners
right of first refusal, Fausto has the legal duty to petitioner not to
sell the property to anybody, even her relatives, at any price until
after she has made an offer to sell to petitioner at a certain price
and said offer was rejected by petitioner. Pursuant to their contract,
it was essential that Fausto should have first offered the property to
petitioner before she sold it to respondent. It was only after
petitioner failed to exercise its right of first priority could Fausto
then lawfully sell the property to respondent.
The rule is that a sale made in violation of a right of first refusal
is valid. However, it may be rescinded, or, as in this case, may be
the subject of an action for specific performance.[22] In Riviera
Filipina, Inc. vs. Court of Appeals,[23] the Court discussed the
concept and interpretation of the right of first refusal and the
consequences of a breach thereof, to wit:
. . . It all started in 1992 with Guzman, Bocaling & Co. v.
Bonnevie where the Court held that a lease with a proviso
granting the lessee the right of first priority all things and
conditions being equal meant that there should be identity of the
terms and conditions to be offered to the lessee and all other
prospective buyers, with the lessee to enjoy the right of first
priority. A deed of sale executed in favor of a third party who
cannot be deemed a purchaser in good faith, and which is in
violation of a right of first refusal granted to the lessee is not
voidable under the Statute of Frauds but rescissible under Articles
1380 to 1381 (3) of the New Civil Code.
Subsequently in 1994, in the case of Ang Yu Asuncion v. Court
of Appeals, the Court en banc departed from the doctrine laid
down in Guzman, Bocaling & Co. v. Bonnevie and refused to
rescind a contract of sale which violated the right of first refusal.
The Court held that the so-called right of first refusal cannot be
deemed a perfected contract of sale under Article 1458 of the New
Civil Code and, as such, a breach thereof decreed under a final
judgment does not entitle the aggrieved party to a writ of execution
of the judgment but to an action for damages in a proper forum for
the purpose.

In the 1996 case of Equatorial Realty Development, Inc. v.

Mayfair Theater, Inc., the Court en banc reverted back to the
doctrine in Guzman Bocaling & Co. v. Bonnevie stating that
rescission is a relief allowed for the protection of one of the
contracting parties and even third persons from all injury and
damage the contract may cause or to protect some incompatible
and preferred right by the contract.
Thereafter in 1997, in Paraaque Kings Enterprises, Inc. v.
Court of Appeals, the Court affirmed the nature of and the
concomitant rights and obligations of parties under a right of first
refusal. The Court, summarizing the rulings in Guzman, Bocaling
& Co. v. Bonnevie and Equatorial Realty Development, Inc.
v. Mayfair Theater, Inc., held that in order to have full
compliance with the contractual right granting petitioner the first
option to purchase, the sale of the properties for the price for which
they were finally sold to a third person should have likewise been
first offered to the former. Further, there should be identity of terms
and conditions to be offered to the buyer holding a right of first
refusal if such right is not to be rendered illusory. Lastly, the basis
of the right of first refusal must be the current offer to sell of the
seller or offer to purchase of any prospective buyer.
The prevailing doctrine therefore, is that a right of first refusal
means identity of terms and conditions to be offered to the lessee
and all other prospective buyers and a contract of sale entered into
in violation of a right of first refusal of another person, while valid,
is rescissible.[24]
It was also incorrect for the CA to rule that it would be useless
to annul the sale between Fausto and respondent because the
property would still remain with respondent after the death of her
mother by virtue of succession, as in fact, Fausto died in March
1996, and the property now belongs to respondent, being Faustos
heir.[25]
For one, Fausto was bound by the terms and conditions of the
lease contract. Under the right of first refusal clause, she was
obligated to offer the property first to petitioner before selling it to
anybody else. When she sold the property to respondent without

offering it to petitioner, the sale while valid is rescissible so that

petitioner may exercise its option under the contract.
With the death of Fausto, whatever rights and obligations she
had over the property, including her obligation under the lease
contract, were transmitted to her heirs by way of succession, a
mode of acquiring the property, rights and obligation of the
decedent to the extent of the value of the inheritance of the heirs.
Article 1311 of the Civil Code provides:
ART. 1311. Contracts take effect only between the parties, their
assigns and heirs, except in case where the rights and obligations
arising from the contract are not transmissible by their nature, or
by stipulation or by provision of law. The heir is not liable beyond
the value of the property he received from the decedent.
A lease contract is not essentially personal in character.
Thus, the rights and obligations therein are transmissible to the
heirs. The general rule is that heirs are bound by contracts entered
into by their predecessors-in-interest except when the rights and
obligations arising therefrom are not transmissible by (1) their
nature, (2) stipulation or (3) provision of law.[27]
[26]

In this case, the nature of the rights and obligations are, by

their nature, transmissible. There is also neither contractual
stipulation nor provision of law that makes the rights and
obligations under the lease contract intransmissible. The lease
contract between petitioner and Fausto is a property right, which is
a right that passed on to respondent and the other heirs, if any,
upon the death of Fausto.
In DKC Holdings Corporation vs. Court of Appeals,[28] the Court
held that the Contract of Lease with Option to Buy entered into by
the late Encarnacion Bartolome with DKC Holdings Corporation was
binding upon her sole heir, Victor, even after her demise and it
subsists even after her death. The Court ruled that:
. . . Indeed, being an heir of Encarnacion, there is privity of interest
between him and his deceased mother. He only succeeds to
what rights his mother had and what is valid and binding

against her is also valid and binding as against him. This is

clear from Paraaque Kings Enterprises vs. Court of Appeals, where
this Court rejected a similar defense-

The CA likewise found that petitioner acknowledged the

legitimacy of the sale to respondent and it is now barred from
exercising its right of first refusal. According to the appellate court:

With respect to the contention of respondent Raymundo

that he is not privy to the lease contract, not being the
lessor nor the lessee referred to therein, he could thus not
have violated its provisions, but he is nevertheless a
proper party. Clearly, he stepped into the shoes of the
owner-lessor of the land as, by virtue of his purchase, he
assumed all the obligations of the lessor under the lease
contract. Moreover, he received benefits in the form of
rental payments. Furthermore, the complaint, as well as
the petition, prayed for the annulment of the sale of the
properties to him. Both pleadings also alleged collusion
between him and respondent Santos which defeated the
exercise by petitioner of its right of first refusal.

Second, when TRCDC, in a letter to Fausto, signified its intention to

renew the lease contract, it was Pacunayen who answered the
letter on June 19, 1991. In that letter Pacunayen demanded that
TRCDC vacate the leased premises within sixty (60) days and
informed it of her ownership of the leased premises. The pertinent
portion of the letter reads:

In order then to accord complete relief to petitioner,

respondent Raymundo was a necessary, if not
indispensable, party to the case. A favorable judgment for
the petitioner will necessarily affect the rights of
respondent Raymundo as the buyer of the property over
which petitioner would like to assert its right of first option
to buy.[29] (Emphasis supplied)
Likewise in this case, the contract of lease, with all its
concomitant provisions, continues even after Faustos death and her
heirs merely stepped into her shoes.[30] Respondent, as an heir of
Fausto, is therefore bound to fulfill all its terms and conditions.
There is no personal act required from Fausto such that
respondent cannot perform it. Faustos obligation to deliver
possession of the property to petitioner upon the exercise by the
latter of its right of first refusal may be performed by respondent
and the other heirs, if any. Similarly, nonperformance is not
excused by the death of the party when the other party has a
property interest in the subject matter of the contract.[31]

Furtherly, please be advised that the land is no longer under the

absolute ownership of my mother and the undersigned is now the
real and absolute owner of the land.
Instead of raising a howl over the contents of the letter, as would
be its expected and natural reaction under the circumstances,
TRCDC surprisingly kept silent about the whole thing. As we
mentioned in the factual antecedents of this case, it even invited
Pacunayen to its special board meeting particularly to discuss with
her the renewal of the lease contract. Again, during that meeting,
TRCDC did not mention anything that could be construed as
challenging Pacunayens ownership of the leased premises. Neither
did TRCDC assert its priority right to purchase the same against
Pacunayen.[32]
The essential elements of estoppel are: (1) conduct of a party
amounting to false representation or concealment of material facts
or at least calculated to convey the impression that the facts are
otherwise than, and inconsistent with, those which the party
subsequently attempts to assert; (2) intent, or at least expectation,
that this conduct shall be acted upon by, or at least influence, the
other party; and (3) knowledge, actual or constructive, of the real
facts.[33]
The records are bereft of any proposition that petitioner waived
its right of first refusal under the contract such that it is now
estopped from exercising the same. In a letter dated June 17, 1991,
petitioner wrote to Fausto asking for a renewal of the term of lease.
[34]
Petitioner cannot be faulted for merely seeking a renewal of the

lease contract because obviously, it was working on the assumption

that title to the property is still in Faustos name and the latter has
the sole authority to decide on the fate of the property. Instead, it
was respondent who replied, advising petitioner to remove all the
improvements on the property, as the lease is to expire on the 1 st of
August 1991. Respondent also informed petitioner that her mother
has already sold the property to her.[35] In order to resolve the
matter, a meeting was called among petitioners stockholders,
including respondent, on July 27, 1991, where petitioner, again,
proposed that the lease be renewed. Respondent, however,
declined. While petitioner may have sought the renewal of the
lease, it cannot be construed as a relinquishment of its right of first
refusal. Estoppel must be intentional and unequivocal.[36]
Also, in the excerpts from the minutes of the special meeting, it
was further stated that the possibility of a sale was likewise
considered.[37] But respondent also refused to sell the land, while
the improvements, if for sale shall be subject for appraisal. [38] After
respondent refused to sell the land, it was then that petitioner filed
the complaint for annulment of sale, specific performance and
damages.[39] Petitioners acts of seeking all possible avenues for the
amenable resolution of the conflict do not amount to an intentional
and unequivocal abandonment of its right of first refusal.
Respondent was well aware of petitioners right to priority of
sale, and that the sale made to her by her mother was merely for
her to be able to take charge of the latters affairs. As admitted by
respondent in her Appellees Brief filed before the CA, viz.:
After June 19, 1991, TRCDC invited Pacunayen to meeting with the
officers of the corporation. . . . In the same meeting,
Pacunayens attention was called to the provision of the
Contract of Lease had by her mother with TRCDC,
particularly paragraph 7 thereof, which states:
7. That should the lessor decide to sell the leased premises, the
LESSEE shall have the priority right to purchase the same.
Of course, in the meeting she had with the officers of TRCDC,
Pacunayen explained that the sale made in her favor by her mother

was just a formality so that she may have the proper representation
with TRCDC in the absence of her parents, more so that her father
had already passed away, and there was no malice in her mine (sic)
and that of her mother, or any intention on their part to deceive
TRCDC. All these notwithstanding, and for her to show their good
faith in dealing with TRCDC, Pacunayen started the ground work to
reconvey ownership over the whole land, now covered by Transfer
Certificare (sic) of Title No. M-259, to and in the name of her mother
(Fausto), but the latter was becoming sickly, old and weak, and
they found no time to do it as early as they wanted to. [40] (Emphasis
supplied)
Given the foregoing, the Kasulatan ng Bilihan Patuluyan ng
Lupa dated August 8, 1990 between Fausto and respondent must
be rescinded. Considering, however, that Fausto already died
on March 16, 1996, during the pendency of this case with
the CA, her heirs should have been substituted as respondents in
this case. Considering further that the Court cannot declare
respondent Pacunayen as the sole heir, as it is not the proper forum
for that purpose, the right of petitioner may only be enforced
against the heirs of the deceased Catalina Matienzo Fausto,
represented by respondent Pacunayen.
In Paraaque Kings Enterprises, Inc. vs. Court of Appeals,[41] it
was ruled that the basis of the right of the first refusal must be the
current offer to sell of the seller or offer to purchase of any
prospective buyer. It is only after the grantee fails to exercise its
right of first priority under the same terms and within the period
contemplated, could the owner validly offer to sell the property to a
third person, again, under the same terms as offered to the
grantee. The circumstances of this case, however, dictate the
application of a different ruling. An offer of the property to
petitioner under identical terms and conditions of the offer
previously given to respondent Pacunayen would be inequitable.
The subject property was sold in 1990 to respondent Pacunayen for
a measly sum of P10,000.00. Obviously, the value is in a small
amount because the sale was between a mother and daughter. As
admitted by said respondent, the sale made in her favor by her
mother was just a formality so that she may have the proper
representation
with
TRCDC
in
the
absence
of
her

parents[42] Consequently, the offer to be made to petitioner in this

case should be under reasonable terms and conditions, taking into
account the fair market value of the property at the time it was sold
to respondent.

Except as provided by law or by stipulation, one is entitled to an

adequate compensation only for such pecuniary loss suffered
by him as he has duly proved. Such compensation is referred to
as actual or compensatory damages. (Emphasis supplied)

In its complaint, petitioner prayed for the cancellation of TCT

No. M-35468 in the name of respondent Pacunayen, [43] which was
issued by the Register of Deeds of Morong on February 7, 1991.
[44]
Under ordinary circumstances, this would be the logical effect of
the rescission of the Kasulatan ng Bilihan Patuluyan ng
Lupa between the deceased Fausto and respondent Pacunayen.
However, the circumstances in this case are not ordinary. The buyer
of the subject property is the sellers own daughter. If and when the
title (TCT No. M-35468) in respondent Pacunayens name is
cancelled and reinstated in Faustos name, and thereafter
negotiations between petitioner and respondent Pacunayen for the
purchase of the subject property break down, then the subject
property will again revert to respondent Pacunayen as she appears
to be one of Faustos heirs. This would certainly be a winding route
to traverse. Sound reason therefore dictates that title should
remain in the name of respondent Pacunayen, for and in behalf of
the other heirs, if any, to be cancelled only when petitioner
successfully exercises its right of first refusal and purchases the
subject property.

The rule is that actual or compensatory damages cannot be

presumed, but must be proved with reasonable degree of certainty.
A court cannot rely on speculations, conjectures, or guesswork as
to the fact and amount of damages, but must depend upon
competent proof that they have been suffered by the injured party
and on the best obtainable evidence of the actual amount thereof.
It must point out specific facts, which could afford a basis for
measuring whatever compensatory or actual damages are borne.[47]

Petitioner further seeks the award of the following damages in

its favor: (1) P100,000.00 as actual damages; (2) P1,100,000.00 as
compensation for lost goodwill or reputation; (3) P100,000.00 as
moral damages; (4) P100,000.00 as exemplary damages;
(5) P50,000.00 as attorneys fees; (6)P1,000.00 appearance fee per
hearing; and (7) the costs of suit.[45]
According to petitioner, respondents act in fencing the property
led to the closure of the Tanay Coliseum Cockpit and petitioner was
unable to conduct cockfights and generate income of not less
than P100,000.00 until the end of September 1991, aside from the
expected rentals from the cockpit space lessees in the amount
of P11,000.00.[46]
Under Article 2199 of the Civil Code, it is provided that:

In the present case, there is no question that the Tanay

Coliseum Cockpit was closed for two months and TRCDC did not
gain any income during said period. But there is nothing on record
to substantiate petitioners claim that it was bound to lose
some P111,000.00 from such closure. TRCDCs president, Ambrosio
Sacramento, testified that they suffered income losses with the
closure of the cockpit from August 2, 1991 until it re-opened on
October 20, 1991.[48] Mr. Sacramento, however, cannot state with
certainty the amount of such unrealized income. [49] Meanwhile,
TRCDCs accountant, Merle Cruz, stated that based on the
corporations financial statement for the years 1990 and 1991,
[50]
they derived the amount of P120,000.00 as annual income from
rent.[51] From said financial statement, it is safe to presume that
TRCDC generated a monthly income of P10,000.00 a month
(P120,000.00 annual income divided by 12 months). At best
therefore, whatever actual damages that petitioner suffered from
the cockpits closure for a period of two months can be reasonably
summed up only to P20,000.00.
Such award of damages shall earn interest at the legal rate of
six percent (6%) per annum, which shall be computed from the
time of the filing of the Complaint on August 22, 1991, until the
finality of this decision. After the present decision becomes final
and executory, the rate of interest shall increase to twelve percent
(12%) per annum from such finality until its satisfaction, this
interim period being deemed to be equivalent to a forbearance of

credit.[52] This is in accord with the guidelines laid down by the

Court in Eastern Shipping Lines, Inc. vs. Court of Appeals,
[53]
regarding the manner of computing legal interest, viz.:
II. With regard particularly to an award of interest in the concept of
actual and compensatory damages, the rate of interest, as well as
the accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the payment
of a sum of money, i.e., a loan or forbearance of money, the
interest due should be that which may have been stipulated in
writing. Furthermore, the interest due shall itself earn legal interest
from the time it is judicially demanded. In the absence of
stipulation, the rate of interest shall be 12% per annum to be
computed from default, i.e., from judicial or extrajudicial demand
under and subject to the provisions of Article 1169 of the Civil
Code.
2. When an obligation, not constituting a loan or forbearance of
money, is breached, an interest on the amount of damages
awarded may be imposed at the discretion of the court at the rate
of 6% per annum. No interest, however, shall be adjudged on
unliquidated claims or damages except when or until the demand
can be established with reasonable certainty. Accordingly, where
the demand is established with reasonable certainty, the interest
shall begin to run from the time the claim is made judicially or
extrajudicially (Art. 1169, Civil Code) but when such certainty
cannot be so reasonably established at the time the demand is
made, the interest shall begin to run only from the date the
judgment of the court is made (at which time quantification of
damages may be deemed to have been reasonably ascertained).
The actual base for the computation of legal interest shall, in any
case, be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money
becomes final and executory, the rate of legal interest, whether the
case falls under paragraph 1 or paragraph 2, above, shall be
12% per annum from such finality until its satisfaction, this interim
period being deemed to be by then an equivalent to a forbearance
of credit.[54]

Petitioner also claims the amount of P1,100,000.00 as

compensation for lost goodwill or reputation. It alleged that with
the unjust and wrongful conduct of the defendants as abovedescribed, plaintiff stands to lose its goodwill and reputation
established for the past 20 years.[55]
An award of damages for loss of goodwill or reputation falls
under actual or compensatory damages as provided in Article 2205
of the Civil Code, to wit:
Art. 2205. Damages may be recovered:
(1) For loss or impairment of earning capacity in cases of temporary
or permanent personal injury;
(2) For injury to the plaintiffs business standing or commercial
credit.
Even if it is not recoverable as compensatory damages, it may
still be awarded in the concept of temperate or moderate damages.
[56]
In arriving at a reasonable level of temperate damages to be
awarded, trial courts are guided by the ruling that:
. . . There are cases where from the nature of the case, definite
proof of pecuniary loss cannot be offered, although the court is
convinced that there has been such loss. For instance, injury to
one's commercial credit or to the goodwill of a business firm is
often hard to show certainty in terms of money. Should damages be
denied for that reason? The judge should be empowered to
calculate moderate damages in such cases, rather than that the
plaintiff should suffer, without redress from the defendant's
wrongful act. (Araneta v. Bank of America, 40 SCRA 144, 145) [57]
In this case, aside from the nebulous allegation of petitioner in
its amended complaint, there is no evidence on record, whether
testimonial or documentary, to adequately support such claim.
Hence, it must be denied.
Petitioners claim for moral damages must likewise be denied.
The award of moral damages cannot be granted in favor of a

corporation because, being an artificial person and having

existence only in legal contemplation, it has no feelings, no
emotions, no senses. It cannot, therefore, experience physical
suffering and mental anguish, which can be experienced only by
one having a nervous system.[58] Petitioner being a corporation,
[59]
the claim for moral damages must be denied.
With regard to the claim for exemplary damages, it is a
requisite in the grant thereof that the act of the offender must be
accompanied by bad faith or done in wanton, fraudulent or
malevolent manner.[60] Moreover, where a party is not entitled to
actual or moral damages, an award of exemplary damages is
likewise baseless.[61] In this case, petitioner failed to show that
respondent acted in bad faith, or in wanton, fraudulent or
malevolent manner.
Petitioner likewise claims the amount of P50,000.00 as
attorneys fees, the sum of P1,000.00 for every appearance of its
counsel, plus costs of suit. It is well settled that no premium should
be placed on the right to litigate and not every winning party is
entitled to an automatic grant of attorney's fees. The party must
show that he falls under one of the instances enumerated in Article
2208 of the Civil Code. In this case, since petitioner was compelled
to engage the services of a lawyer and incurred expenses to
protect its interest and right over the subject property, the award of
attorneys fees is proper. However there are certain standards in
fixing attorney's fees, to wit: (1) the amount and the character of
the services rendered; (2) labor, time and trouble involved; (3) the
nature and importance of the litigation and business in which the
services were rendered; (4) the responsibility imposed; (5) the
amount of money and the value of the property affected by the
controversy or involved in the employment; (6) the skill and the
experience called for in the performance of the services; (7) the
professional character and the social standing of the attorney; and
(8) the results secured, it being a recognized rule that an attorney
may properly charge a much larger fee when it is contingent than
when it is not.[62] Considering the foregoing, the award
of P10,000.00 as attorneys fees, including the costs of suit, is
reasonable under the circumstances.

WHEREFORE, the instant Petition for Review is PARTIALLY

GRANTED. The Court of Appeals Decision dated June 14, 1999 in
CA-G.R. CV No. 43770 is MODIFIED as follows:
(1) the Kasulatan ng Bilihan Patuluyan ng Lupa dated August 8,
1990 between Catalina Matienzo Fausto and respondent
Anunciacion Fausto Pacunayen is hereby deemed rescinded;
(2) The Heirs of the deceased Catalina Matienzo Fausto who are
hereby deemed substituted as respondents, represented by
respondent Anunciacion Fausto Pacunayen, are ORDERED to
recognize the obligation of Catalina Matienzo Fausto under the
Contract of Lease with respect to the priority right of petitioner
Tanay Recreation Center and Development Corp. to purchase the
subject property under reasonable terms and conditions;
(3) Transfer Certificate of Title No. M-35468 shall remain in the
name of respondent Anunciacion Fausto Pacunayen, which shall be
cancelled in the event petitioner successfully purchases the subject
property;
(4) Respondent is ORDERED to pay petitioner Tanay Recreation
Center and Development Corporation the amount of Twenty
Thousand Pesos (P20,000.00) as actual damages, plus interest
thereon at the legal rate of six percent (6%) per annum from the
filing of the Complaint until the finality of this Decision. After this
Decision becomes final and executory, the applicable rate shall be
twelve percent (12%) per annum until its satisfaction; and,
(5) Respondent is ORDERED to pay petitioner the amount of Ten
Thousand Pesos (P10,000.00) as attorneys fees, and to pay the
costs of suit.
(6) Let the case be remanded to the Regional Trial Court, Morong,
Rizal (Branch 78) for further proceedings on the determination of
the reasonable terms and conditions of the offer to sell by
respondents to petitioner, without prejudice to possible mediation
between the parties.

The rest of the unaffected dispositive portion of the Court of

Appeals Decision is AFFIRMED.

PEREZ,
- versus -

SO ORDERED.

SERENO,
REYES, and
BERNABE, JJ.

Promulgated:

Republic of the Philippines

CONTINENTAL AIRLINES, INC.,

Supreme Court

Respondent.

Manila

January 16, 2012

x------------------------------------------------------------------------------------x

SECOND DIVISION
DECISION

SPOUSES FERNANDO

G.R. No. 188288

REYES, J.:

and LOURDES VILORIA,

Present:
Petitioners,

This is a petition for review under Rule 45 of the Rules of

CARPIO, J.,
Chairperson,

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, [P]100,000.00 as moral damages,
[P]50,000.00 as exemplary damages, [P]40,000.00 as
attorneys fees and costs of suit to plaintiffsappellees is hereby REVERSED and SET ASIDE.

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,

Defendant-appellants counterclaim
is DENIED.

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.

Costs against plaintiffs-appellees.

Subsequently, Fernando requested Mager to reschedule
SO ORDERED.2

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

On April 3, 2006, the Regional Trial Court of Antipolo City,

by night, Fernando opted to request for a refund. Mager, however,

Branch 74 (RTC) rendered a Decision, giving due course to the

denied his request as the subject tickets are non-refundable and

complaint for sum of money and damages filed by petitioners

the only option that Continental Airlines can offer is the re-issuance

Fernando Viloria (Fernando) and Lourdes Viloria (Lourdes),

of new tickets within one (1) year from the date the subject tickets

collectively called Spouses Viloria, against respondent Continental

were issued. Fernando decided to reserve two (2) seats with

Airlines, Inc. (CAI). As culled from the records, below are the facts

Frontier Air.

giving rise to such complaint.

As he was having second thoughts on traveling via Frontier

In a letter dated March 24, 1998, Continental Micronesia

Air, Fernando went to the Greyhound Station where he saw an

denied Fernandos request for a refund and advised him that he

Amtrak station nearby. Fernando made inquiries and was told that

may take the subject tickets to any Continental ticketing location

there are seats available and he can travel on Amtrak anytime and

for the re-issuance of new tickets within two (2) years from the date

any day he pleased. Fernando then purchased two (2) tickets for

they were issued. Continental Micronesia informed Fernando that

Washington, D.C.

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

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

On June 17, 1999, Fernando went to Continentals ticketing

misrepresenting that Amtrak was already fully booked. Fernando

office at Ayala Avenue, Makati City to have the subject tickets

reiterated his demand for a refund but Mager was firm in her

replaced by a single round trip ticket to Los Angeles, California

position that the subject tickets are non-refundable.

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

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

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 CAIs 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

in the United States or Canada and any place outside

thereof to which tariffs in force in those countries
apply.8

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 P1,000,000.00 as moral
damages, P500,000.00 as exemplary damages and P250,000.00 as

According to CAI, one of the conditions attached to their

contract of carriage is the non-transferability and non-refundability
of the subject tickets.

attorneys fees.7

The RTCs Ruling

CAI interposed the following defenses: (a) Spouses Viloria
have no right to ask for a refund as the subject tickets are nonrefundable; (b) Fernando cannot insist on using the ticket in

Following a full-blown trial, the RTC rendered its April 3,

Lourdes name for the purchase of a round trip ticket to Los Angeles

2006 Decision, holding that Spouses Viloria are entitled to a refund

since the same is non-transferable; (c) as Mager is not a CAI

in view of Magers misrepresentation in obtaining their consent in

employee, CAI is not liable for any of her acts; (d) CAI, its

the purchase of the subject tickets.9 The relevant portion of the

employees and agents did not act in bad faith as to entitle Spouses

April 3, 2006 Decision states:

Viloria to moral and exemplary damages and attorneys 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) carriers 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

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 defendants 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. Magers misleading
misrepresentations. Continental Airlines agent Ms.
Mager further relied on and exploited plaintiff
Fernandos need and told him that they must book a
flight immediately or risk not being able to travel at
all on the couples preferred date. Unfortunately,
plaintiffs spouses fell prey to the airlines and its
agents unethical tactics for baiting trusting
customers.10

Citing Articles 1868 and 1869 of the Civil Code, the RTC
ruled that Mager is CAIs 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 CAIs agent in view of CAIs 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

claim, the contractual relationship between Holiday Travel and CAI

Furthermore, the RTC ruled that CAI acted in bad faith in

is not an agency but that of a sale.

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 Courts Ruling

On appeal, the CA reversed the RTCs April 3, 2006 Decision,

holding that CAI cannot be held liable for Magers 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 CAIs agent. Furthermore, contrary to Spouses Vilorias

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
principals 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

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--vis those of the competing companies.
The Spouses Viloria may not intervene with the
business judgment of Continental Airlines.14

The Petitioners Case

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.

In this Petition, this Court is being asked to review the

findings and conclusions of the CA, as the latters reversal of the
RTCs 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 CAIs undertaking to re-issue new tickets to them within
the period stated in their March 24, 1998 letter. CAI likewise acted

Finally, the CA held that CAI did not act in bad faith when

in bad faith when it disallowed Fernando to use Lourdes ticket to

they charged Spouses Viloria with the higher amount of

purchase a round trip to Los Angeles given that there is nothing in

US$1,867.40 for a round trip ticket to Los Angeles. According to the

Lourdes ticket indicating that it is non-transferable. As a common

CA, there is no compulsion for CAI to charge the lower amount of

carrier, it is CAIs duty to inform its passengers of the terms and

US$856.00, which Spouses Viloria claim to be the fee charged by

conditions of their contract and passengers cannot be bound by

other airlines. The matter of fixing the prices for its services is CAIs

such terms and conditions which they are not made aware of. Also,

prerogative, which Spouses Viloria cannot intervene. In particular:

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

It is within the respective rights of persons owning

and/or operating business entities to peg the

contracts and limited its claim for a refund on CAIs alleged breach
of its undertaking in its March 24, 1998 letter.

word non-refundable clearly appears on the face of the subject

tickets.
The Respondents Case

CAI also denies that it is bound by the acts of Holiday Travel

In its Comment, CAI claimed that Spouses Vilorias

and Mager and that no principal-agency relationship exists between

allegation of bad faith is negated by its willingness to issue new

them. As an independent contractor, Holiday Travel was without

tickets to them and to credit the value of the subject tickets against

capacity to bind CAI.

the value of the new ticket Fernando requested. CAI argued that
Spouses Vilorias sole basis to claim that the price at which CAI was
willing to issue the new tickets is unconscionable is a piece of

Issues

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

To determine the propriety of disturbing the CAs January 30,

time when Fernando asked CAI to apply the value of the subject

2009 Decision and whether Spouses Viloria have the right to the

tickets for the purchase of a new one.16 CAI likewise argued that it

reliefs they prayed for, this Court deems it necessary to resolve the

did not undertake to protect Spouses Viloria from any changes or

following issues:

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.

a. Does a principal-agent relationship exist between

CAI and Holiday Travel?

With respect to Spouses Vilorias claim that they are not

aware of CAIs 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

b. Assuming that an agency relationship exists

between CAI and Holiday Travel, is CAI bound
by the acts of Holiday Travels agents and
employees such as Mager?

c. Assuming that CAI is bound by the acts of Holiday

Travels 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?

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 CAs 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

e. Is CAI justified in pegging a different price for the

round trip ticket to Los Angeles requested by

and if the findings of the CA are contradicted by the evidence on

record.17

Fernando?
f. Alternatively, did CAI act in bad faith or renege its
obligation to Spouses Viloria to apply the

According to the CA, agency is never presumed and that he

value of the subject tickets in the purchase of

who alleges that it exists has the burden of proof. Spouses Viloria,

new ones when it refused to allow Fernando to

on whose shoulders such burden rests, presented evidence that fell

use Lourdes ticket and in charging a higher

short of indubitably demonstrating the existence of such agency.

price for a round trip ticket to Los Angeles?

We disagree. The CA failed to consider undisputed facts,

This Courts Ruling

discrediting CAIs 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,

I. A principal-agent
relationship exists
between CAI and
Holiday Travel.

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

carriage with third persons on CAIs behalf. The third element is

Court explained the nature of an agency and spelled out the

also present as it is undisputed that Holiday Travel merely acted in

essential elements thereof:

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

Out of the above given principles, sprung the

creation and acceptance of the relationship of
agency whereby 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.

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

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

agent.

Prior to Spouses Vilorias 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

Contrary to the findings of the CA, all the elements of an

conditions thereof; and this constitutes an unequivocal testament

agency exist in this case. The first and second elements are present

to Holiday Travels authority to act as its agent. This Court cannot

as CAI does not deny that it concluded an agreement with Holiday

therefore allow CAI to take an altogether different position and

Travel, whereby Holiday Travel would enter into contracts of

deny that Holiday Travel is its agent without condoning or giving

imprimatur to whatever damage or prejudice that may result from

ownership and control over the property and the agent merely acts

such denial or retraction to Spouses Viloria, who relied on good

on the principals behalf and under his instructions in furtherance of

faith on CAIs acts in recognition of Holiday Travels authority.

the objectives for which the agency was established. On the other

Estoppel is primarily based on the doctrine of good faith and the

hand, the contract is clearly a sale if the parties intended that the

avoidance of harm that will befall an innocent party due to its

delivery of the property will effect a relinquishment of title, control

injurious reliance, the failure to apply it in this case would result in

and ownership in such a way that the recipient may do with the

gross travesty of justice.

20

Estoppel bars CAI from making such

property as he pleases.

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

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:

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

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

principal was also at

fault or negligent or
that the principal
exercise control and
supervision over
them.

As to how the CA have arrived at the conclusion that the

contract between CAI and Holiday Travel is a sale is certainly

Considering that Holiday Travel is CAIs agent, does it

confounding, considering that CAI is the one bound by the

necessarily follow that CAI is liable for the fault or negligence of

contracts of carriage embodied by the tickets being sold by Holiday

Holiday Travels employees? Citing China Air Lines, Ltd. v. Court of

Travel on its behalf. It is undisputed that CAI and not Holiday Travel

Appeals, et al.,23 CAI argues that it cannot be held liable for the

who is the party to the contracts of carriage executed by Holiday

actions of the employee of its ticketing agent in the absence of an

Travel with third persons who desire to travel via Continental

employer-employee relationship.

Airlines, and this conclusively indicates the existence of a principalagent 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.

An examination of this Courts pronouncements in China Air

Lines will reveal that an airline company is not completely
exonerated from any liability for the tort committed by its agents
employees. A prior determination of the nature of the passengers
cause of action is necessary. If the passengers cause of action

II. In actions based on

quasi-delict, a
principal can only be
held liable for the tort
committed by its
agents employees if
it has been
established by
preponderance of
evidence that the

against the airline company is premised on culpa aquiliana or

quasi-delict for a tort committed by the employee of the airline
companys 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 companys
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 agents employees and the contractual

However, the records are devoid of any evidence by which

relationship between the airline company and its agent does not

CAIs alleged liability can be substantiated. Apart from their claim

operate to create a juridical tie between the airline company and its

that CAI must be held liable for Magers supposed fraud because

agents employees. Article 2180 of the Civil Code does not make

Holiday Travel is CAIs agent, Spouses Viloria did not present

the principal vicariously liable for the tort committed by its agents

evidence that CAI was a party or had contributed to Magers

employees and the principal-agency relationship per se does not

complained act either by instructing or authorizing Holiday Travel

make the principal a party to such tort; hence, the need to prove

and Mager to issue the said misrepresentation.

the principals own fault or negligence.

It may seem unjust at first glance that CAI would consider

On the other hand, if the passengers cause of action for

Spouses Viloria bound by the terms and conditions of the subject

damages against the airline company is based on contractual

contracts, which Mager entered into with them on CAIs behalf, in

breach or culpa contractual, it is not necessary that there be

order to deny Spouses Vilorias request for a refund or Fernandos

evidence of the airline companys fault or negligence. As this Court

use of Lourdes ticket for the re-issuance of a new one, and

previously stated in China Air Linesand reiterated in Air France vs.

simultaneously claim that they are not bound by Magers supposed

Gillego,

24

in an action based on a breach of contract of carriage,

misrepresentation for purposes of avoiding Spouses Vilorias claim

the aggrieved party does not have to prove that the common

for damages and maintaining the validity of the subject contracts.

carrier was at fault or was negligent. All that he has to prove is the

It may likewise be argued that CAI cannot deny liability as it

existence of the contract and the fact of its non-performance by the

benefited from Magers acts, which were performed in compliance

carrier.

with Holiday Travels obligations as CAIs agent.

Spouses Vilorias cause of action on the basis of Magers

However, a persons vicarious liability is anchored on his

alleged fraudulent misrepresentation is clearly one of tort or quasi-

possession of control, whether absolute or limited, on the

delict, there being no pre-existing contractual relationship between

tortfeasor. Without such control, there is nothing which could justify

them. Therefore, it was incumbent upon Spouses Viloria to prove

extending the liability to a person other than the one who

that CAI was equally at fault.

committed the tort. As this Court explained in Cangco v. Manila

Railroad Co.:25

nugatory assertion. Citing Belen v. Belen,27this Court ruled in Jayme

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)

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

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

control over Holiday Travels employees or that CAI was equally at

fault, no liability can be imposed on CAI for Magers 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.
Magers
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 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 Fernandos 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 Magers 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,

Article 1390, in relation to Article 1391 of the Civil Code,

through insidious words or machinations of one of the contracting

provides that if the consent of the contracting parties was obtained

parties, the other is induced to enter into a contract which, without

through fraud, the contract is considered voidable and may be

them, he would not have agreed to. In order that fraud may vitiate

annulled within four (4) years from the time of the discovery of the

consent, it must be the causal (dolo causante), not merely the

fraud. Once a contract is annulled, the parties are obliged under

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

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

preponderance of evidence is not adequate:

Fraud must also be discounted, for according

to the Civil Code:

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

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.

subject contracts. In fact, Spouses Viloria failed to prove by clear

and convincing evidence that Magers 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.

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.

This Court finds the only proof of Magers alleged fraud,

which is Fernandos 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"

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.

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.

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 Fernandos vitiated consent, Spouses Viloria likewise asked for a
Even assuming that Magers 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

refund based on CAIs supposed bad faith in reneging on its

undertaking to replace the subject tickets with a round trip ticket
from Manila to Los Angeles.

the purchase of new ones. Under Article 1392 of the Civil Code,
ratification extinguishes the action to annul a voidable contract.
In doing so, Spouses Viloria are actually asking for a
rescission of the subject contracts based on contractual breach.
Ratification of a voidable contract is defined under Article
1393 of the Civil Code as follows:

Resolution, the action referred to in Article 1191, is based on the

defendants 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 partys failure to comply with his obligations

CAI cannot insist on the

non-transferability of the
subject tickets.

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

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 CAIs
supposed breach of its undertaking to issue new tickets upon
surrender of the subject tickets?

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

Article 1191, as presently worded, states:

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 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 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.

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.

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.

According to Spouses Viloria, CAI acted in bad faith and

breached the subject contracts when it refused to apply the value

Contrary to CAIs claim, that the subject tickets are non-

of Lourdes ticket for Fernandos purchase of a round trip ticket to

transferable cannot be implied from a plain reading of the provision

Los Angeles and in requiring him to pay an amount higher than the

printed on the subject tickets stating that [t]o the extent not in

price fixed by other airline companies.

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) carriers conditions of carriage and related

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).

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

Clearly, there is nothing in the above-quoted section of CAIs

certain condition or undertaking that is not clearly stipulated. Since

letter from which the restriction on the non-transferability of the

the prohibition on transferability is not written on the face of the

subject tickets can be inferred. In fact, the words used by CAI in its

subject tickets and CAI failed to inform Spouses Viloria thereof, CAI

letter supports the position of Spouses Viloria, that each of them

cannot refuse to apply the value of Lourdes ticket as payment for

can use the ticket under their name for the purchase of new tickets

Fernandos purchase of a new ticket.

whether for themselves or for some other person.

the round trip ticket between Manila and Los Angeles. CAI was
CAIs refusal to
accept Lourdes ticket
for the purchase of a
new ticket for
Fernando is only a
casual breach.

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,
CAIs 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.

Nonetheless, the right to rescind a contract for nonperformance 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

Moreover, Spouses Vilorias 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

While CAIs refusal to allow Fernando to use the value of

clearly stated that [n]on-refundable tickets may be used as a form

Lourdes ticket as payment for the purchase of a new ticket is

of payment toward the purchase of another Continental

unjustified as the non-transferability of the subject tickets was not

ticket42 and there is nothing in it suggesting that CAI had obliged

clearly stipulated, it cannot, however be considered substantial.

itself to protect Spouses Viloria from any fluctuation in the prices of

The endorsability of the subject tickets is not an essential part of

tickets or that the surrender of the subject tickets will be

the underlying contracts and CAIs failure to comply is not essential

considered as full payment for any ticket that the petitioners intend

to its fulfillment of its undertaking to issue new tickets upon

to buy regardless of actual price and destination. The CA was

Spouses Vilorias surrender of the subject tickets. This Court takes

correct in holding that it is CAIs right and exclusive prerogative to

note of CAIs willingness to perform its principal obligation and this

fix the prices for its services and it may not be compelled to

is to apply the price of the ticket in Fernandos name to the price of

observe and maintain the prices of other airline companies. 43

with the tenor of the news therein stated.45 (citations

omitted)
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.

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

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)

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

Therefore, CAIs liability for damages for its refusal to accept

offered for the purpose of proving the truth of the matter alleged.

Lourdes ticket for the purchase of Fernandos round trip ticket is

As ruled in Feria v. Court of Appeals,:44

offset by Spouses Vilorias 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

[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

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.

damages is likewise not warranted. Apart from the requirement that

the defendant acted in a wanton, oppressive and malevolent
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 P17,000.00 debt within 3 years
as stipulated, they are both liable for damages.

manner, the claimant must prove his entitlement to moral

damages.49

WHEREFORE, premises considered, the instant Petition

is DENIED.

SO ORDERED.

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 P17,000.00 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

FIRST DIVISION

G.R. No. 149801

SPOUSES
CRUZ,

RENATO

and

FLORINDA DELA

Before the Court is a petition for review on certiorari under

Rule 45 of the Rules of Court assailing the April 17, 2001
Decision[1] of the Court of Appeals (CA) in CA-G.R. CV No. 64487, as

Petitioners,

Present:

reiterated in its Resolution[2] of September 4, 2001, affirming the

decision of the Regional Trial Court (RTC) of Manila, Branch 44 in its

Civil
Case
No.
96-77509,
an
action
for
Nullity
of
PUNO, C.J., Chairperson,
Contract/Agreement with Damages thereat commenced by spouses

- versus -

CARPIO,

Renato and Florinda dela Cruz (petitioners) against respondent

CORONA,

spouses Gil and Leonila Segovia.

AZCUNA, and
LEONARDO-DE CASTRO,

The facts, as culled from the records, are as follows.

Sometime in July 1985, petitioner Florinda dela Cruz

Promulgated:

(Florinda) wanted to purchase two (2) parcels of land located

at Paltok Street, Sta. Mesa, Manila, Lot 503 with an apartment unit
erected thereon and Lot 505 with a residential house. The two lots

SPOUSES GIL and LEONILA SEGOVIA,

June 26, 2008

Respondents.
x------------------------------------------------------------------------------------------x

were being sold together for P180,000.00. Inasmuch as Florinda

had only P144,000.00 at hand, she asked her sister, respondent
Leonila Segovia (Leonila), to contribute P36,000.00 to complete the
purchase price. The sisters agreed that Lot 503 and the apartment
unit thereat would belong to Leonila upon full payment of its

DECISION

purchase price of P80,000.00, while Lot 505 with a residential

house would belong to Florinda. The properties were then
registered in the name of petitioner Renato dela Cruz married to

LEONARDO-DE CASTRO, J.:

Florinda. The parties, however, verbally agreed that Leonila and her
family would stay at Lot 505 until she had fully paid for Lot 503.

Desiring to reduce the verbal agreement into writing, the

parties executed and signed a handwritten covenant entitled Note
of Agreement

[3]

dated April 28, 1990, which read:

Ano mang oras o panahon maaring ilipat kay

Mo/Gil Segovia [respondent] ang pag-aari ng
sasakyan at bahay kung mababayaran nila
ang P18,000 at P34,000 na balance sa Apt. na
walang ano mang condition, interest at ano mang
hangad hanggang year 1999.
Ang halagang P18,000 ay may interest na 2%
hanggang sa ito ay mabayaran kay Flor dela Cruz
[petitioner]. Ang halagang P34,000 ay walang
interest at ito ay babayaran up to 1999. Ang upa sa
apt. ay cocolectahin ni Flor kapalit sa residential
house.
Ang ano mang mga gastos sa papeles ay
sasagutin ni Mo/Gil Segovia [respondent] kung ililipat
sa pangalan niya ang sasakyan na Pinoy Fierra-Van
NEX 741. Ang pagbili sa lupa at bahay 503 Paltok ay
ganoon din. (underscoring supplied)

Leonila signed an Agreement[4] embodying the detailed scheme of

payment for the lot covered by the sisters agreement, to wit:
We, Gil and Leonila Segovia, husband and
wife, of legal age, residing at 505 A. Paltok Street,
Sta. Mesa, Manila, jointly agrees to pay Florinda dela
Cruz the sum of P34,000.00 pesos Philippine
currency in the following terms and conditions:
1.

All
previous
contract
or
agreement is superseded by this
existing contract.

2.

Payment of the said amount will

be payable in installment basis; in
a monthly fashion respectively with
no specific amount of payment
within the period of ten (10) years;
effectively after the contract is
signed by both parties. P314.81
per month or P 3,1777.77 (sic) per
year. And by the year 1999 will
be P34,000.00.

3.

The borrowers (Sps. Segovia)

agree to put their real property
located at 505 B Paltok St., Sta.
Mesa, Mla., with TCT # 177862Registry
of
deeds
(public
document) as guarantees for the
above loan, which has a monthly
rent of P1,200.00 and will be
collected by the Lender (Florinda)
as part of the agreement of the
loan.

4.

As part of the agreement, the

borrowers will live in the Lender's
house, located at 505 Paltok St. in
exchange for her property rents.

Sometime in 1991, Linda Duval, a sister of Florinda and

Leonila, arrived from the United States to attend their mothers
funeral. Linda noticed the strained relations between her two
siblings. When she inquired about the status of her sisters
agreement regarding Lot 503, Leonila informed Linda that the
agreement was yet to be reduced into a formal contract. Linda
offered to prepare a contract between Florinda and Leonila who
acceded to the offer. Thus, on September 9, 1991, Florinda and

5.

6.

7.

The lender also agrees that the

borrowers manage the collection of
rents around the house and
endorse said rents to the owner
who is the Lender. Lender gives her
full consent to the borrowers to
sub-rent whatever rooms she
chooses inside her premises.

Leonila and her family vacate the house at 505 Paltok Street, which
prompted respondents to consign the P26,444.56 in court.[5]

On March 8, 1996, petitioners filed with the RTC of Manila,

Branch 44, a complaint for Nullity of Contract/Agreement with
Damages

If payment was not made after

ten (10) years, the Lender will take
ownership
of
the
property
described above.

on

the

ground

that

the

Agreement

executed

on September 9, 1991 did not contain the true intention of the

parties because Florindas consent thereto was vitiated by mistake.
Allegedly, Florinda did not know that the agreement provided that

If payment is made on or before

the due date of the agreement, the
Lender shall immediately take care
of all the necessary action with
regards
to
impediment,
attachment, encumbrances to the
property.

the ten-year period for payment of the balance commenced from

September 1991 and not from July 1985 which was her true
intention.

On May 5, 1999, the RTC rendered a decision dismissing

the complaint for Nullity of Contract/Agreement with Damages and
declaring the subject Agreement valid and subsisting. The decisions

xxx
After

the

Note

of

dispositive portion reads:

Agreement

of April

28,

1990 and

Agreement of September 9, 1991, Leonila continued paying the

balance she owed Florinda. Particularly, she paid the amount
of P10,000.00 in September 1990 and P7,555.44 on May 16,
1995. Finally, in October 1995, Leonila attempted to pay the
remaining

balance

of P26,444.56

in

full

satisfaction

of

her

obligation but Florinda refused to accept the same on the ground

that, the ten-year period for the payment of the balance, reckoned
from July 1985, the alleged date of the verbal agreement between
them, had already expired. Thereafter Florinda demanded that

WHEREFORE, in view of the foregoing

considerations and a thorough examination of the
evidence, and the pleadings together with the
supporting documents, this Court finds the
Agreement valid and subsisting thus, the complaint
filed by plaintiffs on March 8, 1996 is hereby ordered
dismissed for lack of merit.
The defendants are hereby ordered to pay the
amount of P26,000.00 which is the remaining
balance to complete the purchase price of the 503
Paltok Street, Sta. Mesa, Manila property to the
plaintiffs afterwhich the latter and all the persons

claiming under them, to surrender the ownership of

503 Paltok Street, Sta. Mesa, Manila, vacate and to
surrender possession thereof.
The plaintiffs are hereby ordered to pay
defendants
attorneys
fees
in
the
amount
of P50,000.00, and to pay the costs.
The counterclaim is denied.
SO ORDERED.[6]

that the Agreement is a valid existing contract only it

did not express the intention of the parties, which
may be a ground for reformation of contract only
under Article 1359 of the Civil Code of the Philippines
which provides that when, there having been a
meeting of the minds of the parties to a contract,
their true intention is not expressed in the instrument
purporting to embody the agreement, by reason of
mistake, fraud, inequitable conduct or accident, one
of the parties may ask for the reformation of the
instrument to the end that such true intention may
be expressed.
xxx

In arriving at its decision, the RTC explained:

Granting arguendo, that Florinda dela Cruzs

allegation that she has not read the Agreement is
true, signing a contract without fully knowing the
stipulations does not vitiate consent. Prudence
dictates that Florinda dela Cruz who presented the
agreement for signature should acquaint herself first
with the fine prints of a contract before stamping her
approval thereto. As it is, the fact remains that
Florinda dela Cruz signed the agreement voluntarily
on September 9, 1991 binding themselves that the
balance of P34,000.00 be paid in installments within
ten (10) years upon signing the agreement or until
1999. Indeed, the evidence will show that Florinda
dela Cruz voluntarily entered into the Agreement and
participated in the preparation thereof and after it
has been prepared, the same was read to and by the
parties themselves including Florinda dela Cruz and
later voluntarily affixed her signature. Renato dela
Cruz was also present at the time of the signing of
the Agreement and presented a copy thereof.
A further reading of the complaint in
paragraph 7 thereof, it is clear from the allegations

Thus, the four year period to file the action for

annulment, assuming there were indeed mistakes
therein which vitiated plaintiffs [petitioners] consent
commenced to run on September 9, 1991. The action
had already prescribed or lapsed and plaintiffs
[petitioners] could no longer ask for the annulment of
the agreement.
As to the contention that the subject agreement had no
force and effect on account of the absence of the signature of
Florindas husband, petitioner Renato dela Cruz (Renato), the RTC
ruled to the contrary, thus:

Indeed, Renato dela Cruz did not sign the

Agreement, however, he was present at the time the
Agreement was signed by the parties and their
witnesses, and the same was presented to him for
his signature. In fact, attempts were even made to
procure his signature, but plaintiff wife Florinda dela
Cruz insisted that her signature already carries that
of her husband Renato dela Cruz. The parties never
insisted that Renato dela Cruz sign the Agreement as
the wife has spoken. It is further observed that by his

actuations Renato dela Cruz has agreed and has

given his conformity to the agreement. He also did
not object to the execution of the same at the time it
was signed by his wife Florinda dela Cruz
on September 9, 1991, even he was present and he
was shown and furnished a copy of the said
agreement.

The action for annulment shall be brought

within four (4) years from the time of discovery of the
mistake
(Art.
1391,
New
Civil
Code
of
the Philippines).
On
the
other
hand,
the
defendants
[respondents] evidence that after the preparation by
Linda Duval on September 9, 1991, the Agreement
was read to and by the parties, shown and signed by
the parties and furnished each a copy of the
agreement. Therefore, it could not be said that
plaintiffs [petitioners] were not aware of the terms
and conditions of the Agreement and did not
discover the alleged mistakes contained therein
on September 9, 1991.

xxx
It must be pointed out that plaintiff Florinda
dela Cruz always consult her husband, Renato dela
Cruz on all matters respecting their transactions (pp.
42-43, tsn, Sept. 13, 1996; p. 25, tsn, Aug. 15, 1997).
So that the claim of Florinda dela Cruz that
she has never informed her husband involving a very
substantial property registered in his name, for ten
years that it had allegedly been in effect and that
she has been regularly collecting defendants
staggered installment payments for the said property
for a number of years lacks basis.
More, Renatos claim that he was never aware
of the agreement between the parties is doomed,
since he was present at the time of the purchase of
the property where he witnessed Leonila Segovia
contributed their hard earned savings in the amount
of P36,000.00 to complete their share to the
purchase price of P180,000.00 of the properties in
question, and who reminded defendants that the
subject property will ultimately be theirs upon
completion of their amortizations.

More, plaintiffs [petitioners] likewise never

raise any objection nor declare that there were
mistakes in the agreement. It was only on March 8,
1996 that the present action for annulment was filed.

Their motion for reconsideration having been denied,

petitioners filed with the RTC a Notice of Appeal. [7] Respondents too
filed a Notice of Partial Appeal [8] questioning the dismissal of their
counter-claim for damages. Accordingly, the records of the case
were elevated to the CA, where both appeals were docketed as CAG.R. CV No. 64487.

The CA affirmed the findings of the RTC in its decision,

[9]

Finally, the RTC ruled that the action for annulment had
already lapsed when the Complaint was filed on March 8, 1996.

promulgated on April 17, 2001. In so ruling, the CA also declared

that, while the expiry date of the payment period was an important
stipulation, it could not be considered as the substance of the
contract nor the primary motivation for which the parties entered

into the agreement. The substance of the Agreement was the sale
of the property at 503 Paltok Street. The mistake that petitioners

AGREED AND HAD GIVEN HIS CONFORMITY TO THE

AGREEMENT.

point to pertains to their interpretation of the contract, which is not

a ground to annul the same. The CA found that the stipulations of
the written agreement, signed on September 9, 1991, clearly

We deny the petition.

intended to give the respondents ten (10) years from 1991 within
which to effect payment of the balance of the consideration for the
sale of the 503 property. In view of the explicit terms of the said
written agreement, the verbal agreement of July 1985 was already
of no moment.

We agree with the two courts below when they declared that
the four (4)-year period for filing an action for annulment of
the September 9, 1991 Agreement, on ground of vitiated consent,
had already lapsed when the complaint subject of the present
controversy was filed on March 8, 1996.

The motion for reconsideration of petitioners was denied by

the CA in the resolution dated September 4, 2001.

This is in accordance with Article 1391 of the Civil Code,

which pertinently reads:

Aggrieved by the foregoing CA decision, petitioners elevated

the case to this Court raising the following assignment of errors:
I.
THE COURT OF APPEALS WITH DUE RESPECT
SERIOUSLY
ERRED
IN
HOLDING
THAT
THE
AGREEMENT IS VALID AND SUBSISTING AND
ORDERING THE PETITIONERS TO SURRENDER
OWNERSHIP OF THE SUBJECT PROPERTY TO THE
RESPONDENTS.

Art. 1391. The action for annulment shall be brought

within four years.
This period shall begin:
xxx
In case of mistake or fraud, from the time of the
discovery of the same.
xxx.

II.
THE COURT OF APPEALS WITH DUE RESPECT
SERIOUSLY ERRED IN HOLDING THAT PETITIONER
RENATO DELA CRUZ BY HIS ACTUATIONS HAD

The complaint for Nullity of Contract/ Agreement with

Damages was filed on March 7, 1996, while the agreement subject
thereof was entered into on September 9, 1991. The Agreement

was read to the parties before they affixed their signatures

for the acquisition of two lots which were being sold together

thereon. Petitioners were thereafter furnished a copy of the subject

for P180,000.00. Florinda who had only P144,000.00 asked Leonila

Agreement. Petitioners are presumed to have discovered the

to contribute P36,000.00 to complete the purchase price of said

alleged mistake on September 9, 1991. Hence, the action for

lots. With money pooled together, the sisters agreed that Lot 503

annulment which was filed four years and six months from the time

be

of the discovery of the mistake had already prescribed. Evidently,

The P36,000.00 contribution of Leonila shall be applied to the 503

the Agreement could no longer be set aside.

property which upon full payment of the remaining balance

valued

at P80,000.00

and Lot 505

valued

at P100,000.00.

of P44,000.00 advanced by Florinda shall belong to Leonila. On the

other hand, of Florindas P144,000.00 contribution, P100,000.00
We also agree with the ruling that the absence of Renatos
signature in the September 9, 1991 Agreement bears little
significance to its validity. Article 124 of the Family Code relied
upon by petitioners provides that the administration of the conjugal
partnership is now a joint undertaking of the husband and the
wife. In the event that one spouse is incapacitated or otherwise
unable to participate in the administration of the conjugal

shall be considered as full payment for the purchase of the 505

property and the P44,000.00 which was the balance of the
purchase price of Lot 503, as loan to Leonila. To secure payment of
the loan, Lot 503 was provisionally registered in the name of
petitioners. Hence Lot 503 was at the outset not intended to be
part of the conjugal asset of the petitioners but only as a security
for the payment of the P44,000.00 due from respondents.

partnership, the other spouse may assume sole powers of

administration. However, the power of administration does not
include the power to dispose or encumber property belonging to

Moreover, while Florindas husband did not affix his signature

the conjugal partnership. In all instances, the present law

to the above-mentioned Agreement, we find no ground to disturb

specifically requires the written consent of the other spouse, or

the uniform findings of the trial court and appellate court that

authority of the court for the disposition or encumbrance of

Renato, by his actuations, agreed and gave his conformity to the

conjugal partnership property without which, the disposition or

Agreement. As found by the courts below, Renatos consent to the

encumbrance shall be void.

Agreement was drawn from the fact that he was present at the
time it was signed by the sisters and their witnesses; he had
knowledge of the Agreement as it was presented to him for his

The foregoing provision finds no application in this case

because the transaction between Florinda and Leonila in reality did
not involve any disposition of property belonging to any of the
sisters conjugal assets. It may be recalled that the agreement was

signature, although he did not sign the same because his wife
Florinda insisted that her signature already carried that of her
husband; Renato witnessed the fact that Leonila contributed her
hard earned savings in the amount of P36,000.00 to complete their

share in the purchase price of the properties in question in the total

amount of P180,000.00. The aforesaid factual findings of the courts
below are beyond review at this stage.[10]

WHEREFORE, the petition is DENIED and the assailed decision

and resolution of the Court of Appeals are AFFIRMED.

Costs against the petitioners.

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.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
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 plaintiffappellee, the herein private respondent Maxima Castro.

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.

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;

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.

3. That the signatures of the plaintiff appearing on

the following documents are genuine:

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 .

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 abovementioned 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:
I
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 VISA-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.
V
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 overemphasized.
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.

FIRST DIVISION

[G.R. No. 126013. February 12, 1997]

SPOUSES HEINZRICH THEIS AND BETTY THEIS, petitioners,

vs. HONORABLE COURT OF APPEALS, HONORABLE
ELEUTERIO GUERRERO, ACTING PRESIDING JUDGE,
BRANCH XVIII, REGIONAL TRIAL COURT, TAGAYTAY
CITY,
CALSONS
DEVELOPMENT
CORPORATION, respondents.
DECISION
HERMOSISIMA, JR., J.:
In the instant petition, we shall have the occasion to apply the
concept of mistake in the annulment of contracts.
Private respondent Calsons Development Corporation is the
owner of three (3) adjacent parcels of land covered by Transfer
Certificate of Title (TCT) Nos. 15515 (parcel no. 1 in the location
map), 15516 (parcel no. 2) and 15684 (parcel no. 3), with the area
of 1,000 square meters, 226 square meters and 1,000 square
meters, respectively. All three parcels of land are situated along
Ligaya Drive, Barangay Francisco, Tagaytay City. Adjacent to parcel
no. 3, which is the lot covered by TCT No. 15684, is a vacant lot
denominated as parcel no. 4.
In 1985, private respondent constructed a two-storey house on
parcel no. 3. The lots covered by TCT No. 15515 and TCT No. 15516,
which are parcel no. 1 and parcel no. 2, respectively, remained idle.
However, in a survey conducted in 1985, parcel no. 3, where
the two-storey house stands, was erroneously indicated to be
covered not by TCT No. 15684 but by TCT No. 15515, while the two
idle lands (parcel nos. 1 and 2) were mistakenly surveyed to be
located on parcel no. 4 instead (which was not owned by private
respondent) and covered by TCT Nos. 15516 and 15684.
On October 26, 1987, unaware of the mistake by which private
respondent appeared to be the owner of parcel no. 4 as indicated in

the erroneous survey, and based on the erroneous information

given by the surveyor that parcel no. 4 is covered by TCT No. 15516
and 15684, private respondent, through its authorized
representative, one Atty. Tarcisio S. Calilung, sold said parcel no. 4
to petitioners.
Upon execution of the Deed of Sale, private respondent
delivered TCT Nos. 15516 and 15684 to petitioners who, on October
28, 1987, immediately registered the same with the Registry of
Deeds of Tagaytay City. Thus, TCT Nos. 17041 and 17042 in the
names of the petitioners were issued.
Indicated on the Deed of Sale as purchase price was the
amount of P130,000.00. The actual price agreed upon and paid,
however, was P486,000.00. This amount was not immediately paid
to private respondent; rather, it was deposited in escrow in an
interest-bearing account in its favor with the United Coconut
Planters Bank in Makati City. The P486,000.00 in escrow was
released to, and received by, private respondent on December 4,
1987.
Thereafter, petitioners did not immediately occupy and take
possession of the two (2) idle parcels of land purchased from
private respondent. Instead, petitioners went to Germany.
In the early part of 1990, petitioners returned to the
Philippines. When they went to Tagaytay to look over the vacant
lots and to plan the construction of their house thereon, they
discovered that parcel no. 4 was owned by another person. They
also discovered that the lots actually sold to them were parcel nos.
2 and 3 covered by TCT Nos. 15516 and 15684, respectively. Parcel
no. 3, however, could not have been sold to the petitioners by the
private respondents as a two-storey house, the construction cost of
which far exceeded the price paid by the petitioners, had already
been built thereon even prior to the execution of the contract
between the disputing parties.
Petitioners insisted that they wanted parcel no. 4, which is the
idle lot adjacent to parcel no. 3, and persisted in claiming that it
was parcel no. 4 that private respondent sold to them. However,
private respondent could not have possibly sold the same to them
for it did not own parcel no. 4 in the first place.
The mistake in the identity of the lots is traceable to the
erroneous survey conducted in 1985.
To remedy the mistake, private respondent offered parcel nos.
1 and 2 covered by TCT Nos. 15515 and 15516, respectively, as
these two were precisely the two vacant lots which private

respondent owned and intended to sell when it entered into the

transaction with petitioners. Petitioners adamantly rejected the
good faith offer. They refused to yield to reason and insisted on
taking parcel no. 3, covered by TCT No. 155864 and upon which a
two-storey house stands, in addition to parcel no. 2, covered by TCT
No. 15516, on the ground that these TCTs have already been
cancelled and new ones issued in their name.
Such refusal of petitioners prompted private respondent to
make another offer, this time, the return of an amount double the
price paid by petitioners. Petitioners still refused and stubbornly
insisted in their stand.
Private respondent was then compelled to file an action for
annulment of deed of sale and reconveyance of the properties
subject thereof[1] in the Regional Trial Court.[2]
The trial court rendered judgment in favor of private
respondent. Identifying the core issue in the instant controversy to
be the voidability of the contract of sale between petitioners and
private respondent on the ground of mistake, the trial court
annulled said contract of sale after finding that there was indeed a
mistake in the identification of the parcels of land intended to be
the subject matter of said sale. The trial court ratiocinated:
"Meeting head-on the issue of alleged mistake in the object of the
same, defendants in their answer averred that they relied on the
technical descriptions of TCT Nos. 15516 and 15684 appearing in
the deed of sale x x x
A resolution of the conflicting claims of the parties to the instant
controversy calls for an inquiry on their real intent relative to the
identity of the parcels which plaintiff intended to sell to defendants
and which the latter in turn, intended to buy from the former. For,
the Court cannot ignore the dictates of logic and common sense
which, ordinarily, could not push a person to sell to another, a
property which the former does not own in the first place, for fear
of adverse consequences. The vendee, following the same
reasoning, would not buy a thing unless he is totally certain that
the seller is the real owner of the thing offered for sale. It is equally
true that when one sells or buys a real property, he either sells or
buys the property as he sees it, in its actual setting and by its
physical metes and bounds, and not be the mere lot number
assigned to the same property in the certificate of title or in any
document. And, when a buyer of real property decides to purchase
from his seller, he is ordinarily bound by prudence to ascertain the
true nature, identity or character of the property that he intends to

buy and ascertain the title of his vendor before he parts with his
money. It is quite obvious that the foregoing precepts and
precautions were observed by the parties in the case at bar as
there is no question at all that the sale in question was
consummated through the initiative of Mrs. Gloria Contreras and
then Vice-Mayor Benjamin Erni x x x both brokers of the sale who,
after a chance meeting with defendants at the Taal Vista Lodge
Hotel prior to the sale of plaintiff's parcels, brought defendants to
the vicinity where plaintiff's three (3) adjacent parcels of land are
located and pointed to defendants the two (2) vacant parcels right
beside plaintiff's house. It is also undisputed that when defendants
intimated to the brokers their desire to buy the vacant lots pointed
to them when they visited the same place, they were brought to
plaintiff's representative, Tarcisio S. Calilung, at the latter's office in
Makati where the parties discussed the terms of the sale.
The Court notes further from the records that defendants' desire to
buy vacant lots from plaintiff is not only confirmed by the testimony
of Gloria Contreras and the ocular inspection conducted by the
court but by defendant Betty Theis herself when the latter testified
as follows:
'COURT:
Q. Why, what was the lot that you intended to buy?
A. The right side of the house, Your Honor.' (TSN of
November 8, 1991, page 19)
Similarly, in answer to a question propounded to the same
defendant by their counsel, she stated that
'ATTY. ROSALES:
Q. In other words, the titles delivered to you were not
the titles covering the right side of the house?
A. No, sir.' (Ibid., page 20)
It is relevant to mention that when the defendants attempted to
take possession of the parcels of land they bought from the plaintiff
on which they intended to construct their house after their return
from a foreign sojourn, they admittedly wanted to take that vacant
area, which as herein shown, turns out to be a property not owned
by plaintiff. From this act of the defendants, a clear meaning is
shown. Defendants themselves, knew right from the beginning that
what they intended to buy was that vacant lot, not the lot where

plaintiff's house stands, covered by TCT No. 15684 which was

wrongly mentioned as one of the objects of the sale. x x x
The fact that the Deed of Sale subsequently executed by plaintiff
and the defendants on October 27, 1987 covers the parcel of land
where plaintiff's two-storey house was constructed will clearly
reflect a situation that is totally different from what defendants had
intended to buy from the plaintiff viz-a-viz [sic] the latter's intention
to sell its two (2) vacant lots to defendants. Notwithstanding
defendants' claim that it was not possible for plaintiff's
representative not to be familiar with its properties, the acts and
circumstances established in this case would clearly show, and this
Court is convinced, that the inclusion of the parcel where plaintiff's
house is constructed is solely attributable to a mistake in the object
of the sale between the parties. This mistake, obviously, was made,
on the part of plaintiff's representative when the latter mistook the
vacant lot situated on the right side of plaintiff's house as its vacant
parcels of land when its vacant lots are actually situated on the left
side of the same house. Indeed, such mistake on plaintiff's part
appears to be tragic as it turned out later that the vacant lot on the
right side of plaintiff's house did not belong to plaintiff. Worse, is
the fact that what was conveyed to defendants under the deed of
sale was the parcel where plaintiff's house already stood at the
time of the sale. This, definitely, is not what the parties intended.
x x x Going by the facts established by defendants' evidence, it is
clear that defendants did not intend to buy the parcel of land where
plaintiff's house stood as defendant Betty Theis declared in her
testimony that they wanted to buy the parcel at the right side of
plaintiff's house where she and her husband would construct their
house (TSN of June 4, 1991, p. 56). Neither can this Court accept
the hypothesis that plaintiff intended to sell that parcel where its
house was already constructed for if this was its true intention, it
would not sell its two (2) lots at the price of P486,000.00 which is
way below the costs of its construction of P1,500,000.00.
The law itself explicitly recognizes that consent of the parties is one
of the essential elements to the validity of the contract and where
consent is given through mistake, the validity of the contractual
relations between the parties is legally impaired.
As earlier stated, the facts obtaining in the case at bar undoubtedly
show that when defendants bought the properties of plaintiff, they
intended to buy the vacant lots owned by the latter. As the sale
that was finally consummated by the parties had covered the

parcel where plaintiff's house was constructed even before the sale
took place, this Court can safely assume that the deed of sale
executed by the parties did not truly express their true intention. In
other words, the mistake or error on the subject of the sale in
question appears to be substantial as the object of the same
transaction is different from that intended by the parties.
This fiasco could have been cured and the pain and travails of this
litigation avoided, had parties agreed to reformation of the deed of
sale. But, as shown by the sequence of events occurring after the
sale was consummated, and the mistake was discovered, the
defendants refused, insisting that they wanted the vacant lots on
the right side of plaintiff's house, which was impossible for plaintiff
to do, as said vacant lots were not of its own
dominion."[3] [Emphasis supplied]
Aggrieved by the decision of the trial court, petitioners sought
its reversal[4] from respondent Court of Appeals.[5] Respondent
court, however, did not find the appeal meritorious and accordingly
affirmed[6] the trial court decision. Ruled the respondent appellate
court:
"There is no doubt that when defendants-appellants attempted to
take physical possession of Parcel No. 4 in May, 1990, they were
prevented by the true owner thereof from taking possession of said
land. To clear the matter, plaintiff-appellee hired a new surveyor
who revealed in his survey that Parcel No. 4 is not included in
plaintiff-appellee's Transfer Certificates of Title from which said
plaintiff-appellee mistakenly offered defendants-appellants said
Parcel No. 4. Realizing its mistake, plaintiff-appellee offered
defendants-appellants Parcels Nos. 1 and 2 under the same
Transfer Certificates of Title or the reimbursement of the purchase
price in double amount. But defendants-appellants insisted this
time to acquire Parcel No. 3 wherein plaintiff-appellee had already a
house, and was not the object of the sale.
Said Parcel No. 3 cannot be the object of the sale between the
parties as plaintiff-appellee's house already stands in the said area
even before defendants-appellants had chosen Parcel No. 4 which
was described to be on the right side of said plaintiff-appellee's
house in Parcel No. 3. There is no dispute that defendantsappellants wanted to buy Parcel No. 4 as testified to by defendantappellant Betty Theis, herself (p. 19, TSN, Nov. 8, 1991), which lot
turned out to be outside of the Transfer Certificates of Title of
plaintiff-appellee. Defendants-appellants cannot now insist on

Parcel No. 3 as the same was not the object of the sale between the
parties.
Clearly, therefore, there was honest mistake on the part of plaintiffappellee in the sale of Parcel No. 4 to defendants-appellants which
plaintiff-appellee tried to remedy by offering defendants-appellants
instead his Parcels Nos. 1 or 2, or reimbursement of the purchase
price in double amount."[7] [Emphasis ours]
We find that respondent court correctly affirmed the findings
and conclusions of the trial court in annulling the deed of sale as
the former are supported by evidence and the latter are in
accordance with existing law and jurisprudence.
Art. 1390 of the New Civil Code provides:
"Art. 1390. The following contracts are voidable or annullable, even
though there may have been no damage to the contracting parties:
(1) x x x
(2) Those where the consent is vitiated by mistake, violence,
intimidation, undue influence, or fraud.
x x x"
In the case at bar, the private respondent obviously committed
an honest mistake in selling parcel no. 4. As correctly noted by the
Court of Appeals, it is quite impossible for said private respondent
to sell the lot in question as the same is not owned by it. The good
faith of the private respondent is evident in the fact that when the
mistake was discovered, it immediately offered two other vacant
lots to the petitioners or to reimburse them with twice the amount
paid. That petitioners refused either option left the private
respondent with no other choice but to file an action for the
annulment of the deed of sale on the ground of mistake. As
enunciated in the case of Mariano vs. Court of Appeals:[8]
"A contract may be annulled where the consent of one of the
contracting parties was procured by mistake, fraud, intimidation,
violence, or undue influence."
Art. 1331 of the New Civil Code provides for the situations
whereby mistake may invalidate consent. It states:

"Art. 1331. In order that mistake may invalidate consent, it should

refer to the substance of the thing which is the object of the
contract, or to those conditions which have principally moved one
or both parties to enter into the contract."
Tolentino[9] explains that the concept of error in this article
must include both ignorance, which is the absence of knowledge
with respect to a thing, and mistake properly speaking, which is a
wrong conception about said thing, or a belief in the existence of
some circumstance, fact, or event, which in reality does not exist.
In both cases, there is a lack of full and correct knowledge about
the thing. The mistake committed by the private respondent in
selling parcel no. 4 to the petitioners falls within the second type.
Verily, such mistake invalidated its consent and as such, annulment
of the deed of sale is proper.
The petitioners cannot be justified in their insistence that
parcel no. 3, upon which private respondent constructed a twostorey house, be given to them in lieu of parcel no. 4. The cost of
construction in 1985 for the said house (P1,500,000.00) far exceeds
the amount paid by the petitioners to the private respondent
(P486,000.00). Moreover, the trial court, in questioning private
respondent's witness, Atty. Tarciso Calilung (who is also its
authorized representative) clarified that parcel no. 4, the lot
mistakenly sold, was a vacant lot:[10]
"COURT: What property did you point to them?
A. I pointed to parcel No. 4, as appearing in the sketch.
COURT: Parcel No. 4 is a vacant lot?
A. Yes, your Honor.
COURT: So, there was no house on that lot?
A. There was no house. There were pineapple crops
existing on the property.
COURT: So, you are telling the Court that the intended lot
is vacant lot or Parcel 4?
A. Yes, your Honor.
Thus, to allow the petitioners to take parcel no. 3 would be to
countenance unjust enrichment. Considering that petitioners
intended at the outset to purchase a vacant lot, their refusal to
accept the offer of the private respondent to give them two (2)
other vacant lots in exchange, as well as their insistence on parcel

no. 3, which is a house and lot, is manifestly unreasonable. As held

by this Court in the case of Security Bank and Trust Company v.
Court of Appeals[11]:
"Hence, to allow petitioner bank to acquire the constructed building
at a price far below its actual construction cost would undoubtedly
constitute unjust enrichment for the bank to the prejudice of the
private respondent. Such unjust enrichment, as previously
discussed, is not allowed by law."
WHEREFORE, the petition is hereby DISMISSED and the
decision of the Court Appeals in CA-G.R. 47000 dated May 31, 1996
AFFIRMED. Costs against the petitioner.
SO ORDERED

COUNTRY CLUB INC., SILHOUETTE TRADING CORPORATION,

and PABLO ROMAN JR., respondents.

MARTINEZ, J.:
These are consolidated petitions for review emanating from Civil
Case No. Q-93-15266 of the Regional Trial Court of Quezon City,
Branch 78, entitled "Metropolitan Waterworks and Sewerage
System (hereafter MWSS) vs. Capitol Hills Golf & Country Club Inc.
(hereafter, CHGCCI), STC (hereafter, SILHOUETTE), Ayala
Corporation, Ayala Land, Inc. (hereafter AYALA) Pablo Roman, Jr.,
Josefina A. Roxas, Jesus Hipolito, Alfredo Juinito, National Treasurer
of the Philippines and the Register of Deeds of Quezon City."
From the voluminous pleadings and other documents submitted by
the parties and their divergent styles in the presentation of the
facts, the basic antecedents attendant herein are as follows:

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION

G.R. No. 126000 October 7, 1998

METROPOLITAN WATERWORKS AND SEWERAGE SYSTEM
(MWSS), petitioner,
vs.
COURT OF APPEALS, HON. PERCIVAL LOPEZ, AYALA
CORPORATION and AYALA LAND, INC.,respondents.
G.R. No. 128520 october 7, 1998
METROPOLITAN WATERWORKS AND SEWERAGE
SYSTEM, petitioner,
vs.
HON. PERCIVAL MANDAP LOPEZ, CAPITOL HILLS GOLF AND

Sometime in 1965, petitioner MWSS (then known as NAWASA)

leased around one hundred twenty eight (128) hectares of its land
(hereafter, subject property) to respondent CHGCCI (formerly the
International Sports Development Corporation) for twenty five (25)
years and renewable for another fifteen (15) years or until the year
2005, with the stipulation allowing the latter to exercise a right of
first refusal should the subject property be made open for sale. The
terms and conditions of respondent CHGCCI's purchase thereof
shall nonetheless be subject to presidential approval.
Pursuant to Letter of instruction (LOI) No. 440 issued on July
29,1976 by then President Ferdinand E. Marcos directing petitioner
MWSS to negotiate the cancellation of the MWSS-CHGCCI lease
agreement for the disposition of the subject property, Oscar Ilustre,
then General Manager of petitioner MWSS, sometime in November
of 1980 informed respondent CHGCCI, through its president herein
respondent Pablo Roman, Jr., of its preferential right to buy the
subject property which was up for sale. Valuation thereof was to be
made by an appraisal company of petitioner MWSS' choice, the
Asian Appraisal Co., Inc. which, on January 30, 1981, pegged a fair
market value of P40.00 per square meter or a total of
P53,800,000.00 for the subject property.

Upon being informed that petitioner MWSS and respondent CHGCCI

had already agreed in principle on the purchase of the subject
property, President Marcos expressed his approval of the sale as
shown in his marginal note on the letter sent by respondents Jose
Roxas and Pablo Roman, Jr. dated December 20, 1982.
The Board of Trustees of petitioner MWSS thereafter passed
Resolution 36-83, approving the sale of the subject property in
favor of respondent SILHOUETTE, as assignee of respondent
CHGCCI, at the appraised value given by Asian Appraisal Co., Inc.
Said Board Resolution reads:
NOW, THEREFORE, BE IT RESOLVED, as it is hereby
resolved, that in accordance with Section 3, Par. (g)
of the MWSS Charter and subject to the approval of
the President of the Philippines, the sale of a parcel
of land located in Balara, Quezon City, covered by
TCT No. 36069 of the Registry of Deeds of Quezon
City, containing an area of ONE HUNDRED TWENTY
SEVEN (127.313) hectares more or less, which is the
remaining portion of the area under lease after
segregating a BUFFER ZONE already surveyed along
the undeveloped area near the treatment plant and
the developed portion of the CHGCCI golf course, to
SILHOUETTE TRADING CORPORATION as Assignee of
Capitol Hills Golf & Country Club, Inc., at FORTY
(P40.00) PESOS per square meter, be and is hereby
approved.
BE IT RESOLVED FURTHER, that the General Manager
be authorized, as he is hereby authorized to sign for
and in behalf of the MWSS the contract papers and
other pertinent documents relative thereto.
The MWSS-SILHOUETTE sales agreement eventually pushed
through. Per the Agreement dated May 11, 1983 covering said
purchase, the total price for the subject property is P50,925,200,
P25 Million of which was to be paid upon President Marcos' approval
of the contract and the balance to be paid within one (1) year from
the transfer of the title to respondent SILHOUETTE as vendee with
interest at 12% per annum. The balance was also secured by an
irrevocable letter of credit. A Supplemental Agreement was forged
between petitioner MWSS and respondent SILHOUETTE on August
11, 1983 to accurately identify the subject property.

Subsequently, respondent SILHOUETTE, under a deed of sale dated

July 26, 1984, sold to respondent AYALA about sixty-seven (67)
hectares of the subject property at P110.00 per square meter. Of
the total price of around P74 Million, P25 Million was to be paid by
respondent AYALA directly to petitioner MWSS for respondent
SILHOUETTE's account and P2 Million directly to respondent
SILHOUETTE. P11,600,000 was to be paid upon the issuance of title
in favor of respondent AYALA, and the remaining balance to be
payable within one (1) year with 12% per annum interest.
Respondent AYALA developed the land it purchased into a prime
residential area now known as the Ayala Heights Subdivision.
Almost a decade later, petitioner MWSS on March 26, 1993 filed an
action against all herein named respondents before the Regional
Trial Court of Quezon City seeking for the declaration of nullity of
the MWSS-SILHOUETTE sales agreement and all subsequent
conveyances involving the subject property, and for the recovery
thereof with damages.
Respondent AYALA filed its answer pleading the affirmative
defenses of (1) prescription, (2) laches, (3)
waiver/estoppel/ratification, (4) no cause of action, (5) non-joinder
of indispensable parties, and (6) non-jurisdiction of the court for
non-specification of amount of damages sought.
On June 10, 1993; the trial court issued an Order dismissing the
complaint of petitioner MWSS on grounds of prescription, laches,
estoppel and non-joinder of indispensable parties.
Petitioner MWSS's motion for reconsideration of such Order was
denied, forcing it to seek relief from the respondent Court where its
appeal was docketed as CA-G.R. CV No. 50654. It assigned as errors
the following:
I. The court a quo committed manifest
serious error and gravely abused its
discretion when it ruled that plaintiffs
cause of action is for annulment of
contract which has already prescribed
in the face of the clear and
unequivocal recitation of six causes of
action in the complaint, none of which
is for annulment.

II. The lower court erred and exceeded

its jurisdiction when, contrary to the
rules of court and jurisprudence, it
treated and considered the affirmative
defenses of Ayalas defenses not
categorized by the rules as grounds for
a motion to dismiss as grounds of a
motion to dismiss which justify the
dismissal of the complaint.
III. The lower court abused its
discretion and exceeded its jurisdiction
when it favorably acted on Ayala's
motion for preliminary hearing of
affirmative defenses (motion to
dismiss) by dismissing the complaint
without conducting a hearing or
otherwise requiring the Ayalas to
present evidence on the factual
moorings of their motion.
IV. The lower court acted without
jurisdiction and committed manifest
error when it resolved factual issues
and made findings and conclusions of
facts all in favor of the Ayalas in the
absence of any evidence presented by
the parties.
V. The court a quo erred when,
contrary to the rules and
jurisprudence, it prematurely ruled
that laches and estoppel bar the
complaint as against Ayalas or that
otherwise the alleged failure to
implead indispensable parties dictates
the dismissal of the complaint.

reconsideration of the respondents concerned met a similar fate in

the May 9, 1994 Order of the trial court. They thus filed special civil
actions for certiorari before the respondent Court which were
docketed as CA-G.R. SP Nos. 34605, 34718 and 35065 and
thereafter consolidated with CA-G.R. CV No. 50694 for disposition.
Respondent court, on August 19, 1996, rendered the assailed
decision, the dispositive portion of which reads:
WHEREFORE, judgment is rendered:
1.) DENYING the petitions for writ of certiorari for lack
of merit; and
2.) AFFIRMING the order of the lower court dismissing
the complaint against the appellees Ayalas.
SO ORDERED.
Petitioner MWSS appealed to this Court that portion of the
respondent Court's decision affirming the trial court's dismissal of
its complaint against respondent AYALA, docketed as G.R. No.
126000. The portion dismissing the petition for certiorari (CA-GR
Nos. 34605, 347718 and 35065) of respondents Roman, CHGCCI
and SILHOUETTE, however, became final and executory for their
failure to appeal therefrom. Nonetheless, these respondents were
able to thereafter file before the trial court another motion to
dismiss grounded, again, on prescription which the trial court in an
Order of October 1996 granted.
This prompted petitioner MWSS to file another petition for review of
said trial court Order before this Court and docketed as G.R. No.
128520. On motion of petitioner MWSS, this Court in a Resolution
dated December 3, 1997 directed the consolidation of G.R. Nos.
126000 and 128520.
The errors assigned by petitioner MWSS in CA-GR No. 126000 are:

In the meantime, respondents CHGCCI and Roman filed their own

motions to hear their affirmative defenses which were identical to
those adduced by respondent AYALA. For its part, respondent
SILHOUETTE filed a similarly grounded motion to dismiss.
Ruling upon these motions, the trial court issued an order dated
December 13, 1993 denying all of them. The motions for

I.
In holding, per the questioned Decision dated 19
August 1996, that plaintiffs cause of action is for
annulment of contract which has already prescribed
in the face of the clear and unequivocal recitation of

six causes of action in the complaint, none of which

is for annulment, and in effect affirming the dismissal
by the respondent judge of the complaint against
respondent Ayalas. This conclusion of respondent CH
is, with due respect, manifestly mistaken and legally
absurd.
II.
In failing to consider that the complaint recited six
alternative causes of action, such that the
insufficiency of one cause assuming there is such
insufficiency does not render insufficient the other
causes and the complaint itself. The contrary ruling
in this regard by respondent CA is founded entirely
on speculation and conjecture and is constitutive of
grave abuse of discretion.
In G.R. No. 128520, petitioner MWSS avers that:
I.
The court of origin erred in belatedly granting
respondent's motions to dismiss which are but a
rehash, a disqualification, of their earlier motion for
preliminary hearing of affirmative defense / motion to
dismiss. These previous motions were denied by the
lower court, which denial the respondents raised to
the Court of Appeals by way of perfection
for certiorari, which petitions in turn were dismissed
for lack of merit by the latter court. The correctness
and validity of the lower court's previous orders
denying movant's motion for preliminary hearing of
affirmative defense / motion to dismiss has
accordingly been settled already with finality and
cannot be disturbed or challenged anew at this
instance of defendant's new but similarly anchored
motions to dismiss, without committing procedural
heresy causative of miscarriage of justice.
II.
The lower court erred in not implementing correctly
the decision of the Court of Appeal. After all,

respondents' own petitions for certiorari questioning

the earlier denial of their motion for preliminary
hearing of affirmative defense / motion to dismiss
were dismissed by the Court of Appeal, in the
process of affirming the validity and legality of such
denial by the court a quo. The dismissal of the
respondents' petitions are embodied in the
dispositive portion of the said decision of the Court of
Appeals dated 19 August 1996. The lower court
cannot choose to disregard such decretal aspect of
the decision and instead implement an obiter dictum.
III.
That part of the decision of the decision of the Court
of Appeals resolving the issue of prescription
attendant to the appeal of plaintiff against the
Ayalas, has been appealed by plaintiff to the
Supreme Court by way of a petition for review
on certiorari. Not yet being final and executory, the
lower court erred in making capital out of the same
to dismiss the case against the other defendants,
who are the respondents herein.
IV.
The lower court erred in holding, per the questioned
orders, that plaintiff's cause of action is for
annulment of contract which has already prescribed
in the face of the clear and unequivocal recitation of
six causes of action in the complaint, none of which
is for annulment. This conclusion of public
respondent is manifestly mistaken and legally
absurd.
V.
The court a quo erred in failing to consider the
complaint recites six alternative causes of action,
such that the insufficiency of one cause assuming
there is such insufficiency does not render
insufficient the other cause and the complaint itself.
The contrary ruling in this regard by public
respondent is founded entirely on speculation and

conjecture and is constitutive of grave abuse of

discretion.
In disposing of the instant petition, this Court shall dwell on the
more crucial grounds upon which the trial court and respondent
based their respective rulings unfavorable to petitioner MWSS; i.e.,
prescription, laches, estoppel/ratification and non-joinder of
indispensable parties.
RE: Prescription
Petitioner MWSS claims as erroneous both the lower courts' uniform
finding that the action has prescribed, arguing that its complaint is
one to declare the MWSS-SILHOUETTE sale, and all subsequent
conveyances of the subject property, void which is imprescriptible.
We disagree.
The very allegations in petitioner MWSS' complaint show that the
subject property was sold through contracts which, at most, can be
considered only as voidable, and not void. Paragraph 12 of the
complaint reads in part:
12. . . . .
The plaintiff has been in continuous, peaceful and
public possession and ownership of the aforedescribed properties, the title (TCT No. [36069]
199170) thereto, including its derivative titles TCT
Nos. 213872 and 307655, having been duly issued in
its name. However, as a result of fraudulent and
illegal acts of herein defendants, as described in the
paragraphs hereinafter following, the original of said
title/s were cancelled and in lieu thereof new titles
were issued to corporate defendant/s covering
subject 127.9271 hectares. . . . .
Paragraph 34 alleges:
34. Sometime thereafter, clearly influenced by the
premature if not questionable approval by Mr. Marcos
of a non-existent agreement, and despite full
knowledge that both the assessed and market value
of subject property were much higher, the MWSS

Board of Trusties illegally passed an undated

resolution ("Resolution No. 36-83"), approving the
"sale" of the property to CHGCCI at P40/sq.m. and
illegally authorizing General Manager Ilustre to sign
the covering contract.
This "resolution" was signed by Messrs. Jesus Hipolito
as Chairman; Oscar Ilustre, as Vice Chairman; Aflredo
Junio, as Member; and Silvestre Payoyo, as Member; .
...
Paragraph 53 states:
53. Defendants Pablo Roman, Jr., Josefino Cenizal,
and Jose Roxas as well as defendant corporations
(CHGCCI, STC and Ayala) who acted through the
former and their other principal officers, knowingly
induced and caused then President Marcos and the
former officers of plaintiff MWSS to enter into the
aforesaid undated "Agreement" which are manifestly
and grossly disadvantageous to the government and
which gave the same defendants unwarranted
benefits, i.e., the ownership and dominion of the
afore-described property of plaintiff.
Paragraph 54 avers:
54. Defendants Jesus Hipolito and Alfredo Junio, then
public officers, together with the other public officers
who are now deceased (Ferdinand Marcos, Oscar
Ilustre, and Sivestre Payoyo) knowingly allowed
themselves to be persuaded, induced and influenced
to approve and/or enter into the aforementioned
"Agreements" which are grossly and manifestly
disadvantageous to the MWSS/government and
which bestowed upon the other defendants the
unwarranted benefit/ownership of subject property.
The three elements of a contract consent, the object, and the
cause of obligation 1 are all present. It cannot be otherwise argued
that the contract had for its object the sale of the property and the
cause or consideration thereof was the price to be paid (on the part
of respondents CHGCCI/SILHOUETTE) and the land to be sold (on
the part of petitioner MWSS). Likewise, petitioner MWSS' consent to

the May 11, 1983 and August 11, 1983 Agreements is patent on
the face of these documents and on its own resolution No. 36-83.
As noted by both lower courts, petitioner MWSS admits that it
consented to the sale of the property, with the qualification that
such consent was allegedly unduly influenced by the President
Marcos. Taking such allegation to be hypothetically true, such
would have resulted in only voidable contracts because all three
elements of a contract, still obtained nonetheless. The alleged
vitiation of MWSS' consent did not make the sale null and void ab
initio. Thus, "a contract where consent is given through mistake,
violence, intimidation, undue influence or fraud, is voidable" 2.
Contracts "where consent is vitiated by mistake, violence,
intimidation, undue influence or fraud" are voidable or annullable 3.
These are not void as
Concepts of Voidable Contracts. Voidable or
anullable contracts are existent, valid, and binding,
although they can be annulled because of want of
capacity or vitiated consent of the one of the parties,
but before annulment, they are effective and
obligatory between parties. Hence, it is valid until it
is set aside and its validity may be assailed only in an
action for that purpose. They can be confirmed or
ratified. 4
As the contracts were voidable at the most, the four year
prescriptive period under Art. 1391 of the New Civil Code will apply.
This article provides that the prescriptive period shall begin in the
cases of intimidation, violence or undue influence, from the time
the defect of the consent ceases", and "in case of mistake or fraud,
from the time of the discovery of the same time".
Hypothetically admitting that President Marcos unduly influenced
the sale, the prescriptive period to annul the same would have
begun on February 26, 1986 which this Court takes judicial notice
of as the date President Marcos was deposed. Prescription would
have set in by February 26, 1990 or more than three years before
petitioner MWSS' complaint was failed.
However, if petitioner MWSS' consent was vitiated by fraud, then
the prescriptive period commenced upon discovery. Discovery
commenced from the date of the execution of the sale documents
as petitioner was party thereto. At the least, discovery is deemed to
have taken place on the date of registration of the deeds with the

register of Deeds as registration is constructive notice to the

world. 5 Given these two principles on discovery, the prescriptive
period commenced in 1983 as petitioner MWSS actually knew of
the sale, or, in 1984 when the agreements were registered and
titles thereafter were issued to respondent SILHOUTTE. At the
latest, the action would have prescribed by 1988, or about five
years before the complaint was instituted. Thus, in Aznar vs.
Bernard 6, this Court held that:
Lastly, even assuming that the petitioners had
indeed failed to raise the affirmative defense of
prescription in a motion to dismiss or in an
appropriate pleading (answer, or amended or
supplemental answer) and an amendment would no
longer be feasible, still prescription, if apparent on
the face of the complaint, may be favorably
considered. In the case at bar, the private
respondents admit in their complaint that the
contract or real estate mortgage which they alleged
to be fraudulent and which had been foreclosed,
giving rise to this controversy with the petitioners,
was executed on July 17, 1978, or more than eight
long years before the commencement of the suit in
the court a quo, on September 15, 1986. And an
action declare a contract null and void on the ground
of fraud must be instituted within four years.
Extinctive prescription is thus apparent on the face of
the complaint itself as resolved by the Court.
Petitioner MWSS further contends that prescription does not apply
as its complaint prayed not for the nullification of voidable
contracts but for the declaration of nullity of void ab initio contracts
which are imprescriptible. This is incorrect, as the prayers in a
complaint are not determinative of what legal principles will
operate based on the factual allegations of the complaint. And
these factual allegations, assuming their truth, show that MWSS
consented to the sale, only that such consent was purportedly
vitiated by undue influence or fraud. Therefore, the rules on
prescription will operate. Even if petitioner MWSS asked for the
declaration of nullity of these contracts, the prayers will not be
controlling as only the factual allegations in the complaint
determine relief. "(I)t is the material allegations of fact in the
complaint, not the legal conclusion made therein or the prayer that
determines the relief to which the plaintiff is entitled" 7. Respondent
court is thus correct in holding that:

xxx xxx xxx

The totality then of those allegations in the complaint
makes up a case of a voidable contract of sale not
a void one. The determinative allegations are those
that point out that the consent of MWSS in the
Agreement of Sale was vitiated either by fraud or
undue for the declaration of nullity of the said
contract because the Complaint says no. Basic is the
rule however that it is the body and not the caption
nor the prayer of the Complaint that determines the
nature of the action. True, the caption and prayer of
the Complaint state that the action is for a judicial
declaration of nullity of a contract, but alas, as
already pointed out, its body unmistakably alleges
only a voidable contract. One cannot change the real
nature of an action adopting a different
nomenclature any more than one can change gin into
whisky by just replacing the label on the bottle with
that of the latter's and calling it whisky. No matter
what, the liquid inside remains gin.
xxx xxx xxx
Petitioner MWSS also theorizes that the May 11, 1983 MWSSSILHOUTTE Agreement and the August 11, 1983 Supplemental
Agreement were void ab initio because the "initial agreement" from
which these agreements emanated was executed "without the
knowledge, much less the approval" of petitioner MWSS through its
Board of Trustees. The "initial agreement" referred to in petitioner
MWSS' argument is the December 20, 1982 letter of respondents
Roxas and Roman, Jr. to President Marcos where the authors
mentioned that they had reached an agreement with petitioner's
then general manager, Mr. Oscar Ilustre. Petitioner MWSS maintains
that Mr. Ilustre was not authorized to enter into such "initial
agreement", contrary to Art. 1874 of the New Civil Code which
provides that "when a sale of a parcel of land or any interest
therein is through an agent, the authority of the latter shall be in
writing otherwise the sale shall be void." It then concludes that
since its Res. No. 36-83 and the May 11, 1983 and August 11, 1983
Agreements are "fruits" of the "initial agreement" (for which Mr.
Ilustre was allegedly not authorized in writing), all of these would
have been also void under Art. 1422 of NCC, which provides that a
contract which is the direct result of a pronounced illegal contract,
is also void and inexistent."

The argument does not impress. The "initial agreement" reflected

in the December 20, 1982 letter of respondent Roman to Pres.
Marcos, is not a sale under Art. 1874. Since the nature of the "initial
agreement" is crucial, we
quotes 8 the letter in full:
We respectfully approach Your Excellency in all
humility and in the spirit of the Yuletide Season. We
have explained to Your Excellency when you allowed
us the honor to see you, that the negotiations with
MWSS which the late Pablo R. Roman initiated way
back in 1975, with your kind approval, will finally be
concluded.
We have agreed in principle with Mr. Oscar Ilustre on
the terms of the sale as evidenced by the following:
1. Our written
agreement to hire Asian
Appraisal Company to
appraise the entire
leased area which then
be the basis for the
negotiations of the
purchase price of the
property; and
2. Our exchange of
communications wherein
made a counter-offer
and our acceptance
counter-offer.
However, we were informed by Mr. Ilustre that only
written instruction from Your Excellency will allow us
to finally sign the Agreement.
In sum, our Agreement is for the purchase price of
FIFTY-SEVEN MILLION TWO-HUNDRED-FORTY
THOUSAND PESOS (P57,240,000) for the entire
leased area of 135 hectares; TWENTY-SEVEN MILLION
PESOS (P27,000,000) payable upon approval of the
contract by Your Excellency and the balance of
THIRTY MILLION TWO HUNDRED FORTY THOUSAND

PESOS (P30,240,000) after one (1) year inclusive of a

12% interest.
We believe that this arrangement is fair and
equitable to both parties considering that the value
of the land was appraised by a reputable company
and independent appraisal company jointly
commissioned by both parties and considering
further that Capitol Hills has still a 23-year lien on the
property by virtue of its existing lease contract with
MWSS.
We humbly seek your instruction, Your Excellency
and please accept our families' sincere wish for a
Merry Christmas and a Happy New Year to you and
the First Family.
The foregoing does not document a sale, but at most, only the
conditions proposed by respondent Roman to enter into one. By the
terms thereof, it refers only to an "agreement in principle".
Reflecting a future consummation, the letter mentions
"negotiations with MWSS (which) with your (Marcos) kind approval,
will finally be concluded". It must likewise be noted that
presidential approval had yet to be obtained. Thus, the "initial
agreement" was not a sale as it did not in any way transfer
ownership over the property. The proposed terms had yet to be
approval by the President and the agreement in principle still had
to be formalized in a deed of sale. Written authority as is required
under Art. 1834 of the New Civil Code, was not needed at the point
of the "initial agreement".
Verily, the principle on prescription of actions is designed to cover
situations such as the case at bar, where there have been a series
of transfers to innocent purchasers for value. To set aside these
transactions only to accommodate a party who has slept on his
rights is anathema to good order. 9
RE: Laches
Even assuming, for argument's sake, that the allegations in the
complaint establish the absolute nullity of the assailed contracts
and hence imprescriptible, the complaint can still be dismissed on
the ground of laches which is different from prescription. This Court,
as early as 1966, has distinguished these two concepts in this wise:

. . . (T)he defense of laches applies independently of

prescription. Laches is different from the statute of
limitations. Prescription is concerned with the fact of
delay, whereas laches, is concerned with the effect of
delay. Prescription is a matter of time; laches is
principally a question of inequity of permitting a
claim to be enforced, this inequity being founded on
some change in the condition of the property or the
relation of the parties. Prescription is statutory;
laches is not. Laches applies in inequity, whereas
prescription applies at law. Prescription is based on
fixed-time; laches is not. 10
Thus, the prevailing doctrine is that the right to have a
contract declared void ab initio may be barred by laches
although not barred by prescription. 11
It has, for all its elements are present, viz:
(1) conduct on the part
of the defendant, or one
under whom he claims,
giving rise to the
situation that led to the
complaint and for which
the complaint seeks a
remedy;
(2) delay in asserting the
complainant's rights,
having had knowledge
or notice of the
defendant's conduct and
having been afforded an
opportunity to institute a
suit;
(3) lack of knowledge or
notice on the part of the
defendant that the
complainant would
assert the right on which
he bases his suit; and

(4) injury or prejudice to

the defendant in the
event relief is accorded
to the complainant, or
the suit is not held
barred. 12
There is no question on the presence of the first element. the main
thrust of petitioner MWSS's complaint is to bring to the fore what it
claims as fraudulent and/or illegal acts of the respondents in the
acquisition of the subject property.
The second element of delay is evident from the fact that petitioner
tarried for almost ten (10) years from the conclusion of the sale
sometime in 1983 before formally laying claim to the subject
property in 1993.
The third element is present as can be deduced from the
allegations in the complaint that petitioner MWSS (a) demanded for
a downpayment for no less than three times; (b) accepted
downpayment for P25 Million; and (c) accepted a letter of credit for
the balance. The pertinent paragraphs in the complaint thus read:
38. In a letter dated September 19, 1983, for failure
of CHGCCI to pay on time, Mr. Ilustre demanded
payment of the downpayment of P25 Million which
was due as of 18 April 1983. A copy of this letter is
hereto attached as Annex "X";
39. Again, in a letter dated February 7, 1984, then
MWSS Acting General Manager Aber Canlas
demanded payment from CHGCCI of the purchase
price long overdue. A copy of this letter is hereto
attached as Annex "Y";
40. Likewise, in a letter dated March 14, 1984, Mr.
Canlas again demanded from CHGCCI payment of
the price. A copy of this demand letter is hereto
attached as Annex "Z";
41. Thereafter, in a letter dated July 27, 1984,
another entity, defendant Ayala Corporation, through
SVP Renato de la Fuente, paid with a check the long
overdue downpayment of P25,000,000.00 of

STC/CHGCCI. Likewise a domestic stand-by letter of

credit for the balance was issued in favor of MWSS;
Copies of the said letter, check and letter of credit
are hereto attached as Annexes "AA", "BB", and "CC",
respectively.
Under these facts supplied by petitioner MWSS itself,
respondents have every good reason to believe that
petitioner was honoring the validity of the conveyances of
the subject property, and that the sudden institution of the
complaint in 1993 alleging the nullity of such conveyances
was surely an unexpected turn of events for respondents.
Hence, petitioner MWSS cannot escape the effect of laches.
RE: Ratification
Pertinent to this issue is the claim of petitioner MWSS that Mr.
Ilustre was never given the authority by its Board of Trustees to
enter into the "initial agreement" of December 20, 1982 and
therefore, the sale of the subject property is invalid.
Petitioner MWSS misses the paint. The perceived infirmity in the
"initial agreement" can be cured by ratification. So settled is the
precept that ratification can be made by the corporate board either
expressly or impliedly. Implied ratification may take various forms
like silence or acquiescence; by acts showing approval or
adoption of the contract; or by acceptance and retention of benefits
flowing therefrom. 13 Both modes of ratification have been made in
this case.
There was express ratification made by the Board of petitioner
MWSS when it passed Resolution No. 36-83 approving the sale of
the subject property to respondent SILHOUETTE and authorizing Mr.
Ilustre, as General Manager, "to sign for and in behalf of the MWSS
the contract papers and other pertinent documents relative
thereto." Implied ratification by "silence or acquiescence" is
revealed from the acts of petitioner MWSS in (a) sending three (3)
demand letters for the payment of the purchase price, (b)
accepting P25 Million as downpayment, and (c) accepting a letter of
credit for the balance, as hereinbefore mentioned. It may well be
pointed out also that nowhere in petitioner MWSS' complaint is it
alleged that it returned the amounts, or any part thereof, covering
the purchase price to any of the respondents-vendees at any point
in time. This is only indicative of petitioner MWSS' acceptance and

retention of benefits flowing from the sales transactions which is

another form of implied ratification.
RE: Non-joinder of indispensable parties
There is no denying that petitioner MWSS' action against herein
respondents for the recovery of the subject property now converted
into a prime residential subdivision would ultimately affect the
proprietary rights of the many lot owners to whom the land has
already been parceled out. They should have been included in the
suit as parties-defendants, for "it is well established that owners of
property over which reconveyance is asserted are indispensable
parties without whom no relief is available and without whom the
court can render no valid judgment."14 Being indispensable parties,
the absence of these lot-owners in the suit renders all subsequent
actions of the trial court null and void for want of authority to act,
not only as to the absent parties but even as to those
present. 15 Thus, when indispensable parties are not before the
court, the action should be dismissed. 16
WHEREFORE, in view of the foregoing, the consolidated petitions
are hereby DENIED.

namely: TEODULO
S.
FRANCISCO,
EMILIANO S.
FRANCISCO,
MARIA THERESA
S.
FRANCISCO,
PAULINA S. FRANCISCO, THOMAS S. FRANCISCO; PEDRO
ALTEA
FRANCISCO;
CARINA FRANCISCO-ALCANTARA;
EFREN ALTEA
FRANCISCO;
DOMINGA
LEA FRANCISCOREGONDON; BENEDICTO ALTEA FRANCISCO and ANTONIO
ALTEA
FRANCISCO), petitioner,
vs.
PASTOR
HERRERA, respondent.
DECISION
QUISUMBING, J.:
This is a petition for review on certiorari of the decision [1] of the
Court of Appeals, dated August 30, 1999, in CA-G.R. CV No. 47869,
which affirmed in toto the judgment[2] of the Regional Trial Court
(RTC) of Antipolo City, Branch 73, in Civil Case No. 92-2267. The
appellate court sustained the trial courts ruling which: (a) declared
null and void the deeds of sale of the properties covered by Tax
Declaration Nos. 01-00495 and 01-00497; and (b) directed
petitioner to return the subject properties to respondent who, in
turn, must refund to petitioner the purchase price of P1,750,000.
The facts, as found by the trial court and affirmed by the Court
of Appeals, are as follows:

SO ORDERED.

Eligio Herrera, Sr., the father of respondent, was the owner of

two parcels of land, one consisting of 500 sq. m. and another
consisting of 451 sq. m., covered by Tax Declaration (TD) Nos. 0100495 and 01-00497, respectively. Both were located at Barangay
San Andres, Cainta, Rizal.[3]

SECOND DIVISION

On January 3, 1991, petitioner bought from said landowner the

first parcel, covered by TD No. 01-00495, for the price
of P1,000,000, paid in installments from November 30, 1990 to
August 10, 1991.
On March 12, 1991, petitioner bought the second parcel
covered by TD No. 01-00497, for P750,000.

[G.R. No. 139982. November 21, 2002]

JULIAN FRANCISCO (Substituted by his Heirs, namely: CARLOS

ALTEA FRANCISCO; the heirs of late ARCADIO
FRANCISCO,
namely: CONCHITA
SALANGSANGFRANCISCO (surviving spouse),
and
his
children

Contending that the contract price for the two parcels of land
was grossly inadequate, the children of Eligio, Sr., namely, Josefina
Cavestany, Eligio Herrera, Jr., and respondent Pastor Herrera, tried
to negotiate with petitioner to increase the purchase price. When
petitioner refused, herein respondent then filed a complaint for
annulment of sale, with the RTC of Antipolo City, docketed as Civil
Case No. 92-2267. In his complaint, respondent claimed ownership
over the second parcel, which is the lot covered by TD No. 01-

00497, allegedly by virtue of a sale in his favor since 1973. He

likewise claimed that the first parcel, the lot covered by TD No. 0100495, was subject to the co-ownership of the surviving heirs of
Francisca A. Herrera, the wife of Eligio, Sr., considering that she
died intestate on April 2, 1990, before the alleged sale to
petitioner. Finally, respondent also alleged that the sale of the two
lots was null and void on the ground that at the time of sale, Eligio,
Sr. was already incapacitated to give consent to a contract because
he was already afflicted with senile dementia, characterized by
deteriorating mental and physical condition including loss of
memory.
In his answer, petitioner as defendant below alleged
respondent was estopped from assailing the sale of the
Petitioner contended that respondent had effectively ratified
contracts of sales, by receiving the consideration offered in
transaction.

that
lots.
both
each

On November 14, 1994, the Regional Trial Court handed down

its decision, the dispositive portion of which reads:
WHEREFORE, in view of all the foregoing, this court hereby orders
that:

WHEREFORE, premises considered, the decision appealed from is

hereby AFFIRMED in toto. Costs against defendant-appellant.
SO ORDERED.[5]
Hence, this petition for review anchored on the following
grounds:
I. THE COURT OF APPEALS COMPLETELY IGNORED THE
BASIC DIFFERENCE BETWEEN A VOID AND A MERELY
VOIDABLE CONTRACT THUS MISSING THE ESSENTIAL
SIGNIFICANCE OF THE ESTABLISHED FACT OF
RATIFICATION
BY
THE
RESPONDENT
WHICH
EXTINGUISHED WHATEVER BASIS RESPONDENT MAY
HAVE HAD IN HAVING THE CONTRACT AT BENCH
ANNULLED.
II. THE DECISION OF THE COURT OF APPEALS ON SENILE
DEMENTIA:
A. DISREGARDED THE FACTUAL BACKGROUND OF THE
CASE;
B. WAS CONTRARY TO ESTABLISHED JURISPRUDENCE; AND

1. The deeds of sale of the properties covered by Tax Dec.

Nos. 01-00495 and 01-00497 are declared null and void;

C. WAS PURELY CONJECTURAL, THE CONJECTURE BEING

ERRONEOUS.

2. The defendant is to return the lots in question including

all improvements thereon to the plaintiff and the
plaintiff is ordered to simultaneously return to the
defendant the purchase price of the lots sold totalling
to P750,000.00 for lot covered by TD 01-00497
and P1,000,000.00 covered by TD 01-00495;

III. THE COURT OF APPEALS WAS IN GROSS ERROR AND IN

FACT VIOLATED PETITIONERS RIGHT TO DUE PROCESS
WHEN IT RULED THAT THE CONSIDERATION FOR THE
QUESTIONED CONTRACTS WAS GROSSLY INADEQUATE.

3. The court also orders the defendant to pay the cost of

the suit.
4. The counter-claim of the defendant is denied for lack of
merit.
SO ORDERED.[4]
Petitioner then elevated the matter to the Court of Appeals in
CA-G.R. CV No. 47869. On August 30, 1999, however, the appellate
court affirmed the decision of the Regional Trial Court, thus:

[6]

The resolution of this case hinges on one pivotal issue: Are the
assailed contracts of sale void or merely voidable and hence
capable of being ratified?
Petitioner contends that the Court of Appeals erred when it
ignored the basic distinction between void and voidable contracts.
He argues that the contracts of sale in the instant case, following
Article 1390[7] of the Civil Code are merely voidable and not void ab
initio. Hence, said contracts can be ratified. Petitioner argues that
while it is true that a demented person cannot give consent to a
contract
pursuant
to
Article
1327,[8] nonetheless
the dementia affecting one of the parties will not make the contract
void per se but merely voidable. Hence, when respondent accepted
the purchase price on behalf of his father who was allegedly
suffering from senile dementia, respondent effectively ratified the

contracts. The ratified contracts then become valid and enforceable

as between the parties.
Respondent counters that his act of receiving the purchase
price does not imply ratification on his part. He only received the
installment payments on his senile fathers behalf, since the latter
could no longer account for the previous payments. His act was
thus meant merely as a safety measure to prevent the money from
going into the wrong hands. Respondent also maintains that the
sales of the two properties were null and void. First, with respect to
the lot covered by TD No. 01-00497, Eligio, Sr. could no longer sell
the same because it had been previously sold to respondent in
1973.As to lot covered by TD No. 01-00495, respondent contends
that it is co-owned by Eligio, Sr. and his children, as heirs of Eligios
wife. As such, Eligio, Sr. could not sell said lot without the consent
of his co-owners.
We note that both the trial court and the Court of Appeals
found that Eligio, Sr. was already suffering from senile dementia at
the time he sold the lots in question. In other words, he was already
mentally incapacitated when he entered into the contracts of sale.
Settled is the rule that findings of fact of the trial court, when
affirmed by the appellate court, are binding and conclusive upon
the Supreme Court.[9]
Coming now to the pivotal issue in this controversy. A void or
inexistent contract is one which has no force and effect from the
very beginning. Hence, it is as if it has never been entered into and
cannot be validated either by the passage of time or by
ratification. There are two types of void contracts: (1) those where
one of the essential requisites of a valid contract as provided for
by Article 1318[10] of the Civil Code is totally wanting; and (2) those
declared to be so under Article 1409 [11] of the Civil Code. By
contrast, a voidable or annullable contract is one in which the
essential requisites for validity under Article 1318 are present, but
vitiated by want of capacity, error, violence, intimidation, undue
influence, or deceit.
Article 1318 of the Civil Code states that no contract exists
unless there is a concurrence of consent of the parties, object
certain as subject matter, and cause of the obligation established.
Article 1327 provides that insane or demented persons cannot give
consent to a contract. But, if an insane or demented person does
enter into a contract, the legal effect is that the contract is voidable
or annullable as specifically provided in Article 1390. [12]
In the present case, it was established that the vendor Eligio,
Sr. entered into an agreement with petitioner, but that the formers

capacity to consent was vitiated by senile dementia. Hence, we

must rule that the assailed contracts are not void or inexistent per
se; rather, these are contracts that are valid and binding unless
annulled through a proper action filed in court seasonably.
An annullable contract may be rendered perfectly valid by
ratification, which can be express or implied. Implied ratification
may take the form of accepting and retaining the benefits of a
contract.[13] This is what happened in this case. Respondents
contention that he merely received payments on behalf of his
father merely to avoid their misuse and that he did not intend to
concur with the contracts is unconvincing. If he was not agreeable
with the contracts, he could have prevented petitioner from
delivering the payments, or if this was impossible, he could have
immediately instituted the action for reconveyance and have the
payments consigned with the court. None of these happened. As
found by the trial court and the Court of Appeals, upon learning of
the sale, respondent negotiated for the increase of the purchase
price while receiving the installment payments. It was only when
respondent failed to convince petitioner to increase the price that
the former instituted the complaint for reconveyance of the
properties. Clearly, respondent was agreeable to the contracts, only
he wanted to get more. Further, there is no showing that
respondent returned the payments or made an offer to do so. This
bolsters the view that indeed there was ratification. One cannot
negotiate for an increase in the price in one breath and in the same
breath contend that the contract of sale is void.
Nor can we find for respondents argument that the contracts
were void as Eligio, Sr., could not sell the lots in question as one of
the properties had already been sold to him, while the other was
the subject of a co-ownership among the heirs of the deceased wife
of Eligio, Sr. Note that it was found by both the trial court and the
Court of Appeals that Eligio, Sr., was the declared owner of said
lots. This finding is conclusive on us. As declared owner of said
parcels of land, it follows that Eligio, Sr., had the right to transfer
the ownership thereof under the principle of jus disponendi.
In sum, the appellate court erred in sustaining the judgment of
the trial court that the deeds of sale of the two lots in question
were null and void.
WHEREFORE, the instant petition is GRANTED. The decision
dated August 30, 1999 of the Court of Appeals in CA-G.R. CV No.
47869, affirming the decision of the Regional Trial Court in Civil
Case No. 92-2267 is REVERSED. The two contracts of sale covering

lots under TD No. 01-00495 and No. 01-00497 are hereby declared
VALID. Costs against respondent.
SO ORDERED.

Sometime before January 6, 1995 while the Cebu Winland Tower

Condominium was under construction, petitioner offered to sell to
respondent condominium units at promotional prices. As an added
incentive, petitioner offered a 3% discount provided 30% of the
purchase price is paid as down payment and the balance paid in 24
equal monthly installments.
On January 6, 1995, respondent accepted the offer of petitioner and
bought two condominium units designated as Unit Nos. 2405 and
2406, as well as four parking slots designated as slots 91, 99, 101
and 103 (subject properties).

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 173215

May 21, 2009

CEBU WINLAND DEVELOPMENT CORPORATION, Petitioner,

vs.
ONG SIAO HUA, Respondent.
DECISION
PUNO, CJ.:
Before us is a Petition for Review1 filed under Rule 45 of the Rules of
Court assailing the Decision2 dated February 14, 2006 of the Court
of Appeals and its Resolution3 dated June 2, 2006 denying
petitioners motion for reconsideration of the said decision.

The area per condominium unit as indicated in petitioners price list

is 155 square meters and the price per square meter is P22,378.95.
The price for the parking slot is P240,000 each. Respondent,
therefore, paid P2,298,655.08 as down payment and issued 24
postdated checks in the amount of P223,430.70 per check for the
balance of the purchase price in the total amount of P5,362,385.19
computed as follows:4
155 sq.m./unit x 2 units x P22,378.95/sq.m.

P6,937,474.50

4 parking slots at P240,000/slot

Sub-total
Less: 3% discount

960,000.00
P 7,897,474.50
( 236,924.23)

Net purchase price

P 7,660,550.27

30% down payment

( 2,298,165.08)

Balance at P223,430.70 per month for 24 months

P 5,362,385.19

The facts are undisputed.

The parties did not execute any written document setting forth the
said transaction.

Petitioner, Cebu Winland Development Corporation, is the owner

and developer of a condominium project called the Cebu Winland
Tower Condominium located in Juana Osmea Extension, Cebu City.

On October 10, 1996, possession of the subject properties was

turned over to respondent.5

Respondent, Ong Siao Hua, is a buyer of two condominium units

and four parking slots from petitioner.

After the purchase price was fully paid with the last check dated
January 31, 1997, respondent requested petitioner for the
condominium certificates of title evidencing ownership of the units.

Petitioner then sent to respondent, for the latters signature,

documents denominated as Deeds of Absolute Sale for the two
condominium units.
Upon examination of the deed of absolute sale of Unit No. 2405 and
the identical document for Unit No. 2406, respondent was
distressed to find that the stated floor area is only 127 square
meters contrary to the area indicated in the price list which was
155 square meters. Respondent caused a verification survey of the
said condominium units and discovered that the actual area is only
110 square meters per unit. Respondent demanded from petitioner
to refund the amount of P2,014,105.50 representing excess
payments for the difference in the area, computed as follows: 6
155 sq.m.-110 = 45 x 2 units = 90 sq.m. x P22,378.95
= P2,014,105.50
Petitioner refused to refund the said amount to respondent.
Consequently, respondent filed a Complaint7 on August 7, 1998 in
the Regional Office of the Housing and Land Use Regulatory Board
(HLURB) in Cebu City, praying for the refund of P2,014,105.50 plus
interest, moral damages and attorneys fees, including the
suspension of petitioners license to sell. The case was docketed as
HLURB Case No. REM-0220-080798.
On December 6, 1999, the Housing and Land Use Arbiter (the
Arbiter) rendered a Decision8 dismissing the complaint. The Arbiter
found petitioner not guilty of misrepresentation. Considering further
that the subject properties have been delivered on October 10,
1996 and respondent filed his complaint only on August 7, 1998,
the Arbiter further ruled that respondents action had already
prescribed pursuant to Article 1543,9 in relation to Articles 1539
and 1542,10 of the Civil Code.1avvphi1 The dispositive portion of
the said decision reads:
WHEREFORE, Premises Considered, judgment is hereby rendered
DISMISSING this Complaint, and ordering the parties to do the
following, to wit:
1. For the Complainant to SIGN the two (2) Deed[s] of
Absolute Sale which this Board finds to be in order within 30
days from finality of this decision; and

2. For the Respondent to DELIVER the corresponding

condominium certificate of title for the two units namely
units 2405 and 2406 free from all liens and encumbrances.
Consequently, the counterclaim is likewise dismissed for it finds no
evidence that Complainant acted in bad faith in filing this
complaint.
Cost against the parties.
SO ORDERED.11
Aggrieved, respondent filed a Petition for Review of said decision
with the Board of Commissioners of the HLURB (the Board). In the
course of its proceedings, the Board ordered that an ocular
inspection of Unit Nos. 2405 and 2406 be conducted by an
independent engineer. The Board further ordered that there should
be two measurements of the areas in controversy, one based on
the master deed and another based on the internal surface of the
perimeter wall. After the ocular inspection, the independent
geodetic engineer found the following measurements:
Unit 2405- Based on internal face of perimeter wall = 109
sq. m. Based on master deed = 115 sq. m.
Unit 2406- Based on internal face of perimeter wall = 110
sq. m.
Based on master deed = 116 sq. m.12
Thereafter, the Board rendered its Decision13 dated June 8, 2004
affirming the Arbiters finding that respondents action had already
prescribed. However, the Board found that there was a mistake
regarding the object of the sale constituting a ground for rescission
based on Articles 1330 and 133114 of the Civil Code. Hence, the
Board modified the decision of the Arbiter as follows:
Wherefore[,] the decision of the [O]ffice below is hereby modified
with the following additional directive:
In the alternative, and at the option of the complainant, the
contract is rescinded and the respondent is directed to refund to
(sic) P7,660,550[.]27 while complainant is directed to turn over

possession of the units 2405, 2406 and the four parking lots to the
respondent.
SO ORDERED.15

The Court of Appeals Erred in Holding That in A Contract of Sale

Ownership Is Not Transferred by Delivery[.]
II.

Not satisfied with the decision of the Board, petitioner filed an

appeal to the Office of the President arguing that the Board erred in
granting relief to respondent considering that the latters action
had already prescribed. On March 11, 2005, the Office of the
President rendered a Decision16 finding that respondents action
had already prescribed pursuant to Article 1543 of the Civil Code.
The dispositive portion of said decision reads as follows:
WHEREFORE, premises considered, the Decision dated June 8, 2004
of the HLURB is hereby MODIFIED and the Decision dated
December 6, 1999 of the Housing and Land Use Arbiter is hereby
REINSTATED.
SO ORDERED.17
Respondent filed a Motion for Reconsideration but the same was
denied by the Office of the President in a Resolution 18 dated June
20, 2005. Hence, respondent filed a Petition for Review before the
Court of Appeals.
On February 14, 2006, the Court of Appeals rendered the assailed
Decision finding that respondents action has not prescribed. The
dispositive portion of the Decision reads:
WHEREFORE, in view of the foregoing premises, judgment is hereby
rendered by us GRANTING the petition filed in this case, REVERSING
and SETTING ASIDE the assailed Decision and Resolution of the
Office of the President dated March 11, 2005 and June 20, 2005,
respectively, and reinstating the Decision promulgated by the
Board of Commissioners of the HLURB on June 8, 2004.
SO ORDERED.19
Petitioners Motion for Reconsideration20 of the assailed decision
having been denied in the Resolution dated June 2, 2006, petitioner
is now before us, in this petition for review raising the following
grounds:
I.

The Court of Appeals Erred in Holding That Respondents Action Has

Not Prescribed.
III.
The Court of Appeals Erred And Exceeded Its Jurisdiction When It
Found Petitioner Guilty Of Misrepresentation As The Decision Of The
HLURB Board of Commissioners On The Same Matter Is Final With
Respect To Respondent Who Did Not Appeal Said Decision That
Petitioner Did Not Commit Misrepresentation.21
The issue before us is whether respondents action has prescribed
pursuant to Article 1543, in relation to Articles 1539 and 1542 of
the Civil Code, to wit:
ARTICLE 1539. The obligation to deliver the thing sold includes that
of placing in the control of the vendee all that is mentioned in the
contract, in conformity with the following rules:
If the sale of real estate should be made with a statement of its
area, at the rate of a certain price for a unit of measure or number,
the vendor shall be obliged to deliver to the vendee, if the latter
should demand it, all that may have been stated in the contract;
but, should this be not possible, the vendee may choose between a
proportional reduction of the price and the rescission of the
contract, provided that, in the latter case, the lack in the area be
not less than one-tenth of that stated.
The same shall be done, even when the area is the same, if any
part of the immovable is not of the quality specified in the contract.
The rescission, in this case, shall only take place at the will of the
vendee, when the inferior value of the thing sold exceeds one-tenth
of the price agreed upon.
Nevertheless, if the vendee would not have bought the immovable
had he known of its smaller area or inferior quality, he may rescind
the sale. (1469a) [Emphasis supplied]

ARTICLE 1542. In the sale of real estate, made for a lump sum and
not at the rate of a certain sum for a unit of measure or number,
there shall be no increase or decrease of the price, although there
be a greater or lesser area or number than that stated in the
contract.

ARTICLE 1496. The ownership of the thing sold is acquired by the

vendee from the moment it is delivered to him in any of the ways
specified in Articles 1497 to 1501, or in any other manner signifying
an agreement that the possession is transferred from the vendor to
the vendee. (n)

The same rule shall be applied when two or more immovables are
sold for a single price; but if, besides mentioning the boundaries,
which is indispensable in every conveyance of real estate, its area
or number should be designated in the contract, the vendor shall
be bound to deliver all that is included within said boundaries, even
when it exceeds the area or number specified in the contract; and,
should he not be able to do so, he shall suffer a reduction in the
price, in proportion to what is lacking in the area or number, unless
the contract is rescinded because the vendee does not accede to
the failure to deliver what has been stipulated. (1471) [Emphasis
supplied]

ARTICLE 1497. The thing sold shall be understood as delivered,

when it is placed in the control and possession of the vendee.
(1462a)

ARTICLE 1543. The actions arising from Articles 1539 and 1542
shall prescribe in six months, counted from the day of delivery.
(1472a) [Emphasis supplied]
Petitioner argues that it delivered possession of the subject
properties to respondent on October 10, 1996, hence, respondents
action filed on August 7, 1998 has already prescribed.
Respondent, on the one hand, contends that his action has not
prescribed because the prescriptive period has not begun to run as
the same must be reckoned from the execution of the deeds of sale
which has not yet been done.
The resolution of the issue at bar necessitates a scrutiny of the
concept of "delivery" in the context of the Law on Sales or as used
in Article 1543 of the Civil Code. Under the Civil Code, the vendor is
bound to transfer the ownership of and deliver the thing which is
the object of the sale. The pertinent provisions of the Civil Code on
the obligation of the vendor to deliver the object of the sale
provide:
ARTICLE 1495. The vendor is bound to transfer the ownership of
and deliver, as well as warrant the thing which is the object of the
sale. (1461a)

ARTICLE 1498. When the sale is made through a public instrument,

the execution thereof shall be equivalent to the delivery of the
thing which is the object of the contract, if from the deed the
contrary does not appear or cannot clearly be inferred.
xxxx
Under the Civil Code, ownership does not pass by mere stipulation
but only by delivery.22 Manresa explains, "the delivery of the
thing . . . signifies that title has passed from the seller to the
buyer."23 According to Tolentino, the purpose of delivery is not only
for the enjoyment of the thing but also a mode of acquiring
dominion and determines the transmission of ownership, the birth
of the real right. The delivery under any of the forms provided by
Articles 1497 to 1505 of the Civil Code signifies that the
transmission of ownership from vendor to vendee has taken
place.24
Article 1497 above contemplates what is known as real or actual
delivery, when the thing sold is placed in the control and
possession of the vendee. Article 1498, on the one hand, refers to
symbolic delivery by the execution of a public instrument. It should
be noted, however, that Article 1498 does not say that the
execution of the deed provides a conclusive presumption of the
delivery of possession. It confines itself to providing that the
execution thereof is equivalent to delivery, which means that the
presumption therein can be rebutted by means of clear and
convincing evidence. Thus, the presumptive delivery by the
execution of a public instrument can be negated by the failure of
the vendee to take actual possession of the land sold.25
In Equatorial Realty Development, Inc. v. Mayfair Theater, Inc., 26 the
concept of "delivery" was explained as follows:

Delivery has been described as a composite act, a thing in which

both parties must join and the minds of both parties concur. It is an
act by which one party parts with the title to and the possession of
the property, and the other acquires the right to and the possession
of the same. In its natural sense, delivery means something in
addition to the delivery of property or title; it means transfer of
possession. In the Law on Sales, delivery may be either actual or
constructive, but both forms of delivery contemplate
"the absolute giving up of the control and custody of the property
on the part of the vendor, and the assumption of the same by the
vendee." (Emphasis supplied)
In light of the foregoing, "delivery" as used in the Law on Sales
refers to the concurrent transfer of two things: (1) possession and
(2) ownership. This is the rationale behind the jurisprudential
doctrine that presumptive delivery via execution of a public
instrument is negated by the reality that the vendee actually failed
to obtain material possession of the land subject of the sale.27 In
the same vein, if the vendee is placed in actual possession of the
property, but by agreement of the parties ownership of the same is
retained by the vendor until the vendee has fully paid the price, the
mere transfer of the possession of the property subject of the sale
is not the "delivery" contemplated in the Law on Sales or as used in
Article 1543 of the Civil Code.
In the case at bar, it appears that respondent was already placed in
possession of the subject properties. However, it is crystal clear
that the deeds of absolute sale were still to be executed by the
parties upon payment of the last installment. This fact shows that
ownership of the said properties was withheld by petitioner.
Following case law, it is evident that the parties did not intend to
immediately transfer ownership of the subject properties until full
payment and the execution of the deeds of absolute
sale.28 Consequently, there is no "delivery" to speak of in this case
since what was transferred was possession only and not ownership
of the subject properties.
We, therefore, hold that the transfer of possession of the subject
properties on October 10, 1996 to respondent cannot be considered
as "delivery" within the purview of Article 1543 of the Civil Code. It
follows that since there has been no transfer of ownership of the
subject properties since the deeds of absolute sale have not yet
been executed by the parties, the action filed by respondent has
not prescribed.

The next issue is whether the sale in the case at bar is one made
with a statement of its area or at the rate of a certain price for a
unit of measure and not for a lump sum. Article 1539 provides that
"If the sale of real estate should be made with a statement of its
area, at the rate of a certain price for a unit of measure or number,
the vendor shall be obliged to deliver to the vendeeall that may
have been stated in the contract; but, should this be not possible,
the vendee may choose between a proportional reduction of the
price and the rescission of the contract." Article 1542, on the one
hand, provides that "In the sale of real estate, made for a lump sum
and not at the rate of a certain sum for a unit of measure or
number, there shall be no increase or decrease of the price,
although there be a greater or lesser area or number than that
stated in the contract."
The distinction between Article 1539 and Article 1542 was
explained by Manresa29 as follows:
. . . If the sale was made for a price per unit of measure or number,
the consideration of the contract with respect to the vendee, is the
number of such units, or, if you wish, the thing purchased as
determined by the stipulated number of units. But if, on the other
hand, the sale was made for a lump sum, the consideration of the
contract is the object sold, independently of its number or measure,
the thing as determined by the stipulated boundaries, which has
been called in law a determinate object.
This difference in consideration between the two cases implies a
distinct regulation of the obligation to deliver the object, because,
for an acquittance delivery must be made in accordance with the
agreement of the parties, and the performance of the agreement
must show the confirmation, in fact, of the consideration which
induces each of the parties to enter into the contract.
In Rudolf Lietz, Inc. v. Court of Appeals,30 we held:
Article 1539 governs a sale of immovable by the unit, that is, at a
stated rate per unit area. In a unit price contract, the statement of
area of immovable is not conclusive and the price may be reduced
or increased depending on the area actually delivered. If the vendor
delivers less than the area agreed upon, the vendee may oblige the
vendor to deliver all that may be stated in the contract or demand
for the proportionate reduction of the purchase price if delivery is
not possible. If the vendor delivers more than the area stated in the
contract, the vendee has the option to accept only the amount

agreed upon or to accept the whole area, provided he pays for the
additional area at the contract rate.
In some instances, a sale of an immovable may be made for a lump
sum and not at a rate per unit. The parties agree on a stated
purchase price for an immovable the area of which may be
declared based on an estimate or where both the area and
boundaries are stated.
In the case where the area of the immovable is stated in the
contract based on an estimate, the actual area delivered may not
measure up exactly with the area stated in the contract. According
to Article 1542 of the Civil Code, in the sale of real estate, made for
a lump sum and not at the rate of a certain sum for a unit of
measure or number, there shall be no increase or decrease of the
price although there be a greater or lesser area or number than
that stated in the contract. However, the discrepancy must not be
substantial. A vendee of land, when sold in gross or with the
description "more or less" with reference to its area, does not
thereby ipso facto take all risk of quantity in the land. The use of
"more or less" or similar words in designating quantity covers only
a reasonable excess or deficiency.
Where both the area and the boundaries of the immovable are
declared, the area covered within the boundaries of the immovable
prevails over the stated area. In cases of conflict between areas
and boundaries, it is the latter which should prevail. What really
defines a piece of ground is not the area, calculated with more or
less certainty, mentioned in its description, but the boundaries
therein laid down, as enclosing the land and indicating its limits. In
a contract of sale of land in a mass, it is well established that the
specific boundaries stated in the contract must control over any
statement with respect to the area contained within its boundaries.
It is not of vital consequence that a deed or contract of sale of land
should disclose the area with mathematical accuracy. It is sufficient
if its extent is objectively indicated with sufficient precision to
enable one to identify it. An error as to the superficial area is
immaterial. Thus, the obligation of the vendor is to deliver
everything within the boundaries, inasmuch as it is the entirety
thereof that distinguishes the determinate object.
In the case at bar, it is undisputed by the parties that the purchase
price of the subject properties was computed based on the price list
prepared by petitioner, or P22,378.95 per square meter. Clearly,
the parties agreed on a sale at a rate of a certain price per unit of

measure and not one for a lump sum. Hence, it is Article 1539 and
not Article 1542 which is the applicable law. Accordingly,
respondent is entitled to the relief afforded to him under Article
1539, that is, either a proportional reduction of the price or the
rescission of the contract, at his option. Respondent chose the
former remedy since he prayed in his Complaint for the refund of
the amount of P2,014,105.50 representing the proportional
reduction of the price paid to petitioner.
In its decision, the Court of Appeals held that the action filed by
respondent has not prescribed and reinstated the decision of the
Board. It is an error to reinstate the decision of the Board. The
Board, in its decision, held that there was a mistake regarding the
object of the sale constituting a ground for rescission based on
Articles 1330 and 1331 of the Civil Code. It then granted the relief
of rescission at the option of respondent. Articles 1330 and 1331 of
the Civil Code provide:
ARTICLE 1330. A contract where consent is given through mistake,
violence, intimidation, undue influence, or fraud is voidable.
(1265a)1avvphi1
ARTICLE 1331. In order that mistake may invalidate consent, it
should refer to the substance of the thing which is the object of the
contract, or to those conditions which have principally moved one
or both parties to enter into the contract.
We find that these articles are inapplicable to the case at bar. In
order that mistake may invalidate consent and constitute a ground
for annulment of contract based on Article 1331, the mistake must
be material as to go to the essence of the contract; that without
such mistake, the agreement would not have been made.31 The
effect of error must be determined largely by its influence upon the
party. If the party would have entered into the contract even if he
had knowledge of the true fact, then the error does not vitiate
consent.32
In the case at bar, the relief sought by respondent was for a refund
and he continued to occupy the subject properties after he found
out that the same were smaller in area. All these show that
respondent did not consider the error in size significant enough to
vitiate the contract. Hence, the Court of Appeals erred in affirming
the Boards decision to grant rescission based on Articles 1330 and
1331 of the Civil Code.

IN VIEW WHEREOF, the petition is DENIED. The decision of the

Court of Appeals is AFFIRMED but with the MODIFICATION that the
decision of the HLURB is not reinstated. Petitioner is ordered to
refund the amount of Two Million Fourteen Thousand One Hundred
Five Pesos and Fifty Centavos (P2,014,105.50) to respondent with
legal interest of six percent (6%) per annum from August 7, 1998,
the date of judicial demand. A twelve percent (12%) interest per
annum, in lieu of six percent (6%), shall be imposed on such
amount from the date of promulgation of this decision until the
payment thereof. Costs against petitioner.
SO ORDERED.

On the basis of this annotation which petitioner insists is the

proof that there already exists a valid, perfected agreement to sell
the Mayhaligue property, petitioner filed with the trial court, a
complaint for specific performance and collection of sum of money
with damages. However, the trial court held that:

FIRST DIVISION

[G.R. No. 125531. February 12, 1997]

JOVAN

LAND, petitioner, vs. COURT OF APPEALS

EUGENIO QUESADA, INC., respondents.

Petitioner learned from co-petitioner Consolacion P. Mendoza

that private respondent was selling the aforesaid Mayhaligue
property. Thus, petitioner through Joseph Sy made a written offer,
dated July 27, 1987 for P10.25 million. This first offer was not
accepted by Conrado Quesada, the General Manager of private
respondent. Joseph Sy sent a second written offer dated July 31,
1989 for the same price but inclusive of an undertaking to pay the
documentary stamp tax, transfer tax, registration fees and notarial
charges. Check No. 247048, dated July 31, 1989, for one million
pesos drawn against the Philippine Commercial and Industrial Bank
(PCIB) was enclosed therewith as earnest money. This second offer,
with earnest money, was again rejected by Conrado
Quesada. Undaunted, Joseph Sy, on August 10, 1989, sent a third
written offer for twelve million pesos with a similar check for one
million pesos as earnest money. Annotated on this third letter-offer
was the phrase "Received original, 9-4-89" beside which appears
the signature of Conrado Quesada.

and

DECISION
HERMOSISIMA, JR. J.:
This is a petition for review on certiorari to reverse and set
aside the decision of the Court of Appeals in C.A.-G.R. CV No.
47515.
Petitioner Jovan Land, Inc. is a corporation engaged in the real
estate business. Its President and Chairman of the Board of
Directors is one Joseph Sy.
Private respondent Eugenio Quesada is the owner of the Q
Building located on an 801 sq. m. lot at the corner of Mayhaligue
Street and Rizal Avenue, Sta. Cruz, Manila. The property is covered
by TCT No. 77796 of the Registry of Deeds of Manila.

"x x x the business encounters between Joseph Sy and

Conrado Quesada had not passed the negotiation stage
relating to the intended sale by the defendant corporation
of the property in question. x x x As the court finds, there is
nothing in the record to point that a contract was ever
perfected. In fact, there is nothing in writing which is
indispensably necessary in order that the perfected
contract could be enforced under the Statute of Frauds." [1]
Since the trial court dismissed petitioner's complaint for lack of
cause of action, petitioner appealed[2] to respondent Court of
Appeals before which it assigned the following errors:
"1. The Court a quo failed to appreciate that there was
already a perfected contract of sale between Jovan Land,
Inc. and the private respondent];
2. The Court a quo erred in its conclusion that there was no
implied acceptance of the offer by appellants to appellee
[private respondent];
3. The Court a quo was in error where it concluded that the
contract of sale was unenforceable;

4.The Court a quo failed to rule that appellant [petitioner]

Mendoza is entitled to her broker's commission." [3]
Respondent court placed petitioner to task on their assignment
of errors and concluded that not any of them justifies a reversal of
the trial court decision.
We agree.
In the case of Ang Yu Asuncion v. Court of Appeals,[4] we
held that:
"xxx [A] contract (Art. 1157, Civil Code), x x x 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 xxx. 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 xxx. The perfection of the contract takes place
upon the concurrence of the essential elements thereof."
Moreover, it is a fundamental principle that before contract of
sale can be valid, the following elements must be present, viz: (a)
consent or meeting of the minds; (b) determinate subject matter;
(3) price certain in money or its equivalent. Until the contract of
sale is perfected, it cannot, as an independent source of obligation,
serve as a binding juridical relation between the parties.
In the case at bench, petitioner, anchors its main argument on
the annotation on its third letter-offer of the phrase "Received
original, 9-4-89," beside which appears the signature of Conrado
Quesada. It also contends that the said annotation is evidence to
show that there was already a perfected agreement to sell as
respondent can be said to have accepted petitioner's payment in
the form of a check which was enclosed in the third letter.
However, as correctly elucidated by the Court of Appeals:
"Sy insisted in his testimony that this offer of P12M was
accepted by Conrado Quesada but there is nothing written
or documentary to show that such offer was accepted by
Conrado Quesada. While Sy claimed that the acceptance
could be gleaned from the notation in the third written
offer, the court is not impressed thereon however because
the notation merely states as follows: "Received Original,
(S)-Conrado Quesada" and below this signature is "9-489". As explained by Conrado Quesada in his testimony

what was received by him was the original of the written

offer.
The court cannot believe that this notation marked as
Exhibit D-2 would signify the acceptance of the
offer. Neither does it signify, as Sy had testified that the
check was duly received on said date. If this were true Sy,
who appears to be an intelligent businessman could have
easily asked Conrado Quesada to indicate on Exhibit D the
alleged fact of acceptance of said check. And better still, Sy
could have asked Quesada the acceptance in writing
separate of the written offer if indeed there was an
agreement as to the price of the proposed sale of the
property in question."[5]
Clearly then, a punctilious examination of the receipt reveals
that the same can neither be regarded as a contract of sale nor a
promise to sell. Such an annotation by Conrado Quesada amounts
to neither a written nor an implied acceptance of the offer of Joseph
Sy. It is merely a memorandum of the receipt by the former of the
latter's offer. The requisites of a valid contract of sale are lacking in
said receipt and therefore the "sale" is neither valid nor
enforceable.
Although there was a series of communications through letteroffers and rejections as evident from the facts of this case, still it is
undeniable that no written agreement was reached between
petitioner and private respondent with regard to the sale of the
realty. Hence, the alleged transaction is unenforceable as the
requirements under the Statute of Frauds have not been complied
with. Under the said provision, an agreement for the sale of real
property or of an interest therein, to be enforceable, must be in
writing and subscribed by the party charged or by an agent thereof
Petitioner also asseverates that the failure of Conrado Quesada
to return the check for one million pesos, translates to implied
acceptance of its third letter-offer. It, however, does not rebut the
finding of the trial court that private respondent was returning the
check but petitioner refused to accept the same and that when
Conrado Quesada subsequently sent it back to petitioner through
registered mail, the latter failed to claim its mail from the post
office.
Finally, we fittingly apply here the oft-repeated doctrine that
the factual findings of the trial court, especially as regards the
credibility of witnesses, are conclusive upon this court, unless the
case falls under the jurisprudentially established exceptions. But

this is a case that tenders no exceptional circumstance; rather, we

find the observations of the trial court to be legally sound and valid:
"x x x Joseph Sy's testimony is not impressive because of
several inconsistencies herein pointed out. On the matter
of earnest money, the same appears to be the idea solely
of the [petitioner], assuming that he had intended to bind
the [petitioner] corporation. In the written second offer x x
x he had stated that the check of P1M had been enclosed
(attached) therewith. The same check x x x was again
mentioned to be enclosed (attached) in the third written
offer under date August 10, 1989 x x x. Sy testified in his
direct examination that he had personally given this check
to Conrado Quesada. But on cross examination, he
reversed himself by saying that the check was given thru
his [co-petitioner] Mendoza. Examining the third written
offer, it appears that when it was first typewritten,
this P11M was noted to have been corrected, and that as
per his testimony, Sy had increased it to P12M. This is the
reason according to Sy why there was a superimposition of
the number '12' over the number '11' to mean P12M as the
revised consideration for the sale of the property in
question."[6]
Respondent court thus concluded that:
"x x x [since] the matter of evaluation of the credibility of
witness[es] is addressed to the trial court and unless
clearly contrary to the records before Us, the findings of the
said court are entitled to great respondent on appeal, x x x
it was Joseph Sy's idea to offer the earnest money, and the
evidence to show that Joseph Sy accepted the same, is
wanting. x x x"[7]
and accordingly affirmed the trial court judgment appealed from.
As shown elucidated above, we agree with the findings and
conclusions of the trial court and the respondent court. Neither has
petitioner posited any new issues in the instant petition that
warrant the further exercise by this court of its review powers.
WHEREFORE, premises considered, this petition is DENIED.
Costs against petitioner.
SO ORDERED.

FIRST DIVISION

[G.R. No. 132474. November 19, 1999]

RENATO CENIDO (deceased), represented by VICTORIA

CENIDOSA, petitioner,
vs. SPOUSES
AMADEO
APACIONADO and HERMINIA STA. ANA, respondents.
DECISION
PUNO, J.:
In this petition for review, petitioner Renato Cenido seeks to
reverse and set aside the decision of the Court of Appeals [1] in CAG.R. CV No. 41011 which declared the private respondents as the
owners of a house and lot in Binangonan, Rizal.[2]
The antecedent facts are as follows:
On May 22, 1989, respondent spouses Amadeo Apacionado
and Herminia Sta. Ana filed with the Regional Trial Court, Branch
70, Rizal a complaint against petitioner Renato Cenido for
Declaration of Ownership, Nullity, with Damages.[3] The spouses
alleged that: (1) they are the owners of a parcel of unregistered
land, 123 square meters in area and located at Rizal Street, Barrio
Layunan, Binangonan, Rizal, more particularly described as follows:
x x x that certain parcel of land located at Rizal, St., Layunan,
Binangonan, Rizal, with an area of 123 square meters, more or less,
bounded on the North by Gavino Aparato; on the East by Rizal St.,
on the South by Tranquilino Manuzon; and on the West by Simplicio
Aparato, and the residential house standing thereon.[4]

(2) this house and lot were purchased by the spouses from its
previous owner, Bonifacio Aparato, now deceased, who lived under
the spouses' care and protection for some twenty years prior to his
death; (3) while he was alive, Bonifacio Aparato mortgaged the said
property twice, one to the Rural Bank of Binangonan and the other
to Linda C. Ynares, as security for loans obtained by him; (4) the
loans were paid off by the spouses thereby securing the release
and cancellation of said mortgages; (5) the spouses also paid and
continue to pay the real estate taxes on the property; (6) from the
time of sale, they have been in open, public, continuous and
uninterrupted possession of the property in the concept of owners;
(7) that on January 7, 1987, petitioner Renato Cenido, claiming to
be the owner of the subject house and lot, filed a complaint for
ejectment against them with the Municipal Trial Court, Branch 2,
Binangonan, Rizal; (8) through fraudulent and unauthorized means,
Cenido was able to cause the issuance in his name of Tax
Declaration No. 02-0368 over the subject property, which fact the
spouses learned only upon the filing of the ejectment case; (9)
although the ejectment case was dismissed by the Municipal Trial
Court (MTC), Branch 2, the tax declaration in Cenido's name was
not cancelled and still subsisted; (10) the spouses have referred the
matter to the barangay for conciliation but Cenido unjustifiably
refused to appear thereat. The spouses thus prayed that:
WHEREFORE, it is respectfully prayed of the Honorable Court that
judgment issue in the case:
1. Declaring them (plaintiffs) the true and absolute owners of the
house and lot now covered by Tax Declaration No. 02-0368;
2. Declaring Tax Declaration No. 02-0368 in the name of defendant
Renato Cenido as null and void and directing the Provincial
Assessor of Rizal and the Municipal Assessor of Binangonan, Rizal
to register and to declare the house and lot covered by the same in
their names (plaintiffs) for purposes of taxation;
3. Ordering defendant to pay them in the least amount of
P50,000.00 as and for moral damages suffered;
4. Ordering defendant to pay them the amount of P10,000.00 as
and for attorney's fees;
5. Ordering payment by defendant of exemplary damages in such
amount which the Honorable Court may deem just and equitable in
the premises;

6. Ordering defendant to pay the costs of suit; and

Plaintiffs pray for such other and further relief which the Honorable
Court may deem just and equitable considering the foregoing
premises.[5]
Petitioner Cenido answered claiming that: (1) he is the
illegitimate son of Bonifacio Aparato, the deceased owner of the
subject property; (2) as Aparato's sole surviving heir, he became
the owner of the property as evidenced by the cancellation of Tax
Declaration No. 02-0274 in Bonifacio's name and the issuance of
Tax Declaration No. 02-0368 in his name; (3) his ownership over the
house and lot was also confirmed in 1985 by the Municipal Trial
Court, Branch 1, Binangonan in Case No. 2264 which adjudicated
various claims involving the same subject property wherein
plaintiffs were privy to the said case; (4) that in said case, the
Apacionado spouses participated in the execution of the
compromise agreement partitioning the deceased's estate among
his heirs, which agreement was adopted by the Municipal Trial
Court as its judgment; (5) that the Apacionado spouses were
allowed to stay in his father's house temporarily; (6) the mortgages
on the property were obtained by his father upon request of the
Apacionados who used the proceeds of the loans exclusively for
themselves; (7) the real estate taxes on the property were paid for
by his father, the principal, and the spouses were merely his
agents; (8) the instrument attesting to the alleged sale of the
house and lot by Bonifacio Aparato to the spouses is not a public
document; (8) petitioner Cenido was never summoned to appear
before the barangay for conciliation proceedings.[6]
Respondent spouses replied that: (1) Cenido is not the
illegitimate son of Bonifacio, Cenido's claim of paternity being
spurious; (2) the ownership of the property was not the proper
subject in Civil Case No. 2264 before the MTC, Branch I, nor were
the spouses parties in said case.[7]
The parties went to trial. Respondent spouses presented four
(4) witnesses, namely, respondent Herminia Sta. Ana Apacionado;
Rolando Nieves, the barangay captain; Norberto Aparato, the son of
Gavino Aparato, Bonifacio's brother; and Carlos Inabayan, one of
the two witnesses to the deed of sale between Bonifacio Aparato
and the spouses over the property. Petitioner Cenido presented only
himself as witness.
On March 30, 1993, the trial court rendered judgment. The
court upheld petitioner Cenido's ownership over the property by
virtue of the recognition made by Bonifacio's then surviving

brother, Gavino, in the compromise judgment of the

MTC. Concomitantly, the court also did not sustain the deed of sale
between Bonifacio and the spouses because it was neither
notarized nor signed by Bonifacio and was intrinsically
defective. The court ordered thus:
WHEREFORE, in the light of the foregoing considerations, the Court
believes that preponderance of evidence is on the side of
defendant and so the complaint could not be given due
course. Accordingly, the case is, as it should be, dismissed. No
attorney's fees or damages is being awarded as no evidence to this
effect had been given by defendant. With costs against plaintiffs.
SO ORDERED.[8]
Respondent spouses appealed to the Court of Appeals. In a
decision dated September 30, 1997, the appellate court found the
appeal meritorious and reversed the decision of the trial court. It
held that the recognition of Cenido's filiation by Gavino, Bonifacio's
brother, did not comply with the requirements of the Civil Code and
the Family Code; that the deed between Bonifacio and respondent
spouses was a valid contract of sale over the property; and
Cenido's failure to object to the presentation of the deed before the
trial court was a waiver of the defense of the Statute of Frauds. The
Court of Appeals disposed of as follows:
WHEREFORE, the appealed Decision is hereby REVERSED and SET
ASIDE. Plaintiffs-Appellants Spouses Amadeo Apacionado and
Herminia Sta. Ana are declared owners of the subject house and lot
now covered by Tax Declaration No. 02-6368.[9]
Hence, this recourse. Petitioner Cenido alleges that:
1. The unsigned, unnotarized and highly doubtful private document
designated as Pagpapatunay which is solely relied upon by the
respondents in support of their case is not sufficient to vest
ownership of and transfer the title, rights and interest over the
subject property to the respondents.
x x x.
2. The Court of Appeals departed from the accepted and usual
course of judicial proceedings in that it ruled against the petitioner
in view of the alleged weakness of his defense rather than evaluate

the case based on the strength of the respondents evidence,

thereby necessitating this Honorable Court's exercise of its power
of supervision.[10]
Victoria Cenidosa, in representation of petitioner Cenido, has
manifested, through counsel, that petitioner died in September
1993; that on December 18, 1985, eight years before his death,
Cenido sold the subject house and lot to Maria D. Ojeda for the sum
of P70,000.00; that Maria D. Ojeda is now old and sickly, and is thus
being represented in the instant case by her daughter, Victoria O.
Cenidosa.[11]
In the same vein, respondent Herminia Sta. Ana Apacionado
also manifested that her husband, Amadeo Apacionado, died on
August 11, 1989. Amadeo is now being represented by his
compulsory heirs.[12]
Before ruling on petitioner's arguments, it is necessary to
establish certain facts essential for a proper adjudication of the
case.
The records reveal that the late Bonifacio Aparato had two
siblings-- a sister named Ursula and a brother named Gavino.
[13]
Ursula died on March 1, 1979, [14] Bonifacio on January 3,
1982[15] and Gavino, sometime after Bonifacio's death. Both Ursula
and Bonifacio never married and died leaving no legitimate
offspring.Gavino's son, Norberto, however, testified that there was
a fourth sibling, a sister, who married but also died; as to when she
died or whether she left any heirs, Norberto did not know. [16] What
is clear and undisputed is that Bonifacio was survived by Gavino
who also left legitimate heirs.
Both Bonifacio and Ursula lived in the subject property under
the care and protection of the Apacionados. Herminia Sta. Ana
Apacionado started living with them in 1976. She took care of
Bonifacio and Ursula, who died three years later. Herminia married
Amado Apacionado, whose paternal grandmother was a sister of
Bonifacio.[17] Amadeo moved into Bonifacio's house and assisted
Herminia in taking care of the old man until his demise.
Shortly after Bonifacio's death, Civil Case No. 2264 was
instituted by petitioner Cenido against Gavino Aparato before the
Municipal Trial Court, Branch 1, Binangonan. The records do not
reveal the nature of this action.[18] Nevertheless, three years after
filing of the case, the parties entered into a compromise
agreement.The parties listed the properties of Bonifacio comprising
two parcels of land: one parcel was the residential house and lot in
question and the other was registered agricultural land with an area

of 38,641 square meters; Gavino Aparato expressly recognized

Renato Cenido as the sole illegitimate son of his brother, likewise,
Cenido recognized Gavino as the brother of Bonifacio; as
Bonifacio's heirs, they partitioned his estate among themselves,
with the subject property and three portions of the agricultural land
as Cenido's share, and the remaining 15,309 square meters of the
agricultural land as Gavino's; both parties agreed to share in the
documentation, registration and other expenses for the transfer of
their shares. This compromise agreement was adopted as the
decision of the MTC on January 31, 1985.[19]
In the same year, petitioner Cenido obtained in his name Tax
Declaration No. 02-6368 over the subject property. Two years later,
in January 1987, he filed an ejectment case against respondent
spouses who continued occupying the property in question. This
case was dismissed.
Respondent spouses claim of ownership over the subject
property is anchored on a one-page typewritten document entitled
Pagpapatunay, executed by Bonifacio Aparato. The Pagpapatunay
reads as follows:
PAGPAPATUNAY
DAPAT MALAMAN NG LAHAT:
Akong si BONIFACIO APARATO, binata, Pilipino, husto sa gulang, at
kasalukuyang naninirahan sa Layunan, Binangonan, Rizal, ay
nagpapatunay nitong mga sumusunod:
Una: -- Na, ako ang siyang nagmamay-ari ng isang lagay na lupang
SOLAR at Bahay Tirahan na nakatirik sa nabanggit na solar na
makikita sa lugar ng Rizal St., Layunan, Binangonan, Rizal;
Ikalawa: -- Na, sapagkat ang nagalaga sa akin hanggang sa ako'y
tuluyang kunin ng Dakilang Maykapal ay walang iba kungdi ang
mag-asawang AMADEO APACIONADO at HERMINIA STA. ANA
APACIONADO;
Ikatlo: -- Na, pinatutunayan ko sa mga maykapangyarihan at
kanginumang tao na ang nabanggit na SOLAR at bahay tirahan ay
ipinagbili ko sa nabanggit na mag-asawa sa halagang SAMPUNG
LIBONG (P10,000.00) PISO, bilang pakunsuwelo sa kanilang
pagmamalasakit sa aking pagkatao at kalalagayan;

Na, patunay na ito ay aking nilagdaan ng maliwanag ang aking isip

at nalalaman ko ang lahat ng nilalaman nito.
SA KATUNAYAN NG LAHAT, lumagda ako ng aking pangalan at
apelyido ngayong ika-10 ng Disyembre 1981, dito sa Layunan,
Binangonan, Rizal.
(Thumbmarked)
BONIFACIO APARATO
Nagpatunay
NILAGDAAN SA HARAP NINA:
(SGD.) (SGD.)
Virgilio O. Cenido Carlos Inabayan
- Saksi - - Saksi -[20]
On its face, the document Pagpapatunay attests to the fact
that Bonifacio Aparato was the owner of the house and lot in
Layunan, Rizal; that because the Apacionado spouses took care of
him until the time of his death, Bonifacio sold said property to them
for the sum of P10,000.00; that he was signing the same document
with a clear mind and with full knowledge of its contents; and as
proof thereof, he was affixing his signature on said document on
the tenth day of December 1981 in Layunan, Binangonan, Rizal.
Bonifacio affixed his thumbmark on the space above his name; and
this was witnessed by Virgilio O. Cenido and Carlos Inabayan.
Petitioner Cenido disputes the authenticity and validity of the
Pagpapatunay. He claims that it is not a valid contract of sale and
its genuineness is highly doubtful because: (1) it was not notarized
and is merely a private instrument; (2) it was not signed by the
vendor, Bonifacio; (3) it was improbable for Bonifacio to have
executed the document and dictated the words lumagda ako ng
aking pangalan at apelyido because he was paralyzed and could no
longer sign his name at that time; and (4) the phrase ang nagalaga sa akin hanggang sa ako'y tuluyang kunin ng Dakilang
Maykapal speaks of an already departed Bonifacio and could have
been made only by persons other than the dead man himself. [21]
To determine whether the Pagpapatunay is a valid contract of
sale, it must contain the essential requisites of contracts, viz: (1)
consent of the contracting parties; (2) object certain which is the
subject matter of the contract; and (3) cause of the obligation
which is established.[22]

The object of the Pagpapatunay is the house and lot. The

consideration is P10,000.00 for the services rendered to Aparato by
respondent
spouses. According
to
respondent
Herminia
Apacionado, this P10,000.00 was not actually paid to Bonifacio
because the amount merely quantified the services they rendered
to the old man. It was the care the spouses voluntarily gave that
was the cause of the sale.[23] The cause therefore was the service
remunerated.[24]
Petitioner alleges that Bonifacio did not give his consent to the
deed because he did not affix his signature, but merely his
thumbmark, on the document. Bonifacio was a literate person who
could legibly sign his full name, and his signature is evident in
several documents such as his identification card as member of the
Anderson Fil-American Guerillas;[25] the Kasulatan ng Palasanglaan
dated July 25, 1974 where he and his two other siblings mortgaged
the subject property for P2,000.00 to one Linda Y. Cenido;
[26]
Padagdag sa Sanglaan dated June 16, 1976;[27] and another
Padagdag sa Sanglaan dated March 2, 1979.[28]
Respondent Herminia Sta. Ana Apacionado testified that
Bonifacio Aparato affixed his thumbmark because he could no
longer write at the time of execution of the document. The old man
was already 61 years of age and could not properly see with his
eyes. He was stricken by illness a month before and was paralyzed
from the waist down. He could still speak, albeit in a garbled
manner, and be understood. The contents of the Pagpapatunay
were actually dictated by him to one Leticia Bandola who typed the
same on a typewriter she brought to his house.[29]
That Bonifacio was alive at the time of execution of the
contract and voluntarily gave his consent to the instrument is
supported by the testimony of Carlos Inabayan, the lessee of
Bonifacio's billiard hall at the ground floor of the subject
property. Inabayan testified that on December 10, 1981, he was
summoned to go up to Bonifacio's house. There, he saw Bonifacio,
respondent Apacionados, and a woman and her husband. He was
given a sheet of paper to read. He read the paper and understood
that it was a deed of sale of the house and lot executed by
Bonifacio in favor of the Apacionados. Thereafter, Bonifacio
requested him to sign the document as witness. Reexamining the
Pagpapatunay, Inabayan saw that Bonifacio affixed his thumbmark
on the space above his name. Inabayan thus signed the document
and returned to the billiard hall.[30]
Inabayan's
testimony
has
not
been
rebutted
by
petitioner. Petitioner, through counsel, waived his right to do so,

finding no need to cross-examine the witness. [31] This waiver was

granted by the court in the order of September 23, 1992.[32]
One who alleges any defect or the lack of a valid consent to a
contract must establish the same by full, clear and convincing
evidence, not merely by preponderance thereof. [33] Petitioner has
not alleged that the old man, by his physical or mental state, was
incapacitated to give his consent at the time of execution of the
Pagpapatunay. Petitioner has not shown that Bonifacio was insane
or demented or a deaf-mute who did not know how to write.
[34]
Neither has petitioner claimed, at the very least, that the
consent of Bonifacio to the contract was vitiated by mistake,
violence, intimidation, undue influence or fraud. [35] If by assailing
the intrinsic defects in the wordage of the Pagpapatunay petitioner
Cenido seeks to specifically allege the exercise of extrinsic fraud
and undue influence on the old man, these defects are not
substantial as to render the entire contract void. There must be
clear and convincing evidence of what specific acts of undue
influence[36] or fraud[37]were employed by respondent spouses that
gave rise to said defects. Absent such proof, Bonifacio's presumed
consent to the Pagpapatunay remains.
The Pagpapatunay, therefore, contains all the essential
requisites of a contract. Its authenticity and due execution have not
been disproved either. The finding of the trial court that the
document was prepared by another person and the thumbmark of
the dead Bonifacio was merely affixed to it is pure conjecture. On
the contrary, the testimonies of respondent Herminia Sta. Ana and
Carlos Inabayan prove that the document is authentic and was duly
executed by Bonifacio himself.
The Pagpapatunay is undisputably a private document. And
this fact does not detract from its validity. The Civil Code, in Article
1356 provides:
Art. 1356. Contracts shall be obligatory, in whatever form
they may have been entered into, provided all the essential
requisites for their validity are present. However, when the
law requires that a contract be in some form in order that it
may be valid or enforceable, or that a contract be proved in
a certain way, that requirement is absolute and
indispensable. In such cases, the right of the parties stated in the
following article cannot be exercised.
Generally, contracts are obligatory, in whatever form such
contracts may have been entered into, provided all the essential
requisites for their validity are present. When, however, the law

requires that a contract be in some form for it to be valid or

enforceable, that requirement must be complied with.
A certain form may be prescribed by law for any of the
following purposes: for validity, enforceability, or greater efficacy of
the contract.[38] When the form required is for validity, its nonobservance renders the contract void and of no effect. [39] When the
required form is for enforceability, non-compliance therewith will
not permit, upon the objection of a party, the contract, although
otherwise valid, to be proved or enforced by action. [40] Formalities
intended for greater efficacy or convenience or to bind third
persons, if not done, would not adversely affect the validity or
enforceability of the contract between the contracting parties
themselves.[41]
Article 1358 of the Civil Code requires that:

Art. 1403. The following contracts are unenforceable, unless they

are ratified:
(1) x x x
(2) Those that do not comply with the Statute of Frauds as set forth
in this number. In the following cases an agreement hereafter
made shall be unenforceable by action, unless the same, or
some note or memorandum thereof, be in writing, and
subscribed and by the party charged, or by his agent;
evidence, therefore, of the agreement cannot be received without
the writing, or a secondary evidence of its contents:
(a) An agreement that by its terms is not to be performed within a
year from the making thereof;

Art. 1358. The following must appear in a public document:

(1) Acts and contracts which have for their object the
creation, transmission, modification or extinguishment of
real rights over immovable property; sales of real property
or of an interest therein are governed by Articles 1403, No.
2 and 1405;
(2) The cession, repudiation or renunciation of hereditary rights or
of those of the conjugal partnership of gains;
(3) The power to administer property, or any other power which has
for its object an act appearing or which should appear in a public
document, or should prejudice a third person;
(4) The cession of actions or rights proceeding from an act
appearing in a public document.
All other contracts where the amount involved exceeds five
hundred pesos must appear in writing, even a private one. But
sales of goods, chattels or things in action are governed by Articles
1403, No. 2 and 1405.
Acts and contracts which create, transmit, modify or extinguish real
rights over immovable property should be embodied in a public
document. Sales of real property are governed by the Statute of
Frauds which reads:

xxx
(e) An agreement for the leasing for a longer period than one
year, or for the sale of real property or of an interest
therein;
(3) x x x.
The sale of real property should be in writing and subscribed by the
party charged for it to be enforceable. The Pagpapatunay is in
writing and subscribed by Bonifacio Aparato, the vendor; hence, it
is enforceable under the Statute of Frauds. Not having been
subscribed and sworn to before a notary public, however, the
Pagpapatunay is not a public document, and therefore does not
comply with Article 1358, paragraph 1 of the Civil Code.
The requirement of a public document in Article 1358 is not for
the validity of the instrument but for its efficacy. [42] Although a
conveyance of land is not made in a public document, it does not
affect the validity of such conveyance.[43] Article 1358 does not
require the accomplishment of the acts or contracts in a public
instrument in order to validate the act or contract but only to insure
its efficacy,[44] so that after the existence of said contract has been
admitted, the party bound may be compelled to execute the proper
document.[45] This is clear from Article 1357, viz:
Art. 1357. If the law requires a document or other special
form, as in the acts and contracts enumerated in the
following article [Article 1358], the contracting parties may

compel each other to observe that form, once the contract

has been perfected. This right may be exercised
simultaneously with the action upon the contract.
The private conveyance of the house and lot is therefore valid
between Bonifacio Aparato and respondent spouses. The question
of whether the Pagpapatunay is sufficient to transfer and
convey title to the land for purposes of original registration [46] or
the issuance of a real estate tax declaration in respondent spouses'
names, as prayed for by respondent spouses,[47] is another matter
altogether.[48] For greater efficacy of the contract, convenience of
the parties and to bind third persons, respondent spouses have the
right to compel the vendor or his heirs to execute the necessary
document to properly convey the property.[49]
Anent petitioner's second assigned error, the fact that the
Court of Appeals sustained the validity of the Pagpapatunay was
not a conclusion that necessarily resulted from the weakness of
petitioner's claim of filiation to Bonifacio Aparato. Of and by itself,
the Pagpapatunay is a valid contract of sale between the parties
and the Court of Appeals did not err in upholding its validity.
The issue of petitioner's paternity, however, is essential to
determine whether Tax Declaration No. 02-6368 in the name of
petitioner Cenido should be nullified, as prayed for by respondent
spouses in their complaint.
Tax Declaration No. 02-6368[50] in petitioner Cenido's name was
issued pursuant to the compromise judgment of the MTC where
Gavino Aparato, Bonifacio's brother, expressly recognized petitioner
Cenido as Bonifacio's sole illegitimate son. The compromise
judgment was rendered in 1985, three years after Bonifacio's
demise.
Under the Civil Code,[51] natural children and illegitimate
children other than natural are entitled to support and successional
rights only when recognized or acknowledged by the putative
parent.[52] Unless recognized, they have no rights whatsoever
against their alleged parent or his estate.[53]
The filiation of illegitimate children may be proved by any of
the forms of recognition of natural children. [54] This recognition may
be made in three ways:[55] (1) voluntarily, which must be express
such as that in a record of birth, a will, a statement before a court
of record, or in any authentic writing;[56] (2) legally, i.e.,when a
natural child is recognized, such recognition extends to his or her
brothers and sisters of the full blood;[57] and (3) judicially or
compulsorily, which may be demanded by the illegitimate child of

his parents.[58] The action for compulsory recognition of the

illegitimate child must be brought during the lifetime of the
presumed parents. This is explicitly provided in Article 285 of the
Civil Code, viz:
Art. 285. The action for the recognition of natural children may be
brought only during the lifetime of the presumed parents, except in
the following cases:
(1) If the father or mother died during the minority of the child, in
which case the latter may file the action before the expiration of
four years from the attainment of his majority;
(2) If after the death of the father or of the mother a document
should appear of which nothing had been heard and in which either
or both parents recognize the child.
In this case, the action must be commenced within four years from
the finding of the document.
The illegitimate child can file an action for compulsory
recognition only during the lifetime of the presumed parent. After
the parent's death, the child cannot bring such action, except,
however, in only two instances: one is when the supposed parent
died during the minority of the child, and the other is when after
the death of the parent, a document should be discovered in which
the parent recognized the child as his. The action must be brought
within four years from the attainment of majority in the first case,
and from the discovery of the document in the second case. The
requirement that the action be filed during the parent's lifetime is
to prevent illegitimate children, on account of strong temptations to
large estates left by dead persons, to claim part of this estate
without giving the alleged parent personal opportunity to be heard.
[59]
It is vital that the parent be heard for only the parent is in a
position to reveal the true facts surrounding the claimant's
conception.[60]
In the case at bar, petitioner Cenido did not present any record
of birth, will or any authentic writing to show he was voluntarily
recognized by Bonifacio as his illegitimate son. In fact, petitioner
admitted on the witness stand that he had no document to prove
Bonifacio's recognition, much less his filiation. [61] The voluntary
recognition of petitioner's filiation by Bonifacio's brother before the
MTC does not qualify as a statement in a court of record. Under the
law, this statement must be made personally by the parent himself

or herself, not by any brother, sister

concept of recognition speaks of a
theparent, or if the parent refuses,
establish the paternity or maternity
wedlock.[62]

or relative; after all, the

voluntary declaration by
by judicial authority, to
of children born outside

The compromise judgment of the MTC does not qualify as a

compulsory recognition of petitioner. In the first place, when he
filed this case against Gavino Aparato, petitioner was no longer a
minor. He was already pushing fifty years old. [63] Secondly, there is
no allegation that after Bonifacio's death, a document was
discovered where Bonifacio recognized petitioner Cenido as his
son. Thirdly, there is nothing in the compromise judgment that
indicates that the action before the MTC was a settlement of
Bonifacio's estate with a gross value not exceeding P20,000.00.
[64]
Definitely, the action could not have been for compulsory
recognition because the MTC had no jurisdiction over the subject
matter.[65]
The Real Property Tax Code provides that real property tax be
assessed in the name of the person owning or administering the
property on which the tax is levied.[66] Since petitioner Cenido has
not proven any successional or administrative rights to Bonifacio's
estate, Tax Declaration No. 02-6368 in Cenido's name must be
declared null and void.
IN VIEW WHEREOF, the petition is denied and the Decision
and Resolution of the Court of Appeals in CA-G.R. CV No. 41011 are
affirmed. Tax Declaration No. 02-6368 in the name of petitioner
Renato Cenido is declared null and void.
No costs.
SO ORDERED.

[G.R. No. 108921. April 12, 2000]

JOSEFINA VILLANUEVA-MIJARES, WALDETRUDES
VILLANUEVA-NOLASCO, GODOFREDO VILLANUEVA,
EDUARDO VILLANUEVA, GERMELINA VILLANUEVAFULGENCIO, MILAGROS VILLANUEVA-ARQUISOLA, and
CONCEPCION MACAHILAS VDA. DE VILLANUEVA, petitioners,
vs. THE COURT OF APPEALS, PROCERFINA VILLANUEVA,
PROSPERIDAD VILLANUEVA, RAMON VILLANUEVA, ROSA
VILLANUEVA, VIRGINIA NEPOMUCENO, PAULA
NEPOMUCENO, TARCELA NEPOMUCENO, MERCEDES
VILLANUEVA, ADELAIDA VILLANUEVA, APARICION
VILLANUEVA, JOSEFINA VILLANUEVA, BETTY VILLANUEVA,
BOBBY VILLANUEVA, MERLINDA VILLANUEVA, MORBINA
VILLANUEVA, FLORITA VILLANUEVA, DIONISIO VILLANUEVA,
and EDITA VILLANUEVA, respondents.
DECISION
QUISUMBING, J.:
This petition for review seeks the reversal of the Decision[1] of the
respondent Court of Appeals promulgated on September 28, 1992,
in CA G.R. CV No. 27427, as well as of the Resolution promulgated
on February 4, 1993, which denied the petitioners Motion for
Reconsideration. Edp sc
Petitioners Josefina Villanueva-Mjiares, Waldetrudes VillanuevaNolasco, Godofredo Villanueva, Eduardo Villanueva, Germelina
Villanueva-Fulgencio, and Milagros Villanueva-Arquisola are the
legitimate children of the late Leon Villanueva. Petitioner
Concepcion Macahilas vda. de Villanueva is his widow. Leon was
one of eight (8) children of Felipe Villanueva, predecessor-ininterest of the parties in the present case.
Private respondents were the plaintiffs-appellants in CA G.R. No.
27427, entitled "Procerfina Villanueva, et al., v. Josefina VillanuevaNolasco, et al.". They are related by blood to the petitioners as
descendants of Felipe.
The pertinent facts of the case are not in dispute.

SECOND DIVISION

During his lifetime, Felipe, owned real property described as

follows:

"A parcel of land, situated at Estancia, Kalibo, Capiz.

Bounded on the N. by the Provincial Road to New
Washington; on the S. by Nicanor Gonzales; on the E.
by Nicanor Gonzales; and on the W. by Leon
Barrientos and Mauricio Parojinog, containing an area
of fifteen thousand three hundred thirty-six (15,336)
square meters, more or less declared in the name of
Felipe Villanueva under Tax Declaration No. 3888 and
assessed at Three Hundred Ten (P310.00) Pesos."[2]
Felipe begot the following legitimate children: Simplicio, Benito,
Leon, Nicolasa, Eustaqio, Camila, Fausta, and Pedro.
Upon Felipes death, ownership of the land was passed on to his
children.
In 1952, Pedro, one of the children of Felipe got his share
equivalent to one-sixth (1/6) of the property with an area of one
thousand nine hundred five (1,905) square meters and had it
declared under his name pursuant to Tax Declaration No. 8085.
The remaining undivided portion of the land is described as follows:
"A parcel of land situated at Estancia, Kalibo, Capiz,
bounded on the N. by the National Road to New
Washington; on the S. by Nicanor Gonzales; on the E.
by Pedro Villanueva and on the W. by Leon Barrientos
and Mauricio Parojinog, containing an area of eleven
thousand nine hundred fifty-nine (11,959) square
meters, more or less and declared under Tax
Declaration No. 8086 and assessed at Three Hundred
Thirty-Three Pesos and Forty Centavos (P333.40)."[3]
This was held in trust by Leon for his co-heirs. During Leons
lifetime, his co-heirs made several seasonable and lawful demands
upon him to subdivide and partition the property, but for one
reason or another, no subdivision took place.
After the death of Leon in August 1972, private respondents
discovered that the shares of four of the heirs of Felipe, namely,
Simplicio, Nicolasa, Fausta and Maria Baltazar, spouse of Benito,
was purchased by Leon as evidenced by a Deed of Sale executed
on August 25, 1946 but registered only in 1971. It also came to
light that Leon had, sometime in July 1970, executed a sale and

partition of the property in favor of his own children, herein

petitioners. By virtue of such Deed of Partition, private respondents
had succeeded in obtaining Original Certificate of Title (OCT) No. C256. On April 25, 1975, petitioners managed to secure separate
and independent titles over their pro-indiviso shares in their
respective names. Ed p
Private respondents then filed a case for partition with annulment
of documents and/or reconveyance and damages with the Regional
Trial Court of Kalibo, Aklan, docketed as Civil Case No. 2389. Private
respondents contended that the sale in favor of Leon was
fraudulently obtained through machinations and false pretenses.
Thus, the subsequent sale of the lot by Leon to his children was null
and void despite the OCT in his favor.
Petitioners, for their part, claimed that the sale by Simplicio, Fausta,
Nicolasa, and Maria Baltazar was a valid sale; that private
respondent Procerfina even signed as an instrumental witness to
the Deed of Sale; that Maria Baltazar, widow of Benito, as
administrator of her husbands estate, had the right to sell the
undivided share of Benito; that the basis for the issuance of the
OCT in Land Registration Case No. K-231 was the sale by his coheirs to Leon; that the order of default issued in Land Registration
Case No. K-231 was against the whole world; that prescription had
set in since they had been in possession of the property in the
concept of owners thereof since August 29, 1946, up to the
present; and that private respondents were estopped since no trust
relationship existed between the litigants.
After trial, the Regional Trial Court of Kalibo rendered its decision in
Civil Case No. 2389, declaring "the defendants the legal owners of
the property in question in accordance with the individual titles
issued to them."[4]
The trial court also declared plaintiffs action already barred by res
judicata.
Dissatisfied, herein private respondents elevated the case to the
Court of Appeals. Their appeal was docketed as CA-G.R. CV No.
27427.
On appeal, the private respondents conceded the right of Simplicio,
Nicolasa, and Fausta to sell their respective shares but disputed the
authority of Maria Baltazar to convey any portion of her late

husbands estate, since the latter was his capital and did not form
part of the conjugal property.[5]
On September 28, 1992, respondent appellate court rendered its
decision, the dispositive portion of which reads:
"WHEREFORE, the appealed judgement is REVERSED.
Appellants Procerfina Villanueva, Prosperidad
Villanueva, Ramon Villanueva and Rosa Villanueva
are hereby adjudged rightful co-owners pro indiviso
of an undivided one-sixth (1/6) portion of the
property litigated upon (Lot 3789, Psc-36), as heirs of
their late father, Benito Villanueva; and the appellees
are hereby ordered to execute a registerable
document conveying to the said appellants their onesixth (1/6) portion of subject property.
"Conformably, the parties concerned are required to
agree on a project of partition, for the segregation of
the one-sixth (1/6) portion adjudicated to said
appellants; otherwise, should they fail to do so within
a reasonable time, any interested party may seek
relief from the trial court a quo, which is hereby
directed, in that eventuality, to cause the partition of
the subject property in accordance with pertinent
rules, and this pronouncement. Costs against
appellee.
"SO ORDERED."[6]
The Court of Appeals ruled that under the Old Civil Code and
applicable jurisprudence, Maria Baltazar had no authority to sell the
portion of her late husbands share inherited by her then minor
children since she had not been appointed their guardian.
Respondent court likewise declared that as far as private
respondents Procerfina, Prosperidad, Ramon and Rosa, were
concerned, the Deed of Sale of August 25, 1946 was
"unenforceable."[7] Mi sedp
Respondent appellate court also ruled that the prescription period
had not run in favor of Leon since private respondents had always
known that Leon was the administrator of the estate. It was only in
1975 when their suspicion were aroused and they inquired about
the status of the land.[8]

Dissatisfied with the ruling of the respondent appellate court,

herein petitioners now come before this Court assigning the
following errors:
I
IN NOT HOLDING THAT THE PRIVATE RESPONDENTS
ARE NOT BARRED BY LACHES, ESTOPPEL IN PAIS,
AND RES JUDICATA, THE RESPONDENT, THE COURT
OF APPEALS, HAS DECIDED A QUESTION OF
SUBSTANCE IN A WAY PROBABLY NOT IN ACCORD
WITH LAW OR WITH THE APPLICABLE DECISIONS OF
THIS HONORABLE COURT, AMONG THEM, TIJAM V.
SIBONGHANOY, NO. L-21450, APRIL 15, 1968, 23
SCRA 29.
II
IN HOLDING THAT THE DEED OF SALE DATED
AUGUST 25, 1946, EXHIBIT "I", ALSO EXHIBIT "C, IS
UNENFORCEABLE AGAINST THE PRIVATE
RESPONDENTS FOR BEING AN UNAUTHORIZED
CONTRACT, THE RESPONDENT, THE COURT OF
APPEALS, HAS DECIDED A QUESTION OF SUBSTANCE
IN A WAY PROBABLY NOT IN ACCORD WITH LAW OR
WITH THE APPLICABLE DECISIONS OF THIS
HONORABLE COURT, THE WEIGHT OF THE EVIDENCE
BEING THAT MARIA BALTAZAR, THE PRIVATE
RESPONDENTS MOTHER, HAD THE AUTHORITY TO
CONVEY THE ONE-SIXTHS (1/6) SHARE OF THE LATE
BENITO VILLANUEVA TO THE PETITIONERS, AND/OR
THAT HER ACT WAS SUBSEQUENTLY RATIFIED BY THE
PRIVATE RESPONDENTS.
III.
IN GRANTING THE APPEAL AND CONSEQUENTLY, IN
REVERSING THE COURT A QUO, THE RESPONDENT,
THE COURT OF APPEALS, HAS DECIDED A QUESTION
OF SUBSTANCE IN A WAY PROBABLY NOT IN ACCORD
WITH THE LAW OR APPLICABLE DECISIONS OF THIS
HONORABLE COURT.[9]

The grounds relied upon by the petitioners may be subsumed in

two issues, to wit:
(1) Whether or not the appellate court erred in failing to declare
action by the private respondents to recover the property in
question barred by laches, estoppel, prescription, and res
judicata; and
(2) Whether or not the appellate court erred in declaring the Deed
of Sale of August 25, 1946 unenforceable against the private
respondents for being an unauthorized contract.
Petitioners citing Tijam v. Sibonghanoy, 23 SCRA 29 (1968),
contend that the action of the private respondents was already
barred by laches.[10] They argue that private respondents filed their
action more than twenty-nine (29) years too late, counted from the
date Maria Baltazar signed the questioned Deed of Sale of August
26, 1948.
Laches is negligence or omission to assert a right within a
reasonable time, warranting the presumption that the party entitled
to assert it has either abandoned or declined to assert it.[11] Its
essential elements are: (1) conduct on the part of the defendant, or
of one under whom he claims, giving rise to the situation
complained of; (2) delay in asserting complainants right after he
had knowledge of the defendants conduct and after he has an
opportunity to sue; (3) lack of knowledge or notice on the part of
the defendant that the complainant would assert the right on which
he bases his suit; and (4) injury or prejudice to the defendant in the
event relief is accorded to the complainant. [12] Misoedp
In Chavez v. Bonto-Perez, 242 SCRA 73, 80 (1995), we said there is
no absolute rule on what constitutes laches. It is a creation of
equity and applied not really to penalize neglect or sleeping upon
ones rights but rather to avoid recognizing a right when to do so
would result in a clearly inequitable situation. The question of
laches, we said, is addressed to the sound discretion of the court
and each case must be decided according to its particular
circumstances.
At the time of signing of the Deed of Sale of August 26, 1948,
private respondents Procerfina, Prosperidad, Ramon and Rosa were
minors. They could not be faulted for their failure to file a case to
recover their inheritance from their uncle Leon, since up to the age
of majority, they believed and considered Leon their co-heir and

administrator. It was only in 1975, not in 1948, that they became

aware of the actionable betrayal by their uncle. Upon learning of
their uncles actions, they filed an action for recovery. Hence, the
doctrine of stale demands formulated in Tijam cannot be applied
here. They did not sleep on their rights, contrary to petitioners
assertion. Under the circumstances of the instant case, we do not
think that respondent appellate court erred in considering private
respondents action. The action was not too late.
Furthermore, when Felipe Villanueva died, an implied trust was
created by operation of law between Felipes children and Leon,
their uncle, as far as the 1/6 share of Felipe. Leons fraudulent titling
of Felipes 1/6 share was a betrayal of that implied trust.
Petitioners aver that the failure of Maria Baltazars children to
bringing their action in 1969 when they had reached the age of
majority meant that they had impliedly ratified the Deed of Sale
and are now estopped to assail the same. They erroneously relied
on Asiatic Integrated Corporation v. Alikpala, 67 SCRA 60 (1975). In
that case, payments made by Asiatic pursuant to the terms of the
contract accrued to the benefit of the City without protest on the
part of the municipal board, such that the Board already
acquiesced to the validation of the contract. In the instant case,
there is no implied ratification, no benefit accruing to the children
of Maria Baltazar.
Neither is the action barred by prescription. In Vda. de Cabrera v.
Court of Appeals, 267 SCRA 339, 353 (1997), and Sta. Ana, Jr. v.
Court of Appeals, 281 SCRA 624, 629 (1997), we held that an action
for reconveyance of a parcel of land based on implied or
constructive trust prescribes in 10 years, the point of reference
being the date of registration of the deed or the date of the
issuance of the certificate of title of the property. Here the
questioned Deed of Sale was registered only in 1971. Private
respondents filed their complaint in 1975, hence well within the
prescriptive period.
Petitioners assert that the disputed property is registered. Relying
on Cachero v. Marzan, 196 SCRA 601, 610 (1991), and Cureg v.
Intermediate Appellate Court, 177 SCRA 313, 320 (1989), where we
held that a land registration case is an action in rem binding upon
the whole world, and considering that the private respondents
failed to object to the registration of the realty in question, then res
judicata had set in. True, but notwithstanding the binding effect of
the land registration case upon the private respondents, the latter

are not deprived of a remedy. While a review of the decree of

registration is no longer available after the expiration of the oneyear period from entry thereof, an equitable remedy is still
available. Those wrongfully deprived of their property may initiate
an action for reconveyance of the property. [13]
As to the second issue, we find no reversible error committed by
the respondent appellate court in declaring the Deed of Sale
unenforceable on the children of Maria Baltazar. As correctly
pointed out by the Court of Appeals, there was no question as to
the sale of the shares of Simplicio, Nicolasa, and Fausta, to their
brother Leon. But not so with Maria Baltazar concerning the share
of her late husband, Benito, to Leon. Under the law then prevailing
at the time of the demise of her spouse, her husbands share in the
common inheritance pertained to her minor children who were her
late husbands heirs and successors-in-interest. Edp mis
As explained by the Court of Appeals:
"Since the late Benito Villanueva, son of Felipe
Villanueva, died before the effectivity of Republic Act
No. 386, otherwise known as the New Civil Code of
the Philippines, the old Civil Code governs the
distribution and disposition of his intestate estate.
Thereunder, the legitime of the children and
descendants consisted of two-thirds (2/3) of the
hereditary estate of the father and of the mother
(first paragraph, Article 808); and the widower or
widow, as the case may be, who, at the time of death
of his or her spouse, was not divorced or if divorced,
due to the fault of the deceased spouse, was entitled
to a portion in usufruct equal to that which pertains
as legitime to each of the legitimate children or
descendants not bettered (Article 834,
1st paragraph.)"[14]
In addition, under the jurisprudence prevailing at the time of
Benitos death, the rule was that while parents may be the
guardians of their minor children, such guardianship did not extend
to the property of their minor children.[15] Parents then had no
power to dispose of the property of their minor children without
court authorization.[16] Without authority from a court, no person
could make a valid contract for or on behalf of a minor or convey
any interest of a minor in land.[17] Admittedly, Maria Baltazar
showed no authorization from a court when she signed the Deed of

Sale of August 26, 1948, allegedly conveying her childrens realty to

Leon.
While it is true that the Court of Appeals upheld the validity of the
Deed of Sale, it nevertheless correctly ruled that the sale by Maria
Baltazar of her childrens share was invalid. From its execution up to
the time that an action for reconveyance was instituted below by
the private respondents and to the present, the Deed of Sale of
August 26, 1948, remained unenforceable as to private
respondents Procerfina, Ramon, Prosperidad, and Rosa. Article 1529
of the old Civil Code,[18] which was the prevailing law in 1948 and
thus governed the questioned Deed of Sale, clearly provided that a
contract is unenforceable when there is an absence of authority on
the part of one of the contracting parties. Interpreting Article 1529
of the old Civil Code, the Court has ruled that the nullity of the
unenforceable contract is of a permanent nature and it will exist as
long the unenforceable contract is not duly ratified. The mere lapse
of time cannot give efficacy to such a contract. The defect is such
that it cannot be cured except by the subsequent ratification of the
unenforceable contract by the person in whose name the contract
was executed.[19] In the instant case, there is no showing of any
express or implied ratification of the assailed Deed of Sale by the
private respondents Procerfina, Ramon, Prosperidad, and Rosa.
Thus, the said Deed of Sale must remain unenforceable as to them.
WHEREFORE, the petition is DENIED for lack of merit, and the
assailed judgment of the Court of Appeals is AFFIRMED. Let the
records of this case be remanded to the lower court for execution of
the judgment. Costs against petitioners.
SO ORDERED.

THIRD DIVISION

Instead of filing an answer to the complaint, petitioner moved

for its dismissal on the allegation that the parties had settled their
differences amicably. Petitioner averred that both parties had
executed an agreement, dated 17 June 1994, which was to so
operate as an addendum to the 1991 and 1993 contracts between
them.The agreement was signed by a representative of petitioner
and by Solis purportedly acting for and in behalf of respondent
Concepcion.

[G.R. No. 139532. August 9, 2001]

REGAL
FILMS,
INC., petitioner,
CONCEPCION, respondent.

vs. GABRIEL

DECISION
VITUG, J.:
The case involves a compromise judgment issued by the
Regional Trial Court of Quezon City, later affirmed by the Court of
Appeals, and now being assailed in the instant petition for review.
Culled from the records, the facts that led to the controversy
would not appear to be in serious dispute.
In 1991, respondent Gabriel "Gabby" Concepcion, a television
artist and movie actor, through his manager Lolita Solis, entered
into a contract with petitioner Regal Films, Inc., for services to be
rendered by respondent in petitioners motion pictures. Petitioner, in
turn, undertook to give two parcels of land to respondent, one
located in Marikina and the other in Cavite, on top of the talent fees
it had agreed to pay.
In 1993, the parties renewed the contract, incorporating the
same undertaking on the part of petitioner to give respondent the
two parcels of land mentioned in the first agreement. Despite the
appearance of respondent in several films produced by petitioner,
the latter failed to comply with its promise to convey to
respondentthe two aforementioned lots.
On 30 May 1994, respondent and his manager filed an action
against petitioner before the Regional Trial Court of Quezon City,
docketed Civil Case No. Q-94-20714 and raffled to Branch 76, for
rescission of contract with damages. In his complaint, respondent
contended that he was entitled to rescind the contract, plus
damages, and to be released from further commitment to work
exclusively for petitioner owing to the latters failure to honor the
agreement.

The preliminary conference held by the trial court failed to

produce a settlement between the parties; thereupon, the trial
court ordered Solis and respondent to comment on petitioner's
motion to dismiss.
On 30 September 1994, Solis filed a motion to dismiss the
complaint reiterating that she, acting for herself and for respondent
Concepcion, had already settled the case amicably with
petitioner. On 17 October 1994, respondent Concepcion himself
opposed the motion to dismiss contending that the addendum,
containing provisions grossly disadvantageous to him, was
executed without his knowledge and consent. Respondent stated
that Solis had since ceased to be his manager and had no authority
to sign the addendum for him.
During the preliminary conference held on 23 June 1995,
petitioner intimated to respondent and his counsel its willingness to
allow respondent to be released from his 1991 and 1993 contracts
with petitioner rather than to further pursue the addendum which
respondent had challenged.
On 03 July 1995, respondent filed a manifestation with the trial
court to the effect that he was now willing to honor
the addendum to the 1991 and 1993 contracts and to have it
considered as a compromise agreement as to warrant a judgment
in accordance therewith. The manifestation elicited a comment
from both petitioner and Solis to the effect that the relationship
between the parties had by then become strained, following the
notorious Manila Film Festival scam involving respondent, but that
it was still willing to release respondent from his contract.
On 24 October 1995, the trial court issued an order rendering
judgment on compromise based on the subject addendum which
respondent had previously challenged but later agreed to honor
pursuant to his manifestation of 03 July 1995.
Petitioner moved for reconsideration; having been denied, it
then elevated the case to the Court of Appeals arguing that the trial
court erred in treating the addendum of 17 June 1994 as being a

compromise agreement and in depriving it of its right to procedural

due process.

Petitioner argues that the subject addendum could not be the

basis of the compromise judgment. The Court agrees.

On 30 July 1999, the appellate court rendered judgment

affirming the order of the trial court of 24 October 1995; it ruled:

A compromise is an agreement between two or more persons

who, for preventing or putting an end to a lawsuit, adjust their
respective positions by mutual consent in the way they feel they
can live with. Reciprocal concessions are the very heart and life of
every compromise agreement,[3] where each party approximates
and concedes in the hope of gaining balanced by the danger of
losing.[4] It is, in essence, a contract. Law and jurisprudence recite
three minimum elements for any valid contract - (a) consent; (b)
object certain which is the subject matter of the contract; and (c)
cause of the obligation which is established. [5] Consent is
manifested by the meeting of the offer and the acceptance upon
the thing and the cause which are to constitute the agreement. The
offer, however, must be certain and the acceptance seasonable
and absolute; if qualified, the acceptance would merely constitute a
counter-offer.[6]

"In the instant case, there was an Addendum to the contract signed
by Lolita and Regal Films' representative to which addendum
Concepcion through his Manifestation expressed his
conformity. There was, therefore, consent of all the parties.
The addendum/compromise agreement was perfected and is
binding on the parties and may not later be disowned simply
because of a change of mind of Regal Films and/or Lolita by
claiming, in their Opposition/Reply to Concepcion's Manifestation,
that after the 1995 Metro Manila Films Festival scam/fiasco in which
Concepcion was involved, the relationship between the parties had
become bitter to render compliance with the terms and conditions
of the Addendum no longer possible and consequently release
Concepcion from the 1991 and 1993 contracts."[1]
Dissatisfied, petitioner appealed to this Court claiming in its
petition for review that "I.
THE COURT OF APPEALS ERRED IN AFFIRMING THE TRIAL COURT'S
ACTION IN RENDERING JUDGMENT ON A COMPROMISE BASED ON
THE ADDENDUM WHEN PETITIONER REGAL FILMS SUBMITTED THIS
DOCUMENT TO THE TRIAL COURT MERELY TO SERVE AS BASIS FOR
ITS MOTION TO DISMISS;
II.
THE COURT OF APPEALS ERRED IN RENDERING JUDGMENT ON A
COMPROMISE WHEN THE PARTIES DID NOT AGREE TO SUCH A
COMPROMISE;
III.
THE COURT OF APPEALS ERRED IN HOLDING THAT THE MINDS OF
THE PARTIES HAD MET TO ELEVATE THE PREVIOUSLY REJECTED
ADDENDUM TO THE LEVEL OF A JUDGMENT ON A COMPROMISE."[2]
The petition is meritorious.

In this instance, the addendum was flatly rejected by

respondent on the theses (a) that he did not give his consent
thereto nor authorized anyone to enter into the agreement, and (b)
that it contained provisions grossly disadvantageous to him. The
outright rejection of the addendum made known to the other ended
the offer.When respondent later filed his Manifestation, stating that
he was, after all, willing to honor the addendum, there was nothing
to still accept.
Verily, consent could be given not only by the party himself but
by anyone duly authorized and acting for and in his behalf. But by
respondent's own admission, the addendum was entered into
without his knowledge and consent. A contract entered into in the
name of another by one who ostensibly might have but who, in
reality, had no real authority or legal representation, or who, having
such authority, acted beyond his powers, would be unenforceable.
[7]
The addendum, let us then assume, resulted in an unenforceable
contract, might it not then be susceptible to ratification by the
person on whose behalf it was executed? The answer would
obviously be in the affirmative; however, that ratification should be
made before its revocation by the other contracting party. [8] The
adamant refusal of respondent to accept the terms of
the addendum constrained petitioner, during the preliminary
conference held on 23 June 1995, to instead express its willingness
to release respondent from his contracts prayed for in his complaint
and to thereby forego the rejected addendum. Respondent's
subsequent attempt to ratify the addendum came much too late

for, by then, the addendum had already been deemed revoked by

petitioner.
WHEREFORE, the petition is GRANTED, and the appealed
judgment of the Court of Appeals affirming that of the trial court is
SET ASIDE, and the case is remanded to the trial court for further
proceedings. No costs.
SO ORDERED.

SECOND DIVISION

[G.R. No. 121069. February 7, 2003]

BENJAMIN CORONEL AND EMILIA MEKING VDA. DE

CORONEL, petitioners,
vs. FLORENTINO
CONSTANTINO, AUREA BUENSUCESO, AND THE
HONORABLE COURT OF APPEALS, respondents.
DECISION
AUSTRIA-MARTINEZ, J.:
This refers to the petition for review on certiorari of the
decision of the Court of Appeals, dated March 27, 1995, in CA-G.R.
CV No. 44023[1] which affirmed the decision of the Regional Trial
Court of Bulacan, Branch 8, dated April 12, 1993 in Civil Case No.
105-M-91[2]; and the resolution of said appellate court, dated July 4,
1995, denying the motion for reconsideration of its decision.
The factual background of the case is as follows:
The subject property consists of two parcels of land situated in
Sta. Monica, Hagonoy, Bulacan, designated as Cadastral Lots Nos.
5737 and 5738. The property is originally owned by Honoria

Aguinaldo. One-half (1/2) of it was inherited by Emilia Meking Vda.

de Coronel together with her sons Benjamin, Catalino and Ceferino,
all surnamed Coronel. The other half was inherited by Florentino
Constantino and Aurea Buensuceso.
On February 20, 1991, Constantino and Buensuceso filed a
complaint for declaration of ownership, quieting of title and
damages with prayer for writ of mandatory and/or prohibitory
injunction with the Regional Trial Court of Bulacan (Branch 8)
against Benjamin, Emilia and John Does, docketed as Civil Case No.
105-M-91. Plaintiffs allege that: on April 23, 1981, Jess C. Santos
and Priscilla Bernardo purchased the property belonging to Emilia
and her sons by virtue of a deed of sale signed by Emilia; on June
21, 1990, Santos and Bernardo in turn sold the same to
Constantino and Buensuceso by virtue of a compromise agreement
in Civil Case No. 8289-M; they are the owners of the subject
property and defendants have illegally started to introduce
construction on the premises in question; and pray that defendants
respect, acknowledge and confirm the right of ownership of the
plaintiffs to the share, interest and participation of the one-third
(1/3) portion of the above described property.
After defendants filed their Answer, pre-trial ensued wherein
the parties stipulated that: (1) the property in question was
previously owned by Honoria Aguinaldo, one-half (1/2) of which was
inherited by the defendants while the other half was inherited by
the plaintiffs from the same predecessor; (2) it was admitted by
counsel for the defendants that there was a sale between Jess
Santos and the plaintiffs covering the subject property; and (3) that
there was no evidence presented in Civil Case No. 8289-M by either
of the parties and that the decision therein was based on a
compromise agreement.[3]
After trial on the merits, the trial court rendered a decision in
favor of the plaintiffs, the decretal portion of which reads as follows:
WHEREFORE, judgment is hereby made in favor of plaintiffs, the
Court hereby declares plaintiffs as the sole and absolute owners of
the properties covered by Tax Declarations Nos. 28960 and 28961
of Hagonoy, Bulacan, and orders the defendants to respect,
acknowledge and confirm the right of ownership of plaintiffs over
the whole property described above, to remove whatever
improvements introduced by them thereon, and to pay the
plaintiffs, solidarily and severally P10,000.00 as attorneys fees and
costs of suit.
SO ORDERED.[4]

On appeal brought by defendants, the Court of Appeals

affirmed the decision of the lower court and denied defendants
motion for reconsideration.
Hence, herein petition brought by defendants, raising the
following issues:

Kaming mag-iinang Emilia Micking Vda. Coronel at Benjamin M.

Coronel kapwa may sapat na gulang, Pilipino, naninirahan sa nayon
ng Sta. Monica, Hagonoy, Bulacan, sa kasulatang ito ay malaya
naming:
PINATUTUNAYAN

I.
WHETHER OR NOT THE CONTRACT [OF] SALE EXECUTED
BY A PARENT-CO-OWNER, IN HER OWN BEHALF, IS
UNENFORCEABLE WITH RESPECT TO THE SHARES OF
HER CO-HEIRS-CHILDREN;
II.
WHETHER OR NOT THE MINOR CHILDREN CAN RATIFY
UNAUTHORIZED ACTIONS OF THEIR PARENTS;
III.
WHETHER OR NOT THE CO-HEIRS ARE INDISPENSABLE
DEFENDANTS IN AN ACTION FOR DECLARATION OF
OWNERSHIP AND QUIETING OF TITLE;
IV.
WHETHER OR NOT THE DEED OF SALE WHICH IS A PRIVATE
DOCUMENT WAS SUFFICIENTLY ESTABLISHED WHEN THE
COUNSEL
FOR
THE
DEFENDANTS-PETITIONERS
ADMITTED ONLY ITS EXISTENCE BUT NOT ITS
CONTENTS.[5]
The third issue was raised by the petitioners for the first time
with the Court of Appeals. They claim that the complaint should
have been dismissed because private respondents failed to implead
the heirs of Ceferino and Catalino who died in 1983 and 1990,
[6]
respectively, in their complaint as indispensable parties. We do
not agree.
A careful reading of the Kasulatan ng Bilihang Patuluyan which
is a private document, not having been duly notarized, shows that
only the share of Emilia in the subject property was sold because
Benjamin did not sign the document and the shares of Ceferino and
Catalino were not subject of the sale. Pertinent portions of the
document read as follows:

Na, kami ay tunay na nagmamay-ari ng isang lagay na lupang

Bakuran na minana namin sa aming Lolong yumaong Mauricio
Coronel, na ang ayos, takal at kalagayan ay ang sumusunod:
ORIGINAL CERTIFICATE OF TITLE NO. 5737
Bakuran sa nayon ng Sta. Monica, Hagonoy, Bulacan na may sukat
na 416 Square Meters ang kabuuan 208 Square Meters Lot A-1 ang
kalahati nito na kanilang ipinagbibili.
xxxxxxxxx
Na, dahil at alang-alang sa halagang DALAWAMPUT LIMANG LIBONG
PISO (P25,000) salaping Pilipino, na aming tinanggap sa kasiyahang
loob namin, buhat sa mag-asawang Jess C. Santos at Prescy
Bernardo, kapwa may sapat na gulang, Pilipino at naninirahan sa
nayon ng Sta. Monica, Hagonoy, Bulacan, sa bisa ng kasulatang ito,
ay aming isinasalin, inililipat at ipinagbibili ng bilihang patuluyan
ang lahat ng aming dapat na makaparte sa lupang Bakuran
Nakasaad sa dakong unahan nito, sa nabanggit na Jess C. Santos at
Prescy Bernardo o sa kanilang tagapagmana at kahalili.
Na, ako namang Jess C. Santos, bilang nakabili, ay kusang loob ding
nagsasaysay sa kasulatang ito na ako ay kasangayon sa lahat ng
ditoy nakatala, bagaman ang lupang naturan ay hindi pa nahahati
sa dapat magmana sa yumaong Honoria Aguinaldo.
Na, sa aming kagipitan inari naming ipagbili ang aming karapatan o
kaparte na minana sa yumaong Guillermo Coronel ay
napagkasunduan namin mag-iina na ipagbili ang bakurang ito na
siyang makalulunas sa aming pangangailangan x x x.
Na, kaming nagbili ang magtatanggol ng katibayan sa
pagmamayari sa lupang naturan, sakaling may manghihimasok.

KASULATAN NG BILIHANG PATULUYAN

PANIWALAAN NG LAHAT:

SA KATUNAYAN NITO, kami ay lumagda sa kasulatang ito sa bayan

ng Malabon, Rizal ngayong ika-23 ng Abril, 1981.

(Signed) (Signed)
EMILIA MICKING Vda. CORONEL JESS C. SANTOS
Nagbili Nakabili
(Unsigned) (Signed)
BENJAMIN M. CORONEL PRISCILLA BERNARDO
Nagbili Nakabili[7]
Thus, it is clear, as already stated, that petitioner Benjamin did
not sign the document and that the shares of Catalino and Ceferino
in the subject property were not sold by them.
Since the shares of Catalino and Ceferino were not sold,
plaintiffs Constantino and Buensuceso have no cause of action
against them or against any of their heirs. Under Rule 3, Section 7
of the 1997 Rules of Civil Procedure, indispensable parties are
parties in interest without whom no final determination can be had
of an action. In the present case, the heirs of Catalino and Ceferino
are not indispensable parties because a complete determination of
the rights of herein petitioners and respondents can be had even if
the said heirs are not impleaded.
Besides, it is undisputed that petitioners never raised before
the trial court the issue of the private respondents failure to
implead said heirs in their complaint. Instead, petitioners actively
participated in the proceedings in the lower court and raised only
the said issue on appeal with the Court of Appeals. It is a settled
rule that jurisdictional questions may be raised at any time unless
an exception arises where estoppel has supervened. [8] In the
present case, petitioners participation in all stages of the case
during trial, without raising the issue of the trial courts lack of
jurisdiction over indispensable parties, estops them from
challenging the validity of the proceedings therein.
Further, the deed of sale is not a competent proof that
petitioner Benjamin had sold his own share of the subject
property. It cannot be disputed that Benjamin did not sign the
document and therefore, it is unenforceable against him.
Emilia executed the instrument in her own behalf and not in
representation of her three children.
Article 493 of the Civil Code states:

Each co-owner shall have the full ownership of his part and of the
fruits and benefits pertaining thereto, and he may therefore
alienate, assign or mortgage it, and even substitute another person
in its enjoyment, except when personal rights are involved. But the
effect of the alienation or the mortgage, with respect to the coowners, shall be limited to the portion which may be allotted to him
in the division upon the termination of the co-ownership.
Consequently, the sale of the subject property made by Emilia
in favor of Santos and Bernardo is limited to the portion which may
be allotted to her upon the termination of her co-ownership over
the subject property with her children.
As to the first, second and fourth issues it has been established
that at the time of execution of the Kasulatan ng Bilihang Patuluyan
on April 23, 1981[9], the subject property was co-owned, proindiviso, by petitioner Emilia together with her petitioner son
Benjamin, and her two other sons, Catalino and Ceferino. No proof
was presented to show that the co-ownership that existed among
the heirs of Ceferino and Catalino and herein petitioners has ever
been terminated.
Applying Articles 1317 and 1403 of the Civil Code, the Court of
Appeals ruled that through their inaction and silence, the three
sons of Emilia are considered to have ratified the aforesaid sale of
the subject property by their mother.
Articles 1317 and 1403 (1) of the Civil Code provide:
Art. 1317. No one may contract in the name of another without
being authorized by the latter, or unless he has by law a right to
represent him.
A contract entered into in the name of another by one who has no
authority or legal representation or who has acted beyond his
powers shall be unenforceable, unless it is ratified, expressly or
impliedly, by the person on whose behalf it has been executed,
before it is revoked by the other contracting party.
Art. 1403. The following contracts are unenforceable, unless they
are ratified:
(1) Those entered into in the name of another person by one who
has been given no authority or legal representation, or who has
acted beyond his powers.

xxxxxxxxx
We do not agree with the appellate court. The three sons of
Emilia did not ratify the sale. In Maglucot-Aw vs. Maglucot[10] we
held that:
Ratification means that one under no disability voluntarily adopts
and gives sanction to some unauthorized act or defective
proceeding, which without his sanction would not be binding on
him. It is this voluntary choice, knowingly made, which amounts to
a ratification of what was theretofore unauthorized, and becomes
the authorized act of the party so making the ratification.
No evidence was presented to show that the three brothers were
aware of the sale made by their mother. Unaware of such sale,
Catalino, Ceferino and Benjamin could not be considered as having
voluntarily remained silent and knowingly chose not to file an
action for the annulment of the sale. Their alleged silence and
inaction may not be interpreted as an act of ratification on their
part.
We also find no concrete evidence to show that Ceferino,
Catalino and Benjamin benefited from the sale. It is true that
private respondent Constantino testified that Benjamin took money
from Jess Santos but this is mere allegation on the part of
Constantino. No other evidence was presented to support such
allegation. Bare allegations, unsubstantiated by evidence, are not
equivalent to proof under our Rules of Court.[11] Neither do the
records show that Benjamin admitted having received money from
Jess Santos. Even granting that Benjamin indeed received money
from Santos, Constantinos testimony does not show that the
amount received was part of the consideration for the sale of the
subject property.
To repeat, the sale is valid insofar as the share of petitioner
Emilia Meking Vda. de Coronel is concerned. The due execution of
the Kasulatan ng Bilihang Patuluyan was duly established when
petitioners, through their counsel, admitted during the pre-trial
conference that the said document was signed by Emilia. [12] While
petitioners claim that Emilia erroneously signed it under the
impression that it was a contract of mortgage and not of sale, no
competent evidence was presented to prove such allegation.
Hence, Jess C. Santos and Priscilla Bernardo, who purchased
the share of Emilia, became co-owners of the subject property
together with Benjamin and the heirs of Ceferino and Catalino. As

such, Santos and Bernardo could validly dispose of that portion of

the subject property pertaining to Emilia in favor of herein private
respondents Constantino and Buensuceso.
However, the particular portions properly pertaining to each of
the co-owners are not yet defined and determined as no partition in
the proper forum or extrajudicial settlement among the parties has
been effected among the parties. Consequently, the prayer of
respondents for a mandatory or prohibitory injunction lacks merit.
WHEREFORE, the assailed Decision and Resolution of the
Court of Appeals are AFFIRMED with the following MODIFICATIONS:
1. Plaintiffs-private respondents Florentino Constantino and
Aurea Buensuceso are declared owners of one-half (1/2) undivided
portion of the subject property plus the one-fourth () undivided
share of defendant-petitioner Emilia Meking Vda. de Coronel; and,
defendant-petitioner Benjamin Coronel together with the heirs of
Catalino Coronel and the heirs of Ceferino Coronel are declared
owners of one-fourth () share each of the other one-half (1/2)
portion of the subject property, without prejudice to the parties
entering into partition of the subject property, judicial or otherwise.
2. The order of removal of the improvements and the award of
the amount of Ten Thousand Pesos (P10,000.00) as attorneys fees
and costs of suit are DELETED.
No costs.
SO ORDERED.

Republic of the Philippines

Supreme Court
Manila

THIRD DIVISION

THE
MUNICIPALITY
OF
HAGONOY,
BULACAN, represented by the HON.
FELIX V. OPLE, Municipal Mayor, and
FELIX V. OPLE, in his personal capacity,
Petitioners,

G.R. No. 168289

DECISION

Present:

- versus -

CORONA, J., Chairperson

VELASCO, JR.,

HON. SIMEON P. DUMDUM, JR., in his

capacity as the Presiding Judge of the
REGIONAL TRIAL COURT, BRANCH 7,
CEBU CITY; HON. CLERK OF COURT & EXOFFICIO SHERIFF of the REGIONAL TRIAL
COURT of CEBU CITY; HON. CLERK OF
COURT & EX-OFFICIO SHERIFF of the
REGIONAL TRIAL COURT of BULACAN
and his DEPUTIES; and EMILY ROSE GO
KO LIM CHAO, doing business under the
name and style KD SURPLUS,

PERALTA, J.:

NACHURA,
PERALTA, and
MENDOZA, JJ.

This is a Joint Petition[1] under Rule 45 of the Rules of Court brought

by the Municipality of Hagonoy, Bulacan and its former chief
executive, Mayor Felix V. Ople in his official and personal capacity,
from the January 31, 2005 Decision[2] and the May 23, 2005
Resolution[3]of the Court of Appeals in CA-G.R. SP No. 81888. The
assailed decision affirmed the October 20, 2003 Order[4] issued by
the Regional Trial Court of Cebu City, Branch 7 in Civil Case No.
CEB-28587 denying petitioners motion to dismiss and motion to
discharge/dissolve the writ of preliminary attachment previously
issued in the case. The assailed resolution denied reconsideration.

Respondents.

The case stems from a Complaint[5] filed by herein private

respondent Emily Rose Go Ko Lim Chao against herein petitioners,
the Municipality of Hagonoy, Bulacan and its chief executive, Felix
V. Ople (Ople) for collection of a sum of money and damages. It was
alleged that sometime in the middle of the year 2000, respondent,
Promulgated:

doing business as KD Surplus and as such engaged in buying and

selling surplus trucks, heavy equipment, machinery, spare parts

March 22, 2010

x-----------------------------------------------------------------------------------------x

and related supplies, was contacted by petitioner Ople. Respondent

had entered into an agreement with petitioner municipality through
Ople for the delivery of motor vehicles, which supposedly were

needed to carry out certain developmental undertakings in the

of frauds, pointing out that there was no written contract or

municipality. Respondent claimed that because of Oples earnest

document that would evince the supposed agreement they entered

representation that funds had already been allocated for the

into with respondent. They averred that contracts of this nature,

project, she agreed to deliver from her principal place of business

before being undertaken by the municipality, would ordinarily be

in Cebu City twenty-one

value

subject to several preconditions such as a public bidding and prior

totaled P5,820,000.00. To prove this, she attached to the complaint

approval of the municipal council which, in this case, did not obtain.

copies of the bills of lading showing that the items were consigned,

From this, petitioners impress upon us the notion that no contract

delivered to and received by petitioner municipality on different

was ever entered into by the local government with respondent.

dates.

[6]

motor

vehicles

whose

However, despite having made several deliveries, Ople

[10]

To address the claim that respondent had made the deliveries

allegedly did not heed respondents claim for payment. As of the

under the agreement, they advanced that the bills of lading

filing of the complaint, the total obligation of petitioner had already

attached to the complaint were hardly probative, inasmuch as

totaledP10,026,060.13 exclusive of penalties and damages. Thus,

these documents had been accomplished and handled exclusively

respondent prayed for full payment of the said amount, with

by respondent herself as well as by her employees and agents. [11]

interest at not less than 2% per month, plus P500,000.00 as

damages for business losses, P500,000.00 as exemplary damages,
attorneys fees of P100,000.00 and the costs of the suit.

Petitioners also filed a Motion to Dissolve and/or Discharge

the Writ of Preliminary Attachment Already Issued,[12] invoking
immunity of the state from suit, unenforceability of the contract,

On February 13, 2003, the trial court issued an Order [7] granting
respondents

prayer

for

writ

of

preliminary

attachment

conditioned upon the posting of a bond equivalent to the amount of

the claim. On March 20, 2003, the trial court issued the Writ of
Preliminary Attachment[8]directing the sheriff to attach the estate,

and failure to substantiate the allegation of fraud.[13]

On October 20, 2003, the trial court issued an Order [14] denying the
two motions. Petitioners moved for reconsideration, but they were
denied in an Order[15] dated December 29, 2003.

real and personal properties of petitioners.

Believing that the trial court had committed grave abuse of
Instead of addressing private respondents allegations, petitioners
filed a Motion to Dismiss [9] on the ground that the claim on which
the action had been brought was unenforceable under the statute

discretion in issuing the two orders, petitioners elevated the matter

to the Court of Appeals via a petition for certiorari under Rule 65. In
it, they faulted the trial court for not dismissing the complaint
despite the fact that the alleged contract was unenforceable under

the statute of frauds, as well as for ordering the filing of an answer

Commenting on the petition, private respondent notes that with

and in effect allowing private respondent to prove that she did

respect to the Court of Appeals denial of the certiorari petition, the

make several deliveries of the subject motor vehicles. Additionally,

same was rightly done, as the fact of delivery may be properly and

it was likewise asserted that the trial court committed grave abuse

adequately addressed at the trial of the case on the merits; and

of discretion in not discharging/dissolving the writ of preliminary

that the dissolution of the writ of preliminary attachment was not

attachment, as prayed for in the motion, and in effect disregarding

proper under the premises inasmuch as the application for the writ

the rule that the local government is immune from suit.

sufficiently alleged fraud on the part of petitioners. In the same

breath, respondent laments that the denial of petitioners motion for
reconsideration was rightly done by the Court of Appeals, because

On January

31,

2005,

following

assessment

of

the

parties

it raised no new matter that had not yet been addressed.[19]

arguments, the Court of Appeals, finding no merit in the petition,

upheld private respondents claim and affirmed the trial courts
order.[16] Petitioners moved for reconsideration, but the same was

After the filing of the parties respective memoranda, the case was

likewise denied for lack of merit and for being a mere scrap of

deemed submitted for decision.

paper for having been filed by an unauthorized counsel. [17] Hence,

this petition.
We now rule on the petition.
In their present recourse, which raises no matter different from
those passed upon by the Court of Appeals, petitioners ascribe

To begin with, the Statute of Frauds found in paragraph (2),

error to the Court of Appeals for dismissing their challenge against

Article 1403 of the Civil Code, [20] requires for enforceability certain

the trial courts October 20 and December 29, 2003 Orders. Again,

contracts enumerated therein to be evidenced by some note or

they reason that the complaint should have been dismissed at the

memorandum. The term Statute of Frauds is descriptive of statutes

first instance based on unenforceability and that the motion to

that require certain classes of contracts to be in writing; and that

dissolve/discharge the preliminary attachment should have been

do not deprive the parties of the right to contract with respect to

granted.

[18]

the matters therein involved, but merely regulate the formalities of

the contract necessary to render it enforceable.[21]

In other words, the Statute of Frauds only lays down the

the trial court for the purpose of ruling on the motion to dismiss. In

method by which the enumerated contracts may be proved. But it

other words, since there exists an indication by way of allegation

does not declare them invalid because they are not reduced to

that there has been performance of the obligation on the part of

writing inasmuch as, by law, contracts are obligatory in whatever

respondent, the case is excluded from the coverage of the rule on

form they may have been entered into, provided all the essential

dismissals based on unenforceability under the statute of frauds,

requisites for their validity are present. [22] The object is to prevent

and either party may then enforce its claims against the other.

fraud and perjury in the enforcement of obligations depending, for

evidence thereof, on the unassisted memory of witnesses by
requiring certain enumerated contracts and transactions to be
evidenced by a writing signed by the party to be charged.

[23]

No other principle in remedial law is more settled than that

The

when a motion to dismiss is filed, the material allegations of the

effect of noncompliance with this requirement is simply that no

complaint are deemed to be hypothetically admitted. [27] This

action can be enforced under the given contracts. [24] If an action is

hypothetical admission,

nevertheless

dismissal

Corporation v. Roxas[28] and Navoa v. Court of Appeals, [29] extends

under Section 1(i),[25] Rule 16 of the Rules of Court, unless there has

not only to the relevant and material facts well pleaded in the

been, among others, total or partial performance of the obligation

complaint, but also to inferences that may be fairly deduced from

filed

in

court,

on the part of either party.

it

shall

warrant

[26]

according to Viewmaster Construction

them. Thus, where it appears that the allegations in the complaint

furnish sufficient basis on which the complaint can be maintained,
the same should not be dismissed regardless of the defenses that

It has been private respondents consistent stand, since the

may be raised by the defendants. [30] Stated differently, where the

inception of the instant case that she has entered into a contract

motion to dismiss is predicated on grounds that are not indubitable,

with petitioners. As far as she is concerned, she has already

the better policy is to deny the motion without prejudice to taking

performed her part of the obligation under the agreement by

such measures as may be proper to assure that the ends of justice

undertaking the delivery of the 21 motor vehicles contracted for by

may be served.[31]

Ople in the name of petitioner municipality. This claim is well

substantiated at least for the initial purpose of setting out a valid
cause of action against petitioners by copies of the bills of lading

It is interesting to note at this point that in their bid to have

attached to the complaint, naming petitioner municipality as

the case dismissed, petitioners theorize that there could not have

consignee of the shipment. Petitioners have not at any time

been a contract by which the municipality agreed to be bound,

expressly denied this allegation and, hence, the same is binding on

because it was not shown that there had been compliance with the

required bidding or that the municipal council had approved the

they believe that respondent has not been able to substantiate her

contract. The argument is flawed. By invoking unenforceability

allegations of fraud necessary for the issuance of the writ.[32]

under the Statute of Frauds, petitioners are in effect acknowledging

the existence of a contract between them and private respondent
only, the said contract cannot be enforced by action for being non-

Private respondent, for her part, counters that, contrary to

compliant with the legal requisite that it be reduced into

petitioners claim, she has amply discussed the basis for the

writing. Suffice it to say that while this assertion might be a viable

issuance

defense against respondents claim, it is principally a matter of

affidavit; and that petitioners claim of immunity from suit is

evidence that may be properly ventilated at the trial of the case on

negated by Section 22 of the Local Government Code, which vests

the merits.

municipal corporations with the power to sue and be sued. Further,

of

the

writ

of

preliminary

attachment

in

her

she contends that the arguments offered by petitioners against the

writ of preliminary attachment clearly touch on matters that when
Verily, no grave abuse of discretion has been committed by
the trial court in denying petitioners motion to dismiss this

ruled upon in the hearing for the motion to discharge, would

amount to a trial of the case on the merits.[33]

case. The Court of Appeals is thus correct in affirming the same.

The general rule spelled out in Section 3, Article XVI of the

We now address the question of whether there is a valid

Constitution is that the state and its political subdivisions may not

reason to deny petitioners motion to discharge the writ of

be sued without their consent. Otherwise put, they are open to suit

preliminary attachment.

but only when they consent to it. Consent is implied when the
government enters into a business contract, as it then descends to
the level of the other contracting party; or it may be embodied in a

Petitioners, advocating a negative stance on this issue, posit

general or special law[34] such as that found in Book I, Title I,

that as a municipal corporation, the Municipality of Hagonoy is

Chapter 2, Section 22 of the Local Government Code of 1991, which

immune from suit, and that its properties are by law exempt from

vests local government units with certain corporate powers one of

execution and garnishment. Hence, they submit that not only was

them is the power to sue and be sued.

there an error committed by the trial court in denying their motion

to dissolve the writ of preliminary attachment; they also advance
that it should not have been issued in the first place. Nevertheless,

Be that as it may, a difference lies between suability and

liability. As held in City of Caloocan v. Allarde,[35] where the suability
of the state is conceded and by which liability is ascertained
judicially, the state is at liberty to determine for itself whether to
satisfy the judgment or not. Execution may not issue upon such
judgment, because statutes waiving non-suability do not authorize
the seizure of property to satisfy judgments recovered from the
action. These

statutes

only

convey

an

implication

that

the

legislature will recognize such judgment as final and make

provisions for its full satisfaction. Thus, where consent to be sued is
given by general or special law, the implication thereof is limited
only to the resultant verdict on the action before execution of the

The universal rule that where the State gives

its consent to be sued by private parties either by
general or special law, it may limit claimants action
only up to the completion of proceedings anterior to
the stage of execution and that the power of the
Courts ends when the judgment is rendered, since
government funds and properties may not be seized
under writs of execution or garnishment to satisfy
such judgments, is based on obvious considerations
of public policy. Disbursements of public funds must
be covered by the corresponding appropriations as
required by law. The functions and public services
rendered by the State cannot be allowed to be
paralyzed or disrupted by the diversion of public
funds from their legitimate and specific objects. x x
x[39]

judgment.[36]

Traders
[37]

Royal

Bank

v.

Intermediate

Appellate

Court,

citing Commissioner of Public Highways v. San Diego,

[38]

With this in mind, the Court holds that the writ of

is

preliminary attachment must be dissolved and, indeed, it must not

instructive on this point. In that case which involved a suit on a

have been issued in the very first place. While there is merit in

contract entered into by an entity supervised by the Office of the

private respondents position that she, by affidavit, was able to

President, the Court held that while the said entity opened itself to

substantiate the allegation of fraud in the same way that the fraud

suit by entering into the subject contract with a private entity; still,

attributable to petitioners was sufficiently alleged in the complaint

the trial court was in error in ordering the garnishment of its funds,

and, hence, the issuance of the writ would have been justified. Still,

which were public in nature and, hence, beyond the reach of

the writ of attachment in this case would only prove to be useless

garnishment and attachment proceedings.Accordingly, the Court

and unnecessary under the premises, since the property of the

ordered that the writ of preliminary attachment issued in that case

municipality may not, in the event that respondents claim is

be lifted, and that the parties be allowed to prove their respective

validated, be subjected to writs of execution and garnishment

claims at the trial on the merits. There, the Court highlighted the

unless, of course, there has been a corresponding appropriation

reason for the rule, to wit:

provided by law.[40]

Anent the other issues raised by petitioners relative to the

denial

of

their

motion

to

dissolve

the

writ

It appears, however, that after the issuance of the Court of

of

Appeals decision, only Oples personal representation signed the

attachment, i.e., unenforceability of the contract and the veracity

motion for reconsideration. There is no showing that the municipal

of private respondents allegation of fraud, suffice it to say that

legal officer made the same manifestation, as he previously did

these pertain to the merits of the main action. Hence, these issues

upon the filing of the petition.[45] From this, the Court of Appeals

are not to be taken up in resolving the motion to discharge, lest we

concluded that it was as if petitioner municipality and petitioner

run the risk of deciding or prejudging the main case and force a

Ople, in his official capacity, had never moved for reconsideration

trial on the merits at this stage of the proceedings. [41]

of the assailed decision, and adverts to the ruling in Ramos v. Court

of

Appeals[46] andMunicipality

of

Pililla,

Rizal

v.

Court

of

Appeals[47] that only under well-defined exceptions may a private

There is one final concern raised by petitioners relative to
the denial of their motion for reconsideration. They complain that it

counsel be engaged in lawsuits involving a municipality, none of

which exceptions obtains in this case.[48]

was an error for the Court of Appeals to have denied the motion on
the ground that the same was filed by an unauthorized counsel
and, hence, must be treated as a mere scrap of paper.[42]

The Court of Appeals is mistaken. As can be seen from the

manner in which the Manifestation with Entry of Appearance is
worded, it is clear that petitioner municipalitys legal officer was

It can be derived from the records that petitioner Ople, in his

intent on adopting, for both the municipality and Mayor Ople, not

personal capacity, filed his Rule 65 petition with the Court of

only the certioraripetition filed with the Court of Appeals, but also

Appeals through the representation of the law firm Chan Robles &

all other pleadings that may be filed thereafter by Oples personal

Associates. Later on, municipal legal officer Joselito Reyes, counsel

representation, including the motion for reconsideration subject of

for petitioner Ople, in his official capacity and for petitioner

this

municipality, filed with the Court of Appeals a Manifestation with

reconsideration would warrant a denial, because there seems to be

Entry of Appearance[43] to the effect that he, as counsel, was

no matter raised therein that has not yet been previously

adopting all the pleadings filed for and in behalf of [Oples personal

addressed in the assailed decision of the Court of Appeals as well

representation] relative to this case.[44]

as in the proceedings below, and that would have otherwise

case. In

any

event,

however,

the

said

warranted a different treatment of the issues involved.

motion

for

WHEREFORE,

the

Petition

is GRANTED

IN

versus -

CASTRO,

PART. The January 31, 2005 Decision of the Court of Appeals in CA-

BRION,

G.R. SP No. 81888 is AFFIRMED insofar as it affirmed the October

PERALTA,*

20, 2003 Decision of the Regional Trial Court of Cebu City, Branch 7

BERSAMIN,

denying petitioners motion to dismiss in Civil Case No. CEB-

DEL CASTILLO,

28587. The assailed decision is REVERSED insofar as it affirmed

the said trial courts denial of petitioners motion to discharge the
writ of preliminary attachment issued in that case. Accordingly,
the August 4, 2003 Writ of Preliminary Attachment issued in Civil
Case No. CEB-28587 is ordered lifted.

SO ORDERED.

BERNARDO L. LOZADA, SR., and the

ABAD,

HEIRS OF ROSARIO MERCADO, namely,

VICENTE LOZADA, MARIO M. LOZADA,
MARCIA L. GODINEZ, VIRGINIA L. FLORES,
BERNARDO LOZADA, JR., DOLORES
GACASAN, SOCORRO CAFARO and ROSARIO
LOZADA, represented by MARCIA LOZADA
GODINEZ,

VILLARAMA, JR.,

Respondents.

PEREZ, and
MENDOZA, JJ.

Promulgated:

February 25, 2010

EN BANC
x------------------------------------------------------------------------------------x
MACTAN-CEBU INTERNATIONAL AIRPORT
AUTHORITY and AIR TRANSPORTATION
OFFICE,

G.R. No. 176625

Present:

DECISION

Petitioners,
PUNO, C.J.,

NACHURA, J.:

CARPIO,
CORONA,

This is a petition for review on certiorari under Rule 45 of the Rules

CARPIO MORALES,VELASCO, JR.,
of Court, seeking to reverse, annul, and set aside the
NACHURA, LEONARDO-DE

Decision[1] dated February 28, 2006 and the Resolution [2] dated
February 7, 2007 of the Court of Appeals (CA) (Cebu City),
Twentieth Division, in CA-G.R. CV No. 65796.

On December 29, 1961, the trial court rendered judgment in favor

of the Republic and ordered the latter to pay Lozada the fair market
value of Lot No. 88, adjudged at P3.00 per square meter, with
consequential damages by way of legal interest computed from

The antecedent facts and proceedings are as follows:

November 16, 1947the time when the lot was first occupied by the
airport. Lozada received the amount of P3,018.00 by way of
payment.

Subject of this case is Lot No. 88-SWO-25042 (Lot No. 88), with an
area

of

1,017

square

meters,

more

or

less,

located

in

Lahug, Cebu City. Its original owner was Anastacio Deiparine when
the same was subject to expropriation proceedings, initiated by the
Republic of the Philippines (Republic), represented by the then Civil
Aeronautics

Administration

(CAA),

for

the

expansion

and

improvement of the Lahug Airport. The case was filed with the then
Court of First Instance of Cebu, Third Branch, and docketed as Civil
Case No. R-1881.

The

affected

landowners

appealed. Pending

appeal,

the

Air

Transportation Office (ATO), formerly CAA, proposed a compromise

settlement whereby the owners of the lots affected by the
expropriation proceedings would either not appeal or withdraw
their respective appeals in consideration of a commitment that the
expropriated lots would be resold at the price they were
expropriated in the event that the ATO would abandon the Lahug
Airport,

pursuant

to

an

established

policy

involving

similar

cases. Because of this promise, Lozada did not pursue his

As early as 1947, the lots were already occupied by the U.S.
Army. They were turned over to the Surplus Property Commission,

appeal. Thereafter, Lot No. 88 was transferred and registered in the

name of the Republic under TCT No. 25057.

the Bureau of Aeronautics, the National Airport Corporation and

then to the CAA.
The

projected

improvement

and

expansion

plan

of

the

old Lahug Airport, however, was not pursued.

During the pendency of the expropriation proceedings, respondent
Bernardo

L.

Lozada,

Sr.

acquired

Lot

No.

88

from

Deiparine. Consequently, Transfer Certificate of Title (TCT) No. 9045

was issued in Lozadas name.

Lozada, with the other landowners, contacted then CAA Director

Vicente Rivera, Jr., requesting to repurchase the lots, as per

previous agreement. The CAA replied that there might still be a

commercial complex. Lot No. 88 became the site of a jail known

need for the Lahug Airport to be used as an emergency DC-3

as Bagong Buhay Rehabilitation Complex, while a portion thereof

airport. It reiterated, however, the assurance that should this Office

was occupied by squatters.[3] The old airport was converted into

dispose and resell the properties which may be found to be no

what is now known as the Ayala I.T. Park, a commercial area.

longer necessary as an airport, then the policy of this Office is to

give priority to the former owners subject to the approval of the
President.

Thus, on June 4, 1996, petitioners initiated a complaint for the

recovery of possession and reconveyance of ownership of Lot No.
88. The case was docketed as Civil Case No. CEB-18823 and was

On November 29, 1989, then President Corazon C. Aquino issued a

raffled to the Regional Trial Court (RTC), Branch 57, Cebu City. The

Memorandum to the Department of Transportation, directing the

complaint substantially alleged as follows:

transfer of general aviation operations of the Lahug Airport to

the Mactan International Airport before the end of 1990 and, upon
such transfer, the closure of the Lahug Airport.

(a) Spouses Bernardo and Rosario Lozada were the

registered owners of Lot No. 88 covered by TCT
No. 9045;

Sometime in 1990, the Congress of the Philippines passed Republic

Act (R.A.) No. 6958, entitled An Act Creating the Mactan-Cebu
International Airport Authority, Transferring Existing Assets of the
Mactan International Airport and the Lahug Airport to the Authority,
Vesting the Authority with Power to Administer and Operate the

(b) In the early 1960s, the Republic sought to acquire

by expropriation Lot No. 88, among others, in
connection
with
its
program
for
the
improvement
and
expansion
of
the Lahug Airport;

Mactan International Airport and the Lahug Airport, and For Other
Purposes.

From the date of the institution of the expropriation proceedings up

(c) A decision was rendered by the Court of First

Instance in favor of the Government and
against the land owners, among whom was
Bernardo Lozada, Sr. appealed therefrom;

to the present, the public purpose of the said expropriation

(expansion of the airport) was never actually initiated, realized, or
implemented. Instead, the old airport was converted into a

(d) During the pendency of the appeal, the parties

entered into a compromise settlement to the
effect that the subject property would be resold

to the original owner at the same price when it

was expropriated in the event that the
Government abandons the Lahug Airport;

In their Answer, petitioners asked for the immediate dismissal of

the complaint. They specifically denied that the Government had
made assurances to reconvey Lot No. 88 to respondents in the
event that the property would no longer be needed for airport

(e) Title to Lot No. 88 was subsequently transferred

to the Republic of the Philippines (TCT No.
25057);

operations. Petitioners instead asserted that the judgment of

condemnation was unconditional, and respondents were, therefore,
not entitled to recover the expropriated property notwithstanding
non-use or abandonment thereof.

(f) The projected expansion and improvement of

the Lahug Airport did not materialize;
After pretrial, but before trial on the merits, the parties stipulated
(g) Plaintiffs sought to repurchase their property from
then CAA Director Vicente Rivera. The latter
replied by giving as assurance that priority
would be given to the previous owners, subject
to the approval of the President, should CAA
decide to dispose of the properties;

on the following set of facts:

(1) The lot involved is Lot No. 88-SWO-25042 of the

Banilad Estate, situated in the City of Cebu,
containing an area of One Thousand Seventeen
(1,017) square meters, more or less;

(h) On November 29, 1989, then President Corazon

C. Aquino, through a Memorandum to the
Department
of
Transportation
and
Communications (DOTC), directed the transfer
of
general
aviation
operations
at
the Lahug Airport to
the
Mactan-Cebu
International Airport Authority;

(2) The property was expropriated among several

other properties in Lahug in favor of the
Republic of the Philippines by virtue of a
Decision dated December 29, 1961 of the CFI of
Cebu in Civil Case No. R-1881;

(i) Since the public purpose for the expropriation no

longer exists, the property must be returned to
the plaintiffs.[4]

(3) The public purpose for which the property was

expropriated
was
for
the
purpose
of
the Lahug Airport;

(4) After the expansion, the property was transferred

in the name of MCIAA; [and]

(5) On November 29, 1989, then President Corazon

C. Aquino directed the Department of
Transportation and Communication to transfer
general aviation operations of the Lahug Airport
to the Mactan-Cebu International Airport
Authority and to close the Lahug Airport after
such transfer[.][5]

During trial, respondents presented Bernardo Lozada, Sr. as their

lone witness, while petitioners presented their own witness,

1. ordering MCIAA and ATO to restore to

plaintiffs the possession and ownership of their land,
Lot No. 88 Psd-821 (SWO-23803), upon payment of
the expropriation price to plaintiffs; and

2. ordering the Register of Deeds to effect the

transfer of the Certificate of Title from defendant[s]
to plaintiffs on Lot No. [88], cancelling TCT No. 20357
in the name of defendant MCIAA and to issue a new
title on the same lot in the name of Bernardo L.
Lozada, Sr. and the heirs of Rosario Mercado, namely:
Vicente M. Lozada, Mario M. Lozada, Marcia L.
Godinez, Virginia L. Flores, Bernardo M. Lozada, Jr.,
Dolores L. Gacasan, Socorro L. Cafaro and Rosario M.
Lozada.

Mactan-Cebu International Airport Authority legal assistant Michael

Bacarisas.

On October 22, 1999, the RTC rendered its Decision, disposing as

No pronouncement as to costs.

SO ORDERED.[6]

follows:

WHEREFORE, in the light of the foregoing, the Court

hereby renders judgment in favor of the plaintiffs,
Bernardo L. Lozada, Sr., and the heirs of Rosario
Mercado, namely, Vicente M. Lozada, Marcia L.
Godinez, Virginia L. Flores, Bernardo M. Lozada, Jr.,
Dolores L. Gacasan, Socorro L. Cafaro and Rosario M.
Lozada, represented by their attorney-in-fact Marcia
Lozada Godinez, and against defendants CebuMactan International Airport Authority (MCIAA) and
Air Transportation Office (ATO):

Aggrieved, petitioners interposed an appeal to the CA. After the

filing of the necessary appellate briefs, the CA rendered its assailed
Decision dated February 28, 2006, denying petitioners appeal and
affirming in

toto the

Decision

of

the

RTC,

Branch

57, Cebu City. Petitioners motion for reconsideration was, likewise,

denied in the questioned CA Resolution dated February 7, 2007.

Hence, this petition arguing that: (1) the respondents utterly failed
to prove that there was a repurchase agreement or compromise
settlement between them and the Government; (2) the judgment in
Civil Case No. R-1881 was absolute and unconditional, giving title in
fee simple to the Republic; and (3) the respondents claim of verbal
assurances from government officials violates the Statute of
Frauds.

expropriation is granted upon condition that the city

can only use it for a public street, then, of course,
when the city abandons its use as a public street, it
returns to the former owner, unless there is some
statutory provision to the contrary. x x x. If, upon the
contrary, however, the decree of expropriation gives
to the entity a fee simple title, then, of course, the
land becomes the absolute property of the
expropriator, whether it be the State, a province, or
municipality, and in that case the non-user does not
have the effect of defeating the title acquired by the
expropriation proceedings. x x x.

The petition should be denied.

Petitioners anchor their claim to the controverted property on the

supposition that the Decision in the pertinent expropriation
proceedings did not provide for the condition that should the
intended

use

of

Lot

No.

88

for

the

expansion

of

the Lahug Airport be aborted or abandoned, the property would

When land has been acquired for public use

in fee simple, unconditionally, either by the exercise
of eminent domain or by purchase, the former owner
retains no right in the land, and the public use may
be abandoned, or the land may be devoted to a
different use, without any impairment of the estate
or title acquired, or any reversion to the former
owner. x x x.[8]

revert to respondents, being its former owners. Petitioners cite, in

support of this position, Fery v. Municipality of Cabanatuan,[7] which
declared that the Government acquires only such rights in
expropriated parcels of land as may be allowed by the character of
its title over the properties

If x x x land is expropriated for a particular purpose,

with the condition that when that purpose is ended
or abandoned the property shall return to its former
owner, then, of course, when the purpose is
terminated or abandoned the former owner
reacquires the property so expropriated. If x x x land
is expropriated for a public street and the

Contrary to the stance of petitioners, this Court had ruled

otherwise in Heirs of Timoteo Moreno and Maria Rotea v. MactanCebu International Airport Authority,[9] thus

Moreover, respondent MCIAA has brought to

attention a significant and telling portion
the Decision in Civil Case No. R-1881 validating
discernment
that
the
expropriation
by
predecessors of respondent was ordered under

our
in
our
the
the

running
impression
continue in operation

that Lahug Airport would

As for the public purpose of the

expropriation proceeding, it cannot
now
be
doubted. Although Mactan Airport is
being constructed, it does not take
away the actual usefulness and
importance of the Lahug Airport: it is
handling the air traffic both civilian and
military. From
it aircrafts fly
to
Mindanao and Visayas and pass thru it
on
their
flights
to
the
North
and Manila. Then, no evidence was
adduced to show how soon is
the Mactan Airport to be placed in
operation
and
whether
the Lahug Airport will
be
closed
immediately thereafter. It is up to the
other departments of the Government
to determine said matters. The Court
cannot substitute its judgment for
those of the said departments or
agencies. In the absence of such
showing, the Court will presume that
the Lahug Airport will continue to be in
operation (emphasis supplied).

While in the trial in Civil Case No. R-1881 [we] could

have simply acknowledged the presence of public
purpose for the exercise of eminent domain
regardless of the survival of Lahug Airport, the trial
court in its Decision chose not to do so but instead
prefixed its finding of public purpose upon its
understanding that Lahug Airport will continue to be
in operation. Verily, these meaningful statements in

the body of the Decision warrant the conclusion that

the expropriated properties would remain to be so
until it was confirmed that Lahug Airport was no
longer in operation. This inference further implies
two (2) things: (a) after the Lahug Airport ceased its
undertaking as such and the expropriated lots were
not being used for any airport expansion project, the
rights vis--vis the expropriated Lots Nos. 916 and 920
as between the State and their former owners,
petitioners herein, must be equitably adjusted; and
(b) the foregoing unmistakable declarations in the
body of the Decision should merge with and become
an intrinsic part of the fallo thereof which under the
premises is clearly inadequate since the dispositive
portion is not in accord with the findings as contained
in the body thereof.[10]

Indeed, the Decision in Civil Case No. R-1881 should be read in its
entirety, wherein it is apparent that the acquisition by the Republic
of the expropriated lots was subject to the condition that
the Lahug Airport would continue its operation. The condition not
having materialized because the airport had been abandoned, the
former owner should then be allowed to reacquire the expropriated
property.[11]

On this note, we take this opportunity to revisit our ruling in Fery,

which involved an expropriation suit commenced upon parcels of
land to be used as a site for a public market. Instead of putting up a
public

market,

respondent Cabanatuan constructed

residential

houses for lease on the area. Claiming that the municipality lost its

right to the property taken since it did not pursue its public

purpose stated in the petition for expropriation filed, failing which,

purpose, petitioner Juan Fery, the former owner of the lots

it should file another petition for the new purpose. If not, it is then

expropriated, sought to recover his properties. However, as he had

incumbent upon the expropriator to return the said property to its

admitted that, in 1915, respondentCabanatuan acquired a fee

private

simple title to the lands in question, judgment was rendered in

same. Otherwise, the judgment of expropriation suffers an intrinsic

favor

jurisprudence,

flaw, as it would lack one indispensable element for the proper

particularly City of Fort Wayne v. Lake Shore & M.S. RY. Co.,

exercise of the power of eminent domain, namely, the particular

[12]

public purpose for which the property will be devoted. Accordingly,

of

the

municipality,

following

American

McConihay v. Theodore Wright,[13] and Reichling v. Covington

Lumber Co.,

[14]

owner,

if

the

latter desires

to

reacquire

the

all uniformly holding that the transfer to a third

the private property owner would be denied due process of law,

party of the expropriated real property, which necessarily resulted

and the judgment would violate the property owners right to

in the abandonment of the particular public purpose for which the

justice, fairness, and equity.

property was taken, is not a ground for the recovery of the same by
its previous owner, the title of the expropriating agency being one
of fee simple.

In light of these premises, we now expressly hold that the taking of

private property, consequent to the Governments exercise of its
power of eminent domain, is always subject to the condition that

Obviously, Fery was not decided pursuant to our now sacredly held

the property be devoted to the specific public purpose for which it

constitutional right that private property shall not be taken for

was taken.Corollarily, if this particular purpose or intent is not

public use without just compensation.[15] It is well settled that the

initiated or not at all pursued, and is peremptorily abandoned, then

taking of private property by the Governments power of eminent

the former owners, if they so desire, may seek the reversion of the

domain is subject to two mandatory requirements: (1) that it is for

property, subject to the return of the amount of just compensation

a particular public purpose; and (2) that just compensation be paid

received. In such a case, the exercise of the power of eminent

to the property owner. These requirements partake of the nature of

domain has become improper for lack of the required factual

implied conditions that should be complied with to enable the

justification.[17]

condemnor to keep the property expropriated.[16]

Even without the foregoing declaration, in the instant case, on the

More particularly, with respect to the element of public use, the

question of whether respondents were able to establish the

expropriator should commit to use the property pursuant to the

existence of an oral compromise agreement that entitled them to

repurchase Lot No. 88 should the operations of the Lahug Airport be

abandoned, we rule in the affirmative.

It bears stressing that both the RTC, Branch 57, Cebu and the CA
have passed upon this factual issue and have declared, in no
uncertain terms, that a compromise agreement was, in fact,
entered into between the Government and respondents, with the
former undertaking to resell Lot No. 88 to the latter if the
improvement and expansion of the Lahug Airport would not be
pursued. In affirming the factual finding of the RTC to this effect,
the CA declared

Lozadas testimony is cogent. An octogenarian

widower-retiree
and
a
resident
of Moon
Park, California since
1974,
he
testified
that
government representatives verbally promised him
and his late wife while the expropriation proceedings
were on-going that the government shall return the
property if the purpose for the expropriation no
longer exists. This promise was made at the premises
of the airport. As far as he could remember, there
were no expropriation proceedings against his
property in 1952 because the first notice of
expropriation he received was in 1962. Based on the
promise, he did not hire a lawyer. Lozada was firm
that he was promised that the lot would be reverted
to him once the public use of the lot ceases. He
made it clear that the verbal promise was made in
Lahug with other lot owners before the 1961 decision
was handed down, though he could not name the
government
representatives
who
made
the
promise.It was just a verbal promise; nevertheless, it
is binding. The fact that he could not supply the

necessary details for the establishment of his

assertions during cross-examination, but that When it
will not be used as intended, it will be returned back,
we just believed in the government, does not
dismantle the credibility and truthfulness of his
allegation. This Court notes that he was 89 years old
when he testified in November 1997 for an incident
which happened decades ago. Still, he is a
competent witness capable of perceiving and making
his perception known. The minor lapses are
immaterial. The decision of the competency of a
witness rests primarily with the trial judge and must
not be disturbed on appeal unless it is clear that it
was erroneous. The objection to his competency
must be made before he has given any testimony or
as
soon
as
the
incompetency
becomes
apparent. Though Lozada is not part of the
compromise agreement,[18] he nevertheless adduced
sufficient evidence to support his claim.[19]

As correctly found by the CA, unlike in Mactan Cebu International

Airport Authority v. Court of Appeals,[20] cited by petitioners, where
respondent therein offered testimonies which were hearsay in
nature, the testimony of Lozada was based on personal knowledge
as the assurance from the government was personally made to
him. His testimony on cross-examination destroyed neither his
credibility as a witness nor the truthfulness of his words.

Verily, factual findings of the trial court, especially when

affirmed by the CA, are binding and conclusive on this Court and
may not be reviewed. A petition for certiorari under Rule 45 of the

Rules of Court contemplates only questions of law and not of fact.

the CA. Moreover, contrary to the claim of petitioners, the fact of

[21]

Lozadas eventual conformity to the appraisal of Lot No. 88 and his

Not one of the exceptions to this rule is present in this case to

warrant a reversal of such findings.

seeking the correction of a clerical error in the judgment as to the

true area of Lot No. 88 do not conclusively establish that
respondents absolutely parted with their property. To our mind,

As regards the position of petitioners that respondents testimonial

these acts were simply meant to cooperate with the government,

evidence violates the Statute of Frauds, suffice it to state that the

particularly because of the oral promise made to them.

Statute of Frauds operates only with respect to executory contracts,

and does not apply to contracts which have been completely or
partially performed, the rationale thereof being as follows:

The right of respondents to repurchase Lot No. 88 may be enforced

based on a constructive trust constituted on the property held by
the government in favor of the former. On this note, our ruling

In executory contracts there is a wide field for fraud

because unless they be in writing there is no
palpable evidence of the intention of the contracting
parties. The statute has precisely been enacted to
prevent fraud. However, if a contract has been totally
or partially performed, the exclusion of parol
evidence would promote fraud or bad faith, for it
would enable the defendant to keep the benefits
already delivered by him from the transaction in
litigation, and, at the same time, evade the
obligations, responsibilities or liabilities assumed or
contracted by him thereby.[22]

In this case, the Statute of Frauds, invoked by petitioners to bar the

claim of respondents for the reacquisition of Lot No. 88, cannot
apply, the oral compromise settlement having been partially
performed. By reason of such assurance made in their favor,
respondents relied on the same by not pursuing their appeal before

in Heirs of Timoteo Moreno is instructive, viz.:

Mactan-Cebu International Airport Authority is correct

in stating that one would not find an express
statement in the Decision in Civil Case No. R-1881 to
the effect that the [condemned] lot would return to
[the landowner] or that [the landowner] had a right
to repurchase the same if the purpose for which it
was expropriated is ended or abandoned or if the
property was to be used other than as the Lahug
Airport. This omission notwithstanding, and while the
inclusion of this pronouncement in the judgment of
condemnation would have been ideal, such precision
is not absolutely necessary nor is it fatal to the cause
of petitioners herein. No doubt, the return or
repurchase of the condemned properties of
petitioners could be readily justified as the manifest
legal effect or consequence of the trial courts
underlying presumption that Lahug Airport will
continue to be in operation when it granted the
complaint for eminent domain and the airport
discontinued its activities.

The
predicament
of
petitioners
involves
a
constructive trust, one that is akin to the implied
trust referred to in Art. 1454 of the Civil Code, If an
absolute conveyance of property is made in order to
secure the performance of an obligation of the
grantor toward the grantee, a trust by virtue of law is
established. If the fulfillment of the obligation is
offered by the grantor when it becomes due, he may
demand the reconveyance of the property to him. In
the case at bar, petitioners conveyed Lots No. 916
and 920 to the government with the latter obliging
itself to use the realties for the expansion of Lahug
Airport; failing to keep its bargain, the government
can be compelled by petitioners to reconvey the
parcels of land to them, otherwise, petitioners would
be denied the use of their properties upon a state of
affairs that was not conceived nor contemplated
when the expropriation was authorized.

Although the symmetry between the instant case

and the situation contemplated by Art. 1454 is not
perfect, the provision is undoubtedly applicable. For,
as explained by an expert on the law of trusts: The
only problem of great importance in the field of
constructive trust is to decide whether in the
numerous and varying fact situations presented to
the courts there is a wrongful holding of property
and hence a threatened unjust enrichment of the
defendant. Constructive trusts are fictions of equity
which are bound by no unyielding formula when they
are used by courts as devices to remedy any
situation in which the holder of legal title may not in
good conscience retain the beneficial interest.

In constructive trusts, the arrangement is temporary

and passive in which the trustees sole duty is to
transfer the title and possession over the property to
the plaintiff-beneficiary. Of course, the wronged party
seeking the aid of a court of equity in establishing a
constructive
trust
must
himself
do
equity.Accordingly, the court will exercise its
discretion in deciding what acts are required of the
plaintiff-beneficiary as conditions precedent to
obtaining such decree and has the obligation to
reimburse the trustee the consideration received
from the latter just as the plaintiff-beneficiary would
if he proceeded on the theory of rescission. In the
good judgment of the court, the trustee may also be
paid the necessary expenses he may have incurred
in sustaining the property, his fixed costs for
improvements thereon, and the monetary value of
his services in managing the property to the extent
that plaintiff-beneficiary will secure a benefit from his
acts.

The rights and obligations between the constructive

trustee and the beneficiary, in this case, respondent
MCIAA and petitioners over Lots Nos. 916 and 920,
are echoed in Art. 1190 of the Civil Code, When the
conditions have for their purpose the extinguishment
of an obligation to give, the parties, upon the
fulfillment of said conditions, shall return to each
other what they have received x x x In case of the
loss, deterioration or improvement of the thing, the
provisions which, with respect to the debtor, are laid
down in the preceding article shall be applied to the
party who is bound to return x x x.[23]

On the matter of the repurchase price, while petitioners are obliged

WHEREFORE, the petition is DENIED. The February 28, 2006

to reconvey Lot No. 88 to respondents, the latter must return to the

Decision of the Court of Appeals, affirming the October 22, 1999

former

Decision of the Regional Trial Court, Branch 87, Cebu City, and its

what

they

received

as

just

compensation

for

the

expropriation of the property, plus legal interest to be computed

February

7,

2007

from default, which in this case runs from the time petitioners

are AFFIRMED with MODIFICATION as follows:

Resolution

comply with their obligation to respondents.

1. Respondents are ORDERED to return to petitioners the just

Respondents must likewise pay petitioners the necessary expenses

compensation they received for the expropriation of Lot No. 88,

they may have incurred in maintaining Lot No. 88, as well as the

plus legal interest, in the case of default, to be computed from the

monetary value of their services in managing it to the extent that

time petitioners comply with their obligation to reconvey Lot No. 88

respondents were benefited thereby.

to them;

Following Article 1187[24] of the Civil Code, petitioners may keep

2. Respondents are ORDERED to pay petitioners the necessary

whatever income or fruits they may have obtained from Lot No. 88,

expenses the latter incurred in maintaining Lot No. 88, plus the

and respondents need not account for the interests that the

monetary value of their services to the extent that respondents

amounts they received as just compensation may have earned in

were benefited thereby;

the meantime.

3. Petitioners are ENTITLED to keep whatever fruits and

In accordance with Article 1190

[25]

of the Civil Code vis--vis Article

income they may have obtained from Lot No. 88; and

1189, which provides that (i)f a thing is improved by its nature, or

by time, the improvement shall inure to the benefit of the creditor x
x x, respondents, as creditors, do not have to pay, as part of the

4. Respondents are also ENTITLED to keep whatever interests the

process of restitution, the appreciation in value of Lot No. 88, which

amounts they received as just compensation may have earned in

is a natural consequence of nature and time.

[26]

the meantime, as well as the appreciation in value of Lot No. 88,

which is a natural consequence of nature and time;

In light of the foregoing modifications, the case is REMANDED to

the Regional Trial Court, Branch 57, Cebu City, only for the purpose

- versus -

CORONA, C.J., Chairperso

of receiving evidence on the amounts that respondents will have to

VELASCO, JR.,

pay petitioners in accordance with this Courts decision. No costs.

SO ORDERED.

LEONARDO-DE CASTRO,
EDUARDO J. FUENTEBELLA, MARCOS S.
CID, BENJAMIN F. CID, BERNARD G.
BANTA, and ARMANDO GABRIEL, JR.,

DEL CASTILLO, and

PEREZ, JJ.

Respondents.
Promulgated:

June 29, 2010

x-----------------------------------------------------------------------------------------x

DECISION

Republic of the Philippines

SUPREME COURT
Manila
VELASCO, JR., J.:
FIRST DIVISION

In this Petition for Review [1] under Rule 45 of the Rules of

ANTHONY ORDUA, DENNIS ORDUA, and
ANTONITA ORDUA,

G.R. No. 176841

Court, Anthony Ordua, Dennis Ordua and Antonita Ordua assail and
seek to set aside the Decision[2] of the Court of Appeals (CA) dated
December 4, 2006 in CA-G.R. CV No. 79680, as reiterated in its

Petitioners,

Present:

Resolution of March 6, 2007, which affirmed the May 26, 2003

Decision[3] of the Regional Trial Court (RTC), Branch 3 in Baguio City,

in Civil Case No. 4984-R, a suit for annulment of title and

constructed their house thereon. They also paid real property taxes

reconveyance commenced by herein petitioners against herein

for the house and declared it for tax purposes, as evidenced by Tax

respondents.

Declaration No. (TD) 96-04012-111087 [7] in which they place the

assessed value of the structure at PhP 20,090.

Central to the case is a residential lot with an area of 74

square meters located at Fairview Subdivision, Baguio City,

After the death of Gabriel Sr., his son and namesake,

originally registered in the name of Armando Gabriel, Sr. (Gabriel

respondent Gabriel Jr., secured TCT No. T-71499 [8] over the subject

Sr.) under Transfer Certificate of Title (TCT) No. 67181 of the

lot and continued accepting payments from the petitioners. On

Registry of Deeds of Baguio City.

[4]

December 12, 1996, Gabriel Jr. wrote Antonita authorizing her to

fence off the said lot and to construct a road in the adjacent lot.
[9]

On December 13, 1996, Gabriel Jr. acknowledged receipt of a PhP

As gathered from the petition, with its enclosures, and the

40,000 payment from petitioners.[10] Through a letter[11] dated May

comments thereon of four of the five respondents, [5] the Court

1, 1997, Gabriel Jr. acknowledged that petitioner had so far made

gathers the following relevant facts:

an aggregate payment of PhP 65,000, leaving an outstanding

balance of PhP 60,000. A receipt Gabriel Jr. issued dated November
24, 1997 reflected a PhP 10,000 payment.

Sometime in 1996 or thereabouts, Gabriel Sr. sold the

subject lot to petitioner Antonita Ordua (Antonita), but no formal
deed was executed to document the sale. The contract price was

Despite all those payments made for the subject lot, Gabriel

apparently payable in installments as Antonita remitted from time

Jr. would later sell it to Bernard Banta (Bernard) obviously without

to time and Gabriel Sr. accepted partial payments. One of the

the knowledge of petitioners, as later developments would show.

Orduas would later testify that Gabriel Sr. agreed to execute a final
deed of sale upon full payment of the purchase price.[6]
As narrated by the RTC, the lot conveyance from Gabriel Jr.
to Bernard was effected against the following backdrop: Badly in
As early as 1979, however, Antonita and her sons, Dennis

need of money, Gabriel Jr. borrowed from Bernard the amount of

and Anthony Ordua, were already occupying the subject lot on the

PhP 50,000, payable in two weeks at a fixed interest rate, with the

basis of some arrangement undisclosed in the records and even

further condition that the subject lot would answer for the loan in

case of default. Gabriel Jr. failed to pay the loan and this led to the

unencumbered

execution of a Deed of Sale[12] dated June 30, 1999 and the

Furthermore, respondent Eduardo, before buying the property, was

issuance later of TCT No. T-72782

[13]

for subject lot in the name of

Bernard upon cancellation of TCT No. 71499 in the name of Gabriel,

at

the

time

each

purchased

the

property.

said to have inspected the same and found it unoccupied by the

Orduas.[18]

Jr. As the RTC decision indicated, the reluctant Bernard agreed to

acquire the lot, since he had by then ready buyers in respondents
Marcos Cid and Benjamin F. Cid (Marcos and Benjamin or the Cids).

Sometime in May 2000, or shortly after his purchase of the

subject lot, Eduardo, through his lawyer, sent a letter addressed to
the residence of Gabriel Jr. demanding that all persons residing on

Subsequently, Bernard sold to the Cids the subject lot for

PhP 80,000. Armed with a Deed of Absolute Sale of a Registered

or physically occupying the subject lot vacate the premises or face

the prospect of being ejected.[19]

Land[14] dated January 19, 2000, the Cids were able to cancel TCT
No. T-72782 and secure TCT No. 72783 [15] covering the subject lot.
Just like in the immediately preceding transaction, the deed of sale

Learning of Eduardos threat, petitioners went to the

between Bernard and the Cids had respondent Eduardo J.

residence of Gabriel Jr. at No. 34 Dominican Hill, Baguio City. There,

Fuentebella (Eduardo) as one of the instrumental witnesses.

they met Gabriel Jr.s estranged wife, Teresita, who informed them
about her having filed an affidavit-complaint against her husband
and the Cids for falsification of public documents on March 30,

Marcos and Benjamin, in turn, ceded the subject lot to

2000. According to Teresita, her signature on the June 30, 1999

Eduardo through a Deed of Absolute Sale[16] dated May 11, 2000.

Gabriel Jr.Bernard deed of sale was a forgery. Teresita further

Thus, the consequent cancellation of TCT No. T-72782 and issuance

informed the petitioners of her intent to honor the aforementioned

on May 16, 2000 of TCT No. T-3276 [17] over subject lot in the name

1996 verbal agreement between Gabriel Sr. and Antonita and the

of Eduardo.

partial payments they gave her father-in-law and her husband for
the subject lot.

As successive buyers of the subject lot, Bernard, then

Marcos and Benjamin, and finally Eduardo, checked, so each

On July 3, 2001, petitioners, joined by Teresita, filed a

claimed, the title of their respective predecessors-in-interest with

Complaint[20] for Annulment

the Baguio Registry and discovered said title to be free and

Damages against the respondents before the RTC, docketed as Civil

of

Title,

Reconveyance

with

these damages), Exemplary Damages of Ten

Thousand
(P10,000.00)
Pesos
each
so
that each defendant shall receive Forty Thousand
(P40,000.00) Pesos as Exemplary Damages. Also,
plaintiffs are ordered to pay each defendant (except
Armando Gabriel, Jr., Benjamin F. Cid, and Eduardo J.
Fuentebella who did not testify on these damages),
Fifty Thousand (P50,000.00) Pesos as Attorneys Fees,
jointly and solidarily.

Case No. 4984-R, specifically praying that TCT No. T-3276 dated
May 16, 2000 in the name of Eduardo be annulled. Corollary to this
prayer, petitioners pleaded that Gabriel Jr.s title to the lot be
reinstated and that petitioners be declared as entitled to acquire
ownership of the same upon payment of the remaining balance of
the purchase price therefor agreed upon by Gabriel Sr. and
Antonita.

Cost of suit against the plaintiffs.[21]

While impleaded and served with summons, Gabriel Jr.

opted not to submit an answer.

Ruling of the RTC

On the main, the RTC predicated its dismissal action on the basis of
the following grounds and/or premises:

By Decision dated May 26, 2003, the RTC ruled for the
respondents, as defendants a quo, and against the petitioners, as
plaintiffs therein, the dispositive portion of which reads:

1. Eduardo was a purchaser in good faith and, hence, may

avail himself of the provision of Article 1544 [22] of the Civil Code,

WHEREFORE, the instant complaint is hereby

DISMISSED for lack of merit. The four (4) plaintiffs are
hereby ordered by this Court to pay each defendant
(except Armando Gabriel, Jr., Benjamin F. Cid, and
Eduardo J. Fuentebella who did not testify on these
damages), Moral Damages of Twenty Thousand
(P20,000.00) Pesos, so that each defendant shall
receive Moral Damages of Eighty Thousand
(P80,000.00) Pesos each. Plaintiffs shall also pay all
defendants (except Armando Gabriel, Jr., Benjamin F.
Cid, and Eduardo J. Fuentebella who did not testify on

which provides that in case of double sale, the party in good faith
who is able to register the property has better right over the
property;

2. Under Arts. 1356[23] and 1358[24] of the Code, conveyance

of

real

property

unenforceable;

must

be

in

the

proper

form,

else

it

is

Hence, the instant petition on the submission that the appellate

3. The verbal sale had no adequate consideration; and

4. Petitioners right of action to assail Eduardos title

prescribes in one year from date of the issuance of such title and

court committed reversible error of law:

1. xxx WHEN IT HELD THAT THE SALE OF

THE SUBJECT LOT BY ARMANDO GABRIEL, SR.
AND RESPONDENT ARMANDO GABRIEL, JR. TO
THE PETITIONERS IS UNENFORCEABLE.

the one-year period has already lapsed.

From the above decision, only petitioners appealed to the

CA, their appeal docketed as CA-G.R. CV No. 79680.

2. xxx IN NOT FINDING THAT THE SALE

OF THE SUBJECT LOT BY RESPONDENT
ARMANDO GABRIEL, JR. TO RESPONDENT
BERNARD
BANTA
AND
ITS
SUBSEQUENT SALE BY THE LATTER TO HIS
CO-RESPONDENTS ARE NULL AND VOID.

The CA Ruling
3. xxx IN NOT FINDING THAT THE
RESPONDENTS ARE BUYERS IN BAD FAITH
On December 4, 2006, the appellate court rendered the
assailed Decision affirming the RTC decision. The fallo reads:
WHEREFORE,
premises
considered,
the
instant appeal is hereby DISMISSED and the 26 May
2003 Decision of the Regional Trial Court, Branch 3 of
Baguio City in Civil Case No. 4989-R is hereby
AFFIRMED.

SO ORDERED.[25]

4. xxx IN FINDING THAT THE SALE OF

THE SUBJECT LOT BETWEEN GABRIEL, SR.
AND RESPONDENT GABRIEL, JR. AND THE
PETITIONERS
HAS
NO
ADEQUATE
CONSIDERATION.

5. xxx IN RULING THAT THE INSTANT

ACTION HAD ALREADY PRESCRIBED.

6. xxx IN FINDING THAT THE PLAINTIFFSAPPELLANTS ARE LIABLE FOR MORAL AND

EXEMPLARY DAMAGES AND ATTORNEYS FEES.

[26]

the petitioners dominion of the property, authorized them to

construct a fence around it. And no less than his wife, Teresita,
testified as to the fact of sale and of payments received.

The Courts Ruling

Pursuant to such sale, Antonita and her two sons established

their residence on the lot, occupying the house they earlier

The core issues tendered in this appeal may be reduced to

four and formulated as follows, to wit: first, whether or not the sale
of the subject lot by Gabriel Sr. to Antonita is unenforceable under
the Statute of Frauds; second, whether or not such sale has
adequate consideration; third, whether the instant action has

constructed thereon. They later declared the property for tax

purposes, as evidenced by the issuance of TD 96-04012-111087 in
their or Antonitas name, and paid the real estates due thereon,
obviously as sign that they are occupying the lot in the concept of
owners.

already prescribed; and, fourth, whether or not respondents are

purchasers in good faith.
The petition is meritorious.

Given the foregoing perspective, Eduardos assertion in his

Answer that persons appeared in the property [27] only after he
initiated ejectment proceedings[28] is clearly baseless. If indeed
petitioners entered and took possession of the property after he

Statute of Frauds Inapplicable

(Eduardo) instituted the ejectment suit, how could they explain the

to Partially Executed Contracts

fact that he sent a demand letter to vacate sometime in May 2000?

With the foregoing factual antecedents, the question to be

It is undisputed that Gabriel Sr., during his lifetime, sold the

resolved is whether or not the Statute of Frauds bars the

subject property to Antonita, the purchase price payable on

enforcement of the verbal sale contract between Gabriel Sr. and

installment basis. Gabriel Sr. appeared to have been a recipient of

Antonita.

some partial payments. After his death, his son duly recognized the
sale by accepting payments and issuing what may be considered as
receipts therefor. Gabriel Jr., in a gesture virtually acknowledging

The CA, just as the RTC, ruled that the contract is

unenforceable for non-compliance with the Statute of Frauds.

respect to the matters therein involved, but merely regulates the

We disagree for several reasons. Foremost of these is that

formalities of the contract necessary to render it enforceable.[32]

the Statute of Frauds expressed in Article 1403, par. (2), [29] of the
Civil Code applies only to executory contracts, i.e., those where no
performance has yet been made. Stated a bit differently, the legal
consequence of non-compliance with the Statute does not come
into play where the contract in question is completed, executed,
or partially consummated.[30]

Since contracts are generally obligatory in whatever form

they may have been entered into, provided all the essential
requisites for their validity are present, [33] the Statute simply
provides the method by which the contracts enumerated in Art.
1403 (2) may be proved but does not declare them invalid because
they are not reduced to writing. In fine, the form required under
the Statute is for convenience or evidentiary purposes only.

The Statute of Frauds, in context, provides that a contract

for the sale of real property or of an interest therein shall be
unenforceable unless the sale or some note or memorandum
thereof

is

in

and

execution of the sale in question. The records show that petitioners

has

had, on separate occasions, given Gabriel Sr. and Gabriel Jr. sums

been partially executed through the partial payments made

of money as partial payments of the purchase price. These

by one party duly received by the vendor, as in the present case,

payments were duly receipted by Gabriel Jr. To recall, in his letter of

the contract is taken out of the scope of the Statute.

May 1, 1997, Gabriel, Jr. acknowledged having received the

where

the

subscribed
verbal

by

the

contract

party
of

or

There can be no serious argument about the partial

his

agent. However,

writing

sale

aggregate payment of PhP 65,000 from petitioners with the balance

of PhP 60,000 still remaining unpaid. But on top of the partial
The purpose of the Statute is to prevent fraud and perjury in

payments thus made, possession of the subject of the sale had

the enforcement of obligations depending for their evidence on the

been transferred to Antonita as buyer. Owing thus to its partial

unassisted memory of witnesses, by requiring certain enumerated

execution, the subject sale is no longer within the purview of the

contracts and transactions to be evidenced by a writing signed by

Statute of Frauds.

the party to be charged.

[31]

The Statute requires certain contracts to

be evidenced by some note or memorandum in order to be

enforceable. The term Statute of Frauds is descriptive of statutes
that require certain classes of contracts to be in writing.

The

Statute does not deprive the parties of the right to contract with

Lest it be overlooked, a contract that infringes the Statute of

Frauds is ratified by the acceptance of benefits under the contract.

[34]

Evidently, Gabriel, Jr., as his father earlier, had benefited from

The trial courts posture, with which the CA effectively

the partial payments made by the petitioners. Thus, neither Gabriel

concurred, is patently flawed. For starters, they equated incomplete

Jr. nor the other respondentssuccessive purchasers of subject

payment of the purchase price with inadequacy of price or what

lotscould plausibly set up the Statute of Frauds to thwart petitioners

passes as lesion, when both are different civil law concepts with

efforts towards establishing their lawful right over the subject lot

differing legal consequences, the first being a ground to rescind an

and removing any cloud in their title. As it were, petitioners need

otherwise valid and enforceable contract. Perceived inadequacy of

only to pay the outstanding balance of the purchase price and that

price, on the other hand, is not a sufficient ground for setting aside

would complete the execution of the oral sale.

a sale freely entered into, save perhaps when the inadequacy is

shocking to the conscience.[35]

There was Adequate Consideration

The Court to be sure takes stock of the fact that the
contracting parties to the 1995 or 1996 sale agreed to a purchase
Without directly saying so, the trial court held that the

price of PhP 125,000 payable on installments. But the original lot

petitioners cannot sue upon the oral sale since in its own words: x x

owner, Gabriel Sr., died before full payment can be effected.

x for more than a decade, [petitioners] have not paid in full

Nevertheless, petitioners continued remitting payments to Gabriel,

Armando Gabriel, Sr. or his estate, so that the sale transaction

Jr., who sold the subject lot to Bernard on June 30, 1999. Gabriel, Jr.,

between Armando Gabriel Sr. and [petitioners] [has] no adequate

as may be noted, parted with the property only for PhP 50,000. On

consideration.

the other hand, Bernard sold it for PhP 80,000 to Marcos and
Benjamin. From the foregoing price figures, what is abundantly
clear is that what Antonita agreed to pay Gabriel, Sr., albeit in
installment, was very much more than what his son, for the same
lot, received from his buyer and the latters buyer later. The Court,
therefore, cannot see its way clear as to how the RTC arrived at its
simplistic conclusion about the transaction between Gabriel Sr. and
Antonita being without adequate consideration.

The Issues of Prescription and the Bona

Fides of the Respondents as Purchasers

The RTC and necessarily the CA found the purchaserrespondents thesis on prescription correct stating in this regard
that Eduardos TCT No. T-3276 was issued on May 16, 2000 while
petitioners filed their complaint for annulment only on July 3, 2001.

Considering the interrelation of these two issues, we will

discuss them jointly.

To the courts below, the one-year prescriptive period to assail the

issuance of a certificate of title had already elapsed.

There can be no quibbling about the fraudulent nature of the

We are not persuaded.

conveyance of the subject lot effected by Gabriel Jr. in favor of

Bernard. It is understandable that after his fathers death, Gabriel Jr.
inherited subject lot and for which he was issued TCT No. No. T-

The basic complaint, as couched, ultimately seeks the

71499. Since the Gabriel Sr. Antonita sales transaction called for

reconveyance of a fraudulently registered piece of residential

payment

also

land. Having possession of the subject lot, petitioners right to the

understandable why the title to the property remained with the

reconveyance thereof, and the annulment of the covering title, has

Gabriels. And after the demise of his father, Gabriel Jr. received

not prescribed or is not time-barred. This is so for an action for

payments from the Orduas and even authorized them to enclose

annulment

the subject lot with a fence. In sum, Gabriel Jr. knew fully well about

imprescriptible where the suitor is in possession of the property

the sale and is bound by the contract as predecessor-in-interest of

subject of the acts,[36] the action partaking as it does of a suit for

Gabriel Sr. over the property thus sold.

quieting of title which is imprescriptible.[37] Such is the case in this

of

the

contract

price

in

installments,

it

is

of

title

or

reconveyance

based

on

fraud

is

instance. Petitioners have possession of subject lots as owners

having purchased the same from Gabriel, Sr. subject only to the full
Yet, the other respondents (purchasers of subject lot) still

payment of the agreed price.

maintain that they are innocent purchasers for value whose rights
are protected by law and besides which prescription has set in
against petitioners action for annulment of title and reconveyance.

The prescriptive period for the reconveyance of fraudulently

registered real property is 10 years, reckoned from the date of the
issuance of the certificate of title, if the plaintiff is not in
possession, but imprescriptible if he is in possession of the

property.[38] Thus, one who is in actual possession of a piece of land

The general rule is that one dealing with a parcel of land

claiming to be the owner thereof may wait until his possession is

registered under the Torrens System may safely rely on the

disturbed or his title is attacked before taking steps to vindicate his

correctness of the certificate of title issued therefor and is not

right.[39] As

obliged to go beyond the certificate. [41] Where, in other words, the

it

is,

petitioners

action

for

reconveyance

is

imprescriptible.

certificate of title is in the name of the seller, the innocent

purchaser for value has the right to rely on what appears on the
certificate, as he is charged with notice only of burdens or claims
on the res as noted in the certificate. Another formulation of the
rule is that (a) in the absence of anything to arouse suspicion or (b)
except where the party has actual knowledge of facts and

This brings us to the question of whether or not the

circumstances that would impel a reasonably cautious man to make

respondent-purchasers, i.e., Bernard, Marcos and Benjamin, and

such inquiry or (c) when the purchaser has knowledge of a defect of

Eduardo, have the status of innocent purchasers for value, as was

title in his vendor or of sufficient facts to induce a reasonably

the thrust of the trial courts disquisition and disposition.

prudent man to inquire into the status of the title of the property,
[42]

said purchaser is without obligation to look beyond the

certificate and investigate the title of the seller.

We are unable to agree with the RTC.

Eduardo and, for that matter, Bernard and Marcos and

Benjamin, can hardly claim to be innocent purchasers for value or
purchasers in good faith. For each knew or was at least expected to

It is the common defense of the respondent-purchasers that

know that somebody else other than Gabriel, Jr. has a right or

they each checked the title of the subject lot when it was his turn to

interest over the lot.This is borne by the fact that the initial seller,

acquire the same and found it clean, meaning without annotation of

Gabriel Jr., was not in possession of subject property. With respect

any encumbrance or adverse third party interest. And it is upon this

to Marcos and Benjamin, they knew as buyers that Bernard, the

postulate that each claims to be an innocent purchaser for value, or

seller, was not also in possession of the same property. The same

one who buys the property of another without notice that some

goes with Eduardo, as buyer, with respect to Marcos and Benjamin.

other person has a right to or interest in it, and who pays therefor a
full and fair price at the time of the purchase or before receiving
such notice.[40]

Basic is the rule that a buyer of a piece of land which is in

the actual possession of persons other than the seller must be wary

and should investigate the rights of those in possession. Otherwise,

the first buyer of the second sale cannot defeat the first buyers

without such inquiry, the buyer can hardly be regarded as a buyer

rights except when the second buyer first register in good faith the

in good faith. When a man proposes to buy or deal with realty, his

second sale; and (2) knowledge gained by the second buyer of the

duty is to read the public manuscript, i.e., to look and see who is

first sale defeats his rights even if he is first to register, since such

there upon it and what his rights are. A want of caution and

knowledge taints his registration with bad faith.

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

Upon the facts obtaining in this case, the act of registration

land sold to him is in adverse possession of another is a buyer in

by any of the three respondent-purchasers was not coupled with

bad faith.

[43]

good faith. At the minimum, each was aware or is at least

presumed to be aware of facts which should put him upon such
inquiry and investigation as might be necessary to acquaint him

Where the land sold is in the possession of a person other

with the defects in the title of his vendor.

than the vendor, the purchaser must go beyond the certificates of

title and make inquiries concerning the rights of the actual
possessor.[44] And where, as in the instant case, Gabriel Jr. and the

The award by the lower courts of damages and attorneys

subsequent vendors were not in possession of the property, the

fees to some of the herein respondents was predicated on the filing

prospective vendees are obliged to investigate the rights of the one

by the original plaintiffs of what the RTC characterized as an

in possession. Evidently, Bernard, Marcos and Benjamin, and

unwarranted suit. The basis of the award, needless to stress, no

Eduardo did not investigate the rights over the subject lot of the

longer obtains and, hence, the same is set aside.

petitioners who, during the period material to this case, were in

actual possession thereof. Bernard, et al. are, thus, not purchasers
in good faith and, as such, cannot be accorded the protection

WHEREFORE,

the

petition

is

hereby GRANTED.

The

extended by the law to such purchasers. [45] Moreover, not being

appealed December 4, 2006 Decision and the March 6, 2007

purchasers in good faith, their having registered the sale, will not,

Resolution of the Court of Appeals in CA-G.R. CV No. 79680

as against the petitioners, carry the day for any of them under Art.

affirming the May 26, 2003 Decision of the Regional Trial Court,

1544 of the Civil Code prescribing rules on preference in case of

Branch

double sales of immovable property. Occea v. Esponilla[46] laid down

ASIDE. Accordingly, petitioner Antonita Ordua is hereby recognized

the following rules in the application of Art. 1544: (1) knowledge by

to have the right of ownership over subject lot covered by TCT No.

in

Baguio

City

are

hereby REVERSED and SET

T-3276 of the Baguio Registry registered in the name of Eduardo J.

Fuentebella. The

Register

of

Deeds

of

Baguio

City

is

RIDO

MONTECILLO, petitioner, vs. IGNACIA REYNES and

SPOUSES
REDEMPTOR
and
ELISA
ABUCAY, respondents.

hereby ORDERED to cancel said TCT No. T-3276 and to issue a new
one in the name of Armando Gabriel, Jr. with the proper annotation
of the conditional sale of the lot covered by said title in favor of

DECISION
CARPIO, J.:

Antonita Ordua subject to the payment of the PhP 50,000

outstanding balance. Upon full payment of the purchase price by
Antonita Ordua, Armando Gabriel, Jr. is ORDERED to execute a
Deed of Absolute Sale for the transfer of title of subject lot to the
name of Antonita Ordua, within three (3) days from receipt of said
payment.

The Case
On March 24, 1993, the Regional Trial Court of Cebu City,
Branch 18, rendered a Decision[1] declaring the deed of sale of a
parcel of land in favor of petitioner null and void ab initio. The Court
of Appeals,[2] in its July 16, 1998 Decision[3] as well as its February
11, 1999 Order[4] denying petitioners Motion for Reconsideration,
affirmed the trial courts decision in toto. Before this Court now is a
Petition for Review on Certiorari [5] assailing the Court of Appeals
decision and order.

No pronouncement as to costs.
The Facts
Respondents Ignacia Reynes (Reynes for brevity) and Spouses
Abucay (Abucay Spouses for brevity) filed on June 20, 1984 a
complaint for Declaration of Nullity and Quieting of Title against
petitioner Rido Montecillo (Montecillo for brevity). Reynes asserted
that she is the owner of a lot situated in Mabolo, Cebu City, covered
by Transfer Certificate of Title No. 74196 and containing an area of
448 square meters (Mabolo Lot for brevity). In 1981, Reynes sold
185 square meters of the Mabolo Lot to the Abucay Spouses who
built a residential house on the lot they bought.

SO ORDERED.

THIRD DIVISION

[G.R. No. 138018. July 26, 2002]

Reynes alleged further that on March 1, 1984 she signed a

Deed of Sale of the Mabolo Lot in favor of Montecillo (Montecillos
Deed of Sale for brevity). Reynes, being illiterate,[6] signed by
affixing her thumb-mark[7] on the document. Montecillo promised to
pay the agreed P47,000.00 purchase price within one month from
the signing of the Deed of Sale. Montecillos Deed of Sale states as
follows:
That I, IGNACIA T. REYNES, of legal age, Filipino, widow, with
residence and postal address at Mabolo, Cebu City, Philippines, for
and in consideration of FORTY SEVEN THOUSAND

(P47,000.00) PESOS, Philippine Currency, to me in hand

paid by RIDO MONTECILLO, of legal age, Filipino, married, with
residence and postal address at Mabolo, Cebu City, Philippines,
the receipt hereof is hereby acknowledged, have sold,
transferred, and conveyed, unto RIDO MONTECILLO, his heirs,
executors, administrators, and assigns, forever, a parcel of land
together with the improvements thereon, situated at Mabolo, Cebu
City, Philippines, free from all liens and encumbrances, and more
particularly described as follows:
A parcel of land (Lot 203-B-2-B of the subdivision plan Psd-07-01-00
2370, being a portion of Lot 203-B-2, described on plan (LRC) Psd76821, L.R.C. (GLRO) Record No. 5988), situated in the Barrio of
Mabolo, City of Cebu. Bounded on the SE., along line 1-2 by Lot
206; on the SW., along line 2-3, by Lot 202, both of Banilad Estate;
on the NW., along line 4-5, by Lot 203-B-2-A of the subdivision of
Four Hundred Forty Eight (448) square meters, more or less.
of which I am the absolute owner in accordance with the provisions
of the Land Registration Act, my title being evidenced by Transfer
Certificate of Title No. 74196 of the Registry of Deeds of the City of
Cebu, Philippines. That This Land Is Not Tenanted and Does Not Fall
Under the Purview of P.D. 27.[8] (Emphasis supplied)
Reynes further alleged that Montecillo failed to pay the
purchase price after the lapse of the one-month period, prompting
Reynes to demand from Montecillo the return of the Deed of
Sale. Since Montecillo refused to return the Deed of Sale, [9] Reynes
executed a document unilaterally revoking the sale and gave a
copy of the document to Montecillo.
Subsequently, on May 23, 1984 Reynes signed a Deed of Sale
transferring to the Abucay Spouses the entire Mabolo Lot, at the
same time confirming the previous sale in 1981 of a 185-square
meter portion of the lot. This Deed of Sale states:
I, IGNACIA T. REYNES, of legal age, Filipino, widow and resident of
Mabolo, Cebu City, do hereby confirm the sale of a portion of Lot
No. 74196 to an extent of 185 square meters to Spouses
Redemptor Abucay and Elisa Abucay covered by Deed per Doc. No.
47, Page No. 9, Book No. V, Series of 1981 of notarial register of
Benedicto Alo, of which spouses is now in occupation;
That for and in consideration of the total sum of FIFTY THOUSAND
(P50,000) PESOS, Philippine Currency, received in full and receipt

whereof is herein acknowledged from SPOUSES REDEMPTOR

ABUCAY and ELISA ABUCAY, do hereby in these presents, SELL,
TRANSFER and CONVEY absolutely unto said Spouses Redemptor
Abucay and Elisa Abucay, their heirs, assigns and successors-ininterest the whole parcel of land together with improvements
thereon and more particularly described as follows:
TCT No. 74196
A parcel of land (Lot 203-B-2-B of the subdivision plan psd-07-01002370, being a portion of Lot 203-B-2, described on plan (LRC) Psd
76821, LRC (GLRO) Record No. 5988) situated in Mabolo, Cebu City,
along Arcilla Street, containing an area of total FOUR HUNDRED
FORTY EIGHT (448) Square meters.
of which I am the absolute owner thereof free from all liens and
encumbrances and warrant the same against claim of third persons
and other deeds affecting said parcel of land other than that to the
said spouses and inconsistent hereto is declared without any effect.
In witness whereof, I hereunto signed this 23rd day of May, 1984 in
Cebu City, Philippines. [10]
Reynes and the Abucay Spouses alleged that on June 18, 1984
they received information that the Register of Deeds of Cebu City
issued Certificate of Title No. 90805 in the name of Montecillo for
the Mabolo Lot.
Reynes and the Abucay Spouses argued that for lack of
consideration there (was) no meeting of the minds [11] between
Reynes and Montecillo. Thus, the trial court should declare null and
void ab initio Montecillos Deed of Sale, and order the cancellation
of Certificate of Title No. 90805 in the name of Montecillo.
In his Answer, Montecillo, a bank executive with a B.S.
Commerce degree,[12] claimed he was a buyer in good faith and had
actually paid the P47,000.00 consideration stated in his Deed of
Sale. Montecillo, however, admitted he still owed Reynes a balance
of P10,000.00. He also alleged that he paid P50,000.00 for the
release of the chattel mortgage which he argued constituted a lien
on the Mabolo Lot. He further alleged that he paid for the real
property tax as well as the capital gains tax on the sale of the
Mabolo Lot.
In their Reply, Reynes and the Abucay Spouses contended that
Montecillo did not have authority to discharge the chattel

mortgage, especially after Reynes revoked Montecillos Deed of Sale

and gave the mortgagee a copy of the document of
revocation. Reynes and the Abucay Spouses claimed that
Montecillo secured the release of the chattel mortgage through
machination. They further asserted that Montecillo took advantage
of the real property taxes paid by the Abucay Spouses and
surreptitiously caused the transfer of the title to the Mabolo Lot in
his name.
During pre-trial, Montecillo claimed that the consideration for
the sale of the Mabolo Lot was the amount he paid to Cebu Ice and
Cold Storage Corporation (Cebu Ice Storage for brevity) for the
mortgage debt of Bienvenido Jayag (Jayag for brevity). Montecillo
argued that the release of the mortgage was necessary since the
mortgage constituted a lien on the Mabolo Lot.
Reynes, however, stated that she had nothing to do with
Jayags mortgage debt except that the house mortgaged by Jayag
stood on a portion of the Mabolo Lot. Reynes further stated that the
payment by Montecillo to release the mortgage on Jayags house is
a matter between Montecillo and Jayag. The mortgage on the
house, being a chattel mortgage, could not be interpreted in any
way as an encumbrance on the Mabolo Lot. Reynes further claimed
that the mortgage debt had long prescribed since the P47,000.00
mortgage debt was due for payment on January 30, 1967.
The trial court rendered a decision on March 24, 1993 declaring
the Deed of Sale to Montecillo null and void. The trial court ordered
the cancellation of Montecillos Transfer Certificate of Title No.
90805 and the issuance of a new certificate of title in favor of the
Abucay Spouses. The trial court found that Montecillos Deed of Sale
had no cause or consideration because Montecillo never paid
Reynes the P47,000.00 purchase price, contrary to what is stated in
the Deed of Sale that Reynes received the purchase price. The trial
court ruled that Montecillos Deed of Sale produced no effect
whatsoever for want of consideration. The dispositive portion of the
trial courts decision reads as follows:

WHEREFORE, in view of the foregoing consideration, judgment is

hereby rendered declaring the deed of sale in favor of defendant
null and void and of no force and effect thereby ordering the
cancellation of Transfer Certificate of Title No. 90805 of the Register
of Deeds of Cebu City and to declare plaintiff Spouses Redemptor
and Elisa Abucay as rightful vendees and Transfer Certificate of
Title to the property subject matter of the suit issued in their
names. The defendants are further directed to pay moral damages
in the sum of P20,000.00 and attorneys fees in the sum
ofP2,000.00 plus cost of the suit.
xxx
Not satisfied with the trial courts Decision, Montecillo appealed
the same to the Court of Appeals.

Ruling of the Court of Appeals

The appellate court affirmed the Decision of the trial court in
toto and dismissed the appeal[13] on the ground that Montecillos
Deed of Sale is void for lack of consideration. The appellate court
also denied Montecillos Motion for Reconsideration [14] on the ground
that it raised no new arguments.
Still dissatisfied, Montecillo filed the present petition for review
on certiorari.

The Issues
Montecillo raises the following issues:
1. Was there an agreement between Reynes and Montecillo
that the stated consideration of P47,000.00 in the Deed
of Sale be paid to Cebu Ice and Cold Storage to secure
the release of the Transfer Certificate of Title?
2. If there was none, is the Deed of Sale void from the
beginning or simply rescissible?[15]

The Ruling of the Court

The petition is devoid of merit.

First issue: manner of payment of the P47,000.00 purchase

price.
Montecillos Deed of Sale does not state that the P47,000.00
purchase price should be paid by Montecillo to Cebu Ice
Storage. Montecillo failed to adduce any evidence before the trial
court showing that Reynes had agreed, verbally or in writing, that
the P47,000.00 purchase price should be paid to Cebu Ice
Storage. Absent any evidence showing that Reynes had agreed to
the payment of the purchase price to any other party, the payment
to be effective must be made to Reynes, the vendor in the
sale. Article 1240 of the Civil Code provides as follows:
Payment shall be made to the person in whose favor the obligation
has been constituted, or his successor in interest, or any person
authorized to receive it.
Thus, Montecillos payment to Cebu Ice Storage is not the payment
that would extinguish[16] Montecillos obligation to Reynes under the
Deed of Sale.
It militates against common sense for Reynes to sell her
Mabolo Lot for P47,000.00 if this entire amount would only go to
Cebu Ice Storage, leaving not a single centavo to her for giving up
ownership of a valuable property. This incredible allegation of
Montecillo becomes even more absurd when one considers that
Reynes did not benefit, directly or indirectly, from the payment of
the P47,000.00 to Cebu Ice Storage.
The trial court found that Reynes had nothing to do with Jayags
mortgage debt with Cebu Ice Storage. The trial court made the
following findings of fact:
x x x. Plaintiff Ignacia Reynes was not a party to nor privy of the
obligation in favor of the Cebu Ice and Cold Storage Corporation,
the obligation being exclusively of Bienvenido Jayag and wife who
mortgaged their residential house constructed on the land subject
matter of the complaint. The payment by the defendant to release
the residential house from the mortgage is a matter between him
and Jayag and cannot by implication or deception be made to
appear as an encumbrance upon the land.[17]

Thus, Montecillos payment to Jayags creditor could not possibly

redound to the benefit[18] of Reynes. We find no reason to disturb
the factual findings of the trial court. In petitions for review on
certiorari as a mode of appeal under Rule 45, as in the instant case,
a petitioner can raise only questions of law. [19] This Court is not the
proper venue to consider a factual issue as it is not a trier of facts.

Second issue: whether the Deed of Sale is void ab initio or

only rescissible.
Under Article 1318 of the Civil Code, [T]here is no contract
unless the following requisites concur: (1) Consent of the
contracting parties; (2) Object certain which is the subject matter of
the contract; (3) Cause of the obligation which is established.
Article 1352 of the Civil Code also provides that [C]ontracts without
cause x x x produce no effect whatsoever.
Montecillo argues that his Deed of Sale has all the requisites of
a valid contract. Montecillo points out that he agreed to purchase,
and Reynes agreed to sell, the Mabolo Lot at the price
of P47,000.00. Thus, the three requisites for a valid contract
concur: consent, object certain and consideration. Montecillo
asserts there is no lack of consideration that would prevent the
existence of a valid contract. Rather, there is only non-payment of
the consideration within the period agreed upon for payment.
Montecillo argues there is only a breach of his obligation to pay
the full purchase price on time. Such breach merely gives Reynes a
right to ask for specific performance, or for annulment of the
obligation to sell the Mabolo Lot. Montecillo maintains that in
reciprocal obligations, the injured party can choose between
fulfillment and rescission,[20] or more properly cancellation, of the
obligation under Article 1191[21] of the Civil Code. This Article also
provides that the court shall decree the rescission claimed, unless
there be just cause authorizing the fixing of the period. Montecillo
claims that because Reynes failed to make a demand for payment,
and instead unilaterally revoked Montecillos Deed of Sale, the court
has a just cause to fix the period for payment of the balance of the
purchase price.
These arguments are not persuasive.
Montecillos Deed of Sale states that Montecillo paid, and
Reynes received, the P47,000.00 purchase price on March 1, 1984,

the date of signing of the Deed of Sale. This is clear from the
following provision of the Deed of Sale:
That I, IGNACIA T. REYNES, x x x for and in consideration of
FORTY SEVEN THOUSAND (P47,000.00) PESOS, Philippine
Currency, to me in hand paid by RIDO MONTECILLO xxx,
receipt of which is hereby acknowledged, have sold,
transferred, and conveyed, unto RIDO MONTECILLO, x x x a parcel
of land x x x.
On its face, Montecillos Deed of Absolute Sale [22] appears
supported by a valuable consideration. However, based on the
evidence presented by both Reynes and Montecillo, the trial court
found that Montecillo never paid to Reynes, and Reynes never
received from Montecillo, the P47,000.00 purchase price. There was
indisputably a total absence of consideration contrary to what is
stated in Montecillos Deed of Sale. As pointed out by the trial court
From the allegations in the pleadings of both parties and the oral
and documentary evidence adduced during the trial, the court is
convinced that the Deed of Sale (Exhibits 1 and 1-A) executed by
plaintiff Ignacia Reynes acknowledged before Notary Public
Ponciano Alvinio is devoid of any consideration. Plaintiff Ignacia
Reynes through the representation of Baudillo Baladjay had
executed a Deed of Sale in favor of defendant on the promise that
the consideration should be paid within one (1) month from the
execution of the Deed of Sale. However, after the lapse of said
period, defendant failed to pay even a single centavo of the
consideration. The answer of the defendant did not allege clearly
why no consideration was paid by him except for the allegation that
he had a balance of only P10,000.00. It turned out during the pretrial that what the defendant considered as the consideration was
the amount which he paid for the obligation of Bienvenido Jayag
with the Cebu Ice and Cold Storage Corporation over which plaintiff
Ignacia Reynes did not have a part except that the subject of the
mortgage was constructed on the parcel of land in question.
Plaintiff Ignacia Reynes was not a party to nor privy of the
obligation in favor of the Cebu Ice and Cold Storage Corporation,
the obligation being exclusively of Bienvenido Jayag and wife who
mortgaged their residential house constructed on the land subject
matter of the complaint. The payment by the defendant to release
the residential house from the mortgage is a matter between him
and Jayag and cannot by implication or deception be made to
appear as an encumbrance upon the land. [23]

Factual findings of the trial court are binding on us, especially if

the Court of Appeals affirms such findings.[24] We do not disturb
such findings unless the evidence on record clearly does not
support such findings or such findings are based on a patent
misunderstanding of facts,[25] which is not the case here. Thus, we
find no reason to deviate from the findings of both the trial and
appellate courts that no valid consideration supported Montecillos
Deed of Sale.
This is not merely a case of failure to pay the purchase price,
as Montecillo claims, which can only amount to a breach of
obligation with rescission as the proper remedy. What we have here
is a purported contract that lacks a cause - one of the three
essential requisites of a valid contract.Failure to pay the
consideration is different from lack of consideration. The former
results in a right to demand the fulfillment or cancellation of the
obligation under an existing valid contract[26] while the latter
prevents the existence of a valid contract
Where the deed of sale states that the purchase price has been
paid but in fact has never been paid, the deed of sale is null and
void ab initio for lack of consideration. This has been the wellsettled rule as early as Ocejo Perez & Co. v. Flores,[27] a 1920
case. As subsequently explained inMapalo v. Mapalo[28]
In our view, therefore, the ruling of this Court in Ocejo Perez & Co.
vs. Flores, 40 Phil. 921, is squarely applicable herein. In that case
we ruled that a contract of purchase and sale is null and void and
produces no effect whatsoever where the same is without cause or
consideration in that the purchase price which appears thereon as
paid has in fact never been paid by the purchaser to the vendor.
The Court reiterated this rule in Vda. De Catindig v. Heirs of
Catalina Roque,[29] to wit
The Appellate Courts finding that the price was not paid or that the
statement in the supposed contracts of sale (Exh. 6 to 26) as to the
payment of the price was simulated fortifies the view that the
alleged sales were void. If the price is simulated, the sale is
void . . . (Art. 1471, Civil Code)
A contract of sale is void and produces no effect whatsoever where
the price, which appears thereon as paid, has in fact never been
paid by the purchaser to the vendor (Ocejo, Perez & Co. vs. Flores
and Bas, 40 Phil. 921; Mapalo vs. Mapalo, L-21489, May 19, 1966,
64 O.G. 331, 17 SCRA 114, 122). Such a sale is non-existent

(Borromeo vs. Borromeo, 98 Phil. 432) or cannot be considered

consummated (Cruzado vs. Bustos and Escaler, 34 Phil. 17;
Garanciang vs. Garanciang, L-22351, May 21, 1969, 28 SCRA 229).
Applying this well-entrenched doctrine to the instant case, we rule
that Montecillos Deed of Sale is null and void ab initio for lack of
consideration.
Montecillo asserts that the only issue in controversy is the
mode and/or manner of payment and/or whether or not payment
has been made.[30] Montecillo implies that the mode or manner of
payment is separate from the consideration and does not affect the
validity of the contract. In the recent case of San Miguel
Properties Philippines, Inc. v. Huang,[31] we ruled that

Montecillo on the manner of payment. This prevented the existence

of a valid contract because of lack of consent.
In summary, Montecillos Deed of Sale is null and void ab
initio not only for lack of consideration, but also for lack of
consent. The cancellation of TCT No. 90805 in the name of
Montecillo is in order as there was no valid contract transferring
ownership of the Mabolo Lot from Reynes to Montecillo.
WHEREFORE, the petition is DENIED and the assailed Decision
dated July 16, 1998 of the Court of Appeals in CA-G.R. CV No.
41349 is AFFIRMED. Costs against petitioner.
SO ORDERED.

In Navarro v. Sugar Producers Cooperative Marketing Association,

Inc. (1 SCRA 1181 [1961]), we laid down the rule that the manner
of payment of the purchase price is an essential element
before a valid and binding contract of sale can
exist. Although the Civil Code does not expressly state that the
minds of the parties must also meet on the terms or manner of
payment of the price, the same is needed, otherwise there is no
sale. As held in Toyota Shaw, Inc. v. Court of Appeals (244 SCRA
320 [1995]), agreement on the manner of payment goes into the
price such that a disagreement on the manner of payment is
tantamount to a failure to agree on the price. (Emphasis
supplied)
One of the three essential requisites of a valid contract is
consent of the parties on the object and cause of the contract. In a
contract of sale, the parties must agree not only on the price, but
also on the manner of payment of the price. An agreement on the
price but a disagreement on the manner of its payment will not
result in consent, thus preventing the existence of a valid contract
for lack of consent. This lack of consent is separate and distinct
from lack of consideration where the contract states that the
price has been paid when in fact it has never been paid.
Reynes expected Montecillo to pay him directly the P47,000.00
purchase price within one month after the signing of the Deed of
Sale. On the other hand, Montecillo thought that his agreement
with Reynes required him to pay the P47,000.00 purchase price to
Cebu Ice Storage to settle Jayags mortgage debt. Montecillo also
acknowledged a balance of P10,000.00 in favor of Reynes although
this amount is not stated in Montecillos Deed of Sale. Thus, there
was no consent, or meeting of the minds, between Reynes and

EN BANC

[G.R. No. 155001. May 5, 2003]

DEMOSTHENES P. AGAN, JR., JOSEPH B. CATAHAN, JOSE

MARI B. REUNILLA, MANUEL ANTONIO B. BOE,
MAMERTO S. CLARA, REUEL E. DIMALANTA, MORY V.
DOMALAON, CONRADO G. DIMAANO, LOLITA R.
HIZON, REMEDIOS P. ADOLFO, BIENVENIDO C.
HILARIO, MIASCOR WORKERS UNION - NATIONAL
LABOR UNION (MWU-NLU), and PHILIPPINE AIRLINES
EMPLOYEES
ASSOCIATION
(PALEA), petitioners,

vs. PHILIPPINE INTERNATIONAL AIR TERMINALS CO.,

INC., MANILA INTERNATIONAL AIRPORT AUTHORITY,
DEPARTMENT
OF
TRANSPORTATION
AND
COMMUNICATIONS and SECRETARY LEANDRO M.
MENDOZA, in his capacity as Head of the Department
of Transportation and Communications, respondents,
MIASCOR GROUNDHANDLING CORPORATION, DNATA-WINGS
AVIATION SYSTEMS CORPORATION, MACROASIAEUREST
SERVICES,
INC.,
MACROASIA-MENZIES
AIRPORT
SERVICES
CORPORATION,
MIASCOR
CATERING
SERVICES
CORPORATION,
MIASCOR
AIRCRAFT
MAINTENANCE
CORPORATION,
and
MIASCOR LOGISTICS CORPORATION, petitioners-inintervention,

CEFERINO C. LOPEZ, RAMON M. SALES, ALFREDO B.

VALENCIA, MA. TERESA V. GAERLAN, LEONARDO DE
LA ROSA, DINA C. DE LEON, VIRGIE CATAMIN RONALD
SCHLOBOM, ANGELITO SANTOS, MA. LUISA M.
PALCON
and
SAMAHANG
MANGGAGAWA
SA
PALIPARAN
NG
PILIPINAS
(SMPP), petitioners,
vs. PHILIPPINE INTERNATIONAL AIR TERMINALS CO.,
INC., MANILA INTERNATIONAL AIRPORT AUTHORITY,
DEPARTMENT
OF
TRANSPORTATION
AND
COMMUNICATIONS,
SECRETARY
LEANDRO
M.
MENDOZA, in his capacity as Head of the Department
of Transportation and Communications, respondents.
DECISION
PUNO, J.:

[G.R. No. 155547. May 5, 2003]

SALACNIB F. BATERINA, CLAVEL A. MARTINEZ and

CONSTANTINO
G.
JARAULA, petitioners,
vs. PHILIPPINE INTERNATIONAL AIR TERMINALS CO.,
INC., MANILA INTERNATIONAL AIRPORT AUTHORITY,
DEPARTMENT
OF
TRANSPORTATION
AND
COMMUNICATIONS, DEPARTMENT OF PUBLIC WORKS
AND HIGHWAYS, SECRETARY LEANDRO M. MENDOZA,
in his capacity as Head of the Department of
Transportation and Communications, and SECRETARY
SIMEON A. DATUMANONG, in his capacity as Head of
the
Department
of
Public
Works
and
Highways, respondents,
JACINTO V. PARAS, RAFAEL P. NANTES, EDUARDO C.
ZIALCITA, WILLY BUYSON VILLARAMA, PROSPERO C.
NOGRALES, PROSPERO A. PICHAY, JR., HARLIN CAST
ABAYON,
and
BENASING
O.
MACARANBON, respondents-intervenors,

[G.R. No. 155661. May 5, 2003]

Petitioners and petitioners-in-intervention filed the instant

petitions for prohibition under Rule 65 of the Revised Rules of Court
seeking to prohibit the Manila International Airport Authority (MIAA)
and the Department of Transportation and Communications (DOTC)
and its Secretary from implementing the following agreements
executed by the Philippine Government through the DOTC and the
MIAA and the Philippine International Air Terminals Co., Inc.
(PIATCO): (1) the Concession Agreement signed on July 12, 1997,
(2) the Amended and Restated Concession Agreement dated
November 26, 1999, (3) the First Supplement to the Amended and
Restated Concession Agreement dated August 27, 1999, (4) the
Second Supplement to the Amended and Restated Concession
Agreement dated September 4, 2000, and (5) the Third Supplement
to the Amended and Restated Concession Agreement dated June
22, 2001 (collectively, the PIATCO Contracts).
The facts are as follows:
In August 1989, the DOTC engaged the services of Aeroport de
Paris (ADP) to conduct a comprehensive study of the Ninoy Aquino
International Airport (NAIA) and determine whether the present
airport can cope with the traffic development up to the year
2010. The study consisted of two parts: first, traffic forecasts,
capacity of existing facilities, NAIA future requirements, proposed
master plans and development plans; and second, presentation of
the preliminary design of the passenger terminal building. The ADP
submitted a Draft Final Report to the DOTC in December 1989.
Some time in 1993, six business leaders consisting of John
Gokongwei, Andrew Gotianun, Henry Sy, Sr., Lucio Tan, George Ty

and Alfonso Yuchengco met with then President Fidel V. Ramos to

explore the possibility of investing in the construction and
operation of a new international airport terminal. To signify their
commitment to pursue the project, they formed the Asias Emerging
Dragon Corp. (AEDC) which was registered with the Securities and
Exchange Commission (SEC) on September 15, 1993.

project. The proponent would be evaluated based on its ability to

provide a minimum amount of equity to the project, and its
capacity to secure external financing for the project.

On October 5, 1994, AEDC submitted an unsolicited proposal to

the Government through the DOTC/MIAA for the development of
NAIA International Passenger Terminal III (NAIA IPT III) under a buildoperate-and-transfer arrangement pursuant to RA 6957 as
amended by RA 7718 (BOT Law).[1]

On August 16, 1996, the PBAC issued PBAC Bulletin No. 3

amending the Bid Documents. The following amendments were
made on the Bid Documents:

On December 2, 1994, the DOTC issued Dept. Order No. 94-832

constituting the Prequalification Bids and Awards Committee (PBAC)
for the implementation of the NAIA IPT III project.
On March 27, 1995, then DOTC Secretary Jose Garcia endorsed
the proposal of AEDC to the National Economic and Development
Authority (NEDA). A revised proposal, however, was forwarded by
the DOTC to NEDA on December 13, 1995. On January 5, 1996, the
NEDA Investment Coordinating Council (NEDA ICC) Technical Board
favorably endorsed the project to the ICC Cabinet Committee which
approved the same, subject to certain conditions, on January 19,
1996. On February 13, 1996, the NEDA passed Board Resolution No.
2 which approved the NAIA IPT III project.
On June 7, 14, and 21, 1996, DOTC/MIAA caused the
publication in two daily newspapers of an invitation for competitive
or comparative proposals on AEDCs unsolicited proposal, in
accordance with Sec. 4-A of RA 6957, as amended. The alternative
bidders were required to submit three (3) sealed envelopes on or
before 5:00 p.m. of September 20, 1996. The first envelope should
contain the Prequalification Documents, the second envelope the
Technical Proposal, and the third envelope the Financial Proposal of
the proponent.
On June 20, 1996, PBAC Bulletin No. 1 was issued, postponing
the availment of the Bid Documents and the submission of the
comparative bid proposals. Interested firms were permitted to
obtain the Request for Proposal Documents beginning June 28,
1996, upon submission of a written application and payment of a
non-refundable fee of P50,000.00 (US$2,000).
The Bid Documents issued by the PBAC provided among others
that the proponent must have adequate capability to sustain the
financing requirement for the detailed engineering, design,
construction, operation, and maintenance phases of the

On July 23, 1996, the PBAC issued PBAC Bulletin No. 2 inviting
all bidders to a pre-bid conference on July 29, 1996.

a. Aside from the fixed Annual Guaranteed Payment, the proponent

shall include in its financial proposal an additional percentage of
gross revenue share of the Government, as follows:
i. First 5 years 5.0%
ii. Next 10 years 7.5%
iii. Next 10 years 10.0%
b. The amount of the fixed Annual Guaranteed Payment shall be
subject of the price challenge. Proponent may offer an Annual
Guaranteed Payment which need not be of equal amount, but
payment of which shall start upon site possession.
c. The project proponent must have adequate capability to sustain
the financing requirement for the detailed engineering, design,
construction, and/or operation and maintenance phases of the
project as the case may be. For purposes of pre-qualification, this
capability shall be measured in terms of:
i. Proof of the availability of the project proponent and/or the
consortium to provide the minimum amount of equity for the
project; and
ii. a letter testimonial from reputable banks attesting that the
project proponent and/or the members of the consortium are
banking with them, that the project proponent and/or the members
are of good financial standing, and have adequate resources.
d. The basis for the prequalification shall be the proponents
compliance with the minimum technical and financial requirements
provided in the Bid Documents and the IRR of the BOT Law. The
minimum amount of equity shall be 30% of the Project Cost.

e. Amendments to the draft Concession Agreement shall be issued

from time to time. Said amendments shall only cover items that
would not materially affect the preparation of the proponents
proposal.
On August 29, 1996, the Second Pre-Bid Conference was held
where certain clarifications were made. Upon the request of
prospective bidder Peoples Air Cargo & Warehousing Co., Inc
(Paircargo), the PBAC warranted that based on Sec. 11.6, Rule 11 of
the Implementing Rules and Regulations of the BOT Law, only the
proposed Annual Guaranteed Payment submitted by the
challengers would be revealed to AEDC, and that the challengers
technical and financial proposals would remain confidential. The
PBAC also clarified that the list of revenue sources contained in
Annex 4.2a of the Bid Documents was merely indicative and that
other revenue sources may be included by the proponent, subject
to approval by DOTC/MIAA. Furthermore, the PBAC clarified that
only those fees and charges denominated as Public Utility Fees
would be subject to regulation, and those charges which would be
actually deemed Public Utility Fees could still be revised, depending
on the outcome of PBACs query on the matter with the Department
of Justice.
In September 1996, the PBAC issued Bid Bulletin No. 5, entitled
Answers to the Queries of PAIRCARGO as Per Letter Dated
September 3 and 10, 1996. Paircargos queries and the PBACs
responses were as follows:
1. It is difficult for Paircargo and Associates to meet the required
minimum equity requirement as prescribed in Section 8.3.4 of the
Bid Documents considering that the capitalization of each member
company is so structured to meet the requirements and needs of
their current respective business undertaking/activities. In order to
comply with this equity requirement, Paircargo is requesting PBAC
to just allow each member of (sic) corporation of the Joint Venture
to just execute an agreement that embodies a commitment to
infuse the required capital in case the project is awarded to the
Joint Venture instead of increasing each corporations current
authorized capital stock just for prequalification purposes.
In prequalification, the agency is interested in ones financial
capability at the time of prequalification, not future or potential
capability.

A commitment to put up equity once awarded the project is not

enough to establish that present financial capability. However, total
financial capability of all member companies of the Consortium, to
be established by submitting the respective companies audited
financial statements, shall be acceptable.
2. At present, Paircargo is negotiating with banks and other
institutions for the extension of a Performance Security to the joint
venture in the event that the Concessions Agreement (sic) is
awarded to them. However, Paircargo is being required to submit a
copy of the draft concession as one of the documentary
requirements.Therefore, Paircargo is requesting that theyd (sic) be
furnished copy of the approved negotiated agreement between the
PBAC and the AEDC at the soonest possible time.
A copy of the draft Concession Agreement is included in the Bid
Documents. Any material changes would be made known to
prospective challengers through bid bulletins. However, a final
version will be issued before the award of contract.
The PBAC also stated that it would require AEDC to sign
Supplement C of the Bid Documents (Acceptance of Criteria and
Waiver of Rights to Enjoin Project) and to submit the same with the
required Bid Security.
On September 20, 1996, the consortium composed of Peoples
Air Cargo and Warehousing Co., Inc. (Paircargo), Phil. Air and
Grounds Services, Inc. (PAGS) and Security Bank Corp. (Security
Bank) (collectively, Paircargo Consortium) submitted their
competitive proposal to the PBAC. On September 23, 1996, the
PBAC opened the first envelope containing the prequalification
documents of the Paircargo Consortium. On the following day,
September 24, 1996, the PBAC prequalified the Paircargo
Consortium.
On September 26, 1996, AEDC informed the PBAC in writing of
its reservations as regards the Paircargo Consortium, which include:
a. The lack of corporate approvals and financial capability of
PAIRCARGO;
b. The lack of corporate approvals and financial capability of PAGS;

c. The prohibition imposed by RA 337, as amended (the General

Banking Act) on the amount that Security Bank could legally invest
in the project;
d. The inclusion of Siemens as a contractor of the PAIRCARGO Joint
Venture, for prequalification purposes; and
e. The appointment of Lufthansa as the facility operator, in view of
the Philippine requirement in the operation of a public utility.
The PBAC gave its reply on October 2, 1996, informing AEDC
that it had considered the issues raised by the latter, and that
based on the documents submitted by Paircargo and the
established prequalification criteria, the PBAC had found that the
challenger, Paircargo, had prequalified to undertake the
project. The Secretary of the DOTC approved the finding of the
PBAC.
The PBAC then proceeded with the opening of the second
envelope of the Paircargo Consortium which contained its Technical
Proposal.
On October 3, 1996, AEDC reiterated its objections, particularly
with respect to Paircargos financial capability, in view of the
restrictions imposed by Section 21-B of the General Banking Act
and Sections 1380 and 1381 of the Manual Regulations for Banks
and Other Financial Intermediaries.On October 7, 1996, AEDC again
manifested its objections and requested that it be furnished with
excerpts of the PBAC meeting and the accompanying technical
evaluation report where each of the issues they raised were
addressed.
On October 16, 1996, the PBAC opened the third envelope
submitted by AEDC and the Paircargo Consortium containing their
respective financial proposals. Both proponents offered to build the
NAIA Passenger Terminal III for at least $350 million at no cost to
the government and to pay the government: 5% share in gross
revenues for the first five years of operation, 7.5% share in gross
revenues for the next ten years of operation, and 10% share in
gross revenues for the last ten years of operation, in accordance
with the Bid Documents. However, in addition to the foregoing,
AEDC offered to pay the government a total of P135 million as
guaranteed payment for 27 years while Paircargo Consortium
offered to pay the government a total of P17.75 billion for the same
period.

Thus, the PBAC formally informed AEDC that it had accepted

the price proposal submitted by the Paircargo Consortium, and
gave AEDC 30 working days or until November 28, 1996 within
which to match the said bid, otherwise, the project would be
awarded to Paircargo.
As AEDC failed to match the proposal within the 30-day period,
then DOTC Secretary Amado Lagdameo, on December 11, 1996,
issued a notice to Paircargo Consortium regarding AEDCs failure to
match the proposal.
On February 27, 1997, Paircargo Consortium incorporated into
Philippine International Airport Terminals Co., Inc. (PIATCO).
AEDC subsequently protested the alleged undue preference
given to PIATCO and reiterated its objections as regards the
prequalification of PIATCO.
On April 11, 1997, the DOTC submitted the concession
agreement for the second-pass approval of the NEDA-ICC.
On April 16, 1997, AEDC filed with the Regional Trial Court of
Pasig a Petition for Declaration of Nullity of the Proceedings,
Mandamus and Injunction against the Secretary of the DOTC, the
Chairman of the PBAC, the voting members of the PBAC and
Pantaleon D. Alvarez, in his capacity as Chairman of the PBAC
Technical Committee.
On April 17, 1997, the NEDA-ICC conducted an ad
referendum to facilitate the approval, on a no-objection basis, of
the BOT agreement between the DOTC and PIATCO. As the ad
referendum gathered only four (4) of the required six (6)
signatures, the NEDA merely noted the agreement.
On July 9, 1997, the DOTC issued the notice of award for the
project to PIATCO.
On July 12, 1997, the Government, through then DOTC
Secretary Arturo T. Enrile, and PIATCO, through its President, Henry
T. Go, signed the Concession Agreement for the Build-Operate-andTransfer Arrangement of the Ninoy Aquino International Airport
Passenger Terminal III (1997 Concession Agreement). The
Government granted PIATCO the franchise to operate and maintain
the said terminal during the concession period and to collect the
fees, rentals and other charges in accordance with the rates or
schedules stipulated in the 1997 Concession Agreement. The
Agreement provided that the concession period shall be for twentyfive (25) years commencing from the in-service date, and may be
renewed at the option of the Government for a period not

exceeding twenty-five (25) years. At the end of the concession

period, PIATCO shall transfer the development facility to MIAA.
On November 26, 1998, the Government and PIATCO signed an
Amended and Restated Concession Agreement (ARCA). Among the
provisions of the 1997 Concession Agreement that were amended
by the ARCA were: Sec. 1.11 pertaining to the definition of
certificate of completion; Sec. 2.05 pertaining to the Special
Obligations of GRP; Sec. 3.02 (a) dealing with the exclusivity of the
franchise given to the Concessionaire; Sec. 4.04 concerning the
assignment by Concessionaire of its interest in the Development
Facility; Sec. 5.08 (c) dealing with the proceeds of Concessionaires
insurance; Sec. 5.10 with respect to the temporary take-over of
operations by GRP; Sec. 5.16 pertaining to the taxes, duties and
other imposts that may be levied on the Concessionaire; Sec. 6.03
as regards the periodic adjustment of public utility fees and
charges; the entire Article VIII concerning the provisions on the
termination of the contract; and Sec. 10.02 providing for the venue
of the arbitration proceedings in case a dispute or controversy
arises between the parties to the agreement.
Subsequently, the Government and PIATCO signed three
Supplements to the ARCA. The First Supplement was signed on
August 27, 1999; the Second Supplement on September 4, 2000;
and the Third Supplement on June 22, 2001 (collectively,
Supplements).
The First Supplement to the ARCA amended Sec. 1.36 of the
ARCA defining Revenues or Gross Revenues; Sec. 2.05 (d) of the
ARCA referring to the obligation of MIAA to provide sufficient funds
for the upkeep, maintenance, repair and/or replacement of all
airport facilities and equipment which are owned or operated by
MIAA; and further providing additional special obligations on the
part of GRP aside from those already enumerated in Sec. 2.05 of
the ARCA. The First Supplement also provided a stipulation as
regards the construction of a surface road to connect NAIA Terminal
II and Terminal III in lieu of the proposed access tunnel crossing
Runway 13/31; the swapping of obligations between GRP and
PIATCO regarding the improvement of Sales Road; and the changes
in the timetable. It also amended Sec. 6.01 (c) of the ARCA
pertaining to the Disposition of Terminal Fees; Sec. 6.02 of the
ARCA by inserting an introductory paragraph; and Sec. 6.02 (a) (iii)
of the ARCA referring to the Payments of Percentage Share in Gross
Revenues.
The Second Supplement to the ARCA contained provisions
concerning the clearing, removal, demolition or disposal of

subterranean structures uncovered or discovered at the site of the

construction of the terminal by the Concessionaire. It defined the
scope of works; it provided for the procedure for the demolition of
the said structures and the consideration for the same which the
GRP shall pay PIATCO; it provided for time extensions, incremental
and consequential costs and losses consequent to the existence of
such structures; and it provided for some additional obligations on
the part of PIATCO as regards the said structures.
Finally, the Third Supplement provided for the obligations of
the Concessionaire as regards the construction of the surface road
connecting Terminals II and III.
Meanwhile, the MIAA which is charged with the maintenance
and operation of the NAIA Terminals I and II, had existing
concession contracts with various service providers to offer
international airline airport services, such as in-flight catering,
passenger handling, ramp and ground support, aircraft
maintenance and provisions, cargo handling and warehousing, and
other services, to several international airlines at the NAIA. Some of
these service providers are the Miascor Group, DNATA-Wings
Aviation Systems Corp., and the MacroAsia Group. Miascor, DNATA
and MacroAsia, together with Philippine Airlines (PAL), are the
dominant players in the industry with an aggregate market share of
70%.
On September 17, 2002, the workers of the international airline
service providers, claiming that they stand to lose their
employment upon the implementation of the questioned
agreements, filed before this Court a petition for prohibition to
enjoin the enforcement of said agreements.[2]
On October 15, 2002, the service providers, joining the cause
of the petitioning workers, filed a motion for intervention and a
petition-in-intervention.
On October 24, 2002, Congressmen Salacnib Baterina, Clavel
Martinez and Constantino Jaraula filed a similar petition with this
Court.[3]
On November 6, 2002, several employees of the MIAA likewise
filed a petition assailing the legality of the various agreements. [4]
On December 11, 2002. another group of Congressmen, Hon.
Jacinto V. Paras, Rafael P. Nantes, Eduardo C. Zialcita, Willie B.
Villarama, Prospero C. Nograles, Prospero A. Pichay, Jr., Harlin Cast
Abayon and Benasing O. Macaranbon, moved to intervene in the
case as Respondents-Intervenors. They filed their Comment-In-

Intervention defending the validity of the assailed agreements and

praying for the dismissal of the petitions.
During the pendency of the case before this Court, President
Gloria Macapagal Arroyo, on November 29, 2002, in her speech at
the 2002 Golden Shell Export Awards at Malacaang Palace, stated
that she will not honor (PIATCO) contracts which the Executive
Branchs legal offices have concluded (as) null and void.[5]
Respondent PIATCO filed its Comments to the present petitions
on November 7 and 27, 2002. The Office of the Solicitor General
and the Office of the Government Corporate Counsel filed their
respective Comments in behalf of the public respondents.
On December 10, 2002, the Court heard the case on oral
argument. After the oral argument, the Court then resolved in open
court to require the parties to file simultaneously their respective
Memoranda in amplification of the issues heard in the oral
arguments within 30 days and to explore the possibility of
arbitration or mediation as provided in the challenged contracts.
In their consolidated Memorandum, the Office of the Solicitor
General and the Office of the Government Corporate Counsel
prayed that the present petitions be given due course and that
judgment be rendered declaring the 1997 Concession Agreement,
the ARCA and the Supplements thereto void for being contrary to
the Constitution, the BOT Law and its Implementing Rules and
Regulations.
On March 6, 2003, respondent PIATCO informed the Court that
on March 4, 2003 PIATCO commenced arbitration proceedings
before the International Chamber of Commerce, International Court
of Arbitration (ICC) by filing a Request for Arbitration with the
Secretariat of the ICC against the Government of the Republic of
the Philippines acting through the DOTC and MIAA.
In the present cases, the Court is again faced with the task of
resolving complicated issues made difficult by their intersecting
legal and economic implications. The Court is aware of the far
reaching fall out effects of the ruling which it makes today. For more
than a century and whenever the exigencies of the times demand
it, this Court has never shirked from its solemn duty to dispense
justice and resolve actual controversies involving rights which are
legally demandable and enforceable, and to determine whether or
not there has been grave abuse of discretion amounting to lack or
excess of jurisdiction.[6] To be sure, this Court will not begin to do
otherwise today.

We shall first dispose of the procedural issues raised by

respondent PIATCO which they allege will bar the resolution of the
instant controversy.
Petitioners Legal Standing to File
the present Petitions
a. G.R. Nos. 155001 and 155661
In G.R. No. 155001 individual petitioners are employees of
various service providers[7] having separate concession contracts
with MIAA and continuing service agreements with various
international airlines to provide in-flight catering, passenger
handling, ramp and ground support, aircraft maintenance and
provisions, cargo handling and warehousing and other services.
Also included as petitioners are labor unions MIASCOR Workers
Union-National Labor Union and Philippine Airlines Employees
Association. These petitioners filed the instant action for prohibition
as taxpayers and as parties whose rights and interests stand to be
violated by the implementation of the PIATCO Contracts.
Petitioners-Intervenors in the same case are all corporations
organized and existing under Philippine laws engaged in the
business of providing in-flight catering, passenger handling, ramp
and ground support, aircraft maintenance and provisions, cargo
handling and warehousing and other services to several
international airlines at the Ninoy Aquino International Airport.
Petitioners-Intervenors allege that as tax-paying international
airline and airport-related service operators, each one of them
stands to be irreparably injured by the implementation of the
PIATCO Contracts. Each of the petitioners-intervenors have
separate and subsisting concession agreements with MIAA and with
various international airlines which they allege are being interfered
with and violated by respondent PIATCO.
In G.R. No. 155661, petitioners constitute employees of MIAA
and Samahang Manggagawa sa Paliparan ng Pilipinas - a legitimate
labor union and accredited as the sole and exclusive bargaining
agent of all the employees in MIAA. Petitioners anchor their petition
for prohibition on the nullity of the contracts entered into by the
Government and PIATCO regarding the build-operate-and-transfer
of the NAIA IPT III. They filed the petition as taxpayers and persons
who have a legitimate interest to protect in the implementation of
the PIATCO Contracts.
Petitioners in both cases raise the argument that the PIATCO
Contracts contain stipulations which directly contravene numerous
provisions of the Constitution, specific provisions of the BOT Law

and its Implementing Rules and Regulations, and public policy.

Petitioners contend that the DOTC and the MIAA, by entering into
said contracts, have committed grave abuse of discretion
amounting to lack or excess of jurisdiction which can be remedied
only by a writ of prohibition, there being no plain, speedy or
adequate remedy in the ordinary course of law.
In particular, petitioners assail the provisions in the 1997
Concession Agreement and the ARCA which grant PIATCO the
exclusive right to operate a commercial international passenger
terminal within the Island of Luzon, except those international
airports already existing at the time of the execution of the
agreement. The contracts further provide that upon the
commencement of operations at the NAIA IPT III, the Government
shall cause the closure of Ninoy Aquino International Airport
Passenger Terminals I and II as international passenger terminals.
With respect to existing concession agreements between MIAA and
international airport service providers regarding certain services or
operations, the 1997 Concession Agreement and the ARCA
uniformly provide that such services or operations will not be
carried over to the NAIA IPT III and PIATCO is under no obligation to
permit such carry over except through a separate agreement duly
entered into with PIATCO.[8]
With respect to the petitioning service providers and their
employees, upon the commencement of operations of the NAIA IPT
III, they allege that they will be effectively barred from providing
international airline airport services at the NAIA Terminals I and II as
all international airlines and passengers will be diverted to the NAIA
IPT III. The petitioning service providers will thus be compelled to
contract with PIATCO alone for such services, with no assurance
that subsisting contracts with MIAA and other international airlines
will be respected. Petitioning service providers stress that despite
the very competitive market, the substantial capital investments
required and the high rate of fees, they entered into their
respective contracts with the MIAA with the understanding that the
said contracts will be in force for the stipulated period, and
thereafter, renewed so as to allow each of the petitioning service
providers to recoup their investments and obtain a reasonable
return thereon.
Petitioning employees of various service providers at the NAIA
Terminals I and II and of MIAA on the other hand allege that with
the closure of the NAIA Terminals I and II as international passenger
terminals under the PIATCO Contracts, they stand to lose
employment.

The question on legal standing is whether such parties have

alleged such a personal stake in the outcome of the controversy as
to assure that concrete adverseness which sharpens the
presentation of issues upon which the court so largely depends for
illumination of difficult constitutional questions. [9] Accordingly, it has
been held that the interest of a person assailing the
constitutionality of a statute must be direct and personal. He must
be able to show, not only that the law or any government act is
invalid, but also that he sustained or is in imminent danger of
sustaining some direct injury as a result of its enforcement, and not
merely that he suffers thereby in some indefinite way. It must
appear that the person complaining has been or is about to be
denied some right or privilege to which he is lawfully entitled or
that he is about to be subjected to some burdens or penalties by
reason of the statute or act complained of.[10]
We hold that petitioners have the requisite standing. In the
above-mentioned cases, petitioners have a direct and substantial
interest to protect by reason of the implementation of the PIATCO
Contracts. They stand to lose their source of livelihood, a property
right which is zealously protected by the Constitution. Moreover,
subsisting concession agreements between MIAA and petitionersintervenors and service contracts between international airlines
and petitioners-intervenors stand to be nullified or terminated by
the operation of the NAIA IPT III under the PIATCO Contracts. The
financial prejudice brought about by the PIATCO Contracts on
petitioners and petitioners-intervenors in these cases are legitimate
interests sufficient to confer on them the requisite standing to file
the instant petitions.
b. G.R. No. 155547
In G.R. No. 155547, petitioners filed the petition for prohibition
as members of the House of Representatives, citizens and
taxpayers. They allege that as members of the House of
Representatives, they are especially interested in the PIATCO
Contracts, because the contracts compel the Government and/or
the House of Representatives to appropriate funds necessary to
comply with the provisions therein.[11] They cite provisions of the
PIATCO Contracts which require disbursement of unappropriated
amounts in compliance with the contractual obligations of the
Government. They allege that the Government obligations in the
PIATCO Contracts which compel government expenditure without
appropriation is a curtailment of their prerogatives as legislators,
contrary to the mandate of the Constitution that [n]o money shall
be paid out of the treasury except in pursuance of an appropriation
made by law.[12]

Standing is a peculiar concept in constitutional law because in

some cases, suits are not brought by parties who have been
personally injured by the operation of a law or any other
government act but by concerned citizens, taxpayers or voters who
actually sue in the public interest. Although we are not unmindful of
the
cases
of Imus
Electric
Co.
v.
Municipality
of
Imus[13] and Gonzales v. Raquiza[14] wherein this Court held that
appropriation must be made only on amounts immediately
demandable, public interest demands that we take a more
liberal view in determining whether the petitioners suing as
legislators, taxpayers and citizens have locus standi to file
the instant petition. In Kilosbayan, Inc. v. Guingona,[15] this
Court held [i]n line with the liberal policy of this Court on locus
standi, ordinary taxpayers, members of Congress, and even
association of planters, and non-profit civic organizations were
allowed to initiate and prosecute actions before this Court to
question the constitutionality or validity of laws, acts, decisions,
rulings, or orders of various government agencies or
instrumentalities.[16] Further, insofar as taxpayers' suits are
concerned . . . (this Court) is not devoid of discretion as to
whether or not it should be entertained. [17] As such . . . even if,
strictly speaking, they [the petitioners] are not covered by the
definition, it is still within the wide discretion of the Court to waive
the requirement and so remove the impediment to its addressing
and resolving the serious constitutional questions raised. [18] In view
of the serious legal questions involved and their impact on public
interest, we resolve to grant standing to the petitioners.
Other Procedural Matters
Respondent PIATCO further alleges that this Court is without
jurisdiction to review the instant cases as factual issues are
involved which this Court is ill-equipped to resolve. Moreover,
PIATCO alleges that submission of this controversy to this Court at
the first instance is a violation of the rule on hierarchy of courts.
They contend that trial courts have concurrent jurisdiction with this
Court with respect to a special civil action for prohibition and
hence, following the rule on hierarchy of courts, resort must first be
had before the trial courts.
After a thorough study and careful evaluation of the issues
involved, this Court is of the view that the crux of the instant
controversy involves significant legal questions. The facts
necessary to resolve these legal questions are well established and,
hence, need not be determined by a trial court.

The rule on hierarchy of courts will not also prevent this Court
from assuming jurisdiction over the cases at bar. The said rule may
be relaxed when the redress desired cannot be obtained in
the appropriate courts or where exceptional and compelling
circumstances justify availment of a remedy within and
calling for the exercise of this Courts primary jurisdiction.[19]
It is easy to discern that exceptional circumstances exist in
the cases at bar that call for the relaxation of the rule. Both
petitioners and respondents agree that these cases are
of transcendental importance as they involve the construction
and operation of the countrys premier international airport.
Moreover, the crucial issues submitted for resolution are of first
impression and they entail the proper legal interpretation of key
provisions of the Constitution, the BOT Law and its Implementing
Rules and Regulations. Thus, considering the nature of the
controversy before the Court, procedural bars may be lowered to
give way for the speedy disposition of the instant cases.
Legal Effect of the Commencement
of Arbitration Proceedings by
PIATCO
There is one more procedural obstacle which must be
overcome. The Court is aware that arbitration proceedings pursuant
to Section 10.02 of the ARCA have been filed at the instance of
respondent PIATCO. Again, we hold that the arbitration step taken
by PIATCO will not oust this Court of its jurisdiction over the cases
at bar.
In Del Monte Corporation-USA v. Court of Appeals,
even after finding that the arbitration clause in the
Distributorship Agreement in question is valid and the dispute
between the parties is arbitrable, this Court affirmed the trial courts
decision denying petitioners Motion to Suspend Proceedings
pursuant to the arbitration clause under the contract. In so ruling,
this Court held that as contracts produce legal effect between the
parties, their assigns and heirs, only the parties to the
Distributorship Agreement are bound by its terms, including the
arbitration clause stipulated therein. This Court ruled that
arbitration proceedings could be called for but only with respect to
the parties to the contract in question. Considering that there are
parties to the case who are neither parties to the Distributorship
Agreement nor heirs or assigns of the parties thereto, this Court,
citing its previous ruling in Salas, Jr. v. Laperal Realty
Corporation,[21] held
that
to
tolerate
the splitting
of
proceedings by allowing arbitration as to some of the parties on
[20]

the one hand and trial for the others on the other hand would, in
effect, result in multiplicity of suits, duplicitous procedure
and unnecessary delay.[22] Thus, we ruled that the interest of
justice would best be served if the trial court hears and
adjudicates the case in a single and complete proceeding.
It is established that petitioners in the present cases who
have presented legitimate interests in the resolution of the
controversy are not parties to the PIATCO Contracts.
Accordingly, they cannot be bound by the arbitration clause
provided for in the ARCA and hence, cannot be compelled to submit
to arbitration proceedings. A speedy and decisive resolution of
all the critical issues in the present controversy, including
those raised by petitioners, cannot be made before an
arbitral tribunal. The object of arbitration is precisely to allow an
expeditious determination of a dispute. This objective would not be
met if this Court were to allow the parties to settle the cases by
arbitration as there are certain issues involving non-parties to the
PIATCO Contracts which the arbitral tribunal will not be equipped to
resolve.
Now, to the merits of the instant controversy.
I
Is PIATCO a qualified bidder?
Public respondents argue that the Paircargo Consortium,
PIATCOs predecessor, was not a duly pre-qualified bidder on the
unsolicited proposal submitted by AEDC as the Paircargo
Consortium failed to meet the financial capability required under
the BOT Law and the Bid Documents. They allege that in computing
the ability of the Paircargo Consortium to meet the minimum equity
requirements for the project, the entire net worth of Security
Bank, a member of the consortium, should not be
considered.
PIATCO relies, on the other hand, on the strength of the
Memorandum dated October 14, 1996 issued by the DOTC
Undersecretary Primitivo C. Cal stating that the Paircargo
Consortium is found to have a combined net worth
of P3,900,000,000.00, sufficient to meet the equity requirements of
the project. The said Memorandum was in response to a letter from
Mr. Antonio Henson of AEDC to President Fidel V. Ramos questioning
the financial capability of the Paircargo Consortium on the ground
that it does not have the financial resources to put up the required
minimum equity ofP2,700,000,000.00. This contention is based on
the restriction under R.A. No. 337, as amended or the General

Banking Act that a commercial bank cannot invest in any single

enterprise in an amount more than 15% of its net worth. In the said
Memorandum, Undersecretary Cal opined:
The Bid Documents, as clarified through Bid Bulletin Nos. 3 and 5,
require that financial capability will be evaluated based on total
financial capability of all the member companies of the [Paircargo]
Consortium. In this connection, the Challenger was found to have a
combined net worth of P3,926,421,242.00 that could support a
project costing approximately P13 Billion.
It is not a requirement that the net worth must be unrestricted. To
impose that as a requirement now will be nothing less than unfair.
The financial statement or the net worth is not the sole basis in
establishing financial capability. As stated in Bid Bulletin No. 3,
financial capability may also be established by testimonial letters
issued by reputable banks. The Challenger has complied with this
requirement.
To recap, net worth reflected in the Financial Statement should not
be taken as the amount of the money to be used to answer the
required thirty percent (30%) equity of the challenger but rather to
be used in establishing if there is enough basis to believe that the
challenger can comply with the required 30% equity. In fact, proof
of sufficient equity is required as one of the conditions for award of
contract (Section 12.1 IRR of the BOT Law) but not for prequalification (Section 5.4 of the same document).[23]
Under the BOT Law, in case of a build-operate-and-transfer
arrangement, the contract shall be awarded to the bidder who,
having
satisfied
the minimum
financial,
technical,
organizational and legal standards required by the law, has
submitted the lowest bid and most favorable terms of the project.
[24]
Further, the 1994 Implementing Rules and Regulations of the
BOT Law provide:
Section 5.4 Pre-qualification Requirements.
.
c. Financial Capability: The project proponent must have adequate
capability to sustain the financing requirements for the detailed
engineering design, construction and/or operation and

maintenance phases of the project, as the case may be. For

purposes of pre-qualification, this capability shall be measured in
terms of (i) proof of the ability of the project proponent
and/or the consortium to provide a minimum amount of
equity to the project, and (ii) a letter testimonial from
reputable banks attesting that the project proponent and/or
members of the consortium are banking with them, that
they are in good financial standing, and that they have
adequate resources. The government agency/LGU concerned
shall determine on a project-to-project basis and before prequalification, the minimum amount of equity needed. (emphasis
supplied)
Pursuant to this provision, the PBAC issued PBAC Bulletin No. 3
dated August 16, 1996 amending the financial capability
requirements for pre-qualification of the project proponent as
follows:
6. Basis of Pre-qualification
The basis for the pre-qualification shall be on the compliance of the
proponent to the minimum technical and financial requirements
provided in the Bid Documents and in the IRR of the BOT Law, R.A.
No. 6957, as amended by R.A. 7718.
The minimum amount of equity to which the proponents financial
capability will be based shall be thirty percent (30%) of the
project cost instead of the twenty percent (20%) specified
in Section 3.6.4 of the Bid Documents. This is to correlate with
the required debt-to-equity ratio of 70:30 in Section 2.01a of the
draft concession agreement. The debt portion of the project
financing should not exceed 70% of the actual project cost.
Accordingly, based on the above provisions of law, the
Paircargo Consortium or any challenger to the unsolicited proposal
of AEDC has to show that it possesses the requisite financial
capability to undertake the project in the minimum amount
of 30% of the project cost through (i) proof of the ability to
provide a minimum amount of equity to the project, and (ii) a letter
testimonial from reputable banks attesting that the project
proponent or members of the consortium are banking with them,
that they are in good financial standing, and that they have
adequate resources.

As the minimum project cost was estimated to be

US$350,000,000.00 or roughly P9,183,650,000.00,[25] the Paircargo
Consortium had to show to the satisfaction of the PBAC that it had
the ability to provide the minimum equity for the project in the
amount of at least P2,755,095,000.00.
Paircargos Audited Financial Statements as of 1993 and 1994
indicated
that
it
had
a
net
worth
of P2,783,592.00
and P3,123,515.00
respectively.[26] PAGS
Audited
Financial
Statements
as
of
1995
indicate
that
it
has
approximately P26,735,700.00 to invest as its equity for the
project.[27]Security Banks Audited Financial Statements as of 1995
show that it has a net worth equivalent to its capital funds in the
amount of P3,523,504,377.00.[28]
We agree with public respondents that with respect to Security
Bank, the entire amount of its net worth could not be invested in
a single undertaking or enterprise, whether allied or non-allied in
accordance with the provisions of R.A. No. 337, as amended or the
General Banking Act:
Sec. 21-B. The provisions in this or in any other Act to the contrary
notwithstanding, the Monetary Board, whenever it shall deem
appropriate and necessary to further national development
objectives or support national priority projects, may authorize a
commercial bank, a bank authorized to provide commercial
banking services, as well as a government-owned and
controlled bank, to operate under an expanded commercial
banking authority and by virtue thereof exercise, in
addition to powers authorized for commercial banks, the
powers of an Investment House as provided in Presidential
Decree No. 129, invest in the equity of a non-allied
undertaking, or own a majority or all of the equity in a financial
intermediary other than a commercial bank or a bank authorized to
provide commercial banking services: Provided, That (a) the
total investment in equities shall not exceed fifty percent (50%) of
the net worth of the bank; (b) the equity investment in any one
enterprise whether allied or non-allied shall not exceed
fifteen percent (15%) of the net worth of the bank; (c) the
equity investment of the bank, or of its wholly or majority-owned
subsidiary, in a single non-allied undertaking shall not exceed
thirty-five percent (35%) of the total equity in the enterprise nor
shall it exceed thirty-five percent (35%) of the voting stock in
that enterprise; and (d) the equity investment in other banks shall
be deducted from the investing bank's net worth for purposes of
computing the prescribed ratio of net worth to risk assets.

.
Further, the 1993 Manual of Regulations for Banks provides:
SECTION X383. Other Limitations and Restrictions. The following
limitations and restrictions shall also apply regarding equity
investments of banks.
a. In any single enterprise. The equity investments of banks in any
single enterprise shall not exceed at any time fifteen percent (15%)
of the net worth of the investing bank as defined in Sec. X106 and
Subsec. X121.5.
Thus, the maximum amount that Security Bank could validly
invest in the Paircargo Consortium is only P528,525,656.55,
representing 15% of its entire net worth. The total net worth
therefore of the Paircargo Consortium, after considering
the maximum amounts that may be validly invested by each of
its members is P558,384,871.55 or only 6.08% of the project
cost,[29] an amount substantially less than the prescribed minimum
equity investment required for the project in the amount
of P2,755,095,000.00 or 30% of the project cost.

the project as for all intents and purposes, such ceiling or legal
restriction determines the true maximum amount which a bidder
may invest in the project.
Further, the determination of whether or not a bidder is prequalified to undertake the project requires an evaluation of the
financial capacity of the said bidder at the time the bid is
submitted based on the required documents presented by the
bidder. The PBAC should not be allowed to speculate on the future
financial ability of the bidder to undertake the project on the
basis of documents submitted. This would open doors to abuse and
defeat the very purpose of a public bidding. This is especially true
in the case at bar which involves the investment of billions of pesos
by the project proponent. The relevant government authority is
duty-bound to ensure that the awardee of the contract possesses
the minimum required financial capability to complete the project.
To allow the PBAC to estimate the bidders future financial
capability would not secure the viability and integrity of the
project. A restrictive and conservative application of the rules and
procedures of public bidding is necessary not only to protect the
impartiality and regularity of the proceedings but also to ensure the
financial and technical reliability of the project. It has been held
that:

The purpose of pre-qualification in any public bidding is to

determine, at the earliest opportunity, the ability of the bidder to
undertake the project. Thus, with respect to the bidders financial
capacity at the pre-qualification stage, the law requires the
government agency to examine and determine the ability of the
bidder to fund the entire cost of the project by considering the
maximum amounts that each bidder may invest in the
project at the time of pre-qualification.

The basic rule in public bidding is that bids should be evaluated

based on the required documents submitted before and not after
the opening of bids. Otherwise, the foundation of a fair and
competitive public bidding would be defeated. Strict observance
of the rules, regulations, and guidelines of the bidding
process is the only safeguard to a fair, honest and
competitive public bidding.[30]

The PBAC has determined that any prospective bidder for the
construction, operation and maintenance of the NAIA IPT III project
should prove that it has the ability to provide equity in the
minimum amount of 30% of the project cost, in accordance with the
70:30 debt-to-equity ratio prescribed in the Bid Documents. Thus,
in the case of Paircargo Consortium, the PBAC should determine
the maximum amounts that each member of the consortium may
commit for the construction, operation and maintenance of the
NAIA IPT III project at the time of pre-qualification. With respect
to Security Bank, the maximum amount which may be invested
by it would only be 15% of its net worth in view of the restrictions
imposed by the General Banking Act. Disregarding the investment
ceilings provided by applicable law would not result in a proper
evaluation of whether or not a bidder is pre-qualified to undertake

Thus, if the maximum amount of equity that a bidder may

invest in the project at the time the bids are submitted falls
short of the minimum amounts required to be put up by the bidder,
said bidder should be properly disqualified. Considering that at the
pre-qualification stage, the maximum amounts which the Paircargo
Consortium may invest in the project fell short of the minimum
amounts prescribed by the PBAC, we hold that Paircargo
Consortium was not a qualified bidder. Thus the award of the
contract by the PBAC to the Paircargo Consortium, a disqualified
bidder, is null and void.
While it would be proper at this juncture to end the resolution
of the instant controversy, as the legal effects of the
disqualification of respondent PIATCOs predecessor would come

into play and necessarily result in the nullity of all the subsequent
contracts entered by it in pursuance of the project, the Court feels
that it is necessary to discuss in full the pressing issues of the
present controversy for a complete resolution thereof.
II
Is the 1997 Concession Agreement valid?
Petitioners and public respondents contend that the 1997
Concession Agreement is invalid as it contains provisions that
substantially depart from the draft Concession Agreement included
in the Bid Documents. They maintain that a substantial departure
from the draft Concession Agreement is a violation of public policy
and renders the 1997 Concession Agreement null and void.
PIATCO maintains, however, that the Concession Agreement
attached to the Bid Documents is intended to be a draft, i.e.,
subject to change, alteration or modification, and that this intention
was clear to all participants, including AEDC, and DOTC/MIAA. It
argued further that said intention is expressed in Part C (6) of Bid
Bulletin No. 3 issued by the PBAC which states:
6. Amendments to the Draft Concessions Agreement
Amendments to the Draft Concessions Agreement shall be issued
from time to time. Said amendments shall only cover items that
would not materially affect the preparation of the proponents
proposal.
By its very nature, public bidding aims to protect the public
interest by giving the public the best possible advantages through
open competition. Thus:
Competition must be legitimate, fair and honest. In the field of
government contract law, competition requires, not only `bidding
upon a common standard, a common basis, upon the same thing,
the same subject matter, the same undertaking,' but also that it be
legitimate, fair and honest; and not designed to injure or defraud
the government.[31]
An essential element of a publicly bidded contract is that all
bidders must be on equal footing. Not simply in terms of application
of the procedural rules and regulations imposed by the relevant
government agency, but more importantly, on the contract
bidded upon. Each bidder must be able to bid on the same

thing. The rationale is obvious. If the winning bidder is allowed to

later include or modify certain provisions in the contract awarded
such that the contract is altered in any material respect, then the
essence of fair competition in the public bidding is destroyed. A
public bidding would indeed be a farce if after the contract is
awarded, the winning bidder may modify the contract and include
provisions which are favorable to it that were not previously made
available to the other bidders. Thus:
It is inherent in public biddings that there shall be a fair competition
among the bidders. The specifications in such biddings provide the
common ground or basis for the bidders. The specifications should,
accordingly, operate equally or indiscriminately upon all bidders. [32]
The same rule was restated by Chief Justice Stuart of the
Supreme Court of Minnesota:
The law is well settled that where, as in this case, municipal
authorities can only let a contract for public work to the lowest
responsible bidder, the proposals and specifications therefore must
be so framed as to permit free and full competition. Nor can they
enter into a contract with the best bidder containing
substantial provisions beneficial to him, not included or
contemplated in the terms and specifications upon which
the bids were invited.[33]
In fact, in the PBAC Bid Bulletin No. 3 cited by PIATCO to
support its argument that the draft concession agreement is
subject to amendment, the pertinent portion of which was quoted
above, the PBAC also clarified that [s]aid amendments shall
only cover items that would not materially affect the
preparation of the proponents proposal.
While we concede that a winning bidder is not precluded from
modifying or amending certain provisions of the contract bidded
upon, such changes must not constitute substantial or
material amendments that would alter the basic parameters
of the contract and would constitute a denial to the other
bidders of the opportunity to bid on the same terms. Hence,
the determination of whether or not a modification or amendment
of a contract bidded out constitutes a substantial amendment rests
on whether the contract, when taken as a whole, would contain
substantially different terms and conditions that would have the
effect of altering the technical and/or financial proposals previously
submitted by other bidders. The alterations and modifications in

the contract executed between the government and the winning

bidder must be such as to render such executed contract to be an
entirely different contract from the one that was bidded
upon.
In the case of Caltex (Philippines), Inc. v. Delgado
Brothers, Inc.,[34] this Court quoted with approval the ruling of the
trial court that an amendment to a contract awarded through public
bidding, when such subsequent amendment was made without a
new public bidding, is null and void:
The Court agrees with the contention of counsel for the plaintiffs
that the due execution of a contract after public bidding is a
limitation upon the right of the contracting parties to alter or
amend it without another public bidding, for otherwise what would
a public bidding be good for if after the execution of a
contract after public bidding, the contracting parties may
alter or amend the contract, or even cancel it, at their
will? Public biddings are held for the protection of the public, and
to give the public the best possible advantages by means of open
competition between the bidders. He who bids or offers the
best terms is awarded the contract subject of the bid, and it
is obvious that such protection and best possible
advantages to the public will disappear if the parties to a
contract executed after public bidding may alter or amend
it without another previous public bidding.[35]

adjusted by PIATCO whenever it deems necessary without need for

consent of DOTC/MIAA; and (3) new fees and charges that may be
imposed by PIATCO which have not been previously imposed or
collected at the Ninoy Aquino International Airport Passenger
Terminal I, pursuant to Administrative Order No. 1, Series of 1993,
as amended. The glaring distinctions between the draft Concession
Agreement and the 1997 Concession Agreement lie in the types of
fees included in each category and the extent of the supervision
and regulation which MIAA is allowed to exercise in relation thereto.
For fees under the first category, i.e., those which are subject
to periodic adjustment in accordance with a prescribed parametric
formula and effective only upon written approval by MIAA, the
draft Concession Agreement includes the following:[36]
(1) aircraft parking fees;
(2) aircraft tacking fees;
(3) groundhandling fees;
(4) rentals and airline offices;
(5) check-in counter rentals; and
(6) porterage fees.

Hence, the question that comes to fore is this: is the 1997

Concession Agreement the same agreement that was
offered for public bidding, i.e., the draft Concession Agreement
attached to the Bid Documents? A close comparison of the draft
Concession Agreement attached to the Bid Documents and the
1997 Concession Agreement reveals that the documents differ in at
least two material respects:
a. Modification on the Public
Utility Revenues and Non-Public
Utility Revenues that may be
collected by PIATCO
The fees that may be imposed and collected by PIATCO under
the draft Concession Agreement and the 1997 Concession
Agreement may be classified into three distinct categories: (1) fees
which are subject to periodic adjustment of once every two years in
accordance with a prescribed parametric formula and adjustments
are made effective only upon written approval by MIAA; (2) fees
other than those included in the first category which maybe

Under the 1997 Concession Agreement, fees which are

subject to adjustment and effective upon MIAA approval are
classified as Public Utility Revenues and include: [37]
(1) aircraft parking fees;
(2) aircraft tacking fees;
(3) check-in counter fees; and
(4) Terminal Fees.
The implication of the reduced number of fees that are subject
to MIAA approval is best appreciated in relation to fees included in
the second
category identified
above.
Under
the 1997
Concession Agreement, fees which PIATCO may adjust whenever
it deems necessary without need for consent of DOTC/MIAA are

Non-Public Utility Revenues and is defined as all other income not

classified as Public Utility Revenues derived from operations of the
Terminal and the Terminal Complex.[38] Thus, under the 1997
Concession Agreement, groundhandling fees, rentals from airline
offices and porterage fees are no longer subject to MIAA regulation.
Further, under Section 6.03 of the draft Concession
Agreement, MIAA reserves the right to regulate (1) lobby and
vehicular parking fees and (2) other new fees and charges that may
be imposed by PIATCO. Such regulation may be made by periodic
adjustment and is effective only upon written approval of MIAA. The
full text of said provision is quoted below:
Section 6.03. Periodic Adjustment in Fees and Charges.
Adjustments in the aircraft parking fees, aircraft tacking fees,
groundhandling fees, rentals and airline offices, check-in-counter
rentals and porterage fees shall be allowed only once every two
years and in accordance with the Parametric Formula attached
hereto as Annex F. Provided that adjustments shall be made
effective only after the written express approval of the MIAA.
Provided, further, that such approval of the MIAA, shall be
contingent only on the conformity of the adjustments with the
above said parametric formula. The first adjustment shall be made
prior to the In-Service Date of the Terminal.
The MIAA reserves the right to regulate under the foregoing
terms and conditions the lobby and vehicular parking fees
and other new fees and charges as contemplated in
paragraph 2 of Section 6.01 if in its judgment the users of
the airport shall be deprived of a free option for the
services they cover.[39]
On the other hand, the equivalent provision under the 1997
Concession Agreement reads:
Section 6.03 Periodic Adjustment in Fees and Charges.
.
(c) Concessionaire shall at all times be judicious in fixing fees and
charges constituting Non-Public Utility Revenues in order to ensure
that End Users are not unreasonably deprived of services. While
the vehicular parking fee, porterage fee and greeter/well
wisher fee constitute Non-Public Utility Revenues of
Concessionaire, GRP may intervene and require
Concessionaire to explain and justify the fee it may set from

time to time, if in the reasonable opinion of GRP the said fees

have become exorbitant resulting in the unreasonable deprivation
of End Users of such services.[40]
Thus, under the 1997 Concession Agreement, with respect
to (1) vehicular parking fee, (2) porterage fee and (3) greeter/well
wisher fee, all that MIAA can do is to require PIATCO to explain
and justify the fees set by PIATCO. In the draft Concession
Agreement, vehicular parking fee is subject to MIAA regulation
and approval under the second paragraph of Section 6.03 thereof
while porterage fee is covered by the first paragraph of the same
provision. There is an obvious relaxation of the extent of control
and regulation by MIAA with respect to the particular fees that may
be charged by PIATCO.
Moreover, with respect to the third category of fees that may
be imposed and collected by PIATCO, i.e., new fees and charges
that may be imposed by PIATCO which have not been previously
imposed or collected at the Ninoy Aquino International Airport
Passenger Terminal I, under Section 6.03 of the draft Concession
Agreement MIAA has reserved the right to regulate the same
under the same conditions that MIAA may regulate fees under the
first category, i.e., periodic adjustment of once every two years in
accordance with a prescribed parametric formula and effective only
upon written approval by MIAA. However, under the 1997
Concession Agreement, adjustment of fees under the third
category is not subject to MIAA regulation.
With respect to terminal fees that may be charged by PIATCO,
as shown earlier, this was included within the category of Public
Utility Revenues under the 1997 Concession Agreement. This
classification is significant because under the 1997 Concession
Agreement, Public Utility Revenues are subject to an Interim
Adjustment of fees upon the occurrence of certain extraordinary
events specified in the agreement. [42] However, under the draft
Concession Agreement, terminal fees are not included in the
types of fees that may be subject to Interim Adjustment.[43]
[41]

Finally, under the 1997 Concession Agreement, Public Utility

Revenues, except terminal fees, are denominated in US
Dollars[44] while payments to the Government are in Philippine
Pesos. In the draft Concession Agreement, no such stipulation
was included. By stipulating that Public Utility Revenues will be paid
to PIATCO in US Dollars while payments by PIATCO to the
Government are in Philippine currency under the 1997 Concession
Agreement, PIATCO is able to enjoy the benefits of depreciations of

the Philippine Peso, while being effectively insulated from the

detrimental effects of exchange rate fluctuations.
When taken as a whole, the changes under the 1997
Concession Agreement with respect to reduction in the types of
fees that are subject to MIAA regulation and the relaxation of such
regulation with respect to other fees are significant amendments
that substantially distinguish the draft Concession Agreement from
the 1997 Concession Agreement. The 1997 Concession
Agreement, in this respect, clearly gives PIATCO more
favorable terms than what was available to other bidders at
the time the contract was bidded out. It is not very difficult to
see that the changes in the 1997 Concession Agreement translate
to direct and concrete financial advantages for PIATCO which
were not available at the time the contract was offered for bidding.
It cannot be denied that under the 1997 Concession
Agreement only Public Utility Revenues are subject to MIAA
regulation. Adjustments of all other fees imposed and
collected by PIATCO are entirely within its control. Moreover,
with respect to terminal fees, under the 1997 Concession
Agreement, the same is further subject to Interim Adjustments not
previously stipulated in the draft Concession Agreement. Finally,
the change in the currency stipulated for Public Utility Revenues
under the 1997 Concession Agreement, except terminal fees, gives
PIATCO an added benefit which was not available at the time of
bidding.
b. Assumption by the
Government of the liabilities of
PIATCO in the event of the latters
default thereof
Under the draft Concession Agreement, default by PIATCO
of any of its obligations to creditors who have provided, loaned or
advanced funds for the NAIA IPT III project does not result in the
assumption by the Government of these liabilities. In fact, nowhere
in the said contract does default of PIATCOs loans figure in the
agreement. Such default does not directly result in any concomitant
right or obligation in favor of the Government.
However, the 1997 Concession Agreement provides:
Section 4.04 Assignment.

of the payment due date of the Attendant Liability prior to its stated
date of maturity, the Unpaid Creditors and Concessionaire shall
immediately inform GRP in writing of such default. GRP shall, within
one hundred eighty (180) Days from receipt of the joint written
notice of the Unpaid Creditors and Concessionaire, either (i) take
over the Development Facility and assume the Attendant Liabilities,
or (ii) allow the Unpaid Creditors, if qualified, to be substituted as
concessionaire and operator of the Development Facility in
accordance with the terms and conditions hereof, or designate a
qualified operator acceptable to GRP to operate the Development
Facility, likewise under the terms and conditions of this Agreement;
Provided that if at the end of the 180-day period GRP shall not have
served the Unpaid Creditors and Concessionaire written notice of its
choice, GRP shall be deemed to have elected to take over the
Development Facility with the concomitant assumption of Attendant
Liabilities.
(c) If GRP should, by written notice, allow the Unpaid Creditors to
be substituted as concessionaire, the latter shall form and organize
a concession company qualified to take over the operation of the
Development Facility. If the concession company should elect to
designate an operator for the Development Facility, the concession
company shall in good faith identify and designate a qualified
operator acceptable to GRP within one hundred eighty (180) days
from receipt of GRPs written notice. If the concession company,
acting in good faith and with due diligence, is unable to designate a
qualified operator within the aforesaid period, then GRP shall at the
end of the 180-day period take over the Development Facility and
assume Attendant Liabilities.
The term Attendant Liabilities under the 1997 Concession
Agreement is defined as:
Attendant Liabilities refer to all amounts recorded and from time to
time outstanding in the books of the Concessionaire as owing to
Unpaid Creditors who have provided, loaned or advanced
funds actually used for the Project, including all interests,
penalties, associated fees, charges, surcharges, indemnities,
reimbursements and other related expenses, and further including
amounts owed by Concessionaire to its suppliers, contractors and
sub-contractors.

.
(b) In the event Concessionaire should default in the payment of an
Attendant Liability, and the default has resulted in the acceleration

Under the above quoted portions of Section 4.04 in relation to

the definition of Attendant Liabilities, default by PIATCO of its
loans used to finance the NAIA IPT III project triggers the

occurrence of certain events that leads to the assumption

by the Government of the liability for the loans. Only in one
instance may the Government escape the assumption of PIATCOs
liabilities, i.e., when the Government so elects and allows a
qualified operator to take over as Concessionaire. However, this
circumstance is dependent on the existence and availability
of a qualified operator who is willing to take over the rights
and obligations of PIATCO under the contract, a
circumstance that is not entirely within the control of the
Government.
Without going into the validity of this provision at this juncture,
suffice it to state that Section 4.04 of the 1997 Concession
Agreement may be considered a form of security for the loans
PIATCO has obtained to finance the project, an option that was not
made available in the draft Concession Agreement. Section 4.04 is
an important amendment to the 1997 Concession Agreement
because it grants PIATCO a financial advantage or benefit
which was not previously made available during the bidding
process. This financial advantage is a significant modification that
translates to better terms and conditions for PIATCO.
PIATCO, however, argues that the parties to the bidding
procedure acknowledge that the draft Concession Agreement is
subject to amendment because the Bid Documents permit
financing or borrowing. They claim that it was the lenders who
proposed the amendments to the draft Concession Agreement
which resulted in the 1997 Concession Agreement.
We agree that it is not inconsistent with the rationale and
purpose of the BOT Law to allow the project proponent or the
winning bidder to obtain financing for the project, especially in this
case which involves the construction, operation and maintenance
of the NAIA IPT III. Expectedly, compliance by the project proponent
of its undertakings therein would involve a substantial amount of
investment. It is therefore inevitable for the awardee of the
contract to seek alternate sources of funds to support the project.
Be that as it may, this Court maintains that amendments to the
contract bidded upon should always conform to the general policy
on public bidding if such procedure is to be faithful to its real nature
and purpose. By its very nature and characteristic, competitive
public bidding aims to protect the public interest by giving the
public the best possible advantages through open competition. [45] It
has been held that the three principles in public bidding are (1) the
offer to the public; (2) opportunity for competition; and (3) a basis
for the exact comparison of bids. A regulation of the matter which
excludes any of these factors destroys the distinctive character of

the system and thwarts the purpose of its adoption.[46] These are
the basic parameters which every awardee of a contract bidded out
must conform to, requirements of financing and borrowing
notwithstanding. Thus, upon a concrete showing that, as in this
case, the contract signed by the government and the contractawardee is an entirely different contract from the contract bidded,
courts should not hesitate to strike down said contract in its
entirety for violation of public policy on public bidding. A strict
adherence on the principles, rules and regulations on public bidding
must be sustained if only to preserve the integrity and the faith of
the general public on the procedure.
Public bidding is a standard practice for procuring government
contracts for public service and for furnishing supplies and other
materials. It aims to secure for the government the lowest possible
price under the most favorable terms and conditions, to curtail
favoritism in the award of government contracts and avoid
suspicion of anomalies and it places all bidders in equal footing.
[47]
Any government action which permits any substantial
variance between the conditions under which the bids are
invited and the contract executed after the award thereof is
a grave abuse of discretion amounting to lack or excess of
jurisdiction which warrants proper judicial action.
In view of the above discussion, the fact that the foregoing
substantial amendments were made on the 1997 Concession
Agreement renders the same null and void for being contrary to
public policy. These amendments convert the 1997 Concession
Agreement to an entirely different agreement from the contract
bidded out or the draft Concession Agreement. It is not difficult to
see that the amendments on (1) the types of fees or charges that
are subject to MIAA regulation or control and the extent thereof and
(2) the assumption by the Government, under certain conditions, of
the liabilities of PIATCO directly translates concrete financial
advantages to PIATCO that were previously not available
during the bidding process. These amendments cannot be
taken as merely supplements to or implementing provisions of
those already existing in the draft Concession Agreement. The
amendments discussed above present new terms and conditions
which provide financial benefit to PIATCO which may have altered
the technical and financial parameters of other bidders had they
known that such terms were available.
III
Direct Government Guarantee

Article IV, Section 4.04(b) and (c), in relation to Article 1.06, of

the 1997 Concession Agreement provides:
Section 4.04 Assignment
.
(b) In the event Concessionaire should default in the payment of
an Attendant Liability, and the default resulted in the
acceleration of the payment due date of the Attendant Liability
prior to its stated date of maturity, the Unpaid Creditors and
Concessionaire shall immediately inform GRP in writing of such
default. GRP shall within one hundred eighty (180) days from
receipt of the joint written notice of the Unpaid Creditors and
Concessionaire, either (i) take over the Development Facility
and assume the Attendant Liabilities, or (ii) allow the Unpaid
Creditors, if qualified to be substituted as concessionaire and
operator of the Development facility in accordance with the terms
and conditions hereof, or designate a qualified operator acceptable
to GRP to operate the Development Facility, likewise under the
terms and conditions of this Agreement; Provided, that if at the end
of the 180-day period GRP shall not have served the Unpaid
Creditors and Concessionaire written notice of its choice, GRP
shall be deemed to have elected to take over the
Development Facility with the concomitant assumption of
Attendant Liabilities.
(c) If GRP, by written notice, allow the Unpaid Creditors to be
substituted as concessionaire, the latter shall form and organize a
concession company qualified to takeover the operation of the
Development Facility. If the concession company should elect to
designate an operator for the Development Facility, the concession
company shall in good faith identify and designate a qualified
operator acceptable to GRP within one hundred eighty (180) days
from receipt of GRPs written notice. If the concession company,
acting in good faith and with due diligence, is unable to designate a
qualified operator within the aforesaid period, then GRP shall at
the end of the 180-day period take over the Development
Facility and assume Attendant Liabilities.
.
Section 1.06. Attendant Liabilities
Attendant Liabilities refer to all amounts recorded and from
time to time outstanding in the books of the Concessionaire

as owing to Unpaid Creditors who have provided, loaned or

advanced funds actually used for the Project, including all
interests, penalties, associated fees, charges, surcharges,
indemnities, reimbursements and other related
expenses, and further including amounts owed by Concessionaire
to its suppliers, contractors and sub-contractors.[48]
It is clear from the above-quoted provisions that Government,
in the event that PIATCO defaults in its loan obligations, is
obligated to pay all amounts recorded and from time to time
outstanding from the books of PIATCO which the latter owes to its
creditors.[49] These amounts include all interests, penalties,
associated fees, charges, surcharges, indemnities, reimbursements
and other related expenses.[50] This obligation of the Government to
pay PIATCOs creditors upon PIATCOs default would arise if the
Government opts to take over NAIA IPT III. It should be noted,
however, that even if the Government chooses the second option,
which is to allow PIATCOs unpaid creditors operate NAIA IPT III, the
Government is still at a risk of being liable to PIATCOs creditors
should the latter be unable to designate a qualified operator within
the prescribed period.[51] In effect,whatever option the
Government chooses to take in the event of PIATCOs failure
to fulfill its loan obligations, the Government is still at a risk
of assuming PIATCOs outstanding loans. This is due to the fact
that the Government would only be free from assuming PIATCOs
debts if the unpaid creditors would be able to designate a qualified
operator within the period provided for in the contract. Thus, the
Governments assumption of liability is virtually out of its
control. The Government under the circumstances provided for in
the 1997 Concession Agreement is at the mercy of the existence,
availability and willingness of a qualified operator. The above
contractual provisions constitute a direct government guarantee
which is prohibited by law.
One of the main impetus for the enactment of the BOT Law is
the lack of government funds to construct the infrastructure and
development projects necessary for economic growth and
development. This is why private sector resources are being tapped
in order to finance these projects. The BOT law allows the private
sector to participate, and is in fact encouraged to do so by way of
incentives, such as minimizing the unstable flow of returns,
[52]
provided that the government would not have to unnecessarily
expend scarcely available funds for the project itself. As such, direct
guarantee, subsidy and equity by the government in these projects
are strictly prohibited.[53] This is but logical for if the
government would in the end still be at a risk of paying the

debts incurred by the private entity in the BOT projects,

then the purpose of the law is subverted.
Section 2(n) of the BOT Law defines direct guarantee as follows:
(n) Direct government guarantee An agreement whereby the
government or any of its agencies or local government units
assume responsibility for the repayment of debt directly
incurred by the project proponent in implementing the
project in case of a loan default.
Clearly by providing that the Government assumes the
attendant liabilities, which consists of PIATCOs unpaid debts, the
1997 Concession Agreement provided for a direct government
guarantee for the debts incurred by PIATCO in the implementation
of the NAIA IPT III project. It is of no moment that the relevant
sections are subsumed under the title of assignment. The
provisions providing for direct government guarantee which is
prohibited by law is clear from the terms thereof.
The fact that the ARCA superseded the 1997 Concession
Agreement did not cure this fatal defect. Article IV, Section 4.04(c),
in relation to Article I, Section 1.06, of the ARCA provides:
Section 4.04 Security
.
(c) GRP agrees with Concessionaire (PIATCO) that it shall
negotiate in good faith and enter into direct agreement
with the Senior Lenders, or with an agent of such Senior Lenders
(which agreement shall be subject to the approval of the Bangko
Sentral ng Pilipinas), in such form as may be reasonably acceptable
to both GRP and Senior Lenders, with regard, inter alia, to the
following parameters:
.
(iv) If the Concessionaire [PIATCO] is in default under a
payment obligation owed to the Senior Lenders, and as a
result thereof the Senior Lenders have become entitled to
accelerate the Senior Loans, the Senior Lenders shall have the right
to notify GRP of the same, and without prejudice to any other rights
of the Senior Lenders or any Senior Lenders agent may have
(including without limitation under security interests granted in
favor of the Senior Lenders), to either in good faith identify and

designate a nominee which is qualified under sub-clause (viii)(y)

below to operate the Development Facility [NAIA Terminal 3] or
transfer the Concessionaires [PIATCO] rights and obligations under
this Agreement to a transferee which is qualified under sub-clause
(viii) below;
.
(vi) if the Senior Lenders, acting in good faith and using reasonable
efforts, are unable to designate a nominee or effect a transfer in
terms and conditions satisfactory to the Senior Lenders within one
hundred eighty (180) days after giving GRP notice as referred to
respectively in (iv) or (v) above, then GRP and the Senior Lenders
shall endeavor in good faith to enter into any other arrangement
relating to the Development Facility [NAIA Terminal 3] (other than a
turnover of the Development Facility [NAIA Terminal 3] to GRP)
within the following one hundred eighty (180) days. If no
agreement relating to the Development Facility [NAIA Terminal 3]
is arrived at by GRP and the Senior Lenders within the said 180-day
period, then at the end thereof the Development Facility [NAIA
Terminal 3] shall be transferred by the Concessionaire
[PIATCO] to GRP or its designee and GRP shall make a
termination payment to Concessionaire [PIATCO] equal to
the Appraised Value (as hereinafter defined) of the
Development Facility [NAIA Terminal 3] or the sum of the
Attendant Liabilities, if greater. Notwithstanding Section
8.01(c) hereof, this Agreement shall be deemed terminated upon
the transfer of the Development Facility [NAIA Terminal 3] to GRP
pursuant hereto;
.
Section 1.06. Attendant Liabilities
Attendant Liabilities refer to all amounts in each case
supported by verifiable evidence from time to time owed or which
may become owing by Concessionaire [PIATCO] to Senior
Lenders or any other persons or entities who have provided,
loaned, or advanced funds or provided financial facilities to
Concessionaire [PIATCO] for the Project [NAIA Terminal
3], including, without limitation, all principal, interest,
associated fees, charges, reimbursements, and other
related expenses (including the fees, charges and expenses of
any agents or trustees of such persons or entities), whether
payable at maturity, by acceleration or otherwise, and further

including amounts owed by Concessionaire [PIATCO] to its

professional consultants and advisers, suppliers, contractors and
sub-contractors.[54]
It is clear from the foregoing contractual provisions that in the
event that PIATCO fails to fulfill its loan obligations to its Senior
Lenders, the Government is obligated to directly negotiate and
enter into an agreement relating to NAIA IPT III with the Senior
Lenders, should the latter fail to appoint a qualified nominee or
transferee who will take the place of PIATCO. If the Senior Lenders
and the Government are unable to enter into an agreement after
the prescribed period, the Government must then pay PIATCO, upon
transfer of NAIA IPT III to the Government, termination payment
equal to the appraised value of the project or the value of the
attendant liabilities whichever is greater. Attendant liabilities
as defined in the ARCA includes all amounts owed or thereafter
may be owed by PIATCO not only to the Senior Lenders with whom
PIATCO has defaulted in its loan obligations but to all other persons
who may have loaned, advanced funds or provided any other type
of financial facilities to PIATCO for NAIA IPT III. The amount of
PIATCOs debt that the Government would have to pay as a result of
PIATCOs default in its loan obligations -- in case no qualified
nominee or transferee is appointed by the Senior Lenders and no
other agreement relating to NAIA IPT III has been reached between
the Government and the Senior Lenders -- includes, but is not
limited to, all principal, interest, associated fees, charges,
reimbursements, and other related expenses . . . whether payable
at maturity, by acceleration or otherwise.[55]
It is clear from the foregoing that the ARCA provides for
a direct guarantee by the government to pay PIATCOs loans
not only to its Senior Lenders but all other entities who
provided PIATCO funds or services upon PIATCOs default in
its loan obligation with its Senior Lenders. The fact that the
Governments obligation to pay PIATCOs lenders for the latters
obligation would only arise after the Senior Lenders fail to appoint a
qualified nominee or transferee does not detract from the fact that,
should the conditions as stated in the contract occur, the
ARCA stillobligates the Government to pay any and all amounts
owed by PIATCO to its lenders in connection with NAIA IPT
III. Worse, the conditions that would make the Government liable
for PIATCOs debts is triggered by PIATCOs own default of its loan
obligations to its Senior Lenders to which loan contracts the
Government was never a party to. The Government was not even
given an option as to what course of action it should take in case
PIATCO defaulted in the payment of its senior loans. The

Government, upon PIATCOs default, would be merely notified by the

Senior Lenders of the same and it is the Senior Lenders who are
authorized to appoint a qualified nominee or transferee. Should the
Senior Lenders fail to make such an appointment, the Government
is then automatically obligated to directly deal and negotiate with
the Senior Lenders regarding NAIA IPT III. The only way the
Government would not be liable for PIATCOs debt is for a qualified
nominee or transferee to be appointed in place of PIATCO to
continue the construction, operation and maintenance of NAIA IPT
III. This pre-condition, however, will not take the contract out of the
ambit of a direct guarantee by the government as the existence,
availability and willingness of a qualified nominee or transferee is
totally out of the governments control. As such the Government
is virtually at the mercy of PIATCO (that it would not default on
its loan obligations to its Senior Lenders), the Senior Lenders (that
they would appoint a qualified nominee or transferee or agree to
some other arrangement with the Government) and the existence
of a qualified nominee or transferee who is able and willing to take
the place of PIATCO in NAIA IPT III.
The proscription against government guarantee in any
form is one of the policy considerations behind the BOT
Law. Clearly, in the present case, the ARCA obligates the
Government to pay for all loans, advances and obligations arising
out of financial facilities extended to PIATCO for the implementation
of the NAIA IPT III project should PIATCO default in its loan
obligations to its Senior Lenders and the latter fails to appoint a
qualified nominee or transferee. This in effect would make the
Government liable for PIATCOs loans should the conditions as set
forth in the ARCA arise. This is a form of direct government
guarantee.
The BOT Law and its implementing rules provide that in order
for an unsolicited proposal for a BOT project may be accepted, the
following conditions must first be met: (1) the project involves a
new concept in technology and/or is not part of the list of priority
projects, (2) no direct government guarantee, subsidy or
equity is required, and (3) the government agency or local
government unit has invited by publication other interested parties
to a public bidding and conducted the same. [56] The failure to meet
any of the above conditions will result in the denial of the
proposal. It is further provided that the presence of direct
government guarantee, subsidy or equity will necessarily disqualify
a proposal from being treated and accepted as an unsolicited
proposal.[57] The BOT Law clearly and strictly prohibits direct
government guarantee, subsidy and equity in unsolicited proposals
that the mere inclusion of a provision to that effect is fatal and is

sufficient to deny the proposal. It stands to reason therefore that if

a proposal can be denied by reason of the existence of direct
government guarantee, then its inclusion in the contract executed
after the said proposal has been accepted is likewise sufficient to
invalidate the contract itself. A prohibited provision, the inclusion of
which would result in the denial of a proposal cannot, and should
not, be allowed to later on be inserted in the contract resulting from
the said proposal. The basic rules of justice and fair play alone
militate against such an occurrence and must not, therefore, be
countenanced particularly in this instance where the government is
exposed to the risk of shouldering hundreds of million of dollars in
debt.
This Court has long and consistently adhered to the legal
maxim that those that cannot be done directly cannot be done
indirectly.[58] To declare the PIATCO contracts valid despite
the clear statutory prohibition against a direct government
guarantee would not only make a mockery of what the BOT
Law seeks to prevent -- which is to expose the government
to the risk of incurring a monetary obligation resulting from
a contract of loan between the project proponent and its
lenders and to which the Government is not a party to -- but
would also render the BOT Law useless for what it seeks to
achieve - to make use of the resources of the private sector
in
the
financing,
operation
and
maintenance
of
infrastructure and development projects[59] which are
necessary for national growth and development but which
the government, unfortunately, could ill-afford to finance at
this point in time.
IV
Temporary takeover of business affected with public
interest
Article XII, Section 17 of the 1987 Constitution provides:
Section 17. In times of national emergency, when the public
interest so requires, the State may, during the emergency and
under reasonable terms prescribed by it, temporarily take over or
direct the operation of any privately owned public utility or
business affected with public interest.
The above provision pertains to the right of the State in times
of national emergency, and in the exercise of its police power, to
temporarily take over the operation of any business affected with

public interest. In the 1986 Constitutional Commission, the term

national emergency was defined to include threat from external
aggression, calamities or national disasters, but not strikes unless it
is of such proportion that would paralyze government service.
[60]
The duration of the emergency itself is the determining factor as
to how long the temporary takeover by the government would last.
[61]
The temporary takeover by the government extends only to the
operation of the business and not to the ownership thereof. As such
the government is not required to compensate the private
entity-owner of the said business as there is no transfer of
ownership, whether permanent or temporary. The private entityowner affected by the temporary takeover cannot, likewise, claim
just compensation for the use of the said business and its
properties as the temporary takeover by the government is in
exercise of its police power and not of its power of eminent
domain.
Article V, Section 5.10 (c) of the 1997 Concession Agreement
provides:
Section 5.10 Temporary Take-over of operations by GRP.
.
(c) In the event the development Facility or any part thereof and/or
the operations of Concessionaire or any part thereof, become the
subject matter of or be included in any notice, notification, or
declaration concerning or relating to acquisition, seizure or
appropriation by GRP in times of war or national emergency, GRP
shall, by written notice to Concessionaire, immediately take over
the operations of the Terminal and/or the Terminal Complex. During
such take over by GRP, the Concession Period shall be suspended;
provided, that upon termination of war, hostilities or national
emergency, the operations shall be returned to Concessionaire, at
which time, the Concession period shall commence to run
again. Concessionaire shall be entitled to reasonable
compensation for the duration of the temporary take over
by GRP, which compensation shall take into account the
reasonable cost for the use of the Terminal and/or Terminal
Complex, (which is in the amount at least equal to the debt
service requirements of Concessionaire, if the temporary take
over should occur at the time when Concessionaire is still servicing
debts owed to project lenders), any loss or damage to the
Development Facility, and other consequential damages. If the
parties cannot agree on the reasonable compensation of
Concessionaire, or on the liability of GRP as aforesaid, the matter
shall be resolved in accordance with Section 10.01

[Arbitration]. Any amount determined to be payable by GRP to

Concessionaire shall be offset from the amount next payable by
Concessionaire to GRP.[62]

public interest requires a monopoly. As monopolies are subject to

abuses that can inflict severe prejudice to the public, they are
subject to a higher level of State regulation than an ordinary
business undertaking.

PIATCO cannot, by mere contractual stipulation,

contravene the Constitutional provision on temporary
government takeover and obligate the government to pay
reasonable cost for the use of the Terminal and/or Terminal
Complex.[63] Article XII, section 17 of the 1987 Constitution
envisions a situation wherein the exigencies of the times
necessitate the government to temporarily take over or direct the
operation of any privately owned public utility or business affected
with public interest. It is the welfare and interest of the public which
is the paramount consideration in determining whether or not to
temporarily take over a particular business. Clearly, the State in
effecting the temporary takeover is exercising its police
power. Police power is the most essential, insistent, and illimitable
of powers.[64] Its exercise therefore must not be unreasonably
hampered nor its exercise be a source of obligation by the
government in the absence of damage due to arbitrariness of its
exercise.[65] Thus, requiring the government to pay reasonable
compensation for the reasonable use of the property pursuant to
the operation of the business contravenes the Constitution.

In the cases at bar, PIATCO, under the 1997 Concession

Agreement and the ARCA, is granted the exclusive right to
operate a commercial international passenger terminal within the
Island of Luzon at the NAIA IPT III.[68] This is with the exception of
already existing international airports in Luzon such as those
located in the Subic Bay Freeport Special Economic Zone (SBFSEZ),
Clark Special Economic Zone (CSEZ) and in Laoag City. [69] As such,
upon commencement of PIATCOs operation of NAIA IPT III, Terminals
1 and 2 of NAIA would cease to function as international passenger
terminals. This, however, does not prevent MIAA to use Terminals 1
and 2 as domestic passenger terminals or in any other manner as it
may deem appropriate except those activities that would compete
with NAIA IPT III in the latters operation as an international
passenger terminal.[70]The right granted to PIATCO to exclusively
operate NAIA IPT III would be for a period of twenty-five (25)
years from the In-Service Date[71] and renewable for another
twenty-five (25) years at the option of the government. [72] Both the
1997 Concession Agreement and the ARCA further provide
that, in view of the exclusive right granted to PIATCO, the
concession contracts of the service providers currently
servicing Terminals 1 and 2 would no longer be renewed
and those concession contracts whose expiration are
subsequent to the In-Service Date would cease to be
effective on the said date.[73]

V
Regulation of Monopolies
A monopoly is a privilege or peculiar advantage vested in one
or more persons or companies, consisting in the exclusive right (or
power) to carry on a particular business or trade, manufacture a
particular article, or control the sale of a particular commodity.
[66]
The 1987 Constitution strictly regulates monopolies,
whether private or public, and even provides for their prohibition if
public interest so requires. Article XII, Section 19 of the 1987
Constitution states:
Sec. 19. The state shall regulate or prohibit monopolies when the
public interest so requires. No combinations in restraint of trade or
unfair competition shall be allowed.
Clearly, monopolies are not per se prohibited by the
Constitution but may be permitted to exist to aid the government in
carrying on an enterprise or to aid in the performance of various
services and functions in the interest of the public.
[67]
Nonetheless, a determination must first be made as to whether

The operation of an international passenger airport terminal is

no doubt an undertaking imbued with public interest. In entering
into a BuildOperate-and-Transfer contract for the construction,
operation and maintenance of NAIA IPT III, the government has
determined that public interest would be served better if private
sector resources were used in its construction and an exclusive
right to operate be granted to the private entity undertaking the
said project, in this case PIATCO. Nonetheless, the privilege given to
PIATCO is subject to reasonable regulation and supervision by the
Government through the MIAA, which is the government agency
authorized to operate the NAIA complex, as well as DOTC, the
department to which MIAA is attached.[74]
This is in accord with the Constitutional mandate that a
monopoly which is not prohibited must be regulated. [75] While it is
the declared policy of the BOT Law to encourage private sector
participation by providing a climate of minimum government

regulations,[76] the same does not mean that Government must

completely surrender its sovereign power to protect public interest
in the operation of a public utility as a monopoly. The operation of
said public utility can not be done in an arbitrary manner to the
detriment of the public which it seeks to serve. The right granted to
the public utility may be exclusive but the exercise of the right
cannot run riot. Thus, while PIATCO may be authorized to
exclusively operate NAIA IPT III as an international passenger
terminal, the Government, through the MIAA, has the right and the
duty to ensure that it is done in accord with public interest. PIATCOs
right to operate NAIA IPT III cannot also violate the rights of third
parties.
Section 3.01(e) of the 1997 Concession Agreement and the
ARCA provide:
3.01 Concession Period
.
(e) GRP confirms that certain concession agreements relative
to certain services and operations currently being undertaken at
the Ninoy Aquino International Airport passenger Terminal I have a
validity period extending beyond the In-Service Date. GRP
through DOTC/MIAA, confirms that these services and
operationsshall not be carried over to the Terminal and the
Concessionaire is under no legal obligation to permit such
carry-over except through a separate agreement duly entered into
with Concessionaire. In the event Concessionaire becomes involved
in any litigation initiated by any such concessionaire or operator,
GRP undertakes and hereby holds Concessionaire free and
harmless on full indemnity basis from and against any loss and/or
any liability resulting from any such litigation, including the cost of
litigation and the reasonable fees paid or payable to
Concessionaires counsel of choice, all such amounts shall be fully
deductible by way of an offset from any amount which the
Concessionaire is bound to pay GRP under this Agreement.
During the oral arguments on December 10, 2002, the counsel
for the petitioners-in-intervention for G.R. No. 155001 stated that
there are two service providers whose contracts are still existing
and whose validity extends beyond the In-Service Date. One
contract remains valid until 2008 and the other until 2010. [77]
We hold that while the service providers presently operating at
NAIA Terminal 1 do not have an absolute right for the renewal or

the extension of their respective contracts, those contracts whose

duration extends beyond NAIA IPT IIIs In-Service-Date should not be
unduly prejudiced. These contracts must be respected not just by
the parties thereto but also by third parties. PIATCO cannot, by law
and certainly not by contract, render a valid and binding contract
nugatory. PIATCO, by the mere expedient of claiming an exclusive
right to operate, cannot require the Government to break its
contractual obligations to the service providers. In contrast to the
arrastre and stevedoring service providers in the case of Anglo-Fil
Trading Corporation v. Lazaro[78] whose contracts consist of
temporary hold-over permits, the affected service providers in the
cases at bar, have a valid and binding contract with the
Government, through MIAA, whose period of effectivity, as well as
the other terms and conditions thereof, cannot be violated.
In fine, the efficient functioning of NAIA IPT III is imbued with
public interest. The provisions of the 1997 Concession Agreement
and the ARCA did not strip government, thru the MIAA, of its right
to supervise the operation of the whole NAIA complex, including
NAIA IPT III. As the primary government agency tasked with the job,
[79]
it is MIAAs responsibility to ensure that whoever by contract is
given the right to operate NAIA IPT III will do so within the bounds
of the law and with due regard to the rights of third parties and
above all, the interest of the public.
VI
CONCLUSION
In sum, this Court rules that in view of the absence of the
requisite financial capacity of the Paircargo Consortium,
predecessor of respondent PIATCO, the award by the PBAC of the
contract for the construction, operation and maintenance of the
NAIA IPT III is null and void. Further, considering that the 1997
Concession Agreement contains material and substantial
amendments, which amendments had the effect of converting the
1997 Concession Agreement into an entirely different agreement
from the contract bidded upon, the 1997 Concession Agreement is
similarly null and void for being contrary to public policy. The
provisions under Sections 4.04(b) and (c) in relation to Section 1.06
of the 1997 Concession Agreement and Section 4.04(c) in relation
to Section 1.06 of the ARCA, which constitute a direct government
guarantee expressly prohibited by, among others, the BOT Law and
its Implementing Rules and Regulations are also null and void. The
Supplements, being accessory contracts to the ARCA, are likewise
null and void.

WHEREFORE, the 1997 Concession Agreement, the Amended

and Restated Concession Agreement and the Supplements thereto
are set aside for being null and void.
SO ORDERED.

JOSE

MENCHAVEZ,
JUAN
MENCHAVEZ
JR.,
SIMEON
MENCHAVEZ,
RODOLFO
MENCHAVEZ,
CESAR
MENCHAVEZ,
REYNALDO,
MENCHAVEZ,
ALMA
MENCHAVEZ, ELMA MENCHAVEZ, CHARITO M. MAGA,
FE M. POTOT, THELMA M. REROMA, MYRNA M. YBAEZ,
and
SARAH
M.
VILLABER, petitioners, vs. FLORENTINO
TEVES
JR., respondent.
DECISION

PANGANIBAN, J.:
Avoid contract is deemed legally nonexistent. It produces no
legal effect. As a general rule, courts leave parties to such a
contract as they are, because they are in pari delicto or equally at
fault. Neither party is entitled to legal protection.

The Case
Before us is a Petition for Review [1] under Rule 45 of the Rules
of Court, assailing the February 28, 2001 Decision[2] and the April
16, 2002 Resolution[3] of the Court of Appeals (CA) in CA-GR CV No.
51144. The challenged Decision disposed as follows:
WHEREFORE, the assailed decision is hereby MODIFIED, as
follows:
THIRD DIVISION

[G.R. No. 153201. January 26, 2005]

1. Ordering [petitioners] to jointly and severally pay the

[respondent] the amount of P128,074.40 as actual damages,
and P50,000.00 as liquidated damages;
2. Dismissing the third party complaint against the third party
defendants;
3. Upholding the counterclaims of the third party defendants
against the [petitioners. Petitioners] are hereby required to pay
[the] third party defendants the sum of P30,000.00 as moral
damages for the clearly unfounded suit;

4. Requiring the [petitioners] to reimburse the third party

defendants the sum of P10,000.00 in the concept of attorneys fees
and appearance fees of P300.00 per appearance;
5. Requiring the [petitioners] to reimburse the third party
defendants the sum of P10,000.00 as exemplary damages pro bono
publico and litigation expenses including costs, in the sum
of P5,000.00.[4]
The assailed
Reconsideration.

Resolution

denied

petitioners

Motion

for

The Facts

3. The LESSORS hereby warrant that the above-described parcel of

land is fit and good for the intended use as FISHPOND;
4. The LESSORS hereby warrant and assure to maintain the LESSEE
in the peaceful and adequate enjoyment of the lease for the entire
duration of the contract;
5. The LESSORS hereby further warrant that the LESSEE can and
shall enjoy the intended use of the leased premises as FISHPOND
FOR THE ENTIRE DURATION OF THE CONTRACT;
6. The LESSORS hereby warrant that the above-premises is free
from all liens and encumbrances, and shall protect the LESSEE of
his right of lease over the said premises from any and all claims
whatsoever;

On February 28, 1986, a Contract of Lease was executed by

Jose S. Menchavez, Juan S. Menchavez Sr., Juan S. Menchavez Jr.,
Rodolfo Menchavez, Simeon Menchavez, Reynaldo Menchavez,
Cesar Menchavez, Charito M. Maga, Fe M. Potot, Thelma R. Reroma,
Myrna Ybaez, Sonia S. Menchavez, Sarah Villaver, Alma S.
Menchavez, and Elma S. Menchavez, as lessors; and Florentino
Teves Jr. as lessee. The pertinent portions of the Contract are herein
reproduced as follows:

7. Any violation of the terms and conditions herein provided, more

particularly the warranties above-mentioned, the parties of this
Contract responsible thereof shall pay liquidated damages in the
amount of not less than P50,000.00 to the offended party of this
Contract; in case the LESSORS violated therefor, they bound
themselves jointly and severally liable to the LESSEE;

WHEREAS, the LESSORS are the absolute and lawful co-owners of

that area covered by FISHPOND APPLICATION No. VI-1076 of Juan
Menchavez, Sr., filed on September 20, 1972, at Fisheries Regional
Office No. VII, Cebu City covering an area of 10.0 hectares more or
less located at Tabuelan, Cebu;

On June 2, 1988, Cebu RTC Sheriffs Gumersindo Gimenez and

Arturo Cabigon demolished the fishpond dikes constructed by
respondent and delivered possession of the subject property to
other parties.[6] As a result, he filed a Complaint for damages with
application for preliminary attachment against petitioners. In his
Complaint, he alleged that the lessors had violated their Contract of
Lease, specifically the peaceful and adequate enjoyment of the
property for the entire duration of the Contract. He
claimed P157,184.40 as consequential damages for the demolition
of the fishpond dikes, P395,390.00 as unearned income, and an
amount not less than P100,000.00 for rentals paid.[7]

xxxxxxxxx
NOW, THEREFORE, for and in consideration of the mutual covenant
and stipulations hereinafter set forth, the LESSORS and the LESSEE
have agreed and hereby agree as follows:
1. The TERM of this LEASE is FIVE (5) YEARS, from and after the
execution of this Contract of Lease, renewable at the OPTION of the
LESSORS;
2. The LESSEE agrees to pay the LESSORS at the residence of JUAN
MENCHAVEZ SR., one of the LESSORS herein, the sum of FORTY
THOUSAND PESOS (P40,000.00) Philippine Currency, annually x x x;

x x x x x x x x x.[5]

Respondent further asserted that the lessors had withheld from

him the findings of the trial court in Civil Case No. 510-T, entitled
Eufracia Colongan and Paulino Pamplona v. Juan Menchavez Sr. and
Sevillana S. Menchavez. In that case involving the same property,
subject of the lease, the Menchavez spouses were ordered to
remove the dikes illegally constructed and to pay damages and
attorneys fees.[8]

Petitioners filed a Third Party Complaint against Benny and

Elizabeth Allego, Albino Laput, Adrinico Che and Charlemagne
Arendain Jr., as agents of Eufracia Colongan and Paulino Pamplona.
The third-party defendants maintained that the Complaint filed
against them was unfounded. As agents of their elderly parents,
they could not be sued in their personal capacity. Thus, they
asserted their own counterclaims.[9]
After trial on the merits, the RTC ruled thus:
[The court must resolve the issues one by one.] As to the question
of whether the contract of lease between Teves and the
[petitioners] is valid, we must look into the present law on the
matter of fishponds. And this is Pres. Decree No. 704 which
provides in Sec. 24:
Lease of fishponds-Public lands available for fishpond development
including those earmarked for family-size fishponds and not yet
leased prior to November 9, 1972 shall be leased only to qualified
persons, associations, cooperatives or corporations, subject to the
following conditions.
1. The lease shall be for a period of twenty five years (25),
renewable for another twenty five years;
2. Fifty percent of the area leased shall be developed and be
producing in commercial scale within three years and the remaining
portion shall be developed and be producing in commercial scale
within five years; both periods begin from the execution of the
lease contract;
3. All areas not fully developed within five years from the date of
the execution of the lease contract shall automatically revert to the
public domain for disposition of the bureau; provided that a lessee
who failed to develop the area or any portion thereof shall not be
permitted to reapply for said area or any portion thereof or any
public land under this decree; and/or any portion thereof or any
public land under this decree;
4. No portion of the leased area shall be subleased.
The Constitution, (Sec. 2 & 3, Art. XII of the 1987 Constitution)
states:

Sec. 2 - All lands of the public domain, waters, minerals, coal,

petroleum and other mineral oils, all forces of potential energy,
fisheries, forests, or timber, wild life, flora and fauna and other
natural resources are owned by the state.
Sec. 3 - Lands of the public domain are classified into agricultural,
forest or timber, mineral lands and national parks. Agricultural
lands of the public domain may be further classified by law
according to the uses to which they may be devoted. Alienable
lands of the public domain shall be limited to agricultural lands x x
x.
As a consequence of these provisions, and the declared public
policy of the State under the Regalian Doctrine, the lease contract
between Florentino Teves, Jr. and Juan Menchavez Sr. and his family
is a patent nullity. Being a patent nullity, [petitioners] could not
give any rights to Florentino Teves, Jr. under the principle:NEMO
DAT QUOD NON HABET - meaning ONE CANNOT GIVE WHAT HE
DOES NOT HAVE, considering that this property in litigation belongs
to the State and not to [petitioners]. Therefore, the first issue is
resolved in the negative, as the court declares the contract of lease
as invalid and void ab-initio.
On the issue of whether [respondent] and [petitioners] are guilty of
mutual fraud, the court rules that the [respondent] and
[petitioners] are in pari-delicto. As a consequence of this, the court
must leave them where they are found. x x x.
xxxxxxxxx
x x x. Why? Because the defendants ought to have known that they
cannot lease what does not belong to them for as a matter of fact,
they themselves are still applying for a lease of the same property
under litigation from the government.
On the other hand, Florentino Teves, being fully aware that
[petitioners were] not yet the owner[s], had assumed the risks and
under the principle of VOLENTI NON FIT INJURIA NEQUES DOLUS He who voluntarily assumes a risk, does not suffer damage[s]
thereby. As a consequence, when Teves leased the fishpond area
from [petitioners]- who were mere holders or possessors thereof, he
took the risk that it may turn out later that his application for lease
may not be approved.

Unfortunately however, even granting that the lease of [petitioners]

and [their] application in 1972 were to be approved, still [they]
could not sublease the same. In view therefore of these, the parties
must be left in the same situation in which the court finds them,
under the principle IN PARI DELICTO NON ORITOR ACTIO,
meaning[:] Where both are at fault, no one can found a claim.
On the third issue of whether the third party defendants are liable
for demolishing the dikes pursuant to a writ of execution issued by
the lower court[, t]his must be resolved in the negative, that the
third party defendants are not liable. First, because the third party
defendants are mere agents of Eufracia Colongan and Eufenio
Pamplona, who are the ones who should be made liable if at all,
and considering that the demolition was pursuant to an order of the
court to restore the prevailing party in that Civil Case 510-T,
entitled: Eufracia Colongan v. Menchavez.
After the court has ruled that the contract of lease is null and void
ab-initio, there is no right of the [respondent] to protect and
therefore[,] there is no basis for questioning the Sheriffs authority
to demolish the dikes in order to restore the prevailing party, under
the principle VIDETUR NEMO QUISQUAM ID CAPERE QUOD EI
NECESSE EST ALII RESTITUERE - He will not be considered as using
force who exercise his rights and proceeds by the force of law.
WHEREFORE, in view of all foregoing [evidence] and considerations,
this court hereby renders judgment as follows:
1. Dismissing the x x x complaint by the [respondent] against the
[petitioners];
2. Dismissing the third party complaint against the third party
defendants;
3. Upholding the counterclaims of the third party defendants
against the [petitioners. The petitioners] are hereby required to pay
third party defendants the sum of P30,000.00 as moral damages
for this clearly unfounded suit;
4. Requiring the [petitioners] to reimburse the third party
defendants the sum of P10,000.00 in the concept of attorneys fees
and appearance fees of P300.00 per appearance;

5. Requiring the [petitioners] to pay to the third party defendants

the sum of P10,000.00 as exemplary damages probono publico and
litigation expenses including costs, in the sum of P5,000.00.
[10]
(Underscoring in the original)
Respondent elevated the case to the Court of Appeals, where it
was docketed as CA-GR CV No. 51144.

Ruling of the Court of Appeals

The CA disagreed with the RTCs finding that petitioners and
respondent were in pari delicto. It contended that while there was
negligence on the part of respondent for failing to verify the
ownership of the subject property, there was no evidence that he
had knowledge of petitioners lack of ownership. [11] It held as
follows:
x x x. Contrary to the findings of the lower court, it was not duly
proven and established that Teves had actual knowledge of the fact
that [petitioners] merely usurped the property they leased to him.
What Teves admitted was that he did not ask for any additional
document other than those shown to him, one of which was the
fishpond application. In fact, [Teves] consistently claimed that he
did not bother to ask the latter for their title to the property
because he relied on their representation that they are the lawful
owners of the fishpond they are holding for lease. (TSN, July 11,
1991, pp. 8-11)[12]
The CA ruled that respondent could recover actual damages in
the amount of P128,074.40. Citing Article 1356[13] of the Civil Code,
it further awarded liquidated damages in the amount of P50,000,
notwithstanding the nullity of the Contract.[14]
Hence, this Petition.[15]

The Issues
Petitioners raise the following issues for our consideration:
1. The Court of Appeals disregarded the evidence, the law and
jurisprudence when it modified the trial courts decision when it

ruled in effect that the trial court erred in holding that the
respondent and petitioners are in pari delicto, and the courts must
leave them where they are found;

Art. 1412. If the act in which the unlawful or forbidden cause

consists does not constitute a criminal offense, the following rules
shall be observed:

2. The Court of Appeals disregarded the evidence, the law and

jurisprudence in modifying the decision of the trial court and ruled
in effect that the Regional Trial Court erred in dismissing the
respondents Complaint.[16]

(1) When the fault is on the part of both contracting parties, neither
may recover what he has given by virtue of the contract, or
demand the performance of the others undertaking;

The Courts Ruling

(2) When only one of the contracting parties is at fault, he cannot

recover what he has given by reason of the contract, or ask for the
fulfillment of what has been promised him. The other, who is not at
fault, may demand the return of what he has given without any
obligation to comply with his promise.

The Petition has merit.

Main Issue:
Were the Parties in Pari Delicto?
The Court shall discuss the two issues simultaneously.
In Pari Delicto Rule
on Void Contracts
The parties do not dispute the finding of the trial and the
appellate courts that the Contract of Lease was void. [17] Indeed, the
RTC correctly held that it was the State, not petitioners, that owned
the fishpond. The 1987 Constitution specifically declares that all
lands of the public domain, waters,fisheries and other natural
resources belong to the State.[18] Included here are fishponds, which
may not be alienated but only leased. [19] Possession thereof, no
matter how long, cannot ripen into ownership.[20]
Being merely applicants for the lease of the fishponds,
petitioners had no transferable right over them. And even if the
State were to grant their application, the law expressly disallowed
sublease of the fishponds to respondent. [21] Void are all contracts in
which the cause, object or purpose is contrary to law, public order
or public policy.[22]
A void contract is equivalent to nothing; it produces no civil
effect.[23] It does not create, modify or extinguish a juridical relation.
[24]
Parties to a void agreement cannot expect the aid of the law; the
courts leave them as they are, because they are deemed in pari
delicto or in equal fault.[25] To this rule, however, there are
exceptions that permit the return of that which may have been
given under a void contract.[26] One of the exceptions is found in
Article 1412 of the Civil Code, which states:

On this premise, respondent contends that he can recover from

petitioners, because he is an innocent party to the Contract of
Lease.[27] Petitioners allegedly induced him to enter into it through
serious misrepresentation.[28]
Finding of In Pari Delicto:
A Question of Fact
The issue of whether respondent was at fault or whether the
parties were in pari delicto is a question of fact not normally taken
up in a petition for review on certiorari under Rule 45 of the Rules
of Court.[29] The present case, however, falls under two recognized
exceptions to this rule.[30] This Court is compelled to review the
facts, since the CAs factual findings are (1) contrary to those of the
trial court;[31] and (2) premised on an absence of evidence, a
presumption that is contradicted by the evidence on record. [32]
Unquestionably, petitioners leased out a property that did not
belong to them, one that they had no authority to sublease. The
trial court correctly observed that petitioners still had a pending
lease application with the State at the time they entered into the
Contract with respondent.[33]
Respondent, on the other hand, claims that petitioners misled
him into executing the Contract.[34] He insists that he relied on their
assertions regarding their ownership of the property. His own
evidence, however, rebuts his contention that he did not know that
they lacked ownership. At the very least, he had notice of their
doubtful ownership of the fishpond.
Respondent himself admitted that he was aware that the
petitioners lease application for the fishpond had not yet been
approved.[35] Thus, he knowingly entered into the Contract with the

risk that the application might be disapproved. Noteworthy is the

fact that the existence of a fishpond lease application necessarily
contradicts a claim of ownership. That respondent did not know of
petitioners lack of ownership is therefore incredible.
The evidence of respondent himself shows that he negotiated
the lease of the fishpond with both Juan Menchavez Sr. and Juan
Menchavez Jr. in the office of his lawyer, Atty. Jorge Esparagoza.
[36]
His counsels presence during the negotiations, prior to the
parties meeting of minds, further debunks his claim of lack of
knowledge. Lawyers are expected to know that fishponds belong to
the State and are inalienable. It was reasonably expected of the
counsel herein to advise his client regarding the matter of
ownership.
Indeed, the evidence presented by respondent demonstrates
the contradictory claims of petitioners regarding their alleged
ownership of the fishpond. On the one hand, they claimed
ownership and, on the other, they assured him that their fishpond
lease application would be approved. [37] This circumstance should
have been sufficient to place him on notice. It should have
compelled him to determine their right over the fishpond, including
their right to lease it.
The Contract itself stated that the area was still covered by a
fishpond application.[38] Nonetheless, although petitioners declared
in the Contract that they co-owned the property, their erroneous
declaration should not be used against them. A cursory
examination of the Contract suggests that it was drafted to favor
the lessee. It can readily be presumed that it was he or his counsel
who prepared it -- a matter supported by petitioners evidence.
[39]
The ambiguity should therefore be resolved against him, being
the one who primarily caused it.[40]
The CA erred in finding that petitioners had failed to prove
actual knowledge of respondent of the ownership status of the
property that had been leased to him. On the contrary, as the party
alleging the fact, it was he who had the burden of proving through
a preponderance of evidence[41] -- that they misled him regarding
the ownership of the fishpond. His evidence fails to support this
contention. Instead, it reveals his fault in entering into a void
Contract. As both parties are equally at fault, neither may recover
against the other.[42]

The CA erred in awarding liquidated damages, notwithstanding

its finding that the Contract of Lease was void. Even if it was
assumed that respondent was entitled to reimbursement as
provided under paragraph 1 of Article 1412 of the Civil Code, the
award of liquidated damages was contrary to established legal
principles.
Liquidated damages are those agreed upon by the parties to a
contract, to be paid in case of a breach thereof. [43] Liquidated
damages are identical to penalty insofar as legal results are
concerned.[44] Intended to ensure the performance of the principal
obligation, such damages are accessory and subsidiary obligations.
[45]
In the present case, it was stipulated that the party responsible
for the violation of the terms, conditions and warranties of the
Contract would pay not less than P50,000 as liquidated damages.
Since the principal obligation was void, there was no contract that
could have been breached by petitioners; thus, the stipulation on
liquidated damages was inexistent. The nullity of the principal
obligation carried with it the nullity of the accessory obligation of
liquidated damages.[46]
As explained earlier, the applicable law in the present factual
milieu is Article 1412 of the Civil Code. This law merely allows
innocent parties to recover what they have given without any
obligation to comply with their prestation. No damages may be
recovered on the basis of a void contract; being nonexistent, the
agreement produces no juridical tie between the parties involved.
Since there is no contract, the injured party may only recover
through other sources of obligations such as a law or a quasicontract.[47] A party recovering through these other sources of
obligations may not claim liquidated damages, which is an
obligation arising from a contract.
WHEREFORE, the Petition is GRANTED and the assailed
Decision and Resolution SET ASIDE. The Decision of the trial court is
hereby REINSTATED.
No pronouncement as to costs.
SO ORDERED.

Liquidated Damages
Not Proper
SECOND DIVISION

[G.R. No. 132887. August 11, 2005]

THE

MANILA
BANKING
CORPORATION, petitioner,
EDMUNDO S. SILVERIO and
THE COURT
APPEALS, respondents.

vs.
OF

DECISION
CHICO-NAZARIO, J.:
Before the Court is a petition for review on certiorari of the
Decision[1] and Resolution[2] of the Court of Appeals reversing the
dismissal by the Regional Trial Court (RTC) of Makati City of the
petition of private respondent for cancellation of notice of levy on
attachment and writ of attachment on two (2) parcels of land
located in Paraaque City.
The facts that gave rise to the present controversy are as
follows:
Purificacion Ver was the registered owner of two parcels of land
located at La Huerta, Paraaque City, covered by Transfer
Certificates of Title (TCTs) No. 31444 (452448) and No. 45926
(452452) of the Registry of Deeds of Paraaque City.[3]
On 16 April 1979, Purificacion Ver sold the properties to Ricardo
C. Silverio, Sr. (Ricardo, Sr.) for P1,036,475.00.[4] The absolute deed
of sale evidencing the transaction was not registered; hence, title
remained with the seller, Purificacion Ver.
On 22 February 1990, herein petitioner, The Manila Banking
Corporation (TMBC), filed a complaint with the RTC of Makati City
for the collection of a sum of money with application for the
issuance of a writ of preliminary attachment against Ricardo, Sr.
and the Delta Motors Corporation docketed as Civil Case No. 90513.[5] On 02 July 1990, by virtue of an Order of Branch 62 of the
RTC of Makati City, notice of levy on attachment of real property
and writ of attachment were inscribed on TCTs No. 31444 (452448)
and No. 45926 (452452).[6] On 29 March 1993, the trial court
rendered its Decision in favor of TMBC and against Ricardo, Sr. and
the Delta Motors Corporation.[7] The Decision was brought up to the
Court of Appeals for review.[8]
In the meantime, on 22 July 1993, herein private respondent,
Edmundo S. Silverio (Edmundo), the nephew [9] of judgment debtor
Ricardo, Sr., requested TMBC to have the annotations on the

subject properties cancelled as the properties were no longer

owned by Ricardo, Sr.[10] This letter was referred to the Bangko
Sentral Ng Pilipinas, TMBCs statutory receiver.[11] No steps were
taken to have the annotations cancelled. [12] Thus, on 17 December
1993, Edmundo filed in the RTC of Makati City a case for
Cancellation of Notice of Levy on Attachment and Writ of
Attachment on Transfer Certificates of Title Nos. 452448 and
452452 of the Office of the Registrar of Land Titles and Deeds of
Paraaque, Metro Manila. In his petition, Edmundo alleged that as
early as 11 September 1989, the properties, subject matter of the
case, were already sold to him by Ricardo, Sr. As such, these
properties could not be levied upon on 02 July 1990 to answer for
the debt of Ricardo, Sr. who was no longer the owner thereof. In its
Answer with Compulsory Counterclaim, TMBC alleged, among other
things, that the sale in favor of Edmundo was void, therefore, the
properties levied upon were still owned by Ricardo, Sr., the debtor
in Civil Case No. 90-513.
On 02 May 1995, after trial on the merits, the lower court
rendered its Decision dismissing Edmundos petition. TMBCs
counterclaim was likewise dismissed for lack of sufficient merit. The
trial court held:
After a careful study of the facts proven in the instant case, the
Court is compelled to rule that the petitioner is not entitled to a
cancellation of the annotations/inscriptions of the notice of levy on
attachment and writ of attachment appearing on Transfer
Certificates of Title Nos. 45228 31444 and (452452) 45926 of the
Registry of Deeds of Paraaque, Metro Manila. The Court is inclined
to agree with the contention of oppositor that the supposed deed of
sale in favor of herein petitioner is fictitious and simulated and thus
void ab initio. The all-important factor that what appears in the
notarial register of the notary public, albeit in loose form, is not a
deed of sale but a mere affidavit of a different person Maria J.
Segismundo --, as shown in Exhibit 10-A, is sufficient to prove that
no effective, valid and legal sale of the properties in question was
executed between the Silverio uncle and nephew. There being no
valid sale to him, petitioner has no right at all to ask for the
cancellation of the aforementioned annotations.
WHEREFORE, the instant petition is hereby dismissed, with costs
against petitioner. Oppositors counterclaim is ordered dismissed for
lack of sufficient merit.[13]

The Court of Appeals, upon reviewing the case at the instance

of Edmundo, reversed and set aside the trial courts ruling. The
dispositive portion of its Decision reads:
WHEREFORE, foregoing considered, the appealed decision is hereby
REVERSED and SET-ASIDE. A new one is rendered ORDERING the
Register of Deeds of Paraaque City to cancel the Notice of Levy on
Attachment and the Writ of Attachment made on TCT Nos. 452448
and 452452.
Costs against oppositor-appellee.[14]
The motion for reconsideration filed by TMBC was denied for
lack of merit in a Resolution dated 25 February 1998.[15]
Hence, the present petition, TMBC imputing upon the Court of
Appeals grave error in:
I.
. . . HOLDING THAT PETITIONER TMBC CANNOT QUESTION THE
VALIDITY OF THE SALE OF THE PROPERTIES COVERED BY TCT NO.
31444 (452448) AND 45926 (452452); UNDER ARTICLE 1421 OF
THE CIVIL CODE, THE DEFENSE OF NULLITY OF A CONTRACT IS
AVAILABLE TO THIRD PERSONS WHOSE INTERESTS ARE DIRECTLY
AFFECTED.
II.
ORDERING THE CANCELLATION OF THE NOTICE OF LEVY ON
ATTACHMENT AND THE WRIT OF ATTACHMENT MADE ON TCT NO.
452448 AND 452452 SINCE AS AGAINST TWO (2) TRANSACTIONS
CONCERNING THE SAME LAND, THE REGISTERED TRANSACTION
PREVAILS OVER THE ALLEGED EARLIER UNREGISTERED RIGHT.
III.
FINDING THAT PETITIONER TMBC IS GUILTY OF BAD FAITH IN
FAILING TO MAKE INQUIRIES ON THE RIGHTS OF RICARDO SILVERIO,
SR. OVER THE SUBJECT PROPERTIES.
Basic is the rule that only properties belonging to the debtor
can be attached, and an attachment and sale of properties
belonging to a third party are void.[16] At the pith of the controversy,
therefore, is the issue of ownership of the subject properties at the

time of the levy thereof as the right of petitioner TMBC, as creditor,

depends on whether such properties were still owned by its debtor,
Ricardo, Sr., and not by Edmundo, who is concededly not a debtor
of TMBC. If the properties were validly transferred to Edmundo
before the levy thereof then cancellation of the annotation is in
order. If, however, the sale was absolutely simulated and was
entered into between uncle and nephew for the lone reason of
removing the properties from the reach of TMBC, then the
annotation should stay.
The issue of whether the contract is simulated or real is factual
in nature, and the Court eschews factual examination in a petition
for review under Rule 45 of the Rules of Court. [17] This rule,
however, is not without exceptions, one of which is when there
exists a conflict between the factual findings of the trial court and
of the appellate court,[18] as in the case at bar.
The trial court, in ruling that TMBC was well within its rights to
cause the levy of the properties through a writ of preliminary
attachment, held that the sale between Ricardo, Sr. and his
nephew, Edmundo, ostensibly effected before the levy of the
subject properties, was void for being absolutely simulated. The
fictitious nature of the sale between the uncle and nephew,
according to the trial court, is made evident by the all-important
factor that what appears in the notarial register of the notary
public, albeit in loose form, is not a deed of sale but a mere
affidavit of a different person Maria J. Segismundo -- as shown in
Exhibit 10-A. The trial court thus concluded that as the sale was
void, the properties were still owned by Ricardo, Sr. at the time the
levy thereon was effected.
In reversing the trial court, the Court of Appeals reasoned,
among other things, that the sale between Ricardo, Sr. and
Edmundo was not void and that assuming it to be void, only the
parties to the sale and/or their assigns can impugn or assail its
validity. Moreover, assailing the validity of a sale for being in fraud
of creditors is a remedy of last resort, i.e., accion pauliana can be
availed of only after the creditor has had exhausted all the
properties of the debtor not exempt from execution. [19] In herein
case, it does not appear that TMBC sought other properties of
Ricardo, Sr. other than the subject properties alleged to have been
transferred in fraud of creditors. Thus, as the sale of the subject
properties was not void, it rightfully transferred ownership to
Edmundo who is not a debtor of TMBC. Consequently, TMBC could
not legally attach the same under Section 5, Rule 57 of the Rules of
Civil Procedure.

The validity of the contract of sale being the focal point in the
two courts decision, we begin our analysis into the matter with two
veritable presumptions: first, that there was sufficient consideration
of the contract[20] and, second, that it was the result of a fair and
regular private transaction.[21] As we held in Suntay v. Court of
Appeals,[22] if shown to hold, these presumptions infer prima
facie the transactions validity, except that it must yield to the
evidence adduced.
Between the disparate positions of the trial court and the Court
of Appeals, we find those of the trial court to be more in accord
with the evidence on hand and the laws applicable thereto.
It will be noted that the Court of Appeals never justified its
ruling that the lower court erred in finding the subject sale was
void. On the other hand, the evidence is overwhelming that the
sale dated 11 September 1989 between Ricardo Sr. and Edmundo
was absolutely simulated and that it was non-existent prior to its
initial appearance on 22 July 1993 when the latter wrote TMBC to
cause the cancellation of its lien.
An absolutely simulated contract, under Article 1346 of the
Civil Code, is void. [23] It takes place when the parties do not intend
to be bound at all.[24] The characteristic of simulation is the fact that
the apparent contract is not really desired or intended to produce
legal effects or in any way alter the juridical situation of the parties.
[25]
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. [26] Lacking,
therefore, in a fictitious and simulated contract is consent which is
essential to a valid and enforceable contract.[27]
In herein case, badges of fraud and simulation permeate the
whole transaction, thus, we cannot but refuse to give the sale
validity and legitimacy. Consider the following circumstances:
1) There is no proof that the said sale took place prior to the
date of the attachment. The notarized deed of sale, which would
have served as the best evidence of the transaction, did not
materialize until 22 July 1993, or three (3) years after TMBC caused
the annotation of its lien on the titles subject matter of the alleged
sale. Mr. Jerry Tanchuan, Archivist 1 of the Records Management of
the Archives Office (RMAO), testified that the procedure being
followed with respect to notarized documents is that the Records
Section of the RTC will transmit to the RMAO copies in its
possession of the original documents notarized by a notary public
together with the Notarial Registry Book. [28] In herein case, the RTC

did not transmit any book of Atty. Anacleto T. Lacanilao, Jr., the
notary public who allegedly notarized the deed of sale between
Ricardo, Sr. and Edmundo for the year 1989. [29] Instead, what the
RMAO was in possession of was only a loose leaf entry form for
Document No. 444, Page 90, Book No. 17, Series of 1989 which is
an affidavit of one Maria J. Segismundo dated 11 September 1989.
[30]
The RMAO did not have available in its file the particular deed of
sale acknowledged by Atty. Lacanilao as Document No. 444, Page
90, Book No. 17, Series of 1989. [31] In Tala Realty Services
Corporation v. Banco Filipino Savings and Mortgage Bank,[32] as
reiterated in two other Tala cases,[33] the Court rejected a notarized
deed that was not reported to the Clerk of Court of the RTC by the
notary public who notarized it. The Court held that this fact
militates against the use of the document as basis to uphold the
petitioners claim. The same is true in this case. The fact that the
assailed deed of sale is not one of those submitted by Atty.
Lacanilao to the Clerk of Court of the RTC of Makati City [34] renders
it virtually worthless in the absence of corroboration as to its due
execution other than petitioner (now private respondent)
Edmundos self-serving statements. This being the case, Edmundo
could simply have presented the witnesses to the transaction (his
wife and his lawyer), Atty. Lacanilao or the seller himself, Ricardo
Sr., to testify as to the execution of the contract of sale on 11
September 1989. This he did not do, thus lending more credence to
the theory of TMBC that the sale was entered into only as an
afterthought, hatched to prevent the transfer of the properties to
TMBC after the latter had already annotated its lien thereon.
2) Edmundo, to say the least, was very evasive when
questioned regarding details of the alleged sale. The deed of sale
mentioned Three Million One Hundred Nine Thousand and Four
Hundred Twenty-Five pesos (P3,109,425.00) as the contract price
paid by hand during the execution of the contract, yet, when asked
on cross-examination, Edmundo could not remember if he paid
directly to Ricardo, Sr.[35] Worse, he could not remember where
Ricardo, Sr. was at the time of the sale.[36] Thus:
Q: Now, Mr. Silverio, there is on page 2 marked as Exhibit
D-1 a signature over the typewritten name Edmundo
S. Silverio, will you please tell us whose signature is
that?
A. My signature.
Q. And again, there is a signature over the typewritten
name Ricardo Silverio, vendor, will you please tell us
whose signature is that?

A: That is the signature of the seller.

Q: And why do you say or how did you know that this is the
signature of Ricardo Silverio?
A: Because the Deed of Absolute Sale was executed and
signed infront of me.[37]
...
Q: And Mr. Witness, at the time of the Deed of Sale on
September 11, 1989, was Ricardo Silverio in the
country at that time?
A: I cannot give the exact presence of him. I cannot
remember now.
Q: But at the time of the Deed of Sale on September 11,
1989, you know if he was in the country or not?
A: I cannot remember.
Q: With respect to the consideration for the purchase of
subject parcels of land, what was the manner of
payment for said consideration?
A: It is already mentioned in the Deed of Absolute Sale.
Q: In the deed of Absolute Sale there is mentioned made
by hand, can you explain that?
A: The Deed of Absolute Sale clearly specified already the
payment on which the payment was made.
Q: The Deed of Absolute Sale mentioned by hand, what
does that mean that you personally handed the
payment to Mr. Silverio?
A: Payment was made to him.
Q: By hand you mean he was present?
A: When you said date, there was an exemption of
payments made.
Q: But you gave the payment personally to Mr. Silverio?
A: I have to recall.
Q: So you cannot recall?
A: I cannot recall.[38]

If it were true that money indeed changed hands on 11

September 1989 as evidenced by the assailed deed of sale, then,
at the very least, Edmundo, as buyer, would definitely not have
forgotten personally handing P3,109,425.00 to the seller, Ricardo,
Sr. It goes against ordinary human experience for a person to
simply forget the details of the day when he became poorer
by P3,109,425.00 cash. The only logical conclusion is that there
was actually no consideration for the said sale. Verily, a deed of
sale in which the stated consideration has not in fact been paid is a
false contract that is void ab initio.[39] Likewise, a contract of
purchase and sale is null and void and produces no effect
whatsoever where it appears that [the] same is without cause or
consideration which should have been the motive thereof, or the
purchase price appears thereon as paid but which in fact has never
been paid by the purchaser to the vendor. [40]
3) As correctly pointed out by TMBC, an indication of simulation
of contract is the complete absence of an attempt in any manner
on the part of the ostensible buyer to assert rights of ownership
over the subject properties. In herein case, Edmundo did not
attempt to have the 1989 deed of sale registered until 1993. [41] He
was not in possession of the properties.[42] He did not have a
contract of lease with the actual occupant of the properties. [43] As
late as 1991, it was Ricardo, Sr. who was claiming to be the rightful
owner of the properties in connection with an ejectment case he
filed against third persons.[44] When asked to explain why it was
Ricardo, Sr. who was asserting ownership over the properties,
Edmundo lamely replied because I am asking him so.[45]
Taken together with the other circumstances surrounding the
sale, Edmundos failure to exercise acts of dominium over the
subject properties buttresses TMBCs position that the former did
not at all intend to be bound by the contract of sale. In Suntay,
[46]
as reiterated in such cases as Santiago v. Court of Appeals,
[47]
Cruz v. Bancom Finance Corporation[48] and Ramos v. Heirs of
Ramos, Sr.,[49] we held that the most proturberant index of
simulation is the complete absence of an attempt in any manner on
the part of the [ostensible buyer] to assert his rights of ownership
over the [properties] in question. The supposed buyers failure to
take exclusive possession of the property allegedly sold or, in the
alternative, to collect rentals, is contrary to the principle of
ownership.[50] Such failure is a clear badge of simulation that
renders the whole transaction void pursuant to Article 1409 of the
Civil Code.[51]
When a contract is void, the right to set-up its nullity or nonexistence is available to third persons whose interests are directly

affected thereby.[52] The material interest of TMBC need not be

belabored. Suffice it to say that as judgment creditor of Ricardo, Sr.,
it has the right to protect its lien acquired through a writ of
preliminary attachment as security for the satisfaction of any
judgment in its favor.
The Court of Appeals, however, erroneously ruled that TMBC
should first go after the properties of its debtor, Ricardo, Sr., and,
failing therein would be the only time it will acquire a material
interest over the subject properties, thus:
Article 117 of the New Civil Code is very explicit that the right or
remedy of the creditor to impugn the acts which the debtor may
have done to defraud them is subsidiary in nature. It can only be
availed of in the absence of any other legal remedy to obtain
reparation for the injury. Otherwise stated, the right of accion
paulianacan be availed of only AFTER the creditor have exhausted
all the properties of the debtor not exempt from executions.
This fact is not present in this case. Not a single proof was offered
to show that oppositor-appellee had exhausted all the properties of
Ricardo Silverio before it tried to question the validity of the
contract of sale. In fact, oppositor-appellee never alleged in its
pleadings that it had exhausted all the properties of Ricardo Silverio
before it impugned the validity of the sale made by Ricardo Silverio
to petitioner-appellant.
This being the case, oppositor-appellee cannot and is not in the
proper position to question the validity of the sale of the subject
properties by Ricardo Silverio to petitioner-appellant. Oppositorappellee has not shown that it has the material interest to question
the sale.[53]
Contrary to the position taken by the Court of Appeals, TMBC
need not look farther than the subject properties to protect its
rights. The remedy of accion pauliana is available when the subject
matter is a conveyance, otherwise valid undertaken in fraud of
creditors.[54] Such a contract is governed by the rules on rescission
which prescribe, under Art. 1383 of the Civil Code, that such action
can be instituted only when the party suffering damage has no
other legal means to obtain reparation for the same. The contract
of sale before us, albeit undertaken as well in fraud of creditors, is
not merely rescissible but is void ab initio for lack of consent of the
parties to be bound thereby. A void or inexistent contract is one
which has no force and effect from the very beginning, as if it had

never been entered into; it produces no effect whatsoever either

against or in favor of anyone. [55]Rescissible contracts, on the other
hand, are not void ab initio, and the principle, quod nullum est
nullum producit effectum, in void and inexistent contracts is
inapplicable.[56] Until set aside in an appropriate action, rescissible
contracts are respected as being legally valid, binding and in force.
[57]
Tolentino, a noted civilist, distinguished between these two types
of contracts entered into in fraud of creditors, thus:
Absolute simulation implies that there is no existing contract, no
real act executed; while fraudulent alienation means that there is a
true and existing transfer or contract. The former can be attacked
by any creditor, including one subsequent to the contract; while the
latter can be assailed only by the creditors before the alienation. In
absolute simulation, the insolvency of the debtor making the
simulated transfer is not a prerequisite to the nullity of the
contract; while in fraudulent alienation, the action to rescind,
or accion pauliana, requires that the creditor cannot recover in any
other manner what is due him. Finally, the action to declare a
contract absolutely simulated does not prescribe (articles 1409 and
1410); while the accion pauliana to rescind a fraudulent alienation
prescribes in four years (article 1389).[58]
IN SUM, considering that an absolutely simulated contract is
not a recognized mode of acquiring ownership, [59] the levy of the
subject properties on 02 July 1990 pursuant to a writ of preliminary
attachment duly issued by the RTC in favor of TMBC and against its
debtor, Ricardo, Sr., was validly made as the properties were
invariably his. Consequently, Edmundo, who has no legal interest in
these properties, cannot cause the cancellation of the annotation of
such lien for the reasons stated in his petition.
WHEREFORE, premises considered, the Decision of the Court
of Appeals dated 17 October 1997 and its Resolution dated 25
February 1998 are hereby REVERSED and SET ASIDE. The Decision
of the Regional Trial Court of Makati City, Branch 145, dated 02 May
1995, is REINSTATED, dismissing the petition for Cancellation of
Notice of Levy on Attachment and Writ of Attachment on Transfer
Certificates of Title No. 31444 (452448) and No. 45926 (452452) of
the Registry of Deeds of Paraaque City. With costs.
SO ORDERED.

Philippine National Police Crime Laboratory which found the same

to be a forgery.4

Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 165879

November 10, 2006

MARIA B. CHING, Petitioner,

vs.
JOSEPH C. GOYANKO, JR., EVELYN GOYANKO, JERRY
GOYANKO, IMELDA GOYANKO, JULIUS GOYANKO, MARY
ELLEN GOYANKO AND JESS GOYANKO, Respondents.
DECISION
CARPIO MORALES, J.:
On December 30, 1947, Joseph Goyanko (Goyanko) and Epifania
dela Cruz (Epifania) were married.1 Out of the union were born
respondents Joseph, Jr., Evelyn, Jerry, Imelda, Julius, Mary Ellen and
Jess, all surnamed Goyanko.
Respondents claim that in 1961, their parents acquired a 661
square meter property located at 29 F. Cabahug St., Cebu City but
that as they (the parents) were Chinese citizens at the time, the
property was registered in the name of their aunt, Sulpicia Ventura
(Sulpicia).
On May 1, 1993, Sulpicia executed a deed of sale2 over the
property in favor of respondents father Goyanko. In turn, Goyanko
executed on October 12, 1993 a deed of sale3 over the property in
favor of his common-law-wife-herein petitioner Maria B. Ching.
Transfer Certificate of Title (TCT) No. 138405 was thus issued in
petitioners name.
After Goyankos death on March 11, 1996, respondents discovered
that ownership of the property had already been transferred in the
name of petitioner. Respondents thereupon had the purported
signature of their father in the deed of sale verified by the

Respondents thus filed with the Regional Trial Court of Cebu City a
complaint for recovery of property and damages against petitioner,
praying for the nullification of the deed of sale and of TCT No.
138405 and the issuance of a new one in favor of their father
Goyanko.
In defense, petitioner claimed that she is the actual owner of the
property as it was she who provided its purchase price. To disprove
that Goyankos signature in the questioned deed of sale is a
forgery, she presented as witness the notary public who testified
that Goyanko appeared and signed the document in his presence.
By Decision of October 16, 1998,5 the trial court dismissed the
complaint against petitioner, the pertinent portions of which
decision read:
There is no valid and sufficient ground to declare the sale as null
and void, fictitious and simulated. The signature on the questioned
Deed of Sale is genuine. The testimony of Atty. Salvador Barrameda
who declared in court that Joseph Goyanko, Sr. and Maria Ching
together with their witnesses appeared before him for notarization
of Deed of Sale in question is more reliable than the conflicting
testimonies of the two document examiners. Defendant Maria
Ching asserted that the Deed of Sale executed by Joseph Goyanko,
Sr. in her favor is valid and genuine. The signature of Joseph
Goyanko, Sr. in the questioned Deed of Absolute Sale is genuine as
it was duly executed and signed by Joseph Goyanko, Sr. himself.
The parcel of lands known as Lot No. 6 which is sought to be
recovered in this case could never be considered as the conjugal
property of the original Spouses Joseph C. Goyanko and Epifania
dela Cruz or the exclusive capital property of the husband. The
acquisition of the said property by defendant Maria Ching is wellelicited from the aforementioned testimonial and documentary
evidence presented by the defendant. Although for a time being
the property passed through Joseph Goyanko, Sr. as a buyer yet his
ownership was only temporary and transitory for the reason that it
was subsequently sold to herein defendant Maria Ching. Maria
Ching claimed that it was even her money which was used by
Joseph Goyanko, Sr. in the purchase of the land and so it was
eventually sold to her. In her testimony, defendant Ching justified
her financial capability to buy the land for herself. The transaction

undertaken was from the original owner Sulpicia Ventura to Joseph

Goyanko, Sr. and then from Joesph Goyanko, Sr. to herein defendant
Maria Ching.
The land subject of the litigation is already registered in the name
of defendant Maria Ching under TCT No. 138405. By virtue of the
Deed of Sale executed in favor of Maria Ching, Transfer Certificate
of Title No. 138405 was issued in her favor. In recognition of the
proverbial virtuality of a Torrens title, it has been repeatedly held
that, unless bad faith can be established on the part of the person
appearing as owner on the certificate of title, there is no other
owner than that in whose favor it has been issued. A Torrens title is
not subject to collateral attack. It is a well-known doctrine that a
Torrens title, as a rule, is irrevocable and indefeasible, and the duty
of the court is to see to it that this title is maintained and respected
unless challenged in a direct proceedings [sic].6 (Citations omitted;
underscoring supplied)
Before the Court of Appeals where respondents appealed, they
argued that the trial court erred:
1. . . . when it dismissed the complaint a quo . . . , in effect,
sustaining the sale of the subject property between Joseph,
Sr. and the defendant-appellee, despite the proliferation in
the records and admissions by both parties that defendantappellee was the "mistress" or "common-law wife" of Joseph,
Sr..
2. . . . when it dismissed the complaint a quo . . . , in effect,
sustaining the sale of the subject property between Joseph,
Sr. and the defendant-appellee, despite the fact that the
marriage of Joseph, Sr. and Epifania was then still subsisting
thereby rendering the subject property as conjugal property
of Joseph, Sr. and Epifania.
3. . . . in dismissing the complaint a quo . . . , in effect,
sustaining the validity of the sale of the subject property
between Joseph, Sr. and the defendant-appellee, despite the
clear findings of forgery and the non-credible testimony of
notary public.7
By Decision dated October 21, 2003,8 the appellate court reversed
that of the trial court and declared null and void the questioned
deed of sale and TCT No. 138405. Held the appellate court:

. . . The subject property having been acquired during the existence

of a valid marriage between Joseph Sr. and Epifania dela CruzGoyanko, is presumed to belong to the conjugal partnership.
Moreover, while this presumption in favor of conjugality is
rebuttable with clear and convincing proof to the contrary, we find
no evidence on record to conclude otherwise. The record shows
that while Joseph Sr. and his wife Epifania have been estranged for
years and that he and defendant-appellant Maria Ching, have in
fact been living together as common-law husband and wife, there
has never been a judicial decree declaring the dissolution of his
marriage to Epifania nor their conjugal partnership. It is therefore
undeniable that the 661-square meter property located at No. 29 F.
Cabahug Street, Cebu City belongs to the conjugal partnership.
Even if we were to assume that the subject property was not
conjugal, still we cannot sustain the validity of the sale of the
property by Joseph, Sr. to defendant-appellant Maria Ching, there
being overwhelming evidence on records that they have been living
together as common-law husband and wife. On this score, Art.
1352 of the Civil Code provides:
"Art. 1352. Contracts without cause, or with unlawful cause,
produce no effect whatsoever. The cause is unlawful if it is contrary
to law, morals, good customs, public order or public policy."
We therefore find that the contract of sale in favor of the
defendant-appellant Maria Ching was null and void for being
contrary to morals and public policy. The purported sale, having
been made by Joseph Sr. in favor of his concubine, undermines the
stability of the family, a basic social institution which public policy
vigilantly protects. Furthermore, the law emphatically prohibits
spouses from selling property to each other, subject to certain
exceptions. And this is so because transfers or conveyances
between spouses, if allowed during the marriage would destroy the
system of conjugal partnership, a basic policy in civil law. The
prohibition was designed to prevent the exercise of undue influence
by one spouse over the other and is likewise applicable even to
common-law relationships otherwise, "the condition of those who
incurred guilt would turn out to be better than those in legal
union.9 (Underscoring supplied)
Hence, the present petition, petitioners arguing that the appellate
court gravely erred in:
I.

. . . APPLYING THE STATE POLICY ON PROHIBITION AGAINST

CONVEYANCES AND TRANSFERS OF PROPERTIES BETWEEN
LEGITIMATE AND COMMON LAW SPOUSES ON THE SUBJECT
PROPERTY, THE SAME BEING FOUND BY THE COURT A QUO,
AS THE EXCLUSIVE PROPERTY OF PETITIONER, AND THAT
THE SAME WAS NEVER PART OF THE CONJUGAL PROPERTY
OF THE MARRIAGE BETWEEN RESPONDENTS MOTHER
EPIFANIA GOYANKO AND PETITIONERS COMMON LAW
HUSBAND, JOSEPH GOYANKO, SR., NOR THE EXCLUSIVE OR
CAPITAL PROPERTY OF THE LATTER AT ANYTIME BEFORE THE
SAME WAS VALIDLY ACQUIRED BY PETITIONER.
II.
. . . NOT FINDING THAT A JURIDICAL RELATION OF TRUST AS
PROVIDED FOR UNDER ARTICLES 1448 AND 1450 OF THE
NEW CIVIL CODE CAN VALIDLY EXIST BETWEEN COMMON
LAW SPOUSES.
III.
. . . NOT FINDING THAT A CONVEYANCE OVER A PROPERTY
MADE BY A TRUSTEE, WHO BECAME AS SUCH IN
CONTEMPLATION OF LAW, AND WHO HAPPENS TO BE A
COMMON LAW HUSBAND OF THE BENEFICIARY, IS NOT A
VIOLATION OF A STATE POLICY ON PROHIBITION AGAINST
CONVEYANCES AND TRANSFERS OF PROPERTIES BETWEEN
LEGITIMATE AND COMMON LAW SPOUSES.
IV.
. . . ALLOWING RESPONDENTS TO ABANDON THEIR
ORIGINAL THEORY OF THEIR CASE DURING APPEAL.10
The pertinent provisions of the Civil Code which apply to the
present case read:
ART. 1352. Contracts without cause, or with unlawful cause,
produce no effect whatever. The cause is unlawful if it is contrary to
law, morals, good customs, public order or public policy.
ART. 1409. The following contracts are inexistent and void from the
beginning:

(1) Those whose cause, object or purpose is contrary to law,

morals, good customs, public order or public policy;
(2) Those which are absolutely simulated or fictitious;
(3) Those whose cause or object did not exist at the time of
the transaction;
(4) Those whose object is outside the commerce of men;
(5) Those which contemplate an impossible service;
(6) Those where the intention of the parties relative to the
principal object of the contract cannot be ascertained;
(7) Those expressly prohibited or declared void by law.
These contracts cannot be ratified. Neither can the right to set up
the defense of illegality be waived.
ARTICLE 1490. The husband and wife cannot sell property to each
other, except:
(1) When a separation of property was agreed upon in the
marriage settlements; or
(2) When there has been a judicial separation of property
under Article 191. (Underscoring supplied)
The proscription against sale of property between spouses applies
even to common law relationships. So this Court ruled in CalimlimCanullas v. Hon. Fortun, etc., et al.:11
Anent the second issue, we find that the contract of sale was null
and void for being contrary to morals and public policy. The sale
was made by a husband in favor of a concubine after he had
abandoned his family and left the conjugal home where his
wife and children lived and from whence they derived their
support. The sale was subversive of the stability of the
family, a basic social institution which public policy
cherishes and protects.

Article 1409 of the Civil Code states inter alia that: contracts whose
cause, object, or purposes is contrary to law, morals, good
customs, public order, or public policy are void and inexistent from
the very beginning.

to the lender or payor to secure the payment of the debt, a trust

arises by operation of law in favor of the person to whom the
money is loaned or for whom it is paid. The latter may redeem the
property and compel a conveyance thereof to him.

Article 1352 also provides that: "Contracts without cause, or

with unlawful cause, produce no effect whatsoever. The cause is
unlawful if it is contrary to law, morals, good customs, public order,
or public policy."

does not persuade.

Additionally, the law emphatically prohibits the spouses

from selling property to each other subject to certain
exceptions.1wphi1 Similarly, donations between spouses
during marriage are prohibited. And this is so because if
transfers or conveyances between spouses were allowed during
marriage, that would destroy the system of conjugal partnership, a
basic policy in civil law. It was also designed to prevent the exercise
of undue influence by one spouse over the other, as well as to
protect the institution of marriage, which is the cornerstone of
family law.The prohibitions apply to a couple living as
husband and wife without benefit of marriage, otherwise,
"the condition of those who incurred guilt would turn out to
be better than those in legal union." Those provisions are
dictated by public interest and their criterion must be imposed
upon the will of the parties. . . .12 (Italics in the original; emphasis
and underscoring supplied)
As the conveyance in question was made by Goyangko in favor of
his common- law-wife-herein petitioner, it was null and void.
Petitioners argument that a trust relationship was created between
Goyanko as trustee and her as beneficiary as provided in Articles
1448 and 1450 of the Civil Code which read:
ARTICLE 1448. There is an implied trust when property is sold, and
the legal estate is granted to one party but the price is paid by
another for the purpose of having the beneficial interest of the
property. The former is the trustee, while the latter is the
beneficiary. However, if the person to whom the title is conveyed is
a child, legitimate or illegitimate, of the one paying the price of the
sale, no trust is implied by law, it being disputably presumed that
there is a gift in favor of the child.
ARTICLE 1450. If the price of a sale of property is loaned or paid by
one person for the benefit of another and the conveyance is made

For petitioners testimony that it was she who provided the

purchase price is uncorroborated. That she may have been
considered the breadwinner of the family and that there was proof
that she earned a living do not conclusively clinch her claim.
As to the change of theory by respondents from forgery of their
fathers signature in the deed of sale to sale contrary to public
policy, it too does not persuade. Generally, a party in a litigation is
not permitted to freely and substantially change the theory of his
case so as not to put the other party to undue disadvantage by not
accurately and timely apprising him of what he is up against, 13 and
to ensure that the latter is given the opportunity during trial to
refute all allegations against him by presenting evidence to the
contrary. In the present case, petitioner cannot be said to have
been put to undue disadvantage and to have been denied the
chance to refute all the allegations against her. For the nullification
of the sale is anchored on its illegality per se, it being violative of
the above-cited Articles 1352, 1409 and 1490 of the Civil Code.
WHEREFORE, the petition is DENIED for lack of merit.
Costs against petitioner.
SO ORDERED

Republic of the Philippines

Supreme Court
Manila

PERALTA, J.:
SECOND DIVISION
This is a petition for review[1] on certiorari under Rule 45 of the
Rules of Court seeking to nullify and set aside the Decision [2] of the
GOLDEN
APPLE
REALTY
DEVELOPMENT
CORPORATIONand ROSVIBON
CORPORATION,

AND

G.R. No. 119857

Court

of

Appeals

(CA)

dated January

23,

1995 and

the

Resolution[3] dated March 28, 1995 in CA-G.R. CV No. 40961.

REALTY
Present:

The antecedent facts are the following:

Petitioners,
CARPIO, J.,* Chairperson,
On December 1, 1981, Hayari Trading Corporation (Hayari), through
NACHURA,
a
Loan
Agreement,[4] borrowed
from
Manphil
Investment
- versus -

PERALTA,
ABAD,
VILLARAMA, JR.,**and

SIERRA
GRANDE
REALTY
CORPORATION,
MANPHIL
INVESTMENT CORPORATION, RENAN
V. SANTOS andPATRICIO MAMARIL,

Thousand Pesos (P2,500,000.00) for the benefit of Filipinas Textile

Mills, Inc. (Filtex).

MENDOZA, JJ.
On the same date, Hayari President Yu Han Yat, Jr., his wife Terry
Promulgated:

Respondents.

Corporation (Manphil) the amount of Two Million Five Hundred

Villanueva Yu and the latter's uncle, Bernardino Villanueva,

executed an Assumption of Joint and Solidary Liability [5] for and in
consideration of the loan granted to Hayari, assuming joint and

July 28, 2010

x-----------------------------------------------------------------------------------------x

solidary liability with Hayari for the due and punctual payment of all
and/or any amortizations on the loan, as well as all amounts
payable to Manphil, in connection therewith and for the strict
performance and fulfillment of the obligation of Hayari.

DECISION
In

connection

therewith,

Valiant

Realty

and

Development

Corporation, represented by its General Manager Bernardino

Villanueva, and Sierra Grande Realty Corporation (Sierra Grande),

sisters, and Rosvibon Realty Corporation (Rosvibon), majority of its

represented by Terry Villanueva Yu, executed a Third Party Real

stocks are owned by Rosita So, another sister of the father of the

Estate Mortgage

[6]

in favor of Manphil over a parcel of land,

otherwise known as the Roberts property.

Villanueva brothers and sisters, for the amount of P441,032.00. The

amount of P10,000.00 of the purchase price will have to be paid to
the vendor upon the signing of the contract and the balance to be
paid to the mortgagee Manphil, on or before October 31, 1987.

Filtex also constituted a real estate mortgage over certain parcels

of land that it owned and also constituted a chattel mortgage over
the machinery of Hayari in order to secure payment of the loan.

On June

29,

subdivided

1985,

into

four

the Roberts
lots,

[9]

property was

subject

to

the

surveyed

approval

of

and
the

subdivision plan.
Thereafter, Bernardino Villanueva suggested that the Roberts
property be subdivided to make it easier for Sierra Grande to sell
the same. On June 22, 1985, as suggested, the Board of Directors

On July 26, 1985, Sierra Grande, through Bernardino Villanueva,

of Sierra Grande, composed of brothers and sisters Robert

finally executed a Deed of Sale [10] of Lots 1, 2 and 3, with a total

Villanueva, Daniel Villanueva, Terry Villanueva Yu, Susan Villanueva

land area of 1,402 square meters, to Golden Apple, for P382,080.00

and Eden Villanueva, passed a resolution

[7]

authorizing General

Manager Bernardino Villanueva, brother of their deceased father, to

and another Deed of Sale[11] of Lot 4, with a total land area of 499
sq. m., to Rosvibon for P119,760.00.

hire a geodetic engineer and cause the subdivision plan to be

approved by the Land Registration Commission, and to sell the
subdivided lots after approval of the subdivision plan, if found to be

Meanwhile, Sierra Grande's Board, on August 29, 1985, passed a

necessary and for which the corporation may need to carry its

resolution[12] revoking the authority of Bernardo Villanueva to sell

purpose.

the Roberts property. Hayari President Yu Han Yat, Jr., husband of

Sierra Grande director Terry Villanueva Yu, advised Manphil,
through a letter[13] dated August 30, 1985, that all dealings with

Eventually, on June 22, 1985, Bernardino Villanueva executed a

respect to its loan or credit facility with Manphil shall be coursed

Contract to Sell[8] the Roberts property with Golden Apple Realty

through or effected with the express knowledge, representation or

and Development, Inc. (Golden Apple), majority of its stocks are

consent

owned by Elmer Tan, a first cousin of the Villanueva brothers and

resolution[14] notarized on September 3, 1985 was passed by the

of

the

President

of

Hayari. Thereafter,

directors of Sierra Grande revoking the authority previously granted

receivership, informing the latter of the following: that Hayari had

to Bernardino Villanueva to negotiate and contract the sale of

not made any request to borrow any duplicate original title; that

the Roberts property and any other property, in behalf of the

Bernardino Villanueva was not connected in any way with Hayari;

corporation and place on notice all prospective buyers or vendees

that Bernardino Villanueva had no authority to borrow any duplicate

not to negotiate or contract with any party other than the duly

original title; and that whatever authorization Bernardo Villanueva

authorized officer or officers of the corporation who are expressly

had in dealing with the Roberts property had been withdrawn and

empowered to enter into such transaction and who can exhibit a

abrogated under a board resolution. The letter also requested that

formal board resolution duly certified by the board secretary and

even if payments were made on the loan of Hayari by a third party,

signed by the majority of the board of directors who are also the

the subject duplicate original title must not be released without the

majority stockholders representing at least 2/3 of the capital stock .

express consent of Hayari.

Nevertheless, on September 16, 1985, Elmer Tan, on behalf of the

Later, on August 15, 1988, Terry Villanueva Yu, the President of

buyer corporations, paid to Manphil for Hayari's account an

Sierra Grande at that time, informed[20] Manphil that Bernardino

amortization of P57,819.72, for the principal sum due on July 27,

Villanueva and Elmer Tan had attempted to pre-terminate Hayari's

1985; P42,192.30,

loan in order to obtain the duplicate original title of the subject

for

Int.-CBP; P27,329.05,

for

interest;

and P3,423.40, as penalties.[15]

lot. It was also mentioned in the letter that Hayari may opt to preterminate the loan itself and be subrogated in the right of action
against Bernardino Villanueva.

Sometime in January 1986, Sierra Grande learned that Bernardino

Villanueva[16] tried to secure the duplicate original title [17] of the
subject parcel of land from Manphil claiming to be the President of

However, on October 20, 1988, Manphil allowed Elmer Tan to pre-

Hayari. As a result, on November 20, 1986, Sierra Grande, through

terminate Hayari's obligation after making total payments to

Susan Villanueva Tan, the Corporate Secretary, wrote [18] Manphil

Manphil in the amount of P3,134,921.00.[21]

stating that Bernardino Villanueva was not in any way connected

officially with Sierra Grande and was not authorized to deal in any
way with the Roberts property nor borrow the transfer certificate
title to the same property. Susan Tan also wrote

[19]

the Bangko

Sentral ng Pilipinas (BSP), as the subject property was already on

Hence, Golden Apple and Rosvibon, on November 28, 1988, filed

with the Regional Trial Court of Pasay City, a Complaint[22] against
Sierra Grande and Manphil for specific performance and damages.

On April
On February 27, 1991, the trial court rendered its Decision, [23] the
dispositive portion of which reads:
WHEREFORE, the Court hereby renders judgment for
the plaintiffs and against the defendants, ordering,

3,

Sierra

Grande

filed

Motion

for

Reconsideration[24] of the decision, which was eventually denied by

the trial court.[25]

The respondents herein filed their appeal with the CA, which
reversed

1) all defendants to surrender and

deliver to plaintiffs corporations the
owner's duplicate copy of TCT No.
19801 of the Registry of Deeds
for Pasay City;

1991,

Decision

[26]

the

decision

of

the

trial

court

in

its

dated January 23, 1995. The dispositive portion of the

said Decision reads as follows:

WHEREFORE, the Court REVERSES the appealed

decision. We DISMISS the plaintiffs' complaint and on
defendant
Sierra
Grande's
counterclaim,
we
SENTENCE plaintiffs to pay defendant Sierra
Grande P20,000.00, as attorney's fees and costs.

2) defendants Sierra Grande to pay

plaintiffs the sums of P50,000.00 by
way of moral and exemplary damages,
respectively;

SO ORDERED.
3) defendant Sierra Grande to pay
plaintiffs the sum of P50,000.00 as and
for attorney's fees and costs of suit.

The

Motion

for

Reconsideration[27] dated February

3,

1995 filed by herein petitioners was later on denied by the CA.

The Counterclaim is hereby DISMISSED.

SO ORDERED.

[28]

Thus, the present petition.

Petitioners raised the following assignment of errors:

ASSIGNMENT OF ERRORS

The respondent Court of Appeals grievously

erred in:

4.1 invalidating the Deeds of Absolute Sale

between Golden Apple and Rosvibon, as vendees,
and Sierra Grande, as vendor, on the primordial
premise that badges of fraud attended their
execution;

4.7 invalidating the contracts on the ground of

conflict of interest; and finally

4.8 disallowing damages awarded by the trial

court to the petitioners.

The petition is unmeritorious.

4.2 applying Article 1602 of the Civil Code to
the case at bar;
In reversing the decision of the trial court, the CA, in a short
and succinct manner, made factual conclusions that necessitated
4.3 overextending Article 1602 of the Civil
Code to include lack of capacity, notarial infirmity,
and conflict of interest to the concept of badges of
fraud;

its finding that the contracts in question were invalid.

The said ruling of the CA is contrary to the factual findings of
the trial court. In Guillang v. Bedania,[29] this Court reiterated that it
is not a trier of facts, but certain exceptions apply, thus:

4.4 invalidating the contracts on the ground of

insufficiency of consideration;

4.5 invalidating the contracts on the ground of

lack of legal personality of vendee Rosvibon Realty;

4.6 invalidating the contracts on the ground of

irregularity in its execution and in concluding that the
deeds of sale were ante-dated;

The principle is well-established that this

Court is not a trier of facts. Therefore, in an appeal
by certiorari under Rule 45 of the Rules of
Court, only questions of law may be raised. The
resolution of factual

issues is the function of the lower courts whose

findings on these matters are received with respect
and are, as a rule, binding on this Court.[30]
However, this rule is subject to certain exceptions.
One of these is when the findings of the
appellate court are contrary to those of
the trial court.[31] Findings of fact of the trial court
and the Court of Appeals may also be set aside when
such findings are not supported by the evidence or
where the lower courts' conclusions are based on a
misapprehension of facts.[32]

Petitioners claim that the CA misused the term badges of

fraud in reaching its decision. According to them, Article 1602,
upon which the term badges of fraud refers to, is not applicable,
because the said article refers to a sale with a right to repurchase,
whereas

the

subject

invalidated

contracts

were

absolute

sales. They cited a case[33] where this Court pronounced that,

badges of fraud is a circumstance in Article 1602 of the Civil Code,
which, if present in any given transaction, gives rise to the
presumption that it is not a sale but an equitable mortgage. Thus,
according to petitioners, the CA confused Article 1602 (1) with that
of Article 1470,[34] because both articles deal with sale in general

Obviously, the contrary findings of the trial court and the CA

and have inadequacy of price as subject matter. Either way, they

leave this Court with no other alternative but to re-examine some

argue, the inadequacy of the price does not result in the

of the facts raised in the present petition.

cancellation or invalidation of contracts.

However,

the

above

argument

of

petitioners

is

speculative. A close reading of the CA Decision would reveal that

the said court used the phrase badges of fraud to refer to certain
fraudulent acts that attended the execution of the Contract to Sell
and the Deeds of Absolute Sale which would eventually tend to
prove that the same transactions were indeed suspicious as the
said contracts were antedated, simulated and fraudulent. The said
findings were pointed out by the CA in this manner:

We declare the contracts invalid.

We find that there were badges of fraud

showing that the contracts were simulated and
fraudulent.

cases[36] concerning various subjects, has used the same phrase in

its rulings referring to the said phrase's general and ordinary
meaning.

First, one of the vendees, Rosvibon, was

incorporated only on July 8, 1985 (Exhibit 17A). Thus, at the time the Contract to Sell was
executed, Rosvibon Realty Corporation had no legal
personality to purchase the property.

Petitioners also contend that whether or not one of the

vendee corporations is not yet in existence at the time the
Contract to Sell was executed cannot be directly questioned by any
party to a suit as the existence of a corporation may only be

Second, the deeds of absolute sale were

executed irregularly. The notarial acknowledgment
did not indicate the residence certificates of the
vendees which were in fact obtained subsequent to
the date of notarization. This is an anomaly which
shows that the deeds of sale were ante-dated to beat
the resolution revoking the vendor's authority to sell.

attacked by the Government through the Solicitor General in a quo

Third, there was no sufficient consideration

paid for the property involved and, worse, was
attended with fraudulent conflict of interest because
the vendor, Bernardino Villanueva, was a stockholder
of the buyer corporations.[35]

That particular line of argument is an over-stretch. It is

This then refutes the whole discussion of petitioners as to the

misuse or misappreciation of the applicable laws by the CA in
arriving at its judgment. Again, an examination of the CAs Decision
shows that the phrase did not refer to any particular provision of a
law, hence, the general and ordinary meaning of the phrase
prevails. In

the

same

manner,

this

Court,

in

numerous

warranto proceeding called for the purpose and not by a collateral

attack whereby the corporate existence is questioned in some
incidental proceedings not provided by law for the express purpose
of attacking the corporate existence.

undisputed that petitioner Rosvibon had no legal personality at the

time of the execution of the Contract to Sell. As stated by the
petitioners themselves in their petition:

x x x It is worthy to note at this juncture,

that while it may be true that one of the
vendees corporation, Rosvibon, does not have
the personality to enter into a Contract to Sell
on June 22, 1985, as it was only incorporated
on July 8, 1985, it cannot be said that said
corporation does not have the personality to enter
into the Contract of Sale as the said contract was
executed on 26 July 1985.[37]

It bears to stress, however, that the CA did not pass upon

On Cross-examination:

the corporate personality of Rosvibon nor did it declare the same

corporation's franchise invalid. Thus, there is no need for a quo

Atty. Alindato

warranto proceeding as claimed by petitioners. The CA merely

made the finding which is undisputed by the petitioners that
Rosbivon had no legal personality at the time of the execution of
the Contract to Sell. According to the CA, because of Rosbivon's
lack of personality at the time of the execution of the Contract to
Sell, its presence as a party to the same transaction is taken as
another indication that fraud was indeed attendant. This is one of

Q: But you are sure, of course, that this

document was completed in its form without any
additional data to be filled up, Mr. Witness, except
your signature and the date and the document
number, and the page number, etc. And of course,
the dry seal?

the situations included, and comprising the phrase badges of fraud.

As to the contention of petitioners that the CA erred in

A: I could remember, sir, that it took upon me

to see that the residence certificate of the
corporation being represented by Mrs. Rosita So and
Elmer Tan did not have the residence certificate.

invalidating the contracts on the ground of notarial infirmity and

concluding that they were ante-dated, this Court finds the said
argument devoid of any merit.
Petitioners claim that, since the representative of the
corporation

appeared

before

the

Notary

Public,

the

acknowledgment was complied with, even if they admitted that the

representatives of the corporations which executed the Deeds of

But upon the assurance of Mr. Bernardino

Villanueva that they will just put it afterwards, I
notarized it because as far as I am concerned, as a
notary public, as long as I know the persons who
appeared before me and they have so identified
themselves the company or entity that they are
representing would be of legal ground already.

Absolute Sale did not present their residence certificates nor

indicate the number, date and place of issue of the same residence
certificates in the acknowledgment. As shown in the records and in
the testimony of the Notary Public, Atty. Melanio L. Zoreta, the
requirement of the presentation of the residence certificate was
missing. Thus, as testified:

Q: So you are changing your previous answer

that this document was represented to you was
already complete when you said that in your latest
answer that there were numbers of residence
certificate which are lacking?

A: Actually, I am changing my answer but you

asked again for me for the second time. That is why I
took note that the residence certificate of the two
corporations were not yet then typewritten or given
by the parties involved.[38]

It must be noted that the property in question, subject of the

Contract to Sell for the sum of P441,032.00, is a land with a
contained area of, more or less, One Thousand Nine Hundred and
One (1,901) sq. m. with a two-storey residential building located in
Pasay City. In claiming that the said price of the property is not
inadequate, petitioners stated that the payment of Elmer Tan to
pre-terminate Hayari's obligation amounting to Three Million One

The CA then had a basis in concluding the defect in the

Hundred Thirty-Four Thousand Nine Hundred Twenty-One Pesos

notarial requirement of the transaction. The pertinent provisions of

(P3,134,921.00) as part of the consideration paid for the property

the Notarial Law

[39]

applicable at that time provides:

should be included. However, as correctly argued by respondent

Sierra Grande, the amortizations paid by Elmer Tan to Manphil was
for a loan incurred by Hayari and not by respondent Sierra Grande;

Sec. 251. Requirement as to notation of

payment of cedula tax Every contract, deed, or other
document acknowledged before a notary public shall
have certified thereon that the parties thereto have
presented their proper cedula certificates or are
exempt from the cedula tax, and these shall be
entered by the notary public as a part of such
certification, the number, the place of issues, and
date of each cedula certificate as aforesaid.

thus, any payment of the amortizations on the loan of Hayari

cannot be considered as part of the consideration for the sale of the
land owned by respondent Sierra Grande. It is then safe to declare
that respondent Sierra Grande did not benefit from the loan or from
its pre-termination. Moreover, the records are bereft of any
evidence to support the claim of petitioners that the sum of money
paid by Elmer Tan, on behalf of Hayari, was part of the
consideration for the same property. What only appears is that the
only consideration paid for the sale of the Roberts property was the

Another issue raised by petitioners is that the CA erred in

voiding

the

contracts

on

the

ground

of

insufficiency

of

consideration or price, because the claim of inadequacy of price

must be proven and that the respondents belatedly questioned the
contracts' validity. They further claim that the consideration was
substantial and adequate.

sum contained in the Contract to Sell, which was P441,032.00

which, considering the size[40] and location[41] of the property, is
inadequate. What prompted Elmer Tan to pay the total amount
of P3,134,921.00 cannot be gleaned from the records, except that it
was for the loan incurred by Hayari, which is an independent
juridical entity, separate and distinct from Sierra Grande. Hence,
the CA did not commit any error in declaring that there was an
insufficiency of consideration or price as the same is shown on the
very face of the Contract to Sell.

Anent the contention of petitioners that inadequacy of price

does not invalidate a contract, the said rule is not without an
exception. As provided in the Civil Code:
SO ORDERED.

Art. 1355. Except in cases specified by law,

lesion or inadequacy of cause shall not invalidate a
contract, unless there has been fraud, mistake
or undue influence.
Republic of the Philippines
Supreme Court
The CA was clear as to its main reason for invalidating the

Manila

contracts in question there was fraud. The inadequacy of price was

merely one of the circumstances upon which the CA was able to
find the existence of fraud and not the main cause for the
invalidation of the subject contracts.

All the other sub-issues raised by petitioners are rendered

inconsequential by the above disquisitions of this Court.

WHEREFORE, the petition for review on certiorari dated May 3,

1995 is DENIED. Consequently, the Decision dated January 23,
1995 and the Resolution dated March 28, 1995, of the Court of
Appeals, are hereby AFFIRMED.

THIRD DIVISION

SPOUSES VICTORIANO CHUNG and

DEBBIE CHUNG,
Petitioners,

G.R. No. 156038

The facts of the case, gathered from the records, are briefly

Present:

summarized below.
CARPIO MORALES, J., Chairperson,
BRION,
- versus -

In

February

1985,

the

petitioners

contracted

with

respondent Ulanday Construction, Inc. (respondent) to construct,

BERSAMIN,
VILLARAMA, JR., and
SERENO, JJ.

within a 150-day period,[5] the concrete structural shell of the

formers

two-storey

residential

in Urdaneta Village, Makati City at

ofP3,291,142.00.

the

house

contract

price

[6]

Promulgated:
ULANDAY CONSTRUCTION, INC.,*
The Contract[7] provided that: (a) the respondent shall

Respondent.

October 11, 2010

supply

all

the

necessary

materials,

labor,

and

equipment

indispensable for the completion of the project, except for work to

x---------------------------------------------------------------------------------------- be done by other contractors;[8] (b) the petitioners shall pay
DECISION
a P987,342.60[9] downpayment, with the balance to be paid in
BRION, J.:
progress payments based on actual work completed;[10] (c) the
Construction Manager or Architect shall check the respondents
We resolve the petition for review on certiorari[1] filed by
petitioners

Spouses

Victoriano

Chung

and

Chung

payment within 3 days from receipt; [11] (d) the petitioners shall pay

(petitioners) to challenge the decision[2] and resolution[3] of the

the respondents within 7 days from receipt of the Construction

Court of Appeals (CA) in CA-G.R. CV No. 61583.

[4]

Debbie

request for progress payment and endorse it to the petitioners for

Managers or Architects certificate; (e) the respondent cannot

change or alter the plans, specifications, and works without the
petitioners prior written approval;[12] (f) a penalty equal to 0.01% of
the contract amount shall be imposed for each day of delay in

FACTUAL BACKGROUND

completion, but the respondent shall be granted proportionate time

extension

for

delays

caused

by

the

petitioners; [13] (g)

the

respondent shall correct, at its expense, defects appearing during

the 12-month warranty period after the petitioners issuance of final
acceptance of work.[14]

Subsequently, the parties agreed to exclude from the

contract the roofing and flushing work, for P321,338.00,[15] reducing
the contract price to P2,969,804.00. On March 17, 1995, the
petitioners paid the P987,342.60 downpayment,[16] with the balance
of P1,982,461.40 to be paid based on the progress billings. While
the

building

permit

was

issued

on April

10,

1995,[17] actual

construction started on March 7, 1995.[18]

As

the

actual

construction

went

on,

the

respondent

submitted 12 progress billings. [19] While the petitioners settled the

first 7 progress billings, amounting to P1,270,641.59,[20] payment
was made beyond the seven (7)-day period provided in the
contract. The petitioner subsequently granted the respondent
a P100,000.00 cash advance,[21] leaving the unpaid progress billings
at P445,922.13.[22]

During the construction, the respondent also effected 19

change orders

without

the

petitioners

prior

written

approval,

amounting

to P912,885.91.[23] The petitioners, however, paid P42,298.61 for

Change Order No. 1[24] and partially paid P130,000.00 for Change
Order Nos. 16 and 17.[25] Petitioner Debbie Chung acknowledged in
writing that the balance for Change Order Nos. 16 and 17 would be
paid upon completion of the contract. [26] The outstanding balance
on the change orders totaled P740,587.30.

On July 4, 1995, the respondent notified the petitioners that

the

delay

in

the

payment

of

progress

accomplishment of the contract work.

[27]

billings

delays

the

The respondent made

similar follow-up letters between July 1995 to February 1996.

[28]

On March 28, 1996, the respondent demanded full payment for

progress billings and change orders.[29] On April 8, 1996, the

respondent demanded payment of P1,310,670.56 as outstanding
balance on progress billings and change orders.[30]

In a letter dated April 16, 1996, the petitioners denied

liability, asserting that the respondent violated the contract
provisions by, among others, failing to finish the contract within the
150-day stipulated period, failing to comply with the provisions on
change orders, and overstating its billings.[31]

On May 8, 1996, the respondent filed a complaint with the

Regional Trial Court (RTC), Branch 145, Makati City, for collection of

the unpaid balance of the contract and the unpaid change orders,
plus damages and attorneys fees.[32]

The RTC noted that the petitioners were nonetheless liable

for P130,000.00 under Change Order Nos. 16 and 17, because
petitioner Debbie Chung ratified and acknowledged that such
amount was still due upon completion. It also noted that the

petitioners

respondent should not be faulted or penalized for the delay in the

complained of the respondents delayed and defective work. They

completion of the contract within the 150-day period due to the

demanded payment of liquidated damages for delay in the

petitioners delay in the payment of the progress billings. It found,

completion, the construction errors, loss or non-usage of specified

however, that the petitioners are liable for the construction defect

construction materials, unconstructed and non-completed works,

on the roof leak traceable to the shallow concrete gutter.

In

their

answer

with

counterclaim,[33] the

plus damages and attorneys fees.

Thus, the RTC ordered the respondent to repair, at its
THE RTC RULING

expense, the defective concrete gutter of the petitioners house and

to restore other affected structures according to the architectural
plans and specifications. It likewise ordered the petitioners to pay

In a decision[34] dated December 11, 1997, the RTC found

the respondentP629,819.84 as unpaid balance on the progress

that both parties have not complied strictly with the requirements

billings and P130,000.00 as unpaid balance on the ratified change

of the contract. It observed that change orders were made without

orders.

the parties prescribed written agreement, and that each party

should bear their respective costs. It noted that the respondent
could not demand from the petitioners the payment for change

Both parties elevated the case to the CA by way of ordinary

orders undertaken upon instruction of the project architect without

appeal under Rule 41 of the Rules of Court. The respondent averred

the petitioners written approval. Applying Article 1724 of the Civil

that the RTC failed to consider evidence of the petitioners bad faith

Code, the RTC found that when the respondent performed the

in violating the contract, while the petitioners argued that the RTC

change orders without the petitioners written agreement, it did so

should have quantified the cost of the repairs and simply ordered

at its own risk and it could not compel the petitioners to pay.

the respondent to reimburse the petitioners expenses.

THE CA RULING

The CA decided the appeal on June 28, 2002. [35] It found

THE PETITION

Article 1724 inapplicable because the provision pertains to disputes

arising from the higher cost of labor and materials, while the
respondent demands payment of change order billings and there

The petitioners insist that the CA should have quantified the

was no demand for increase in the costs of labor and materials.

cost of the repairs on the defective gutter and simply ordered the

Applying the principle of estoppel in pais, the appellate court noted

respondent

that the petitioners impliedly consented or tacitly ratified the

repairing the defective gutter requires the demolition of the

change orders by payment of several change order billings and

existing cement gutter, the removal of the entire roofing and the

their inaction or non-objection to the construction of the projects

dismantling of the second floor steel trusses; they are entitled to

covered by the change orders.

liquidated damages for the unjust delay in the completion of the

Thus, the CA affirmed the RTC decision, but increased the

payment

on

the

unpaid

balance

of

the

change

orders

to P740,587.11. It likewise ordered the petitioners to pay 6%

interest on the unpaid amounts from the day of formal demand and
until the finality of the decision, and 12% interest after finality of
the decision, plus P50,000.00 as exemplary damages.

to

reimburse

the

petitioners

expenses

because

construction within the 150-day contract period; the award

of P629,819.84

for

progress

billings

is

unwarranted

since

only P545,920.00 is supported by the respondents evidence; the

respondents

construction

errors

should

set-off

or

limit

the

petitioners liability, if any; the CA misinterpreted Article 1724 of the

Civil Code and misapplied the principle of estoppel in pais since the
contract specifically provides the petitioners prior written approval
for change orders; the respondent is not entitled to exemplary
damages and attorneys fees since the respondent was at fault for

Both parties filed motions for reconsideration. On November

the defective gutter.

15, 2002, the CA issued a resolution denying the petitioners motion

for reconsideration, but partially granting the respondents motion
for reconsideration by awarding it attorneys fees equal to 10% of
the total award.

THE CASE FOR THE RESPONDENT

[36]

The respondent submits that the petition is merely dilatory

Hence, the petitioners came to us through the present
petition.

since it seeks to review the lower courts factual findings and

conclusions, and it raised no legal issue cognizable by this Court. [37]

be complied with in good faith. [41] No party is permitted to change

his mind or disavow and go back upon his own acts, or to proceed

THE ISSUE

contrary thereto, to the prejudice of the other party. [42] In the

present case, we find that both parties failed to comply strictly with
their contractual stipulations on the progress billings and change

The core issue is whether the CA erred in: (a) affirming the

orders that caused the delays in the completion of the project.

RTC decision for payment of progress billings; (b) in increasing the

amount due for change orders; and, (c) in awarding exemplary
damages and attorneys fees to the respondent.

Amount
awarded
for
unsupported by evidence

unpaid

progress

billings

is

OUR RULING
There is no dispute that the petitioners failed to pay
progress billings nos. 8 to 12. However, we find no basis to hold the
petitioners liable for P629,819.84, the balance of the total contract

We find the petition meritorious.

price, without deducting the discount of P18,000.00 granted by the

respondent. The petitioners likewise cannot be held liable for the
This Court is not a trier of facts. However, when the

balance of the total contract price because that amount is clearly

inference drawn by the CA from the facts is manifestly mistaken, as

unsupported

in the present case, we can review the evidence to allow us to

supported by progress billings nos. 8 to 12. Deducting the

arrive at the correct factual conclusions based on the record. [38]

respondents P100,000.00 cash advance,[44]the unpaid progress

by

the

evidence;

only P545,922.13[43] is

actually

billings amount to only P445,922.13.

Contract is the law between the parties
Article 1724 of the Civil Code applies

In contractual relations, the law allows the parties leeway

between them.

The CA erred in ruling that Article 1724 of the Civil Code

Contract stipulations that are not contrary to law, morals, good

does not apply because the provision pertains to disputes arising

and considers their agreement as the

[39]

law

customs, public order or public policy shall be binding [40] and should

from the higher cost of labor and materials and there was no
demand for increase in the costs of labor and materials.

Significantly, the respondent did not secure the required

written approval of the petitioners before making the changes in
the plans, specifications and works. Thus, for undertaking change
orders without the stipulated written approval of the petitioners,

Article 1724[45] governs the recovery of additional costs in

contracts for

the respondent cannot claim the additional costs it incurred, save

for the change orders the petitioners accepted and paid for as
discussed below.

a stipulated price (such as fixed lump-sum contracts), and the

increase in price for additional work due to change in plans and
specifications. Such added cost can only be allowed upon the: (a)
written authority from the developer or project owner ordering or
allowing the written changes in work, and (b) written agreement of

CA misapplied the principle of estoppel in pais

parties with regard to the increase in price or cost due to the

change in work or design modification. Compliance with these two
requisites is a condition precedent for the recovery. The absence of
one or the other condition bars the recovery of additional costs.

The petitioners payment of Change Order Nos. 1, 16, and 17

Neither the authority for the changes made nor the additional price

and their non-objection to the other change orders effected by the

to be paid therefor may be proved by any other evidence.[46]

respondent cannot give rise to estoppel in pais that would render

the petitioners liable for the payment of all change orders.

In the present case, Article I, paragraph 6, of the Contract

incorporates this provision:

Estoppel in pais, or equitable estoppel, arises when one, by

his acts, representations or admissions or by his silence when he

The CONTRACTOR shall make no change or

alteration in the plans, and specifications as well as
in the works subject hereof without the prior written
approval of the OWNER. A mere act of tolerance shall
not constitute approval.[47]

ought to speak out, intentionally or through culpable negligence,

induces another to believe certain facts to exist and the other
rightfully relies and acts on such beliefs so that he will be
prejudiced if the former is permitted to deny the existence of such
facts.[48] The real office of the equitable norm of estoppel is limited
to supplying deficiency in the law, but it should not supplant
positive law.[49]

In this case, the requirement for the petitioners written

consent to any change or alteration in the specifications, plans and
works is explicit in Article 1724 of the Civil Code and is deemed
written in the contract between the parties.[50] The contract also
expressly provides that a mere act of tolerance does not constitute
approval. Thus, the petitioners did not, by accepting and paying for
Change Order Nos. 1, 16, and 17, do away with the contractual
term on change orders nor with the application of Article 1724. The
payments for Change Order Nos. 1, 16, and 17 are, at best, acts of
tolerance on the petitioners part that could not modify the contract.

Consistent with this ruling, the petitioners are still liable for
the P130,000.00 balance on Change Order Nos. 16 and 17 that, to
date, remain unpaid.

approval. There, too, is the matter of defective construction

discussed below.

[51]

Accordingly, the petitioners outstanding liabilities amount

to P445,922.13 for the unpaid progress billings and P130,000.00 for
the ratified change orders, or a total of P575,922.13.

Petitioners liability is set-off by respondents construction

defect

We cannot sustain the lower courts order to repair the

defective concrete gutter. The considerable lapse of time between
Award

of

exemplary

damages

and

attorneys

fees

is

unwarranted.

the filing of the complaint in May 1996 and the final resolution of
the present case renders the order to repair at this time highly
impractical, if not manifestly absurd. Besides, under the contract,
the respondents repair of construction defects, at its expense,

We cannot allow the award for exemplary damages and

attorneys fees. It is a requisite in the grant of exemplary damages
that the act of the offender must be accompanied by bad faith or
done in a wanton, fraudulent, or malevolent manner.[52] On the

pertains to the 12-month warranty period after the petitioners

issuance of the final acceptance of work.[54] This provision does not
apply since the petitioners have not even issued a certificate of
completion and final acceptance of work.

other hand, attorneys fees may be awarded only when a party is

compelled to litigate or to incur expenses to protect his interest by
reason of an unjustified act of the other party, as when the
defendant acted in gross and evident bad faith in refusing the
plaintiffs plainly valid, just and demandable claim. [53] We do not see
the presence of these circumstances in the present case. As
previously discussed, the petitioners refusal to pay the change
orders was based on a valid ground lack of their prior written

Under the circumstances, fairness and reason dictate that

we simply order the set-off of the petitioners contractual liabilities
totaling P575,922.13 against the repair cost for the defective
gutter,

pegged

at P717,524.00,[55] leaving

the

amount

of P141,601.87 still due from the respondent. Support in law for this
ruling for partial legal compensation proceeds from Articles 1278,

[56]

1279,[57] 1281,[58] and 1283[59] of the Civil Code. In short, both

No pronouncement as to costs.

parties are creditors and debtors of each other, although in

different amounts that are already due and demandable.
SO ORDERED.
ARTURO D. BRION

Monetary award is subject to legal interest

Republic of the Philippines

SUPREME COURT
Manila

Pursuant to our definitive ruling in Eastern Shipping Lines,

Inc. v. Court of Appeals,[60] we hold that the amount of P141, 601.87

EN BANC

is subject to the legal interest of 6% per annum computed from the

time the RTC rendered judgment on December 11, 1997 since it
was the respondent who filed the complaint. [61] After the finality of
this decision, the judgment award inclusive of interest shall bear
interest at 12% per annum until full satisfaction.

G.R. No. L-23072

November 29, 1968

SIMEON B. MIGUEL, ET AL., plaintiffs-appellants,

vs.
FLORENDO CATALINO, defendant-appellee.
Bienvenido L. Garcia for plaintiffs-appellants.
Moises P. Cating for defendant-appellee.

WHEREFORE,

the

petition

is

hereby GRANTED.

The

REYES, J.B.L., J.:

assailed decision and resolution of the Court of Appeals in CA-G.R.

CV Nos. 61583 are REVERSED and SET ASIDE. The respondent
is ORDERED to pay the petitioners P141,601.87 representing the
balance of the repair costs for the defective gutter in the
petitioners house, with interest at 6% per annum to be computed
from the date of the filing of the complaint until finality of this
decision and 12% per annum thereafter until full payment.

Direct appeal from the judgment in Civil Case No. 1090 of the Court
of First Instance of Baguio, dismissing the plaintiffs' complaint for
recovery of possession of a parcel of land, registered under Act
496, in the name of one Bacaquio,1 a long-deceased illiterate nonChristian resident of Mountain Province, and declaring the
defendant to be the true owner thereof.
On January 22, 1962, appellants Simeon, Emilia and Marcelina
Miguel, and appellant Grace Ventura brought suit in the Court
below against Florendo Catalino for the recovery of the land abovedescribed, plaintiffs claiming to be the children and heirs of the

original registered owner, and averred that defendant, without their

knowledge or consent, had unlawfully taken possession of the land,
gathered its produce and unlawfully excluded plaintiffs therefrom.
Defendant answered pleading ownership and adverse possession
for 30 years, and counterclaimed for attorney's fees. After trial the
Court dismissed the complaint, declared defendant to be the
rightful owner, and ordered the Register of Deeds to issue a
transfer certificate in lieu of the original. Plaintiffs appealed directly
to this Court, assailing the trial Court's findings of fact and law.
As found by the trial Court, the land in dispute is situated in the
Barrio of San Pascual, Municipality of Tuba, Benguet, Mountain
Province and contains an area of 39,446 square meters, more or
less. It is covered by Original Certificate of Title No. 31, which was
issued on 28 December 1927 in the name of Bacaquio (or
Bakakew), a widower. No encumbrance or sale has ever been
annotated in the certificate of title.
The plaintiff-appellant Grace Ventura2 is the only child of Bacaquio
by his first wife, Debsay, and the other plaintiffs-appellants,
Simeon, Emilia and Marcelina, all surnamed "Miguel", are his
children by his third wife, Cosamang. He begot no issue with his
second wife, Dobaney. The three successive wives have all died.
Bacaquio, who died in 1943, acquired the land when his second
wife died and sold it to Catalino Agyapao, father of the defendant
Florendo Catalino, for P300.00 in 1928. Of the purchase price
P100.00 was paid and receipted for when the land was surveyed,
but the receipt was lost; the balance was paid after the certificate
of title was issued. No formal deed of sale was executed, but since
the sale in 1928, or for more than 30 years, vendee Catalino
Agyapao and his son, defendant-appellee Florendo Catalino, had
been in possession of the land, in the concept of owner, paying the
taxes thereon and introducing improvements.
On 1 February 1949, Grace Ventura, by herself alone, "sold" (as per
her Transferor's Affidavit, Exhibit "6") anew the same land for
P300.00 to defendant Florendo Catalino.
In 1961, Catalino Agyapao in turn sold the land to his son, the
defendant Florendo Catalino.
This being a direct appeal from the trial court, where the value of
the property involved does not exceed P200,000.00, only the issues
of law are reviewable by the Supreme Court, the findings of fact of

the court a quobeing deemed conceded by the appellant (Jacinto v.

Jacinto, 105 Phil. 1218; Del Castillo v. Guerro, L-11994, 25 July
1960; Abuyo, et al. v. De Suazo, L-21202, 29 Oct. 1966; 18 SCRA
600, 601). We are thus constrained to discard appellant's second
and third assignments of error.
In their first assignment, appellants assail the admission in
evidence over the objection of the appellant of Exhibit "3". This
exhibit is a decision in favor of the defendant-appellee against
herein plaintiff-appellant Grace Ventura, by the council of Barrio of
San Pascual, Tuba, Benguet, in its Administrative Case No. 4, for the
settlement of ownership and possession of the land. The decision
is ultra vires because barrio councils, which are not courts, have no
judicial powers (Sec. 1, Art. VIII, Constitution; see Sec. 12, Rep. Act
2370, otherwise known as the Barrio Charter). Therefore, as
contended by appellants, the exhibit is not admissible in a judicial
proceeding as evidence for ascertaining the truth respecting the
fact of ownership and possession (Sec. 1, Rule 128, Rules of Court).
Appellants are likewise correct in claiming that the sale of the land
in 1928 by Bacaquio to Catalino Agyapao, defendant's father, is null
and void ab initio, for lack of executive approval (Mangayao et al.
vs. Lasud, et al., L-19252, 29 May 1964). However, it is not the
provisions of the Public Land Act (particularly Section 118 of Act
2874 and Section 120 of Commonwealth Act 141) that nullify the
transaction, for the reason that there is no finding, and the
contending parties have not shown, that the land titled in the name
of Bacaquio was acquired from the public domain (Palad vs. Saito,
55 Phil. 831). The laws applicable to the said sale are: Section
145(b) of the Administrative Code of Mindanao and Sulu, providing
that no conveyance or encumbrance of real property shall be made
in that department by any non-christian inhabitant of the same,
unless, among other requirements, the deed shall bear indorsed
upon it the approval of the provincial governor or his representative
duly authorized in writing for the purpose; Section 146 of the same
Code, declaring that every contract or agreement made in violation
of Section 145 "shall be null and void"; and Act 2798, as amended
by Act 2913, extending the application of the above provisions to
Mountain Province and Nueva Vizcaya.
Since the 1928 sale is technically invalid, Bacaquio remained, in
law, the owner of the land until his death in 1943, when his title
passed on, by the law on succession, to his heirs, the plaintiffsappellants.

Notwithstanding the errors aforementioned in the appealed

decision, we are of the opinion that the judgment in favor of
defendant-appellee Florendo Catalino must be sustained. For
despite the invalidity of his sale to Catalino Agyapao, father of
defendant-appellee, the vendor Bacaquio suffered the latter to
enter, possess and enjoy the land in question without protest, from
1928 to 1943, when the seller died; and the appellants, in turn,
while succeeding the deceased, also remained inactive, without
taking any step to reivindicate the lot from 1944 to 1962, when the
present suit was commenced in court. Even granting appellants'
proposition that no prescription lies against their father's recorded
title, their passivity and inaction for more than 34 years (19281962) justifies the defendant-appellee in setting up the equitable
defense of laches in his own behalf. As a result, the action of
plaintiffs-appellants must be considered barred and the Court below
correctly so held. Courts can not look with favor at parties who, by
their silence, delay and inaction, knowingly induce another to
spend time, effort and expense in cultivating the land, paying taxes
and making improvements thereon for 30 long years, only to spring
from ambush and claim title when the possessor's efforts and the
rise of land values offer an opportunity to make easy profit at his
expense. In Mejia de Lucas vs. Gamponia, 100 Phil. 277, 281, this
Court laid down a rule that is here squarely applicable:
Upon a careful consideration of the facts and circumstances,
we are constrained to find, however, that while no legal
defense to the action lies, an equitable one lies in favor of
the defendant and that is, the equitable defense of laches.
We hold that the defense of prescription or adverse
possession in derogation of the title of the registered owner
Domingo Mejia does not lie, but that of the equitable
defense of laches. Otherwise stated, we hold that while
defendant may not be considered as having acquired title by
virtue of his and his predecessors' long continued
possession for 37 years, the original owner's right to recover
back the possession of the property and title thereto from
the defendant has, by the long period of 37 years and by
patentee's inaction and neglect, been converted into a stale
demand.
As in the Gamponia case, the four elements of laches are present in
the case at bar, namely: (a) conduct on the part of the defendant,
or of one under whom he claims, giving rise to the situation of
which complaint is made and for which the complaint seeks a
remedy; (b) delay in asserting the complainant's rights, the

complainant having had knowledge or notice, of the defendant's

conduct and having been afforded an opportunity to institute a suit;
(c) lack of knowledge or notice on the part of the defendant that
the complainant would assert the right on which he bases his suit;
and (d) injury or prejudice to the defendant in the event relief is
accorded to the complainant, or the suit is not held to be barred. In
the case at bar, Bacaquio sold the land in 1928 but the sale is void
for lack of the governor's approval. The vendor, and also his heirs
after him, could have instituted an action to annul the sale from
that time, since they knew of the invalidity of the sale, which is a
matter of law; they did not have to wait for 34 years to institute
suit. The defendant was made to feel secure in the belief that no
action would be filed against him by such passivity, and also
because he "bought" again the land in 1949 from Grace Ventura
who alone tried to question his ownership; so that the defendant
will be plainly prejudiced in the event the present action is not held
to be barred.
The difference between prescription and laches was elaborated in
Nielsen & Co., Inc. vs. Lepanto Consolidated Mining Co., L-21601,
17 December 1966, 18 SCRA p. 1040, as follows:
Appellee is correct in its contention that the defense of
laches applies independently of prescription. Laches is
different from the statute of limitations. Prescription is
concerned with the fact of delay, whereas laches is
concerned with the effect of delay. Prescription is a matter of
time; laches is principally a question of inequity of
permitting a claim to be enforced, this inequity being
founded on some change in the condition of the property or
the relation of the parties. Prescription is statutory; laches is
not. Laches applies in equity, whereas prescription applies
at law. Prescription is based on fixed time laches is not, (30
C.J.S., p. 522. See also Pomeroy's Equity Jurisprudence, Vol.
2, 5th ed., p. 177) (18 SCRA 1053).
With reference to appellant Grace Ventura, it is well to remark that
her situation is even worse than that of her co-heirs and coplaintiffs, in view of her executing an affidavit of transfer (Exh. 6)
attesting under oath to her having sold the land in controversy to
herein defendant-appellee, and the lower Court's finding that in
1949 she was paid P300.00 for it, because she, "being a smart
woman of enterprise, threatened to cause trouble if the defendant
failed to give her P300.00 more, because her stand (of being the
owner of the land) was buttressed by the fact that Original

Certificate of Title No. 31 is still in the name of her father,

Bacaquio" (Decision, Record on Appeal, p. 24). This sale, that was
in fact a quitclaim, may not be contested as needing executive
approval; for it has not been shown that Grace Ventura is a nonchristian inhabitant like her father, an essential fact that cannot be
assumed (Sale de Porkan vs. Yatco, 70 Phil. 161, 175).
Since the plaintiffs-appellants are barred from recovery, their
divestiture of all the elements of ownership in the land is complete;
and the Court a quo was justified in ordering that Bacaquio's
original certificate be cancelled, and a new transfer certificate in
the name of Florendo Catalino be issued in lieu thereof by the
Register of Deeds.
FOR THE FOREGOING REASONS, the appealed decision is hereby
affirmed, with costs against the plaintiffs-appellants.

Victoriano R. Aldava for petitioners.

Manuel P. Pun for respondents.

MARTIN, J.:
The prime issue presented to Us in this special civil action for
certiorari and/or mandamus, which was certified by the Court of
Appeals on July 15, 1975, involves the rule in determining whether
an order is final and appealable or is merely interlocutory.
Sometime in 1962, Pedro San Miguel, 1 the predecessor-in-interest
of the herein petitioners, commenced a "Complaint for Partition of
Real Estate" before the Court of First Instance of Bulacan against
private respondent Pablo San Miguel. The complaint, docketed as
Civil Case No. 2624, sought the partition of Lot No. 4543 of the
Lolomboy Estate, which is a portion of original Lot No. 3237 and
covered by Transfer Certificate of Title No. T-15369 of the Registry
of Deeds of Bulacan.
Traversing the complaint, respondent Pablo San Miguel disclaimed
co-ownership and asserted exclusive ownership of Lot No. 4543.
Subsequently, on March 19, 1964, the then trial judge, Ricardo C.
Puno, ordered the dismissal of the case pursuant to Section 3, Rule
17 of the Revised Rules of Court for "apparent lack of interest in the
prosecution of the respective claims of the litigants."

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. L-41053 February 27, 1976
FELICISIMA DE LA CRUZ, ET AL., petitioners,
vs.
HON. EDGARDO L. PARAS, as Judge, CFI of Bulacan, Branch
VII, and PABLO SAN MIGUEL, respondents.

Eleven years thereafter, another complaint for partition, docketed

as Civil Case No. 4300-M of the Court of First Instance of Bulacan,
was instituted by the same Pedro San Miguel against private
respondent Pablo San Miguel. This time, the complaint prayed for
the partition of Lot No. 4543 (covered by TCT No. T-15369, Bulacan)
and Lot No. 3269 (covered by TCT No. T-15370, Bulacan). In due
time, Pablo San Miguel filed his answer, pleading therein the
defense of res judicata. For him, the same subject matter and
cause of action had already been litigate . d upon and resolved in
the previous Civil Case No. 2624. After preliminary hearing, the
respondent Judge issued an order on December 10, 1973,
dismissing Civil Case No. 4300-M "insofar as Lot 4543 is concerned"
in view of the principle of res judicata.

The case was ordered to proceed as regards Lot No. 3269, and on
July 31, 1974, respondent Judge rendered a decision ordering the
parties "as CO-OWNERS to present to this Court within ten (10)
days from receipt hereof, a PROJECT OF PARTITION, dividing Lot No.
3269 (Transfer Certificate of Title No. T-15370, Bulacan) into two
equal parts." Petitioners received a copy of this decision on August
13,1974.
On September 12, 1974, petitioners interposed their appeal from
this judgment of the trial court. On said date, their notice of appeal,
appeal bond and record on appeal were filed.
On December 9, 1974, respondent Judge approved petitioners'
corrected record on appeal but "insofar only as Lot No. 3269 is
concerned ... because the case with respect to Lot 4543 has long
became (sic) FINAL, cannot be appealed anymore, and therefore
any record on appeal thereon will be useless, moot and
academic ...
After the denial of their motion for reconsideration, petitioners filed
a "Petition for certiorari And/Or Mandamus" before the Court of
Appeals on February 5, 1975, but the latter court elevated the
petition to Us upon discovering that only questions of law are
raised.
It is readily discernible that the decisive question in this case is
whether or not the order of the respondent Judge, dated December
10, 1973, dismissing Civil Case No. 4300-M as regards Lot No.
4543, is final and appealable.
Section 2, Rule 41 of the Revised Rules of Court provides that
"(o)nly final judgments or orders shall be subject to appeal."
Interlocuootry or incidental judgments or orders do not stay the
progress of an action nor are they subject of appeal "until final
judgment or order is rendered for one party or the other." The test
to determine whether an order or judgment is interlocutory or final
is this: "Does it leave something to be done in the trial court with
respect to the mertis of the case? If it does, it is interlocutory; if it
does not, if is final." 2 A court order is final character if it puts an
end to the particular matter resolved or settles definitely the
matter threin disposed of, 3 such that no further questions can
come before the court except the execution of the order. 4 The term
"final" judgment or order signifies a judgment or an order which
disposes of the cause as to all the parties, reserving no further
questions or direction for future determination. 5 The order or

judgment may validly refer to the entire controversy or to some

definite and separate branch threof. "In the absence of a statutory
definition, a final judgment, order decree has been held to be ...
one that finally disposes of, adjudicates, or determines the
rights, or some right or rights of the parties, either on the entire
controversy or on some definite and separate branch thereof, and
which concludes them until it is reversed or set aside. 6 The central
point to consider is, threfore, the effects of the order on the rights
of the parties. A court order, on the other hand, is merely
interlocutory in character if it is provisional and leaves substantial
proceeding to be had in connection with its subject. 7 The word
"interlocutory" refers to "something intervening between the
commencement and the end of a suit which decides some point or
matter but is not a final decision of the whole controversy." 8
1. We find that the order of dismissal entered by respondent Judge
in Civil Case No. 4300-M on December 10, 1973, is a clear final and
appealable order. The said order is a final disposition of the whole
controversy between the parties with respect to the ownership of
Lot No. 4543. It is absolute and conclusive on all questions in
regard thereto. 9 The trial court's order is not a mere narrow
acceptance of private respondent's plea of res judicata. It has more
the far-ranging effect of confirming private respondent's claim of
exclusive ownership of Lot No. 4543, as previously adjudicated in
the prior Civil Case No. 2624. It imports that private respondent is
the sole owner of this specific lot; as a result of which, the
deceased Pedro San Miguel or his succesors-in-interest for that
matter stand to suffer the loss of what they claim is their rightful
share thereto. 10 After the issuance of this order, nothing more was
left for the trial court to try or decide, as the conflicting claims of
the parties over the subject lot have already been resolved. As a
matter of fact, the final order of dismissal cannot even be assailed
by certiorari. The remedy is appeal, which petitioners herein have
failed to undertake. 11The fact that the other lot, Lot No. 3269,
remained under litigation and the respective claims of the parties
thereto yet to be settled by the trial court would not affect the final
nature of the subject order, because a decree, is nonetheless final
although some independent branch of the case is reserved for
future consideration . 12
2. Reason lies in the order of the respondent Judge, dated
December 10, 1973, foreclosing the relitigation of Lot No.
4543 because of the March 19, 1964 order of the then trial Judge,
Ricardo C. Puno, in Civil Case No. 2624, which involves the same
lot, dismissing the case for lack of interest to prosecute. This

dismissal order of the said trial Judge has the effect and
consequences of a dismissal on the merits under Section 3, Rule 17
of the Revised Rules of Court since it was neither without prejudice
nor based upon lack of jurisdiction. 13 It is worthy to note that the
deceased Pedro San Miguel interposed no appeal therefrom.
Instead, he attempted to revive the subject matter of that Civil
Case No. 2624 (Lot No. 4543) eleven years threafter, when he
commensed Civil Case No. 4300-M, praying for the partition of Lot
No. 3629 and Lot No. 4543. This, the deceased Pedro San Miguel
could not do so. Litigation on this particular Lot No. 4543 must
reach a terminal point. The principle of estoppel by judgment, on of
the aspects of the doctrine of res judicata,precludes the re-litigation
in another action of a specific question actually litigated and
determined in a former one. 14 The second casde, Civil Case No.
4300-M, is barred by the prior judgment in the first case, Civil Case
No. 2624, insofar as it relates to Lot No. 4543. For, thre is Identity
of parties, subject matter and cause of action between the first
case where the jdugment was rendered and the second case which
is sought to be barred as far as Lot No. 4543 is concerned. Likewise,
the judgment in the first case is a final one rendered by a court of
competent jurisdiction upon the merits. 15
3. There is no doubt that access to the courts is a constitutional
guarantee. This is, however, subject to limitation s. Once the rights
of a party-litigant have been adjudicated in a valid final judgment
of a competent court, the party-litigant can no longer litigate the
same again. 16 A right, question or fact distinctly placed in issue
and directly determined by a court of competent jurisdiction,
cannot be disputed in a subsequent suit between the same parties
or their privies; and even if the second suit is for a different cause
of action, the right, question or fact once so determined must, as
between the same parties or privies, be taken as conclusively
established, so long as the judgment in the firs suit remains
unmodified. 17Public policy and sound practice jdemand that "at the
risk of occasional errors, judgments of courts should become final
at some definite date fixed by law." 18 Reipublicae ut sit finis litium.
It results, thjrefore, that respondent Judge did not abusde his
discetion when he issued the order of December 9, 1974, approving
petitioners' corrected record on appeal "insofar only as Lot 3269 is
concerned ... because the case with respect to Lot 4543 has long
became (sic) FINAL ... ."
ACCORDINGLY, the order of December 9, 1974, subject matter of
this petition, issued by respondent Judge in his Civil Case No. 4300-

M, approving petitioners corrected record on appeal with respect

only to Lot 2369, is hereby affirmed. Costs against petitioners.
SO ORDERED.

FIRST DIVISION

[G.R. No. 116682. January 2, 1997]

ROBLETT
INDUSTRIAL
CONSTRUCTION
CORPORATION, petitioner, vs. COURT OF APPEALS
and
CONTRACTORS
EQUIPMENT
CORPORATION, respondents.
DECISION
BELLOSILLO, J.:
On 23 September 1986 respondent Contractors Equipment
Corporation (CEC) instituted an action for a sum of money against
petitioner Roblett Industrial Construction Corporation (RICC) before
the Regional Trial Court of Makati alleging that in 1985 it leased to
the latter various construction equipment which it used in its
projects. As a result RICC incurred unpaid accounts amounting
to P342, 909.38.
On 19 December 1985 RICC through its Assistant Vice
President for Finance Candelario S. Aller Jr. entered into an
Agreement[1] with CEC where it confirmed petitioner's account. As
an off-setting arrangement respondent received from petitioner
construction
materials
worth P115,000.00
thus
reducing
petitioner's balance to P227, 909.38.
A day before the execution of their Agreement, or on 18
December 1985, RICC paid CEC P10,000.00 in postdated checks
which when deposited were dishonored. As a consequence the
latter debited the amount to petitioner's account of P227,909.38
thus increasing its balance toP237,909.38.

On 24 July 1986 Mariano R. Manaligod Jr., General Manager of

CEC, sent a letter of demand to petitioner through its Vice President
for Finance regarding the latter's overdue account of P237,909.38
and sought settlement thereof on or before 31 July 1986. In reply,
petitioner requested for thirty (30) days to have enough time to
look for funds to substantially settle its account.
Traversing the allegations of respondent, Candelario S. Aller Jr.
declared that he signed the Agreement with the real intention of
having proof of payment. In fact Baltazar Banlot, Vice President for
Finance of petitioner, claimed that after deliberation and audit it
appeared that petitioner overpaid respondent by P12,000.00 on the
basis of the latter's Equipment Daily Time Reports for 2 May to 14
June
1985
which
reflected
a
total
obligation
of
only P103,000.00. He claimed however that the Agreement was not
approved by the Board and that he did not authorize Aller Jr. to sign
thereon.
On rebuttal, Manaligod Jr. declared that petitioner had received
a statement of account covering the period from 28 March to 12
July 1985 in the amount of P376,350.18 which it never
questioned. From this amount P3,440.80, based on respondent's
account with petitioner and P30,000.00, representing payments
made by the latter, were deducted thus leaving a balance
of P342,909.38 as mentioned in the Agreement.
On 19 December 1990 the trial court rendered judgment
ordering petitioner to pay respondent: (a) P237,909.38 plus legal
interest from 31 July 1986 until full payment; (b) P2,000.00 as
litigation expenses; (c) 20% of the sum due and payable as
attorney's fees and, (d) cost of suit. [2] Its ruling is anchored on its
finding that 1. The Court finds the Agreement (EXHIBIT "A," EXHIBIT "I")
between the parties valid and that it reflects the true intention of
the parties. It must be emphasized that the same agreement was
used by plaintiff as the basis for claiming defendant's obligation
of P237,909.38 and also used by defendant as the same basis for
its alleged payment in full of its obligation to plaintiff. But while
plaintiff treats the entire agreement as valid, defendant wants the
court to treat that portion which treats of the offsetting
of P115,000.00 as valid, whereas it considers the other terms and
conditions as "onerous, illegal and want of prior consent and Board
approval."This Court cannot agree to defendant's contention. It
must be stressed that defendant's answer was not made under
oath, and therefore, the genuineness and due execution of the
agreement (EXHIBIT "A," EXHIBIT "I") which was the basis for

plaintiff's claim is deemed admitted (Section 8, Rule 8, Rules of

Court). Such admission, under the principle of estoppel, is rendered
conclusive upon defendant and cannot be denied or disproved as
against plaintiff (Art. 1431, Civil Code). Either the agreement
(EXHIBIT "A," EXHIBIT "I") is valid or void. It must be treated as a
whole and not to be divided into parts and consider only those
provisions which favor one party (in this case the
defendant). Contracts must bind both contracting parties, its
validity or compliance cannot be left to the will of one of them (Art.
1308, New Civil Code).
Defendant further contends that the agreement did not reflect the
real intention of the parties. However, when plaintiff wrote
defendant in its letter dated July 24, 1986 (EXHIBIT "F") that it be
given thirty (30) days to substantially settle the same, clearly, at
this point in time, defendant did not question its account with
plaintiff, nor did it question the validity nor the contents of the
Agreement (EXHIBIT "A," EXHIBIT "I"). This Court is not convinced
that the Agreement (EXHIBIT "A," EXHIBIT "I") does not reflect the
true intention of the parties. On the contrary, it does.
2. To the issue that defendant has fully paid its obligation to
plaintiff by way of offset for the P115,000.00 construction materials
received by plaintiff, this Court finds the contention of defendant
without basis in fact. Defendant's presentation of evidence
(EXHIBITS "2," "2-A" up to "2-Z") merely consists of daily time
reports of plaintiff consisting of 191 hours only, the period May 2,
1985 to June 14 1985 and does not reflect the entire period of the
lease agreement (EXHIBIT "L"), while plaintiff accurately reflects in
Exhibits "I," "J," "K" and its submarkings the entire period, covered
by the lease agreement (EXHIBIT "L"), which is from March 28,
1985 to July 12, 1985 and correctly states the amount due plaintiff
from defendant in the amount of P376,350.18. [3]
On 29 July 1994 respondent Court of Appeals affirmed the
decision of the trial court.[4]
Petitioner imputes the following errors to respondent court: (1)
in not holding that, insofar as it fixed petitioner's alleged obligation
to respondent at P342,909.38, the Agreement is unenforceable for
being in the nature of an unauthorized contract; and, (2) in not
holding that petitioner's obligation to respondent had been fully
paid and that petitioner even overpaid respondent by P12,000.00.

As regards the first error, petitioner asserts that the Agreement

is unenforceable for having been executed by Candelario S. Aller Jr.
without authority.
Significantly, in the proceedings before respondent Court of
Appeals, petitioner assigned a lone error allegedly committed by
the trial court, i.e., full payment, if not overpayment by P12,000.00,
of the obligation referred to in the second issue raised in the
petition therein. Quite obviously, having limited itself to that
particular issue to the exclusion of any other, petitioner can no
longer be permitted to assail the finding of the trial court on the
validity of the Agreement.[5]
As regards the factual issue on the correctness of the amount
of petitioner's obligation, or whether it has been fully paid,
petitioner insists that from a perusal of Exhs. "2," "2-A" to "2-Z" all
of which refer to respondent's Equipment Daily Time Reports for 2
May to 14 June 1985, it was established that the equipment leased
was actually used for only 191 hours. Multiplying 191 hours by the
rental rate of P540.00 per hour will amount to P103,140.00 which is
petitioner's correct rental obligation to respondent. Taking into
account the construction materials worth P115,000.00 received by
respondent from petitioner an overpayment of P12,000.00 more or
less results. In the absence of any showing that the trial court failed
to appreciate facts and circumstances of weight and substance that
would have altered its conclusion, no compelling reason exists for
this Court to impinge upon matters more appropriately within its
province.[6] Consequently, we sustain the finding of the trial court
that the evidence relied upon by petitioner is incomplete as it does
not reflect the entire period of the lease agreement which, on the
basis of respondent's evidence, covered the period of 28 March to
12 July 1985.
Furthermore, estoppel in pais arises when one, by his acts,
representations or admissions, or by his own silence when he ought
to speak out, intentionally or through culpable negligence, induces
another to believe certain facts to exist and such other rightfully
relies and acts on such belief, so that he will be prejudiced if the
former is permitted to deny the existence of such facts. [7] This
doctrine obtains in the present case. A statement of account
for P376,350.18 covering the period above mentioned was received
from respondent by petitioner with nary a protest from the
latter. Neither did petitioner controvert the demand letter
concerning the overdue account of P237,909.38; on the contrary, it
asked for ample time to source funds to substantially settle the
account.

WHEREFORE, the petition is DENIED. The decision of

respondent Court of Appeals dated 29 July 1994 affirming that of
the Regional Trial Court of Makati dated 19 December 1990 is
AFFIRMED. Costs against petitioner.
SO ORDERED.

SECOND DIVISION

[G.R. No. 109803. April 20, 1998]

PHILIPPINE BANK OF COMMUNICATIONS, petitioner, vs. THE

COURT OF APPEALS and OLYMPIA FERNANDEZPUEN, respondents.
DECISION
PUNO, J.:
The present case arose from a complaint for "Nullification of
Real Estate Mortgage"[1] filed by private respondent Olympia
Fernandez-Puen against her estranged husband, Chee Puen, and
petitioner Philippine Bank of Communications before the Regional
Trial Court of Pasig.
Private respondent is the president and majority stockholder of
Global, Inc., a 100% Filipino corporation engaged in selling
pharmaceutical products, hospital equipment and supplies. Her
husband, Chee Puen, used to be its General Manager. They have
been living separately from each other prior to the present
controversy. She resides in Timog Avenue, Quezon City, while he
lives in Bel-Air Village, Makati.
The records show that on April 25, 1978, Chee Puen, then the
general manager of Global, Inc., informed respondent that their

company needed a three hundred thousand peso (P300,000.00)

loan for its operational expenses. He proposed that her paraphernal
lot in Makati be used as collateral.[2] Respondent hesitated as she
was afraid they would not be able to pay the loan. He assured her
that the loan would not exceed P300,000.00 and she was asked to
sign three (3) sets of blank forms of real estate mortgage (REM) of
petitioner bank. He wrote down in pencil the figure 300 under the
space provided for the amount to be loaned and indicated with
checkmarks the spaces where respondent should sign. Respondent
signed the blank mortgage forms due to Chee Puen's
representation. Chee Puen had the mortgage document later
notarized by Atty. Edilberto Arzadon, using a residence certificate
bearing respondent's forged signature.
It appears that Chee Puen then applied for a three million peso
(P3,000,000.00) loan from petitioner bank for Global, Inc. To secure
the loan, he mortgaged respondent's paraphernal lot in Makati,
using the blank real estate mortgage forms signed by her. He also
submitted a "Secretary's Certificate of Board Resolution" (marked
as Exhibit "H") where he misrepresented himself as president and
acting corporate secretary of Global, Inc.[3]
It is established that petitioner bank did not investigate Chee
Puen's authority to mortgage respondent's property. Respondent's
signature in her residence certificate was not verified. Neither was
the verity of the "Secretary's Certificate of Board Resolution" (Exh.
"H") ascertained. The three-million peso (P3,000,000.00) loan was
approved without undergoing the usual bank procedure.
Three (3) years later, in February 1981, respondent and Chee
Puen had a quarrel because respondent refused to give the cash
allegedly needed for Global, Inc. Chee Puen threatened respondent
to leave their company. A special meeting of Global's board of
directors was called and it passed a resolution replacing Chee Puen
as official signatory of its checks.
On February 16, 1981, respondent personally delivered a copy
of the board resolution to the Buendia branch of petitioner bank. On
the occasion, respondent chanced upon Chee Puen while encashing
two (2) checks for Global, Inc. Respondent tore the checks into
pieces (Exhibits "E" and "F") as he has been disauthorized to
manage the company. When Chee Puen left, the teller informed
respondent that Chee Puen had obtained a loan of P3,000,000.00
from the bank.
After further investigation, respondent filed this case against
Chee Puen and petitioner to nullify the subject mortgage deed. In
her complaint, respondent alleged that she did not authorize Chee

Puen to mortgage her property to secure the aforesaid P3 M

loan. She claimed that her residence certificate used to notarize the
mortgage application form was spurious.
At the trial, respondent presented Francisco Cruz, Jr.,
Supervising Document Examiner of the PC-CIS Crime Laboratory, to
prove that she signed the subject mortgage forms in blank. Cruz
testified that the subject mortgage contract, consisting of one (1)
original and two (2) duplicate original copies, contained
respondent's genuine signatures, but the signatures were affixed
before the typewritten entries therein were prepared. He disclosed,
further, that respondent's alleged signature on the residence
certificate presented to notary public Arzadon differed from
respondent's specimen signatures. He opined that it was written by
another person.
For its part, petitioner bank maintained that respondent and
Chee Puen went to its office in April, 1978 to apply for the loan. She
accomplished and signed the mortgage contract in its office and,
afterwards, had it notarized by Atty. Arzadon in the presence of
witnesses.
On May 30, 1986, the trial court rendered judgment in favor of
respondent. The relevant portion of it decision[4] provides:
"Considering that defendant Chee C. Puen has been guilty
of bad faith and defendant Philippine Bank of
Communications of gross negligence amounting to bad
faith (See Soberano vs. Manila Railroad Co., L-19407,
November 23, 1966, 18 SCRA 732, 738), which compelled
the plaintiff to incur expenses to protect her interest,
plaintiff is entitled to an award of attorney's fees and
expenses of litigation. (Article 2208, pars. (2) and (5), New
Civil Code).
"IN VIEW OF ALL THE FOREGOING, the Court renders
judgment in favor of plaintiff and against defendants
Philippine Bank of Communications and Chee C. Puen,
declaring the real estate mortgage (Exhs. C-3 and 4 - PB
Com) null and void; ordering defendant Philippine Bank of
Communications to deliver the owner's duplicate copy of
TCT No. (97379) S-4748 of the Province of Rizal to the
plaintiff; and the Register of Deeds of Rizal (Makati
branch) to cancel the subject real estate mortgage in favor
of Philippine Bank of Communications upon
plaintiff's payment of the prescribed fees.

"The defendants are ordered to pay plaintiff, jointly and

severally, the amount of Fifty Thousand Pesos (P50,000.00),
for and as attorney's fees and expenses of litigation.
"The counterclaims of defendants are dismissed for lack of
merit.
"SO ORDERED."
On November 20, 1992, the Court of Appeals [5] modified the
decision of the trial court, thus:
"WHEREFORE, the decision under appeal should be, as it is
hereby, affirmed in all its aspects except that the portion of
the judgment ordering defendants to pay plaintiff jointly
and severally the amount of P50,000.00 for attorney's fees
and expenses of litigation should be, as it is hereby,
deleted therefrom.
"SO ORDERED."
Hence, this petition where it is contended:
"1. The Honorable Court of Appeals erred in affirming the
nullification of the subject real estate mortgage by the
lower court.
"2. The Honorable Court of Appeals erred in affirming the
ruling of the lower court that the respondent was not
estopped/barred from questioning the legality/validity of
the real estate mortgage.
"3. The Honorable Court of Appeals erred in affirming the
ruling of the lower court that the petitioner is not entitled to
its compulsory counterclaim."
We reject the first contention. The private respondent proved
that it was not her intent to mortgage her lot to secure a P3 M loan
of Global, Inc. Chee Puen misrepresented to her that the loan would
be no more than P300,000.00. Due to her trust on Chee Puen, she
signed the mortgage application in blank. Chee Puen then applied
for a P3 M loan. He had the mortgage application notarized using a
forged residence certificate of the respondent. He also submitted to
the
petitioner
bank
a
"Secretary's
Certificate of
Board
Resolution" where he falsely stated that he was President and
Acting Corporate Secretary of Global, Inc.
The testimony of the private respondent is well corroborated by
other evidence. Mr. Francisco Cruz, Supervising Document
Examiner of the PC-CIS Crime Laboratory found and concluded that

"the three (3) questioned handwritten signatures of Olympia

Fernandez-Puen appearing in the real estate mortgage document
were signed before the typewritten entries were prepared" (Exh.
"N", "N-2"). The same official also found that the "questioned
signature of Olympia Fernandez-Puen appearing in the Residence
Certificate No. 00019600 when compared with her standard
signatures were written by two different persons" (Exh. "T", "T2"). There is no doubt also that Chee Puen was never the President
of Global, Inc. and hence the "Secretary's Certificate of Board
Resolution" to that effect is false and fraudulent. In light of these
established facts, it is futile for petitioner bank to insist that the real
estate mortgage contract should not be nullified. Respondent has
not consented to collateralize Global, Inc.'s P3 M loan with her
paraphernal land.
We also reject petitioner's plea that the equitable principle of
estoppel[6] be applied against the respondent. Article 1431 provides
that "through estoppel, an admission or representation is rendered
conclusive upon the person making it and cannot be denied or
disproved as against the person relying thereon." Implementing
this substantive law, section 2 (a) of Rule 131 provides: "Whenever
a party has by his own declaration, act or omission, intentionally
and deliberately led another to believe a particular thing true, and
to act upon such belief, he cannot, in any litigation arising out of
such declaration, act or omission be permitted to falsify it." By its
incorporation in the Civil Code, estoppel in our jurisdiction has
become an equitable defense that is both substantive and
remedial. Its successful invocation can therefore bar a right and not
merely its equitable enforcement.
Case law tells us that the elements of estoppel are: "first, the
actor who usually must have knowledge, notice or suspicion of the
true facts, communicates something to another in a misleading
way, either by words, conduct or silence; second, the other in fact
relies, and relies reasonably or justifiably, upon that
communication; third, the other would be harmed materially if the
actor is later permitted to assert any claim inconsistent with his
earlier conduct; and fourth, the actor knows, expects or foresees
that the other would act upon the information given or that a
reasonable person in the actor's position would expect or foresee
such action."[7]
The established facts preclude the application of estoppel
against the respondent. Respondent did not deliberately or
intentionally lead the petitioner bank to believe that she was
putting up her paraphernal property to secure a P3 M loan of
Global, Inc. It was Chee Puen who made the misrepresentation thus

defrauding respondent herself. Furthermore, petitioner's reliance on

the mortgage application signed in blank by respondent is not a
reasonable reliance. As a banking institution, petitioner bank was
grossly negligent when (a) it took no step to verify whether the
respondent was really offering her paraphernal property as
collateral; (b) made no credit check on respondent and Global, Inc.;
and (c) conducted no investigation on the authenticity of the
"Secretary's Certificate of Board Resolution" dated April 27,
1978. The business of a bank is affected with public interest and it
should observe a higher standard of diligence when dealing with
the public. Neither will it matter that petitioner bank itself was
misled by Chee Puen, a third person to the contract. Under Article
1342 of the Civil Code, the misrepresentation of a third person will
vitiate consent if it has resulted in substantial mistake and the
same is mutual.
We cannot also subscribe to the proposition of petitioner bank
that we apply the equitable defense of laches against the
respondent. In Chung Ka Bio v. IAC,[8] we held that unlike the
statute of limitation, laches does not involve mere lapse or passage
of time but is principally an impediment to the assertion or
enforcement of a right which has become under the circumstances
inequitable or unfair to permit. Its essential elements are:
(1) conduct on the part of defendant or one under whom he claims,
giving rise to the situation complained of; (2) delay in asserting
complainant's right after he had knowledge of the defendant's
conduct and after he has an opportunity to sue; (3) lack of
knowledge or notice on the part of the defendant that the
complainant would assert the right on which he bases his suit; (4)
injury or prejudice to the defendant in the event relief is accorded
to the complainant. Unlike estoppel, laches as an equitable defense
usually bars only the equitable enforcement of a right but not the
right itself. It is an affirmative defense and the burden of proving it
rests on the defendant.[9]
In the case at bar, the evidence does not show the lapse of an
unreasonable length of time before the respondent sued to annul
the real estate mortgage of her property to the petitioner
bank. Respondent discovered the fraud perpetrated by Chee Puen
only on February 16, 1981. On this date, respondent went to the
Buendia branch of petitioner bank to submit the board resolution of
Global, Inc., replacing Chee Puen as check signatory. She saw him
still encashing checks of the corporation and they had a
confrontation. She was later informed by the bank cashier of the P3
M loan negotiated by Chee Puen. Respondent promptly investigated
the unauthorized loan. As soon as the investigation was completed,
respondent filed a criminal case for falsification against Chee Puen,

a disbarment complaint against Atty. Edilberto Arzadon who

notarized the mortgage deed, an administrative complaint in the
Central Bank against the petitioner and a complaint for nullification
of Real Estate Mortgage in the RTC of Pasig, Metro Manila. These
prompt and decisive actions on the part of the respondent do not
warrant the assumption that she has abandoned or declined to
assert her right to annul the subject real estate mortgage. Her
complaint for annulment cannot by any stretch of the imagination
be characterized as a stale demand.
IN VIEW WHEREOF, the petition is dismissed. Costs against
petitioner.
SO ORDERED.

THIRD DIVISION

[G.R. No. 116111. January 21, 1999]

REPUBLIC OF THE PHILIPPINES, (Represented by the Acting

Commissioner
of
Land
Registration), petitioner,
vs. COURT OF APPEALS, Spouses CATALINO SANTOS
and
THELMA
BARRERO
SANTOS,
ST.
JUDES
ENTERPRISES, INC., Spouses DOMINGO CALAGUIAN
and FELICIDAD CALAGUIAN, VIRGINIA DE LA FUENTE
and LUCY MADAYA, respondents.
DECISION
PANGANIBAN, J.:
Is the immunity of the government from laches and estoppel
absolute? May it still recover the ownership of lots sold in good faith
by a private developer to innocent purchasers for value.
Notwithstanding its approval of the subdivision plan and its
issuance of separate individual certificates of title thereto?

The Case

These are the main questions raised in the Petition for Review
before us, seeking to set aside the November 29, 1993
Decision[1] of the Court of Appeals[2] in CA-GR CV No. 34647. The
assailed Decision affirmed the ruling[3] of the Regional Trial Court of
Caloocan City, Branch 125, in Civil Case No. C-111708, which
dismissed petitioners Complaint for the cancellation of Transfer
Certificates of Title (TCTs) to several lots in Caloocan City, issued in
the name of private respondents.
In a Resolution[4] dated July 7, 1994, the Court of Appeals
denied the Republics motion for reconsideration.

The Facts

The facts of the case are not disputed. The trial courts
summary, which was adopted by the Court of Appeals, is
reproduced below:
Defendant St. Judes Enterprises, Inc. is the registered owner of a
parcel of land known as Lot 865-B-1 of the subdivision plan (LRC)
PSD-52368, being a portion of Lot 865-B located in Caloocan City
containing an area of 40,623 square meters. For Lot 865-B-1
defendant St. Judes Enterprises, Inc. was issued TCT No. 22660 on
July 25, 1966.
Sometime in March 1966 defendant St Judes Enterprises, Inc.
subdivided Lot No. 865-B-1 under subdivision plan (LRC) PSD-55643
and as a result thereof the Register of Deeds of Caloocan City
cancelled TCT No. 22660 and in lieu thereof issued Certificates of
Title Nos. 23967 up to 24068 inclusive, all in the name of
defendants St. Judes Enterprises, Inc. The subdivision of lot 865-B-1
[which was] covered [by] TCT No. 22660 was later found to have
expanded and enlarged from its original area of 40,523 square
meters to 42,044 square meters or an increase of 1,421 square
meters. This expansion or increase in area was confirmed by the
land Registration Commission [to have been made] on the northern
portion of Lot 865-B-1.
Subsequently, defendant St. Judes Enterprises, Inc. sold the lots
covered by TCT Nos. 24013 and 24014 to defendant Sps. Catalino

Santos and Thelma Barreto Santos[;] TCT No. 24019 to defendant

Sps. Domingo Calaguian and Felicidad de Jesus[;] TCT No. 24022 to
defendant Virginia dela Fuente[;] and TCT No. 2402[3] to defendant
Lucy Madaya. Accordingly, these titles were cancelled and said
defendants were issued the following: TCT No. C-43319 issued in
the name of Sps. Santos containing an area of 344 square meters[;]
TCT No. 55513 issued in the name of defendants Sps. Calaguian
containing an area of 344 square meters[;] TCT No. 13309 issued in
the name of Sps. Santos[;] TCT No. 24069 issued in the name of
Virginia dela Fuente containing an area of 350 square meters[;] and
TCT No. C-46648 issued in the name of defendant Lucy Mandaya
with an area of 350 square meters."[5]
"[On January 29, 1985, then Solicitor General Estelito Mendoza
filed] an action seeking xxx the annulment and cancellation of
Transfer Certificates of Title (TCT) Nos. 24015, 24017, 24018,
24020, 24021, 24024, 24025 and 24068 issued in the name of
defendant St. Jude's Enterprises, Inc.[;] Transfer Certificates of Title
Nos. 13309 and C-43319 both registered in the name of Sps.
Catalino Santos and Thelma B. Santos[;] TCT No. 55513 registered
in the name of Sps. Domingo Calaguian and Felicidad de Jesus[;]
TCT No. 24069 registered in the name of Virginia dela Fuente[;] and
TCT No. C-46648 registered in the name of Lucy Mandaya,
principally on the ground that said Certificates of Title were issued
on the strength of [a] null and void subdivision plan (LRC) PSD55643 which expanded the original area of TCT No. 22660 in the
name of St. Jude's Enterprises, Inc. from 40,623 square meters to
42,044 square meters upon its subdivision
"Defendants Virginia dela Fuente and Lucy Mandaya were declared
in default for failure to file their respective answer within the
reglementary period.
"Defendants Sps. Catalino Santos and Thelma Barreto Santos, St.
Jude's Enterprises, Inc. and Sps. Domingo Calaguian and Felicidad
Calaguian filed separate answers to the complaint. Defendants Sps.
Domingo Calaguian and Sps. Catalino Santos interposed defenses,
among others, that they acquired the lots in question in good faith
from their former owner, defendant St. Jude's Enterprises, Inc. and
for value and that the titles issued to the said defendants were
rendered incontrovetible, conclusive and indefeasible after one
year from the date of the issuance of the titles by the Register of
Deeds of Caloocan City.

"On the other hand, defendant St. Jude's Enterprises, Inc.

Interposed defenses, among others, that the cause of action of
plaintiff is barred by prior judgment; that the subdivision plan
submitted having been approved by the LRC, the government is
now in estoppel to question the approved subdivision plan; and the
plaintiff's allegation that the area of the subdivision increased by
1,421 square meters is without any basis in fact and in law."[6]

Ruling of the Trial Court

On April 30, 1991, the trial court dismissed the Complaint.

While the plaintiff sufficiently proved the enlargement or
expansion of the area of the disputed property, it presented no
proof that Respondent St. Jude Enterprises, Inc. (St. Jude) had
committed fraud when it submitted the subdivision plan to the Land
Registration Commission (LRC) for approval. Because the plan was
presumed to have been subjected to investigation, study and
verification by the LRC, there was no one to blame for the increase
in the area but the plaintiff[,] for having allowed and approved
the subdivision plan. Thus, the court concluded, the government
was already in estoppel to question the approved subdivision plan.
[7]

The trial court also took into account the absence of complaints
from adjoining owners whose supposed lots [were] encroached
upon by the defendants, as well as the fact that an adjoining owner
had
categorically
stated
that
there
was
no
such
encroachment. Finding that Spouses Santos, Spouses Calaguian,
Dela Fuente and Madaya had brought their respective lots from St.
Jude for value and in good faith, the court held that their titles
could no longer be questioned, because under the Torrens system,
such titles had become absolute and irrevocable. As regards the
Republics allegation that it had filed the case to protect the
integrity of the said system, the court said:

xxx [S]ustaining the position taken by the government would

certainly lead to disastrous consequences. Buyers in good faith
would lose their titles. Adjoining owners who were deprived of a
portion of their lot would be forced to accept the portion of the
property allegedly encroached upon. Actions for recovery will be
filed right and left[;] thus instead of preserving the integrity of the
Torrens System it would certainly cause chaos rather than
stability. Finally, if only to strengthen the Torrens System and in the
interest of justice, the boundaries of the affected properties of the
defendants should not be disturbed and the status quo should be
maintained.[8]
The solicitor general appealed the trial courts Decision to the
Court of Appeals.

Ruling of the Appellate Court

Citing several cases[9] upholding the indefeasibility of titles

issued under the Torrens system, the appellate court affirmed the
trial court. It berated petitioner for bringing the suit only after
nineteen (19) years had passed since the issuance of St. Judes title
and the approval of the subdivision plan. The pertinent portion of
the assailed Decision reads:[10]
xxx Rather than make the Torrens system reliable and stable, [its]
act of filing the instant suit rocks the system, as it gives the
impression to Torrens title holders, like appellees, that their titles to
properties can be questioned by the same authority who had
approved the same even after a long period of time. In that case,
no Torrens title holder shall be at peace with the ownership and
possession of his land, for the Commission of land Registration can
question his title any time it makes a finding unfavorable to said
Torrens title holder.
Undaunted, petitioner seeks a review by this Court.[11]

The Issues

In this petition, the Republic raises the following issues for our
resolution:[12]

1. Whether or not the government is estopped from questioning the

approved subdivision plan which expanded the areas covered by
the transfer certificates of title in question;
2. Whether or not the Court of Appeals erred when it did not
consider the Torrens System as merely a means of registering title
to land;
3. Whether or not the Court of Appeals erred when it failed to
consider that petitioners complaint before the lower court was filed
to preserve the integrity of the Torrens System.
We shall discuss the second and third questions
together. Hence, the issues shall be (1) the applicability of estoppel
against the State and (2) the Torrens system.

The Courts Ruling

The petition is bereft of merit.

First Issue: Estoppel Against the Government

The general rule is that the State cannot be put in estoppel by

the mistakes or error of its officials or agents.[13] However, like all
general rules, this is also subject to exceptions, viz.: [14]
Estoppels against the public are little favored. They should not be
invoked except in rate and unusual circumstances, and may not be
invoked where they would operate to defeat the effective operation
of a policy adopted to protect the public. They must be applied with
circumspection and should be applied only in those special cases
where the interests of justice clearly require it. Nevertheless, the
government must not be allowed to deal dishonorably or
capriciously with its citizens, and must not play an ignoble part or
do a shabby thing; and subject to limitations x x x, the doctrine of
equitable estoppel may be invoked against public authorities as
well as against private individuals.
In Republic v. Sandiganbayan,[15] the government, in its effort
to recover ill-gotten wealth, tried to skirt the application of estoppel

against it by invoking a specific constitutional provision. [16] The

Court countered:[17]
We agree with the statement that the State is immune from
estoppel, but this concept is understood to refer to acts and
mistakes of its officials especially those which are irregular (Sharp
International Marketing vs. Court of Appeals, 201 SCRA 299; 306
[1991]; Republic v. Aquino, 120 SCRA 186 [1983]), which peculiar
circumstances are absent in the case at bar. Although the States
right of action to recover ill-gotten wealth is not vulnerable to
estoppel[;] it is non sequitur to suggest that a contract, freely and
in good faith executed between the parties thereto is susceptible to
disturbance ad infinitum. A different interpretation will lead to the
absurd scenario of permitting a party to unilaterally jettison a
compromise agreement which is supposed to have the authority
of res judicata (Article 2037, New Civil Code), and like any other
contract, has the force of law between parties thereto (Article 1159,
New Civil Code; Hernaez vs. Kao, 17 SCRA 296 [1966]; 6 Padilla,
Civil Code Annotated, 7th ed., 1987, p. 711; 3 Aquino, Civil Code,
1990 ed., p. 463). xxx.
The Court further declared that (t)he real office of the equitable
norm of estoppel is limited to supply[ing] deficiency in the law, but
it should not supplant positive law.[18]
In the case at bar, for nearly twenty years (starting from the
issuance of St. Judes titles in 1966 up to the filing of the Complaint
in 1985), petitioner failed to correct and recover the alleged
increase in the land area of St. Jude. Its prolonged inaction strongly
militates against its cause, as it is tantamount to laches, which
means the failure or neglect, for an unreasonable and unexplained
length of time, to do that which by exercising due diligence could or
should have been done earlier; it is negligence or omission to
assert a right within a reasonable time, warranting a presumption
that the party entitled to assert it either has abandoned it or
declined to assert it.[19]
The Court notes private respondents argument that, prior to
the subdivision, the surveyors erred in the original survey of the
whole tract of land covered by TCT No. 22660. So that less then
the actual land area was indicated on the title. Otherwise, the
adjoining owners would have complained upon the partition of the
land in accordance with the LRC-approved subdivision plan. As it is,
Florencio Quintos, the owner of the 9,146 square-meter Quintos
Village adjoining the northern portion of St. Judes property (the
portion allegedly expanded), even attested on August 16, 1973 that

there [was] no overlapping of boundaries as per my approved plan

(LRC) PSD 147766 dated September 8, 1971. [20] None of the other
neighboring owners ever complained against St. Jude or the
purchasers of its property. It is clear, therefore, that there was no
actual damage to third persons caused by the resurvey and the
subdivision.
Significantly, the other private respondents -- Spouses Santos,
Spouses Calaguian, Dela Fuente and Madaya -- bought such
expanded lots in good faith, relying on the clean certificates of St.
Jude, which had no notice of any flaw in them either. It is only fair
and reasonable to apply the equitable principle of estoppel by
laches against the government to avoid an injustice [21] to the
innocent purchasers for value.
Likewise time-settled is the doctrine that where innocent third
persons, relying on the correctness of the certificate of title, acquire
rights over the property, courts cannot disregard such rights and
order the cancellation of the certificate. Such cancellation would
impair public confidence in the certificate of title, for everyone
dealing with property registered under the Torrens system would
have to inquire in every instance whether the title has been
regularly issued or not. This would be contrary to the very purpose
of the law, which is to stabilize land titles. Verily, all persons dealing
with registered land may safely rely on the correctness of the
certificate of title issued therefor, and the law or the courts do not
oblige them to go behind the certificate in order to investigate
again the true condition of the property. They are only charged with
notice of the liens and encumbrances on the property that are
noted on the certificate.[22]
When private respondents-purchasers bought their lots from
St. Jude, they did not have to go behind the titles thereto to verify
their contents or search for hidden defects or inchoate rights that
could defeat their rights to said lots. Although they were bound by
liens and encumbrances annotated on the titles, private
respondents-purchasers could not have had notice of defects that
only an inquiry beyond the face of the titles could have satisfied.
[23]
The rationale for this presumption has been stated thus:[24]
The main purpose of the Torrens System is to avoid possible
conflicts of title to real estate and to facilitate transactions relative
thereto by giving the public the right to rely upon the face of a
Torrens Certificate of Title and to dispense with the need of
inquiring further, except when the party concerned had actual
knowledge of facts and circumstances that should impel a
reasonably cautious man to make such further inquiry (Pascua v.

Capuyoc, 77 SCRA 78). Thus, where innocent third persons relying

on the correctness of the certificate thus issued, acquire rights over
the property, the court cannot disregard such rights (Director of
Land v. Abache, et al., 73 Phil. 606).
In another case,[25] this Court further said:
The Torrens System was adopted in this country because it was
believed to be most effective measure to guarantee the integrity of
land titles and to protect their indefeasibility once the claim of
ownership is established and recognized. If a person purchases a
piece of land on the assurance that the sellers title thereto is valid,
he should not run the risk of being told later that his acquisition
was ineffectual after all. This would not only be unfair to him. What
is worse is that if this were permitted, public confidence in the
system would be eroded and land transactions would have to be
attended by complicated and not necessarily conclusive
investigations and proof of ownership. The further consequence
would be that land conflicts could be even more abrasive, if not
even violent. The Government, recognizing the worthy purposes of
the Torrens System, should be the first to accept the validity of
titles issued thereunder once the conditions laid down by the law
are satisfied.[Italics supplied.]
Petitioner never presented proof that the private respondents
who had bought their lots from St. Jude were buyers in bad
faith. Consequently, their claim of good faith prevails. A purchaser
in good faith and for value is one who buys the property of another
without notice that some other person has a right to or an interest
in such property; and who pays a full and fair price for the same at
the time of such purchase or before he or she has notice of the
claims or interest of some other person.[26] Good faith is the honest
intention to abstain from taking any unconscientious advantage of
another.[27]
Furthermore, it should be stressed that the total area of forty
thousand six hundred twenty-three (40,623) square meters
indicated on St. Judes original title (TCT No. 22660) was not
an exact area. Such figure was followed by the phrase more or
less. This plainly means that the land area indicated was not
precise. Atty. Antonio H. Noblejas, who became the counsel of St.
Jude subsequent to his tenure as Land Registration Commissioner,
offers a sensible explanation. In his letter[28] to the LRC dated
November 8, 1982, he gave the following information:

a. Records show that our client owned a large tract of land situated
in an area cutting the boundary of Quezon City and Caloocan City,
then known as Lot 865-B, Psd-60608, and described in T.C.T. No.
100412, containing an area of 96,931 sq. meters, more or less.

surveyor[]s findings on the ground, which

rectifies previous surveryors error in computing its area as 40,622
sq. meters in Plan (LRC) Psd-52368, which is about 3.5% tolerable
error (1,422 divided by 40,622 = .035).

b. It will be noted that on the northern portion of this Lot 865-B,

Psd-60608, is xxx Lot 865-A, Psd-60608, which means that at a
previous point of time, these 2 lots composed one whole tract of
land.

[h.] It is well settled that in the identification of a parcel of land

covered by certificate of title, what is controlling are the metes and
bounds as set forth in its Technical Description and not the area
stated therein, which is merely an approximation as indicated in the
more or less phrase placed after the number of square meters.

c. On December 23, 1965, Lot 865-B, Psd-60608, was subdivided

into 2 lots, denominated as Lot 865-B-1, with an area of 40,622 sq.
meters, more or less, on the Caloocan side, and Lot 865-B-2, with
an area of 56,308 sq. meters, more or less, on the Quezon City
side, under Plan (LRC) Psd-52368.
d. On March 1-10, 1966, Lot 865-B-1, Psd-52368, then covered by
T.C.T. No. N-22660, was subdivided into residential lots under Plan
(LRC) Psd-55643, with a total area of 42,044 sq. meters, more or
less.
e. It will be noted that Lot 865-B, Psd-60608, covered by T.C.T. No.
100412, contained an area of 96,931 sq. meters, more or less, but
when subdivided under Plan (LRC) Psd-52368, into 2 lots, its total
area shrank by 1 sq. meter, to wit:
Lot 865-B-1, Psd-52368 = 40,622 sq. meters
Lot 865-B-2, Psd-52368 = 56,308
96,930 sq. meters.
f. There is no allegation whatever in the Perez report that there was
error in laying out the metes and bounds of Lot 865-B-1 in Plan
(LRC) Psd-55643, as specified in the Technical Description of the
said lot set forth in T.C.T. No. N-22660 covering the same. There is
likewise no allegation, on the contrary there is confirmation from
the boundary owner on the northern side, Mr. Florencio Quintos,
that there is no overlapping of boundaries on the northern side of
Lot 865-B-1, Psd-55643.
g. We respectfully submit that the area of 42, 044 sq. meters
stated in Plan (LRC) Psd-55643 as the size of Lot 865-B-a, is the
more accurate area, confirmed by the Perez report as per

i. There is thus no unauthorized expansion of the survey occasioned

by the subdivision of Lot 865-B-1 under Plan (LRC) Psd-55643;
consequently, LRC Circular No. 167, Series of 1967, finds no
application thereto, as to bar the processing and registration in due
course of transactions involving the subdivision lots of our client,
subject hereof. This is apart from the fact that LRC Circular No. 167
has not been implemented by the Register of Deeds of Caloocan
City or any proper government authority since its issuance in 1967,
and that, in the interest of justice and equity, its restrictive and
oppressive effect on transactions over certificates of titles of
subdivisions that allegedly expanded on re-surveys, cannot be
allowed to continue indefinitely. (Italics supplied.)
The discrepancy in the figures could have been caused by the
inadvertence or the negligence of the surveyors. There is no proof,
though, that the land area indicated was intentionally and
fraudulently increased. The property originally registered was the
same property that was subdivided. It is well-settled that what
defines a piece of titled property is not the numerical date
indicated as the area of the land, but the boundaries or metes and
bounds of the property specified in its technical description as
enclosing it and showing its limits. [29]
Petitioner miserably failed to prove any fraud, either on the
part of Private Respondent St. Jude or on the part of land
registration officials who had approved the subdivision plan and
issued the questioned TCTs. Other than its peremptory statement in
the Complaint that the expansion of the area was motivated by bad
faith with intent to defraud, to the damage and prejudice of the
government and of public interests, petitioner did not allege
specifically how fraud was perpetrated to cause an increase in the
actual land size indicated. Nor was any evidence proffered to
substantiate the allegation. That the land registration authorities
supposedly erred or committed an irregularity was merely a
conclusion drawn from the table survey showing that the aggregate

area of the subdivision lots exceeded the area indicated on the title
of the property before its subdivision. Fraud cannot be presumed,
and the failure of petitioner to prove it defeats it own cause.

SO ORDERED.

Second Issue: The Torrens System

True, the Torrens system is not a means of acquiring titles to

lands; it is merely a system of registration of titles to lands.
[30]
Consequently, land erroneously included in a Torrens certificate
of title is not necessarily acquired by the holder of such certificate.

SECOND DIVISION

[31]

But in the interest of justice and equity, neither may the

titleholder be made to bear the unfavorable effect of the mistake or
negligence of the States agents, in the absence of proof of his
complicity in a fraud or of manifest damage to third
persons. First, the real purpose of the Torrens system is to quite
title to land to put a stop forever to any question as to the legality
of the title, except claims that were noted in the certificate at the
time of the registration or that may arise subsequent thereto.
[32]
Second, as we discussed earlier, estoppel by laches now bars
petitioner from questioning private respondents titles to the
subdivision lots. Third, it was never proven that Private Respondent
St. Jude was a party to the fraud that led to the increase in the area
of the property after its subdivision. Finally, because petitioner
even failed to give sufficient proof of any error that might have
been committed by its agent who had surveyed the property, the
presumption of regularity in the performance of their functions
must be respected. Otherwise, the integrity of the Torrens system,
which petitioner purportedly aims to protect by filing this case,
shall forever be sullied by the ineptitude and inefficiency of land
registration officials, who are ordinarily presumed to have regularly
performed their duties.[33]
We cannot, therefore, adhere to the petitioners submission
that, in filing this suit, it seeks to preserve the integrity of the
Torrens system. To the contrary, it is rather evident from our
foregoing discussion that petitioners action derogates the very
integrity of the system. Time and again, we have said that a Torrens
certificate is evidence of an indefeasible title to property in favor of
the person whose name appears thereon.
WHEREFORE, the petition is hereby DENIED and the assailed
Decision is AFFIRMED.

[G.R. No. 123817. December 17, 1999]

IBAAN RURAL BANK INC., petitioner, vs. THE COURT OF

APPEALS
and
MR.
and
MRS.
RAMON
TARNATE, respondents.
DECISION
QUISUMBING, J.:
This petition for review under Rule 45 of the Rules of Court
seeks to set aside the decision of the Court of Appeals in CA-G.R.
CV No. 32984 affirming with modification the decision of the
Regional Trial Court of Batangas, Branch 2, in Civil Case No. 534, as
well as the resolution of the Court of Appeals denying petitioners
motion for reconsideration.
The facts are as follows:
Spouses Cesar and Leonila Reyes were the owners of three (3)
lots covered by Transfer Certificate of Title (TCT) Nos. 33206, 33207
and 33208 of the Register of Deeds of Lipa City. On March 21, 1976,
the spouses mortgaged these lots to Ibaan Rural Bank, Inc. [herein
petitioner]. On June 11, 1976, with the knowledge and consent of
the petitioner, the spouses as sellers, and Mr. and Mrs. Ramon
Tarnate [herein private respondents] as buyers, entered into a Deed
of Absolute Sale with Assumption of Mortgage of the lots in
question. Private respondents failed to pay the loan and the bank
extra-judicially foreclosed on the mortgaged lots. The Provincial
Sheriff conducted a public auction of the lots and awarded the lots
to the bank, the sole bidder. On December 13, 1978, the Provincial

Sheriff issued a Certificate of Sale which was registered on October

16, 1979. The certificate stated that the redemption period expires
two (2) years from the registration of the sale.No notice of the
extrajudicial foreclosure was given to the private respondents. On
September 23, 1981, private respondents offered to redeem the
foreclosed lots and tendered the redemption amount of
P77,737.45. However, petitioner Bank refused the redemption on
the ground that it had consolidated its titles over the lots. The
Provincial Sheriff also denied the redemption on the ground that
private respondents did not appear on the title to be the owners of
the lots.
Private respondents filed a complaint to compel the bank to
allow their redemption of the foreclosed lots. They alleged that the
extra-judicial foreclosure was null and void for lack of valid notice
and demand upon them. They further argued that they were
entitled to redeem the foreclosed lots because they offered to
redeem and tendered the redemption price before October 16,
1981, the deadline of the 2-year redemption period.
The bank opposed the redemption, contending that the private
respondents had no right to redeem the lots because they were not
the real parties in interest; that at the time they offered to redeem
on September 23, 1981, the right to redeem had prescribed, as
more than one year had elapsed from the registration of the
Certificate of Sale on October 16, 1979; that there was no need of
personal notice to them because under Section 3 of Act 3135, only
the posting of notice of sale at three public places of the
municipality where the properties are located was required. [1]
After trial on the merits, the lower court ruled in favor of herein
private respondents and against the petitioner, thus:
WHEREFORE, in view of the foregoing, the Court renders judgment
in favor of the plaintiffs and against the defendants, to wit:
(a) Ordering the defendant Ibaan Rural Bank Inc., and Provincial
Sheriff of Batangas for the redemption of the foreclosed properties
covered by Transfer Certificate of Title Nos. T-33206, T-33207 and T33208 of the Registry of Deeds, Lipa City by the plaintiffs by paying
the mortgaged obligation.

(b) Ordering the Provincial Sheriff of Batangas to cancel the

Transfer Certificate of Titles issued to defendant Ibaan Rural Bank,
Inc. and its successors-in-interest and to issue the corresponding
Transfer of Certificate of Titles to plaintiffs upon payment of the
required legal fees.
(c) Ordering the defendant Ibaan Rural Bank, Inc., to pay plaintiffs
moral damages in the amount of P200,000.00, and attorneys fees
in the sum of P20,000.00.
All other claims not having been duly proved are ordered
DISMISSED.
Without pronouncement as to costs.
SO ORDERED.[2]
On appeal, the Court of Appeals affirmed with modification the
decision of the lower court. The dispositive portion of the CA
decision reads:
WHEREFORE, the decision appealed from is hereby AFFIRMED with
the following modifications:
1. The register of Deeds of Lipa City is hereby ordered to cancel the
Certificate of Titles issued to defendant Ibaan Rural Bank, Inc. and
its successor-in-interest and to issue the corresponding Transfer
Certificate of Title to plaintiffs-appellees upon proper redemption of
the properties and payment of the required legal fees.
2. Defendant Ibaan Rural bank, is hereby ordered to pay to plaintiffs
the amount of P15,000.00 as attorneys fees.
3. The moral damages awarded in favor of plaintiffs is hereby
ordered deleted.
SO ORDERED.[3]
A timely Motion for Reconsideration was filed by the petitioner
but the same was denied in a Resolution dated February 14,
1996. Hence, this petition.
Petitioner assigns the following errors:

1. THE RESPONDENT COURT ERRED AND, ACCORDINGLY, THE

PETITIONER IS ENTITLED TO A REVIEW OF ITS DECISION, WHEN IT
SUSTAINED AVAILABILITY OF REDEMPTION DESPITE THE LAPSE OF
ONE YEAR FROM DATE OF REGISTRATION OF THE CERTIFICATE OF
SALE.
2. THE RESPONDENT COURT ERRED AND, ACCORDINGLY, THE
PETITIONER IS ENTITLED TO A REVIEW OF ITS DECISION, WHEN THE
RESPONDENT COURT ALLOWED RECOVERY OF ATTORNEYS FEES
SIMPLY BECAUSE THE PETITIONER DID NOT ALLOW THE PRIVATE
RESPONDENTS TO EXERCISE BELATEDLY REDEMPTION OF THE
FORECLOSED PROPERTY.[4]
Essentially, two issues are raised for resolution. What was the
period of redemption: two years as unilaterally fixed by the sheriff
in the contract, or one year as fixed by law? May respondent court
properly award attorneys fees solely on the basis of the refusal of
the bank to allow redemption?
We now resolve these issues.
When petitioner received a copy of the Certificate of Sale
registered in the Office of the Register of Deeds of Lipa City, it had
actual and constructive knowledge of the certificate and its
contents.[5] For two years, it did not object to the two-year
redemption period provided in the certificate. Thus, it could be said
that petitioner consented to the two-year redemption period
specially since it had time to object and did not. When
circumstances imply a duty to speak on the part of the person for
whom an obligation is proposed, his silence can be construed as
consent.[6] By its silence and inaction, petitioner misled private
respondents to believe that they had two years within which to
redeem the mortgage. After the lapse of two years, petitioner is
estopped from asserting that the period for redemption was only
one year and that the period had already lapsed. Estoppel in
pais arises when one, by his acts, representations or admissions, or
by his own silence when he ought to speak out, intentionally or
through culpable negligence, induces another to believe certain
facts to exist and such other rightfully relies and acts on such
belief, so that he will be prejudiced if the former is permitted to
deny the existence of such facts.[7]
In affirming the decision of the trial court, the Court of Appeals
relied on Lazo vs. Republic Surety and Insurance Co., Inc., [8] where
the court held that the one year period of redemption provided in
Act No. 3135 is only directory and can be extended by agreement
of the parties. True, but it bears noting that in Lazo the

parties voluntarily agreed to extend the redemption period. Thus,

the concept of legal redemption was converted by the parties
in Lazo into conventional redemption. This is not so in the instant
case. There was no voluntary agreement. In fact, the sheriff
unilaterally and arbitrarily extended the period of redemption to
two (2) years in the Certificate of Sale. The parties were not even
privy to the extension made by the sheriff. Nonetheless, as above
discussed, the bank can not after the lapse of two years insist that
the redemption period was one year only.
Additionally, the rule on redemption is liberally interpreted in
favor of the original owner of a property. The fact alone that he is
allowed the right to redeem clearly demonstrates the solicitousness
of the law in giving him another opportunity, should his fortune
improve, to recover his lost property.[9]
Lastly, petitioner is a banking institution on whom the public
expects
diligence,
meticulousness
and
mastery
of
its
transactions. Had petitioner diligently reviewed the Certificate of
Sale it could have easily discovered that the period was extended
one year beyond the usual period for redemption. Banks, being
greatly affected with public interest, are expected to exercise a
degree of diligence in the handling of its affairs higher than that
expected of an ordinary business firm.[10]
On the second issue, the award of attorneys fees must be
disallowed for lack of legal basis. The fact that private respondents
were compelled to litigate and incur expenses to protect and
enforce their claim does not justify the award of attorneys fees. The
general rule is that attorneys fees cannot be recovered as part of
damages because of the public policy that no premium should be
placed on the right to litigate. [11] The award of attorneys fees must
be deleted where the award of moral and exemplary damages are
eliminated.[12]
WHEREFORE, the decision of the Court of Appeals in CA-G.R.
CV No. 32984 is AFFIRMED, with the MODIFICATION that the award
of attorneys fees is deleted. No pronouncement as to costs.
SO ORDERED.

SECOND DIVISION
[G.R. No. 122899. June 8, 2000]
METROPOLITAN BANK & TRUST COMPANY, petitioner,
vs. COURT OF APPEALS and G.T.P. DEVELOPMENT
CORPORATION, respondents.
DECISION
BUENA, J.:
This petition for review on certiorari under Rule 45 of the Rules of
Court assails (1) the amended decision of public respondent Court
of Appeals [1] dated 03 July 1995 in CA-GR CV No. 33395 affirming
the trial court's judgment ordering herein petitioner Metropolitan
Bank and Trust Company (hereafter, METROBANK) to release/cancel
the real estate mortgage constituted over the subject property, and
(2) the respondent court's resolution dated 04 December 1995
denying petitioner METROBANK's motion for reconsideration.
The subject property is a parcel of land in Diliman, Quezon City
consisting of six hundred ninety (690) square meters originally
owned by businessman Tomas Chia under Transfer Certificate of
Title No. RT-16753 (106901) of the Registry of Deeds for Quezon
City. Saddled with debts and business reverses, Mr. Chia offered the
subject property for sale to private respondent G.T.P. Development
Corporation (hereafter, GTP), with assumption of the mortgage
indebtedness in favor of petitioner METROBANK secured by the
subject property.
Pending negotiations for the proposed sale, Atty. Bernardo Atienza,
acting in behalf of respondent GTP, went to the METROBANK branch
in Quiapo, Manila sometime in the last week of August 1980 to
inquire on Mr. Chia's remaining balance on the real estate
mortgage. METROBANK obliged with a statement of account of Mr.
Chia amounting to about P115,000.00 as of August ,1980.
The deed of sale[2] and the memorandum of agreement[3] between
Mr. Chia and respondent GTP were eventually executed and signed

on 04 September 1980 in the office of Atty. Atienza. Twelve (12)

days later, or on 16 September 1980, Atty. Atienza went to
METROBANK Quiapo Branch and paid one hundred sixteen
thousand four hundred sixteen pesos and seventy-one centavos
(P116,416.71),[4] for which METROBANK issued an official receipt
acknowledging payment.
This notwithstanding, petitioner METROBANK refused to release the
real estate mortgage on the subject property despite repeated
requests from Atty. Atienza, thus prompting respondent GTP to file
on October 17, 1980 an action for specific performance against
petitioner METROBANK and Mr. Chia.
In answer to the complaint, Mr. Chia denied having executed any
deed of sale in favor of respondent GTP involving the subject
property. Petitioner for its part justified its non-release of the real
estate mortgage (1) upon the advise of Mr. Chia that he never
executed any sales agreement with respondent GTP, and (2) by the
fact that there are other loans incurred by Mr. Chia which are also
secured by the subject property.
After trial, judgment was rendered by the regional trial court on 11
December 1990 granting the reliefs prayed for by respondent GTP
as plaintiff, viz:
"WHEREFORE, after a careful and thorough study of
the record, this Court holds that in view of the facts
contained in the records, judgment is hereby
rendered in favor of plaintiff and against defendants,
ordering "1.....Defendant Metropolitan Bank & Trust Co. to
execute the release or cancellation of the real estate
mortgages executed by the deceased defendant
Tomas Chia and his wife, defendant Vicenta Chia,
over the property described in TCT No. 106901 of the
registry of deeds for Quezon City;
"2.....Defendants to surrender or deliver the owner's
duplicate copy of said TCT No. 106901; and,
"3.....Defendants to pay, jointly and severally, the
sum of P10,000.00 as and for attorney's fees, plus
costs of suit.

"The counterclaims set up by both defendants are

dismissed.
"IT IS SO ORDERED."[5]
On appeal, respondent Court of Appeals rendered a Decision dated
24 October 1994[6] reversing the trial court's 11 December 1990
judgment, ruling in the main that the one hundred sixteen
thousand four hundred sixteen pesos and seventy-one centavos
(P116,416.71) paid by respondent GTP to petitioner METROBANK
did not extinguish the real estate mortgage inasmuch as there are
other unliquidated past due loans secured by the subject property.
With this unfavorable turn of events, respondent GTP, on 07
November 1994,[7] filed before respondent Court of Appeals a
"motion for reconsideration with alternative prayer to require
METROBANK to furnish appellee (GTP) of the alleged unpaid
balance of Mr. Chia." At the re-scheduled date of oral arguments on
08 March 1995 where METROBANK was supposed to bring before
the respondent Court the current statement of the mortgage debt
of Mr. Chia secured by the deeds of mortgage sought to be
released, METROBANK's counsel did not appear; only the lawyers of
respondent GTP and Mr. Chia appeared. Thus, the Court required
GTP's counsel to file a memorandum in lieu of oral arguments in
support of its motion for reconsideration.[8] GTP filed its
memorandum on March 17, 1995[9] to which a reply memorandum
was filed by METROBANK on April 10, 1995.[10]
On 03 July 1995,[11] the now assailed amended decision was
rendered reconsidering the original 24 October 1994 Decision and
thus affirming the 11 December 1990 judgment of the regional trial
court. Respondent Court of Appeals took a second hard look at the
evidence on hand and seriously considered METROBANK's refusal
to specify any unpaid debt secured by the subject property, in
concluding anew that "the present case for specific performance is
well-grounded, absent indubitable showing that the aforesaid
amount of P116,416.71 paid by appellee on September 16, 1980
did not suffice to pay in full the mortgage debt assumed under the
Deed of Absolute Sale, with assumption of mortgage, it inked with
the late Tomas Chia. There is therefore merit in its motion for
reconsideration at bench." Petitioner METROBANK is now before us
after its motion for reconsideration of the 03 July 1995 amended
decision was denied by respondent Court of Appeals per Resolution
of 04 December 1995.[12]

We find no compelling reasons to disturb the assailed decision.

We quote with favor the following pronouncements of respondent
Court of Appeals in the Amended Decision, thus:
"x x x. In the case under scrutiny, we are convinced
that we erred in reversing the appealed judgment
despite the finding that subject property covered by
TCT 106901- Quezon City had been sold, in a manner
absolute and irrevocable, by the spouses, Tomas Chia
and Vicenta Chan, to plaintiff-appellee, and on
September 16, 1980, the latter complied with its
contractual obligation thereunder by paying the total
mortgage debt it assumed, amounting according to
Metrobank itself, to P116,416.71, as of September
16, 1980.
"All things studiedly viewed in proper perspective, we
are of the opinion, and so rule, that whatever debts
or loans mortgagor Chia contracted with Metrobank
after September 4, 1980, without the conformity of
plaintiff-appellee, could not be adjudged as part of
the mortgage debt the latter so assumed. We are
persuaded that the contrary ruling on this point in
Our October 24, 1994 decision would be unfair and
unjust to plaintiff-appellee because, before buying
subject property and assuming the mortgage debt
thereon, the latter inquired from Metrobank about
the exact amount of the mortgage debt involved.
"The stipulation in subject Deeds of Mortgage that
mortgagors' debts subsequently obtained would be
covered by the same security became inapplicable,
when mortgagor sold to appellee the mortgaged
property with the knowledge of the mortgagee bank.
Thus, since September 4, 1980, it was obvious that
whatever additional loan mortgagor got from
Metrobank, the same was not chargeable to and
collectible from plaintiff-appellee. It is then decisively
clear that Metrobank is without any valid cause or
ground not to release the Deeds of Mortgage in
question, despite full payment of the mortgage debt
assumed by appellee."[13]

Petitioner METROBANK is estopped from refusing the discharge of

the real estate mortgage on the claim that the subject property still
secures "other unliquidated past due loans." In Maneclang vs.
Baun,[14] this Court enumerated the requisites for estoppel by
conduct to operate, to wit:
"1.....there must have been a representation or
concealment of material facts;
"2.....the representation must have been with
knowledge of the facts;
"3.....the party to whom it was made must have been
ignorant of the truth of the matter; and
"4.....it must have been with the intention that the
other party would act upon it.
Respondent GTP, thru Atty. Atienza, requested from METROBANK
that he be furnished a copy of the full indebtedness secured by the
real estate mortgage.[15] In response thereto, petitioner
METROBANK issued a statement of account as of September 15,
1980[16] which amount was immediately settled and paid the next
day amounting to P116, 416.71. Petitioner METROBANK is thus
barred from taking a stand inconsistent with its representation
upon which respondent GTP, as an innocent third person to the real
mortgage agreement, placed exclusive reliance. Respondent GTP
had the reasonable right to rely upon such representations as true,
considering that it had no participation whatsoever in the mortgage
agreement and the preparation of the statement of account,
coupled with the expectation that a reputable banking institution
such as petitioner METROBANK do conduct their business concerns
in the highest standards of efficiency and professionalism. For an
admission or representation is rendered conclusive upon the person
making it, and cannot be denied or disproved as against a person
relying thereon. A party may not go back on his own acts and
representations to the prejudice of the other party who relied upon
them. In the law of evidence, whenever a party has, by his own
declaration, act or omission, intentionally and deliberately led
another to believe a particular thing true, and to act upon such
belief, he cannot, in any litigation arising out of such declaration,
act, or omission, be permitted to falsify it.[17]
Just as decisive is petitioner METROBANK's failure to bring before
respondent Court of Appeals the current statement evidencing

what it claims as "other unliquidated past due loans" at the

scheduled hearing of 8 March 1995. It was a golden opportunity, so
to speak, lost for petitioner METROBANK to defend its non-release
of the real estate mortgage. Thus, the following pronouncements of
this Court in Manila Bay Club Corporation vs. Court
of Appeals et. al,[18] speaking thru Mr. Justice Ricardo Francisco,
[19]
find rightful application, viz."It is a well-settled rule that when the evidence tends
to prove a material fact which imposes a liability on a
party, and he has it in his power to produce evidence
which from its very nature must overthrow the case
made against him if it is not founded on fact, and he
refuses to produce such evidence, the presumption
arises that the evidence, if produced, would operate
to his prejudice, and support the case of his
adversary. x x x"
"No rule of law is better settled than that a party
having it in his power to prove a fact, if it exists,
which, if proved, would benefit him, his failure to
prove it must be taken as conclusive that the fact
does not exist."
x x x......................x x x......................x x x
"Where facts are in evidence affording legitimate
inferences going to establish the ultimate fact that
the evidence is designed to prove, and the party to
be affected by the proof, with an opportunity to do
so, fails to deny or explain them, they may well be
taken as admitted with all the effect of the inferences
afforded. x x x"
"The ordinary rule is that one who has knowledge
peculiarly within his own control, and refuses to
divulge it, cannot complain if the court puts the most
unfavorable construction upon his silence, and infers
that a disclosure would have shown the fact to be as
claimed by the opposing party."
Verily, petitioner METROBANK's omission to present its evidence
only created an adverse inference against its cause. Therefore, it
cannot now be heard to complain since respondent Court extended

a reasonable opportunity to petitioner METROBANK that it did not

avail.
WHEREFORE, the petition is DENIED. The amended decision of
respondent Court of Appeals dated 3 July 1995 as well as its
resolution of 4 December 1995 is AFFIRMED, with costs against
petitioner.

SO ORDERED.