G.R. No.

L-55684 December 19, 1984

CHRYSLER PHILIPPINES CORPORATION, petitioner,

vs.
THE HONORABLE COURT OF APPEALS and SAMBOK MOTORS CO.
(BACOLOD), respondents,

Reyes, Santayana, Tayao & Picazo Law Office for petitioner.

Alampay, Alvero & Alampay Law Office for private respondent.

MELENCIO-HERRERA, J:

Subject of this Petition for Review is the Decision of the then Court of Appeals in CA-G.R. No.
65328-R reversing the judgment of the then Court of First Instance of Rizal, Branch XX, in Civil Case
No. 16624, and dismissing petitioner Chrysler Philippines Corporation's suit for Damages against
private respondent Sambok Motors Company (Bacolod) arising from breach of contract.

Petitioner is a domestic corporation engaged in the assembling and sale of motor vehicles and other
automotive products. Respondent Sambok Motors Co., a general partnership, during the period
relevant to these proceedings, was its dealer for automotive products with offices at Bacolod
(Sambok, Bacolod) and Iloilo (Sambok, Iloilo). The two offices were run by relatives. Miguel Ng was
Assistant Manager for Sambok, Bacolod, while an elder brother, Pepito Ng, was the President. 1

On September 7, 1972, petitioner filed with the Court of First Instance of Rizal, Branch XX, Pasig,
Rizal, a Complaint for Damages against Allied Brokerage Corporation, Negros Navigation Company
and Sambok, Bacolod, alleging that on October 2, 1970, Sambok, Bacolod, ordered from petitioner
various automotive products worth P30,909.61, payable in 45 days; that on November 25, 1970,
petitioner delivered said products to its forwarding agent, Allied Brokerage Corporation, for shipment;
that Allied Brokerage loaded the goods on board the M/S Doña Florentina, a vessel owned and
operated by Negros Navigation Company, for delivery to Sambok, Bacolod; that when petitioner tried
to collect from the latter the amount of P31,037.56, representing the price of the spare parts plus
handling charges, Sambok, Bacolod, refused to pay claiming that it had not received the
merchandise; that petitioner also demanded the return of the merchandise or their value from Allied
Brokerage and Negros Navigation, but both denied any liability.

In its Answer, Sambok, Bacolod, denied having received from petitioner or from any of its co-
defendants, the automotive products referred to in the Complaint, and professed no knowledge of
having ordered from petitioner said articles.

Upon a Joint Motion to Dismiss filed by petitioner and Allied Brokerage, the Trial Court. on October
23, 1975, dismissed the case with prejudice against Allied Brokerage for lack of cause of action, and
also dismissed the latter's counterclaim against petitioner.

On July 31, 1978, the Trial Court rendered its Decision dismissing the Complaint against Negros
Navigation for lack of cause of action, but finding Sambok, Bacolod, liable for the claim of petitioner,
thus:

PREMISES CONSIDERED, the Court renders judgment as follows:

 (1) The complaint against defendant Negros Navigation is dismissed for lack of
cause of action.

(2) Defendant Sambok Motors Co. (Bacolod) is ordered to pay plaintiff Chrysler
Philippines Corporation:

(a) The sum of Thirty-One Thousand Thirty Seven Pesos and Fifty
Six Centavos (P31,037.56) with interest at the rate of twelve percent
(12) per annum from January 1, 1971 until fully paid;

(b) The sum of Five Thousand Pesos as and for attorney's fees and
expenses of litigation;

(c) The costs of the suit.

(3) The counterclaim of defendant Negros Navigation and Sambok Motors Co.
(Bacolod) are dismissed for lack of merit.

The case against Negros Navigation was dismissed for failure of petitioner and Sambok, Bacolod, to
file the necessary notices and claims as conditions precedent for a judicial action. 2

On the other hand, the Trial Court found that the act of Sambok, Bacolod, "in refusing to take
delivery of the shipment for no justifiable reason from Negros Navigation despite having received the
Bill of Lading constituted wrongful neglect or refusal to accept and pay for the subject shipment, by
reason of which defendant Sambok Motors may be held liable for damages."

Sambok, Bacolod, appealed. On November 26, 1980, respondent Appellate Court set aside the
appealed judgment and dismissed petitioner's Complaint, after finding that the latter had not
performed its part of the obligation under the contract by not delivering the goods at Sambok, Iloilo,
the place designated in the Parts Order Form (Exhibits "A", "A-1" to "A-6"), and must, therefore,
suffer the loss. In other words, respondent Appellate Court found. that there was misdelivery.

Hence, this Petition for Review on Certiorari, with the following errors assigned to respondent Court:

The Respondent Court of Appeals erred in finding that the issue of misshipment or
misdelivery of the automotive spare parts involved in the litigation was raised by the
private respondent Sambok Motors Co. (Bacolod) in the Trial Court.

II

The Respondent Court of Appeals erred in refusing to apply the provisions of Section
18, Rule 46 of the Revised Rules of Court quoted below, that since the question of
misshipment or misdelivery was not raised by the private respondent in the Trial
Court, this issue cannot for the first time be raised on appeal.

Section 18. Questions that may be raised on appeal. Whether or not

the appellant has filed a motion for new trial in the court below, he
may include in his assignment of errors any question of law or fact
 that has been raised in the court below and which is within the issues
framed by the parties.

III

The Respondent Court of Appeals erred in finding that the private respondent gave
the alleged instruction to the petitioner to ship the automotive spare parts to Iloilo City
and not to Bacolod City.

IV

The Respondent Court of Appeals erred in finding that the defendant Negros
Navigation notified the private respondent of the arrival of the shipment at Bacolod
City.

The Respondent Court of Appeals erred in reversing the decision of the Trial Court
that the act of the private respondent in refusing to take delivery of the automotive
spare parts that it purchased from the petitioner after having been notified of the
shipment constitutes wrongful neglect resulting in the loss of the cargo for which it
should be liable in damages to the petitioner.

To our minds, the matter of misdelivery is not the decisive factor for relieving Sambok, Bacolod, of
liability herein. While it may be that the Parts Order Form (E exhibits "A", "A-1" to "A-6") specifically
indicated Iloilo as the destination, as testified to by Ernesto Ordonez, Parts Sales Representative of
petitioner, 3 Sambok, Bacolod, and Sambok, Iloilo, are actually one. In fact, admittedly, the order for
spare parts was made by the President of Sambok, Pepito Ng, through its marketing consultant.
Notwithstanding, upon receipt of the Bill of Lading, Sambok, Bacolod, initiated, but did not pursue,
steps to take delivery as they were advised by Negros Navigation that because some parts were
missing. they would just be informed as soon as the missing parts were located. 4

It was only four years later, however, or in 1974, when a warehouseman of Negros Navigation,
Severino Aguarte, found in their off-shore bodega, parts of the shipment.- in question, but already
deteriorated and valueless. 5

Under the circumstances, Sambok, Bacolod, cannot be faulted for not accepting or refusing to
accept the shipment from Negros Navigation four years after shipment. The evidence is clear that
Negros Navigation could not produce the merchandise nor ascertain its whereabouts at the time
Sambok, Bacolod, was ready to take delivery. Where the seller delivers to the buyer a quantity of
goods less than he contracted to sell, the buyer may reject them. 6

From the evidentiary record, Negros Navigation was the party negligent in failing to deliver the
complete shipment either to Sambok, Bacolod, or to Sambok, Iloilo, but as the Trial Court found,
petitioner failed to comply with the conditions precedent to the filing of a judicial action. Thus, in the
last analysis, it is petitioner that must shoulder the resulting loss. The general rule that before,
delivery, the risk of loss is home by the seller who is still the owner, under the principle of "res petit
domino", 7 is applicable in petitioner's case.
In sum, the judgment of respondent Appellate Court, will have to be sustained not on the basis of
misdelivery but on non-delivery since the merchandise was never placed in the control and
possession of Sambok, Bacolod, the vendee. 8

WHEREFORE, we hereby affirm the Decision of the then Court of Appeals in CA-G.R. No. 65328-R,
without pronouncement as to costs.

SO ORDERED.

G.R. No. L-21263 April 30, 1965

LAWYERS COOPERATIVE PUBLISHING COMPANY, plaintiff-appellee,

vs.
PERFECTO A. TABORA, defendant-appellant.

Paredes, Poblador, Cruz and Nazareno for plaintiff-appellee.

Tabora and Concon for defendant-appellant.

BAUTISTA ANGELO, J.:

On May 3, 1955, Perfecto A. Tabora bought from the Lawyers Cooperative Publishing Company one
complete set of American Jurisprudence consisting of 48 volumes with 1954 pocket parts, plus one
set of American Jurisprudence, General Index, consisting of 4 volumes, for a total price of P1,675.50
which, in addition to the cost of freight of P6.90, makes a total of P1,682.40. Tabora made a partial
payment of P300.00, leaving a balance of P1,382.40. The books were duly delivered and receipted
for by Tabora on May 15, 1955 in his law office Ignacio Building, Naga City.

In the midnight of the same date, however, a big fire broke out in that locality which destroyed and
burned all the buildings standing on one whole block including at the law office and library of Tabora
As a result, the books bought from the company as above stated, together with Tabora's important
documents and papers, were burned during the conflagration. This unfortunate event was
immediately reported by Tabora to the company in a letter he sent on May 20, 1955. On May 23, the
company replied and as a token of goodwill it sent to Tabora free of charge volumes 75, 76, 77 and
78 of the Philippine Reports. As Tabora failed to pay he monthly installments agreed upon on the
balance of the purchase price notwithstanding the long time that had elapsed, the company
demanded payment of the installments due, and having failed, to pay the same, it commenced the
present action before the Court of First Instance of Manila for the recovery of the balance of the
obligation. Plaintiff also prayed that defendant be ordered to pay 25% of the amount due as
liquidated damages, and the cost of action.

Defendant, in his answer, pleaded force majeure as a defense. He alleged that the books bought
from the plaintiff were burned during the fire that broke out in Naga City on May 15, 1955, and since
the loss was due to force majeure he cannot be held responsible for the loss. He prayed that the
complaint be dismissed and that he be awarded moral damages in the amount of P15,000.00.
After due hearing, the court a quo rendered judgment for the plaintiff. It ordered the defendant to pay
the sum of P1,382.40, with legal interest thereon from the filing of the complaint, plus a sum
equivalent to 25% of the total amount due as liquidated damages, and the cost of action.

Defendant took the case to the Court of Appeals, but the same is now before us by virtue of a
certification issued by that Court that the case involves only questions of law.

Appellant bought from appellee one set of American Jurisprudence, including one set of general
index, payable on installment plan. It was provided in the contract that "title to and ownership of the
books shall remain with the seller until the purchase price shall have been fully paid. Loss or
damage to the books after delivery to the buyer shall be borne by the buyer." The total price of the
books, including the cost of freight, amounts to P1,682.40. Appellant only made a down payment of
P300.00 thereby leaving a balance of P1,382.40. This is now the import of the present action aside
from liquidated damages.

Appellant now contends that since it was agreed that the title to and the ownership of the books shall
remain with the seller until the purchase price shall have been fully paid, and the books were burned
or destroyed immediately after the transaction, appellee should be the one to bear the loss for, as a
result, the loss is always borne by the owner. Moreover, even assuming that the ownership of the
books were transferred to the buyer after the perfection of the contract the latter should not answer
for the loss since the same occurred through force majeure. Here, there is no evidence that
appellant has contributed in any way to the occurrence of the conflagration. 1äwphï1.ñët

This contention cannot be sustained. While as a rule the loss of the object of the contract of sale is
borne by the owner or in case of force majeure the one under obligation to deliver the object is
exempt from liability, the application of that rule does not here obtain because the law on the
contract entered into on the matter argues against it. It is true that in the contract entered into
between the parties the seller agreed that the ownership of the books shall remain with it until the
purchase price shall have been fully paid, but such stipulation cannot make the seller liable in case
of loss not only because such was agreed merely to secure the performance by the buyer of his
obligation but in the very contract it was expressly agreed that the "loss or damage to the books after
delivery to the buyer shall be borne by the buyer." Any such stipulation is sanctioned by Article 1504
of our Civil Code, which in part provides:

(1) Where delivery of the goods has been made to the buyer or to a bailee for the buyer, in
pursuance of the contract and the ownership in the goods has been retained by the seller
merely to secure performance by the buyer of his obligations under the contract, the goods
are at the buyer's risk from the time of such delivery.

Neither can appellant find comfort in the claim that since the books were destroyed by fire without
any fault on his part he should be relieved from the resultant obligation under the rule that an obligor
should be held exempt from liability when the loss occurs thru a fortuitous event. This is because this
rule only holds true when the obligation consists in the delivery of a determinate thing and there is no
stipulation holding him liable even in case of fortuitous event. Here these qualifications are not
present. The obligation does not refer to a determinate thing, but is pecuniary in nature, and the
obligor bound himself to assume the loss after the delivery of the goods to him. In other words, the
obligor agreed to assume any risk concerning the goods from the time of their delivery, which is an
exception to the rule provided for in Article 1262 of our Civil Code.

Appellant likewise contends that the court a quo erred in sentencing him to pay attorney's fees. This
is merely the result of a misapprehension for what the court a quo ordered appellant to pay is not
25% of the amount due as attorney's fees, but as liquidated damages, which is in line with an
express stipulation of the contract. We believe, however, that the appellant should not be made to
pay any damages because his denial to pay the balance of the account is not due to bad faith.

WHEREFORE, the decision appealed from is modified by eliminating that portion which refers to
liquidated damages. No costs.

G.R. No. 164985 January 15, 2014

FIRST UNITED CONSTRUCTORS CORPORATION and BLUE STAR CONSTRUCTION

CORPORATION,Petitioners,
vs.
BAYANIHAN AUTOMOTIVE CORPORATION, Respondent.

DECISION

BERSAMIN, J.:

This case concerns the applicability of the legal principles of recoupment and compensation.

The Case

Under review is the decision promulgated on July 26, 2004,1 whereby the Court of Appeals CA)
affirmed the judgment rendered on May 14 1996 by the Regional Trial Court, Branch 107, in Quezon
City adjudging the petitioners defendants) liable to pay to the respondent plaintiff) various sums of
money and damages.2

Antecedents

Petitioner First United Constructors Corporation (FUCC) and petitioner Blue Star Construction
Corporation (Blue Star) were associate construction firms sharing financial resources, equipment
and technical personnel on a case-to-case basis. From May 27, 1992 to July 8, 1992, they ordered
six units of dump trucks from the respondent, a domestic corporation engaged in the business of
importing and reconditioning used Japan-made trucks, and of selling the trucks to interested buyers
who were mostly engaged in the construction business, to wit:

TO WHOM
UNIT DATE OF DELIVERY
DELIVERY
Isuzu Dump Truck FUCC 27 May 1992

Isuzu Dump Truck FUCC 27 May 1992

Isuzu Dump Truck FUCC 10 June 1992

Isuzu Dump Truck FUCC 18 June 1992
 Isuzu Dump Truck Blue Star 4 July 1992
Isuzu Dump Truck FUCC 8 July 1992

The parties established a good business relationship, with the respondent extending service and
repair work to the units purchased by the petitioners. The respondent also practiced liberality
towards the petitioners in the latter’s manner of payment by later on agreeing to payment on terms
for subsequent purchases.

On September 19, 1992, FUCC ordered from the respondent one unit of Hino Prime Mover that the
respondent delivered on the same date. On September 29, 1992, FUCC again ordered from the
respondent one unit of Isuzu Transit Mixer that was also delivered to the petitioners. For the two
purchases, FUCC partially paid in cash, and the balance through post-dated checks, as follows:

BANK/CHECK NO. DATE AMOUNT

Pilipinas Bank 18027379 23 November 1992 ₱360,000.00

Pilipinas Bank 18027384 1 December 1992 ₱375,000.00

Upon presentment of the checks for payment, the respondent learned that FUCC had ordered the
payment stopped. The respondent immediately demanded the full settlement of their obligation from
the petitioners, but to no avail. Instead, the petitioners informed the respondent that they were
withholding payment of the checks due to the breakdown of one of the dump trucks they had earlier
purchased from respondent, specifically the second dump truck delivered on May 27, 1992.

Due to the refusal to pay, the respondent commenced this action for collection on April 29, 1993,
seeking payment of the unpaid balance in the amount of ₱735,000.00 represented by the two
checks.

In their answer, the petitioners averred that they had stopped the payment on the two checks worth
₱735,000.00 because of the respondent’s refusal to repair the second dump truck; and that they had
informed the respondent of the defects in that unit but the respondent had refused to comply with its
warranty, compelling them to incur expenses for the repair and spare parts. They prayed that the
respondent return the price of the defective dump truck worth ₱830,000.00 minus the amounts of
their two checks worth ₱735,000.00, with 12% per annum interest on the difference of ₱90,000.00
from May 1993 until the same is fully paid; that the respondent should also reimburse them the sum
of ₱247,950.00 as their expenses for the repair of the dump truck, with 12% per annum interest from
December 16, 1992, the date of demand, until fully paid; and that the respondent pay exemplary
damages as determined to be just and reasonable but not less than ₱500,000, and attorney’s fees of
₱50,000 plus ₱1,000.00 per court appearance and other litigation expenses.

It was the position of the respondent that the petitioners were not legally justified in withholding
payment of the unpaid balance of the purchase price of the Hino Prime Mover and the Isuzu Transit
Mixer due the alleged defects in second dump truck because the purchase of the two units was an
entirely different transaction from the sale of the dump trucks, the warranties for which having long
expired.

Judgment of the RTC

On May 14, 1996, the RTC rendered its judgment,3 finding the petitioners liable to pay for the unpaid
balance of the purchase price of the Hino Prime Mover and the Isuzu Transit Mixer totaling
₱735,000.00 with legal interest and attorney’s fees; and declaring the respondent liable to pay to the
petitioners the sum of ₱71,350.00 as costs of the repairs incurred by the petitioners. The RTC held
that the petitioners could not avail themselves of legal compensation because the claims they had
set up in the counterclaim were not liquidated and demandable. The fallo of the judgment states:

WHEREFORE, judgment is hereby rendered:

1. Ordering defendants, jointly and severally to pay plaintiff the sum of ₱360,000.00 and
₱375,000.00 with interest at the legal rate of 12% per annum computed from February 11,
1993, which is the date of the first extrajudicial demand, until fully paid;

2. Ordering the defendants, jointly and severally, to pay plaintiff the sum equivalent to 10% of
the principal amount due, for attorney’s fees;

3. On the counterclaim, ordering plaintiff to pay defendants the sum of ₱71,350.00 with
interest at the legal rate of 12% per annum computed from the date of this decision until fully
paid;

4. Ordering plaintiff to pay the defendants attorney’s fees equivalent to 10% of the amount
due;

5. No pronouncement as to costs.

SO ORDERED.4

Decision of the CA

The petitioners appealed, stating that they could justifiably stop the payment of the checks in the
exercise of their right of recoupment because of the respondent’s refusal to settle their claim for
breach of warranty as to the purchase of the second dump truck.

In its decision promulgated on July 26, 2004,5 however, the CA affirmed the judgment of the RTC. It
held that the remedy of recoupment could not be properly invoked by the petitioners because the
transactions were different; that the expenses incurred for the repair and spare parts of the second
dump truck were not a proper subject of recoupment because they did not arise out of the purchase
of the Hino Prime Mover and the Isuzu Transit Mixer; and that the petitioners’ claim could not also be
the subject of legal compensation or set-off, because the debts in a set-off should be liquidated and
demandable.

Issues

The petitioners are now before the Court asserting in their petition for review on certiorari that the CA
erred in:

x x x NOT UPHOLDING THE RIGHT OF PETITIONER[S] TO RECOUPMENT UNDER PAR.

(1) OF ART. 1599 OF THE CIVIL CODE, WHICH PROVIDES [FOR] THE RIGHTS AND
REMEDIES AVAILABLE TO A BUYER AGAINST A SELLER’S BREACH OF WARRANTY.
 II

x x x RULING THAT PETITIONERS CANNOT AVAIL OF COMPENSATION ALLEGEDLY

BECAUSE THEIR CLAIMS AGAINST RESPONDENT ARE NOT LIQUIDATED AND
DEMANDABLE.

III

x x x NOT HOLDING RESPONDENT LIABLE TO PETITIONERS FOR LEGAL INTEREST

COMPUTED FROM THE FIRST EXTRAJUDICIAL DEMAND, AND FOR ACTUAL
EXEMPLARY DAMAGES.6

The petitioners submit that they were justified in stopping the payment of the two checks due to the
respondent’s breach of warranty by refusing to repair or replace the defective second dump truck
earlier purchased; that the withholding of payments was an effective exercise of their right of
recoupment as allowed by Article 1599(1) of the Civil Code; due to the seller’s breach of warranty
that the CA’s interpretation (that recoupment in diminution or extinction of price in case of breach of
warranty by the seller should refer to the reduction or extinction of the price of the same item or unit
sold and not to a different transaction or contract of sale) was not supported by jurisprudence; that
recoupment should not be restrictively interpreted but should include the concept of compensation or
set-off between two parties who had claims arising from different transactions; and that the series of
purchases and the obligations arising therefrom, being inter-related, could be considered as a single
and ongoing transaction for all intents and purposes.

The respondent counters that the petitioners could not refuse to pay the balance of the purchase
price of the Hino Prime Mover and the Isuzu Transit Mixer on the basis of the right of recoupment
under Article 1599 of the Civil Code; that the buyer’s remedy of recoupment related only to the same
transaction; and that compensation was not proper because the claims of the petitioners as alleged
in their counterclaim were not liquidated and demandable.

There is no longer any question that the petitioners were liable to the respondent for the unpaid
balance of the purchase price of the Hino Prime Mover and the Isuzu Transit Mixer. What remain to
be resolved are strictly legal, namely: one, whether or not the petitioners validly exercised the right of
recoupment through the withholding of payment of the unpaid balance of the purchase price of the
Hino Prime Mover and the Isuzu Transit Mixer; and, two, whether or not the costs of the repairs and
spare parts for the second dump truck delivered to FUCC on May 27, 1992 could be offset for the
petitioners’ obligations to the respondent.

Ruling

We affirm the decision of the CA with modification.

1.
Petitioners could not validly resort to recoupment against respondent

Recoupment (reconvencion) is the act of rebating or recouping a part of a claim upon which one is
sued by means of a legal or equitable right resulting from a counterclaim arising out of the same
transaction.7 It is the setting up of a demand arising from the same transaction as the plaintiff’s claim,
to abate or reduce that claim.
The legal basis for recoupment by the buyer is the first paragraph of Article 1599 of the Civil Code,
viz:

Article 1599. Where there is a breach of warranty by the seller, the buyer may, at his election:

(1) Accept or keep the goods and set up against the seller, the breach of warranty by way of
recoupment in diminution or extinction of the price;

(2) Accept or keep the goods and maintain an action against the seller for damages for the
breach of warranty;

(3) Refuse to accept the goods, and maintain an action against the seller for damages for the
breach of warranty;

(4) Rescind the contract of sale and refuse to receive the goods or if the goods have already
been received, return them or offer to return them to the seller and recover the price or any
part thereof which has been paid.

When the buyer has claimed and been granted a remedy in anyone of these ways, no other remedy
can thereafter be granted, without prejudice to the provisions of the second paragraph of article
1191. (Emphasis supplied)

xxxx

In its decision, the CA applied the first paragraph of Article 1599 of the Civil Code to this case,
explaining thusly:

Paragraph (1) of Article 1599 of the Civil Code which provides for the remedy of recoupment in
diminution or extinction of price in case of breach of warranty by the seller should therefore be
interpreted as referring to the reduction or extinction of the price of the same item or unit sold and
not to a different transaction or contract of sale. This is more logical interpretation of the said article
considering that it talks of breach of warranty with respect to a particular item sold by the seller.
Necessarily, therefore, the buyer’s remedy should relate to the same transaction and not to another.

Defendants-appellants’ act of ordering the payment on the prime mover and transit mixer stopped
was improper considering that the said sale was a different contract from that of the dump trucks
earlier purchased by defendants-appellants.

The claim of defendants-appellants for breach of warranty, i.e. the expenses paid for the repair and
spare parts of dump truck no. 2 is therefore not a proper subject of recoupment since it does not
arise out of the contract or transaction sued on or the claim of plaintiff-appellee for unpaid balances
on the last two (2) purchases, i. e. the prime mover and the transit mixer.8

The CA was correct. It was improper for petitioners to set up their claim for repair expenses and
other spare parts of the dump truck against their remaining balance on the price of the prime mover
and the transit mixer they owed to respondent. Recoupment must arise out of the contract or
1av vphi1

transaction upon which the plaintiff’s claim is founded.9To be entitled to recoupment, therefore, the
claim must arise from the same transaction, i.e., the purchase of the prime mover and the transit
mixer and not to a previous contract involving the purchase of the dump truck. That there was a
series of purchases made by petitioners could not be considered as a single transaction, for the
records show that the earlier purchase of the six dump trucks was a separate and distinct
transaction from the subsequent purchase of the Hino Prime Mover and the Isuzu Transit Mixer.
Consequently, the breakdown of one of the dump trucks did not grant to petitioners the right to stop
and withhold payment of their remaining balance on the last two purchases.

2.
Legal compensation was permissible

Legal compensation takes place when the requirements set forth in Article 1278 and Article 1279 of
the Civil Code are present, to wit:

Article 1278. Compensation shall take place when two persons, in their own right, are creditors and
debtors of each other."

Article 1279. In order that compensation may be proper, it is necessary:

(1) That each of the obligors be bound principally, and that he be at the same time a principal
creditor of the other;

(2) That both debts consists in a sum of money, or if the things due are consumable, they be
of the same kind, and also of the same quality if the latter has been stated;

(3) That the two debts be due;

(4) That they be liquidated and demandable;

(5) That over neither of them there be any retention or controversy, commenced by third
persons and communicated in due time to the debtor.

As to whether petitioners could avail themselves of compensation, both the RTC and CA ruled that
they could not because the claims of petitioners against respondent were not liquidated and
demandable.

The Court cannot uphold the CA and the RTC.

The RTC already found that petitioners were entitled to the amount of ₱71,350.00 stated in their
counterclaim, and the CA concurred in the finding, stating thusly:

It is noteworthy that in the letter of December 16, 1992 (Exh. "1") defendants were charging plaintiff
only for the following items of repair:

1. Cost of repair and spare parts - ₱46,800.00

2. Cost of repair and spare parts - 24,550.00

₱71,350.00

Said amounts may be considered to have been spent for repairs covered by the warranty period of
three (3) months. While the invoices (Exhs. "2-B" and "3-A") dated September 26, 1992 and
September 18, 1992, this delay in repairs is attributable to the fact that when defects were brought to
the attention of the plaintiff in the letter of August 14, 1992 (Exh. "8") which was within the warranty
period, the plaintiff did not respond with the required repairs and actual repairs were undertaken by
defendants. Thereafter, the spare parts covered by Exhibits "2-B" and "3-A" pertain to the engine,
which was covered by the warranty.

x x x. Defendants in their letter of August 14, 1992 (Exhb. "8") demanded correction of defects. In
their letter of August 22, 1992 (Exh. "9") they demanded replacement. In their letter of August 27,
1992 (Exh. "10"), they demanded ‘replacement/repair’. In September, 1992, they undertook repairs
themselves (Exhs. "2-B" and "3-A") and demanded payment for the expenses in their letter of
December 16, 1992 (Exh. "1"). All other items of expenses connected with subsequent breakdowns
are no longer chargeable to plaintiff which granted only a 3-month warranty. x x x10

Considering that preponderant evidence showing that petitioners had spent the amount of
₱71,350.00 for the repairs and spare parts of the second dump truck within the warranty period of
three months supported the finding of the two lower courts, the Court accepts their finding. Verily,
factual findings of the trial court, when affirmed by the CA, are conclusive on the Court when
supported by the evidence on record.11

A debt is liquidated when its existence and amount are determined.12 Accordingly, an unliquidated
claim set up as a counterclaim by a defendant can be set off against the plaintiff’s claim from the
moment it is liquidated by judgment.13 Article 1290 of the Civil Code provides that when all the
requisites mentioned in Article 1279 of the Civil Code are present, compensation takes effect by
operation of law, and extinguishes both debts to the concurrent amount. With petitioners’ expenses
for the repair of the dump truck being already established and determined with certainty by the lower
courts, it follows that legal compensation could take place because all the requirements were
present. Hence, the amount of ₱71,350.00 should be set off against petitioners’ unpaid obligation of
₱735,000.00, leaving a balance of ₱663,650.00, the amount petitioners still owed to respondent.

We deem it necessary to modify the interest rate imposed by the trial and appellate courts. The1âwphi1

legal interest rate to be imposed from February 11, 1993, the time of the extrajudicial demand by
respondent, should be 6% per annum in the absence of any stipulation in writing in accordance with
Article 2209 of the Civil Code, which provides:

Article 2209. If the obligation consists in the payment of a sum of money, and the debtor incurs in
delay, the indemnity for damages, there being no stipulation to the contrary, shall be the payment of
the interest agreed upon, and in the absence of stipulation, the legal interest, which is six per cent
per annum.

WHEREFORE, the Court AFFIRMS the decision promulgated on July 26, 2004 in all respects
subject to the MODIFICATION that petitioners are ordered, jointly and severally, to pay to
respondent the sum of 1 663,650.00, plus interest of 6% per annum computed from February

11, 1993, the date of the first extrajudicial demand, until fully paid; and ORDERS the petitioners to
pay the costs of suit.

SO ORDERED.
G.R. No. L-46306 October 27, 1939

LEVY HERMANOS, INC., plaintiff-appellant,

vs.
LAZARO BLAS GERVACIO, defendant-appellee.

Felipe Caniblas for appellant.

Abreu, Lichaucco and Picazo for appellee.

MORAN, J.:

On February 9-4, 1938, plaintiff filed a complaint in the Court of First Instance of Manila, which
substantially recites the following facts:

On March 10, 1937, plaintiff Levy Hermanos, Inc., sold to defendant Lazaro Blas Gervacio, a
Packard car. Defendant, after making the initial payment, executed a promissory note for the
balance of P2,400, payable on or before June 15, 1937, with interest at 12 per cent per annum, to
secure the payment of the note, he mortgaged the car to the plaintiff. Defendant failed to pay the
note it its maturity. Wherefore, plaintiff foreclosed the mortgage and the car was sold at public
auction, at which plaintiff was the highest bidder for P1,800. The present action is for the collection
of the balance of P1,600 and interest.

Defendant admitted the allegations of the complaint, and with this admission, the parties submitted
the case for decision. The lower court applied, the provisions of Act No. 4122, inserted as articles
1454-A of the Civil Code, and rendered judgment in favor of the defendant. Plaintiff appealed.

Article 1454-A of the Civil Code reads as follows:

In a contract for the sale of personal property payable in installments shall confer upon the
vendor the right to cancel the sale or foreclose the mortgage if one has been given on the
property, without reimbursement to the purchaser of the installments already paid, if there be
an agreement to this effect.

However, if the vendor has chosen to foreclose the mortgage he shall have no further action
against the purchaser for the recovery of any unpaid balance owing by the same and any
agreement to the contrary shall be null and void.

In Macondray and Co. vs. De Santos (33 Off. Gaz., 2170), we held that "in order to apply the
provisions of article 1454-A of the Civil Code it must appear that there was a contract for the sale of
personal property payable in installments and that there has been a failure to pay two or more
installments." The contract, in the instant case, while a sale of personal property, is not, however,
one on installments, but on straight term, in which the balance, after payment of the initial sum,
should be paid in its totality at the time specified in the promissory note. The transaction is not is not,
therefore, the one contemplated in Act No. 4122 and accordingly the mortgagee is not bound by the
prohibition therein contained as to the right to the recovery of the unpaid balance.

Undoubtedly, the law is aimed at those sales where the price is payable in several installments, for,
generally, it is in these cases that partial payments consist in relatively small amounts, constituting
thus a great temptation for improvident purchasers to buy beyond their means. There is no such
temptation where the price is to be paid in cash, or, as in the instant case, partly in cash and partly in
one term, for, in the latter case, the partial payments are not so small as to place purchasers off their
guard and delude them to a miscalculation of their ability to pay. The oretically, perhaps, there is no
difference between paying the price in tow installments, in so far as the size of each partial payment
is concerned; but in actual practice the difference exists, for, according to the regular course of
business, in contracts providing for payment of the price in two installments, there is generally a
provision for initial payment. But all these considerations are immaterial, the language of the law
being so clear as to require no construction at all.lâwphi1.nêt

The suggestion that the cash payment made in this case should be considered as an installment in
order to bring the contract sued upon under the operation of the law, is completely untenable. A cash
payment cannot be considered as a payment by installment, and even if it can be so considered, still
the law does not apply, for it requires non-payment of two or more installments in order that its
provisions may be invoked. Here, only one installment was unpaid.

Judgment is reversed, and the defendant-appellee is hereby sentenced to pay plaintiff-appellant the
sum of P1,600 with interest at the rate of 12 per cent per annum from June 15, 1937, and the sum of
P52.08 with interest at the rate of 6 per cent from the date of the filing of the complaint, with costs in
both instances against the appellee.

G.R. No. 61043

NOCON, J.:
Elevated to this Court by the Court of Appeals, in its Resolution of May 20,
1982, on a pure question of law,[1] is the appeal therein by defendants-
appellants, Niu Kim Duan and Chan Fue Eng assailing the trial court's
decision promulgated on October 11, 1977,[2] which ordered them to pay
plaintiff-appellee, Delta Motor Sales Corporation, the amount of P6,188.29
with a 14% per annum interest which was due on the three (3) "Daikin" air-
conditioners defendants-appellants purchased from plaintiff-appellee
under a Deed of Conditional Sale, after the same was declared rescinded by
the trial court. They were likewise ordered to pay plaintiff-appellee
P1,000.00 for and as attorney's fees.
The events which led to the filing of the case in the lower court were
summarized by the Court of Appeals, as follows:
"'On July 5, 1975, the defendants purchased from the plaintiff three (3)
units of 'DAIKIN' air-conditioner all valued at P19,350.00 as evidenced by
the Deed of Conditional Sale, Exhibit A; that the aforesaid deed of sale had
the following terms and conditions:
'(a) the defendants shall pay a down payment of P774.00 and the balance of
P18,576.00 shall [be] paid by them in twenty four (24) installments; (b) the
title to the properties purchased shall remain with the plaintiff until the
purchase price thereof is fully paid; (c) if any two installments are not paid
by the defendants on their due dates, the whole of the principal sum
remaining unpaid shall become due, with interest at the rate of 14% per
annum; and (d) in case of a suit, the defendants shall pay an amount
equivalent to 25% of the remaining unpaid obligation as damages, penalty
and attorney's fees; that to secure the payment of the balance of P18,576.00
the defendants jointly and severally executed in favor of the plaintiff a
promissory note, Exhibit C; that the three (3) air-conditioners were
delivered to and received by the defendants as shown by the delivery
receipt, Exhibit B; that after paying the amount of P6,966.00, the
defendants failed to pay at least two (2) monthly installments; that as of
January 6, 1977, the remaining unpaid obligation of the defendants
amounted to P12,920.08; that statements of accounts were sent to the
defendants and the plaintiff's collectors personally went to the former to
effect collections but they failed to do so; that because of the unjustified
refusal of the defendants to pay their outstanding account and their
wrongful detention of the properties in question, the plaintiff tried to
recover the said properties extra-judicially but it failed to do so; that the
matter was later referred by the plaintiff to its legal counsel for legal action;
that in its verified complaint dated January 28, 1977, the plaintiff prayed
for the issuance of a writ of replevin, which the Court granted in its Order
dated February 28, 1977, after the plaintiff posted the requisite bond; that
on April 11, 1977, the plaintiff, by virtue of the aforesaid writ, succeeded in
retrieving the properties in question; that as of October 3, 1977, the
outstanding account of the defendants is only in the amount of P6,188.29
as shown by the computation, Exhibit F, after deducting the interests in
arrears, cover charges, replevin bond premiums, the value of the units
repossessed and the like; and, that in view of the failure of the defendants
to pay their obligations, the amount of P6,966.00 which had been paid by
way of installments were treated as rentals for the units in question for two
(2) years pursuant to the provisions of paragraph 5 of the Deed of
Conditional Sale, Exhibit A.' (pp. 5-7, Record; pp. 4-6, Appellant's Brief)."
As above-stated, the trial court ruled in favor of plaintiff-appellee.
Defendants-appellants assail the Deed of Conditional Sale under which
they purchased the three (3) Daikin air-conditioners from plaintiff-appellee
as being contrary to law, morals, good custom, public order or public policy.
In particular, they point to the contract's paragraphs 5 and 7 as iniquitous,
which paragraphs state that:
"5. Should BUYER fail to pay any of the monthly installments when due, or
otherwise fail to comply with any of the terms and conditions herein
stipulated, this contract shall automatically become null and void; and all
sums so paid by BUYER by reason thereof shall be considered as rental and
the SELLER shall then and there be free to take possession thereof without
liability for trespass or responsibility for any article left in or attached to the
PROPERTY;
xxx xxx
"7. Should SELLER rescind this contract for any of the reasons stipulated in
the preceding paragraph, the BUYER, by these presents obligates himself to
peacefully deliver the PROPERTY to the SELLER in case of rescission, and
should a suit be brought in court by the SELLER to seek judicial declaration
of rescissions and take possession of the PROPERTY, the BUYER hereby
obligates himself to pay all the expenses to be incurred by reason of such
suit and in addition to pay the sum equivalent to 25% of the remaining
unpaid obligation as damages, penalty and attorney's fees;"[3]
Defendants-appellants claim that for the use of the plaintiff-appellee's three
air-conditioners, from July 5, 1975[4] to April 11,1977,[5] or for a period of
about 22 months, they, in effect, paid rentals in the amount of
P6,429.92,[6] or roughly one-third (1/3) of the entire price of said air-
conditioners which was P19,350.00. They also complain that for the said
period the trial court is ordering them to pay P6,188.29 as the balance due
for the three air-conditioners repossessed. Defendants-appellants were
likewise ordered to pay P1,000.00 as attorney's fees when plaintiff-appellee
never sought for attorney's fees in its complaint. They satirically pointed
out that by putting "a few touches here and there, the same units can be
sold again to the next imprudent customer"[7] by plaintiff-appellee. Thus,
enforcement of the Deed of Conditional Sale will unjustly enrich plaintiff-
appellee at the expense of defendants-appellants.
I
Defendants-appellants cannot complain that their downpayment of
P774.00 and installment payments of P5,655.92[8] were treated as rentals --
even though the total amount of P6,429.92 which they had paid,
approximates one-third (1/3) of the cost of the three (3) air-conditioners. A
stipulation in a contract that the installments paid shall not be returned to
the vendee is valid insofar as the same may not be unconscionable under
the circumstances is sanctioned by Article 1486 of the New Civil
Code.[9] The monthly installment payable by defendants-appellants was
P774.00.[10] The P5,655.92 installment payments correspond only to seven
(7) monthly installments. Since they admit having used the air-conditioners
for twenty-two (22) months, this means that they did not pay fifteen (15)
monthly installments on the said air-conditioners and were thus using the
same FREE for said period -- to the prejudice of plaintiff-appellee. Under
the circumstances, the treatment of the installment payments as rentals
cannot be said to be unconscionable.
II
The vendor in a sale of personal property payable in installments may
exercise one of three remedies, namely, (1) exact the fulfillment of the
obligation, should the vendee fail to pay; (2) cancel the sale upon the
vendee's failure to pay two or more installments; (3) foreclose the chattel
mortgage, if one has been constituted on the property sold, upon the
vendee's failure to pay two or more installments. The third option or
remedy, however, is subject to the limitation that the vendor cannot recover
any unpaid balance of the price and any agreement to the contrary is void
(Art. 1484)[11]
The three (3) remedies are alternative and NOT cumulative. If the creditor
chooses one remedy, he cannot avail himself of the other two.
It is not disputed that the plaintiff-appellee had taken possession of the
three air-conditioners, through a writ of replevin when defendants-
appellants refused to extra-judicially surrender the same. This was done
pursuant to paragraphs 5 and 7 of its Deed of Conditional Sale when
defendants-appellants failed to pay at least two (2) monthly installments,
so much so that as of January 6, 1977, the total amount they owed plaintiff-
appellee, inclusive of interest, was P12,920,08.[12] The case plaintiff-
appellee filed was to seek a judicial declaration that it had validly rescinded
the Deed of Conditional Sale.[13]
Clearly, plaintiff-appellee chose the second remedy of Article 1484 in
seeking enforcement of its contract with defendants-appellants. This is
shown from the fact that its Exhibit "F" which showed the computation of
the outstanding account of defendants- appellants as of October 3, 1977
took into account "the value of the units repossessed."[14] Having done so, it
is barred from exacting payment from defendants-appellants of the balance
of the price of the three air-conditioning units which it had already
repossessed. It cannot have its cake and eat it too.[15]
WHEREFORE, the judgment of the trial court in Civil Case No. 25578 is
hereby SET ASIDE and the complaint filed by plaintiff-appellee Delta
Motor Sales Corporation is hereby DISMISSED. No costs.
SO ORDERED.

Narvasa, C.J., (Chairman), Padilla, Regalado, and Melo, JJ.,concur.

G.R. No. L-10789 May 28, 1957

AMADOR TAJANLANGIT, ET AL., plaintiff-appellants,

vs.
SOUTHERN MOTORS, INC., ET AL., defendants-appellees.

Almacen and Almacen for appellants.

Diosdado Garingalao for appellees.

BENGZON, J.:

The case. Appellants seek to reverse the order of Hon. Pantaleon Pelayo, Judge of the Iloilo court of
first instance refusing to interfere with the alias writ of execution issued in Civil Case No. 2942
pending in another sala of the same court.

The facts. In April 1953 Amador Tajanlangit and his wife Angeles, residents of Iloilo, bought, from
the Southern Motors Inc. of Iloilo two tractors and a thresher. In payment for the same, they
executed the promissory note Annex A whereby they undertook to satisfy the total purchase price of
P24,755.75 in several installments (with interest) payable on stated dates from May 18, 1953
December 10, 1955. The note stipulated that if default be made in the payment of interest or of any
installment, then the total principal sum still unpaid with interest shall at once become demandable
etc. The spouse failed to meet any installment. Wherefore, they were sued, in the above Civil Case
No. 2942, for the amount of the promissory note.1 The spouses defaulted, and the court, after
listening to the Southern Motors' evidence entered Judgment for it in the total sum of P24,755.75
together with interest at 12 per cent, plus 10 per cent of the total amount due as attorney's fees and
costs of collection.

Carrying out the order of execution, the sheriff levied on the same machineries and farm implements
which had been bought by the spouses; and later sold them at public auction to the highest bidder —
which turned out to be the Southern Motors itself — for the total sum of P10,000.

As its judgment called for much more, the Southern Motors subsequently asked and obtained,
an alias writ of execution; and pursuant thereto, the provincial sheriff levied attachment on the
Tajanlangits' rights and interests in certain real properties — with a view to another sale on
execution.

To prevent such sale, the Tajanlangits instituted this action in the Iloilo court of first instance for the
purpose among others, of annulling the alias writ of execution and all proceedings subsequent
thereto. Their two main theories: (1) They had returned the machineries and farm implements to the
Southern Motors Inc., the latter accepted them, and had thereby settled their accounts; for that
reason, said spouses did not contest the action in Civil Case No. 2942; and (2) as the Southern
Motors Inc. had repossessed the machines purchased on installment (and mortgaged) the buyers
were thereby relieved from further responsibility, in view of the Recto Law, now article 1484 of the
New Civil Code.

For answer, the company denied the alleged "settlement and understanding" during the pendency of
civil case No. 2949. It also denied having repossessed the machineries, the truth being that they
were attached by the sheriff and then deposited by the latter in its shop for safekeeping, before the
sale at public auction.

The case was submitted for decision mostly upon a stipulation of facts. Additional testimony was
offered together with documentary evidence. Everything considered the court entered judgment,
saying in part;

The proceedings in Civil Case No. 2942 above referred to, were had in the Court of First
Instance (Branch 1) of the Province and of the City of Iloilo. While this court (Branch IV)
sympathizes with plaintiffs, it cannot grant, in this action, the relief prayed for the complaint
because courts of similar jurisdiction cannot invalidate the judgments and orders of each
other. Plaintiffs have not pursued the proper remedy. This court is without authority and
jurisdiction to declare null and void the order directing the issuance of alias writ of execution
because it was made by another court of equal rank and category (see Cabiao and
Izquierdo vs. Del Rosario and Lim, 44 Phil., 82-186).

WHEREFORE, judgement is hereby rendered dismissing the complaint with costs against
plaintiffs costs against plaintiffs. Let the writ of preliminiary injunction issued on August 26,
1954, be lifted.

The plaintiffs reasonably brought the matter to the Court of Appeals, but the latter forwarded the
expediente, being of the opinion that the appeal involved questions of jurisdiction and/or law

Discussion. Appellants' brief elaborately explains in the nine errors assigned, their original two
theories although their "settlement" idea appears to be somewhat modified.

"What is being sought in this present action" say appellants "is to prohibit and forbid the appellee
Sheriff of Iloilo from attaching and selling at public auction sale the real properties of appellants
because that is now forbidden by our law after the chattels that have been purchased and duly
mortgagee had already been repossessed by the same vendor-mortgagee and later on sold at
public auction sale and purchased by the same at such meager sum of P10,000."

"Our law" provides,

ART. 1484. In a contract of sale of personal property the price of which is payable in
installments, the vendor may exercise of the following remedies:
 (1) Exact fulfillment of the obligation, should the vendee fail to pay;

(2) Cancel the sale, should the vendee's failure to pay cover two or more installments;

(3) Foreclose the chattel mortgage on the thing sold, if one has been constituted, should the
vendee's failure to pay cover two or more installments. In this case, he shall have no further
action against the purchaser to recover any unpaid balance of the price. Any agreement to
the contrary shall be void. (New Civil Code.)

Appellants would invoke the last paragraph. But there has been no foreclosure of the chattel
mortgage nor a foreclosure sale. Therefore the prohibition against further collection does not apply.

At any rate it is the actual sale of the mortgaged chattel in accordance with section 14 Act
No. 1508 that would bar the creditor (who chooses to foreclose) from recovering any unpaid
balance. (Pacific Com. Co. vs.De la Rama, 72 Phil. 380.) (Manila Motor Co. vs. Fernandez,
99 Phil., 782.).

It is true that there was a chattel mortgage on the goods sold. But the Southern Motors elected to
sue on the note exclusively, i.e. to exact fulfillment of the obligation to pay. It had a right to select
among the three remedies established in Article 1484. In choosing to sue on the note, it was not
thereby limited to the proceeds of the sale, on execution, of the mortgaged good.2

In Southern Motors Inc. vs. Magbanua, (100 Phil., 155) a similar situation arose in connection with
the purchase on installment of a Chevrolet truck by Magbanua. Upon the latter's default, suit on the
note was filed, and the truck levied on together with other properties of the debtor. Contending that
the seller was limited to the truck, the debtor obtained a discharge of the other properties. This court
said:

By praying that the defendant be ordered to pay the sum of P4,690 together with the
stipulated interest at 12% per annum from 17 March 1954 until fully paid, plus 10 per cent of
the total amount due as attorney's fees and cost of collection, the plaintiff acted to exact the
fulfillment of the obligation and not to foreclose the mortgage on the truck. . . .

As the plaintiff has chosen to exact the fulfillment of the defendant's obligation, the former
may enforce execution of the judgement rendered in its favor on the personal and real
properties of the latter not exempt from execution sufficient to satisfy the judgment. That part
of the judgement depriving the plaintiff of its right to enforce judgment against the properties
of the defendant except the mortgaged truck and discharging the writ of attachment on his
other properties is erroneous. (Emphasis ours.)

Concerning their second theory, — settlement or cancellation — appellants allege that the very
implements sold "were duly returned" by them, and "were duly received and accepted by the said
vendor-mortgagee". Therefore they argue, "upon the return of the same chattels and due
acceptance of the same by the vendor-mortgagee, the conditional sale is ipso facto cancelled, with
the right of the vendor-mortgagee to appropriate whatever downpayment and posterior monthly
installments made by the purchaser as it did happen in the present case at bar."

The trouble with the argument is that it assumes that acceptance of the goods by the Southern
Motors Co, with a view to "cancellation" of the sale. The company denies such acceptance and
cancellation, asserting the goods, were deposited in its shop when the sheriff attached them in
pursuance of the execution. Its assertion is backed up by the sheriff, of whose credibility there is no
reason to doubt. Anyway this cancellation or settlement theory may not be heeded now, because it
would contravene the decision in Civil Case No. 2942 above-mentioned — it would show the
Tajanlangits owned nothing to Southern Motors Inc. Such decision is binding upon them, unless and
until they manage to set it aside in a proper proceeding — and this is not it.

There are other points involved in the case, such as the authority of the judge of one branch of a
court of first instance to enjoin proceedings in another branch of the same court. As stated, Judge
Pelayo refused to interfere on that ground. Appellants insist this was error on several counts. We
deem it unnecessary to deal with this procedural aspect, inasmuch as we find that, on the merits,
plaintiffs are not entitled to the relief demanded.

Judgment. The decision dismissing the complaint, is affirmed, with costs against appellants. So
ordered.

G.R. No. 109966 May 31, 1999

ELISCO TOOL MANUFACTURING CORPORATION, petitioner,

vs.
COURT OF APPEALS, ROLANDO LANTAN, and RINA LANTAN, respondents.

MENDOZA, J.:

This is a petition for review of the decision1 of the Court of Appeals which affirmed in toto the
decision of the Regional Trial Court of Pasig, Branch 51, declaring respondent spouses Rolando
Lantan and Rina Lantan owners of a 1979 model 2-door Colt Lancer car which they had acquired
under a car plan for top employees of the Elizalde group of companies.

The facts are as follows:

Private respondent Rolando Lantan was employed at the Elisco Tool Manufacturing Corporation as
head of its cash department. On January 9, 1980, he entered into an agreement with the company
which provided as follows:2

That, EMPLOYER is the owner of a car Colt Lancer 2 door, Model 1979, with Serial
No. 3403 under LTC Registration Certificate No. 0526558;

That, for and in consideration of a monthly rental of ONE THOUSAND TEN & 65/100
ONLY (P1,010.65) Philippine Currency, EMPLOYER desire to lease and
EMPLOYEE accept in lease the motor vehicle aforementioned for a period of FIVE
(5) years;

That, the EMPLOYEE agree as he hereby agreed to pay the lease rental thru salary
deduction from his monthly remuneration in the amount as above specified for a
period of FIVE (5) years;

That, for the duration of the lease contract, all expenses and costs of registration,
insurance, repair and maintenance, gasoline, oil, part replacement inclusive of all
expenses necessary to maintain the vehicle in top condition shall be for the account
of the EMPLOYEE;
 That, at the end of FIVE (5) year period or upon payment of the 60th monthly rental,
EMPLOYEE may exercise the option to purchase the motor vehicle from the
EMPLOYER and all monthly rentals shall be applied to the payment of the full
purchase price of the car and further, should EMPLOYEE desire to exercise this
option before the 5-year period lapse, he may do so upon payment of the remaining
balance on the five year rental unto the EMPLOYER, it being understood however
that the option is limited to the EMPLOYEE;

That, upon failure of the EMPLOYEE to pay THREE (3) accumulated monthly rentals
will vest upon the EMPLOYER the full right to lease the vehicle to another
EMPLOYEE;

That, in the event of resignation and or dismissal from the service, the EMPLOYEE
shall return the subject motor vehicle to the EMPLOYER in its compound at
Kalawaan Sur, Pasig, Metro Manila in good working and body condition.

On the same day, January 9, 1980, private respondent executed a promissory note reading as
follows:3

PROMISSORY NOTE

P60,639.00

FOR VALUE RECEIVED, we promise to pay [to] the order of ELISCO TOOL MFG.
CORP. — SPECIAL PROJECT, at its office at Napindan, Taguig, Metro Manila,
Philippines, the sum of ONE THOUSAND TEN & 65/100 PESOS (P1,010.65),
Philippine Currency, beginning January 9, 1980, without the necessity of notice or
demand in accordance with the schedule of payment hereto attached as an integral
part hereof.

In case of default, in the payment of any installment on the stipulated due date, we
agree to pay as liquidated damages 2% of the amount due and unpaid for every
thirty (30) days of default or fraction thereof. Where the default covers two
successive installments, the entire unpaid balance shall automatically become due
and payable.

It is further agreed that if upon such default attorney's services are availed of, an
additional sum equal to TWENTY (20%) percent of the total amount due thereon, but
in no case be less than P1,000.00 shall be paid to holder(s) hereof as attorney's fees
in addition to the legal costs provided for by law. We agree to submit to the
jurisdiction of the proper courts of Makati, Metro Manila or the Province of Rizal, at
the option of the holder(s) waiving for this purpose any other venue. 1âwphi1.nêt

In case extraordinary inflation or deflation of the currency stipulated should occur

before this obligation is paid in full, the value of the currency at the time of the
establishment of the obligation will be the basis of payment.

Holder(s) may accept partial payment reserving his right of recourse against each
and all endorsers who hereby waive DEMAND PRESENTMENT and NOTICE.
 Acceptance by the holder(s) of payment or any part thereof after due date shall not
be considered as extending the time for the payment of the aforesaid obligation or as
a modification of any of the condition hereof.

After taking possession of the car, private respondent installed accessories therein worth
P15,000.00.

In 1981, Elisco Tool ceased operations, as a result of which private respondent Rolando Lantan was
laid off. Nonetheless, as of December 4, 1984, private respondent was able to make payments for
the car in the total amount of P61,070.94.

On June 6, 1986, petitioner filed a complaint, entitled "replevin plus sum of money," against private
respondent Rolando Lantan, his wife Rina, and two other persons, identified only as John and Susan
Doe, before the Regional Trial Court of Pasig, Metro Manila. Petitioner alleged that private
respondents failed to pay the monthly rentals which, as of May 1986, totalled P39,054.86; that
despite demands, private respondents failed to settle their obligation thereby entitling petitioner to
the possession of the car; that petitioner was ready to post a bond in an amount double the value of
the car, which was P60,000; and that in case private respondents could not return the car, they
should be held liable for the amount of P60,000 plus the accrued monthly rentals thereof, with
interest at the rate of 14% per annum, until fully paid. Petitioner's complaint contained the following
prayer:

WHEREFORE, plaintiffs prays that judgment be rendered as follows:

ON THE FIRST CAUSE OF ACTION

Ordering defendant Rolando Lantan to pay the plaintiff the sum of P39,054.86 plus
legal interest from the date of demand until the whole obligation is fully paid;

ON THE SECOND CAUSE OF ACTION

To forthwith issue a Writ of Replevin ordering the seizure of the motor vehicle more
particularly described in paragraph 3 of the Complaint, from defendant Rolando
Lantan and/or defendants Rina Lantan, John Doe, Susan Doe and other person or
persons in whose possession the said motor vehicle may be found, complete with
accessories and equipment, and direct deliver thereof to plaintiff in accordance with
law, and after due hearing to confirm said seizure and plaintiff's possession over the
same;

ON THE ALTERNATIVE CAUSE OF ACTION

In the event that manual delivery of the subject motor vehicle cannot be effected for
any reason, to render judgment in favor of plaintiff and against defendant Rolando
Lantan ordering the latter to pay the sum of SIXTY THOUSAND PESOS
(P60,000.00) which is the estimated actual value of the above-described motor
vehicle, plus the accrued monthly rentals thereof with interests at the rate of fourteen
percent (14%) per annum until fully paid;

PRAYER COMMON TO ALL CAUSES OF ACTION

 1. Ordering the defendant Rolando Lantan to pay the plaintiff an amount equivalent
to twenty-five percent (25%) of his outstanding obligation, for and as attorney's fees;

2. Ordering defendants to pay the cost or expenses of collection, repossession,

bonding fees and other incidental expenses to be proved during the trial; and

3. Ordering defendants to pay the costs of suit.

Plaintiff also prays for such further reliefs as this Honorable Court may deem just and
equitable under the premises.

Upon petitioner's posting a bond in the amount of P120,000, the sheriff took possession of the car in
question and after five (5) days turned it over to petitioner.4

In due time, private respondents filed their answer. They claimed that the agreement on which the
complaint was based had not been signed by petitioner's representative, Jose Ma. S. del Gallego,
although it had been signed by private respondent Rolando Lantan; that their true agreement was "to
buy and sell and not lease with option to buy" the car in question at a monthly amortization of
P1,000; and that petitioner accepted the installment payments made by them and, in January 1986,
agreed that the balance of the purchase price would be paid on or before December 31, 1986.
Private respondents cited the provision of the agreement making respondent Rolando Lantan liable
for the expenses for registration, insurance, repair and maintenance, gasoline, oil and part
replacements, inclusive of all necessary expenses, as evidence that the transaction was one of sale.
Private respondents further alleged that, in any event, petitioner had waived its rights under the
agreement because of the following circumstances: (a) while the parties agreed that payment was to
be made through salary deduction, petitioner accepted payments in cash or checks; (b) although
they agreed that upon the employee's resignation, the car should be returned to the employer,
private respondent Rolando Lantan was not required to do so when he resigned in September 1982;
(c) petitioner did not lease the vehicle to another employee after private respondent Rolando Lantan
had allegedly failed to pay three monthly "rentals"; and (d) petitioner failed to enforce the manner of
payment under the agreement by its acceptance of payments in various amounts and on different
dates.

In its reply, petitioner maintained that the contract between the parties was one of lease with option
to purchase and that the promissory note was merely a "nominal security" for the agreement. It
contended that the mere acceptance of the amounts paid by private respondents and for indefinite
periods of time was not evidence that the parties' agreement was one of purchase and sale. Neither
was it guilty of laches because, under the law, an action based on a written contract can be brought
within ten (10) years from the time the action accrues. On August 31, 1987, the trial court5 rendered
its decision.

The trial court sustained private respondents' claim that the agreement in question was one of sale
and held that the latter had fully paid the price of the car having paid the total amount of P61,070.94
aside from installing accessories in the car worth P15,000.00. Said the trial court:

Plaintiff now comes claiming ownership of the car in question and has succeeded in
repossessing the same by virtue of the writ of seizure issued in this case on July 29,
1986. Not content with recovering possession of the said car, plaintiff still asks that
defendants should pay it the sum of P39,054.86, allegedly representing the rentals
due on the car from the time of the last payment made by defendants to its
repossession thereof. This is indeed a classic case of one having his cake and eating
it too! Under the Recto law (Arts. 1484 & 1485, Civil Code), the vendor who
 repossesses the goods sold on installments, has no right to sue the vendee for the
unpaid balance thereof.

The Court can take judicial notice of the practice wherein executives enjoy car plans
in progressive companies. The agreement of January 9, 1980 between the parties is
one such car plan. If defendant Rolando Lantan failed to keep up with his
amortizations on the car in question, it was not because of his own liking but rather
he was pushed to it by circumstances when his employer folded up and sent him to
the streets. That plaintiff was giving all the chance to defendants to pay the value of
the car and acquire full ownership thereof is shown by the delay in instituting the
instant case. . . .

The court likewise found that the amount of P61,070.94 included a 2% penalty for late payments for
which there was no stipulation in the agreement:

. . . The agreement and defendant Rolando Lantan's promissory note of January 9,

1980 do not provide even for interest on the remaining balance of the purchase price
of the car. This privilege extended by corporations to their top executives is
considered additional emolument to them. And so the reason for the lack of provision
for interest, much less penalty charges. Therefore, all payments made by defendant
should be applied to the principal account. Since the principal was only P60,639.00,
the defendants have made an overpayment of P431.94 which should be returned to
defendant by plaintiff.

For this reason, it ordered petitioner to pay private respondents the amount of P431.94 as
excess payment, as well as rentals at the rate of P1,000 a month for depriving private
respondents of the use of their car, and moral damages for the worry, embarrassment, and
mental torture suffered by them on account of the repossession of the car.

The dispositive portion of the trial court's decision reads as follows:

WHEREFORE, judgment is hereby rendered in favor of defendants and against

plaintiff, dismissing plaintiff's complaint; declaring defendants the lawful owners of
that Colt Lancer 2-door, Model 1979 with Serial No. 3403 under Registration
Certificate No. 0526558; ordering plaintiff to deliver to defendants the aforesaid
motor vehicle complete with all the accessories installed therein by defendants;
should for any reason plaintiff is unable to deliver the said car to defendants, plaintiff
is ordered to pay to defendants the value of said car in the sum of P60,639.00 plus
P15,000.00, the value of the accessories, plus interest of 12% on the said sums from
August 6, 1986; and sentencing plaintiff to pay defendants the following sums:

a) P12,431.94 as actual damages broken down as follows:

1) P431.94 overpayment made by defendants to

plaintiff; and

2) P12,000.00 rental on the car in question from

August 6, 1986 to August 5, 1987, plus the sum of
P1,000.00 a month beginning August 6, 1987 until the
car is returned by plaintiff to, and is received by,
defendant;
 b) the sum of P20,000.00 as moral damages;

c) the sum of P5,000.00 as exemplary damages; and

d) the sum of P5,000.00 as attorney's fees.

Costs against the plaintiff.

SO ORDERED.

Petitioner appealed to the Court of Appeals. On the other hand, private respondents filed a motion
for execution pending appeal. In its resolution of March 9, 1989, the Court of Appeals granted private
respondents' motion and, upon the filing of a bond, in the amount of P70,000.00, it issued a writ of
execution, pursuant to which the car was delivered to private respondents on April 16, 1989.6

On August 26, 1992, the Court of Appeals rendered its decision, affirming in toto the decision of the
trial court. Hence, the instant petition for review on certiorari.

Petitioner contends that the Court of Appeals erred —

(a) in disregarding the admission in the pleadings as to what

documents contain the terms of the parties' agreement.

(b) in holding that the interest stipulation in respondents' Promissory

Note was not valid and binding.

(c) in holding that respondents had fully paid their obligations.

It further argues that —

On the assumption that the Lease Agreement with option to buy in

this case may be treated as a sale on installments, the respondent
Court of Appeals nonetheless erred in not finding that the parties
have validly agreed that the petitioner as seller may [i] cancel the
contract upon the respondent's default on three or more installments,
[ii] retake possession of the personality, and [iii] keep the rents
already paid.

First. Petitioner does not deny that private respondent Rolando Lantan acquired the vehicle in
question under a car plan for executives of the Elizalde group of companies. Under a typical car
plan, the company advances the purchase price of a car to be paid back by the employee through
monthly deductions from his salary. The company retains ownership of the motor vehicle until it shall
have been fully paid for.7 However, retention of registration of the car in the company's name is only
a form of a lien on the vehicle in the event that the employee would abscond before he has fully paid
for it. There are also stipulations in car plan agreements to the effect that should the employment of
the employee concerned be terminated before all installments are fully paid, the vehicle will be taken
by the employer and all installments paid shall be considered rentals per agreement. 8

This Court has long been aware of the practice of vendors of personal property of denominating a
contract of sale on installment as one of lease to prevent the ownership of the object of the sale from
passing to the vendee until and unless the price is fully paid. As this Court noted in Vda. de Jose
v. Barrueco:9

Sellers desirous of malting conditional sales of their goods, but who do not wish
openly to make a bargain in that form, for one reason or another, have frequently
resorted to the device of making contracts in the form of leases either with options to
the buyer to purchase for a small consideration at the end of term, provided the so-
called rent has been duly paid, or with stipulations that if the rent throughout the term
is paid, title shall thereupon vest in the lessee. It is obvious that such transactions are
leases only in name. The so-called rent must necessarily be regarded as payment of
the price in installments since the due payment of the agreed amount results, by the
terms of the bargain, in the transfer of title to the lessee.

In an earlier case, Manila Gas Corporation v. Calupitan, 10 which involved a lease agreement of a
stove and a water heater, the Court said:

. . . [W]e are of the opinion, and so hold, that when in a so-called contract of lease of
personal property it is stipulated that the alleged lessee shall pay a certain amount
upon signing the contract, and on or before the 5th of every month, another specific
amount, by way of rental, giving the alleged lessee the right of option to buy the said
personal property before the expiration of the period of lease, which is the period
necessary for the payment of the said amount at the rate of so much a month,
deducting the payments made by way of advance and alleged monthly rentals, and
the said alleged lessee makes the advance payment and other monthly installments,
noting in his account and in the receipts issued to him that said payments are on
account of the price of the personal property allegedly leased, said contract is one of
sale on installment and not of lease. 11

In U.S. Commercial v. Halili, 12 a lease agreement was declared to be in fact a sale of personal
property by installment. Said the Court: 13

. . . There can hardly be any question that the so-called contracts of lease on which
the present action is based were veritable leases of personal property with option to
purchase, and as such come within the purview of the above article [Art. 1454-A of
the old Civil Code on sale of personal property by installment]. In fact the instruments
(exhibits "A" and "B") embodying the contracts bear the heading or title "Lease-Sale
(Lease-Sale of Transportation and/or Mechanical Equipment)." The contracts fix the
value of the vehicles conveyed to the lessee and expressly refer to the remainder of
said value after deduction of the down payment made by the lessee as "the unpaid
balance of the purchase price of the leased equipment." The contracts also provide
that upon the full value (plus stipulated interest) being paid, the lease would
terminate and title to the leased property would be transferred to the lessee. Indeed,
as the defendant-appellant points out, the inclusion of a clause waiving benefit of
article 1454-A of the old Civil Code is conclusive proof of the parties" understanding
that they were entering into a lease contract with option to purchase which come
within the purview of said article.

Being leases of personal property with option to purchase as contemplated in the

above article, the contracts in question are subject to the provision that when the
lessor in such case "has chosen to deprive the lessee of the enjoyment of such
personal property," "he shall have no further action" against the lessee "for the
 recovery of any unpaid balance" owing by the latter, "agreement to the contrary
being null and void."

It was held that in choosing to deprive the defendant of possession of the leased vehicles, the
plaintiff waived its right to bring an action to recover unpaid rentals on the said vehicles.

In the case at bar, although the agreement provides for the payment by private respondents of
"monthly rentals," the fifth paragraph thereof gives them the option to purchase the motor vehicle at
the end of the 5th year or upon payment of the 60th monthly rental when "all monthly rentals shall be
applied to the payment of the full purchase price of the car." It is clear that the transaction in this
case is a lease in name only. The so-called monthly rentals are in truth monthly amortizations on the
price of the car.

Second. The contract being one of sale on installment, the Court of Appeals correctly applied to it
the following provisions of the Civil Code:

Art. 1484. In a contract of sale of personal property the price of which is payable in
installments, the vendor may exercise any of the following remedies:

(1) Exact fulfillment of the obligation, should the

vendee fail to pay;

(2) Cancel the sale, should the vendee's failure to pay

cover two or more installments;

(3) Foreclose the chattel mortgage on the thing sold, if

one has been constituted, should the vendee's failure
to pay cover two or more installments. In this case, he
shall have no further action against the purchaser to
recover any unpaid balance of the price. Any
agreement to the contrary shall be void.

Art. 1485. The preceding article shall be applied to contracts purporting to be leases
of personal property with option to buy, when the lessor has deprived the lessee of
the possession or enjoyment of the thing.

The remedies provided for in Art. 1484 are alternative, not cumulative. The exercise of one bars the
exercise of the others. 14 This limitation applies to contracts purporting to be leases of personal
property with option to buy by virtue of Art. 1485. 15 The condition that the lessor has deprived the
lessee of possession or enjoyment of the thing for the purpose of applying Art. 1485 was fulfilled in
this case by the filing by petitioner of the complaint for replevin to recover possession of movable
property. By virtue of the writ of seizure issued by the trial court, the deputy sheriff seized the vehicle
on August 6, 1986 and thereby deprived private respondents of its use. 16 The car was not returned
to private respondent until April 16, 1989, after two (2) years and eight (8) months, upon issuance by
the Court of Appeals of a writ of execution. 17

Petitioner prayed that private respondents be made to pay the sum of P39,054.86, the amount that
they were supposed to pay as of May 1986, plus interest at the legal rate. 18 At the same time, it
prayed for the issuance of a writ of replevin or the delivery to it of the motor vehicle "complete with
accessories and equipment." 19 In the event the car could not be delivered to petitioner, it was prayed
that private respondent Rolando Lantan be made to pay petitioner the amount of P60,000.00, the
"estimated actual value" of the car, "plus accrued monthly rentals thereof with interests at the rate of
fourteen percent (14%) per annum until fully paid." 20 This prayer of course cannot be granted, even
assuming that private respondents have defaulted in the payment of their obligation. This led the trial
court to say that petitioner wanted to eat its cake and have it too.

Notwithstanding this impossibility in petitioner's choice of remedy, this case should be considered as
one for specific performance, pursuant to Art. 1484(1), consistent with its prayer with respect to the
unpaid installments as of May 1986. In this view, the prayer for the issuance of a writ of replevin is
only for the purpose of insuring specific performance by private respondents.

Both the trial court and the Court of Appeals correctly ruled that private respondents could no longer
be held liable for the amounts of P39,054.86 or P60,000.00 because private respondents had
fulfilled their part of the obligation. The agreement does not provide for the payment of interest on
unpaid monthly "rentals" or installments because it was entered into in pursuance of a car plan
adopted by the company for the benefit of its deserving employees. As the trial court correctly noted,
the car plan was intended to give additional benefits to executives of the Elizalde group of
companies.

Petitioner contends that the promissory note provides for such interest payment. However, as the
Court of Appeals held:

The promissory note in which the 2% monthly interest on delayed payments appears
does not form part of the contract. There is no consideration for the promissory note.
There is nothing to show that plaintiff advanced the purchase price of the vehicle for
Lantan so as to make the latter indebted to the former for the amount stated in the
promissory note. Thus, as stated in the complaint: "That sometime in January, 1980,
defendant Rolando Lantan entered into an agreement with the plaintiff for the lease
of a motor vehicle supplied by the latter, with the option to purchase at the end of the
period of lease . . . ." In other words, plaintiff did not buy the vehicle for Rolando
Lantan, advancing the purchase price for that purpose. There is nothing in the
complaint or in the evidence to show such arrangement. Therefore, there was no
indebtedness secured by a promissory note to speak of. There being no
consideration for the promissory note, the same, including the penalty clause
contained thereon, has no binding effect. 21

There is no evidence that private respondents received the amount of P60,639.00 indicated in the
promissory note as its value. What was proven below is the fact that private respondents received
from petitioner the 2-door Colt Lancer car which was valued at P60,000 and for which private
respondent Rolando Lantan paid monthly amortizations of P1,010.65 through salary deductions.

Indeed, as already stated, private respondents' default in paying installments was due to the
cessation of operations of Elizalde Steel Corporation, petitioner's sister company. Petitioner's
acceptance of payments made by private respondents through cash and checks could have been
impelled solely by petitioner's inability to deduct the amortizations from private respondent Rolando
Lantan's salary which he stopped receiving when his employment was terminated in September
1982. Apparently, to minimize the adverse consequences of the termination of private respondent's
employment, petitioner accepted even late payments. That petitioner accepted payments from
private respondent Rolando Lantan more than two (2) years after the latter's employment had been
terminated constitutes a waiver of petitioner's right to collect interest upon the delayed payments.
The 2% surcharge is not provided for in the agreement. Its collection by the company would in fact
run counter to the purpose of providing "added emoluments" to its deserving employees.
Consequently, the total amount of P61,070.94 already paid to petitioner should be considered
payment of the full purchase price of the car or the total installments paid.
Third. Private respondents presented evidence that they "felt bad, were worried, embarrassed and
mentally tortured" by the repossession of the car. 22 This has not been rebutted by petitioner. There is
thus a factual basis for the award of moral damages. In addition, petitioner acted in a wanton,
fraudulent, reckless and oppressive manner in filing the instant case, hence, the award of exemplary
damages is justified. 23 The award of attorney's fees is likewise proper considering that private
respondents were compelled to incur expenses to protect their rights. 24

WHEREFORE, the decision of the Court of Appeals is AFFIRMED with costs against petitioner. 1âw phi 1.nêt

SO ORDERED.

G.R. No. 214752, March 09, 2016

EQUITABLE SAVINGS BANK, (NOW KNOWN AS THE MERGED ENTITY "BDO UNIBANK,
INC.") Petitioner, v. ROSALINDA C. PALCES, Respondent.

DECISION

PERLAS-BERNABE, J.:

Assailed in this petition for review on certiorari1 are the Decision2 dated February 13, 2014 and the
Resolution3 dated October 8, 2014 of the Court of Appeals (CA) in CA-G.R. CV No. 96008, which partially
affirmed the Decision4 dated May 20, 2010 of the Regional Trial Court of Pasay City, Branch 114 (RTC) in
Civil Case No. 07-03 86-CFM and ordered petitioner Equitable Savings Bank, now BDO Unibank, Inc.
(petitioner), to reimburse respondent Rosalinda C. Palces (respondent) the installments she made in March
2007 amounting to P103,000.00.

The Facts

On August 15, 2005, respondent purchased a Hyundai Starex GRX Jumbo (subject vehicle) through a loan
granted by petitioner in the amount of P1,196,100.00. In connection therewith, respondent executed a
Promissory' Note with Chattel Mortgage5 in favor of petitioner, stating, inter alia, that: (a) respondent shall
pay petitioner the aforesaid amount in 36-monthly installments of P33,225.00 per month, beginning
September 18, 2005 and every 18th of the month thereafter until full payment of the loan; (b) respondent's
default in paying any installment renders the remaining balance due and payable; and (c) respondent's
failure to pay any installments shall give petitioner the right to declare the entire obligation due and payable
and may likewise, at its option, x x x foreclose this mortgage; or file an ordinary civil action for collection
and/or such other action or proceedings as may be allowed under the law.6

From September 18, 2005 to December 21, 2006, respondent paid the monthly installment of P33,225.00
per month. However, she failed to pay the monthly installments in January and February 2007, thereby
triggering the acceleration clause contained in the Promissory Note with Chattel Mortgage7and prompting
petitioner to send a demand letter8 dated February 22, 2007 to compel respondent to pay the remaining
balance of the loan in the amount of P664,500.00.9 As the demand went unheeded, petitioner filed on March
7, 2007 the instant Complaint for Recovery of Possession with Replevin with Alternative Prayer for Sum of
Money and Damages10 against respondent before the RTC, praying that the court a quo: (a) issue a writ of
replevin ordering the seizure of the subject vehicle and its delivery to petitioner; or (b) in the alternative as
when the recovery of the subject vehicle cannot be effected, to render judgment ordering respondent to pay
the remaining balance of the loan, including penalties, charges, and other costs appurtenant thereto.11

Pending respondent's answer, summons12 and a writ of replevin13 were issued and served to her personally
on April 26, 2007, and later on, a Sheriffs Return14 dated May 8, 2007 was submitted as proof of the
implementation of such writ.15

In her defense,16 while admitting that she indeed defaulted on her installments for January and February
2007, respondent nevertheless insisted that she called petitioner regarding such delay in payment and
spoke to a bank officer, a certain Rodrigo Dumagpi, who gave his consent thereto. Respondent then
maintained that in order to update her installment payments, she paid petitioner the amounts of P70,000.00
on March 8, 2007 and P33,000.00 on March 20, 2007, or a total of P103,000.00. Despite the aforesaid
payments, respondent was surprised when petitioner filed the instant complaint, resulting in the sheriff
taking possession of the subject vehicle.17

The RTC Ruling

In a Decision18 dated May 20, 2010, the RTC ruled in petitioner's favor and, accordingly, confirmed
petitioner's right and possession over the subject vehicle and ordered respondent to pay the former the
amount of P15,000.00 as attorney's fees as well as the costs of suit.19

The RTC found that respondent indeed defaulted on her installment payments in January and February
2007, thus, rendering the entire balance of the loan amounting to P664,500.00 due and demandable. In this
relation, the RTC observed that although respondent made actual payments of the installments due, such
payments were all late and irregular, and the same were not enough to fully pay her outstanding obligation,
considering that petitioner had already declared the entire balance of the loan due and demandable.
However, since the writ of replevin over the subject vehicle had already been implemented, the RTC merely
confirmed petitioner's right to possess the same and ruled that it is no longer entitled to its alternative
prayer, i.e., the payment of the remaining balance of the loan, including penalties, charges, and other costs
appurtenant thereto.20

Respondent moved for reconsideration,21 but was denied in an Order22 dated August 31, 2010. Dissatisfied,
respondent appealed23 to the CA, contending that petitioner acted in bad faith in seeking to recover more
than what is due by attempting to collect the balance of the loan and, at the same time, recover the subject
vehicle.24

The CA Ruling

In a Decision25 dated February 13, 2014, the CA affirmed the RTC ruling with modification: (a) ordering
petitioner to return the amount of P103,000.00 to respondent; and (b) deleting the award of attorney's fees
in favor of petitioner for lack of sufficient basis. It held that while respondent was indeed liable to petitioner
under the Promissory Note with Chattel Mortgage, petitioner should not have accepted respondent's late
partial payments in the aggregate amount of P103,000.00. In this regard, the CA opined that by choosing to
recover the subject vehicle via a writ of replevin, petitioner already waived its right to recover any unpaid
installments, pursuant to Article 1484 of the Civil Code. As such, the CA concluded that respondent is
entitled to the recovery of the aforesaid amount.26

Aggrieved, petitioner moved for partial reconsideration27 - specifically praying for the setting aside of the
order to return the amount of P103,000.00 to respondent - which was, however, denied in a
Resolution28dated October 8, 2014; hence, this petition.

The Issues Before The Court

The issues raised for the Court's resolution are whether or not the CA correctly: (a) ordered petitioner to
return to respondent the amount of P103,000.00 representing the latter's late installment payments; and
(b) deleted the award of attorney's fees in favor of petitioner.

The Court's Ruling

The petition is partly meritorious.

Citing Article 1484 of the Civil Code, specifically paragraph 3 thereof, the CA ruled that petitioner had
already waived its right to recover any unpaid installments when it sought - and was granted - a writ of
replevin in order to regain possession of the subject vehicle. As such, petitioner is no longer entitled to
receive respondent's late partial payments in the aggregate amount of P103,000.00.

The CA is mistaken on this point.

Article 1484 of the Civil Code, which governs the sale of personal properties in installments, states in full:
chanRoble svirtual Lawlib ra ry
Article 1484. In a contract of sale of personal property the price of which is payable in
installments, the vendor may exercise any of the following remedies:

(1) Exact fulfilment of the obligation, should the vendee fail to pay;

(2) Cancel the sale, should the vendee's failure to pay cover two or more installments;

(3) Foreclose the chattel mortgage on the thing sold, if one has been constituted, should the vendee's
failure to pay cover two or more installments. In this case, he shall have no further action against the
purchaser to recover any unpaid balance of the price. Any agreement to the contrary shall be void.
(Emphases and underscoring supplied)
In this case, there was no vendor-vendee relationship between respondent and petitioner. A judicious
perusal of the records would reveal that respondent never bought the subject vehicle from petitioner but
from a third party, and merely sought financing from petitioner for its full purchase price. In order to
document the loan transaction between petitioner and respondent, a Promissory Note with Chattel
Mortgage29 dated August 18, 2005 was executed wherein, inter alia, respondent acknowledged her
indebtedness to petitioner in the amount of P1,196,100.00 and placed the subject vehicle as a security for
the loan.30 Indubitably, a loan contract with the accessory chattel mortgage contract - and not a contract of
sale of personal property in installments - was entered into by the parties with respondent standing as the
debtor-mortgagor and petitioner as the creditor-mortgagee. Therefore, the conclusion of the CA that Article
1484 finds application in this case is misplaced, and thus, must be set aside.

The Promissory Note with Chattel Mortgage subject of this case expressly stipulated, among others, that:
(a) monthly installments shall be paid on due date without prior notice or demand;31 (b) in case of default,
the total unpaid principal sum plus the agreed charges shall become immediately due and payable;32 and (c)
the mortgagor's default will allow the mortgagee to exercise the remedies available to it under the law. In
light of the foregoing provisions, petitioner is justified in filing his Complaint33 before the RTC seeking for
either the recovery of possession of the subject vehicle so that it can exercise its rights as a mortgagee, i.e.,
to conduct foreclosure proceedings over said vehicle;34 or in the event that the subject vehicle cannot be
recovered, to compel respondent to pay the outstanding balance of her loan.35 Since it is undisputed that
petitioner had regained possession of the subject vehicle, it is only appropriate that foreclosure proceedings,
if none yet has been conducted/concluded, be commenced in accordance with the provisions of Act No.
1508,36 otherwise known as "The Chattel Mortgage Law," as intended. Otherwise, respondent will be placed
in an unjust position where she is deprived of possession of the subject vehicle while her outstanding debt
remains unpaid, either in full or in part, all to the undue advantage of petitioner - a situation which law and
equity will never permit.37

Further, there is nothing in the Promissory Note with Chattel Mortgage that bars petitioner from receiving
any late partial payments from respondent. If at all, petitioner's acceptance of respondent's late partial
payments in the aggregate amount of P103,000.00 will only operate to reduce her outstanding obligation to
petitioner from P664,500.00 to P561,500.00. Such a reduction in respondent's outstanding obligation should
be accounted for when petitioner conducts the impending foreclosure sale of the subject vehicle. Once such
foreclosure sale has been made, the proceeds thereof should be applied to the reduced amount of
respondent's outstanding obligation, and the excess of said proceeds, if any, should be returned to her.38

In sum, the CA erred in ordering petitioner to return the amount of P103,000.00 to respondent. In view of
petitioner's prayer for and subsequent possession of the subject vehicle in preparation for its foreclosure, it
is only proper that petitioner be ordered to commence foreclosure proceedings, if none yet has been
conducted/concluded, over the vehicle in accordance with the provisions of the Chattel Mortgage Law, i.e.,
within thirty (30) days from the finality of this Decision.39

Finally, anent the issue of attorney's fees, it is settled that attorney's fees "cannot be recovered as part of
damages because of the policy that no premium should be placed on the right to litigate. They are not to be
awarded every time a party wins a suit. The power of the court to award attorney's fees under Article
220840 of the Civil Code demands factual, legal, and equitable justification. Even when a claimant is
compelled to litigate with third persons or to incur expenses to protect his rights, still, attorney's fees may
not be awarded where no sufficient showing of bad faith could be reflected in a party's persistence in a case
other than an erroneous conviction of the righteousness of his cause."41 In this case, suffice it to say that
the CA correctly ruled that the award of attorney's fees and costs of suit should be deleted for lack of
sufficient basis.
chanro bleslaw

WHEREFORE, the petition is PARTLY GRANTED. The Decision dated February 13, 2014 and the Resolution
dated October 8, 2014 of the Court of Appeals in CA-G.R. CV No. 96008 are hereby SET ASIDE. In case
foreclosure proceedings on the subject chattel mortgage has not yet been conducted/concluded, petitioner
Equitable Savings Bank, now BDO Unibank, Inc., is ORDERED to commence foreclosure proceedings on the
subject vehicle in accordance with the Chattel Mortgage Law, i.e., within thirty (30) days from the finality of
this Decision. The proceeds therefrom should be applied to the reduced outstanding balance of respondent
Rosalinda C. Palces in the amount of P561,500.00, and the excess, if any, should be returned to her.

SO ORDERED. cralawlawlibra ry

[G.R. No. 130347. March 3, 1999]

ABELARDO VALARAO, GLORIOSA VALARAO and CARLOS

VALARAO, petitioners, vs. COURT OF APPEALS and MEDEN A.
ARELLANO, respondents.

DECISION
PANGANIBAN, J.:

Article 1592 of the Civil Code applies only to contracts of sale, and not to contracts to sell or
conditional sales where title passes to the vendee only upon full payment of the purchase
price. Furthermore, in order to enforce the automatic forfeiture clause in a deed of conditional sale,
the vendors have the burden of proving a contractual breach on the part of the vendee.

The Case

Before us is a Petition for Review assailing the June 13, 1997 Decision of the Court of Appeals
(CA)[1] which reversed and set aside the October 10, 1994 Decision[2] of the Regional Trial Court
(RTC) of Quezon City, Branch 82. The dispositive portion of the assailed CA Decision reads:

WHEREFORE, the decision appealed from is REVERSED and SET ASIDE, and a
new one is entered (1) ordering [herein private respondent] to pay the amount of [o]ne
[m]illion [o]ne [h]undred [n]inety [s]even [t]housand [p]esos (P1,197,000.00) in favor
of [herein petitioners], with legal interest thereon from December 31, 1992; (2) and
directing [herein petitioners] to execute in favor of [herein respondent], upon receipt
of the aforesaid amount, the final and absolute deed of sale of the subject property
with all the improvements.[3]
 Also assailed by petitioners is the August 21, 1997 CA Resolution denying reconsideration.
The aforementioned RTC Decision, which was reversed and set aside by the CA, disposed as
follows:

WHEREFORE, premises considered, judgment is hereby rendered declaring the

aforesaid Deed of conditional Sale as automatically rescinded and all payments made
thereunder by the [private respondent] to the [petitioners] as forfeited in favor of the
latter, by way of rentals and as liquidated damages, as well as declaring all
improvements introduced on the property subject to the said Deed of Condition[al]
Sale to belong to the [petitioners] without any right of reimbursement. Further, the
[private respondent] and all persons claiming right under her are hereby ordered to
vacate the said property and to turnover possession thereof to the
[petitioners]. FINALLY, the [private respondent] is hereby ordered to pay to the
[petitioners] the amount of P50,000.00 as attorneys fees and for expenses of litigation,
as well as to pay the costs of the suit. The Writ of Preliminary Injunction previously
issued is hereby ordered LIFTED and DISSOLVED, and the bond posted for its
issuance held liable for the satisfaction of the money judgment herein made in favor
of the [petitioners].[4]

The Facts

The undisputed facts of the case as narrated by the Court of Appeals are as follows:

On September 4, 1987, spouses Abelardo and Gloriosa Valarao, thru their son Carlos
Valarao as their attorney-in-fact, sold to [Private Respondent] Meden Arellano under
a Deed of Conditional Sale a parcel of land situated in the District of Diliman, Q.C.,
covered by TCT No. 152879 with an area of 1,504 square meters, for the sum of
THREE MILLION TWO HUNDRED TWENTY FIVE THOUSAND PESOS
(P3,225,000.00) payable under a schedule of payment stated therein.

In the same Deed of Conditional Sale, the [private respondent] vendee obligated
herself to encumber by way of real estate mortgage in favor of [petitioners] vendors
her separate piece of property with the condition that upon full payment of the balance
of P2,225,000.00, the said mortgage shall become null and void and without further
force and effect. (Item No. 3, pp. 2-3 of Deed of Conditional Sale).

It was further stipulated upon that should the vendee fail to pay three (3) successive
monthly installments or any one year-end lump sum payment within the period
stipulated, the sale shall be considered automatically rescinded without the necessity
of judicial action and all payments made by the vendee shall be forfeited in favor of
the vendors by way of rental for the use and occupancy of the property and as
liquidated damages. All improvements introduced by the vendee to the property shall
belong to the vendors without any right of reimbursement. (Par. (2), Item No. 3, p. 3
of Deed of Conditional Sale).

[Private respondent] appellant alleged that as of September , 1990, she had already
paid the amount of [t]wo [m]illion [t]wenty-[e]ight [t]housand (P2,028,000.00)
[p]esos, although she admitted having failed to pay the installments due in October
and November, 1990. Petitioner, however, [had] tried to pay the installments due [in]
the said months, including the amount due [in] the month of December, 1990 on
December 30 and 31, 1990, but was turned down by the vendors-[petitioners] thru
their maid, Mary Gonzales, who refused to accept the payment offered. [Private
respondent] maintains that on previous occasions, the same maid was the one who
[had] received payments tendered by her. It appears that Mary Gonzales refused to
receive payment allegedly on orders of her employers who were not at home.

[Private respondent] then reported the matter to, and sought the help of, the local
barangay officials. Efforts to settle the controversy before the barangay proved
unavailing as vendors-[petitioners] never appeared in the meetings arranged by the
barangay lupon.

[Private respondent] tried to get in touch with [petitioners] over the phone and was
able to talk with [Petitioner] Gloriosa Valarao who told her that she [would] no longer
accept the payments being offered and that [private respondent] should instead confer
with her lawyer, a certain Atty. Tuazon. When all her efforts to make payment were
unsuccessful, [private respondent] sought judicial action by filing this petition for
consignation on January 4, 1991.

On the other hand, vendors-[petitioners], thru counsel, sent [private respondent] a

letter dated 4 January 1991 (Exh. C) notifying her that they were enforcing the
provision on automatic rescission as a consequence of which the Deed of Conditional
Sale [was deemed] null and void, and xxx all payments made, as well as the
improvements introduced on the property, [were] thereby forfeited. The letter also
made a formal demand on the [private respondent] to vacate the property should she
not heed the demand of [petitioners] to sign a contract of lease for her continued stay
in the property (p. 2 of Letter dated Jan. 4, 1991; Exh. C).

In reply, [private respondent] sent a letter dated January 14, 1991 (Exh. D), denying
that she [had] refused to pay the installments due [in] the months of October,
November and December, and countered that it was [petitioners] who refused to
accept payment, thus constraining her to file a petition for consignation before the
Regional Trial Court of Quezon City docketed as Civil Case No. Q-91-7603.
Notwithstanding their knowledge of the filing by [private respondent] of a
consignation case against them in the Regional Trial Court of Quezon City docketed
as Civil Case No. Q-91-7603, [petitioners], through counsel, sent the [private
respondent] another letter dated January 19, 1991 (Exh. F), denying the allegations of
her attempts to tender payment on December 30 and 31, 1990, and demanding that
[private respondent] vacate and turnover the property and pay a monthly
compensation for her continued occupation of the subject property at the rate
of P20,000.00, until she shall have vacated the same.

Ruling of the Court of Appeals

In reversing the Regional Trial Court, the Court of Appeals held that the refusal of herein
petitioners to accept the tender of payment was unjustified. Notwithstanding the stipulation in the
Deed of Conditional Sale that the rescission of the contract shall of right take place upon the failure
of the vendee to pay three successive monthly installments, the appellate court observed that a
judicial demand or a notarial act was still required pursuant to Article 1592 of the Civil Code. Thus,
petitioners letter informing private respondent of the rescission of the contract did not suffice, for
it was not notarized. The CA also observed that the alleged breach of contract arising from the
failure of the vendee to pay the monthly installments for October and November 1990 within the
stipulated time is rather slight and not substantial, and to authorize the automatic rescission on
account thereof will work injustice to the other party, who has paid a total of P2,028,000.00 out of
a total obligation of P3,225,000.00. The rule is that rescission cannot be availed of as to unjustly
enrich one party.

The Issues

In their Memorandum before us, petitioners raise the following issues:[5]

I Whether the Answer [-- (a)] categorically indicating willingness to accept the
amount already due if the [private respondent] would update the account, [(b)]
praying that if she fail[ed] to do so immediately, xxx the Deed of Conditional Sale be
declared rescinded, pursuant to the second paragraph of Section 3 thereof, with costs
against the [private respondent], [(c)] ordering the latter to vacate and turn over
possession of the premises to the [petitioners], and to pay the latter attorneys fees in
the amount of P50,000.00 and the expenses of litigation [--] is tantamount to a judicial
demand and notice of rescission under Art. 1592 of the Civil Code.

II Whether the automatic forfeiture clause is valid and binding between the parties.

III Whether the action for consignation may prosper without actual deposit [in court]
of the amount due xxx [so as] to produce the effect of payment.
 The Courts Ruling

The petition[6] is devoid of merit.

Preliminary Matter: Notarial or Judicial Demand

Citing Article 1592 of the Civil Code, the Court of Appeals ruled that the petitioners letter
dated January 4, 1991, could not effect the rescission of the Deed of Conditional Sale, because the
said letter was not notarized. On the other hand, petitioners argue that they made a judicial demand,
which was embodied in their Manifestation filed on May 1, 1991, and Answer submitted on July
1, 1991.[7]
We believe, however, that the issue of whether the requirement of a judicial demand or a
notarial act has been fulfilled is immaterial to the resolution of the present case. Article 1592 of
the Civil Code states:

ART. 1592. In the sale of immovable property, even though it may have been
stipulated that upon failure to pay the price at the time agreed upon the rescission of
the contract shall of right take place, the vendee may pay, even after the expiration of
the period, as long as no demand for rescission of the contract has been made upon
him either judicially or by notarial act. After the demand, the court may not grant him
a new term.

It is well-settled that the above-quoted provision applies only to a contract of sale,[8] and not
to a sale on installment[9] or a contract to sell.[10] Thus, in Luzon Brokerage v. Maritime
Building,[11] this Court ruled that Art. 1592 of the new Civil Code (Art. 1504 of the old Civil Code)
requiring demand by suit or notarial act in case the vendor of realty wants to rescind does not apply
to a contract to sell or promise to sell, where title remains with the vendor until full payment of the
price. The Court stresses the difference between these two types of contract. In a contract to sell,
the title over the subject property is transferred to the vendee only upon the full payment of the
stipulated consideration. Unlike in a contract of sale, the title does not pass to the vendee upon the
execution of the agreement or the delivery of the thing sold.[12]
In the present case, the Deed of Conditional Sale is of the same nature as a sale on installment
or a contract to sell, which is not covered by Article 1592. The aforementioned agreement
provides:
xxx

Should the VENDEE fail to pay three (3) successive monthly installments or any one
year-end lump sum payment within the period stipulated herein, this Deed of
Conditional Sale shall be considered xxx automatically rescinded without the
necessity of judicial action[,] and all payments made by the VENDEE shall be
forfeited in favor of the VENDORS by way of rental for the use and occupancy of the
property and as liquidated damages. All improvements introduced by the VENDEE to
the property shall belong to the VENDORS without any right of reimbursement. The
VENDORS and/or their agents or representatives shall have the right to enter the
premises of the property and to eject the VENDEE and all persons claiming right
under her therefrom with the use of reasonable force if necessary.

That upon full payment to the VENDORS of the total consideration of P3,225,000.00,
the VENDORS shall immediately and without delay execute in favor of the VENDEE
the final and absolute deed of sale of the property and all its improvements.

Petitioners-vendors unmistakably reserved for themselves the title to the property until full
payment of the purchase price by the vendee. Clearly, the agreement was not a deed of sale, but
more in the nature of a contract to sell or of a sale on installments.[13] Even after the execution of
the Deed of Conditional Sale, the Torrens Certificate of Title remained with and in the name of
the vendors. In rejecting the application of Article 1592 to a contract to sell, the Court held
in Luzon Brokerage[14] that the full payment of the price (through the punctual performance of the
monthly payments) was a condition precedent to the execution of the final sale and to the transfer
of the property from [the vendor] to the [vendee]; so that there was to be no actual sale until and
unless full payment was made.

Main Issue: Enforcement of the Automatic Forfeiture Clause

As a general rule, a contract is the law between the parties.[15] Thus, from the moment the
contract is perfected, the parties are bound not only to the fulfillment of what has been expressly
stipulated but also to all consequences which, according to their nature, may be in keeping with
good faith, usage and law.[16] Also, the stipulations of the contract being the law between the
parties, courts have no alternative but to enforce them as they were agreed [upon] and written,
there being no law or public policy against the stipulated forfeiture of payments already
made.[17] However, it must be shown that private respondent-vendee failed to perform her
obligation, thereby giving petitioners-vendors the right to demand the enforcement of the contract.
We concede the validity of the automatic forfeiture clause, which deems any previous
payments forfeited and the contract automatically rescinded upon the failure of the vendee to pay
three successive monthly installments or any one yearend lump sum payment. However,
petitioners failed to prove the conditions that would warrant the implementation of this clause.
Both the appellate and the trial courts agree on the following:
1. The Deed of Conditional Sale provided for automatic rescission in case the vendee failed to
pay three (3) successive monthly installments or any one yearend lump sum payment within the
stipulated period therein.
2. Each monthly installment was due at the end of the month.
3. The installments for October and November 1990 were not paid.
 4. The private respondent-vendee, Meden Arellano, went to the house of the petitioners-vendors
on December 30, 1990.
5. Arellano offered to pay P48,000 (total amount of installments due in October, November, and
December 1990) to Mary Gonzales, the petitioners maid, but the latter refused to accept it upon
instruction of petitioners.
6. Arellano returned the next day, December 31, 1990, and insisted on paying, but again the maid
refused to accept it.
7. Arellano proceeded to the barangay office around 10:00 a.m. to file a case against petitioners
for their refusal to accept the payments.
8. Four (4) days later, on January 4, 1991, private respondents filed a Petition for Consignation.
9. Despite the said petition, the money was nevertheless not deposited in court.
10. Negotiations between both parties went under way, culminating in the vendees filling a
Motion to Deposit the entire balance due, which was duly opposed by the vendor, and hence was
denied by the trial court.
From the foregoing, it is clear that petitioners were not justified in refusing to accept the tender
of payment made by private respondent on December 30 and 31, 1990. Had they accepted it on
either of said dates, she would have paid all three monthly installments due. In other words, there
was no deliberate failure on her part to meet her responsibility to pay.[18] The Court takes note of
her willingness and persistence to do so, and, petitioners cannot now say otherwise. The fact is:
they refused to accept her payment and thus have no reason to demand the enforcement of the
automatic forfeiture clause. They cannot be rewarded for their own misdeed.
Because their maid had received monthly payments in the past,[19] it is futile for petitioners to
insist now that she could not have accepted the aforementioned tender of payment, on the ground
that she did not have a special power of attorney to do so. Clearly, they are estopped from denying
that she had such authority. Under Article 1241 of the Civil Code, payment through a third person
is valid [I]f by the creditors conduct, the debtor has been led to believe that the third person had
authority to receive the payment.

Failure to Consign the Amount Due

Petitioners also maintain that the consignation was not valid because the amount tendered was not
deposited with the trial court. True, there is no showing that she deposited the money with the
proper judicial authority which, taken together with the other requisites for a valid
consignation,[20] would have released her from her obligation to pay. However, she does not deny
her obligation and, in fact, is willing to pay not only the three monthly installments due but also
the entire residual amount of the purchase price. Verily, she even filed a Motion to Deposit the
said entire balance with the trial court, which however denied said motion upon opposition of the
petitioners.[21]
Accordingly, we agree with the Court of Appeals that it would be inequitable to allow the
forfeiture of the amount of more than two million pesos already paid by private respondent, a sum
which constitutes two thirds of the total consideration. Because she did make a tender of payment
which was unjustifiably refused, we hold that petitioners cannot enforce the automatic forfeiture
clause of the contract.

Application of the Maceda Law

In any event, the rescission of the contract and the forfeiture of the payments already made
could not be effected, because the case falls squarely under Republic Act No. 6552,[22] otherwise
known as the Maceda Law. Section 3 of said law provides:

SEC. 3. In all transactions or contracts involving the sale or financing of real estate on
installment payments, including residential condominium apartments but excluding
industrial lots, commercial buildings and sales to tenants under Republic Act
Numbered Thirty-eight hundred Forty-four as amended by Republic Act Numbered
Sixty-three hundred eighty-nine, where the buyer has paid at least two years of
installments, the buyer is entitled to the following rights in case he defaults in the
payment of succeeding installments:

(a) To pay, without additional interest, the unpaid installments due within the total
grace period earned by him, which is hereby fixed at the rate of one month grace
period for every year of installment payments made: Provided, That this right shall be
exercised by the buyer only once in every five years of the life of the contract and its
extensions, if any.

(b) If the contract is cancelled, the seller shall refund to the buyer the cash surrender
value of the payments on the property equivalent to fifty percent of the total payments
made and, after five years of installments, an additional five percent every year but
not to exceed ninety percent of the total payments made: Provided, That the actual
cancellation of the contract shall take place after thirty days from receipt by the buyer
of the notice of cancellation or the demand for rescission of the contract by a notarial
act and upon full payment of the cash surrender value to the buyer.

Down payments, deposits or options on the contract shall be included in the

computation of the total number of installments made.

Hence, the private respondent was entitled to a one-month grace period for every year of
installments paid, which means that she had a total grace period of three months from December
31, 1990.Indeed, to rule in favor of petitioner would result in patent injustice and unjust
enrichment. This tribunal is not merely a court of law, but also a court of justice.
WHEREFORE, the Petition is DENIED and the dispositive portion of the appealed Decision
of the Court of Appeals is hereby AFFIRMED. The CAs discussion on the need for judicial or
notarial demand is MODIFIED in accordance with this Decision. Costs against petitioners.
 SO ORDERED.

SPOUSES FAUSTINO AND G.R. No. 172036

JOSEFINA GARCIA,
SPOUSES MELITON GALVEZ Present:
AND HELEN GALVEZ,
and CONSTANCIA ARCAIRA CARPIO, J., Chairperson,
represented by their Attorney-in-Fact BRION,
JULIANA O. MOTAS, DEL CASTILLO,
Petitioners, ABAD, and
PEREZ, JJ.

- versus -

COURT OF APPEALS,
EMERLITA DE LA CRUZ, Promulgated:
and DIOGENES G. BARTOLOME,
Respondents. April 23, 2010
x--------------------------------------------------x

DECISION

CARPIO, J.:

G.R. No. 172036 is a petition for review[1] assailing the Decision[2] promulgated on
25 January 2006 as well as the Resolution[3] promulgated on 16 March 2006 of the
Court of Appeals (appellate court) in CA-G.R. CV No. 63651. The appellate court
reversed and set aside the decision of Branch 23 of the Regional Trial Court of Trece
Martires City, Cavite (trial court) in Civil Case No. TM-622. The appellate court
ordered Emerlita Dela Cruz (Dela Cruz) to return to spouses Faustino and Josefina
Garcia, spouses Meliton and Helen Galvez, and Constancia Arcaira (collectively,
petitioners) the amount in excess of one-half percent of P1,500,000. Dela Cruzs co-
defendant, Diogenes Bartolome (Bartolome), did not incur any liability.

The appellate court narrated the facts as follows:

On May 28, 1993, plaintiffs spouses Faustino and Josefina Garcia and
spouses Meliton and Helen Galvez (herein appellees) and defendant
Emerlita dela Cruz (herein appellant) entered into a Contract to Sell
wherein the latter agreed to sell to the former, for Three Million One
Hundred Seventy Thousand Two Hundred Twenty (P3,170,220.00)
Pesos, five (5) parcels of land situated at Tanza, Cavite particularly known
as Lot Nos. 47, 2768, 2776, 2767, 2769 and covered by Transfer
Certificate of Title Nos. T-340674, T-340673, T-29028, T-29026, T-
29027, respectively. At the time of the execution of the said contract, three
of the subject lots, namely, Lot Nos. 2776, 2767, and 2769 were registered
in the name of one Angel Abelida from whom defendant allegedly
acquired said properties by virtue of a Deed of Absolute Sale dated March
31, 1989.

As agreed upon, plaintiffs shall make a down payment of Five Hundred

Thousand (P500,000.00) Pesos upon signing of the contract. The balance
of Two Million Six Hundred Seventy Thousand Two Hundred Twenty
(P2,670,220.00) Pesos shall be paid in three installments, viz: Five
Hundred Thousand (P500,000.00) Pesos on June 30, 1993; Five Hundred
Thousand (P500,000.00) Pesos on August 30, 1993; One Million Six
Hundred Seventy Thousand Two Hundred Twenty (P1,670,220.00) Pesos
on December 31, 1993.

On its due date, December 31, 1993, plaintiffs failed to pay the last
installment in the amount of One Million Six Hundred Seventy Thousand
Two Hundred Twenty (P1,670,220.00) Pesos.Sometime in July 1995,
plaintiffs offered to pay the unpaid balance, which had already been
delayed by one and [a] half year, which defendant refused to accept. On
September 23, 1995, defendant sold the same parcels of land to intervenor
Diogenes G. Bartolome for Seven Million Seven Hundred Ninety Three
Thousand (P7,793,000.00) Pesos.

In order to compel defendant to accept plaintiffs payment in full

satisfaction of the purchase price and, thereafter, execute the necessary
document of transfer in their favor, plaintiffs filed before the RTC a
complaint for specific performance.
In their complaint, plaintiffs alleged that they discovered the infirmity of
the Deed of Absolute Sale covering Lot Nos. 2776, 2767 and 2769,
between their former owner Angel Abelida and defendant, the same being
spurious because the signature of Angel Abelida and his wife were
falsified; that at the time of the execution of the said deed, said spouses
were in the United States; that due to their apprehension regarding the
authenticity of the document, they withheld payment of the last
installment which was supposedly due on December 31, 1993; that they
tendered payment of the unpaid balance sometime in July 1995, after
Angel Abelida ratified the sale made in favor [of] defendant, but defendant
refused to accept their payment for no jusitifiable reason.

In her answer, defendant denied the allegation that the Deed of Absolute
Sale was spurious and argued that plaintiffs failed to pay in full the agreed
purchase price on its due date despite repeated demands; that the Contract
to Sell contains a proviso that failure of plaintiffs to pay the purchase price
in full shall cause the rescission of the contract and forfeiture of one-half
(1/2%) percent of the total amount paid to defendant; that a notarized letter
stating the indended rescission of the contract to sell and forfeiture of
payments was sent to plaintiffs at their last known address but it was
returned with a notation insufficient address.

Intervenor Diogenes G. Bartolome filed a complaint in intervention

alleging that the Contract to Sell dated May 31, 1993 between plaintiffs
and defendant was rescinded and became ineffective due to unwarranted
failure of the plaintiffs to pay the unpaid balance of the purchase price on
or before the stipulated date; that he became interested in the subject
parcels of land because of their clean titles; that he purchased the same
from defendant by virtue of an Absolute Deed of Sale executed on
September 23, 1995 in consideration of the sum of Seven Million Seven
Hundred Ninety Three Thousand (P7,793,000.00) Pesos.[4]

The Decision of the Trial Court

 In its Decision dated 15 April 1999, the trial court ruled that Dela Cruzs
rescission of the contract was not valid. The trial court applied Republic Act No.
6552 (Maceda Law) and stated that Dela Cruz is not allowed to unilaterally cancel
the Contract to Sell. The trial court found that petitioners are justified in withholding
the payment of the balance of the consideration because of the alleged spurious sale
between Angel Abelida and Emerlita Dela Cruz. Moreover, intervenor Diogenes
Bartolome (Bartolome) is not a purchaser in good faith because he was aware of
petitioners interest in the subject parcels of land.

The dispositive portion of the trial courts decision reads:

ACCORDINGLY, defendant Emerlita dela Cruz is ordered to accept the
balance of the purchase price in the amount of P1,670,220.00 within ten
(10) days after the judgment of this Court in the above-entitled case has
become final and executory and to execute immediately the final deed of
sale in favor of plaintiffs.

Defendant is further directed to pay plaintiffs the amount of P400,000.00

as moral damages and P100,000.00 as exemplary damages.

The deed of sale executed by defendant Emerlita dela Cruz in favor of

Atty. Diogenes Bartolome is declared null and void and the amount
of P7,793,000.00 which was paid by intervenor Bartolome to Emerlita
dela Cruz as the consideration of the sale of the five (5) parcels of land is
hereby directed to be returned by Emerlita dela Cruz to Atty. Diogenes
Bartolome within ten (10) days from the finality of judgment.

Further, defendant is directed to pay plaintiff the sum of P100,000.00 as

attorneys fees.

SO ORDERED.[5]

Dela Cruz and Bartolome appealed from the judgment of the trial court.

The Decision of the Appellate Court

The appellate court reversed the trial courts decision and dismissed Civil Case
No. TM-622. Dela Cruzs obligation under the Contract to Sell did not arise because
of petitioners undue failure to pay in full the agreed purchase price on the stipulated
date. Moreover, judicial action for the rescission of a contract is not necessary where
the contract provides that it may be revoked and cancelled for violation of any of its
terms and conditions. The dispositive portion of the appellate courts decision reads:

WHEREFORE, in view of all the foregoing, the appealed decision of the

Regional Trial Court is hereby REVERSED and SET ASIDE and Civil
Case No. TM-622 is, consequently, DISMISSED. Defendant is however
ordered to return to plaintiffs the amount in excess of one-half (1/2%)
percent of One Million Five Hundred Thousand (P1,500,000.00) Pesos
which was earlier paid by plaintiffs.

SO ORDERED.[6]

The appellate court likewise resolved to deny petitioners Motion for

Reconsideration for lack of merit.[7]

Hence, this petition.

Issues

Petitioners raised the following grounds for the grant of their petition:

I. The Honorable Court of Appeals erred when it failed to consider the

provisions of Republic Act 6552, otherwise known as the Maceda Law.

II. The Honorable Court of Appeals erred when it failed to consider

that Respondent Dela Cruz could not pass title over the three (3)
properties at the time she entered to a Contract to Sell as her purported
ownership was tainted with fraud, thereby justifying Petitioners
Spouses Garcia, Spouses Galvez and Arcairas suspension of payment.

III. The Honorable Court of Appeals gravely erred when it failed to

consider that Respondent Dela Cruzs rescission was done in evident
bad faith and malice on account of a second sale she entered with
Respondent Bartolome for a much bigger amount.
 IV. The Honorable Court of Appeals erred when it failed to declare
Respondent Bartolome is not an innocent purchaser for value despite
the presence of evidence as to his bad faith.[8]

The Courts Ruling

The petition has no merit.

Both parties admit the following: (1) the contract between petitioners and Dela Cruz
was a contract to sell; (2) petitioners failed to pay in full the agreed purchase price
of the subject property on the stipulated date; and (3) Dela Cruz did not want to
accept petitioners offer of payment and did not want to execute a document of
transfer in petitioners favor.

The pertinent provisions of the contract, denominated Contract to Sell, between the
parties read:
Failure on the part of the vendees to comply with the herein stipulation as
to the terms of payment shall cause the rescission of this contract and the
payments made shall be returned to the vendees subject however, to
forfeiture in favor of the Vendor equivalent to 1/2% of the total amount
paid.

xxx

It is hereby agreed and covenanted that possession shall be retained by the

VENDOR until a Deed of Absolute Sale shall be executed by her in favor
of the Vendees. Violation of this provision shall authorize/empower the
VENDOR [to] demolish any construction/improvement without need of
judicial action or court order.

That upon and after the full payment of the balance, a Deed of Absolute
Sale shall be executed by the Vendor in favor of the Vendees.
 That the duplicate original of the owners copy of the Transfer Certificate
of Title of the above subject parcels of land shall remain in the possession
of the Vendor until the execution of the Deed of Absolute Sale.[9]

Contracts are law between the parties, and they are bound by its stipulations. It is
clear from the above-quoted provisions that the parties intended their agreement to
be a Contract to Sell: Dela Cruz retains ownership of the subject lands and does not
have the obligation to execute a Deed of Absolute Sale until petitioners payment of
the full purchase price.Payment of the price is a positive suspensive condition,
failure of which is not a breach but an event that prevents the obligation of the vendor
to convey title from becoming effective. Strictly speaking, there can be no rescission
or resolution of an obligation that is still non-existent due to the non-happening of
the suspensive condition.[10] Dela Cruz is thus not obliged to execute a Deed of
Absolute Sale in petitioners favor because of petitioners failure to make full payment
on the stipulated date.

We ruled thus in Pangilinan v. Court of Appeals:[11]

Article 1592 of the New Civil Code, requiring demand by suit or by
notarial act in case the vendor of realty wants to rescind does not apply to
a contract to sell but only to contract of sale. In contracts to sell, where
ownership is retained by the seller and is not to pass until the full payment,
such payment, as we said, is a positive suspensive condition, the failure of
which is not a breach, casual or serious, but simply an event that prevented
the obligation of the vendor to convey title from acquiring binding force.
To argue that there was only a casual breach is to proceed from the
assumption that the contract is one of absolute sale, where non-payment
is a resolutory condition, which is not the case.

The applicable provision of law in instant case is Article 1191 of the New
Civil Code which provides as follows:

Art. 1191. The power to rescind obligations is implied in

reciprocal ones, in case one of the obligors should not
comply with what is incumbent upon him.

The injured party may choose between the fulfillment and

the rescission of the obligation, with 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. (1124)

Pursuant to the above, the law makes it available to the injured party
alternative remedies such as the power to rescind or enforce fulfillment of
the contract, with damages in either case if the obligor does not comply
with what is incumbent upon him. There is nothing in this law which
prohibits the parties from entering into an agreement that a violation of
the terms of the contract would cause its cancellation even without court
intervention. The rationale for the foregoing is that in contracts providing
for automatic revocation, judicial intervention is necessary not for
purposes of obtaining a judicial declaration rescinding a contract already
deemed rescinded by virtue of an agreement providing for rescission even
without judicial intervention, but in order to determine whether or not the
rescission was proper. Where such propriety is sustained, the decision of
the court will be merely declaratory of the revocation, but it is not in itself
the revocatory act. Moreover, the vendors right in contracts to sell with
reserved title to extrajudicially cancel the sale upon failure of the vendee
to pay the stipulated installments and retain the sums and installments
already received has long been recognized by the well-established
doctrine of 39 years standing. The validity of the stipulation in the contract
providing for automatic rescission upon non-payment cannot be doubted.
It is in the nature of an agreement granting a party the right to rescind a
contract unilaterally in case of breach without need of going to
court. Thus, rescission under Article 1191 was inevitable due to
petitioners failure to pay the stipulated price within the original period
fixed in the agreement.

Petitioners justify the delay in payment by stating that they had notice that Dela Cruz
is not the owner of the subject land, and that they took pains to rectify the alleged
defect in Dela Cruzs title. Be that as it may, Angel Abelidas (Abelida)
affidavit[12] confirming the sale to Dela Cruz only serves to strengthen Dela Cruzs
claim that she is the absolute owner of the subject lands at the time the Contract to
Sell between herself and petitioners was executed. Dela Cruz did not conceal from
petitioners that the title to Lot Nos. 2776, 2767 and 2769 still remained under
Abelidas name, and the Contract to Sell[13] even provided that petitioners
should shoulder the attendant expenses for the transfer of ownership from
Abelida to Dela Cruz.

The trial court erred in applying R.A. 6552,[14] or the Maceda Law, to the present
case. The Maceda Law applies to contracts of sale of real estate on installment
payments, including residential condominium apartments but excluding industrial
lots, commercial buildings and sales to tenants. The subject lands, comprising five
(5) parcels and aggregating 69,028 square meters, do not comprise residential real
estate within the contemplation of the Maceda Law.[15] Moreover, even if we apply
the Maceda Law to the present case, petitioners offer of payment to Dela Cruz was
made a year and a half after the stipulated date. This is beyond the sixty-day grace
period under Section 4 of the Maceda Law.[16] Petitioners still cannot use the second
sentence of Section 4 of the Maceda Law against Dela Cruz for Dela Cruzs alleged
failure to give an effective notice of cancellation or demand for rescission because
Dela Cruz merely sent the notice to the address supplied by petitioners in the
Contract to Sell.

It is undeniable that petitioners failed to pay the balance of the purchase price on the
stipulated date of the Contract to Sell. Thus, Dela Cruz is within her rights to sell the
subject lands to Bartolome. Neither Dela Cruz nor Bartolome can be said to be in
bad faith.

WHEREFORE, we DENY the petition. We AFFIRM in toto the Court of Appeals

Decision promulgated on 25 January 2006 as well as the Resolution promulgated on
16 March 2006 in CA-G.R. CV No. 63651.

Costs against petitioners.

SO ORDERED.
 [G.R. No. 141205. May 9, 2002]

ACTIVE REALTY & DEVELOPMENT CORPORATION, petitioner,

vs. NECITA G. DAROYA, represented by Attorney-In-Fact Shirley
Daroya-Quinones, respondents.

DECISION
PUNO, J.:

This is a petition for review on certiorari under Rule 45 of the Revised Rules of
Court which seeks to reverse and set aside the Resolution of the Court of Appeals, dated
August 3, 1999, denying due course to petitioners appeal for insufficiency of form and
substance.
Petitioner ACTIVE REALTY & DEVELOPMENT CORPORATION is the owner
and developer of Town & Country Hills Executive Village in Antipolo, Rizal. On
January 2, 1985, it entered into a Contract to Sell[1] with respondent NECITA
DAROYA, a contract worker in the Middle East, whereby the latter agreed to buy a 515
sq. m. lot for P224,025.00 in petitioners subdivision.
The contract to sell stipulated that the respondent shall pay the initial amount
of P53,766.00 upon execution of the contract and the balance of P170,259.00 in sixty
(60) monthly installments of P4,893.35.Adding the down payment and installment
payments, it would appear that the total amount is P346,367.00, a figure higher than
that stated as the contract price.
On May 5, 1989, petitioner accepted respondents amortization in the amount
of P40,000.00. By August 8, 1989, respondent was in default of P15,282.85
representing three (3) monthly amortizations.Petitioner sent respondent a notice
of cancellation[2] of their contract to sell, to take effect thirty (30) days from receipt
of the letter. It does not appear from the records, however, when respondent received
the letter. Nonetheless, when respondent offered to pay for the balance of the contract
price, petitioner refused as it has allegedly sold the lot to another buyer.
On August 26, 1991, respondent filed a complaint for specific performance and
damages[3] against petitioner before the Arbitration Branch of the Housing and Land
Use Regulatory Board (HLURB). It sought to compel the petitioner to execute a final
Deed of Absolute Sale in respondents favor after she pays any balance that may still be
due from her. Respondent claimed that she is entitled to the final deed of sale after she
offered to pay the balance of P24,048.47, considering that she has already paid the
total sum of P314,816.76, which amount is P90,835.76 more than the total contract
price of P224,025.00.
On June 14, 1993, HLURB Arbiter Alfredo M. Tan II found for the respondent. He
ruled that the cancellation of the contract to sell was void as petitioner failed to pay the
cash surrender value to respondent as mandated by law. However, as the subject lot was
already sold to a third party and the respondent had agreed to a full refund of her
installment payments, petitioner was ordered to refund to respondent all her
payments in the amount of P314,816.70, with 12% interest per annum from
August 26, 1991 (the date of the filing of the complaint) until fully paid and to
pay P10,000.00 as attorneys fees.[4]
On appeal, the HLURB Board of Commissioners set aside the Arbiters
Decision. The Board refused to apply the remedies provided under the Maceda Law
and instead deemed it fit to formulate an equitable solution to the case. It ruled that, as
both parties were at fault, i.e., respondent incurred in delay in her installment payments
and respondent failed to send a notarized notice of cancellation, petitioner was
ordered to refund to the respondent one half of the total amount she has paid
or P157,408.35, which was allegedly akin to the remedy provided under the Maceda
Law.[5]
Respondent appealed to the Office of the President. On June 2, 1998, then Chief
Presidential Counsel Renato C. Corona, acting by authority of the President, modified
the Decision of the HLURB as he found that it was not in accord with the provisions
of the Maceda Law. He held that as petitioner did not comply with the legal requisites
for a valid cancellation of the contract, the contract to sell between the parties subsisted
and concluded that respondent was entitled to the lot after payment of her outstanding
balance. However, as the petitioner disclosed that the lot was already sold to another
person and that the actual value of the lot as of the date of the contract was P1,700.00
per square meter, petitioner was ordered to refund to the respondent the amount
of P875,000.00, the true and actual value of the lot as of the date of the contract,
with interest at 12% per annum computed from August 26, 1991 until fully paid,
or to deliver a substitute lot at the choice of respondent.[6]
Upon denial of its motion for reconsideration, petitioner assailed the Decision in
the Court of Appeals. However, its petition for review[7] was denied due course for
insufficiency in form and substance,[8]because: 1) no affidavit of service was attached
to the petition; 2) except for certified true copies of the decision and resolution of the
Office of the President, no other material portions of the record, as would support the
allegations in the petition, were attached; and, 3) the certification of forum-shopping
was signed by the head counsel and vice-president of the petitioner corporation who
was not authorized by a Board Resolution to represent petitioner.
Petitioner moved for reconsideration. The Court of Appeals denied it on an entirely
new ground, i.e., for untimely filing of the petition for review.[9]
Petitioner now impugns the decision of the Court of Appeals and raises the
following procedural issues:
I

THE HONORABLE COURT OF APPEALS GROSSLY ERRED IN RELYING

TOO MUCH ON FORM RATHER THAN ON THE MERITS OF THE PETITION
THEREBY DENYING PETITIONER OF ITS RIGHT TO DUE PROCESS.
II

THE HONORABLE COURT OF APPEALS ANCHORED THE DENIAL OF

PETITIONERS MOTION FOR RECONSIDERATION ON INCONSISTENT AND
CONFLICTING RULINGS NOT BORNE BY THE FACTS AND THE RECORDS
OF THE CASE.

On the procedural points raised, we find for the petitioner.

Our perusal of the record reveals that petitioner substantially complied with the
formal requirements of Rule 43 of the Rules of Court. [10] First, as to the non-
attachment of the affidavit of service, the records bear that the petition was
accompanied by the original registry receipts issued by the post office, showing that the
petition and its annexes were served upon the parties. Moreover, respondents counsel
of record, Atty. Sergio Guadiz, actually received a copy of the petition. [11] Second,
petitioner likewise complied with Section 6 (c) of Rule 43 requiring the submission of
copies of the award, judgment, final order and resolution appealed from. Its petition
was accompanied by the duplicate original of the appealed Decision of the Chief
Presidential Legal Counsel and his Resolution denying petitioners motion for
reconsideration, the Decision of the HLURB Board of Commissioners and that of the
HLURB arbiter. A perusal of these documents will reveal that they contained all the
relevant facts of the case from which the appellate body can form its own decision. Its
failure to submit the other documents, like the Complaint, Answer, Position Papers and
Appeal Memoranda of the parties before the HLURB, was due to the refusal of the
Office of the President to give them a certified true copy of these documents which
were submitted with said Office. Third, as to the lack of Board Resolution by petitioner
corporation authorizing Atty. Rene Katigbak, its Chief Legal Counsel and Vice-
President for Legal Affairs, to represent it in the filing of the appeal, petitioner admits
that this was due to its honest belief that such authority is not required as it was not
mentioned in Section 6(c) of Rule 43.[12] To make up for such omission, petitioner
submitted a Secretarys Certificate[13] confirming and ratifying the authority of Atty.
Katigbak to represent petitioner. Finally, we find that the Court of Appeals erred in
denying petitioners motion for reconsideration due to untimely filing as the records
clearly show that it was filed on June 25, 1999, a day before the expiration of the period
to appeal granted by the Court of Appeals.[14]
In denying due course to the petition, the appellate court gave premium to form and
failed to consider the important rights of the parties in the case at bar. [15] At the very
least, petitioner substantially complied with the procedural requirements for appeal,
hence, it is best to give due course to the petition at bar to clarify the rights and duties
of a buyer in contracts to sell real estate on installment basis.
The issue to be resolved is whether or not the petitioner can be compelled to refund
to the respondent the value of the lot or to deliver a substitute lot at respondents option.
We find for the respondent and rule in the affirmative.
The contract to sell in the case at bar is governed by Republic Act No. 6552 -- The
Realty Installment Buyer Protection Act, or more popularly known as the Maceda Law
-- which came into effect in September 1972. Its declared public policy is to protect
buyers of real estate on installment basis against onerous and oppressive
conditions.[16] The law seeks to address the acute housing shortage problem in our
country that has prompted thousands of middle and lower class buyers of houses, lots
and condominium units to enter into all sorts of contracts with private housing
developers involving installment schemes. Lot buyers, mostly low income earners
eager to acquire a lot upon which to build their homes, readily affix their signatures on
these contracts, without an opportunity to question the onerous provisions therein as the
contract is offered to them on a take it or leave it basis. [17] Most of these contracts of
adhesion, drawn exclusively by the developers, entrap innocent buyers by requiring
cash deposits for reservation agreements which oftentimes include, in fine print,
onerous default clauses where all the installment payments made will be forfeited upon
failure to pay any installment due even if the buyers had made payments for several
years.[18] Real estate developers thus enjoy an unnecessary advantage over lot buyers
who they often exploit with iniquitous results. They get to forfeit all the installment
payments of defaulting buyers and resell the same lot to another buyer with the same
exigent conditions. To help especially the low income lot buyers, the legislature enacted
R.A. No. 6552 delineating the rights and remedies of lot buyers and protect them from
one-sided and pernicious contract stipulations.
More specifically, Section 3 of R.A. No. 6552 provided for the rights of the buyer
in case of default in the payment of succeeding installments, where he has already paid
at least two (2) years of installments, thus:
 (a) To pay, without additional interest, the unpaid installments due within the
total grace period earned by him, which is hereby fixed at the rate of one month
grace period for every one year of installment payments made; x x x

(b) If the contract is cancelled, the seller shall refund to the buyer the cash
surrender value of the payments on the property equivalent to fifty per cent of the
total payments made; provided, that the actual cancellation of the contract shall
take place after thirty days from receipt by the buyer of the notice of
cancellation or the demand for rescission of the contract by a notarial act
and upon full payment of the cash surrender value to the buyer.

In this case, respondent has already paid in four (4) years a total of P314,860.76
or P90,835.76 more than the contract price of P224,035.00. In April 1989, petitioner
decided to cancel the contract when the respondent incurred in delay in the payment
of P15,282.85, representing three (3) monthly amortizations. Petitioner refused to
accept respondents subsequent tender of payment of the outstanding balance alleging
that it has already cancelled the contract and sold the subject lot to another
buyer. However, the records clearly show that the petitioner failed to comply with
the mandatory twin requirements for a valid and effective cancellation under the
law,[19] i.e., he failed to send a notarized notice of cancellation and refund the cash
surrender value. At no time, from the date it gave a notice of cancellation up to the time
immediately before the respondent filed the case against petitioner, did the latter exert
effort to pay the cash surrender value. In fact, the records disclose that it was only during
the preliminary hearing of the case before the HLURB arbiter when petitioner offered
to pay the cash surrender value. Petitioner justifies its inaction on the ground that the
respondent was always out of the country. Even then, the records are bereft of evidence
to show that petitioner attempted to pay the cash surrender value to respondent through
her last known address. The omission is surprising considering that even during the
times respondent was out of the country, petitioner has been sending her written notices
to remind her to pay her installment arrears through her last known address. Clearly,
had respondent not filed a case demanding a final deed of sale in her favor, petitioner
would not have lifted a finger to give respondent what was due her actual payment of
the cash surrender value, among others.In disregard of basic equitable principles,
petitioners stance would enable it to resell the property, keep respondents installment
payments, not to mention the cash surrender value which it was obligated to
return. The Layug[20] case cited by petitioner is inapropos. In Layug, the lot buyer did
not pay for the outstanding balance of his account and the Court found that notarial
rescission or cancellation was no longer necessary as the seller has already filed in court
a case for rescission of the contract to sell. In the case at bar, respondent offered to pay
for her outstanding balance of the contract price but respondent refused to accept
it. Neither did petitioner adduce proof that the respondents offer to pay was made after
the effectivity date stated in its notice of cancellation. Moreover, there was no formal
notice of cancellation or court action to rescind the contract. Given the circumstances,
we find it illegal and iniquitous that petitioner, without complying with the mandatory
legal requirements for canceling the contract, forfeited both respondents land and hard-
earned money after she has paid for, not just the contract price, but more than the
consideration stated in the contract to sell.
Thus, for failure to cancel the contract in accordance with the procedure
provided by law, we hold that the contract to sell between the parties remains valid
and subsisting. Following Section 3(a) of R.A. No. 6552, respondent has the right
to offer to pay for the balance of the purchase price, without interest, which she
did in this case. Ordinarily, petitioner would have had no other recourse but to accept
payment. However, respondent can no longer exercise this right as the subject lot was
already sold by the petitioner to another buyer which lot, as admitted by the petitioner,
was valued at P1,700.00 per square meter. As respondent lost her chance to pay for the
balance of the P875,000.00 lot, it is only just and equitable that the petitioner be ordered
to refund to respondent the actual value of the lot resold, i.e., P875,000.00, with 12%
interest per annum computed from August 26, 1991 until fully paid or to deliver a
substitute lot at the option of the respondent.
On a final note, it would not be amiss to stress that the HLURB Board Decision
ordering petitioner to refund to respondent one half of her total payments is not an
equitable solution as it punished the respondent for her delinquent payments but totally
disregarded petitioners failure to comply with the mandatory requisites for a valid
cancellation of the contract to sell. The Board failed to consider that the Maceda law
was enacted to remedy the plight of low and middle-income lot buyers, save them
from the exacting default clauses in real estate sales and assure them of a home they
can call their own.Neither would the Decision of the HLURB Arbiter ordering a full
refund of the installment payments of respondent in the amount of P314,816.70 be
justified as, under the law, respondent is entitled to the lot she purchased after payment
of her outstanding balance which she was ready and willing to do. Thus, to penalize the
petitioner for failing in its obligation to deliver the subject lot and to give the respondent
what is rightly hers, the petitioner was correctly ordered to refund to the respondent the
actual value of the land (P875,000.00) she lost to another buyer, plus interest at the rate
of 12% per annum from August 26, 1991 until fully paid or to deliver a substitute lot at
the choice of the respondent.
IN VIEW WHEREOF, the Decision of then Chief Presidential Legal Assistant
Renato Corona, Office of the President, dated June 2, 1998, is AFFIRMED in
toto. Costs against petitioner.
SO ORDERED.
G.R. No. 147695 September 13, 2007

MANUEL C. PAGTALUNAN, petitioner,

vs.
RUFINA DELA CRUZ VDA. DE MANZANO, respondent.

DECISION

AZCUNA, J.:

This is a petition for review on certiorari under Rule 45 of the Rules of Court of the Court of Appeals’
(CA) Decision promulgated on October 30, 2000 and its Resolution dated March 23, 2001 denying
petitioner’s motion for reconsideration. The Decision of the CA affirmed the Decision of the Regional
Trial Court (RTC) of Malolos, Bulacan, dated June 25, 1999 dismissing the case of unlawful detainer
for lack of merit.

The facts are as follows:

On July 19, 1974, Patricio Pagtalunan (Patricio), petitioner’s stepfather and predecessor-in-interest,
entered into a Contract to Sell with respondent, wife of Patricio’s former mechanic, Teodoro
Manzano, whereby the former agreed to sell, and the latter to buy, a house and lot which formed half
of a parcel of land, covered by Transfer Certificate of Title (TCT) No. T-10029 (now TCT No.
RT59929 [T-254773]), with an area of 236 square meters. The consideration of P17,800 was agreed
to be paid in the following manner: P1,500 as downpayment upon execution of the Contract to Sell,
and the balance to be paid in equal monthly installments of P150 on or before the last day of each
month until fully paid.

It was also stipulated in the contract that respondent could immediately occupy the house and lot;
that in case of default in the payment of any of the installments for 90 days after its due date, the
contract would be automatically rescinded without need of judicial declaration, and that all payments
made and all improvements done on the premises by respondent would be considered as rentals for
the use and occupation of the property or payment for damages suffered, and respondent was
obliged to peacefully vacate the premises and deliver the possession thereof to the vendor.

Petitioner claimed that respondent paid only P12,950. She allegedly stopped paying after December
1979 without any justification or explanation. Moreover, in a "Kasunduan"1 dated November 18,
1979, respondent borrowed P3,000 from Patricio payable in one year either in one lump sum
payment or by installments, failing which the balance of the loan would be added to the principal
subject of the monthly amortizations on the land.

Lastly, petitioner asserted that when respondent ceased paying her installments, her status of buyer
was automatically transformed to that of a lessee. Therefore, she continued to possess the property
by mere tolerance of Patricio and, subsequently, of petitioner.

On the other hand, respondent alleged that she paid her monthly installments religiously, until
sometime in 1980 when Patricio changed his mind and offered to refund all her payments provided
she would surrender the house. She refused. Patricio then started harassing her and began
demolishing the house portion by portion. Respondent admitted that she failed to pay some
installments after December 1979, but that she resumed paying in 1980 until her balance dwindled
to P5,650. She claimed that despite several months of delay in payment, Patricio never sued for
ejectment and even accepted her late payments.

Respondent also averred that on September 14, 1981, she and Patricio signed an agreement (Exh.
2) whereby he consented to the suspension of respondent’s monthly payments until December
1981. However, even before the lapse of said period, Patricio resumed demolishing respondent’s
house, prompting her to lodge a complaint with the Barangay Captain who advised her that she
could continue suspending payment even beyond December 31, 1981 until Patricio returned all the
materials he took from her house. This Patricio failed to do until his death.

Respondent did not deny that she still owed Patricio P5,650, but claimed that she did not resume
paying her monthly installment because of the unlawful acts committed by Patricio, as well as the
filing of the ejectment case against her. She denied having any knowledge of the Kasunduan of
November 18, 1979.

Patricio and his wife died on September 17, 1992 and on October 17, 1994, respectively. Petitioner
became their sole successor-in-interest pursuant to a waiver by the other heirs. On March 5, 1997,
respondent received a letter from petitioner’s counsel dated February 24, 1997 demanding that she
vacate the premises within five days on the ground that her possession had become unlawful.
Respondent ignored the demand. The Punong Barangay failed to settle the dispute amicably.

On April 8, 1997, petitioner filed a Complaint for unlawful detainer against respondent with the
Municipal Trial Court (MTC) of Guiguinto, Bulacan praying that, after hearing, judgment be rendered
ordering respondent to immediately vacate the subject property and surrender it to petitioner;
forfeiting the amount of P12,950 in favor of petitioner as rentals; ordering respondent to pay
petitioner the amount of P3,000 under the Kasunduan and the amount of P500 per month from
January 1980 until she vacates the property, and to pay petitioner attorney’s fees and the costs.

On December 22, 1998, the MTC rendered a decision in favor of petitioner. It stated that although
the Contract to Sell provides for a rescission of the agreement upon failure of the vendee to pay any
installment, what the contract actually allows is properly termed a resolution under Art. 1191 of the
Civil Code.

The MTC held that respondent’s failure to pay not a few installments caused the resolution or
termination of the Contract to Sell. The last payment made by respondent was on January 9, 1980
(Exh. 71). Thereafter, respondent’s right of possession ipso facto ceased to be a legal right, and
became possession by mere tolerance of Patricio and his successors-in-interest. Said tolerance
ceased upon demand on respondent to vacate the property.

The dispositive portion of the MTC Decision reads:

Wherefore, all the foregoing considered, judgment is hereby rendered, ordering the
defendant:

a. to vacate the property covered by Transfer Certificate of Title No. T-10029 of the
Register of Deeds of Bulacan (now TCT No. RT-59929 of the Register of Deeds of
Bulacan), and to surrender possession thereof to the plaintiff;

b. to pay the plaintiff the amount of P113,500 representing rentals from January 1980
to the present;
 c. to pay the plaintiff such amount of rentals, at P500/month, that may become due
after the date of judgment, until she finally vacates the subject property;

d. to pay to the plaintiff the amount of P25,000 as attorney’s fees.

SO ORDERED.2

On appeal, the RTC of Malolos, Bulacan, in a Decision dated June 25, 1999, reversed the decision
of the MTC and dismissed the case for lack of merit. According to the RTC, the agreement could not
be automatically rescinded since there was delivery to the buyer. A judicial determination of
rescission must be secured by petitioner as a condition precedent to convert the possession de
facto of respondent from lawful to unlawful.

The dispositive portion of the RTC Decision states:

WHEREFORE, judgment is hereby rendered reversing the decision of the Municipal Trial
Court of Guiguinto, Bulacan and the ejectment case instead be dismissed for lack of merit.3

The motion for reconsideration and motion for execution filed by petitioner were denied by the RTC
for lack of merit in an Order dated August 10, 1999.

Thereafter, petitioner filed a petition for review with the CA.

In a Decision promulgated on October 30, 2000, the CA denied the petition and affirmed the
Decision of the RTC. The dispositive portion of the Decision reads:

WHEREFORE, the petition for review on certiorari is Denied. The assailed Decision of the
Regional Trial Court of Malolos, Bulacan dated 25 June 1999 and its Order dated 10 August
1999 are hereby AFFIRMED.

SO ORDERED. 4

The CA found that the parties, as well as the MTC and RTC failed to advert to and to apply Republic
Act (R.A.) No. 6552, more commonly referred to as the Maceda Law, which is a special law enacted
in 1972 to protect buyers of real estate on installment payments against onerous and oppressive
conditions.

The CA held that the Contract to Sell was not validly cancelled or rescinded under Sec. 3 (b) of R.A.
No. 6552, and recognized respondent’s right to continue occupying unmolested the property subject
of the contract to sell.

The CA denied petitioner’s motion for reconsideration in a Resolution dated March 23, 2001.

Hence, this petition for review on certiorari.

Petitioner contends that:

A. Respondent Dela Cruz must bear the consequences of her deliberate withholding of, and
refusal to pay, the monthly payment. The Court of Appeals erred in allowing Dela Cruz who
acted in bad faith from benefiting under the Maceda Law.
 B. The Court of Appeals erred in resolving the issue on the applicability of the Maceda Law,
which issue was not raised in the proceedings a quo.

C. Assuming arguendo that the RTC was correct in ruling that the MTC has no jurisdiction
over a rescission case, the Court of Appeals erred in not remanding the case to the RTC for
trial.5

Petitioner submits that the Maceda Law supports and recognizes the right of vendors of real estate
to cancel the sale outside of court, without need for a judicial declaration of rescission, citing Luzon
Brokerage Co., Inc., v. Maritime Building Co., Inc.6

Petitioner contends that respondent also had more than the grace periods provided under the
Maceda Law within which to pay. Under Sec. 37 of the said law, a buyer who has paid at least two
years of installments has a grace period of one month for every year of installment paid. Based on
the amount of P12,950 which respondent had already paid, she is entitled to a grace period of six
months within which to pay her unpaid installments after December, 1979. Respondent was given
more than six months from January 1980 within which to settle her unpaid installments, but she
failed to do so. Petitioner’s demand to vacate was sent to respondent in February 1997.

There is nothing in the Maceda Law, petitioner asserts, which gives the buyer a right to pay
arrearages after the grace periods have lapsed, in the event of an invalid demand for rescission. The
Maceda Law only provides that actual cancellation shall take place after 30 days from receipt of the
notice of cancellation or demand for rescission and upon full payment of the cash surrender value to
the buyer.

Petitioner contends that his demand letter dated February 24, 1997 should be considered the notice
of cancellation since the demand letter informed respondent that she had "long ceased to have any
right to possess the premises in question due to [her] failure to pay without justifiable cause." In
support of his contention, he cited Layug v. Intermediate Appellate Court8 which held that "the
additional formality of a demand on [the seller’s] part for rescission by notarial act would appear, in
the premises, to be merely circuitous and consequently superfluous." He stated that in Layug, the
seller already made a written demand upon the buyer.

In addition, petitioner asserts that whatever cash surrender value respondent is entitled to have been
applied and must be applied to rentals for her use of the house and lot after December, 1979 or after
she stopped payment of her installments.

Petitioner argues that assuming Patricio accepted respondent’s delayed installments in 1981, such
act cannot prevent the cancellation of the Contract to Sell. Installments after 1981 were still unpaid
and the applicable grace periods under the Maceda Law on the unpaid installments have long
lapsed. Respondent cannot be allowed to hide behind the Maceda Law. She acted with bad faith
and must bear the consequences of her deliberate withholding of and refusal to make the monthly
payments.

Petitioner also contends that the applicability of the Maceda Law was never raised in the
proceedings below; hence, it should not have been applied by the CA in resolving the case.

The Court is not persuaded.

The CA correctly ruled that R.A No. 6552, which governs sales of real estate on installment, is
applicable in the resolution of this case.
This case originated as an action for unlawful detainer. Respondent is alleged to be illegally
withholding possession of the subject property after the termination of the Contract to Sell between
Patricio and respondent. It is, therefore, incumbent upon petitioner to prove that the Contract to Sell
had been cancelled in accordance with R.A. No. 6552.

The pertinent provision of R.A. No. 6552 reads:

Sec. 3. In all transactions or contracts involving the sale or financing of real estate on
installment payments, including residential condominium apartments but excluding industrial
lots, commercial buildings and sales to tenants under Republic Act Numbered Thirty-eight
hundred forty-four as amended by Republic Act Numbered Sixty-three hundred eighty-nine,
where the buyer has paid at least two years of installments, the buyer is entitled to the
following rights in case he defaults in the payment of succeeding installments:

(a) To pay, without additional interest, the unpaid installments due within the total grace
period earned by him, which is hereby fixed at the rate of one month grace period for every
one year of installment payments made: Provided, That this right shall be exercised by the
buyer only once in every five years of the life of the contract and its extensions, if any.

(b) If the contract is cancelled, the seller shall refund to the buyer the cash surrender
value of the payments on the property equivalent to fifty percent of the total payments
made and, after five years of installments, an additional five percent every year but not to
exceed ninety percent of the total payments made: Provided, That the actual cancellation
of the contract shall take place after thirty days from receipt by the buyer of the notice
of cancellation or the demand for rescission of the contract by a notarial act and upon
full payment of the cash surrender value to the buyer.9

R.A. No. 6552, otherwise known as the "Realty Installment Buyer Protection Act," recognizes in
conditional sales of all kinds of real estate (industrial, commercial, residential) the right of the seller
to cancel the contract upon non-payment of an installment by the buyer, which is simply an event
that prevents the obligation of the vendor to convey title from acquiring binding force.10 The Court
agrees with petitioner that the cancellation of the Contract to Sell may be done outside the court
particularly when the buyer agrees to such cancellation.

However, the cancellation of the contract by the seller must be in accordance with Sec. 3 (b) of R.A.
No. 6552, which requires a notarial act of rescission and the refund to the buyer of the full payment
of the cash surrender value of the payments on the property. Actual cancellation of the contract
takes place after 30 days from receipt by the buyer of the notice of cancellation or the demand for
rescission of the contract by a notarial act and upon full payment of the cash surrender value to the
buyer.

Based on the records of the case, the Contract to Sell was not validly cancelled or rescinded under
Sec. 3 (b) of R.A. No. 6552.

First, Patricio, the vendor in the Contract to Sell, died on September 17, 1992 without canceling the
Contract to Sell.

Second, petitioner also failed to cancel the Contract to Sell in accordance with law.

Petitioner contends that he has complied with the requirements of cancellation under Sec. 3 (b) of
R.A. No. 6552. He asserts that his demand letter dated February 24, 1997 should be considered as
the notice of cancellation or demand for rescission by notarial act and that the cash surrender value
of the payments on the property has been applied to rentals for the use of the house and lot after
respondent stopped payment after January 1980.

The Court, however, finds that the letter11 dated February 24, 1997, which was written by petitioner’s
counsel, merely made formal demand upon respondent to vacate the premises in question within
five days from receipt thereof since she had "long ceased to have any right to possess the premises
x x x due to [her] failure to pay without justifiable cause the installment payments x x x."

Clearly, the demand letter is not the same as the notice of cancellation or demand for rescission by
a notarial actrequired by R.A No. 6552. Petitioner cannot rely on Layug v. Intermediate Appellate
Court12 to support his contention that the demand letter was sufficient compliance. Layug held that
"the additional formality of a demand on [the seller’s] part for rescission by notarial act would appear,
in the premises, to be merely circuitous and consequently superfluous" since the seller therein filed
an action for annulment of contract, which is a kindred concept of rescission by notarial
act.13 Evidently, the case of unlawful detainer filed by petitioner does not exempt him from complying
with the said requirement.

In addition, Sec. 3 (b) of R.A. No. 6552 requires refund of the cash surrender value of the payments
on the property to the buyer before cancellation of the contract. The provision does not provide a
different requirement for contracts to sell which allow possession of the property by the buyer upon
execution of the contract like the instant case. Hence, petitioner cannot insist on compliance with the
requirement by assuming that the cash surrender value payable to the buyer had been applied to
rentals of the property after respondent failed to pay the installments due.

There being no valid cancellation of the Contract to Sell, the CA correctly recognized respondent’s
right to continue occupying the property subject of the Contract to Sell and affirmed the dismissal of
the unlawful detainer case by the RTC.

The Court notes that this case has been pending for more than ten years. Both parties prayed for
other reliefs that are just and equitable under the premises. Hence, the rights of the parties over the
subject property shall be resolved to finally dispose of that issue in this case.

Considering that the Contract to Sell was not cancelled by the vendor, Patricio, during his lifetime or
by petitioner in accordance with R.A. No. 6552 when petitioner filed this case of unlawful detainer
after 22 years of continuous possession of the property by respondent who has paid the substantial
amount of P12,300 out of the purchase price of P17,800, the Court agrees with the CA that it is only
right and just to allow respondent to pay her arrears and settle the balance of the purchase price.

For respondent’s delay in the payment of the installments, the Court, in its discretion, and applying
Article 220914 of the Civil Code, may award interest at the rate of 6% per annum15 on the unpaid
balance considering that there is no stipulation in the Contract to Sell for such interest. For purposes
of computing the legal interest, the reckoning period should be the filing of the complaint for unlawful
detainer on April 8, 1997.

Based on respondent’s evidence16 of payments made, the MTC found that respondent paid a total
of P12,300 out of the purchase price of P17,800. Hence, respondent still has a balance of P5,500,
plus legal interest at the rate of 6% per annum on the unpaid balance starting April 8, 1997.

The third issue is disregarded since petitioner assails an inexistent ruling of the RTC on the lack of
jurisdiction of the MTC over a rescission case when the instant case he filed is for unlawful detainer.
WHEREFORE, the Decision of the Court of Appeals dated October 30, 2000 sustaining the
dismissal of the unlawful detainer case by the RTC is AFFIRMED with the
following MODIFICATIONS:

1. Respondent Rufina Dela Cruz Vda. de Manzano shall pay petitioner Manuel C.
Pagtalunan the balance of the purchase price in the amount of Five Thousand Five Hundred
Pesos (P5,500) plus interest at 6% per annum from April 8, 1997 up to the finality of this
judgment, and thereafter, at the rate of 12% per annum;

2. Upon payment, petitioner Manuel C. Pagtalunan shall execute a Deed of Absolute Sale of
the subject property and deliver the certificate of title in favor of respondent Rufina Dela Cruz
Vda. de Manzano; and

3. In case of failure to pay within 60 days from finality of this Decision, respondent Rufina
Dela Cruz Vda. de Manzano shall immediately vacate the premises without need of further
demand, and the downpayment and installment payments of P12,300 paid by her shall
constitute rental for the subject property.

No costs.

SO ORDERED.

G.R. No. 195619 September 5, 2012

PLANTERS DEVELOPMENT BANK, Petitioner,

vs.
JULIE CHANDUMAL, Respondent.

DECISION

REYES, J.:

In this petition for review under Rule 45 of the Rules of Court, Planters Development Bank (PDB)
questions the Decision1 dated July 27, 2010 of the Court of Appeals (CA), as well as its
Resolution2 dated February 16, 2011, denying the petitioner's motion for reconsideration in CA-G.R.
CV No. 82861. The assailed decision nullified the Decision3 dated May 31, 2004 of the Regional Trial
Court (RTC), Las Piñas City, Branch 255 in Civil Case No. LP-99-0137.

Antecedent Facts

The instant case stemmed from a contract to sell a parcel of land, together with improvements,
between BF Homes, Inc. (BF Homes) and herein respondent Julie Chandumal (Chandumal). The
property subject of the contract is located in Talon Dos, Las Piñas City and covered by Transfer
Certificate of Title No. T-10779. On February 12, 1993, BF Homes sold to PDB all its rights,
participations and interests over the contract.
Chandumal paid her monthly amortizations from December 1990 until May 1994 when she began to
default in her payments. In a Notice of Delinquency and Rescission of Contract with Demand to
Vacate4 dated July 14, 1998, PDB gave Chandumal a period of thirty (30) days from receipt within
which to settle her installment arrearages together with all its increments; otherwise, all her rights
under the contract shall be deemed extinguished and terminated and the contract declared as
rescinded. Despite demand, Chandumal still failed to settle her obligation.

On June 18, 1999, an action for judicial confirmation of notarial rescission and delivery of possession
was filed by PDB against Chandumal, docketed as Civil Case No. LP-99-0137. PDB alleged that
despite demand, Chandumal failed and/or refused to pay the amortizations as they fell due; hence, it
caused the rescission of the contract by means of notarial act, as provided in Republic Act (R.A.) No.
6552.5 According to PDB, it tried to deliver the cash surrender value of the subject property, as
required under R.A. No. 6552, in the amount of ₱ 10,000.00; however, the defendant was
unavailable for such purpose.6

Consequently, summons was issued and served by deputy sheriff Roberto T. Galing (Sheriff Galing).
According to his return, Sheriff Galing attempted to personally serve the summons upon Chandumal
on July 15, 19 and 22, 1999 but it was unavailing as she was always out of the house on said dates.
Hence, the sheriff caused substituted service of summons on August 5, 1999 by serving the same
through Chandumal’s mother who acknowledged receipt thereof.7

For her failure to file an answer within the prescribed period, PDB filed on April 24, 2000 an ex parte
motion to declare Chandumal in default. On January 12, 2001, the RTC issued an Order granting the
motion of PDB.8

On February 23, 2001, Chandumal filed an Urgent Motion to Set Aside Order of Default and to Admit
Attached Answer. She maintained that she did not receive the summons and/or was not notified of
the same. She further alleged that her failure to file an answer within the reglementary period was
due to fraud, mistake or excusable negligence. In her answer, Chandumal alleged the following
defenses: (a) contrary to the position of PDB, the latter did not make any demand for her to pay the
unpaid monthly amortization; and (b) PDB did not tender or offer to give the cash surrender value of
the property in an amount equivalent to fifty percent (50%) of the actual total payment made, as
provided for under Section 3(b) of R.A. No. 6552. Moreover, Chandumal claimed that since the total
payment she made amounts to ₱ 782,000.00, the corresponding cash surrender value due her
should be ₱ 391,000.00.9

Per Order10 dated August 2, 2001, the RTC denied Chandumal’s motion to set aside the order of
default. Her motion for reconsideration was also denied for lack of merit.11 Conformably, the RTC
allowed PDB to present its evidence ex parte.12 On May 31, 2004, the RTC rendered a

Decision13 in favor of PDB, the dispositive portion of which reads:

WHEREFORE, the foregoing considered, judgment is hereby rendered in favor of the plaintiff
Planters Development Bank and against defendant Julie Chandumal as follows, to wit:

1. Declaring the notarial rescission of the Contract to Sell dated 03 January 1990 made by the
plaintiff per the Notice of Delinquency and Rescission of Contract with Demand to Vacate dated 14
July 1998 as judicially confirmed and ratified;

2. Requiring the plaintiff to deposit in the name of the defendant the amount of ₱ 10,000.00
representing the cash surrender value for the subject property with the Land Bank of the Philippines,
Las Pi[ñ]as City Branch in satisfaction of the provisions of R.A. No. 6552; and,
3. Ordering the defendant to pay the plaintiff the amount of ₱ 50,000.00 as and by way of attorney’s
fees, including the costs of suit.

SO ORDERED.14

From the foregoing judgment, Chandumal appealed to the CA.

On July 27, 2010, the CA, without ruling on the propriety of the judicial confirmation of the notarial
rescission, rendered the assailed decision nullifying the RTC decision due to invalid and ineffective
substituted service of summons. The dispositive portion of the CA decision provides:

WHEREFORE, premises considered, the decision of Branch 255 of the Regional Trial Court of Las
Piñas City, dated May 31, 2004, in Civil Case No. LP-99-0137 is hereby NULLIFIED and VACATED.

SO ORDERED.15

PDB filed a motion for reconsideration but it was denied by the CA in its Resolution dated February
16, 2011.

Hence, this petition based on the following assignment of errors:

The Honorable Court of Appeals erred in reversing the decision of the trial court on the ground of
improper service of summons;

II

The decision of the trial court is valid as it duly acquired jurisdiction over the person of respondent
Chandumal through voluntary appearance; and

III

The trial court did not err in confirming and ratifying the notarial rescission of the subject contract to
sell.16

PDB contends that the RTC properly acquired jurisdiction over the person of Chandumal. According
1âw phi 1

to PDB, there was proper service of summons since the sheriff complied with the proper procedure
governing substituted service of summons as laid down in Section 7, Rule 14 of the Rules of Court.
PDB alleges that it is clear from the sheriff’s return that there were several attempts on at least three
(3) different dates to effect personal service within a reasonable period of nearly a month, before he
caused substituted service of summons. The sheriff likewise stated the reason for his failure to effect
personal service and that on his fourth attempt, he effected the service of summons through
Chandumal’s mother who is unarguably, a person of legal age and with sufficient discretion. PDB
also argues that Chandumal voluntarily submitted herself to the jurisdiction of the court when she
filed an Urgent Motion to Set Aside Order of Default and to Admit Attached Answer.

For her part, Chandumal asserts that she never received a copy of the summons or was ever
notified of it and she only came to know of the case sometime in July or August 2000, but she was
already in the United States of America by that time, and that the CA correctly ruled that there was
no valid service of summons; hence, the RTC never acquired jurisdiction over her person.
 Issues

1. Whether there was a valid substituted service of summons;

2. Whether Chandumal voluntarily submitted to the jurisdiction of the trial court; and

3. Whether there was proper rescission by notarial act of the contract to sell.

Our Ruling

The fundamental rule is that jurisdiction over a defendant in a civil case is acquired either through
service of summons or through voluntary appearance in court and submission to its authority. If a
defendant has not been properly summoned, the court acquires no jurisdiction over its person, and a
judgment rendered against it is null and void.17

Where the action is in personam18 and the defendant is in the Philippines, service of summons may
be made through personal service, that is, summons shall be served by handing to the defendant in
person a copy thereof, or if he refuses to receive and sign for it, by tendering it to him.19 If the
defendant cannot be personally served with summons within a reasonable time, it is then that
substituted service may be made.20 Personal service of summons should and always be the first
option, and it is only when the said summons cannot be served within a reasonable time can the
process server resort to substituted service.21

No valid substituted service of

summons

In this case, the sheriff resorted to substituted service of summons due to his failure to serve it
personally. In Manotoc v. Court of Appeals,22 the Court detailed the requisites for a valid substituted
service of summons, summed up as follows: (1) impossibility of prompt personal service – the party
relying on substituted service or the sheriff must show that the defendant cannot be served promptly
or there is impossibility of prompt service; (2) specific details in the return – the sheriff must describe
in the Return of Summons the facts and circumstances surrounding the attempted personal service;
(3) a person of suitable age and discretion – the sheriff must determine if the person found in the
alleged dwelling or residence of defendant is of legal age, what the recipient’s relationship with the
defendant is, and whether said person comprehends the significance of the receipt of the summons
and his duty to immediately deliver it to the defendant or at least notify the defendant of said receipt
of summons, which matters must be clearly and specifically described in the Return of Summons;
and (4) a competent person in charge, who must have sufficient knowledge to understand the
obligation of the defendant in the summons, its importance, and the prejudicial effects arising from
inaction on the summons.23 These were reiterated and applied in Pascual v. Pascual,24 where the
substituted service of summon made was invalidated due to the sheriff’s failure to specify in the
return the necessary details of the failed attempts to effect personal service which would justify
resort to substituted service of summons.

In applying the foregoing requisites in the instant case, the CA correctly ruled that the sheriff’s return
failed to justify a resort to substituted service of summons. According to the CA, the Return of
Summons does not specifically show or indicate in detail the actual exertion of efforts or any positive
step taken by the officer or process server in attempting to serve the summons personally to the
defendant. The return merely states the alleged whereabouts of the defendant without indicating that
such information was verified from a person who had knowledge thereof.25Indeed, the sheriff’s return
shows a mere perfunctory attempt to cause personal service of the summons on Chandumal. There
was no indication if he even asked Chandumal’s mother as to her specific whereabouts except that
she was "out of the house", where she can be reached or whether he even tried to await her return.
The "efforts" exerted by the sheriff clearly do not suffice to justify substituted service and his failure
to comply with the requisites renders such service ineffective.26

Respondent voluntarily submitted

to the jurisdiction of the trial court

Despite that there was no valid substituted service of summons, the Court, nevertheless, finds that
Chandumal voluntarily submitted to the jurisdiction of the trial court.

Section 20, Rule 14 of the Rules of Court states:

Sec. 20. Voluntary appearance. – The defendant’s voluntary appearance in the action shall be
equivalent to service of summons. The inclusion in a motion to dismiss of other grounds aside from
lack of jurisdiction over the person of the defendant shall not be deemed a voluntary appearance.

When Chandumal filed an Urgent Motion to Set Aside Order of Default and to Admit Attached
Answer, she effectively submitted her person to the jurisdiction of the trial court as the filing of a
pleading where one seeks an affirmative relief is equivalent to service of summons and vests the
trial court with jurisdiction over the defendant’s person. Thus, it was ruled that the filing of motions to
admit answer, for additional time to file answer, for reconsideration of a default judgment, and to lift
order of default with motion for reconsideration is considered voluntary submission to the trial court’s
jurisdiction.27 The Court notes that aside from the allegation that she did not receive any summons,
Chandumal’s motion to set aside order of default and to admit attached answer failed to positively
assert the trial court’s lack of jurisdiction. In fact, what was set forth therein was the substantial claim
that PDB failed to comply with the requirements of R.A. No. 6552 on payment of cash surrender
value,28 which already delves into the merits of PDB’s cause of action. In addition, Chandumal even
appealed the RTC decision to the CA, an act which demonstrates her recognition of the trial court’s
jurisdiction to render said judgment.

Given Chandumal’s voluntary submission to the jurisdiction of the trial court, the RTC, Las Piñas
City, Branch 255, had all authority to render its Decision dated May 31, 2004. The CA, therefore,
erred in nullifying said RTC decision and dispensing with the resolution of the substantial issue
raised herein, i.e., validity of the notarial rescission. Instead, however, of remanding this case to the
CA, the Court will resolve the same considering that the records of the case are already before us
and in order to avoid any further delay.29

There is no valid rescission of the

contract to sell by notarial act
pursuant to Section 3(b), R.A. No. 6552

That the RTC had jurisdiction to render the decision does not necessarily mean, however, that its
ruling on the validity of the notarial rescission is in accord with the established facts of the case, the
relevant law and jurisprudence. 1âwphi1

PDB claims that it has validly rescinded the contract by notarial act as provided under R.A. No.
6552. Basically, PDB instituted Civil Case No. LP-99-0137 in order to secure judicial confirmation of
the rescission and to recover possession of the property subject of the contract.

In Leaño v. Court of Appeals,30 it was held that:

R. A. No. 6552 recognizes in conditional sales of all kinds of real estate (industrial, commercial,
residential) the right of the seller to cancel the contract upon non-payment of an installment by the
buyer, which is simply an event that prevents the obligation of the vendor to convey title from
acquiring binding force. The law also provides for the rights of the buyer in case of cancellation.
Thus, Sec. 3 (b) of the law provides that:

"If the contract is cancelled, the seller shall refund to the buyer the cash surrender value of the
payments on the property equivalent to fifty percent of the total payments made and, after five years
of installments, an additional five percent every year but not to exceed ninety percent of the total
payments made: Provided, That the actual cancellation of the contract shall take place after thirty
days from receipt by the buyer of the notice of cancellation or the demand for rescission of the
contract by a notarial act and upon full payment of the cash surrender value to the buyer."31 (Citation
omitted and emphasis ours)

R.A. No. 6552 recognizes the right of the seller to cancel the contract but any such cancellation must
be done in conformity with the requirements therein prescribed. In addition to the notarial act of
rescission, the seller is required to refund to the buyer the cash surrender value of the payments on
the property. The actual cancellation of the contract can only be deemed to take place upon the
expiry of a thirty (30)-day period following the receipt by the buyer of the notice of cancellation or
demand for rescission by a notarial act and the full payment of the cash surrender value.32

In this case, it is an admitted fact that PDB failed to give Chandumal the full payment of the cash
surrender value. In its complaint,33 PDB admitted that it tried to deliver the cash surrender value of the
subject property as required under R.A. No. 6552 but Chandumal was "unavailable" for such
purpose. Thus, it prayed in its complaint that it be ordered to "deposit with a banking institution in the
Philippines, for the account of Defendants (sic), the amount of Ten Thousand Pesos (₱ 10,000.00),
Philippine Currency, representing the cash surrender value of the subject property; x x x."34 The
allegation that Chandumal made herself unavailable for payment is not an excuse as the twin
requirements for a valid and effective cancellation under the law, i.e., notice of cancellation or
demand for rescission by a notarial act and the full payment of the cash surrender value, is
mandatory.35 Consequently, there was no valid rescission of the contract to sell by notarial act
undertaken by PDB and the RTC should not have given judicial confirmation over the same.

WHEREFORE, the petition is DENIED. The Decision dated July 27, 2010 of the Court of Appeals, as
well as its Resolution dated February 16, 2011, denying the Motion for Reconsideration in CA-G.R.
CV No. 82861 are AFFIRMED in so far as there was no valid service of summons. Further, the
Court DECLARES that there was no valid rescission of contract pursuant to R.A. No. 6552.
Accordingly, the Decision dated May 31, 2004 of the Regional Trial Court, Las Piñas City, Branch
255 in Civil Case No. LP-99-0 137 is REVERSED and SET ASIDE, and is therefore, DISMISSED for
lack of merit.

SO ORDERED.

G.R. No. 189145 December 4, 2013

OPTIMUM DEVELOPMENT BANK, Petitioner,

vs.
SPOUSES BENIGNO V. JOVELLANOS and LOURDES R. JOVELLANOS, Respondents.
 DECISION

PERLAS-BERNABE, J.:

Assailed in this petition for review on certiorari1 are the Decision2 dated May 29, 2009 and
Resolution 3 dated August 10, 2009 of the Court of Appeals (CA) in CA-G.R. SP No. 104487 which
reversed the Decision4 dated December 27, 2007 of the Regional Trial Court of Caloocan City,
Branch 128 (RTC) in Civil Case No. C-21867 that, in turn, affirmed the Decision5 dated June 8, 2007
of the Metropolitan Trial Court, Branch 53 of that same city (MeTC) in Civil Case No. 06-28830
ordering respondents-spouses Benigno and Lourdes Jovellanos (Sps. Jovellanos) to, inter
alia, vacate the premises of the property subject of this case.

The Facts

On April 26, 2005, Sps. Jovellanos entered into a Contract to Sell6 with Palmera Homes, Inc.
(Palmera Homes) for the purchase of a residential house and lot situated in Block 3, Lot 14, Villa
Alegria Subdivision, Caloocan City (subject property) for a total consideration of ₱1,015,000.00.
Pursuant to the contract, Sps. Jovellanos took possession of the subject property upon a down
payment of ₱91,500.00, undertaking to pay the remaining balance of the contract price in equal
monthly installments of ₱13,107.00 for a period of 10 years starting June 12, 2005.7

On August 22, 2006, Palmera Homes assigned all its rights, title and interest in the Contract to Sell
in favor of petitioner Optimum Development Bank (Optimum) through a Deed of Assignment of even
date.8

On April 10, 2006, Optimum issued a Notice of Delinquency and Cancellation of Contract to Sell9 for
Sps. Jovellanos’s failure to pay their monthly installments despite several written and verbal
notices.10

In a final Demand Letter dated May 25, 2006,11 Optimum required Sps. Jovellanos to vacate and
deliver possession of the subject property within seven (7) days which, however, remained
unheeded. Hence, Optimum filed, on November 3, 2006, a complaint for unlawful detainer12 before
the MeTC, docketed as Civil Case No. 06-28830. Despite having been served with summons,
together with a copy of the complaint,13 Sps. Jovellanos failed to file their answer within the
prescribed reglementary period, thus prompting Optimum to move for the rendition of judgment.14

Thereafter, Sps. Jovellanos filed their opposition with motion to admit answer, questioning the
jurisdiction of the court, among others. Further, they filed a Motion to Reopen and Set the Case for
Preliminary Conference, which the MeTC denied.

The MeTC Ruling

In a Decision15 dated June 8, 2007, the MeTC ordered Sps. Jovellanos to vacate the subject property
and pay Optimum reasonable compensation in the amount of ₱5,000.00 for its use and occupation
until possession has been surrendered. It held that Sps. Jovellanos’s possession of the said property
was by virtue of a Contract to Sell which had already been cancelled for non-payment of the
stipulated monthly installment payments. As such, their "rights of possession over the subject
property necessarily terminated or expired and hence, their continued possession thereof
constitute[d] unlawful detainer."16
Dissatisfied, Sps. Jovellanos appealed to the RTC, claiming that Optimum counsel made them
believe that a compromise agreement was being prepared, thus their decision not to engage the
services of counsel and their concomitant failure to file an answer.17

They also assailed the jurisdiction of the MeTC, claiming that the case did not merely involve the
issue of physical possession but rather, questions arising from their rights under a contract to sell
which is a matter that is incapable of pecuniary estimation and, therefore, within the jurisdiction of
the RTC.18

The RTC Ruling

In a Decision19 dated December 27, 2007, the RTC affirmed the MeTC’s judgment, holding that the
latter did not err in refusing to admit Sps. Jovellanos’ s belatedly filed answer considering the
mandatory period for its filing. It also affirmed the MeTC’s finding that the action does not involve the
rights of the respective parties under the contract but merely the recovery of possession by Optimum
of the subject property after the spouses’ default.20

Aggrieved, Sps. Jovellanos moved for reconsideration which was, however, denied in a
Resolution21 dated June 27, 2008. Hence, the petition before the CA reiterating that the RTC erred in
affirming the decision of the MeTC with respect to:

(a) the non-admission of their answer to the complaint; and

(b) the jurisdiction of the MeTC over the complaint for unlawful detainer.22

The CA Ruling

In an Amended Decision23 dated May 29, 2009, the CA reversed and set aside the RTC’s decision,
ruling to dismiss the complaint for lack of jurisdiction. It found that the controversy does not only
involve the issue of possession but also the validity of the cancellation of the Contract to Sell and the
determination of the rights of the parties thereunder as well as the governing law, among others,
Republic Act No. (RA) 6552.24

Accordingly, it concluded that the subject matter is one which is incapable of pecuniary estimation
and thus, within the jurisdiction of the RTC.25

Undaunted, Optimum moved for reconsideration which was denied in a Resolution26 dated August
10, 2009. Hence, the instant petition, submitting that the case is one for unlawful detainer, which falls
within the exclusive original jurisdiction of the municipal trial courts, and not a case incapable of
pecuniary estimation cognizable solely by the regional trial courts.

The Court’s Ruling

The petition is meritorious. What is determinative of the nature of the action and the court with
jurisdiction over it are the allegations in the complaint and the character of the relief sought, not the
defenses set up in an answer.27

A complaint sufficiently alleges a cause of action for unlawful detainer if it recites that:

(a) initially, possession of the property by the defendant was by contract with or by tolerance
of the plaintiff;
 (b) eventually, such possession became illegal upon notice by plaintiff to defendant of the
termination of the latter's right of possession;

(c) thereafter, defendant remained in possession of the property and deprived plaintiff of the
enjoyment thereof; and

(d) within one year from the last demand on defendant to vacate the property, plaintiff
instituted the complaint for ejectment.28

Corollarily, the only issue to be resolved in an unlawful detainer case is physical or material
possession of the property involved, independent of any claim of ownership by any of the parties
involved.29

In its complaint, Optimum alleged that it was by virtue of the April 26, 2005 Contract to Sell that Sps.
Jovellanos were allowed to take possession of the subject property. However, since the latter failed
to pay the stipulated monthly installments, notwithstanding several written and verbal notices made
upon them, it cancelled the said contract as per the Notice of Delinquency and Cancellation dated
April 10, 2006. When Sps. Jovellanos refused to vacate the subject property despite repeated
demands, Optimum instituted the present action for unlawful detainer on November 3, 2006, or
within one year from the final demand made on May 25, 2006.

While the RTC upheld the MeTC’s ruling in favor of Optimum, the CA, on the other hand, declared
that the MeTC had no jurisdiction over the complaint for unlawful detainer, reasoning that the case
involves a matter which is incapable of pecuniary estimation – i.e., the validity of the cancellation of
the Contract to Sell and the determination of the rights of the parties under the contract and law –
and hence, within the jurisdiction of the RTC. The Court disagrees. Metropolitan Trial Courts are
conditionally vested with authority to resolve the question of ownership raised as an incident in an
ejectment case where the determination is essential to a complete adjudication of the issue of
possession.30 Concomitant to the ejectment court’s authority to look into the claim of ownership for
purposes of resolving the issue of possession is its authority to interpret the contract or agreement
upon which the claim is premised. Thus, in the case of Oronce v. CA,31 wherein the litigants’
opposing claims for possession was hinged on whether their written agreement reflected the
intention to enter into a sale or merely an equitable mortgage, the Court affirmed the propriety of the
ejectment court’s examination of the terms of the agreement in question by holding that, "because
metropolitan trial courts are authorized to look into the ownership of the property in controversy in
ejectment cases, it behooved MTC Branch 41 to examine the bases for petitioners’ claim of
ownership that entailed interpretation of the Deed of Sale with Assumption of Mortgage."32 Also, in
Union Bank of the Philippines v. Maunlad Homes, Inc.33 (Union Bank), citing Sps. Refugia v. CA,34 the
Court declared that MeTCs have authority to interpret contracts in unlawful detainer cases, viz.:35

The authority granted to the MeTC to preliminarily resolve the issue of ownership to determine the
issue of possession ultimately allows it to interpret and enforce the contract or agreement between
the plaintiff and the defendant. To deny the MeTC jurisdiction over a complaint merely because the
issue of possession requires the interpretation of a contract will effectively rule out unlawful detainer
as a remedy. As stated, in an action for unlawful detainer, the defendant’s right to possess the
property may be by virtue of a contract, express or implied;

corollarily, the termination of the defendant’s right to possess would be governed by the terms of the
same contract.

Interpretation of the contract between the plaintiff and the defendant is inevitable because it is the
contract that initially granted the defendant the right to possess the property; it is this same contract
that the plaintiff subsequently claims was violated or extinguished, terminating the defendant’s right
to possess. We ruled in Sps. Refugia v. CA that – where the resolution of the issue of possession
hinges on a determination of the validity and interpretation of the document of title or any other
contract on which the claim of possession is premised, the inferior court may likewise pass upon
these issues.

The MeTC’s ruling on the rights of the parties based on its interpretation of their contract is, of
course, not conclusive, but is merely provisional and is binding only with respect to the issue of
possession. (Emphases supplied; citations omitted)

In the case at bar, the unlawful detainer suit filed by Optimum against Sps. Jovellanos for illegally
withholding possession of the subject property is similarly premised upon the cancellation or
termination of the Contract to Sell between them. Indeed, it was well within the jurisdiction of the
MeTC to consider the terms of the parties’ agreement in order to ultimately determine the factual
bases of Optimum’s possessory claims over the subject property. Proceeding accordingly, the MeTC
held that Sps. Jovellanos’s non-payment of the installments due had rendered the Contract to Sell
without force and effect, thus depriving the latter of their right to possess the property subject of said
contract.36 The foregoing disposition aptly squares with existing jurisprudence. As the Court similarly
held in the Union Bank case, the seller’s cancellation of the contract to sell necessarily extinguished
the buyer’s right of possession over the property that was the subject of the terminated agreement.37

Verily, in a contract to sell, the prospective seller binds himself to sell the property subject of the
agreement exclusively to the prospective buyer upon fulfillment of the condition agreed upon which
is the full payment of the purchase price but reserving to himself the ownership of the subject
property despite delivery thereof to the prospective buyer.38

The full payment of the purchase price in a contract to sell is a suspensive condition, the non-
fulfillment of which prevents the prospective seller’s obligation to convey title from becoming
effective,39 as in this case. Further, it is significant to note that given that the Contract to Sell in this
case is one which has for its object real property to be sold on an installment basis, the said contract
is especially governed by – and thus, must be examined under the provisions of – RA 6552, or the
"Realty Installment Buyer Protection Act", which provides for the rights of the buyer in case of his
default in the payment of succeeding installments. Breaking down the provisions of the law, the
Court, in the case of Rillo v. CA,40 explained the mechanics of cancellation under RA 6552 which are
based mainly on the amount of installments already paid by the buyer under the subject contract, to
wit:41

Given the nature of the contract of the parties, the respondent court correctly applied Republic Act
No. 6552. Known as the Maceda Law, R.A. No. 6552 recognizes in conditional sales of all kinds of
real estate (industrial, commercial, residential) the right of the seller to cancel the contract upon non-
payment of an installment by the buyer, which is simply an event that prevents the obligation of the
vendor to convey title from acquiring binding force. It also provides the right of the buyer on
installments in case he defaults in the payment of succeeding installments, viz.:

(1) Where he has paid at least two years of installments,

(a) To pay, without additional interest, the unpaid installments due within the total grace
period earned by him, which is hereby fixed at the rate of one month grace period for every
one year of installment payments made:

Provided, That this right shall be exercised by the buyer only once in every five years of the life of
the contract and its extensions, if any. (b) If the contract is cancelled, the seller shall refund to the
buyer the cash surrender value of the payments on the property equivalent to fifty per cent of the
total payments made and, after five years of installments, an additional five per cent every year but
not to exceed ninety per cent of the total payments made:

Provided, That the actual cancellation of the contract shall take place after cancellation or the
demand for rescission of the contract by a notarial act and upon full payment of the cash surrender
value to the buyer.

Down payments, deposits or options on the contract shall be included in the computation of the total
number of installments made.

(2) Where he has paid less than two years in installments, Sec. 4. x x x the seller shall give the
buyer a grace period of not less than sixty days from the date the installment became due. If the
buyer fails to pay the installments due at the expiration of the grace period, the seller may cancel the
contract after thirty days from receipt by the buyer of the notice of cancellation or the demand for
rescission of the contract by a notarial act. (Emphasis and underscoring supplied)

Pertinently, since Sps. Jovellanos failed to pay their stipulated monthly installments as found by the
MeTC, the Court examines Optimum’s compliance with Section 4 of RA 6552, as above-quoted and
highlighted, which is the provision applicable to buyers who have paid less than two (2) years-worth
of installments. Essentially, the said provision provides for three (3) requisites before the seller may
actually cancel the subject contract: first, the seller shall give the buyer a 60-day grace period to be
reckoned from the date the installment became due; second, the seller must give the buyer a notice
of cancellation/demand for rescission by notarial act if the buyer fails to pay the installments due
at the expiration of the said grace period; and third, the seller may actually cancel the contract only
after thirty (30) days from the buyer’s receipt of the said notice of cancellation/demand for rescission
by notarial act. In the present case, the 60-day grace period automatically operated42 in favor of the
buyers, Sps. Jovellanos, and took effect from the time that the maturity dates of the installment
payments lapsed. With the said grace period having expired bereft of any installment payment on
the part of Sps. Jovellanos,43 Optimum then issued a notarized Notice of Delinquency and
Cancellation of Contract on April 10, 2006. Finally, in proceeding with the actual cancellation of the
contract to sell, Optimum gave Sps. Jovellanos an additional thirty (30) days within which to settle
their arrears and reinstate the contract, or sell or assign their rights to another.44

It was only after the expiration of the thirty day (30) period did Optimum treat the contract to sell as
effectively cancelled – making as it did a final demand upon Sps. Jovellanos to vacate the subject
property only on May 25, 2006. Thus, based on the foregoing, the Court finds that there was a valid
and effective cancellation of the Contract to Sell in accordance with Section 4 of RA 6552 and since
Sps. Jovellanos had already lost their right to retain possession of the subject property as a
consequence of such cancellation, their refusal to vacate and turn over possession to Optimum
makes out a valid case for unlawful detainer as properly adjudged by the MeTC.

WHEREFORE, the petition is GRANTED. The Decision dated May 29, 2009 and Resolution dated
August 10, 2009 of the Court of Appeals in CA-G.R. SP No. 104487 are SET ASIDE. The Decision
dated June 8, 2007 of Metropolitan Trial Court, Branch 53, Caloocan City in Civil Case No. 06-28830
is hereby REINSTATED.

SO ORDERED.
G.R. No. 204160 September 22, 2014

SPOUSES MICHELLE M. NOYNAY and NOEL S. NOYNAY, Petitioners,

vs.
CITIHOMES BUILDER AND DEVELOPMENT, INC., Respondent.

DECISION

MENDOZA, J.:

In this petition for review on certiorari1 under Rule 45 of the Rules of Court, Spouses Noel and
Michelle Noynay (Spouses Noynay) assail the July 16, 2012 Decision2 of the Court of Appeals (CA)
and October 15, 2012 Resolution,3 which affirmed with modification the September 17, 20 I 0
Decision4 of the Regional Trial CoUii, Branch 21, Malolos, Bulacan ( RTCJ. Earlier, the RTC
reversed the March 26, 2010 Decision5 of the Municipal Trial Court for Cities, San Jose Del Monte,
Bulacan (MTCC). which dismissed the complaint6 for unlawful detainer filed by Citihomes Builder and
Development, Inc. (Citihomes) against Spouses Noynay for lack of cause of action.

The Facts:

On December 29, 2004, Citihomes and Spouses Noynay executed a contract to sell7 covering the
sale of a house and lot located in San Jose Del Monte, Bulacan, and covered by Transfer Certificate
of Title (TCT) No. T-43469. Under the terms of the contract, the price of the property was fixed at
₱915,895.00, with a downpayment of ₱183,179.00, and the remaining balance to be paid in 120
equal monthly installments with an annual interest rate of 21% commencing on February 8, 2005
and every 8th day of the month thereafter.

Subsequently, on May 12, 2005, Citihomes executed the Deed of Assignment of Claims and
Accounts8(Assignment)in favor of United Coconut Planters Bank (UCPB) on May 12, 2005. Under
the said agreement, UCPB purchased from Citihomes various accounts, including the account of
Spouses Noynay, for a consideration of ₱100,000,000.00. In turn, Citihomes assigned its rights,
titles, interests, and participation in various contracts to sell with its buyers to UCPB.

In February of 2007, Spouses Noynay allegedly started to default in their payments. Months later,
Citihomes decided to declare Spouses Noynay delinquent and to cancel the contract considering
that nine months of agreed amortizations were left unpaid. On December 8, 2007, the notarized
Notice of Delinquency and Cancellation of the Contract To Sell,9 dated November 21, 2007, was
received by Spouses Noynay. They were given 30 days within which to pay the arrears and failure to
do so would authorize Citihomes to consider the contract as cancelled.

On June 15, 2009, Citihomes sent its final demand letter asking Spouses Noynay to vacate the
premises due to their continued failure to pay the arrears. Spouses Noynay did not heed the
demand, forcing Citihomes to file the complaint for unlawful detainerbefore the MTCC on July 29,
2009.

In the said complaint, Citihomes alleged that as per Statement of Account as of March 18, 2009,
SpousesNoynay had a total arrears in the amount of ₱272,477.00, inclusive of penalties. Thus,
Citihomes prayed that Spouses Noynay be ordered to vacate the subject property and pay the
amount of ₱8,715.97 a month as a reasonable compensation for the use and occupancy to
commence from January 8, 2007 until Spouses Noynay vacate the same.
In its March 26, 2010 Decision,10 the MTCC dismissed the complaint. It considered the annotation in
the certificate of title, which was dated prior to the filing of the complaint, which showed that
Citihomes had executed the Assignment favor of UCPB, as having the legal effect of divesting
Citihomes of its interest and right over the subject property. As far as the MTCC was concerned,
Citihomes did not have a cause of action against Spouses Noynay.

The RTC, however, reversedthe ruling of the MTCC. In its September 17, 2010 Decision,11 the RTC
stated that the MTCC erred in interpreting the deed of assignment as having the effect of
relinquishing all of Citihomes’ rights over the subject property. The RTC explained that the
assignment was limited only to the installment accounts receivables due from Spouses Noynay and
did not include the transfer of title or ownership over the property. It pointed out that Citihomes
remained as the registered owner of the subject property, and so it had the right to ask for the
eviction of Spouses Noynay. As to the issue of who had the better right of possession, the RTC
ordered that the records be remanded to the MTCC for the proper determination.

Spouses Noynay then went to the CA. On July 16, 2012, the CA affirmed the conclusion of the RTC
that Citihomes still had the right and interest over the property in its capacity as the registered
owner. Moreover, the issue on who, between the parties had a better possessory right over the
property, was resolved infavor of Citihomes.

In disposing the issue of possession, the CA primarily recognized the relevance of Republic Act
(R.A.)No. 6552, otherwise known as the Realty Installment Buyer Act (Maceda Law), in determining
the limits of the right to possess of Spouses Noynay in their capacity as defaulting buyers in a realty
installment scheme. Under the said law, the cancellation of a contract would only follow if the
requirements set forth therein had been complied with, particularly the giving of a "notice of
delinquency and cancellation of the contract" to the defaulting party and,in some cases, the payment
to the buyer of the cash surrender value if at least two years of installments had been paid. The CA
noted that Spouses Noynay failed to complete the minimum two (2) years of installment, despite the
allegation that three (3) years of amortizations had already been paid. As an effect, the CA
pronounced that the termination of the contract was validly effected by the expiration of the 30-day
period from the time the notice of cancellation was received by Spouses Noynay. From thatmoment,
the CA treated Spouses Noynay to have lost the right to possess the property. In addition, the CA
made Spouses Noynay liable for the payment of monthly rentals from the time their possession
became illegal.

Spouses Noynay moved for reconsideration, but the CA denied their motion.

Hence, this petition.

ISSUE

The lone issue presented for resolution is whether Citihomes has a cause of action for ejectment
against Spouses Noynay. In effect, Spouses Noynay would have this Court determine whether
Citihomes may rightfully evict them.

Position of Spouses Noynay

Spouses Noynay insist that by virtue of the assignment of rights which Citihomes executed in favor
of UCPB, Citihomes did not have a cause of action against them because it no longerhad an interest
over the subject property. Contrary to the findings of the CA, the monthly installments amounting to
three years were already paid, by reason of which, Section 3(b) of the Maceda Law should apply.
This means that for the cancellation to be effective, the cash surrender value should have been paid
first to them by Citihomes; and that because no payment was made, it follows that no valid
cancellation could also be effected. Thisallegedly strengthened their right to the possession of the
property even to this day.

Position of Citihomes

Citihomes counters that it has the right to ask for the eviction of the petitioners in its capacity as the
registered owner despite the assignment of rights it made to UCPB. It believes that because
Spouses Noynay failed to pay at least two (2) years of installments, the cancellation became
effective upon the expiration of the 30-day periodfollowing the receipt of the notice of delinquency
and cancellation notice and without the need for the payment of the cash surrender value under
Section 3(b) of the Maceda Law.

Ruling of the Court

Cause of action has been defined as an act or omission by which a party violates a right of
another.12 It requires the existence of a legal right on the part of the plaintiff, a correlative obligation of
the defendant to respect such right, and an act or omission of such defendant in violation of the
plaintiff’s rights.13 A complaint should not be dismissed for insufficiency of cause of action if it
appears clearly from the complaint and its attachments that the plaintiff is entitled to relief.14 The
complaint, however, may be dismissed for lack of cause of action laterafter questions of fact have
been resolved on the basis of stipulations, admissions or evidence presented.15

Relative thereto, a plaintiff in an unlawful detainer case which seeks recovery of the property must
prove one’s legal right to evict the defendant, a correlative obligation on the part of such defendant
to respect the plaintiff’s right to evict, and the defendant’s act or omission in the form of refusal to
vacate upon demand when his possession ultimately becomes illegal.

At first glance, the main thrust of the discussion in the lower courts is the issue on whether
Citihomes had suchright to evict Spouses Noynay. At its core is the ruling of the MTCC thatthe right
to demand the eviction of Spouses Noynay was already transferred to UCPB from the moment the
Assignment was executed by Citihomes, which was done prior to the institution of the unlawful
detainer case. Thus, based on the evidence presented during the trial, the MTCC held that
Citihomes did not have a cause of action against Spouses Noynay.The RTC held otherwise
justifying that Citihomes may still be the right party to evict Spouses Noynay in its capacity as the
registered owner of the property. The CA affirmed the RTC on this point.

The Court, however, agrees with the MTCC.

The determination of whether Citihomes has a right to ask for the eviction of Spouses Noynay
entirely depends on the review of the Assignment of Claims and Accounts it executed in favor of
UCPB. If it turns out that what was assigned merely covered the collectible amounts or receivables
due from Spouses Noynay, Citihomes would necessarily have the right to demand the latter’s
eviction asonly an aspect of the contract to sell passed on to UCPB. Simply put, because an
assignment covered only credit dues, the relation between Citihomes as the seller and Spouses
Noynay as the buyer under their Contract to Sell remained. If on the other hand, it appears that the
assignment covered all of Citihomes’ rights, obligations and benefits in favor ofUCPB, the conclusion
would certainly be different.

Under the provisions of the Assignment, it was stipulated that:

NOW, THEREFORE, for and in consideration of the foregoing premises, the ASSIGNOR hereby
agrees as follows:

1. The ASSIGNOR hereby assigns, transfers and sets over unto the ASSIGNEE all its rights, titles
and interest in and to, excluding its obligations under the Contract/s to Sellenumerated and
described in the List of Assigned Receivables which is hereto attached and marked as Annex "A"
hereof, including any and all sum of money due and payable to the ASSIGNOR, the properties
pertaining thereto,all replacements, substitution, increases and accretion thereof and thereto which
the ASSIGNOR has executed with the Buyers, as defined in the Agreement, and all moneysdue, or
which may grow upon the sales therein set forth.

2. For purposes of this ASSIGNMENT, the ASSIGNOR hereby delivers to the ASSIGNEE, which
hereby acknowledges receipt of the following documents evidencing the ASSIGNOR’s title, right,
interest, participation and benefit in the assigned Installment Account Receivables listed in Annex
"A" and made as integral part hereof.

a) Original Contracts to Sell

b) Transfer Certificates of Title

3. The ASSIGNOR, hereby irrevocably appoints the ASSIGNEE to be its true and lawful agent or
representativefor it and in its name and stead, but for such ASSIGNEE’s own benefit: (1) to sell,
assign, transfer, set over, pledge, compromise or discharge the whole, or any part, of said
assignment; (2) to do all acts and things necessary, or proper, for any such purpose; (3) to ask,
collect, receive and sue for the moneys due, or which may grow due, upon the said Assignment;and
(4) to substitute one person, or more, with like powers; hereby ratifying and confirming all that said
agent or representative, or his substitute, or substitutes, shall lawfully do, by virtue hereof.16

[Emphases supplied]

Clearly, the conclusion of the MTCC had factual and legal bases. Evident from the tenor of the
agreement was the intent on the part of Citihomes, as assignor, to assign all of its rights and benefits
in favor of UCPB. Specifically, what Citihomes did was an assignment or transfer of all contractual
rights arising from various contracts to sell, including the subject contract to sell, with all the rights,
obligations and benefits appurtenant thereto in favor of UCPB for a consideration of
₱100,000,000.00. Indeed, the intent was more than just an assignment of credit. This intent to
assign all rights under the contract to sell was even fortified by the delivery of documents such as
the pertinent contracts to sell and the TCTs. Had it been the intent of Citihomes to assign merely its
interest in the receivables due from Spouses Noynay, the tenor of the deed of assignment would
have been couched in very specific terms.

Included in those matters which were handed over to UCPB were the provisions outlined in Section
6 of the Contract to Sell. In the said provision, Citihomes, as the seller has been given the right to
cancel the contract to sell in cases of continuing default by Spouses Noynay, to wit: SECTION 6. If
for any reason, whatsoever, the BUYER fails to pay three (3) consecutive monthly installments, the
provision of RA No. 6552 shall apply.

Where the BUYER has paid less than two (2) years of installments and defaults in the payment of
three (3) consecutive monthly installment, he shall be given a grace period of not less than sixty (60)
days from the date the installment payments became due and payable within which to pay the
installments and/or make payments in arrears together with the installments corresponding to the
months of the grace period. In the event the BUYER continues to default in the payment of the
installments within or at the expiration of the grace period herein provided, the SELLER shall have
the right to cancel this agreement thirty (30) days from the BUYER’s receipt of the notice of
cancellation or demand for rescission by a notarial act. Thereafter, the SELLER may dispose of the
residential house and lot subject of this agreement in favor of other persons as if this agreement had
never been entered into.

WHERE the BUYER has paid atleast two (2) years of installments and he defaults in the payment of
three (3) consecutive monthly installments, the SELLER shall be entitled:

a. To pay, without additional interest, the unpaid installment due within the total grace period
earned by the BUYER which is fixed at the rate of one (1) month grace period for every one
(1) year of installment payment made; Provided, that this right shall be exercised by the
BUYER only once for every five (5) years of the life of this agreement.

b. If this agreement is cancelled, the SELLER shall refund to the BUYER the cash surrender
value of the payments equivalent to fifty percent thereof and, after five years of installments,
an additional five percent (5%) for every year but not to exceed ninety (90%) of the total
payments made; Provided, that the actual cancellation of this agreement shall take place
after thirty (30) days from receipt by the BUYER of the notice of cancellation or demand for
rescission by a notarial act and upon full payment of the cash surrender value to the BUYER.

xxx xxx xxx

The BUYER, at the termination of the contract, shall promptly surrender the said property to the
SELLER, and should the former fail to comply with the provision, on top of the remedy provided for
above, the BUYER hereby expressly appoints the SELLER as their duly authorized attorney-in-fact
with power and authority to open, enter and take full possession of the property in the presence of
any peace officer and to take an inventory of the equipment, furniture, merchandise and effect. In
case the BUYER fails to claim the said equipment, furniture, merchandise and effects and/or
liquidate their liabilities with the SELLER within thirty (30) days from the date of transfer of
possession of the property to the latter, the SELLER is hereby given the right to dispose of said
property in a private or public sale and to apply the proceeds to whatever expenses it may have
incurred in line with the warehousing of the equipment, furniture, merchandise and effects.17

The exercise of such right to cancel necessarily determines the existence of the right to evict
Spouses Noynay. The existence of the right to evict is the first constitutive element ofthe cause of
action in this unlawful detainer case. Considering,however, that the right to cancel was already
assigned prior to the commencement of this controversy with the execution of the Assignment, its
legal consequences cannotbe avoided.

Well-established is the rule that the assignee is deemed subrogated to the rights as well as to the
obligations of the seller/assignor. By virtue of the deed of assignment, the assignee is deemed
subrogated to the rights and obligations of the assignor and is bound by exactly the same conditions
as those which bound the assignor.18 What can be inferred from here is the effect on the status of the
assignor relative to the relations established by a contract which has been subsequently assigned;
that is, the assignor becomes a complete stranger to all the mattersthat have been conferred to the
assignee.

In this case, the execution of the Assignment in favor of UCPB relegated Citihomes to the status of a
mere stranger to the jural relations established under the contractto sell. With UCPB as the
assignee, it is clear that Citihomes has ceased tohave any right to cancel the contract to sell with
Spouses Noynay. Without this right,which has been vested in UCPB, Citihomes undoubtedly had no
cause ofaction against Spouses Noynay.

This is not to say that Citihomes lost all interest over the property. To be clear, what were assigned
covered only the rights inthe Contract to Sell and not the property rights over the house and lot,
which remained registered under Citihomes’ name. Considering, however, that the unlawful detainer
case involves mere physical or materialpossession of the property and is independent of any claim
of ownership by any of the parties,19 the invocation of ownership by Citihomes is immaterial in the
just determination of the case.

Granting that the MTCC erred in ruling that Citihomes had no cause of action by reason of the
Assignment it made in favor of UCPB, the Court still upholds the right of the Spouses Noynay to
remain undisturbed in the possession of the subject property. The reason is simple – Citihomes
failed to comply with the procedures for the proper cancellation of the contract to sell as prescribed
by Maceda Law.

In Pagtalunan v. Manzano,20 the Court stressed the importance of complying with the provisions of
the Maceda Law as to the cancellation of contracts to sell involving realty installment schemes.
There it was held that the cancellation of the contract by the seller must be in accordance with
Section 3 (b) of the Maceda Law, which requires the notarial act of rescission and the refund to the
buyer of the full payment of the cash surrender value of the payments made on the property. The
actual cancellation of the contract takes place after thirty (30) days from receipt by the buyer of the
notice of cancellation or the demand for rescission of the contract by a notarial act and upon
fullpayment of the cash surrender value to the buyer, to wit: (b) If the contract is cancelled, the seller
shall refund to the buyer the cash surrender value of the payments on the propertyequivalent to fifty
percent of the total payments made and, after five years of installments, an additional five percent
every year but not to exceed ninety percent of the total payments made: Provided, That the actual
cancellation of the contract shall take place after thirty days from receipt by the buyer of the notice of
cancellation or the demand for rescission of the contract bya notarial act and upon full payment of
the cash surrender value to the buyer.

[Emphases supplied]

According to the lower courts, Spouses Noynay failed to complete the two-year minimum period of
paid amortizations, thus, the cancellation of the contract to sell no longer required the payment of the
cash surrender value. This conclusion rests on the allegation that the amortization payments
commenced only on May 31, 2005. If indeedit were true that the payments started only on that date,
Spouses Noynay would not have completed the required two-year period to be entitled to the
payment of cash surrender value. Records, however, show otherwise. The Contract to Sell, dated
December 29, 2004, was very particularon the matter. It stipulated as follows:

SECTION 1. NOW, THEREFORE, for and in consideration of the sume of NINE HUNDRED
FIFTEEN THOUSAND EIGHT HUNDRED NINETY FIVE PESOS ONLY, (915,895.00) Philippine
Currency, inclusive of miscellaneous charges hereunder set forth, and of the foregoing premises, the
SELLER hereby agrees to sell, cede and convey to the BUYER, their heirs, administrators, and
successors-in-interest, the aforedescribed residential house and lot or lot only under the following
terms and conditions:

a. The amount of ONE HUNDRED EIGHTY THREE THOUSAND ONE HUNDRED

SEVENTY NINE PESOS ONLY (₱183,179.00), Philippine Currency, representing full
downpayment shall be paid upon signing of this contract.
 b. The balanceof the total purchase price in the amount of SEVEN HUNDRED THIRTY TWO
THOUSAND SEVEN HUNDRED SIXTEEN PESOS ONLY, (₱732,716..00), Philippine
Currency shall be paid by the BUYER in 120 equal monthly installments in the amount of
₱14,649.31 per month with an interest of 21% per annum to commenceon 02.08.05 and
every 8th day of the month thereafter.21

Citihomes claimed that the period ofthe payment of the amortizations started from May 31,
2005.22 As can be gleaned from the contract to sell, however, it appears that the payment of the
downpayment started from the signing thereof on December 29, 2004.

To this end, the factual admissions made by the parties during the preliminary conference would
shed light on the matter. It must be remembered that these judicial admissions are legally binding on
the party making the admissions. Similar to pre-trial admissions in a pre-trial order in ordinary civil
cases, the contents of the record of a preliminary conference control the subsequent course of the
action, thereby, defining and limiting the issues to be tried. A contrary ruling would render useless
the proceedings during the preliminary conference and would, in fact, be antithetical to the very
purpose of a preliminary conference, which is, among others, to allow the parties to admit and
stipulate on a given set of facts and to simplify the issues involved.23

The fairly recent case of Oscar Constantino v. Heirs of Oscar Constantino,24 is most instructive:

In Bayas, et al. v. Sandiganbayan, et al., this Court emphasized that:

Once the stipulations are reduced into writing and signed by the parties and their counsels, they
become binding on the parties who made them. They become judicial admissionsof the fact or facts
stipulated. Even if placed at a disadvantageous position, a party may not be allowed to rescind them
unilaterally, it must assume the consequences of the disadvantage.(citations omitted)

Moreover, in Alfelor v. Halasan,this Court declared that:

A party who judicially admits a fact cannot later challenge the fact as judicial admissions are a
waiver of proof; production of evidence is dispensed with. A judicial admissionalso removes an
admitted fact from the field of controversy. Consequently, an admission made in the pleadings
cannot be controverted by the party making such admission and are conclusive as to such party,
and all proofs to the contrary or inconsistent therewith should be ignored, whether objection is
interposed by the party or not. The allegations, statements or admissions contained in a pleading are
conclusive as against the pleader. A party cannot subsequently take a position contrary of or
inconsistent with what was pleaded. (Citations omitted)

[Emphases supplied]

Here, Spouses Noynay proposed for stipulation the factual allegation that they had been paying
Citihomesthe monthly amortization of the property for more than three (3) years and only stopped
payment by January 8, 2008. In the Preliminary Conference Order,25 dated January 28, 2010, the
MTCC noted the said factas admitted, to wit:

The defendants proposed the following matters for stipulations:

1. That the defendants had already paid the plaintiff the total amount of Php 633,000.00 –
Not Admitted
 2. That the defendants have beenpaying the plaintiff the monthly amortization of the property
for more than three years and only stopped payment by January 8, 2008 – Admitted.26

xxx xxx x x x[Emphasis supplied]

Moreover, based on the Statement of Account,27 dated March 18, 2009, Spouses Noynay started
defaulting from January 8, 2008. This shows that prior to that date, amortizations covering the 3-year
period, which started with the downpayment, had been paid. This is consistent with the admission of
Citihomes during the preliminary conference. By its admission that Spouses Noynay had been
paying the amortizations for three (3) years, there is no reason to doubt Spouses Noynay's
compliance with the minimum requirement of two years payment of amortization, entitling them to
the payment of the cash surrender value provided for by law and by the contract to sell. To reiterate,
Section 3(b) of the Maceda Law requires that for an actual cancellation to take place, the notice of
cancellation by notarial act and the full payment of the cash surrender value must be first received
by the buyer. Clearly, no payment of the cash surrender value was made to Spouses Noynay.
Necessarily, no cancellation of the contract to selI could be considered as validly effected.

Without the valid cancellation of the contract, there is no basis to treat the possession of the property
by Spouses Noynay as illegal. In AMOSUP-PTGWO-ITF v. Decena,28 the Court essentially held that
1âw phi 1

such similar failure' to validly cancel the contract, meant that the possessor therein, similar to
Spouses Noynay in this case, remained entitled to the possession of the property. In the said case,
the Court stated:

In the parallel case of Pagtalunan v. Dela Cruz Vda. De Manzano, which likewise originated as an
action for unlawful detainer, we affirmed the finding of the appellate court that, since the contract to
sell was not validly cancelled or rescinded under Section 3(b) of R.A. No. 6552, the respondent
therein had the right to continue occupying unmolested the property subject thereof. WHEREFORE,
the petition is GRANTED. The July 16, 2012 Decision and October 15, 2012 Resolution of the Court
of Appeals are hereby REVERSED and SET ASIDE. The March 26, 2010 Decision of the Municipal
Trial Court for Cities is REINSTATED.

SO ORDERED.

G.R. No. 178584 October 8, 2012

ASSOCIATED MARINE OFFICERS AND SEAMEN'S UNION OF THE PHILIPPINES PTGWO-

ITF, Petitioner,
vs.
NORIEL DECENA, Respondent.

DECISION

PERLAS-BERNABE, J.:

This Petition for Review on Certiorari seeks the reversal of the Decision1 of the Court of Appeals (CA)
dated July 31, 2006, as well as the Resolution2 dated June 20, 2007, which dismissed the complaint
for unlawful detainer filed by petitioner against respondent on the ground of prematurity, as petitioner
has not shown that it complied with the mandatory requirements for a valid and effective cancellation
of the contract to sell a house and lot.

The Factual Antecedents

Associated Marine Officers and Seamen's Union of the Philippines –

PTGWO-ITF (petitioner) is a duly registered labor organization engaged in an on-going Shelter

Program, which offers residential lots and fully-furnished houses to its members-seafarers under a
reimbursement scheme requiring no down payment and no interest on the principal sum advanced
for the acquisition and development of the land and the construction of the house.

On April 27, 1995, petitioner entered into a contract3 under the Shelter Program with one of its
members, Noriel Decena (respondent), allowing the latter to take possession of a house and lot
described as 7 STOLT MODEL, Lot 16, Block 7, in the Seamen's Village, Sitio Piela, Barangay
Paliparan, Dasmariñas, Cavite, with the obligation to reimburse petitioner the cost
(US$28,563)4 thereof in 180 equal monthly payments. It was stipulated in said contract that, in case
respondent fails to remit three (3) monthly reimbursement payments, he shall be given a 3-month
grace period within which to remit his arrears, otherwise, the contract shall be automatically revoked
or cancelled and respondent shall voluntarily vacate the premises without need of demand or judicial
action.5

Subsequently, respondent failed to pay twenty-five (25) monthly reimbursement payments covering
the period August 1999 to August 2001, despite demands. Hence, petitioner cancelled the contract
and treated all his reimbursement payments as rental payments for his occupancy of the house and
lot.

On August 21, 2001, petitioner sent respondent a notice of final demand6 requiring him to fulfill his
obligation within a 30-day grace period. Thereafter, on October 18, 2001, his wife received a notice
to vacate7 the premises. For failure of respondent to heed said notices, petitioner filed a complaint
before the barangay lupon and, eventually, a case for unlawful detainer, docketed as Civil Case No.
12108 before the Municipal Trial Court (MTC) of Dasmariñas, Cavite.

The Ruling of the MTC

On December 4, 2002, the MTC found petitioner's case meritorious and, thus, rendered
judgment9 ordering respondent to (1) vacate the premises; (2) pay monthly rental in the amount of ₱
8,109.00 from August 1999 with legal interests thereon until he has actually and fully paid the same;
and (3) pay attorney's fees in the amount of ₱ 30,000.00, as well as the costs of suit.

The Ruling of the RTC

On appeal (App. Civil Case No. 312-03), the Regional Trial Court (RTC) of Imus, Cavite, affirmed10 in
toto the decision of the MTC after finding that the cancellation and revocation of the contract for
failure of respondent to remit 25 monthly reimbursement payments converted the latter's stay on the
premises to one of "mere permission"11by petitioner, and that respondent's refusal to heed the notice
to vacate the premises rendered his continued possession thereof unlawful.12

With respect to the issue raised by respondent that the instant case is covered by Republic Act No.
6552 (R.A. No. 6552),13 the Maceda Law, the RTC ruled in the negative, ratiocinating that the Shelter
Contract Award is neither a contract of sale nor a contract to sell. Rather, it is "more akin to a
contract of lease with the monthly reimbursements as rentals."14

The Ruling of the Court of Appeals

On petition for review (CA-G.R. SP No. 81954) before the CA, the appellate court set aside the
decision of the RTC and entered a new judgment15 dismissing the complaint for unlawful detainer and
restoring respondent to the peaceful possession of the subject house and lot. The CA held that the
contract between the parties is not a contract of lease, but a contract to sell, which stipulates that
upon full payment of the value of the house and lot, respondent shall become the owner
thereof.16 The issues, which involve "the propriety of terminating the relationship contracted by the
parties, as well as the demand upon [respondent] to deliver the premises and to pay unpaid
reimbursements,"17 extend beyond those commonly involved in unlawful detainer suits, thus,
converting the instant case into one incapable of pecuniary estimation exclusively cognizable by the
RTC.18

Moreover, the appellate court faulted petitioner for failing to comply with the mandatory twin
requirements for a valid and effective cancellation of a contract to sell under Section 3 (b) of R.A.
No. 6552: (1) to send a notarized notice of cancellation, and (2) to refund the cash surrender value
of the payments on the property. Consequently, it held that the contract to sell still subsists, at least
until properly rescinded, and the action for ejectment filed by petitioner is premature.19

Aggrieved, petitioner filed a motion for reconsideration, which was denied by the CA in its
Resolution20 dated June 20, 2007. Hence, petitioner is now before this Court alleging that –

The Issues

1. The Honorable Court of Appeals erred in changing the main issue to be resolved in the instant
unlawful detainer case from who has the better right of possession to whether or not the agreement
between the parties is a contract of lease or a contract to sell, especially when the nature of the
agreement between the parties was never questioned nor raised as an issue in the court a quo.

2. Even assuming that the Honorable Court of Appeals was correct in changing the main issue to be
resolved, it nevertheless erred in determining that:

a. The agreement between the parties is allegedly one of contract to sell – when the Housing
and Land Use Regulatory Board itself already made a pronouncement that the Shelter
Program and its contract award is not a sale of real estate.

b. The action for unlawful detainer filed by petitioner AMOSUP is allegedly premature –
especially considering that Republic Act No. 6552, which requires notarial notice of
rescission, is not applicable to the case at bar and, thus, the written notice of termination
previously served on the respondent is already sufficient.21

The Ruling of the Court

It is basic that a contract is what the law defines it to be, and not what it is called by the contracting
parties. A contract to sell is defined as a bilateral contract whereby the prospective seller, while
expressly reserving the ownership of the subject property despite delivery thereof to the prospective
buyer, binds itself to sell the said property exclusively to the prospective buyer upon fulfillment of the
condition agreed upon, that is, full payment of the purchase price.22
The Shelter Contract Award granted to respondent expressly stipulates that "upon completion of
payment of the amount of US$28,563 representing the full value of the House and Lot subject of the
Contract Award, the UNION shall execute a Deed of Transfer and shall cause the issuance of the
corresponding Transfer Certificate of Title in favor of and in the name of the AWARDEE."23 It cannot
be denied, therefore, that the parties herein entered into a contract to sell in the guise of a
reimbursement scheme requiring respondent to make monthly reimbursement payments which are,
in actuality, installment payments for the value of the subject house and lot.

While respondent occupied the subject premises, title nonetheless remained with petitioner.
Considering, therefore, that the basis for such occupation is a contract to sell the premises on
installment, the contractual relations between the parties are more than that of a lessor-lessee.24 The
appellate court thus correctly ruled that the Shelter Contract Award has not been converted into one
of lease.

Petitioner tried, albeit in vain, to mislead the Court that the nature of the agreement between the
parties, and even the validity of the termination thereof, were never raised in the trial courts. In the
pre-trial brief filed by respondent before the MTC, the first issue he presented is "whether or not the
present action is a simple case of or an action for unlawful detainer or an action for rescission of the
Contract of Shelter Award which is outside of the jurisdiction of the Honorable Court."25

In the parallel case of Pagtalunan v. Dela Cruz Vda. De Manzano,26 which likewise originated as an
action for unlawful detainer, we affirmed the finding of the appellate court that, since the contract to
sell was not validly cancelled or rescinded under Section 3(b) of R.A. No. 6552, the respondent
therein had the right to continue occupying unmolested the property subject thereof. Section 3(b)
reads:

SEC. 3. In all transactions or contracts involving the sale or financing of real estate on installment
payments, including residential condominium apartments but excluding industrial lots, commercial
buildings and sales to tenants under Republic Act Numbered Thirty-eight hundred forty-four, as
amended by Republic Act Numbered Sixty-three hundred eighty-nine, where the buyer has paid at
least two years of installments, the buyer is entitled to the following rights in case he defaults in the
payment of succeeding installments:

xxx

(b) If the contract is canceled, the seller shall refund to the buyer the cash surrender value of the
payments on the property equivalent to fifty per cent of the total payments made, and, after five
years of installments, an additional five per cent every year but not to exceed ninety per cent of the
total payments made: Provided, That the actual cancellation of the contract shall take place after
thirty days from receipt by the buyer of the notice of cancellation or the demand for rescission of the
contract by a notarial act and upon full payment of the cash surrender value to the buyer. (Emphasis
supplied)

As we emphasized in Pagtalunan, "R.A. No. 6552, otherwise known as the Realty Installment Buyer
Protection Act, recognizes in conditional sales of all kinds of real estate (industrial, commercial,
residential) the right of the seller to cancel the contract upon non-payment of an installment by the
buyer, which is simply an event that prevents the obligation of the vendor to convey title from
acquiring binding force." While we agreed that the cancellation of a contract to sell may be done
outside of court, however, "the cancellation by the seller must be in accordance with Sec. 3(b) of
R.A. No. 6552, which requires a notarial act of rescission and the refund to the buyer of the full
payment of the cash surrender value of the payments on the property."27 In the present case, as aptly
pointed out by the appellate court, petitioner failed to prove that the Shelter Contract Award had
been cancelled in accordance with R.A. No. 6552, which would have been the basis for the illegality
of respondent's possession of the subject premises. Hence, the action for ejectment must
necessarily fail.

Petitioner nonetheless insists on the inapplicability of R.A. No. 6552 in this case, capitalizing on the
Decision28 of the Housing and Land Use Regulatory Board in HLURB CASE No. IV6-090902-1842
entitled "Seamen's Village Brotherhood Homeowners Association, Inc. v. Associated Marine Officers
And Seamen's Union of the Philippines (AMOSUP)" which held that the transaction between
petitioner and the residents of Seamen's Village cannot be considered a sale within the purview of
Presidential Decree (P.D.) No. 957.29 It should be pointed out that the only issue resolved in that case
is "whether or not the respondent (petitioner herein) is engaged in the business of selling real estate
subdivisions, so as to fall under the ambit of P.D. 957, the resolution of which would determine
whether or not respondent is required under the law to register with (the) Office and procure a
license to sell."30

Section 2(b) of P.D. 957 defines a sale as follows:

b.) Sale or Sell – "sale" or "sell" shall include every disposition, or attempt to dispose, for a valuable
consideration, of a subdivision lot, including the building and other improvements thereon, if any, in a
subdivision project or a condominium unit in a condominium project. "Sale" or "sell" shall include a
contract to sell, a contract of purchase and sale, an exchange, an attempt to sell, an option of sale or
purchase, a solicitation of a sale, or an offer to sell, directly or by an agent, or by a circular letter,
advertisement or otherwise.

A privilege given to a member of a cooperative, corporation, partnership, or any association and/or

the issuance of a certificate or receipt evidencing or giving the right of participation in, or right to any
land in consideration of payment of the membership fee or dues, shall be deemed a sale within the
meaning of this definition.

A reading of the Decision in its entirety reveals a vacillation on the part of the HLURB in classifying
the transaction between petitioner and its members. While the HLURB held that there is no sale as
contemplated under the first paragraph of the aforequoted provision "for the reason that there is no
valuable consideration involved in the transaction,"31 yet it went on to opine that the second
paragraph of the same provision "appears to have an apparent application in the instant case
although the same is not clear."32 Then, in its final disposition,33 the HLURB required petitioner to
secure a Certificate of Registration and License to Sell for its subdivision project thereby effectively
bringing it under the jurisdiction of said office. Clearly, the argument of petitioner that respondent is
not a realty installment buyer that needs to be protected by the law has no leg to stand on.

In the interest, however, of putting an end to the controversy between the parties herein that had
lasted for more than ten (10) years, as in the cited case of Pagtalunan, the Court orders respondent
to pay his arrears and settle the balance of the full value of the subject premises. He had enjoyed
the use thereof since 1995. After defaulting in August 1999, respondent had not made any
subsequent reimbursement payments. Thus, for the delay in his reimbursement payments, we
award interest at the rate of 6% per annum on the unpaid balance applying Article 220934 of the Civil
Code, there being no stipulation in the Shelter Contract Award for such interest.35 For purposes of
computing the legal interest, the reckoning period should be the notice of final demand, conformably
with Articles 116936 and 158937 of the same Code, which, as found by the MTC, was sent by petitioner
to respondent on August 21, 2001.38

In his Comment to the instant Petition, respondent claimed that he had made payments in the
amount of ₱ 318,167.70.39 The total amount for reimbursement for the subject house and lot is
US$28,563, which the Shelter Contract Award requires to be paid in "180 equal monthly periodic
reimbursements of US$159 or in equivalent Philippine Currency at the time the same falls due."40 For
lack of pertinent data with which to determine how many months respondent's alleged total payment
of ₱ 318,167.70 is equivalent to, we direct petitioner to submit to the trial court an accounting of the
payments made by respondent particularly showing the number of months he was able to make the
required payments of US$159 or its peso equivalent. The balance of the full value of the subject
premises shall then be computed on the basis of the following formula: (180 months minus the
number of months that respondent had already paid) multiplied by US$159 or its peso equivalent at
the time of payment.

WHEREFORE, the Decision of the Court of Appeals dated July 31, 2006 and the Resolution dated
June 20, 2007 are hereby AFFIRMED with the following MODIFICATIONS:

1. The Municipal Trial Court of Dasmariñas, Cavite is directed to conduct a hearing, within a
maximum period of thirty (30) days from receipt of this Decision, to determine: (a) the unpaid
balance of the full value of the subject house and Jot; and (b) the reasonable amount of
rental for the subject property at present times.

2. Within sixty (60) days from the determination of the trial court of said balance, respondent
shall pay the amount thereof to petitioner, with interest at six percent ( 6%) per annum from
August 1, 2001 up to the date of actual payment;

3. Upon payment, petitioner shall execute a Deed of Absolute Sale of the subject property
and deliver the transfer certificate of title in favor of respondent;

4. In case of failure to pay within the mandated 60-day period, respondent shall immediately
vacate the premises without need of further demand. Petitioner, on the other hand, shall pay
respondent the cash surrender value equivalent to 50% of the total reimbursement payments
made. The Shelter Contract Award shall then be deemed cancelled thirty (30) days after
receipt by respondent of the full payment of the cash surrender value. If respondent fails to
vacate the premises, he shall be charged reasonable rental in the amount determined by the
trial court.

SO ORDERED.

G.R. No. 107207 November 23, 1995

VIRGILIO R. ROMERO, petitioner,

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

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

Petitioner Virgilio R. Romero, a civil engineer, was engaged in the business of production,
manufacture and exportation of perlite filter aids, permalite insulation and processed perlite ore. In
1988, petitioner and his foreign partners decided to put up a central warehouse in Metro Manila on a
land area of approximately 2,000 square meters. The project was made known to several freelance
real estate brokers.

A day or so after the announcement, Alfonso Flores and his wife, accompanied by a broker, offered
a parcel of land measuring 1,952 square meters. Located in Barangay San Dionisio, Parañaque,
Metro Manila, the lot was covered by TCT No. 361402 in the name of private respondent Enriqueta
Chua vda. de Ongsiong. Petitioner visited the property and, except for the presence of squatters in
the area, he found the place suitable for a central warehouse.

Later, the Flores spouses called on petitioner with a proposal that should he advance the amount of
P50,000.00 which could be used in taking up an ejectment case against the squatters, private
respondent would agree to sell the property for only P800.00 per square meter. Petitioner expressed
his concurrence. On 09 June 1988, a contract, denominated "Deed of Conditional Sale," was
executed between petitioner and private respondent. The simply-drawn contract read:

DEED OF CONDITIONAL SALE

KNOW ALL MEN BY THESE PRESENTS:

This Contract, made and executed in the Municipality of Makati, Philippines this 9th
day of June, 1988 by and between:

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

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

-and-

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

Filipino, and residing at 110 San Miguel St., Plainview Subd.,
Mandaluyong Metro Manila, hereinafter referred to as the VENDEE:

W I T N E S S E T H : That

WHEREAS, the VENDOR is the owner of One (1) parcel of land with a total area of
ONE THOUSAND NINE HUNDRED FIFTY TWO (1,952) SQUARE METERS, more
or less, located in Barrio San Dionisio, Municipality of Parañaque, Province of Rizal,
covered by TCT No. 361402 issued by the Registry of Deeds of Pasig and more
particularly described as follows:

xxx xxx xxx

WHEREAS, the VENDEE, for (sic) has offered to buy a parcel of land and the
VENDOR has accepted the offer, subject to the terms and conditions hereinafter
stipulated:

NOW, THEREFORE, for and in consideration of the sum of ONE MILLION FIVE
HUNDRED SIXTY ONE THOUSAND SIX HUNDRED PESOS (P1,561,600.00)
ONLY, Philippine Currency, payable by VENDEE to in to (sic) manner set forth, the
VENDOR agrees to sell to the VENDEE, their heirs, successors, administrators,
executors, assign, all her rights, titles and interest in and to the property mentioned in
the FIRST WHEREAS CLAUSE, subject to the following terms and conditions:

1. That the sum of FIFTY THOUSAND PESOS (P50,000.00) ONLY

Philippine Currency, is to be paid upon signing and execution of this
instrument.

2. The balance of the purchase price in the amount of ONE MILLION

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

3. Upon full payment of the overall purchase price as aforesaid,

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

It is hereby agreed, covenanted and stipulated by and between the parties hereto
that if after 60 days from the date of the signing of this contract the VENDOR shall
not be able to remove the squatters from the property being purchased, the
downpayment made by the buyer shall be returned/reimbursed by the VENDOR to
the VENDEE.

That in the event that the VENDEE shall not be able to pay the VENDOR the balance
of the purchase price of ONE MILLION FIVE HUNDRED ELEVEN THOUSAND SIX
HUNDRED PESOS (P1,511,600.00) ONLY after 45 days from written notification to
the VENDEE of the removal of the squatters from the property being purchased, the
FIFTY THOUSAND PESOS (P50,000.00) previously paid as downpayment shall be
forfeited in favor of the VENDOR.

Expenses for the registration such as registration fees, documentary stamp, transfer
fee, assurances and such other fees and expenses as may be necessary to transfer
the title to the name of the VENDEE shall be for the account of the VENDEE while
capital gains tax shall be paid by the VENDOR.

IN WITNESS WHEREOF, the parties hereunto signed those (sic) presents in the City
of Makati MM, Philippines on this 9th day of June, 1988.

(Sgd.) (Sgd.)

VIRGILIO R. ROMERO ENRIQUETA CHUA VDA.

 DE ONGSIONG

Vendee Vendor

SIGNED IN THE PRESENCE OF:

(Sgd.) (Sgd.)

Rowena C. Ongsiong Jack M. Cruz1

Alfonso Flores, in behalf of private respondent, forthwith received and acknowledged a check
for P50,000.002from petitioner.3

Pursuant to the agreement, private respondent filed a complaint for ejectment (Civil Case No. 7579)
against Melchor Musa and 29 other squatter families with the Metropolitan Trial Court of Parañaque.
A few months later, or on 21 February 1989, judgment was rendered ordering the defendants to
vacate the premises. The decision was handed down beyond the 60-day period (expiring 09 August
1988) stipulated in the contract. The writ of execution of the judgment was issued, still later, on 30
March 1989.

In a letter, dated 07 April 1989, private respondent sought to return the P50,000.00 she received
from petitioner since, she said, she could not "get rid of the squatters" on the lot. Atty. Sergio A.F.
Apostol, counsel for petitioner, in his reply of 17 April 1989, refused the tender and stated:.

Our client believes that with the exercise of reasonable diligence considering the
favorable decision rendered by the Court and the writ of execution issued pursuant
thereto, it is now possible to eject the squatters from the premises of the subject
property, for which reason, he proposes that he shall take it upon himself to eject the
squatters, provided, that expenses which shall be incurred by reason thereof shall be
chargeable to the purchase price of the land.4

Meanwhile, the Presidential Commission for the Urban Poor ("PCUD"), through its Regional Director
for Luzon, Farley O. Viloria, asked the Metropolitan Trial Court of Parañaque for a grace period of 45
days from 21 April 1989 within which to relocate and transfer the squatter families. Acting favorably
on the request, the court suspended the enforcement of the writ of execution accordingly.

On 08 June 1989, Atty. Apostol reminded private respondent on the expiry of the 45-day grace
period and his client's willingness to "underwrite the expenses for the execution of the judgment and
ejectment of the occupants."5

In his letter of 19 June 1989, Atty. Joaquin Yuseco, Jr., counsel for private respondent, advised Atty.
Apostol that the Deed of Conditional Sale had been rendered null and void by virtue of his client's
failure to evict the squatters from the premises within the agreed 60-day period. He added that
private respondent had "decided to retain the property."6

On 23 June 1989, Atty. Apostol wrote back to explain:

The contract of sale between the parties was perfected from the very moment that
there was a meeting of the minds of the parties upon the subject lot and the price in
the amount of P1,561,600.00. Moreover, the contract had already been partially
fulfilled and executed upon receipt of the downpayment of your client. Ms. Ongsiong
 is precluded from rejecting its binding effects relying upon her inability to eject the
squatters from the premises of subject property during the agreed period. Suffice it to
state that, the provision of the Deed of Conditional Sale do not grant her the option or
prerogative to rescind the contract and to retain the property should she fail to
comply with the obligation she has assumed under the contract. In fact, a perusal of
the terms and conditions of the contract clearly shows that the right to rescind the
contract and to demand the return/reimbursement of the downpayment is granted to
our client for his protection.

Instead, however, of availing himself of the power to rescind the contract and
demand the return, reimbursement of the downpayment, our client had opted to take
it upon himself to eject the squatters from the premises. Precisely, we refer you to
our letters addressed to your client dated April 17, 1989 and June 8, 1989.

Moreover, it is basic under the law on contracts that the power to rescind is given to
the injured party. Undoubtedly, under the circumstances, our client is the injured
party.

Furthermore, your client has not complied with her obligation under their contract in
good faith. It is undeniable that Ms. Ongsiong deliberately refused to exert efforts to
eject the squatters from the premises of the subject property and her decision to
retain the property was brought about by the sudden increase in the value of realties
in the surrounding areas.

Please consider this letter as a tender of payment to your client and a demand to
execute the absolute Deed of Sale.7

A few days later (or on 27 June 1989), private respondent, prompted by petitioner's continued
refusal to accept the return of the P50,000.00 advance payment, filed with the Regional Trial Court
of Makati, Branch 133, Civil Case No. 89-4394 for rescission of the deed of "conditional" sale, plus
damages, and for the consignation of P50,000.00 cash.

Meanwhile, on 25 August 1989, the Metropolitan Trial Court issued an alias writ of execution in Civil
Case No. 7579 on motion of private respondent but the squatters apparently still stayed on.

Back to Civil Case No. 89-4394, on 26 June 1990, the Regional Trial Court of Makati8 rendered
decision holding that private respondent had no right to rescind the contract since it was she who
"violated her obligation to eject the squatters from the subject property" and that petitioner, being the
injured party, was the party who could, under Article 1191 of the Civil Code, rescind the agreement.
The court ruled that the provisions in the contract relating to (a) the return/reimbursement of the
P50,000.00 if the vendor were to fail in her obligation to free the property from squatters within the
stipulated period or (b), upon the other hand, the sum's forfeiture by the vendor if the vendee were to
fail in paying the agreed purchase price, amounted to "penalty clauses". The court added:

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

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

Private respondent appealed to the Court of Appeals. On 29 May 1992, the appellate court rendered
its decision. 10It opined that the contract entered into by the parties was subject to a resolutory
condition, i.e., the ejectment of the squatters from the land, the non-occurrence of which resulted in
the failure of the object of the contract; that private respondent substantially complied with her
obligation to evict the squatters; that it was petitioner who was not ready to pay the purchase price
and fulfill his part of the contract, and that the provision requiring a mandatory return/reimbursement
of the P50,000.00 in case private respondent would fail to eject the squatters within the 60-day
period was not a penal clause. Thus, it concluded.

WHEREFORE, the decision appealed from is REVERSED and SET ASIDE, and a
new one entered declaring the contract of conditional sale dated June 9, 1988
cancelled and ordering the defendant-appellee to accept the return of the
downpayment in the amount of P50,000.00 which was deposited in the court below.
No pronouncement as to costs.11

Failing to obtain a reconsideration, petitioner filed this petition for review on certiorari raising issues
that, in fine, center on the nature of the contract adverted to and the P50,000.00 remittance made by
petitioner.

A perfected contract of sale may either be absolute or conditional12 depending on whether the
agreement is devoid of, or subject to, any condition imposed on the passing of title of the thing to be
conveyed or on the obligation of a party thereto. When ownership is retained until the fulfillment of a
positive condition the breach of the condition will simply prevent the duty to convey title from
acquiring an obligatory force. If the condition is imposed on an obligationof a party which is not
complied with, the other party may either refuse to proceed or waive said condition (Art. 1545, Civil
Code). Where, of course, the condition is imposed upon the perfection of the contract itself, the
failure of such condition would prevent the juridical relation itself from coming into existence.13

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

The term "condition" in the context of a perfected contract of sale pertains, in reality, to the
compliance by one party of an undertaking the fulfillment of which would beckon, in turn, the
demandability of the reciprocal prestation of the other party. The reciprocal obligations referred to
would normally be, in the case of vendee, the payment of the agreed purchase price and, in the case
of the vendor, the fulfillment of certain express warranties (which, in the case at bench is the timely
eviction of the squatters on the property).

It would be futile to challenge the agreement here in question as not being a duly perfected contract.
A sale is at once perfected when a person (the seller) obligates himself, for a price certain, to deliver
and to transfer ownership of a specified thing or right to another (the buyer) over which the latter
agrees.15

The object of the sale, in the case before us, was specifically identified to be a 1,952-square meter
lot in San Dionisio, Parañaque, Rizal, covered by Transfer Certificate of Title No. 361402 of the
Registry of Deeds for Pasig and therein technically described. The purchase price was fixed at
P1,561,600.00, of which P50,000.00 was to be paid upon the execution of the document of sale and
the balance of P1,511,600.00 payable "45 days after the removal of all squatters from the above
described property."

From the moment the contract is perfected, the parties are bound not only to the fulfillment of what
has been expressly stipulated but also to all the consequences which, according to their nature, may
be in keeping with good faith, usage and law. Under the agreement, private respondent is obligated
to evict the squatters on the property. The ejectment of the squatters is a condition the operative act
of which sets into motion the period of compliance by petitioner of his own obligation, i.e., to pay the
balance of the purchase price. Private respondent's failure "to remove the squatters from the
property" within the stipulated period gives petitioner the right to either refuse to proceed with the
agreement or waive that condition in consonance with Article 1545 of the Civil Code.16 This option
clearly belongs to petitioner and not to private respondent.

We share the opinion of the appellate court that the undertaking required of private respondent does
not constitute a "potestative condition dependent solely on his will" that might, otherwise, be void in
accordance with Article 1182 of the Civil Code17 but a "mixed" condition "dependent not on the will of
the vendor alone but also of third persons like the squatters and government agencies and
personnel concerned."18 We must hasten to add, however, that where the so-called "potestative
condition" is imposed not on the birth of the obligation but on its fulfillment, only the obligation is
avoided, leaving unaffected the obligation itself.19

In contracts of sale particularly, Article 1545 of the Civil Code, aforementioned, allows the obligee to
choose between proceeding with the agreement or waiving the performance of the condition. It is
this provision which is the pertinent rule in the case at bench. Here, evidently, petitioner has waived
the performance of the condition imposed on private respondent to free the property from squatters.20

In any case, private respondent's action for rescission is not warranted. She is not the injured
party.21 The right of resolution of a party to an obligation under Article 1191 of the Civil Code is
predicated on a breach of faith by the other party that violates the reciprocity between them.22 It is
private respondent who has failed in her obligation under the contract. Petitioner did not breach the
agreement. He has agreed, in fact, to shoulder the expenses of the execution of the judgment in the
ejectment case and to make arrangements with the sheriff to effect such execution. In his letter of 23
June 1989, counsel for petitioner has tendered payment and demanded forthwith the execution of
the deed of absolute sale. Parenthetically, this offer to pay, having been made prior to the demand
for rescission, assuming for the sake of argument that such a demand is proper under Article
159223 of the Civil Code, would likewise suffice to defeat private respondent's prerogative to rescind
thereunder.

There is no need to still belabor the question of whether the P50,000.00 advance payment is
reimbursable to petitioner or forfeitable by private respondent, since, on the basis of our foregoing
conclusions, the matter has ceased to be an issue. Suffice it to say that petitioner having opted to
proceed with the sale, neither may petitioner demand its reimbursement from private respondent nor
may private respondent subject it to forfeiture.
WHEREFORE, the questioned decision of the Court of Appeals is hereby REVERSED AND SET
ASIDE, and another is entered ordering petitioner to pay private respondent the balance of the
purchase price and the latter to execute the deed of absolute sale in favor of petitioner. No costs.

SO ORDERED.

G.R. No. 130403 July 30, 2007

FRANCISCO GONZALES, Petitioner,

vs.
SEVERINO C. LIM and TOYOTA SHAW, INC., Respondents.

DECISION

CORONA, J.:

At bar is an appeal by certiorari under Rule 45 of the Rules of Court questioning the decision1 and
resolution2 of the Court of Appeals (CA) in CA-G.R. CV No. 41716 entitled Severino C. Lim and
Toyota Shaw, Inc. v. Francisco Gonzales and Carmen Gonzales.

The facts follow.

Petitioner Francisco Gonzales, Roque Ma. Gonzales and Carmen Gonzales (Gonzaleses) were the
owners of Motown Vehicles, Inc. (Motown). Motown was the licensed distributor of Ford vehicles in
the country. Its assets included two buildings standing on a 4,944 sq. m. lot leased from Tanglaw
Realty Inc. (Tanglaw).

In 1988, when Ford Philippines ceased operations, the Gonzaleses sold Motown’s shares of stocks
to respondents Severino C. Lim and Toyota Shaw, Inc. which was then putting up a Toyota car
dealership. The "Agreement" signed by the parties stated that the sale included Motown’s two lease
contracts with Tanglaw. It read:

WHEREAS, Motown, which owns these fixed and moveable improvements and equipments…does
not own the land on which these improvements and equipments are located, but merely leases the
bare land… from Tanglaw Realty Corp. under 2 Lease Contracts both dated June 17, 1978 both
commencing Nov. 15, 1977 and expiring Nov. 14, 2002.

xxx xxx xxx

4. PAYMENT — The aforementioned price amounting to ₱6,746,000.00 shall be paid by

[respondents] to the [Gonzaleses] in two (2) installments payable simultaneous to the occurrence of
the following events:

1. ₱6,246,000 – [u]pon signing of this contract xxx

2. ₱500,000 – [u]pon receipt of official communication from Tanglaw Realty Corporation to

the effect that Motown can have continuing and unhampered use of the pieces of [the
 leased] land…covered by the 2 Lease Contracts…[I]t is understood that the continuation of
the lease at a reasonable rate for the original term of the 2 lease agreements is a central,
indivisible and very basic part of this agreement, since the [bases] for the valuation of
Motown by [respondents are] its location and the improvements and equipments contained
therein.3

xxx xxx xxx

After paying the initial installment of ₱6,246,000 to the Gonzaleses, respondents claimed they
discovered that one of Motown’s lease contracts had already been terminated prior to the sale. As a
result, they were allegedly constrained to negotiate with Tanglaw for a new lease contract (with a
higher rental).

Subsequently, respondents filed a case in the Regional Trial Court (RTC), Branch 65 of Makati,4 for
declaratory relief with damages against the Gonzaleses, seeking release from their obligation to pay
the ₱500,000 balance.

During the trial, respondents (as then plaintiffs) accused the Gonzaleses of falsely representing to
them that the latter’s two lease contracts were still subsisting at the time of the sale. They
maintained that the Gonzaleses guaranteed a "continuing and unhampered use" of the premises but
Tanglaw had nonetheless threatened to evict them from one of the leased portions.

To support their claim, they presented in court a copy of the "Agreement" indicating the Gonzaleses’
alleged warranty that the two lease contracts with Tanglaw were still good.

Petitioner (with his then co-defendants) countered that respondents were well aware of the
termination of one of the two lease contracts at the time of sale. He denied giving a warranty on both
contracts and explained that he only signed the "Agreement" (showing Motown’s two lease contracts
with Tanglaw) on prodding by respondents that they needed it to convince Toyota Philippines they
were ready with their dealership site. According to petitioner, respondents told him it was only "for
show" and amendments thereto would be made later on.

Petitioner added that his only undertaking was to help respondents negotiate a new lease contract
that would have similar terms as his. As a counterclaim, petitioner asked for the payment of
respondents’ ₱500,000 balance.

After trial, the RTC dismissed respondents’ case but granted petitioner’s counterclaim of ₱500,000.
The court a quo’s decision read:

...[T]he court finds that [petitioner] did not warrant the existence of the lease on one of the premises.
The court believes that even before the ["Agreement"] has been executed[,] [respondents were]
already aware that one of the leases has been terminated…[I]f [petitioner] warranted anything at all,
it was only that he will help [respondents] procure a new lease contract under the old term.

xxx xxx xxx

…In view of the foregoing, the complaint is DISMISSED[.] On the counterclaim, [respondents] are
ordered to pay [petitioner] ₱500,000, representing the outstanding balance for the sale of Motown
shares of stocks plus legal interest from October 10, 1989, the date of the lease between Tanglaw
Realty and Toyota Shaw, Inc., when [petitioner] was deemed to have fulfilled his promise.
 xxx xxx xxx

SO ORDERED.5

Respondents appealed to the CA which affirmed with modification the trial court’s decision. It agreed
with the RTC that respondents could not feign ignorance of Motown’s terminated lease contract;
however, it deleted the order directing respondents to pay petitioner ₱500,000. The CA ruled that the
payment was not due since petitioner failed to obtain the required official communication from
Tanglaw. The CA decision read:

xxx xxx xxx

xxx. The phrase "continuation of the lease contract at a reasonable rate" proves that [respondents]
did not contemplate stepping into the shoes of Motown as lessee of the parcels of land because if
what they truly expected was to continue exactly the same lease agreement between [Tanglaw] and
Motown, there would have been no need to include [said] phrase… Clearly, [respondents]
anticipated nay expected that if they continue the lease, it would not be under the same terms and
conditions as the original contract, but rather at a new, reasonable rate. Therefore, there was no
warranty from [petitioner]…

…[W]ith regard to the question of whether [respondents] are now obliged to pay [petitioner] the
₱500,000.00…, the Court finds that [petitioner had] not been able to fulfill [his] obligation to submit
the required official communication from Tanglaw Realty Corporation. Thus, [respondents]
are…freed from their obligation to pay the final installment of ₱500,000.00.

xxx xxx xxx

WHEREFORE, judgment is hereby rendered MODIFYING the lower court’s decision by deleting the
portion ordering [respondents] to pay [petitioner] ₱500,000 plus legal interest. Instead, the Court
hereby declares [petitioner’s] counterclaim DISMISSED.6

Petitioner filed a motion for reconsideration (MR), contending that the payment of the ₱500,000
balance was already due because respondents themselves had prevented him from fulfilling his
undertaking in the "Agreement." Petitioner insisted that since respondents negotiated directly with
Tanglaw for a new lease contract, petitioner’s obligation should be deemed fulfilled.

The CA denied the MR.7 Hence, this petition.8

In this petition, the lone issue for resolution is whether petitioner was still entitled to the payment of
₱500,000 despite failure to comply with the provision in the "Agreement" requiring him to obtain an
official communication from Tanglaw regarding the continuation of Motown’s lease contract.

At the outset, petitioner’s undertaking set forth in the "Agreement" may be deemed a "condition," a
future and uncertain event upon which the existence of an obligation is made to depend or that
which subordinates the existence of a liability under a contract to a certain future event.9 It was a
condition that was imposed on an obligation after the consummation of the contract of sale, not a
condition on the perfection of the contract itself (non-fulfillment of which could have prevented the
juridical relation from coming into existence).

Article 1545 of the Civil Code is pertinent:

Art. 1545. Where the obligation of either party to a contract of sale is subject to any condition
which is not performed, such party may refuse to proceed with the contract or he may waive
performance of the condition. If the other party has promised that the condition should happen or
be performed, such first mentioned party may also treat the nonperformance of the condition as a
breach of warranty. (emphasis supplied)

xxx xxx xxx

These options were echoed in Romero v. CA,10 where we declared that if the condition was imposed
on an obligation of a party which was not complied with, the other party may either (1) refuse to
proceed with the agreement or (2) waive the fulfillment of the condition.

In the case at bar, respondents obviously did not choose the first option as they proceeded with their
contract with petitioner despite the latter’s non-fulfillment of the condition in the agreement. In fact, in
their comment, they stated that they "took possession of the properties and caused extensive
improvement and installed facilities and equipment" thereon.11

Did respondents, however, waive fulfillment of the condition? Yes.

The records reveal that respondents negotiated directly with Tanglaw for a new lease contract even
without the required official communication that petitioner was supposed to obtain for them, a
condition in the "Agreement" which they themselves imposed on the latter. Although they had the
right to require his compliance with the condition or compel his performance of the undertaking, they
opted otherwise.

Respondents’ assertion that they were merely forced to deal directly with Tanglaw because the latter
had threatened to evict them has no merit. As the RTC and the CA both held, respondents, at the
time of the sale, already knew that one of Motown’s two lease contracts with Tanglaw had been
terminated. This being a finding of fact, we shall not look into it, absent any compelling reason to do
so.12 Respondents therefore cannot invoke this argument to justify their actions and evade their
liability to petitioner.
1awphil

Moreover, respondents’ contention that the condition did not preclude them from dealing with
Tanglaw or that they were "to refrain from negotiating directly"13 can only mean that they did not
really expect petitioner to comply strictly and absolutely with it. Respondents’ conduct showed that
they did not only disregard the condition but also placed petitioner in a position that his compliance
was no longer necessary. We are thus constrained to rule that they had effectively waived
compliance with the condition.

Finally, the condition was deemed waived when respondents forged their new lease contract with
Tanglaw.14

WHEREFORE, the petition is hereby GRANTED. The assailed decision and resolution of the Court
of Appeals in CA-G.R. CV No. 41716 are hereby SET ASIDE and the decision of the Regional Trial
Court REINSTATED.

SO ORDERED.
G.R. No. 146839 March 23, 2011

ROLANDO T. CATUNGAL, JOSE T. CATUNGAL, JR., CAROLYN T. CATUNGAL and ERLINDA

CATUNGAL-WESSEL, Petitioners,
vs.
ANGEL S. RODRIGUEZ, Respondent.

DECISION

LEONARDO-DE CASTRO, J.:

Before the Court is a Petition for Review on Certiorari, assailing the following issuances of the Court
of Appeals in CA-G.R. CV No. 40627 consolidated with CA-G.R. SP No. 27565: (a) the August 8,
2000 Decision,1 which affirmed the Decision2 dated May 30, 1992 of the Regional Trial Court (RTC),
Branch 27 of Lapu-lapu City, Cebu in Civil Case No. 2365-L, and (b) the January 30, 2001
Resolution,3 denying herein petitioners’ motion for reconsideration of the August 8, 2000 Decision.

The relevant factual and procedural antecedents of this case are as follows:

This controversy arose from a Complaint for Damages and Injunction with Preliminary
Injunction/Restraining Order4filed on December 10, 1990 by herein respondent Angel S. Rodriguez
(Rodriguez), with the RTC, Branch 27, Lapu-lapu City, Cebu, docketed as Civil Case No. 2365-L
against the spouses Agapita and Jose Catungal (the spouses Catungal), the parents of petitioners.

In the said Complaint, it was alleged that Agapita T. Catungal (Agapita) owned a parcel of land (Lot
10963) with an area of 65,246 square meters, covered by Original Certificate of Title (OCT) No.
1055 in her name situated in the Barrio of Talamban, Cebu City. The said property was allegedly the
exclusive paraphernal property of Agapita.

On April 23, 1990, Agapita, with the consent of her husband Jose, entered into a Contract to
Sell6 with respondent Rodriguez. Subsequently, the Contract to Sell was purportedly "upgraded" into
a Conditional Deed of Sale7 dated July 26, 1990 between the same parties. Both the Contract to Sell
and the Conditional Deed of Sale were annotated on the title.

The provisions of the Conditional Deed of Sale pertinent to the present dispute are quoted below:

1. The VENDOR for and in consideration of the sum of TWENTY[-]FIVE MILLION PESOS
(₱25,000,000.00) payable as follows:

a. FIVE HUNDRED THOUSAND PESOS (₱500,000.00) downpayment upon the signing of

this agreement, receipt of which sum is hereby acknowledged in full from the VENDEE.

b. The balance of TWENTY[-]FOUR MILLION FIVE HUNDRED THOUSAND PESOS

(₱24,500,000.00) shall be payable in five separate checks, made to the order of JOSE Ch.
CATUNGAL, the first check shall be for FOUR MILLION FIVE HUNDRED THOUSAND
PESOS (₱4,500,000.00) and the remaining balance to be paid in four checks in the amounts
of FIVE MILLION PESOS (₱5,000,000.00) each after the VENDEE have (sic) successfully
negotiated, secured and provided a Road Right of Way consisting of 12 meters in width
cutting across Lot 10884 up to the national road, either by widening the existing Road Right
of Way or by securing a new Road Right of Way of 12 meters in width. If however said Road
Right of Way could not be negotiated, the VENDEE shall give notice to the VENDOR for
 them to reassess and solve the problem by taking other options and should the situation
ultimately prove futile, he shall take steps to rescind or cancel the herein Conditional Deed of
Sale.

c. That the access road or Road Right of Way leading to Lot 10963 shall be the responsibility
of the VENDEE to secure and any or all cost relative to the acquisition thereof shall be borne
solely by the VENDEE. He shall, however, be accorded with enough time necessary for the
success of his endeavor, granting him a free hand in negotiating for the passage.

BY THESE PRESENTS, the VENDOR do hereby agree to sell by way of herein CONDITIONAL
DEED OF SALE to VENDEE, his heirs, successors and assigns, the real property described in the
Original Certificate of Title No. 105 x x x.

xxxx

5. That the VENDEE has the option to rescind the sale. In the event the VENDEE exercises his
option to rescind the herein Conditional Deed of Sale, the VENDEE shall notify the VENDOR by way
of a written notice relinquishing his rights over the property. The VENDEE shall then be reimbursed
by the VENDOR the sum of FIVE HUNDRED THOUSAND PESOS (₱500,000.00) representing the
downpayment, interest free, payable but contingent upon the event that the VENDOR shall have
been able to sell the property to another party.8

In accordance with the Conditional Deed of Sale, Rodriguez purportedly secured the necessary
surveys and plans and through his efforts, the property was reclassified from agricultural land into
residential land which he claimed substantially increased the property’s value. He likewise alleged
that he actively negotiated for the road right of way as stipulated in the contract.9

Rodriguez further claimed that on August 31, 1990 the spouses Catungal requested an advance of
₱5,000,000.00 on the purchase price for personal reasons. Rodriquez allegedly refused on the
ground that the amount was substantial and was not due under the terms of their agreement. Shortly
after his refusal to pay the advance, he purportedly learned that the Catungals were offering the
property for sale to third parties.10

Thereafter, Rodriguez received letters dated October 22, 1990,11 October 24, 199012 and October
29, 1990,13 all signed by Jose Catungal who was a lawyer, essentially demanding that the former
make up his mind about buying the land or exercising his "option" to buy because the spouses
Catungal allegedly received other offers and they needed money to pay for personal obligations and
for investing in other properties/business ventures. Should Rodriguez fail to exercise his option to
buy the land, the Catungals warned that they would consider the contract cancelled and that they
were free to look for other buyers.

In a letter dated November 4, 1990,14 Rodriguez registered his objections to what he termed the
Catungals’ unwarranted demands in view of the terms of the Conditional Deed of Sale which allowed
him sufficient time to negotiate a road right of way and granted him, the vendee, the exclusive right
to rescind the contract. Still, on November 15, 1990, Rodriguez purportedly received a letter dated
November 9, 199015 from Atty. Catungal, stating that the contract had been cancelled and
terminated.

Contending that the Catungals’ unilateral rescission of the Conditional Deed of Sale was unjustified,
arbitrary and unwarranted, Rodriquez prayed in his Complaint, that:
 1. Upon the filing of this complaint, a restraining order be issued enjoining defendants [the
spouses Catungal], their employees, agents, representatives or other persons acting in their
behalf from offering the property subject of this case for sale to third persons; from
entertaining offers or proposals by third persons to purchase the said property; and, in
general, from performing acts in furtherance or implementation of defendants’ rescission of
their Conditional Deed of Sale with plaintiff [Rodriguez].

2. After hearing, a writ of preliminary injunction be issued upon such reasonable bond as
may be fixed by the court enjoining defendants and other persons acting in their behalf from
performing any of the acts mentioned in the next preceding paragraph.

3. After trial, a Decision be rendered:

a) Making the injunction permanent;

b) Condemning defendants to pay to plaintiff, jointly and solidarily:

Actual damages in the amount of ₱400,000.00 for their unlawful rescission of the Agreement and
their performance of acts in violation or disregard of the said Agreement;

Moral damages in the amount of ₱200,000.00;

Exemplary damages in the amount of ₱200,000.00; Expenses of litigation and attorney’s fees in the
amount of ₱100,000.00; and

Costs of suit.16

On December 12, 1990, the trial court issued a temporary restraining order and set the application
for a writ of preliminary injunction for hearing on December 21, 1990 with a directive to the spouses
Catungal to show cause within five days from notice why preliminary injunction should not be
granted. The trial court likewise ordered that summons be served on them.17

Thereafter, the spouses Catungal filed their opposition18 to the issuance of a writ of preliminary
injunction and later filed a motion to dismiss19 on the ground of improper venue. According to the
Catungals, the subject property was located in Cebu City and thus, the complaint should have been
filed in Cebu City, not Lapu-lapu City. Rodriguez opposed the motion to dismiss on the ground that
his action was a personal action as its subject was breach of a contract, the Conditional Deed of
Sale, and not title to, or possession of real property.20

In an Order dated January 17, 1991,21 the trial court denied the motion to dismiss and ruled that the
complaint involved a personal action, being merely for damages with a prayer for injunction.

Subsequently, on January 30, 1991, the trial court ordered the issuance of a writ of preliminary
injunction upon posting by Rodriguez of a bond in the amount of ₱100,000.00 to answer for
damages that the defendants may sustain by reason of the injunction.

On February 1, 1991, the spouses Catungal filed their Answer with Counterclaim22 alleging that they
had the right to rescind the contract in view of (1) Rodriguez’s failure to negotiate the road right of
way despite the lapse of several months since the signing of the contract, and (2) his refusal to pay
the additional amount of ₱5,000,000.00 asked by the Catungals, which to them indicated his lack of
funds to purchase the property. The Catungals likewise contended that Rodriguez did not have an
exclusive right to rescind the contract and that the contract, being reciprocal, meant both parties had
the right to rescind.23 The spouses Catungal further claimed that it was Rodriguez who was in breach
of their agreement and guilty of bad faith which justified their rescission of the contract.24 By way of
counterclaim, the spouses Catungal prayed for actual and consequential damages in the form of
unearned interests from the balance (of the purchase price in the amount) of ₱24,500,000.00, moral
and exemplary damages in the amount of ₱2,000,000.00, attorney’s fees in the amount of
₱200,000.00 and costs of suits and litigation expenses in the amount of ₱10,000.00.25 The spouses
Catungal prayed for the dismissal of the complaint and the grant of their counterclaim.

The Catungals amended their Answer twice,26 retaining their basic allegations but amplifying their
charges of contractual breach and bad faith on the part of Rodriguez and adding the argument that
in view of Article 1191 of the Civil Code, the power to rescind reciprocal obligations is granted by the
law itself to both parties and does not need an express stipulation to grant the same to the injured
party. In the Second Amended Answer with Counterclaim, the spouses Catungal added a prayer for
the trial court to order the Register of Deeds to cancel the annotations of the two contracts at the
back of their OCT.27

On October 24, 1991, Rodriguez filed an Amended Complaint,28 adding allegations to the effect that
the Catungals were guilty of several misrepresentations which purportedly induced Rodriguez to buy
the property at the price of ₱25,000,000.00. Among others, it was alleged that the spouses Catungal
misrepresented that their Lot 10963 includes a flat portion of land which later turned out to be a
separate lot (Lot 10986) owned by Teodora Tudtud who sold the same to one Antonio Pablo. The
Catungals also allegedly misrepresented that the road right of way will only traverse two lots owned
by Anatolia Tudtud and her daughter Sally who were their relatives and who had already agreed to
sell a portion of the said lots for the road right of way at a price of ₱550.00 per square meter.
However, because of the Catungals’ acts of offering the property to other buyers who offered to buy
the road lots for ₱2,500.00 per square meter, the adjacent lot owners were no longer willing to sell
the road lots to Rodriguez at ₱550.00 per square meter but were asking for a price of ₱3,500.00 per
square meter. In other words, instead of assisting Rodriguez in his efforts to negotiate the road right
of way, the spouses Catungal allegedly intentionally and maliciously defeated Rodriguez’s
negotiations for a road right of way in order to justify rescission of the said contract and enable them
to offer the property to other buyers.

Despite requesting the trial court for an extension of time to file an amended Answer,29 the Catungals
did not file an amended Answer and instead filed an Urgent Motion to Dismiss30 again invoking the
ground of improper venue. In the meantime, for failure to file an amended Answer within the period
allowed, the trial court set the case for pre-trial on December 20, 1991.

During the pre-trial held on December 20, 1991, the trial court denied in open court the Catungals’
Urgent Motion to Dismiss for violation of the rules and for being repetitious and having been
previously denied.31 However, Atty. Catungal refused to enter into pre-trial which prompted the trial
court to declare the defendants in default and to set the presentation of the plaintiff’s evidence on
February 14, 1992.32

On December 23, 1991, the Catungals filed a motion for reconsideration33 of the December 20, 1991
Order denying their Urgent Motion to Dismiss but the trial court denied reconsideration in an Order
dated February 3, 1992.34Undeterred, the Catungals subsequently filed a Motion to Lift and to Set
Aside Order of Default35 but it was likewise denied for being in violation of the rules and for being not
meritorious.36 On February 28, 1992, the Catungals filed a Petition for Certiorari and
Prohibition37 with the Court of Appeals, questioning the denial of their motion to dismiss and the
order of default. This was docketed as CA-G.R. SP No. 27565.
Meanwhile, Rodriguez proceeded to present his evidence before the trial court.

In a Decision dated May 30, 1992, the trial court ruled in favor of Rodriguez, finding that: (a) under
the contract it was complainant (Rodriguez) that had the option to rescind the sale; (b) Rodriguez’s
obligation to pay the balance of the purchase price arises only upon successful negotiation of the
road right of way; (c) he proved his diligent efforts to negotiate the road right of way; (d) the spouses
Catungal were guilty of misrepresentation which defeated Rodriguez’s efforts to acquire the road
right of way; and (e) the Catungals’ rescission of the contract had no basis and was in bad faith.
Thus, the trial court made the injunction permanent, ordered the Catungals to reduce the purchase
price by the amount of acquisition of Lot 10963 which they misrepresented was part of the property
sold but was in fact owned by a third party and ordered them to pay ₱100,000.00 as damages,
₱30,000.00 as attorney’s fees and costs.

The Catungals appealed the decision to the Court of Appeals, asserting the commission of the
following errors by the trial court in their appellants’ brief38 dated February 9, 1994:

THE COURT A QUO ERRED IN NOT DISMISSING OF (SIC) THE CASE ON THE GROUNDS OF
IMPROPER VENUE AND LACK OF JURISDICTION.

II

THE COURT A QUO ERRED IN CONSIDERING THE CASE AS A PERSONAL AND NOT A REAL
ACTION.

III

GRANTING WITHOUT ADMITTING THAT VENUE WAS PROPERLY LAID AND THE CASE IS A
PERSONAL ACTION, THE COURT A QUO ERRED IN DECLARING THE DEFENDANTS IN
DEFAULT DURING THE PRE-TRIAL WHEN AT THAT TIME THE DEFENDANTS HAD ALREADY
FILED THEIR ANSWER TO THE COMPLAINT.

IV

THE COURT A QUO ERRED IN CONSIDERING THE DEFENDANTS AS HAVING LOST THEIR
LEGAL STANDING IN COURT WHEN AT MOST THEY COULD ONLY BE CONSIDERED AS IN
DEFAULT AND STILL ENTITLED TO NOTICES OF ALL FURTHER PROCEEDINGS ESPECIALLY
AFTER THEY HAD FILED THE MOTION TO LIFT THE ORDER OF DEFAULT.

THE COURT A QUO ERRED IN ISSUING THE WRIT [OF] PRELIMINARY INJUNCTION
RESTRAINING THE EXERCISE OF ACTS OF OWNERSHIP AND OTHER RIGHTS OVER REAL
PROPERTY OUTSIDE OF THE COURT’S TERRITORIAL JURISDICTION AND INCLUDING
PERSONS WHO WERE NOT BROUGHT UNDER ITS JURISDICTION, THUS THE NULLITY OF
THE WRIT.

VI
THE COURT A QUO ERRED IN NOT RESTRAINING ITSELF MOTU PROP[R]IO FROM
CONTINUING WITH THE PROCEEDINGS IN THE CASE AND IN RENDERING DECISION
THEREIN IF ONLY FOR REASON OF COURTESY AND FAIRNESS BEING MANDATED AS
DISPENSER OF FAIR AND EQUAL JUSTICE TO ALL AND SUNDRY WITHOUT FEAR OR FAVOR
IT HAVING BEEN SERVED EARLIER WITH A COPY OF THE PETITION FOR CERTIORARI
QUESTIONING ITS VENUE AND JURISDICTION IN CA-G.R. NO. SP 27565 IN FACT NOTICES
FOR THE FILING OF COMMENT THERETO HAD ALREADY BEEN SENT OUT BY THE
HONORABLE COURT OF APPEALS, SECOND DIVISION, AND THE COURT A QUO WAS
FURNISHED WITH COPY OF SAID NOTICE.

VII

THE COURT A QUO ERRED IN DECIDING THE CASE IN FAVOR OF THE PLAINTIFF AND
AGAINST THE DEFENDANTS ON THE BASIS OF EVIDENCE WHICH ARE IMAGINARY,
FABRICATED, AND DEVOID OF TRUTH, TO BE STATED IN DETAIL IN THE DISCUSSION OF
THIS PARTICULAR ERROR, AND, THEREFORE, THE DECISION IS REVERSIBLE.39

On August 31, 1995, after being granted several extensions, Rodriguez filed his appellee’s
brief,40 essentially arguing the correctness of the trial court’s Decision regarding the foregoing issues
raised by the Catungals. Subsequently, the Catungals filed a Reply Brief41 dated October 16, 1995.

From the filing of the appellants’ brief in 1994 up to the filing of the Reply Brief, the spouses
Catungal were represented by appellant Jose Catungal himself. However, a new counsel for the
Catungals, Atty. Jesus N. Borromeo (Atty. Borromeo), entered his appearance before the Court of
Appeals on September 2, 1997.42 On the same date, Atty. Borromeo filed a Motion for Leave of
Court to File Citation of Authorities43 and a Citation of Authorities.44 This would be followed by Atty.
Borromeo’s filing of an Additional Citation of Authority and Second Additional Citation of Authority
both on November 17, 1997.45

During the pendency of the case with the Court of Appeals, Agapita Catungal passed away and
thus, her husband, Jose, filed on February 17, 1999 a motion for Agapita’s substitution by her
surviving children.46

On August 8, 2000, the Court of Appeals rendered a Decision in the consolidated cases CA-G.R. CV
No. 40627 and CA-G.R. SP No. 27565,47 affirming the trial court’s Decision.

In a Motion for Reconsideration dated August 21, 2000,48 counsel for the Catungals, Atty. Borromeo,
argued for the first time that paragraphs 1(b) and 549 of the Conditional Deed of Sale, whether taken
separately or jointly, violated the principle of mutuality of contracts under Article 1308 of the Civil
Code and thus, said contract was void ab initio. He adverted to the cases mentioned in his various
citations of authorities to support his argument of nullity of the contract and his position that this
issue may be raised for the first time on appeal.

Meanwhile, a Second Motion for Substitution50 was filed by Atty. Borromeo in view of the death of
Jose Catungal.

In a Resolution dated January 30, 2001, the Court of Appeals allowed the substitution of the
deceased Agapita and Jose Catungal by their surviving heirs and denied the motion for
reconsideration for lack of merit

Hence, the heirs of Agapita and Jose Catungal filed on March 27, 2001 the present petition for
review,51 which essentially argued that the Court of Appeals erred in not finding that paragraphs 1(b)
and/or 5 of the Conditional Deed of Sale, violated the principle of mutuality of contracts under Article
1308 of the Civil Code. Thus, said contract was supposedly void ab initio and the Catungals’
rescission thereof was superfluous.

In his Comment,52 Rodriguez highlighted that (a) petitioners were raising new matters that cannot be
passed upon on appeal; (b) the validity of the Conditional Deed of Sale was already admitted and
petitioners cannot be allowed to change theories on appeal; (c) the questioned paragraphs of the
Conditional Deed of Sale were valid; and (d) petitioners were the ones who committed fraud and
breach of contract and were not entitled to relief for not having come to court with clean hands.

The Court gave due course to the Petition53 and the parties filed their respective Memoranda.

The issues to be resolved in the case at bar can be summed into two questions:

I. Are petitioners allowed to raise their theory of nullity of the Conditional Deed of Sale for the
first time on appeal?

II. Do paragraphs 1(b) and 5 of the Conditional Deed of Sale violate the principle of mutuality
of contracts under Article 1308 of the Civil Code?

On petitioners’ change of theory

Petitioners claimed that the Court of Appeals should have reversed the trial courts’ Decision on the
ground of the alleged nullity of paragraphs 1(b) and 5 of the Conditional Deed of Sale
notwithstanding that the same was not raised as an error in their appellants’ brief. Citing Catholic
Bishop of Balanga v. Court of Appeals,54 petitioners argued in the Petition that this case falls under
the following exceptions:

(3) Matters not assigned as errors on appeal but consideration of which is necessary in
arriving at a just decision and complete resolution of the case or to serve the interest of
justice or to avoid dispensing piecemeal justice;

(4) Matters not specifically assigned as errors on appeal but raised in the trial court and are
matters of record having some bearing on the issue submitted which the parties failed to
raise or which the lower court ignored;

(5) Matters not assigned as errors on appeal but closely related to an error assigned; and

(6) Matters not assigned as errors but upon which the determination of a question properly
assigned is dependent.55

We are not persuaded.

This is not an instance where a party merely failed to assign an issue as an error in the brief nor
failed to argue a material point on appeal that was raised in the trial court and supported by the
record. Neither is this a case where a party raised an error closely related to, nor dependent on the
resolution of, an error properly assigned in his brief. This is a situation where a party completely
changes his theory of the case on appeal and abandons his previous assignment of errors in his
brief, which plainly should not be allowed as anathema to due process.
Petitioners should be reminded that the object of pleadings is to draw the lines of battle between the
litigants and to indicate fairly the nature of the claims or defenses of both parties.56 In Philippine
National Construction Corporation v. Court of Appeals,57 we held that "[w]hen a party adopts a
certain theory in the trial court, he will not be permitted to change his theory on appeal, for to permit
him to do so would not only be unfair to the other party but it would also be offensive to the basic
rules of fair play, justice and due process."58

We have also previously ruled that "courts of justice have no jurisdiction or power to decide a
question not in issue. Thus, a judgment that goes beyond the issues and purports to adjudicate
something on which the court did not hear the parties, is not only irregular but also extrajudicial and
invalid. The rule rests on the fundamental tenets of fair play."59

During the proceedings before the trial court, the spouses Catungal never claimed that the
provisions in the Conditional Deed of Sale, stipulating that the payment of the balance of the
purchase price was contingent upon the successful negotiation of a road right of way (paragraph
1[b]) and granting Rodriguez the option to rescind (paragraph 5), were void for allegedly making the
fulfillment of the contract dependent solely on the will of Rodriguez.

On the contrary, with respect to paragraph 1(b), the Catungals did not aver in the Answer (and its
amended versions) that the payment of the purchase price was subject to the will of Rodriguez but
rather they claimed that paragraph 1(b) in relation to 1(c) only presupposed a reasonable time be
given to Rodriguez to negotiate the road right of way. However, it was petitioners’ theory that more
than sufficient time had already been given Rodriguez to negotiate the road right of way.
Consequently, Rodriguez’s refusal/failure to pay the balance of the purchase price, upon demand,
was allegedly indicative of lack of funds and a breach of the contract on the part of Rodriguez.

Anent paragraph 5 of the Conditional Deed of Sale, regarding Rodriguez’s option to rescind, it was
petitioners’ theory in the court a quo that notwithstanding such provision, they retained the right to
rescind the contract for Rodriguez’s breach of the same under Article 1191 of the Civil Code.

Verily, the first time petitioners raised their theory of the nullity of the Conditional Deed of Sale in
view of the questioned provisions was only in their Motion for Reconsideration of the Court of
Appeals’ Decision, affirming the trial court’s judgment. The previous filing of various citations of
authorities by Atty. Borromeo and the Court of Appeals’ resolutions noting such citations were of no
moment. The citations of authorities merely listed cases and their main rulings without even any
mention of their relevance to the present case or any prayer for the Court of Appeals to consider
them. In sum, the Court of Appeals did not err in disregarding the citations of authorities or in
1âwphi 1

denying petitioners’ motion for reconsideration of the assailed August 8, 2000 Decision in view of the
proscription against changing legal theories on appeal.

Ruling on the questioned provisions of the Conditional Deed of Sale

Even assuming for the sake of argument that this Court may overlook the procedural misstep of
petitioners, we still cannot uphold their belatedly proffered arguments.

At the outset, it should be noted that what the parties entered into is a Conditional Deed of Sale,
whereby the spouses Catungal agreed to sell and Rodriguez agreed to buy Lot 10963 conditioned
on the payment of a certain price but the payment of the purchase price was additionally made
contingent on the successful negotiation of a road right of way. It is elementary that "[i]n conditional
obligations, the acquisition of rights, as well as the extinguishment or loss of those already acquired,
shall depend upon the happening of the event which constitutes the condition."60
Petitioners rely on Article 1308 of the Civil Code to support their conclusion regarding the claimed
nullity of the aforementioned provisions. Article 1308 states that "[t]he contract must bind both
contracting parties; its validity or compliance cannot be left to the will of one of them."

Article 1182 of the Civil Code, in turn, provides:

Art. 1182. When the fulfillment of the condition depends upon the sole will of the debtor, the
conditional obligation shall be void. If it depends upon chance or upon the will of a third person, the
obligation shall take effect in conformity with the provisions of this Code.

In the past, this Court has distinguished between a condition imposed on the perfection of a contract
and a condition imposed merely on the performance of an obligation. While failure to comply with the
first condition results in the failure of a contract, failure to comply with the second merely gives the
other party the option to either refuse to proceed with the sale or to waive the condition.61 This
principle is evident in Article 1545 of the Civil Code on sales, which provides in part:

Art. 1545. Where the obligation of either party to a contract of sale is subject to any condition which
is not performed, such party may refuse to proceed with the contract or he may waive performance
of the condition x x x.

Paragraph 1(b) of the Conditional Deed of Sale, stating that respondent shall pay the balance of the
purchase price when he has successfully negotiated and secured a road right of way, is not a
condition on the perfection of the contract nor on the validity of the entire contract or its compliance
as contemplated in Article 1308. It is a condition imposed only on respondent’s obligation to pay the
remainder of the purchase price. In our view and applying Article 1182, such a condition is not purely
potestative as petitioners contend. It is not dependent on the sole will of the debtor but also on the
will of third persons who own the adjacent land and from whom the road right of way shall be
negotiated. In a manner of speaking, such a condition is likewise dependent on chance as there is
no guarantee that respondent and the third party-landowners would come to an agreement
regarding the road right of way. This type of mixed condition is expressly allowed under Article 1182
of the Civil Code.

Analogous to the present case is Romero v. Court of Appeals,62 wherein the Court interpreted the
legal effect of a condition in a deed of sale that the balance of the purchase price would be paid by
the vendee when the vendor has successfully ejected the informal settlers occupying the property. In
Romero, we found that such a condition did not affect the perfection of the contract but only imposed
a condition on the fulfillment of the obligation to pay the balance of the purchase price, to wit:

From the moment the contract is perfected, the parties are bound not only to the fulfillment of what
has been expressly stipulated but also to all the consequences which, according to their nature, may
be in keeping with good faith, usage and law. Under the agreement, private respondent is obligated
to evict the squatters on the property. The ejectment of the squatters is a condition the operative act
of which sets into motion the period of compliance by petitioner of his own obligation, i.e., to pay the
balance of the purchase price. Private respondent's failure "to remove the squatters from the
property" within the stipulated period gives petitioner the right to either refuse to proceed with the
agreement or waive that condition in consonance with Article 1545 of the Civil Code. This option
clearly belongs to petitioner and not to private respondent.

We share the opinion of the appellate court that the undertaking required of private respondent does
not constitute a "potestative condition dependent solely on his will" that might, otherwise, be void in
accordance with Article 1182 of the Civil Code but a "mixed" condition "dependent not on the will of
the vendor alone but also of third persons like the squatters and government agencies and
personnel concerned." We must hasten to add, however, that where the so-called "potestative
condition" is imposed not on the birth of the obligation but on its fulfillment, only the condition is
avoided, leaving unaffected the obligation itself.63 (Emphases supplied.)

From the provisions of the Conditional Deed of Sale subject matter of this case, it was the vendee
(Rodriguez) that had the obligation to successfully negotiate and secure the road right of way.
However, in the decision of the trial court, which was affirmed by the Court of Appeals, it was found
that respondent Rodriguez diligently exerted efforts to secure the road right of way but the spouses
Catungal, in bad faith, contributed to the collapse of the negotiations for said road right of way. To
quote from the trial court’s decision:

It is therefore apparent that the vendee’s obligations (sic) to pay the balance of the purchase price
arises only when the road-right-of-way to the property shall have been successfully negotiated,
secured and provided. In other words, the obligation to pay the balance is conditioned upon the
acquisition of the road-right-of-way, in accordance with paragraph 2 of Article 1181 of the New Civil
Code. Accordingly, "an obligation dependent upon a suspensive condition cannot be demanded until
after the condition takes place because it is only after the fulfillment of the condition that the
obligation arises." (Javier v[s] CA 183 SCRA) Exhibits H, D, P, R, T, FF and JJ show that plaintiff
[Rodriguez] indeed was diligent in his efforts to negotiate for a road-right-of-way to the property. The
written offers, proposals and follow-up of his proposals show that plaintiff [Rodriguez] went all out in
his efforts to immediately acquire an access road to the property, even going to the extent of offering
₱3,000.00 per square meter for the road lots (Exh. Q) from the original ₱550.00 per sq. meter. This
Court also notes that defendant (sic) [the Catungals] made misrepresentation in the negotiation they
have entered into with plaintiff [Rodriguez]. (Exhs. F and G) The misrepresentation of defendant (sic)
[the Catungals] as to the third lot (Lot 10986) to be part and parcel of the subject property [(]Lot
10963) contributed in defeating the plaintiff’s [Rodriguez’s] effort in acquiring the road-right-of-way to
the property. Defendants [the Catungals] cannot now invoke the non-fulfillment of the condition in the
contract as a ground for rescission when defendants [the Catungals] themselves are guilty of
preventing the fulfillment of such condition.

From the foregoing, this Court is of the considered view that rescission of the conditional deed of
sale by the defendants is without any legal or factual basis.64 x x x. (Emphases supplied.)

In all, we see no cogent reason to disturb the foregoing factual findings of the trial court.

Furthermore, it is evident from the language of paragraph 1(b) that the condition precedent (for
respondent’s obligation to pay the balance of the purchase price to arise) in itself partly involves an
obligation to do, i.e., the undertaking of respondent to negotiate and secure a road right of way at his
own expense.65 It does not escape our notice as well, that far from disclaiming paragraph 1(b) as
void, it was the Catungals’ contention before the trial court that said provision should be read in
relation to paragraph 1(c) which stated:

c. That the access road or Road Right of Way leading to Lot 10963 shall be the responsibility of the
VENDEE to secure and any or all cost relative to the acquisition thereof shall be borne solely by the
VENDEE. He shall, however, be accorded with enough time necessary for the success of his
endeavor, granting him a free hand in negotiating for the passage.66 (Emphasis supplied.)

The Catungals’ interpretation of the foregoing stipulation was that Rodriguez’s obligation to negotiate
and secure a road right of way was one with a period and that period, i.e., "enough time" to
negotiate, had already lapsed by the time they demanded the payment of ₱5,000,000.00 from
respondent. Even assuming arguendo that the Catungals were correct that the respondent’s
obligation to negotiate a road right of way was one with an uncertain period, their rescission of the
Conditional Deed of Sale would still be unwarranted. Based on their own theory, the Catungals had
a remedy under Article 1197 of the Civil Code, which mandates:

Art. 1197. If the obligation does not fix a period, but from its nature and the circumstances it can be
inferred that a period was intended, the courts may fix the duration thereof.

The courts shall also fix the duration of the period when it depends upon the will of the debtor.

In every case, the courts shall determine such period as may under the circumstances have been
probably contemplated by the parties. Once fixed by the courts, the period cannot be changed by
them.

What the Catungals should have done was to first file an action in court to fix the period within which
Rodriguez should accomplish the successful negotiation of the road right of way pursuant to the
above quoted provision. Thus, the Catungals’ demand for Rodriguez to make an additional payment
of ₱5,000,000.00 was premature and Rodriguez’s failure to accede to such demand did not justify
the rescission of the contract.

With respect to petitioners’ argument that paragraph 5 of the Conditional Deed of Sale likewise
rendered the said contract void, we find no merit to this theory. Paragraph 5 provides:

5. That the VENDEE has the option to rescind the sale. In the event the VENDEE exercises his
option to rescind the herein Conditional Deed of Sale, the VENDEE shall notify the VENDOR by way
of a written notice relinquishing his rights over the property. The VENDEE shall then be reimbursed
by the VENDOR the sum of FIVE HUNDRED THOUSAND PESOS (₱500,000.00) representing the
downpayment, interest free, payable but contingent upon the event that the VENDOR shall have
been able to sell the property to another party.67

Petitioners posited that the above stipulation was the "deadliest" provision in the Conditional Deed of
Sale for violating the principle of mutuality of contracts since it purportedly rendered the contract
subject to the will of respondent.

We do not agree.

It is petitioners’ strategy to insist that the Court examine the first sentence of paragraph 5 alone and
resist a correlation of such sentence with other provisions of the contract. Petitioners’ view, however,
ignores a basic rule in the interpretation of contracts – that the contract should be taken as a whole.

Article 1374 of the Civil Code provides that "[t]he various stipulations of a contract shall be
interpreted together, attributing to the doubtful ones that sense which may result from all of them
taken jointly." The same Code further sets down the rule that "[i]f some stipulation of any contract
should admit of several meanings, it shall be understood as bearing that import which is most
adequate to render it effectual."68

Similarly, under the Rules of Court it is prescribed that "[i]n the construction of an instrument where
there are several provisions or particulars, such a construction is, if possible, to be adopted as will
give effect to all"69 and "for the proper construction of an instrument, the circumstances under which
it was made, including the situation of the subject thereof and of the parties to it, may be shown, so
that the judge may be placed in the position of those whose language he is to interpret."70
Bearing in mind the aforementioned interpretative rules, we find that the first sentence of paragraph
5 must be taken in relation with the rest of paragraph 5 and with the other provisions of the
Conditional Deed of Sale.

Reading paragraph 5 in its entirety will show that Rodriguez’s option to rescind the contract is not
absolute as it is subject to the requirement that there should be written notice to the vendor and the
vendor shall only return Rodriguez’s downpayment of ₱500,000.00, without interest, when the
vendor shall have been able to sell the property to another party. That what is stipulated to be
returned is only the downpayment of ₱500,000.00 in the event that Rodriguez exercises his option to
rescind is significant. To recall, paragraph 1(b) of the contract clearly states that the installments on
the balance of the purchase price shall only be paid upon successful negotiation and procurement of
a road right of way. It is clear from such provision that the existence of a road right of way is a
material consideration for Rodriguez to purchase the property. Thus, prior to him being able to
procure the road right of way, by express stipulation in the contract, he is not bound to make
additional payments to the Catungals. It was further stipulated in paragraph 1(b) that: "[i]f however
said road right of way cannot be negotiated, the VENDEE shall give notice to the VENDOR for them
to reassess and solve the problem by taking other options and should the situation ultimately prove
futile, he [Rodriguez] shall take steps to rescind or [cancel] the herein Conditional Deed of Sale." The
intention of the parties for providing subsequently in paragraph 5 that Rodriguez has the option to
rescind the sale is undeniably only limited to the contingency that Rodriguez shall not be able to
secure the road right of way. Indeed, if the parties intended to give Rodriguez the absolute option to
rescind the sale at any time, the contract would have provided for the return of all payments made by
Rodriguez and not only the downpayment. To our mind, the reason only the downpayment was
stipulated to be returned is that the vendee’s option to rescind can only be exercised in the event
that no road right of way is secured and, thus, the vendee has not made any additional payments,
other than his downpayment.

In sum, Rodriguez’s option to rescind the contract is not purely potestative but rather also subject to
the same mixed condition as his obligation to pay the balance of the purchase price – i.e., the
negotiation of a road right of way. In the event the condition is fulfilled (or the negotiation is
successful), Rodriguez must pay the balance of the purchase price. In the event the condition is not
fulfilled (or the negotiation fails), Rodriguez has the choice either (a) to not proceed with the sale and
demand return of his downpayment or (b) considering that the condition was imposed for his benefit,
to waive the condition and still pay the purchase price despite the lack of road access. This is the
most just interpretation of the parties’ contract that gives effect to all its provisions.

In any event, even if we assume for the sake of argument that the grant to Rodriguez of an option to
rescind, in the manner provided for in the contract, is tantamount to a potestative condition, not
being a condition affecting the perfection of the contract, only the said condition would be considered
void and the rest of the contract will remain valid. In Romero, the Court observed that "where the so-
called ‘potestative condition’ is imposed not on the birth of the obligation but on its fulfillment, only
the condition is avoided, leaving unaffected the obligation itself."71

It cannot be gainsaid that "contracts have the force of law between the contracting parties and
should be complied with in good faith."72 We have also previously ruled that "[b]eing the primary law
between the parties, the contract governs the adjudication of their rights and obligations. A court has
no alternative but to enforce the contractual stipulations in the manner they have been agreed upon
and written."73 We find no merit in petitioners’ contention that their parents were merely "duped" into
accepting the questioned provisions in the Conditional Deed of Sale. We note that although the
contract was between Agapita Catungal and Rodriguez, Jose Catungal nonetheless signed thereon
to signify his marital consent to the same. We concur with the trial court’s finding that the spouses
Catungals’ claim of being misled into signing the contract was contrary to human experience and
conventional wisdom since it was Jose Catungal who was a practicing lawyer while Rodriquez was a
non-lawyer.74 It can be reasonably presumed that Atty. Catungal and his wife reviewed the
provisions of the contract, understood and accepted its provisions before they affixed their
signatures thereon.

After thorough review of the records of this case, we have come to the conclusion that petitioners
failed to demonstrate that the Court of Appeals committed any reversible error in deciding the
present controversy. However, having made the observation that it was desirable for the Catungals
to file a separate action to fix the period for respondent Rodriguez’s obligation to negotiate a road
right of way, the Court finds it necessary to fix said period in these proceedings. It is but equitable for
us to make a determination of the issue here to obviate further delay and in line with the judicial
policy of avoiding multiplicity of suits.

If still warranted, Rodriguez is given a period of thirty (30) days from the finality of this decision to
negotiate a road right of way. In the event no road right of way is secured by Rodriquez at the end of
said period, the parties shall reassess and discuss other options as stipulated in paragraph 1(b) of
the Conditional Deed of Sale and, for this purpose, they are given a period of thirty (30) days to
agree on a course of action. Should the discussions of the parties prove futile after the said thirty
(30)-day period, immediately upon the expiration of said period for discussion, Rodriguez may (a)
exercise his option to rescind the contract, subject to the return of his downpayment, in accordance
with the provisions of paragraphs 1(b) and 5 of the Conditional Deed of Sale or (b) waive the road
right of way and pay the balance of the deducted purchase price as determined in the RTC Decision
dated May 30, 1992.

WHEREFORE, the Decision dated August 8, 2000 and the Resolution dated January 30, 2001 of the
Court of Appeals in CA-G.R. CV No. 40627 consolidated with CA-G.R. SP No. 27565 are
AFFIRMED with the following modification:

If still warranted, respondent Angel S. Rodriguez is given a period of thirty (30) days from the finality
of this Decision to negotiate a road right of way. In the event no road right of way is secured by
respondent at the end of said period, the parties shall reassess and discuss other options as
stipulated in paragraph 1(b) of the Conditional Deed of Sale and, for this purpose, they are given a
period of thirty (30) days to agree on a course of action. Should the discussions of the parties prove
futile after the said thirty (30)-day period, immediately upon the expiration of said period for
discussion, Rodriguez may (a) exercise his option to rescind the contract, subject to the return of his
downpayment, in accordance with the provisions of paragraphs 1(b) and 5 of the Conditional Deed
of Sale or (b) waive the road right of way and pay the balance of the deducted purchase price as
determined in the RTC Decision dated May 30, 1992.

No pronouncement as to costs.

SO ORDERED.

G.R. No. 132269 April 27, 2000

HARRISON MOTORS CORPORATION, petitioner,
vs.
RACHEL A. NAVARRO, respondent.

BELLOSILLO, J.:

This is a review on certiorari of the Decision of the Court of Appeals affirming that of the Regional
Trial Court of Makati which ordered petitioner to pay private respondent P32,943.00 as
reimbursement for taxes paid, P7,500.00 as attorney's fees and the costs of suit. 1

Sometime in June of 1987 Harrison Motors Corporation through its president, Renato Claros, sold
two (2) Isuzu Elf trucks to private respondent Rachel Navarro, owner of RN Freight Lines, a
franchise holder operating and maintaining a fleet of cargo trucks all over Luzon. Petitioner, a known
importer, assembler and manufacturer, assembled the two (2) trucks using imported component
parts. 2 Prior to the sale, Renato Claros represented to private respondent that all the BIR taxes and
customs duties for the parts used on the two (2) trucks had been paid for. 3

On 10 September 1987 the Bureau of Internal Revenue (BIR) and the Land Transportation Office
(LTO) entered into a Memorandum of Agreement (MOA) which provided that prior to registration in
the LTO of any assembled or re-assembled motor vehicle which used imported parts, a Certificate of
Payment should first be obtained from the BIR to prove payment of all taxes required under existing
laws. 4

On 12 October 1987 the Bureau of Customs (BOC) issued Customs Memorandum Order No. 44-87
promulgating rules, regulations and procedure for the voluntary payment of duties and taxes on
imported motor vehicles assembled by non-assemblers. 5

Pursuant to the 10 September 1987 MOA between the BIR and the LTO, the BIR issued on 18
December 1987 Revenue Memorandum Order No. 44-87 which provided the procedure governing
the processing and issuance of the Certificate of Payment of internal revenue taxes for purposes of
registering motor vehicles. 6

On 16 June 1988 the BIR, BOC and LTO entered into a tripartite MOA which provided that prior to
the registration in the LTO of any locally assembled motor vehicle using imported component parts,
a Certificate of Payment should first be obtained from the BIR and the BOC to prove that all existing
taxes and customs duties have been paid. 7

In December of 1988 government agents seized and detained the two (2) Elf trucks of respondent
after discovering that there were still unpaid BIR taxes and customs duties thereon. The BIR and the
BOC ordered private respondent to pay the proper assessments or her trucks would be
impounded. 8 Private respondent went to Claros to ask for the receipts evidencing payment of BIR
taxes and customs duties; however, Claros refused to comply. 9 Private respondent then demanded
from Claros that he pay the assessed taxes and warned him that he would have to reimburse her
should she be forced to pay for the assessments herself. Her demands were again ignored.

But wanting to secure the immediate release of the trucks to comply with her business commitments,
private respondent paid the assessed BIR taxes and customs duties amounting to
P32,943.00. 10 Consequently, she returned to petitioner's office to ask for reimbursement, but
petitioner again refused, prompting her to send a demand letter through her lawyer. 11 When
petitioner still ignored her letter, she filed a complaint for a sum of money on 24 September 1990
with the Regional Trial Court of Makati. 12

On 24 May 1991 private respondent filed a Motion to Declare Defendant in Default which was
granted by the RTC on the same day.

On 18 November 1991 private respondent filed a Manifestation and Motion praying for the
scheduling of the reception of her evidence ex-parte since petitioner had not as yet filed a Motion to
Lift Order of Default. Thus, on 22 November 1991 the trial court ordered the reception of private
respondent's evidence ex-parte.13

It was only on 2 December 1991 when petitioner finally filed a Motion to Lift Order of Default.
However, on 20 January 1992 the trial court denied petitioner's motion for its failure to attach an
affidavit of merit showing that it had a valid and meritorious defense. 14

On 5 March 1992 the trial court rendered a decision ordering petitioner to reimburse private
respondent in the amount of P32,943.00 for the customs duties and internal revenue taxes the latter
had to pay to discharge her two (2) Elf trucks from government custody. Petitioner was also required
to pay P7,500.00 for attorney's fees plus the costs. 15

The Court of Appeals subsequently sustained the lower court, hence this recourse of petitioner. 16

Petitioner argues that it was no longer obliged to pay for the additional taxes and customs duties
imposed on the imported component parts by the Memorandum Orders and the two (2) Memoranda
of Agreement since such administrative regulations only took effect after the execution of its contract
of sale with private respondent. Holding it liable for payment of the taxes specified in the
administrative regulations, which have the force and effect of laws, would not only violate the non-
impairment clause of the Constitution but also the principle of non-retroactivity of laws provided in
Art. 4 of the Civil Code. 17 Furthermore, petitioner claims that it did pay the assessed taxes and duties
otherwise it would not have been able to secure the release of such spare parts from the customs
and to register the vehicles with the LTO under its name.

The records however reveal that the Memorandum Orders and Memoranda of Agreement do not
impose any additional BIR taxes or customs duties.

Customs Memorandum Order No. 44-87 is concerned with the Rules, Regulations and Procedures
in the Payment of Duties and Taxes on Imported Vehicles Locally Assembled by Non-
Assemblers. 18 It does not charge any new tax. It simply provides the procedure on how
owners/consignees or their purchasers could voluntarily initiate payment for any unpaid customs
duties on locally assembled vehicles using imported component parts.

Neither does BIR Revenue Memorandum Order No. 44-87 19 exact any tax. It merely outlines the
procedure which governs the processing and issuance of the Certificate of Payment of internal
revenue taxes for purposes of registering motor vehicles with the arms and telling her she looked
beautiful. The special treatment and sexual advances continued during her employment for four (4)
years but she never reciprocated his flirtations, until finally, she noticed that his attitude towards her
changed. He made her understand that if she would not give in to his sexual advances he would
cause her termination from the service; and he made good his threat when he started harassing her.
She just found out one day that her table which was equipped with telephone and intercom units and
containing her personal belongings was transferred without her knowledge to a place with neither
telephone nor intercom, for which reason, an argument ensued when she confronted William Chua
resulting in her being charged with gross disrespect. 11

Respondent Cortez explains, as regards the second charge, that the money entrusted to her for
transmittal was not lost; instead, she gave it to the company personnel in-charge for proper
transmittal as evidenced by a receipt duly signed by the latter. 12

With respect to the third imputation, private respondent admits that she asked someone to punch-in
her time card because at that time she was doing an errand for one of the company's officers,
Richard Tan, and that was with the permission of William Chua. She maintains that she did it in good
faith believing that she was anyway only accommodating the request of a company executive and
done for the benefit of the company with the acquiescence of her boss, William Chua. Besides, the
practice was apparently tolerated as the employees were not getting any the BIR which would then
transmit the Certificate to the LTO to prove that all the BIR taxes required under existing laws have
been paid.

The 16 June 1988 tripartite MOA among the BIR, LTO and the BOC virtually contained the same
provisions. The MOA provided that prior to registration with the LTO of any assembled motor vehicle
using imported component parts, a certificate of Payment should first be secured from the BIR or the
BOC which should then be duly forwarded to LTO. The Certificate would serve as proof that all taxes
and customs duties required under existing laws, rules and regulations had already been settled.

Clearly, petitioner's contention is unmeritorious. What Sec. 10, Art. III, of the Constitution prohibits is
the passage of a law which enlarges, abridges or in any manner changes the intention of the
contracting parties. 21 The Memorandum Orders and the two (2) Memoranda of Agreement do not
impose any additional taxes which would unduly impair the contract of sale between petitioner and
private respondent. Instead, these administrative regulations were passed to enforce payment of
existing BIR taxes and customs duties at the time of importation.

But who should pay the BIR taxes and customs duties which the administrative regulations sought to
enforce?

Petitioner contends that private respondent should be the one to pay the internal revenue taxes and
customs duties. It claims that at the time the Memorandum Orders and the two (2) Memoranda of
Agreement took effect the two (2) Elf trucks were already sold to private respondent, thus, it no
longer owned the vehicles. Whatever payments private respondent made to the government after
the sale were solely her concern and such burden should not be passed on to petitioner. 22 Petitioner
further argues that holding it liable for payment of BIR taxes and customs duties required under the
administrative regulations violates the principle of non-retroactivity of laws under the Civil Code.

Such contention deserves scant consideration. It is true that administrative rulings and regulations
are generally prospective in nature.23 An inspection of the two (2) Memoranda of Agreement however
demonstrates that their intent is to enforce payment of taxes on assemblers/manufacturers who
import component parts without paying the correct assessments. The WHEREAS clause of the 10
September 1987 MOA clearly illustrates this —

WHEREAS, in order to avoid or evade the higher taxes on imported motor vehicles, certain
persons import parts and assemble and re-assemble them into complete motor vehicles, or
assemble or re-assemble motor vehicles using imported parts;

While the WHEREAS clause of the 16 June 1988 MOA provides —

 WHEREAS, in order to avoid or evade the higher taxes on imported motor vehicles, certain
persons, firms or corporations who are non-BOI licensed assemblers of imported motor
vehicle component parts would assemble or re-assemble them into whole unit motor
vehicles;

It is also apparent in Par. 9 of the 16 June 1988 MOA that the taxes to be enforced are designated
as assembler's/manufacturer's tax. It states —

9. The BIR shall collect the assembler's/manufacturer's tax, while the BOC shall collect the
duties and taxes and ad valorem tax.

Thus, although private respondent is the one required by the administrative regulations to secure the
Certificate of Payment for the purpose of registration, petitioner as the importer and the
assembler/manufacturer of the two (2) Elf trucks is still the one liable for payment of revenue taxes
and customs duties. Petitioner's obligation to pay does not arise from the administrative regulations
but from the tax laws existing at the time of importation. Hence, even if private respondent already
owned the two (2) trucks when the Memorandum Orders and Memoranda of Agreement took effect,
the fact remains that petitioner was still the one duty-bound to pay for the BIR taxes and customs
duties.

It is also quite obvious that as between petitioner, who is the importer-assembler/manufacturer, and
private respondent, who is merely the buyer, it is petitioner which has the obligation to pay taxes to
the BIR and the BOC. Petitioner would be unjustly enriched if private respondent should be denied
reimbursement. 24 It would inequitably amass profits from selling assembled trucks even if it did not
pay the taxes due on its imported spare parts. Imposing the tax burden on private respondent would
only encourage the proliferation of smugglers who scheme to evade taxes by passing on their tax
obligations to their unsuspecting buyers.

In a last ditch effort to exempt itself from liability, petitioner claims that it had paid the taxes due on
the imported parts otherwise it would not have been able to obtain their release from the BOC and to
register the vehicles with the LTO.

Non-sequitur. The fact that petitioner was able to secure the release of the parts from customs and
to register the assembled trucks with the LTO does not necessarily mean that all taxes and customs
duties were legally settled. As a matter of fact, the provisions of the two (2) Memoranda of
Agreement clearly establish that the government is aware of the widespread registration of
assembled motor vehicles with the LTO even if the taxes due on their imported component parts
remain unpaid. Paragraph 1 of the 10 September 1987 MOA states —

The LTO shall make as one of the requirements for the registration of motor vehicles that
were assembled or re-assembled using imported parts, the payment to the BIR of the taxes
required under existing laws.

The same requirement shall be imposed with respect to the renewal of the registration of
such motor vehicles had they been registered or their registration been renewed in the past
without the payment of the required taxes.

While par. 1 of the 16 June 1988 MOA states —

The LTO shall make as one of the requirements for the registration of motor vehicles that
were assembled or re-assembled by non-BOI licensed assemblers using imported
 component parts, the payment to the BIR and the BOC of taxes and duties required under
existing laws, rules and regulations;

The same requirement shall be imposed with respect to the renewal of the registration of
such motor vehicles even if they were already registered or their registration had been
renewed in the past without the payment of the required taxes.

Obviously, the two (2) Memoranda of Agreement were executed to prevent the anomalous
circumstance, as in the case at bar, where assembled vehicles are registered with the LTO even if
taxes and customs duties remain unpaid.

Besides, petitioner's allegation that it already paid the BIR taxes and customs duties is highly
doubtful. This entire controversy would have been avoided had petitioner simply furnished private
respondent with the receipts evidencing payment of BIR taxes and customs duties. If only private
respondent had the receipts to prove payment of such assessments then she would have easily
secured the release of her two (2) Elf trucks. But petitioner arbitrarily and unjustly denied private
respondent's demands. Instead, petitioner obstinately insisted that it was no longer concerned with
the problem involving the two (2) trucks since it no longer owned the vehicles after the
consummation of the sale.

It is true that the ownership of the trucks shifted to private respondent after the sale. But petitioner
must remember that prior to its consummation it expressly intimated to her that it had already paid
the taxes and customs duties.25Such representation shall be considered as a seller's express
warranty under Art. 1546 of the Civil Code which covers any affirmation of fact or any promise by the
seller which induces the buyer to purchase the thing and actually purchases it relying on such
affirmation or promise. 26 It includes all warranties which are derived from express language, whether
the language is in the form of a promise or representation. 27 Presumably, therefore, private
respondent would not have purchased the two (2) Elf trucks were it not for petitioner's assertion and
assurance that all taxes on its imported parts were already settled.

This express warranty was breached the moment petitioner refused to furnish private respondent
with the corresponding receipts since such documents were the best evidence she could present to
the government to prove that all BIR taxes and customs duties on the imported component parts
were fully paid. Without evidence of payment, she was powerless to prevent the trucks from being
impounded.

Under Art. 1599 of the Civil Code, once an express warranty is breached the buyer can accept or
keep the goods and maintain an action against the seller for damages. This was what private
respondent did. She opted to keep the two (2) trucks which she apparently needed for her business
and filed a complaint for damages, particularly seeking the reimbursement of the amount she paid to
secure the release of her vehicles.

WHEREFORE, the Decision of the Court of Appeals dated 22 January 1998 ordering petitioner
HARRISON MOTORS CORPORATION to reimburse private respondent RACHEL A. NAVARRO for
the taxes and duties she paid in the amount of P32,943.00 and to pay her attorney's fees in the
amount of P7,500.00 is AFFIRMED. In addition, the amount of P32,943.00 shall earn interest at the
legal rate from 24 September 1990 when private respondent filed her complaint with the trial court
until fully paid. Costs against petitioner.

SO ORDERED. 1âw phi 1.nêt

G.R. No. 73913 January 31, 1989

JERRY T. MOLES, petitioner,

vs.
INTERMEDIATE APPELLATE COURT and MARIANO M. DIOLOSA, respondents.

Zoilo V. De la Cruz, Jr., Kenneth Barredo, Romeo Sabig and Natalio V. Sitjao for petitioners.

Rolando N. Medalla and Jose G. Guinez, Jr., for private respondents.

REGALADO, J.:

This petition for review on certiorari assails the decision of the then Intermediate Appellate
Court 1 dismissing the complaint filed by herein petitioner against the herein private respondent in the
former Court of First Instance of Negros Occidental in Civil Case No. 13821 thereof. 2

The factual backdrop of this controversy, as culled from the records, 3 shows that on May 17, 1978,
petitioner Jerry T. Moles commenced a suit against private respondent Mariano M. Diolosa in the
aforesaid trial court, Branch IV in Bacolod City, for rescission of contract with damages. Private
respondent moved to dismiss on the ground of improper venue, invoking therefor Sales Invoice No.
075A executed between petitioner and private respondent on April 23, 1977 which provides that all
judicial actions arising from this contract shall be instituted in the City of Iloilo. 4This was opposed by
petitioner who averred that there is no formal document evidencing the sale which is substantially
verbal in character. In an order dated June 23, 1978, the trial court denied the motion to dismiss,
holding that the question of venue could not be resolved at said stage of the case. The subsequent
motion for reconsideration was likewise denied.

Consequently, private respondent, invoking the aforesaid venue stipulation, preceeded to this Court
on a petition for prohibition with preliminary injunction in G.R. No. 49078, questioning the validity of
the order denying his aforesaid two motions and seeking to enjoin the trial court from further
proceeding with the case. This petition was dismissed for lack of merit in a resolution of the Court,
dated February 7, 1979, and which became final on March 15, 1979. Thereafter, private respondent
filed his answer and proceeded to trial.

The aforecited records establish that sometime in 1977, petitioner needed a linotype printing
machine for his printing business, The LM Press at Bacolod City, and applied for an industrial loan
with the Development Bank of the Philippines. (hereinafter, DBP) for the purchase thereof. An agent
of Smith, Bell and Co. who is a friend of petitioner introduced the latter to private respondent, owner
of the Diolosa Publishing House in Iloilo City, who had two available machines. Thereafter, petitioner
went to Iloilo City to inspect the two machines offered for sale and was informed that the same were
secondhand but functional.

On his second visit to the Diolosa Publishing House, petitioner together with Rogelio Yusay, a letter
press machine operator, decided to buy the linotype machine, Model 14. The transaction was
basically verbal in nature but to facilitate the loan application with the DBP, a pro forma invoice,
dated April 23, 1977 and reflecting the amount of P50,000.00 as the consideration of the sale, was
signed by petitioner with an addendum that payment had not yet been made but that he promised to
pay the full amount upon the release of his loan from the aforementioned bank on or before the end
of the month. 5 Although the agreed selling price was only P40,000.00, the amount on the invoice
was increased by P10,000.00, said increase being intended for the purchase of new matrices for
said machine.

Sometime between April and May, 1977, the machine was delivered to petitioner's publishing house
at Tangub, Bacolod City where it was installed by one Crispino Escurido, an employee of respondent
Diolosa. Another employee of the Diolosa Publishing House, Tomas Plondaya, stayed at petitioners
house for almost a month to train the latter's cousin in operating the machine. 6

Under date of August 29, 1977, private respondent issued a certification wherein he warranted that
the machine sold was in A-1 condition, together with other express warranties. 7

Prior to the release of the loan, a representative from the DBP, Bacolod, supposedly inspected the
machine but he merely looked at it to see that it was there .8 The inspector's recommendation was
favorable and, thereafter, petitioner's loan of P50,000.00 was granted and released. However,
before payment was made to private respondent, petitioner required the former, in a letter dated
September 30, 1977, to accomplish the following, with the explanations indicated by him:

1.) Crossed check for P15,407.10 representing.

a) P 10,000.00-Overprice in the machine:

b) P203.00-Freight and handling of the machine;

c) P203.00-Share in the electric repair; and

d) P5,000.00- Insurance that Crispin will come back and repair the linotype machine
at seller's account as provided in the contract; after Crispin has put everything in
order when he goes home on Sunday he will return the check of P15,000.00.

2) Official receipt in the amount of P 50,000.00 as full payment of the linotype

machine.

These were immediately complied with by private respondent and on the same day, September
30,1977, he received the DBP check for P50,000.00. 9

It is to be noted that the aforesaid official receipt No. 0451, dated September 30, 1977 and prepared
and signed by private respondent, expressly states that he received from the petitioner the DBP
check for P50,000.00 issued in our favor in full payment of one (1) Unit Model 14 Linotype Machine
as per Pro forma Invoice dated April 23, 1977. 10

On November 29, 1977, petitioner wrote private respondent that the machine was not functioning
properly as it needed a new distributor bar. In the same letter, petitioner unburdened himself of his
grievances and sentiments in this wise.

We bought this machine in good faith because we trusted you very much being our
elder brother in printing and publishing business. We did not hire anybody to look
over the machine, much more ask for a rebate in your price of P40,000.00 and
believed what your trusted two men, Tomas and Crispin, said although they were
hiding the real and actual condition of the machine for your business protection.
 Until last week, we found out the worst ever to happen to us. We have been cheated
because the expert of the Linotype machine from Manila says, that the most he will
buy your machine is at P5,000.00 only. ... 11

Private respondent made no reply to said letter, so petitioner engaged the services of other
technicians. Later, after several telephone calls regarding the defects in the machine, private
respondent sent two technicians to make the necessary repairs but they failed to put the machine in
running condition. In fact, since then petitioner was never able to use the machine.12

On February 18, 1978, not having received from private respondent the action requested in his
preceding letter as herein before stated, petitioner again wrote private respondent, this time with the
warning that he would be forced to seek legal remedies to protect his interest. 13

Obviously in response to the foregoing letter, private respondent decided to purchase a new
distributor bar and, on March 16, 1978, private respondent delivered this spare part to petitioner
through one Pedro Candido. However, when thereafter petitioner asked private respondent to pay
for the price of the distributor bar, the latter asked petitioner to share the cost with him. Petitioner
thus finally decided to indorse the matter to his lawyer.

An expert witness for the petitioner, one Gil Legaspina, declared that he inspected the linotype
machine involved in this case at the instance of petitioner. In his inspection thereof, he found the
following defects: (1) the vertical automatic stop lever in the casting division was worn out; (2) the
justification lever had a slight breach (balana in the dialect); (3) the distributor bar was worn out; (4)
the partition at the entrance channel had a tear; (5) there was no "pie stacker" tube entrance; and (6)
the slouch arm lever in the driving division was worn out.

It turned out that the said linotype machine was the same machine that witness Legaspina had
previously inspected for Sy Brothers, a firm which also wanted to buy a linotype machine for their
printing establishment. Having found defects in said machine, the witness informed Sy Brother about
his findings, hence the purchase was aborted. In his opinion, major repairs were needed to put the
machine back in good running condition.14

After trial, the court a quo rendered a decision the dispositive portion of which reads:

IN VIEW OF THE FOREGOING CONSIDERATIONS, judgment is hereby rendered

as follows:

(1) Decreeing the rescission of the contract of sale involving one linotype machine
No. 14 between the defendant as seller and the plaintiff as buyer;

(2) Ordering the plaintiff to return to the defendant at the latter's place of business in
Iloilo City the linotype machine aforementioned together with all accessories that
originally were delivered to the plaintiff;

(3) Ordering the defendant to return to the plaintiff the sum of Forty Thousand Pesos
(P40,000.00) representing the price of the linotype machine, plus interest at the legal
rate counted from May 17, 1978 when this action was instituted, until fully paid;

(4) Ordering the defendant to indemnify the plaintiff the sum of Four Thousand Five
Hundred Pesos (P4,500.00) representing unearned income or actual damages;
 (5) Ordering the defendant to pay the plaintiff the sum of One Thousand Pesos
(Pl,000.00) for attorney's fees.

Costs against the defendant.15

From this decision, private respondent appealed to the Intermediate Appellate Court which reversed
the judgment of the lower court and dismissed petitioner's complaint, hence the present petition.

We find merit in petitioner's cause.

On the matter of venue, private respondent relies on the aforementioned Sales Invoice No. 076A
which allegedly requires that the proper venue should be Iloilo City and not Bacolod City. We agree
with petitioner that said document is not the contract evidencing the sale of the linotype machine, it
being merely a preliminary memorandum of a proposal to buy one linotype machine, using for such
purpose a printed form used for printing job orders in private respondent's printing business. As
hereinbefore explained, this issue on venue was brought to Us by private respondent in a special
civil action for prohibition with preliminary injunction in G.R. No. 49078. After considering the
allegations contained, the issues raised and the arguments adduced in said petition, as well as the
comments thereto, the Court dismissed the petition for lack of merit. Respondent court erred in
reopening the same issue on appeal, with a contrary ruling.

Furthermore, it was error for the respondent court, after adopting the factual findings of the lower
court, to reverse the latter's holding that the sales invoice is merely a pro forma memorandum. The
records do not show that this finding is grounded entirely on speculation, surmises or conjectures as
to warrant a reversal thereof. 16 In fact, as hereinbefore stated, private respondent expressly admitted
in his official receipt No. 0451, dated September 30, 1977, that the said sales invoice was merely
a pro forma invoice. Consequently, the printed provisions therein, especially since the printed form
used was for purposes of other types of transactions, could not have been intended by the parties to
govern their transaction on the printing machine. It is obvious that a venue stipulation, in order to
bind the parties, must have been intelligently and deliberately intended by them to exclude their case
from the reglementary rules on venue. Yet, even such intended variance may not necessarily be
given judicial approval, as, for instance, where there are no restrictive or qualifying words in the
agreement indicating that venue cannot be laid in any place other than that agreed upon by the
parties, 17 and in contracts of adhesion. 18

Now, when an article is sold as a secondhand item, a question arises as to whether there is an
implied warranty of its quality or fitness. It is generally held that in the sale of a designated and
specific article sold as secondhand, there is no implied warranty as to its quality or fitness for the
purpose intended, at least where it is subject to inspection at the time of the sale. On the other hand,
there is also authority to the effect that in a sale of a secondhand articles there may be, under some
circumstances, an implied warranty of fitness for the ordinary purpose of the article sold or for the
particular purpose of the buyer. 19

In a line of decisions rendered by the United States Supreme Court, it had theretofore been held that
there is no implied warranty as to the condition, adaptation, fitness, or suitability for the purpose for
which made, or the quality, of an article sold as and for a secondhand article. 20

Thus, in finding for private respondent, the respondent court cited the ruling in Sison vs. Ago, et
al. 21 to the effect that unless goods are sold as to raise an implied warranty, as a general rule there
is no implied warranty in the sale of secondhand articles.22
Said general rule, however, is not without exceptions. Article 1562 of our Civil Code, which was
taken from the Uniform Sales Act, provides:

Art. 1562. In a sale of goods, there is an implied warranty or condition as to the

quality or fitness of the goods, as follows:

(1) Where the buyer, expressly or by implication, makes known to the seller the
particular purpose for which the goods are acquired, and it appears that the buyer
relies on the seller's skill or judgment (whether he be the grower or manufacturer or
not), there is an implied warranty that the goods shall be reasonably fit for such
purpose;

xxx

In Drumar Mining Co. vs. Morris Ravine Mining Co., 23 the District Court of Appeals, 3rd District,
California, in applying a similar provision of law, ruled:

'There is nothing in the Uniform Sales Act declaring there is no implied warranty in
the sale of secondhand goods. Section 1735 of the Civil Code declares there is no
implied warranty or condition as to the quality or fitness for any particular purpose, of
goods supplied under a contract to sell or a sale, except (this general statement is
followed by an enumeration of several exceptions). It would seem that the legislature
intended this section to apply to all sales of goods, whether new or secondhand. In
subdivision 1 of this section, this language is used: where the buyer ... makes known
to the seller the particular purpose for which the goods are required, and it appears
that the buyer relies on the seller's skill or judgment ... there is an implied warranty
that the goods shall be reasonably fit for such purpose.'

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

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

To repeat, in the case before Us, a certification to the effect that the linotype machine bought by
petitioner was in A-1 condition was issued by private respondent in favor of the former. This cannot
but be considered as an express warranty. However, it is private respondent's submission, that the
same is not binding on him, not being a part of the contract of sale between them. This contention is
bereft of substance.

It must be remembered that the certification was a condition sine qua non for the release of
petitioner's loan which was to be used as payment for the purchase price of the machine. Private
respondent failed to refute this material fact. Neither does he explain why he made that express
warranty on the condition of the machine if he had not intended to be bound by it. In fact, the
respondent court, in declaring that petitioner should have availed of the remedy of requiring repairs
as provided for in said certification, thereby considered the same as part and parcel of the verbal
contract between the parties.
On the basis of the foregoing circumstances, the inescapable conclusion is that private respondent
is indeed bound by the express warranty he executed in favor of herein petitioner.

We disagree with respondent court that private respondents express warranty as to the A-1
condition of the machine was merely dealer's talk. Private respondent was not a dealer of printing or
linotype machines to whom could be ascribed the supposed resort to the usual exaggerations of
trade in said items. His certification as to the condition of the machine was not made to induce
petitioner to purchase it but to confirm in writing for purposes of the financing aspect of the
transaction his representations thereon. Ordinarily, what does not appear on the face of the written
instrument should be regarded as dealer's or trader's talk; 25 conversely, what is specifically
represented as true in said document, as in the instant case, cannot be considered as mere dealer's
talk.

On the question as to whether the hidden defects in the machine is sufficient to warrant a rescission
of the contract between the parties, we have to consider the rule on redhibitory defects contemplated
in Article 1561 of the Civil Code. A redhibitory defect must be an imperfection or defect of such
nature as to engender a certain degree of importance. An imperfection or defect of little
consequence does not come within the category of being redhibitory.26

As already narrated, an expert witness for the petitioner categorically established that the machine
required major repairs before it could be used. This, plus the fact that petitioner never made
appropriate use of the machine from the time of purchase until an action was filed, attest to the
major defects in said machine, by reason of which the rescission of the contract of sale is sought.
The factual finding, therefore, of the trial court that the machine is not reasonably fit for the particular
purpose for which it was intended must be upheld, there being ample evidence to sustain the same.

At a belated stage of this appeal, private respondent came up for the first time with the contention
that the action for rescission is barred by prescription. While it is true that Article 1571 of the Civil
Code provides for a prescriptive period of six months for a redhibitory action a cursory reading of the
ten preceding articles to which it refers will reveal that said rule may be applied only in case of
implied warranties. The present case involves one with and express warranty. Consequently, the
general rule on rescission of contract, which is four years 27 shall apply. Considering that the original
case for rescission was filed only one year after the delivery of the subject machine, the same is well
within the prescriptive period. This is aside from the doctrinal rule that the defense of prescription is
waived and cannot be considered on appeal if not raised in the trial court, 28 and this case does not
have the features for an exception to said rule.

WHEREFORE, the judgment of dismissal of the respondent court is hereby REVERSED and SET
ASIDE, and the decision of the court a quo is hereby REINSTATED.

SO ORDERED.

G.R. No. 196419

PILIPINAS MAKRO, INC., Petitioner

vs.
COCO CHARCOAL PHILIPPINES, INC. and LIM KIM SAN, Respondents
 DECISION

MARTIRES, J.:

This Petition for Review on Certiorari seeks to reverse and set aside the 30 December 2010
Decision1 and 7 April 2011 Resolution2 of the Court of Appeals (CA) in CA-G.R. CV No. 83836 which
reversed the 16 August 2004 Decision3 of the Regional Trial Court, Branch 276, Muntinlupa
City {RTC).

Petitioner Pilipinas Makro, Inc. (Makro) is a duly registered domestic corporation. In 1999, it was in
need of acquiring real properties in Davao City to build on and operate a store to establish its
business presence in the city. After conferring with authorized real estate agents, Makro found two
parcels of land suitable for its purpose.4

On 26 November 1999, Makro and respondent Coco Charcoal Phils., Inc. (Coco
Charcoal)5 executed a notarized Deed of Absolute Sale6 wherein the latter would sell its parcel of
land, with a total area of 1,000 square meters and covered by Transfer Certificate of Title (TCT) No.
208776, to the former for the amount of ₱8,500,000.00. On the same date, Makro entered into
another notarized Deed of Absolute Sale7 with respondent Lim Kim San (Lim) for the sale of the
latter's land, with a total area of 1,000 square meters and covered by TCT No. 282650, for the same
consideration of ₱8,500,000.00.

Coco Charcoal and Lim's parcels of land are contiguous and parallel to each other. Aside from the
technical descriptions of the properties in question, both deeds of sale contained identical provisions,
similar terms, conditions, and warranties.8

In December 1999, Makro engaged the services of Engineer Josefina M. Vedua (Engr. Vedua), a
geodetic engineer, to conduct a resurvey and relocation of the two adjacent lots. As a result of the
resurvey, it was discovered that 131 square meters of the lot purchased from Coco Charcoal had
been encroached upon by the Department of Public Works and Highways (DPWH) for its road
widening project and construction of a drainage canal to develop and expand the Davao-Cotabato
National Highway. On the other hand, 130 square meters of the land bought from Lim had been
encroached upon by the same DPWH project. Meanwhile, TCT Nos. T-321199 and T-321049 were
issued in January 2000 in favor of Makro after the deeds of sale were registered and the titles of the
previous owners were cancelled.9

Makro informed the representatives of Coco Charcoal and Lim about the supposed encroachment
on the parcels of land due to the DPWH project. Initially, Makro offered a compromise agreement in
consideration of a refund of 75% of the value of the encroached portions. Thereafter, Makro sent a
final demand letter to collect the refund of the purchase price corresponding to the area encroached
upon by the road widening project, seeking to recover ₱1,113,500.00 from Coco Charcoal and
₱1,105,000.00 from Lim. Failing to recover such, Makro filed separate complaints against Coco
Charcoal and Lim to collect the refund sought.

The RTC Decision

In its 16 August 2004 Decision, the RTC granted Makro's complaint and ordered respondents to
refund the amount corresponding to the value of the encroached area. The trial court ruled that the
1âwphi1

DPWH project encroached upon the purchased properties, such that Makro had to adjust its
perimeter fences. It noted that Makro was constrained to bring legal action after its demand for
refund remained unheeded. The trial court expounded that the road right of way includes not only
the paved road, but also the shoulders and gutters. It highlighted that the unpaved portion of the
right of way was well within the area Makro had purchased.

The RTC also found respondents in bad faith because they had concealed from Makro the fact that
the DPWH had already taken possession of a portion of the lands they had sold, respectively,
considering that drainage pipes had already been installed prior to the sale. It noted that DPWH
could not have undertaken the diggings and subsequent installation of drainage pipes without Coco
Charcoal and Lim's consent, being the previous owners of the lots in question. The dispositive
portion reads:

PREMISES CONSIDERED, judgment is rendered for the plaintiff and defendants LIM KIM SAN
directed to return and reimburse to plaintiff the sum of ONE MILLION FIVE HUNDRED THOUSAND
(Phpl,500,000.00) PESOS, Philippine Currency, with interest at 12% per annum, attorney's fees of
Php200,000.00, exemplary damages of Php200,000.00 to deter anybody similarly prone;

Coco Charcoal Philippines, Inc. is likewise directed to pay a refund and return to plaintiff corporation
the value of ONE MILLION FIVE HUNDRED THOUSAND (Phpl,500,000.00) PESOS, Philippine
Currency, with interest at 12% per annum, representing the 131 square meters parcel of land it
cannot occupy and to pay attorney's fees in the sum of Php200,000.00 and exemplary damages of
Php200,000.00 to deter anybody similarly inclined;

Both Defendants are directed to pay the cost of this litigation.

It is SO ORDERED.10

Aggrieved, Coco Charcoal and Lim appealed before the CA.

The CA Ruling

In its 30 December 2010 Decision, the CA reversed the RTC decision. While the appellate court
agreed that the DPWH project encroached upon the frontal portions of the properties, it ruled that
Makro was not entitled to a refund. It explained that the warranty expressed in Section 4(i)11 of the
deeds of sale is similar to the warranty against eviction set forth under Article 1548 of the Civil Code.
As such, the CA posited that only a buyer in good faith may sue to a breach of warranty against
eviction. It averred that Makro could not feign ignorance of the ongoing road widening project. The
appellate court noted Makro's actual knowledge of the encroachment before the execution of the
sale constitutes its recognition that Coco Charcoal and Lim's warranty against liens, easements, and
encumbrances does not include the respective 131 and 130 square meters affected by the DPWH
project, but covers only the remainder of the property. It ruled:

WHEREFORE, premises considered, the instant appeal is GRANTED. Accordingly, the herein
assailed August 16, 2004 Decision of the trial court is REVERSED and SET ASIDE, and the action
instituted by appellee MAKRO against appellants Coco Charcoal and Lim Kim San for collection of
sum of money by way of refund is hereby DISMISSED for lack of cause of action.

SO ORDERED.12

Makro moved for reconsideration, but the same was denied by the CA in its assailed 7 April 2011
Resolution.

Hence, this present petition raising the following:

 ISSUES

WHETHER THE COURT OF APPEALS ERRED IN DENYING MAKRO'S MOTION FOR

EXTENSION TO FILE A MOTION FOR RECONSIDERATION; AND

II

WHETHER THE COURT OF APPEALS ERRED IN DENYING MAKRO A REFUND ON THE

GROUND OF BAD FAITH.

THE COURT'S RULING

The petition is meritorious.

Non-extendible period to file motion for reconsideration; exceptions

Makro filed two motions for extension to file a motion for reconsideration. On the first motion, it
sought an extension after its former lawyer, Atty. Edwin Lacierda, withdrew as a counsel in view of
his appointment as press secretary for former President Benigno Aquino III. Makro again asked for
an extension after its present counsel was confined for dengue and typhoid fever. Eventually, it filed
its motion for reconsideration on 7 March 2011.

In its 7 April 2011 Resolution, the CA denied Makro's motions for extension to file a motion for
reconsideration, explaining that the 15-day period for the filing of such is non-extendible and that a
motion for extension is prohibited.

It must be remembered that procedural rules are set not to frustrate the ends of substantial justice,
but are tools to expedite the resolution of cases on their merits. The Court reminds us in Gonzales v.
Serrano 13that the prohibition on motion for extension to file a motion for reconsideration is not
absolute, to wit:

The Court shall first delve on the procedural issue of the case. In Imperial v. Court of Appeals, 14 the
Court ruled:

In a long line of cases starting with Habaluyas Enterprises v. Japson, 15 we have laid down the
following guideline:

Beginning one month after the promulgation of this Resolution, the rule shall be strictly enforced that
no motion for extension of time to file a motion for new trial or reconsideration may be filed with the
Metropolitan or Municipal Trial Courts, the Regional Trial Courts, and the Intermediate Appellate
Court. Such a motion may be filed only in cases pending with the Supreme Court as the court of last
resort, which may in its sound discretion either grant or deny the extension requested.

Thus, the general rule is that no motion for extension of time to file a motion for reconsideration is
allowed. This rule is consistent with the rule in the 2002 Internal Rules of the Court of Appeals that
unless an appeal or a motion for reconsideration or new trial is filed within the 15-day reglementary
period, the CA's decision becomes final. Thus, a motion for extension of time to file a motion for
reconsideration does not stop the running of the 15-day period for the computation of a decision's
finality. At the end of the period, a CA judgment becomes final, immutable and beyond our power to
review.

This rule, however, admits of exceptions based on a liberal reading of the rule, so long as the
petitioner is able to prove the existence of cogent reasons to excuse its non-observance. xxx

While the CA was correct in denying his Urgent Motion for Extension to File Motion for
Reconsideration for being a prohibited motion, the Court, in the interest of justice, looked into the
merits of the case, and opted to suspend the prohibition against such motion for extension after it
found that a modification of the CA Decision is warranted by the law and the jurisprudence on
administrative cases involving sexual harassment. The emerging trend of jurisprudence, after all, is
more inclined to the liberal and flexible application of procedural rules. Rules of procedure exist to
ensure the orderly, just and speedy dispensation of cases; to this end, inflexibility or liberality must
be weighed. Thus, the relaxation or suspension of procedural rules, or exemption of a case from
their operation is warranted only by compelling reasons or when the purpose of justice requires it.
(emphases and underscoring supplied)

The Court finds that cogent reason exists to justify the relaxation of the rules regarding the filing of
motions for extension to file a motion for reconsideration. The explanation put forth by Makro in filing
its motions for extension clearly were not intended to delay the proceedings but were caused by
reasons beyond its control, which cannot be avoided even with the exercise of appropriate care or
prudence. Its former counsel had to withdraw in the light of his appointment as a cabinet secretary
and its new lawyer was unfortunately afflicted with a serious illness. Thus, it would have been more
prudent for the CA to relax the procedural rules so that the substantive issues would be thoroughly
ventilated.

More importantly, the liberal application of the rules becomes more imperative considering that
Makro's position is meritorious.

Express Warranty vis-a vis Implied Warranty

In addressing the issues of the present case, the following provisions of the deeds of sale between
Makro and respondents are pertinent:

Section 2. General Investigation and Relocation

Upon the execution of this Deed, the BUYER shall undertake at its own expense a general
investigation and relocation of their lots which shall be conducted by a surveyor mutually acceptable
to both parties. Should there be any discrepancy between the actual areas of the lots as resurveyed
and the areas as indicated in their Transfer Certificates of Title, the Purchase Price shall be adjusted
correspondingly at the rate of PESOS: EIGHT THOUSAND FIVE HUNDRED (Php8,500.000) per
square meter. In the event that the actual area of a lot is found to be in excess of the area specified
in the Titles, the Purchase Price shall be increased on the basis of the rate specified herein.
Conversely, in the event that the actual area of a lot is found to be less than the area specified in the
Titles, the BUYER shall deduct a portion of the Purchase Price corresponding to the deficiency in the
area on the basis of the rate specified herein. In any case of discrepancy, be it more or less than the
actual area of the Property as specified in the Titles, the SELLER agrees to make the necessary
correction of the title covering the lots before the same is transferred to the BUYER.16

Section 4. Representations and Warranties

The SELLER hereby represents and warrants to the BUYER that:

1. The Property is and shall continue to be free and clear of all easements, liens and encumbrances
of any nature whatsoever, and is, and shall continue to be, not subject to any claim set-off or
defense which will prevent the BUYER from obtaining full and absolute ownership and possession
over the Property or from developing or using it as a site for its store building.17

Pursuant to Section 2 of the deeds of sale, Makro engaged the services of a surveyor which found
that the DPWH project had encroached upon the properties purchased. After demands for a refund
had failed, it opted to file the necessary judicial action for redress.

The courts a quo agree that the DPWH project encroached upon the properties Makro had
purchased from respondents. Nevertheless, the CA opined that Makro was not entitled to a refund
1âw phi1

because it had actual knowledge of the ongoing road widening project. The appellate court likened
Section 4(i) of the deeds of sale as a warranty against eviction, which necessitates that the buyer be
in good faith for it to be enforced.

A warranty is a collateral undertaking in a sale of either real or personal property, express or implied;
that if the property sold does not possess certain incidents or qualities, the purchaser may either
consider the sale void or claim damages for breach of warranty.18 Thus, a warranty may either be
express or implied.

An express warranty pertains to any affirmation of fact or any promise by the seller relating to the
thing, the natural tendency of which is to induce the buyer to purchase the same.19 It includes all
warranties derived from the language of the contract, so long as the language is express-it may take
the form of an affirmation, a promise or a representation.20 On the other hand, an implied warranty is
one which the law derives by application or inference from the nature of transaction or the relative
situation or circumstances of the parties, irrespective of any intention of the seller to create it.21 In
other words, an express warranty is different from an implied warranty in that the former is found
within the very language of the contract while the latter is by operation of law.

Thus, the CA erred in treating Section 4(i) of the deeds of sale as akin to an implied warranty against
eviction. First,the deeds of sale categorically state that the sellers assure that the properties sold
were free from any encumbrances which may prevent Makro from fully and absolutely possessing
the properties in question. Second, in order for the implied warranty against eviction to be
enforceable, the following requisites must concur: (a) there must be a final judgment; (b) the
purchaser has been deprived of the whole or part of the thing sold; (c) said deprivation was by virtue
of a prior right to the sale made by the vendor; and (d) the vendor has been summoned and made
co-defendant in the suit for eviction at the instance of the vendee.22 Evidently, there was no final
judgment and no opportunity for the vendors to have been summoned precisely because no judicial
action was instituted.

Further, even if Section 4(i) of the deeds of sale was to be deemed similar to an implied warranty
against eviction, the CA erred in concluding that Makro acted in bad faith. It is true that the warranty
against eviction cannot be enforced if the buyer knew of the risks or danger of eviction and still
assumed its consequences.23 The CA highlights that Makro was aware of the encroachments even
before the sale because the ongoing road widening project was visible enough to inform the buyer of
the diminution of the land area of the property purchased.

The Court disagrees.

It is undisputed that Makro's legal counsel conducted an ocular inspection on the properties in
question before the execution of the deeds of sale and that there were noticeable works and
constructions going on near them. Nonetheless, these are insufficient to charge Makro with actual
knowledge that the DPWH project had encroached upon respondents' properties. The dimensions of
the properties in relation to the DPWH project could have not been accurately ascertained through
the naked eye. A mere ocular inspection could not have possibly determined the exact extent of the
encroachment. It is for this reason that only upon a relocation survey performed by a geodetic
engineer, was it discovered that 131 square meters and 130 square meters of the lots purchased
from Coco Charcoal and Lim, respectively, had been adversely affected by the DPWH project.

To reiterate, the fact of encroachment is settled as even the CA found that the DPWH project had
disturbed a portion of the properties Makro had purchased. The only reason the appellate court
denied Makro recompense was because of its purported actual knowledge of the intrusion which is
not reason enough to deny Makro a refund of the proportionate amount pursuant to Section 2 of the
deeds of sale.

Nevertheless, the RTC errs in ordering respondents to pay ₱l,500,00.00 each to Makro. Under
Section 2 of the deeds of sale, the purchase price shall be adjusted in case of increase or decrease
in the land area at the rate of ₱8,500.00 per square meter. In the case at bar, 131 square meters
and 130 square meters of the properties of Coco Charcoal and Lim, respectively, were encroached
upon by the DPWH project. Applying the formula set under the deeds of sale, Makro should be
entitled to receive ₱l,113,500.00 from Coco Charcoal and ₱l,105,000.00 from Lim. It is noteworthy
that Makro's complaint against respondents also prayed for the same amounts. The RTC awarded
₱l,500,00.00 without sufficient factual basis or justifiable reasons.

Exemplary damages and attorney's fees may be awarded only for cause provided for by law.

In finding for Makro, the RTC also awarded attorney's fees and exemplary damages in its favor. The
trial court ruled that Makro was entitled to attorney's fees because it was forced to bring the matter
before the court assisted by counsel. It found the grant of exemplary damages in order because
respondents were in bad faith for concealing from Makro the fact that the DPWH had already
dispossessed a portion of the lots purchased.

In ABS-CBN Broadcasting Corporation v. Court of Appeals, 24 the Court cautioned that the fact that a
party was compelled to litigate his cause does not necessarily warrant the award of attorney's fees,
to wit:

As regards attorney's fees, the law is clear that in the absence of stipulation, attorney's fees may be
recovered as actual or compensatory damages under any of the circumstances provided for in
Article 2208 of the Civil Code.

The general rule is that attorney's fees cannot be recovered as part of damages because of the
policy that no premium should be placed on the right to litigate. They are not to be awarded every
time a party wins a suit. The power of the court to award attorney's fees under Article 2208 demands
factual, legal, and equitable justification. Even when a claimant is compelled to litigate with third
persons or to incur expenses to protect his rights, still attorney's fees may not be awarded where no
sufficient showing of bad faith could be reflected in a party's persistence in a case other than an
erroneous conviction of the righteousness of his cause. (emphasis supplied)

Other than the bare fact that Makro was compelled to hire the services of counsel to prosecute its
case, the RTC did not provide compelling reasons to justify the award of attorney's fees. Thus, it is
but right to delete the award especially since there is no showing that respondents had acted in bad
faith in refusing Makro's demand for refund. It is in consonance with the policy that there is no
premium on the right to litigate.25
On the other hand, exemplary damages may be awarded if the defendant had acted in a wanton,
fraudulent, reckless, oppressive or malevolent manner.26 The RTC found the award of exemplary
damages warranted because respondents allegedly concealed the fact the DPWH had already taken
possession of a portion of the land they had sold to Makro. Bad faith, however, involves a state of
mind dominated by ill will or motive implying a conscious and intentional design to do a wrongful act
for a dishonest purpose or moral obliquity.27 Here, there is insufficient evidence to definitively
ascertain that respondents' omission to mention the ongoing DPWH projects was impelled by a
conscious desire to defraud Makro. This is especially true since the road widening project was
already in progress even before the time of the sale, and which would have been noticeable when
Makro conducted its ocular inspection.

WHEREFORE, the petition is GRANTED. The 30 December 2010 Decision and 7 April 2011
Resolution of the Court of Appeals in CA-G.R. CV No. 83836 are REVERSED and SET
ASIDE. Petitioner Pilipinas Makro, Inc. is entitled to recover ₱l,113,500.00 from respondent Coco
Charcoal Phils., Inc. and ₱l,105,000.00 from respondent Lim Kim San.

SO ORDERED.

G.R. No. 119745 June 20, 1997

POWER COMMERCIAL AND INDUSTRIAL CORPORATION, petitioner,

vs.
COURT OF APPEALS, SPOUSES REYNALDO and ANGELITA R. QUIAMBAO and PHILIPPINE
NATIONAL BANK, respondents.

PANGANIBAN, J.:

Is the seller's failure to eject the lessees from a lot that is the subject of a contract of sale with
assumption of mortgage a ground (1) for rescission of such contract and (2) for a return by the
mortgagee of the amortization payments made by the buyer who assumed such mortgage?

Petitioner posits an affirmative answer to such question in this petition for review on certiorari of the
March 27, 1995 Decision1 of the Court of Appeals, Eighth Division, in CA-G.R. CV Case No. 32298
upholding the validity of the contract of sale with assumption of mortgage and absolving the
mortgagee from the liability of returning the mortgage payments already made.2

The Facts

Petitioner Power Commercial & Industrial Development Corporation, an industrial asbestos

manufacturer, needed a bigger office space and warehouse for its products. For this purpose, on
January 31, 1979, it entered into a contract of sale with the spouses Reynaldo and Angelita R.
Quiambao, herein private respondents. The contract involved a 612-sq. m. parcel of land covered by
Transfer Certificate of Title No. S-6686 located at the corner of Bagtican and St. Paul Streets, San
Antonio Village, Makati City. The parties agreed that petitioner would pay private respondents
P108,000.00 as down payment, and the balance of P295,000.00 upon the execution of the deed of
transfer of the title over the property. Further, petitioner assumed, as part of the purchase price, the
existing mortgage on the land. In full satisfaction thereof, he paid P79,145.77 to Respondent
Philippine National Bank ("PNB" for brevity).

On June 1, 1979, respondent spouses mortgaged again said land to PNB to guarantee a loan of
P145,000.00, P80,000.00 of which was paid to respondent spouses. Petitioner agreed to assume
payment of the loan.

On June 26, 1979, the parties executed a Deed of Absolute Sale With Assumption of Mortgage
which contained the following terms and conditions:3

That for and in consideration of the sum of Two Hundred Ninety-Five Thousand
Pesos (P295,000.00) Philippine Currency, to us in hand paid in cash, and which we
hereby acknowledge to be payment in full and received to our entire satisfaction, by
POWER COMMERCIAL AND INDUSTRIAL DEVELOPMENT CORPORATION, a
100% Filipino Corporation, organized and existing under and by virtue of Philippine
Laws with offices located at 252-C Vito Cruz Extension, we hereby by these presents
SELL, TRANSFER and CONVEY by way of absolute sale the above described
property with all the improvements existing thereon unto the said Power Commercial
and Industrial Development Corporation, its successors and assigns, free from all
liens and encumbrances.

We hereby certify that the aforesaid property is not subject to nor covered by the
provisions of the Land Reform Code — the same having no agricultural lessee
and/or tenant.

We hereby also warrant that we are the lawful and absolute owners of the above
described property, free from any lien and/or encumbrance, and we hereby agree
and warrant to defend its title and peaceful possession thereof in favor of the said
Power Commercial and Industrial Development Corporation, its successors and
assigns, against any claims whatsoever of any and all third persons; subject,
however, to the provisions hereunder provided to wit:

That the above described property is mortgaged to the Philippine National Bank,
Cubao, Branch, Quezon City for the amount of one hundred forty-five thousand
pesos, Philippine, evidenced by document No. 163, found on page No. 34 of Book
No. XV, Series of 1979 of Notary Public Herita
L. Altamirano registered with the Register of Deeds of Pasig (Makati), Rizal . . . ;

That the said Power Commercial and Industrial Development Corporation assumes
to pay in full the entire amount of the said mortgage above described plus interest
and bank charges, to the said mortgagee bank, thus holding the herein vendor free
from all claims by the said bank;

That both parties herein agree to seek and secure the agreement and approval of the
said Philippine National Bank to the herein sale of this property, hereby agreeing to
abide by any and all requirements of the said bank, agreeing that failure to do so
shall give to the bank first lieu (sic) over the herein described property.

On the same date, Mrs. C.D. Constantino, then General Manager of petitioner-corporation,
submitted to PNB said deed with a formal application for assumption of mortgage.4
On February 15, 1980, PNB informed respondent spouses that, for petitioner's failure to submit the
papers necessary for approval pursuant to the former's letter dated January 15, 1980, the application
for assumption of mortgage was considered withdrawn; that the outstanding balance of P145,000.00
was deemed fully due and demandable; and that said loan was to be paid in full within fifteen (15)
days from notice.5

Petitioner paid PNB P41,880.45 on June 24, 1980 and P20,283.14 on December 23, 1980,
payments which were to be applied to the outstanding loan. On December 23, 1980, PNB received a
letter from petitioner which reads:6

With regard to the presence of the people who are currently in physical occupancy of
the (l)ot . . . it is our desire as buyers and new owners of this lot to make use of this
lot for our own purpose, which is why it is our desire and intention that all the people
who are currently physically present and in occupation of said lot should be removed
immediately.

For this purpose we respectfully request that . . . our assumption of mortgage be

given favorable consideration, and that the mortgage and title be transferred to our
name so that we may undertake the necessary procedures to make use of this lot
ourselves.

It was our understanding that this lot was free and clear of problems of this nature,
and that the previous owner would be responsible for the removal of the people who
were there. Inasmuch as the previous owner has not been able to keep his
commitment, it will be necessary for us to take legal possession of this lot inorder
(sic) to take physical possession.

On February 19, 1982, PNB sent petitioner a letter as follows:7

(T)his refers to the loan granted to Mr. Reynaldo Quiambao which was assumed by
you on June 4, 1979 for P101,500.00. It was last renewed on December 24, 1980 to
mature on June 4, 1981.

A review of our records show that it has been past due from last maturity with interest
arrearages amounting to P25,826.08 as of February 19, 1982. The last payment
received by us was on December 24, 1980 for P20,283. 14. In order to place your
account in current form, we request you to remit payments to cover interest, charges,
and at least part of the principal.

On March 17, 1982, petitioner filed Civil Case No. 45217 against respondent spouses for rescission
and damages before the Regional Trial Court of Pasig, Branch 159. Then, in its reply to PNB's letter
of February 19, 1982, petitioner demanded the return of the payments it made on the ground that its
assumption of mortgage was never approved. On May 31, 1983,8 while this case was pending, the
mortgage was foreclosed. The property was subsequently bought by PNB during the public auction.
Thus, an amended complaint was filed impleading PNB as party defendant.

On July 12, 1990, the trial court9 ruled that the failure of respondent spouses to deliver actual
possession to petitioner entitled the latter to rescind the sale, and in view of such failure and of the
denial of the latter's assumption of mortgage, PNB was obliged to return the payments made by the
latter. The dispositive portion of said decision states: 10
 IN VIEW OF ALL THE FOREGOING, the Court hereby renders judgment in favor of
plaintiff and against defendants:

(1) Declaring the rescission of the Deed of Sale with Assumption of Mortgage
executed between plaintiff and defendants Spouses Quiambao, dated June 26,
1979;

(2) Ordering defendants Spouses Quiambao to return to plaintiff the amount of

P187,144.77 (P108,000.00 plus P79,145.77) with legal interest of 12% per
annum from date of filing of herein complaint, that is, March 17, 1982 until the same
is fully paid;

(3) Ordering defendant PNB to return to plaintiff the amount of P62,163.59

(P41,880.45 and P20,283.14) with 12% interest thereon from date of herein
judgment until the same is fully paid.

No award of other damages and attorney's fees, the same not being warranted under
the facts and circumstances of the case.

The counterclaim of both defendants spouses Quiambao and PNB are dismissed for
lack of merit.

No pronouncement as to costs.

SO ORDERED.

On appeal by respondent-spouses and PNB, Respondent Court of Appeals reversed the trial court.
In the assailed Decision, it held that the deed of sale between respondent spouses and petitioner did
not obligate the former to eject the lessees from the land in question as a condition of the sale, nor
was the occupation thereof by said lessees a violation of the warranty against eviction. Hence, there
was no substantial breach to justify the rescission of said contract or the return of the payments
made. The dispositive portion of said Decision reads: 11

WHEREFORE, the Decision appealed from is hereby REVERSED and the complaint
filed by Power Commercial and Industrial Development Corporation against the
spouses Reynaldo and Angelita Quiambao and the Philippine National Bank is
DISMISSED. No costs.

Hence, the recourse to this Court.

Issues

Petitioner contends that: (1) there was a substantial breach of the contract between the parties
warranting rescission; and (2) there was a "mistake in payment" made by petitioner, obligating PNB
to return such payments. In its Memorandum, it specifically assigns the following errors of law on the
part of Respondent Court: 12

A. Respondent Court of Appeals gravely erred in failing to consider in its decision

that a breach of implied warranty under Article 1547 in relation to Article 1545 of the
Civil Code applies in the case-at-bar.
 B. Respondent Court of Appeals gravely erred in failing to consider in its decision
that a mistake in payment giving rise to a situation where the principle of solutio
indebiti applies is obtaining in the case-at-bar.

The Court's Ruling

The petition is devoid of merit. It fails to appreciate the difference between a condition and a
warranty and the consequences of such distinction.

Conspicuous Absence of an Imposed Condition

The alleged "failure" of respondent spouses to eject the lessees from the lot in question and to
deliver actual and physical possession thereof cannot be considered a substantial breach of a
condition for two reasons: first, such "failure" was not stipulated as a condition — whether resolutory
or suspensive — in the contract; and second, its effects and consequences were not specified
either. 13

The provision adverted to by petitioner does not impose a condition or an obligation to eject the
lessees from the lot. The deed of sale provides in part: 14

We hereby also warrant that we are the lawful and absolute owners of the above
described property, free from any lien and/or encumbrance, and we hereby agree
and warrant to defend its title and peaceful possession thereof in favor of the said
Power Commercial and Industrial Development Corporation, its successors and
assigns, against any claims whatsoever of any and all third persons; subject,
however, to the provisions hereunder provided to wit:

By his own admission, Anthony Powers, General Manager of petitioner-corporation, did not ask the
corporation's lawyers to stipulate in the contract that Respondent Reynaldo was guaranteeing the
ejectment of the occupants, because there was already a proviso in said deed of sale that the sellers
were guaranteeing the peaceful possession by the buyer of the land in question. 15 Any obscurity in a
contract, if the above-quoted provision can be so described, must be construed against the party
who caused it. 16 Petitioner itself caused the obscurity because it omitted this alleged condition when
its lawyer drafted said contract.

If the parties intended to impose on respondent spouses the obligation to eject the tenants from the
lot sold, it should have included in the contract a provision similar to that referred to in Romero
vs. Court of Appeals, 17 where the ejectment of the occupants of the lot sold by private respondent
was the operative act which set into motion the period of petitioner's compliance with his own
obligation, i.e., to pay the balance of the purchase price. Failure to remove the squatters within the
stipulated period gave the other party the right to either refuse to proceed with the agreement or to
waive that condition of ejectment in consonance with Article 1545 of the Civil Code. In the case
cited, the contract specifically stipulated that the ejectment was a condition to be fulfilled; otherwise,
the obligation to pay the balance would not arise. This is not so in the case at bar.

Absent a stipulation therefor, we cannot say that the parties intended to make its nonfulfillment a
ground for rescission. If they did intend this, their contract should have expressly stipulated so.
In Ang vs. C.A.,18 rescission was sought on the ground that the petitioners had failed to fulfill their
obligation "to remove and clear" the lot sold, the performance of which would have given rise to the
payment of the consideration by private respondent. Rescission was not allowed, however, because
the breach was not substantial and fundamental to the fulfillment by the petitioners of the obligation
to sell.
As stated, the provision adverted to in the contract pertains to the usual warranty against eviction,
and not to a condition that was not met.

The terms of the contract are so clear as to leave no room for any other interpretation. 19

Furthermore, petitioner was well aware of the presence of the tenants at the time it entered into the
sales transaction. As testified to by Reynaldo, 20 petitioner's counsel during the sales negotiation
even undertook the job of ejecting the squatters. In fact, petitioner actually filed suit to eject the
occupants. Finally, petitioner in its letter to PNB of December 23, 1980 admitted that it was the
"buyer(s) and new owner(s) of this lot."

Effective Symbolic Delivery

The Court disagrees with petitioner's allegation that the respondent spouses failed to deliver the lot
sold. Petitioner asserts that the legal fiction of symbolic delivery yielded to the truth that, at the
execution of the deed of sale, transfer of possession of said lot was impossible due to the presence
of occupants on the lot sold. We find this misleading.

Although most authorities consider transfer of ownership as the primary purpose of sale, delivery
remains an indispensable requisite as our law does not admit the doctrine of transfer of property by
mere consent. 21 The Civil Code provides that delivery can either be (1) actual (Article 1497) or (2)
constructive (Articles 1498-1501). Symbolic delivery (Article 1498), as a species of constructive
delivery, effects the transfer of ownership through the execution of a public document. Its efficacy
can, however, be prevented if the vendor does not possess control over the thing sold, 22 in which
case this legal fiction must yield to reality.

The key word is control, not possession, of the land as petitioner would like us to believe. The Court
has consistently held that: 23

. . . (I)n order that this symbolic delivery may produce the effect of tradition, it is
necessary that the vendor shall have had such control over the thing sold that . . . its
material delivery could have been made. It is not enough to confer upon the
purchaser the ownership and the right of possession. The thing sold must be placed
in his control. When there is no impediment whatever to prevent the thing sold
passing into the tenancy of the purchaser by the sole will of the vendor, symbolic
delivery through the execution of a public instrument is sufficient. But if,
notwithstanding the execution of the instrument, the purchaser cannot have the
enjoyment and material tenancy of the thing and make use of it himself or through
another in his name, because such tenancy and enjoyment are opposed by the
interposition of another will, then fiction yields to reality — the delivery has not been
effected.

Considering that the deed of sale between the parties did not stipulate or infer otherwise, delivery
was effected through the execution of said deed. The lot sold had been placed under the control of
petitioner; thus, the filing of the ejectment suit was subsequently done. It signified that its new owner
intended to obtain for itself and to terminate said occupants' actual possession thereof. Prior physical
delivery or possession is not legally required and the execution of the deed of sale is deemed
equivalent to delivery. 24 This deed operates as a formal or symbolic delivery of the property sold and
authorizes the buyer to use the document as proof of ownership. Nothing more is required.

Requisites of Breach of Warranty Against Eviction

Obvious to us in the ambivalent stance of petitioner is its failure to establish any breach of the
warranty against eviction. Despite its protestation that its acquisition of the lot was to enable it to set
up a warehouse for its asbestos products and that failure to deliver actual possession thereof
defeated this purpose, still no breach of warranty against eviction can be appreciated because the
facts of the case do not show that the requisites for such breach have been satisfied. A breach of
this warranty requires the concurrence of the following circumstances:

(1) The purchaser has been deprived of the whole or part of the thing sold;

(2) This eviction is by a final judgment;

(3) The basis thereof is by virtue of a right prior to the sale made by the vendor; and

(4) The vendor has been summoned and made co-defendant in the suit for eviction at the instance
of the vendee. 25

In the absence of these requisites, a breach of the warranty against eviction under Article
1547 cannot be declared.

Petitioner argues in its memorandum that it has not yet ejected the occupants of said lot, and not
that it has been evicted therefrom. As correctly pointed out by Respondent Court, the presence of
lessees does not constitute an encumbrance of the land, 26 nor does it deprive petitioner of its control
thereof.

We note, however, that petitioner's deprivation of ownership and control finally occurred when it
failed and/or discontinued paying the amortizations on the mortgage, causing the lot to be foreclosed
and sold at public auction. But this deprivation is due to petitioner's fault, and not to any act
attributable to the vendor-spouses.

Because petitioner failed to impugn its integrity, the contract is presumed, under the law, to be valid
and subsisting.

Absence of Mistake In Payment

Contrary to the contention of petitioner that a return of the payments it made to PNB is warranted
under Article 2154 of the Code, solutio indebiti does not apply in this case. This doctrine applies
where: (1) a payment is made when there exists no binding relation between the payor, who has no
duty to pay, and the person who received the payment, and (2) the payment is made through
mistake, and not through liberality or some other cause. 27

In this case, petitioner was under obligation to pay the amortizations on the mortgage under the
contract of sale and the deed of real estate mortgage. Under the deed of sale (Exh. "2"), 28 both
parties agreed to abide by any and all the requirements of PNB in connection with the real estate
mortgage. Petitioner was aware that the deed of mortgage (Exh. "C") made it solidarily and,
therefore, primarily 29 liable for the mortgage obligation: 30

(e) The Mortgagor shall neither lease the mortgaged property. . . nor sell or dispose
of the same in any manner, without the written consent of the Mortgagee. However, if
not withstanding this stipulation and during the existence of this mortgage, the
property herein mortgaged, or any portion thereof, is . . . sold, it shall be the
obligation of the Mortgagor to impose as a condition of the sale, alienation or
 encumbrance that the vendee, or the party in whose favor the alienation or
encumbrance is to be made, should take the property subject to the obligation of this
mortgage in the same terms and condition under which it is constituted, it being
understood that the Mortgagor is not in any manner relieved of his obligation to the
Mortgagee under this mortgage by such sale, alienation or encumbrance; on the
contrary both the vendor and the vendee, or the party in whose favor the alienation
or encumbrance is made shall be jointly and severally liable for said mortgage
obligations. . . .

Therefore, it cannot be said that it did not have a duty to pay to PNB the amortization on the
mortgage.

Also, petitioner insists that its payment of the amortization was a mistake because PNB disapproved
its assumption of mortgage after it failed to submit the necessary papers for the approval of such
assumption.

But even if petitioner was a third party in regard to the mortgage of the land purchased, the payment
of the loan by petitioner was a condition clearly imposed by the contract of sale. This fact alone
disproves petitioner's insistence that there was a "mistake" in payment. On the contrary, such
payments were necessary to protect its interest as a "the buyer(s) and new owner(s) of the lot."

The quasi-contract of solutio indebiti is one of the concrete manifestations of the ancient principle
that no one shall enrich himself unjustly at the expense of another. 31 But as shown earlier, the
payment of the mortgage was an obligation petitioner assumed under the contract of sale. There is
no unjust enrichment where the transaction, as in this case, is quid pro quo, value for value.

All told, respondent Court did not commit any reversible error which would warrant the reversal of
the assailed Decision.

WHEREFORE, the petition is hereby DENIED, and the assailed Decision is AFFIRMED.

SO ORDERED.

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

MARIA LUISA DE LEON ESCALER and ERNESTO ESCALER, CECILIA J. ROXAS and PEDRO
ROXAS, petitioners,
vs.
COURT OF APPEALS, JOSE L. REYNOSO, now deceased, to be substituted by his heirs or
legal representatives and AFRICA V. REYNOSO, respondents.

Avanceña Law Office for petitioners.

Bauza, Ampil, Suarez, and Paredes Law Office for respondent Africa V. Reynoso.
CUEVAS, J.:

This is a Petition for Review on certiorari of the Decision of the then Court of Appeals (now the
Intermediate Appellate Court) and of its Resolution denying petitioners' Motion for Reconsideration,
in CA G.R. No. 41953-R, which was an appeal from the judgment of the Court of First Instance of
Rizal in Civil Case No. 9014 entitled "Maria Luisa de Leon Escaler, et al vs. Jose L. Reynoso and
Africa Reynoso."

The following are the pertinent background facts:

On March 7, 1958, the spouses Africa V. Reynoso and Jose L, Reynoso sold to petitioners several
others, a parcel of land, situated in Antipolo, Rizal with an area of 239,479 square meters and
covered by TCT No. 57400 of the Register of Deeds of the Province of Rizal. The Deed of
Sale 1 contained the following covenant against eviction, to wit:

That the VENDOR is the absolute owner of a parcel of land ... the ownership thereof
being evidenced by an absolute deed of sale executed in her favor by registered
owner ANGELINA C. REYNOSO, ...;

That the VENDOR warrants valid title to and ownership of said parcel of land and
further, warrant to defend the property herein sold and conveyed, unto the
VENDEES, their heirs, and assignees, from any and all claims of any persons
whatsoever.

On April 21, 1961, the Register of Deeds of Rizal and A. Doronilla Resources Development, Inc. filed
Case No. 4252 before the Court of First Instance of Rizal for the cancellation of OCT No. 1526
issued in the name of Angelina C. Reynoso (predecessor-in-interest of private respondents-vendors)
on February 26, 1958 under Decree No. 62373, LRC Record No. N-13783, on the ground that the
property covered by said title is already previously registered under Transfer Certificate of Title No.
42999 issued in the name of A. Doronilla Development, Inc. Petitioners as vendees filed their
opposition to the said petition.

On June 10, 1964, an Order 2 was issued in the said case, the dispositive portion of which reads:

IN VIEW OF THE ABOVE CONSIDERATIONS, this Court is constrained to set aside

Decree No. 62373 issued in LRC. Rec. No. N-13783 and the Register of Deeds of
Rizal is directed to cancel OCT No. 1526 of his office and all Transfer Certificates of
Title issued subsequently thereafter to purchaser of said property or portions thereof,
the same being null and void, the expenses for such cancellation to be charged to
spouses Angelina Reynoso and Floro Reynoso. The owner's duplicates in the
possession of the transferees of the property covered by OCT No. 1526 are declared
null and void and said transferees are directed to surrender to the Register of Deeds
of Rizal, said owner's duplicates for cancellation.

The other reliefs sought for by the party oppositors are denied the same not falling
within the jurisdiction of this Court under this proceeding.

SO ORDERED.

On August 31, 1965, herein petitioners, spouses Maria de Leon Escaler and Ernesto Escaler and
spouses Cecilia J. Roxas and Pedro Roxas, filed Civil Case No. 9014 before the Court of First
Instance of Rizal against their vendors, herein private respondents, spouses Jose L. Reynoso and
Africa Reynoso for the recovery of the value of the property sold to them plus damages on the
ground that the latter have violated the vendors' "warranty against eviction."

The complaint among others, alleged that the Order issued in Case No. 4252 which cancelled the
title of Angelina C. Reynoso and all subsequent Transfer Certificates of Title derived and/or
emanating therefrom and which includes the titles of petitioners, is now final, and by reason thereof
petitioners lost their right over the property sold; and that in said Case No. 4252, the respondents
were summoned and/or given their day in court at the instance of the petitioners. 3

The respondents, as defendants, filed their answer alleging, among others, by way of affirmative
defenses that "the cause of action, if any, of plaintiffs against defendants have been fully adjudicated
in Case No. 4252 when plaintiffs failed to file a third-party complaint against defendants." 4

On August 18, 1967, petitioners, as plaintiffs, filed a Motion for Summary Judgment, alleging the
facts already averred in the complaint, and further alleging that the defendants were summoned and
were given their day in court at the instance of plaintiffs in Case No. 4252. In support of their said
motion, the plaintiffs attached the affidavit of Atty. Alberto R. Avanceña who had represented the
plaintiffs in Case No. 4252 and had filed a joint opposition in behalf of all the vendees. The pertinent
portion of that affidavit, states—

4. That he has furnished a copy of said joint opposition to Africa Reynoso, wife of
Jose L. Reynoso, at her given address at c/o Antipolo Enterprises, Antipolo, Rizal
and the latter had received the same, as evidenced by the photostatic copy of the
Registry Return Receipt thereto affixed as Annex "C-l";

xxx xxx xxx

6. That he hereby executed this Affidavit to prove that said defendants Africa
Reynoso and Jose L. Reynoso were given their day in Court and/or were afforded
their opportunity to be heard in Case No. 4252 aforecited.

On September 27, 1967, judgment was rendered by the trial court, the pertinent portion of which
reads—

Considering the foregoing motion for summary judgment and it appearing that the
defendants under a Deed of Absolute Sale (Annex "C") have expressly warranted
their valid title and ownership of the said parcel of land and further warranted to
defend said property from any and all claims of any persons whomever in favor of
plaintiffs; that the said warranties were violated when on June 10, 1964, an Order
was promulgated by the Court of First Instance of Rizal in Case No. 4252 (Related to
LRC Case No. 1559, LRC Record No. N13293). In Re: Petition for Cancellation of
Original Registration, etc., covering the parcel of land in question; that said order of
June 10, 1964 has become final and executory there being no appeal interposed
thereto and defendants were summoned and were given a day in court at the
instance of the plaintiffs in Case No. 4252, the Court hereby grants the motion for
summary judgment, and hereby orders the defendants to jointly and severally return
to the plaintiffs Maria Luisa de Leon Escaler and Ernesto Escaler, Cecilia J. Roxas
and Pedro Roxas, the value of the property sold to them at the time of eviction which
is not to be less than P5,500.00 to reimburse to each one of the plaintiffs the
expenses of contract and litigation and the amount of P2,250.00 to pay the attorney's
fees of P1,000.00 plus the costs of suit.
 SO ORDERED.

Private respondents appealed the aforesaid decision to the then Court of Appeals 5 assigning as sole
error—that the lower court erred in finding that they were summoned and were given their day in
court at the instance of petitioners-plaintiffs in Case No. 4252.

In reversing the decision of the trial court and dismissing the case, the then Court of Appeals found
and so ruled that petitioners as vendees had not given private respondents-vendors, formal notice of
the eviction case as mandated by Arts. 1558 and 1559 of the New Civil Code.

Hence, the instant recourse, petitioners contending —

1) that the Court of Appeals erred in applying strictly to the instant case the
provisions of Articles 1558 and 1559 of the new Civil Code; and

2) that the decision of the Court of First Instance of Rizal should have been affirmed
by the Court of Appeals or at least, the, Court of Appeals should have remanded the
case to the trial court, for hearing on the merits.

The petition is devoid of merit. Consequently, it must be dismissed.

Article 1548, in relation to Articles 1558. and 1559 of the New Civil Code reads as follows:

Art. 1548, Eviction shall take place whenever by a final judgment based on a right
prior to the sale or an act imputable to the vendor, the vendee is deprived of the
whole or of a part of the thing purchased.

The vendor shall answer for the eviction even though nothing has been said in the
contract on the subject.

The contracting parties, however, may increase, diminish, or suppress this legal
obligation of the vendor.

Art. 1558. The vendor shall not be obliged to make good the proper warranty, unless
he is summoned in the suit for eviction at the instance of the vendee. (emphasis
supplied)

Art. 1559. The defendant vendee shall ask, within the time fixed in the Rules of Court
for answering the complaint that the vendor be made as co-defendant.

In order that a vendor's liability for eviction may be enforced, the following requisites must concur—
a) there must be a final judgment; b) the purchaser has been deprived of the whole or part of the
thing sold; c) said deprivation was by virtue of a right prior to the sale made by the vendor; and d)
the vendor has been summoned and made co-defendant in the suit for eviction at the instance of the
vendee. 6

In the case at bar, the fourth requisite—that of being summoned in the suit for eviction (Case No.
4252) at the instance of the vendee—is not present. All that the petitioners did, per their very
admission, was to furnish respondents, by registered mail, with a copy of the opposition they
(petitioners filed in the eviction suit. Decidedly, this is not the kind of notice prescribed by the
aforequoted Articles 1558 and 1559 of the New Civil Code. The term "unless he is summoned in the
suit for eviction at the instance of the vendee" means that the respondents as vendor/s should be
made parties to the suit at the instance of petitioners-vendees, either by way of asking that the
former be made a co-defendant or by the filing of a third-party complaint against said vendors.
Nothing of that sort appeared to have been done by the petitioners in the instant case.

IN VIEW OF THE FOREGOING CONSIDERATIONS, the petition is DISMISSED and the appealed
decision of the then Court of Appeals is AFFIRMED.

No pronouncement as to costs.

SO ORDERED.

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

Separate Opinions

AQUINO, J., dissenting:

In 1958 Cecilia Roxas and Maria Luisa de Leon Escaler and ten other persons bought for P12,000
from Africa V Reynoso, 23.9 hectares of land located at Barrio San Isidro, Antipolo, Rizal covered by
OCT No. 1526 in the name of Angelina C. Reynoso. Africa had purchased the land from Angelina (9-
12, Record on Appeal). Escaler and Roxas obtained TCT Nos. 58389 and 58393, respectively.

On April 21, 1961 the register of deeds of Rizal in Civil Case No. 4252, LRC Case No. 1559, Rec.
No. 13793, filed a petition for the cancellation of Decree No. N-62373 and OCT No. 1526 issued in
the name of Angelina C. Reynoso because the 23.9 hectare land covered by said decree and title
had been previously registered in the name of A. Doronilla Resources Development, Inc. since
February 20, 1956. Angelina was furnished a copy of the petition by registered mail, Registry
Receipt No. 6883. The petition was set for hearing on May 20, 1961.

It was alleged in paragraph 5 of the petition that Angelina transferred to Africa V. Reynoso the said
land. Among the 20 persons furnished copies of the petition for cancellation were Escaler and
Roxas. Escaler and Roxas filed a joint opposition to the petition for cancellation. Their lawyer,
Alberto P. Avanceña, furnished Africa Reynoso and A Angelina C. Reynoso by registered mail with
copies of said opposition sent at their common Postal address, care of Antipolo Enterprises,
Antipolo, Rizal, as shown in Registry Receipts Nos. 58558 and 58559 dated June 24, 1961 (p. 85,
Record of Civil Case No. 4252).

In said joint opposition, it was alleged that Escaler and Roxas were innocent purchasers for value,
that the court, as a land registration court, had no jurisdiction over the controversy and that should
the titles of Escaler and Roxas be nullified, they are entitled to relief from the Assurance Fund.

After hearing, which lasted for three years, Judge Muñoz Palma in her order of June 10, 1964 found
that the land covered by Angelina Reynoso's title, OCT No. 1526, had been previously registered in
1907 under OCT No. 301, which was cancelled by subsequent transfer certificates of title, the latest
of which is TCT No. 42999 in the name of A. Doronilla Resources Development, Inc.
She declared void Decree No. 62373 and Angelina Reynoso's title and those derived therefrom, like
the titles of Escaler and Roxas, in accordance with the rule that the prior registration prevails over
the later registration (Legarda and Prieto vs. Saleeby, 31 Phil. 590).

The titles of Angelina and Africa (maybe relatives by affinity) were void because they were issued for
lands already registered. The titles of Angelina and Africa may be regarded as a form of land-
grabbing. The purchasers were speculators in Antipolo lots.

More than a year later, or on August 31, 1965, Escaler and Roxas in Civil Case No. 9014 sued
Africa Reynoso to enforce the warranty against eviction contained in the deed of sale executed by
Africa in 1958 in their favor. They prayed for the return to each of the plaintiffs of P5,500 as the value
of the land and P4,750 as reimbursement of "expenses of contract", attorney's fees and litigation
expenses.

Africa Reynoso in her answer alleged that Escaler and Roxas failed to file a third- party complaint
against her when the latter were sued in Civil Case No. 4252, that their action had prescribed, that
they should claim from Angelina C. Reynoso reimbursement for the expenses of cancellation of title
and that their claim is against the Assurance Fund.

Africa Reynoso filed a third-party complaint against Angelina C. Reynoso. No summons was issued.
Escaler and Roxas filed a motion for summary judgment.

On September 27, 1967, Judge Navarro ordered the spouses Africa Reynoso and Jose Reynoso to
return solidarity to the Escalers and the Roxases the value of the land amounting to P5,500, to
reimburse to each one of the plaintiffs the "expenses of contract" and litigation in the sum of P2,250
and attorney's fees of P1,000 (61, Record on Appeal).

The Reynoso spouses appealed to the Court of Appeals which reversed the trial court's decision.
The Appellate Court held that because Escaler and Roxas did not make Africa Reynoso a co-
defendant in the eviction case, as required in articles 1558 and 1559 of the Civil Code, they could
not later on enforce the warranty against Africa. Escaler and Roxas appealed to this Court.

In my opinion, it was not possible for Escaler and Roxas to comply strictly with articles 1558 and
1559. The eviction took place, not in an ordinary suit wherein the vendor can be made a co-
defendant, but as an incident in the cancellation of title in a land registration proceeding.

In such a case, the furnishing of the vendor with a copy of the opposition was a substantial
compliance with articles 1558 and 1559. It was a notice to the vendor. Africa's vendor, Angelina, was
first notified of the cancellation proceeding.

At least, Escaler and Roxas complied with article 1481 of the old Civil Code which requires notice to
the vendor. It was not the fault of the petitioners that the eviction case assumed the shape of a mere
incident in the land registration proceeding and not that of an ordinary contentious civil action. Africa
Reynoso could not be made a co- defendant in that incident for cancellation of title, a summary
proceeding.

A contrary view would enable Africa Reynoso to enrich herself unjustly at the expense of the
petitioners.

Makasiar, C.J., Teehankee, Melencio-Herrera, Alampay, JJ., concur.

Separate Opinions

AQUINO, J., dissenting:

In 1958 Cecilia Roxas and Maria Luisa de Leon Escaler and ten other persons bought for P12,000
from Africa V Reynoso, 23.9 hectares of land located at Barrio San Isidro, Antipolo, Rizal covered by
OCT No. 1526 in the name of Angelina C. Reynoso. Africa had purchased the land from Angelina (9-
12, Record on Appeal). Escaler and Roxas obtained TCT Nos. 58389 and 58393, respectively.

On April 21, 1961 the register of deeds of Rizal in Civil Case No. 4252, LRC Case No. 1559, Rec.
No. 13793, filed a petition for the cancellation of Decree No. N-62373 and OCT No. 1526 issued in
the name of Angelina C. Reynoso because the 23.9 hectare land covered by said decree and title
had been previously registered in the name of A. Doronilla Resources Development, Inc. since
February 20, 1956. Angelina was furnished a copy of the petition by registered mail, Registry
Receipt No. 6883. The petition was set for hearing on May 20, 1961.

It was alleged in paragraph 5 of the petition that Angelina transferred to Africa V. Reynoso the said
land. Among the 20 persons furnished copies of the petition for cancellation were Escaler and
Roxas. Escaler and Roxas filed a joint opposition to the petition for cancellation. Their lawyer,
Alberto P. Avanceña, furnished Africa Reynoso and A Angelina C. Reynoso by registered mail with
copies of said opposition sent at their common Postal address, care of Antipolo Enterprises,
Antipolo, Rizal, as shown in Registry Receipts Nos. 58558 and 58559 dated June 24, 1961 (p. 85,
Record of Civil Case No. 4252).

In said joint opposition, it was alleged that Escaler and Roxas were innocent purchasers for value,
that the court, as a land registration court, had no jurisdiction over the controversy and that should
the titles of Escaler and Roxas be nullified, they are entitled to relief from the Assurance Fund.

After hearing, which lasted for three years, Judge Muñoz Palma in her order of June 10, 1964 found
that the land covered by Angelina Reynoso's title, OCT No. 1526, had been previously registered in
1907 under OCT No. 301, which was cancelled by subsequent transfer certificates of title, the latest
of which is TCT No. 42999 in the name of A. Doronilla Resources Development, Inc.

She declared void Decree No. 62373 and Angelina Reynoso's title and those derived therefrom, like
the titles of Escaler and Roxas, in accordance with the rule that the prior registration prevails over
the later registration (Legarda and Prieto vs. Saleeby, 31 Phil. 590).

The titles of Angelina and Africa (maybe relatives by affinity) were void because they were issued for
lands already registered. The titles of Angelina and Africa may be regarded as a form of land-
grabbing. The purchasers were speculators in Antipolo lots.

More than a year later, or on August 31, 1965, Escaler and Roxas in Civil Case No. 9014 sued
Africa Reynoso to enforce the warranty against eviction contained in the deed of sale executed by
Africa in 1958 in their favor. They prayed for the return to each of the plaintiffs of P5,500 as the value
of the land and P4,750 as reimbursement of "expenses of contract", attorney's fees and litigation
expenses.
Africa Reynoso in her answer alleged that Escaler and Roxas failed to file a third- party complaint
against her when the latter were sued in Civil Case No. 4252, that their action had prescribed, that
they should claim from Angelina C. Reynoso reimbursement for the expenses of cancellation of title
and that their claim is against the Assurance Fund.

Africa Reynoso filed a third-party complaint against Angelina C. Reynoso. No summons was issued.
Escaler and Roxas filed a motion for summary judgment.

On September 27, 1967, Judge Navarro ordered the spouses Africa Reynoso and Jose Reynoso to
return solidarity to the Escalers and the Roxases the value of the land amounting to P5,500, to
reimburse to each one of the plaintiffs the "expenses of contract" and litigation in the sum of P2,250
and attorney's fees of P1,000 (61, Record on Appeal).

The Reynoso spouses appealed to the Court of Appeals which reversed the trial court's decision.
The Appellate Court held that because Escaler and R•xas did not make Africa Reynoso a co-
defendant in the eviction case, as required in articles 1558 and 1559 of the Civil Code, they could
not later on enforce the warranty against Africa. Escaler and Roxas appealed to this Court.

In my opinion, it was not possible for Escaler and Roxas to comply strictly with articles 1558 and
1559. The eviction took place, not in an ordinary suit wherein the vendor can be made a co-
defendant, but as an incident in the cancellation of title in a land registration proceeding.

In such a case, the furnishing of the vendor with a copy of the opposition was a substantial
compliance with articles 1558 and 1559. It was a notice to the vendor. Africa's vendor, Angelina, was
first notified of the cancellation proceeding.

At least, Escaler and Roxas complied with article 1481 of the old Civil Code which requires notice to
the vendor. It was not the fault of the petitioners that the eviction case assumed the shape of a mere
incident in the land registration proceeding and not that of an ordinary contentious civil action. Africa
Reynoso could not be made a co- defendant in that incident for cancellation of title, a summary
proceeding.

A contrary view would enable Africa Reynoso to enrich herself unjustly at the expense of the
petitioners.

Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 122544 January 28, 1999

REGINA P. DIZON, AMPARO D. BARTOLOME, FIDELINA D. BLAZA, ESTER ABAD DIZON and
JOSEPH ANTHONY DIZON, RAYMUND A. DIZON, GERARD A. DIZON, and JOSE A. DIZON,
JR., petitioners,
vs.
COURT OF APPEALS and OVERLAND EXPRESS LINES, INC., respondents.
G.R. No. 124741 January 28, 1999

REGINA P. DIZON, AMPARO D. BARTOLOME, FIDELINA D. BALZA, ESTER ABAD DIZON and
JOSEPH ANTHONY DIZON, RAYMUND A. DIZON, GERARD A. DIZON, and Jose A. DIZON,
JR., petitioners,
vs.
COURT OF APPEALS, HON. MAXIMIANO C. ASUNCION, and OVERLAND EXPRESS LINES,
INC., respondents.

MARTINEZ, J.:

Two consolidated petitions were filed before us seeking to set aside and annul the decisions and
resolutions of respondent Court of Appeals. What seemed to be a simple ejectment suit was
juxtaposed with procedural intricacies which finally found its way to this Court.

G.R. No. 122544:

On May 23, 1974, private respondent Overland Express Lines, Inc. (lessee) entered into a Contract
of Lease with Option to Buy with petitioners1 (lessors) involving a 1,755.80 square meter parcel of
land situated at corner MacArthur Highway and South "H" Street, Diliman, Quezon City. The term of
the lease was for one (1) year commencing from May 16, 1974 up to May 15, 1975. During this
period, private respondent was granted an option to purchase for the amount of P3,000.00 per
square meter. Thereafter, the lease shall be on a per month basis with a monthly rental of
P3,000.00.

For failure of private respondent to pay the increased rental of P8,000.00 per month effective June
1976, petitioners filed an action for ejectment (Civil Case No. VIII-29155) on November 10, 1976
before the then City Court (now Metropolitan Trial Court) of Quezon City, Branch VIII. On November
22, 1982, the City Court rendered judgment 2ordering private respondent to vacate the leased
premises and to pay the sum of P624,000.00 representing rentals in arrears and/or as damages in
the form of reasonable compensation for the use and occupation of the premises during the period
of illegal detainer from June 1976 to November 1982 at the monthly rental of P8,000.00, less
payments made, plus 12% interest per annum from November 18, 1976, the date of filing of the
complaint, until fully paid, the sum of P8,000.00 a month starting December 1982, until private
respondent fully vacates the premises, and to pay P20,000.00 as and by way of attorney's fees.

Private respondent filed a certiorari petition praying for the issuance of a restraining order enjoining
the enforcement of said judgment and dismissal of the case for lack of jurisdiction of the City Court.

On September 26, 1984, the then Intermidiate Appellate Court 3 (now Court of Appeals) rendered a
decision 4stating that:

. . ., the alleged question of whether petitioner was granted an extension of the option
to buy the property; whether such option, if any, extended the lease or whether
petitioner actually paid the alleged P300,000.00 to Fidela Dizon, as representative of
private respondents in consideration of the option and, whether petitioner thereafter
offered to pay the balance of the supposed purchase price, are all merely incidental
and do not remove the unlawful detainer case from the jurisdiction or respondent
court. In consonance with the ruling in the case of Teodoro, Jr. vs. Mirasol (supra),
the above matters may be raised and decided in the unlawful detainer suit as, to rule
 otherwise, would be a violation of the principle prohibiting multiplicity of suits.
(Original Records, pp. 38-39).

The motion for reconsideration was denied. On review, this Court dismissed the petition in a
resolution dated June 19, 1985 and likewise denied private respondent's subsequent motion for
reconsideration in a resolution dated September 9, 1985. 5

On October 7, 1985, private respondent filed before the Regional Trial Court (RTC) of Quezon City
(Civil Case No. Q-45541) an action for Specific Performance and Fixing of Period for Obligation with
prayer for the issuance of a restraining order pending hearing on the prayer for a writ of preliminary
injunction. It sought to compel the execution of a deed of sale pursuant to the option to purchase and
the receipt of the partial payment, and to fix the period to pay the balance. In an Order dated
October 25, 1985, the trial court denied the issuance of a writ of preliminary injunction on the ground
that the decision of the then City Court for the ejectment of the private respondent, having been
affirmed by the then Intermediate Appellate Court and the Supreme Court, has become final and
executory.

Unable to secure an injunction, private respondent also filed before the RTC of Quezon City, Branch
102 (Civil Case No. Q-46487) on November 15, 1985 a complaint for Annulment of and Relief from
Judgment with injunction and damages. In its decision 6 dated May 12, 1986, the trial court
dismissed the complaint for annulment on the ground of res judicata, and the writ of preliminary
injunction previously issued was dissolved. It also ordered private respondent to pay P3,000.00 as
attorney's fees. As a consequence of private respondent's motion for reconsideration, the
preliminary injunction was reinstated, thereby restraining the execution of the City Court's judgment
on the ejectment case.

The two cases were the after consolidated before the RTC of Quezon City, Branch 77. On April 28,
1989, a decision 7 was rendered dismissing private respondent's complaint in Civil Case No. Q-
45541 (specific performance case) and denying its motion for reconsideration in Civil Case No.
46487 (annulment of the ejectment case). The motion for reconsideration of said decision was
likewise denied.

On appeal, 8 respondent Court of Appeals rendered a decision 9 upholding the jurisdiction of the City
Court of Quezon City in the ejectment case. It also concluded that there was a perfected contract of
sale between the parties on the leased premises and that pursuant to the option to buy agreement,
private respondent had acquired the rights of a vendee in a contract of sale. It opined that the
payment by private respondent of P300,000.00 on June 20, 1975 as partial payment for the leased
property, which petitioners accepted (through Alice A. Dizon) and for which an official receipt was
issued, was the operative act that gave rise to a perfected contract of sale, and that for failure of
petitioners to deny receipt thereof, private respondent can therefore assume that Alice A. Dizon,
acting as agent of petitioners, was authorized by them to receive the money in their behalf. The
Court of Appeals went further by stating that in fact, what was entered into was a "conditional
contract of sale" wherein ownership over the leased property shall not pass to the private respondent
until it has fully paid the purchase price. Since private respondent did not consign to the court the
balance of the purchase price and continued to occupy the subject premises, it had the obligation to
pay the amount of P1,700.00 in monthly rentals until full payment of the purchase price. The
dispositive portion of said decision reads:

WHEREFORE, the appealed decision in Case No. 46387 is AFFIRMED. The

appealed decision in Case No. 45541 is, on the other hand, ANNULLED and SET
ASIDE. The defendants-appellees are ordered to execute the deed of absolute sale
of the property in question, free from any lien or encumbrance whatsoever, in favor of
 the plaintiff-appellant, and to deliver to the latter the said deed of sale, as well as the
owner's duplicate of the certificate of title to said property upon payment of the
balance of the purchase price by the plaintiff-appellant. The plaintiff-appellant is
ordered to pay P1,700.00 per month from June 1976, plus 6% interest per annum,
until payment of the balance of the purchase price, as previously agreed upon by the
parties.

SO ORDERED.

Upon denial of the motion for partil reconsideration (Civil Case No. Q-45541) by respondent Court of
Appeals, 10petitioners elevated the case via petition for certiorari questioning the authority of Alice A.
Dizon as agent of petitioners in receiving private respondent's partial payment amounting to
P300,000.00 pursuant to the Contract of Lease with Option to Buy. Petitioner also assail the
propriety of private respondent's exercise of the option when it tendered the said amount on June
20, 1975 which purportedly resulted in a perfected contract of sale.

G.R. No. 124741:

Petitioners filed with respondent Court of Appeals a motion to remand the records of Civil Case No.
38-29155 (ejectment case) to the Metropolitan Trial Court (MTC), then City Court of Quezon City,
Branch 38, for execution of the judgment 11 dated November 22, 1982 which was granted in a
resolution dated June 29, 1992. Private respondent filed a motion to reconsider said resolution which
was denied.

Aggrieved, private respondent filed a petition for certiorari, prohibition with preliminary injunction
and/or restraining order with this Court (G.R. Nos. 106750-51) which was dismissed in a resolution
dated September 16, 1992 on the ground that the same was a refiled case previously dismissed for
lack of merit. On November 26, 1992, entry of judgment was issued by this Court.

On July 14, 1993, petitioners filed an urgent ex-parte motion for execution of the decision in Civil
Case No. 38-29155 with the MTC of Quezon City, Branch 38. On September 13, 1993, the trial court
ordered the issuance of a third alias writ of execution. In denying private respondent's motion for
reconsideration, it ordered the immediate implementation of the third writ of execution without delay.

On December 22, 1993, private respondent filed with the Regional Trial Court (RTC) of Quezon City,
Branch 104 a petition for certiorari and prohibition with preliminary injunction/restraining order (SP.
PROC. No. 93-18722) challenging the enforceability and validity of the MTC judgment as well as the
order for its execution.

On January 11, 1994, RTC of Quezon City, Branch 104 issued an

order12 granting the issuance of a writ of preliminary injunction upon private respondent's' posting of
an injunction bond of P50,000.00.

Assailing the aforequoted order after denial of their motion for partial reconsideration, petitioners
filed a petition 13 for certiorari and prohibition with a prayer for a temporary restraining order and/or
preliminary injunction with the Court of Appeals. In its decision, 14 the Court of Appeals dismissed the
petition and ruled that:

The avowed purpose of this petition is to enjoin the public respondent from
restraining the ejectment of the private respondent. To grant the petition would be to
allow the ejectment of the private respondent. We cannot do that now in view of the
decision of this Court in CA-G.R. CV Nos. 25153-54. Petitioners' alleged right to eject
 private respondent has been demonstrated to be without basis in the said civil case.
The petitioners have been shown, after all, to have no right to eject private
respondents.

WHEREFORE, the petition is DENIED due course and is accordingly DISMISSED.

SO ORDERED. 15

Petitioners' motion for reconsideration was denied in a resolution 16 by the Court of Appeals stating
that:

This court in its decision in CA-G.R. CV Nos. 25153-54 declared that the plaintiff-
appellant (private respondent herein) acquired the rights of a vendee in a contract of
sale, in effect, recognizing the right of the private respondent to possess the subject
premises. Considering said decision, we should not allow ejectment; to do so would
disturb the status quo of the parties since the petitioners are not in possession of the
subject property. It would be unfair and unjust to deprive the private respondent of its
possession of the subject property after its rights have been established in a
subsequent ruling.

WHEREFORE, the motion for reconsideration is DENIED for lack of merit.

SO ORDERED. 17

Hence, this instant petition.

We find both petitions impressed with merit.

First. Petitioners have established a right to evict private respondent from the subject premises for
non-payment of rentals. The term of the Contract of Lease with Option to Buy was for a period of
one (1) year (May 16, 1974 to May 15, 1975) during which the private respondent was given an
option to purchase said property at P3,000.00 square meter. After the expiration thereof, the lease
was for P3,000.00 per month.

Admittedly, no definite period beyond the one-year term of lease was agreed upon by petitioners and
private respondent. However, since the rent was paid on a monthly basis, the period of lease is
considered to be from month to month in accordance with Article 1687 of the New Civil
Code.18 Where the rentals are paid monthly, the lease, even if verbal may be deemed to be on a
monthly basis, expiring at the end of every month pursuant to Article 1687, in relation to Article 1673
of the Civil Code. 19 In such case, a demand to vacate is not even necessary for judicial action after
the expiration of every month. 20

When private respondent failed to pay the increased rental of P8,000.00 per month in June 1976,
the petitioners had a cause of action to institute an ejectment suit against the former with the then
City Court. In this regard, the City Court (now MTC) had exclusive jurisdiction over the ejectment
suit. The filing by private respondent of a suit with the Regional Trial Court for specific performance
to enforce the option to purchase did not divest the then City Court of its jurisdiction to take
cognizance over the ejectment case. Of note is the fact that the decision of the City Court was
affirmed by both the Intermediate Appellate Court and this Court.
Second. Having failed to exercise the option within the stipulated one-year period, private
respondent cannot enforce its option to purchase anymore. Moreover, even assuming arguendo that
the right to exercise the option still subsists at the time private respondent tendered the amount on
June 20, 1975, the suit for specific performance to enforce the option to purchase was filed only on
October 7, 1985 or more than ten (10) years after accrual of the cause of action as provided under
Article 1144 of the New Civil Code.21

In this case, there was a contract of lease for one (1) year with option to purchase. The contract of
lease expired without the private respondent, as lessee, purchasing the property but remained in
possession thereof. Hence, there was an implicit renewal of the contract of lease on a monthly basis.
The other terms of the original contract of lease which are revived in the implied new lease under
Article 1670 of the New Civil Code 22 are only those terms which are germane to the lessee's right of
continued enjoyment of the property leased. 23 Therefore, an implied new lease does not ipso
facto carry with it any implied revival of private respondent's option to purchase (as lessee thereof)
the leased premises. The provision entitling the lessee the option to purchase the leased premises is
not deemed incorporated in the impliedly renewed contract because it is alien to the possession of
the lessee. Private respondent's right to exercise the option to purchase expired with the termination
of the original contract of lease for one year. The rationale of this Court is that:

This is a reasonable construction of the provision, which is based on the presumption

that when the lessor allows the lessee to continue enjoying possession of the
property for fifteen days after the expiration of the contract he is willing that such
enjoyment shall be for the entire period corresponding to the rent which is
customarily paid — in this case up to the end of the month because the rent was paid
monthly. Necessarily, if the presumed will of the parties refers to the enjoyment of
possession the presumption covers the other terms of the contract related to such
possession, such as the amount of rental, the date when it must be paid, the care of
the property, the responsibility for repairs, etc. But no such presumption may be
indulged in with respect to special agreements which by nature are foreign to the
right of occupancy or enjoyment inherent in a contract of lease. 24

Third. There was no perfected contract of sale between petitioners and private respondent. Private
respondent argued that it delivered the check of P300,000.00 to Alice A. Dizon who acted as agent
of petitioners pursuant to the supposed authority given by petitioner Fidela Dizon, the payee thereof.
Private respondent further contended that petitioners' filing of the ejectment case against it based on
the contract of lease with option to buy holds petitioners in estoppel to question the authority of
petitioner Fidela Dizon. It insisted that the payment of P300,000.00 as partial payment of the
purchase price constituted a valid exercise of the option to buy.

Under Article 1475 of the New Civil Code, "the contract of sale is perfected at the moment there is a
meeting of minds upon the thing which is the object of the contract and upon the price. From that
moment, the parties may reciprocally demand performance, subject to the provisions of the law
governing the form of contracts." Thus, the elements of a contract of sale are consent, object, and
price in money or its equivalent. It bears stressing that the absence of any of these essential
elements negates the existence of a perfected contract of sale. Sale is a consensual contract and he
who alleges it must show its existence by competent proof. 25

In an attempt to resurrect the lapsed option, private respondent gave P300,000.00 to petitioners
(thru Alice A. Dizon) on the erroneous presumption that the said amount tendered would constitute a
perfected contract of sale pursuant to the contract of lease with option to buy. There was no valid
consent by the petitioners (as co-owners of the leased premises) on the supposed sale entered into
by Alice A. Dizon, as petitioners' alleged agent, and private respondent. The basis for agency is
representation and a person dealing with an agent is put upon inquiry and must discover upon his
peril the authority of the agent. 26 As provided in Article 1868 of the New Civil Code, 27 there was no
showing that petitioners consented to the act of Alice A. Dizon nor authorized her to act on their
behalf with regard to her transaction with private respondent. The most prudent thing private
respondent should have done was to ascertain the extent of the authority of Alice A. Dizon. Being
negligent in this regard, private respondent cannot seek relief on the basis of a supposed agency.

In Bacaltos Coal Mines vs. Court of Appeals, 28 we explained the rule in dealing with an agent:

Every person dealing with an agent is put upon inquiry and must discover upon his
peril the authority of the agent. If he does not make such inquiry, he is chargeable
with knowledge of the agent's authority, and his ignorance of that authority will not be
any excuse. Persons dealing with an assumed agency, whether the assumed agency
be a general or special one, are bound at their peril, if they would hold the principal,
to ascertain not only the fact of the agency but also the nature and extent of the
authority, and in case either is controverted, the burden of proof is upon them to
establish it.

For the long years that private respondent was able to thwart the execution of the ejectment suit
rendered in favor of petitioners, we now write finis to this controversy and shun further delay so as to
ensure that this case would really attain finality.

WHEREFORE, in view of the foregoing, both petitions are GRANTED. The decision dated March 29,
1994 and the resolution dated October 19, 1995 in CA-G.R. CV No. 25153-54, as well as the
decision dated December 11, 1995 and the resolution dated April 23, 1997 in CA-G.R. SP No.
33113 of the Court of Appeals are hereby REVERSED and SET ASIDE.

Let the records of this case be remanded to the trial court for immediate execution of the judgment
dated November 22, 1982 in Civil Case No. VIII-29155 of the then City Court (now Metropolitan Trial
Court) of Quezon City, Branch VIII as affirmed in the decision dated September 26, 1984 of the then
Intermediate Appellate Court (now Court of Appeals) and in the resolution dated June 19, 1985 of
this Court.

However, petitioners are ordered to REFUND to private respondent the amount of P300,000.00
which they received through Alice A. Dizon on June 20, 1975. 1âwphi1.nêt

Republic of the Philippines

Supreme Court
Manila

SECOND DIVISION

VIEGELY SAMELO, represented by G.R. No. 170509

Attorney-in-Fact CRISTINA SAMELO,
Petitioner, Present:
 CARPIO, J., Chairperson,
- versus - BRION,
PEREZ,
SERENO, and
REYES, JJ.
MANOTOK SERVICES, INC., allegedly
represented by PERPETUA Promulgated:
BOCANEGRA (deceased),
Respondent. June 27, 2012

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

DECISION

BRION, J.:

Before us is the petition for review on certiorari[1] filed by Viegely Samelo

(petitioner), represented by her attorney-in-fact Cristina Samelo, to challenge the
decision dated June 21, 2005[2] and the resolution dated November 10, 2005[3] of the
Court of Appeals (CA) in CA-G.R. SP No. 85664.

Background Facts

Manotok Services, Inc. (respondent) alleged that it is the administrator of a

parcel of land known as Lot 9-A, Block 2913, situated at 2882 Dagupan Extension,
Tondo, Manila. On January 31, 1997, the respondent entered into a contract with the
petitioner for the lease of a portion of Lot 9-A, Block 2913, described as Lot 4, Block
15 (subject premises). The lease contract was for a period of one (1) year, with a
monthly rental of P3,960.00. After the expiration of the lease contract on December
31, 1997, the petitioner continued occupying the subject premises without paying
the rent.[4] On August 5, 1998, the respondent, thru its President Rosa Manotok, sent
a letter to the petitioner demanding that she vacate the subject premises and pay
compensation for its use and occupancy.[5] The petitioner, however, refused to heed
these demands.

On November 18, 1998, the respondent filed a complaint for unlawful detainer
against the petitioner before the Metropolitan Trial Court (MeTC), Branch 3,
Manila.[6] The case was docketed as Civil Case No. 161588-CV. The respondent
prayed, among others, that the petitioner and those claiming rights under her be
ordered to vacate the subject premises, and to pay compensation for its use and
occupancy.

In her answer, the petitioner alleged that the respondent had no right to collect rentals
because the subject premises are located inside the property of the Philippine
National Railways (PNR). She also added that the respondent had no certificate of
title over the subject premises. The petitioner further claimed that her signature in
the contract of lease was obtained through the respondents misrepresentation. She
likewise maintained that she is now the owner of the subject premises as she had
been in possession since 1944.[7]

The MeTC Ruling

The MeTC, in its judgment[8] of March 28, 2002, decided in favor of the
respondent, and ordered the petitioner to vacate the subject premises and to deliver
their peaceful possession to the respondent. The MeTC held that the only issue to be
resolved in an unlawful detainer case is physical possession or possession de facto,
and that the respondent had established its right of possession over the subject
premises. It added that the petitioners right under the lease contract already ceased
upon the expiration of the said contract. It further ruled that the petitioner is already
estopped from questioning the right of the respondent over the subject premises
when she entered into a contract of lease with the respondent. The dispositive portion
of the MeTC judgment reads:

WHEREFORE, premises considered, judgment is hereby rendered for the

plaintiff and against defendant, ordering the latter and all persons claiming rights
under her:

1. To vacate the premises located at 2882 Dagupan Extension, Tondo,

Manila, and deliver the peaceful possession thereof to the plaintiff[;]
 2. To pay plaintiff the sum of P40,075.20 as compensation for the use and
occupancy of the premises from January 1, 1998 to August 30, 1998,
plus P4,554.00 a month starting September 1, 1998, until defendant and
all person[s] claiming rights under her to finally vacate the premises[;]

3. To pay plaintiff the sum of P5,000.00 for and as attorneys fees; and

4. To pay the cost of suit.[9]

The RTC Decision

The petitioner filed an appeal[10] with the Regional Trial Court (RTC), Branch
50, Manila. The RTC, in its decision[11] of July 1, 2004, set aside the MeTCs
decision, and dismissed the complaint for unlawful detainer. The RTC held, among
others, that the respondent had no right to collect rentals as it failed to show that it
had authority to administer the subject premises and to enter into a contract of lease
with the petitioner. It also ruled that the subject premises, which were formerly
owned by the PNR, are now owned by the petitioner by virtue of her possession and
stay in the premises since 1944.

The CA Decision

Aggrieved by the reversal, the respondent filed a petition for review with the
CA, docketed as CA-G.R. SP No. 85664.[12] The CA, in its decision of June 21, 2005,
reversed and set aside the RTC decision, and reinstated the MeTC judgment. The
CA held that the petitioner is now estopped from questioning the right of the
respondent over the subject property. It explained that in an action involving the
possession of the subject premises, a tenant cannot controvert the title of his landlord
or assert any rights adverse to that title, without first delivering to the landlord the
premises acquired by virtue of the agreement between themselves. The appellate
court added that the petitioner cannot claim that she repudiated the lease contract, in
the absence of any unequivocal acts of repudiation.

The CA further held that the only issue in an ejectment suit is physical or
material possession, although the trial courts may provisionally resolve the issue of
ownership for the sole purpose of determining the issue of possession. It explained
that the issue of ownership is not required to determine the issue of possession since
the petitioner tacitly admitted that she is a lessee of the subject premises.[13]

The petitioner moved to reconsider this decision, but the CA denied her
motion in its resolution dated November 10, 2005.[14]

In presenting her case before this Court, the petitioner argued that the CA
erred in ruling that a tenant is not permitted to deny the title of his landlord. She
maintained that the respondent is not the owner or administrator of the subject
premises, and insisted that she had been in possession of the land in question since
1944. She further added that she repudiated the lease contract by filing a case for
fraudulent misrepresentation, intimidation, annulment of lease contract, and quieting
of title with injunction before another court.[15]

The Courts Ruling

We find the petition unmeritorious.

Respondent has a better right of possession over the subject premises

An action for unlawful detainer exists when a person unlawfully withholds

possession of any land or building against or from a lessor, vendor, vendee or other
persons, after the expiration or termination of the right to hold possession, by virtue
of any contract, express or implied.[16] The only issue to be resolved in an unlawful
detainer case is physical or material possession of the property involved,
independent of any claim of ownership by any of the parties involved.[17] Thus, when
the relationship of lessor and lessee is established in an unlawful detainer case, any
attempt of the parties to inject the question of ownership into the case is futile, except
insofar as it might throw light on the right of possession.[18]

In the present case, it is undisputed that the petitioner and the respondent
entered into a contract of lease. We note in this regard that in her answer with
affirmative defenses and counterclaim before the MeTC, the petitioner did not deny
that she signed the lease contract (although she maintained that her signature was
obtained through the respondents misrepresentations). Under the lease contract, the
petitioner obligated herself to pay a monthly rental to the respondent in the amount
of P3,960.00. The lease period was for one year, commencing on January 1, 1997
and expiring on December 31, 1997. It bears emphasis that the respondent did not
give the petitioner a notice to vacate upon the expiration of the lease contract in
December 1997 (the notice to vacate was sent only on August 5, 1998), and the latter
continued enjoying the subject premises for more than 15 days, without objection
from the respondent. By the inaction of the respondent as lessor, there can be no
inference that it intended to discontinue the lease contract.[19] An implied new lease
was therefore created pursuant to Article 1670 of the Civil Code, which expressly
provides:

Article 1670. If at the end of the contract the lessee should continue
enjoying the thing leased for fifteen days with the acquiescence of the lessor, and
unless a notice to the contrary by either party has previously been given, it is
understood that there is an implied new lease, not for the period of the original
contract, but for the time established in Articles 1682 and 1687. The other terms of
the original contract shall be revived.

An implied new lease or tacita reconduccion will set in when the following
requisites are found to exist: a) the term of the original contract of lease has expired;
b) the lessor has not given the lessee a notice to vacate; and c) the lessee continued
enjoying the thing leased for fifteen days with the acquiescence of the lessor.[20] As
earlier discussed, all these requisites have been fulfilled in the present case.

Article 1687 of the Civil Code on implied new lease provides:

Article 1687. If the period for the lease has not been fixed, it is understood
to be from year to year, if the rent agreed upon is annual; from month to month, if
it is monthly; from week to week, if the rent is weekly; and from day to day, if the
rent is to be paid daily.

Since the rent was paid on a monthly basis, the period of lease is considered
to be from month to month, in accordance with Article 1687 of the Civil
Code. [A] lease from month to month is considered to be one with a definite period
which expires at the end of each month upon a demand to vacate by the
lessor.[21] When the respondent sent a notice to vacate to the petitioner on August 5,
1998, the tacita reconduccion was aborted, and the contract is deemed to have
expired at the end of that month. [A] notice to vacate constitutes an express act on
the part of the lessor that it no longer consents to the continued occupation by the
lessee of its property.[22] After such notice, the lessees right to continue in possession
ceases and her possession becomes one of detainer.[23]

Estoppel of tenant

We find no merit in the petitioners allegation that the respondent had no

authority to lease the subject premises because the latter failed to prove that it is its
owner or administrator.

The Rules of Court protects the respondent, as lessor, from being questioned
by the petitioner, as lessee, regarding its title or better right of possession over the
subject premises. Section 2(b), Rule 131 of the Rules of Court states that the tenant
is not permitted to deny the title of his landlord at the time of the commencement of
the relation of landlord and tenant between them. Article 1436 of the Civil Code
likewise states that a lessee or a bailee is estopped from asserting title to the thing
leased or received, as against the lessor or bailor.

These provisions bar the petitioner from contesting the respondents title over
the subject premises. The juridical relationship between x x x [a] lessor and x x x [a
lessee] carries with it a recognition of the lessor's title. As [lessee, the petitioner is]
estopped [from denying the] landlord's title, or to assert a better title not only in
[herself], but also in some third person while [she remains] in possession of the
subject premises and until [she surrenders] possession to the landlord. This estoppel
applies even though the lessor had no title at the time the relation of [the] lessor and
[the] lessee was created, and may be asserted not only by the original lessor, but also
by those who succeed to his title.[24] Once a contact of lease is shown to exist
between the parties, the lessee cannot by any proof, however strong, overturn the
conclusive presumption that the lessor has a valid title to or a better right of
possession to the subject premises than the lessee.

The Court thus explained in Tamio v. Ticson:[25]

 Indeed, the relation of lessor and lessee does not depend on the formers title
but on the agreement between the parties, followed by the possession of the
premises by the lessee under such agreement. As long as the latter remains in
undisturbed possession, it is immaterial whether the lessor has a valid title or any
title at all at the time the relationship was entered into.[citations omitted]

The issue of ownership

We are likewise unpersuaded by the petitioners claim that she has acquired
possessory rights leading to ownership[26] over the subject premises, having been in
possession thereof since 1944. We emphasize that aside from her self-serving
allegation, the petitioner did not present any documentary evidence to substantiate
her claim that she stayed on the subject premises since 1944. That the petitioner
presented certificates of title of the Manila Railroad Company over certain properties
in Tondo, Manila, which allegedly cover the subject premises, is of no moment. One
cannot recognize the right of another, and at the same time claim adverse possession
which can ripen to ownership, thru acquisitive prescription. For prescription to set
in, the possession must be adverse, continuous, public, and to the exclusion of
[others].[27] Significantly, the RTC decision failed to state its basis for concluding
that the petitioner stayed in the subject premises since 1944.

At any rate, we hold that no need exists to resolve the issue of ownership in
this case, since it is not required to determine the issue of possession; the execution
of the lease contract between the petitioner, as lessee, and the respondent, as lessor,
belies the formers claim of ownership. We reiterate that the fact of the lease and the
expiration of its term are the only elements in an action for unlawful detainer. The
defense of ownership does not change the summary nature of [this] action. x x
x. Although a wrongful possessor may at times be upheld by the courts, this is merely
temporary and solely for the maintenance of public order. The question of ownership
is to be settled in the proper court and in a proper action.[28]

Interest on rentals due

Additionally, the petitioner is liable to pay interest by way of damages for her failure
to pay the rentals due for the use of the subject premises. [29] We reiterate that the
respondents extrajudicial demand on the petitioner was made on August 5, 1998.
Thus, from this date, the rentals due from the petitioner shall earn interest at 6% per
annum, until the judgment in this case becomes final and executory. After the finality
of judgment, and until full payment of the rentals and interests due, the legal rate of
interest to be imposed shall be 12%.

WHEREFORE, in light of all the foregoing, we DENY the petition. The decision
and the resolution of the Court of Appeals dated June 21, 2005 and November 10,
2005, respectively, in CA-G.R. SP No. 85664 are AFFIRMED with
the MODIFICATION that the unpaid rentals shall earn a corresponding interest of
six percent (6%) per annum, to be computed from August 5, 1998 until the finality
of this decision. After this decision becomes final and executory, the rate of legal
interest shall be computed at twelve percent (12%) per annum from such finality
until its satisfaction.
SO ORDERED.

[G.R. No. 150060. August 19, 2003]

PRIMARY STRUCTURES CORP. represented herein by its President

ENGR. WILLIAM C. LIU, petitioner, vs. SPS. ANTHONY S.
VALENCIA and SUSAN T. VALENCIA, respondents.

DECISION
VITUG, J.:
 On appeal is the decision of the Court of Appeals in CA-G.R. CV No. 59960,
promulgated on 13 February 2001, which has affirmed in toto the decision of the Regional
Trial Court of Cebu City dismissing the complaint of petitioners for legal redemption over
certain rural lots sold to respondents.
Petitioner is a private corporation based in Cebu City and the registered owner of Lot
4523 situated in Liloan, Cebu, with an area of 22,214 square meters. Adjacent to the lot
of petitioner are parcels of land, identified to be Lot 4527, Lot 4528, and Lot 4529 with a
total combined area of 3,751 square meters. The three lots, aforenumbered, have been
sold by Hermogenes Mendoza to respondent spouses sometime in December
1994. Petitioner learned of the sale of the lots only in January, 1996, when Hermogenes
Mendoza sold to petitioner Lot No. 4820, a parcel also adjacent to Lot 4523 belonging to
the latter. Forthwith, it sent a letter to respondents, on 30 January 1996, signifying its
intention to redeem the three lots. On 30 May 1996, petitioner sent another letter to
respondents tendering payment of the price paid to Mendoza by respondents for the
lots. Respondents, in response, informed petitioner that they had no intention of selling
the parcels. Thereupon, invoking the provisions of Articles 1621 and 1623, petitioner filed
an action against respondents to compel the latter to allow the legal
redemption. Petitioner claimed that neither Mendoza, the previous owner, nor
respondents gave formal or even just a verbal notice of the sale of the lots as so required
by Article 1623 of the Civil Code.
After trial, the Regional Trial Court of Cebu dismissed petitioners complaint and
respondents' counterclaim; both parties appealed the decision of the trial court to the
Court of Appeals.The appellate court affirmed the assailed decision.
Basically, the issues posed for resolution by the Court in the instant petition focus on
the application of Article 1621 and Article 1623 of the Civil Code, which read:

ART. 1621. The owners of adjoining lands shall also have the right of redemption
when a piece of rural land, the area of which does not exceed one hectare, is alienated
unless the grantee does not own any rural land.

This right is not applicable to adjacent lands which are separated by brooks, drains,
ravines, roads and other apparent servitudes for the benefit of other estates.

If two or more adjoining owners desire to exercise the right of redemption at the same
time, the owner of the adjoining land of smaller area shall be preferred; and should
both lands have the same area, the one who first requested the redemption.

ART. 1623. The right of legal pre-emption or redemption shall not be exercised
except within thirty days from the notice in writing by the prospective vendor, or by
the vendor, as the case may be. The deed of sale shall not be recorded in the Registry
of Property, unless accompanied by an affidavit of the vendor that he has given
written notice thereof to all possible redemptioners.
The right of redemption of co-owners excludes that of adjoining owners.

Whenever a piece of rural land not exceeding one hectare is alienated, the law grants
to the adjoining owners a right of redemption except when the grantee or buyer does not
own any other rural land.[1] In order that the right may arise, the land sought to be
redeemed and the adjacent property belonging to the person exercising the right of
redemption must both be rural lands. If one or both are urban lands, the right cannot be
invoked.[2]
The trial court found the lots involved to be rural lands. Unlike the case of Fabia vs.
Intermediate Appellate Court[3] (which ruled, on the issue of whether a piece of land was
rural or not, that the use of the property for agricultural purpose would be essential in
order that the land might be characterized as rural land for purposes of legal redemption),
respondents in the instant case, however, did not dispute before the Court of Appeals the
holding of the trial court that the lots in question are rural lands. In failing to assail this
factual finding on appeal, respondents would be hardput to now belatedly question such
finding and to ask the Court to still entertain that issue.
Article 1621 of the Civil Code expresses that the right of redemption it grants to an
adjoining owner of the property conveyed may be defeated if it can be shown that the
buyer or grantee does not own any other rural land. The appellate court, sustaining the
trial court, has said that there has been no evidence proffered to show that respondents
are not themselves owners of rural lands for the exclusionary clause of the law to apply.
With respect to the second issue, Article 1623 of the Civil Code provides that the right
of legal pre-emption or redemption shall not be exercised except within thirty days from
notice in writing by the prospective vendor, or by the vendor, as the case may be. In
stressing the mandatory character of the requirement, the law states that the deed of sale
shall not be recorded in the Registry of Property unless the same is accompanied by an
affidavit of the vendor that he has given notice thereof to all possible redemptioners.
The Court of Appeals has equated the statement in the deed of sale to the effect that
the vendors have complied with the provisions of Article 1623 of the Civil Code, as being
the written affirmation under oath, as well as the evidence, that the required written notice
to petitioner under Article 1623 has been met. Respondents, like the appellate court,
overlook the fact that petitioner is not a party to the deed of sale between respondents
and Mendoza and has had no hand in the preparation and execution of the deed of sale. It
could not thus be considered a binding equivalent of the obligatory written notice
prescribed by the Code.
In Verdad vs. Court of Appeals[4] this court ruled:

We hold that the right of redemption was timely exercised by private

respondents. Concededly, no written notice of the sale was given by the Burdeos heirs
(vendors) to the co-owners required under Article 1623 of the Civil Code -

xxxxxxxxx
 Hence, the thirty-day period of redemption had yet to commence when private
respondent Rosales sought to exercise the right of redemption on 31 March 1987, a
day after she discovered the sale from the Office of the City Treasurer of Butuan City,
or when the case was initiated, on 16 October 1987, before the trial court.

The written notice of sale is mandatory. This Court has long established the rule that
notwithstanding actual knowledge of a co-owner, the latter is still entitled to a written
notice from the selling co-owner in order to remove all uncertainties about the sale, its
terms and conditions, as well as its efficacy and status.

Even in Alonzo vs. Intermediate Appellate Court (150 SCRA 259), relied upon by
petitioner in contending that actual knowledge should be an equivalent to a written
notice of sale, the Court made it clear that it was not reversing the prevailing
jurisprudence; said the Court:

We realize that in arriving at our conclusion today, we are deviating from the strict
letter of the law, which the respondent court understandably applied pursuant to
existing jurisprudence. The said court acted properly as it had no competence to
reverse the doctrines laid down by this Court in the above-cited cases. In fact, and this
should be clearly stressed, we ourselves are not abandoning the De Conejero and
Buttle doctrines. What we are doing simply is adopting an exception to the general
rule, in view of the peculiar circumstances of this case.

In Alonzo, the right of legal redemption was invoked several years, not just days or
months, after the consummation of the contracts of sale. The complaint for legal
redemption itself was there filed more than thirteen years after the sales were
concluded. [5]

WHEREFORE, the instant petition is GRANTED, and the assailed decision of the
Court of Appeals is REVERSED and SET ASIDE. Petitioner is hereby given a period of
thirty days from finality of this decision within which to exercise its right of legal
redemption. No costs.

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. L-26855 April 17, 1989

FRANCISCO GARCIA, PAZ GARCIA, and MARIA GARCIA, petitioners,

vs.
JOSE CALALIMAN, PACIENCIA TRABADILLO & HON. COURT OF APPEALS, Third
Division, respondents.
Jose Gaton for petitioners.

Ricardo Q. Castro for respondents.

PARAS, J.:

This is a petition for review on certiorari of the decision * of the Court of Appeals in CA-G.R. No.
22179-R, promulgated on August 31, 1966, reversing the decision of the Court of First Instance of
Iloilo ** in Civil Case No. 3489, and rendering a new one dismissing the complaint of petitioner
herein, the dispositive portion of which reads as follows:

WHEREFORE, the judgment appealed from is hereby reversed and another entered,
dismissing plaintiff's complaint. No pronouncement as to costs. (p. 29 Rollo)

The facts of the case are as follows:

On February 11, 1946, one Gelacio Garcia died intestate, leaving a parcel of unregistered land
about 372 sq. meters, situated in the Municipality of Tubungan, Province of Iloilo (Exhibits, p. 19).
On his death the property was inherited by his nephews, nieces, grandnephews who are the
descendants of his late brothers, Pedro, Simeon, Buenaventura and Marcos (TSN, Sept. 6,1956, p.
3).

On December 3, 1954, the heirs, Juanita Bertomo, Joaquin Garcia, Porfirio Garcia, Dioscoro Garcia,
Flora Garcia, Consolacion Garcia, Remedios Garcia, Trinidad Garcia, Baltazar Garcia signed a
document entitled, "Extra-judicial Partition and Deed of Sale" (Exhibits, p. 19). The parcel of land
subject of the document was described as follows:

A parcel of residential land, about 372 square meters, lst class, Identified as
Assessor's Lot No. 107, Block No. 8, bounded on the north by Paz and Federal
Streets; on the south by Tabaosares and Antonia Tacalinar; on the East by Piedad
Street; and on the West by Paz Street. This parcel of land has no concrete
monuments to indicate its boundaries but there are dikes, stones and temporary
fences used as landmarks and boundary signals. This parcel of land is covered by
Tax Declaration No. 1149, S. of 1947, in the name of Gelacio Garcia, and its
assessed value of P110.00. (p. 19, Exhibits)

The last paragraph of the same document states:

That for and in consideration of the sum of FIVE HUNDRED PESOS (P500.00),
Philippine Currency, to us in hand paid by the spouses, JOSE CALALIMAN, and
PACIENCIA TRABADILLO, all of legal age, Filipinos and residents of the municipality
of Tubungan, province of Iloilo, Philippines, receipt of which we hereby
acknowledged and confessed to our entire satisfaction, do by these presents, cede,
sell, convey and transfer the above-described parcel of land unto the said spouses,
Jose Calaliman and Paciencia Trabadillo, their heirs, successors and assigns free
from all liens and encumbrances whatever. (p. 19, Exhibits)

The document was inscribed in the Register of Deeds of Iloilo on February 24,1955, Inscription No.
20814, Page 270, Vol. 64 (Exhibits, p. 20).
On December 17, 1954 another group of heirs, Rosario Garcia, Margarita Garcia, Dolores Rufino,
Resurreccion Tagarao, Serafin Tagarao, Buenaventura Tagarao, Fortunata Garcia and Simeon
Garcia, all residents of Isabela, Negros Occidental, also sold to the spouses Jose Calaliman and
Paciencia Trabadillo through their attorney-in-fact, Juanito Bertomo, their shares, rights, interest and
participation in the same parcel of land. The Deed of Sale was registered in the Register of Deeds of
Iloilo also on December 22, 1954, Inscription No. 20640, p. 88, Vol. 64 (Exhibits, p. 2122).

On May 7, 1955 the heirs Francisco Garcia, Paz Garcia, and Maria Garcia, petitioners herein, filed
against the spouses Jose Calaliman and Paciencia Trabadillo, private respondents herein, Civil
Case No. 3489 with the Court of First Instance of Iloilo, for legal redemption of the 3/4 portion of the
parcel of land inherited by the heirs from the late Gelacio Garcia, which portion was sold by their co-
heirs to the defendants. In the complaint (Record on Appeal, p. 4) plaintiffs alleged, among others:

5. That, plaintiffs' co-owners had never offered for sale their interest and shares over
the said land to the plaintiffs prior to the sale in favor of the defendants, nor given
notice of such intention on their part; and that, no notice in writing has been given by
said co-owners to the plaintiffs of the said sale, such that, plaintiffs came to learn of it
only from other source;

6. That, plaintiffs would have purchased the interest and shares of their co-owners
had the latter offered the same to them prior to the sale thereof to the defendants;
and that, within 30 days after learning of the sale made to the defendants under
annexes 'A', 'B' and 'B-l', plaintiffs made repeated offer to the defendants to allow
them to redeem said interest and shares acquired by the defendants in accordance
with the right granted to the plaintiffs by law in such a case, offering a reasonable
price thereof of P300 taking into consideration the fact that the defendants had
acquired only 3/4 of the land of 372 square meters more or less, in area with
assessed value of P110 and a fair market value of 372 at Pl per square meter, the
price actually obtaining in the locality at the time of the sale thereof under Annexes
'A', 'B' and 'B-l'; however, the defendants refused and have until the present refused
to grant redemption thereof giving no reason why other than challenging the plaintiffs
to bring their case in court:

7. That, the circumstances surrounding the transaction between the defendants and
plaintiffs' co-owners, the vendors, were such that defendants could not have actually
paid nor the vendors actually received the total price of P800 as stipulated in the
deeds Annexes 'A', 'B' and 'B-l' while the said price fixed is grossly excessive and
highly exaggerated and prohibitive for evidently ulterior motive:

8. That, the land herein described is an ancestral property and plaintiffs have actually
a house standing thereon and having lived thereon ever since, such that, the
defendants' refusal to allow redemption thereof has caused the plaintiffs mental
torture, worry and anxiety, forcing them to litigate and retain services of counsel,
therefore, plaintiffs demand against the defendants P500 for moral damage, P500 for
exemplary damage, P300 for attorney's fees, aside from actual expenses incurred;
and, furthermore, P5 monthly as reasonable value of defendants' occupation of a
portion of the premises counting from the filing of this complaint.

They prayed that the trial court render judgment:

1. Declaring the plaintiffs to be entitled to redeem from the defendants for the price of
P300 or for such reasonable price as may be determined by this Honorable Court the
 interest and shares over the land described in this complaint of plaintiffs' co-owners,
Joaquin, Porfirio, Flora, Dioscoro, Consolacion, Remedios, Trinidad, Baltazar,
Rosario, Margarita, Dolores, Fortunata and Simon, all surnamed Garcia, and
Resurreccion, Serafin and Buenaventura, all surnamed Tagarao, sold by them to the
defendants under the deeds of sale Annexes 'A', 'B' and 'B-l' of this complaint; and
ordering the defendants to execute the proper instrument of reconveyance or
redemption thereof in favor of the plaintiffs; and, ordering them to vacate the
premises;

2. Condemning the defendants to pay to the plaintiffs P500 for moral damage; P500
for exemplary damage; P300 for attorney's fees and actual expenses incurred; P5
monthly from the filing of this complaint as reasonable value of defendants'
occupation of a portion of the land; the costs of this action; and, for such other relief
and remedy as may be legal, just and equitable."

On the other hand, the defendants, private respondents herein, alleged in their answer the following
special affirmative defenses (Record on Appeal, p. 14):

1. That plaintiffs have no cause of action against the herein defendants;

2. That due notices in writing have been sent to plaintiff Francisco Garcia at his
residence at 2875 Felix Huertas St., Sta. Cruz, Manila, sometime last June 1953, in
which plaintiff Francisco Garcia was informed of his co-owners signified intention to
sell their shares, and likewise, the other plaintiffs Paz and Maria Garcia were
personally notified of the same hence, for that reason, they are now barred to claim
legal redemption of the land in question, having filed their belated claim too late."

The trial court rendered judgment on September 12, 1957 in favor of the plaintiffs (Record on
Appeal, p. 15), the dispositive portion of which reads as follows:

WHEREFORE, judgment is hereby rendered:

(a) Sentencing the defendants to resell the property to the plaintiffs for P800.00
which is the total consideration of the two deeds of sale Exhibits A and B;

(b) In the event that the defendants fail to execute the deed of resale within ten days
from the date this decision becomes final, the Clerk of Court is hereby ordered to
execute the corresponding deed pursuant to the provisions of Section 10 of Rule 39
of the Rules of Court;

(c) Without pronouncement as to costs.

On October 14, 1957 plaintiffs filed their notice of Appeal predicated on "(a) failure of the Court to
adjudge the real or reasonable price of the sale or otherwise the redemption value thereof; (b) failure
of the Court to adjudge damages including attorney's fees in favor of the plaintiffs and the costs."
(Record on Appeal, p. 18).

Defendants filed their own notice of appeal on October 15, 1957 (Record on Appeal, p. 19).
On appeal the Court of Appeals in a decision promulgated on August 31, 1966 reversed the decision
of the trial court and rendered another one dismissing plaintiff's complaint with no pronouncement as
to costs (Rollo, p. 22).

The instant petition for review by certiorari was filed with the Court on December 12, 1966 (Rollo, p.
11). The Court at first dismissed the petition in a resolution dated December 22, 1966, for insufficient
supporting papers (Rollo, p. 35) but reconsidered the said Resolution of Dismissal later in a
Resolution dated February 8, 1967 (Rollo, p. 97) as prayed for in a motion for reconsideration filed
by petitioners on February 1, 1967 (Rollo, p. 38). The same Resolution of February 8, 1967 gave
due course to the petition.

The Brief for the Petitioners was filed on June 9,1967 (Rollo, p. 106); the Brief for the Respondents
was received in the Court on August 31, 1967 (Rollo, p. 119).

Petitioners having manifested they would not file reply brief on September 14,1967 (Rollo, p. 122)
the Court considered the case submitted for decision, in a Resolution dated September 21, 1967
(Rollo, p. 124).

Petitioners assign the following errors:

I. THE HONORABLE COURT OF APPEALS ERRED IN DECLARING THAT THE

30-DAY PERIOD PRESCRIBED IN ARTICLE 1088 OF THE NEW CIVIL CODE FOR
A CO-HEIR TO EXERCISE HIS RIGHT OF LEGAL REDEMPTION, HAD ALREADY
ELAPSED WHEN THE HEREIN PLAINTIFFS FILED THE ACTION ON MAY 7,1955.

II. THE HONORABLE COURT OF APPEALS ERRED IN DECLARING THAT

THERE WAS NO OFFER TO REIMBURSE THE DEFENDANTS FOR THE
PORTION OF THE LAND IN QUESTION SOLD TO THEM BY THE CO-HEIRS OF
THE PLAINTIFFS.

III. THE HONORABLE COURT OF APPEALS ERRED IN REVERSING THE

JUDGMENT OF THE LOWER COURT, AND IN NOT ADJUDGING DAMAGES,
ATTORNEY'S FEES AND COSTS IN FAVOR OF THE PLAINTIFFS.

(Brief for the Petitioners, p. 1)

There is no question that the provision of law applicable in the instant case is Art. 1088 of the New
Civil Code (Art. 1067, Old Civil Code) as the matter concerns heirs and inheritance not yet
distributed (Wenceslao v. Calimon, 46 Phil. 906 [1923]). Art. 1088 states:

Article 1088. Should any of the heirs sell his hereditary rights to a stranger before the
partition, any or all of the co-heirs may be subrogated to the rights of the purchaser
by reimbursing him for the price of the sale, provided they do so within the period of
one month from the time they were notified in writing of the sale by the vendor.

The main issue is whether or not petitioners took all the necessary steps to effectuate their exercise
of the right of legal redemption within the period fixed by Art. 1088 of the Civil Code.

It is undisputed that no notification in writing was ever received by petitioners about the sale of the
hereditary interest of some of their co-heirs in the parcel of land they inherited from the late Gelacio
Garcia, although in a letter dated June 23, 1953 petitioner Francisco Garcia wrote one of his co-
heirs, Joaquin Garcia, who is an uncle of petitioners, proposing to buy the hereditary interests of his
co-heirs in their unpartitioned inheritance, (Exhibit, p. 3). Although said petitioner asked that his letter
be answered "in order that I will know the results of what I have requested you," (Exhibit, p. 14) there
is no proof that he was favored with one.

Petitioners came to know that their co-heirs were selling the property on December 3, 1954 when
one of the heirs, Juanito Bertomo, asked Petitioner Paz Garcia to sign a document prepared in the
Municipality of Tubungan because the land they inherited was going to be sold to private
respondent, Jose Calaliman (TSN, September 6, 1957, p. 60). The document mentioned by
petitioner Paz Garcia could be no other than the one entitled "Extra-Judicial Partition and Deed of
Sale" dated December 3, 1954 as it is in this document that the name of Paz Garcia, Maria Garcia
and Amado Garcia appear unsigned by them (Exhibits, p. 19).

It is not known whether the other heirs whose names appear in the document had already signed the
document at the time Paz Garcia was approached by Juanito Bertomo. Paz Garcia, however,
testified that she immediately informed her brother Francisco that Juanita Bertomo wanted to sell the
land to Jose Calaliman (TSN, September 6,1957, p. 62). On December 26, 1954 he wrote
respondents giving them notice of his desire to exercise the right of legal redemption and that he will
resort to court action if denied the right (Exhibits, p. 8). The respondents received the letter on
January 13, 1955 but petitioner Francisco Garcia did not get any answer from them. Neither did
respondents show him a copy of the document of sale nor inform him about the price they paid for
the sale when he went home to Tubungan from Manila sometime in March 1955 and went to see the
respondent spouse about the matter on March 24,1955 (TSN, September 6,1957, p. 18).

Because of the refusal of respondent Jose Calaliman to show him the document of sale or reveal to
him the price paid for the parcel of land, petitioner Francisco Garcia went to the Office of the
Register of Deeds on the same date, March 24,1955 and there found two documents of sale
regarding the same parcel of land (TSN, Ibid, p. 19).

Petitioners filed the case for legal redemption with the trial court on May 7, 1955. Respondents claim
that the 30-day period prescribed in Article 1088 of the New Civil Code for petitioners to exercise the
right to legal redemption had already elapsed at that time and that the requirement of Article 1088 of
the New Civil Code that notice would be in writing is deemed satisfied because written notice would
be superfluous, the purpose of the law having been fully served when petitioner Francisco Garcia
went to the Office of the Register of Deeds and saw for himself, read and understood the contents of
the deeds of sale (Brief for respondents, p. 6).

The issue has been squarely settled in the case of Castillo v. Samonte, where this Court observed:

Both the letter and spirit of the new Civil Code argue against any attempt to widen
the scope of the notice specified in Article 1088 by including therein any other kind of
notice, such as verbal or by registration. If the intention of the law had been to
include verbal notice or any other means of information as sufficient to give the effect
of this notice, then there would have been no necessity or reasons to specify in
Article 1088 of the New Civil Code that the said notice be made in writing for, under
the old law, a verbal notice or information was sufficient (106 Phil. 1023 [1960]).

In the above-quoted decision the Court did not consider the registration of the deed of sale with the
Register of Deeds sufficient notice, most specially because the property involved was unregistered
land, as in the instant case. The Court took note of the fact that the registration of the deed of sale
as sufficient notice of a sale under the provision of Section 51 of Act No. 496 applies only to
registered lands and has no application whatsoever to a case where the property involved is,
admittedly, unregistered land.

Consistent with aforesaid ruling, in the interpretation of a related provision (Article 1623 of the New
Civil Code) this Court had stressed that written notice is indispensable, actual knowledge of the sale
acquired in some other manners by the redemptioner, notwithstanding. He or she is still entitled to
written notice, as exacted by the Code, to remove all uncertainty as to the sale, its terms and its
validity, and to quiet any doubt that the alienation is not definitive. The law not having provided for
any alternative, the method of notifications remains exclusive, though the Code does not prescribe
any particular form of written notice nor any distinctive method for written notification of redemption
(Conejero et al. v. Court of Appeals et al., 16 SCRA 775 [1966]; Etcuban v. Court of Appeals, 148
SCRA 507 [1987]; Cabrera v. Villanueva, G.R. No. 75069, April 15,1988).

Petitioners fault the appellate court in not awarding them damages, attorney's fees and costs. After
finding in favor of respondent spouses and against petitioners herein it is untenable for petitioners to
expect that the appellate court would award damages and attorney's fees and costs. However as
already discussed, petitioners have not lost their right to redeem, for in the absence of a written
notification of the sale by the vendors, the 30-day period has not even begun to run. Petitioners
clearly can claim attorney's fees for bad faith on the part of respondents, first, for refusing
redemption, and secondly for declaring the entire land as theirs, although they knew some heirs had
not sold their shares.

PREMISES CONSIDERED, the decision of the Court of Appeals is REVERSED and the decision of
the trial court is REINSTATED with the modification that petitioners be awarded damages, attorney's
fees and costs in the amount prayed for.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC
G.R. No. 72873 May 28, 1987

CARLOS ALONZO and CASIMIRA ALONZO, petitioners,

vs.
INTERMEDIATE APPELLATE COURT and TECLA PADUA, respondents.

Perpetuo L.B. Alonzo for petitioners.

Luis R. Reyes for private respondent.

CRUZ, J.:

The question is sometimes asked, in serious inquiry or in curious conjecture, whether we are a court
of law or a court of justice. Do we apply the law even if it is unjust or do we administer justice even
against the law? Thus queried, we do not equivocate. The answer is that we do neither because we
are a court both of law and of justice. We apply the law with justice for that is our mission and
purpose in the scheme of our Republic. This case is an illustration.

Five brothers and sisters inherited in equal pro indiviso shares a parcel of land registered in 'the
name of their deceased parents under OCT No. 10977 of the Registry of Deeds of Tarlac. 1

On March 15, 1963, one of them, Celestino Padua, transferred his undivided share of the herein petitioners for the sum of P550.00 by way of
absolute sale. 2 One year later, on April 22, 1964, Eustaquia Padua, his sister, sold her own share to the same vendees, in an instrument
denominated "Con Pacto de Retro Sale," for the sum of P 440.00. 3

By virtue of such agreements, the petitioners occupied, after the said sales, an area corresponding
to two-fifths of the said lot, representing the portions sold to them. The vendees subsequently
enclosed the same with a fence. In 1975, with their consent, their son Eduardo Alonzo and his wife
built a semi-concrete house on a part of the enclosed area.4

On February 25, 1976, Mariano Padua, one of the five coheirs, sought to redeem the area sold to
the spouses Alonzo, but his complaint was dismissed when it appeared that he was an American
citizen .5 On May 27, 1977, however, Tecla Padua, another co-heir, filed her own complaint invoking
the same right of redemption claimed by her brother. 6

The trial court * also dismiss this complaint, now on the ground that the right had lapsed, not having been exercised within thirty days
from notice of the sales in 1963 and 1964. Although there was no written notice, it was held that actual knowledge of the sales by the co-
heirs satisfied the requirement of the law. 7

In truth, such actual notice as acquired by the co-heirs cannot be plausibly denied. The other co-
heirs, including Tecla Padua, lived on the same lot, which consisted of only 604 square meters,
including the portions sold to the petitioners . 8 Eustaquia herself, who had sold her portion, was
staying in the same house with her sister Tecla, who later claimed redemption petition. 9 Moreover,
the petitioners and the private respondents were close friends and neighbors whose children went to
school together. 10

It is highly improbable that the other co-heirs were unaware of the sales and that they thought, as they alleged, that the area occupied by the
petitioners had merely been mortgaged by Celestino and Eustaquia. In the circumstances just narrated, it was impossible for Tecla not to
know that the area occupied by the petitioners had been purchased by them from the other. co-heirs. Especially significant was the erection
thereon of the permanent semi-concrete structure by the petitioners' son, which was done without objection on her part or of any of the other
co-heirs.
The only real question in this case, therefore, is the correct interpretation and application of the
pertinent law as invoked, interestingly enough, by both the petitioners and the private respondents.
This is Article 1088 of the Civil Code, providing as follows:

Art. 1088. Should any of the heirs sell his hereditary rights to a stranger before the
partition, any or all of the co-heirs may be subrogated to the rights of the purchaser
by reimbursing him for the price of the sale, provided they do so within the period of
one month from the time they were notified in writing of the sale by the vendor.

In reversing the trial court, the respondent court ** declared that the notice required by the said article was written notice
and that actual notice would not suffice as a substitute. Citing the same case of De Conejero v. Court of Appeals 11 applied by the trial court,
the respondent court held that that decision, interpreting a like rule in Article 1623, stressed the need for written notice although no particular
form was required.

Thus, according to Justice J.B.L. Reyes, who was the ponente of the Court, furnishing the co-heirs
with a copy of the deed of sale of the property subject to redemption would satisfy the requirement
for written notice. "So long, therefore, as the latter (i.e., the redemptioner) is informed in writing of the
sale and the particulars thereof," he declared, "the thirty days for redemption start running. "

In the earlier decision of Butte v. UY, 12 " the Court, speaking through the same learned jurist, emphasized that the written
notice should be given by the vendor and not the vendees, conformably to a similar requirement under Article 1623, reading as follows:

Art. 1623. The right of legal pre-emption or redemption shall not be exercised except
within thirty days from the notice in writing by the prospective vendor, or by the
vendors, as the case may be. The deed of sale shall not be recorded in the Registry
of Property, unless accompanied by an affidavit of the vendor that he has given
written notice thereof to all possible redemptioners.

The right of redemption of co-owners excludes that of the adjoining owners.

As "it is thus apparent that the Philippine legislature in Article 1623 deliberately selected a particular
method of giving notice, and that notice must be deemed exclusive," the Court held that notice given
by the vendees and not the vendor would not toll the running of the 30-day period.

The petition before us appears to be an illustration of the Holmes dictum that "hard cases make bad
laws" as the petitioners obviously cannot argue against the fact that there was really no written
notice given by the vendors to their co-heirs. Strictly applied and interpreted, Article 1088 can lead to
only one conclusion, to wit, that in view of such deficiency, the 30 day period for redemption had not
begun to run, much less expired in 1977.

But as has also been aptly observed, we test a law by its results; and likewise, we may add, by its
purposes. It is a cardinal rule that, in seeking the meaning of the law, the first concern of the judge
should be to discover in its provisions the in tent of the lawmaker. Unquestionably, the law should
never be interpreted in such a way as to cause injustice as this is never within the legislative intent.
An indispensable part of that intent, in fact, for we presume the good motives of the legislature, is
to render justice.

Thus, we interpret and apply the law not independently of but in consonance with justice. Law and
justice are inseparable, and we must keep them so. To be sure, there are some laws that, while
generally valid, may seem arbitrary when applied in a particular case because of its peculiar
circumstances. In such a situation, we are not bound, because only of our nature and functions, to
apply them just the same, in slavish obedience to their language. What we do instead is find a
balance between the word and the will, that justice may be done even as the law is obeyed.
As judges, we are not automatons. We do not and must not unfeelingly apply the law as it is worded,
yielding like robots to the literal command without regard to its cause and consequence. "Courts are
apt to err by sticking too closely to the words of a law," so we are warned, by Justice Holmes again,
"where these words import a policy that goes beyond them." 13 While we admittedly may not legislate, we
nevertheless have the power to interpret the law in such a way as to reflect the will of the legislature. While we may not read into the law a
purpose that is not there, we nevertheless have the right to read out of it the reason for its enactment. In doing so, we defer not to "the letter
that killeth" but to "the spirit that vivifieth," to give effect to the law maker's will.

The spirit, rather than the letter of a statute determines its construction, hence, a
statute must be read according to its spirit or intent. For what is within the spirit is
within the letter but although it is not within the letter thereof, and that which is within
the letter but not within the spirit is not within the statute. Stated differently, a thing
which is within the intent of the lawmaker is as much within the statute as if within the
letter; and a thing which is within the letter of the statute is not within the statute
unless within the intent of the lawmakers. 14

In requiring written notice, Article 1088 seeks to ensure that the redemptioner is properly notified of the sale and to
indicate the date of such notice as the starting time of the 30-day period of redemption. Considering the shortness of
the period, it is really necessary, as a general rule, to pinpoint the precise date it is supposed to begin, to obviate any
problem of alleged delays, sometimes consisting of only a day or two.

The instant case presents no such problem because the right of redemption was invoked
not days but years after the sales were made in 1963 and 1964. The complaint was filed by Tecla
Padua in 1977, thirteen years after the first sale and fourteen years after the second sale. The delay
invoked by the petitioners extends to more than a decade, assuming of course that there was a valid
notice that tolled the running of the period of redemption.

Was there a valid notice? Granting that the law requires the notice to be written, would such notice
be necessary in this case? Assuming there was a valid notice although it was not in writing. would
there be any question that the 30-day period for redemption had expired long before the complaint
was filed in 1977?

In the face of the established facts, we cannot accept the private respondents' pretense that they
were unaware of the sales made by their brother and sister in 1963 and 1964. By requiring written
proof of such notice, we would be closing our eyes to the obvious truth in favor of their palpably false
claim of ignorance, thus exalting the letter of the law over its purpose. The purpose is clear enough:
to make sure that the redemptioners are duly notified. We are satisfied that in this case the other
brothers and sisters were actually informed, although not in writing, of the sales made in 1963 and
1964, and that such notice was sufficient.

Now, when did the 30-day period of redemption begin?

While we do not here declare that this period started from the dates of such sales in 1963 and 1964,
we do say that sometime between those years and 1976, when the first complaint for redemption
was filed, the other co-heirs were actually informed of the sale and that thereafter the 30-day period
started running and ultimately expired. This could have happened any time during the interval of
thirteen years, when none of the co-heirs made a move to redeem the properties sold. By 1977, in
other words, when Tecla Padua filed her complaint, the right of redemption had already been
extinguished because the period for its exercise had already expired.

The following doctrine is also worth noting:

While the general rule is, that to charge a party with laches in the assertion of an
alleged right it is essential that he should have knowledge of the facts upon which he
 bases his claim, yet if the circumstances were such as should have induced inquiry,
and the means of ascertaining the truth were readily available upon inquiry, but the
party neglects to make it, he will be chargeable with laches, the same as if he had
known the facts. 15

It was the perfectly natural thing for the co-heirs to wonder why the spouses Alonzo, who were not among them, should enclose a portion of
the inherited lot and build thereon a house of strong materials. This definitely was not the act of a temporary possessor or a mere mortgagee.
This certainly looked like an act of ownership. Yet, given this unseemly situation, none of the co-heirs saw fit to object or at least inquire, to
ascertain the facts, which were readily available. It took all of thirteen years before one of them chose to claim the right of redemption, but
then it was already too late.

We realize that in arriving at our conclusion today, we are deviating from the strict letter of the law,
which the respondent court understandably applied pursuant to existing jurisprudence. The said
court acted properly as it had no competence to reverse the doctrines laid down by this Court in the
above-cited cases. In fact, and this should be clearly stressed, we ourselves are not abandoning the
De Conejero and Buttle doctrines. What we are doing simply is adopting an exception to the general
rule, in view of the peculiar circumstances of this case.

The co-heirs in this case were undeniably informed of the sales although no notice in writing was
given them. And there is no doubt either that the 30-day period began and ended during the 14
years between the sales in question and the filing of the complaint for redemption in 1977, without
the co-heirs exercising their right of redemption. These are the justifications for this exception.

More than twenty centuries ago, Justinian defined justice "as the constant and perpetual wish to
render every one his due." 16 That wish continues to motivate this Court when it assesses the facts and the law in every case
brought to it for decision. Justice is always an essential ingredient of its decisions. Thus when the facts warrants, we interpret the law in a
way that will render justice, presuming that it was the intention of the lawmaker, to begin with, that the law be dispensed with justice. So we
have done in this case.

WHEREFORE, the petition is granted. The decision of the respondent court is REVERSED and that
of the trial court is reinstated, without any pronouncement as to costs. It is so ordered.

Teehankee, C.J., Yap, Narvasa, Melencio-Herrera Gutierrez, Jr., Paras, Gancayco, Padilla, Bidin,
Sarmiento and Cortes, JJ., concur.

Fernan and Feliciano, JJ., are on leave.

SECOND DIVISION

G.R. No. 219638, December 07, 2016

MARCELINO REPUELA AND CIPRIANO REPUELA, SUBSTITUTED BY CARMELA REPUELA, MERLINDA

R. VILLARUEL, WILLIAM REPUELA, ROSITA P. REPUELA, CRISTINA R. RAMOS, ORLANDO
REPUELA, JUNNE REPUELA, AND OSCAR REPUELA, Petitioners, v. ESTATE OF THE SPOUSES OTILLO
LARAWAN AND JULIANA BACUS, REPRESENTED BY NANCY LARAWAN MANCAO, GALILEO
LARAWAN AND SOCRATES LARAWAN, Respondents.
 DECISION

MENDOZA, J.:

This Petition for Review on Certiorari under Rule 45 of the Rules of Court assails the May 29, 2014
Decision1 and the June 10, 2015 Resolution2 of the Court of Appeals (CA) in CA-G.R. CV No. 03976, which
reversed and set aside the February 23, 2011 Decision3 of the Regional Trial Court (RTC), Seventh Judicial
Region, Branch 7, Cebu City, in Civil Case No. CEB-28524, a case for Annulment of Documents, Quieting of
Title, Redemption, Damages, and Attorney's Fees.

The Antecedents

Spouses Lorenzo and Magdalena Repuela owned Lot No. 3357 (subject property), situated in Lawaan III,
Talisay City, Cebu, and covered by Transfer Certificate of Title (TCT) No. 5154. After they had passed away,
their children Marcelino Repuela (Marcelino) and Cipriano Repuela (Cipriano) succeeded them as owners of
the subject property.4

Cipriano and Marcelino (Repuela brothers) claimed that sometime in July 1963, after the death of their
parents, they went to the house of Otillo Larawan (Otillo) to borrow P200.00 for Marcelino's fare to Iligan
City; that to secure the loan, the spouses Otillo and Juliana Larawan (Spouses Larawan) required them to
turn over the certificate of title for Lot No. 3357; that they were made to sign a purported mortgage
contract but they were not given a copy of the said document; that Cipriano affixed his signature while
Marcelino, being illiterate, just placed his thumb mark on the document; that they remained in possession of
the land despite the mortgage and had been planting bamboos, corn, bananas, and papayas thereon and
sharing the produce between them; and that they also paid the taxes due on the property.5

In October 2002, as recalled by Cipriano's daughter, Cristina Repuela Ramos (Cristina), she went to the City
Treasurer's Office of Talisay City, upon the request of her father, to verify whether Spouses Larawan were
paying the realty taxes on the mortgaged property. She learned that Spouses Larawan did not pay the taxes
and the tax declaration on the subject property was already in their names as early as 1964; that in the
Registry of Deeds of Cebu, TCT No. 5154 was already cancelled and a new certificate of title, TCT No.
10506, had been issued to Otillo; that Spouses Larawan were able to transfer the certificate of title to their
names by virtue of the Extajudicial Declaration of Heirs and Sale bearing the signature of her father Cipriano
and the thumb mark of her uncle Marcelino; and that her father and uncle remembered that they were
made to sign a blank document.

On January 17, 2003, Cipriano and Marcelino, on account of this predicament, were compelled to file a
complaint before the RTC for the annulment of the Extrajudicial Declaration of Heirs and Sale and the
cancellation of TCT No. 10506. During the trial, Catalina Burlas (Burlas), who lived next to the subject
property, and Alma Abellanosa (Abellanosa), City Assessor of Talisay City, were also presented as witnesses
for the Repuela brothers.6

Burlas testified that the Repuela brothers confided in her about Marcelino's desire to go to Iligan City but
they had no money for his fare; that another neighbor referred the Repuela brothers to Otillo, who could
lend them P200.00 but only upon the signing of a deed of mortgage and the surrender of the certificate of
title as collateral; that Marcelino was able to leave for Iligan but he came back after three months to help
Cipriano in cultivating the land; that she did not see any other person till the land except the Repuela
brothers; and that she could not recall a time when Otillo, whom she personally knew, ever visited or
cultivated the subject property.7

Abellanosa, as City Assessor, stated that based on the records of her office, Lot No. 3357 was declared for
taxation purposes for the first time in 1961 when Tax Declaration No. 12543 was issued in the name of
Lorenzo Repuela; that in 1964, Tax Declaration No. 24112 was issued in the name of Spouses Larawan on
the basis of a deed of sale; and that the subsequent tax declarations had Spouses Larawan as the owners.8

For the Estate of Spouses Larawan, on the other hand, the transaction between the Repuela brothers and
Otillo was a sale and not a mortgage of a parcel of land. The Estate also invoked laches on the part of the
Repuela brothers for failing to file a complaint during the lifetime of Spouses Larawan. Galileo Larawan
(Galileo), son of Spouses Larawan and the sole witness for the Estate, testified that he knew of the
transaction between his father and the Repuela brothers because his father brought him along to the office
of Atty. Celestino Bacalso (Atty. Bacalso), where the document entitled Extrajudicial Declaration of Heirs and
Sale was prepared; that the said document was signed by Cipriano and thumbmarked by Marcelino which
was witnessed by Hilario Bacalso and Fernando Abellanosa; that he witnessed the Repuela brothers affix
their signature and thumbmark after Atty. Bacalso read and explained to them the contents of the document
in the Cebuano dialect; that after the document was notarized, his father handed P2,000.00 to the Repuela
brothers as consideration for the sale; and that he was only six (6) years old when these all happened.9

Galileo also pointed out that the new certificate of title, TCT No. 10506, in the name of Spouses Larawan,
was issued by the Register of Deeds on August 20, 1963; that his mother paid the real estate taxes during
her lifetime and, after her death, he himself made the payments; that he secured the tax declaration for the
subject property from the office of the Talisay City Assessor; that their family had been in possession of the
subject property and they had harvested and enjoyed the produce of the land such as bamboos, jackfruit
and 100 coconut trees; and that there were no other persons claiming ownership over the land, as the
Repuela brothers never offered to redeem the subject property from their family.10

The Ruling of the RTC

After the trial, the RTC decided in favor of the Repuela brothers. It held that the transaction between the
parties was not a sale but an equitable mortgage. The testimony of Galileo for the respondent, who was
admittedly just six (6) years old then, was "likely colored by the lens of adult perspective and self-interest."
It believed the claim of Cipriano, who only had the benefit of a Grade One education, and the illiterate
Marcelino, that they merely signed a document without knowing its nature. The trial court gave more
credence to the claim of possession of the Repuela brothers because the same was affirmed by a
disinterested person, Burlas, who had been living in the area since she was small and whose lot adjoined the
subject property. According to her, only Cipriano and Marcelino cultivated the land and she never saw
anyone, not even Otillo, work on the land.11

Moreover, it was the trial court's opinion that the evidence of possession weighed more on the side of the
Repuela brothers than that of the Estate of Spouses Larawan. Their assertion of possession was bolstered by
the fact that they too paid taxes on the property, an indication that they were still in possession of the
subject property. Considering that they still possessed the subject property even after the execution of the
sale, in the concept of an owner and continued paying the land taxes thereon, the RTC was of the view that
the contract, entered into by the Repuela brothers and Otillo, was an equitable mortgage under Article 1602
of the Civil Code.12 Thus, the RTC disposed: chanRob lesvi rtual Lawl ibra ry

Hence, the Court: ChanRoblesVi rtua lawlib rary

1. Declares the sale in the document, "Extrajudicial Declaration of Heirs and Sale," signed by Cipriano and
Marcelino Repuela in favor of Otillo Larawan and spouse on July 1, 1963, as in effect an equitable mortgage;

2. Gives Cipriano and Marcelino Repuela thirty (30) days from the finality of this decision to redeem the
property in the amount of Two Thousand Pesos (P2,000.00), with interest at the legal rate computed from
the date of the filing of the Complaint; and

3. Directs defendants to pay plaintiffs: ChanRobles Vi rt ualawlib ra ry

a. P20,000.00, as attorney's fees, and

b. P20,000.00, as litigation expenses. chan roblesv irt uallawl ibra ry

Costs are assessed against the defendants.

SO ORDERED.13

Not in conformity, the Estate of Spouses Larawan appealed the case to the CA.

The Ruling of the CA

On May 29, 2014, the CA reversed and set aside the February 23, 2011 Decision of the RTC for the following
reasons: ChanRoblesVirtualawli bra ry

1. The Repuela brothers failed to present any direct and positive proof to rebut the presumption of the
document's due execution. They failed to prove any factual circumstance to point that the transaction
covered therein was one of mortgage, or at the least, that such was their intention;

2. The Repuela brothers had not proven continued possession of the subject property which would have
given the impression that it was not sold but merely mortgaged;

3. None of the enumerated circumstances in Article 1602 of the Civil Code was present in order for the
presumption of equitable mortgage to apply. Contrary to the factual finding of the trial court, the evidence
did not show that they were still in possession of the property even after the execution of the document and
that they continued paying the taxes on the property immediately after the execution of the deed; and,

4. Granting arguendo that the transaction was a mortgage, their cause of action was already barred by
laches as 39 years had already elapsed before they asserted their rights over the subject property.14

The decretal portion of the CA decision reads: ChanRoblesVirt ualawli bra ry

WHEREFORE, premises considered, the instant appeal is GRANTED. The February 23, 2011 Decision of the
RTC Branch 7 of Cebu City in Civil Case No. CEB-28524 is REVERSEDand SET ASIDE and the complaint
for Annulment of Documents, Quieting of Title, Redemption, Damages and Attorney's Fees is DISMISSED.

SO ORDERED. cralawlawlibra ry
15

After their motion for reconsideration was denied by the CA in its Resolution, dated June 10, 2015, the heirs
of the Repuela brothers (petitioners) filed the subject petition.

Issue

Whether the Extrajudicial Declaration of Heirs

and Sale amounted to an equitable mortgage.

Petitioners explain that the Repuela brothers only filed the case in 2003 because they found no urgency to
file it as there were no indications that their title and possession over the subject property were threatened.
They claim that their predecessors-in-interest were in peaceful, open, continuous, and public possession as
owners of the subject property from the time of the transaction in 1963 until the time when they decided to
partition their property and learned, in the process, that the tax declaration and title of their lot were
already transferred in the name of Spouses Larawan. They argue that considering that they, who were
claiming to be the owners thereof, were in actual possession of the property, their right to seek
reconveyance, which in effect sought to quiet the title to the property, never prescribed.16

Petitioners further argue that the existence of the Extrajudicial Declaration of Heirs and Sale was not enough
proof that the Repuela brothers really intended to sell the property, and that the stipulations in the contract
should be construed together with the parties' contemporaneous and subsequent acts as regards the
execution of the contract. The same was true with the issuance of a new owner's TCT in favor of Spouses
Larawan. It neither imports conclusive evidence of ownership nor proves that the agreement between the
parties was one of sale. A conveyance by registration in the name of the transferee and the issuance of a
new certificate is not secured from the operation of the equitable doctrine, to the effect that any conveyance
intended as security for a debt would be held in effect to be a mortgage, than most informal conveyance
that could be devised.17

The CA, according to petitioners, should have given more credence to the testimonies of the Repuela
brothers, as corroborated and affirmed by the disinterested witness, Burlas, over that of Galileo, the lone
witness for the respondent. As correctly observed by the trial court, Galileo was just six (6) years old when
he supposedly witnessed the alleged transaction in the office of Atty. Bacalso, and so he could not have
possibly known the nature of the executed contract. Echoing the RTC, they pointed out that a six-year old
boy's curiosity and concerns could not have extended to things of this nature and that his recollection of
events was likely colored by the lens of adult perspective and self-interest, as Galileo himself admitted that
he did not read the document.18

Finally, they stress that the Repuela brothers remained in possession of the subject property even after the
transaction and they also paid the taxes thereon for the years 1985 to 2002 on December 18, 2002. These
circumstances surrounding the transaction entered into by and between the Repuela brothers and Otillo
would naturally lead anyone to infer that this instance was espoused in Article 1602 of the Civil Code. This is
in line with jurisprudence consistently holding that the presence of one, and not the confluence of several
circumstances, is sufficient to prove that a contract of sale is one of an equitable mortgage.19

The Position of Respondent

In its Comment,20 dated December 28, 2015, respondent Estate of Spouses Larawan (respondent) averred
that the extrajudicial settlement and sale executed by the parties could not be presumed as an equitable
mortgage. First, the said contract was "not a sale with right to repurchase" and the price of the sale was not
unusually inadequate. Second, there is no documentary evidence that would support the claim of possession
by the Repuela brothers, as lessee or otherwise, continuously from the execution of the document of sale
until the filing of the case. Third, the third situation (when upon or after the expiration of the right to
repurchase, another instrument extending the period of redemption or granting a new period was executed)
wherein a contract shall be presumed to be an equitable mortgage is not applicable in the instant case. The
Extrajudicial Declaration of Heirs and Sale did not provide for a right to repurchase. As such, there was no
period of redemption to be extended or a new period to be executed. Fourth, there was no showing that
Otillo, as purchaser, retained for himself a part of the purchase price. He paid the amount of P2,000.00 as
sale consideration to the Repuela brothers.21 Fifth, there was no agreement in the contract of sale that the
Repuela brothers, as vendors, bound themselves to pay the taxes on the thing sold. And finally, the
Extrajudicial Declaration of Heirs and Sale was quite clear and specific that what was involved was a sale of
the subject property. From the terms of the contract, no inference could be made that the real intention of
the parties was to secure the payment of a debt or the performance of any other obligation.

The Court's Ruling

The Court finds merit in the petition.

An equitable mortgage is one which, although lacking in some formality, or form, or words, or other
requisites demanded by a statute, reveals the intention of the parties to charge real property as security for
a debt, and contains nothing impossible or contrary to law.22

For a presumption of an equitable mortgage to arise, two requisites must first be satisfied, namely: that the
parties entered into a contract denominated as a contract of sale and that their intention was to secure an
existing debt by way of mortgage.23 There is no single conclusive test to determine whether a deed of sale,
absolute on its face, is really a simple loan accommodation secured by a mortgage. Article 1602, in relation
to Article 1604 of the Civil Code, however, enumerates several instances when a contract, purporting to be,
and in fact styled as, an absolute sale, is presumed to be an equitable mortgage. Thus: ChanRobles Virtualawl ibra ry

ART. 1602. The contract shall be presumed to be an equitable mortgage, in any of the following
cases: chanRoble svirtual Lawli bra ry

(1) When the price of a sale with right to repurchase is unusually inadequate;

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

(3) When upon or after the expiration of the right to repurchase another instrument extending the period of
redemption or granting a new period is executed;

(4) When the purchaser retains for himself a part of the purchase price;

(5) When the vendor binds himself to pay the taxes on the thing sold;
(6) In any other case where it may be fairly inferred that the real intention of the parties is that
the transaction shall secure the payment of a debt or the performance of any other obligation.

In any of the foregoing case, any money, fruits, or other benefit to be received by the vendee as rent or
otherwise shall be considered as interest which shall be subject to the usury laws.

xxx

ART. 1604. The provisions of Article 1602 shall also apply to a contract purporting to be
an absolute sale. [Emphases and underscoring supplied]

Evident from Article 1602, the presence of any of the circumstances set forth therein suffices for a contract
to be deemed an equitable mortgage. No concurrence or an overwhelming number is needed.24In other
words, the fact that some or most of the circumstances mentioned are absent in a case will not negate the
existence of an equitable mortgage.

In this case, it appears that two (2) instances enumerated in Article 1602 — possession of the subject
property and inference that the transaction was in fact a mortgage attended the assailed transaction.

Possession as Lessee or
otherwise

Article 1602 (2) of the Civil Code provides that when the supposed vendor remains in possession of the
property even after the conclusion of the transaction, the purported contract of sale is presumed to be an
equitable mortgage. In general terms, possession is the holding of a thing or the enjoyment of a right,
whether by material occupation or by the fact that the right is subjected to the will of the claimant. The
gathering of the products of and the act of planting on the land constitute occupation, possession and
cultivation.25
cralaw red

In this case, petitioners insist that the Repuela brothers remained in possession of the subject property after
the transaction, as was corroborated by a disinterested person, Burlas, who lived in the adjoining lot from
the time she was a child. According to her, it was only the Repuela brothers who tilled the land and planted
corn, bananas and camote. She never saw Otillo, whom she also knew, till or work on the land.

The respondent's claim of possession, as supported by a transfer certificate of title and tax declaration of the
subject property, both in the name of Spouses Larawan is, to the Court's mind, not persuasive. These
documents do not prove actual possession. They do not rebut the overwhelming evidence of the Repuela
brothers that they were in actual possession. The fact of registration in the name of Spouses Larawan does
not change the picture. A conveyance of land, accompanied by registration in the name of the transferee
and the issuance of a new certificate, is no more secured from the operation of this equitable doctrine than
the most informal conveyance that could be devised. In an equitable mortgage, title to the property in issue,
which has been transferred to the respondents actually remains or is transferred back to the petitioner as
owner-mortgagor, conformably to the well-established doctrine that the mortgagee does not become the
owner of the mortgaged property because the ownership remains with the mortgagor pursuant to Article
2088, of the Civil Code.26

Inference can be made

that the transaction was
an equitable mortgage

From the attending circumstances of the case, it can be inferred that the real intention of the Repuela
brothers was to secure their indebtedness from Spouses Larawan. They needed money for Marcelino's fare
so they went to the house of Otillo to borrow P200.00. Considering that Spouses Larawan would only agree
to extend the loan if they would surrender their certificate of title over the subject property, they obliged in
the belief that its purpose was only to secure their loan. In other words, they surrendered the title to
Spouses Larawan as security to obtain the much needed loan. It was never their intention to sell the subject
property.
As held in Banga v. Sps. Bello,27 in determining whether a deed, absolute in form, is a mortgage, the court
is not limited to the written memorials of the transaction. "The decisive factor in evaluating such agreement
is the intention of the parties, as shown not necessarily by the terminology used in the contract but by all
the surrounding circumstances, such as the relative situation of the parties at that time, the attitude, acts,
conduct, declarations of the parties, the negotiations between them leading to the deed, and generally, all
pertinent facts having a tendency to fix and determine the real nature of their design and understanding."28

There is a presumption of
mistake

Granting that indeed Cipriano and Marcelino, signed and thumbmarked, respectively, the Extrajudicial
Declaration of Heirs and Sale, there is still reason to believe that they did so without understanding the real
nature, effects and consequences of what they did as they were never explained to them. Cipriano, who only
finished Grade One, and Marcelino, an illiterate, were in dire need of money. As such, the possibility that
they affixed their conformity to the onerous contract to their detriment just to get the loan was not remote.
In dire need as they were, they signed a document despite knowing that it did not express their real
intention. "Necessitous men are not, truly speaking, free men; but to answer a present emergency, will
submit to any terms that the crafty may impose upon them." 29 For this reason, the Repuela brothers should
be given the protection afforded by the Civil Code provisions on equitable mortgage.

As aptly explained in Cruz v. Court of Appeals,30 the Court held: ChanRoble sVirtualawl ibra ry

Vendors covered by Art. 1602 usually find themselves in an unequal position when bargaining with the
vendees, and will readily sign onerous contracts to get the money they need. Necessitous men are not really
free men in the sense that to answer a pressing emergency they will submit to any terms that the crafty
may impose on them. This is precisely the evil that Art. 1602 seeks to guard against. The evident intent of
the provision is to give the supposed vendor maximum safeguards for the protection of his legal rights under
the true agreement of the parties.31

Besides, where a party is unable to read or when the contract is in a language not understood by a party
and mistake or fraud is alleged, the obligation to show that the terms of the contract had been fully
explained to the said party who is unable to read or understand the language of the contract devolves on
the party seeking to enforce it. Indeed, that burden to show that the other party fully understood the
contents of the document rests upon the party who seeks to enforce the contract. If he fails to discharge
this burden, the presumption of mistake, if not, fraud, stands unrebutted and controlling.32 Respondent
failed to overcome this burden.

In the case at bench, Galileo's testimony that he had witnessed the Repuela brothers affix their conformity
after Atty. Bacalso read and explained to them the contents of the document in the Cebuano dialect, fails to
convince this Court. As keenly observed by the RTC, Galileo was just six (6) years old when he witnessed
the transaction in the office of Atty. Bacalso. To the Court's mind, Galileo could not have possibly known the
nature of the purported contract, much less, perceived with certainty if the Repuela brothers were indeed
apprised of the true nature of the said contract before they were made to sign and thumbmark it. For this
reason, the presumption of mistake, if not fraud, shall remain.

Furthermore, it must be pointed out that the law accords the equitable mortgage presumption in situations
when doubt exists as to the true intent of the parties to the contract,33 as in this case. Courts are generally
inclined to construe one purporting to be a sale as an equitable mortgage, which involves a lesser
transmission of rights and interests over the property in controversy.34

There was no prescription

or laches

Contrary to the findings of the CA that petitioners' cause of action was already barred by laches because of
the 39 years that had already lapsed before they asserted their rights over the property, the Court holds
otherwise. In Inamarga v. Alano,35 the Court considered the deed of sale as equitable mortgage and
wrote: ChanRobles Vi rtua lawlib rary
xxx Where there is no consent given by one party in a purported contract, such contract was not perfected;
therefore, there is no contract to speak of. The deed of sale relied upon by petitioner is deemed a void
contract. This being so, the action based on said deed of sale shall not prescribe in accordance with Article
1410 of the Civil Code.36 [Emphasis supplied]

Legal Interest

In the case of Muñoz v. Ramirez,37 the Court stated that where it was established that the reciprocal
obligations of the parties were under an equitable mortgage, reconveyance of the property should be
ordered to the rightful owner therein upon the payment of the loan within 90 days from the finality of that
decision.38

In the case at bench, the RTC ordered the Repuela brothers to pay their loan amounting to P2,000.00 with
interest at the legal rate computed from the date of the filing of the complaint in order for them to repair the
property.

In determining the legal rate applicable in this case, Circular No. 799, series of 2013, issued by the Office of
the Governor of the Bangko Sentral ng Pilipinas on June 21, 2013, which was the basis of the Court in Nacar
v. Gallery Frames,39 provides that effective July 1, 2013, the rate of interest for the loan or forbearance of
any money, goods or credits and the rate allowed in judgments, in the absence of an express contract as to
such rate of interest, shall be six percent (6%) per annum. Applying the foregoing, the rate of interest of
12% per annum on the obligation of the Repuela brothers shall apply from the date of the filing of the
complaint on January 17, 2003 until June 30, 2013 only. From July 1, 2013 until fully paid, the legal rate of
6% per annum shall be applied to their unpaid obligation.

WHEREFORE, the petition is GRANTED. The assailed May 29, 2014 Decision and the June 10, 2015
Resolution of the Court of Appeals in CA-G.R. CV No. 03976 are SET ASIDE. The February 23, 2011
Decision of the Regional Trial Court, Cebu City, Seventh Judicial Region, Branch 7 in Civil Case No. CEB-
28524 is REINSTATED with MODIFACATION in that the 12% interest per annum shall only apply from
January 17, 2003 until June 30, 2013 only, after which date and until fully paid, the mortgage indebtedness
of Cipriano Repuela and Marcelino Repuela shall earn interest at 6% per annum.

SO ORDERED. cralawlawlibra ry

THIRD DIVISION

G.R. No. 152168 December 10, 2004

HEIRS OF THE LATE SPOUSES AURELIO AND ESPERANZA BALITE; Namely, ANTONIO T.
BALITE, FLOR T. BALITE-ZAMAR, VISITACION T. BALITE-DIFUNTORUM, PEDRO T. BALITE,
PABLO T. BALITE, GASPAR T. BALITE, CRISTETA T. BALITE and AURELIO T. BALITE JR.,
All Represented by GASPAR T. BALITE,petitioners,
vs.
RODRIGO N. LIM, respondent.
 DECISION

PANGANIBAN, J.:

A deed of sale that allegedly states a price lower than the true consideration is nonetheless binding
between the parties and their successors in interest. Furthermore, a deed of sale in which the parties
clearly intended to transfer ownership of the property cannot be presumed to be an equitable
mortgage under Article 1602 of the Civil Code. Finally, an agreement that purports to sell in metes
and bounds a specific portion of an unpartitioned co-owned property is not void; it shall effectively
transfer the seller’s ideal share in the co-ownership.

The Case

Before us is a Petition for Review1 under Rule 45 of the Rules of Court, assailing the February 11,
2002 Decision2 of the Court of Appeals (CA) in CA-GR CV No. 65395. The decretal portion of the
Decision reads as follows:

"IN THE LIGHT OF ALL THE FOREGOING, the Decision of the Court a quo subject of the
appeal is hereby SET ASIDE AND REVERSED and another Decision is hereby rendered as
follows:

1. The "Deed of Absolute Sale" (Exhibit "A") is valid only insofar as the pro indiviso share
of Esperanza Balite over the property covered by Original Certificate of Title No. 10824 is
concerned;

2. The Register of Deeds is hereby ordered to cancel Transfer Certificate of Title No. 6683
and to issue another over the entirety of the property covered by Original Certificate of Title
No. 10824, upon the payment of the capital gains tax due, as provided for by law, (based on
the purchase price of the property in the amount of P1,000,000.00), with the following as co-
owners, over the property described therein:

a) Each of the [petitioners] over an undivided portion of 975 square meters;

b) The [respondent], with an undivided portion of 9,751 square meters.

3. The [respondent] is hereby ordered to pay to the [petitioners] the amount of P120,000.00,
within a period of five (5) months from the finality of the Decision of this Court;

4. In the event that the [respondent] refuses or fails to remit the said amount to the
[petitioner] within the period therefor, the rights and obligations of the parties shall be
governed by Republic 6552 (Maceda Law)."3

The Facts
The CA summarized the facts in this manner:

"The spouses Aurelio x x x and Esperanza Balite were the owners of a parcel of land,
located [at] Poblacion (Barangay Molave), Catarman, Northern Samar, with an area of
seventeen thousand five hundred fifty-one (17,551) square meters, [and] covered by Original
Certificate of Title [OCT] No. 10824. When Aurelio died intestate [in 1985, his wife],
Esperanza Balite, and their children, x x x [petitioners] Antonio Balite, Flor Balite-Zamar,
Visitacion Balite-Difuntorum, Pedro Balite, Pablo Balite, Gaspar Balite, Cristeta (Tita) Balite
and Aurelio Balite, Jr., inherited the [subject] property and became co-owners thereof, with
Esperanza x x x inheriting an undivided [share] of [9,751] square meters.

"In the meantime, Esperanza x x x [became] ill and was in dire need of money for her
hospital expenses x x x. She, through her daughter, Cristeta, offered to sell to Rodrigo Lim,
[her] undivided share x x x for the price of P1,000,000.00. x x x Esperanza x x x and Rodrigo
x x x agreed that, under the "Deed of Absolute Sale", to be executed by Esperanza x x x
over the property, it will be made to appear that the purchase price of the property would
be P150,000.00, although the actual price agreed upon by them for the property
was P1,000,000.00.

"On April 16, 1996, Esperanza x x x executed a "Deed of Absolute Sale" in favor of Rodrigo
N. Lim over a portion of the property, covered by [OCT] No. 10824, with an area of 10,000
square meters, for the price of P150,000.00 x x x.

[They] also executed, on the same day, a "Joint Affidavit" under which they declared that the
real price of the property was P1,000,000.00, payable to Esperanza x x x, by installments, as
follows:

1. P30,000.00 – upon signing today of the document of sale.

2. P170,000.00 – payable upon completion of the actual relocation survey of the land
sold by a Geodetic Engineer.

3. P200,000.00 – payable on or before May 15, 1996.

4. P200,000.00 – payable on or before July 15, 1996.

5. P200,000.00 – payable on or before September 15, 1996.

6. P200,000.00 – payable on or before December 15, 1996.

"Only Esperanza and two of her children, namely, Antonio x x x and Cristeta x x x, knew
about the said transaction. x x x Geodetic Engineer Bonifacio G. Tasic conducted a
subdivision survey of the property and prepared a "Sketch Plan" showing a portion of the
property, identified as Lot 243 with an area of 10,000 square meters, under the name
Rodrigo N. Lim.

"The "Sketch Plan" was signed by Rodrigo x x x and Esperanza. Thereafter, Rodrigo x x x
took actual possession of the property and introduced improvements thereon. He remitted to
Esperanza x x x and Cristeta x x x sums of money in partial payments of the x x x property
for which he signed "Receipts".
"Gaspar, Visitacion, Flor, Pedro and Aurelio, Jr. x x x learned of the sale, and on August 21,
1996, they wrote a letter to the Register of Deeds [RD] of Northern Samar, [saying] that they
[were] not x x x informed of the sale of a portion of the said property by their mother x x x nor
did they give their consent thereto, and requested the [RD] to:

"x x x hold in abeyance any processal or approval of any application for registration
of title of ownership in the name of the buyer of said lot, which has not yet been
partitioned judicially or extrajudicially, until the issue of the legality/validity of the
above sale has been cleared."

"On August 24, 1996, Antonio x x x received from Rodrigo x x x, the amount of P30,000.00 in
partial payment of [the] property and signed a "Receipt" for the said amount, declaring
therein that "the remaining balance of P350,000.00 shall personally and directly be released
to my mother, Esperanza Balite, only." However, Rodrigo x x x drew and issued RCBC
Check No. 309171, dated August 26, 1996, [payable] to the order of Antonio Balite in the
amount of P30,000.00 in partial payment of the property.

"On October 1, 1996, Esperanza x x x executed a "Special Power of Attorney" appointing her
son, Antonio, to collect and receive, from Rodrigo, the balance of the purchase price of the x
x x property and to sign the appropriate documents therefor.

"On October 23, 1996, Esperanza signed a letter addressed to Rodrigo informing the latter
that her children did not agree to the sale of the property to him and that she was
withdrawing all her commitments until the validity of the sale is finally resolved:

xxx xxx xxx

"On October 31, 1996, Esperanza died intestate and was survived by her aforenamed
children.

"[Meanwhile], Rodrigo caused to be published, in the Samar Reporter, on November 14, 21

and 28, 1996, the aforesaid "Deed of Absolute Sale". Earlier, on November 21, 1996,
Antonio received the amount of P10,000.00 from Rodrigo for the payment of the estate tax
due from the estate of Esperanza.

"Also, the capital gains tax, in the amount of P14,506.25, based on the purchase price
of P150,000.00 appearing on the "Deed of Absolute Sale", was paid to the Bureau of Internal
Revenue which issued a "Certification" of said payments, on March 5, 1997, authorizing the
registration of the "Deed of Absolute Sale" x x x. However, the [RD] refused to issue a title
over the property to and under the name of Rodrigo unless and until the owner’s duplicate of
OCT No. 10824 was presented to [it]. Rodrigo filed a "Petition for Mandamus" against the RD
with the Regional Trial Court of Northern Samar (Rodrigo Lim versus Fernando Abella,
Special Civil Case No. 48). x x x. On June 13, 1997, the court issued an Order to the RD to
cancel OCT No. 10824 and to issue a certificate of title over Lot 243 under the name of
Rodrigo.

"On June 27, 1997, [petitioners] filed a complaint against Rodrigo with the Regional Trial
Court of Northern Samar, entitled and docketed as "Heirs of the Spouses Aurelio Balite, et
al. versus Rodrigo Lim, Civil Case No. 920, for "Annulment of Sale, Quieting of Title,
Injunction and Damages x x x, [the origin of the instant case.]

xxx xxx xxx

 "The [petitioners] had a "Notice of Lis Pendens", dated June 23, 1997, annotated, on June
27, 1997, at the dorsal portion of OCT No. 10824.

"In the meantime, the RD cancelled, on July 10, 1997, OCT No. 10824 and issued Transfer
Certificate of Title [TCT] No. 6683 to and under the name of Rodrigo over Lot 243. The
"Notice of Lis Pendens" x x x was carried over in TCT No. 6683.

"Subsequently, Rodrigo secured a loan from the Rizal Commercial Banking Corporation in
the amount of P2,000,000.00 and executed a "Real Estate Mortgage" over the [subject]
property as security therefor.

"On motion of the [petitioners], they were granted x x x leave to file an "Amended Complaint"
impleading the bank as [additional] party-defendant. On November 26, 1997, [petitioners]
filed their "Amended Complaint".

The [respondent] opposed the "Amended Complaint" x x x contending that it was improper
for [petitioners] to join, in their complaint, an ordinary civil action for the nullification of the
"Real Estate Mortgage" executed by the respondent in favor of the Bank as the action of the
petitioners before the court was a special civil action.

"On March 30, 1998, the court issued an Order rejecting the "Amended Complaint" of the
petitioners on the grounds that: (a) the Bank cannot be impleaded as party-defendant under
Rule 63, Section 1 of the 1997 Rules of Civil Procedure; (b) the "Amended Complaint"
constituted a collateral attack on TCT No. 6683. The [petitioners] did not file any motion for
the reconsideration of the order of the court."4

The trial court dismissed the Complaint and ordered the cancellation of the lis pendens annotated at
the back of TCT No. 6683. It held that, pursuant to Article 493 of the Civil Code, a co-owner has the
right to sell his/her undivided share. The sale made by a co-owner is not invalidated by the absence
of the consent of the other co-owners. Hence, the sale by Esperanza of the 10,000-square-meter
portion of the property was valid; the excess from her undivided share should be taken from the
undivided shares of Cristeta and Antonio, who expressly agreed to and benefited from the sale.

Ruling of the Court of Appeals

The CA held that the sale was valid and binding insofar as Esperanza Balite’s undivided share of the
property was concerned. It affirmed the trial court’s ruling that the lack of consent of the co-owners
did not nullify the sale. The buyer, respondent herein, became a co-owner of the property to the
extent of the pro indiviso share of the vendor, subject to the portion that may be allotted to him upon
the termination of the co-ownership. The appellate court disagreed with the averment of petitioners
that the registration of the sale and the issuance of TCT No. 6683 was ineffective and that they
became the owners of the share of Esperanza upon the latter’s death.

The CA likewise rejected petitioners’ claim that the sale was void allegedly because the actual
purchase price of the property was not stated in the Deed of Absolute Sale. It found that the true and
correct consideration for the sale was P1,000,000 as declared by Esperanza and respondent in their
Joint Affidavit. Applying Article 13535 of the Civil Code, it held that the falsity of the price or
consideration stated in the Deed did not render it void. The CA pointed out, however, that the State
retained the right to recover the capital gains tax based on the true price of P1,000,000.

The appellate court rejected petitioners’ contention that, because of the allegedly unconscionably
low and inadequate consideration involved, the transaction covered by the Deed was an equitable
mortgage under Article 1602 of the Civil Code. Observing that the argument had never been raised
in the court a quo, it ruled that petitioners were proscribed from making this claim, for the first time,
on appeal.

The CA further held that the remaining liability of respondent was P120,000. It relied on the Receipt
dated August 24, 1996, which stated that his outstanding balance for the consideration
was P350,000. It deducted therefrom the amounts of P30,000 received by Antonio on August 27,
1996; and P200,000, which was the amount of the check dated September 15, 1996, issued by
respondent payable to Esperanza.

Finally, the appellate court noted that the mortgage over the property had been executed after the
filing of the Complaint. What petitioners should have filed was a supplemental complaint instead of
an amended complaint. Contrary to respondent’s argument, it also held that the bank was not
an indispensable party to the case; but was merely a proper party. Thus, there is no necessity to
implead it as party-defendant, although the court a quo had the option to do so. And even if it were
not impleaded, the appellate court ruled that the bank would still have been bound by the outcome of
the case, as the latter was a mortgagee pendente lite over real estate that was covered by a
certificate of title with an annotated lis pendens.

Hence, this Petition.6

Issues

In their Memorandum, petitioners present the following issues:

"A

"Whether or not the [CA] seriously erred in not deciding that the Deed of Absolute Sale dated
April 16, 1996 is null and void on the grounds that it is falsified; it has an unlawful cause; and
it is contrary to law and/or public policy.

"B

"Whether or not the [CA] gravely erred in not finding that the amount paid by [respondent] is
only three hundred twenty thousand (P320,000.00) pesos and that respondent’s claim that
he has paid one million pesos except P44,000.00 as balance, is fraudulent and false.

"C

"Whether or not the [CA] seriously erred in not deciding that at the time the Deed of Sale was
registered x x x on May 30, 1997, said Deed of Sale can no longer bind the property covered
by OCT No. 10824 because said land had already become the property of all the petitioners
upon the death of their mother on October 31, 1996 and therefore such registration is functus
of[f]icio involving a null and void document.

"D

"Whether or not the [CA] seriously erred in not ruling that petitioners’ amended complaint
dated November 27, 1997 was proper and admissible and deemed admitted to conform to
evidence presented.
 "E

"Whether or not the [CA] seriously erred in not declaring that TCT No. T-6683 in the name of
Respondent Rodrigo N. Lim is null and void and all dealings involving the same are likewise
null and void and/or subject to the decision of the case at bar in view of the notice of lis
pendens annotated therein.

"F

"Even assuming but without admitting that the Deed of Sale is enforceable, the respondent
court seriously erred in not deciding that the consideration is unconscionably low and
inadequate and therefore the transaction between the executing parties constitutes an
equitable mortgage.

"G

"The [CA] greatly erred in not rendering judgment awarding damages and attorney’s fee[s] in
favor of petitioners among others."7

In sum, the issues raised by petitioners center on the following: 1) whether the Deed of Absolute
Sale is valid, and 2) whether there is still any sum for which respondent is liable.

The Court’s Ruling

The Petition has no merit.

First Issue:

Validity of the Sale

Petitioners contend that the Deed of Absolute Sale is null and void, because the undervalued
consideration indicated therein was intended for an unlawful purpose -- to avoid the payment of
higher capital gains taxes on the transaction. According to them, the appellate court’s reliance on
Article 1353 of the Civil Code was erroneous. They further contend that the Joint Affidavit is not
proof of a true and lawful cause, but an integral part of a scheme to evade paying lawful taxes and
registration fees to the government.

We have before us an example of a simulated contract. Article 1345 of the Civil Code provides that
the simulation of a contract may either be absolute or relative. In absolute simulation, there is a
colorable contract but without any substance, because the parties have no intention to be bound by
it. An absolutely simulated contract is void, and the parties may recover from each other what they
may have given under the "contract."8 On the other hand, if the parties state a false cause in the
contract to conceal their real agreement, such a contract is relatively simulated. Here, the parties’
real agreement binds them.9

In the present case, the parties intended to be bound by the Contract, even if it did not reflect the
actual purchase price of the property. That the parties intended the agreement to produce legal
effect is revealed by the letter of Esperanza Balite to respondent dated October 23, 199610 and
petitioners’ admission that there was a partial payment of P320,000 made on the basis of the Deed
of Absolute Sale. There was an intention to transfer the ownership of over 10,000 square meters of
the property . Clear from the letter is the fact that the objections of her children prompted Esperanza
to unilaterally withdraw from the transaction.

Since the Deed of Absolute Sale was merely relatively simulated, it remains valid and enforceable.
All the essential requisites prescribed by law for the validity and perfection of contracts are present.
However, the parties shall be bound by their real agreement for a consideration of P1,000,000 as
reflected in their Joint Affidavit.11

The juridical nature of the Contract remained the same. What was concealed was merely the actual
price. Where the essential requisites are present and the simulation refers only to the content or
terms of the contract, the agreement is absolutely binding and enforceable12 between the parties and
their successors in interest.

Petitioners cannot be permitted to unmake the Contract voluntarily entered into by their predecessor,
even if the stated consideration was included therein for an unlawful purpose. "The binding force of a
contract must be recognized as far as it is legally possible to do so."13 However, as properly held by
the appellate court, the government has the right to collect the proper taxes based on the correct
purchase price.

Being onerous, the Contract had for its cause or consideration the price of P1,000,000. Both this
consideration as well as the subject matter of the contract -- Esperanza’s share in the property
covered by OCT No. 10824 -- are lawful. The motives of the contracting parties for lowering the price
of the sale -- in the present case, the reduction of capital gains tax liability -- should not be confused
with the consideration.14 Although illegal, the motives neither determine nor take the place of the
consideration. 15

Deed of Sale not an

Equitable Mortgage

Petitioner further posits that even assuming that the deed of sale is valid it should only be deemed
an equitable mortgage pursuant to Articles 1602 and 1604 of the Civil Code, because the price was
clearly inadequate. They add that the presence of only one of the circumstances enumerated under
Article 1602 would be sufficient to consider the Contract an equitable mortgage. We disagree.

For Articles 1602 and 1604 to apply, two requisites must concur: one, the parties entered into a
contract denominated as a contract of sale; and, two, their intention was to secure an existing debt
by way of mortgage.16

Indeed, the existence of any of the circumstances enumerated in Article 1602, not a concurrence or
an overwhelming number thereof, suffices to give rise to the presumption that a
contract purporting to be an absolute sale is actually an equitable mortgage.17 In the present case,
however, the Contract does not merely purport to be an absolute sale. The records and the
documentary evidence introduced by the parties indubitably show that the Contract is, indeed, one of
absolute sale. There is no clear and convincing evidence that the parties agreed upon a mortgage of
the subject property.

Furthermore, the voluntary, written and unconditional acceptance of contractual commitments

negates the theory of equitable mortgage. There is nothing doubtful about the terms of, or the
circumstances surrounding, the Deed of Sale that would call for the application of Article 1602. The
Joint Affidavit indisputably confirmed that the transaction between the parties was a sale.
When the words of a contract are clear and readily understandable, there is no room for
construction. Contracts are to be interpreted according to their literal meaning and should not be
interpreted beyond their obvious intendment.18The contract is the law between the parties.

Notably, petitioners never raised as an issue before the trial court the fact that the document did not
express the true intent and agreement of the contracting parties. They raised mere suppositions on
the inadequacy of the price, in support of their argument that the Contract should be considered as
an equitable mortgage.

We find no basis to conclude that the purchase price of the property was grossly inadequate.
Petitioners did not present any witness to testify as to the market values of real estate in the
subject’s locale. They made their claim on the basis alone of the P2,000,000 loan that respondent
had been able to obtain from the Rizal Commercial Banking Corporation. This move did not
sufficiently show the alleged inadequacy of the purchase price. A mortgage is a mere security for a
loan. There was no showing that the property was the only security relied upon by the bank; or that
the borrowers had no credit worthiness, other than the property offered as collateral.

Co-Ownership

The appellate court was correct in affirming the validity of the sale of the property insofar as the pro
indiviso share of Esperanza Balite was concerned.

Article 493 of the Civil Code19 gives the owner of an undivided interest in the property the right to
freely sell and dispose of such interest. The co-owner, however, has no right to sell or alienate a
specific or determinate part of the thing owned in common, because such right over the thing is
represented by an aliquot or ideal portion without any physical division. Nonetheless, the mere fact
that the deed purports to transfer a concrete portion does not per se render the sale void.20 The sale
is valid, but only with respect to the aliquot share of the selling co-owner. Furthermore, the sale is
subject to the results of the partition upon the termination of the co-ownership.

Hence, the transaction between Esperanza Balite and respondent could be legally recognized only
in respect to the former’s pro indiviso share in the co-ownership. As a matter of fact, the Deed of
Absolute Sale executed between the parties expressly referred to the 10,000-square-meter portion
of the land sold to respondent as the share of Esperanza in the conjugal property. Her clear intention
was to sell merely her ideal or undivided share in it. No valid objection can be made against that
intent. Clearly then, the sale can be given effect to the extent of 9,751 square meters, her ideal
share in the property as found by both the trial and the appellate courts.

Transfer of Property

During her lifetime, Esperanza had already sold to respondent her share in the subject parcel; hence
her heirs could no longer inherit it. The property she had transferred or conveyed no longer formed
part of her estate to which her heirs may lay claim at the time of her death. The transfer took effect
on April 16, 1996 (the date the Deed of Absolute Sale was executed), and not on May 30, 1997,
when the Deed of Absolute Sale was registered. Thus, petitioners’ claim that the property became
theirs upon the death of their mother is untenable.

Second Issue:

Respondent’s Liability
Petitioners insist that the appellate court erred in holding that respondent’s outstanding liability on
the Deed of Sale was P120,000, when the Receipts on record show payments in the total amount
of P320,000 only. They argue that the August 24, 1996 Receipt, on which the appellate court based
its conclusion, was unreliable.

To begin with, this Court is not a trier of facts. 21 It is not its function to examine and determine the
weight of the evidence. Well-entrenched is the doctrine that only errors of law,22 and not of facts, are
reviewable by this Court in a petition for review on certiorari under Rule 45 of the Revised Rules of
Court. Philippine Airlines, Inc. v. Court of Appeals23 has held that factual findings of the Court of
Appeals are binding and conclusive upon the Supreme Court. These findings may be reviewed24 only
under exceptional circumstances such as, among others, when the inference is manifestly
mistaken;25 the judgment is based on a misapprehension of facts;26 findings of the trial court contradict
those of the CA;27 or the CA manifestly overlooked certain relevant and undisputed facts that, if
properly considered, would justify a different conclusion.28

Although the factual findings of the two lower courts were not identical, we hold that in the present
case, the findings of the CA are in accord with the documents on record. The trial court admitted in
evidence the August 24, 1996 Receipt signed by Antonio Balite. Interestingly, he was never
presented in the lower court to dispute the veracity of the contents of that Receipt, particularly the
second paragraph that had categorically stated the outstanding balance of respondent as of August
24, 1996, to be P350,000. Furthermore, the evidence shows that subsequent payments of P30,000
and P200,000 were made by the latter. Thus, we affirm the CA’s Decision holding that the remaining
unpaid balance of the price was P120,000.

WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED. Costs against the
petitioners.

SO ORDERED.

SECOND DIVISION
 KINGS PROPERTIES G.R. No. 170023
CORPORATION,
Petitioner, Present:

CARPIO, J., Chairperson,

LEONARDO-DE CASTRO,*
BRION,
- versus -
DEL CASTILLO, and
ABAD, JJ.

CANUTO A. GALIDO,
Respondent.
Promulgated:
November 27, 2009
x---------------------------------------------------x

DECISION

CARPIO, J.:

The Case

Kings Properties Corporation (petitioner) filed this Petition for Review on

Certiorari[1]assailing the Court of Appeals Decision[2]dated 20 December 2004 in CA-
G.R. CV No. 68828 as well as the Resolution[3]dated 10 October 2005 denying the
Motion for Reconsideration. In the assailed decision, the Court of Appeals reversed
the Regional Trial Courts Decision[4]dated 4 July 2000. This case involves an action
for cancellation of certificates of title, registration of deed of sale and issuance of
certificates of title filed by Canuto A. Galido (respondent) before Branch 71 of the
Regional Trial Court of Antipolo City (trial court).

The Facts

On 18 April 1966, the heirs of Domingo Eniceo, namely Rufina Eniceo and Maria
Eniceo, were awarded with Homestead Patent No. 112947 consisting of four
parcels of land located in San Isidro, Antipolo, Rizal (Antipolo property) and
particularly described as follows:
1. Lot No. 1 containing an area of 96,297 square meters;
Lot No. 3 containing an area of 25,170 square meters;
Lot No. 4 containing an area of 26,812 square meters; and
Lot No. 5 containing an area of 603 square meters.

The Antipolo property with a total area of 14.8882 hectares was registered under
Original Certificate of Title (OCT) No. 535.[5]The issuance of the homestead patent
was subject to the following conditions:

To have and to hold the said tract of land, with the appurtenances thereunto of right
belonging unto the said Heirs of Domingo Eniceo and to his heir or heirs and assigns
forever, subject to the provisions of sections 118, 121, 122 and 124 of
Commonwealth Act No. 141, as amended, which provide that except in favor of the
Government or any of its branches, units or institutions, the land hereby acquired
shall be inalienable and shall not be subject to incumbrance for a period of five (5)
years next following the date of this patent, and shall not be liable for the
satisfaction of any debt contracted prior to the expiration of that period; that it shall
not be alienated, transferred or conveyed after five (5) years and before twenty-five
(25) years next following the issuance of title, without the approval of the Secretary
of Agriculture and Natural Resources; that it shall not be incumbered, alienated, or
transferred to any person, corporation, association, or partnership not qualified to
acquire public lands under the said Act and its amendments; x x x [6]

On 10 September 1973, a deed of sale covering the Antipolo property was executed
between Rufina Eniceo and Maria Eniceo as vendors and respondent as vendee.
Rufina Eniceo and Maria Eniceo sold the Antipolo property to respondent
for P250,000.[7] A certain Carmen Aldana delivered the owners duplicate copy of
OCT No. 535 to respondent.[8]

Petitioner alleges that when Maria Eniceo died in June 1975, Rufina Eniceo and the
heirs of Maria Eniceo (Eniceo heirs),[9]who continued to occupy the Antipolo
property as owners, thought that the owners duplicate copy of OCT No. 535 was
lost.[10]

On 5 April 1988, the Eniceo heirs registered with the Registry of Deeds of Marikina
City (Registry of Deeds) a Notice of Loss dated 2 April 1988 of the owners copy of
OCT No. 535. The Eniceo heirs also filed a petition for the issuance of a new owners
duplicate copy of OCT No. 535 with Branch 72 of the Regional Trial Court (RTC) of
Antipolo, Rizal. The case was docketed as LRC Case No. 584-A.[11]

On 31 January 1989, the RTC rendered a decision finding that the certified true copy
of OCT No. 535 contained no annotation in favor of any person, corporation or
entity. The RTC ordered the Registry of Deeds to issue a second owners copy of OCT
No. 535 in favor of the Eniceo heirs and declared the original owners copy of OCT
NO. 535 cancelled and considered of no further value.[12]
On 6 April 1989, the Registry of Deeds issued a second owners copy of OCT No. 535
in favor of the Eniceo heirs.[13]
Petitioner states that as early as 1991, respondent knew of the RTC decision in LRC
Case No. 584-A because respondent filed a criminal case against Rufina Eniceo and
Leonila Bolinas (Bolinas) for giving false testimony upon a material fact during the
trial of LRC Case No. 584-A.[14]

Petitioner alleges that sometime in February 1995, Bolinas came to the office of
Alberto Tronio Jr. (Tronio), petitioners general manager, and offered to sell the
Antipolo property. During an on-site inspection, Tronio saw a house and
ascertained that the occupants were Bolinas relatives. Tronio also went to the
Registry of Deeds to verify the records on file. Tronio ascertained that OCT No. 535
was clean and had no lien and encumbrances. After the necessary verification,
petitioner decided to buy the Antipolo property.[15]

On 14 March 1995, respondent caused the annotation of his adverse claim in OCT
No. 535.[16]

On 20 March 1995, the Eniceo heirs executed a deed of absolute sale in favor of
petitioner covering lots 3 and 4 of the Antipolo property for P500,000.[17]

On the same date, Transfer Certificate of Title (TCT) Nos. 277747 and 277120 were
issued. TCT No. 277747 covering lots 1 and 5 of the Antipolo property was
registered in the names of Rufina Eniceo, Ambrosio Eniceo, Rodolfo Calove,
Fernando Calove and Leonila Calove Bolinas.[18]TCT No. 277120 covering lots 3 and
4 of the Antipolo property was registered in the name of petitioner.[19]
On 5 April 1995, the Eniceo heirs executed another deed of sale in favor of
petitioner covering lots 1 and 5 of the Antipolo property for P1,000,000. TCT No.
278588 was issued in the name of petitioner and TCT No. 277120 was cancelled.[20]

On 17 August 1995, the Secretary of the Department of Environment and Natural

Resources (DENR Secretary) approved the deed of sale between the Eniceo heirs
and respondent.[21]

On 16 January 1996, respondent filed a civil complaint with the trial court against
the Eniceo heirs and petitioner. Respondent prayed for the cancellation of the
certificates of title issued in favor of petitioner, and the registration of the deed of
sale and issuance of a new transfer certificate of title in favor of respondent.[22]

On 4 July 2000, the trial court rendered its decision dismissing the case for lack of
legal and factual basis.[23]

Respondent appealed to the Court of Appeals (CA). On 20 December 2004, the CA

rendered a decision reversing the trial courts decision.[24] Respondent filed a motion
for reconsideration, which the CA denied in its Resolution dated 10 October 2005.

Aggrieved by the CAs decision and resolution, petitioner elevated the case before
this Court.

The Ruling of the Trial Court

The trial court stated that although respondent claims that the Eniceo heirs sold to
him the Antipolo property, respondent did not testify in court as to the existence,
validity and genuineness of the purported deed of sale and his possession of the
duplicate owners copy of OCT No. 535. The trial court stated that as owner of a
property consisting of hectares of land, respondent should have come to court to
substantiate his claim and show that the allegations of the Eniceo heirs and
petitioner are mere fabrications.[25]

The trial court noticed that respondent did not register the deed of sale with the
Register of Deeds immediately after its alleged execution on 10 September 1973.
Further, respondent waited for 22 long years before he had the sale approved by
the DENR Secretary. The trial court declared that respondent slept on his
rights. The trial court concluded that respondents failure to register the sale and
secure the cancellation of OCT No. 535 militates against his claim of ownership.
The trial court believed that respondent has not established the preponderance
of evidence necessary to justify the relief prayed for in his complaint.[26]

The trial court stated that Bolinas was able to prove that the Eniceo heirs have
remained in actual possession of the land. The filing of a petition for the issuance
of a new owners duplicate copy requires the posting of the petition in three
different places which serves as a notice to the whole world. Respondents failure
to oppose this petition can be deemed as a waiver of his right, which is fatal to his
cause.[27]

The trial court noted that petitioner is a buyer in good faith and for value because
petitioner has exercised due diligence in inspecting the property and verifying the
title with the Register of Deeds.[28]

The trial court held that even if the court were to believe that the deed of sale in
favor of respondent were genuine, still it could not be considered a legitimate
disposition of property, but merely an equitable mortgage. The trial court stated
that respondent never obtained possession of the Antipolo property at any given
time and a buyer who does not take possession of a property sold to him is
presumed to be a mortgagee only and not a vendee.[29]
 The Ruling of the Court of Appeals

The CA ruled that the deed of sale in favor of respondent, being a notarized
document, has in its favor the presumption of regularity and carries the evidentiary
weight conferred upon it with respect to its due execution. The CA added that
whoever asserts forgery has the burden of proving it by clear, positive and
convincing evidence because forgery can never be presumed. The CA found that
petitioner and the Eniceo heirs have not substantiated the allegation of forgery.[30]

The CA pointed out that laches has not set in. One of the requisites of laches, which
is injury or prejudice to the defendant in the event relief is accorded to the
complainant or the suit is not held to be barred, is wanting in the instant case. The
CA added that unrecorded sales of land brought under the Torrens system are valid
between parties because registration of the instrument is merely intended to bind
third persons.[31]

The CA declared that petitioners contention regarding the validity of the

questioned deed on the ground that it was executed without the approval of the
DENR Secretary is untenable. The DENR Secretary approved the deed of sale on
17 August 1995. However, even supposing that the sale was not approved, the
requirement for the DENR Secretarys approval is merely directory and its absence
does not invalidate any alienation, transfer or conveyance of the homestead after
5 years and before 25 years from the issuance of the title which can be complied
with at any time in the future.[32]

The CA ruled that petitioner is a buyer in bad faith because it purchased the
disputed properties from the Eniceo heirs after respondent had caused the
inscription on OCT No. 535 of an adverse claim. Registration of the adverse claim
serves as a constructive notice to the whole world. Petitioner cannot feign
ignorance of facts which should have put it on guard and then claim that it acted
under the honest belief that there was no defect in the title of the vendors.
Knowing that an adverse claim was annotated in the certificates of title of the
Eniceo heirs, petitioner was forewarned that someone is claiming an interest in
the disputed properties.[33]

The CA found no merit in petitioners contention that the questioned deed of sale
is an equitable mortgage. The CA stated that for the presumption of an equitable
mortgage to arise, one must first satisfy the requirement that the parties entered
into a contract denominated as a contract of sale and that their intention was to
secure an existing debt by way of mortgage.[34]

The CA stated that the execution of the notarized deed of sale, even without
actual delivery of the disputed properties, transferred ownership from the Eniceo
heirs to respondent. The CA held that respondents possession of the owners
duplicate copy of OCT No. 535 bolsters the contention that the Eniceo heirs sold
the disputed properties to him by virtue of the questioned deed.[35]

The CA reversed the trial courts decision. The dispositive portion of the CA
decision reads:

WHEREFORE, the appealed decision of the Regional Trial Court of Rizal

(Antipolo, Branch 71) is REVERSED and SET ASIDE and another rendered
as follows:

1. DECLARING NULL AND VOID TRANSFER CERTIFICATES OF

TITLES NOS. 277747, 277120 AND 278588 OF THE REGISTRY OF
DEEDS OF MARIKINA CITY (THE LAST TWO IN THE NAME OF
DEFENDANT-APPELLEE KINGS PROPERTIES CORPORATION),
THE DERIVATIVE TITLES THEREOF AND THE INSTRUMENTS
WHICH WERE THE BASES OF THE ISSUANCE OF SAID
CERTIFICATES OF TITLE; AND
 2. DECLARING PLAINTIFF-APPELLANT CANUTO A. GALIDO THE
OWNER OF FEE SIMPLE OF LOT NOS. 1, 3, 4, 5 FORMERLY
REGISTERED UNDER ORIGINAL CERTIFICATE OF TITLE NO. 535
IN THE NAME OF THE HEIRS OF DOMINGO ENICEO,
REPRESENTED BY RUFINA ENICEO, AND ORDERING THE
REGISTER OF DEEDS OF MARIKINA CITY TO ISSUE NEW
TRANSFER CERTIFICATES OF TITLE FOR SAID PARCELS OF LAND
IN THE NAME OF PLAINTIFF-APPELLANT CANUTO A. GALIDO,
UPON PAYMENT OF THE PROPER FEES AND PRESENTATION OF
THE DEED OF SALE DATED SEPTEMBER 10, 1973 EXECUTED BY
RUFINA ENICEO AND MARIA ENICEO, AS SOLE HEIRS OF THE
LATE DOMINGO ENICEO, IN FAVOR OF THE LATTER.[36]

The Issues

Petitioner raises two issues in this petition:

1. Whether the adverse claim of respondent over the Antipolo property

should be barred by laches;[37]and
2. Whether the deed of sale delivered to respondent should be presumed an
equitable mortgage pursuant to Article 1602(2) and 1604 of the Civil
Code.[38]

The Ruling of the Court

Validity of the deed of sale to respondent

The contract between the Eniceo heirs and respondent executed on 10 September
1973 was a perfected contract of sale. A contract is perfected once there is consent
of the contracting parties on the object certain and on the cause of the
obligation.[39]In the present case, the object of the sale is the Antipolo property and
the price certain is P250,000.

The contract of sale has also been consummated because the vendors and vendee
have performed their respective obligations under the contract. In a contract of
sale, the seller obligates himself to transfer the ownership of the determinate thing
sold, and to deliver the same to the buyer, who obligates himself to pay a price
certain to the seller.[40]The execution of the notarized deed of sale and the delivery
of the owners duplicate copy of OCT No. 535 to respondent is tantamount to a
constructive delivery of the object of the sale. In Navera v. Court of Appeals, the
Court ruled that since the sale was made in a public instrument, it was clearly
tantamount to a delivery of the land resulting in the symbolic possession thereof
being transferred to the buyer.[41]
Petitioner alleges that the deed of sale is a forgery. The Eniceo heirs also claimed
in their answer that the deed of sale is fake and spurious.[42]However, as correctly
held by the CA, forgery can never be presumed. The party alleging forgery is
mandated to prove it with clear and convincing evidence.[43]Whoever alleges
forgery has the burden of proving it. In this case, petitioner and the Eniceo heirs
failed to discharge this burden.

Petitioner invokes the belated approval by the DENR Secretary, made within 25
years from the issuance of the homestead, to nullify the sale of the Antipolo
property. The sale of the Antipolo property cannot be annulled on the ground that
the DENR Secretary gave his approval after 21 years from the date the deed of sale
in favor of respondent was executed. Section 118 of Commonwealth Act No. 141
or the Public Land Act (CA 141), as amended by Commonwealth Act No.
456,[44]reads:
SEC. 118. EXCEPT IN FAVOR OF THE GOVERNMENT OR ANY
OF ITS BRANCHES, UNITS, OR INSTITUTIONS, OR
LEGALLY CONSTITUTED BANKING CORPORATIONS,
 LANDS ACQUIRED UNDER FREE PATENT OR HOMESTEAD
PROVISIONS SHALL NOT BE SUBJECT TO ENCUMBRANCE
OR ALIENATION FROM THE DATE OF THE APPROVAL OF
THE APPLICATION AND FOR A TERM OF FIVE YEARS FROM
AND AFTER THE DATE OF THE ISSUANCE OF THE PATENT
OR GRANT X X X

No alienation, transfer, or conveyance of any homestead after five years and before
twenty-five years after the issuance of title shall be valid without the approval of the
Secretary of Agriculture and Natural Resources,[45]which approval shall not be denied
except on constitutional and legal grounds.

In Spouses Alfredo v. Spouses Borras,[46]the Court explained the implications of

Section 118 of CA 141. Thus:

A grantee or homesteader is prohibited from alienating to a private

individual a land grant within five years from the time that the
patent or grant is issued. A violation of this prohibition renders a
sale void. This , however, expires on the fifth year. From then on until
the next 20 years, the land grant may be alienated provided the Secretary
of Agriculture and Natural Resources approves the alienation. The
Secretary is required to approve the alienation unless there are
constitutional and legal grounds to deny the approval. In this case, there
are no apparent or legal grounds for the Secretary to disapprove the sale
of the Subject Land.

The failure to secure the approval of the Secretary does not ipso
factomake a sale void. The absence of approval by the Secretary does
not a sale made after the expiration of the 5-year period, for in such
event the requirement of Section 118 of the Public Land Act becomes
merely directory or a formality. The approval may be secured later,
producing the effect of ratifying and adopting the transaction as if the
sale had been previously authorized. (Underscoring supplied)
 Equitable Mortgage

Petitioner contends that the deed of sale in favor of respondent is an equitable

mortgage because the Eniceo heirs remained in possession of the Antipolo
property despite the execution of the deed of sale.

An equitable mortgage is one which although lacking in some formality, or form or

words, or other requisites demanded by a statute, nevertheless reveals the
intention of the parties to charge real property as security for a debt, and contains
nothing impossible or contrary to law.[47]The essential requisites of an equitable
mortgage are:

1. The parties entered into a contract denominated as a contract

of sale; and
2. Their intention was to secure existing debt by way of a mortgage.[48]

In Lim v. Calaguas,[49]the Court held that in order for the presumption of equitable
mortgage to apply, there must be: (1) something in the language of the contract;
or (2) in the conduct of the parties which shows clearly and beyond doubt that they
intended the contract to be a mortgage and not a pacto de retro sale.[50]Proof by
parol evidence should be presented in court. Parol evidence is admissible to
support the allegation that an instrument in writing, purporting on its face to
transfer the absolute title to property, was in truth and in fact given merely as
security for the payment of a loan. The presumption of equitable mortgage under
Article 1602 of the Civil Code is not conclusive. It may be rebutted by competent
and satisfactory proof of the contrary.[51]

Petitioner claims that an equitable mortgage can be presumed because the Eniceo
heirs remained in possession of the Antipolo property. Apart from the fact that the
Eniceo heirs remained in possession of the Antipolo property, petitioner has failed
to substantiate its claim that the contract of sale was intended to secure an
existing debt by way of mortgage. In fact, mere tolerated possession is not enough
to prove that the transaction was an equitable mortgage.[52]

Furthermore, petitioner has not shown any proof that the Eniceo heirs were
indebted to respondent. On the contrary, the deed of sale executed in favor of
respondent was drafted clearly to convey that the Eniceo heirs sold and transferred
the Antipolo property to respondent. The deed of sale even inserted a provision
about defrayment of registration expenses to effect the transfer of title to
respondent.

In any event, as pointed out by respondent in his Memorandum, this defense of

equitable mortgage is available only to petitioners predecessors-in-interest who
should have demanded, but did not, for the reformation of the deed of sale. [53] A
perusal of the records shows that the Eniceo heirs never presented the defense of
equitable mortgage before the trial court. In their Answer[54]and
Memorandum[55]filed before the trial court, the Eniceo heirs claimed that the
alleged deed of sale dated 10 September 1973 between Rufina Eniceo and Maria
Eniceo was fake and spurious. The Eniceo heirs contended that even assuming
there was a contract, no consideration was involved. It was only in the Appellees
Brief[56]filed before the CA that the Eniceo heirs claimed as an alternative defense
that the deed should be presumed as an equitable mortgage.
IN PHILIPPINE PORTS AUTHORITY V. CITY OF ILOILO,[57]WE RULED THAT A PARTY
WHO ADOPTS A CERTAIN THEORY UPON WHICH THE CASE IS TRIED AND DECIDED
BY THE LOWER COURT WILL NOT BE PERMITTED TO CHANGE THE THEORY ON
APPEAL. A THEORY OF THE CASE NOT BROUGHT TO THE ATTENTION OF THE LOWER
COURT WILL NOT BE CONSIDERED BY A REVIEWING COURT, AS A NEW THEORY
CANNOT BE RAISED FOR THE FIRST TIME AT SUCH LATE STAGE.
ALTHOUGH PETITIONER RAISED THE DEFENSE OF EQUITABLE MORTGAGE IN THE
LOWER COURT, HE CANNOT CLAIM THAT THE DEED WAS AN EQUITABLE
MORTGAGE BECAUSE PETITIONER WAS NOT A PRIVY TO THE DEED OF SALE DATED
10 SEPTEMBER 1973. PETITIONER MERELY STEPPED INTO THE SHOES OF THE
ENICEO HEIRS. PETITIONER, WHO MERELY ACQUIRED ALL THE RIGHTS OF ITS
PREDECESSORS, CANNOT ESPOUSE A THEORY THAT IS CONTRARY TO THE THEORY
OF THE CASE CLAIMED BY THE ENICEO HEIRS.

The Court notes that the Eniceo heirs have not appealed the CAs decision, hence,
as to the Eniceo heirs, the CAs decision that the contract was a sale and not an
equitable mortgage is now final. Since petitioner merely assumed the rights of the
Eniceo heirs, petitioner is now estopped from questioning the deed of sale dated
10 September 1973.

Petitioner is not a buyer in good faith

Petitioner maintains that the subsequent sale must be upheld because petitioner
is a buyer in good faith, having exercised due diligence by inspecting the property
and the title sometime in February 1995.
In Agricultural and Home Extension Development Group v. Court of Appeals,[58] a
buyer in good faith is defined as 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.

In Balatbat v. Court of Appeals,[59]the Court held that in the realm of double sales,
the registration of an adverse claim places any subsequent buyer of the registered
land in bad faith because such annotation was made in the title of the property
before the Register of Deeds and he could have discovered that the subject
property was already sold.[60]The Court explained further, thus:
A purchaser of a valued piece of property cannot just close his eyes
to facts which should put a reasonable man upon his guard and
then claim that he acted in good faith and under the belief that
there were no defect in the title of the vendor. One who purchases
real estate with knowledge of a defect or lack of title in his vendor
cannot claim that he has acquired title thereto in good faith as
against the true owner of the land or of an interest therein; and
the same rule must be applied to one who has knowledge of facts
which should have put him upon such inquiry and investigation
 as be necessary to acquaint him with the defects in the title of his
vendor.[61]

Petitioner does not dispute that respondent registered his adverse claim with the
Registry of Deeds on 14 March 1995. The registration of the adverse claim
constituted, by operation of law, notice to the whole world.[62]From that date
onwards, subsequent buyers were deemed to have constructive notice of
respondents adverse claim.
PETITIONER PURCHASED THE ANTIPOLO PROPERTY ONLY ON 20 MARCH 1995 AND
5 APRIL 1995 AS SHOWN BY THE DATES IN THE DEEDS OF SALE. ON THE SAME
DATES, THE REGISTRY OF DEEDS ISSUED NEW TCTS IN FAVOR OF PETITIONER WITH
THE ANNOTATED ADVERSE CLAIM. CONSEQUENTLY, THE ADVERSE CLAIM
REGISTERED PRIOR TO THE SECOND SALE CHARGED PETITIONER WITH
CONSTRUCTIVE NOTICE OF THE DEFECT IN THE TITLE OF ENICEO HEIRS.
THEREFORE, PETITIONER CANNOT BE DEEMED AS A PURCHASER IN GOOD FAITH
WHEN THEY BOUGHT AND REGISTERED THE ANTIPOLO PROPERTY.
IN CARBONELL V. COURT OF APPEALS,[63]THIS COURT RULED THAT IN DOUBLE
SALES, THE FIRST BUYER ALWAYS HAS PRIORITY RIGHTS OVER SUBSEQUENT
BUYERS OF THE SAME PROPERTY. BEING THE FIRST BUYER, HE IS NECESSARILY IN
GOOD FAITH COMPARED TO SUBSEQUENT BUYERS.THE GOOD FAITH OF THE FIRST
BUYER REMAINS ALL THROUGHOUT DESPITE HIS SUBSEQUENT ACQUISITION OF
KNOWLEDGE OF THE SUBSEQUENT SALE. ON THE OTHER HAND, THE SUBSEQUENT
BUYER, WHO MAY HAVE ENTERED INTO A CONTRACT OF SALE IN GOOD FAITH,
WOULD BECOME A BUYER IN BAD FAITH BY HIS SUBSEQUENT ACQUISITION OF
ACTUAL OR CONSTRUCTIVE KNOWLEDGE OF THE FIRST SALE.[64]THE SEPARATE
OPINION OF THEN JUSTICE TEEHANKEE IS INSTRUCTIVE, THUS:

The governing principle here is prius tempore, potior jure(first in time,

stronger in right). Knowledge gained by the first buyer of the second sale
cannot defeat the first buyers rights except only as provided by the Code
and that is where the second buyer first registers in good faith the second
sale ahead of the first. Such knowledge of the first buyer does bar her
from availing of her rights under the law, among them, to first her
purchase as against the second buyer. But in converso knowledge gained
 by the second buyer of the first sale defeats his rights even if he is first to
register the second sale, since such knowledge taints his prior
registration with bad faith.
This is the price exacted by Article 1544 of the Civil Code for the second
buyer being able to displace the first buyer: that before the second buyer
can obtain priority over the first, he must show that he acted in good
faith throughout (i.e., in ignorance of the first sale and of the first buyers
rights) from the time of acquisition until the title is transferred to him by
registration or failing registration, by delivery of possession. The second
buyer must show continuing good faith and innocence or lack of
knowledge of the first sale until his contract ripens into full ownership
through prior registration as provided by law.[65]

Laches
PETITIONER CONTENDS THAT RESPONDENT IS GUILTY OF LACHES BECAUSE HE
SLEPT ON HIS RIGHTS BY FAILING TO REGISTER THE SALE OF THE ANTIPOLO
PROPERTY AT THE EARLIEST POSSIBLE TIME. PETITIONER CLAIMS THAT DESPITE
RESPONDENTS KNOWLEDGE OF THE SUBSEQUENT SALE IN 1991, RESPONDENT
STILL FAILED TO HAVE THE DEED OF SALE REGISTERED WITH THE REGISTRY OF
DEEDS.

The essence of laches is the failure or neglect, for an unreasonable and unexplained
length of time, to do that which, through due diligence, could have been done
earlier, thus giving rise to a presumption that the party entitled to assert it had
either abandoned or declined to assert it.[66]

Respondent discovered in 1991 that a new owners copy of OCT No. 535 was issued
to the Eniceo heirs. Respondent filed a criminal case against the Eniceo heirs for
false testimony. When respondent learned that the Eniceo heirs were planning to
sell the Antipolo property, respondent caused the annotation of an adverse claim.
On 16 January 1996, when respondent learned that OCT No. 535 was cancelled and
new TCTs were issued, respondent filed a civil complaint with the trial court against
the Eniceo heirs and petitioner. Respondents actions negate petitioners argument
that respondent is guilty of laches.

True, unrecorded sales of land brought under Presidential Decree No. 1529 or the
Property Registration Decree (PD 1529) are effective between and binding only
upon the immediate parties. The registration required in Section 51 of PD 1529 is
intended to protect innocent third persons, that is, persons who, without
knowledge of the sale and in good faith, acquire rights to the
property.[67] Petitioner, however, is not an innocent purchaser for value.

WHEREFORE, we DENY the petition. We AFFIRM the 20 December 2004 Decision

and 10 October 2005 Resolution of the Court of Appeals in CA-G.R. CV No. 68828.
SO ORDERED.

THIRD DIVISION

HEIRS OF JOSE REYES, JR., namely: G.R. No. 158377

MAGDALENA C. REYES, OSCAR C.
REYES, GAMALIEL C. REYES,
NENITA R. DELA CRUZ, RODOLFO C.
REYES, and RODRIGO C. REYES,
 Petitioners, Present:

-versus -
CARPIO MORALES., Chairperson,
BRION,
BERSAMIN,
AMANDA S. REYES, CONSOLACION
S. REYES, EUGENIA R. ABAD,* and
ELVAMBUENA, LUCINA R. VILLARAMA, JR., JJ.
MENDOZA, PEDRITO S. REYES,
MERLINDA R. FAMODULAN,
EDUARDO S. REYES, and JUNE S.
REYES,
Respondents.

Promulgated:

August 13, 2010

x-----------------------------------------------------------------------------------------x
DECISION

BERSAMIN, J.:

The petitioners[1] assail the decision dated July 31, 2002 rendered in C.A.-G.R. CV
No. 53039,[2] by which the Court of Appeals (CA) affirmed the decision dated May
21, 1996of the Regional Trial Court (RTC), Branch 9, in Malolos, Bulacan.[3]
 Antecedents

Antonio Reyes and his wife, Leoncia Mag-isa Reyes (Leoncia), were owners
of a parcel of residential land with an area of 442 square meters, more or less,
located in Pulilan, Bulacan and covered by Tax Declaration No. 7590. On that land
they constructed their dwelling. The couple had four children, namely: Jose Reyes,
Sr. (Jose, Sr.), Teofilo Reyes (Teofilo), Jose Reyes, Jr. (Jose, Jr.) and Potenciana
Reyes-Valenzuela (Potenciana). Antonio Reyes died intestate, and was survived by
Leoncia and their three sons, Potenciana having predeceased her father.
Potenciana also died intestate, survived by her children, namely: Gloria
ReyesValenzuela, Maria Reyes Valenzuela, and Alfredo Reyes Valenzuela. Jose, Jr.,
and his family resided in the house of the parents, but Teofilo constructed on the
property his own house, where he and his family resided.

On July 9, 1955, Leoncia and her three sons executed a deed

denominated Kasulatan ng Biling Mabibiling Muli,[4] whereby they sold the land
and its existing improvements to the Spouses Benedicto Francia and Monica Ajoco
(Spouses Francia) for P500.00, subject to the vendors right to repurchase for the
same amount sa oras na sila'y makinabang. Potencianas heirs did not assent to
that deed. Nonetheless, Teofilo and Jose, Jr. and their respective families remained
in possession of the property and paid the realty taxes thereon.

Leoncia and her children did not repay the amount of P500.00.

The Spouses Francia both died intestate (i.e., Monica Ajoco on September
16, 1963, and Benedicto Francia on January 13, 1964).

Alejandro Reyes (Alejandro), the son of Jose, Sr., first partially paid to the Spouses
Francia the amount of P265.00 for the obligation of Leoncia, his uncles and his
father. Alejandro later paid the balance of P235.00. Thus, on August 11, 1970, the
heirs of Spouses Francia executed a deed entitled Pagsasa-ayos ng Pag-aari at
Pagsasalin,[5]whereby they transferred and conveyed to Alejandro all their rights
and interests in the property for P500.00.

On August 21, 1970, Alejandro executed a Kasulatan ng Pagmeme-

[6]
ari, wherein he declared that he had acquired all the rights and interests of the
heirs of the Spouses Francia, including the ownership of the property, after the
vendors had failed to repurchase within the given period. On the basis of
the Kasulatan ng Pagmeme-ari, Tax Declaration No. 3703 covering the
property[7] was canceled by Tax Declaration No. 8715,[8] effective 1971, issued to
Alejandro. From then on, he had paid the realty taxes for the property.
Nevertheless, on October 17, 1970, Alejandro, his grandmother (Leoncia),
and his father (Jose, Sr.) executed a Magkakalakip na Salaysay,[9] by which
Alejandro acknowledged the right of Leoncia, Jose, Jr., and Jose, Sr. to repurchase
the property at any time for the same amount of P500.00.

On October 22, 1970, Leoncia died intestate.[10] She was survived by Jose, Sr.,
Teofilo, Jose, Jr. and the heirs of Potenciana. Even after Leonicas death, Teofilo and
Jose, Jr., with their respective families, continued to reside in the property.
Subsequently, Tax Declaration 1228,[11] under the name of Alejandro, was
issued effective 1980. All of Leoncias sons eventually died intestate, survived by
their respective heirs, namely:

Name of Decedent Surviving Heirs

Teofilo Romeo Reyes, Leonardo Reyes,
and Leonora C. Reyes

Jose, Jr. Rodrigo Reyes, Nenita Reyes- dela Cruz, Rodolfo Reyes, Oscar Reyes,
Gamaliel Reyes, Magdalena Reyes (petitioners herein), Efren Reyes and Amado
Reyes dela
Cruz
Jose, Sr. Alejandro Reyes (respondents
predecessor)[12]

On September 2, 1993, Alejandro also died intestate.[13] Surviving him were his wife,
Amanda Reyes, and their children, namely: Consolacion Reyes, Eugenia Reyes-
Elvambuena, Luciana Reyes-Mendoza, Pedrito S. Reyes, Merlinda Reyes-
Famodulan, Eduardo Reyes and June S. Reyes (respondents herein).

In 1994, respondent Amanda Reyes asked the heirs of Teofilo and Jose, Jr., to
vacate the property because she and her children already needed it. After the
petitioners refused to comply, she filed a complaint against the petitioners in
the barangay, seeking their eviction from the property. When no amicable
settlement was reached, the Barangay Lupon issued a certification to file action to
the respondents on September 26, 1994.[14]

In the interim, petitioner Nenita R. de la Cruz and her brother Romeo Reyes
also constructed their respective houses on the property.[15]

RTC Proceedings and Ruling

On September 28, 1994, the respondents initiated this suit for quieting of title and
reconveyance in the RTC.[16] The complaint, docketed as Civil Case No. 817-M-94
and entitled Amanda Reyes, et al. v. Heirs of Jose Reyes, Jr., et al., was later
amended.[17] They alleged that their predecessor Alejandro had acquired ownership
of the property by virtue of the deed Pagsasa-ayos ng Pag-aari at
Pagsasalin executed on August 11, 1970 by the heirs of the Spouses Francia; that
on the basis of such deed of assignment, Alejandro had consolidated his ownership
of the property via his Kasulatan ng Pagmeme-ari; and that under the Magkasanib
na Salaysay, Alejandro had granted to Leoncia, his father Jose, Sr., and his uncles,
Teofilo and Jose, Jr. the right to repurchase the property, but they had failed to do
so.

The respondents prayed for judgment in their favor, as follows:

WHEREFORE, it is respectfully prayed that judgment be rendered:

1. Quieting the title to the property by declaring the plaintiffs

(respondents herein) as the rightful and lawful owners thereof;

2. Ordering the defendants (petitioners herein) to vacate subject

premises and reconvey and or surrender possession thereof to the
plaintiffs;

3. Ordering the defendants to recognize the right of the plaintiffs as

the lawful owners of subject property;

4. Ordering the defendants to pay plaintiffs the following:

a. Moral damages in the amount of P50,000.00;

b. Exemplary damages in the amount of P20,000.00;

c. Attorney's fees of P20,000.00, acceptance fee of

P10,000.00 and P500.00 per recorded Court
appearance of counsel;

d. The costs of this suit.

 Plaintiffs further pray for such other relief which the Honorable
Court may deem just and equitable under the premises.[18]

In their answer,[19] the petitioners averred that the Kasulatan ng Biling Mabibiling
Muli was an equitable mortgage, not a pacto de retro sale; that the mortgagors had
retained ownership of the property; that the heirs of the Spouses Francia could not
have validly sold the property to Alejandro through the Pagsasaayos ng Pag-aari
at Pagsasalin; that Alejandros right was only to seek reimbursement of the P500.00
he had paid from the co-owners, namely: Leoncia, Teofilo, Jose, Jr. and Jose, Sr. and
the heirs of Potenciana; and that Alejandro could not have also validly consolidated
ownership through the Kasulatan ng Pagmeme-ari, because a consolidation of
ownership could only be effected via a court order.

The petitioners interposed a counterclaim for the declaration of the transaction as

an equitable mortgage, and of their property as owned in common by all the heirs
of Leoncia, Teofilo, Jose, Jr. and Jose, Sr.

On May 21, 1996, the RTC ruled in favor of the respondents, declaring that
Alejandro had acquired ownership of the property in 1965 by operation of law upon
the failure of the petitioners predecessors to repurchase the property; that the
joint affidavit executed by Alejandro, Leoncia and Jose, Jr. and Jose, Sr., to extend
the period of redemption was inefficacious, because there was no more period to
extend due to the redemption period having long lapsed by the time of its
execution; and that the action should be dismissed insofar as the heirs of
Potenciana were concerned, considering that Potenciana, who had predeceased
her parents, had no successional rights in the property.
Accordingly, the RTC decreed as follows:
 WHEREFORE, on the basis of the evidence adduced and the
law/jurisprudence applicable thereon, judgment is hereby rendered:

a) sustaining the validity of the Kasulatan ng Biling Mabibiling

Muli (Exh. B/Exh. 1) executed on July 9, 1955 by Leoncia Mag-isa and her
sons Teofilo, Jose, Sr. and Jose, Jr., all surnamed Reyes, in favor of
Spouses Benedicto Francia and Monica Ajoco as well as the Pagsasa-ayos
ng Pag-aari at Pagsasalin (Settlement of Estate and Assignment) [Exh.
C/Exh. 4] executed on August 11, 1970 by the heirs of spouses Benedicto
Francia and Monica Ajoco in favor of the spouses Alejandro Reyes and
Amanda Salonga;
b) declaring the aforementioned Kasulatan Ng Biling Mabibili Muli
(Exh. B/ Exh. 1) to be a contract of sale with right to repurchase and not
an equitable mortgage;
c) confirming the consolidation of ownership, by operation of law,
of spouses Alejandro M. Reyes and Amanda Salonga over the residential
lot mentioned and referred to in Exhibit B/Exhibit 1 and Exhibit C/Exhibit
4;

d) allowing the registration with the Registry of Deeds for

the Province of Bulacan of the Kasulatan ng Pagmeme-ari (Document of
Ownership) [Exh. E/Exh. 5] executed by Alejandro M. Reyes on August
21, 1970 or of any appropriate deed of consolidation of ownership over
the residential lot covered by Exhibit E/Exhibit 5 which the plaintiffs, as
eventual owners by succession of the aforementioned proeprty, may
deem proper to execute;
e) ordering the defendants and all persons claiming rights under
them to vacate the residential lot subject of the above-entitled case and
to restore possession thereof unto the plaintiffs;
f) directing the defendants (except the heirs of Potenciana Reyes-
Valenzuela) to pay unto the plaintiffs the amount of P20,000.00 as
attorney's fees; and
 g) dismissing the complaint in so far as the defendant heirs of
Potenciana Reyes-Valenzuela are concerned as well as their counterclaim
for damages and attorney's fees.

No pronouncement as to costs.

SO ORDERED. [20]
Aggrieved, the petitioners appealed to the CA.

CA Ruling

In the CA, the petitioners assailed the RTCs dispositions, except the dismissal of the
complaint as against Potencianas heirs.

In its decision dated July 31, 2002, the CA ruled that the transaction covered by
the Kasulatan ng Biling Mabibiling Muli was not a pacto de retro sale but an
equitable mortgage under Article 1602 of the Civil Code; that even after the deeds
execution, Leoncia, Teofilo, Jose, Jr. and their families had remained in possession
of the property and continued paying realty taxes for the property; that the
purported vendees had not declared the property for taxation purposes under their
own names; and that such circumstances proved that the parties envisaged an
equitable mortgage in the Kasulatan ng Biling Mabibiling Muli.

The CA observed that the heirs of the Spouses Francia had themselves admitted in
paragraph 5 of the Pagsasa-ayos ng Pag-aari at Pagsasalin that the property had
been mortgaged to their predecessors-in-interest, viz:

Na, sa oras ng kamatayan ay nakaiwan sila ng isang lagay na lupang

nakasanla sa kanila na makikilala sa kasulatang kalakip nito sa halagang
 LIMANG DAANG PISO (P500.00). Ngunit nuong nabubuhay pa ang
magasawang Benedicto Francia at Monica Ajoco ay nakatanggap na ng
halagang P265.00 kay Alejandro Reyes - Filipino, kasal kay Amanda
Salonga, may sapat nagulang at naninirahan sa Pulilan, Bulacan.[21]

However, the CA held that the appellants (petitioners herein) failure to file an
action for the reformation of the Kasulatan ng Biling Mabibiling Muli to reflect the
true intention of the parties within ten years from the deeds execution on July 9,
1955, pursuant to Article 1144 of the Civil Code,[22] already barred them from
claiming that the transaction executed between Leoncia and her children, on one
hand, and the Spouses Francia, on the other hand, was an equitable mortgage. The
CA agreed with the RTC that the Magkakalakip na Salaysay did not effectively
extend the period for Leoncia and her children to repurchase the property,
considering that the period to repurchase had long lapsed by the time the
agreement to extend it was executed on October 17, 1970.

Issues

In this appeal, therefore, the petitioners insist that:[23]

I.
The Honorable Court of Appeals erred in finding that respondents
(were) already barred from claiming that the transaction entered into by
their predecessors-in-interest was an equitable mortgage and not
a pacto de retro sale;

II.
The Honorable Court of Appeals erred in affirming the findings of the
court a quo that the Magkasanib na Salaysay (Joint Affidavit), executed
by Alejandro, Leoncia and Jose, Jr., wherein Leoncia and her children
 were granted by Alejandro the right to repurchase the property at
anytime for the amount of P500.00, was of no legal significance.

Ruling of the Court

The petition is meritorious.

A.

The CA correctly concluded that the true agreement of the parties vis--
vis the Kasulatan ng Biling Mabibiling Muli was an equitable mortgage, not a pacto
de retro sale. There was no dispute that the purported vendors had continued in
the possession of the property even after the execution of the agreement; and that
the property had remained declared for taxation purposes under Leoncias name,
with the realty taxes due being paid by Leoncia, despite the execution of the
agreement. Such established circumstances are among the badges of an equitable
mortgage enumerated in Article 1602, paragraphs 2 and 5 of the Civil Code, to wit:

Art. 1602. The contract shall be presumed to be an equitable

mortgage, in any of the following cases:
xxx
(2) When the vendor remains in possession as lessee or otherwise;
xxx
(5) When the vendor binds himself to pay the taxes on the thing
sold;
xxx

The existence of any one of the conditions enumerated under Article 1602 of
the Civil Code, not a concurrence of all or of a majority thereof, suffices to give rise
to the presumption that the contract is an equitable mortgage.[24] Consequently,
the contract between the vendors and vendees (Spouses Francia) was an equitable
mortgage.

B.

Are the petitioners now barred from claiming that the transaction under
the Kasulatan ng Biling Mabibiling Muli was an equitable mortgage by their failure
to redeem the property for a long period of time?

The petitioners contend that prescription, if it must apply to them, should as well
be applied to the respondents, who had similarly failed to enforce their right under
the equitable mortgage within ten years from its execution on July 9, 1955.
Consequently, they urge the upholding of the original intention of the parties to
the Kasulatan ng Biling Mabibiling Muli, without taking prescription into account,
because both parties did not enforce their respective rights within the ten-year
prescriptive period, is more in keeping with fairness and equity.
We agree with the petitioners.

Considering that sa oras na silay makinabang, the period of redemption stated in

the Kasulatan ng Biling Mabibiling Muli, signified that no definite period had been
stated, the period to redeem should be ten years from the execution of the
contract, pursuant to Articles 1142 and 1144 of the Civil Code.[25] Thus, the full
redemption price should have been paid by July 9, 1955; and upon the expiration
of said 10-year period, mortgagees Spouses Francia or their heirs should
have foreclosed the mortgage, but they did not do so. Instead, they accepted
Alejandros payments, until the debt was fully satisfied by August 11, 1970.
 The acceptance of the payments even beyond the 10-year period of
redemption estopped the mortgagees heirs from insisting that the period to
redeem the property had already expired. Their actions impliedly recognized the
continued existence of the equitable mortgage. The conduct of the original parties
as well as of their successors-in-interest manifested that the parties to
the Kasulatan ng Biling Mabibiling Muli really intended their transaction to be an
equitable mortgage, not a pacto de retro sale.
In Cuyugan v. Santos,[26] the purported buyer under a so-called contract to sell with
right to repurchase also accepted partial payments from the purported seller. We
held that the acceptance of partial payments was absolutely incompatible with the
idea of irrevocability of the title of ownership of the purchaser upon the expiration
of the term stipulated in the original contract for the exercise of the right of
redemption. Thereby, the conduct of the parties manifested that they had intended
the contract to be a mortgage, not a pacto de retro sale.

C.
When Alejandro redeemed the property on August 11, 1970, he did not
thereby become a co-owner thereof, because his father Jose, Sr. was then still alive.
Alejandro merely became the assignee of the mortgage, and the property
continued to be co-owned by Leoncia and her sons Jose, Sr., Jose Jr., and Teofilo.
As an assignee of the mortgage and the mortgage credit, Alejandro acquired only
the rights of his assignors, nothing more. He himself confirmed so in
the Magkasanib na Salaysay, whereby he acknowledged the co-owners right to
redeem the property from him at any time (sa ano mang oras) for the
same redemption price of P500.00.

It is worthy to note that Alejandros confirmation in the Magkasanib na

Salaysay of the co-owners right to redeem was made despite 15 years having
meanwhile elapsed from the execution of the original Kasulatan ng Biling
Mabibiling Muli (July 9, 1955) until the execution of the Magkasanib na
Salaysay (August 21, 1970).
 D.

Neither did the petitioners failure to initiate an action for reformation within ten
years from the execution of the Kasulatan ng Biling Mabibiling Muli bar them from
insisting on their rights in the property. The records show that the parties in
the Kasulatan ng Biling Mabibiling Muli had abided by their true agreement under
the deed, to the extent that they and their successors-in-interest still deemed the
agreement as an equitable mortgage despite the lapse of 15 years from the
execution of the purported pacto de retro sale. Hence, an action for reformation of
the Kasulatan ng Biling Mabibiling Muli was unnecessary, if not superfluous,
considering that the reason underlying the requirement for an action for
reformation of instrument has been to ensure that the parties to a contract abide
by their true intended agreement.

The Kasulatan ng Pagmeme-ari executed by Alejandro on August 21, 1970 was

ineffectual to predicate the exclusion of the petitioners and their predecessors in
interest from insisting on their claim to the property. Alejandros being an assignee
of the mortgage did not authorize him or his heirs to appropriate the mortgaged
property for himself without violating the prohibition against pactum
commissorium contained in Article 2088 of the Civil Code, to the effect that [t]he
creditor cannot appropriate the things given by way of pledge or mortgage, or
dispose of them[;] [a]ny stipulation to the contrary is null and void. Aptly did the
Court hold in Montevirgen v. Court of Appeals:[27]

The declaration, therefore, in the decision of July 1, 1971 to the effect

that absolute ownership over the subject premises has become
consolidated in the respondents upon failure of the petitioners to pay
their obligation within the specified period, is a nullity, for consolidation
of ownership is an improper and inappropriate remedy to enforce a
transaction declared to be one of mortgage. It is the duty of respondents,
 as mortgagees, to foreclose the mortgage if he wishes to secure a perfect
title to the mortgaged property if he buys it in the foreclosure sale.

Moreover, the respondents, as Alejandros heirs, were entirely bound by his

previous acts as their predecessors-in-interest. Thus, Alejandros acknowledgment
of the effectivity of the equitable mortgage agreement precluded the respondents
from claiming that the property had been sold to him with right to repurchase.[28]

E.

What was the effect of the Magkasanib na Salaysay?

Both the trial court and the CA declared that the Magkasanib na Salaysay, which
extended the redemption period of the mortgaged property, was inefficacious,
because the period to redeem could no longer be extended after the original
redemption period had already expired.

In contrast, the petitioners submit that disregarding the Magkasanib na

Salaysay made no sense, considering that the respondents predecessors-in-
interest admitted therein that the petitioners had a right to redeem the property.

The respondents counter, however, that the Magkasanib na Salaysay, which

acknowledged the other co-owners right to redeem the property, was void; that
the petitioners could no longer claim to be co-owners entitled to redeem the
property, because the co-ownership had come to an end by Alejandro having
openly repudiated the co-ownership; that Alejandros acts of repudiation had
consisted of: (a) redeeming the property from the Spouses Francia; (b) acquiring
the property from the heirs of Spouses Francia by virtue of a deed of assignment
denominated as Pag-aayos ng Pag-aari at Pagsasalin; (c) executing an affidavit of
consolidation of ownership over the property (Kasulatan ng Pagmeme-ari); (d)
applying for the cancellation of the tax declaration of property in the name of
Leoncia, and the subsequent issuance of a new tax declaration in his name; (e) his
continuous possession of the property from 1955, which possession the
respondents as his heirs had continued up to the present time, or for a period of
almost 50 years already; and (f) the payment of the taxes by Alejandro and the
respondents for more than 30 years without any contribution from the petitioners;
and that such repudiation established that Alejandro and his successors-in-interest
had already acquired sole title over the property through acquisitive prescription.

The respondents and the lower courts positions cannot be sustained.

The provisions of the Civil Code governing equitable mortgages disguised as sale
contracts, like the one herein, are primarily designed to curtail the evils brought
about by contracts of sale with right to repurchase, particularly the circumvention
of the usury law and pactum commissorium.[29] Courts have taken judicial notice of
the well-known fact that contracts of sale with right to repurchase have been
frequently resorted to in order to conceal the true nature of a contract, that is, a
loan secured by a mortgage. It is a reality that grave financial distress renders
persons hard-pressed to meet even their basic needs or to respond to an
emergency, leaving no choice to them but to sign deeds of absolute sale of property
or deeds of sale with pacto de retro if only to obtain the much-needed loan from
unscrupulous money lenders.[30] This reality precisely explains why the pertinent
provision of the Civil Code includes a peculiar rule concerning the period of
redemption, to wit:

Art. 1602. The contract shall be presumed to be an equitable

mortgage, in any of the following cases:
xxx
(3)When upon or after the expiration of the right to repurchase
another instrument extending the period of redemption or granting a
new period is executed;
xxx
Ostensibly, the law allows a new period of redemption to be agreed upon or
granted even after the expiration of the equitable mortgagors right to repurchase,
and treats such extension as one of the indicators that the true agreement between
the parties is an equitable mortgage, not a sale with right to repurchase. It was
indubitable, therefore, that the Magkasanib na Salaysay effectively afforded to
Leoncia, Teofilo, Jose, Sr. and Jose, Jr. a fresh period within which to pay to
Alejandro the redemption price of P500.00.

F.
Did Alejandro and his heirs (respondents herein) acquire the mortgaged
property through prescription?

It is true that Alejandro became a co-owner of the property by right of

representation upon the death of his father, Jose Sr.[31] As a co-owner, however, his
possession was like that of a trustee and was not regarded as adverse to his co-
owners but in fact beneficial to all of them.[32]

Yet, the respondents except to the general rule, asserting that Alejandro,
having earlier repudiated the co-ownership, acquired ownership of the property
through prescription.
The Court cannot accept the respondents posture.

In order that a co-owners possession may be deemed adverse to that of the cestui
que trust or the other co-owners, the following elements must concur:

1. The co-owner has performed unequivocal acts of repudiation of

the co-ownership amounting to an ouster of the cestui que trust or
the other co-owners;
 2. Such positive acts of repudiation have been made known to
the cestui que trust or the other co-owners;

3. The evidence on the repudiation is clear and conclusive; and

4. His possession is open, continuous, exclusive, and notorious.[33]

The concurrence of the foregoing elements was not established herein. For one,
Alejandro did not have adverse and exclusive possession of the property, as, in fact,
the other co-owners had continued to possess it, with Alejandro and his heirs
occupying only a portion of it. Neither did the cancellation of the previous tax
declarations in the name of Leoncia, the previous co-owner, and the issuance of a
new one in Alejandros name, and Alejandros payment of the realty taxes constitute
repudiation of the co-ownership. The sole fact of a co-owner declaring the land in
question in his name for taxation purposes and paying the land taxes did not
constitute an unequivocal act of repudiation amounting to an ouster of the other
co-owner and could not constitute adverse possession as basis for title by
prescription.[34] Moreover, according to Blatero v. Intermediate Appellate
Court,[35] if a sale a retro is construed as an equitable mortgage, then the execution
of an affidavit of consolidation by the purported buyer to consolidate ownership of
the parcel of land is of no consequence and the constructive possession of the
parcel of land will not ripen into ownership, because only possession acquired and
enjoyed in the concept of owner can serve as title for acquiring dominion.[36]
In fine, the respondents did not present proof showing that Alejandro had
effectively repudiated the co-ownership. Their bare claim that Alejandro had made
oral demands to vacate to his co-owners was self-serving and insufficient.
Alejandros execution of the affidavit of consolidation of ownership on August 21,
1970[37] and his subsequent execution on October 17, 1970 of the joint
affidavit[38] were really equivocal and ambivalent acts that did not manifest his
desire to repudiate the co-ownership.
The only unequivocal act of repudiation was done by the respondents when they
filed the instant action for quieting of title on September 28, 1994, nearly a year
after Alejandros death on September 2, 1993. However, their possession could not
ripen into ownership considering that their act of repudiation was not coupled with
their exclusive possession of the property.

G.
The respondents can only demand from the petitioners the partition of the co-
owned property and the reimbursement from their co-owners of the amount
advanced by Alejandro to repay the obligation. They may also seek from their co-
owners the proportional reimbursement of the realty taxes paid for the property,
pursuant to Article 488 of the CivilCode.[39] In the alternative, they may opt to
foreclose the equitable mortgage, considering that the petitioners period to
redeem the mortgaged property, which was ten years from the execution on
October 17, 1970 of the Magkakasanib na Salaysay, had already long lapsed. We
clarify, however, that the respondents may take these recourses only through the
appropriate actions commenced in court.

H.
The petitioners counterclaim for damages is dismissed for their failure to prove
their entitlement to it.[40]

WHEREFORE, we grant the petition for review on certiorari.

The decision dated July 31, 2002 rendered by the Court of Appeals is
reversed and set aside, and another judgment is rendered:

a) Upholding the validity of the Kasulatan ng Biling Mabibiling Muli (Deed of

Sale with Right of Repurchase) executed on July 9, 1955 by Leoncia Mag-isa Reyes
and her sons Teofilo, Jose, Sr. and Jose, Jr., all surnamed Reyes, in favor of the late
Spouses Benedicto Francia and Monica Ajoco as well as the Pagsasa-ayos ng Pag-
aari at Pagsasalin(Settlement of Estate and Assignment) executed on August 11,
1970 by the heirs of the late Spouses Benedicto Francia and Monica Ajoco in favor
of the spouses Alejandro Reyes and Amanda Salonga;

b) Declaring the Kasulatan ng Biling Mabibili Muli to be an equitable

mortgage, not a contract of sale with right to repurchase;

c) Finding the Magkakalakip na Salaysay executed on October 17, 1970 by

and among Leoncia Mag-isa Reyes, Jose Reyes, Sr. and Alejandro Reyes valid and
effective;

c) Nullifying the Kasulatan ng Pagmeme-ari executed by Alejandro M. Reyes

on August 21, 1970; and

d) Dismissing the petitioners counterclaim.

Costs of suit to be paid by the respondents.

THIRD DIVISION

SPS. CARLOS AND EULALIA G.R. No. 171250

RAYMUNDO and SPS.
Present:
ANGELITO AND JOCELYN
BUENAOBRA,
YNARES-SANTIAGO, J.,
Petitioners, Chairperson,
AUSTRIA-MARTINEZ,
CHICO-NAZARIO, and
 - versus - NACHURA, JJ.

Promulgated:
SPS. DOMINADOR and ROSALIA
BANDONG,
July 4, 2007
Respondents.
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

DECISION

CHICO-NAZARIO, J.:

This is a Petition for Review on Certiorari under Rule 45 of the Revised Rules of
Court, filed by petitioners Spouses Carlos and Eulalia Raymundo and
Spouses Angelito and Jocelyn Buenaobra seeking the reversal and setting aside of
the Decision[1] of the Court of Appeals dated 26 September 2005 and its
Resolution[2] dated 24 January 2006 in CA-G.R. CV No. 59557. The Court of Appeals,
in its assailed Decision and Resolution, reversed the Decision[3] of the Regional Trial
Court (RTC) dated 28 January 1998, in Civil Case No. C-14980, declaring the Deed
of Sale executed by respondent Dominador Bandong (Dominador) in favor of
petitioner Eulalia Raymundo (Eulalia) as valid and binding.The dispositive portion
of the asailed Court of Appeals Decision reads:

WHEREFORE, premises considered, we hereby GRANT the

appeal. The January 28, 1998 decision of the RTC, Branch
126, Caloocan City is hereby REVERSED and SET ASIDE and a new one
entered:

1. ANNULLING the Deed of Absolute Sale dated February 3,

1989 as a deed of sale, and considering it instead as
a real estate mortgage of the disputed property to
secure the payment of the P70,000.00 the plaintiffs-
appellants spouses Bandong owe the defendants-
appellees spouses Raymundo. The
spouses Bandong are given one (1) year from the
finality of this Decision within which to pay
the P70,000.00 owed to the spouses Raymundo, at
12% interest per annum computed from July 17,
1991 until its full payment.

2. ANNULLING the Deed of Absolute Sale dated September

25, 1990, between the spouses Raymundo as
vendors and the spouses Buenaobra as vendees.

3. ORDERING the Register of Deeds of Caloocan City to

issue a new Transfer Certificate of Title covering Lot
18, Block 2 of the subdivision plan PSD 16599, a
portion of Lot 1073 of the Cadastral Survey
of Caloocan, in the names of the
spouses Dominador and Rosalia Bandong, after the
cancellation pursuant to this Decision of TCT No.
222871 currently in the names of the
spouses Angelito and Jocelyn Buenaobra;
and FURTHER ORDERING the said Register of Deeds
to annotate in the new Transfer Certificate of Title in
the names of the spouses Bandong a real estate
mortgage in favor of the spouses Carlos
 and Eulalia Raymundo reflecting the terms of this
Decision.

4. AWARDING moral damages in the amount

of P50,000.00; exemplary damages of P20,000.00;
and attorneys fees and expenses of litigation
of P20,000.00, plus P500.00 per proven appearance
of the plaintiffs-appellants counsel in court
all solidarily payable by the spouses Carlos
and Eulalia Raymundo and the spouses Angelito and
Jocelyn Buenaobra, to the
spouses Dominador and Rosalia Bandong.

5. ORDERING the payment of the costs of the suit, payable

by the spouses Carlos and Eulalia Raymundo and the
spouses Angelito and Jocelyn Buenaobra.[4]

The factual and procedural backdrop of this case are as follows:

Eulalia was engaged in the business of buying and selling large cattle from
different provinces within the Philippines. For this purpose, she
employed biyaheros whose primary task involved the procuring of large cattle with
the financial capital provided by Eulalia and delivering the procured cattle to her
for further disposal. In order to secure the financial capital she advanced for
the biyaheros, Eulalia required them to surrender the Transfer Certificates of Title
(TCTs) of their properties and to execute the corresponding Deeds of Sale in her
favor.

Dominador had been working for Eulalia as one of her biyaheros for three
decades. Considering his long years of service without any previous derogatory
record, Eulaliano longer required Dominador to post any security in the
performance of his duties.[5]

However, in 1989, Eulalia found that Dominador incurred shortage in his

cattle procurement operation in the amount of P70,000.00. Dominador and his
wife RosaliaBandong (Rosalia) then executed a Deed of Sale[6] in favor of Eulalia on
3 February 1989, covering a parcel of land with an area of 96 square meters, more
or less, located at Caloocan City and registered under TCT No. 1421 (subject
property), in the name of the Spouses Bandong. On the strength of the aforesaid
deed, the subject property was registered in the names of Eulalia and her husband
Carlos Raymundo (Carlos). The subject property was thereafter sold by the
Spouses Raymundo to Eulalias grandniece and herein co-petitioner,
Jocelyn Buenaobra (Jocelyn). Thus, the subject property came to be registered in
the name of Jocelyn and her husband Angelito Buenaobra (Angelito).

After the TCT of the subject property was transferred to their names, the
Spouses Buenaobra instituted before the Metropolitan Trial Court (MeTC)
of Caloocan City, an action for ejectment against the Spouses Bandong, docketed
as Civil Case No. 20053, seeking the eviction of the latter from the subject property,
which the Spouses Bandongopposed on the ground that they are the rightful
owners and possessors thereof. The MeTC ruled in favor of the
Spouses Buenaobra which, on appeal, was affirmed in toto by the RTC[7] and
subsequently, by the Court of Appeals.[8] Finally, when the case was raised on
appeal before us in G.R. No. 109422, we issued a Resolution[9] dated 12 July 1993,
finding that no substantial arguments were raised therein to warrant the reversal
of the appealed decision.

To assert their right to the subject property, the Spouses Bandong instituted
an action for annulment of sale before the RTC against Eulalia and Jocelyn on the
ground that their consent to the sale of the subject property was vitiated
by Eulalia after they were served by Jocelyns counsel with the demand to
vacate. This was docketed as Civil Case No. C-14980. The Spouses Bandong alleged
that there was no sale intended but only equitable mortgage for the purpose of
securing the shortage incurred by Dominador in the amount of P70,000 while
employed as biyahero by Eulalia.

Eulalia countered that Dominador received from her a significant sum of

money, either as cash advances for the purpose of procuring large cattle or as
personal loan, and when he could no longer pay his obligations, the
Spouses Bandong voluntarily ceded the subject property to her by executing the
corresponding deed of sale in her favor. Indeed, the Spouses Bandong personally
appeared before the Notary Public and manifested that the deed was their own
voluntary act and deed.

For her part, Jocelyn maintained that she was a buyer in good faith and for
value for she personally inquired from the Register of Deeds of the presence of any
liens and encumbrances on the TCT of the subject property and found that the
same was completely free therefrom. While she admitted that she had previous
notice that Dominador and a certain Lourdes Santos (Lourdes) were in possession
of the subject property, Jocelyn claimed that the said possessors already
acknowledged her ownership thereof and even asked for time to vacate. In the
end, though, they refused to leave the premises.

On 28 June 1998, the RTC rendered a Decision[10] in Civil Case No. C-14980 in
favor of Eulalia and Jocelyn by declaring that the Deed of Sale
between Dominador and Eulalia was valid and binding and, consequently, the
subsequent sale between Eulalia and Jocelyn was also lawful absent any showing
that Jocelyn was a buyer in bad faith. The dispositive portion of the said decision
reads:

WHEREFORE, judgment is hereby rendered DISMISSING the

complaint filed by the [Spouses Bandong] and ordering said
[Spouses Bandong] to pay [herein petitioners]
spouses Raymundo and Buenaobra the amount of P50,000 and P30,000,
respectively, as attorneys fees and costs of the suit.
 On appeal in CA-G.R. SP No. 59557, the Court of Appeals reversed the RTC
Decision and found that the transaction entered into
by Dominador and Eulalia was not one of sale but an equitable mortgage
considering that the purchase price was grossly inadequate and the
Spouses Bandong remained as possessors of the subject property
after Eulaliasalleged purchase thereof. The appellate court likewise charged
Jocelyn with knowledge that the Spouses Raymundo were not the absolute owners
of the subject property negating the presumption that she was an innocent
purchaser for value.

The Court of Appeals found the Motion for Reconsideration filed by

petitioners unmeritorious and denied the same in its Resolution[11] dated 24
January 2006.

Hence, this instant Petition for Review on Certiorari filed by the petitioners
assailing the Decision dated 26 September 2005 and the Resolution dated 24
January 2006rendered by the Court of Appeals. For the resolution of this Court are
the following issues:

I.
WHETHER OR NOT THE DEED OF SALE BETWEEN DOMINADOR AND
EULALIA IS VALID AND BINDING.

II.

WHETHER OR NOT JOCELYN IS A BUYER IN GOOD FAITH.

 In arguing that the sale between Dominador and Eulalia is valid, petitioners
posit that gross inadequacy of the price is not sufficient to invalidate the sale, and
granting arguendo that insufficient consideration may void a sale, it has not been
proven that the consideration of sale between Dominador and Eulalia was grossly
inadequate.

Elaborating, petitioners maintain that the amount of P110,000.00 (which

they claimed they have given to Dominador), or even the sum of P70,000.00 (which
respondents admitted receiving), was a substantial consideration, sufficient to
support a sale contract. Mere inadequacy of the price is not sufficient to invalidate
a sale; the price must be grossly inadequate or utterly shocking to the conscience
in order to avoid a contract of sale.

Petitioners further aver that the alleged market value of the subject property
as submitted by the appraiser, one of respondents witnesses, would not serve as
an objective basis in determining the actual value of the subject property, much
less the supposed amount of its purchase price, in the absence of any logical and
valid basis for its determination.

Finally, petitioners contend that so long as the contract was voluntarily

entered into by the parties and in the absence of a clear showing that their consent
thereto was vitiated by fraud, mistake, violence or undue influence, such as in the
case at bar, the said contract should be upheld.

We do not agree.

An equitable mortgage is one that - although lacking in some formality, forms

and words, or other requisites demanded by a statute - nevertheless reveals the
intention of the parties to charge a real property as security for a debt and contains
nothing impossible or contrary to law.[12]
 The instances when a contract - regardless of its nomenclature - may be
presumed to be an equitable mortgage are enumerated in the Civil Code as follows:

Art. 1602. The contract shall be presumed to be an equitable

mortgage, in any of the following cases:

(1) When the price of a sale with right to repurchase is unusually

inadequate;

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

(3) When upon or after the expiration of the right to repurchase

another instrument extending the period of redemption or granting a
new period is executed;

(4) When the purchaser retains for himself a part of the purchase
price;

(5) When the vendor binds himself to pay the taxes on the thing
sold.

(6) In any other case where it may be fairly inferred that the real
intention of the parties is that the transaction shall secure the payment
of a debt or the performance of any other obligation.
 Art. 1604. The provisions of Article 1602 shall also apply to a
contract purporting to be an absolute sale.

For Articles 1602 and 1604 to apply, two requisites must concur: one, the
parties entered into a contract denominated as a contract of sale; and two, their
intention was to secure an existing debt by way of an equitable mortgage.[13]

There is no question that Dominador and Eulalia entered into a contract of

sale as evidenced by the document denominated as Deed of Sale[14] signed by
them. As to whether the parties intended to transfer ownership of the subject
property or merely to constitute a security for an existing debt is an issue that needs
to be addressed by this Court.

In resolving this kind of controversy, the doctrine in Reyes v. Court of

Appeals[15] directs us to give utmost consideration to the intention of the parties in
light of the relative situation of each and the circumstances surrounding the
execution of the contract, thus:

In determining whether a deed absolute in form is a mortgage, the

court is not limited to the written memorials of the transaction. The
decisive factor in evaluating such agreement is the intention of the
parties, as shown not necessarily by the terminology used in the
contract but by all the surrounding circumstances, such as the relative
situation of the parties at that time, the attitude acts, conduct,
declarations of the parties, the negotiations between them leading to the
deed, and generally, all pertinent facts having a tendency to fix and
determine the real nature of their design and understanding.
x x x[16] (Emphasis supplied.)
 By applying the aforestated principle to the case at bar, we are
constrained to rule that in executing the said Deed of
Sale, Dominador and Eulalia never intended the transfer of ownership of the
subject property but to burden the same with an encumbrance to secure the
indebtedness incurred by Dominador on the occasion of his employment
with Eulalia.

By Eulalias own admission,[17] it was her customary business practice to

require her biyaheros to deliver to her the titles to their real properties and to
execute in her favor the corresponding deeds of sale over the said properties as
security for the money she provided for their cattle procurement task, and
since Dominador worked for Eulaliasbusiness for years, he was allowed to advance
the money without any security. Significantly, it was only after he incurred a
shortage that the sale contract was executed.

We are not inclined to believe the contention of the petitioners

that Dominador ceded his property to Eulalia as payment for his obligation for it is
contrary to human experience that a person would easily part with his property
after sustaining a debt. Rather, he would first look for means to settle his
obligation, and the selling of a property on which the house that shelters him and
his family stands, would be his last resort. The only reasonable conclusion that may
be derived from Dominadors act of executing a Deed of Sale in favor of Eulalia is
that the latter required him to do so in order to ensure that he will subsequently
pay his obligation to her.

This conclusion is in accord with the doctrine we enunciated in Aguirre v.

Court of Appeals,[18] that:

The explicit provision of Article 1602 that any of those circumstances would suffice to
construe a contract of sale to be one of equitable mortgage is in consonance with the
rule that the law favors the least transmission of property rights. To stress, the existence
of any one of the conditions under Article 1602, not a concurrence, or an overwhelming
 number of such circumstances, suffices to give rise to the presumption that the contract
is an equitable mortgage.

While we agree in the petitioners insistence that inadequacy of the price is

not sufficient to nullify the contract of sale, their persistence is, however,
misplaced. It is worthy to note that the factual circumstances attendant in the case
at bar call not for the application of the legal and jurisprudential principles on
annulment of contract per se, but more aptly, of the provisions of Articles 1602 and
1604 of the Civil Code on the construction of the contract of sale as an equitable
mortgage.

Consequently, the agreement between Dominador and Eulalia was not

avoided in its entirety so as to prevent it from producing any legal effect at
all. Instead, we construe that said transaction is an equitable mortgage, thereby
merely altering the relationship of the parties from seller and buyer, to mortgagor
and mortgagee, while the subject property is not transferred but subjected to a lien
in favor of the latter.

Moreover, granting that the purchase price is adequate, the fact that
respondents remain in possession of the subject property after its supposed sale is
sufficient to support our finding that the contract is one of equitable mortgage and
not of sale. To reiterate, the existence of any one of the conditions under Article
1602, not a concurrence, or an overwhelming number of such circumstances,
suffices to give rise to the presumption that the contract is an equitable
mortgage.[19]
 Having threshed the issue that there was no sale in favor of Eulalia but an
equitable mortgage leads us to an inevitable conclusion that she has no right to
subsequently transfer ownership of the subject property, in consonance with the
principle that nobody can dispose of what he does not have.[20] One of the
exceptions[21] to this rule, however, can be found in Article 1506 of the Civil Code,
wherein the seller has voidable title to a property but his title has not yet been
nullified at the time of the sale, and the subsequent buyer of the property was in good
faith.

An innocent purchaser for value is one who buys the property of another, without
notice that some other person has a right or interest in the property, for which a
full and fair price is paid by the buyer at the time of the purchase or before receipt
of any notice of claims or interest of some other person in the property.[22]

Petitioners are harping on the contention that Jocelyn was an innocent

purchaser for value. Invoking the indefeasibility of a Torrens title, they assert
that there is nothing in the subject propertys TCT that should arouse Jocelyns
suspicion as to put her on guard that there is a defect in Eulalias title.

Again, we are not persuaded. The burden of proving the purchasers good
faith lies in the one who asserts the same. In discharging the burden, it is not
enough to invoke the ordinary presumption of good
[23] [24]
faith. In Arrofo v. Quio, we have elucidated that:

[A] person dealing with registered land, [is not required] to inquire further that what
the Torrens title on its face indicates. This rule, however, is not absolute but admits of
exceptions.

Thus, while it is true x x x that a person dealing with registered lands need not go
beyond the certificate of title, it is likewise a well-settled rule that a purchaser or
mortgagee cannot close his eyes to facts which should put a reasonable man on his
guard, and then claim that he acted in good faith under the belief that there was no
defect in the title of the vendor or mortgagor. His mere refusal to face up to the fact that
such defect exists, or his willful closing of his eyes to the possibility of the existence of a
 defect in the vendors or mortgagors title, will not make him an innocent purchaser for
value, if it afterwards develops that the title was in fact defective, and it appears that he
had such notice of the defect as would have led to its discovery had he acted with the
measure of precaution which may be required of a prudent man in a like situation.

In the present case, we are not convinced by the petitioners incessant

assertion that Jocelyn is an innocent purchaser for value. To begin with, she is a
grandniece of Eulaliaand resides in the same locality where the latter lives and
conducts her principal business. It is therefore impossible for her not to acquire
knowledge of her grand aunts business practice of requiring
her biyaheros to surrender the titles to their properties and to sign the
corresponding deeds of sale over said properties in her favor, as security. This
alone should have put Jocelyn on guard for any possible abuses that Eulalia may
commit with the titles and the deeds of sale in her possession.

The glaring lack of good faith of Jocelyn is more apparent in her own
admission that she was aware that Dominador and a certain Lourdes were in
possession of the subject property. A buyer of real property that is in the
possession of a person other than the seller must be wary. A buyer who does
not investigate the rights of the one in possession can hardly be regarded as a
buyer in good faith.[25] Jocelyns self-serving statement that she personally talked
to Dominador and Lourdes about her acquisition of the subject property and
intention to take possession of the same, and that Dominador and Lourdes even
pleaded for time to vacate the subject property cannot be given credence in
light of the prompt filing by the Spouses Bandong of an action for the annulment
of the sale contract between Dominador and Eulalia after they received the
demand to vacate from Jocelyns lawyer.

In the last analysis, good faith, or the lack of it, is a question of

intention. But in ascertaining the intention that impels one on a given occasion,
 the courts are necessarily controlled by the evidence as to the conduct and
other outward acts by which the motive may be safely determined.[26]

Petitioners question further the belated filing by the Spouses Bandong of

an action for the annulment of sale, since the Spouses Bandong filed the same
only after they received the notice to vacate, and not immediately after the
execution of the assailed Deed of Sale. We have repeatedly held that the one
who is in actual possession of a piece of land claiming to be the owner thereof
may await to vindicate his right. His undisturbed possession gives him a
continuing right to seek the aid of a court of equity to ascertain and determine
the nature of the adverse claim of a third party and its effect on his own title,
which right can be claimed only by one who is in possession.[27]

Finally, we agree with the Court of Appeals that the ejectment case which
had been litigated to finality by the Spouses Buenaobra and the respondents
need not alter our conclusion in the present case. Well entrenched is the
doctrine that in ejectment cases, the sole question for resolution is the physical
or material possession of the property in question, so that neither the claim of
juridical possession nor an averment of ownership can outrightly prevent the
court from taking cognizance of the case.[28] In ejectmentcases, all the court may
do is to resolve who is entitled to its possession although, in doing so, it may
make a determination of who is the owner of the property in order to resolve
the issue of possession. But such determination of ownership is not clothed with
finality. Neither will it affect ownership of the property or constitute a binding
and conclusive adjudication on the merits with respect to the issue of
ownership.[29]

WHEREFORE, IN VIEW OF THE FOREGOING, the instant Petition

is DENIED. The Decision dated 26 September 2005, and the Resolution dated 24
January 2006, rendered by the Court of Appeals in CA-G.R. SP No. 59957, are
hereby AFFIRMED. Costs against petitioner.

SO ORDERED.

SECOND DIVISION

G.R. No. 92248 December 9, 1992

VICENCIO T. TORRES and SOCORRO S. TORRES, petitioners,

vs.
COURT OF APPEALS, CEFERINO ILLUSCUPIDES, ARACELI ILLUSCUPIDES and EMILIO
OLORES, respondents.

G.R. No. 93390 December 9, 1992

CEFERINO ILLUSCUPIDES and ARACELI CAMACHO-ILLUSCUPIDES, petitioners,

vs.
COURT OF APPEALS, VICENCIO T. TORRES and SOCORRO S. TORRES, respondents.

NOCON. J.:

Before Us is the petition for review on certiorari of petitioners Ceferino Illuscupides and Araceli
Camacho-Illuscupides in G.R. No. 93390 from the decision of the Court of Appeals dated January
18, 1990. The petition for review on certiorari in G.R. No. 92248, Vivencio T. Torres, et al. vs. Court
of Appeals, et al., was dismissed by the Court on June 18, 1990 1 for failure to show that a reversible
error was committed by the Court of Appeals, and no motion for reconsideration was taken
therefrom.

The facts are undisputed: the Illuscupideses are the owners of two (2) adjoining parcels of lands
located in the Tapuac District, Dagupan City. The parcels are covered by TCT Nos. 14874 and
15167, and have a combined area of 465 square meters. The said properties were mortgaged to the
Government Service Insurance System (GSIS).

Sometime in 1965, the Illuscupideses contracted Emilio Olores for the construction of a nine (9) door
apartment on the parcels of land for the sum of P79,400.00. While construction was going on,
another door was added, thereby increasing the cost of the construction to P97,000.00. However,
the Illuscupideses could only pay Olores P54,390.51, thus compelling the latter to sue them for the
balance before the Court of First Instance of Pangasinan in Civil Case No. D-1955. On November
1969, judgment was rendered in favor of Olores for the unpaid balance with interests and costs. The
Illuscupideses then appealed the decision to the Court of Appeals.

Meanwhile, the Illuscupideses received a notice from the GSIS that it was going to foreclosure the
mortgage for their failure to pay the loan when the same became due. To stave off the foreclosure,
the Illuscupideses sold the properties to Vivencio Torres and Socorro Torres (petitioners in G.R. No.
92248), as evidenced by the Deed of Sale dated October 19, 1973 2 for P130,000.00, of which the
vendees paid the vendors P10,000.00, P6,000.00 and P3,000.00. The vendees likewise paid
P51,498.97 to the GSIS. The aforesaid payments were in accordance to the schedule found in the
promissory note executed by the parties on October 19, 1973, 3 which provided —

Downpayment (paid on October 1973) .......... P10,000.00

Payment to the GSIS

(assumption of mortgage) .......... 51,000.00

Cash payment upon issuance of

title in the name of vendee ......... 25,000.00

Balance payable as follows:

 Dec. 30, 1974 .................... 11,000.00
Dec. 30, 1975 .................... 11,000.00
Dec. 30, 1976 .................... 11,000.00
Dec. 30, 1977 .................... 11,000.00

Provided that no installment

shall be paid until after the
final adjudication of claim of
Engr. E. Olores against vendor .................... 44,000.00

—————
P130,000.00

The parties also executed on the same day an agreement 4 whereby the Torreses would "RESELL,
RETRANSFER, and RECONVEY" to the Illuscupideses "that certain building, more particularly
designated as a ten-door concrete apartment."

Olores found out about the transaction and, fearing that he would not be able to collect from the
Illuscupideses, in case the Court of Appeals would uphold the decision of the trial court in his favor,
filed a new case for rescission of the sale against the Illuscupideses and the Torreses. The
Illuscupideses filed a counter-claim against Olores, and a cross-claim against the Torreses, alleging
that the Deed of Sale was a pacto de retro sale.

In 1977, the Court of Appeals upheld the decision in the collection case for the unpaid balance of the
construction costs in favor of Olores. When said judgment became final and executory. Olores tried
to execute the same but was unable to do so.

Meanwhile, trial in the rescission case continued until judgment was rendered on October 7,
1986, 5 the dispositive portion of which provided:

WHEREFORE, premises considered, by preponderance of evidence, judgment is

hereby rendered:

1. Dismissing the complaint for rescission filed by plaintiff;

2. Ordering the dismissal of the cross-claim and counterclaims of defendants

Illuscupides against defendants Torres and plaintiff;

3. Ordering defendants Illuscupides and/or Torres to deliver the P41,000.00 withheld

by them as part of the purchase price of the lots and apartments for the satisfaction
of the claim of plaintiff;

4. Ordering defendants Illuscupides to pay plaintiff and defendants Torres the sum of
P5,000.00 as attorney's fees each; (and)

5. Ordering the defendants Illuscupides to pay the costs.

Olores and the Illuscupides then appealed to the Court of Appeals, where the case was docketed as
CA-G.R. CV No. 14779. On January 18, 1990, the appellate court rendered a decision, 6 the
dispositive portion of which reads as follows:
 WHEREFORE, the decision dated October 7, 1986 is hereby AFFIRMED insofar as
the dismissal of the complaint of plaintiff-appellant Olores, the cross-claim and
counter-claim of defendants-appellants Illuscupides, and the counter-claim of
defendant-appellees Torres; REVERSED insofar as Nos. 3, 4 and 5 of the dispositve
portion of the Decision are concerned; and the defendants-appellees spouses
Vivencio Torres and Socorro Torres are ordered to reconvey in favor of the
defendants-cross-claimants spouses Ceferino Illuscupides and Socorro Illuscupides
"that certain building more particularly designated as a ten-door apartment in the
Deed of Sale executed by and between the above-named parties on October 19,
1973." Without pronouncement as to costs.

With regard to the appeal of the Illuscupideses, the Court of Appeals did not agree with their
contention that the sale of the properties to the Torreses was actually a pacto de retro sale, since the
terms of the Deed of Sale did not provide for the redemption of the property by the vendors.
However, the appellate court discovered that the land and the apartment were sold separately, and
only the land appears to have been fully paid. And since the Agreement (Annex "F") provided that
the apartment should be resold to the Illuscupideses, the appellate court held that the Torreses
should reconvey the apartment to the Illuscupideses.

The Illuscupideses filed a motion asking that the Court of Appeals rule upon the apartment rentals
collected by Torreses, since it had ruled that the apartment be reconveyed to them. The appellate
court denied the motion on the ground that the matter of the rentals was not raised as assignment of
error in their brief.

From said resolution, the Illuscupideses elevated the case to this Court on a petition for review
for certiorari. The Torreses filed a separate petition for review on certiorari, but the same was
dismissed by this Court on June 18, 1990. The dismissal of the Torreses' petition is now final in view
of their failure to file a timely motion for reconsideration.

In their petition, the Illuscupideses allege that the Court of Appeals erred in (1) not construing the
Deed of Sale of October 19, 1973 to be a pacto de retro sale; and (2) in not ruling upon the rentals
collected by the Torreses from the apartment after it had ordered the reconveyance of the apartment
to the Illuscupides.

The petition is totally devoid of merit.

The Court of Appeals was correct in construing the Deed of Sale as an absolute sale inasmuch as
the terms thereof are clear on the matter. The Illuscupideses argue, however, that the appellate
court should have taken into account the circumstances surrounding the execution of the deed,
particularly the fact that an Agreement to resell the apartment was executed on the very same day
as the deed of sale.

The argument is unavailing. Even if this Court were to agree with the Illuscupideses that parole
evidence may be allowed to add to the terms of the deed of sale, this Court has held in the case
of Villarica, et al. vs. Court of Appeals, et al., 7 that —

[t]he right of repurchase is not a right granted the vendor by the vendee in a
subsequent instrument, but is a right reserved by the vendor in the same instrument
of sale as one of the stipulations of the contract. Once the instrument of absolute
sale is executed, the vendor can no longer reserve the right to repurchase, and any
right thereafter granted the vendor by the vendee in a separate instrument cannot be
a right to repurchase but some other right like an option to buy in the instant case. 8
As with regard to the Illuscupideses' second contention, the Court of Appeals acted correctly in not passing upon the rentals collected by the
Torreses since the Illuscupideses did not ask for the same in their original cross-claim.

WHEREFORE, the decision appealed from is hereby AFFIRMED in toto. Costs against petitioners
Illuscupideses.

SO ORDERED.

IRST DIVISION

G.R. No. 162365 January 15, 2014

ROBERTO R. DAVID, Petitioner,
vs.
EDUARDO C. DAVID, Respondent.

DECISION

BERSAMIN, J.:

In a sale with right to repurchase, title and ownership of the property sold are immediately vested in
the vendee, subject to the resolutory condition of repurchase by the vendor within the stipulated
period.

The Case

Under review at the defendant's instance is the decision promulgated on October 10, 2003,1 whereby
the Court of Appeals (CA) affirmed the judgment rendered on December 5, 2001 by the Regional
Trial Court (RTC), Branch 61, in Baguio City ordering him to return to the plaintiff the motor vehicle
and trailer subject of the complaint, or to pay their value of ₱500,000.00 should the return not be
effected, and to pay the plaintiff ₱20,000.00 as litigation expenses, ₱50,000.00 as attorney's fees,
and the costs of suit.2

Antecedents

Respondent Eduardo C. David (Eduardo) initiated this replevin suit against Roberto R. David
(Roberto), his first cousin and former business partner, to recover the possession of one unit of
International CO 9670 Truck Tractor and Mi-Bed Trailer.

It appears that on July 7, 1995, Eduardo and his brother Edwin C. David (Edwin), acting on their own
and in behalf of their co-heirs, sold their inherited properties to Roberto, specifically: (a) a parcel of
land with an area of 1,231 square meters, together with all the improvements existing thereon,
located in Baguio City and covered by Transfer Certificate of Title No. T-22983 of the Registry of
Deeds of Baguio City (Baguio City lot); and (b) two units International CO 9670 Truck Tractor with
two Mi-Bed Trailers.3 A deed of sale with assumption of mortgage (deed of sale)4 embodied the
terms of their agreement, stipulating that the consideration for the sale was ₱6,000,000.00, of which
₱2,000,000 was to be paid to Eduardo and Edwin, and the remaining ₱4,000,000.00 to be paid to
Development Bank of the Philippines (DBP) in Baguio City to settle the outstanding obligation
secured by a mortgage on such properties. The parties further agreed to give Eduardo and Edwin
the right to repurchase the properties within a period of three years from the execution of the deed of
sale based on the purchase price agreed upon, plus 12% interest per annum.

In April 1997, Roberto and Edwin executed a memorandum of agreement (MOA)5 with the Spouses
Marquez and Soledad Go (Spouses Go), by which they agreed to sell the Baguio City lot to the latter
for a consideration of ₱10,000,000.00. The MOA stipulated that "in order to save payment of high
and multiple taxes considering that the x x x subject matter of this sale is mortgaged with DBP,
Baguio City, and sold [to Roberto], Edwin will execute the necessary Deed of Absolute Sale in favor
of [the Spouses Go], in lieu of [Roberto]."6 The Spouses Go then deposited the amount of
₱10,000,000.00 to Roberto’s account.7

After the execution of the MOA, Roberto gave Eduardo ₱2,800,000.00 and returned to him one of
the truck tractors and trailers subject of the deed of sale. Eduardo demanded for the return of the
other truck tractor and trailer, but Roberto refused to heed the demand.
Thus, Eduardo initiated this replevin suit against Roberto, alleging that he was exercising the right to
repurchase under the deed of sale; and that he was entitled to the possession of the other motor
vehicle and trailer.

In his answer, Roberto denied that Eduardo could repurchase the properties in question; and
insisted that the MOA had extinguished their deed of sale by novation.

Judgment of the RTC

On December 5, 2001,8 the RTC rendered judgment in favor of Eduardo, holding that the stipulation
giving Eduardo the right to repurchase had made the deed of sale a conditional sale; that Eduardo
had fulfilled the conditions for the exercise of the right to repurchase; that the ownership of the
properties in question had reverted to Eduardo; that Roberto’s defense of novation had no merit; and
that due to Roberto’s bad faith in refusing to satisfy Eduardo’s claim, Eduardo should be awarded
litigation expenses and attorney’s fees. The dispositive portion of the judgment reads:

WHEREFORE, premises considered, judgment is hereby rendered for the plaintiff and against the
defendant ORDERING the latter to return to the former the motor vehicle and trailer subject matter of
the case or to pay its value in the amount of ₱500,000 in case manual delivery can not be effected;
to pay plaintiff the amount of ₱20,000 as litigation expenses; the amount of ₱50,000 as attorney's
fees and the costs of this suit.

SO ORDERED.9

Roberto appealed to the CA.

Ruling of the CA

On October 10, 2003,10 the CA promulgated its decision affirming the RTC. It opined that although
there was no express exercise of the right to repurchase, the sum of all the relevant circumstances
indicated that there was an exercise of the right to repurchase pursuant to the deed of sale, that the
findings of the RTC to the effect that the conditions for the exercise of the right to repurchase had
been adequately satisfied by Eduardo, and that no novation as claimed by Roberto had intervened.

On February 16, 2004,11 the CA denied Roberto’s motion for reconsideration.12

Hence, this petition for review on certiorari.

Issues

Roberto seeks a reversal, claiming that the CA erred:

x x x IN HOLDING THAT THE RESPONDENT HAS EXERCISED THEIR RIGHT TO

REPURCHASE;

x x x IN HOLDING THAT THERE WAS NO NOVATION OF THE DEED OF SALE WITH

ASSUMPTION OF MORTGAGE WHEN THE PARTIES EXECUTED A MEMORANDUM OF
AGREEMENT FOR THE SALE OF THE SUBJECT HOUSE AND LOT AND, THEREAFTER SOLD
THE SAID PROPERTY TO THIRD PERSONS;

x x x IN RESOLVING THE INSTANT CASE IN FAVOR OF RESPO[N]DENT.13

 Ruling of the Court

The petition for review has no merit.

A sale with right to repurchase is governed by Article 1601 of the Civil Code, which provides that:
"Conventional redemption shall take place when the vendor reserves the right to repurchase the
thing sold, with the obligation to comply with the provisions of Article 1616 and other stipulations
which may have been agreed upon." Conformably with Article 1616,14 the seller given the right to
repurchase may exercise his right of redemption by paying the buyer: (a) the price of the sale, (b)
the expenses of the contract, (c) legitimate payments made by reason of the sale, and (d) the
necessary and useful expenses made on the thing sold.

The deed of sale entered into by Eduardo and Roberto contained the following stipulation on the
right to repurchase, to wit:

x x x the Vendors are given the right to repurchase the aforesaid described real property, together
with the improvements thereon, and the two (2) motor vehicles, together with their respective trailers
from the Vendee within a period of three (3) years from the execution of this document on the
purchase price agreed upon by the parties after considering the amount previously paid to the
Vendors in the amount of TWO MILLION PESOS (₱2,000,000.00), Philippine Currency, with an
interest of twelve percent (12%) per annum and the amount paid with the Development Bank of the
Philippines with an interest of twelve percent (12%) per annum.15

The CA and the RTC both found and held that Eduardo had complied with the conditions stipulated
in the deed of sale and prescribed by Article 1616 of the Civil Code. Pertinently, the CA stated:

It should be noted that the alleged repurchase was exercised within the stipulated period of three (3)
years from the time the Deed of Sale with Assumption of Mortgage was executed. The only question
now, therefore, which remains to be resolved is whether or not the conditions set forth in the Deed of
Sale with Assumption of Mortgage, i.e. the tender of the purchase price previously agreed upon,
which is Php2.0 Million, plus 12% interest per annum, and the amount paid by the defendant to DBP,
had been satisfied.

From the testimony of the defendant himself, these preconditions for the exercise of plaintiff's right to
repurchase were adequately satisfied by the latter. Thus, as stated, from the Php10 Million purchase
price which was directly paid to the defendant, the latter deducted his expenses plus interests and
the loan, and the remaining amount he turned over to the plaintiff. This testimony is an unequivocal
acknowledgement from defendant that plaintiff and his co-heirs exercised their right to repurchase
the property within the agreed period by satisfying all the conditions stipulated in the Deed of Sale
with Assumption of Mortgage. Moreover, defendant returned to plaintiff the amount of Php2.8 Million
from the total purchase price of Php10.0 Million. This only means that this is the excess amount
pertaining to plaintiff and co-heirs after the defendant deducted the repurchase price of Php2.0
Million plus interests and his expenses. Add to that is the fact that defendant returned one of the
trucks and trailers subject of the Deed of Sale with Assumption of Mortgage to the plaintiff. This is, at
best, a tacit acknowledgement of the defendant that plaintiff and his co-heirs had in fact exercised
their right to repurchase.16 x x x

Considering that the factual findings of the trial court, when affirmed by the CA, are binding on the
Court,17 the Court affirms the judgment of the CA upholding Eduardo’s exercise of the right of
repurchase. Roberto could no longer assail the factual findings because his petition for review on
certiorari was limited to the review and determination of questions of law only. A question of law
exists when the doubt centers on what the law is on a certain set of undisputed facts, while a
question of fact exists when the doubt centers on the truth or falsity of the alleged facts.18Whether the
conditions for the right to repurchase were complied with, or whether there was a tender of payment,
is a question of fact. With both the RTC and the CA finding and holding that Eduardo had fulfilled the
conditions for the exercise of the right to repurchase, therefore, we conclude that Eduardo had
effectively repurchased the properties subject of the deed of sale.

In Metropolitan Bank and Trust Company v. Tan,19 the Court ruled that a redemption within the period
allowed by law is not a matter of intent but of payment or valid tender of the full redemption price
within the period. Verily, the tender of payment is the seller’s manifestation of his desire to
repurchase the property with the offer of immediate performance.20 As we stated in Legaspi v. Court
of Appeals,21 a sincere tender of payment is sufficient to show the exercise of the right to repurchase.
Here, Eduardo paid the repurchase price to Roberto by depositing the proceeds of the sale of the
Baguio City lot in the latter’s account. Such payment was an effective exercise of the right to
repurchase.

On the other hand, the Court dismisses as devoid of merit Roberto’s insistence that the MOA had
extinguished the obligations established under the deed of sale by novation.

The issue of novation involves a question of fact, as it necessarily requires the factual determination
of the existence of the various requisites of novation, namely: (a) there must be a previous valid
obligation; (b) the parties concerned must agree to a new contract; (c) the old contract must be
extinguished; and (d) there must be a valid new contract.22 With both the RTC and the CA concluding
that the MOA was consistent with the deed of sale, novation whereby the deed of sale was
extinguished did not occur. In that regard, it is worth repeating that the factual findings of the lower
courts are binding on the Court.

In sales with the right to repurchase, the title and ownership of the property sold are immediately
vested in the vendee, subject to the resolutory condition of repurchase by the vendor within the
stipulated period.23 Accordingly, the ownership of the affected properties reverted to Eduardo once
he complied with the condition for the repurchase, thereby entitling him to the possession of the
other motor vehicle with trailer.

WHEREFORE, the Court AFFIRMS the decision promulgated on October 10, 2003; and ORDERS
the petitioner to pay the costs of suit.

SO ORDERED.

FIRST DIVISION

April 19, 2017

G.R. No. 194533

PHILIPPINE STEEL COATING CORP., Petitioner,

vs.
EDUARD QUINONES, Respondent.

DECISION

SERENO, CJ:

Before us is a Petition for Review on Certiorari under Rule 45 of the Rules of Court assailing the
Court of Appeals (CA) Decision 1 and Resolution 2 The CA affirmed in toto the Regional Trial Court
(R TC) Decision in Civil Case No. A-1708 for damages. 3

THE FACTS

This case arose from a Complaint for damages filed by respondent Quinones (owner of Amianan
Motors) against petitioner PhilSteel. The Complaint alleged that in early 1994, Richard Lopez, a
sales engineer of PhilSteel, offered Quinones their new product: primer-coated, long-span, rolled
galvanized iron (G.I.) sheets. The latter showed interest, but asked Lopez if the primer-coated
sheets were compatible with the Guilder acrylic paint process used by Amianan Motors in the
finishing of its assembled buses. Uncertain, Lopez referred the query to his immediate superior,
Ferdinand Angbengco, PhilSteel's sales manager.

Angbengco assured Quinones that the quality of their new product was superior to that of the non-
primer coated G.l. sheets being used by the latter in his business. Quinones expressed reservations,
as the new product might not be compatible with the paint process used by Amianan Motors.

Angbengco fmiher guaranteed that a laboratory test had in fact been conducted by PhilSteel, and
that the results proved that the two products were compatible; hence, Quinones was induced to
purchase the product and use it in the manufacture of bus units.

However, sometime in 1995, Quinones received several complaints from customers who had bought
bus units, claiming that the paint or finish used on the purchased vehicles was breaking and peeling
off. Quinones then sent a letter-complaint to PhilSteel invoking the warranties given by the latter.
According to respondent, the damage to the vehicles was attributable to the hidden defects of the
primer-coated sheets and/or their incompatibility with the Guilder acrylic paint process used by
Amianan Motors, contrary to the prior evaluations and assurances of PhilSteel. Because of the
barrage of complaints, Quinones was forced to repair the damaged buses.

PhilSteel counters that Quinones himself offered to purchase the subject product directly from the
former without being induced by any of PhilSteel's representatives. According to its own
investigation, PhilSteel discovered that the breaking and peeling off of the paint was caused by the
erroneous painting application done by Quinones.

The RTC rendered a Decision 4 in favor of Quinones and ordered PhilSteel to pay damages. The trial
court found that Lopez's testimony was damaging to PhilSteel's position that the latter had not
induced Quinones or given him assurance that his painting system was compatible with PhilSteel's
primer-coated G.I. sheets. The trial court concluded that the paint blistering and peeling off were due
to the incompatibility of the painting process with the primer-coated G .I. sheets. The RTC also found
that the assurance made by Angbengco constituted an express warranty under Article 1546 of the
Civil Code. Quinones incurred damages from the repair of the buses and suffered business
reverses. In view thereof, PhilSteel was held liable for damages.

THE RULING OF THE CA

The CA affirmed the ruling of the RTC in toto.

The appellate court ruled that PhilSteel in fact made an express warranty that the primer-coated G.I.
sheets were compatible with the acrylic paint process used by Quinones on his bus units. The
assurances made by Angbengco were confirmed by PhilSteel's own employee, Lopez.

The CA further held that the cause of the paint damage to the bus units of Quinones was the
incompatibility of the primer-coated sheet with the acrylic paint process used by Amianan Motors.
The incompatibility was in fact acknowledged through a letter dated 29 June 1996 from Angbengco
himself. 5

The CA also agreed with the R TC that PhilSteel was liable for both actual and moral damages. For
actual damages, the appellate court reasoned that PhilSteel committed a breach of duty against
Quinones when the company made assurances and false representations that its primer-coated
sheets were compatible with the acrylic paint process of Quinones. The CA awarded moral
damages, ruling that PhilSteel's almost two years of undue delay in addressing the repeated
complaints about paint blisters constituted bad faith.

In addition, the CA concurred with the RTC that attorney's fees were in order since Quinones was
forced to file a case to recover damages.

Accordingly, the CA dismissed the appeal of PhilSteel.

Petitioner sought a reversal of the Decision in its Motion for Reconsideration. The motion was,
however, denied by the CA in its Resolution dated 19 November 2010.

Hence, this Petition.

ISSUES

Petitioner raises the following issues:

1. Whether vague oral statements made by seller on the characteristics of a generic good
can be considered warranties that may be invoked to warrant payment of damages;

2. Whether general warranties on the suitability of products sold prescribe in six (6) months
under Article 1571 of the Civil Code;

3. Assuming that statements were made regarding the characteristics of the product,
whether respondent as buyer is equally negligent; and

4. Whether non-payment of price is justified on allegations of breach of warranty.6

OUR RULING
We DENY the Petition.

This Court agrees with the CA that this is a case of express warranty under Article 1546 of the Civil
Code, which provides:

Any affirmation of fact or any promise by the seller relating to the thing is an express warranty if the
natural tendency of such affirmation or promise is to induce the buyer to purchase the same, and if
the buyer purchases the thing relying thereon. No affirmation of the value of the thing, nor any
statement purporting to be a statement of the seller's opinion only, shall be construed as a warranty,
unless the seller made such affirmation or statement as an expert and it was relied upon by the
buyer.

As held in Carrascoso, Jr. v. CA, 7 the following requisites must be established in order to prove that
there is an express warranty in a contract of sale: (1) the express warranty must be an affirmation of
fact or any promise by the seller relating to the subject matter of the sale; (2) the natural effect of the
affirmation or promise is to induce the buyer to purchase the thing; and (3) the buyer purchases the
thing relying on that affirmation or promise.

An express warranty can be oral

when it is a positive affirmation of a
fact that the buyer relied on.

Petitioner argues that the purported warranties by mere "vague oral statements" cannot be invoked
to warrant the payment of damages.

A warranty is a statement or representation made by the seller of goods - contemporaneously and

as part of the contract of sale - that has reference to the character, quality or title of the goods; and is
issued to promise or undertake to insure that ce1iain facts are or shall be as the seller represents
them. 8 A warranty is not necessarily written. It may be oral as long as it is not given as a mere
opinion or judgment. Rather, it is a positive affirmation of a fact that buyers rely upon, and that
influences or induces 9 them to purchase the product.

Contrary to the assertions of petitioner, the finding of the CA was that the former, through
Angbengco, did not simply make vague oral statements on purported warranties. 10 Petitioner
expressly represented to respondent that the primer-coated G .I. sheets were compatible with the
acrylic paint process used by the latter on his bus units. This representation was made in the face of
respondent's express concerns regarding incompatibility. Petitioner also claimed that the use of their
product by Quinones would cut costs. Angbengco was so certain of the compatibility that he
suggested to respondent to assemble a bus using the primer-coated sheet and have it painted with
the acrylic paint used in Amianan Motors.

At the outset, Quinones had reservations about the compatibility of his acrylic paint primer with the
primer-coated G.I. sheets of PhilSteel. But he later surrendered his doubts about the product after 4
to 5 meetings with Angbengco, together with the latter's subordinate Lopez. Only after several
meetings was Quinones persuaded to buy their G.I. sheets. On 15 April 1994, he placed an initial
order for petitioner's product and, following Angbengco's instructions, had a bus painted with acrylic
paint. The results of the painting test turned out to be successful. Satisfied with the initial success of
that test, respondent made subsequent orders of the primer-coated product and used it in Amianan
Motors' mass production of bus bodies. 11
Thus, it was not accurate for petitioner to state that they had made no warranties. It insisted that at
best, they only gave "'assurances" of possible savings Quinones might have if he relied on
PhilSteel's primer-coated G.I. sheets and eliminated the need to apply an additional primer. 12

All in all, these "vague oral statements" were express affirmations not only of the costs that could be
saved if the buyer used PhilSteel's G.I. sheets, but also of the compatibility of those sheets with the
acrylic painting process customarily used in Amianan Motors. Angbengco did not aimlessly utter
those "vague oral statements" for nothing, but with a clear goal of persuading Quinones to buy
PhilSteel's product.

Taken together, the oral statements of Angbengco created an express warranty. They were positive
affirmations of fact that the buyer relied on, and that induced him to buy petitioner's primer-coated G
.I. sheets.

Under Article 1546 of the Civil Code, "'[ n ]o affirmation of the value of the thing, nor any statement
purporting to be a statement of the seller's opinion only, shall be construed as a warranty, unless the
seller made such affirmation or statement as an expert and it was relied upon by the buyer."

Despite its claims to the contrary, petitioner was an expert in the eyes of the buyer Quinones. The
latter had asked if the primer-coated G.I. sheets were compatible with Amianan Motors' acrylic
painting process. Petitioner's former employee, Lopez, testified that he had to refer Quinones to the
former's immediate supervisor, Angbengco, to answer that question. As the sales manager of
PhilSteel, Angbengco made repeated assurances and affirmations and even invoked laboratory
tests that showed compatibility. 13 In the eyes of the buyer Quinones, PhilSteel - through its
representative, Angbengco - was an expert whose word could be relied upon.

This Court cannot subscribe to petitioner's stand that what they told Quinones was mere dealer's talk
or an exaggeration in trade that would exempt them from liability for breach of warranty. Petitioner
cites Gonzalo Puyat & Sons v. Arco Amusement Company, 14 in which this Court ruled that the
contract is the law between the parties and should include all the things they agreed to. Therefore,
what does not appear on the face of the contract should be regarded merely as "dealer's" or "trader's
talk," which cannot Bind either party.15

Contrary however to petitioner's position, the so-called dealer's or trader's talk cannot be treated as
mere exaggeration in trade as defined in Article 1340 of the Civil Code. 16 Quinones did not talk to an
ordinary sales clerk such as can be found in a department store or even a sari-sari store. If Lopez, a
sales agent, had made the assertions of Angbengco without true knowledge about the compatibility
or the authority to warrant it, then his would be considered dealer's talk. But sensing that a person of
greater competence and knowledge of the product had to answer Quinones' concerns, Lopez wisely
deferred to his boss, Angbengco.

Angbengco undisputedly assured Quinones that laboratory tests had been undertaken, and that
those tests showed that the acrylic paint used by Quinones was compatible with the primer-coated
G.I. sheets of Philsteel. Thus, Angbengco was no longer giving a mere seller's opinion or making an
exaggeration in trade. Rather, he was making it appear to Quinones that Phil Steel had already
subjected the latter's primed G.I. sheets to product testing. PhilSteel, through its representative, was
in effect inducing in the mind of the buyer the belief that the former was an expert on the primed G.I.
sheets in question; and that the statements made by petitioner's representatives, particularly
Angbengco (its sales manager), 17 could be relied on. Thus, petitioner did induce the buyer to
purchase the former's G.I. sheets.
The prescription period of the
express warranty applies to the
instant case.

Neither the CA nor the RTC ruled on the prescription period applicable to this case. There being an
express warranty, this Court holds that the prescription period applicable to the instant case is that
prescribed for breach of an express warranty. The applicable prescription period is therefore that
which is specified in the contract; in its absence, that period shall be based on the general rule on
the rescission of contracts: four years (see Article 1389, Civil Code). 18 In this case, no prescription
period specified in the contract between the parties has been put forward. Quinones filed the instant
case on 6 September 199619 or several months after the last delivery of the thing sold. 20His filing of
the suit was well within the prescriptive period of four years; hence, his action has not prescribed.

The buyer cannot be held negligent

in the instant case.

Negligence is the absence of reasonable care and caution that an ordinarily prudent person would
have used in a given situation. 21 Under Article 11 73 of the Civil Code, 22 where it is not stipulated in
the law or the contract, the diligence required to comply with one's obligations is commonly referred
to as paterfamilias; or, more specifically, as bonos paterfamilias or "a good father of a family." A
good father of a family means a person of ordinary or average diligence. To determine the prudence
and diligence that must be required of all persons, we must use as basis the abstract average
standard corresponding to a normal orderly person. Anyone who uses diligence below this standard
is guilty of negligence. 23

Respondent applied acrylic primers, which are stronger than epoxy primers. The G.I. sheets of
PhilSteel were primer-coated with epoxy primer. By applying the acrylic over the epoxy primer used
on the G.I. sheets, the latter primer was either dissolved or stripped off the surface of the iron
sheets. 24

Petitioner alleges that respondent showed negligence by disregarding what it calls a "chemical
reaction so elementary that it could not have escaped respondent Quinones who has been in the
business of manufacturing, assembling, and painting motor vehicles for decades."25 For this
supposed negligence, petitioner insists that respondent cannot hide behind an allegation of breach
of warranty as an excuse for not paying the balance of the unpaid purchase price.

It bears reiteration that Quinones had already raised the compatibility issue at the outset. He relied
on the manpower and expertise of PhilSteel, but at the same time reasonably asked for more details
regarding the product. It was not an impulsive or rush decision to buy. In fact, it took 4 to 5 meetings
to convince him to buy the primed G .I. sheets. And even after making an initial order, he did not
make subsequent orders until after a painting test, done upon the instructions of Angbengco proved
successful. The test was conducted using their acrylic paint over PhilSteel's primer-coated G.I.
sheets. Only then did Quinones make subsequent orders of the primer-coated product, which was
then used in the mass production of bus bodies by Amianan Motors. "26

This Court holds that Quinones was not negligent and should therefore not be blamed for his losses.

The nonpayment of the unpaid

purchase price was justified, since a
breach of warranty was proven.
Petitioner takes issue with the nonpayment by Quinones to PhilSteel of a balance of ₱448,041.50,
an amount that he has duly admitted. 27 It is the nonpayment of the unpaid balance of the purchase
price, of the primer-coated G.I. sheets that is at the center of the present controversy.

Quinones, through counsel, sought damages against petitioner for breach of implied warranty arising
from hidden defects under Article 156 l of the Civil Code, which provides:

The vendor shall be responsible for warranty against the hidden defects which the thing sold may
have, should they render it unfit for the use for which it is intended, or should they diminish its fitness
for such use to such an extent that, had the vendee been aware thereof he would not have acquired
it or would have given a lower price for it; but said vendor shall not be answerable for patent defects
or those which may be visible, or for those which are not visible if the vendee is an expert who, by
reason of his trade or profession, should have known them.

In seeking a remedy from the trial court, Quinones opted not to pay the balance of the purchase
price, in line with a proportionate reduction of the price under Article 1567 Civil Code, which states:

In the cases of articles 1561, 1562, 1564, 1565 and 1566, the vendee may elect between
withdrawing from the contract and demanding a proportionate reduction of the price, with damages
in either case.

Petitioner reasons that since the action of respondent is based on an implied warranty, the action
has already prescribed under Article 1571 28 of the Civil Code. According to petitioner, Quinones can
no longer put up the defense of hidden defects in the product sold as a basis for evading payment of
the balance. 29

We agree with petitioner that the nonpayment of the balance cannot be premised on a mere
allegation of nonexisting warranties. This Court has consistently ruled that whenever a breach of
warranty is not proven, buyers who refuse to pay the purchase price - or even the unpaid balance of
the goods they ordered - must be held liable therefor.30

However, we uphold the finding of both the CA and the RTC that petitioner's breach of warranty was
proven by respondent.

Since what was proven was express warranty, the remedy for implied warranties under Article 1567
of the Civil Code does not apply to the instant case. Instead, following the ruling of this Court
in Harrison Motors

Corporation v. Navarro,31 Article 1599 of the Civil Code applies when an express warranty is
breached. The provision reads:
1awp++i1

Where there is a breach of warranty by the seller, the buyer may, at his election:

(l) Accept or keep the goods and set up against the seller, the breach of warranty by way of
recoupment in diminution or extinction of the price;

(2) Accept or keep the goods and maintain an action against the seller for damages for the
breach of warranty;

(3) Refuse to accept the goods, and maintain an action against the seller for damages for the
breach of warranty;
 (4) Rescind the contract of sale and refuse to receive the goods or if the goods have already
been received, return them or offer to return them to the seller and recover the price or any
part thereof which has been paid.

When the buyer has claimed and been granted a remedy in anyone of these ways,
no other remedy can thereafter be granted, without prejudice to the provisions of the
second paragraph of article 1191.

Where the goods have been delivered to the buyer, he cannot rescind the sale if he
knew of the breach of warranty when he accepted the goods without protest, or if he
fails to notify the seller within a reasonable time of the election to rescind, or if he
fails to return or to offer to return the goods to the seller in substantially as good
condition as they were in at the time the ownership was transferred to the buyer. But
if deterioration or injury of the goods is due to the breach or warranty, such
deterioration or injury shall not prevent the buyer from returning or offering to return
the goods to the seller and rescinding the sale.

Where the buyer is entitled to rescind the sale and elects to do so, he shall cease to
be liable for the price upon returning or offering to return the goods. If the price or
any part thereof has already been paid, the seller shall be liable to repay so much
thereof as has been paid, concurrently with the return of the goods, or immediately
after an offer to return the goods in exchange for repayment of the price.

Where the buyer is entitled to rescind the sale and elects to do so, if the seller
refuses to accept an offer of the buyer to return the goods, the buyer shall thereafter
be deemed to hold the goods as bailee for the seller, but subject to a lien to secure
the payment of any portion of the price which has been paid, and with the remedies
for the enforcement of such lien allowed to an unpaid seller by article 1526.

(5) In the case of breach of warranty of quality, such loss, in the absence of special
circumstances showing proximate damage of a greater amount, is the difference between
the value of the goods at the time of delivery to the buyer and the value they would have had
if they had answered to the warranty.

Quinones has opted for a reduction in price or nonpayment of the unpaid balance of the purchase
price. Applying Article 1599 (1), this Court grants this remedy.

The above provisions define the remedy of recoupment in the diminution or extinction of price in
case of a seller's breach of warranty. According to the provision, recoupment refers to the reduction
or extinction of the price of the same item, unit, transaction or contract upon which a plaintiffs claim
is founded. 32

In the case at bar, Quinones refused to pay the unpaid balance of the purchase price of the primer-
coated G.I. sheets PhilSteel had delivered to him. He took this action after complaints piled up from
1âwphi 1

his customers regarding the blistering and peeling-off of the paints applied to the bus bodies they
had purchased from his Amianan Motors. The unpaid balance of the purchase price covers the
same G .I. sheets. Further, both the CA and the RTC concurred in their finding that the seller's
breach of express warranty had been established. Therefore, this Court finds that respondent has
legitimately defended his claim for reduction in price and is no longer liable for the unpaid balance of
the purchase price of ₱448,04l.50.

The award of attorney's fees is deleted.

Contrary to the finding of the CA and the RTC, this Court finds that attorney's fees are not in order.
Neither of these courts cited any specific factual basis to justify the award thereof. Records merely
show that

Quinones alleged that he had agreed to pay 25% as attorney's fees to his counsel. 33 Hence, if the
award is based on a mere allegation or testimony that a party has agreed to pay a certain
percentage for attorney's fees, the award is not in order. 34

WHEREFORE, in view of the foregoing, the instant Petition is DENIED. The Court of Appeals
Decision dated 17 March 2010 and Resolution dated 19 November 20l0 denying petitioner's Motion
for Reconsideration are hereby AFFIRMED, except for the award of attorney's fees, which is
hereby DELETED.

SO ORDERED.
 THIRD DIVISION

[G.R. No. 148173. December 10, 2004]

SUPERCARS MANAGEMENT & DEVELOPMENT

CORPORATION, represented by its President BENIGNO
CHAN, petitioner, vs. THE LATE FILEMON FLORES, substituted
by his surviving spouse, NORA C. FLORES, respondent. [1]

DECISION
SANDOVAL-GUTIERREZ, J.:

Before us is a petition for review on certiorari assailing the Decision dated

[2]

November 29, 2000 and Resolution dated April 26, 2001, both issued by the
[3]

Court of Appeals in CA-G.R. CV No. 40419, entitled Filemon Flores vs.

Supercars Management & Development Corporation, Mamerto Catley, Pablito
Marquez, and Rizal Commercial Banking Corporation.
In the second week of December 1988, Filemon Flores, respondent,
purchased from Supercars Management and Development Corporation,
petitioner, an Isuzu Carter Crew Cab for P212,000.00 payable monthly with a
down payment equivalent to 30% of the price or P63,600.00. The balance was
to be financed by the Rizal Commercial Banking Corporation (RCBC). The sale
was coursed through Pablito Marquez, petitioners salesman.
Upon delivery of the vehicle on December 27, 1988, respondent paid
petitioner the 30% down payment, plus premium for the vehicles
comprehensive insurance policy amounting to P7,374.80. The RCBC financed
the balance of the purchase price. Its payment was secured by a chattel
mortgage of the same vehicle.
A day after the vehicle was delivered, respondent used it for his familys trip
to Bauang, La Union. While traversing the national highway in Tarlac, Tarlac,
the fan belt of the vehicle snapped. Then its brakes hardened after several
stops and did not function properly; the heater plug did not also function; the
engine could not start; and the fuel consumption increased. [4]

Upon their return to Manila in the first week of January 1989, respondent
complained to petitioner about the defects of the vehicle. Marquez then had the
vehicle repaired and returned it to respondent that same day, assuring the latter
that it was already in good condition.
But after driving the vehicle for a few days, the same defects resurfaced,
prompting respondent to send petitioner a letter dated January 30, 1989
rescinding the contract of sale and returning the vehicle due to breach of
warranty against hidden defects. A copy of the letter was furnished RCBC.
In response to respondents letter, petitioner directed Marquez to have the
vehicle fixed. Thereafter, he returned the vehicle to respondent with the
assurance that it has no more defects. However, when respondent drove it for
a few days, he found that the vehicle was still defective.
Hence, on February 7, 1989, respondent sent petitioner another letter
restating that he is rescinding the contract of sale, a copy of which was furnished
RCBC. On February 9, 1989, he returned the vehicle to petitioner. Later,
Marquez and Mamerto Catley, petitioners salesman, tried to convince
respondent to accept the vehicle as it had been completely repaired. But
respondent refused.
On March 1, 1989, respondent sent petitioner a letter demanding the refund
of his down payment, plus the premium he paid for the vehicles insurance.
Petitioner failed to comply with petitioners demand. Consequently,
respondent stopped paying the monthly amortization for the vehicle.
On March 21, 1989, RCBC sent respondent a letter demanding that he
settle his past overdue accounts for February 15 and March 15, 1989. In reply,
respondent, through a letter dated March 31, 1989, informed RCBC that he had
rescinded the contract of sale and had returned the vehicle to petitioner. This
prompted RCBC to file with the Office of the Clerk of Court and Ex-
Officio Sheriff, Regional Trial Court, Quezon City, a Petition for Extra-judicial
Foreclosure of Chattel Mortgage.
On June 2, 1989, a Notice of Sheriffs Sale of the vehicle was set.
On June 1, 1989, respondent filed with the same Office
a Manifestation/Motion asking for the postponement of the scheduled auction
sale until such time that petitioner and/or RCBC shall have reimbursed him of
the amount he paid for the vehicle; and that should the auction sale be
conducted, the proceeds thereof equivalent to the amount he spent be withheld
and turned over to him.
The auction sale proceeded as scheduled. RCBC, being the highest bidder,
purchased the vehicle. Subsequently, RCBC sold the vehicle to a third party.
 On November 3, 1989, respondent filed with the Regional Trial Court (RTC),
Branch 150, Makati City a complaint for rescission of contract with damages
[5]

against petitioner, Marquez, Catley and RCBC, docketed as Civil Case No. 89-
5566.
In their separate answers, petitioner, Marquez and Catley denied having
committed any breach of warranty against hidden defects, claiming that the
vehicle had only minor and inconsequential defects which were promptly and
satisfactorily repaired by petitioner Supercars pursuant to its warranty as the
seller. For its part, RCBC claimed that it has no liability whatsoever against
[6]

respondent because it merely enforced its right under the chattel mortgage law.
All the defendants prayed for the dismissal of the complaint.
On April 13, 1992, the RTC rendered its Decision in favor of respondent and
against the defendants, thus:

WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the
defendants, ordering the latter to jointly and severally pay the plaintiff as follows:

1. the amount of P70,974.80 representing the 30% down payment and

premium paid for one year comprehensive motor vehicle
insurance plus interests at the rate of 14% per annum from date of
filing of this complaint on October 30, 1989 until fully paid;

2. the sum of P50,000.00 as moral damages;

3. the sum of P25,000.00 as exemplary damages;

4. the sum of P20,000.00 as attorneys fees; and

5. the costs of suit.

SO ORDERED. [7]

Upon motion for reconsideration by RCBC, the RTC, in an Order dated

December 21, 1992, modified its Decision by absolving RCBC from any liability
and dismissing the complaint against it, thus:

xxx

Going into the merits of defendant banks contention that it has valid and meritorious
defense which should ultimately exculpate it from any liability, jointly and severally,
with the other defendants, the Court, after a careful review of the evidence on hand,
reconsiders its Decision insofar as the said bank is concerned. The valid exercise by
the plaintiff of its right to rescind the contract of sale for the purchase of the motor
vehicle in question does not apply to defendant bank. Said contract is effective only as
against defendant Supercars Management and Development Corporation, which must
principally suffer the consequence of its breach of the contract.

This Court likewise takes notice of the fact that since the motor vehicle was
voluntarily surrendered by the plaintiff and that defendant bank merely exercised its
right under the chattel mortgage law, no fault can be attributed to the latter. The fact
that the plaintiff sent a letter to the Office of the City Sheriff of Quezon City, copy
furnished the bank, seeking the postponement of the auction sale of the subject motor
vehicle, will not and cannot be considered as a valid ground to hold said bank liable
for only exercising its rights under the law. At most, the liability must really be
imputed only against defendants Supercars Management and Development
Corporation, Mamerto Catley and Pablito Marquez.

WHEREFORE, considering the foregoing premises, the Decision of this Court dated
April 13, 1992, insofar as it holds defendant Rizal Commercial Banking Corporation
jointly and severally liable to the plaintiff, is hereby MODIFIED and the case against
said bank DISMISSED. Similarly, the compulsory counterclaim against the plaintiff is
likewise dismissed.

The dispositive portion of the same Decision insofar as the rest of the defendants are
concerned is hereby maintained and affirmed in toto.

SO ORDERED. [8]

From the above Decision and Order, petitioner, Marquez and Catley
interposed an appeal to the Court of Appeals, docketed as CA-G.R. CV No.
40419. In a Decision dated November 29, 2000, the Appellate Court affirmed
the RTC Decision with modification in the sense that the complaint against
Marquez and Catley was dismissed, thus:

xxx

It is with respect to appellants Catley and Marquez liability that we are minded to
modify the (appealed) Decision. The two being mere employees (of appellant
Supercars Management and Development Corporation), they cannot be held liable to
refund the amount claimed by Flores. Nor can they be made liable for damages and
attorneys fees, there being no clear evidence that they had a hand in giving rise
thereto.
WHEREFORE, the appealed Amended Decision is AFFIRMED, with the
MODIFICATION that the complaint insofar as defendants-appellants Mamerto Catley
and Pablito Marquez is hereby DISMISSED.

SO ORDERED. [9]

Petitioner filed a motion for reconsideration but denied in a Resolution dated

April 26, 2001. [10]

Hence, the instant petition.

Petitioner contends that respondent has no right to rescind the contract of
sale because the motor vehicle in question, as found by the RTC and the
[11]

Court of Appeals, is already in the hands of a third party, one Mr. Lim an
innocent purchaser for value. Thus, both courts erred in ordering petitioner to
[12]

refund respondent of the amounts he paid for the vehicle.

The issue here is whether respondent has the right to rescind the contract
of sale and to claim damages as a result thereof.
We rule for respondent.
Respondents complaint filed with the RTC seeks to recover from petitioner
the money he paid for the vehicle due to the latters breach of his warranty
against hidden defects under Articles 1547, 1561, and 1566 of the Civil
[13] [14] [15]

Code. The vehicle, after it was delivered to respondent, malfunctioned despite

repeated repairs by petitioner. Obviously, the vehicle has hidden defects. A
hidden defect is one which is unknown or could not have been known to the
vendee. [16]

The findings of both the RTC and Court of Appeals that petitioner committed
a breach of warranty against hidden defects are fully supported by the records.
The Appellate Court correctly ruled:

The evidence clearly shows that Flores [now respondent] was justified in opting to
rescind the sale given the hidden defects of the vehicle, allowance for the repair of
which he patiently extended, but which repair did not turn out to be satisfactory.

xxx

For when by letters of January 30, 1989 and February 7, 1989, which were followed
up by another dated March 1, 1989, Flores declared his rescission of the sale, which
rescission was not impugned or opposed by appellants as in fact they accepted the
return of the vehicle on February 9, 1989, such extra-judicial rescission x x x
produced legal effect (UP vs. de los Angeles, 35 SCRA 102 [1970]; Tolentino
Commentaries and Jurisprudence on the Civil Code, citing Magdalena Estate v.
Myrick, 71 Phil. 344 [1940-1941]).

xxx [17]

It is well within respondents right to recover damages from petitioner who

committed a breach of warranty against hidden defects. Article 1599 of the Civil
Code partly provides:

Article 1599. Where there is a breach of warranty by the seller, the buyer may, at his
election:

xxx

(4) Rescind the contract of sale and refuse to receive the goods, or if the goods have
already been received, return them or offer to return them to the seller and recover the
price or any part thereof which has been paid.

When the buyer has claimed and been granted a remedy in anyone of these ways, no
other remedy can thereafter be granted, without prejudice to the provisions of the
second paragraph of Article 1191.

x x x. (Underscoring supplied)

Petitioners contention that under Article 1191 of the Civil Code, rescission
can no longer be availed of as the vehicle was already in the hands of an
innocent purchaser for value lacks merit. Rescission is proper if one of the
parties to a contract commits a substantial breach of its provisions. It creates
an obligation to return the object of the contract. It can be carried out only when
the one who demands rescission can return whatever he may be obliged to
restore. Rescission abrogates the contract from its inception and requires a
mutual restitution of the benefits received. Petitioner is thus mandated by law
[18]

to give back to respondent the purchase price upon his return of the vehicle.
Records show that at the time respondent opted to rescind the contract, the
vehicle was still in his possession. He returned it to petitioner who, without
objection, accepted it. Accordingly, the 30% down payment equivalent
to P63,600.00, plus the premium for the comprehensive insurance amounting
to P7,374.80 paid by respondent should be returned by petitioner.
As further stated by the Court of Appeals:
Appellants invocation of Article 1191 of the Civil Code in support of his argument
that as the vehicle had been sold to a third party, rescission can no longer ensue is
misplaced.

For, Flores is asking for the refund of the downpayment and payment for insurance
premiums. This brings us to appellants final argument.

Appellants professed excuse from their inability to give refund that refund would
necessitate the return of the subject motor vehicle which is impossible because it is
now in the hands of an innocent purchaser for value miserably fails.

x x x appellant Supercars was paid the balance of the purchase price by RCBC and,
therefore, in addition to the downpayment given by Flores, it had been fully paid for
the vehicle.

Ergo, Supercars had nothing more to do with the vehicle. [19]

However, the lower courts award of P50,000.00 as moral damages

and P25,000.00 as exemplary damages to respondent is erroneous. While no
proof of pecuniary loss is necessary in order that moral damages may be
awarded, the amount of indemnity being left to the discretion of the court, it is
nevertheless essential that the claimant satisfactorily prove the existence of the
factual basis of the damage and its causal relation to defendants acts. Moral
damages are in the category of an award designed to compensate the claimant
for actual injury suffered and not to impose a penalty to the wrongdoer. This
has not been proved by respondent.
In contracts and quasi-contracts, the court may award exemplary damages
if the defendant acted in a wanton, fraudulent, reckless, oppressive, or
malevolent manner. Likewise, respondent failed to establish that petitioner
[20]

acted in such manner.

As to the award of attorneys fees, the same must be deleted since the award
of moral and exemplary damages are eliminated. Moreover, the trial court did
[21]

not give any justification for granting it in its decision. It is now settled that
awards of attorneys fees must be based on findings of fact and law, stated in
the decision of the trial court.[22]

WHEREFORE, the petition is DENIED. The assailed Decision dated

September 20, 1999 and Resolution dated February 1, 2000 of the Court of
Appeals in CA-G.R. CV No. 52177 are AFFIRMED with MODIFICATION. The
award of moral and exemplary damages and attorneys fees are DELETED.
Costs against petitioner.
 SECOND DIVISION

[G.R. No. 152219. October 25, 2004]

NUTRIMIX FEEDS CORPORATION, petitioner, vs. COURT OF APPEALS

and SPOUSES EFREN AND MAURA
EVANGELISTA, respondents.

DECISION
CALLEJO, SR., J.:

For review on certiorari is the Decision[1] of the Court of Appeals in CA-G.R.

CV No. 59615 modifying, on appeal, the Joint Decision[2] of the Regional Trial
Court of Malolos, Bulacan, Branch 9, in Civil Case No. 1026-M-93[3] for sum of
money and damages with prayer for issuance of writ of preliminary attachment,
and Civil Case No. 49-M-94[4] for damages. The trial court dismissed the
complaint of the respondents, ordering them to pay the petitioner the unpaid
value of the assorted animal feeds delivered to the former by the latter, with
legal interest thereon from the filing of the complaint, including attorneys fees.

The Factual Antecedents

On April 5, 1993, the Spouses Efren and Maura Evangelista, the

respondents herein, started to directly procure various kinds of animal feeds
from petitioner Nutrimix Feeds Corporation. The petitioner gave the
respondents a credit period of thirty to forty-five days to postdate checks to be
issued in payment for the delivery of the feeds. The accommodation was made
apparently because of the company presidents close friendship with Eugenio
Evangelista, the brother of respondent Efren Evangelista. The various animal
feeds were paid and covered by checks with due dates from July 1993 to
September 1993. Initially, the respondents were good paying customers. In
some instances, however, they failed to issue checks despite the deliveries of
animal feeds which were appropriately covered by sales invoices.
Consequently, the respondents incurred an aggregate unsettled account with
the petitioner in the amount of P766,151.00. The breakdown of the unpaid
obligation is as follows:
Sales Invoice Number Date Amount
 21334 June 23, 1993 P 7,260.00
21420 June 26, 1993 6,990.00
21437 June 28, 1993 41,510.00
21722 July 12, 1993 45,185.00
22048 July 26, 1993 44,540.00
22054 July 27, 1993 45,246.00
22186 August 2, 1993 84,900.00
Total: P275,631.00
=========
Bank Check Number Due Date Amount
United Coconut
Planters Bank BTS052084 July 30, 1993 P 47,760.00
-do- BTS052087 July 30, 1993 131,340.00
-do- BTS052091 July 30, 1993 59,700.00
-do- BTS062721 August 4, 1993 47,860.00
-do- BTS062720 August 5, 1993 43,780.00
-do- BTS062774 August 6, 1993 15,000.00
-do- BTS062748 September 11, 1993 47,180.00
-do- BTS062763 September 11, 1993 48,440.00
-do- BTS062766 September 18, 1993 49,460.00
Total: P490,520.00
=========
When the above-mentioned checks were deposited at the petitioners
depository bank, the same were, consequently, dishonored because
respondent Maura Evangelista had already closed her account. The petitioner
made several demands for the respondents to settle their unpaid obligation, but
the latter failed and refused to pay their remaining balance with the petitioner.
On December 15, 1993, the petitioner filed with the Regional Trial Court of
Malolos, Bulacan, a complaint, docketed as Civil Case No. 1026-M-93, against
the respondents for sum of money and damages with a prayer for issuance of
writ of preliminary attachment. In their answer with counterclaim, the
respondents admitted their unpaid obligation but impugned their liability to the
petitioner. They asserted that the nine checks issued by respondent Maura
Evangelista were made to guarantee the payment of the purchases, which was
previously determined to be procured from the expected proceeds in the sale
of their broilers and hogs. They contended that inasmuch as the sudden and
massive death of their animals was caused by the contaminated products of the
petitioner, the nonpayment of their obligation was based on a just and legal
ground.
 On January 19, 1994, the respondents also lodged a complaint for damages
against the petitioner, docketed as Civil Case No. 49-M-94, for the untimely and
unforeseen death of their animals supposedly effected by the adulterated
animal feeds the petitioner sold to them. Within the period to file an answer, the
petitioner moved to dismiss the respondents complaint on the ground of litis
pendentia. The trial court denied the same in a Resolution[5] dated April 26,
1994, and ordered the consolidation of the case with Civil Case No. 1026-M-
93. On May 13, 1994, the petitioner filed its Answer with Counterclaim, alleging
that the death of the respondents animals was due to the widespread pestilence
in their farm. The petitioner, likewise, maintained that it received information
that the respondents were in an unstable financial condition and even sold their
animals to settle their obligations from other enraged and insistent creditors. It,
moreover, theorized that it was the respondents who mixed poison to its feeds
to make it appear that the feeds were contaminated.
A joint trial thereafter ensued.
During the hearing, the petitioner presented Rufino Arenas, Nutrimix
Assistant Manager, as its lone witness. He testified that on the first week of
August 1993, Nutrimix President Efren Bartolome met the respondents to
discuss the possible settlement of their unpaid account. The said respondents
still pleaded to the petitioner to continue to supply them with animal feeds
because their livestock were supposedly suffering from a disease.[6]
For her part, respondent Maura Evangelista testified that as direct buyers
of animal feeds from the petitioner, Mr. Bartolome, the company president, gave
them a discount of P12.00 per bag and a credit term of forty-five to seventy-five
days.[7] For the operation of the respondents poultry and piggery farm, the
assorted animal feeds sold by the petitioner were delivered in their residence
and stored in an adjacent bodega made of concrete wall and galvanized iron
sheet roofing with monolithic flooring.[8]
It appears that in the morning of July 26, 1993, three various kinds of animal
feeds, numbering 130 bags, were delivered to the residence of the respondents
in Sta. Rosa, Marilao, Bulacan. The deliveries came at about 10:00 a.m. and
were fed to the animals at approximately 1:30 p.m. at the respondents farm in
Balasing, Sta. Maria, Bulacan. At about 8:30 p.m., respondent Maura
Evangelista received a radio message from a worker in her farm, warning her
that the chickens were dying at rapid intervals. When the respondents arrived
at their farm, they witnessed the death of 18,000 broilers, averaging 1.7 kilos in
weight, approximately forty-one to forty-five days old. The broilers then had a
prevailing market price of P46.00 per kilo.[9]
 On July 27, 1993, the respondents received another delivery of 160 bags of
animal feeds from the petitioner, some of which were distributed to the contract
growers of the respondents. At that time, respondent Maura Evangelista
requested the representative of the petitioner to notify Mr. Bartolome of the fact
that their broilers died after having been fed with the animal feeds delivered by
the petitioner the previous day. She, likewise, asked that a technician or
veterinarian be sent to oversee the untoward occurrence. Nevertheless, the
various feeds delivered on that day were still fed to the animals. On July 27,
1993, the witness recounted that all of the chickens and hogs died.[10] Efren
Evangelista suffered from a heart attack and was hospitalized as a
consequence of the massive death of their animals in the farm. On August 2,
1993, another set of animal feeds were delivered to the respondents, but the
same were not returned as the latter were not yet cognizant of the fact that the
cause of the death of their animals was the polluted feeds of the petitioner.[11]
When respondent Maura Evangelista eventually met with Mr. Bartolome on
an undisclosed date, she attributed the improbable incident to the animal feeds
supplied by the petitioner, and asked Mr. Bartolome for indemnity for the
massive death of her livestock. Mr. Bartolome disavowed liability thereon and,
thereafter, filed a case against the respondents.[12]
After the meeting with Mr. Bartolome, respondent Maura Evangelista
requested Dr. Rolando Sanchez, a veterinarian, to conduct an inspection in the
respondents poultry. On October 20, 1993, the respondents took ample
amounts remaining from the feeds sold by the petitioner and furnished the same
to various government agencies for laboratory examination.
Dr. Juliana G. Garcia, a doctor of veterinary medicine and the Supervising
Agriculturist of the Bureau of Animal Industry, testified that on October 20, 1993,
sample feeds for chickens contained in a pail were presented to her for
examination by respondent Efren Evangelista and a certain veterinarian.[13] The
Clinical Laboratory Report revealed that the feeds were negative of
salmonella[14] and that the very high aflatoxin level[15] found therein would not
cause instantaneous death if taken orally by birds.
Dr. Rodrigo Diaz, the veterinarian who accompanied Efren at the Bureau of
Animal Industry, testified that sometime in October 1993, Efren sought for his
advice regarding the death of the respondents chickens. He suggested that the
remaining feeds from their warehouse be brought to a laboratory for
examination. The witness claimed that the feeds brought to the laboratory came
from one bag of sealed Nutrimix feeds which was covered with a sack.
Dr. Florencio Isagani S. Medina III, Chief Scientist Research Specialist of
the Philippine Nuclear Research Institute, informed the trial court that
respondent Maura Evangelista and Dr. Garcia brought sample feeds and four
live and healthy chickens to him for laboratory examination. In his Cytogenetic
Analysis,[16] Dr. Medina reported that he divided the chickens into two
categories, which he separately fed at 6:00 a.m. with the animal feeds of a
different commercial brand and with the sample feeds supposedly supplied by
the petitioner. At noon of the same day, one of the chickens which had been
fed with the Nutrimix feeds died, and a second chicken died at 5:45 p.m. of the
same day. Samples of blood and bone marrow were taken for chromosome
analysis, which showed pulverized chromosomes both from bone marrow and
blood chromosomes. On cross-examination, the witness admitted that the
feeds brought to him were merely placed in a small unmarked plastic bag and
that he had no way of ascertaining whether the feeds were indeed
manufactured by the petitioner.
Another witness for the respondents, Aida Viloria Magsipoc, Forensic
Chemist III of the Forensic Chemist Division of the National Bureau of
Investigation, affirmed that she performed a chemical analysis[17] of the animal
feeds, submitted to her by respondent Maura Evangelista and Dr. Garcia in a
sealed plastic bag, to determine the presence of poison in the said specimen.
The witness verified that the sample feeds yielded positive results to the tests
for COUMATETRALYL Compound,[18] the active component of RACUMIN, a
brand name for a commercially known rat poison.[19] According to the witness,
the presence of the compound in the chicken feeds would be fatal to internal
organs of the chickens, as it would give a delayed blood clotting effect and
eventually lead to internal hemorrhage, culminating in their inevitable death.
Paz Austria, the Chief of the Pesticide Analytical Section of the Bureau of
Plants Industry, conducted a laboratory examination to determine the presence
of pesticide residue in the animal feeds submitted by respondent Maura
Evangelista and Dr. Garcia. The tests disclosed that no pesticide residue was
detected in the samples received[20] but it was discovered that the animal feeds
were positive for Warfarin, a rodenticide (anticoagulant), which is the chemical
family of Coumarin.[21]
After due consideration of the evidence presented, the trial court ruled in
favor of the petitioner. The dispositive portion of the decision reads:

WHEREFORE, in light of the evidence on record and the laws/jurisprudence

applicable thereon, judgment is hereby rendered:

1) in Civil Case No. 1026-M-93, ordering defendant spouses Efren and Maura
Evangelista to pay unto plaintiff Nutrimix Feeds Corporation the amount
of P766,151.00 representing the unpaid value of assorted animal feeds delivered by
the latter to and received by the former, with legal interest thereon from the filing of
 the complaint on December 15, 1993 until the same shall have been paid in full, and
the amount of P50,000.00 as attorneys fees. Costs against the aforenamed
defendants; and
2) dismissing the complaint as well as counterclaims in Civil Case No. 49-M-94 for
inadequacy of evidence to sustain the same. No pronouncement as to costs.

SO ORDERED.[22]

In finding for the petitioner, the trial court ratiocinated as follows:

On the strength of the foregoing disquisition, the Court cannot sustain the
Evangelistas contention that Nutrimix is liable under Articles 1561 and 1566 of the
Civil Code governing hidden defects of commodities sold. As already explained, the
Court is predisposed to believe that the subject feeds were contaminated sometime
between their storage at the bodega of the Evangelistas and their consumption by the
poultry and hogs fed therewith, and that the contamination was perpetrated by
unidentified or unidentifiable ill-meaning mischief-maker(s) over whom Nutrimix had
no control in whichever way.

All told, the Court finds and so holds that for inadequacy of proof to the contrary,
Nutrimix was not responsible at all for the contamination or poisoning of the feeds
supplied by it to the Evangelistas which precipitated the mass death of the latters
chickens and hogs. By no means and under no circumstance, therefore, may Nutrimix
be held liable for the sundry damages prayed for by the Evangelistas in their
complaint in Civil Case No. 49-M-94 and answer in Civil Case No. 1026-M-93. In
fine, Civil Case No. 49-M-94 deserves dismissal.

Parenthetically, vis--vis the fulminations of the Evangelistas in this specific regard,

the Court does not perceive any act or omission on the part of Nutrimix constitutive of
abuse of rights as would render said corporation liable for damages under Arts. 19 and
21 of the Civil Code. The alleged callous attitude and lack of concern of Nutrimix
have not been established with more definitiveness.

As regards Civil Case No. 1026-M-93, on the other hand, the Court is perfectly
convinced that the deliveries of animal feeds by Nutrimix to the Evangelistas
constituted a simple contract of sale, albeit on a continuing basis and on terms or
installment payments.[23]

Undaunted, the respondents sought a review of the trial courts decision to

the Court of Appeals (CA), principally arguing that the trial court erred in holding
that they failed to prove that their broilers and hogs died as a result of
consuming the petitioners feeds.
 On February 12, 2002, the CA modified the decision of the trial court.
The fallo of the decision reads:

WHEREFORE, premises considered, the appealed decision is hereby MODIFIED

such that the complaint in Civil Case No. 1026-M-93 is DISMISSED for lack of
merit.

SO ORDERED.[24]

In dismissing the complaint in Civil Case No. 1026-M-93, the CA ruled that
the respondents were not obligated to pay their outstanding obligation to the
petitioner in view of its breach of warranty against hidden defects. The CA gave
much credence to the testimony of Dr. Rodrigo Diaz, who attested that the
sample feeds distributed to the various governmental agencies for laboratory
examination were taken from a sealed sack bearing the brand name Nutrimix.
The CA further argued that the declarations of Dr. Diaz were not effectively
impugned during cross-examination, nor was there any contrary evidence
adduced to destroy his damning allegations.
On March 7, 2002, the petitioner filed with this Court the instant petition for
review on the sole ground that

THE HONORABLE COURT OF APPEALS ERRED IN CONCLUDING THAT

THE CLAIMS OF HEREIN PETITIONER FOR COLLECTION OF SUM OF
MONEY AGAINST PRIVATE RESPONDENTS MUST BE DENIED BECAUSE
OF HIDDEN DEFECTS.

The Present Petition

The petitioner resolutely avers that the testimony of Dr. Diaz can hardly be
considered as conclusive evidence of hidden defects that can be attributed to
the petitioner. Parenthetically, the petitioner asserts, assuming that the sample
feeds were taken from a sealed sack bearing the brand name Nutrimix, it cannot
decisively be presumed that these were the same feeds brought to the
respondents farm and given to their chickens and hogs for consumption.
It is the contention of the respondents that the appellate court correctly
ordered the dismissal of the complaint in Civil Case No. 1026-M-93. They
further add that there was sufficient basis for the CA to hold the petitioner guilty
of breach of warranty thereby releasing the respondents from paying their
outstanding obligation.
 The Ruling of the Court

Oft repeated is the rule that the Supreme Court reviews only errors of law
in petitions for review on certiorari under Rule 45. However, this rule is not
absolute. The Court may review the factual findings of the CA should they be
contrary to those of the trial court. Conformably, this Court may review findings
of facts when the judgment of the CA is premised on a misapprehension of
facts.[25]
The threshold issue is whether or not there is sufficient evidence to hold the
petitioner guilty of breach of warranty due to hidden defects.
The petition is meritorious.
The provisions on warranty against hidden defects are found in Articles
1561 and 1566 of the New Civil Code of the Philippines, which read as follows:

Art. 1561. The vendor shall be responsible for warranty against hidden defects which
the thing sold may have, should they render it unfit for the use for which it is
intended, or should they diminish its fitness for such use to such an extent that, had
the vendee been aware thereof, he would not have acquired it or would have given a
lower price for it; but said vendor shall not be answerable for patent defects or those
which may be visible, or for those which are not visible if the vendee is an expert
who, by reason of his trade or profession, should have known them.

Art. 1566. The vendor is responsible to the vendee for any hidden faults or defects in
the thing sold, even though he was not aware thereof.

This provision shall not apply if the contrary has been stipulated, and the vendor was
not aware of the hidden faults or defects in the thing sold.

A hidden defect is one which is unknown or could not have been known to
the vendee.[26] Under the law, the requisites to recover on account of hidden
defects are as follows:
(a) the defect must be hidden;
(b) the defect must exist at the time the sale was made;
(c) the defect must ordinarily have been excluded from the contract;
(d) the defect, must be important (renders thing UNFIT or considerably decreases
FITNESS);
(e) the action must be instituted within the statute of limitations.[27]

In the sale of animal feeds, there is an implied warranty that it is reasonably

fit and suitable to be used for the purpose which both parties
contemplated.[28] To be able to prove liability on the basis of breach of implied
warranty, three things must be established by the respondents. The first is that
they sustained injury because of the product; the second is that the injury
occurred because the product was defective or unreasonably unsafe;
and finally, the defect existed when the product left the hands of the
petitioner.[29] A manufacturer or seller of a product cannot be held liable for any
damage allegedly caused by the product in the absence of any proof that the
product in question was defective.[30] The defect must be present upon the
delivery or manufacture of the product;[31] or when the product left the sellers or
manufacturers control;[32] or when the product was sold to the purchaser;[33] or
the product must have reached the user or consumer without substantial
change in the condition it was sold. Tracing the defect to the petitioner requires
some evidence that there was no tampering with, or changing of the animal
feeds. The nature of the animal feeds makes it necessarily difficult for the
respondents to prove that the defect was existing when the product left the
premises of the petitioner.
A review of the facts of the case would reveal that the petitioner delivered
the animal feeds, allegedly containing rat poison, on July 26, 1993; but it is
astonishing that the respondents had the animal feeds examined only on
October 20, 1993, or barely three months after their broilers and hogs had died.
On cross-examination, respondent Maura Evangelista testified in this manner:
Atty. Cruz:
Q Madam Witness, you said in the last hearing that believing that the 250 bags of
feeds delivered to (sic) the Nutrimix Feeds Corporation on August 2, 1993 were
poison (sic), allegedly your husband Efren Evangelista burned the same with the
chicken[s], is that right?
A Yes, Sir. Some, Sir.
Q And is it not a fact, Madam Witness, that you did not, as according to you, used (sic)
any of these deliveries made on August 2, 1993?
A We were able to feed (sic) some of those deliveries because we did not know yet
during that time that it is the cause of the death of our chicks (sic), Sir.
Q But according to you, the previous deliveries were not used by you because you
believe (sic) that they were poison (sic)?
A Which previous deliveries, Sir[?]
Q Those delivered on July 26 and 22 (sic), 1993?
A Those were fed to the chickens, Sir. This is the cause of the death of the chickens.
Q And you stated that this last delivery on August 2 were poison (sic) also and you did
not use them, is that right?
Atty. Roxas:
That is misleading.
 Atty. Cruz:
She stated that.
Atty. Roxas:
She said some were fed because they did not know yet of the poisoning.
Court:
And when the chickens died, they stopped naturally feeding it to the chickens.
Atty. Cruz:
Q You mean to say, Madam Witness, that although you believe (sic) that the chickens
were allegedly poisoned, you used the same for feeding your animals?
A We did not know yet during that time that the feeds contained poison, only during
that time when we learned about the same after the analysis.
Q Therefore you have known only of the alleged poison in the Nutrimix Feeds only
after you have caused the analysis of the same?
A Yes, Sir.
Q When was that, Madam Witness?
A I cannot be sure about the exact time but it is within the months of October to
November, Sir.
Q So, before this analysis of about October and November, you were not aware that
the feeds of Nutrimix Feeds Corporation were, according to you, with poison?
A We did not know yet that it contained poison but we were sure that the feeds were
the cause of the death of our animals.[34]

We find it difficult to believe that the feeds delivered on July 26 and 27, 1993
and fed to the broilers and hogs contained poison at the time they reached the
respondents. A difference of approximately three months enfeebles the
respondents theory that the petitioner is guilty of breach of warranty by virtue of
hidden defects. In a span of three months, the feeds could have already been
contaminated by outside factors and subjected to many conditions
unquestionably beyond the control of the petitioner. In fact, Dr. Garcia, one of
the witnesses for the respondents, testified that the animal feeds submitted to
her for laboratory examination contained very high level of aflatoxin, possibly
caused by mold (aspergillus flavus).[35] We agree with the contention of the
petitioner that there is no evidence on record to prove that the animal feeds
taken to the various governmental agencies for laboratory examination were
the same animal feeds given to the respondents broilers and hogs for their
consumption. Moreover, Dr. Diaz even admitted that the feeds that were
submitted for analysis came from a sealed bag. There is simply no evidence to
show that the feeds given to the animals on July 26 and 27, 1993
were identical to those submitted to the expert witnesses in October 1993.
 It bears stressing, too, that the chickens brought to the Philippine Nuclear
Research Institute for laboratory tests were healthy animals, and were not the
ones that were ostensibly poisoned. There was even no attempt to have the
dead fowls examined. Neither was there any analysis of the stomach of the
dead chickens to determine whether the petitioners feeds really caused their
sudden death. Mere sickness and death of the chickens is not satisfactory
evidence in itself to establish a prima facie case of breach of warranty.[36]
Likewise, there was evidence tending to show that the respondents
combined different kinds of animal feeds and that the mixture was given to the
animals. Respondent Maura Evangelista testified that it was common practice
among chicken and hog raisers to mix animal feeds. The testimonies of
respondent Maura Evangelista may be thus summarized:
Cross-Examination
Atty. Cruz:
Q Because, Madam Witness, you ordered chicken booster mash from Nutrimix Feeds
Corporation because in July 1993 you were taking care of many chickens, as a
matter of fact, majority of the chickens you were taking care [of] were chicks and
not chickens which are marketable?
A What I can remember was that I ordered chicken booster mash on that month of July
1993 because we have some chicks which have to be fed with chicken booster
mash and I now remember that on the particular month of July 1993 we ordered
several bags of chicken booster mash for the consumption also of our chicken in
our other poultry and at the same time they were also used to be mixed with the
feeds that were given to the hogs.
Q You mean to say [that], as a practice, you are mixing chicken booster mash which is
specifically made for chick feeds you are feeding the same to the hogs, is that
what you want the Court to believe?
A Yes, Sir, because when you mix chicken booster mash in the feeds of hogs
there is a better result, Sir, in raising hogs.[37]
Re-Direct Examination
Atty. Roxas:
Q Now, you mentioned that shortly before July 26 and 27, 1993, various types of
Nutrimix feeds were delivered to you like chicks booster mash, broiler starter mash
and hog finisher or hog grower mash. What is the reason for simultaneous
deliveries of various types of feeds?
A Because we used to mix all those together in one feeding, Sir.
Q And what is the reason for mixing the chick booster mash with broiler starter mash?
A So that the chickens will get fat, Sir.
Re-Cross Examination
 Atty. Cruz:
Q Madam Witness, is it not a fact that the mixing of these feeds by you is your own
concuction (sic) and without the advice of a veterinarian expert to do so?
A That is common practice among raisers to mix two feeds, Sir.
Q By yourself, Madam Witness, who advised you to do the mixing of these two types of
feeds for feeding your chickens?
A That is common practice of chicken raisers, Sir.[38]

Even more surprising is the fact that during the meeting with Nutrimix
President Mr. Bartolome, the respondents claimed that their animals were
plagued by disease, and that they needed more time to settle their obligations
with the petitioner. It was only after a few months that the respondents changed
their justification for not paying their unsettled accounts, claiming anew that their
animals were poisoned with the animal feeds supplied by the petitioner.
The volte-face of the respondents deserves scant consideration for having
been conjured as a mere afterthought.
In essence, we hold that the respondents failed to prove that the petitioner
is guilty of breach of warranty due to hidden defects. It is, likewise, rudimentary
that common law places upon the buyer of the product the burden of proving
that the seller of the product breached its warranty.[39] The bevy of expert
evidence adduced by the respondents is too shaky and utterly insufficient to
prove that the Nutrimix feeds caused the death of their animals. For these
reasons, the expert testimonies lack probative weight. The respondents case
of breach of implied warranty was fundamentally based upon the circumstantial
evidence that the chickens and hogs sickened, stunted, and died after eating
Nutrimix feeds; but this was not enough to raise a reasonable supposition that
the unwholesome feeds were the proximate cause of the death with that degree
of certainty and probability required.[40] The rule is well-settled that if there be
no evidence, or if evidence be so slight as not reasonably to warrant inference
of the fact in issue or furnish more than materials for a mere conjecture, the
court will not hesitate to strike down the evidence and rule in favor of the other
party.[41] This rule is both fair and sound. Any other interpretation of the law
would unloose the courts to meander aimlessly in the arena of speculation.[42]
It must be stressed, however, that the remedy against violations of warranty
against hidden defects is either to withdraw from the contract (accion
redhibitoria) or to demand a proportionate reduction of the price (accion quanti
minoris), with damages in either case.[43] In any case, the respondents have
already admitted, both in their testimonies and pleadings submitted, that they
are indeed indebted to the petitioner for the unpaid animal feeds delivered to
them. For this reason alone, they should be held liable for their unsettled
obligations to the petitioner.
WHEREFORE, in light of all the foregoing, the petition is GRANTED. The
assailed Decision of the Court of Appeals, dated February 12, 2002, is
REVERSED and SET ASIDE. The Decision of the Regional Trial Court of
Malolos, Bulacan, Branch 9, dated January 12, 1998, is REINSTATED. No
costs.
SO ORDERED.