Carbonnel v. Poncio, et al.

G.R. No. L-11231, 12 May 1958

FACTS:

Petitioner Rosario Carbonnel allegedly purchased a parcel of land from respondent Jose Poncio.
Such land was mortgage to a bank which respondent has an obligation to pay. It was alleged that
petitioner partially pay the respondent of the price of the land and to assume respondent`s
responsibility to recover the land. One of the conditions of the alleged sale was that Poncio would be
allowed to continue in staying in said land for one year. However, Poncio has conveyed the same
land the other respondents herein which are the spouses Mr. and Mrs. Infante. Respondents herein
claims that the previous sale between Poncio and petitioner was unenforceable due to a violation of
the Statute of Fraud as the alleged sale was never deduced to writing. Petitioner here claims
ownership of the said property.

ISSUE:

Whether or not the transaction falls under the Statute of Frauds.

RULING:

No. It is well settled in this jurisdiction that the Statute of Frauds is applicable only to executory
contracts. It is the accepted view that part performance of a parol contract for the sale of real estate
has the effect, subject to certain conditions concerning the nature and extent of the acts constituting
performance and the right to equitable relief generally, of taking such contract from the operation of
the statute of frauds, so that chancery may decree its specific performance or grant other equitable
relief. If a contract has been totally or partially performed, the exclusion of parol evidence would
promote fraud or bad faith, for it would enable the defendant to keep the benefits already denied by
him from the transaction in litigation, and, at the same time, evade the obligations, responsibilities or
liabilities assumed or contracted by him thereby.

The true basis of the doctrine of part performance according to the overwhelming weight of authority,
is that it would be a fraud upon the plaintiff if the defendant were permitted to escape performance of
his part of the oral agreement after he has permitted the plaintiff to perform in reliance upon the
agreement.

In the case at bar, it appears that Poncio still asked permission from petitioner to stay in the
premises. Aside from that, it was shown that the passbook of Poncio was in the hand of the
Petitioner and it has a credit account allegedly representing the amount partially paid by petitioner.

Wherefore, the order appealed from is hereby set aside, and let this case be remanded to the lower
court for further proceedings not inconsistent with this decision, with the costs of this instance
against defendants-appellees. It is so ordered.

epublic of the Philippines

SUPREME COURT
Manila
 EN BANC

G.R. No. L-11231 May 12, 1958

ROSARIO CARBONNEL, plaintiff-appellant,

vs.
JOSE PONCIO, RAMON INFANTE, and EMMA INFANTE, defendants-appellees.

Tolentino and Garcia and D. R. Cruz for appellant.

Guillermo B. Guevarra, Ricardo P. Guevarra and Emmanuel S. Tipon for appellees.

CONCEPCION, J.:

The issue in this case is whether the Statute of Frauds is applicable thereto.

Plaintiff Rosario Carbonnel alleges, in her second amended complaint, filed with the Court of First
Instance of Rizal, that, on January 27, 1955, she purchased from defendant Jose Poncio, at P9.50 a
square meter, a parcel of land of about 195 square meters, more or less, located in San Juan del
Monte, Rizal, known as Lot No. 13-B of subdivision plan Psd-19567, and more particularly described
in Transfer Certificate of Title No. 5040 (now No. 37842), excluding the improvements thereon; that
plaintiff paid P247.26 on account of the price and assumed Poncio's obligation with the Republic
Savings Bank amounting to P1,177.48, with the understanding that the balance would be payable
upon execution of the corresponding deed of conveyance; that one of the conditions of the sale was
that Poncio would continue staying in said land for one year, as stated in a document signed by him
(and later marked as Exhibit A), a translation of which was attached to the said complaint: that
Poncio refuses to execute the corresponding deed of sale, despite repeated demand; that plaintiff
has thereby suffered damages in the sum of P5,000, aside from attorney's fees amounting to
P1,000; that Poncio has conveyed the same property to defendants Ramon R. Infante and Emma L.
Infante, who knew, of the first sale to plaintiff; and that the Infantes had thereby, caused damages to
plaintiff in the sum of P5,000.

Plaintiff prayed, therefore, that she be declared owner of the land in question; that the sale to the
Infantes be annulled; that Poncio be required to execute the corresponding deed of conveyance in
plaintiff's favor; that the Register of Deeds of Rizal be directed to issue the corresponding title in
plaintiff's name; and that defendants be sentenced to pay damages.

Defendants moved to dismiss said complaint upon the ground that plaintiff's claim is unenforceable
under the Statute of Frauds, and that said pleading does not state facts sufficient to constitute a
cause of action. The motion was denied, "without prejudice to considering, when this case is decided
on the merits, whether the same falls under the Statute of Frauds."

Thereafter, the Infantes filed an answer denying, most of the allegations of said complaint and
alleged, by way of special defense, that they purchased the land in question in good faith, for value,
and without knowledge of the alleged sale to plaintiff; and that plaintiff's claim is unenforceable under
the Statute of Frauds. They, likewise, set up counterclaims for damages.

In his answer, Poncio denied specifically some allegations of said complaint and alleged that he had
no knowledge sufficient to form a belief as to the truth of the other averments therein. By way of
special defenses, he alleged that he had consistently turned down several offers, made by plaintiff,
to buy the land in question, at P15 a square meter, for he believes that it is worth not less than P20 a
square meter; that Mrs. Infante, likewise, tried to buy the land at P15 a square meter; that, on or
about January 27, 1955, Poncio was advised by plaintiff that should she decide to buy the property
at P20 a square meter, she would allow him to remain in the property for one year; that plaintiff then
induced Poncio to sign a document, copy of which is probable, the one appended to the second
amended complaint; that Poncio signed it "relying upon the statement of the plaintiff that the
document was a permit for him to remain in the premises in the event that defendant decided to sell
the property to the plaintiff at P20 a square meter"; that on January 30, 1955, Mrs. Infante improved
her offer and he agreed to sell the land and its improvements to her for P3,535; that Poncio has not
lost "his mind," to sell his property, worth at least P4,000, for the paltry sum of P1,177.48, the
amount of his obligation to the Republic Savings Bank; and that plaintiff's action is barred by the
Statute of Frauds. Poncio similarly set up a counterclaim for damages.

As the case came up for trial on February 23, 1956 plaintiff introduced the testimony of one
Constancio Meonada, who said that he is janitor of the Sto. Domingo Church and a high school, as
well as auto-mechanic, graduate; that he has been and still is a paying boarder in plaintiff's house;
that Poncio is his townmate, both being from Mahatao, Batanes; that, after making a rough draft,
based upon data furnished by plaintiff, he typed Exhibit A, which is, in the Batanes dialect; that,
thereafter, Poncio came to plaintiff's house, where he was shown Exhibit A; that after the witness
had read its contents to Poncio and given him a copy thereof, Poncio signed Exhibit A and so did the
plaintiff; that Meonada likewise signed at the foot of Exhibit A, as attesting witness; and that
translated freely into English, Exhibit A, reads as follows:

From this date, January 27, Jose Poncio may stay in this lot that I bought from him until one
year without payment. After that one year and he cannot find any place where to transfer his
house, he can also stay in this lot and he will pay according agreement. (t.s.n., p. 4.)

Then, taking the witness stand, plaintiff testified that she has known Poncio since childhood, he
being related to her mother; that Poncio's lot adjoins her lot, in San Juan, Rizal; that one day Poncio
told her that he wanted to sell his property; that, after both had agreed on its price, he said that his
lot is mortgaged to the Republic savings Bank; and that at noon time, on the same day, he came
back stating that both would "go to the bank to pay the balance in arrears." At this juncture, defense
counsel moved to strike out the statement of the witness, invoking, in support of the motion, the
Statute of Frauds. After an extended discussion, the parties agreed to submit memoranda and the
hearing was suspended. Later on, the lower court issued an order dismissing plaintiff's complaint,
without costs, upon the ground that her cause of action is unenforceable under the Statute of
Frauds. The counterclaims were, also, dismissed. Hence, this appeal by plaintiff.

We are of the opinion and so hold that the appeal is well taken. It is well settled in this jurisdiction
that the Statute of Frauds is applicable only to executory contracts (Facturan vs. Sabanal, 81 Phil.,
512), not to contracts that are totally or partially performed (Almirol, et al., vs. Monserrat, 48 Phil., 67,
70; Robles vs. Lizarraga Hermanos, 50 Phil., 387; Diana vs. Macalibo, 74 Phil., 70).

Subject to a rule to the contrary followed in a few jurisdictions, it is the accepted view that
part performance of a parol contract for the sale of real estate has the effect, subject to
certain conditions concerning the nature and extent of the acts constituting performance and
the right to equitable relief generally, of taking such contract from the operation of the statute
of frauds, so that chancery may decree its specific performance or grant other equitable
relief. It is well settled in Great Britain and in this country, with the exception of a few states,
that a sufficient part performance by the purchaser under a parol contract for the sale of real
estate removes the contract from the operation of the statute of frauds. (49 Am. Jur. 722-
723.)

In the words of former Chief Justice Moran: "The reason is simple. In executory contracts there is a
wide field for fraud because unless they be in writing there is no palpable evidence of the intention of
the contracting parties. The statute has precisely been enacted to prevent fraud." (Comments on the
Rules of Court, by Moran, Vol. III [1957 ed.], p. 178.) However, if a contract has been totally or
partially performed, the exclusion of parol evidence would promote fraud or bad faith, for it would
enable the defendant to keep the benefits already denied by him from the transaction in litigation,
and, at the same time, evade the obligations, responsibilities or liabilities assumed or contracted by
him thereby.

For obvious reasons, it is not enough for a party to allege partial performance in order to hold that
there has been such performance and to render a decision declaring that the Statute of Frauds is
inapplicable. But neither is such party required to establish such partial performance
by documentary proof before he could have the opportunity to introduce oral testimony on the
transaction. Indeed, such oral testimony would usually be unnecessary if there were documents
proving partial performance. Thus, the rejection of any and all testimonial evidence on partial
performance, would nullify the rule that the Statute of Frauds is inapplicable to contracts which have
been partly executed, and lead to the very evils that the statute seeks to prevent.

The true basis of the doctrine of part performance according to the overwhelming weight of
authority, is that it would be a fraud upon the plaintiff if the defendant were permitted to
escape performance of his part of the oral agreement after he has permitted the plaintiff to
perform in reliance upon the agreement. The oral contract is enforced in harmony with the
principle that courts of equity will not allow the statute of frauds to be used as an instrument
of fraud. In other words, the doctrine of part performance was established for the same
purpose for which, the statute of frauds itself was enacted, namely, for the prevention of
fraud, and arose from the necessity of preventing the statute from becoming an agent of
fraud for it could not have been the intention of the statue to enable any party to commit a
fraud with impunity. (49 Am. Jur., 725-726; emphasis supplied.)

When the party concerned has pleaded partial performance, such party is entitled to a reasonable
chance to; establish by parol evidence the truth of this allegation, as well as the contract itself. "The
recognition of the exceptional effect of part performance in taking an oral contract out of the statute
of frauds involves the principle that oral evidence is admissible in such cases to prove both the
contract and the part performance of the contract" (49 Am. Jur., 927).

Upon submission of the case for decision on the merits, the Court should determine whether said
allegation is true, bearing in mind that parol evidence is easier to concoct and more likely to be
colored or inaccurate than documentary evidence. If the evidence of record fails to prove clearly that
there has been partial performance, then the Court should apply the Statute of Frauds, if the cause
of action involved falls within the purview thereof. If the Court is, however, convinced that the
obligation in question has been partly executed and that the allegation of partial performance was
not resorted to as a devise to circumvent the Statute, then the same should not be applied.

Apart from the foregoing, there are in the case at bar several circumstances indicating that plaintiff's
claim might not be entirely devoid of factual basis. Thus, for instance, Poncio admitted in his answer
that plaintiff had offered several times to purchase his land.

Again, there is Exhibit A, as document signed by the defendant. It is in the Batanes dialect, which,
according to plaintiff's uncontradicted evidence, is the one spoken by, Poncio, he being a native of
said region. Exhibit A states that Poncio would stay in the land sold by him to plaintiff for one year,
from January 27, 1955, free of charge, and that, if he cannot find a place where to transfer his house
thereon, he may remain in said lot under such terms as may be agreed upon. Incidentally, the
allegation in Poncio's answer to the effect that he signed Exhibit A under the belief that it "was a
permit for him to remain in the premises in the event" that "he decided to sell the property" to the
plaintiff at P20 a sq. m." is, on its face, somewhat difficult to believe. Indeed, if he had not decided as
yet to sell the land to plaintiff, who, had never increased her offer of P15 a square meter, there was
no reason for Poncio to get said, Permit from her. Upon the other hand, if plaintiff intended to
mislead Poncio, she would have caused Exhibit A to be drafted, probably in English, instead of
taking the trouble of seeing to it that it was written precisely in his native dialect, the Batanes.
Moreover, Poncio's signature on Exhibit A suggests that he is neither illiterate nor so ignorant as to
sign a document without reading its contents, apart from the fact that Meonada had read Exhibit A to
him and given him a copy thereof, before he signed thereon, according to Meonada's uncontradicted
testimony.

Then, also, defendants say in their brief:

The only allegation in plaintiff's complaint that bears any relation to her claim that there has
been partial performance of the supposed contract of sale, is the notation of the sum of
P247.26 in the bank book of defendant Jose Poncio. The noting or jotting down of the sum of
P247.26 in the bank book of Jose Poncio does not prove the fact that said amount was the
purchase price of the property in question. For all we knew, the sum of P247.26 which
plaintiff claims to have paid to the Republic Savings Bank for the account of the defendant,
assuming that the money paid to the, Republic Savings Bank came from the plaintiff, was the
result of some usurious loan or accommodation, rather than earnest money or part payment
of the land. Neither is a competent or satisfactory evidence to prove the conveyance on the
land in question the fact that the bank book account of Jose Poncio happens to be in the
possession of the plaintiff. (Defendants-Appellees' brief, pp. 25-26.)

How shall we know why Poncio's bank deposit book is in plaintiff's possession or whether there is
any relation between the P247.26 entry therein and the partial payment of P247.26 allegedly made
by plaintiff to Poncio on account of the price of his land, if we do not allow the plaintiff to explain it on
the witness stand? Without expressing any opinion on the merits of plaintiff's claim, it is clear,
therefore, that she is entitled, legally as well as from the viewpoint of equity, to an opportunity to
introduce parol evidence in support of the allegations of her second amended complaint.

Wherefore, the order appealed from is hereby set aside, and let this case be remanded to the lower
court for further proceedings not inconsistent with this decision, with the costs of this instance
against defendants-appellees. It is so ordered

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-25400 January 14, 1927

THE PHILIPPINE NATIONAL BANK, plaintiff-appellee,

vs.
THE PHILIPPINE VEGETABLE OIL CO., INC., defendant-appellee.
PHIL. C. WHITAKER, intevenor-appellant.
Jose Abad Santos for plaintiff-appellee.
No appearance for defendant-appellee.
Ross, Lawrence & Selph, Thomas Cary Welch and Paredes, Buencamino & Yulo for appellant.

MALCOLM, J.:

This appeal involves the legal right of the Philippine National Bank to obtain a judgment against the
Philippine Vegetable Oil Co., Inc., for P15,812,454, and to foreclose a mortgage on the property of
the Philippine Vegetable Oil Co., Inc., for P17,000,000, and the legal right of Phil. C. Whitaker as
intervenor to obtain a judgment declaring the mortgage which the Philippine National Bank seeks to
foreclose to be without force and effect, requiring an accounting from the Philippine National Bank of
the sales of the property and assets of the Philippine Vegetable Oil Co., Inc., and ordering the
Philippine Vegetable Oil Co., Inc., and the Philippine National Bank to pay him the sum of
P4,424,418.37.

In 1920, the Philippine Vegetable Oil Co., Inc., which will hereafter be called the Vegetable Oil
Company, found itself in financial straits. It was in debt to the extent of approximately P30,000,000.
The Philippine National Bank was the largest creditor. The Vegetable Oil Company owed the bank
P17,000,000. Over P13,000,000 were due the other creditors. The Philippine National Bank was
secured principally by a real and chattel mortgage for P3,500,000. On January 10, 1921, the
Vegetable Oil Company executed another chattel mortgage in favor of the bank on its
vessels Tankerville and H. S. Everett to guarantee the payment of sums not to exceed P4,000,000.

This was the precarious situation which in the latter part of 1920 and the early part of 1921
confronted the Vegetable Oil Company, its General Manager Phil. C. Whitaker, the Philippine
National Bank, and the various creditors of the Vegetable Oil Company. Bankruptcy was imminent.
On January 1, 1921, Mr. Whitaker made his first offer to pledge certain private properties to secure
the creditors of the Oil Company (Intervenor's Exhibit 1). In February of the same year, a creditors'
meeting was held. At the instance of Mr. Whitaker but inspired to such action by the bank, a receiver
for the Vegetable Oil Company was appointed by the Court of First Instance of Manila on March 11,
1921. (Case No. 19644, Court of First Instance of Manila.)

During the period when a receiver was in control of the property of the Vegetable Oil Company, a
number of events occurred. The first was the agreement perfected by the Vegetable Oil Company,
Mr. Whitaker, and some of the creditors of the Oil Company on June 27, 1921, the creditors
transferred to Mr. Whitaker a part of their claims against the Vegetable Oil Company in consideration
of the execution by Mr. Whitaker of a trust deed of his property. The Philippine National Bank was
not a direct party to the agreement although the officials of the bank had full knowledge of its
accomplishment and the general manager of the bank placed his O. K. at the end of the final draft.
(Intervenor's Exhibit 10.) The next move of the bank was to obtain a new mortgage from the
Vegetable Oil Company on February 20, 1922. Shortly thereafter, on February 28, 1922, the
receivership for the Vegetable Oil Company was terminated. The bank suspended the operation of
the Vegetable Oil Company in May, 1922, and definitely closed the Oil Company's plant on August
14, 1922.

Out of the foregoing facts which are not in dispute and others which are in dispute, arose the action
of the Philippine National Bank of May 7, 1924, to foreclose its mortgage on the property of the
Vegetable Oil Company. The Vegetable Oil Company on its part countered with certain special
defenses which need not be described and with the interposition of a counterclaim for P6,000,000.
Phil. C. Whitaker presented a complaint in intervention. The judgment rendered was in favor of the
plaintiff and against the defendant which was ordered to pay the sum of P15,787,454.54,
representing the liquidation between the plaintiff and the defendant, with legal interest beginning with
May 8, 1923, together with P25,000 attorney's fees, and costs, with the addition of the usual order to
foreclose the mortgage. The counterclaim of the defendant and the complaint in intervention were
dismissed.

The trial judge in his decision announced and answered three questions, viz: (1) Whether the
execution of the mortgage, Exhibit A of the plaintiff, was the free act of the defendant; (2) whether
this mortgage was null and without force because at the time of its execution all the property of the
defendant was under the control of a receiver appointed by the court and neither the approval of the
receiver nor of the court had been obtained; and (3) whether the plaintiff had failed to comply with
the contract, that it was alleged to have celebrated with the defendant and the intervenor, that it
would furnish funds to the defendant so that it could continue operating its factory. Much the same
analysis of the issues is made by the intervenor as appellant. The first error, in relation with the sixth
error of the assignment of errors, concerns the holding that the mortgage, Exhibit A, has been legally
and validly executed by the Philippine Vegetable Oil Co., Inc. The second, third, fourth, and fifth
errors, in relation with the sixth error of the assignment of errors, concern the holding that the
Philippine National Bank had not bound itself to finance the operation of the Philippine Vegetable Oil
Co., Inc. In this later connection, the main point at issue between the Philippine National Bank and
Phil. C. Whitaker as disclosed by the amended answer of the Philippine National Bank to the
complaint in intervention, and the opening sentence of the memorandum for intervenor-appellant
filed in this court, is whether the Philippine National Bank ever made any contract binding the bank
to provide the necessary operating capital to the Philippine Vegetable Oil Co., Inc., and whether Mr.
Whitaker has established his right to recover damages from the bank by reason of the latter's
alleged refusal to finance the operation of the Philippine Vegetable Oil Co., Inc. It results, therefore,
in the appeal dividing into two main subjects, the first, the validity of the Philippine National Bank-
Philippine Vegetable Oil Co., Inc., mortgage of February 20, 1922, and second, the alleged
agreement of the Philippine Vegetable Oil Co., Inc. These two topics we propose to discuss
separately and in order. Parenthetically, it may be said that our mode of approach will be to sweep
aside technicalities and to resolve in a broad and liberal manner the various perplexing questions
which are before the court.

I. Validity of the Philippine National Bank — Philippine Vegetable Oil Co., Inc., mortgage of
February 10, 1922.

At the outset, the appellee challenges the right of Phil. C. Whitaker as intervenor to ask that the
mortgage contract executed by the Vegetable Oil Company be declared null and void. Appellee is
right as to the premises. The Vegetable Oil Company is the defendant. The corporation has not
appealed. At the same time, it is evident that Phil. C. Whitaker was one of the largest individual
stockholders of the Vegetable Oil Company, and was until the inauguration of the receivership,
exercising control over and dictating the policy of that company. Out of twenty-eight thousand shares
of the Vegetable Oil Company, Mr. Whitaker was the owner of 5,893 fully paid shares of the par
value of P100 each. He it was who asked for the appointment of the receiver. He it was who was the
leading figure in the negotiations between the Vegetable Oil Company, the Philippine National Bank,
and the other creditors. He it was who pledged his own property to the extent of over P4,000,000 in
an endeavor to assist in the rehabilitation of the Vegetable Oil Company. He is in juriously affected
by the mortgage. In truth, Mr. Whitaker is more vitally interested in the outcome of this case than is
the Vegetable Oil Company. Conceivably if the mortgage had been the free act of the Vegetable Oil
Company, it could not be heard to allege its own fraud, and only a creditor could take advantage of
the fraud to intervene to avoid the conveyance.

We find no merit in appellee's objection and pass on to consider the main question on its merits.
The mortgage, Exhibit A, was executed on February 20, 1922, by "Philippine Vegetable Oil Co., Inc.,
By E. G. Abry, Secretary-Treasurer" "Philippine National Bank By E. W. Wilson, General Manager."
E. G. Abry, according to his testimony, was employed as secretary-treasurer of the Vegetable Oil
Company after a conference with Mr. Wilson and continued in this position during the period when
the Vegetable Oil Company was under the control either of a receiver or of the bank. The other
signature to the instrument was that of E. W. Wilson, General Manager of the Philippine National
Bank.

At this time, E. W. Wilson and Miguel Cuaderno, a Director of the Philippine National Bank, were
serving as Directors of the Vegetable Oil Company. Messrs. Wilson had on July 26, 1921, in a letter
to Mr. Whitaker relative to the reorganization of the Vegetable Oil Company, suggested the
resignation of two members of the Board of Directors so that the bank might "have rather a close
working relationship with the Philippine Vegetable Oil Co." (Intervenor's Exhibit 4). The resolution of
the Board of Directors of September 2, 1921, naming Messrs. Wilson and Cuaderno "to represent
the Philippine National Bank in the Board of Directors of the Philippine Vegetable Oil Co. as
members thereof" did so with the understanding "that neither one of them has any interest other than
that of the bank's in the Philippine Vegetable Oil Co., and that in accepting these directorships they
are doing it solely for the bank." According to the testimony of Major Randall, Mr. Wilson became
President of the Vegetable Oil Company on September 12, 1921.

It has been said that the mortgage was executed on February 20, 1922. That is undeniable. The
allegation of the plaintiff's complaint is "That the defendant, on the 20th day of February, 1922, duly
executed to the plaintiff a mortgage." The mortgage in question recites: "This mortgage, executed at
the City of Manila, Philippine Islands, this twentieth day of February, nineteen hundred and twenty-
two." However, the mortgage was not ratified before a notary public until March 8, 1922, and was not
recorded in the registry of property until March 21, 1922.

To add one more date, it will be recalled that the receivership ended on February 28, 1922. In other
words, as partially interpretative of the situation, the mortgage was executed by the Philippine
National Bank, through its General Manager, and another corporation before the termination of the
receivership of the said corporation, but was not acknowledged or recorded until after the
termination of the receivership.

In the complaint of Phil. C. Whitaker filed in the Court of First Instance of Manila in which it was
prayed that a receiver be appointed to take charge of the Philippine Vegetable Oil Co., Inc., it was
alleged "that the largest individual creditor of said corporation is the Philippine National Bank, the
indebtedness to which amounts to approximately P16,000,000, a portion of which indebtedness is
secured by mortgage on the major part of the assets of the corporation." The order of the court
appointing a receiver contained a similar recital. The Philippine National Bank held the mortgage
mentioned, and possibly two others not mentioned, when the receivership proceedings were
initiated.

It must be evident to all that the Philippine National Bank could legally secure no new mortgage by
the accomplishment of documents between its officials and the officials of the Vegetable Oil
Company while the property of the latter company was in custodia legis. The Vegetable Oil
Company was then inhibited absolutely from giving a mortgage on its property. The receiver was not
a party to the mortgage. The court had not authorized the receiver to consent to the execution of a
new mortgage. Whether the court could have done so is doubtful, but that it would have thus
consented is hardly debatable, considering that it would desire to protect the rights of all the
creditors and not the rights of one particular creditor. The legal conclusion is axiomatic. (Code of
Civil Procedure, secs. 173 et seq., Compañia General de Tabaccos vs. Gauzon and Pomar [1911],
20 Phil., 261.)
To all this the appellee as well as the trial court have answered that while it is true that the document
was executed on February 20, 1922, at a time when the properties of the mortgagor were under
receivership, the mortgage was not acknowledged before a notary public until March 8, 1922, after
the court had determined that the necessity for a receiver no longer existed. But the additional fact
remains that while the mortgage could not have been executed without the dissolution of the
receivership, such dissolution was apparently secured through representations made to the court by
counsel for the bank that the bank would continue to finance the operations of the Vegetable Oil
Company (See testimony of Judge Simplicio del Rosario). Instead of so doing, the bank within less
than two months after the mortgage was recorded, withdrew its support from the Vegetable Oil
Company, and in effect closed its establishment. Also it must not be forgotten that the hands of other
creditors were tied pursuant to the creditors' agreement of June 27, 1921.

To place emphasis on the outstanding facts, it must be repeated that the mortgage was executed
while a receiver was in charge of the Vegetable Oil Company. A mortgage accomplished at such a
time by the corporation under receivership and a creditor would be a nullity. The mortgage was
definitely perfected subsequent to the lifting of the receivership pursuant to implied promises that the
bank would continue to operate the Vegetable Oil Company. It was then accomplished when the
Philippine National Bank was a dominating influence in the affairs of the Vegetable Oil Company. On
the one hand was the Philippine National Bank in person. On the other hand was the Philippine
National Bank by proxy. Under such circumstances, it would be unconscionable to allow the bank,
after the hands of the other creditors were tied, virtually to appropriate to itself all the property of the
Vegetable Oil Company.

Whether we consider the action taken as not expressing the free will of the Vegetable Oil Company,
or as disclosing undue influence on the part of the Philippine National Bank in procuring the
mortgage, or as constituting deceit under the civil law, or whether we go still further and classify the
facts as constructive fraud, the result is the same. The mortgage is clearly voidable.

The setting aside of the mortgage of February 20, 1922, will not necessarily result in the Philippine
National Bank being left without security. It is our understanding that before the receivership was
thought of, the bank was the holder of three mortgages on the property of the Vegetable Oil
Company, the first dated April 11, 1919, for an uncertain amount; the second, dated November 18,
1920, for P3,500,000; and the third, dated January 10, 1921, for P4,000,000. These mortgages
remain in effect and may be foreclosed.

Addressing ourselves directly to the first two questions discussed in the decision of the trial court
and to the first and sixth errors assigned by the intervenor as appellant, we rule that the Philippine
National Bank-Philippine Vegetable Co., Inc., mortgage of February 20, 1922, has not been legally
executed by the Philippine Vegetable Oil Co., Inc.

II. Alleged agreement of the Philippine National Bank to finance the Philippine Vegetable Oil
Co., Inc.

Before it need be decided if the intervenor has a right to recover damages from either the plaintiff or
the defendant because of the plaintiff's refusal to finance the operations of the defendant, it must be
determined if the Philippine National Bank ever entered into any valid agreement by which it bound
itself to provide the necessary operating capital of the Philippine Vegetable Oil Co., Inc. The
question presents both legal and factual aspects. The legal inquiry relates to the applicability or non-
applicability of the Statute of Frauds as found in section 335 of our Code of Civil Procedure. The
question of fact goes on the assumption that the oral evidence can be received without violating the
Statute of Frauds and then, of course, comes down to the weighing of the evidence.
The broad view is that the Statute of Frauds applies only to agreements not to be performed on
either side within a year from the making thereof. Agreements to be fully performed on one side
within the year are taken out of the operation of the statute. As intervenor's theory proceeds on the
assumption that Mr. Whitaker has entirely performed his part of the agreement, equity would argue
that all evidence be admitted to prove the alleged agreement. Surely since the Statute of Frauds was
enacted for the purpose of preventing frauds, it should not be made the instrument to further them.

As preliminary to a presentation of the evidence, it is well to have an understanding of the applicable

law. The Charter of the Philippine National Bank, Act No. 2612, section 20, as amended by Act No.
2938, provides that "The General Manager of the Bank, shall, among others, have the following
powers and duties: . . . (b) To make, with advice and consent of the board of directors, all contracts
on beheld of the said bank and to enter into all necessary obligations by this Act required or
permitted." Predicated on our general liberal point of view, we feel free to take into consideration the
applicable law although no special defense to this effect was interposed by the Philippine National
Bank to intervenor's complaint.

Let us now look into the evidence in detail. We may properly begin with the applicable resolutions of
the Board of Directors of the Philippine National Bank.

In the minutes of the Board of Directors of the Philippine National Bank of October 4, 1921, is found
the following:

Philippine Vegetable Oil Co. — On motion of Director Westerhouse, duly seconded, the
following resolution was adopted by the Board: Be it resolved, that the General Manager be,
and he is, hereby authorized to finance the operation of the Philippine Vegetable Oil Co.
under the Receivership to the extent of P500,000 to be secured by copra and oil and to be
further secured by P500,000 pledged by Phil. C. Whitaker in his creditor's agreement.

Under date of October 28, 1921, is found the following:

The following additional loans with which to buy more copra were approved by the Board, at
the recommendation of the Oil Factory Committee. Philippine Vegetable Oil Co. F. W.
Carpenter, Receiver, P. V. O., P200,000.

Under date of December 5, 1921, is found the following:

After a long discussion and careful deliberation, and on motion of Director Westerhouse, duly
seconded by Director Seaver, the following was unanimously approved by the Board: To
protect the large investments of the Bank, it is the sense of the Board of Directors to continue
financing the operation under receivership of the Philippine Vegetable Oil Co., the Philippine
Manufacturing Co., the Cristobal Oil Co., and the Santa Ana Oil Mills, in as modest and
economical way as is consistent with conditions, the General Manager to report and secure
the approval of the Board for necessary credits from time to time, and that the Board also
recommends that the Oil Committee continue studying the advisability of financing the
operation of other oil mills indebted to the Bank.

Other portions of the minutes of the Board of Directors disclose that the Board authorized advances
to the Vegetable Oil Company to the extent of more than P1,000,000.

Logically, our review of the evidence should stop here. No contract entered into by the General
Manager of the Bank would be valid unless made with the advice and consent of its Board of
Directors. What the Board of Directors had decreed was that the Vegetable Oil Company be
financed under the receivership to the extent of P500,000, a sum which was later increased. The
Board not alone specified the amounts of the loans but cautiously added that the General Manager
"report and secure the approval of the Board for necessary credits from time to time." There was no
indication in any action taken by the Board of Directors that it had ever consented to an agreement
for practically unlimited backing of the Vegetable Oil Company, or that it had ratified any such
promise made by its General Manager.

Out of consideration for the parties, however, we will go further and will examine the remaining
evidence.

Passing in review intervenor's exhibits, we first notice Mr. Whitaker's letter to the Hongkong and
Shanghai Banking Corporation of January 1, 1921. He there confirms his undertaking to assume an
obligation to pledge and mortgage specified personal holdings. The offer is made "contingent upon
its acceptance by the other unsecured creditors . . . . A further condition to the foregoing offer is that
the banks parties to the proposed arrangement supply, subject to the approval of their
representatives on the Board of Directors of the P. V. O. Co., funds sufficient to enable the P. V. O.
Co., to continue its operations during the full term for which my personal secured undertaking
remains in effect." The condition named related to all the banks and not the Philippine National
Bank. (Intervenor's Exhibit 1.) The trust deed by Mr. Whitaker in favor of H. C. Stanford makes the
purposes and uses among others "To secure the Philippine National Bank against such losses as it
may sustain, not exceeding a total of P500,000, on such sums as it shall, from time to time and
within three years from July 1, 1921, advance to the Philippine Vegetable Oil Company to enable the
latter to resume business and continue the manufacture of vegetable oil." This recital is specific as to
P500,000 and is general as to further advances, and is made in a document to which the Philippine
National Bank was not a party. (Intervenor's Exhibit 2.) The creditors' agreement is of similar tenor.
(Intervenor's 3.) One of the paragraphs in the preamble of the power of attorney from the Roman
Catholic Archbishop of Manila to Phil. C. Whitaker mentioned that Mr. Whitaker "has also arranged
with the Philippine National Bank for the funds necessary to enable said Oil Company to resume its
business and continue in the manufacture of vegetable oil." Although this proxy may have been
procured at the instance of the Philippine National Bank, yet obviously it did not bind the officials of
the bank. (Intervenor's Exhibit 5.) The letter of Mr. Wilson as General Manager of the Philippine
National Bank of June 8, 1921, addressed to Mr. Whitaker stated: "I see no good reason why you
should use your property to secure unsecured obligations, and not provide for the operation of the
plant." Merely a friendly warning. (Intervenor's Exhibit 8.) Mr. Wilson's letter to Mr. Whitaker to
enabled the Bank to put its securities in first-class shape. In order to do this, however, it was
necessary for it to furnish certain money for operating the plant, and an additional mortgage was
executed. . . . It is my judgment that it was good business for the Philippine National Bank to operate
the plant as long as it had the P500,000 guarantee. However, the bank put into the undertaking a
great deal more money than it originally intended. Then, too, the guarantee was not as good as we
thought, because the first lien on the property was not being paid off as rapidly as we thought it
would be." Here was merely an expression of gratification regarding the additional mortgage and
emphasis on the P500,000 guarantee. (Intervenor's Exhibit 7.) We discover nothing further of
interest in the exhibits.

The only oral testimony in point is that given by A. D. Gibbs and Phil. C. Whitaker. Mr. Gibbs,
testifying as to a meeting of the creditors of the Vegetable Oil Company, said: "Mr. Wilson stated in
substance that if the negotiations which were then pending between Mr. Whitaker and the other
creditors, whereby the other creditors were to refrain from throwing the P. V. O. Co. into insolvency
or from bringing action against it, could be carried out, that his bank would finance the P. V. O. Co.,
and keep it in operation." Mr. Whitaker, testifying as to the same meeting, said: Mr. Wilson stated
that he had looked into the affairs of the P. V. O. as far as the short time he had permitted, and that
the P. V. O. had evidently made good money in the past and if allowed to resume would make good
again in the future, that the P. N. B., as the largest creditor, contemplated financing a resumption of
the company's operations if the company could be kept out of insolvency." Giving to this testimony
its broadest effect, we still discover no definite agreement binding on the bank but only a general
intimation proffered by the General Manager of the Bank in conference that his bank contemplated
financing the operations of the Vegetable Oil Company.

That is all the evidence, documentary and oral, at all pertinent to the issue. We are clear that taking
it entirely into consideration it discloses no binding promise, tacit or express, made by the Philippine
National Bank to continue indefinitely its backing of the Vegetable Oil Company.

Mr. Whitaker was in no way personally responsible for any part of the obligations of the Vegetable
Oil Company. Nevertheless, he signed the creditors' agreement. That was a praiseworthy act. We
sympathize with him in the situation in which he finds himself. The various creditors have a large
amount of his property. The Philippine National Bank has taken over the assets of the Vegetable Oil
Company. The latter company has ceased operations. Mr. Whitaker has not made himself the
successor in interest of the Vegetable Oil Company and so cannot recover from it in these
proceedings. But sympathy cannot be transmuted into legal authoritativeness. If Mr. Whitaker has
any other remedy, that is for him to determine. Here we cannot give him redress for he has not made
out his case except insofar as he has been successful in overturning the last mortgage of the
Philippine National Bank on the property of the Vegetable Oil Company.

III. Result

We announce the following conclusions:

(1) Plaintiff is entitled to a money judgment against the defendant for P14,183,679.37 with
legal interest thereon beginning with May 8, 1924. Exhibit C — 1 shows that after May 6,
1924, when Exhibit B — 1 was formulated, two further payments were made on the
promissory note for P16,869,975.59, which further reduced the principal from
P15,760,312.85 as totaled in Exhibit B — 1 to P14,183,679.37 as evidenced by Exhibit C —
1. As interest has already been charged up to May 7, 1924, legal interest should begin to run
from that date instead of from May 8, 1923, as fixed by the trial court.

(2) The Philippine National Bank-Philippine Vegetable Oil Co., mortgage of February 20,
1922, has not been legally executed by the Philippine Vegetable Oil Co., Inc., and
consequently cannot be given effect. But the prior mortgages held by the Philippine National
Bank of April 11, 1919, November 18, 1920, and January 10, 1921, remain in force and may
be foreclosed.

(3) The Philippine National Bank will obviously have a preferred claim when the three
mortgages above mentioned shall be foreclosed. The remainder of the assets of the
Philippine Vegetable Oil Co., Inc., if any, should then be applied to the payment pro rata of
the unsecured claims, among them that of Mr. Whitaker and the unsecured part of the debt
to the Philippine National Bank. Intervenor Whitaker is entitled to an accounting of the
proceeds of the Vegetable Oil Company's properties caused to be sold by the Philippine
National Bank and of the business operations of the Vegetable Oil Company since March 11,
1921.

(4) Intervenor Whitaker has failed to establish an agreement binding the Philippine National
Bank to provide the necessary operating capital to the Vegetable Oil Company, and so is not
entitled to recover damages from the Philippine National Bank. Nor can intervenor Whitaker
recover P4,424,418.37 from the Vegetable Oil Company since he is not the legatee of the
 assets of that company. The trial judge accordingly committed no error in dismissing
intervenor's complaint.

(5) No pronouncement is made with reference to intervenor Whitaker's possible rights in

connection with the creditors' agreement since that agreement is not here in question and
the parties thereto are not before the court.

The case will be remanded to the lower court for the entry of judgment and further proceedings as
herein indicated. Judgment affirmed in part and reversed in part, without special finding as to costs
in either instance.

Ostrand, Johns, Romualdez and Villa-Real, JJ., concur.

Separate Opinions

AVANCEÑA, C. J., with whom concurs VILLAMOR, J., concurring and dissenting in part:

In regard to the validity of the mortgage given by the defendant in favor of the plaintiff, I concur in the
dissenting opinion of Mr. Justice Johnson.

The insinuation made in the majority opinion of undue influence, deceit and fraud on the part of the
plaintiff as grounds for declaring this mortgage void, is absolutely unsupported by the record.
Supposing that undue influence, which is a general and abstract conception, exists to some extent, it
does not constitute a cause for annulment of the contract so far as it affects the consent, unless the
same amounts to violence, or intimidation, or constitutes fraud, or produces substantial error on the
part of the other contracting party. (Art. 1265, Civil Code.) The mere intervention of the two
representatives of the plaintiff in the Board of Directors of the defendant and, on the other hand, no
act has been proved to have been executed by them in connection with the mortgage which might
be considered as undue influence. Neither has it been shown that anything was done which might
constitute a fraud on the part of the plaintiff in the execution of this mortgage. Fraud is not presumed.
The only thing which can be considered in connection with this point is the supposed promise given
to the defendant to finance its operations. But, according to the majority opinion, there is no
indication of any act of the Board of Directors of the plaintiff corporation which might imply consent to
an agreement to give unlimited support to the defendant, nor ratification of any promise to this effect
made by the general manager. In order to annul a contract for fraud it must have been committed by
one of the contracting parties. (Art. 1269, Civil Code.) On the other hand, the general manager of the
plaintiff as also admitted in the majority decision, only intimated generally that the plaintiff
corporation would finance its operations. Moreover, it was proven that the plaintiff did in fact furnish
the defendant with capital in order that it might continue operating for some time, and continued to
furnish it with capital even after the execution of the mortgage, which, at any rate, is a compliance
with the supposed promise. It is evident that, if the plaintiff, either directly or through its general
manager, did not make any promise to furnish capital to the defendant without any limitation for its
operation, and did in fact furnish it with capital to some extent, it cannot be said to have acted
fraudulently. The plaintiff was not bound to take a chance when it was clearly seen that the
defendant was running behind and, in defense of its interests and in consideration of its resources, it
had a right to stop when it deemed it unwise to continue any longer. Furthermore, any unfulfilled
promise made to the defendant by the general manager of the plaintiff, without the authorization of
the latter, does not constitute such fraud and cause for the annulment of the contract. Upon this
theory, at most, it might be an incidental fraud committed by a third party, which is not sufficient
cause for the annulment of a contract, but only for an action for damages against the said third party.
(Art. 1270, Civil Code.) At any rate, the appellant-intervenor cannot seek the annulment of this
mortgage under the provisions of article 1302 of the Civil Code, according to which only those
persons who are principally or subsidiarily bound by the contract may bring the action. The
appellant, not having been a party to this mortgage and not being a representative of any of those
who have intervened therein, is not, principally or subsidiarily, bound by virtue thereof, and,
consequently, has not action and cannot impugn its validity. (Decisions of Supreme Court of Spain of
April 18, 1901 and November 23, 1903.)

The appellant's allegation that the mortgage affects him and the foreclose thereof would injure him,
does not give him the right to bring an action for annulment, but, for rescission, if any, which is not
the one brought herein. Commenting on this aspect of the question, Manresa in vol. 8, p. 780, 2d
ed., says: "Third persons need not bring an action for annulment, as provided for in this article (1302,
Civil Code)." The contract really injures or it does not. If it does, whether or not the act or contract is
valid or void, whether or not it is valid or void, they cannot have any interest in the matter.

I concur with the majority in all other respects and vote for the affirmation of the appealed judgment
in all its parts.

JOHNSON, J., dissenting:

I cannot agree with all of the facts stated in the decision nor with the conclusions drawn therefrom. I
find it necessary therefore to dissent. My dissent is based upon the following grounds:

A. Legality of the mortgage

First. That the mortgage in question was executed by the Philippine Vegetable Oil Co., Inc., to the
Philippine National Bank and is a valid subsisting contract.

Second. That the statement that the mortgage was executed upon property in custodia legis is not
supported by the facts of record.

At the time said document became a mortgage, the property covered thereby was not in custodia
legis. It is true that at the time the document was signed on the 20th day of February, 1922, the
property was then in the hands of a receiver. At that time, however, the said document was not a
mortgage; it was nothing more nor less than an evidence of indebtedness. It did not contain all the
requisites of a mortgage. Two additional requisites, under the law, were necessary: (a) It was not a
public document at that time and (b) it had not been registered in the registry of property, which is a
prerequisite to its becoming a mortgage (art. 1875, Civil Code). The property included in said
document passed out of the hands of the receiver on the 28th day of February, 1922, and back into
the hands of its owner, the Philippine Vegetable Oil Company, as its private property. The document
became a public document by acknowledgment before the notary public on the 18th day of March,
1922. Even that act was not sufficient to make said document a mortgage. It even then was only an
evidence of an indebtedness existing between the parties thereto. One thing more, under the law,
was necessary in order to give said document the dignity of a mortgage. Under the law, it had to
be registered in order to become a mortgage. The document was registered on the 21st day of
March, 1922, nearly a month after the property had ceased to be in custodia legis, and thus it
became a mortgage. At the same time said document became a mortgage the property was not
in custodia legis. Therefore the reason given in the majority opinion for pronouncing said mortgage
illegal and void fails, under the facts and the law. (Arts. 1857-1875, Civil Code. Olivares vs. Hoskyn
& Co., 2 Phil., 689; McMicking vs. Kimura, 12 Phil., 98; Susara vs. Martinez, 17 Phil., 254;
Lozano vs. Tan Suico, 23 Phil., 16; Borcelis vs. Golingco, 27 Phil., 560; Legarda and
Prieto vs. Saleeby, 31 Phil., 590; Lim Julian vs. Lutero, G.R. No. 25235.1)

From the foregoing facts and the law it becomes clear that, that part of the majority opinion which
declares the mortgage null and void because it covered property in custodia legis cannot be
supported.

Third. I cannot give my conformity to that part of the majority opinion which charges that said
mortgage did not express the free will of the Philippine Vegetable Oil Co., Inc. The Philippine
Vegetable Oil Co. not only signed said mortgage voluntarily, before witnesses, but nearly three
weeks later ratified its due execution before a notary public. And not only that, the Philippine
Vegetable Oil Co., Inc., recognized the validity of said document, by later, making payments thereon.

Fourth. Neither can I give my conformity to that part of the majority opinion which imputes to the
Philippine National Bank bad faith, undue influence, deceit and constructive fraud in procuring the
execution of said mortgage. The record clearly shows that the mortgage was given to secure the
payment of a preexisting indebtedness for a valuable consideration. In addition to the fact that the
Philippine Vegetable Oil Co. had recognized the validity of said mortgage by making payments
thereon, there is nothing in the record which shows, in the slightest degree, that it had, prior to the
commencement of the present action, even intimated that the mortgage was illegal and void. It may
be added that the failure of the Philippine Vegetable Oil Co., Inc., to appeal is an additional proof of
its belief that the defense of illegality is not well founded.

In my opinion, the facts of record an the law applicable thereto fully support the conclusions of the
lower court that the mortgage had been legally executed, was a valid subsisting contract of
mortgage, and in ordering the foreclosure of the same. That part of the judgment appealed from
should therefore be affirmed.

B. The right of the intervenor, Phil. C. Whitaker

There is still another conclusion of the majority opinion to which I cannot give my conformity, and
that is the right of the intervenor to recover some damages for the breach of contract by virtue of
which the Philippine National Bank obligated itself to continue the operations of the Philippine
Vegetable Oil Co., Inc. As I read the record, it fairly bristles with facts in support of the contention, of
Phil. C. Whitaker, that the Philippine National Bank did promise and did obligate itself to furnish
sufficient funds with which to continue the operation of the Philippine Vegetable Oil Co., Inc., and
that in lieu of said promises and obligations he did, out of his private funds, and property, obligate
himself to pay a portion of said indebtedness against the Philippine Vegetable Oil Co., which
indebtedness he was theretofore under no obligation to pay. (See creditors' agreement an mortgage
in favor of creditors.) Except for the agreement of the Philippine National Bank to continue the
operation of the Philippine Vegetable Oil Co., Inc., I find nothing in the record to support a
consideration of said creditors' agreement, by virtue of which Phil. C. Whitaker promise to pay, out of
his private property an indebtedness of about P4,000,000 of the Philippine Vegetable Oil Co., Inc.
The Philippine National Bank admitted that its manager made such an agreement with Phil. C.
Whitaker, but that the same was never ratified by its Board of Directors.

After a very careful reading and a re-reading of the entire record I am fully persuaded that at the time
Phil. C. Whitaker entered into the alleged contract with the Philippine National Bank, by virtue of
which the latter was to furnish adequate funds for the continued operation of the Philippine
Vegetable Oil factory, that all parties then concerned fully understood and believed that such a
contract had been made and entered into with full and sufficient consideration. Every document
which was executed at that time and prior thereto gives ample evidence that such a contract existed.
C. Proof that all parties concerned believed that the Philippine National Bank had agreed to furnish
sufficient funds for the continued operation of the Philippine Vegetable Oil Company, Inc.

First. Phil. C. Whitaker honestly believed that the Philippine National Bank had entered into a valid
contract with him, by virtue of which said bank was to furnish sufficient funds for the continued
operation of the Philippine Vegetable Oil factory. In fact, that was one of the precedent conditions
upon which he had obligated his private property to the extent of nearly P4,000,000 for the payment
of a portion of the debts of said Oil Company. That fact appears not only from Exhibit 1 but from
many other exhibits found in the record, besides the declaration of Phil. C. Whitaker during the trial
of the cause. There is nothing in the record which intimates that his testimony should not be
accepted. On the first day of January, 1921, and nearly six months before the creditors' agreement
was consummated and during the pendency of the creditors' agreement in Exhibit 1 Mr. Whitaker
said: "A further condition to the foregoing offer (the creditors' agreement) is that the banks, parties to
the proposed arrangement, supply, subject to the approval of their representatives on the Board of
Directors of the Philippine Vegetable Oil Co., Inc., funds sufficient to enable the Philippine Vegetable
Oil Co. to continue its operations during the full terms for which my personal secured undertaking
remains in effect." His belief that such a contract had been entered into is also indicated in Exhibit 6
in which he threatened the Philippine National Bank with an action "in case it should cease to
finance the Philippine Vegetable Oil Co. as contemplated."

Second. The creditors also believed that such a contract existed between Phil. C. Whitaker and the
Philippine National Bank. Under that question the creditors' agreement (Exhibit 3) contains the
following significant statement: "the creation of a fund of P500,000 to be deposited as the same
accumulates in the Philippine National Bank, to be held by it for a period of three years from July 1,
1921, for the purpose of indemnifying it (the Philippine National Bank) against loss on such sums as
it shall hereafter advance to the Philippine Vegetable Oil Co. to enable the latter to resume business
and continue the manufacture of vegetable oil, with the understanding, however, that at the end of
said three years so much of such funds, if any, as shall not have been used for the purpose of such
indemnity shall be delivered to the trustee for distribution pro rata."

Third. The trustee in the mortgage executed and delivered in conformity with the creditors'
agreement (Exhibit 2) also believed that such a contract existed, or, otherwise, the following
pertinent statement would have found no place therein: "To secure the Philippine National Bank
against such losses as it may sustain, not exceeding a total of P500,000 on such sums as it shall,
from time to time and within Vegetable Oil Company to enable the latter to resume business and
continue the manufacture of vegetable oil."

Fourth. The Board of Directors of the Philippine National Bank also evidently believed and
understood that a contract existed between it and Phil. C. Whitaker, by virtue of which the former
was to furnish to the latter sufficient funds for the continued operation of the Philippine Vegetable Oil
factory, or otherwise, said Boar would not have authorized, by resolution, the President of the Bank
to have commenced furnishing funds to the Philippine Vegetable Oil Company for its continued
operation. The fact that the bank later refused to comply with such contract does not relieve it, if a
contract had actually existed, from the present action for damages.

Fifth. The Archbishop of Manila, who was a large stockholder in the Philippine Vegetable Oil Co.,
Inc., also believed that Phil. C. Whitaker had such a contract with the Philippine National Bank. In
Exhibit 5 the Archbishop says, among other things that Phil. C. Whitaker "has also arranged with the
Philippine National Bank for the funds necessary to enable said Oil Company to resume its business
and continue in the manufacture of vegetable oil." That statement of the Archbishop was made
during the pendency of the creditors' agreement.
Sixth. Mr. E. W. Wilson, President of the Philippine National Bank, also believed that the contract
between Phil. C. Whitaker and the bank had been consummated. In Exhibit 7 Mr. Wilson recognized
the wisdom of such a contract "as long as it (the Philippine National Bank) had the P500,000
guaranty."

Seventh. Mr. William A. Randall, Comptroller and Executive Officer of the Philippine Vegetable Oil
Co., Inc. in a letter (Exhibit A) written nearly a year after the alleged agreement between Phil. C.
Whitaker and the Philippine National Bank, expressly recognized the existence of such a contract
with the statement that Phil. C. Whitaker had executed a mortgage in favor of the creditors upon his
private property and had thereby guaranteed to the said bank the sum of P500,000 for the continued
operation of the Philippine Vegetable Oil factory for a period of three years.

Eight. An Additional reason may be given why the creditors believed that the Philippine National
Bank had contracted to furnish adequate funds for the operation of the Philippine Vegetable Oil
factory. From Exhibit 3, the creditors' agreement, it will be noted that the creditors who united in that
agreement had unsecured claims against the Philippine Vegetable Oil Co. amounting to
P13,110,568.78, and that by virtue of that agreement (Exhibit 3) they accepted a mortgage from Mr.
Whitaker for a portion of their claims to be paid within a period of three years, amounting
P4,444,418.37.

It will also be noted that they agreed to accept the obligation of the Philippine Vegetable Oil Co. for
the balance of their respective claims, payable without interest fifteen years from July 1, 1921, with
the understanding, however that the ad interim surplus earning of said Vegetable Oil Co., over and
above its liabilities and an amount necessary for a reasonable working capital for said company,
shall be applied to the pro rata satisfaction of said obligations (par. 6 of Exhibit 3). From Exhibit 3,
therefore, it clearly appears that the creditors fully understood that the Philippine Vegetable Oil
factory was to be continued in its operation. Otherwise, the Philippine Vegetable Oil Co. then being
insolvent, the creditors had no hope of recovering the balance of their claims amounting to above
P9,000,000.

Ninth. The Supreme Court. At the time of the consideration of this appeal the Supreme Court was of
the opinion, which fact does not appear in the majority opinion, that the evidence presented by Phil.
C. Whitaker in support of his allegation that the Philippine Vegetable Oil factory, was admissible to
show the existence of such a contract. A majority of the court, however, was of the opinion that no
liability resulted from the violation of the terms of such contract. The court also at the time decided
that the evidence which Phil. C. Whitaker presented in support of his claim was admissible under
section 335 of Act No. 190.

Since that time I have again carefully examined the entire record and I am fully persuaded that
justice and equity demand that Mr. Phil. C. Whitaker be given an opportunity to show that he is
entitled to recover some damages for the following reasons, in addition to what has been state
above: First, that the contract between Phil. C. Whitaker and the Philippine National Bank is an
enforcible contract and one upon which he might have maintained a separate independent action
without reference to the present action to foreclose the mortgage; second, that the only
consideration for his promise to pay the claims of the other creditors of the Philippine Vegetable Oil
Co., for the fulfillment of which he turned over the trustee practically all of his property amounting to
several million pesos, was the promise of the Philippine National Bank to furnish money for the
continued operation of the Philippine Vegetable Oil factory; third, that except for the promise of the
Philippine National Bank to adequately finance the continued operation of the Philippine Vegetable
Oil factory, there was no consideration received by Mr. Whitaker for rendering himself personally
liable for the personal debts of the Oil Company.
The record is brimming full with evidence that Mr. Whitaker only promised to pay, out of his private
property, the debts of the Philippine Vegetable Oil Co. because of his contract with the Philippine
National Bank to finance the operation of said Oil Company, hoping thereby to pay the debts of said
Oil Company out of the receipts resulting from the operation of said Oil factory and thereby relieve
his individual and private property from the obligation which he had imposed upon it. Mr. Whitaker
was under no obligation to place his individual and private property in jeopardy for the payment of
the debts of the Philippine Vegetable Oil Co., and no doubt would not have entered into his contract
with the creditors except for the promise of the Philippine National Bank to adequately finance the
continued operation of said Company for a period of three years.

On October 4, 1921, a little over two months after the execution of the creditors' mortgage, the Board
of Directors of the Philippine National Bank adopted a resolution, authorizing the President of said
bank to finance the operation of the Philippine Vegetable Oil Co. to the extent of P500,000 to be
secured by copra and oil and to be further secured by P500,000 pledged by Phil. C. Whitaker in his
creditors' agreement. In view of that resolution on the part of the Board of Directors of the Philippine
National Bank, in my judgment, it is idle to extend that the reference in said resolution "and be
further secure by P500,000 pledged by Phil. C. Whitaker in his creditors' agreement" was and
complete acceptance and ratification by the Board of Directors of the Philippine National Bank of the
creditors' agreement theretofore accepted by the President of the bank.

It seems clear to me, from all of the facts found in the record, that the only reason why the creditors
granted to the Philippine National Bank, (now) a first lien, on the property which Mr. Whitaker
mortgaged to the creditors, amounting to P500,000, was to cover possible losses on the part of the
Philippine National Bank in its continued operation for a period of three years, under the agreement
which said bank had with Mr. Whitaker. The proof shows that the bank did furnish funds for the
operation of the Oil factory and that during that period no losses occurred to the bank. In fact, the
record shows that the bank made a profit of something like P100,000 during that period. Both the
creditors and the Philippine National Bank were interested at that time in having the Philippine
Vegetable Oil factory continue its operations for the reason that they must have all recognized that
the assets of said Oil Company were largely inadequate to cover their respective claims. It was only
through the continued operation of said Oil Factory that the creditors and the Philippine National
Bank could hope to have their claims paid in full.

My conclusions from all of the record are: First, that the decision of the lower court ordering the
foreclosure of said mortgage should be affirmed; and, second, that Phil. C. Whitaker should be given
an opportunity to prove whether or not he had suffered any loss or damage from the failure of the
Philippine National Bank to furnish adequate funds for the continued operation of the Philippine
Vegetable Oil factory. The judgment of the lower court should be modified as herein indicated.

STREET, J., concurring and dissenting:

I concur with the majority upon the proposition that the intervenor cannot recover damages from the
bank; but I agree with the Chief Justice in the view that the judgment of foreclosure should be
affirmed. The discussions contained in the dissenting opinions of the Chief Justice and of Mr. Justice
Johnson sufficiently cover the principal features of the case; but there is one other point in the case
upon which I wish to challenge the correctness of the position of the majority. Upon inspection of the
prevailing opinion it will be seen that the last mortgage executed by the defendant Philippine
Vegetable Oil Company, Inc., in favor of the Philippine National Bank, has been declared null and
void by the court at the instance of the intervenor, Phil. C. Whitaker, who is a principal stockholder in
the defendant company. It will be further observed that the nullity of this contract was originally
asserted in the answer of the corporation defendant, but this defense was disallowed by the trial
court in giving judgment in favor of the plaintiff for the foreclosure of the mortgage. From this
judgment the Philippine Vegetable Oil Company did not appeal; and the adjudication of the validity of
the mortgage thereby became conclusive as against the company. There is nothing in the record to
suggest that the abandonment of this defense by the corporation itself and its failure to appeal from
the judgment was due to anything else than a fair exercise of the judgment of its officers and of the
attorney who represented the corporation in the lower court.

But this court concedes to Mr. Whitaker the right to rely upon the defense of the alleged nullity of the
mortgage; and, at his instance only, the court has now set the mortgage aside. This, in my opinion,
is improper practice. It is true that corporation stockholders are entitled to defend legal proceedings
in behalf of their corporation when its directors or managing agents are willfully or fraudulently
neglectful of its interests; and the proper practice in such case is for the stockholders to move the
court for leave to intervene in the suit they wish to defend, and to allege, and make aprima
facie showing, that the authorized and managing agents of the corporation are derelict in their duties
and that the corporation has a meritorious defense to the action (7 R. C. L., p. 334). No such
showing has been made in this case, and, on the contrary, all the indications are that the course
pursued by the officers of the corporation was adopted in good faith. Under these circumstances
there is no propriety in allowing the stockholder to assert in this court a defense which has been
abandoned by the corporation. In justification, apparently, of its departure at this point from the
ordinary rule of procedure, the opinion of the court contains a statement to the effect that, in dealing
with this case, the mode of approach of the court has been to sweep aside technicalities and resolve
in a broad and liberal manner the various perplexing questions which are before the court. I agree
that rules of procedure should, as a general rule, be applied in furtherance of justice; but when the
accumulated experience of courts through a long period of time has determined that in an action
against a corporation the right of defense, save in exceptional cases, pertains to the corporation
concerned, arbitrary departures from that rule should not be allowed. To o so is to admit the mere
caprice of the court as an acceptable criterion for the making of judicial decisions.

G.R. No. 128120 October 20, 2004

SWEDISH MATCH, AB, JUAN ENRIQUEZ, RENE DIZON, FRANCISCO RAPACON, FIEL
SANTOS, BETH FLORES, LAMBRTO DE LA EVA, GLORIA REYES, RODRIGO ORTIZ,
NICANOR ESCALANTE, PETER HODGSON, SAMUEL PARTOSA, HERMINDA ASUNCION,
JUANITO HERRERA, JACOBUS NICOLAAS, JOSEPH PEKELHARING (now Representing
himself without court sanction as "JOOST PEKELHARING)," MASSIMO ROSSI and ED
ENRIQUEZ, petitioners,
vs.
COURT OF APPEALS, ALS MANAGEMENT & DEVELOPMENT CORPORATION and ANTONIO
K. LITONJUA,respondents.

DECISION

TINGA, J.:

Petitioners seek a reversal of the twin Orders1 of the Court of Appeals dated 15 November
19962 and 31 January 1997,3 in CA-G.R. CV No. 35886, entitled "ALS Management et al., v.
Swedish Match, AB et al." The appellate court overturned the trial court’s Order4 dismissing the
respondents’ complaint for specific performance and remanded the case to the trial court for further
proceedings.
Swedish Match AB (hereinafter SMAB) is a corporation organized under the laws of Sweden not
doing business in the Philippines. SMAB, however, had three subsidiary corporations in the
Philippines, all organized under Philippine laws, to wit: Phimco Industries, Inc. (Phimco), Provident
Tree Farms, Inc., and OTT/Louie (Phils.), Inc.

Sometime in 1988, STORA, the then parent company of SMAB, decided to sell SMAB of Sweden
and the latter’s worldwide match, lighter and shaving products operation to Eemland Management
Services, now known as Swedish Match NV of Netherlands, (SMNV), a corporation organized and
existing under the laws of Netherlands. STORA, however, retained for itself the packaging business.

SMNV initiated steps to sell the worldwide match and lighter businesses while retaining for itself the
shaving business. SMNV adopted a two-pronged strategy, the first being to sell its shares in Phimco
Industries, Inc. and a match company in Brazil, which proposed sale would stave-off defaults in the
loan covenants of SMNV with its syndicate of lenders. The other move was to sell at once or in one
package all the SMNV companies worldwide which were engaged in match and lighter operations
thru a global deal (hereinafter, global deal).

Ed Enriquez (Enriquez), Vice-President of Swedish Match Sociedad Anonimas (SMSA)—the

management company of the Swedish Match group—was commissioned and granted full powers to
negotiate by SMNV, with the resulting transaction, however, made subject to final approval by the
board. Enriquez was held under strict instructions that the sale of Phimco shares should be executed
on or before 30 June 1990, in view of the tight loan covenants of SMNV. Enriquez came to the
Philippines in November 1989 and informed the Philippine financial and business circles that the
Phimco shares were for sale.

Several interested parties tendered offers to acquire the Phimco shares, among whom were the AFP
Retirement and Separation Benefits System, herein respondent ALS Management & Development
Corporation and respondent Antonio Litonjua (Litonjua), the president and general manager of ALS.

In his letter dated 3 November 1989, Litonjua submitted to SMAB a firm offer to buy all of the latter’s
shares in Phimco and all of Phimco’s shares in Provident Tree Farm, Inc. and OTT/Louie (Phils.),
Inc. for the sum of ₱750,000,000.00.5

Through its Chief Executive Officer, Massimo Rossi (Rossi), SMAB, in its letter dated 1 December
1989, thanked respondents for their interest in the Phimco shares. Rossi informed respondents that
their price offer was below their expectations but urged them to undertake a comprehensive review
and analysis of the value and profit potentials of the Phimco shares, with the assurance that
respondents would enjoy a certain priority although several parties had indicated their interest to buy
the shares.6

Thereafter, an exchange of correspondence ensued between petitioners and respondents regarding

the projected sale of the Phimco shares. In his letter dated 21 May 1990, Litonjua offered to buy the
disputed shares, excluding the lighter division for US$30.6 million, which per another letter of the
same date was increased to US$36 million.7Litonjua stressed that the bid amount could be adjusted
subject to availability of additional information and audit verification of the company finances.

Responding to Litonjua’s offer, Rossi sent his letter dated 11 June 1990, informing the former that
ALS should undertake a due diligence process or pre-acquisition audit and review of the draft
contract for the Match and Forestry activities of Phimco at ALS’ convenience. However, Rossi made
it clear that at the completion of the due diligence process, ALS should submit its final offer in US
dollar terms not later than 30 June 1990, for the shares of SMAB corresponding to ninety-six percent
(96%) of the Match and Forestry activities of Phimco. Rossi added that in case the "global deal"
presently under negotiation for the Swedish Match Lights Group would materialize, SMAB would
reimburse up to US$20,000.00 of ALS’ costs related to the due diligence process.8

Litonjua in a letter dated 18 June 1990, expressed disappointment at the apparent change in
SMAB’s approach to the bidding process. He pointed out that in their 4 June 1990 meeting, he was
advised that one final bidder would be selected from among the four contending groups as of that
date and that the decision would be made by 6 June 1990. He criticized SMAB’s decision to accept
a new bidder who was not among those who participated in the 25 May 1990 bidding. He informed
Rossi that it may not be possible for them to submit their final bid on 30 June 1990, citing the advice
to him of the auditing firm that the financial statements would not be completed until the end of July.
Litonjua added that he would indicate in their final offer more specific details of the payment
mechanics and consider the possibility of signing a conditional sale at that time.9

Two days prior to the deadline for submission of the final bid, Litonjua again advised Rossi that they
would be unable to submit the final offer by 30 June 1990, considering that the acquisition audit of
Phimco and the review of the draft agreements had not yet been completed. He said, however, that
they would be able to finalize their bid on 17 July 1990 and that in case their bid would turn out
better than any other proponent, they would remit payment within ten (10) days from the execution of
the contracts.10

Enriquez sent notice to Litonjua that they would be constrained to entertain bids from other parties in
view of Litonjua’s failure to make a firm commitment for the shares of Swedish Match in Phimco by
30 June 1990.11

In a letter dated 3 July 1990, Rossi informed Litonjua that on 2 July 1990, they signed a conditional
contract with a local group for the disposal of Phimco. He told Litonjua that his bid would no longer
be considered unless the local group would fail to consummate the transaction on or before 15
September1990.12

Apparently irked by SMAB’s decision to junk his bid, Litonjua promptly responded by letter dated 4
July 1990. Contrary to his prior manifestations, he asserted that, for all intents and purposes, the
US$36 million bid which he submitted on 21 May 1990 was their final bid based on the financial
statements for the year 1989. He pointed out that they submitted the best bid and they were already
finalizing the terms of the sale. He stressed that they were firmly committed to their bid of US$36
million and if ever there would be adjustments in the bid amount, the adjustments were brought
about by SMAB’s subsequent disclosures and validated accounts, such as the aspect that only
ninety-six percent (96%) of Phimco shares was actually being sold and not one-hundred percent
(100%).13

More than two months from receipt of Litonjua’s last letter, Enriquez sent a fax communication to the
former, advising him that the proposed sale of SMAB’s shares in Phimco with local buyers did not
materialize. Enriquez then invited Litonjua to resume negotiations with SMAB for the sale of Phimco
shares. He indicated that SMAB would be prepared to negotiate with ALS on an exclusive basis for a
period of fifteen (15) days from 26 September 1990 subject to the terms contained in the letter.
Additionally, Enriquez clarified that if the sale would not be completed at the end of the fifteen (15)-
day period, SMAB would enter into negotiations with other buyers.14

Shortly thereafter, Litonjua sent a letter expressing his objections to the totally new set of terms and
conditions for the sale of the Phimco shares. He emphasized that the new offer constituted an
attempt to reopen the already perfected contract of sale of the shares in his favor. He intimated that
he could not accept the new terms and conditions contained therein.15
On 14 December 1990, respondents, as plaintiffs, filed before the Regional Trial Court (RTC) of
Pasig a complaint for specific performance with damages, with a prayer for the issuance of a writ of
preliminary injunction, against defendants, now petitioners. The individual defendants were sued in
their respective capacities as officers of the corporations or entities involved in the aborted
transaction.

Aside from the averments related to their principal cause of action for specific performance,
respondents alleged that the Phimco management, in utter bad faith, induced SMAB to violate its
contract with respondents. They contended that the Phimco management took an interest in
acquiring for itself the Phimco shares and that petitioners conspired to thwart the closing of such
sale by interposing various obstacles to the completion of the acquisition audit.16 Respondents
claimed that the Phimco management maliciously and deliberately delayed the delivery of
documents to Laya Manabat Salgado & Co. which prevented them from completing the acquisition
audit in time for the deadline on 30 June 1990 set by petitioners.17 Respondents added that SMAB’s
refusal to consummate the perfected sale of the Phimco shares amounted to an abuse of right and
constituted conduct which is contrary to law, morals, good customs and public policy.18

Respondents prayed that petitioners be enjoined from selling or transferring the Phimco shares, or
otherwise implementing the sale or transfer thereof, in favor of any person or entity other than
respondents, and that any such sale to third parties be annulled and set aside. Respondents also
asked that petitioners be ordered to execute all documents or instruments and perform all acts
necessary to consummate the sales agreement in their favor.

Traversing the complaint, petitioners alleged that respondents have no cause of action, contending
that no perfected contract, whether verbal or written, existed between them. Petitioners added that
respondents’ cause of action, if any, was barred by the Statute of Frauds since there was no written
instrument or document evidencing the alleged sale of the Phimco shares to respondents.

Petitioners filed a motion for a preliminary hearing of their defense of bar by the Statute of Frauds,
which the trial court granted. Both parties agreed to adopt as their evidence in support of or against
the motion to dismiss, as the case may be, the evidence which they adduced in support of their
respective positions on the writ of preliminary injunction incident.

In its Order dated 17 April 1991, the RTC dismissed respondents’ complaint.19 It ruled that there was
no perfected contract of sale between petitioners and respondents. The court a quo said that the
letter dated 11 June 1990, relied upon by respondents, showed that petitioners did not accept the
bid offer of respondents as the letter was a mere invitation for respondents to conduct a due
diligence process or pre-acquisition audit of Phimco’s match and forestry operations to enable them
to submit their final offer on 30 June 1990. Assuming that respondent’s bid was favored by an oral
acceptance made in private by officers of SMAB, the trial court noted, such acceptance was merely
preparatory to a formal acceptance by the SMAB—the acceptance that would eventually lead to the
execution and signing of the contract of sale. Moreover, the court noted that respondents failed to
submit their final bid on the deadline set by petitioners.

Respondents appealed to the Court of Appeals, assigning the following errors:

A. THE TRIAL COURT EXCEEDED ITS AUTHORITY AND JURISDICTION WHEN IT

ERRED PROCEDURALLY IN MOTU PROPIO (sic) DISMISSING THE COMPLAINT IN ITS
ENTIRETY FOR "LACK OF A VALID CAUSE OF ACTION" WITHOUT THE BENEFIT OF A
FULL-BLOWN TRIAL AND ON THE MERE MOTION TO DISMISS.
 B. THE TRIAL COURT ERRED IN IGNORING PLAINTIFF-APPELLANTS’ CAUSE OF
ACTION BASED ON TORT WHICH, HAVING BEEN SUFFICIENTLY PLEADED,
INDEPENDENTLY WARRANTED A FULL-BLOWN TRIAL.

C. THE TRIAL COURT ERRED IN IGNORING PLAINTIFFS-APPELLANTS’ CAUSE OF

ACTION BASED ON PROMISSORY ESTOPPEL WHICH, HAVING BEEN SUFFICIENTLY
PLEADED, WARRANTED A FULL-BLOWN TRIAL, INDEPENDENTLY FOR THE OTHER
CAUSES OF ACTION.

D. THE TRIAL COURT JUDGE ERRED IN FORSWEARING JUDICIAL OBJECTIVITY TO

FAVOR DEFENDANTS-APPELLEES BY MAKING UNFOUNDED FINDINGS, ALL IN
VIOLATION OF PLAINTIFFS-APPELLANTS’ RIGHT TO DUE PROCESS.20

After assessing the respective arguments of the parties, the Court of Appeals reversed the trial
court’s decision. It ruled that the series of written communications between petitioners and
respondents collectively constitute a sufficient memorandum of their agreement under Article 1403
of the Civil Code; thus, respondents’ complaint should not have been dismissed on the ground that it
was unenforceable under the Statute of Frauds. The appellate court opined that any document or
writing, whether formal or informal, written either for the purpose of furnishing evidence of the
contract or for another purpose which satisfies all the Statute’s requirements as to contents and
signature would be

sufficient; and, that two or more writings properly connected could be considered together. The
appellate court concluded that the letters exchanged by and between the parties, taken together,
were sufficient to establish that an agreement to sell the disputed shares to respondents was
reached.

The Court of Appeals clarified, however, that by reversing the appealed decision it was not thereby
declaring that respondents are entitled to the reliefs prayed for in their complaint, but only that the
case should not have been dismissed on the ground of unenforceability under the Statute of Frauds.
It ordered the remand of the case to the trial court for further proceedings.

Hence, this petition.

Petitioners argue that the Court of Appeals erred in failing to consider that the Statute of Frauds
requires not just the existence of any note or memorandum but that such note or memorandum
should evidence an agreement to sell; and, that in this case, there was no word, phrase, or
statement in the letters exchanged between the two parties to show or even imply that an agreement
had been reached for the sale of the shares to respondent.

Petitioners stress that respondent Litonjua made it clear in his letters that the quoted prices were
merely tentative and still subject to further negotiations between him and the seller. They point out
that there was no meeting of the minds on the essential terms and conditions of the sale because
SMAB did not accept respondents’ offer that consideration would be paid in Philippine pesos.
Moreover, Litonjua signified their inability to submit their final bid on 30 June 1990, at the same time
stating that the broad terms and conditions described in their meeting were inadequate for them to
make a response at that time so much so that he would have to await the corresponding specifics.
Petitioners argue that the foregoing circumstances prove that they failed to reach an agreement on
the sale of the Phimco shares.

In their Comment, respondents maintain that the Court of Appeals correctly ruled that the Statute of
Frauds does not apply to the instant case. Respondents assert that the sale of the subject shares to
them was perfected as shown by the following circumstances, namely: petitioners assured them that
should they increase their bid, the sale would be awarded to them and that they did in fact increase
their previous bid of US$30.6 million to US$36 million; petitioners orally accepted their revised offer
and the acceptance was relayed to them by Rene Dizon; petitioners directed them to proceed with
the acquisition audit and to submit a comfort letter from the United Coconut Planters’ Bank (UCPB);
petitioner corporation confirmed its previous verbal acceptance of their offer in a letter dated 11 June
1990; with the prior approval of petitioners, respondents engaged the services of Laya, Manabat,
Salgado & Co., an independent auditing firm, to immediately proceed with the acquisition audit; and,
petitioner corporation reiterated its commitment to be bound by the result of the acquisition audit and

promised to reimburse respondents’ cost to the extent of US$20,000.00. All these incidents,
according to respondents, overwhelmingly prove that the contract of sale of the Phimco shares was
perfected.

Further, respondents argued that there was partial performance of the perfected contract on their
part. They alleged that with the prior approval of petitioners, they engaged the services of Laya,
Manabat, Salgado & Co. to conduct the acquisition audit. They averred that petitioners agreed to be
bound by the results of the audit and offered to reimburse the costs thereof to the extent of
US$20,000.00. Respondents added that in compliance with their obligations under the contract, they
have submitted a comfort letter from UCPB to show petitioners that the bank was willing to finance
the acquisition of the Phimco shares.21

The basic issues to be resolved are: (1) whether the appellate court erred in reversing the trial
court’s decision dismissing the complaint for being unenforceable under the Statute of Frauds; and
(2) whether there was a perfected contract of sale between petitioners and respondents with respect
to the Phimco shares.

The Statute of Frauds embodied in Article 1403, paragraph (2), of the Civil Code22 requires certain
contracts enumerated therein to be evidenced by some note or memorandum in order to be
enforceable. The term "Statute of Frauds" is descriptive of statutes which require certain classes of
contracts to be in writing. The Statute does not deprive the parties of the right to contract with
respect to the matters therein involved, but merely regulates the formalities

of the contract necessary to render it enforceable.23 Evidence of the agreement cannot be received
without the writing or a secondary evidence of its contents.

The Statute, however, simply provides the method by which the contracts enumerated therein may
be proved but does not declare them invalid because they are not reduced to writing. By law,
contracts are obligatory in whatever form they may have been entered into, provided all the essential
requisites for their validity are present. However, when the law requires that a contract be in some
form in order that it may be valid or enforceable, or that a contract be proved in a certain way, that
requirement is absolute and indispensable.24 Consequently, the effect of non-compliance with the
requirement of the Statute is simply that no action can be enforced unless the requirement is
complied with.25 Clearly, the form required is for evidentiary purposes only. Hence, if the parties
permit a contract to be proved, without any objection, it is then just as binding as if the Statute has
been complied with.26

The purpose of the Statute is to prevent fraud and perjury in the enforcement of obligations
depending for their evidence on the unassisted memory of witnesses, by requiring certain
enumerated contracts and transactions to be evidenced by a writing signed by the party to be
charged.27
However, for a note or memorandum to satisfy the Statute, it must be complete in itself and cannot
rest partly in writing and partly in parol. The note or memorandum must contain the names of the
parties, the terms and conditions of the contract, and a description of the property sufficient to render
it capable of identification.28 Such note or memorandum must contain the essential elements of the
contract expressed with certainty that may be ascertained from the note or memorandum itself, or
some other writing to which it refers or within which it is connected, without resorting to parol
evidence.29

Contrary to the Court of Appeals’ conclusion, the exchange of correspondence between the parties
hardly constitutes the note or memorandum within the context of Article 1403 of the Civil Code.
Rossi’s letter dated 11 June 1990, heavily relied upon by respondents, is not complete in itself. First,
it does not indicate at what price the shares were being sold. In paragraph (5) of the letter,
respondents were supposed to submit their final offer in U.S. dollar terms, at that after the
completion of the due diligence process. The paragraph undoubtedly proves that there was as yet
no definite agreement as to the price. Second, the letter does not state the mode of payment of the
price. In fact, Litonjua was supposed to indicate in his final offer how and where payment for the
shares was planned to be made.30

Evidently, the trial court’s dismissal of the complaint on the ground of unenforceability under the
Statute of Frauds is warranted.31

Even if we were to consider the letters between the parties as a sufficient memorandum for
purposes of taking the case out of the operation of the Statute the action for specific performance
would still fail.

A contract is defined as a juridical convention manifested in legal form, by virtue of which one or
more persons bind themselves in favor of another, or others, or reciprocally, to the fulfillment of a
prestation to give, to do, or not to do.32 There can be no contract unless the following requisites
concur: (a) consent of the contracting parties; (b) object certain which is the subject matter of the
contract; (c) cause of the obligation which is established.33Contracts are perfected by mere consent,
which is manifested by the meeting of the offer and the acceptance upon the thing and the cause
which are to constitute the contract.34

Specifically, in the case of a contract of sale, required is the concurrence of three elements, to wit:
(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.35 Such contract is
born from the moment there is a meeting of minds upon the thing which is the object of the contract
and upon the price.36

In general, contracts undergo three distinct stages, to wit: negotiation; perfection or birth; and
consummation. Negotiation begins from the time the prospective contracting parties manifest their
interest in the contract and ends at the moment of agreement of the parties. Perfection or birth of the
contract takes place when the parties agree upon the essential elements of the contract.
Consummation occurs when the parties fulfill or perform the terms agreed upon in the contract,
culminating in the extinguishment thereof.37

A negotiation is formally initiated by an offer. A perfected promise merely tends to insure and pave
the way for the celebration of a future contract. An imperfect promise (policitacion), on the other
hand, is a mere unaccepted offer.38Public advertisements or solicitations and the like are ordinarily
construed as mere invitations to make offers or only as proposals. At any time prior to the perfection
of the contract, either negotiating party may stop the negotiation.39The offer, at this stage, may be
withdrawn; the withdrawal is effective immediately after its manifestation, such as by its mailing and
not necessarily when the offeree learns of the withdrawal.40

An offer would require, among other things, a clear certainty on both the object and the cause or
consideration of the envisioned contract. Consent in a contract of sale should be manifested by the
meeting of the offer and the acceptance upon the thing and the cause which are to constitute the
contract. The offer must be certain and the acceptance absolute. A qualified acceptance constitutes
a counter-offer.41

Quite obviously, Litonjua’s letter dated 21 May 1990, proposing the acquisition of the Phimco shares
for US$36 million was merely an offer. This offer, however, in Litonjua’s own words, "is understood
to be subject to adjustment on the basis of an audit of the assets, liabilities and net worth of Phimco
and its subsidiaries and on the final negotiation between ourselves."42

Was the offer certain enough to satisfy the requirements of the Statute of Frauds? Definitely not.

Litonjua repeatedly stressed in his letters that they would not be able to submit their final bid by 30
June 1990.43With indubitable inconsistency, respondents later claimed that for all intents and
purposes, the US$36 million was their final bid. If this were so, it would be inane for Litonjua to state,
as he did, in his letter dated 28 June 1990 that they would be in a position to submit their final bid
only on 17 July 1990. The lack of a definite offer on the part of respondents could not possibly serve
as the basis of their claim that the sale of the Phimco shares in their favor was perfected, for one
essential element of a contract of sale was obviously wanting—the price certain in money or its
equivalent. The price must be certain, otherwise there is no true consent between the
parties.44 There can be no sale without a price.45 Quite recently, this Court reiterated the long-
standing doctrine that the manner of payment of the purchase price is an essential element before a
valid and binding contract of sale can exist since the 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.46

Granting arguendo, that the amount of US$36 million was a definite offer, it would remain as a mere
offer in the absence of evidence of its acceptance. To produce a contract, there must be
acceptance, which may be express or implied, but it must not qualify the terms of the offer.47 The
acceptance of an offer must be unqualified and absolute to perfect the contract.48 In other words, it
must be identical in all respects with that of the offer so as to produce consent or meeting of the
minds.49

Respondents’ attempt to prove the alleged verbal acceptance of their US$36 million bid becomes
futile in the face of the overwhelming evidence on record that there was in the first place no meeting
of the minds with respect to the price. It is dramatically clear that the US$36 million was not the
actual price agreed upon but merely a preliminary offer which was subject to adjustment after the
conclusion of the audit of the company finances. Respondents’ failure to submit their final bid on the
deadline set by petitioners prevented the perfection of the contract of sale. It was not perfected due
to the absence of one essential element which was the price certain in money or its equivalent.

At any rate, from the procedural stand point, the continuing objections raised by petitioners to the
admission of parol evidence50 on the alleged verbal acceptance of the offer rendered any evidence
of acceptance inadmissible.

Respondents’ plea of partial performance should likewise fail. The acquisition audit and submission
of a comfort letter, even if considered together, failed to prove the perfection of the contract. Quite
the contrary, they indicated that the sale was far from concluded. Respondents conducted the audit
as part of the due diligence process to help them arrive at and make their final offer. On the other
hand, the submission of the comfort letter was merely a guarantee that respondents had the
financial capacity to pay the price in the event that their bid was accepted by petitioners.

The Statute of Frauds is applicable only to contracts which are executory and not to those which
have been consummated either totally or partially.51 If a contract has been totally or partially
performed, the exclusion of parol evidence would promote fraud or bad faith, for it would enable the
defendant to keep the benefits already derived by him from the transaction in litigation, and at the
same time, evade the obligations, responsibilities or liabilities assumed or contracted by him
thereby.52 This rule, however, is predicated on the fact of ratification of the contract within the
meaning of Article 1405 of the Civil Code either (1) by failure to object to the presentation of oral
evidence to prove the same, or (2) by the acceptance of benefits under them. In the instant case,
respondents failed to prove that there was partial performance of the contract within the purview of
the Statute.

Respondents insist that even on the assumption that the Statute of Frauds is applicable in this case,
the trial court erred in dismissing the complaint altogether. They point out that the complaint presents
several causes of action.

A close examination of the complaint reveals that it alleges two distinct causes of action, the first is
for specific performance53 premised on the existence of the contract of sale, while the other is solely
for damages, predicated on the purported dilatory maneuvers executed by the Phimco
management.54

With respect to the first cause of action for specific performance, apart from petitioners’ alleged
refusal to honor the contract of sale—which has never been perfected in the first place—
respondents made a number of averments in their complaint all in support of said cause of action.
Respondents

claimed that petitioners were guilty of promissory estoppel,55 warranty breaches56 and tortious
conduct57 in refusing to honor the alleged contract of sale. These averments are predicated on or at
least interwoven with the existence or perfection of the contract of sale. As there was no such
perfected contract, the trial court properly rejected the averments in conjunction with the dismissal of
the complaint for specific performance.

However, respondents’ second cause of action due to the alleged malicious and deliberate delay of
the Phimco management in the delivery of documents necessary for the completion of the audit on
time, not being based on the existence of the contract of sale, could stand independently of the
action for specific performance and should not be deemed barred by the dismissal of the cause of
action predicated on the failed contract. If substantiated, this cause of action would entitle
respondents to the recovery of damages against the officers of the corporation responsible for the
acts complained of.

Thus, the Court cannot forthwith order dismissal of the complaint without affording respondents an
opportunity to substantiate their allegations with respect to its cause of action for damages against
the officers of Phimco based on the latter’s alleged self-serving dilatory maneuvers.

WHEREFORE, the petition is in part GRANTED. The appealed Decision is

hereby MODIFIED insofar as it declared the agreement between the parties enforceable under the
Statute of Frauds. The complaint before the trial court is ordered DISMISSED insofar as the cause of
action for specific

performance is concerned. The case is ordered REMANDED to the trial court for further proceedings
with respect to the cause of action for damages as above specified.

SO ORDERED.

3. Unenforceable Contract, NCC 1403 – 1408, 1317

PNB v Phil. Vegetable Oil, 49 Phil 857 (1927)

The broad view is that the Statute of Frauds applies only to agreements not to be performed on either
side within a year from the making thereof. Agreements to be fully performed on one side within the
year are taken out of the operation of the statute. The Statute of Frauds was enacted for the purpose of
preventing frauds. It should not be made the instrument to further them. As intervenor's theory
proceeds on the assumption that Mr. Whitaker has entirely performed his part of the agreement, equity
would argue that all evidence be admitted to prove the alleged agreement. Surely since the Statute of
Frauds was enacted for the purpose of preventing frauds, it should not be made the instrument to
further them.

Carbonnel v Poncio, 103 Phil 655 (1958)

The Statute of Frauds is applicable only to executory contracts, not to contracts that are totally or
partially performed. The reason is simple. In executory contracts there is a wide field for fraud because,
unless they be in writing there is no palpable evidence of the intention of the contracting parties.
However, if a contract has been totally or partially performed, the exclusion of parol evidence would
promote fraud or bad faith, for it would enable the defendant to keep the benefits already derived by
him from the transaction in litigation, and, at the same time, evade the obligations, responsibilities or
liabilities assumed or contracted by him thereby. So that when the party concerned has pleaded partial
performance, such party is entitled to a reasonable chance to ,establish by parol evidence the truth of
this allegation, as well as the contract itself. "The recognition of the exceptional effect of part
performance in taking an oral contract out of the statute of frauds involves the principle that oral
evidence is admissible in such cases to prove both the contract and the part performance of the
contract"
Limketkai v CA, March 29, 1996

Moreover, petitioner’s case failed to hurdle the strict requirements of the Statute of Frauds. In this case
there is a patent absence of any deed of sale categorically conveying the subject property from
respondent BPI to petitioner. Exhibits “E,” “G,” “I” which petitioner claims as proof of perfected contract
of sale between it and respondent BPI were not subscribed by the party charged and did not constitute
the memoranda or notes that the law speaks of. To consider them sufficient compliance with the
Statute of Frauds is to betray the avowed purpose of the law to prevent fraud and perjury in the
enforcement of obligations.

“In adherence to the provisions of the Statute of Frauds, the examination and evaluation of the notes or
memoranda adduced by the appellee was confined and limited to within the four corners of the
documents. To go beyond what appears on the face of the documents constituting the notes or
memoranda, stretching their import beyond what is written in black and white, would certainly be
uncalled for, if not violative of the Statute of Frauds and opening the doors to fraud, the very evil sought
to be avoided by the statute. In fine, considering that the documents adduced by the appellee do not
embody the essentials of the contract of sale aside from not having been subscribed by the party
charged or its agent, the transaction involved definitely falls within the ambit of the Statute of Frauds.

Dissenting Opinion (Melo): The contention of respondents that a formal deed of sale is essential before
the contract may be perfected and proved indicates a misapprehension of the Statute of Frauds. As
emphasized in the decision, a sale of land is valid regardless of the form it may have been entered into
(Claudel vs. Court of Appeals, 199 SCRA 113, 199 [1991]). The fact that the deed of sale still had to be
signed and notarized does not mean that no contract was perfected. If the law requires a document or
special legal form, the contracting parties may require each other to observe the formality after the
contract is perfected.

Even assuming for purposes of argument that the perfected contract infringes the Statute of Frauds, in
Abrenica vs. Gonda (34 Phil. 379 [1916]), this Court ruled that the questioned contract is ratified when
the defense fails to object or asks questions on cross-examination. As decided in Abrenica and later
cases such as Talosig vs. Vda. de Nieba (43 SCRA 472 [1972]), assuming that parole evidence was initially
inadmissible, the same became competent and admissible because of the cross-examination. The cross-
examination on the contract is deemed a waiver of the defense of the statute of frauds.

Swedish Match v CA, 441 SCRA 1 (2004)

The Statute of Frauds embodied in Article 1403, paragraph (2), of the Civil Code requires certain
contracts enumerated therein to be evidenced by some note or memorandum in order to be
enforceable. The term “Statute of Frauds” is descriptive of statutes which require certain classes of
contracts to be in writing. The Statute does not deprive the parties of the right to contract with respect
to the matters therein involved, but merely regulates the formalities of the contract necessary to render
it enforceable. Evidence of the agreement cannot be received without the writing or a secondary
evidence of its contents. The Statute, however, simply provides the method by which the contracts
enumerated therein may be proved but does not declare them invalid because they are not reduced to
writing. By law, contracts are obligatory in whatever form they may have been entered into, provided all
the essential requisites for their validity are present. However, when the law requires that a contract be
in some form in order that it may be valid or enforceable, or that a contract be proved in a certain way,
that requirement is absolute and indispensable. Consequently, the effect of non-compliance with the
requirement of the Statute is simply that no action can be enforced unless the requirement is complied
with. Clearly, the form required is for evidentiary purposes only. Hence, if the parties permit a contract
to be proved, without any objection, it is then just as binding as if the Statute has been complied with.

FACTS: Swedish vs. ca

Swedish Match AB (SMAB) had 3 subsidiary corporations in the Philippines, all organized under
Philippine laws, to wit: Phimco Industries (Phimco), Provident Tree Farms (PTF), and OTT/Louie. STORA,
the parent company of SMAB, decided to sell SMAB of Sweden and its worldwide match, lighter, and
shaving products operation to Swedish Match NV (SMNV).

Ed Enriquez, VP of Swedish Match Sociedad Anonimas (SMSA) which is SMAB’s management company,
was held under strict instructions that the sale of Phimco shares should be executed on or before 30
June 1990 in view of the tight loan covenants of SMNV. He came to the Philippines and informed the
Philippine financial and business circles that the Phimco shares were for sale. Several interested parties
tendered offers to acquire the Phimco shares one of which was private respondent, Antonio Litonjua,
the president and general manager of ALS Management & Development Corporation.

On November 1989, Litonjua submitted to SMAB a firm offer to buy all of the latter’s shares in Phimco
and all of Phimco’s shares in PTF and OTT for P750,000,000.00. However, CEO Massimo Rossi informed
respondents that their price offer was below their expectations. Again, on May 1990, Litonjua offered to
buy the disputed shares, excluding the lighter division for US$36M. Rossi wrote that ALS should
undertake a due diligence process or pre-acquisition audit and review of the draft contract for the
Match and Forestry activities of Phimco at ALS convenience. 2 days prior to the deadline for submission
of the final bid, Litonjua told Rossi that they would be unable to submit the final offer by 30 June 1990,
considering that the acquisition audit of Phimco and the review of the draft agreements had not yet
been completed. Thus, Enriquez sent notice to Litonjua that they would be constrained to entertain bids
from other parties in view of Litonjua’s failure to make a firm commitment for the shares of Swedish
Match. In his letter, Litonjua asserted that they submitted the best bid and that they were already
finalizing the terms of the sale.

More than 2 months from receipt of Litonjua’s last letter, Enriquez advised the former that the
proposed sale of SMAB’s shares in Phimco with local buyers did not materialize. Enriquez then invited
Litonjua to resume negotiations with SMAB for the sale of Phimco shares. He indicated that SMAB would
be prepared to negotiate with ALS on an exclusive basis for a period of 15 days from 26 September 1990
subject to the terms contained in the letter. Additionally, Enriquez clarified that if the sale would not be
completed at the end of the 15-day period, SMAB would enter into negotiations with other buyers.
Litonjua emphasized that the new offer constituted an attempt to reopen the already perfected contract
of sale of the shares in his favor. CA ruled that the series of written communications between
petitioners and respondents collectively constitute a sufficient memorandum of their agreement under
Article 1403 of the Civil Code. Thus, letters exchanged by and between the parties, taken together, were
sufficient to establish that an agreement to sell the disputed shares to respondents was reached. On the
other hand, petitioners stress that Litonjua made it clear in his letters that the quoted prices were
merely tentative and still subject to further negotiations between him and the seller. They point out that
there was no meeting of the minds on the essential terms and conditions of the sale because SMAB did
not accept respondent’s offer that consideration would be paid in Philippine pesos. They argued as well
that the foregoing circumstances prove that they failed to reach an agreement on the sale of the Phimco
shares.

ISSUE:

Was there a perfected contract of sale with respect to Phimco shares?

HELD:
No. There was no perfected contract of sale since Litonjua’s letter of proposing acquisition of the
Phimco shares for US$36M was merely an offer. Consent in a contract of sale should be manifested by
the meeting of the offer and acceptance upon the thing and the cause which are to constitute the
contract. The lack of a definite offer on the part of respondents could not possibly serve as the basis of
their claim that the sale of the Phimco shares in their favor was perfected, for one essential element of a
contract of sale was obviously wanting the price certain in money or its equivalent. The price must be
certain, otherwise there is no true consent between the parties. Respondents’ failure to submit their
final bid on the deadline set by petitioners prevented the perfection of the contract of sale. It was not
perfected due to the absence of one essential element which was the price certain in money or its
equivalent.