Republic of the Philippines

SUPREME COURT

THIRD DIVISION

G.R. No. 146997. April 26, 2005

SPOUSES GODOFREDO & DOMINICA FLANCIA, Petitioners,

vs.
COURT OF APPEALS & WILLIAM ONG GENATO, Respondents.

DECISION

CORONA, J.:

Before us is a petition for review under Rule 45 of the Rules of Court, seeking to set aside the
October 6, 2000 decision of the Court of Appeals in CA-G.R. CV No. 56035.
1

The facts as outlined by the trial court follow.

2

This is an action to declare null and void the mortgage executed by defendant Oakland
Development Resources Corp. xxx in favor of defendant William Ong Genato over the house and
lot plaintiffs spouses Godofredo and Dominica Flancia purchased from defendant corporation.

In the complaint, plaintiffs allege that they purchased from defendant corporation a parcel of
land known as Lot 12, Blk. 3, Phase III-A containing an area of 128.75 square meters situated in
Prater Village Subd. II located at Brgy. Old Balara, Quezon City; that by virtue of the contract of
sale, defendant corporation authorized plaintiffs to transport all their personal belongings to
their house at the aforesaid lot; that on December 24, 1992, plaintiffs received a copy of the
execution foreclosing [the] mortgage issued by the RTC, Branch 98 ordering defendant Sheriff
Sula to sell at public auction several lots formerly owned by defendant corporation including
subject lot of plaintiffs; that the alleged mortgage of subject lot is null and void as it is not
authorized by plaintiffs pursuant to Art. 2085 of the Civil Code which requires that the mortgagor
must be the absolute owner of the mortgaged property; that as a consequence of the nullity of
said mortgage, the execution foreclosing [the] mortgage is likewise null and void; that plaintiffs
advised defendants to exclude subject lot from the auction sale but the latter refused. Plaintiffs
likewise prayed for damages in the sum of ₱50,000.00.

Defendant William Ong Genato filed a motion to dismiss the complaint which was opposed by
the plaintiffs and denied by the Court in its Order dated February 16, 1993.

Defendant Genato, then filed his answer averring that on May 19, 1989 co-defendant Oakland
Development Resources Corporation mortgaged to Genato two (2) parcels of land covered by
TCT Nos. 356315 and 366380 as security and guaranty for the payment of a loan in the sum of
₱2,000,000.00; that it appears in the complaint that the subject parcel of land is an unsubdivided
portion of the aforesaid TCT No. 366380 which covers an area of 4,334 square meters more or
less; that said real estate mortgage has been duly annotated at the back of TCT No. 366380 on
May 22, 1989; that for non-payment of the loan of ₱2,000,000.00 defendant Genato filed an
action for foreclosure of real estate mortgage against co-defendant corporation; that after [trial],
a decision was rendered by the Regional Trial Court of Quezon City, Branch 98 against defendant
corporation which decision was affirmed by the Honorable Court of Appeals; that the decision of
the Court of Appeals has long become final and thus, the Regional Trial Court, Brach 98 of
Quezon City issued an Order dated December 7, 1992 ordering defendant Sheriff Ernesto Sula to
cause the sale at public auction of the properties covered by TCT No. 366380 for failure of
defendant corporation to deposit in Court the money judgment within ninety (90) days from
receipt of the decision of the Court of Appeals; that plaintiffs have no cause of action against
defendant Genato; that the alleged plaintiffs’ Contract to Sell does not appear to have been
registered with the Register of Deeds of Quezon City to affect defendant Genato and the latter is
thus not bound by the plaintiffs’ Contract to Sell; that the registered mortgage is superior to
plaintiffs’ alleged Contract to Sell and it is sufficient for defendant Genato as mortgagee to know
that the subject TCT No. 366380 was clean at the time of the execution of the mortgage contract
with defendant corporation and defendant Genato is not bound to go beyond the title to look for
flaws in the mortgagor’s title; that plaintiffs’ alleged Contract to Sell is neither a mutual promise
to buy and sell nor a Contract of Sale. Ownership is retained by the seller, regardless of delivery
and is not to pass until full payment of the price; that defendant Genato has not received any
advice from plaintiffs to exclude the subject lot from the auction sale, and by way of
counterclaim, defendant Genato prays for ₱150,000.00 moral damages and ₱20,000.00 for
attorney’s fees.

On the other hand, defendant Oakland Development Resources Corporation likewise filed its
answer and alleged that the complaint states no cause of action; xxx Defendant corporation also
prays for attorney’s fees of ₱20,000.00 in its counterclaim.3

After trial, the assisting judge of the trial court rendered a decision dated August 16, 1996, the
4

decretal portion of which provided:

Wherefore, premises considered, judgment is hereby rendered.

1) Ordering defendant Oakland Dev’t. Resources Corporation to pay plaintiffs:

a) the amount of ₱10,000.00 representing payment for the ‘option to purchase lot’;

b) the amount of ₱140,000.00 representing the first downpayment of the contract price;

c) the amount of ₱20,520.80 representing five monthly amortizations for February, March, April,
May and June 1990;

d) the amount of ₱3,000.00 representing amortization for November 1990; all plus legal interest
from the constitution of the mortgage up to the time the instant case was filed.

2) Ordering said defendant corporation to pay further to plaintiffs the sum of ₱30,000.00 for
moral damages, ₱10,000.00 for exemplary damages and ₱20,000.00 for and as reasonable
attorney’s fees plus cost;

3) Dismissing defendant corporation’s counterclaim;

4) Dismissing defendant Genato’s counterclaim. 5

On motion for reconsideration, the regular presiding judge set aside the judgment of the
assisting judge and rendered a new one on November 27, 1996, the decretal portion of which
read:

WHEREFORE, premises considered, the Motion for Reconsideration is hereby GRANTED. The
decision dated August 16, 1996 is hereby set aside and a new one entered in favor of the
plaintiffs, declaring the subject mortgage and the foreclosure proceedings held thereunder as
null and void insofar as they affect the superior right of the plaintiffs over the subject lot, and
ordering as follows:

1. Defendant Oakland Development Resources to pay to plaintiffs the amount of ₱20,000.00 for
litigation-related expenses;

2. Ordering defendant Sheriff Ernesto L. Sula to desist from conducting further proceedings in
the extra-judicial foreclosure insofar as they affect the plaintiffs, or, in the event that title has
been consolidated in the name of defendant William O. Genato, ordering said defendant to
reconvey to plaintiffs the title corresponding to Lot 12, Blk. 3, Phase III-A of Prater Village [Subd.
II], located in Old Balara, Quezon City, containing an area of 128.75 square meters; and

3. Dismissing the counterclaims of defendants Oakland and Genato and with costs against them. 6

On appeal, the Court of Appeals issued the assailed order:

Wherefore, foregoing premises considered, the appeal having merit in fact and in law is hereby
GRANTED and the decision of the Trial Court dated 27 November 1996 hereby SET
ASIDE and REVERSED, and its judgment dated August 16, 1996 REINSTATED and AFFIRMED IN
TOTO. No Costs.

SO ORDERED. 7

Hence, this petition.

For resolution before us now are the following issues:

(1) whether or not the registered mortgage constituted over the property was valid;

(2) whether or not the registered mortgage was superior to the contract to sell; and

(3) whether or not the mortgagee was in good faith.

Under the Art. 2085 of the Civil Code, the essential requisites of a contract of mortgage are: (a)
that it be constituted to secure the fulfillment of a principal obligation; (b) that the mortgagor be
the absolute owner of the thing mortgaged; and (c) that the persons constituting the mortgage
have the free disposal of their property, and in the absence thereof, that they be legally
authorized for the purpose.
All these requirements are present in this case.

FIRST ISSUE: WAS THE REGISTERED MORTGAGE VALID?

As to the first essential requisite of a mortgage, it is undisputed that the mortgage was executed
on May 15, 1989 as security for a loan obtained by Oakland from Genato.

As to the second and third requisites, we need to discuss the difference between a contract of
sale and a contract to sell.

In a contract of sale, title to the property passes to the vendee upon the delivery of the thing
sold; in a contract to sell, ownership is, by agreement, reserved by the vendor and is not to pass
to the vendee until full payment of the purchase price.

Otherwise stated, in a contract of sale, the vendor loses ownership over the property and cannot
recover it unless and until the contract is resolved or rescinded; in a contract to sell, title is
retained by the vendor until full payment of the price.
8

In the contract between petitioners and Oakland, aside from the fact that it was denominated as
a contract to sell,the intention of Oakland not to transfer ownership to petitioners until full
payment of the purchase price was very clear. Acts of ownership over the property were
expressly withheld by Oakland from petitioner. All that was granted to them by the "occupancy
permit" was the right to possess it.

Specifically, the contract between Oakland and petitioners stated:

xxx xxx xxx

7. That the BUYER/S may be allowed to enter into and take possession of the property upon
issuance of Occupancy Permit by the OWNER/DEVELOPER exclusively, although title has not yet
passed to the BUYER/S, in which case his possession shall be that of a possessor by mere
tolerance Lessee, subject to certain restrictions contained in this deed.

xxx xxx xxx

13. That the BUYER/S cannot sell, mortgage, cede, transfer, assign or in any manner alienate or
dispose of,in whole or in part, the rights acquired by and the obligations imposed on the
BUYER/S by virtue of this contract, without the express written consent of the
OWNER/DEVELOPER.

xxx xxx xxx

24. That this Contract to Sell shall not in any way [authorize] the BUYER/S to occupy the assigned
house and lot to them. 9

xxx xxx xxx

Clearly, when the property was mortgaged to Genato in May 1989, what was in effect between
Oakland and petitioners was a contract to sell, not a contract of sale. Oakland retained absolute
ownership over the property.

Ownership is the independent and general power of a person over a thing for purposes
recognized by law and within the limits established thereby. According to Art. 428 of the Civil
10

Code, this means that:

The owner has the right to enjoy and dispose of a thing, without other limitations than those
established by law.

xxx xxx xxx

Aside from the jus utendi and the jus abutendi inherent in the right to enjoy the thing, the right
11

to dispose, or the jus disponendi, is the power of the owner to alienate, encumber, transform
and even destroy the thing owned. 12

Because Oakland retained all the foregoing rights as owner of the property, it was entitled
absolutely to mortgage it to Genato. Hence, the mortgage was valid.

SECOND ISSUE: WAS THE REGISTERED MORTGAGE SUPERIOR TO THE CONTRACT TO SELL?

In their memorandum, petitioners cite our ruling in State

Investment House, Inc. v. Court of Appeals to the effect that an unregistered sale is preferred
13

over a registered mortgage over the same property. The citation is misplaced.

This Court in that case explained the rationale behind the rule:

The unrecorded sale between respondents-spouses and SOLID is preferred for the reason that if
the original owner xxx had parted with his ownership of the thing sold then he no longer had
ownership and free disposal of that thing as to be able to mortgage it again.

State Investment House is completely inapplicable to the case at bar. A contract of sale and a
contract to sell are worlds apart. State Investment House clearly pertained to a contract of sale,
not to a contract to sell which was what Oakland and petitioners had. In State Investment House,
ownership had passed completely to the buyers and therefore, the former owner no longer had
any legal right to mortgage the property, notwithstanding the fact that the new owner-buyers
had not registered the sale. In the case before us, Oakland retained absolute ownership over the
property under the contract to sell and therefore had every right to mortgage it.

In sum, we rule that Genato’s registered mortgage was superior to petitioner’s contract to sell,
subject to any liabilities Oakland may have incurred in favor of petitioners by irresponsibly
mortgaging the property to Genato despite its commitments to petitioners under their contract
to sell.

THIRD ISSUE: WAS THE MORTGAGE IN GOOD FAITH?

The third issue involves a factual matter which should not be raised in this petition. Only
questions of law may be raised in a Rule 45 petition. This Court is not a trier of facts. The
resolution of factual issues is the function of the lower courts. We therefore adopt the factual
findings of the Court of Appeals and uphold the good faith of the mortgagee Genato.

RELIANCE ON WHAT APPEARS IN THE TITLE

Just as an innocent purchaser for value may rightfully rely on what appears in the certificate of
title, a mortgagee has the right to rely on what appears in the title presented to him. In the
absence of anything to arouse suspicion, he is under no obligation to look beyond the certificate
and investigate the title of the mortgagor appearing on the face of the said certificate.
14

We agree with the findings and conclusions of the trial court regarding the liabilities of Oakland
in its August 16, 1996 decision, as affirmed by the Court of Appeals:

Anent [plaintiffs’] prayer for damages, the Court finds that defendant corporation is liable to
return to plaintiffs all the installments/payments made by plaintiffs consisting of the amount of
₱10,000.00 representing payment for the ‘option to purchase lot’; the amount of ₱140,000.00
which was the first downpayment; the sum of ₱20,520.80 representing five monthly
amortizations for February, March, April, May and June 1990 and the amount of ₱3,000.00
representing amortization for November 1990 plus legal interest from the time of the mortgage
up to the time this instant case was filed. Further, considering that defendant corporation
wantonly and fraudulently mortgaged the subject property without regard to [plaintiffs’] rights
over the same, said defendant should pay plaintiffs moral damages in the reasonable amount of
₱30,000.00. xxx Furthermore, since defendant [corporation’s] acts have compelled the plaintiffs
to litigate and incur expenses to protect their interest, it should likewise be adjudged to pay
plaintiffs attorney’s fees of ₱20,000.00 under Article 2208 paragraph two (2) of the Civil Code.
15

WHEREFORE, the petition for review is hereby DENIED. The decision of the Court of Appeals
reinstating the August 16, 1996 decision of the trial court is hereby AFFIRMED.

SO ORDERED.

Panganiban, (Chairman), Sandoval-Gutierrez, Carpio-Morales and Garcia, JJ., concur.

THIRD DIVISION

G.R. No. 108346 July 11, 2001

Spouses MARIANO Z. VELARDE and AVELINA D. VELARDE, petitioners,
vs.
COURT OF APPEALS, DAVID A. RAYMUNDO and GEORGE RAYMUNDO, respondents.

PANGANIBAN, J.:

A substantial breach of a reciprocal obligation, like failure to pay the price in the manner
prescribed by the contract, entitled the injured party to rescind the obligation. Rescission
abrogates the contract from its inception and requires a mutual restitution of benefits received.

The Case

Before us is a Petition for Review on Certiorari1 questioning the Decision2 of the Court of Appeals
(CA) in CA-GR CV No. 32991 dated October 9, 1992, as well as its Resolution3 dated December 29,
1992 denying petitioner's motion for reconsideration.4

The dispositive portion of the assailed Decision reads:

"WHEREFORES the Order dated May 15, 1991 is hereby ANNULLED and SET ASIDE and the
Decision dated November 14, 1990 dismissing the [C]omplaint is RESINSTATED. The bonds
posted by plaintiffs-appellees and defendants-appellants are hereby RELEASED."5

The Facts

The factual antecedents of the case, as found by the CA, are as follows:

"x x x. David Raymundo [herein private respondent] is the absolute and registered owner of a
parcel of land, together with the house and other improvements thereon, located at 1918
Kamias St., Dasmariñas Village, Makati and covered by TCT No. 142177. Defendant George
Raymundo [herein private petitioners] is David's father who negotiated with plaintiffs Avelina
and Mariano Velarde [herein petitioners] for the sale of said property, which was, however,
under lease (Exh. '6', p. 232, Record of Civil Case No. 15952).

"On August 8, 1986, a Deed of Sale with Assumption of Mortgage (Exh. 'A'; Exh. '1', pp. 11-12,
Record) was executed by defendant David Raymundo, as vendor, in favor of plaintiff Avelina
Velarde, as vendee, with the following terms and conditions:

'x x x xxx xxx

'That for and in consideration of the amount of EIGHT HUNDRED THOUSAND PESOS
(P800,000.00), Philippine currency, receipt of which in full is hereby acknowledged by the
VENDOR from the VENDEE, to his entire and complete satisfaction, by these presents the
VENDOR hereby SELLS, CEDES, TRANSFERS, CONVEYS AND DELIVERS, freely and voluntarily, with
full warranty of a legal and valid title as provided by law, unto the VENDEE, her heirs, successors
and assigns, the parcel of land mentioned and described above, together with the house and
other improvements thereon.
'That the aforesaid parcel of land, together with the house and other improvements thereon,
were mortgaged by the VENDOR to the BANK OF THE PHILIPPINE ISLANDS, Makati, Metro Manila
to secure the payment of a loan of ONE MILLION EIGHT HUNDRED THOUSAND PESOS
(P1,800,000.00), Philippine currency, as evidenced by a Real Estate Mortgage signed and
executed by the VENDOR in favor of the said Bank of the Philippine Islands, on _____ and which
Real Estate Mortgage was ratified before Notary Public for Makati, _____, as Doc. No. ______,
Page No. _____, Book No. ___, Series of 1986 of his Notarial Register.

'That as part of the consideration of this sale, the VENDEE hereby assumes to pay the mortgage
obligations on the property herein sold in the amount of ONE MILLION EIGHT HUNDRED
THOUSAND PESOS (P1,800,000.00), Philippine currency, in favor of Bank of Philippine Islands, in
the name of the VENDOR, and further agrees to strictly and faithfully comply with all the terms
and conditions appearing in the Real Estate Mortgage signed and executed by the VENDOR in
favor of BPI, including interests and other charges for late payment levied by the Bank, as if the
same were originally signed and executed by the VENDEE.

'It is further agreed and understood by the parties herein that the capital gains tax and
documentary stamps on the sale shall be for the account of the VENDOR; whereas, the
registration fees and transfer tax thereon shall be the account of the VENDEE.' (Exh. 'A', pp.
11-12, Record).'

"On the same date, and as part of the above-document, plaintiff Avelina Velarde, with the
consent of her husband, Mariano, executed an Undertaking (Exh. 'C', pp. 13-14, Record).'

'x x x xxx xxx

'Whereas, as per deed of Sale with Assumption of Mortgage, I paid Mr. David A. Raymundo the
sum of EIGHT HUNDRED THOUSAND PESOS (P800,000.00), Philippine currency, and assume the
mortgage obligations on the property with the Bank of the Philippine Islands in the amount of
ONE MILLION EIGHT HUNDRED THOUSAND PESOS (P1,800,000.00), Philippine currency, in
accordance with the terms and conditions of the Deed of Real Estate Mortgage dated _____,
signed and executed by Mr. David A. Raymundo with the said Bank, acknowledged before Notary
Public for Makati, _____, as Doc. No. _____, Page No. _____, Book No. _____, Series of 1986 of
his Notarial Register.

'WHEREAS, while my application for the assumption of the mortgage obligations on the property
is not yet approved by the mortgagee Bank, I have agreed to pay the mortgage obligations on the
property with the Bank in the name of Mr. David A. Raymundo, in accordance with the terms and
conditions of the said Deed of Real Estate Mortgage, including all interests and other charges for
late payment.

'WHEREAS, this undertaking is being executed in favor of Mr. David A. Raymundo, for purposes
of attesting and confirming our private understanding concerning the said mortgage obligations
to be assumed.

'NOW, THEREFORE, for and in consideration of the foregoing premises, and the assumption of
the mortgage obligations of ONE MILLION EIGHT HUNDRED THOUSAND PESOS (P1,800,000.00),
Philippine currency, with the bank of the Philippine Islands, I, Mrs, Avelina D, Velarde with the
consent of my husband, Mariano Z. Velardo, do hereby bind and obligate myself, my heirs,
successors and assigns, to strictly and faithfully comply with the following terms and conditions:

'1. That until such time as my assumption of the mortgage obligations on the property purchased
is approved by the mortgagee bank, the Bank of the Philippine Islands, I shall continue to pay the
said loan in accordance with the terms and conditions of the Deed of Real Estate Mortgage in the
name of Mr. David A. Raymundo, the original Mortgagor.

'2. That, in the event I violate any of the terms and conditions of the said Deed of Real Estate
Mortgage, I hereby agree that my downpayment of P800,000.00, plus all payments made with
the Bank of the Philippine Islands on the mortgage loan, shall be forfeited in favor of Mr. David A.
Raymundo, as and by way of liquidated damages, without necessity of notice or any judicial
declaration to that effect, and Mr. David A. Raymundo shall resume total and complete
ownership and possession of the property sold by way of Deed of Sale with Assumption of
Mortgage, and the same shall be deemed automatically cancelled and be of no further force or
effect, in the same manner as it (the) same had never been executed or entered into.

'3. That I am executing the Undertaking for purposes of binding myself, my heirs, successors and
assigns, to strictly and faithfully comply with the terms and conditions of the mortgage
obligations with the Bank of the Philippine Islands, and the covenants, stipulations and provisions
of this Undertaking.

'That, David A. Raymundo, the vendor of the property mentioned and identified above, [does]
hereby confirm and agree to the undertakings of the Vendee pertinent to the assumption of the
mortgage obligations by the Vendee with the Bank of the Philippine Islands. (Exh. 'C', pp. 13-14,
Record).'

"This undertaking was signed by Avelina and Mariano Velarde and David Raymundo.

"It appears that the negotiated terms for the payment of the balance of P1.8 million was from
the proceeds of a loan that plaintiffs were to secure from a bank with defendant's help.
Defendants had a standing approved credit line with the Bank of the Philippine Islands (BPI). The
parties agreed to avail of this, subject to BPI's approval of an application for assumption of
mortgage by plaintiffs. Pending BPI's approval o[f] the application, plaintiffs were to continue
paying the monthly interests of the loan secured by a real estate mortgage.

"Pursuant to said agreements, plaintiffs paid BPI the monthly interest on the loan secured by the
aforementioned mortgage for three (3) months as follows: September 19, 1986 at P27,225.00;
October 20, 1986 at P23,000.00; and November 19, 1986 at P23,925.00 (Exh. 'E', 'H' & 'J', pp. 15,
17and 18, Record).

"On December 15, 1986, plaintiffs were advised that the Application for Assumption of Mortgage
with BPI, was not approved (Exh. 'J', p. 133, Record). This prompted plaintiffs not to make any
further payment.
"On January 5, 1987, defendants, thru counsel, wrote plaintiffs informing the latter that their
non-payment to the mortgage bank constitute[d] non-performance of their obligation (Exh. '3', p.
220, Record).

"In a Letter dated January 7, 1987, plaintiffs, thru counsel, responded, as follows:

'This is to advise you, therefore, that our client is willing to pay the balance in cash not later than
January 21, 1987 provided: (a) you deliver actual possession of the property to her not later than
January 15, 1987 for her immediate occupancy; (b) you cause the re- lease of title and mortgage
from the Bank of P.I. and make the title available and free from any liens and encumbrances; and
(c) you execute an absolute deed of sale in her favor free from any liens or encumbrances not
later than January 21, 1987.' (Exhs. 'k', '4', p. 223, Record).

"On January 8, 1987 defendants sent plaintiffs a notarial notice of cancellation/rescission of the
intended saleof the subject property allegedly due to the latter's failure to comply with the terms
and conditions of the Deed of Sale with Assumption of Mortgage and the Undertaking (Exh. '5',
pp. 225-226, Record)."6

Consequently, petitioners filed on February 9, 1987 a Complaint against private respondents for
specific performance, nullity of cancellation, writ of possession and damages. This was docketed
as Civil Case No. 15952 at the Regional Trial Court of Makati, Branch 149. The case was tried and
heard by then Judge Consuelo Ynares-Santiago (now an associate justice of this Court), who
dismissed the Complaint in a Decision dated November 14, 1990.7 Thereafter, petitioners filed a
Motion for Reconsideration.8

Meanwhile, then Judge Ynares-Santiago was promoted to the Court of Appeals and Judge
Salvador S. A. Abad Santos was assigned to the sala she vacated. In an Order dated May 15,
1991,9 Judge Abad Santos granted petitioner's Motion for Reconsideration and directed the
parties to proceed with the sale. He instructed petitioners to pay the balance of P1.8 million to
private respondents who, in turn, were ordered to execute a deed of absolute sale and to
surrender possession of the disputed property to petitioners.

Private respondents appealed to the CA.

Ruling of the Court of Appeal

The CA set aside the Order of Judge Abad Santos and reinstated then Judge Ynares-Santiago's
earlier Decision dismissing petitioners' Complaint. Upholding the validity of the rescission made
by private respondents, the CA explained its ruling in this wise:

"In the Deed of Sale with Assumption of Mortgage, it was stipulated that 'as part of the
consideration of this sale, the VENDEE (Velarde)' would assume to pay the mortgage obligation
on the subject property in the amount of P 1.8 million in favor of BPI in the name of the Vendor
(Raymundo). Since the price to be paid by the Vendee Velarde includes the downpayment of
P800,000.00 and the balance of Pl.8 million, and the balance of Pl.8 million cannot be paid in
cash, Vendee Velarde, as part of the consideration of the sale, had to assume the mortgage
obligation on the subject property. In other words, the assumption of the mortgage obligation is
part of the obligation of Velarde, as vendee, under the contract. Velarde further agreed 'to
strictly and faithfully comply with all the terms and conditions appearing in the Real Estate
Mortgage signed and executed by the VENDOR in favor of BPI x x x as if the same were originally
signed and executed by the Vendee. (p. 2, thereof, p. 12, Record). This was reiterated by Velarde
in the document entitled 'Undertaking' wherein the latter agreed to continue paying said loan in
accordance with the terms and conditions of the Deed of Real Estate Mortgage in the name of
Raymundo. Moreover, it was stipulated that in the event of violation by Velarde of any terms and
conditions of said deed of real estate mortgage, the downpayment of P800,000.00 plus all
payments made with BPI or the mortgage loan would be forfeited and the [D]eed of [S]ale with
[A]ssumption of [M]ortgage would thereby be Cancelled automatically and of no force and effect
(pars. 2 & 3, thereof, pp 13-14, Record).

"From these 2 documents, it is therefore clear that part of the consideration of the sale was the
assumption by Velarde of the mortgage obligation of Raymundo in the amount of Pl.8 million.
This would mean that Velarde had to make payments to BPI under the [D]eed of [R]eal [E]state
[M]ortgage the name of Raymundo. The application with BPI for the approval of the assumption
of mortgage would mean that, in case of approval, payment of the mortgage obligation will now
be in the name of Velarde. And in the event said application is disapproved, Velarde had to pay
in full. This is alleged and admitted in Paragraph 5 of the Complaint. Mariano Velarde likewise
admitted this fact during the hearing on September 15, 1997 (p. 47, t.s.n., September 15, 1987;
see also pp. 16-26, t.s.n., October 8, 1989). This being the case, the non-payment of the
mortgage obligation would result in a violation of the contract. And, upon Velarde's failure to pay
the agreed price, the[n] Raymundo may choose either of two (2) actions - (1) demand fulfillment
of the contract, or (2) demand its rescission (Article 1191, Civil Code).

"The disapproval by BPI of the application for assumption of mortgage cannot be used as an
excuse for Velarde's non-payment of the balance of the purchase price. As borne out by the
evidence, Velarde had to pay in full in case of BPI's disapproval of the application for assumption
of mortgage. What Velarde should have done was to pay the balance of P1.8 million. Instead,
Velarde sent Raymundo a letter dated January 7, 1987 (Exh. 'K', '4') which was strongly given
weight by the lower court in reversing the decision rendered by then Judge Ynares-Santiago. In
said letter, Velarde registered their willingness to pay the balance in cash but enumerated 3 new
conditions which, to the mind of this Court, would constitute a new undertaking or new
agreement which is subject to the consent or approval of Raymundo. These 3 conditions were
not among those previously agreed upon by Velarde and Raymundo. These are mere offers or, at
most, an attempt to novate. But then again, there can be no novation because there was no
agreement of all the parties to the new contract (Garcia, Jr. vs. Court of Appeals, 191 SCRA 493).

"It was likewise agreed that in case of violation of the mortgage obligation, the Deed of Sale with
Assumption of Mortgage would be deemed 'automatically cancelled and of no further force and
effect, as if the same had never been executed or entered into.' While it is true that even if the
contract expressly provided for automatic rescission upon failure to pay the price, the vendee
may still pay, he may do so only for as long as no demand for rescission of the contract has been
made upon him either judicially or by a notarial act (Article 1592, Civil Code). In the case at bar,
Raymundo sent Velarde notarial notice dated January 8, 1987 of cancellation/rescission of the
contract due to the latter's failure to comply with their obligation. The rescission was justified in
view of Velarde's failure to pay the price (balance) which is substantial and fundamental as to
defeat the object of the parties in making the agreement. As adverted to above, the agreement
of the parties involved a reciprocal obligation wherein the obligation of one is a resolutory
condition of the obligation of the other, the non-fulfillment of which entitles the other party to
rescind the contract (Songcuan vs. IAC, 191 SCRA 28). Thus, the non-payment of the mortgage
obligation by appellees Velarde would create a right to demand payment or to rescind the
contract, or to criminal prosecution (Edca Publishing & Distribution Corporation vs. Santos, 184
SCRA 614). Upon appellee's failure, therefore, to pay the balance, the contract was properly
rescinded (Ruiz vs. IAC, 184 SCRA 720). Consequently, appellees Velarde having violated the
contract, they have lost their right to its enforcement and hence, cannot avail of the action for
specific performance (Voysaw vs. Interphil Promotions, Inc., 148 SCRA 635)."10

Hence, this appeal. 11

The Issues

Petitioners, in their Memorandum,12 interpose the following assignment of errors:

"I.

The Court of Appeals erred in holding that the non-payment of the mortgage obligation resulted
in a breach of the contract.

"II

The Court of Appeals erred in holding that the rescission (resolution) of the contract by private
respondents was justified.

"III

The Court of Appeals erred in holding that petitioners' January 7, 1987 letter gave three 'new
conditions' constituting mere offers or an attempt to novate necessitating a new agreement
between the parties."

The Court's Ruling

The Petition is partially meritorious.

First Issue:

Breach of Contract

Petitioner aver that their nonpayment of private respondents' mortgage obligation did not
constitute a breach of contract, considering that their request to assume the obligation had been
disapproved by the mortgagee bank. Accordingly, payment of the monthly amortizations ceased
to be their obligation and, instead, it devolved upon private respondents again.

However, petitioners did not merely stop paying the mortgage obligations; they also failed to pay
the balance of the purchase price. As admitted by both parties, their agreement mandated that
petitioners should pay the purchase price balance of P1.8 million to private respondents in case
the request to assume the mortgage would be disapproved. Thus, on December 15, 1986, when
petitioners received notice of the bank's disapproval of their application to assume respondents'
mortgage, they should have paid the balance of the P1.8 million loan.

Instead of doing so, petitioners sent a letter to private respondents offering to make such
payment only upon the fulfillment of certain conditions not originally agreed upon in the
contract of sale. Such conditional offer to pay cannot take the place of actual payment as would
discharge the obligation of a buyer under a contract of sale.

In a contract of sale, the seller obligates itself to transfer the ownership of and deliver a
determinate things, and the buyer to pay therefor a price certain in money or its equivalent.13

Private respondents had already performed their obligation through the execution of the Deed
of Sale, which effectively transferred ownership of the property to petitioner through
constructive delivery. Prior physical delivery or possession is not legally required, and the
execution of the Deed of Sale is deemed equivalent to delivery.14

Petitioners, on the other hand, did not perform their correlative obligation of paying the contract
price in the manner agreed upon. Worse, they wanted private respondents to perform
obligations beyond those stipulated in the contract before fulfilling their own obligation to pay
the full purchase price.

Second Issue

Validity of the Rescission

Petitioners likewise claim that the rescission of the contract by private respondents was not
justified, inasmuch as the former had signified their willingness to pay the balance of the
purchase price only a little over a month from the time they were notified of the disapproval of
their application for assumption of mortgage. Petitioners also aver that the breach of the
contract was not substantial as would warrant a rescission. They cite several cases15 in which this
Court declared that rescission of a contract would not be permitted for a slight or casual breach.
Finally, they argue that they have substantially performed their obligation in good faith,
considering that they have already made the initial payment of P800,000 and three (3) monthly
mortgage payments.

As pointed out earlier, the breach committed by petitioners was not so much their nonpayment
of the mortgage obligations, as their nonperformance of their reciprocal obligation to pay the
purchase price under the contract of sale. Private respondents' right to rescind the contract finds
basis in Article 1191 of the Civil Code, which explicitly 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 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 right of rescission of a party to an obligation under Article 1191 of the Civil Code is
predicated on a breach of faith by the other party who violates the reciprocity between
them.16 The breach contemplated in the said provision is the obligor's failure to comply with an
existing obligation.17 When the obligor cannot comply with what is incumbent upon it, the
obligee may seek rescission and, in the absence of any just cause for the court to determine the
period of compliance, the court shall decree the rescission.18

In the present case, private respondents validly exercised their right to rescind the contract,
because of the failure of petitioners to comply with their obligation to pay the balance of the
purchase price. Indubitably, the latter violated the very essence of reciprocity in the contract of
sale, a violation that consequently gave rise to private respondent's right to rescind the same in
accordance with law.

True, petitioners expressed their willingness to pay the balance of the purchase price one month
after it became due; however, this was not equivalent to actual payment as would constitute a
faithful compliance of their reciprocal obligation. Moreover, the offer to pay was conditioned on
the performance by private respondents of additional burdens that had not been agreed upon in
the original contract. Thus, it cannot be said that the breach committed by petitioners was
merely slight or casual as would preclude the exercise of the right to rescind.

Misplaced is petitioners' reliance on the cases19 they cited, because the factual circumstances in
those cases are not analogous to those in the present one. In Song Fo there was, on the part of
the buyer, only a delay of twenty (20) days to pay for the goods delivered. Moreover, the buyer's
offer to pay was unconditional and was accepted by the seller.

In Zepeda, the breach involved a mere one-week delay in paying the balance of 1,000 which was
actually paid.

In Tan, the alleged breach was private respondent's delay of only a few days, which was for the
purpose of clearing the title to the property; there was no reference whatsoever to the
nonpayment of the contract price.

In the instant case, the breach committed did not merely consist of a slight delay in payment or
an irregularity; such breach would not normally defeat the intention of the parties to the
contract. Here, petitioners not only failed to pay the P1.8 million balance, but they also imposed
upon private respondents new obligations as preconditions to the performance of their own
obligation. In effect, the qualified offer to pay was a repudiation of an existing obligation, which
was legally due and demandable under the contract of sale. Hence, private respondents were
left with the legal option of seeking rescission to protect their own interest.

Mutual Restitution

Required in Rescission
As discussed earlier, the breach committed by petitioners was the nonperformance of a
reciprocal obligation, not a violation of the terms and conditions of the mortgage contract.
Therefore, the automatic rescission and forfeiture of payment clauses stipulated in the contract
does not apply. Instead, Civil Code provisions shall govern and regulate the resolution of this
controversy.

Considering that the rescission of the contract is based on Article 1191 of the Civil Code, mutual
restitution is required to bring back the parties to their original situation prior to the inception of
the contract. Accordingly, the initial payment of P800,000 and the corresponding mortgage
payments in the amounts of P27,225, P23,000 and P23,925 (totaling P874,150.00) advanced by
petitioners should be returned by private respondents, lest the latter unjustly enrich themselves
at the expense of the former.

Rescission creates the 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.20 To
rescind is to declare a contract void at its inception and to put an end to it as though it never was.
It is not merely to terminate it and release the parties from further obligations to each other, but
to abrogate it from the beginning and restore the parties to their relative positions as if no
contract has been made.21

Third Issue

Attempt to Novate

In view of the foregoing discussion, the Court finds it no longer necessary to discuss the third
issue raised by petitioners. Suffice it to say that the three conditions appearing on the January 7,
1987 letter of petitioners to private respondents were not part of the original contract. By that
time, it was already incumbent upon the former to pay the balance of the sale price. They had no
right to demand preconditions to the fulfillment of their obligation, which had become due.

WHEREFORE, the assailed Decision is hereby AFFIRMED with the MODIFICATION that private
respondents are ordered to return to petitioners the amount of P874,150, which the latter paid
as a consequence of the rescinded contract, with legal interest thereon from January 8, 1987, the
date of rescission. No pronouncement as to costs.

SO ORDERED. 1âwphi1.nêt

Melo, Vitug, and Sandoval-Gutierrez, JJ., concur.

G.R. No. 103577 October 7, 1996

ROMULO A. CORONEL, ALARICO A. CORONEL, ANNETTE A. CORONEL, ANNABELLE C. GONZALES

(for herself and on behalf of Florida C. Tupper, as attorney-in-fact), CIELITO A. CORONEL,
FLORAIDA A. ALMONTE, and CATALINA BALAIS MABANAG, petitioners,
vs.
THE COURT OF APPEALS, CONCEPCION D. ALCARAZ, and RAMONA PATRICIA ALCARAZ, assisted
by GLORIA F. NOEL as attorney-in-fact, respondents.

MELO, J.:p

The petition before us has its roots in a complaint for specific performance to compel herein petitioners (except the last named,
Catalina Balais Mabanag) to consummate the sale of a parcel of land with its improvements located along Roosevelt Avenue in Quezon
City entered into by the parties sometime in January 1985 for the price of P1,240,000.00.

The undisputed facts of the case were summarized by respondent court in this wise:

On January 19, 1985, defendants-appellants Romulo Coronel, et al. (hereinafter referred to as

Coronels) executed a document entitled "Receipt of Down Payment" (Exh. "A") in favor of
plaintiff Ramona Patricia Alcaraz (hereinafter referred to as Ramona) which is reproduced
hereunder:

RECEIPT OF DOWN PAYMENT

P1,240,000.00 — Total amount

50,000 — Down payment

———————————
P1,190,000.00 — Balance

Received from Miss Ramona Patricia Alcaraz of 146 Timog, Quezon City, the sum of Fifty
Thousand Pesos purchase price of our inherited house and lot, covered by TCT No. 119627 of the
Registry of Deeds of Quezon City, in the total amount of P1,240,000.00.

We bind ourselves to effect the transfer in our names from our deceased father, Constancio P.
Coronel, the transfer certificate of title immediately upon receipt of the down payment
above-stated.

On our presentation of the TCT already in or name, We will immediately execute the deed of
absolute sale of said property and Miss Ramona Patricia Alcaraz shall immediately pay the
balance of the P1,190,000.00.

Clearly, the conditions appurtenant to the sale are the following:

1. Ramona will make a down payment of Fifty Thousand (P50,000.00) Pesos upon execution of
the document aforestated;

2. The Coronels will cause the transfer in their names of the title of the property registered in the
name of their deceased father upon receipt of the Fifty Thousand (P50,000.00) Pesos down
payment;
3. Upon the transfer in their names of the subject property, the Coronels will execute the deed of
absolute sale in favor of Ramona and the latter will pay the former the whole balance of One
Million One Hundred Ninety Thousand (P1,190,000.00) Pesos.

On the same date (January 15, 1985), plaintiff-appellee Concepcion D. Alcaraz (hereinafter
referred to as Concepcion), mother of Ramona, paid the down payment of Fifty Thousand
(P50,000.00) Pesos (Exh. "B", Exh. "2").

On February 6, 1985, the property originally registered in the name of the Coronels' father was
transferred in their names under TCT
No. 327043 (Exh. "D"; Exh. "4")

On February 18, 1985, the Coronels sold the property covered by TCT No. 327043 to
intervenor-appellant Catalina B. Mabanag (hereinafter referred to as Catalina) for One Million
Five Hundred Eighty Thousand (P1,580,000.00) Pesos after the latter has paid Three Hundred
Thousand (P300,000.00) Pesos (Exhs. "F-3"; Exh. "6-C")

For this reason, Coronels canceled and rescinded the contract (Exh. "A") with Ramona by
depositing the down payment paid by Concepcion in the bank in trust for Ramona Patricia
Alcaraz.

On February 22, 1985, Concepcion, et al., filed a complaint for specific performance against the
Coronels and caused the annotation of a notice of lis pendens at the back of TCT No. 327403 (Exh.
"E"; Exh. "5").

On April 2, 1985, Catalina caused the annotation of a notice of adverse claim covering the same
property with the Registry of Deeds of Quezon City (Exh. "F"; Exh. "6").

On April 25, 1985, the Coronels executed a Deed of Absolute Sale over the subject property in
favor of Catalina (Exh. "G"; Exh. "7").

On June 5, 1985, a new title over the subject property was issued in the name of Catalina under
TCT No. 351582 (Exh. "H"; Exh. "8").

(Rollo, pp. 134-136)

In the course of the proceedings before the trial court (Branch 83, RTC, Quezon City) the parties
agreed to submit the case for decision solely on the basis of documentary exhibits. Thus,
plaintiffs therein (now private respondents) proffered their documentary evidence accordingly
marked as Exhibits "A" through "J", inclusive of their corresponding submarkings. Adopting these
same exhibits as their own, then defendants (now petitioners) accordingly offered and marked
them as Exhibits "1" through "10", likewise inclusive of their corresponding submarkings. Upon
motion of the parties, the trial court gave them thirty (30) days within which to simultaneously
submit their respective memoranda, and an additional 15 days within which to submit their
corresponding comment or reply thereof, after which, the case would be deemed submitted for
resolution.
On April 14, 1988, the case was submitted for resolution before Judge Reynaldo Roura, who was
then temporarily detailed to preside over Branch 82 of the RTC of Quezon City. On March 1, 1989,
judgment was handed down by Judge Roura from his regular bench at Macabebe, Pampanga for
the Quezon City branch, disposing as follows:

WHEREFORE, judgment for specific performance is hereby rendered ordering defendant to

execute in favor of plaintiffs a deed of absolute sale covering that parcel of land embraced in and
covered by Transfer Certificate of Title No. 327403 (now TCT No. 331582) of the Registry of
Deeds for Quezon City, together with all the improvements existing thereon free from all liens
and encumbrances, and once accomplished, to immediately deliver the said document of sale to
plaintiffs and upon receipt thereof, the said document of sale to plaintiffs and upon receipt
thereof, the plaintiffs are ordered to pay defendants the whole balance of the purchase price
amounting to P1,190,000.00 in cash. Transfer Certificate of Title No. 331582 of the Registry of
Deeds for Quezon City in the name of intervenor is hereby canceled and declared to be without
force and effect. Defendants and intervenor and all other persons claiming under them are
hereby ordered to vacate the subject property and deliver possession thereof to plaintiffs.
Plaintiffs' claim for damages and attorney's fees, as well as the counterclaims of defendants and
intervenors are hereby dismissed.

No pronouncement as to costs.

So Ordered.

Macabebe, Pampanga for Quezon City, March 1, 1989.

(Rollo, p. 106)

A motion for reconsideration was filed by petitioner before the new presiding judge of the
Quezon City RTC but the same was denied by Judge Estrella T. Estrada, thusly:

The prayer contained in the instant motion, i.e., to annul the decision and to render anew
decision by the undersigned Presiding Judge should be denied for the following reasons: (1) The
instant case became submitted for decision as of April 14, 1988 when the parties terminated the
presentation of their respective documentary evidence and when the Presiding Judge at that
time was Judge Reynaldo Roura. The fact that they were allowed to file memoranda at some
future date did not change the fact that the hearing of the case was terminated before Judge
Roura and therefore the same should be submitted to him for decision; (2) When the defendants
and intervenor did not object to the authority of Judge Reynaldo Roura to decide the case prior
to the rendition of the decision, when they met for the first time before the undersigned
Presiding Judge at the hearing of a pending incident in Civil Case No. Q-46145 on November 11,
1988, they were deemed to have acquiesced thereto and they are now estopped from
questioning said authority of Judge Roura after they received the decision in question which
happens to be adverse to them; (3) While it is true that Judge Reynaldo Roura was merely a
Judge-on-detail at this Branch of the Court, he was in all respects the Presiding Judge with full
authority to act on any pending incident submitted before this Court during his incumbency.
When he returned to his Official Station at Macabebe, Pampanga, he did not lose his authority to
decide or resolve such cases submitted to him for decision or resolution because he continued as
Judge of the Regional Trial Court and is of co-equal rank with the undersigned Presiding Judge.
The standing rule and supported by jurisprudence is that a Judge to whom a case is submitted for
decision has the authority to decide the case notwithstanding his transfer to another branch or
region of the same court (Sec. 9, Rule 135, Rule of Court).

Coming now to the twin prayer for reconsideration of the Decision dated March 1, 1989
rendered in the instant case, resolution of which now pertains to the undersigned Presiding
Judge, after a meticulous examination of the documentary evidence presented by the parties,
she is convinced that the Decision of March 1, 1989 is supported by evidence and, therefore,
should not be disturbed.

IN VIEW OF THE FOREGOING, the "Motion for Reconsideration and/or to Annul Decision and
Render Anew Decision by the Incumbent Presiding Judge" dated March 20, 1989 is hereby
DENIED.

SO ORDERED.

Quezon City, Philippines, July 12, 1989.

(Rollo, pp. 108-109)

Petitioners thereupon interposed an appeal, but on December 16, 1991, the Court of Appeals
(Buena, Gonzaga-Reyes, Abad Santos (P), JJ.) rendered its decision fully agreeing with the trial
court.

Hence, the instant petition which was filed on March 5, 1992. The last pleading, private
respondents' Reply Memorandum, was filed on September 15, 1993. The case was, however,
re-raffled to undersigned ponente only on August 28, 1996, due to the voluntary inhibition of the
Justice to whom the case was last assigned.

While we deem it necessary to introduce certain refinements in the disquisition of respondent

court in the affirmance of the trial court's decision, we definitely find the instant petition bereft
of merit.

The heart of the controversy which is the ultimate key in the resolution of the other issues in the
case at bar is the precise determination of the legal significance of the document entitled
"Receipt of Down Payment" which was offered in evidence by both parties. There is no dispute
as to the fact that said document embodied the binding contract between Ramona Patricia
Alcaraz on the one hand, and the heirs of Constancio P. Coronel on the other, pertaining to a
particular house and lot covered by TCT No. 119627, as defined in Article 1305 of the Civil Code
of the Philippines which reads as follows:

Art. 1305. A contract is a meeting of minds between two persons whereby one binds himself,
with respect to the other, to give something or to render some service.

While, it is the position of private respondents that the "Receipt of Down Payment" embodied a
perfected contract of sale, which perforce, they seek to enforce by means of an action for
specific performance, petitioners on their part insist that what the document signified was a
mere executory contract to sell, subject to certain suspensive conditions, and because of the
absence of Ramona P. Alcaraz, who left for the United States of America, said contract could not
possibly ripen into a contract absolute sale.

Plainly, such variance in the contending parties' contentions is brought about by the way each
interprets the terms and/or conditions set forth in said private instrument. Withal, based on
whatever relevant and admissible evidence may be available on record, this, Court, as were the
courts below, is now called upon to adjudge what the real intent of the parties was at the time
the said document was executed.

The Civil Code defines a contract of sale, thus:

Art. 1458. By the contract of sale one of the contracting parties obligates himself to transfer the
ownership of and to deliver a determinate thing, and the other to pay therefor a price certain in
money or its equivalent.

Sale, by its very nature, is a consensual contract because it is perfected by mere consent. The
essential elements of a contract of sale are the following:

a) Consent or meeting of the minds, that is, consent to transfer ownership in exchange for the
price;

b) Determinate subject matter; and

c) Price certain in money or its equivalent.

Under this definition, a Contract to Sell may not be considered as a Contract of Sale because the
first essential element is lacking. In a contract to sell, the prospective seller explicity reserves the
transfer of title to the prospective buyer, meaning, the prospective seller does not as yet agree
or consent to transfer ownership of the property subject of the contract to sell until the
happening of an event, which for present purposes we shall take as the full payment of the
purchase price. What the seller agrees or obliges himself to do is to fulfill is promise to sell the
subject property when the entire amount of the purchase price is delivered to him. In other
words the full payment of the purchase price partakes of a suspensive condition, the
non-fulfillment of which prevents the obligation to sell from arising and thus, ownership is
retained by the prospective seller without further remedies by the prospective buyer. In Roque
vs. Lapuz (96 SCRA 741 [1980]), this Court had occasion to rule:

Hence, We hold that the contract between the petitioner and the respondent was a contract to
sell where the ownership or title is retained by the seller and is not to pass until the full payment
of the price, such payment being a positive suspensive condition and 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.

Stated positively, upon the fulfillment of the suspensive condition which is the full payment of
the purchase price, the prospective seller's obligation to sell the subject property by entering
into a contract of sale with the prospective buyer becomes demandable as provided in Article
1479 of the Civil Code which states:

Art. 1479. A promise to buy and sell a determinate thing for a price certain is reciprocally
demandable.

An accepted unilateral promise to buy or to sell a determinate thing for a price certain is binding
upon the promissor if the promise is supported by a consideration distinct from the price.

A contract to sell may thus be 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 himself to sell the said property exclusively to the prospective buyer
upon fulfillment of the condition agreed upon, that is, full payment of the purchase price.

A contract to sell as defined hereinabove, may not even be considered as a conditional contract
of sale where the seller may likewise reserve title to the property subject of the sale until the
fulfillment of a suspensive condition, because in a conditional contract of sale, the first element
of consent is present, although it is conditioned upon the happening of a contingent event which
may or may not occur. If the suspensive condition is not fulfilled, the perfection of the contract
of sale is completely abated (cf. Homesite and housing Corp. vs. Court of Appeals, 133 SCRA 777
[1984]). However, if the suspensive condition is fulfilled, the contract of sale is thereby perfected,
such that if there had already been previous delivery of the property subject of the sale to the
buyer, ownership thereto automatically transfers to the buyer by operation of law without any
further act having to be performed by the seller.

In a contract to sell, upon the fulfillment of the suspensive condition which is the full payment of
the purchase price, ownership will not automatically transfer to the buyer although the property
may have been previously delivered to him. The prospective seller still has to convey title to the
prospective buyer by entering into a contract of absolute sale.

It is essential to distinguish between a contract to sell and a conditional contract of sale specially
in cases where the subject property is sold by the owner not to the party the seller contracted
with, but to a third person, as in the case at bench. In a contract to sell, there being no previous
sale of the property, a third person buying such property despite the fulfillment of the
suspensive condition such as the full payment of the purchase price, for instance, cannot be
deemed a buyer in bad faith and the prospective buyer cannot seek the relief of reconveyance of
the property. There is no double sale in such case. Title to the property will transfer to the buyer
after registration because there is no defect in the owner-seller's title per se, but the latter, of
course, may be used for damages by the intending buyer.

In a conditional contract of sale, however, upon the fulfillment of the suspensive condition, the
sale becomes absolute and this will definitely affect the seller's title thereto. In fact, if there had
been previous delivery of the subject property, the seller's ownership or title to the property is
automatically transferred to the buyer such that, the seller will no longer have any title to
transfer to any third person. Applying Article 1544 of the Civil Code, such second buyer of the
property who may have had actual or constructive knowledge of such defect in the seller's title,
or at least was charged with the obligation to discover such defect, cannot be a registrant in
good faith. Such second buyer cannot defeat the first buyer's title. In case a title is issued to the
second buyer, the first buyer may seek reconveyance of the property subject of the sale.

With the above postulates as guidelines, we now proceed to the task of deciphering the real
nature of the contract entered into by petitioners and private respondents.

It is a canon in the interpretation of contracts that the words used therein should be given their
natural and ordinary meaning unless a technical meaning was intended (Tan vs. Court of
Appeals, 212 SCRA 586 [1992]). Thus, when petitioners declared in the said "Receipt of Down
Payment" that they —

Received from Miss Ramona Patricia Alcaraz of 146 Timog, Quezon City, the sum of Fifty
Thousand Pesos purchase price of our inherited house and lot, covered by TCT No. 1199627 of
the Registry of Deeds of Quezon City, in the total amount of P1,240,000.00.

without any reservation of title until full payment of the entire purchase price, the natural and
ordinary idea conveyed is that they sold their property.

When the "Receipt of Down Payment" is considered in its entirety, it becomes more manifest
that there was a clear intent on the part of petitioners to transfer title to the buyer, but since the
transfer certificate of title was still in the name of petitioner's father, they could not fully effect
such transfer although the buyer was then willing and able to immediately pay the purchase
price. Therefore, petitioners-sellers undertook upon receipt of the down payment from private
respondent Ramona P. Alcaraz, to cause the issuance of a new certificate of title in their names
from that of their father, after which, they promised to present said title, now in their names, to
the latter and to execute the deed of absolute sale whereupon, the latter shall, in turn, pay the
entire balance of the purchase price.

The agreement could not have been a contract to sell because the sellers herein made no
express reservation of ownership or title to the subject parcel of land. Furthermore, the
circumstance which prevented the parties from entering into an absolute contract of sale
pertained to the sellers themselves (the certificate of title was not in their names) and not the
full payment of the purchase price. Under the established facts and circumstances of the case,
the Court may safely presume that, had the certificate of title been in the names of
petitioners-sellers at that time, there would have been no reason why an absolute contract of
sale could not have been executed and consummated right there and then.

Moreover, unlike in a contract to sell, petitioners in the case at bar did not merely promise to sell
the properly to private respondent upon the fulfillment of the suspensive condition. On the
contrary, having already agreed to sell the subject property, they undertook to have the
certificate of title changed to their names and immediately thereafter, to execute the written
deed of absolute sale.

Thus, the parties did not merely enter into a contract to sell where the sellers, after compliance
by the buyer with certain terms and conditions, promised to sell the property to the latter. What
may be perceived from the respective undertakings of the parties to the contract is that
petitioners had already agreed to sell the house and lot they inherited from their father,
completely willing to transfer full ownership of the subject house and lot to the buyer if the
documents were then in order. It just happened, however, that the transfer certificate of title
was then still in the name of their father. It was more expedient to first effect the change in the
certificate of title so as to bear their names. That is why they undertook to cause the issuance of
a new transfer of the certificate of title in their names upon receipt of the down payment in the
amount of P50,000.00. As soon as the new certificate of title is issued in their names, petitioners
were committed to immediately execute the deed of absolute sale. Only then will the obligation
of the buyer to pay the remainder of the purchase price arise.

There is no doubt that unlike in a contract to sell which is most commonly entered into so as to
protect the seller against a buyer who intends to buy the property in installment by withholding
ownership over the property until the buyer effects full payment therefor, in the contract
entered into in the case at bar, the sellers were the one who were unable to enter into a contract
of absolute sale by reason of the fact that the certificate of title to the property was still in the
name of their father. It was the sellers in this case who, as it were, had the impediment which
prevented, so to speak, the execution of an contract of absolute sale.

What is clearly established by the plain language of the subject document is that when the said
"Receipt of Down Payment" was prepared and signed by petitioners Romeo A. Coronel, et al., the
parties had agreed to a conditional contract of sale, consummation of which is subject only to
the successful transfer of the certificate of title from the name of petitioners' father, Constancio
P. Coronel, to their names.

The Court significantly notes this suspensive condition was, in fact, fulfilled on February 6, 1985
(Exh. "D"; Exh. "4"). Thus, on said date, the conditional contract of sale between petitioners and
private respondent Ramona P. Alcaraz became obligatory, the only act required for the
consummation thereof being the delivery of the property by means of the execution of the deed
of absolute sale in a public instrument, which petitioners unequivocally committed themselves to
do as evidenced by the "Receipt of Down Payment."

Article 1475, in correlation with Article 1181, both of the Civil Code, plainly applies to the case at
bench. Thus,

Art. 1475. 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 the moment, the parties may reciprocally demand performance, subject to the provisions
of the law governing the form of contracts.

Art. 1181. In conditional obligations, the acquisition of rights, as well as the extinguishment or
loss of those already acquired, shall depend upon the happening of the event which constitutes
the condition.

Since the condition contemplated by the parties which is the issuance of a certificate of title in
petitioners' names was fulfilled on February 6, 1985, the respective obligations of the parties
under the contract of sale became mutually demandable, that is, petitioners, as sellers, were
obliged to present the transfer certificate of title already in their names to private respondent
Ramona P. Alcaraz, the buyer, and to immediately execute the deed of absolute sale, while the
buyer on her part, was obliged to forthwith pay the balance of the purchase price amounting to
P1,190,000.00.

It is also significant to note that in the first paragraph in page 9 of their petition, petitioners
conclusively admitted that:

3. The petitioners-sellers Coronel bound themselves "to effect the transfer in our names from
our deceased father Constancio P. Coronel, the transfer certificate of title immediately upon
receipt of the downpayment above-stated". The sale was still subject to this suspensive condition.
(Emphasis supplied.)

(Rollo, p. 16)

Petitioners themselves recognized that they entered into a contract of sale subject to a
suspensive condition. Only, they contend, continuing in the same paragraph, that:

. . . Had petitioners-sellers not complied with this condition of first transferring the title to the
property under their names, there could be no perfected contract of sale. (Emphasis supplied.)

(Ibid.)

not aware that they set their own trap for themselves, for Article 1186 of the Civil Code expressly
provides that:

Art. 1186. The condition shall be deemed fulfilled when the obligor voluntarily prevents its
fulfillment.

Besides, it should be stressed and emphasized that what is more controlling than these mere
hypothetical arguments is the fact that the condition herein referred to was actually and
indisputably fulfilled on February 6, 1985, when a new title was issued in the names of
petitioners as evidenced by TCT No. 327403 (Exh. "D"; Exh. "4").

The inevitable conclusion is that on January 19, 1985, as evidenced by the document
denominated as "Receipt of Down Payment" (Exh. "A"; Exh. "1"), the parties entered into a
contract of sale subject only to the suspensive condition that the sellers shall effect the issuance
of new certificate title from that of their father's name to their names and that, on February 6,
1985, this condition was fulfilled (Exh. "D"; Exh. "4").

We, therefore, hold that, in accordance with Article 1187 which pertinently provides —

Art. 1187. The effects of conditional obligation to give, once the condition has been fulfilled, shall
retroact to the day of the constitution of the obligation . . .

In obligation to do or not to do, the courts shall determine, in each case, the retroactive effect of
the condition that has been complied with.
the rights and obligations of the parties with respect to the perfected contract of sale became
mutually due and demandable as of the time of fulfillment or occurrence of the suspensive
condition on February 6, 1985. As of that point in time, reciprocal obligations of both seller and
buyer arose.

Petitioners also argue there could been no perfected contract on January 19, 1985 because they
were then not yet the absolute owners of the inherited property.

We cannot sustain this argument.

Article 774 of the Civil Code defines Succession as a mode of transferring ownership as follows:

Art. 774. Succession is a mode of acquisition by virtue of which the property, rights and
obligations to be extent and value of the inheritance of a person are transmitted through his
death to another or others by his will or by operation of law.

Petitioners-sellers in the case at bar being the sons and daughters of the decedent Constancio P.
Coronel are compulsory heirs who were called to succession by operation of law. Thus, at the
point their father drew his last breath, petitioners stepped into his shoes insofar as the subject
property is concerned, such that any rights or obligations pertaining thereto became binding and
enforceable upon them. It is expressly provided that rights to the succession are transmitted
from the moment of death of the decedent (Article 777, Civil Code; Cuison vs. Villanueva, 90 Phil.
850 [1952]).

Be it also noted that petitioners' claim that succession may not be declared unless the creditors
have been paid is rendered moot by the fact that they were able to effect the transfer of the title
to the property from the decedent's name to their names on February 6, 1985.

Aside from this, petitioners are precluded from raising their supposed lack of capacity to enter
into an agreement at that time and they cannot be allowed to now take a posture contrary to
that which they took when they entered into the agreement with private respondent Ramona P.
Alcaraz. The Civil Code expressly states that:

Art. 1431. Through estoppel an admission or representation is rendered conclusive upon the
person making it, and cannot be denied or disproved as against the person relying thereon.

Having represented themselves as the true owners of the subject property at the time of sale,
petitioners cannot claim now that they were not yet the absolute owners thereof at that time.

Petitioners also contend that although there was in fact a perfected contract of sale between
them and Ramona P. Alcaraz, the latter breached her reciprocal obligation when she rendered
impossible the consummation thereof by going to the United States of America, without leaving
her address, telephone number, and Special Power of Attorney (Paragraphs 14 and 15, Answer
with Compulsory Counterclaim to the Amended Complaint, p. 2; Rollo, p. 43), for which reason,
so petitioners conclude, they were correct in unilaterally rescinding rescinding the contract of
sale.
We do not agree with petitioners that there was a valid rescission of the contract of sale in the
instant case. We note that these supposed grounds for petitioners' rescission, are mere
allegations found only in their responsive pleadings, which by express provision of the rules, are
deemed controverted even if no reply is filed by the plaintiffs (Sec. 11, Rule 6, Revised Rules of
Court). The records are absolutely bereft of any supporting evidence to substantiate petitioners'
allegations. We have stressed time and again that allegations must be proven by sufficient
evidence (Ng Cho Cio vs. Ng Diong, 110 Phil. 882 [1961]; Recaro vs. Embisan, 2 SCRA 598 [1961].
Mere allegation is not an evidence (Lagasca vs. De Vera, 79 Phil. 376 [1947]).

Even assuming arguendo that Ramona P. Alcaraz was in the United States of America on
February 6, 1985, we cannot justify petitioner-sellers' act of unilaterally and extradicially
rescinding the contract of sale, there being no express stipulation authorizing the sellers to
extarjudicially rescind the contract of sale. (cf. Dignos vs. CA, 158 SCRA 375 [1988]; Taguba vs.
Vda. de Leon, 132 SCRA 722 [1984])

Moreover, petitioners are estopped from raising the alleged absence of Ramona P. Alcaraz
because although the evidence on record shows that the sale was in the name of Ramona P.
Alcaraz as the buyer, the sellers had been dealing with Concepcion D. Alcaraz, Ramona's mother,
who had acted for and in behalf of her daughter, if not also in her own behalf. Indeed, the down
payment was made by Concepcion D. Alcaraz with her own personal check (Exh. "B"; Exh. "2") for
and in behalf of Ramona P. Alcaraz. There is no evidence showing that petitioners ever
questioned Concepcion's authority to represent Ramona P. Alcaraz when they accepted her
personal check. Neither did they raise any objection as regards payment being effected by a third
person. Accordingly, as far as petitioners are concerned, the physical absence of Ramona P.
Alcaraz is not a ground to rescind the contract of sale.

Corollarily, Ramona P. Alcaraz cannot even be deemed to be in default, insofar as her obligation
to pay the full purchase price is concerned. Petitioners who are precluded from setting up the
defense of the physical absence of Ramona P. Alcaraz as above-explained offered no proof
whatsoever to show that they actually presented the new transfer certificate of title in their
names and signified their willingness and readiness to execute the deed of absolute sale in
accordance with their agreement. Ramona's corresponding obligation to pay the balance of the
purchase price in the amount of P1,190,000.00 (as buyer) never became due and demandable
and, therefore, she cannot be deemed to have been in default.

Article 1169 of the Civil Code defines when a party in a contract involving reciprocal obligations
may be considered in default, to wit:

Art. 1169. Those obliged to deliver or to do something, incur in delay from the time the obligee
judicially or extrajudicially demands from them the fulfillment of their obligation.

xxx xxx xxx

In reciprocal obligations, neither party incurs in delay if the other does not comply or is not ready
to comply in a proper manner with what is incumbent upon him. From the moment one of the
parties fulfill his obligation, delay by the other begins. (Emphasis supplied.)
There is thus neither factual nor legal basis to rescind the contract of sale between petitioners
and respondents.

With the foregoing conclusions, the sale to the other petitioner, Catalina B. Mabanag, gave rise
to a case of double sale where Article 1544 of the Civil Code will apply, to wit:

Art. 1544. If the same thing should have been sold to different vendees, the ownership shall be
transferred to the person who may have first taken possession thereof in good faith, if it should
be movable property.

Should if be immovable property, the ownership shall belong to the person acquiring it who in
good faith first recorded it in Registry of Property.

Should there be no inscription, the ownership shall pertain to the person who in good faith was
first in the possession; and, in the absence thereof to the person who presents the oldest title,
provided there is good faith.

The record of the case shows that the Deed of Absolute Sale dated April 25, 1985 as proof of the
second contract of sale was registered with the Registry of Deeds of Quezon City giving rise to
the issuance of a new certificate of title in the name of Catalina B. Mabanag on June 5, 1985.
Thus, the second paragraph of Article 1544 shall apply.

The above-cited provision on double sale presumes title or ownership to pass to the first buyer,
the exceptions being: (a) when the second buyer, in good faith, registers the sale ahead of the
first buyer, and (b) should there be no inscription by either of the two buyers, when the second
buyer, in good faith, acquires possession of the property ahead of the first buyer. Unless, the
second buyer satisfies these requirements, title or ownership will not transfer to him to the
prejudice of the first buyer.

In his commentaries on the Civil Code, an accepted authority on the subject, now a distinguished
member of the Court, Justice Jose C. Vitug, explains:

The governing principle is prius tempore, potior jure (first in time, stronger in right). Knowledge
by the first buyer of the second sale cannot defeat the first buyer's rights except when the
second buyer first registers in good faith the second sale (Olivares vs. Gonzales, 159 SCRA 33).
Conversely, knowledge gained by the second buyer of the first sale defeats his rights even if he is
first to register, since knowledge taints his registration with bad faith (see also Astorga vs. Court
of Appeals, G.R. No. 58530, 26 December 1984). In Cruz vs. Cabana (G.R. No. 56232, 22 June
1984, 129 SCRA 656), it has held that it is essential, to merit the protection of Art. 1544, second
paragraph, that the second realty buyer must act in good faith in registering his deed of sale
(citing Carbonell vs. Court of Appeals, 69 SCRA 99, Crisostomo vs. CA, G.R. No. 95843, 02
September 1992).
(J. Vitug Compendium of Civil Law and Jurisprudence, 1993 Edition, p. 604).

Petitioner point out that the notice of lis pendens in the case at bar was annoted on the title of
the subject property only on February 22, 1985, whereas, the second sale between petitioners
Coronels and petitioner Mabanag was supposedly perfected prior thereto or on February 18,
1985. The idea conveyed is that at the time petitioner Mabanag, the second buyer, bought the
property under a clean title, she was unaware of any adverse claim or previous sale, for which
reason she is buyer in good faith.

We are not persuaded by such argument.

In a case of double sale, what finds relevance and materiality is not whether or not the second
buyer was a buyer in good faith but whether or not said second buyer registers such second sale
in good faith, that is, without knowledge of any defect in the title of the property sold.

As clearly borne out by the evidence in this case, petitioner Mabanag could not have in good
faith, registered the sale entered into on February 18, 1985 because as early as February 22,
1985, a notice of lis pendens had been annotated on the transfer certificate of title in the names
of petitioners, whereas petitioner Mabanag registered the said sale sometime in April, 1985. At
the time of registration, therefore, petitioner Mabanag knew that the same property had already
been previously sold to private respondents, or, at least, she was charged with knowledge that a
previous buyer is claiming title to the same property. Petitioner Mabanag cannot close her eyes
to the defect in petitioners' title to the property at the time of the registration of the property.

This Court had occasions to rule that:

If a vendee in a double sale registers that sale after he has acquired knowledge that there was a
previous sale of the same property to a third party or that another person claims said property in
a pervious sale, the registration will constitute a registration in bad faith and will not confer upon
him any right. (Salvoro vs. Tanega, 87 SCRA 349 [1978]; citing Palarca vs. Director of Land, 43 Phil.
146; Cagaoan vs. Cagaoan, 43 Phil. 554; Fernandez vs. Mercader, 43 Phil. 581.)

Thus, the sale of the subject parcel of land between petitioners and Ramona P. Alcaraz,
perfected on February 6, 1985, prior to that between petitioners and Catalina B. Mabanag on
February 18, 1985, was correctly upheld by both the courts below.

Although there may be ample indications that there was in fact an agency between Ramona as
principal and Concepcion, her mother, as agent insofar as the subject contract of sale is
concerned, the issue of whether or not Concepcion was also acting in her own behalf as a
co-buyer is not squarely raised in the instant petition, nor in such assumption disputed between
mother and daughter. Thus, We will not touch this issue and no longer disturb the lower courts'
ruling on this point.

WHEREFORE, premises considered, the instant petition is hereby DISMISSED and the appealed
judgment AFFIRMED.

SO ORDERED.

Narvasa, C.J., Davide, Jr. and Francisco, JJ., concur.

FIRST DIVISION

[G.R. NO. 166866 : March 27, 2008]

REPUBLIC OF THE PHILIPPINES, represented by the PHILIPPINE ECONOMIC

ZONE AUTHORITY (PEZA) through its Director General, LILIA B. DE
LIMA, Petitioner, v. ANTONIO and LILI FLORENDO,* Respondents.

DECISION

CORONA, J.:

This is a Petition for Review on Certiorari 1 of the February 7, 2005

decision2 of the Court of Appeals (CA) in CA-G.R. SP No. 86718. The CA
dismissed petitioner Republic of the Philippines' petition for certiorari and
prohibition assailing various orders of the Regional Trial Court (RTC),
Lapu-Lapu City, Cebu, Branch 27, in connection with the execution of the
RTC's judgment dated December 21, 1993 in Civil Case No. 2415-L, as
modified by the decision of the CA dated June 25, 2002 in CA-G.R. CV No.
54765. This pertained to a case for expropriation of respondent spouses
Antonio and Lili Florendo's properties.3

Petitioner Republic of the Philippines is represented in this case by the

Philippine Economic Zone Authority (PEZA), a government corporation
created under RA 7916,4 as amended.

On April 14, 1991, the Export Processing Zone Authority, (PEZA),

predecessor of PEZA, filed a complaint for the expropriation of seven
parcels of land (Lot Nos. 4703-B-part, 4702-C, 4702-B, 4704, 4705-H, 4709
and 4710)5 located at Barrio Ibo, Lapu-Lapu City, Cebu, owned by
respondents. The complaint was filed in the RTC of Lapu-Lapu City, Branch
27 and docketed as Civil Case No. 2415-L. The purpose of the expropriation
was to establish and develop an export processing zone or a part thereof
on those real properties.6

After trial on the merits, the RTC rendered a decision ordering the
expropriation of the seven parcels of land and payment of just
compensation of P1,500 per sq. m. with 12% interest per annum from the
time petitioner took possession on March 12, 1992 until full payment
thereof.7 For the aggregate area of 17,967.5 sq. m., the total compensation
was P26,951,250.

Petitioner filed an appeal in the CA docketed as CA-G.R. CV No. 54765 to

question the correctness of the valuation of P1,500 per sq. m. as just
compensation.8 Pending appeal, petitioner and respondents reached an
amicable settlement and agreed on the following:

1. P1,500 per sq. m. valuation fixed by the RTC;

2. waiver by respondents of the payment of the

court-awarded 12% interest and

3. presentation by respondents of clean titles of all the subject

properties before payment by petitioner.

Accordingly, the parties executed a deed of absolute sale dated June 25,
2001 which set out the terms and conditions of their settlement, the
transfer of ownership of Lot No. 4704 under TCT No. 21289 from
respondents to petitioner and the execution by the parties of the
corresponding deed of absolute sale for the remaining six lots as soon as
respondents could settle or clear the encumbrances or other problems
affecting them.9

Thereafter, the consideration for Lot Nos. 4705-H, 4709 and 4710 was paid
by petitioner and ownership was subsequently transferred to it. Petitioner
prepared a joint motion to dismiss the expropriation case but respondent
Antonio Florendo refused to sign because there were still three lots (Lot
Nos. 4703-B-part, 4702-C and 4702-B) which had not yet been paid.
Respondents could not clear these properties of their encumbrances and
liens as there were pending cases filed by third party claimants over them.
Instead, they proposed that a partial compromise agreement be executed
to cover the four lots that had already been sold and transferred to PEZA.
Petitioner, however, found the proposal unacceptable and contrary to their
compromise agreement.10
While the parties were still trying to decide whether a partial compromise
agreement or a joint motion to dismiss should be executed, the CA
rendered a decision11 in CA-G.R. CV No. 54765 dated June 25, 2002
affirming the decision of the RTC with the modification that the fair market
value of the subject properties should be P1,000 per sq. m. instead
of P1,500 per sq. m. No appeal was taken by either party. Neither did they
inform the CA that they had already entered into a compromise
agreement.12Hence, the decision attained finality on July 18, 2002.13

On October 28, 2002, respondents filed a motion for execution of the final
judgment of the CA with respect to the three parcels of land, namely Lot
Nos. 4703-B-part, 4702-C and 4702-B.14 In an order dated March 21, 2003,
the RTC granted respondents' motion and a writ of execution was issued on
April 24, 2003.15 Consequently, notices of garnishment16 were served on
the Land Bank of the Philippines, Lapu-Lapu City Branch which was
petitioner's depository bank, for the amount of P6,108,300.17

On May 19, 2003, petitioner filed a motion to quash the writ of execution
and an urgent ex-parte motion to lift the garnishment. Both motions were
denied by the RTC in an order dated May 21, 2004 on the ground that,
since the deed of absolute sale executed by the parties while the appeal
was pending in the CA was not approved by the latter, the agreement did
not bind it and did not moot the decision it promulgated. In the same order,
the RTC ordered the sheriff to implement the writ of execution dated April
24, 2003.18

Thereafter, notices of garnishment19 were served upon business

establishments and other locators of PEZA20 prompting petitioner to file
motions to recall, lift and set aside the notices of garnishment.21

On September 15, 2004, the RTC denied petitioner's motion for

reconsideration of the order dated May 21, 2004.22 Aggrieved anew,
petitioner filed a petition for certiorari and prohibition in the CA docketed
as CA-G.R. SP No. 86718.

In a decision promulgated on February 7, 2005, the CA dismissed the

petition for lack of merit. It held that there was no supervening event that
would render execution of the judgment unjust. However, it directed that
in executing the final judgment, any amount that might have already been
paid by petitioner to respondents with respect to the four lots should be
deducted.23

Hence this petition with prayer for the issuance of a temporary restraining
order and writ of preliminary injunction. In a resolution dated February 21,
2005, we directed the parties to maintain the status quo before the
issuance of the order dated March 21, 2003 until further orders from the
Court.24ςηαñrοblεš νιr †υαl lαω lιbrαrÿ

Petitioner raises the following issues: (1) whether the compromise

agreement of the parties constituted res judicata and therefore the June
25, 2002 decision of the CA could not have superseded it and (2) whether
or not there was a supervening event that rendered the execution of the
final judgment inequitable.

The parties agree that out of the seven lots, four had been sold and paid
for. The three other lots remain unpaid because respondents could not
deliver the clean titles of these lots to petitioner in accordance with their
compromise agreement.25

Petitioner argues that the parties' compromise agreement became res

judicata and was implemented upon the payment of the four lots.
Accordingly, respondents are estopped from repudiating this agreement by
insisting on the execution of the June 25, 2002 CA decision.26

Respondents counter that there was no perfected compromise agreement

over the three remaining lots as they were not taken out of the judgment
of the appealed case in the CA which became final. Execution of this final
judgment would therefore be proper and just compensation for these
remaining lots should be paid.27

We grant the petition.

The pertinent terms and conditions of the parties' compromise agreement

were expressed in the "whereas" clauses of the June 25, 2001 deed of sale
they executed:
WHEREAS, on 21 December 1993, the [RTC] rendered its decision fixing the
just compensation of the 7 lots at Php1,500 per sq.m. or a total sum of
Php26,951,250.00 plus twelve percent (12%) interest per annum from 12
March 1992 until fully paid; which judgment was appealed by the VENDEE
to the Court of Appeals under CA-G.R. CV No. 54765 which is still pending
with the said court;

WHEREAS, the parties have mutually agreed to settle the said

expropriation case amicably with the VENDEE waiving so much of the
court awarded interest thereby saving the government much needed
funds for other public purposes;

WHEREAS, for this purpose, the Board of Directors of the VENDEE has
issued board Resolution No. 00-416 dated 29 December 2000 approving
the purchase of the aforementioned lots for Php26,951,250.00;

WHEREAS, the parties have agreed to execute a Deed of Absolute Sale

covering initially the lot under TCT No. 21289 (1 of the 7 lots of the vendors,
which has only a minor encumbrance/problem) considering that the
remaining 6 lots of the vendors either have encumbrances or are untitled,
with the understanding that the parties shall execute the corresponding
Deed of Absolute Sale for the remaining 6 lots the moment the VENDORS
shall have settled/cleared the encumbrances/problems affecting the
other 6 lots; (Emphasis supplied) cralawlibrary

xxx xxx xxx

A compromise agreement is a contract whereby the parties make

reciprocal concessions in order to resolve their differences and thus avoid
litigation or to put an end to one already commenced.28 When it complies
with the requisites and principles of contracts, it becomes a valid
agreement which has the force of law between the parties.29 It has the
effect and authority of res judicata once entered into,30even without
judicial approval.31

A compromise agreement is a simple contract which is perfected by mere

consent.32 From that moment of the meeting of the minds of the parties, it
becomes binding on them. To be valid, judicial approval is not required.33
When a compromise agreement is given judicial approval, it becomes more
than a contract binding upon the parties. Having been sanctioned by the
court, it is a determination of the controversy and has the force and effect
of a judgment. It is immediately executory and not appealable, except for
vices of consent, forgery, fraud, misrepresentation and coercion.34 Thus,
although a compromise agreement has the effect and authority of res
judicata upon the parties even without judicial approval, no execution may
issue until it has received the approval of the court where the litigation is
pending and compliance with the terms of the agreement is thereupon
decreed.35

The first question to answer is whether there was a perfected compromise

agreement with respect to the remaining three lots which have not been
paid by petitioner because respondents could not deliver clean titles
thereto.

The compromise agreement the parties executed was in the form of a

contract of sale. The elements of a valid contract of sale are: (a) consent or
meeting of the minds; (b) determinate subject matter and (c) price certain
in money or its equivalent.36 All the elements are present here. The parties
agreed on the sale of a determinate object (the seven lots) and the price
certain (P26,951,250).37

Respondents, however, insist that, as to the three lots, there was no

meeting of the minds because the condition relating to the delivery of
clean titles was not fulfilled. Respondents are wrong.

The delivery of clean titles was not a condition imposed on the perfection
of the contract of sale but a condition imposed on petitioner's obligation to
pay the purchase price of these lots.38 In Jardine Davies Inc. v. CA,39 we
distinguished between a condition imposed on the perfection of a contract
and a condition imposed merely on the performance of an obligation.
While failure to comply with the first condition results in the failure of a
contract, non-compliance with the second merely gives the other party
options and/or remedies to protect its interests.40
The next question is whether this perfected compromise agreement is valid
despite the finality of judgment of the CA. In Magbanua v. Uy,41 we
answered in the affirmative:

The issue involving the validity of a compromise agreement

notwithstanding a final judgment is not novel. Jesalva v. Bautista upheld a
compromise agreement that covered cases pending trial, on appeal, and
with final judgment. The Court noted that Article 2040 impliedly allowed
such agreements; there was no limitation as to when these should be
entered into. Palanca v. Court of Industrial Relationssustained a
compromise agreement, notwithstanding a final judgment in which only
the amount of back wages was left to be determined. The Court found no
evidence of fraud or of any showing that the agreement was contrary to
law, morals, good customs, public order, or public policy.

Gatchalian v. Arlegui upheld the right to compromise prior to the execution

of a final judgment. The Court ruled that the final judgment had been
novated and superseded by a compromise agreement.42

Accordingly, we hold that the compromise agreement reached by the

parties while the appeal was pending in the CA is valid. When the CA
rendered its June 25, 2002 decision, it unknowingly adjudicated a case
which, for all intents and purposes, had already been closed and
terminated by the parties themselves when they agreed on a
settlement.43 It does not matter that the CA decision lapsed into finality
when neither party questioned it. A compromise agreement is still valid
even if there is already a final and executory judgment.44

Furthermore, compromises are favored and encouraged by the

courts.45 Parties are bound to abide by them in good faith.46 Since they
have the force of law between the parties, no party may discard them
unilaterally.47

Consequently, considering that the June 25, 2002 decision of the CA had
been superseded by the compromise agreement of the parties, the various
orders of the RTC directing the execution of the said June 25, 2002 CA
decision were invalid and of no force and effect.48
And since the compromise agreement between the parties has been
upheld and the execution of the June 25, 2002 CA decision has been
invalidated, it is no longer necessary to resolve the second issue.49

WHEREFORE, the petition is hereby GRANTED. The February 7, 2005

decision of the Court of Appeals in CA-G.R. SP No. 86718 is SET ASIDE. The
following orders of the Regional Trial Court, Lapu-Lapu City, Cebu, Branch
27 are hereby declared NULL AND VOID:

(1) order of the RTC, Lapu-Lapu City, Branch 27 dated March

21, 2003 granting respondents' motion for execution;

(2) order of the RTC dated May 21, 2004 denying petitioner's
motion to quash writ of execution and motion to lift
garnishment;

(3) order of the RTC dated September 15, 2004 denying

petitioner's motion for reconsideration of the order dated
May 21, 2004;

(4) writ of execution dated April 24, 2003 and

(5) notices of garnishment dated May 14, 2003, June 22, 2004,
and September 23, 2004, and all other orders and notices
pursuant to the writ of execution.

The status quo order issued by this Court on February 21, 2005 is LIFTED.

SECOND DIVISION

G.R. No. 137290. July 31, 2000

SAN MIGUEL PROPERTIES PHILIPPINES, INC., Petitioner, vs. SPOUSES

ALFREDO HUANG and GRACE HUANG, Respondents.

DECISION
MENDOZA, J.:

This is a petition for review of the decision,1 dated April 8, 1997, of the
Court of Appeals which reversed the decision of the Regional Trial Court,
Branch 153, Pasig City dismissing the complaint brought by respondents
against petitioner for enforcement of a contract of sale.

The facts are not in dispute.

Petitioner San Miguel Properties Philippines, Inc. is a domestic corporation

engaged in the purchase and sale of real properties. Part of its inventory
are two parcels of land totalling 1, 738 square meters at the corner of
Meralco Avenue and General Capinpin Street, Barrio Oranbo, Pasig City,
which are covered by TCT Nos. PT-82395 and PT-82396 of the Register of
Deeds of Pasig City.

On February 21, 1994, the properties were offered for sale

for P52,140,000.00 in cash. The offer was made to Atty. Helena M. Dauz
who was acting for respondent spouses as undisclosed principals. In a
letter2 dated March 24, 1994, Atty. Dauz signified her clients interest in
purchasing the properties for the amount for which they were offered by
petitioner, under the following terms: the sum of P500,000.00 would be
given as earnest money and the balance would be paid in eight equal
monthly installments from May to December, 1994. However, petitioner
refused the counter-offer.

On March 29, 1994, Atty. Dauz wrote another letter3 proposing the
following terms for the purchase of the properties, viz:

This is to express our interest to buy your-above-mentioned property with

an area of 1, 738 sq. meters. For this purpose, we are enclosing herewith
the sum of P1,000,000.00 representing earnest-deposit money, subject to
the following conditions.

1. We will be given the exclusive option to purchase the property within

the 30 days from date of your acceptance of this offer.
2. During said period, we will negotiate on the terms and conditions of the
purchase; SMPPI will secure the necessary Management and Board
approvals; and we initiate the documentation if there is mutual agreement
between us.

3. In the event that we do not come to an agreement on this transaction,

the said amount of P1,000,000.00 shall be refundable to us in full upon
demand. . . .

Isidro A. Sobrecarey, petitioners vice-president and operations manager for

corporate real estate, indicated his conformity to the offer by affixing his
signature to the letter and accepted the "earnest-deposit" of P1 million.
Upon request of respondent spouses, Sobrecarey ordered the removal of
the "FOR SALE" sign from the properties.

Atty. Dauz and Sobrecarey then commenced negotiations. During their

meeting on April 8, 1994, Sobrecarey informed Atty. Dauz that petitioner
was willing to sell the subject properties on a 90-day term. Atty. Dauz
countered with an offer of six months within which to pay.

On April 14, 1994, the parties again met during which Sobrecarey informed
Atty. Dauz that petitioner had not yet acted on her counter-offer. This
prompted Atty. Dauz to propose a four-month period of amortization.

On April 25, 1994, Atty. Dauz asked for an extension of 45 days from April
29, 1994 to June 13, 1994 within which to exercise her option to purchase
the property, adding that within that period, "[we] hope to finalize [our]
agreement on the matter."4 Her request was granted.

On July 7, 1994, Petitioner, through its president and chief executive officer,
Federico Gonzales, wrote Atty. Dauz informing her that because the parties
failed to agree on the terms and conditions of the sale despite the
extension granted by petitioner, the latter was returning the amount of P1
million given as "earnest-deposit."5cräläwvirtualibräry

On July 20, 1994, respondent spouses, through counsel, wrote petitioner

demanding the execution within five days of a deed of sale covering the
properties. Respondents attempted to return the "earnest-deposit" but
petitioner refused on the ground that respondents option to purchase had
already expired.

On August 16, 1994, respondent spouses filed a complaint for specific

performance against petitioner before the Regional Trial Court, Branch 133,
Pasig City where it was docketed as Civil Case No. 64660.

Within the period for filing a responsive pleading, petitioner filed a motion
to dismiss the complaint alleging that (1) the alleged "exclusive option" of
respondent spouses lacked a consideration separate and distinct from the
purchase price and was thus unenforceable and (2) the complaint did not
allege a cause of action because there was no "meeting of the minds"
between the parties and, therefore, no perfected contract of sale. The
motion was opposed by Respondents.

On December 12, 1994, the trial court granted petitioners motion and
dismissed the action. Respondents filed a motion for reconsideration, but it
was denied by the trial court. They then appealed to the Court of Appeals
which, on April 8, 1997, rendered a decision6 reversing the judgment of the
trial court. The appellate court held that all the requisites of a perfected
contract of sale had been complied with as the offer made on March 29,
1994, in connection with which the earnest money in the amount of P1
million was tendered by respondents, had already been accepted by
petitioner. The court cited Art. 1482 of the Civil Code which provides that
"[w]henever earnest money is given in a contract of sale, it shall be
considered as part of the price and as proof of the perfection of the
contract." The fact the parties had not agreed on the mode of payment did
not affect the contract as such is not an essential element for its validity. In
addition, the court found that Sobrecarey had authority to act in behalf of
petitioner for the sale of the properties.7cräläwvirtualibräry

Petitioner moved for reconsideration of the trial courts decision, but its
motion was denied. Hence, this petition.

Petitioner contends that the Court of Appeals erred in finding that there
was a perfected contract of sale between the parties because the March 29,
1994 letter of respondents, which petitioner accepted, merely resulted in
an option contract, albeit it was unenforceable for lack of a distinct
consideration. Petitioner argues that the absence of agreement as to the
mode of payment was fatal to the perfection of the contract of sale.
Petitioner also disputes the appellate courts ruling that Isidro A. Sobrecarey
had authority to sell the subject real properties.8
cräläwvirtualibräry

Respondents were required to comment within ten (10) days from notice.
However, despite 13 extensions totalling 142 days which the Court had
given to them, respondents failed to file their comment. They were thus
considered to have waived the filing of a comment.

The petition is meritorious.

In holding that there is a perfected contract of sale, the Court of Appeals

relied on the following findings: (1) earnest money was allegedly given by
respondents and accepted by petitioner through its vice-president and
operations manager, Isidro A. Sobrecarey; and (2) the documentary
evidence in the records show that there was a perfected contract of sale.

With regard to the alleged payment and acceptance of earnest money, the
Court holds that respondents did not give the P1 million as "earnest
money" as provided by Art. 1482 of the Civil Code. They presented the
amount merely as a deposit of what would eventually become the earnest
money or downpayment should a contract of sale be made by them. The
amount was thus given not as a part of the purchase price and as proof of
the perfection of the contract of sale but only as a guarantee that
respondents would not back out of the sale. Respondents in fact described
the amount as an "earnest-deposit." In Spouses Doromal, Sr. v. Court of
Appeals,9 it was held:

. . . While the P5,000 might have indeed been paid to Carlos in October,
1967, there is nothing to show that the same was in the concept of the
earnest money contemplated in Art. 1482 of the Civil Code, invoked by
petitioner, as signifying perfection of the sale. Viewed in the backdrop of
the factual milieu thereof extant in the record, We are more inclined to
believe that the said P5,000.00 were paid in the concept of earnest money
as the term was understood under the Old Civil Code, that is, as a
guarantee that the buyer would not back out, considering that it is not
clear that there was already a definite agreement as to the price then and
that petitioners were decided to buy 6/7 only of the property should
respondent Javellana refuse to agree to part with her 1/7 share.10 cräläwvirtualibräry

In the present case, the P1 million "earnest-deposit" could not have been
given as earnest money as contemplated in Art. 1482 because, at the time
when petitioner accepted the terms of respondents offer of March 29,
1994, their contract had not yet been perfected. This is evident from the
following conditions attached by respondents to their letter, to wit: (1) that
they be given the exclusive option to purchase the property within 30 days
from acceptance of the offer; (2) that during the option period, the parties
would negotiate the terms and conditions of the purchase; and (3)
petitioner would secure the necessary approvals while respondents would
handle the documentation.

The first condition for an option period of 30 days sufficiently shows that a
sale was never perfected. As petitioner correctly points out, acceptance of
this condition did not give rise to a perfected sale but merely to an option
or an accepted unilateral promise on the part of respondents to buy the
subject properties within 30 days from the date of acceptance of the offer.
Such option giving respondents the exclusive right to buy the properties
within the period agreed upon is separate and distinct from the contract of
sale which the parties may enter.11 All that respondents had was just the
option to buy the properties which privilege was not, however, exercised
by them because there was a failure to agree on the terms of payment. No
contract of sale may thus be enforced by Respondents.

Furthermore, even the option secured by respondents from petitioner was

fatally defective. Under the second paragraph of Art. 1479, an accepted
unilateral promise to buy or sell a determinate thing for a price certain is
binding upon the pror only if the promise is supported by a distinct
consideration. Consideration in an option contract may be anything of
value, unlike in sale where it must be the price certain in money or its
equivalent. There is no showing here of any consideration for the option.
Lacking any proof of such consideration, the option is unenforceable.
Equally compelling as proof of the absence of a perfected sale is the second
condition that, during the option period, the parties would negotiate the
terms and conditions of the purchase. The stages of a contract of sale are
as follows: (1) negotiation, covering the period from the time the
prospective contracting parties indicate interest in the contract to the time
the contract is perfected; (2) perfection, which takes place upon the
concurrence of the essential elements of the sale which are the meeting of
the minds of the parties as to the object of the contract and upon the price;
and (3) consummation, which begins when the parties perform their
respective undertakings under the contract of sale, culminating in the
extinguishment thereof.12 In the present case, the parties never got past
the negotiation stage. The alleged "indubitable evidence"13 of a perfected
sale cited by the appellate court was nothing more than offers and
counter-offers which did not amount to any final arrangement containing
the essential elements of a contract of sale. While the parties already
agreed on the real properties which were the objects of the sale and on the
purchase price, the fact remains that they failed to arrive at mutually
acceptable terms of payment, despite the 45-day extension given by
petitioner.

The appellate court opined that the failure to agree on the terms of
payment was no bar to the perfection of the sale because Art. 1475 only
requires agreement by the parties as to the price of the object. This is error.
In Navarro v. Sugar Producers Cooperative Marketing Association,
Inc.,14 we laid down the rule that the manner of payment of the purchase
price is an essential element before a valid and binding contract of sale can
exist. Although the Civil Code does not expressly state that the minds of the
parties must also meet on the terms or manner of payment of the price,
the same is needed, otherwise there is no sale. As held in Toyota Shaw, Inc.
v. Court of Appeals,15 agreement on the manner of payment goes into the
price such that a disagreement on the manner of payment is tantamount to
a failure to agree on the price.16 In Velasco v. Court of Appeals,17 the
parties to a proposed sale had already agreed on the object of sale and on
the purchase price. By the buyers own admission, however, the parties still
had to agree on how and when the downpayment and the installments
were to be paid. It was held:
. . . Such being the situation, it can not, therefore, be said that a definite
and firm sales agreement between the parties had been perfected over the
lot in question. Indeed, this Court has already ruled before that a definite
agreement on the manner of payment of the purchase price is an essential
element in the formation of a binding and enforceable contract of sale. The
fact, therefore, that the petitioners delivered to the respondent the sum of
P10,000 as part of the down-payment that they had to pay cannot be
considered as sufficient proof of the perfection of any purchase and sale
agreement between the parties herein under Art. 1482 of the new Civil
Code, as the petitioners themselves admit that some essential matter - the
terms of the payment - still had to be mutually covenanted.18 cräläwvirtualibräry

Thus, it is not the giving of earnest money, but the proof of the
concurrence of all the essential elements of the contract of sale which
establishes the existence of a perfected sale.

In the absence of a perfected contract of sale, it is immaterial whether

Isidro A. Sobrecarey had the authority to enter into a contract of sale in
behalf of petitioner. This issue, therefore, needs no further discussion.

WHEREFORE , the decision of the Court of Appeals is REVERSED and

respondents complaint is DISMISSED.

SO ORDERED.

Quisumbing, Buena, and De Leon, Jr., JJ., concur.

G.R. No. 118114 December 7, 1995

TEODORO ACAP, petitioner,

vs.
COURT OF APPEALS and EDY DE LOS REYES, respondents.

PADILLA, J.:
This is a petition for review on certiorari of the decision of the Court of Appeals, 2nd Division, in
1

CA-G.R. No. 36177, which affirmed the decision of the Regional Trial Court of Himamaylan,
2

Negros Occidental holding that private respondent Edy de los Reyes had acquired ownership of
Lot No. 1130 of the Cadastral Survey of Hinigaran, Negros Occidental based on a document
entitled "Declaration of Heirship and Waiver of Rights", and ordering the dispossession of
petitioner as leasehold tenant of the land for failure to pay rentals.

The facts of the case are as follows:

The title to Lot No. 1130 of the Cadastral Survey of Hinigaran, Negros Occidental was evidenced
by OCT No. R-12179. The lot has an area of 13,720 sq. meters. The title was issued and is
registered in the name of spouses Santiago Vasquez and Lorenza Oruma. After both spouses died,
their only son Felixberto inherited the lot. In 1975, Felixberto executed a duly notarized
document entitled "Declaration of Heirship and Deed of Absolute Sale" in favor of Cosme Pido.

The evidence before the court a quo established that since 1960, petitioner Teodoro Acap had
been the tenant of a portion of the said land, covering an area of nine thousand five hundred
(9,500) meters. When ownership was transferred in 1975 by Felixberto to Cosme Pido, Acap
continued to be the registered tenant thereof and religiously paid his leasehold rentals to Pido
and thereafter, upon Pido's death, to his widow Laurenciana.

The controversy began when Pido died intestate and on 27 November 1981, his surviving heirs
executed a notarized document denominated as "Declaration of Heirship and Waiver of Rights of
Lot No. 1130 Hinigaran Cadastre," wherein they declared; to quote its pertinent portions, that:

. . . Cosme Pido died in the Municipality of Hinigaran, Negros Occidental, he died intestate and
without any known debts and obligations which the said parcel of land is (sic) held liable.

That Cosme Pido was survived by his/her legitimate heirs, namely: LAURENCIANA PIDO, wife, ELY,
ERVIN, ELMER, and ELECHOR all surnamed PIDO; children;

That invoking the provision of Section 1, Rule 74 of the Rules of Court, the above-mentioned
heirs do hereby declare unto [sic] ourselves the only heirs of the late Cosme Pido and that we
hereby adjudicate unto ourselves the above-mentioned parcel of land in equal shares.

Now, therefore, We LAURENCIANA , ELY, ELMER, ERVIN and ELECHOR all surnamed PIDO, do
3

hereby waive, quitclaim all our rights, interests and participation over the said parcel of land in
favor of EDY DE LOS REYES, of legal age, (f)ilipino, married to VIRGINIA DE LOS REYES, and
resident of Hinigaran, Negros Occidental, Philippines. . . . (Emphasis supplied)
4

The document was signed by all of Pido's heirs. Private respondent Edy de los Reyes did not sign
said document.

It will be noted that at the time of Cosme Pido's death, title to the property continued to be
registered in the name of the Vasquez spouses. Upon obtaining the Declaration of Heirship with
Waiver of Rights in his favor, private respondent Edy de los Reyes filed the same with the
Registry of Deeds as part of a notice of an adverse claimagainst the original certificate of title.
Thereafter, private respondent sought for petitioner (Acap) to personally inform him that he (Edy)
had become the new owner of the land and that the lease rentals thereon should be paid to him.
Private respondent further alleged that he and petitioner entered into an oral lease agreement
wherein petitioner agreed to pay ten (10) cavans of palay per annum as lease rental. In 1982,
petitioner allegedly complied with said obligation. In 1983, however, petitioner refused to pay
any further lease rentals on the land, prompting private respondent to seek the assistance of the
then Ministry of Agrarian Reform (MAR) in Hinigaran, Negros Occidental. The MAR invited
petitioner to a conference scheduled on 13 October 1983. Petitioner did not attend the
conference but sent his wife instead to the conference. During the meeting, an officer of the
Ministry informed Acap's wife about private respondent's ownership of the said land but she
stated that she and her husband (Teodoro) did not recognize private respondent's claim of
ownership over the land.

On 28 April 1988, after the lapse of four (4) years, private respondent filed a complaint for
recovery of possession and damages against petitioner, alleging in the main that as his leasehold
tenant, petitioner refused and failed to pay the agreed annual rental of ten (10) cavans of palay
despite repeated demands.

During the trial before the court a quo, petitioner reiterated his refusal to recognize private
respondent's ownership over the subject land. He averred that he continues to recognize Cosme
Pido as the owner of the said land, and having been a registered tenant therein since 1960, he
never reneged on his rental obligations. When Pido died, he continued to pay rentals to Pido's
widow. When the latter left for abroad, she instructed him to stay in the landholding and to pay
the accumulated rentals upon her demand or return from abroad.

Petitioner further claimed before the trial court that he had no knowledge about any transfer or
sale of the lot to private respondent in 1981 and even the following year after Laurenciana's
departure for abroad. He denied having entered into a verbal lease tenancy contract with private
respondent and that assuming that the said lot was indeed sold to private respondent without
his knowledge, R.A. 3844, as amended, grants him the right to redeem the same at a reasonable
price. Petitioner also bewailed private respondent's ejectment action as a violation of his right to
security of tenure under P.D. 27.

On 20 August 1991, the lower court rendered a decision in favor of private respondent, the
dispositive part of which reads:

WHEREFORE, premises considered, the Court renders judgment in favor of the plaintiff, Edy de
los Reyes, and against the defendant, Teodoro Acap, ordering the following, to wit:

1. Declaring forfeiture of defendant's preferred right to issuance of a Certificate of Land Transfer

under Presidential Decree No. 27 and his farmholdings;

2. Ordering the defendant Teodoro Acap to deliver possession of said farm to plaintiff, and;

3. Ordering the defendant to pay P5,000.00 as attorney's fees, the sum of P1,000.00 as expenses
of litigation and the amount of P10,000.00 as actual damages. 5
In arriving at the above-mentioned judgment, the trial court stated that the evidence had
established that the subject land was "sold" by the heirs of Cosme Pido to private respondent.
This is clear from the following disquisitions contained in the trial court's six (6) page decision:

There is no doubt that defendant is a registered tenant of Cosme Pido. However, when the latter
died their tenancy relations changed since ownership of said land was passed on to his heirs who,
by executing a Deed of Sale, which defendant admitted in his affidavit, likewise passed on their
ownership of Lot 1130 to herein plaintiff (private respondent). As owner hereof, plaintiff has the
right to demand payment of rental and the tenant is obligated to pay rentals due from the time
demand is made. . . .6

xxx xxx xxx

Certainly, the sale of the Pido family of Lot 1130 to herein plaintiff does not of itself extinguish
the relationship. There was only a change of the personality of the lessor in the person of herein
plaintiff Edy de los Reyes who being the purchaser or transferee, assumes the rights and
obligations of the former landowner to the tenant Teodoro Acap, herein defendant. 7

Aggrieved, petitioner appealed to the Court of Appeals, imputing error to the lower court when
it ruled that private respondent acquired ownership of Lot No. 1130 and that he, as tenant,
should pay rentals to private respondent and that failing to pay the same from 1983 to 1987, his
right to a certificate of land transfer under P.D. 27 was deemed forfeited.

The Court of Appeals brushed aside petitioner's argument that the Declaration of Heirship and
Waiver of Rights (Exhibit "D"), the document relied upon by private respondent to prove his
ownership to the lot, was excluded by the lower court in its order dated 27 August 1990. The
order indeed noted that the document was not identified by Cosme Pido's heirs and was not
registered with the Registry of Deeds of Negros Occidental. According to respondent court,
however, since the Declaration of Heirship and Waiver of Rights appears to have been duly
notarized, no further proof of its due execution was necessary. Like the trial court, respondent
court was also convinced that the said document stands as prima facie proof of appellee's
(private respondent's) ownership of the land in dispute.

With respect to its non-registration, respondent court noted that petitioner had actual
knowledge of the subject saleof the land in dispute to private respondent because as early as
1983, he (petitioner) already knew of private respondent's claim over the said land but which he
thereafter denied, and that in 1982, he (petitioner) actually paid rent to private respondent.
Otherwise stated, respondent court considered this fact of rental payment in 1982 as estoppel
on petitioner's part to thereafter refute private respondent's claim of ownership over the said
land. Under these circumstances, respondent court ruled that indeed there was deliberate
refusal by petitioner to pay rent for a continued period of five years that merited forfeiture of his
otherwise preferred right to the issuance of a certificate of land transfer.

In the present petition, petitioner impugns the decision of the Court of Appeals as not in accord
with the law and evidence when it rules that private respondent acquired ownership of Lot No.
1130 through the aforementioned Declaration of Heirship and Waiver of Rights.
Hence, the issues to be resolved presently are the following:

1. WHETHER OR NOT THE SUBJECT DECLARATION OF HEIRSHIP AND WAIVER OF RIGHTS IS A

RECOGNIZED MODE OF ACQUIRING OWNERSHIP BY PRIVATE RESPONDENT OVER THE LOT IN
QUESTION.

2. WHETHER OR NOT THE SAID DOCUMENT CAN BE CONSIDERED A DEED OF SALE IN FAVOR OF
PRIVATE RESPONDENT OF THE LOT IN QUESTION.

Petitioner argues that the Regional Trial Court, in its order dated 7 August 1990, explicitly
excluded the document marked as Exhibit "D" (Declaration of Heirship, etc.) as private
respondent's evidence because it was not registered with the Registry of Deeds and was not
identified by anyone of the heirs of Cosme Pido. The Court of Appeals, however, held the same
to be admissible, it being a notarized document, hence, a prima facie proof of private
respondents' ownership of the lot to which it refers.

Petitioner points out that the Declaration of Heirship and Waiver of Rights is not one of the
recognized modes of acquiring ownership under Article 712 of the Civil Code. Neither can the
same be considered a deed of sale so as to transfer ownership of the land to private respondent
because no consideration is stated in the contract (assuming it is a contract or deed of sale).

Private respondent defends the decision of respondent Court of Appeals as in accord with the
evidence and the law. He posits that while it may indeed be true that the trial court excluded his
Exhibit "D" which is the Declaration of Heirship and Waiver of Rights as part of his evidence, the
trial court declared him nonetheless owner of the subject lot based on other evidence adduced
during the trial, namely, the notice of adverse claim (Exhibit "E") duly registered by him with the
Registry of Deeds, which contains the questioned Declaration of Heirship and Waiver of Rights as
an integral part thereof.

We find the petition impressed with merit.

In the first place, an asserted right or claim to ownership or a real right over a thing arising from
a juridical act, however justified, is not per se sufficient to give rise to ownership over the res.
That right or title must be completed by fulfilling certain conditions imposed by law. Hence,
ownership and real rights are acquired only pursuant to a legal mode or process. While title is
the juridical justification, mode is the actual process of acquisition or transfer of ownership over
a thing in question.
8

Under Article 712 of the Civil Code, the modes of acquiring ownership are generally classified
into two (2) classes, namely, the original mode (i.e., through occupation, acquisitive prescription,
law or intellectual creation) and the derivative mode (i.e., through succession mortis causa or
tradition as a result of certain contracts, such as sale, barter, donation, assignment or mutuum).

In the case at bench, the trial court was obviously confused as to the nature and effect of the
Declaration of Heirship and Waiver of Rights, equating the same with a contract (deed) of sale.
They are not the same.
In a Contract of Sale, one of the contracting parties obligates himself to transfer the ownership of
and to deliver a determinate thing, and the other party to pay a price certain in money or its
equivalent. 9

Upon the other hand, a declaration of heirship and waiver of rights operates as a public
instrument when filed with the Registry of Deeds whereby the intestate heirs adjudicate and
divide the estate left by the decedent among themselves as they see fit. It is in effect an
extrajudicial settlement between the heirs under Rule 74 of the Rules of Court. 10

Hence, there is a marked difference between a sale of hereditary rights and a waiver of
hereditary rights. The first presumes the existence of a contract or deed of sale between the
parties. The second is, technically speaking, a mode of extinction of ownership where there is
11

an abdication or intentional relinquishment of a known right with knowledge of its existence and
intention to relinquish it, in favor of other persons who are co-heirs in the succession. Private
12

respondent, being then a stranger to the succession of Cosme Pido, cannot conclusively claim
ownership over the subject lot on the sole basis of the waiver document which neither recites
the elements of either a sale, or a donation, or any other derivative mode of acquiring
13 14

ownership.

Quite surprisingly, both the trial court and public respondent Court of Appeals concluded that a
"sale" transpired between Cosme Pido's heirs and private respondent and that petitioner
acquired actual knowledge of said sale when he was summoned by the Ministry of Agrarian
Reform to discuss private respondent's claim over the lot in question. This conclusion has no
basis both in fact and in law.

On record, Exhibit "D", which is the "Declaration of Heirship and Waiver of Rights"
was excluded by the trial court in its order dated 27 August 1990 because the document was
neither registered with the Registry of Deeds nor identified by the heirs of Cosme Pido. There is
no showing that private respondent had the same document attached to or made part of the
record. What the trial court admitted was Annex "E", a notice of adverse claim filed with the
Registry of Deeds which contained the Declaration of Heirship with Waiver of rights and was
annotated at the back of the Original Certificate of Title to the land in question.

A notice of adverse claim, by its nature, does not however prove private respondent's ownership
over the tenanted lot. "A notice of adverse claim is nothing but a notice of a claim adverse to the
registered owner, the validity of which is yet to be established in court at some future date, and
is no better than a notice of lis pendens which is a notice of a case already pending in court."15

It is to be noted that while the existence of said adverse claim was duly proven, there is no
evidence whatsoever that a deed of sale was executed between Cosme Pido's heirs and private
respondent transferring the rights of Pido's heirs to the land in favor of private respondent.
Private respondent's right or interest therefore in the tenanted lot remains an adverse claim
which cannot by itself be sufficient to cancel the OCT to the land and title the same in private
respondent's name.

Consequently, while the transaction between Pido's heirs and private respondent may be
binding on both parties, the right of petitioner as a registered tenant to the land cannot be
perfunctorily forfeited on a mere allegation of private respondent's ownership without the
corresponding proof thereof.

Petitioner had been a registered tenant in the subject land since 1960 and religiously paid lease
rentals thereon. In his mind, he continued to be the registered tenant of Cosme Pido and his
family (after Pido's death), even if in 1982, private respondent allegedly informed petitioner that
he had become the new owner of the land.

Under the circumstances, petitioner may have, in good faith, assumed such statement of private
respondent to be true and may have in fact delivered 10 cavans of palay as annual rental for
1982 to private respondent. But in 1983, it is clear that petitioner had misgivings over private
respondent's claim of ownership over the said land because in the October 1983 MAR
conference, his wife Laurenciana categorically denied all of private respondent's allegations. In
fact, petitioner even secured a certificate from the MAR dated 9 May 1988 to the effect that he
continued to be the registered tenant of Cosme Pido and not of private respondent. The reason
is that private respondent never registered the Declaration of Heirship with Waiver of Rights
with the Registry of Deeds or with the MAR. Instead, he (private respondent) sought to do
indirectly what could not be done directly, i.e., file a notice of adverse claim on the said lot to
establish ownership thereover.

It stands to reason, therefore, to hold that there was no unjustified or deliberate refusal by
petitioner to pay the lease rentals or amortizations to the landowner/agricultural lessor which, in
this case, private respondent failed to establish in his favor by clear and convincing evidence.
16

Consequently, the sanction of forfeiture of his preferred right to be issued a Certificate of Land
Transfer under P.D. 27 and to the possession of his farmholdings should not be applied against
petitioners, since private respondent has not established a cause of action for recovery of
possession against petitioner.

WHEREFORE, premises considered, the Court hereby GRANTS the petition and the decision of
the Court of Appeals dated 1 May 1994 which affirmed the decision of the RTC of Himamaylan,
Negros Occidental dated 20 August 1991 is hereby SET ASIDE. The private respondent's
complaint for recovery of possession and damages against petitioner Acap is hereby DISMISSED
for failure to properly state a cause of action, without prejudice to private respondent taking the
proper legal steps to establish the legal mode by which he claims to have acquired ownership of
the land in question.

SO ORDERED.

FIRST DIVISION

G. R. No. 136773. June 25, 2003]

MILAGROS MANONGSONG, joined by her husband, CARLITO MANONGSONG, Petitioners, v. FELOMENA
JUMAQUIO ESTIMO, EMILIANA JUMAQUIO, NARCISO ORTIZ, CELESTINO ORTIZ, RODOLFO ORTIZ, ERLINDA O.
OCAMPO, PASTOR ORTIZ, JR., ROMEO ORTIZ BENJAMIN DELA CRUZ, SR., BENJAMIN DELA CRUZ, JR., AURORA
NICOLAS, GLORIA RACADIO, ROBERTO DELA CRUZ, JOSELITO DELA CRUZ and LEONCIA S. LOPEZ, respondents.

DECISION

CARPIO, J.:

The Case

Before this Court is a petition for review1 assailing the Decision2 of 26 June 1998 and the Resolution of 21
December 1998 of the Court of Appeals in CA-G.R. CV No. 51643. The Court of Appeals reversed the Decision
dated 10 April 1995 of the Regional Trial Court of Makati City, Branch 135, in Civil Case No. 92-1685, partitioning
the property in controversy and awarding to petitioners a portion of the property.

Antecedent Facts

Spouses Agatona Guevarra (Guevarra) and Ciriaco Lopez had six (6) children, namely: (1) Dominador Lopez; (2)
Enriqueta Lopez-Jumaquio, the mother of respondents Emiliana Jumaquio Rodriguez and Felomena Jumaquio
Estimo (Jumaquio sisters); (3) Victor Lopez, married to respondent Leoncia Lopez; (4) Benigna Lopez-Ortiz, the
mother of respondents Narciso, Celestino, Rodolfo, Pastor Jr. and Romeo Ortiz, and Erlinda Ortiz Ocampo; (5)
Rosario Lopez-dela Cruz, married to respondent Benjamin dela Cruz, Sr. and the mother of respondents Benjamin
Jr., Roberto, and Joselito, all surnamed dela Cruz, and of Gloria dela Cruz Racadio and Aurora dela Cruz Nicolas;
and (6) Vicente Lopez, the father of petitioner Milagros Lopez Manongsong (Manongsong).

The contested property is a parcel of land on San Jose Street, Manuyo Uno, Las Pias, Metro Manila with an area
of approximately 152 square meters (Property). The records do not show that the Property is registered under
the Torrens system. The Property is particularly described in Tax Declaration No. B-001-003903 as bounded in the
north by Juan Gallardo, south by Calle Velay, east by Domingo Lavana and west by San Jose Street. Tax
Declaration No. B-001-00390 was registered with the Office of the Municipal Assessor of Las Pias on 30
September 1984 in the name of Benigna Lopez, et al.4 However, the improvements on the portion of the
Property denominated as No. 831 San Jose St., Manuyo Uno, Las Pias were separately declared in the name of
Filomena J. Estimo under Tax Declaration No. 90-001-02145 dated 14 October 1991.5 cräläwvirtualibräry

Milagros and Carlito Manongsong (petitioners) filed a Complaint 6 on 19 June 1992, alleging that Manongsong
and respondents are the owners pro indiviso of the Property. Invoking Article 494 of the Civil Code,7 petitioners
prayed for the partition and award to them of an area equivalent to one-fifth (1/5) of the Property or its
prevailing market value, and for damages.

Petitioners alleged that Guevarra was the original owner of the Property. Upon Guevarras death, her children
inherited the Property. Since Dominador Lopez died without offspring, there were only five children left as heirs
of Guevarra. Each of the five children, including Vicente Lopez, the father of Manongsong, was entitled to a fifth
of the Property. As Vicente Lopez sole surviving heir, Manongsong claims her fathers 1/5 share in the Property by
right of representation.

There is no dispute that respondents, who are the surviving spouses of Guevarras children and their offspring,
have been in possession of the Property for as long as they can remember. The area actually occupied by each
respondent family differs, ranging in size from approximately 25 to 50 square meters. Petitioners are the only
descendants not occupying any portion of the Property.

Most respondents, specifically Narciso, Rodolfo, Pastor Jr., and Celestino Ortiz, and Erlinda Ortiz Ocampo (Ortiz
family), as well as Benjamin Sr., Benjamin Jr., and Roberto dela Cruz, Aurora dela Cruz Nicolas and Gloria Dela
Cruz Racadio (Dela Cruz family), entered into a compromise agreement with petitioners. Under the Stipulation of
Facts and Compromise Agreement8 dated 12 September 1992 (Agreement), petitioners and the Ortiz and Dela
Cruz families agreed that each group of heirs would receive an equal share in the Property. The signatories to the
Agreement asked the trial court to issue an order of partition to this effect and prayed further that those who
have exceeded said one-fifth (1/5) must be reduced so that those who have less and those who have none shall
get the correct and proper portion.9cräläwvirtualibräry

Among the respondents, the Jumaquio sisters and Leoncia Lopez who each occupy 50 square meter portions of
the Property and Joselito dela Cruz, did not sign the Agreement. 10 However, only the Jumaquio sisters actively
opposed petitioners claim. The Jumaquio sisters contended that Justina Navarro (Navarro), supposedly the
mother of Guevarra, sold the Property to Guevarras daughter Enriqueta Lopez Jumaquio.

The Jumaquio sisters presented provincial Tax Declaration No. 91111 for the year 1949 in the sole name of
Navarro. Tax Declaration No. 911 described a residential parcel of land with an area of 172.51 square meters,
located on San Jose St., Manuyo, Las Pias, Rizal with the following boundaries: Juan Gallardo to the north, I.
Guevarra Street to the south, Rizal Street to the east and San Jose Street to the west. In addition, Tax Declaration
No. 911 stated that the houses of "Agatona Lopez" and "Enriquita Lopez" stood on the Property as
improvements.

The Jumaquio sisters also presented a notarized KASULATAN SA BILIHAN NG LUPA12 (Kasulatan) dated 11
October 1957, the relevant portion of which states:

AKO SI JUSTINA NAVARRO, sapat ang gulang, may asawa, Pilipino at naninirahan sa LAS PIAS, ay siyang
nagma-may-ari at nagtatangkilik ng isang lagay na lupa na matatagpuan sa Manuyo, Las Pias, Rizal, lihis sa
anomang pagkakautang lalong napagkikilala sa pamamagitan ng mga sumusunod na palatandaan:

BOUNDARIES:

NORTH: JUAN GALLARDO SOUTH: I. GUEVARRA ST. EAST: RIZAL ST., WEST: SAN JOSE ST.,

na may sukat na 172.51 metros cuadrados na may TAX DECLARATION BILANG 911.

NA DAHIL AT ALANG ALANG sa halagang DALAWANG DAAN LIMANGPUNG PISO (P250.00), SALAPING PILIPINO,
na sa akin ay kaliwang iniabot at ibinayad ni ENRIQUETA LOPEZ, may sapat na gulang, Pilipino, may asawa at
naninirahan sa Las Pias, Rizal, at sa karapatang ito ay aking pinatutunayan ng pagkakatanggap ng nasabing halaga
na buong kasiyahan ng aking kalooban ay aking IPINAGBILI, ISINALIN AT INILIPAT sa nasabing, ENRIQUETA LOPEZ,
sa kanyang mga tagapagmana at kahalili, ang kabuuang sukat ng lupang nabanggit sa itaas nito sa pamamagitan
ng bilihang walang anomang pasubali. Ang lupang ito ay walang kasama at hindi taniman ng palay o mais.

Simula sa araw na ito ay aking ililipat ang pagmamay-ari at pagtatangkilik ng nasabing lupa kay ENRIQUETA LOPEZ
sa kanilang/kanyang tagapagmana at kahalili x x x.

The Clerk of Court of the Regional Trial Court of Manila certified on 1 June 1994 that the KASULATAN SA BILIHAN
NG LUPA, between Justina Navarro (Nagbili) and Enriqueta Lopez (Bumili), was notarized by Atty. Ruperto Q.
Andrada on 11 October 1957 and entered in his Notarial Register xxx.13 The certification further stated that Atty.
Andrada was a duly appointed notary public for the City of Manila in 1957.

Because the Jumaquio sisters were in peaceful possession of their portion of the Property for more than thirty
years, they also invoked the defense of acquisitive prescription against petitioners, and charged that petitioners
were guilty of laches. The Jumaquio sisters argued that the present action should have been filed years earlier,
either by Vicente Lopez when he was alive or by Manongsong when the latter reached legal age. Instead,
petitioners filed this action for partition only in 1992 when Manongsong was already 33 years old.
The Ruling of the Trial Court

After trial on the merits, the trial court in its Decision14 of 10 April 1995 ruled in favor of petitioners. The trial
court held that the Kasulatanwas void, even absent evidence attacking its validity. The trial court declared:

It appears that the ownership of the estate in question is controverted. According to defendants Jumaquios, it
pertains to them through conveyance by means of a Deed of Sale executed by their common ancestor Justina
Navarro to their mother Enriqueta, which deed was presented in evidence as Exhs. 4 to 4-A. Plaintiff Milagros
Manongsong debunks the evidence as fake. The document of sale, in the observance of the Court, is however
duly authenticated by means of a certificate issued by the RTC of the Manila Clerk of Court as duly notarized
public document (Exh. 5). No countervailing proof was adduced by plaintiffs to overcome or impugn the
documents legality or its validity.

xxx The conveyance made by Justina Navarro is subject to nullity because the property conveyed had a conjugal
character. No positive evidence had been introduced that it was solely a paraphernal property. The name of
Justina Navarros spouse/husband was not mentioned and/or whether the husband was still alive at the time the
conveyance was made to Justina Navarro. Agatona Guevarra as her compulsory heir should have the legal right
to participate with the distribution of the estate under question to the exclusion of others. She is entitled to
her legitime. The Deed of Sale [Exhs 4 & 4-1(sic)] did not at all provide for the reserved legitime or the heirs, and,
therefore it has no force and effect against Agatona Guevarra and her six (6) legitimate children including the
grandchildren, by right of representation, as described in the order of intestate succession. The same Deed of
Sale should be declared a nullity ab initio. The law on the matter is clear. The compulsory heirs cannot be
deprived of their legitime, except on (sic) cases expressly specified by law like for instance disinheritance for
cause. xxx (Emphasis supplied)

Since the other respondents had entered into a compromise agreement with petitioners, the dispositive portion
of the trial courts decision was directed against the Jumaquio sisters only, as follows:

WHEREFORE, premises considered, judgment is hereby rendered in favor of plaintiffs and against the remaining
active defendants, Emiliana Jumaquio and Felomena J. Estimo, jointly and severally, ordering:

1. That the property consisting of 152 square meters referred to above be immediately partitioned giving plaintiff
Milagros Lopez-Manongsong her lawful share of 1/5 of the area in square meters, or the prevailing market value
on the date of the decision;

2. Defendants to pay plaintiffs the sum of P10,000.00 as compensatory damages for having deprived the latter
the use and enjoyment of the fruits of her 1/5 share;

3. Defendants to pay plaintiffs litigation expenses and attorneys fee in the sum of P10,000.00; and

4. Defendants to pay the costs of suit.

SO ORDERED.15 (Emphasis supplied)

When the trial court denied their motion for reconsideration, the Jumaquio sisters appealed to the Court of
Appeals.

The Ruling of the Court of Appeals

Petitioners, in their appellees brief before the Court of Appeals, presented for the first time a supposed
photocopy of the death certificate16of Guevarra, which stated that Guevarras mother was a certain Juliana
Gallardo. Petitioner also attached an affidavit17 from Benjamin dela Cruz, Sr. attesting that he knew Justina
Navarro only by name and had never met her personally, although he had lived for some years with Agatona
Guevarra after his marriage with Rosario Lopez. On the basis of these documents, petitioners assailed the
genuineness and authenticity of the Kasulatan.

The Court of Appeals refused to take cognizance of the death certificate and affidavit presented by petitioners on
the ground that petitioners never formally offered these documents in evidence.

The appellate court further held that the petitioners were bound by their admission that Navarro was the original
owner of the Property, as follows:

Moreover, plaintiffs-appellees themselves admitted before the trial court that Justina Navarro and not Juliana
Gallardo was the original owner of the subject property and was the mother of Agatona Navarro (sic).
Plaintiffs-appellees in their Reply-Memorandum averred:

As regards the existence of common ownership, the defendants clearly admit as follows:

xxx xxx xxx

History of this case tells us that originally the property was owned by JUSTINA NAVARRO who has a daughter by
the name of AGATONA GUEVARRA who on the other hand has six children namely: xxx xxx xxx.

which point-out that co-ownership exists on the property between the parties. Since this is the admitted history,
facts of the case, it follows that there should have been proper document to extinguish this status of
co-ownership between the common owners either by (1) Court action or proper deed of tradition, xxx xxx xxx.

The trial court confirms these admissions of plaintiffs-appellees. The trial court held:

xxx xxx xxx

With the parties admissions and their conformity to a factual common line of relationship of the heirs with one
another, it has been elicited ascendant Justina Navarro is the common ancestor of the heirs herein mentioned,
however, it must be noted that the parties failed to amplify who was the husband and the number of compulsory
heirs of Justina Navarro. xxx xxx xxx

Therefore, plaintiffs-appellees cannot now be heard contesting the fact that Justina Navarro was their common
ancestor and was the original owner of the subject property.

The Court of Appeals further held that the trial court erred in assuming that the Property was conjugal in nature
when Navarro sold it. The appellate court reasoned as follows:

However, it is a settled rule that the party who invokes the presumption that all property of marriage belongs to
the conjugal partnership, must first prove that the property was acquired during the marriage. Proof of
acquisition during the coveture is a condition sine qua non for the operation of the presumption in favor of
conjugal ownership.

In this case, not a single iota of evidence was submitted to prove that the subject property was acquired by
Justina Navarro during her marriage. xxx

The findings of the trial court that the subject property is conjugal in nature is not supported by any evidence.

To the contrary, records show that in 1949 the subject property was declared, for taxation purposes under the
name of Justina Navarro alone. This indicates that the land is the paraphernal property of Justina Navarro.

For these reasons, the Court of Appeals reversed the decision of the trial court, thus:
WHEREFORE, foregoing considered, the appealed decision is hereby REVERSED and SET ASIDE. A new one is
hereby rendered DISMISSING plaintiffs-appellees complaint in so far as defendants-appellants are concerned.

Costs against plaintiffs-appellees.

SO ORDERED.18 cräläwvirtualibräry

Petitioners filed a motion for reconsideration, but the Court of Appeals denied the same in its Resolution of 21
December 1998.19 cräläwvirtualibräry

On 28 January 1999, petitioners appealed the appellate courts decision and resolution to this Court. The Court
initially denied the petition for review due to certain procedural defects. The Court, however, gave due course to
the petition in its Resolution of 31 January 2000.20

The Issues

Petitioners raise the following issues before this Court:

1. WHETHER PETITIONER HAS NO COUNTERVAILING EVIDENCE ON THE ALLEGED SALE BY ONE JUSTINA
NAVARRO;

2. WHETHER THERE IS PRETERITION AND THE ISSUES RAISED ARE REVIEWABLE;

3. WHETHER THERE IS CO-OWNERSHIP PRO INDIVISO;

4. WHETHER THE RULE OF THE MAJORITY CO-OWNERS ON THE LAND SHOULD PREVAIL;

5. WHETHER THE ALLEGED SALE IS VALID AND BINDS THE OTHER CO-HEIRS;

6. WHETHER PRESCRIPTION APPLIES AGAINST THE SHARE OF PETITIONERS. 21 cräläwvirtualibräry

The fundamental question for resolution is whether petitioners were able to prove, by the requisite quantum of
evidence, that Manongsong is a co-owner of the Property and therefore entitled to demand for its partition.

The Ruling of the Court

The petition lacks merit.

The issues raised by petitioners are mainly factual in nature. In general, only questions of law are appealable to
this Court under Rule 45. However, where the factual findings of the trial court and Court of Appeals conflict, this
Court has the authority to review and, if necessary, reverse the findings of fact of the lower courts. 22 This is
precisely the situation in this case.

We review the factual and legal issues of this case in light of the general rules of evidence and the burden of
proof in civil cases, as explained by this Court in Jison v. Court of Appeals :23
cräläwvirtualibräry

xxx Simply put, he who alleges the affirmative of the issue has the burden of proof, and upon the plaintiff in a
civil case, the burden of proof never parts. However, in the course of trial in a civil case, once plaintiff makes out
a prima facie case in his favor, the duty or the burden of evidence shifts to defendant to controvert
plaintiff's prima facie case, otherwise, a verdict must be returned in favor of plaintiff. Moreover, in civil cases,
the party having the burden of proof must produce a preponderance of evidence thereon, with plaintiff having to
rely on the strength of his own evidence and not upon the weakness of the defendants. The concept of
preponderance of evidence refers to evidence which is of greater weight, or more convincing, that which is
offered in opposition to it; at bottom, it means probability of truth.

Whether the Court of Appeals erred in affirming the validity of the

Kasulatan sa Bilihan ng Lupa

Petitioners anchor their action for partition on the claim that Manongsong is a co-owner or co-heir of the
Property by inheritance, more specifically, as the heir of her father, Vicente Lopez. Petitioners likewise allege that
the Property originally belonged to Guevarra, and that Vicente Lopez inherited from Guevarra a 1/5 interest in
the Property. As the parties claiming the affirmative of these issues, petitioners had the burden of proof to
establish their case by preponderance of evidence.

To trace the ownership of the Property, both contending parties presented tax declarations and the testimonies
of witnesses. However, the Jumaquio sisters also presented a notarized KASULATAN SA BILIHAN NG LUPA which
controverted petitioners claim of co-ownership.

The Kasulatan, being a document acknowledged before a notary public, is a public document and prima
facie evidence of its authenticity and due execution. To assail the authenticity and due execution of a notarized
document, the evidence must be clear, convincing and more than merely preponderant.24 Otherwise the
authenticity and due execution of the document should be upheld. 25 The trial court itself held that (n)o
countervailing proof was adduced by plaintiffs to overcome or impugn the documents legality or its validity.26 cräläwvirtualibräry

Even if the Kasulatan was not notarized, it would be deemed an ancient document and thus still presumed to be
authentic. The Kasulatanis: (1) more than 30 years old, (2) found in the proper custody, and (3) unblemished by
any alteration or by any circumstance of suspicion. It appears, on its face, to be genuine.27cräläwvirtualibräry

Nevertheless, the trial court held that the Kasulatan was void because the Property was conjugal at the time
Navarro sold it to Enriqueta Lopez Jumaquio. We do not agree. The trial courts conclusion that the Property was
conjugal was not based on evidence, but rather on a misapprehension of Article 160 of the Civil Code, which
provides:

All property of the marriage is presumed to belong to the conjugal partnership, unless it be proved that it
pertains exclusively to the husband or to the wife.

As the Court of Appeals correctly pointed out, the presumption under Article 160 of the Civil Code applies only
when there is proof that the property was acquired during the marriage. Proof of acquisition during the marriage
is an essential condition for the operation of the presumption in favor of the conjugal partnership.28 cr äläwvirtualibräry

There was no evidence presented to establish that Navarro acquired the Property during her marriage. There is
no basis for applying the presumption under Article 160 of the Civil Code to the present case. On the contrary,
Tax Declaration No. 911 showed that, as far back as in 1949, the Property was declared solely in Navarros
name.29 This tends to support the argument that the Property was not conjugal.

We likewise find no basis for the trial courts declaration that the sale embodied in the Kasulatan deprived the
compulsory heirs of Guevarra of their legitimes. As opposed to a disposition inter vivos by lucrative or gratuitous
title, a valid sale for valuable consideration does not diminish the estate of the seller. When the disposition is for
valuable consideration, there is no diminution of the estate but merely a substitution of values, 30 that is, the
property sold is replaced by the equivalent monetary consideration.

Under Article 1458 of the Civil Code, the elements of a valid contract of sale are: (1) consent or meeting of the
minds; (2) determinate subject matter and (3) price certain in money or its equivalent.31 The presence of these
elements is apparent on the face of the Kasulatan itself. The Property was sold in 1957 for P250.00.32
Whether the Court of Appeals erred in not admitting the documents presented by petitioners for the first time
on appeal

We find no error in the Court of Appeals refusal to give any probative value to the alleged birth certificate of
Guevarra and the affidavit of Benjamin dela Cruz, Sr. Petitioners belatedly attached these documents to their
appellees brief. Petitioners could easily have offered these documents during the proceedings before the trial
court. Instead, petitioners presented these documents for the first time on appeal without any explanation. For
reasons of their own, petitioners did not formally offer in evidence these documents before the trial court as
required by Section 34, Rule 132 of the Rules of Court.33 To admit these documents now is contrary to due
process, as it deprives respondents of the opportunity to examine and controvert them.

Moreover, even if these documents were admitted, they would not controvert Navarros ownership of the
Property. Benjamin dela Cruz, Sr.s affidavit stated merely that, although he knew Navarro by name, he was not
personally acquainted with her.34 Guevarras alleged birth certificate casts doubt only as to whether Navarro was
indeed the mother of Guevarra. These documents do not prove that Guevarra owned the Property or that
Navarro did not own the Property.

Petitioners admitted before the trial court that Navarro was the mother of Guevarra. However, petitioners
denied before the Court of Appeals that Navarro was the mother of Guevarra. We agree with the appellate court
that this constitutes an impermissible change of theory. When a party adopts a certain theory in the court below,
he cannot change his theory on appeal. To allow him to do so is not only unfair to the other party, it is also
offensive to the basic rules of fair play, justice and due process.35
cräläwvirtualibrä ry

If Navarro were not the mother of Guevarra, it would only further undermine petitioners case. Absent any
hereditary relationship between Guevarra and Navarro, the Property would not have passed from Navarro to
Guevarra, and then to the latters children, including petitioners, by succession. There would then be no basis for
petitioners claim of co-ownership by virtue of inheritance from Guevarra. On the other hand, this would not
undermine respondents position since they anchor their claim on the sale under the Kasulatan and not on
inheritance from Guevarra.

Since the notarized Kasulatan is evidence of greater weight which petitioners failed to refute by clear and
convincing evidence, this Court holds that petitioners were not able to prove by preponderance of evidence that
the Property belonged to Guevarras estate. There is therefore no legal basis for petitioners complaint for
partition of the Property.

WHEREFORE, the Decision of 26 June 1998 of the Court of Appeals in CA-G.R. CV No. 51643, dismissing the
complaint of petitioners against Felomena Jumaquio Estimo and Emiliana Jumaquio, is AFFIRMED.

SO ORDERED.

Davide, Jr., C.J., (Chairman), Vitug, Ynares-Santiago, and Azcuna, JJ., concur.

G.R. No. 107132 October 8, 1999

MAXIMA HEMEDES, petitioner,

vs.
THE HONORABLE COURT OF APPEALS, DOMINIUM REALTY AND CONSTRUCTION
CORPORATION, ENRIQUE D. HEMEDES and R & B INSURANCE CORPORATION, respondents.
G.R. No. 108472 October 8, 1999

R & B INSURANCE CORPORATION, petitioner,

vs.
THE HONORABLE COURT OF APPEALS, DOMINIUM REALTY AND CONSTRUCTION
CORPORATION, ENRIQUE D. HEMEDES and MAXIMA HEMEDES, respondents.

GONZAGA-REYES, J.:

Assailed in these petitions for review on certiorari is the decision of the eleventh division of the
1

Court of Appeals in CA-G.R. CV No. 22010 promulgated on September 11, 1992 affirming in
toto the decision of Branch 24 of the Regional Trial Court of Laguna in Civil Case No. B-1766
dated February 22, 1989, and the resolution dated December 29, 1992 denying petitioner R & B
2

Insurance Corporation's (R & B Insurance) motion for reconsideration. As the factual antecedents
and issues are the same, we shall decide the petitions jointly.

The instant controversy involves a question of ownership over an unregistered parcel of land,
identified as Lot No. 6, plan Psu-111331, with an area of 21,773 square meters, situated in Sala,
Cabuyao, Laguna. It was originally owned by the late Jose Hemedes, father of Maxima Hemedes
and Enrique D. Hemedes. On March 22, 1947 Jose Hemedes executed a document entitled
"Donation Inter Vivos With Resolutory Conditions" whereby he conveyed ownership over the
3

subject land, together with all its improvements, in favor of his third wife, Justa Kauapin, subject
to the following resolutory conditions:

(a) Upon the death or remarriage of the DONEE, the title to the property donated shall revert to
any of the children, or their heirs, of the DONOR expressly designated by the DONEE in a public
document conveying the property to the latter; or

(b) In absence of such an express designation made by the DONEE before her death or
remarriage contained in a public instrument as above provided, the title to the property shall
automatically revert to the legal heirs of the DONOR in common.

Pursuant to the first condition above mentioned, Justa Kausapin executed on September 27,
1960 a "Deed of Conveyance of Unregistered Real Property by Reversion" conveying to Maxima
4

Hemedes the subject property under the following terms —

That the said parcel of land was donated unto me by the said Jose Hemedes, my deceased
husband, in a deed of "DONATION INTER VIVOS WITH RESOLUTORY CONDITIONS" executed by
the donor in my favor, and duly accepted by me on March 22, 1947, before Notary Public Luis
Bella in Cabuyao, Laguna;

That the donation is subject to the resolutory conditions appearing in the said deed of
"DONATION INTER VIVOS WITH RESOLUTORY CONDITIONS," as follows:

(a) Upon the death or remarriage of the DONEE, the title to the property donated shall revert to
any of the children, or their heirs, of the DONOR expressly designated by the DONEE in a public
document conveying the property to the latter; or
(b) In absence of such an express designation made by the DONEE before her death or
remarriage contained in a public instrument as above provided, the title to the property shall
automatically revert to the legal heirs of the DONOR in common.

That, wherefore, in virtue of the deed of donation above mentioned and in the exercise of my
right and privilege under the terms of the first resolutory condition therein contained and
hereinabove reproduced, and for and in consideration of my love and affection, I do hereby by
these presents convey, transfer, and deed unto my designee, MAXIMA HEMEDES, of legal age,
married to RAUL RODRIGUEZ, Filipino and resident of No. 15 Acacia Road, Quezon City, who is
one of the children and heirs of my donor, JOSE HEMEDES, the ownership of, and title to the
property hereinabove described, and all rights and interests therein by reversion under the first
resolutory condition in the above deed of donation; Except the possession and enjoyment of the
said property which shall remain vested in me during my lifetime, or widowhood and which upon
my death or remarriage shall also automatically revert to, and be transferred to my designee,
Maxima Hemedes.

Maxima Hemedes, through her counsel, filed an application for registration and confirmation of
title over the subject unregistered land. Subsequently, Original Certificate of Title (OCT) No.
(0-941) 0-198 was issued in the name of Maxima Hemedes married to Raul Rodriguez by the
5

Registry of Deeds of Laguna on June 8, 1962, with the annotation that "Justa Kausapin shall have
the usufructuary rights over the parcel of land herein described during her lifetime or
widowhood."

It is claimed by R & B Insurance that on June 2, 1964, Maxima Hemedes and her husband Raul
Rodriguez constituted a real estate mortgage over the subject property in its favor to serve as
security for a loan which they obtained in the amount of P6,000.00. On February 22, 1968, R & B
Insurance extrajudicially foreclosed the mortgage since Maxima Hemedes failed to pay the loan
even after it became due on August 2, 1964. The land was sold at a public auction on May 3,
1968 with R & B Insurance as the highest bidder and a certificate of sale was issued by the sheriff
in its favor. Since Maxima Hemedes failed to redeem the property within the redemption period,
R & B Insurance executed an Affidavit of Consolidation dated March 29, 1974 and on May 21,
1975 the Register of Deeds of Laguna cancelled OCT No. (0-941) 0-198 and issued Transfer
Certificate of Title (TCT) No. 41985 in the name of R & B Insurance. The annotation of usufruct in
favor of Justa Kausapin was maintained in the new title. 6

Despite the earlier conveyance of the subject land in favor of Maxima Hemedes, Justa Kausapin
executed a "Kasunduan" on May 27, 1971 whereby she transferred the same land to her stepson
Enrique D. Hemedes, pursuant to the resolutory condition in the deed of donation executed in
her favor by her late husband Jose Hemedes. Enrique D. Hemedes obtained two declarations of
real property — in 1972, and again, in 1974, when the assessed value of the property was raised.
Also, he has been paying the realty taxes on the property from the time Justa Kausapin conveyed
the property to him in 1971 until 1979. In the cadastral survey of Cabuyao, Laguna conducted
from September 8, 1974 to October 10, 1974, the property was assigned Cadastral No. 2990, Cad.
455-D, Cabuyao Cadastre, in the name of Enrique Hemedes. Enrique Hemedes is also the named
owner of the property in the records of the Ministry of Agrarian Reform office at Calamba,
Laguna.
On February 28, 1979, Enriques D. Hemedes sold the property to Dominium Realty and
Construction Corporation (Dominium). On April 10, 1981, Justa Kausapin executed an affidavit
affirming the conveyance of the subject property in favor of Enrique D. Hemedes as embodied in
the "Kasunduan" dated May 27, 1971, and at the same time denying the conveyance made to
Maxima Hemedes.

On May 14, 1981, Dominium leased the property to its sister corporation Asia Brewery, Inc. (Asia
Brewery) who, even before the signing of the contract of lease, constructed two warehouses
made of steel and asbestos costing about P10,000,000.00 each. Upon learning of Asia Brewery's
constructions upon the subject property, R & B Insurance sent it a letter on March 16, 1981
informing the former of its ownership of the property as evidenced by TCT No. 41985 issued in
its favor and of its right to appropriate the constructions since Asia Brewery is a builder in bad
faith. On March 27, 1981, a conference was held between R & B Insurance and Asia Brewery but
they failed to arrive at an amicable settlement.
1âwphi1.nêt

On May 8, 1981, Maxima Hemedes also wrote a letter addressed to Asia Brewery wherein she
asserted that she is the rightful owner of the subject property by virtue of OCT No. (0-941) 0-198
and that, as such, she has the right to appropriate Asia Brewery's constructions, to demand its
demolition, or to compel Asia Brewery to purchase the land. In another letter of the same date
addressed to R & B Insurance, Maxima Hemedes denied the execution of any real estate
mortgage in favor of the latter.

On August 27, 1981, Dominium and Enrique D. Hemedes filed a

complaint with the Court of First Instance of Binan, Laguna for the annulment of TCT No. 41985
7

issued in favor of R & B Insurance and/or the reconveyance to Dominium of the subject property.
Specifically, the complaint alleged that Dominium was the absolute owner of the subject
property by virtue of the February 28, 1979 deed of sale executed by Enrique D. Hemedes, who
in turn obtained ownership of the land from Justa Kausapin, as evidenced by the "Kasunduan"
dated May 27, 1971. The plaintiffs asserted that Justa Kausapin never transferred the land to
Maxima Hemedes and that Enrique D. Hemedes had no knowledge of the registration
proceedings initiated by Maxima Hemedes.

After considering the merits of the case, the trial court rendered judgment on February 22, 1989
in favor of plaintiffs Dominium and Enrique D. Hemedes, the dispositive portion of which states
—

WHEREFORE, judgment is hereby rendered:

(a) Declaring Transfer Certificate of Title No. 41985 of the Register of Deeds of Laguna null and
void and ineffective;

(b) Declaring Dominium Realty and Construction Corporation the absolute owner and possessor
of the parcel of land described in paragraph 3 of the complaint;

(c) Ordering the defendants and all persons acting for and/or under them to respect such
ownership and possession of Dominium Realty and Construction Corporation and to forever
desist from asserting adverse claims thereon nor disturbing such ownership and possession; and
(d) Directing the Register of Deeds of Laguna to cancel said Transfer Certificate of Title No. 41985
in the name of R & B Insurance Corporation, and in lieu thereof, issue a new transfer certificate
of title in the name of Dominium Realty and Construction Corporation. No pronouncement as to
costs and attorney's fees.8

Both R & B Insurance and Maxima Hemedes appealed from the trial court's decision. On
September 11, 1992 the Court of Appeals affirmed the assailed decision in toto and on
December 29, 1992, it denied R & B Insurance's motion for reconsideration. Thus, Maxima
Hemedes and R & B Insurance filed their respective petitions for review with this Court on
November 3, 1992 and February 22, 1993, respectively.

In G.R. No. 107132 , petitioner Maxima Hemedes makes the following assignment of errors as
9

regards public respondent's ruling —

RESPONDENT COURT OF APPEALS GRAVELY ERRED IN APPLYING ARTICLE 1332 OF THE NEW CIVIL
CODE IN DECLARING AS SPURIOUS THE DEED OF CONVEYANCE OF UNREGISTERED REAL
PROPERTY BY REVERSION EXECUTED BY JUSTA KAUSAPIN IN FAVOR OF PETITIONER MAXIMA
HEMEDES.

II

RESPONDENT COURT OF APPEALS GRAVELY ERRED IN NOT FINDING AS VOID AND OF NO LEGAL
EFFECT THE "KASUNDUAN" DATED 27 MAY 1971 EXECUTED BY JUSTA KAUSAPIN IN FAVOR OF
RESPONDENT ENRIQUE HEMEDES AND THE SALE OF THE SUBJECT PROPERTY BY RESPONDENT
ENRIQUE HEMEDES IN FAVOR OF RESPONDENT DOMINIUM REALTY AND CONSTRUCTION
CORPORATION.

III

RESPONDENT COURT OF APPEALS GRAVELY ERRED IN NOT FINDING RESPONDENTS ENRIQUE

AND DOMINIUM IN BAD FAITH.

IV

RESPONDENT COURT OF APPEALS GRAVELY ERRED IN DECLARING THAT ORIGINAL CERTIFICATE

OF TITLE NO. (0-941) 0-198 ISSUED IN THE NAME OF PETITIONER MAXIMA HEMEDES NULL AND
VOID.

RESPONDENT COURT OF APPEALS ERRED IN NOT FINDING THAT NO LOAN WAS OBTAINED BY
PETITIONER MAXIMA HEMEDES FROM RESPONDENT R & B INSURANCE CORPORATION.

VI
RESPONDENT COURT OF APPEALS ERRED IN NOT FINDING THAT NO REAL ESTATE MORTGAGE
OVER THE SUBJECT PROPERTY WAS EXECUTED BY PETITIONER MAXIMA HEMEDES IN FAVOR OF
RESPONDENT R & B INSURANCE CORPORATION.

VII

RESPONDENT COURT OF APPEALS ERRED IN NOT FINDING THAT THE VALID TITLE COVERING THE
SUBJECT PROPERTY IS THE ORIGINAL CERTIFICATE OF TITLE NO. (0-941) 0-198 IN THE NAME OF
PETITIONER MAXIMA HEMEDES AND NOT THE TRANSFER CERTIFICATE OF TITLE (TCT) NO. 41985
IN THE NAME OF R & B INSURANCE CORPORATION. 10

Meanwhile, in G.R. No. 108472 , petitioner R & B Insurance assigns almost the same errors,
11

except with regards to the real estate mortgage allegedly executed by Maxima Hemedes in its
favor. Specifically, R & B Insurance alleges that:

RESPONDENT COURT ERRONEOUSLY ERRED IN APPLYING ARTICLE 1332 OF THE CIVIL CODE.

II

RESPONDENT COURT SERIOUSLY ERRED IN GIVING CREDENCE ON (sic) THE KASUNDUAN BY AND
BETWEEN JUSTA KAUSAPIN AND ENRIQUE NOTWITHSTANDING THE FACT THAT JUSTA KAUSAPIN
BY WAY OF A DEED OF CONVEYANCE OF UNREGISTERED REAL PROPERTY BY REVERSION CEDED
THE SUBJECT PROPERTY TO MAXIMA SOME ELEVEN (11) YEARS EARLIER.

III

RESPONDENT COURT SERIOUSLY ERRED IN GIVING CREDENCE ON (sic) THE AFFIDAVIT OF

REPUDIATION OF JUSTA KAUSAPIN NOTWITHSTANDING THE FACT THAT SHE IS A BIAS (sic)
WITNESS AND EXECUTED THE SAME SOME TWENTY-ONE (21) YEARS AFTER THE EXECUTION OF
THE DEED OF CONVEYANCE IN FAVOR OF MAXIMA.

IV

RESPONDENT COURT SERIOUSLY ERRED IN NOT FINDING THAT THE COMPLAINT OF ENRIQUE
AND DOMINIUM HAS PRESCRIBED AND/OR THAT ENRIQUE AND DOMINIUM WERE GUILTY OF
LACHES.

RESPONDENT COURT SERIOUSLY ERRED IN FINDING

R & B AS A MORTGAGEE NOT IN GOOD FAITH.

VI

RESPONDENT COURT SERIOUSLY ERRED IN NOT GRANTING THE DAMAGES PRAYED FOR BY R & B
IN ITS COUNTERCLAIM AND CROSSCLAIM. 12
The primary issue to be resolved in these consolidated petitions is which of the two conveyances
by Justa Kausapin, the first in favor of Maxima Hemedes and the second in favor of Enrique D.
Hemedes, effectively transferred ownership over the subject land.

The Register of Deeds of Laguna issued OCT No. (0-941) 0-198 in favor of Maxima Hemedes on
the strength of the "Deed of Conveyance of Unregistered Real Property by Reversion" executed
by Justa Kausapin. Public respondent upheld the trial court's finding that such deed is sham and
spurious and has "no evidentiary value under the law upon which claimant Maxima Hemedes
may anchor a valid claim of ownership over the property." In ruling thus, it gave credence to the
April 10, 1981 affidavit executed by Justa Kausapin repudiating such deed of conveyance in favor
of Maxima Hemedes and affirming the authenticity of the "Kasunduan" in favor of Enrique D.
Hemedes. Also, it considered as pivotal the fact that the deed of conveyance in favor of Maxima
Hemedes was in English and that it was not explained to Justa Kausapin, although she could not
read nor understand English; thus, Maxima Hemedes failed to discharge her burden, pursuant to
Article 1332 of the Civil Code, to show that the terms thereof were fully explained to Justa
Kausapin. Public respondent concluded by holding that the registration of the property on the
strength of the spurious deed of conveyance is null and void and does not confer any right of
ownership upon Maxima Hemedes. 13

Maxima Hemedes argues that Justa Kausapin's affidavit should not be given any credence since
she is obviously a biased witness as it has been shown that she is dependent upon Enrique D.
Hemedes for her daily subsistence, and she was most probably influenced by Enrique D.
Hemedes to execute the "Kasunduan" in his favor. She also refutes the applicability of article
1332. It is her contention that for such a provision to be applicable, there must be a party
seeking to enforce a contract; however, she is not enforcing the "Deed of Conveyance of
Unregistered Real Property by Reversion" as her basis in claiming ownership, but rather her claim
is anchored upon OCT No. (0-941) 0-198 issued in her name, which document can stand
independently from the deed of conveyance. Also, there exist various circumstances which show
that Justa Kausapin did in fact execute and understand the deed of conveyance in favor of
Maxima Hemedes. First, the "Donation Intervivos With Resolutory Conditions" executed by Jose
Hemedes in favor of Justa Kausapin was also in English, but she never alleged that she did not
understand such document. Secondly, Justa Kausapin failed to prove that it was not her
thumbmark on the deed of conveyance in favor of Maxima Hemedes and in fact, both Enrique D.
Hemedes and Dominium objected to the request of Maxima Hemedes' counsel to obtain a
specimen thumbmark of Justa Kausapin. 14

Public respondent's finding that the "Deed of Conveyance of Unregistered Real Property By
Reversion" executed by Justa Kausapin in favor of Maxima Hemedes is spurious is not supported
by the factual findings in this case. It is grounded upon the mere denial of the same by Justa
Kausapin. A party to a contract cannot just evade compliance with his contractual obligations by
the simple expedient of denying the execution of such contract. If, after a perfect and binding
contract has been executed between the parties, it occurs to one of them to allege some defect
therein as a reason for annulling it, the alleged defect must be conclusively proven, since the
validity and fulfillment of contracts cannot be left to the will of one of the contracting parties.
15

Although a comparison of Justa Kausapin's thumbmark with the thumbmark affixed upon the
deed of conveyance would have easily cleared any doubts as to whether or not the deed was
forged, the records do not show that such evidence was introduced by private respondents and
the lower court decisions do not make mention of any comparison having been made. It is a 16

legal presumption that evidence willfully suppressed would be adverse if produced. The failure
17

of private respondents to refute the due execution of the deed of conveyance by making a
comparison with Justa Kausapin's thumbmark necessarily leads one to conclude that she did in
fact affix her thumbmark upon the deed of donation in favor of her stepdaughter.

Moreover, public respondent's reliance upon Justa Kausapin's repudiation of the deed of
conveyance is misplaced for there are strong indications that she is a biased witness. The trial
court found that Justa Kausapin was dependent upon Enrique D. Hemedes for financial
assistance. Justa Kausapin's own testimony attests to this fact —
18

Atty. Conchu:

Q: Aling Justa, can you tell the Honorable Court why you donated this particular property to
Enrique Hemedes?

A: Because I was in serious condition and he was the one supporting me financially.

Q: As of today, Aling Justa are you continuing to receive any assistance from Enrique Hemedes?

A: Yes Sir.

(TSN pp. 19 and 23, November 17, 1981) 19

Even Enrique Hemedes admitted that Justa Kausapin was dependent upon him for financial
support. The transcripts state as follows:

Atty. Mora:

Now you said that Justa Kausapin has been receiving from you advances for food, medicine &
other personal or family needs?

E. Hemedes:

A: Yes.

Q: Was this already the practice at the time this "Kasunduan" was executed?

A: No that was increased, no, no, after this document.

xxx xxx xxx

Q: And because of these accommodations that you have given to Justa Kausapin; Justa Kausapin
has in turn treated you very well because she's very grateful for that, is it not?

A: I think that's human nature.

Q: Answer me categorically, Mr. Hemedes she's very grateful?

A: Yes she might be grateful but not very grateful.

(TSN, p. 34, June 15, 1984) 20

A witness is said to be biased when his relation to the cause or to the parties is such that he has
an incentive to exaggerate or give false color to his statements, or to suppress or to pervert the
truth, or to state what is false. At the time the present case was filed in the trial court in 1981,
21

Justa Kausapin was already 80 years old, suffering from worsening physical infirmities and
completely dependent upon her stepson Enrique D. Hemedes for support. It is apparent that
Enrique D. Hemedes could easily have influenced his aging stepmother to donate the subject
property to him. Public respondent should not have given credence to a witness that was
obviously biased and partial to the cause of private respondents. Although it is a well-established
rule that the matter of credibility lies within the province of the trial court, such rule does not
apply when the witness' credibility has been put in serious doubt, such as when there appears on
the record some fact or circumstance of weight and influence, which has been overlooked or the
significance of which has been
misinterpreted. 22

Finally, public respondent was in error when it sustained the trial court's decision to nullify the
"Deed of Conveyance of Unregistered Real Property by Reversion" for failure of Maxima
Hemedes to comply with article 1332 of the Civil Code, which states:

When one of the parties is unable to read, or if the contract is in a language not understood by
him, and mistake or fraud is alleged, the person enforcing the contract must show that the terms
thereof have been fully explained to the former.

Art. 1332 was intended for the protection of a party to a contract who is at a disadvantage due
to his illiteracy, ignorance, mental weakness or other handicap. This article contemplates a
23

situation wherein a contract has been entered into, but the consent of one of the parties is
vitiated by mistake or fraud committed by the other contracting party. This is apparent from 24

the ordering of the provisions under Book IV, Title II, Chapter 2, section 1 of the Civil Code, from
which article 1332 is taken. Article 1330 states that —

A contract where consent is given through mistake, violence, intimidation, undue influence, or
fraud is voidable.

This is immediately followed by provisions explaining what constitutes mistake, violence,

intimidation, undue influence, or fraud sufficient to vitiate consent. In order that mistake may
25

invalidate consent, it should refer to the substance of the thing which is the object of the
contract, or to those conditions which have principally moved one or both parties to enter into
the contract. Fraud, on the other hand, is present when, through insidious words or
26

machinations of one of the contracting parties, the other is induced to enter into a contract
which, without them, he would not have agreed to. Clearly, article 1332 assumes that the
27

consent of the contracting party imputing the mistake or fraud was given, although vitiated, and
does not cover a situation where there is a complete absence of consent. 1âwphi1.nêt
In this case, Justa Kausapin disclaims any knowledge of the "Deed of Conveyance of Unregistered
Real Property by Reversion" in favor of Maxima Hemedes. In fact, she asserts that it was only
during the hearing conducted on December 7, 1981 before the trial court that she first caught a
glimpse of the deed of conveyance and thus, she could not have possibly affixed her thumbmark
thereto. It is private respondents' own allegations which render article 1332 inapplicable for it
28

is useless to determine whether or not Justa Kausapin was induced to execute said deed of
conveyance by means of fraud employed by Maxima Hemedes, who allegedly took advantage of
the fact that the former could not understand English, when Justa Kausapin denies even having
seen the document before the present case was initiated in 1981.

It has been held by this Court that ". . . mere preponderance of evidence is not sufficient to
overthrow a certificate of a notary public to the effect that the grantor executed a certain
document and acknowledged the fact of its execution before him. To accomplish this result, the
evidence must be so clear, strong and convincing as to exclude all reasonable controversy as to
the falsity of the certificate, and when the evidence is conflicting, the certificate will be
upheld." In the present case, we hold that private respondents have failed to produce clear,
29

strong, and convincing evidence to overcome the positive value of the "Deed Conveyance of
Unregistered Real Property by Reversion" — a notarized document. The mere denial of its
execution by the donor will not suffice for the purpose.

In upholding the deed of conveyance in favor of Maxima Hemedes, we must concomitantly rule
that Enrique D. Hemedes and his transferee, Dominium, did not acquire any rights over the
subject property. Justa Kausapin sought to transfer to her stepson exactly what she had earlier
transferred to Maxima Hemedes — the ownership of the subject property pursuant to the first
condition stipulated in the deed of donation executed by her husband. Thus, the donation in
favor of Enrique D. Hemedes is null and void for the purported object thereof did not exist at the
time of the transfer, having already been transferred to his sister. Similarly, the sale of the
30

subject property by Enrique D. Hemedes to Dominium is also a nullity for the latter cannot
acquire more rights than its predecessor-in-interest and is definitely not an innocent purchaser
for value since Enrique D. Hemedes did not present any certificate of title upon which it relied.

The declarations of real property by Enrique D. Hemedes, his payment of realty taxes, and his
being designated as owner of the subject property in the cadastral survey of Cabuyao, Laguna
and in the records of the Ministry of Agrarian Reform office in Calamba, Laguna cannot defeat a
certificate of title, which is an absolute and indefeasible evidence of ownership of the property in
favor of the person whose name appears therein. Particularly, with regard to tax declarations
31

and tax receipts, this Court has held on several occasions that the same do not by themselves
conclusively prove title to land.
32

We come now to the question of whether or not R & B Insurance should be considered an
innocent purchaser of the land in question. At the outset, we note that both the trial court and
appellate court found that Maxima Hemedes did in fact execute a mortgage over the subject
property in favor of R & B Insurance. This finding shall not be disturbed because, as we stated
earlier, it is a rule that the factual findings of the trial court, especially when affirmed by the
Court of Appeals, are entitled to respect, and should not be disturbed on
appeal. 33
In holding that R & B Insurance is not a mortgagee in good faith, public respondent stated that
the fact that the certificate of title of the subject property indicates upon its face that the same is
subject to an encumbrance, i.e. usufructuary rights in favor of Justa Kausapin during her lifetime
or widowhood, should have prompted R & B Insurance to ". . . investigate further the
circumstances behind this encumbrance on the land in dispute," but which it failed to do. Also,
public respondent considered against R & B Insurance the fact that it made it appear in the
mortgage contract that the land was free from all liens, charges, taxes and encumbrances. 34

R & B Insurance alleges that, contrary to public respondent's ruling, the presence of an
encumbrance on the certificate of title is not reason for the purchaser or a prospective
mortgagee to look beyond the face of the certificate of title. The owner of a parcel of land may
still sell the same even though such land is subject to a usufruct; the buyer's title over the
property will simply be restricted by the rights of the usufructuary. Thus, R & B Insurance
accepted the mortgage subject to the usufructuary rights of Justa Kausapin. Furthermore, even
assuming that R & B Insurance was legally obliged to go beyond the title and search for any
hidden defect or inchoate right which could defeat its right thereto, it would not have discovered
anything since the mortgage was entered into in 1964, while the "Kasunduan" conveying the
land to Enrique D. Hemedes was only entered into in 1971 and the affidavit repudiating the deed
of conveyance in favor of Maxima Hemedes was executed by Justa Kausapin in 1981. 35

We sustain petitioner R & B Insurance's claim that it is entitled to the protection of a mortgagee
in good faith.

It is a well-established principle that every person dealing with registered land may safely rely on
the correctness of the certificate of title issued and the law will in no way oblige him to go
behind the certificate to determine the condition of the property. An innocent purchaser for
36

value is one who buys the property of another without notice that some other person has a
37

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 of another person. 38

The annotation of usufructuary rights in favor of Justa Kausapin upon Maxima Hemedes' OCT
dose not impose upon R & B Insurance the obligation to investigate the validity of its mortgagor's
title. Usufruct gives a right to enjoy the property of another with the obligation of preserving its
form and
substance. The usufructuary is entitled to all the natural, industrial and civil fruits of the
39

property and may personally enjoy the thing in usufruct, lease it to another, or alienate his
40

right of usufruct, even by a gratuitous title, but all the contracts he may enter into as such
usufructuary shall terminate upon the expiration of the usufruct. 41

Clearly, only the jus utendi and jus fruendi over the property is transferred to the
usufructuary. The owner of the property maintains the jus disponendi or the power to alienate,
42

encumber, transform, and even destroy the same. This right is embodied in the Civil Code,
43

which provides that the owner of property the usufruct of which is held by another, may alienate
it, although he cannot alter the property's form or substance, or do anything which may be
prejudicial to the usufructuary. 44
There is no doubt that the owner may validly mortgage the property in favor of a third person
and the law provides that, in such a case, the usufructuary shall not be obliged to pay the debt of
the mortgagor, and should the immovable be attached or sold judicially for the payment of the
debt, the owner shall be liable to the usufructuary for whatever the latter may lose by reason
thereof. 45

Based on the foregoing, the annotation of usufructuary rights in favor of Justa Kausapin is not
sufficient cause to require R & B Insurance to investigate Maxima Hemedes' title, contrary to
public respondent's ruling, for the reason that Maxima Hemedes' ownership over the property
remained unimpaired despite such encumbrance. R & B Insurance had a right to rely on the
certificate of title and was not in bad faith in accepting the property as a security for the loan it
extended to Maxima Hemedes.

Even assuming in gratia argumenti that R & B Insurance was obligated to look beyond the
certificate of title and investigate the title of its mortgagor, still, it would not have discovered any
better rights in favor of private respondents. Enrique D. Hemedes and Dominium base their
claims to the property upon the "Kasunduan" allegedly executed by Justa Kausapin in favor of
Enrique Hemedes. As we have already stated earlier, such contract is a nullity as its subject
matter was inexistent. Also, the land was mortgaged to R & B Insurance as early as 1964, while
the "Kasunduan" was executed only in 1971 and the affidavit of Justa Kausapin affirming the
conveyance in favor of Enrique D. Hemedes was executed in 1981. Thus, even if R & B Insurance
investigated the title of Maxima Hemedes, it would not have discovered any adverse claim to the
land in derogation of its mortgagor's title. We reiterate that at no point in time could private
respondents establish any rights or maintain any claim over the land.

It is a well-settled principle that where innocent third persons rely upon the correctness of a
certificate of title and acquire rights over the property, the court cannot just disregard such
rights. Otherwise, public confidence in the certificate of title, and ultimately, the Torrens system,
would be impaired for everyone dealing with registered property would still have to inquire at
every instance whether the title has been regularly or irregularly issued. Being an innocent
46

mortgagee for value, R & B Insurance validly acquired ownership over the property, subject only
to the usufructuary rights of Justa Kausapin thereto, as this encumbrance was properly
annotated upon its certificate of title.

The factual findings of the trial court, particularly when affirmed by the appellate court, carry
great weight and are entitled to respect on appeal, except under certain circumstances. One 47

such circumstance that would compel the Court to review the factual findings of the lower courts
is where the lower courts manifestly overlooked certain relevant facts not disputed by the
parties and which, if properly considered, would justify a different conclusion. Also, it is
48

axiomatic that the drawing of the proper legal conclusions from such factual findings are within
the peculiar province of this Court. 49

As regards R & B Insurance's prayer that Dominium be ordered to demolish the warehouses or
that it be declared the owner thereof since the same were built in bad faith, we note that such
warehouses were constructed by Asia Brewery, not by Dominium. However, despite its being a
necessary party in the present case, the lower courts never acquired jurisdiction over Asia
Brewery, whether as a plaintiff or defendant, and their respective decisions did not pass upon
the constructions made upon the subject property. Courts acquire jurisdiction over a party
plaintiff upon the filing of the complaint, while jurisdiction over the person of a party defendant
is acquired upon the service of summons in the manner required by law or by his voluntary
appearance. As a rule, if a defendant has not been summoned, the court acquires no jurisdiction
over his person, and any personal judgment rendered against such defendant is null and
void. In the present case, since Asia Brewery is a necessary party that was not joined in the
50

action, any judgment rendered in this case shall be without prejudice to its rights.
51

As to its claim for moral damages, we hold that R & B Insurance is not entitled to the same for it
has not alleged nor proven the factual basis for the same. Neither is it entitled to exemplary
damages, which may only be awarded if the claimant is entitled to moral, temperate, liquidated
or compensatory damages. R & B Insurance's claim for attorney's fees must also fail. The award
52

of attorney's fees is the exception rather than the rule and counsel's fees are not to be awarded
every time a party wins a suit. Its award pursuant to article 2208 of the Civil Code demands
factual, legal and equitable justification and cannot be left to speculation and
conjecture. Under the circumstances prevailing in the instant case, there is no factual or legal
53

basis for an award of attorney's fees.

WHEREFORE, the assailed decision of public respondent and its resolution dated February 22,
1989 are REVERSED. We uphold petitioner R & B Insurance's assertion of ownership over the
property in dispute, as evidenced by TCT No. 41985, subject to the usufructuary rights of Justa
Kausapin, which encumbrance has been properly annotated upon the said certificate of title. No
pronouncement as to costs.

SO ORDERED.

Panganiban and Purisima, JJ., concur.

Melo, J., please see dissenting opinion.

Vitug, J., please see separate (concurring) opinion.

Separate Opinions

VITUG, J., separate opinion;

I share the opinion expressed by my esteemed colleague, Mme. Justice Minerva P.

Gonzaga-Reyes, in herponencia.

I just would like to add that a donation would not be legally feasible if the donor has neither
ownership nor real right that he can transmit to the donee. Unlike an ordinary contract, a
donation, under Article 712, in relation to Article 725, of the Civil Code is also a mode of
acquiring and transmitting ownership and other real rights by an act of liberality whereby a
person disposes gratuitously that ownership or real right in favor of another who accepts it. It
would be an inefficacious process if the donor would have nothing to convey at the time it is
made.
Art. 744 of the Civil Code states that the "donation of the same thing to two or more different
donees shall be governed by the provisions concerning the sale of the same thing to two or more
persons," i.e., by Article 1544 of the same Code, as if so saying that there can be a case of
"double donations" to different donees with opposing interest. Article 744 is a new provision,
having no counterpart in the old Civil Code, that must have been added unguardedly. Being a
mode of acquiring and transmitting ownership or other real rights, a donation once perfected
would deny the valid execution of a subsequent inconsistent donation (unless perhaps if the
prior donation has provided a suspensive condition which still pends when the later donation is
made).

In sales, Article 1544, providing for the rules to resolve the conflicting rights of two or more
buyers, is appropriate since the law does not prohibit but, in fact, sanctions the perfection of a
sale by a non-owner, such as the sale of future things or a short sale, for it is only at the
consummation stage of the sale, i.e., delivery of the thing sold, that ownership would be deemed
transmitted to the buyer. In the meanwhile, a subsequent sale to another of the same thing by
the same seller can still be a legal possibility. This rule on double sales finds no relevance in an
ordinary donation where the law requires the donor to have ownership of the thing or the real
right he donates at the time of its perfection (see Article 750, Civil Code) since a donation
constitutes a mode, not just a title, in an acquisition and transmission of ownership.

MELO, J., dissenting opinion;

I find myself unable to join the majority. The opinion written by my esteemed colleague,
Madame Justice Minerva Gonzaga-Reyes, will have far-reaching ramifications on settled
doctrines concerning the finality and conclusiveness of the factual findings of the trial court in
view of its unique advantage of being able to observe at first-hand the demeanor and
deportment of witnesses, and especially when such findings of facts are affirmed by the Court of
Appeals, which is the final arbiter of questions of fact (People vs. Edaño, 64 SCRA 675 [1975];
People vs. Tala, 141 SCRA 240; People vs. Canada and Dondoy, 144 SCRA 121 [1986]; People vs.
Clore, 184 SCRA 638 [1990]; Binalay vs. Manalo, 195 SCRA 374 [1991]; People vs. Miscala, 202
SCRA 26 [1991]; People vs. Lagrosa, 230 SCRA. 298 [1994]). All these conditions are present in
the case at bar, and I have grave reservations about the propriety of setting aside time-tested
principles in favor of a finding that hinges principally on the credibility of a single witness, whom
we are asked to disbelieve on the basis merely of her recorded testimony without the benefit of
the advantage that the trial court had, disregarding in the process another long-established rule
— that mere relationship of a witness to a party does not discredit his testimony in court (U.S. vs.
Mante, 27 Phil 124; People vs. Pagaduan, 37 Phil 90; People vs. Reyes, 69 SCRA 474 [1976];
People vs. Padiernos, 69 SCRA 484 [1976]; Borromeo vs. Court of Appeals, 70 SCRA 329 [1976];
People vs. Estocada, 75 SCRA 295 [1977]; People vs. Ciria, 106 SCRA 381 [1981]; People vs. Ramo,
132 SCRA 174 [1984]; People vs. Atencio, 156 SCRA 242 [1987]; People vs. Gutierrez. Jr., 158
SCRA 614 [1988]; People vs. Bandoquillo, 167 SCRA 549 [1988]; People vs. Suitos, 220 SCRA 419
[1993]).

The primordial issue is whether or not the "Deed of Conveyance of Unregistered Real Property
by Reversion" dated September 27, 1960 conveying the subject property to Maxima Hemedes is
valid. If the transfer is not valid, no title passed to her successor-in-interest, R & B Insurance
Corporation.
The Court of Appeals, confirming and summarizing the findings of fact and law made by the trial
court, declared:

We sustain the findings of the trial court.

To begin with, the "Deed of Conveyance of Unregistered Real Property by Reversion" was
nullified by the trial court on two (2) grounds:

First, MAXIMA failed to comply with the requirements laid down by Article 1332 of the Civil Code.
Said provision reads:

Art. 1332. When one of the parties is unable to read, or if the contract is in a language not
understood by him, and mistake or fraud is alleged, the person enforcing the contract must show
that the terms thereof have been fully explained to the former.

In her testimony, MAXIMA admitted the entire document was written in English, a language not
known to Justa Kausapin (TSN, 17 November 1981, pp. 7-8; Deposition of Justa Kausapin). Yet,
MAXIMA failed to introduce sufficient evidence that would purportedly show that the deed of
conveyance was explained to Justa Kausapin before the latter allegedly affixed her thumbmark.
On the contrary, she admitted having failed to translate the deed of conveyance to Justa
Kausapin because according to her, the latter has "no voice" anyway insofar as the property is
concerned. Her testimony reads:

Q — In connection with this deed of conveyance which has been marked as Exh. "2-Maxima," we
note that this is written in English, do you know, Mrs. Hernandez (MAXIMA), whether this
document was ever translated to Justa Kausapin?

A — Justa Kausapin has no voice because that's the order of my father, so anyway. . .

Court — Answer the question, you were only asked whether that was translated.

A — No. (TSN 26 November, 1984, pp. 36-37, Maxima Hemedes).

Second, MAXIMA failed to repudiate the allegation of Justa Kausapin disclaiming knowledge of
her having executed such a deed. As a matter of fact, Justa Kausapin claimed that it was only
during the hearing conducted on 07 December 1981 that she first caught glimpse of the deed of
conveyance (TSN, 07 December 1981, pp. 22-23, ibid.) She therefore could not have possibly
affixed her thumbmark therein. In the light of such a denial, the burden of proving that the deed
of conveyance was indeed genuine laid on MAXIMA. After all, any party who asserts the
affirmative of the issue has the burden of presenting evidence required to obtain a favorable
judgment (Republic v. Court of Appeals, 182 SCRA 290). 1âwphi1.nêt

Instead, what was clearly established from the deposition of Justa Kausapin is the fact that she
never executed any document donating the property to anybody else except ENRIQUE. This can
be readily gleaned from her testimony, reading:
Q — From the time, Aling Justa, that your husband Jose Hemedes donated the property to you
up to the time you in turn donated the same to Enrique Hemedes in 1971, do you recall having
executed any document donating this particular property to anybody else?

A — None, Sir. (TSN, 17 November 1981, p. 21)

(pp. 63-64, Rollo.)

There is no dispute that Justa Kausapin twice repudiated the conveyance in favor of Maxima
Hemedes. As found by the trial court:

In an Affidavit dated April 10, 1981 executed by Justa Kausapin before three witnesses (Exh.
D-Dominium), said affiant disowned the alleged "Deed of Conveyance of Unregistered Real
Property by Reversion" invoked by defendant Maxima Hemedes, and expressly stated that she
never granted any right over the property to Maxima Hemedes, whether as owner or mortgagor,
that she never allowed her to use the land as security or collateral for a loan. In the same
affidavit, Justa Kausapin affirmed the authenticity of the "Kasunduan" whereby she transferred
ownership of the disputed land to Enrique Hemedes, her stepson and reliable source of
assistance throughout the years that she was in need of help. The testimony of Justa Kausapin
was also taken by deposition on November 17, December 7 and 14, 1981 and on January 14,
1982, wherein all the contending parties were represented and had the opportunity to
cross-examine her. In her testimony (the entire transcript of which has been submitted as Exh.
K-Enrique), Justa Kausapin reiterated her repudiation of the Deed of Conveyance in favor of
Maxima Hemedes and re-affirmed the validity of the "Kasunduan" in favor of Enrique Hemedes,
as well as the subsequent sale of the land by Enrique Hemedes to Dominium.

(pp. 83-84, Rollo.)

The majority would hold that the twin repudiations cannot be given credence because the
witness is biased in favor of Enrique Hemedes, who, by providing support and financial assistance
to the witness before, during and after the execution of the "Kasunduan," is said to have
influenced her into signing the same. This issue refers to the credibility of witnesses which, as
stated earlier, is best left for determination by the trial court (People vs. Oliano, 287 SCRA 158
[1998], citing People vs. Pontillar, Jr., 275 SCRA 338 [1997]; People vs. Rubio, 257 SCRA 528
[1996]; People vs. Del Prado, 253 SCRA 731 [1996]). I am not prepared to substitute my judgment
for that of the trial court on the credibility of Justa Kausapin on the basis alone of the
relationship between her and Enrique Hemedes. To reiterate, the rule is: "Mere relationship of a
witness to a party does not discredit his testimony in court." (U.S. vs. Mante, supra; Aznar vs.
Court of Appeals, 70 SCRA 329 [1976]; People vs. Letigio, 268 SCRA 227, 243 [1997]).

I cannot infer from the mere circumstance that Justa Kausapin was receiving support and
sustenance from Enrique Hemedes that she had any improper motives to testify in favor of
Enrique and against Maxima. It must be remembered that Justa Kausapin had a legal right to
such financial assistance, not only from respondent Enrique Hemedes, but also from Maxima
Hemedes, who are both her stepchildren. If one must impute improper motives in favor of
Enrique, one could just as easily ascribe these to Maxima. Furthermore, it must be noted that
Justa Kausapin's entitlement to support flowed from her usufructuary rights contained in the
"Donation Inter Vivos with Resolutory Conditions" executed by her late husband, Jose Hemedes,
the common father of petitioner Maxima and respondent Enrique Hemedes. In supporting his
stepmother, Enrique was, therefore, merely performing a legal or contractual duty in favor of
Justa Kausapin. There was nothing improper in Justa Kausapin's repudiation of the conveyance in
favor of Maxima, especially so if one considers the fact that the latter did not adduce any other
evidence to defeat the presumption that Justa Kausapin was stating the truth when she said that
she never conveyed the property to Justa Maxima. As the trial court found:

. . . The actuation of Enrique Hemedes towards Justa Kausapin is legally and morally justified. It
must be remembered that Justa Kausapin is the stepmother of Enrique Hemedes; she was also
the usufructuary of the property in dispute. It is only natural and in keeping with law and custom,
or Filipino tradition, for a son to support his mother (even if she happens to be a stepmother);
and form a legal standpoint, the naked owner Enrique Hemedes was bound to support Justa
Kausapin by way of giving her what she was entitled to as usufructuary.

(p. 104, Rollo.)

The trial court's ruling on the invalidity of the title of Maxima is not based solely on Justa
Kausapin's repudiation of the deed of conveyance, but likewise on the very acts of Maxima and
her transferee R & B Surety and Insurance. The factual findings of the trial court are to the effect
that despite the alleged transfer of ownership from Justa Kausapin to Maxima Hemedes on
September 27, 1960 and the subsequent transfer to R & B Insurance on May 3, 1968 by way of
foreclosure and public auction sale, neither do these petitioners exercised their rights of
ownership over the disputed property, never even asserting their supposed ownership rights
until it was too late. The following findings of the trial court stand unassailed:

There are other indications which led this Court to believe that neither defendant Maxima
Hemedes nor defendant R & B INSURANCE consider themselves the owner of the property in
question. Both of these claimants never declared themselves as owners of the property for tax
purposes; much less did they pay a single centavo in real estate taxes. The argument that since
Justa Kausapin was in possession of the property as usufructuary she should pay the taxes
contravenes the clear provision of the Civil Code that the taxes which may be imposed directly
on the capital during the usufruct, in this case the realty taxes, shall be at the expense of the
owner (Article 597, Civil Code). If Maxima Hemedes and R & B INSURANCE were convinced that
they were the owners of the property, why did they not pay taxes for the same? This attitude is
not consistent with that of an owner in good faith. The Court has noted that the very owner of R
& B INSURANCE has admitted in her testimony that they declared the property as one of the
assets of R & B INSURANCE only in 1976, which is eight years after they supposedly bought it at
public auction in 1968 (TSN, July 6, 1987, pp. 22-23) (Decision, pp. 32-33).

(pp. 101-102, Rollo.)

Faced with the categorical and straightforward repudiations of the conveyance supposedly made
in her favor, Maxima Hemedes could only gratuitously assert otherwise, as no other testimonial
or documentary evidence was adduced in support thereof. Maxima's self-serving assertions,
however, are legally infirm in view of her admission that the deed of conveyance in her favor was
written in a language unknown to the person who supposedly executed the same and the terms
thereof were not fully explained to the person who executed the same. These are the facts as
found by the trial court:

Questioned about the execution of the "Deed of Conveyance of Unregistered Real Property by
Reversion" which is the basis of her claim, defendant Maxima Hemedes admitted that the
document which is in English was not translated or explained to Justa Kausapin before the latter
supposedly affixed her thumbmark to the document (TSN, November 26, 1984, p. 34; TSN,
December 10, 1984, p. 9). The Court has noted from the records that the Notary Public before
whom the said document was notarized was not presented as a wittiness by defendant Maxima
Hemedes, if only to attest to the execution of said document by Justa Kausapin, considering that
the latter is an illiterate when it comes to documents written in English. Maxima explained the
non-translation of the Deed of Conveyance into a language understood by Justa Kausapin with
the statement that the latter (Justa Kausapin) "has no voice" anyway in so far as the property is
concerned (TSN, November 26, 1984, p. 36) . . . the Notary Public before whom the said
document was supposed to have been axknowledged was also not presented as a witness, and
there was no explanation as to why he was not also presented. In the face of such an admission
and failure on the part of defendant Maxima Hemedes, coupled with the straightforward
repudiation by Justa Kausapin herself of the document relied upon by said defendant the Court
finds and so concludes that the "Deed of Conveyance of Unregistered Real Property by
Reversion" is not a credible and convincing evidence and is of no evidentiary value under the law
upon which claimant Maxima Hemedes may anchor a valid claim of ownership over the property
subject of this action.

(pp. 91-93, Rollo.)

It is argued that private respondents failed to have the thumbmarks of Justa Kausapin appearing
on the deeds executed in favor of Maxima and Enrique compared and this failure may be taken
as wilful suppression of evidence that is presumed to be adverse if produced (Rules of Court,
Rule 131, Sec. 3(e). The applicability of this rule presupposes that the suppressed evidence is not
available to the other party for production in court (People vs. Padiernos, 69 SCRA 484 [1976];
People vs. Silvestre, 279 SCRA 474, 495 [1997]). This is not the case here for the same documents
were available to petitioners. In fact, the records show that counsel for Maxima Hemedes
pledged to submit the document which will be compared with the specimen thumbmark to be
obtained from Justa Kausapin (TSN, December 7, 1981, p. 28). The records, however, do not
show that said counsel persisted in his request for comparison of Kausapin's thumbmarks. If
petitioners were convinced that the specimen thumbprint of Justa Kausapin was of crucial
importance to their cause, they should have insisted on presenting her as a witness and,
thereupon, obtaining her thumbprint. Their own failure to pursue the production of the
specimen thumbprint of Justa Kausapin negated any belated claim that the said specimen was
suppressed (People vs. Tulop, citing People vs. Pagal, 272 SCRA 443 [1998]; Commissioner of
Internal Revenue vs. Tokyo Shipping Company, Ltd., 244 SCRA 332 [1995]; citing Nicolas vs.
Nicolas, 52 Phil 265 [1928] and Ang Seng Quiem vs. Te Chico, 7 Phil 541 [1907]).1âwphi1.nêt

The two courts below were, to my mind, most perceptive when they held that proof of
authenticity of the thumbprint of Justa Kausapin would not render valid an otherwise void
document in light of the admission of Maxima Hemedes that she did not explain the English
contents thereof to Justa Kausapin in a language understood by her.
On the other hand, the validity of the conveyance to Enrique Hemedes is amply proven by the
evidence on record. Thus, largely uncontested are the following findings of fact of the trial court:

Enough has already been said hereinabove concerning the claim of ownership of plaintiff Enrique.
From an overall evaluation of the facts found by the Court to be substantiated by the evidence
on record, the Court is convinced and so holds that the three conflicting claimants, it is party
plaintiffs, Enrique Hemedes and now DOMINIUM, who have both law and equity on their side.
Plaintiff Enrique Hemedes' title to the property in question by virtue of the "Kasunduan" dated
May 27, 1971 was confirmed twice by his grantor, Justa Kausapin; he complied with his
obligations as naked owner by giving Justa Kausapin her usufructuary rights in the form of
financial and other assistance; he declared his ownership of the property openly and adversely to
other claimants by recording the same in the appropriate government agencies, namely, the
Municipal and Provincial Assessor's Office, the Ministry of Agrarian Reform and the Bureau of
Lands; he was openly known in the community where the property is located as the owner
thereof; he paid the taxes on the property conscientiously from the time he acquired the same
to the time he sold the same to co-plaintiff DOMINIUM; he was in continuous possession of the
property during the said period; he paid the tenant, Nemesio Marquez, the disturbance fee
required under the Land Reform Law.

(pp., 102-103, Rollo.)

The Court of Appeals, therefore, did not err in holding that since the deed of conveyance to
Maxima was found to be spurious, it necessarily follows that OCT No. (0-941) 0-198 issued in her
name is null and void. This is because the registration will not invalidate a forged or invalid
document.

I, therefore, vote to dismiss the petition and to affirm the decision appealed from.

Republic of the Philippines

SUPREME COURT
Baguio City

THIRD DIVISION

G.R. No. 115349 April 18, 1997

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
THE COURT OF APPEALS, THE COURT OF TAX APPEALS and ATENEO DE MANILA
UNIVERSITY, respondents.
PANGANIBAN, J.:

In conducting researches and studies of social organizations and cultural values thru its Institute
of Philippine Culture, is the Ateneo de Manila University performing the work of an independent
contractor and thus taxable within the purview of then Section 205 of the National Internal
Revenue Code levying a three percent contractor's tax? This question is answer by the Court in
the negative as it resolves this petition assailing the Decision of the Respondent Court of
1

Appeals in CA-G.R. SP No. 31790 promulgated on April 27, 1994 affirming that of the Court of
2

Tax Appeals. 3

The Antecedent Facts

The antecedents as found by the Court of Appeals are reproduced hereinbelow, the same being
largely undisputed by the parties.

Private respondent is a non-stock, non-profit educational institution with auxiliary units and
branches all over the Philippines. One such auxiliary unit is the Institute of Philippine Culture
(IPC), which has no legal personality separate and distinct from that of private respondent. The
IPC is a Philippine unit engaged in social science studies of Philippine society and culture.
Occasionally, it accepts sponsorships for its research activities from international organizations,
private foundations and government agencies.

On July 8, 1983, private respondent received from petitioner Commissioner of Internal Revenue
a demand letter dated June 3, 1983, assessing private respondent the sum of P174,043.97 for
alleged deficiency contractor's tax, and an assessment dated June 27, 1983 in the sum of
P1,141,837 for alleged deficiency income tax, both for the fiscal year ended March 31, 1978.
Denying said tax liabilities, private respondent sent petitioner a letter-protest and subsequently
filed with the latter a memorandum contesting the validity of the assessments.

On March 17, 1988, petitioner rendered a letter-decision canceling the assessment for deficiency
income tax but modifying the assessment for deficiency contractor's tax by increasing the
amount due to P193,475.55. Unsatisfied, private respondent requested for a reconsideration or
reinvestigation of the modified assessment. At the same time, it filed in the respondent court a
petition for review of the said letter-decision of the petitioner. While the petition was pending
before the respondent court, petitioner issued a final decision dated August 3, 1988 reducing the
assessment for deficiency contractor's tax from P193,475.55 to P46,516.41, exclusive of
surcharge and interest.

On July 12, 1993, the respondent court rendered the questioned decision which dispositively
reads:

WHEREFORE, in view of the foregoing, respondent's decision is SET ASIDE. The deficiency
contractor's tax assessment in the amount of P46,516.41 exclusive of surcharge and interest for
the fiscal year ended March 31, 1978 is hereby CANCELED. No pronouncement as to cost.

SO ORDERED.
Not in accord with said decision, petitioner has come to this Court via the present petition for
review raising the following issues:

1) WHETHER OR NOT PRIVATE RESPONDENT FALLS UNDER THE PURVIEW OF INDEPENDENT

CONTRACTOR PURSUANT TO SECTION 205 OF THE TAX CODE; and

2) WHETHER OR NOT PRIVATE RESPONDENT IS SUBJECT TO 3% CONTRACTOR'S TAX UNDER

SECTION 205 OF THE TAX CODE.

The pertinent portions of Section 205 of the National Internal Revenue Code, as amended,
provide:

Sec. 205. Contractor, proprietors or operators of dockyards, and others. — A contractor's tax of
threeper centum of the gross receipts is hereby imposed on the following:

xxx xxx xxx

(16) Business agents and other independent contractors except persons, associations and
corporations under contract for embroidery and apparel for export, as well as their agents and
contractors and except gross receipts of or from a pioneer industry registered with the Board of
Investments under Republic Act No. 5186:

xxx xxx xxx

The term "independent contractors" include persons (juridical or natural) not enumerated above
(but not including individuals subject to the occupation tax under Section 12 of the Local Tax
Code) whose activity consists essentially of the sale of all kinds of services for a fee regardless of
whether or not the performance of the service calls for the exercise or use of the physical or
mental faculties of such contractors or their employees.

xxx xxx xxx

Petitioner contends that the respondent court erred in holding that private respondent is not an
"independent contractor" within the purview of Section 205 of the Tax Code. To petitioner, the
term "independent contractor", as defined by the Code, encompasses all kinds of services
rendered for a fee and that the only exceptions are the following:

a. Persons, association and corporations under contract for embroidery and apparel for export
and gross receipts of or from pioneer industry registered with the Board of Investment under R.A.
No. 5186;

b. Individuals occupation tax under Section 12 of the Local Tax Code (under the old Section 182
[b] of the Tax Code); and

c. Regional or area headquarters established in the Philippines by multinational corporations,

including their alien executives, and which headquarters do not earn or derive income from the
Philippines and which act as supervisory, communication and coordinating centers for their
affiliates, subsidiaries or branches in the Asia Pacific Region (Section 205 of the Tax Code).
Petitioner thus submits that since private respondent falls under the definition of an
"independent contractor" and is not among the aforementioned exceptions, private respondent
is therefore subject to the 3% contractor's tax imposed under the same Code. 4

The Court of Appeals disagreed with the Petitioner Commissioner of Internal Revenue and
affirmed the assailed decision of the Court of Tax Appeals. Unfazed, petitioner now asks us to
reverse the CA through this petition for review.

The Issues

Petitioner submits before us the following issues:

1) Whether or not private respondent falls under the purview of independent contractor
pursuant to Section 205 of the Tax Code.

2) Whether or not private respondent is subject to 3% contractor's tax under Section 205 of the
Tax Code. 5

In fine, these may be reduced to a single issue: Is Ateneo de Manila University, through its
auxiliary unit or branch — the Institute of Philippine Culture — performing the work of an
independent contractor and, thus, subject to the three percent contractor's tax levied by then
Section 205 of the National Internal Revenue Code?

The Court's Ruling

The petition is unmeritorious.

Interpretation of Tax Laws

The parts of then Section 205 of the National Internal Revenue Code germane to the case before
us read:

Sec. 205. Contractors, proprietors or operators of dockyards, and others. — A contractor's tax of
threeper centum of the gross receipts is hereby imposed on the following:

xxx xxx xxx

(16) Business agents and other independent contractors, except persons, associations and
corporations under contract for embroidery and apparel for export, as well as their agents and
contractors, and except gross receipts of or from a pioneer industry registered with the Board of
Investments under the provisions of Republic Act No. 5186;

xxx xxx xxx

The term "independent contractors" include persons (juridical or natural) not enumerated above
(but not including individuals subject to the occupation tax under Section 12 of the Local Tax
Code) whose activity consists essentially of the sale of all kinds of services for a fee regardless of
whether or not the performance of the service calls for the exercise or use of the physical or
mental faculties of such contractors or their employees.

The term "independent contractor" shall not include regional or area headquarters established in
the Philippines by multinational corporations, including their alien executives, and which
headquarters do not earn or derive income from the Philippines and which act as supervisory,
communications and coordinating centers for their affiliates, subsidiaries or branches in the
Asia-Pacific Region.

The term "gross receipts" means all amounts received by the prime or principal contractor as the
total contract price, undiminished by amount paid to the subcontractor, shall be excluded from
the taxable gross receipts of the subcontractor.

Petitioner Commissioner of Internal Revenue contends that Private Respondent Ateneo de

Manila University "falls within the definition" of an independent contractor and "is not one of
those mentioned as excepted"; hence, it is properly a subject of the three percent contractor's
tax levied by the foregoing provision of law. Petitioner states that the "term 'independent
6

contractor' is not specifically defined so as to delimit the scope thereof, so much so that any
person who . . . renders physical and mental service for a fee, is now indubitably considered an
independent contractor liable to 3% contractor's tax." According to petitioner, Ateneo has the
7

burden of proof to show its exemption from the coverage of the law.

We disagree. Petitioner Commissioner of Internal Revenue erred in applying the principles of tax
exemption without first applying the well-settled doctrine of strict interpretation in the
imposition of taxes. It is obviously both illogical and impractical to determine who are exempted
without first determining who are covered by the aforesaid provision. The Commissioner should
have determined first if private respondent was covered by Section 205, applying the rule of
strict interpretation of laws imposing taxes and other burdens on the populace, before asking
Ateneo to prove its exemption therefrom. The Court takes this occasion to reiterate the
hornbook doctrine in the interpretation of tax laws that "(a) statute will not be construed as
imposing a tax unless it does so clearly, expressly, and unambiguously . . . (A) tax cannot be
imposed without clear and express words for that purpose. Accordingly, the general rule of
requiring adherence to the letter in construing statutes applies with peculiar strictness to tax
lawsand the provisions of a taxing act are not to be extended by implication." Parenthetically,
8

in answering the question of who is subject to tax statutes, it is basic that "in case of doubt, such
statutes are to be construed most strongly against the government and in favor of the subjects
or citizens because burdens are not to be imposed nor presumed to be imposed beyond what
statutes expressly and clearly import." 9

To fall under its coverage, Section 205 of the National Internal Revenue Code requires that the
independent contractor be engaged in the business of selling its services. Hence, to impose the
three percent contractor's tax on Ateneo's Institute of Philippine Culture, it should be sufficiently
proven that the private respondent is indeed selling its services for a fee in pursuit of an
independent business. And it is only after private respondent has been found clearly to be
subject to the provisions of Sec. 205 that the question of exemption therefrom would arise. Only
after such coverage is shown does the rule of construction — that tax exemptions are to be
strictly construed against the taxpayer — come into play, contrary to petitioner's position. This is
the main line of reasoning of the Court of Tax Appeals in its decision, which was affirmed by the
10

CA.

The Ateneo de Manila University Did Not Contract

for the Sale of the Service of its Institute of Philippine Culture

After reviewing the records of this case, we find no evidence that Ateneo's Institute of Philippine
Culture ever sold its services for a fee to anyone or was ever engaged in a business apart from
and independently of the academic purposes of the university.

Stressing that "it is not the Ateneo de Manila University per se which is being taxed," Petitioner
Commissioner of Internal Revenue contends that "the tax is due on its activity of conducting
researches for a fee. The tax is due on the gross receipts made in favor of IPC pursuant to the
contracts the latter entered to conduct researches for the benefit primarily of its clients. The tax is
imposed on the exercise of a taxable activity. . . . [T]he sale of services of private respondent is
made under a contract and the various contracts entered into between private respondent and
its clients are almost of the same terms, showing, among others, the compensation and terms of
payment." (Emphasis supplied.)
11

In theory, the Commissioner of Internal Revenue may be correct. However, the records do not
show that Ateneo's IPC in fact contracted to sell its research services for a fee. Clearly then, as
found by the Court of Appeals and the Court of Tax Appeals, petitioner's theory is inapplicable to
the established factual milieu obtaining in the instant case.

In the first place, the petitioner has presented no evidence to prove its bare contention that,
indeed, contracts for sale of services were ever entered into by the private respondent. As
appropriately pointed out by the latter:

An examination of the Commissioner's Written Formal Offer of Evidence in the Court of Tax
Appeals shows that only the following documentary evidence was presented:

Exhibit 1 BIR letter of authority no. 331844

2 Examiner's Field Audit Report

3 Adjustments to Sales/Receipts

4 Letter-decision of BIR Commissioner Bienvenido A. Tan Jr.

None of the foregoing evidence even comes close to purport to be contracts between private
respondent and third parties. 12

Moreover, the Court of Tax Appeals accurately and correctly declared that the " funds received
by the Ateneo de Manila University are technically not a fee. They may however fall as gifts or
donations which are tax-exempt" as shown by private respondent's compliance with the
requirement of Section 123 of the National Internal Revenue Code providing for the exemption
of such gifts to an educational institution. 13
Respondent Court of Appeals elucidated on the ruling of the Court of Tax Appeals:

To our mind, private respondent hardly fits into the definition of an "independent contractor".

For one, the established facts show that IPC, as a unit of the private respondent, is not engaged
in business. Undisputedly, private respondent is mandated by law to undertake research
activities to maintain its university status. In fact, the research activities being carried out by the
IPC is focused not on business or profit but on social sciences studies of Philippine society and
culture. Since it can only finance a limited number of IPC's research projects, private respondent
occasionally accepts sponsorship for unfunded IPC research projects from international
organizations, private foundations and governmental agencies. However, such sponsorships are
subject to private respondent's terms and conditions, among which are, that the research is
confined to topics consistent with the private respondent's academic agenda; that no proprietary
or commercial purpose research is done; and that private respondent retains not only the
absolute right to publish but also the ownership of the results of the research conducted by the
IPC. Quite clearly, the aforementioned terms and conditions belie the allegation that private
respondent is a contractor or is engaged in business.

For another, it bears stressing that private respondent is a non-stock, non-profit educational
corporation. The fact that it accepted sponsorship for IPC's unfunded projects is merely
incidental. For, the main function of the IPC is to undertake research projects under the
academic agenda of the private respondent. Moreover the records do not show that in accepting
sponsorship of research work, IPC realized profits from such work. On the contrary, the evidence
shows that for about 30 years, IPC had continuously operated at a loss, which means that
sponsored funds are less than actual expenses for its research projects. That IPC has been
operating at a loss loudly bespeaks of the fact that education and not profit is the motive for
undertaking the research projects.

Then, too, granting arguendo that IPC made profits from the sponsored research projects, the
fact still remains that there is no proof that part of such earnings or profits was ever distributed
as dividends to any stockholder, as in fact none was so distributed because they accrued to the
benefit of the private respondent which is a non-profit educational institution. 14

Therefore, it is clear that the funds received by Ateneo's Institute of Philippine Culture are not
given in the concept of a fee or price in exchange for the performance of a service or delivery of
an object. Rather, the amounts are in the nature of an endowment or donation given by IPC's
benefactors solely for the purpose of sponsoring or funding the research with no strings
attached. As found by the two courts below, such sponsorships are subject to IPC's terms and
conditions. No proprietary or commercial research is done, and IPC retains the ownership of the
results of the research, including the absolute right to publish the same. The copyrights over the
results of the research are owned by
Ateneo and, consequently, no portion thereof may be reproduced without its permission. The 15

amounts given to IPC, therefore, may not be deemed, it bears stressing as fees or gross receipts
that can be subjected to the three percent contractor's tax.

It is also well to stress that the questioned transactions of Ateneo's Institute of Philippine Culture
cannot be deemed either as a contract of sale or a contract of a piece of work. "By the contract
of sale, one of the contracting parties obligates himself to transfer the ownership of and to
deliver a determinate thing, and the other to pay therefor a price certain in money or its
equivalent." By its very nature, a contract of sale requires a transfer of ownership. Thus, Article
16

1458 of the Civil Code "expressly makes the obligation to transfer ownership as an essential
element of the contract of sale, following modern codes, such as the German and the Swiss. Even
in the absence of this express requirement, however, most writers, including Sanchez Roman,
Gayoso, Valverde, Ruggiero, Colin and Capitant, have considered such transfer of ownership as
the primary purpose of sale. Perez and Alguer follow the same view, stating that the delivery of
the thing does not mean a mere physical transfer, but is a means of transmitting ownership.
Transfer of title or an agreement to transfer it for a price paid or promised to be paid is the
essence of sale." In the case of a contract for a piece of work, "the contractor binds himself to
17

execute a piece of work for the employer, in consideration of a certain price or compensation. . . .
If the contractor agrees to produce the work from materials furnished by him, he shall deliver
the thing produced to the employer and transfer dominion over the thing, . . ." Ineludably,
18

whether the contract be one of sale or one for a piece of work, a transfer of ownership is
involved and a party necessarily walks away with an object. In the case at bench, it is clear from
19

the evidence on record that there was no sale either of objects or services because, as adverted
to earlier, there was no transfer of ownership over the research data obtained or the results of
research projects undertaken by the Institute of Philippine Culture.

Furthermore, it is clear that the research activity of the Institute of Philippine Culture is done in
pursuance of maintaining Ateneo's university status and not in the course of an independent
business of selling such research with profit in mind. This is clear from a reading of the
regulations governing universities:

31. In addition to the legal requisites an institution must meet, among others, the following
requirements before an application for university status shall be considered:

xxx xxx xxx

(e) The institution must undertake research and operate with a competent qualified staff at least
three graduate departments in accordance with the rules and standards for graduate education.
One of the departments shall be science and technology. The competence of the staff shall be
judged by their effective teaching, scholarly publications and research activities published in its
school journal as well as their leadership activities in the profession.

(f) The institution must show evidence of adequate and stable financial resources and support, a
reasonable portion of which should be devoted to institutional development and research.
(emphasis supplied)

xxx xxx xxx

32. University status may be withdrawn, after due notice and hearing, for failure to maintain
satisfactorily the standards and requirements therefor. 20
Petitioner's contention that it is the Institute of Philippine Culture that is being taxed and not the
Ateneo is patently erroneous because the former is not an independent juridical entity that is
separate and distinct form the latter.

Factual Findings and Conclusions of the Court of Tax Appeals Affirmed by the Court of Appeals
Generally Conclusive

In addition, we reiterate that the "Court of Tax Appeals is a highly specialized body specifically
created for the purpose of reviewing tax cases. Through its expertise, it is undeniably competent
to determine the issue of whether" Ateneo de Manila University may be deemed a subject of
21

the three percent contractor's tax "through the evidence presented before it." Consequently, "as
a matter of principle, this Court will not set aside the conclusion reached by . . . the Court of Tax
Appeals which is, by the very nature of its function, dedicated exclusively to the study and
consideration of tax problems and has necessarily developed an expertise on the subject unless
there has been an abuse or improvident exercise of authority . . ." This point becomes more
22

evident in the case before us where the findings and conclusions of both the Court of Tax
Appeals and the Court of Appeals appear untainted by any abuse of authority, much
less grave abuse of discretion. Thus, we find the decision of the latter affirming that of the
former free from any palpable error.

Public Service, Not Profit, is the Motive

The records show that the Institute of Philippine Culture conducted its research activities at a
huge deficit of P1,624,014.00 as shown in its statements of fund and disbursements for the
period 1972 to 1985. In fact, it was Ateneo de Manila University itself that had funded the
23

research projects of the institute, and it was only when Ateneo could no longer produce the
needed funds that the institute sought funding from outside. The testimony of Ateneo's Director
for Accounting Services, Ms. Leonor Wijangco, provides significant insight on the academic and
nonprofit nature of the institute's research activities done in furtherance of the university's
purposes, as follows:

Q Now it was testified to earlier by Miss Thelma Padero (Office Manager of the Institute of
Philippine Culture) that as far as grants from sponsored research it is possible that the grant
sometimes is less than the actual cost. Will you please tell us in this case when the actual cost is a
lot less than the grant who shoulders the additional cost?

A The University.

Q Now, why is this done by the University?

A Because of our faculty development program as a university, because a university has to have
its own research institute. 24

So, why is it that Ateneo continues to operate and conduct researches through its Institute of
Philippine Culture when it undisputedly loses not an insignificant amount in the process? The
plain and simple answer is that private respondent is not a contractor selling its services for a fee
but an academic institution conducting these researches pursuant to its commitments to
education and, ultimately, to public service. For the institute to have tenaciously continued
operating for so long despite its accumulation of significant losses, we can only agree with both
the Court of Tax Appeals and the Court of Appeals that "education and not profit is [IPC's] motive
for undertaking the research
projects." 25

WHEREFORE, premises considered, the petition is DENIED and the assailed Decision of the Court
of Appeals is hereby AFFIRMED in full.

SO ORDERED.

Narvasa, C.J., Davide, Jr., Melo and Francisco JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 52267 January 24, 1996

ENGINEERING & MACHINERY CORPORATION, petitioner,

vs.
COURT OF APPEALS and PONCIANO L. ALMEDA, respondent.

DECISION

PANGANIBAN, J.:

Is a contract for the fabrication and installation of a central air-conditioning system in a building,
one of "sale" or "for a piece of work"? What is the prescriptive period for filing actions for breach
of the terms of such contract?

These are the legal questions brought before this Court in this Petition for review
on certiorari under Rule 45 of the Rules of Court, to set aside the Decision of the Court of
1

Appeals in CA-G.R. No. 58276-R promulgated on November 28, 1978 (affirming in toto the
2

decision dated April 15, 1974 of the then Court of First Instance of Rizal, Branch II , in Civil Case
3 4

No. 14712, which ordered petitioner to pay private respondent the amount needed to rectify the
faults and deficiencies of the air-conditioning system installed by petitioner in private
respondent's building, plus damages, attorney's fees and costs).

By a resolution of the First Division of this Court dated November 13, 1995, this case was
transferred to the Third. After deliberating on the various submissions of the parties, including
the petition, record on appeal, private respondent's comment and briefs for the petitioner and
the private respondent, the Court assigned the writing of this Decision to the undersigned, who
took his oath as a member of the Court on October 10, 1995.

The Facts

Pursuant to the contract dated September 10, 1962 between petitioner and private respondent,
the former undertook to fabricate, furnish and install the air-conditioning system in the latter's
building along Buendia Avenue, Makati in consideration of P210,000.00. Petitioner was to furnish
the materials, labor, tools and all services required in order to so fabricate and install said system.
The system was completed in 1963 and accepted by private respondent, who paid in full the
contract price.

On September 2, 1965, private respondent sold the building to the National Investment and
Development Corporation (NIDC). The latter took possession of the building but on account of
NIDC's noncompliance with the terms and conditions of the deed of sale, private respondent was
able to secure judicial rescission thereof. The ownership of the building having been decreed
back to private respondent, he re-acquired possession sometime in 1971. It was then that he
learned from some NIDC, employees of the defects of the air-conditioning system of the building.

Acting on this information, private respondent commissioned Engineer David R. Sapico to render
a technical evaluation of the system in relation to the contract with petitioner. In his report,
Sapico enumerated the defects of the system and concluded that it was "not capable of
maintaining the desired room temperature of 76ºF - 2ºF (Exhibit C)" . 5

On the basis of this report, private respondent filed on May 8, 1971 an action for damages
against petitioner with the then Court of First Instance of Rizal (Civil Case No. 14712). The
complaint alleged that the air-conditioning system installed by petitioner did not comply with the
agreed plans and specifications. Hence, private respondent prayed for the amount of
P210,000.00 representing the rectification cost, P100,000.00 as damages and P15,000.00 as
attorney's fees.

Petitioner moved to dismiss the complaint, alleging that the prescriptive period of six months
had set in pursuant to Articles 1566 and 1567, in relation to Article 1571 of the Civil Code,
regarding the responsibility of a vendor for any hidden faults or defects in the thing sold.

Private respondent countered that the contract dated September 10, 1962 was not a contract for
sale but a contract for a piece of work under Article 1713 of the Civil Code. Thus, in accordance
with Article 1144 (1) of the same Code, the complaint was timely brought within the ten-year
prescriptive period.

In its reply, petitioner argued that Article 1571 of the Civil Code providing for a six-month
prescriptive period is applicable to a contract for a piece of work by virtue of Article 1714, which
provides that such a contract shall be governed by the pertinent provisions on warranty of title
and against hidden defects and the payment of price in a contract of sale . 6

The trial court denied the motion to dismiss. In its answer to the complaint, petitioner reiterated
its claim of prescription as an affirmative defense. It alleged that whatever defects might have
been discovered in the air-conditioning system could have been caused by a variety of factors,
including ordinary wear and tear and lack of proper and regular maintenance. It pointed out that
during the one-year period that private respondent withheld final payment, the system was
subjected to "very rigid inspection and testing and corrections or modifications effected" by
petitioner. It interposed a compulsory counterclaim suggesting that the complaint was filed "to
offset the adverse effects" of the judgment in Civil Case No. 71494, Court of First Instance of
Manila, involving the same parties, wherein private respondent was adjudged to pay petitioner
the balance of the unpaid contract price for the air-conditioning system installed in another
building of private respondent, amounting to P138,482.25.

Thereafter, private respondent filed an ex-parte motion for preliminary attachment on the
strength of petitioner's own statement to the effect that it had sold its business and was no
longer doing business in Manila. The trial court granted the motion and, upon private
respondent's posting of a bond of F'50,000.00, ordered the issuance of a writ of attachment.

In due course, the trial court rendered a decision finding that petitioner failed to install certain
parts and accessories called for by the contract, and deviated from the plans of the system, thus
reducing its operational effectiveness to the extent that 35 window-type units had to be installed
in the building to achieve a fairly desirable room temperature. On the question of prescription,
the trial court ruled that the complaint was filed within the ten-year court prescriptive period
although the contract was one for a piece of work, because it involved the "installation of an
air-conditioning system which the defendant itself manufactured, fabricated, designed and
installed."

Petitioner appealed to the Court of Appeals, which affirmed the decision of the trial court. Hence,
it instituted the instant petition.

The Submissions of the Parties

In the instant Petition, petitioner raised three issues. First, it contended that private
respondent's acceptance of the work and his payment of the contract price extinguished any
liability with respect to the defects in the air-conditioning system. Second, it claimed that the
Court of Appeals erred when it held that the defects in the installation were not apparent at the
time of delivery and acceptance of the work considering that private respondent was not an
expert who could recognize such defects. Third, it insisted that, assuming arguendo that there
were indeed hidden defects, private respondent's complaint was barred by prescription under
Article 1571 of the Civil Code, which provides for a six-month prescriptive period.

Private respondent, on the other hand, averred that the issues raised by petitioner, like the
question of whether there was an acceptance of the work by the owner and whether the hidden
defects in the installation could have been discovered by simple inspection, involve questions of
fact which have been passed upon by the appellate court.

The Court's Ruling

The Supreme Court reviews only errors of law in petitions for review on certiorari under Rule 45.
It is not the function of this Court to re-examine the findings of fact of the appellate court unless
said findings are not supported by the evidence on record or the judgment is based on a
misapprehension of facts of Appeals erred when it held that the defects in the installation were
7

not apparent at the time of delivery and acceptance of the work considering that private
respondent was not an expert who could recognize such defects. Third. it insisted that,
assuming arguendothat there were indeed hidden defects, private respondent's complaint was
barred by prescription under Article 1571 of the Civil Code, which provides for a six-month
prescriptive period.

Private respondent, on the other hand, averred that the issues raised by petitioner, like the
question of whether here was an acceptance of the work by the owner and whether the hidden
defects in the installation could have been discovered by simple inspection, involve questions of
fact which have been passed upon by the appellate court.

The Court has consistently held that the factual findings of the trial court, as well as the Court of
Appeals, are final and conclusive and may not be reviewed on appeal. Among the exceptional
circumstances where a reassessment of facts found by the lower courts is allowed are when the
conclusion is a finding grounded entirely on speculation, surmises or conjectures; when the
inference made is manifestly absurd, mistaken or impossible; when there is grave abuse of
discretion in the appreciation of facts; when the judgment is premised on a misapprehension of
facts; when the findings went beyond the issues of the case and the same are contrary to the
admissions of both appellant and appellee. After a careful study of the case at bench, we find
none of the above grounds present to justify the re-evaluation of the findings of fact made by
the courts below. 8

We see no valid reason to discard the factual conclusions of the appellate court. . . . (I)t is not the
function of this Court to assess and evaluate all over again the evidence, testimonial and
documentary, adduced by the parties, particularly where, such as here, the findings of both the
trial court and the appellate court on the matter coincide. (Emphasis supplied)
9

Hence, the first two issues will not be resolved as they raise questions of fact.

Thus, the only question left to be resolved is that of prescription. In their submissions, the parties
argued lengthily on the nature of the contract entered into by them, viz., whether it was one of
sale or for a piece of work.

Article 1713 of the Civil Code defines a contract for a piece of work thus:

By the contract for a piece of work the contractor binds himself to execute a piece of work for
the employer, in consideration of a certain price or compensation. The contractor may either
employ only his labor or skill, or also furnish the material.

A contract for a piece of work, labor and materials may be distinguished from a contract of sale
by the inquiry as to whether the thing transferred is one not in existence and which would never
have existed but for the order, of the person desiring it . In such case, the contract is one for a
10

piece of work, not a sale. On the other hand, if the thing subject of the contract would have
existed and been the subject of a sale to some other person even if the order had not been given,
then the contract is one of sale .
11
Thus, Mr. Justice Vitug explains that -
12

A contract for the delivery at a certain price of an article which the vendor in the ordinary course
of his business manufactures or procures for the general market, whether the same is on hand at
the time or not is a contract of sale, but if the goods are to be manufactured specially for the
customer and upon his special order, and not for the general market, it is a contract for a piece
of work (Art. 1467, Civil Code). The mere fact alone that certain articles are made upon previous
orders of customers will not argue against the imposition of the sales tax if such articles are
ordinarily manufactured by the taxpayer for sale to the public (Celestino Co. vs. Collector, 99 Phil.
841).

To Tolentino, the distinction between the two contracts depends on the intention of the parties.
Thus, if the parties intended that at some future date an object has to be delivered, without
considering the work or labor of the party bound to deliver, the contract is one of sale. But if one
of the parties accepts the undertaking on the basis of some plan, taking into account the work he
will employ personally or through another, there is a contract for a piece of work . 13

Clearly, the contract in question is one for a piece of work. It is not petitioner's line of business to
manufacture air-conditioning systems to be sold "off-the-shelf." Its business and particular field
of expertise is the fabrication and installation of such systems as ordered by customers and in
accordance with the particular plans and specifications provided by the customers. Naturally, the
price or compensation for the system manufactured and installed will depend greatly on the
particular plans and specifications agreed upon with the customers.

The obligations of a contractor for a piece of work are set forth in Articles 1714 and 1715 of the
Civil Code, which provide:

Art. 1714. If the contractor agrees to produce the work from material furnished by him, he shall
deliver the thing produced to the employer and transfer dominion over the thing. This contract
shall be governed by the following articles as well as by the pertinent provisions on warranty of
title and against hidden defects and the payment of price in a contract of sale.

Art. 1715. The contractor shall execute the work in such a manner that it has the qualities agreed
upon and has no defects which destroy or lessen its value or fitness for its ordinary or stipulated
use. Should the work be not of such quality, the employer may require that the contractor
remove the defect or execute another work. If the contractor fails or refuses to comply with this
obligation, the employer may have the defect removed or another work executed, at the
contractor's cost.

The provisions on warranty against hidden defects, referred to in Art. 1714 above-quoted, are
found in Articles 1561 and 1566, which read as follows:

Art. 1561. 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.

xxx xxx xxx

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.

The remedy against violations of the warranty against hidden defects is either to withdraw from
the contract (redhibitory action) or to demand a proportionate reduction of the price (accion
quanti manoris), with damages in either case . 14

In Villostas vs. Court of Appeals , we held that, "while it is true that Article 1571 of the Civil Code
15

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"; and where there is an express warranty in the contract, as in the case at
bench, the prescriptive period is the one specified in the express warranty, and in the absence of
such period, "the general rule on rescission of contract, which is four years (Article 1389, Civil
Code) shall apply" .
16

Consistent with the above discussion, it would appear that this suit is barred by prescription
because the complaint was filed more than four years after the execution of the contract and the
completion of the air-conditioning system.

However, a close scrutiny of the complaint filed in the trial court reveals that the original action
is not really for enforcement of the warranties against hidden defects, but one for breach of the
contract itself. It alleged that the petitioner, "in the installation of the air conditioning system
17

did not comply with the specifications provided" in the written agreement between the parties,
"and an evaluation of the air-conditioning system as installed by the defendant showed the
following defects and violations of the specifications of the agreement, to wit:

GROUND FLOOR:

"A. RIGHT WING:

Equipped with Worthington Compressor, Model 2VC4 directly driven by an Hp Elin electric motor
1750 rmp, 3 phase, 60 cycles, 220 volts, complete with starter evaporative condenser, circulating
water pump, air handling unit air ducts.

Defects Noted:

1. Deteriorated evaporative condenser panels, coils are full of scales and heavy corrosion is very
evident.

2. Defective gauges of compressors;

3. No belt guard on motor;

4. Main switch has no cover;

5. Desired room temperature not attained;

Aside from the above defects, the following were noted not installed although provided in the
specifications.

1. Face by-pass damper of G.I. sheets No. 16. This damper regulates the flow of cooled air
depending on room condition.

2. No fresh air intake provision were provided which is very necessary for efficient comfort
cooling..

3. No motor to regulate the face and by-pass damper.

4. Liquid level indicator for refrigerant not provided.

5. Suitable heat exchanger is not installed. This is an important component to increase

refrigeration efficiency.

6. Modulating thermostat not provided.

7. Water treatment device for evaporative condenser was not provided.

8. Liquid receiver not provided by sight glass.

B. LEFT WING:

Worthington Compressor Model 2VC4 is installed complete with 15 Hp electric motor, 3 phase,
220 volts 60 cycles with starter.

Defects Noted:

Same as right wing. except No. 4, All other defects on right wing are common to the left wing.

SECOND FLOOR: (Common up to EIGHT FLOORS)

Compressors installed are MELCO with 7.5 Hp V-belt driven by 1800 RPM, -220 volts, 60 cycles, 3
phase, Thrige electric motor with starters.

As stated in the specifications under, Section No. IV, the MELCO compressors do not satisfy the
conditions stated therein due to the following:

1. MELCO Compressors are not provided with automatic capacity unloader.

2. Not provided with oil pressure safety control.

3. Particular compressors do not have provision for renewal sleeves.

Out of the total 15 MELCO compressors installed to serve the 2nd floor up to 8th floors, only six
(6) units are in operation and the rest were already replaced. Of the remaining six (6) units,
several of them have been replaced with bigger crankshafts.

NINTH FLOOR:

Two (2) Worthington 2VC4 driven by 15 Hp, 3 phase, 220 volts, 60 cycles, 1750 rpm, Higgs
motors with starters.

Defects Noted are similar to ground floor.

GENERAL REMARKS:

Under Section III, Design conditions of specification for air conditioning work, and taking into
account "A" & "B" same, the present systems are not capable of maintaining the desired
temperature of 76 = 2ºF (sic).

The present tenant have installed 35 window type air conditioning units distributed among the
different floor levels. Temperature measurements conducted on March 29. 1971, revealed that
78ºF room (sic) is only maintained due to the additional window type units.

The trial court, after evaluating the evidence presented, held that, indeed, petitioner failed to
install items and parts required in the contract and substituted some other items which were not
in accordance with the specifications , thus:
18

From all of the foregoing, the Court is persuaded to believe the plaintiff that not only had the
defendant failed to install items and parts provided for in the specifications of the
air-conditioning system be installed, like face and by-pass dampers and modulating thermostat
and many others, but also that there are items, parts and accessories which were used and
installed on the air-conditioning system which were not in full accord with contract specifications.
These omissions to install the equipments, parts and accessories called for in the specifications of
the contract, as well as the deviations made in putting into the air-conditioning system
equipments, parts and accessories not in full accord with the contract specification naturally
resulted to adversely affect the operational effectiveness of the air-conditioning system which
necessitated the installation of thirty-five window type of air-conditioning units distributed
among the different floor levels in order to be able to obtain a fairly desirable room temperature
for the tenants and actual occupants of the building. The Court opines and so holds that the
failure of the defendant to follow the contract specifications and said omissions and deviations
having resulted in the operational ineffectiveness of the system installed makes the defendant
liable to the plaintiff in the amount necessary to rectify to put the air conditioning system in its
proper operational condition to make it serve the purpose for which the plaintiff entered into
the contract with the defendant.

The respondent Court affirmed the trial court's decision thereby making the latter's findings also
its own.
Having concluded that the original complaint is one for damages arising from breach of a written
contract - and not a suit to enforce warranties against hidden defects - we here - with declare
that the governing law is Article 1715 (supra). However, inasmuch as this provision does not
contain a specific prescriptive period, the general law on prescription, which is Article 1144 of
the Civil Code, will apply. Said provision states, inter alia, that actions "upon a written contract"
prescribe in ten (10) years. Since the governing contract was executed on September 10, 1962
and the complaint was filed on May 8, 1971, it is clear that the action has not prescribed.

What about petitioner's contention that "acceptance of the work by the employer relieves the
contractor of liability for any defect in the work"? This was answered by respondent Court as 19

follows:

As the breach of contract which gave rise to the instant case consisted in appellant's omission to
install the equipments (sic), parts and accessories not in accordance with the plan and
specifications provided for in the contract and the deviations made in putting into the air
conditioning system parts and accessories not in accordance with the contract specifications, it is
evident that the defect in the installation was not apparent at the time of the delivery and
acceptance of the work, considering further that plaintiff is not an expert to recognize the same.
From the very nature of things, it is impossible to determine by the simple inspection of air
conditioning system installed in an 8-floor building whether it has been furnished and installed as
per agreed specifications.

Verily, the mere fact that the private respondent accepted the work does not, ipso facto, relieve
the petitioner from liability for deviations from and violations of the written contract, as the law
gives him ten (10) years within which to file an action based on breach thereof.

WHEREFORE, the petition is hereby DENIED and the assailed Decision is AFFIRMED. No costs.

SO ORDERED.

Narvasa, C.J., Davide Jr., Melo and Francisco, JJ., concur.

G.R. No. L-20871 April 30, 1971

KER & CO., LTD., petitioner,

vs.
JOSE B. LINGAD, as Acting Commissioner of Internal Revenue, respondent.

Ross, Selph and Carrascoso for petitioner.

Office of the Solicitor General Arturo A. Alafriz, Solicitor Alejandro B. Afurong and Special Atty.
Balbino Gatdula, Jr. for respondent.
FERNANDO, J.:

Petitioner Ker & Co., Ltd. would have us reverse a decision of the Court of Tax Appeals, holding it
liable as a commercial broker under Section 194 (t) of the National Internal Revenue Code. Its
plea, notwithstanding the vigorous effort of its counsel, is not sufficiently persuasive. An obstacle,
well-nigh insuperable stands in the way. The decision under review conforms to and is in
accordance with the controlling doctrine announced in the recent case of Commissioner of
Internal Revenue v. Constantino. The decisive test, as therein set forth, is the retention of the
1

ownership of the goods delivered to the possession of the dealer, like herein petitioner, for
resale to customers, the price and terms remaining subject to the control of the firm consigning
such goods. The facts, as found by respondent Court, to which we defer, unmistakably indicate
that such a situation does exist. The juridical consequences must inevitably follow. We affirm.

It was shown that petitioner was assessed by the then Commissioner of Internal Revenue
Melecio R. Domingo the sum of P20,272.33 as the commercial broker's percentage tax,
surcharge, and compromise penalty for the period from July 1, 1949 to December 31, 1953.
There was a request on the part of petitioner for the cancellation of such assessment, which
request was turned down. As a result, it filed a petition for review with the Court of Tax Appeals.
In its answer, the then Commissioner Domingo maintained his stand that petitioner should be
taxed in such amount as a commercial broker. In the decision now under review, promulgated on
October 19, 1962, the Court of Tax Appeals held petitioner taxable except as to the compromise
penalty of P500.00, the amount due from it being fixed at P19,772.33.

Such liability arose from a contract of petitioner with the United States Rubber International, the
former being referred to as the Distributor and the latter specifically designated as the Company.
The contract was to apply to transactions between the former and petitioner, as Distributor,
from July 1, 1948 to continue in force until terminated by either party giving to the other sixty
days' notice. The shipments would cover products "for consumption in Cebu, Bohol, Leyte,
2

Samar, Jolo, Negros Oriental, and Mindanao except [the] province of Davao", petitioner, as
Distributor, being precluded from disposing such products elsewhere than in the above places
unless written consent would first be obtained from the Company. Petitioner, as Distributor, is
3

required to exert every effort to have the shipment of the products in the maximum quantity
and to promote in every way the sale thereof. The prices, discounts, terms of payment, terms of
4

delivery and other conditions of sale were subject to change in the discretion of the Company. 5

Then came this crucial stipulation: "The Company shall from time to time consign to the
Distributor and the Distributor will receive, accept and/or hold upon consignment the products
specified under the terms of this agreement in such quantities as in the judgment of the
Company may be necessary for the successful solicitation and maintenance of business in the
territory, and the Distributor agrees that responsibility for the final sole of all goods delivered
shall rest with him. All goods on consignment shall remain the property of the Company until
sold by the Distributor to the purchaser or purchasers, but all sales made by the Distributor shall
be in his name, in which the sale price of all goods sold less the discount given to the Distributor
by the Company in accordance with the provision of paragraph 13 of this agreement, whether or
not such sale price shall have been collected by the Distributor from the purchaser or purchasers,
shall immediately be paid and remitted by the Distributor to the Company. It is further agreed
that this agreement does not constitute Distributor the agent or legal representative 4 of the
Company for any purpose whatsoever. Distributor is not granted any right or authority to assume
or to create any obligation or responsibility, express or implied, in behalf of or in the name of the
Company, or to bind the Company in any manner or thing whatsoever." 6

All specifications for the goods ordered were subject to acceptance by the Company with
petitioner, as Distributor, required to accept such goods shipped as well as to clear the same
through customs and to arrange for delivery in its warehouse in Cebu City. Moreover, orders are
to be filled in whole or in part from the stocks carried by the Company's neighboring branches,
subsidiaries or other sources of Company's brands. Shipments were to be invoiced at prices to
7

be agreed upon, with the customs duties being paid by petitioner, as Distributor, for account of
the Company. Moreover, all resale prices, lists, discounts and general terms and conditions of
8

local resale were to be subject to the approval of the Company and to change from time to time
in its discretion. The dealer, as Distributor, is allowed a discount of ten percent on the net
9

amount of sales of merchandise made under such agreement. On a date to be determined by

10

the Company, the petitioner, as Distributor, was required to report to it data showing in detail all
sales during the month immediately preceding, specifying therein the quantities, sizes and types
together with such information as may be required for accounting purposes, with the Company
rendering an invoice on sales as described to be dated as of the date of inventory and sales
report. As Distributor, petitioner had to make payment on such invoice or invoices on due date
with the Company being privileged at its option to terminate and cancel the agreement forthwith
upon the failure to comply with this obligation. The Company, at its own expense, was to keep
11

the consigned stock fully insured against loss or damage by fire or as a result of fire, the policy of
such insurance to be payable to it in the event of loss. Petitioner, as Distributor, assumed full
responsibility with reference to the stock and its safety at all times; and upon request of the
Company at any time, it was to render inventory of the existing stock which could be subject to
change. There was furthermore this equally tell-tale covenant: "Upon the termination or any
12

cancellation of this agreement all goods held on consignment shall be held by the Distributor for
the account of the Company, without expense to the Company, until such time as provision can
be made by the Company for disposition." 13

The issue with the Court of Tax Appeals, as with us now, is whether the relationship thus created
is one of vendor and vendee or of broker and principal. Not that there would have been the
slightest doubt were it not for the categorical denial in the contract that petitioner was not
constituted as "the agent or legal representative of the Company for any purpose whatsoever." It
would be, however, to impart to such an express disclaimer a meaning it should not possess to
ignore what is manifestly the role assigned to petitioner considering the instrument as a whole.
That would be to lose sight altogether of what has been agreed upon. The Court of Tax Appeals
was not misled in the language of the decision now on appeal: "That the petitioner Ker & Co., Ltd.
is, by contractual stipulation, an agent of U.S. Rubber International is borne out by the facts that
petitioner can dispose of the products of the Company only to certain persons or entities and
within stipulated limits, unless excepted by the contract or by the Rubber Company (Par. 2); that
it merely receives, accepts and/or holds upon consignment the products, which remain
properties of the latter company (Par. 8); that every effort shall be made by petitioner to
promote in every way the sale of the products (Par. 3); that sales made by petitioner are subject
to approval by the company (Par. 12); that on dates determined by the rubber company,
petitioner shall render a detailed report showing sales during the month (Par. 14); that the
rubber company shall invoice the sales as of the dates of inventory and sales report (Par. 14);
that the rubber company agrees to keep the consigned goods fully insured under insurance
policies payable to it in case of loss (Par. 15); that upon request of the rubber company at any
time, petitioner shall render an inventory of the existing stock which may be checked by an
authorized representative of the former (Par. 15); and that upon termination or cancellation of
the Agreement, all goods held on consignment shall be held by petitioner for the account of the
rubber company until their disposition is provided for by the latter (Par. 19). All these
circumstances are irreconcilably antagonistic to the idea of an independent merchant." Hence 14

its conclusion: "However, upon analysis of the contract, as a whole, together with the actual
conduct of the parties in respect thereto, we have arrived at the conclusion that the relationship
between them is one of brokerage or agency." We find ourselves in agreement,
15

notwithstanding the able brief filed on behalf of petitioner by its counsel. As noted at the outset,
we cannot heed petitioner's plea for reversal.

1. According to the National Internal Revenue Code, a commercial broker "includes all persons,
other than importers, manufacturers, producers, or bona fide employees, who, for
compensation or profit, sell or bring about sales or purchases of merchandise for other persons
or bring proposed buyers and sellers together, or negotiate freights or other business for owners
of vessels or other means of transportation, or for the shippers, or consignors or consignees of
freight carried by vessels or other means of transportation. The term includes commission
merchants." The controlling decision as to the test to be followed as to who falls within the
16

above definition of a commercial broker is that of Commissioner of Internal Revenue v.

Constantino. In the language of Justice J. B. L. Reyes, who penned the opinion: "Since the
17

company retained ownership of the goods, even as it delivered possession unto the dealer for
resale to customers, the price and terms of which were subject to the company's control, the
relationship between the company and the dealer is one of agency, ... ." An excerpt from
18

Salisbury v. Brooks cited in support of such a view follows: " 'The difficulty in distinguishing
19

between contracts of sale and the creation of an agency to sell has led to the establishment of
rules by the application of which this difficulty may be solved. The decisions say the transfer of
title or agreement to transfer it for a price paid or promised is the essence of sale. If such
transfer puts the transferee in the attitude or position of an owner and makes him liable to the
transferor as a debtor for the agreed price, and not merely as an agent who must account for the
proceeds of a resale, the transaction is a sale; while the essence of an agency to sell is the
delivery to an agent, not as his property, but as the property of the principal, who remains the
owner and has the right to control sales, fix the price, and terms, demand and receive the
proceeds less the agent's commission upon sales made.' " The opinion relied on the work of
20

Mechem on Sales as well as Mechem on Agency. Williston and Tiedman both of whom wrote
treatises on Sales, were likewise referred to.

Equally relevant is this portion of the Salisbury opinion: "It is difficult to understand or appreciate
the necessity or presence of these mutual requirements and obligations on any theory other
than that of a contract of agency. Salisbury was to furnish the mill and put the timber owned by
him into a marketable condition in the form of lumber; Brooks was to furnish the funds
necessary for that purpose, sell the manufactured product, and account therefor to Salisbury
upon the specific terms of the agreement, less the compensation fixed by the parties in lieu of
interest on the money advanced and for services as agent. These requirements and stipulations
are in tent with any other conception of the contract. If it constitutes an agreement to sell, they
are meaningless. But they cannot be ignored. They were placed there for some purpose,
doubtless as the result of definite antecedent negotiations therefore, consummated by the final
written expression of the agreement." Hence the Constantino opinion could categorically
21

affirm that the mere disclaimer in a contract that an entity like petitioner is not "the agent or
legal representative for any purpose whatsoever" does not suffice to yield the conclusion that it
is an independent merchant if the control over the goods for resale of the goods consigned is
pervasive in character. The Court of Tax Appeals decision now under review pays fealty to such
an applicable doctrine.

2. No merit therefore attaches to the first error imputed by petitioner to the Court of Tax
Appeals. Neither did such Court fail to appreciate in its true significance the act and conduct
pursued in the implementation of the contract by both the United States Rubber International
and petitioner, as was contended in the second assignment of error. Petitioner ought to have
been aware that there was no need for such an inquiry. The terms of the contract, as noted,
speak quite clearly. There is lacking that degree of ambiguity sufficient to give rise to serious
doubt as to what was contemplated by the parties. A reading thereof discloses that the
relationship arising therefrom was not one of seller and purchaser. If it were thus intended, then
it would not have included covenants which in their totality would negate the concept of a firm
acquiring as vendee goods from another. Instead, the stipulations were so worded as to lead to
no other conclusion than that the control by the United States Rubber International over the
goods in question is, in the language of the Constantino opinion, "pervasive". The insistence on a
relationship opposed to that apparent from the language employed might even yield the
impression that such a mode of construction was resorted to in order that the applicability of a
taxing statute might be rendered nugatory. Certainly, such a result is to be avoided.

Nor is it to be lost sight of that on a matter left to the discretion of the Court of Tax Appeals
which has developed an expertise in view of its function being limited solely to the interpretation
of revenue laws, this Court is not prepared to substitute its own judgment unless a grave abuse
of discretion is manifest. It would be to frustrate the objective for which administrative tribunals
are created if the judiciary, absent such a showing, is to ignore their appraisal on a matter that
forms the staple of their specialized competence. While it is to be admitted that counsel for
petitioner did scrutinize with care the decision under review with a view to exposing what was
considered its flaws, it cannot be said that there was such a failure to apply what the law
commands as to call for its reversal. Instead, what cannot be denied is that the Court of Tax
Appeals reached a result to which the Court in the recent Constantino decision gave the
imprimatur of its approval.

WHEREFORE, the Court of Tax Appeals decision of October 19, 1962 is affirmed. With costs
against petitioner.

Concepcion C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Castro, Teehankee, Barredo, Villamor
and Makasiar, JJ., concur.

A.C. No. 6955 July 27, 2006

MAR YUSON, complainant,
vs.
ATTY. JEREMIAS R. VITAN, respondent.

DECISION

PANGANIBAN, C.J.:

Once again this Court exhorts members of the bar to live up to the strictures of the Lawyers'
Oath, the Code of Professional Responsibility, and the Canons of Professional Ethics. Otherwise,
they shall be sanctioned by this Court.

The Case

Before us is a Letter-Complaint1 for the disbarment of Atty. Jeremias R. Vitan, filed by Mar Yuson
with the Commission on Bar Discipline (CBD) of the Integrated Bar of the Philippines (IBP).
Respondent was accused of taking advantage of complainant's generosity and credulity.

On August 5, 2004, IBP-CBD directed Atty. Vitan to submit his Answer within 15 days from
receipt of the Order;2otherwise, he would be considered in default and the case heard ex parte.

Because respondent failed to submit his Answer within the given period, the CBD considered his
failure and non-appearance as a waiver of his right to participate in the proceedings.3 Thus, the
hearing scheduled for August 11, 2005, pushed through, with the original copies of the checks he
had issued presented by complainant as evidence. Afterwards, the CBD issued an Order
submitting the case for Resolution.4 On August 23, 2005, Commissioner Milagros V. San Juan
rendered her Report and Recommendation.5

Respondent denied having received a copy of the Complaint against him and alleged that it was
only on August 24, 2005, that he received the Order submitting the case for resolution. Thus, he
filed an Urgent Motion to Revive/Re-open and with Leave to Admit Attached Answer.6

In its Resolution No. XVII-2005-101 dated October 22, 2005, the IBP Board of Directors adopted
and approved, with modification, the investigating commissioner's Report and Recommendation.
Upon respondent was imposed the penalty of suspension from the practice of law for two years,
after the board found that he had taken advantage of complainant through deceit and
dishonesty. The lawyer was further ordered to give back the money he had received from
complainant.

The Facts

Complainant Mar Yuson was a taxi driver with eight children. In October 2002, he received a sum
of money by way of inheritance. According to him, he and his wife intended to use the money to
purchase a taxi, repair their dilapidated house, and hold a debut party for their daughter.7

They were able to purchase a secondhand taxi, and Atty. Vitan helped him with all the legal
matters concerning this purchase. Regrettably, their other plans were put on hold, because the
lawyer borrowed P100,000 from them in December 2002. It was agreed that the loan would be
repaid before the end of the following year,8 in time for the debut on November 24, 2003.9

To guarantee payment, respondent executed in favor of complainant several postdated checks

to cover the loaned amount. Those checks, however, turned out to be worthless, because they
had been drawn against the lawyer's closed account in the Bank of Commerce in Escolta, Manila.
The six dishonored checks were presented during the hearing before the IBP commissioner.10

Complainant maintained that he had repeatedly tried to recover the debt, only to be turned
away empty-handed each time. He conceded, though, that respondent had given an undisclosed
amount covered by the checks dated January and February 2003.11 The amounts covered by the
dishonored checks remained unpaid.

This development prompted complainant to seek the aid of the IBP National Committee on Legal
Aid (NCLA) in obtaining payment. On November 14, 2003, the IBP-NCLA, through Deputy Director
Rosalie J. de la Cruz, sent him a letter.12 It informed him of the impending administrative case
and advised him to confer with complainant, presumably to settle the matter. Upon receipt13 of
the letter, he again gave assurances that he would pay the loan in time for the debut.14

When the date passed without any payment, complainant demanded a collateral to secure the
loan. Thus, in his favor, Atty. Vitan executed a document denominated as a Deed of Absolute
Sale, covering the latter's parcel of land located in Sta. Maria, Bulacan. According to complainant,
their intention was to transfer the title of the property to him temporarily, so that he
could either sell or mortgage15 it. It was further agreed that, if it was mortgaged, respondent
would redeem it as partial or full payment of the loan.16

Curiously, however, the parties executed a second Deed of Absolute Sale,17 this time in favor of
Atty. Vitan, with complainant as vendor. The purpose of this particular document was not
explained by either party.

On April 12, 2004, complainant was able to mortgage18 the property for P30,000.19 Contrary to
their earlier agreement, respondent did not redeem it from the mortgagee and, instead, simply
sent complainant a letter20 dated July 7, 2004, promising to pay on or before July 12, 2004. As
this promise was not fulfilled, the mortgagee demanded payment from complainant and thereby
allegedly exposed the latter to shame and ridicule.21

On July 19, 2004, IBP-NCLA sent another letter22 on behalf of complainant. Respondent was
informed that an administrative case would be filed against him, unless he settled his obligations
by July 30, 2004, the date given by complainant.

On August 30, 2004, the IBP-NCLA received the reply23 dated July 30, 2004, submitted by Atty.
Vitan who explained that he had already settled his obligation. He maintained that he had in fact
executed, in complainant's favor, a Deed of Absolute Sale over his 203-square-meter residential
property in Sta. Maria, Bulacan. He clarified that "[their] understanding was that [complainant]
ha[d] the option to use, mortgage or sell [the property] and return to me the excess of the
proceeds after obtaining his money represented by my six (6) dishonored checks."24Interestingly,
respondent attached the Deed of Absolute Sale in which he was the vendee and complainant the
vendor.25 It appears that this was the second Deed of Absolute Sale, also referred to in the
Complaint.26

Only after the IBP investigating commissioner had rendered her Report and
Recommendation27 did Atty. Vitan submit his Answer to the Letter-Complaint. He called the
second document a "Counter Deed of Sale," executed as a "sort of collateral/security for the
account of [his] liaison officer [Evelyn Estur]."28 He admitted having given several postdated
checks amounting to P100,000, supposedly to guarantee the indebtedness of Estur to
complainant. Atty. Vitan argued for the first time that it was she who had incurred the debts, and
that he had acted only as a "character reference and/or guarantor."29 He maintained that he had
given in to the one-sided transactions, because he was "completely spellbound by complainant's
seeming sincerity and kindness."30 To corroborate his statements, he attached Estur's Affidavit.31

Report of the Investigating Commissioner

In her Report and Recommendation, Commissioner San Juan recommended that Atty. Vitan be
suspended until his restitution of the amount he had borrowed. She held that respondent,
having taken advantage of complainant and thus shown dishonesty and untrustworthiness, did
not deserve to retain his membership in the bar.

On November 24, 2005, the Supreme Court received the IBP Resolution adopting, with
modification, the Report and Recommendation of the investigating commissioner.

The Court's Ruling

We agree with the findings of the IBP Board of Governors, but reduce the period of suspension
to six months.

Respondent's Administrative Liability

Lawyers are instruments for the administration of justice. They are expected to maintain not only
legal proficiency but also a high standard of ethics, honesty, integrity and fair dealing. In this way,
the people's faith and confidence in the judicial system is ensured.32

In the present case, Atty. Vitan undoubtedly owed money to complainant. In a letter33 to IBP
Deputy Director de la Cruz, respondent admitted having incurred the P100,000 loan. It was only
in his Answer34 that the lawyer suddenly denied that he had personally incurred this obligation.
This time, he pointed to his employee, Estur, as the true debtor. We find his version of the facts
implausible.

First, the story involving a certain Evelyn Estur was clearly a mere afterthought, conjured simply
to escape his liability. If it were true that it was she who owed the money, he should have
mentioned this alleged fact in his letter to the IBP NCLA deputy director. Instead, respondent was
completely silent about Estur and merely asserted that he had already settled his debt with
complainant.

Second, the promise of Atty. Vitan to settle his obligations on particular dates is contained in two
handwritten notes signed by him and worded as follows:
"I undertake to settle the financial obligations of P100,000 – plus before the end of the year."35

"Mar:

"We will settle on July 12, 2004, on or before said date."36

The wordings of these promissory notes disclose that he had a personal obligation to
complainant, without any mention of Estur at all. If it were true that Atty. Vitan had executed
those notes for the account of his liaison officer, he should have used words to that effect. As a
lawyer, he was aware that the preparation of promissory notes was not a "mere formality;" it
had legal consequences. It is quite far-fetched for a lawyer to assume the role of guarantor,
without saying so in the notes.

A lawyer may be disciplined for evading the payment of a debt validly incurred.37 In this case, the
failure of Atty. Vitan to pay his debt for over three years despite repeated demands puts in
question his standing as a member of the bar. Worse, he made several promises to pay his debt
promptly, but reneged on all of them. He even started to hide from complainant according to the
latter .38

Failure to honor just debts, particularly from clients, constitutes dishonest conduct that does not
speak well of a member of the bar.39 It is vital that a lawyer's conduct be kept beyond reproach
and above suspicion at all times. Rule 1.01 of the Code of Professional Responsibility clearly
provides that lawyers must not engage in unlawful, immoral or deceitful conduct. They must
comport themselves in a manner that will secure and preserve the respect and confidence of the
public for the legal profession.40

Atty. Vitan contends that his obligation was already extinguished, because he had allegedly sold
his Bulacan property to complainant.41 Basically, respondent is asserting that what had
transpired was a dation in payment. Governed by the law on sales, it is a transaction that takes
place when a piece of property is alienated to the creditor in satisfaction of a debt in money.42 It
involves delivery and transmission of ownership of a thing -- by the debtor to the creditor -- as an
accepted equivalent of the performance of the obligation.43

Going over the records of this case, we find the contention of Atty. Vitan undeserving of
credence. The records reveal that he did not really intend to sell and relinquish ownership over
his property in Sta. Maria, Bulacan, notwithstanding the execution of a Deed of Absolute Sale in
favor of complainant. The second Deed of Absolute Sale, which reconveyed the property to
respondent, is proof that he had no such intention. This second Deed, which he referred to as his
"safety net,"44 betrays his intention to counteract the effects of the first one .

In a manner of speaking, Atty. Vitan was taking back with his right hand what he had given with
his left. The second Deed of Absolute Sale returned the parties right back where they started, as
if there were no sale in favor of complainant to begin with. In effect, on the basis of the second
Deed of Sale, respondent took back and asserted his ownership over the property despite having
allegedly sold it. Thus, he fails to convince us that there was a bona fide dation in payment or
sale that took place between the parties; that is, that there was an extinguishment of obligation.
It appears that the true intention of the parties was to use the Bulacan property
to facilitate payment. They only made it appear that the title had been transferred to
complainant to authorize him to sell or mortgage the property.45Atty. Vitan himself admitted in
his letter dated July 30, 2004, that their intention was to convert the property into cash, so that
payment could be obtained by complainant and the excess returned to respondent.46 The
records, however, do not show that the proceeds derived were sufficient to discharge the
obligation of the lawyer fully; thus, he is still liable to the extent of the deficiency.

We hasten to add, however, that this administrative case is not the proper venue for us to
determine the extent of the remaining liability. This Court will not act as a collection agency from
faltering debtors, when the amount of the indebtedness is indefinite and disputed.47

Nevertheless, the records satisfactorily reveal the failure of respondent to live up to his duties as
a lawyer in consonance with the strictures of the Lawyer's Oath, the Code of Professional
Responsibility, and the Canons of Professional Ethics, thereby degrading not only his person but
his profession as well. So far, we find that his lack of sincerity in fulfilling his obligations is
revealed by his acts of issuing promissory notes and reneging on them; executing a simulated
Deed of Absolute Sale; and breaking his promise to redeem the property from the mortgagee.

The repeated failure of Atty. Vitan to fulfill his promise puts in question his integrity and
character. Indeed, not only his integrity as an individual but, more important, his stature as a
member of the bar is affected by his acts of welching on his promises and misleading
complainant. Canon 1 and Rule 1.01 of the Code of Professional Responsibility explicitly state
thus:

"CANON 1 — A lawyer shall uphold the constitution, obey the laws of the land and promote
respect for law and legal processes.

"Rule 1.01 — A lawyer shall not engage in unlawful, dishonest, immoral or deceitful conduct."

Any wrongdoing, whether professional or nonprofessional, indicating unfitness for the profession
justifies disciplinary action.48

There is yet another reason to find Atty. Vitan administratively liable. In his letter of July 30, 2004,
was an admission that the personal checks he issued in favor of complainant had all been
dishonored.49 Whether those checks were issued for the account of respondent or of Estur is not
important. The fact remains that the lawyer knowingly issued worthless checks and thus
revealed his disposition to defraud complainant.

The act of a lawyer in issuing a check without sufficient funds to cover them -- or, worse, drawn
against a closed account --constitutes such willful dishonesty and unethical conduct as to
undermine the public confidence in the law and in lawyers.50 The act also manifests a low regard
for the Oath taken by the lawyer upon joining the profession, whose image should be held in
high esteem, not seriously and irreparably tarnished.51

Moreover, the inimical effect of the issuance of worthless checks has been recognized by this
Court in an earlier case, from which we quote:
"[T]he effect [of issuance of worthless checks] transcends the private interests of the parties
directly involved in the transaction and touches the interests of the community at large. The
mischief it creates is not only a wrong to the payee or holder, but also an injury to the public
since the circulation of valueless commercial papers can very well pollute the channels of trade
and commerce, injure the banking system and eventually hurt the welfare of society and the
public interest."52

We have also held that the deliberate failure to pay just debts and the issuance of worthless
checks constitute gross misconduct,53 for which a lawyer may be sanctioned with one year's
suspension from the practice of law,54 or a suspension of six months upon partial payment of the
obligation.55

In the instant case, complainant himself admits that respondent had already paid the amounts
covered by the January and February checks.56 Thus, there has been a partial payment that
justifies a modification of IBP's recommended penalty.

WHEREFORE, Atty. Jeremias R. Vitan is hereby found guilty of gross misconduct

and SUSPENDED from the practice of law for six (6) months, effective upon his receipt of this
Decision, with the warning that a repetition of the same or any other misconduct will be dealt
with more severely.

Let a copy of this Decision be entered in respondent's record as a member of the Bar, and notice
served on the Integrated Bar of the Philippines and on the Office of the Court Administrator for
circulation to all courts in the country.

SO ORDERED.

Puno, Quisumbing, Ynares-Santiago, Sandoval-Gutierrez, Carpio, Austria-Martinez, Corona,

Carpio-Morales, Callejo, Sr., Azcuna, Tinga, Chico-Nazario, Garcia, Velasco, Jr., J.J., concur.

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 82508 September 29, 1989

FILINVEST CREDIT CORPORATION, petitioner,

vs.
THE COURT OF APPEALS, JOSE SY BANG and ILUMINADA TAN SY BANG,*respondents.

Labaquis, Loyola, Angara and Associates for petitioner.

Alfredo 1. Raya for private respondents.

SARMIENTO, J.:

This is a petition for review on certiorari of the decision, dated March 17, 1988, of the Court of
1

Appeals which affirmed with modification the decision of the Regional Trial Court of Quezon,
2

Branch LIX, Lucena City. The controversy stemmed from the following facts: The private
respondents, the spouses Jose Sy Bang and Iluminada Tan, were engaged in the sale of gravel
produced from crushed rocks and used for construction purposes. In order to increase their
production, they engaged the services of Mr. Ruben Mercurio, the proprietor of Gemini Motor
Sales in Lucena City, to look for a rock crusher which they could buy. Mr. Mercurio referred the
private respondents to the Rizal Consolidated Corporation which then had for sale one such
machinery described as:

ONE UNIT LIPPMAN PORTABLE CRUSHING PLANT (RECONDITIONED) [sic]

JAW CRUSHER-10xl6 DOUBLE ROLL CRUSHER 16x16

3 UNITS PRODUCT CONVEYOR

75 HP ELECTRIC MOTOR

8 PCS. BRAND NEW TIRES CHASSIS NO. 19696 GOOD RUNNING CONDITION 3

Oscar Sy Bang, a brother of private respondent Jose Sy Bang, went to inspect the machine at the
Rizal Consolidated's plant site. Apparently satisfied with the machine, the private respondents
signified their intent to purchase the same. They were however confronted with a problem-the
rock crusher carried a cash price tag of P 550,000.00. Bent on acquiring the machinery, the
private respondents applied for financial assistance from the petitioner, Filinvest Credit
Corporation. The petitioner agreed to extend to the private respondents financial aid on the
following conditions: that the machinery be purchased in the petitioner's name; that it be leased
(with option to purchase upon the termination of the lease period) to the private respondents;
and that the private respondents execute a real estate mortgage in favor of the petitioner as
security for the amount advanced by the latter. Accordingly, on May 18,1981, a contract of lease
of machinery (with option to purchase) was entered into by the parties whereby the private
respondents agreed to lease from the petitioner the rock crusher for two years starting from July
5, 1 981 payable as follows:

P10,000.00 - first 3 months

23,000.00 - next 6 months

24,800.00 - next 15 months

The contract likewise stipulated that at the end of the two-year period, the machine would be
owned by the private respondents. Thus, the private respondents issued in favor of the
petitioner a check for P150,550.00, as initial rental (or guaranty deposit), and twenty-four (24)
postdated checks corresponding to the 24 monthly rentals. In addition, to guarantee their
compliance with the lease contract, the private respondents executed a real estate mortgage
over two parcels of land in favor of the petitioner. The rock crusher was delivered to the private
respondents on June 9, 1981. Three months from the date of delivery, or on September 7, 1981,
however, the private respondents, claiming that they had only tested the machine that month,
sent a letter-complaint to the petitioner, alleging that contrary to the 20 to 40 tons per hour
capacity of the machine as stated in the lease contract, the machine could only process 5 tons of
rocks and stones per hour. They then demanded that the petitioner make good the stipulation in
the lease contract. They followed that up with similar written complaints to the petitioner, but
the latter did not, however, act on them. Subsequently, the private respondents stopped
payment on the remaining checks they had issued to the petitioner. 5

As a consequence of the non-payment by the private respondents of the rentals on the rock
crusher as they fell due despite the repeated written demands, the petitioner extrajudicially
foreclosed the real estate mortgage. On April 18, 1983, the private respondents received a
6

Sheriff s Notice of Auction Sale informing them that their mortgaged properties were going to be
sold at a public auction on May 25, 1983 at 10:00 o'clock in the morning at the Office of the
Provincial Sheriff in Lucena City to satisfy their indebtedness to the petitioner. To thwart the
7

impending auction of their properties, the private respondents filed before the Regional Trial
Court of Quezon, on May 4, 1983, a complaint against the petitioner, for the rescission of the
8

contract of lease, annullment of the real estate mortgage, and for injunction and damages, with
prayer for the issuance of a writ of preliminary injunction. On May 23, 1983, three days before
9

the scheduled auction sale, the trial court issued a temporary restraining order commanding the
Provincial Sheriff of Quezon, and the petitioner, to refrain and desist from proceeding with the
public auction. Two years later, on September 4, 1985, the trial court rendered a decision in
10

favor of the private respondents, the dispositive portion of which reads:

WHEREFORE, PREMISES CONSIDERED, judgment is hereby rendered:

1. making the injunction permanent;

2. rescinding the contract of lease of the machinery and equipment and ordering the plaintiffs to
return to the defendant corporation the machinery subject of the lease contract, and the
defendant corporation to return to plaintiffs the sum of P470,950.00 it received from the latter
as guaranty deposit and rentals with legal interest thereon until the amount is fully restituted;

3. annulling the real estate mortgage constituted over the properties of the plaintiffs covered by
Transfer Certificate of Title Nos. T32480 and T-5779 of the Registry of Deeds of Lucena City;

4. ordering the defendant corporation to pay plaintiffs P30,000.00 as attorney's fees and the
costs of the suit.

SO ORDERED. 11

Dissatisfied with the trial court's decision, the petitioner elevated the case to the respondent
Court of Appeals.
On March 17, 1988, the appellate court, finding no error in the appealed judgment, affirmed the
same in toto. Hence, this petition.
12

Before us, the petitioner reasserts that the private respondents' cause of action is not against it
(the petitioner), but against either the Rizal Consolidated Corporation, the original owner-seller
of the subject rock crusher, or Gemini Motors Sales which served as a conduit facilitator of the
purchase of the said machine. The petitioner argues that it is a financing institution engaged in
quasi-banking activities, primarily the lending of money to entrepreneurs such as the private
respondents and the general public, but certainly not the leasing or selling of heavy machineries
like the subject rock crusher. The petitioner denies being the seller of the rock crusher and only
admits having financed its acquisition by the private respondents. Further, the petitioner
absolves itself of any liability arising out of the lease contract it signed with the private
respondents due to the waiver of warranty made by the latter. The petitioner likewise maintains
that the private respondents being presumed to be knowledgeable about machineries, should be
held responsible for the detection of defects in the machine they had acquired, and on account
of that, they are estopped from claiming any breach of warranty. Finally, the petitioner
interposed the defense of prescription, invoking Article 1571 of the Civil Code, which provides:

Art. 1571. Actions arising from the provisions of the preceding ten articles shall be barred after
six months, from the delivery of the thing sold.

We find the petitioner's first contention untenable. While it is accepted that the petitioner is a
financing institution, it is not, however, immune from any recourse by the private respondents.
Notwithstanding the testimony of private respondent Jose Sy Bang that he did not purchase the
rock crusher from the petitioner, the fact that the rock crusher was purchased from Rizal
Consolidated Corporation in the name and with the funds of the petitioner proves beyond doubt
that the ownership thereof was effectively transferred to it. It is precisely this ownership which
enabled the petitioner to enter into the "Contract of Lease of Machinery and Equipment" with
the private respondents.

Be that as it may, the real intention of the parties should prevail. The nomenclature of the
agreement cannot change its true essence, i.e., a sale on installments. It is basic that a contract is
what the law defines it and the parties intend it to be, not what it is called by the parties. It is
13

apparent here thatthe intent of the parties to the subject contract is for the so-called rentals to
be the installment payments. Upon the completion of the payments, then the rock crusher,
subject matter of the contract, would become the property of the private respondents. This form
of agreement has been criticized as a lease only in name. Thus in Vda. de Jose v. Barrueco we 14

stated:

Sellers desirous of making 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 bargain, in the transfer of title to the lessee.
15
The importance of the criticism is heightened in the light of Article 1484 of the new Civil Code
which provides for the remedies of an unpaid seller of movables on installment basis.

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 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 or 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.

Under the aforequoted provision, the seller of movables in installments, in case the buyer fails to
pay two or more installments may elect to pursue either of the following remedies: (1) exact
fulfillment by the purchaser of the obligation; (2) cancel the sale; or (3) foreclose the mortgage
on the purchased property if one was constituted thereon. It is now settled that the said
remedies are alternative and not cumulative and therefore, the exercise of one bars the exercise
of the others.

Indubitably, the device contract of lease with option to buy is at times resorted to as a means to
circumvent Article 1484, particularly paragraph (3) thereof.Through the set-up, the vendor, by
retaining ownership over the property in the guise of being the lessor, retains, likewise, the right
to repossess the same, without going through the process of foreclosure, in the event the
vendee-lessee defaults in the payment of the installments. There arises therefore no need to
constitute a chattel mortgage over the movable sold. More important, the vendor, after
repossessing the property and, in effect, canceling the contract of sale, gets to keep all the
installments-cum-rentals already paid. It is thus for these reasons that Article 1485 of the new
Civil Code provides that:

Article 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 possession or
enjoyment of the thing. (Emphasis ours.)

Unfortunately, even with the foregoing findings, we however fail to find any reason to hold the
petitioner liable for the rock crusher's failure to produce in accordance with its described
capacity. According to the petitioner, it was the private respondents who chose, inspected, and
tested the subject machinery. It was only after they had inspected and tested the machine, and
found it to their satisfaction, that the private respondents sought financial aid from the
petitioner. These allegations of the petitioner had never been rebutted by the private
respondents. In fact, they were even admitted by the private respondents in the contract they
signed. Thus:

LESSEE'S SELECTION, INSPECTION AND VERIFICATION.-The LESSEE hereby confirms and

acknowledges that he has independently inspected and verified the leased property and has
selected and received the same from the Dealer of his own choosing in good order and excellent
running and operating condition and on the basis of such verification, etc. the LESSEE has agreed
to enter into this Contract." 16

Moreover, considering that between the parties, it is the private respondents, by reason of their
business, who are presumed to be more knowledgeable, if not experts, on the machinery subject
of the contract, they should not therefore be heard now to complain of any alleged deficiency of
the said machinery. It is their failure or neglect to exercise the caution and prudence of an expert,
or, at least, of a prudent man, in the selection, testing, and inspection of the rock crusher that
gave rise to their difficulty and to this conflict. A well- established principle in law is that between
two parties, he, who by his negligence caused the loss, shall bear the same.

At any rate, even if the private respondents could not be adjudged as negligent, they still are
precluded from imputing any liability on the petitioner. One of the stipulations in the contract
they entered into with the petitioner is an express waiver of warranties in favor of the latter. By
so signing the agreement, the private respondents absolved the petitioner from any liability
arising from any defect or deficiency of the machinery they bought. The stipulation on the
machine's production capacity being "typewritten" and that of the waiver being "printed" does
not militate against the latter's effectivity. As such, whether "a capacity of 20 to 40 tons per
hour" is a condition or a description is of no moment. What stands is that the private
respondents had expressly exempted the petitioner from any warranty whatsoever.
Their Contract of Lease Of Machinery And Equipment states:

WARRANTY-LESSEE absolutely releases the lessor from any liability whatsoever as to any and all
matters in relation to warranty in accordance with the provisions hereinafter stipulated. 17

Taking into account that due to the nature of its business and its mode of providing financial
assistance to clients, the petitioner deals in goods over which it has no sufficient know-how or
expertise, and the selection of a particular item is left to the client concerned, the latter,
therefore, shoulders the responsibility of protecting himself against product defects. This is
where the waiver of warranties is of paramount importance. Common sense dictates that a
buyer inspects a product before purchasing it (under the principle of caveat emptor or "buyer
beware") and does not return it for defects discovered later on, particularly if the return of the
product is not covered by or stipulated in a contract or warranty. In the case at bar, to declare
the waiver as non-effective, as the lower courts did, would impair the obligation of contracts.
Certainly, the waiver in question could not be considered a mere surplusage in the contract
between the parties. Moreover, nowhere is it shown in the records of the case that the private
respondent has argued for its nullity or illegality. In any event, we find no ambiguity in the
language of the waiver or the release of warranty. There is therefore no room for any
interpretation as to its effect or applicability vis-a- vis the deficient output of the rock crusher.
Suffice it to say that the private respondents have validly excused the petitioner from any
warranty on the rock crusher. Hence, they should bear the loss for any defect found therein.

WHEREFORE, the Petition is GRANTED; the Decision of the Court of Appeals dated March 17,
1988 is hereby REVERSED AND SET ASIDE, and another one rendered DISMISSING the complaint.
Costs against the private respondents.
SO ORDERED.

Melencio-Herrera (Chairperson), Paras and Regalado, ii., concur,