G.R. No.

127520 February 9, 2007

AURORA FE B. CAMACHO, Petitioner,

vs.
COURT OF APPEALS and ANGELINO BANZON, Respondents.

DECISION

CALLEJO, SR., J.:

This is a Petition for Review on Certiorari of the Decision1 of the Court of Appeals (CA) in CA-G.R.
CV No. 41268 affirming with modification the Decision2 of the Regional Trial Court (RTC) of Balanga,
Bataan, Branch 1.

The Antecedents

Camacho was the owner of Lot 261, a 7.5-hectare parcel of land situated in Balanga, Bataan and
covered by Transfer Certificate of Title No. T-10,185.

On July 14, 1968, Camacho and respondent Atty. Angelino Banzon entered into a contract for legal
services denominated as a "Contract of Attorney’s Fee."3 The agreement is worded as follows:

KNOW ALL MEN BY THESE PRESENTS:

That we, Aurora B. Camacho, widow, of legal age and resident of Balanga, Bataan, and Angelino M.
Banzon, have agreed on the following:

That I, Aurora B. Camacho is the registered owner of Lot No. 261 Balanga Cadastre, has secured
the legal services of Atty. Angelino M. Banzon to perform the following:

1. To negotiate with the Municipal Government of Balanga so that the above-

mentioned lot shall be the site of the proposed Balanga Public Market;

2. To sell 1200 sq. m. for the sum of TWENTY- FOUR THOUSAND PESOS
(P24,000.00) right at the Market Site;

3. And to perform all the legal phase incidental to this work.

That for and in consideration of this undertaking, I bind myself to pay Atty. Angelino M. Banzon FIVE
THOUSAND SQUARE METERS (5000) of the said lot, for which in no case I shall not be
responsible for payment of income taxes in relation hereto, this area located also at market site.

That I, Angelino M. Banzon, is willing to undertake the above-enumerated undertaking.

WITNESS our hands this 14 of July, 1968, in Balanga, Bataan.

(Signed) (Signed)
ANGELINO M. BANZON AURORA B. CAMACHO

Pursuant to the agreement, Atty. Banzon, on even date, sent a letter-proposal4 to the municipal
council offering three sites for the proposed public market which included Lot 261. Still on the same
date, Camacho executed a Special Power of Attorney5 giving Atty. Banzon the authority to execute
and sign for her behalf a Deed of Donation transferring a 17,000-sq-m portion of Lot 261 to the
municipal government of Balanga, Bataan. The Deed of Donation was executed, which was later
accepted by the local government unit in Municipal Resolution No. 127.6

Silvestre Tuazon had been an agricultural tenant in Lot 261 since World War II. On August 22, 1968,
Tuazon and Camacho entered into an "Agreement with Voluntary Surrender"7 where Tuazon
voluntarily surrendered his right as a tenant of the landholding. Despite the agreement, however,
Tuazon plowed a portion of the lot and planted palay without Camacho’s consent. Since Tuazon
refused to vacate the premises, Camacho and the Municipality of Balanga, through then Acting
Mayor Victor Y. Baluyot, filed a complaint8 for forcible entry on November 18, 1969 before the
Municipal Trial Court (MTC) of Balanga, Bataan. The complaint was docketed as Civil Case No. 424.
The case was eventually decided in favor of the plaintiffs and Tuazon was ordered to vacate the lot.
On appeal to the RTC, trial de novo ensued, in view of the absence of the transcript of stenographic
notes of the proceedings before the MTC. The RTC issued a preliminary mandatory injunction
ordering Tuazon to "discontinue entering the subject premises until further orders of the court."9

On September 1, 1973, the plaintiffs, through Atty. Banzon, and Tuazon entered into an "Agreement
to Stay Court Order."10 Under the agreement, Tuazon was allowed to cultivate specific portions of the
property as indicated in a sketch plan which the parties prepared, and to use the market’s water
supply to irrigate his plants within the lot subject to the market’s preferential rights. The parties also
contracted that "the agreement shall in no way affect the merits of Civil Case No. 3512 and CAR
Case No. 520-B’73; and that no part shall be construed as impliedly creating new tenancy
relationship."

On December 6, 1973, Camacho filed a Manifestation11 in Civil Case No. 3512 declaring that she
had terminated the services of Atty. Banzon and had retained the services of new counsel, Atty.
Victor De La Serna.

On December 17, 1973, Atty. Banzon filed a Complaint-in-Intervention12 in Civil Case No. 3512. He
alleged that Camacho had engaged his services as counsel in CAR Case No. 59 B’65 (where a
favorable decision was rendered) and in Civil Case No. 3512. Under the Contract of Attorney’s Fee
which they had both signed, Camacho would compensate him with a 5,000-sq-m portion of Lot 261
in case he succeeds in negotiating with the Municipality of Balanga in transferring the projected new
public market which had been set for construction at the Doña Francisca Subdivision, all legal
requirements having been approved by a municipal resolution, the Development Bank of the
Philippines, and the National Urban Planning Commission. Atty. Banzon further claimed that as a
consequence of the seven cases filed by/against Camacho, she further bound herself orally to give
him a 1,000-sq-m portion of Lot 261 as attorney’s fee. He had also acquired from Camacho by
purchase an 80-sq-m portion of the subject lot as evidenced by a Provisional Deed of Sale13 and
from third parties an 800-sq-m portion. He further declared that his requests for Camacho to deliver
the portions of the subject lot remained unheeded, and that of the seven cases14 he had handled for
Camacho, four had been decided in her favor while three are pending. Atty. Banzon thus prayed for
the following relief:

1. Ordering the ejectment of Defendant Silvestre Tuazon, in so far as (6880) square meters is
concerned, INTERVENOR’S claim over Lot 261;

2. The First Cause of Action, ordering the Plaintiff Aurora B. Camacho to deliver (5000)
square meters as per Annex "A"; EIGHTY square meters as per Annex "C"; EIGHT
 HUNDRED (800) square meters which the INTERVENOR purchased from third parties;

3. On the Second Cause of Action, ordering the Plaintiff Aurora B. Camacho to pay the sum of
P8,820.00, corresponding to the lease rental of (5880) square meters a month, counted from
July, 1973, until the same is delivered to the INTERVENOR;

4. On the Third Cause of Action, ordering the Plaintiff Aurora B. Camacho to deliver (1000)
square meters, as attorney’s fee in handling seven (7) cases;

5. Ordering the Plaintiff Aurora B. Camacho and Defendant Silvestre Tuazon to pay jointly and
severally, the sum of P5,000.00 for attorney’s fee for legal services to the INTERVENOR; cost
and litigation expenses of P1,000. until the case is terminated.

6. To grant such relief, just and equitable in the premises.15

Camacho opposed16 Atty. Banzon’s motion on the ground that the admission of the complaint-in-
intervention would merely serve to delay the case. She also claimed that his interest could be fully
ventilated in a separate case for recovery of property or for damages.

On April 5, 1974, the RTC granted17 the motion and subsequently admitted the complaint-in-
intervention.

On December 31, 1973, Atty. Banzon and Tuazon entered into the following amicable settlement:

1. That for and in consideration of the sum of TWO THOUSAND PESOS (P2,000.00),
Philippine currency, which have been received from the INTERVENOR and acknowledged to
have been received by the Defendant Silvestre Tuazon, the latter hereby acknowledges,
waives his defenses against the claim of the INTERVENOR ANGELINO M. BANZON over a
portion of Lot No. 261, portion of the lot in question, to the extent of SIX THOUSAND EIGHT
HUNDRED EIGHTY (6880) SQUARE METERS as claimed and contained in the COMPLAINT
IN INTERVENTION and to give effect to this AMICABLE SETTLEMENT hereby surrenders
the actual possession of the said portion, subject to the approval of this Hon. Court, in favor of
the INTERVENOR;

2. That the herein parties to this AMICABLE SETTLEMENT waive and renounce whatever
rights or claims, including future claims that each may have against each other;

3. That the parties herein bind themselves to comply with the conditions of the foregoing
settlement;

4. That the foregoing AMICABLE SETTLEMENT was realized and achieved between the
herein parties, thru the prior intercession of the Defendant’s counsel Atty. Narciso V. Cruz, Jr.

WHEREFORE, it is respectfully prayed that the foregoing AMICABLE SETTLEMENT be approved

and made as the basis of this Hon. Court’s decision between the herein INTERVENOR and
DEFENDANT Silvestre Tuazon.18

In Answer19 to the complaint-in-intervention, Camacho denied that she solicited the services of Atty.
Banzon to facilitate the transfer of the site of the proposed public market; in fact, it was Atty. Banzon
who approached and convinced her to donate a portion of the lot to the municipality of Balanga. He
assured her that the municipality of Balanga planned to relocate the public market and was scouting
for a new location. He also told her that her lot appeared to be the most ideal location, and that he
would take care of all the legal problems.

Camacho admitted, however, that she signed the Contract of Attorney’s Fee but only upon the
request of Atty. Banzon. He told her that the document would be shown to the municipal councilors
"for formality’s sake" to prove his authority to act for and in behalf of Camacho. It was never intended
to bind her to pay attorney’s fees.20 She further denied that she agreed to give to Atty. Banzon 1,000
sq m for handling the seven cases; they never discussed attorney’s fees. The cases stemmed from
his assurance that he would take care of any legal problem resulting from the donation of her
property. She was not even a party in some of the cases cited by Atty. Banzon.21 Lastly, she denied
that he had made demands to deliver the mentioned portions of the property.22

In his Reply,23 Atty. Banzon countered that the Balanga Municipal Council Resolution No. 128
transferring the market site to Camacho’s property was enacted precisely because of his letter-
proposal24 to the municipal council.

On August 14, 1977, Camacho and Tuazon entered into a Compromise Agreement,25 whereby
Camacho agreed to transfer a 1,000-sq-m portion of Lot 261-B in favor of Tuazon; for his part,
Tuazon moved to dismiss Civil Case No. 3805 and to remove all the improvements outside the
portion of the property which Camacho had agreed to convey to him. Thus, the RTC rendered a
partial decision26 approving the compromise agreement.

On September 12, 1978, Camacho filed a Motion to Dismiss27 the Complaint-in-Intervention filed by
Atty. Banzon on the ground that the jurisdiction of the court to try the case ceased to exist because
the principal action had been terminated. The RTC denied the motion in its Order28 dated March 16,
1979. It held that Atty. Banzon had an interest over the subject property which he had to protect and
that the compromise agreement between Camacho and Tuazon did not include him. Moreover, the
dismissal of the intervention would not achieve its purpose of avoiding multiplicity of suits. The
propriety of the denial of Camacho’s motion to dismiss was finally settled by this Court in Camacho
v. Court of Appeals29 where this Court affirmed the denial of the motion.

After trial on the merits, the RTC rendered a Decision30 on September 1, 1992 in favor of Atty.
Banzon. The fallo reads:

ACCORDINGLY, judgment is hereby rendered:

1. Ordering plaintiff Aurora B. Camacho under the Contract of Attorney’s Fees, [to deliver]
5000 square meters of the subject landholding, Lot 261-B-1, covered by Transfer Certificate of
Title No. T-76357, or any other derivative sublots of the original Lot 261-B;

2. Declaring the dismissal of said intervenor from the case at bar as unjustified;

3. Ordering said plaintiff to pay and deliver to said intervenor 1000 square meters of the
property in question, Lot 261-B-1 or any other derivative sublots of the original Lot 261-B in
case of deficiency, for legal services rendered in seven (7) cases;

4. Directing said plaintiff to deliver to said intervenor, under a Provisional Deed of Sale, 80
square meters of the subject property, Lot 261-B-1 or any other derivative sublots of the
 original Lot 261 in case of deficiency, after payment of the balance of the purchase price;

5. Ordering said plaintiff to execute the corresponding Deed of Sale in favor of said intervenor
for the aforesaid 80 square meters;

6. Condemning said plaintiff to pay moral damages to said intervenor in the amount
of P100,000.00; attorney’s fees in the sum of P30,000.00; and the costs of the suit.

SO ORDERED.31

According to the RTC, Camacho had indeed read the contract and freely affixed her signature
thereon. Applying the provisions of Section 7 (now section 9), Rule 13032 of the Rules of Court, it
concluded that the terms of the contract were embodied in the document itself. Moreover, Camacho
did not bother to pay for all the other cases being handled by Atty. Banzon because she knew that
she had agreed already to pay attorney’s fees. The court likewise found that applying the provisions
of Sections 2433 and 26,34 Rule 138 of the Rules of Court, the area of the lot agreed upon as
attorney’s fees appears to be a reasonable compensation for his services. Since Atty. Banzon
handled other cases subsequent to the execution of the contract of attorney’s fees, the additional
1,000-sq-m lot which the parties had orally agreed upon is proper. The RTC declared that Atty.
Banzon was entitled to be compensated based on quantum meruit since his dismissal from the
present case was unjustified. It also held that Camacho was obliged to execute the necessary public
instrument covering the 80-sq-m portion of the lot which she had sold to Atty. Banzon. It went further
and awarded moral damages to Atty. Banzon on account of the mental anguish and besmirched
reputation he had suffered.

On October 8, 1992, Atty. Banzon filed a Motion for Execution Pending Appeal.35 Camacho, on the
other hand, filed a Notice of Appeal. Atty. Banzon filed a motion to dismiss on the ground that since
the case originated from the municipal court, it should be assailed via petition for review. On
November 20, 1992, the court issued an Order36 denying the motion for execution pending appeal for
failure to state good reasons therefor. It likewise granted the notice of appeal on the ground that the
complaint-in-intervention originated from the RTC and not from the MTC; under the factual backdrop
of the case, ordinary appeal is proper.

On appeal to the CA, Camacho raised the following errors:

I.

THE LOWER COURT ERRED IN ALLOWING JUDGE ABRAHAM VERA TO SIGN THE
DECISION IN THE INSTANT CASE, CONSIDERING THAT JUDGE VERA HAD LONG
CEASED TO BE THE JUDGE OF THAT COURT AND WAS THE PRESIDING JUDGE OF
BRANCH 90 OF THE REGIONAL TRIAL COURT OF QUEZON CITY WHEN THE INSTANT
DECISION WAS SIGNED ON SEPTEMBER 1, 1992.

II.

THE LOWER COURT ERRED IN UPHOLDING THE VALIDITY AND DUE EXECUTION OF
CONTRACT EXH. "C" AND IN ORDERING PLAINTIFF TO DELIVER TO INTERVENOR
5,000 SQUARE METERS OF LOT 261-B-1, T.C.T. T-76357, CONSIDERING THAT THIS
LOT IS NOT SPECIFIED IN EXH. "C".
 III.

THE LOWER COURT ERRED IN DECLARING THAT INTERVENOR’S DISCHARGE AS

PLAINTIFF’S COUNSEL IN THE CASE AT BAR WAS UNJUSTIFIED, IN AWARDING
INTERVENOR MORAL DAMAGES, AND IN DISMISSING PLAINTIFFS’ COUNTERCLAIMS.

IV.

THE LOWER COURT ERRED IN AWARDING INTERVENOR 1,000 SQUARE METERS OF

PLAINTIFF’S LAND FOR HIS HANDLING OF ALLEGED SEVEN CASES.

V.

THE LOWER COURT ERRED IN ORDERING PLAINTIFF TO EXECUTE A FINAL DEED OF

SALE FOR 80 SQUARE METERS OUT OF LOT 261-B-1, CONSIDERING THAT LOT 261-B-
1 IS NOT SPECIFIED IN THE PROVISIONAL DEED OF SALE.37

On October 29, 1996, the CA rendered a decision38 affirming with modification the RTC ruling. The
fallo reads:

WHEREFORE, foregoing considered, the appealed decision is hereby AFFIRMED with modification
requiring plaintiff Camacho to DELIVER 5,000 sq.m. and 1,000 sq. m. of Lot 261-B-1 to Intervenor as
his attorney’s fee and 80 sq. m. also from Lot 261 subject to the conditions embodied under no. 4 of
the dispositive portion of the assailed decision all within thirty (30) days from the finality of this
decision.

SO ORDERED.39

The CA held that all the elements of a valid contract were present: Camacho (a dentistry graduate
and an experienced businesswoman conversant in English) cannot plead that she did not
understand the undertaking she had entered into; the object of the contract is certain since the genus
of the object was expressed although there was no determination of the individual specie; and the
cause of the obligation – to negotiate and offer a site where the public market will be constructed – is
not unlawful and cannot be considered as influence peddling. As to the alleged violation of the terms
of the special power of attorney, the court held that Camacho was estopped from claiming damages
by reason thereof.

The CA likewise found the award of moral damages to be in order; that the discharge of Atty. Banzon
as counsel for Camacho was not justified and his discharge does not in any way deprive him of his
right to attorney’s fees. Lastly, the CA held that the RTC erred in requiring Camacho to deliver Lot
261-B-1, since Atty. Banzon cannot demand a portion of superior quality in the same way that
appellant cannot transfer an inferior quality.

On December 3, 1996, the CA issued a Resolution40 instituting petitioner Aurora Fe Camacho as

substitute for the deceased Aurora B. Camacho.

Atty. Banzon filed a Motion for Partial Reconsideration of the CA Decision, as well as a Motion to
Declare Decision Final insofar as Camacho was concerned. On the other hand, Camacho moved to
cancel the notice of lis pendens. In the meantime, petitioner had filed the petition before this Court.
Thus, the CA no longer acted on the motions on the ground that it had already lost jurisdiction over
the case.41

In the present petition, petitioner raises the following issues:

1. WHETHER OR NOT INTERVENOR CAN BE AWARDED A FAVORABLE JUDGMENT

DESPITE ABSENCE OF ANY FINDINGS OF FACT IN THE DECISION WHICH SHOW THAT
HE WAS ABLE TO PROVE THE (SIC) HIS MATERIAL ALLEGATIONS UPON WHICH HE
BASIS (SIC) HIS CLAIM UNDER CONTRACT OF ATTORNEY’S FEE, EXH. "C,"
ESPECIALLY PAR. 7 OF THE COMPLAINT-IN-INTERVENTION.

CAN THE BURDEN OF PROVING THE AND (SIC) DUE EXECUTION OF CONTRACT EXH.
"C" BE SHIFTED TO PLAINTIFF CAMACHO WITHOUT VIOLATING SECT. 1, RULE 131, OF
THE RULES OF COURT?

2. DID THE COURT OF APPEALS CORRECTLY APPLY THE PROVISION OF ART. 1246
OF THE CIVIL CODE TO THE INSTANT CASE IN RULING THAT CONTRACT EXH. "C" IS
VALID AS TO OBJECT?

WILL THE DECISION REQUIRING THE DELIVERY OF 5,000 SQUARE METERS OF LOT
261 BASED ON THE SAID ART. 1246, IN WHICH INTERVENOR CANNOT DEMAND A
THING OF SUPERIOR QUALITY AND NEITHER CAN PLAINTIFF CAMACHO DELIVER A
THING OF INFERIOR QUALITY, BE SUSCEPTIBLE OF IMPLEMENTATION WITHOUT
NEED OF A NEW CONTRACT OR AGREEMENT BETWEEN THE PARTIES?

IF SO, WILL THAT NOT ALL THE MORE PROVE THAT TE OBJECT OF CONTRACT EXH.
"C" IS INDETERMINATE PURSUANT [TO] ART. 1349 OF THE CIVIL CODE?

3. WHETHER OR NOT THE COURT OF APPEALS WAS IN A POSITION TO PROCLAIM

THE LEGALITY OR ILLEGALITY OF THE ALLEGED CONTRACT WITHOUT FIRST
REVEALING OR SETTING FORTH THE REAL NATURE OF THIS OR THESE
UNDERTAKINGS BASED ON THE ALLEGATIONS AND TESTIMONIES OF INTERVENOR.
HENCE, WHETHER OR NOT THE TWO UNDERTAKINGS IN CONTRACT EXH. "C" ARE
LAWFUL.

4. WHETHER OR NOT THE COURT OF APPEALS COMMIT A GRAVE ABUSE OF

DISCRETION BY TREATING LIKE A MATTER OUT OF RECORD THE ALLEGED
REASONS OF PLAINTIFF CAMACHO FOR DISMISSING INTERVENOR AS HER
COUNSEL IN THE CASE AT BAR, WHICH WERE ENUMERATED AND DISCUSSED ON
PAGES 42-60 OF HER APPELLANT’S BRIEF, ANNEX "B," AND WHICH WERE
PRINCIPALLY AND SPECIFICALLY COVERED IN HER THIRD ASSIGNMENT OF ERRORS
AND CONSIDERING THAT ONE OF THESE ALLEGED REASONS ALSO CONSTITUTE
PLAINTIFF CAMACHO’S COUNTERCLAIM FOR WHICH SHE IS SEEKING MORAL
DAMAGES OF P100,000.

DID NOT THE COURT OF APPEALS COMMIT GRAVE ABUSE OF DISCRETION IN

REPRESENTING PLAINTIFF CAMACHO’S THIRD ASSIGNED ERROR AS REFERRING
MERELY TO THE ISSUE OF WHETHER OR NOT THE AWARD OF MORAL DAMAGES TO
INTERVENOR IS JUSTIFIED.

WAS NOT PLAINTIFF CAMACHO THEREBY DEPRIVED OF HER CONSTITUTIONAL

 RIGHT TO DUE PROCESS OF LAW?

5. WHETHER OR NOT THE AWARD OF 1,000 SQ. M. OF LOT 261 ATTORNEY’S FEE FOR
ALLEGED HANDLING OF SEVEN CASES HAS ANY LEGAL BASIS CONSIDERING THAT
THERE IS NO SHOWING IN THE DECISION THAT THE ORAL CONTRACT ALLEGED BY
INTERVENOR TO BE THE BASIS OF THE SAID ATTORNEY’S FEE WAS DULY POROVEN
(SIC).42

Petitioner argues that the findings of facts in the assailed decision are mere conclusions, without
citation of evidence to support them. She likewise avers that consent was not clearly proven; the
conclusion of the CA was based on the presumption that the document was read prior to being
signed. Petitioner insists that there is no "object certain" to speak of since the exact location of the
subject property cannot be determined; in short, the issue is not the quality of the property but its
identity. Petitioner further asserts that the cause of the contract – pirating of the municipality’s market
project and ejecting the tenant to convert the property into a commercial establishment – is illegal.
She further insists that respondent failed to accomplish the twin objective of ejecting Silvestre
Tuazon and converting the remaining land into a commercial area; thus, he is not entitled to the
5,000-sq-m lot. She further contends that the CA erred in awarding moral damages because
respondent did not ask for it in his complaint-in-intervention. Lastly, she asserts that the CA erred in
affirming the award of the 1,000-sq-m lot pursuant to a verbal contract between Camacho and
respondent, especially considering the prevailing jurisprudence against a lawyer’s acquisition of a
client’s lot in litigation without the latter’s consent.

In his Comment,43 respondent counters that the elements of a valid contract are present: Camacho’s
consent to the contract is evidenced by her signature which was in fact admitted by the latter; that
while it is true that the identity of the 5,000-sq-m portion of Lot 261 has not been specified due to the
absence of the necessary technical descriptions, it is capable of being made determinate without the
need of a new agreement between the parties; as to the validity of the cause of the contract, the
general principle of estoppel applies.

The Ruling of the Court

Article 1305 of the New Civil Code defines a contract as a "meeting of minds between two persons
whereby one binds himself, with respect to the other, to give something or to render some service."
Contracts shall be obligatory in whatever form they may have been entered into, provided all the
essential requisites for their validity are present.44

In general, there are three (3) essential requisites for a valid contract: (1) consent of the contracting
parties; (2) an object certain which is the subject of the contract; and (3) thecause of the obligation
which is established.45

The first element –

Consent of the contracting parties –

Is shown by their signatures on the Contract

Consent is manifested by the meeting of the offer and the acceptance upon the thing and the cause
which are to constitute the agreement.46 In this case, Camacho admitted the existence of the contract
as well as the genuineness of her signature. However, she claimed that she signed only upon the
request of Atty. Banzon, who told her that the document would only be shown to the municipal
councilors ("for formality’s sake") to prove his authority in her behalf. It was never intended to bind
her to pay him attorney’s fees;47 in short, petitioner insists that Camacho had not given her consent
to the contract.

We, however, do not agree. The contract between Camacho and respondent is evidenced by a
written document signed by both parties denominated as Contract of Attorney’s Fee. It is an
established rule that written evidence is so much more certain and accurate than that which rests in
fleeting memory only; that it would be unsafe, when parties have expressed the terms of their
contract in writing, to admit weaker evidence to control and vary the stronger, and to show that the
parties intended a different contract from that expressed in the writing signed by them.48 Moreover,
the moment a party affixes her signature thereon, he or she is bound by all the terms stipulated
therein and is open to all the legal obligations that may arise from their breach.49

In the instant case, Camacho voluntarily signed the document evidencing the contract. Camacho’s
claim that the document was intended only to show respondent’s authority to represent her with
respect to the transaction is flimsy, since a special power of attorney could just as easily have
accomplished that purpose. In fact, Camacho did execute a Special Power of Attorney50 after the
Contract of Attorney’s Fee was executed, and if Camacho were to be believed, the Contract of
Attorney’s Fee should have been immediately canceled thereafter since it was no longer needed. As
correctly held by the CA, Camacho was an experienced businesswoman, a dentistry graduate and is
conversant in the English language. We note that the words and phrases used in the Contract of
Attorney’s Fee are very simple and clear; thus, she cannot plead that she did not understand the
undertaking she had entered into.51 Considering that her undertaking was to part with a 5,000-sq-m
portion of her property, she should have been more vigilant in protecting her rights.

Even assuming that the contract did not reflect the true intention of the parties as to their respective
obligations, it is nevertheless binding. The existence of the written contract, coupled with Camacho’s
admission that the signature appearing thereon was hers, constitute ineluctable evidence of her
consent to the agreement. It cannot be overcome by mere denial and allegations that they did not
intend to be bound thereby. We also note that Camacho did not avail of the remedy of reformation of
the instrument in order to reflect what, according to her, was the true agreement.

Camacho’s consent to the contract was further manifested in the following events that transpired
after the contract was executed: the execution of the agreement with voluntary surrender signed by
Tuazon; the execution of the Deed of Donation where Atty. Banzon was authorized to sign the same
on behalf of Camacho; and the sale of 1200 sq. m. portion of the property right at the market site. In
all these transactions, Atty. Banzon represented Camacho pursuant to the Contract of Attorney’s
Fee.

The object of the contract is still certain despite the parties’ failure to indicate the specific portion of
the property to be given as compensation for services

Articles 1349 and 1460 of the Civil Code provide the guidelines in determining whether or not the
object of the contract is certain:

Article 1349. The object of every contract must be determinate as to its kind. The fact that the
quantity is not determinate shall not be an obstacle to the existence of the contract, provided it is
possible to determine the same, without the need of a new contract between the parties.
 xxxx

Article 1460. A thing is determinate when it is particularly designated and/or physically segregated
from all others of the same class.

The requisite that a thing be determinate is satisfied if at the time the contract is entered into, the
thing is capable of being made determinate without the necessity of a new or further agreement
between the parties.

In this case, the object of the contract is the 5,000-sq-m portion of Lot 261, Balanga Cadastre. The
failure of the parties to state its exact location in the contract is of no moment; this is a mere error
occasioned by the parties’ failure to describe with particularity the subject property, which does not
indicate the absence of the principal object as to render the contract void.52 Since Camacho bound
herself to deliver a portion of Lot 261 to Atty. Banzon, the description of the property subject of the
contract is sufficient to validate the same.

The Cause or Consideration of the contract is not illegal

In general, the cause is the why of the contract or the essential reason which moves the contracting
parties to enter into the contract.53 For the cause to be valid, it must be lawful such that it is not
contrary to law, morals, good customs, public order or public policy.54 Petitioner insists that the cause
of the subject contract is illegal. However, under the terms of the contract, Atty. Banzon was obliged
to negotiate with the municipal government of Balanga for the transfer of the proposed new public
market to Camacho’s property (Lot 261); to sell 1,200 square meters right at the market site; and to
take charge of the legal phases incidental to the transaction which include the ejectment of persons
unlawfully occupying the property (whether through amicable settlement or court action), and the
execution of the Deed of Donation and other papers necessary to consummate the transaction.
There was thus nothing wrong with the services which respondent undertook to perform under the
contract. They are not contrary to law, morals, good customs, public order or public policy.

Petitioner argues that the cause of the contract is the "pirating" of the municipality’s market project
and ejecting the tenant to convert the property into a commercial establishment. This is premised on
the fact that the construction of the new public market at Doña Francisca Subdivision had originally
been approved by the municipal council of Balanga, the Development Bank of the Philippines, and
the National Urban Planning Commission; and at the time the contract was executed, Tuazon
occupied the property. The records show, however, that the municipal council was scouting for a
new location because it had reservations regarding the site of the proposed project. And while Lot
261 was considered to be the most ideal (because it stands on higher ground and is not susceptible
to flooding) it does not follow that respondent no longer negotiated for and in Camacho’s behalf.
There were other terms to be negotiated, such as the mode of transfer (whether sale or donation);
the titling of the property in the name of the municipality; the terms of payment, if any; and such other
legalities necessary to consummate the transaction.

It must be stressed that Camacho was not deprived of any property right. The portions of her
property which she parted with (the 17,000-sq-m portion donated to the municipality; the 5,000-sq-m
portion given to respondent as attorney’s fees; and the 1,200-sq-m portion which was sold) were
either in exchange for services rendered or for monetary consideration. In fact, all these transactions
resulted in the increase in the economic value of her remaining properties.

Thus, the defense of the illegality of respondent’s undertaking is baseless. The municipal council had
the authority to choose the best site for its project. We also note that the market site was transferred
with the active participation of Camacho, who agreed to donate the 17,000-sq-m portion of her
property; the new public market was constructed and became operational; and the sale of the 1,200-
sq-m lot was consummated when Camacho executed the deeds herself. Thus, petitioner cannot be
allowed to evade the payment of Camacho’s liabilities under the contract with respondent; a contrary
conclusion would negate the rule of estoppel and unjust enrichment.

As to the additional 1,000-sq-m-portion of Lot 261, however, we find and so hold that respondent is
not entitled thereto.

Indeed, it was sufficiently established that an attorney-client relationship existed between Camacho
and respondent and that the latter handled several other cases for his client. The records show that
the parties had agreed upon specific sums of money as attorney’s fees for the other cases:

Civil Case No. C-1773 P10,000.0055

Civil Case No. 424 P1,000.0056

CAR Case No. 278-B’70 P2,000.0057

CAR Case No. 520-B’73 P5,000.0058

Civil Case No. 3281 P5,000.0059

This clearly negates respondent’s claim of an additional 1,000-sq-m share as compensation for
services rendered. Likewise, there being no evidence on respondent’s right over the 800-sq-m
allegedly purchased from third persons, he is likewise not entitled to this portion of the property.

On the other hand, Camacho admitted in her Answer60 to the Complaint-in-Intervention that
respondent had purchased from her an 80-sq-m portion of the property. Since she had merely
executed a Provisional Deed of Sale,61 we agree with the RTC that respondent has the right to
require the execution of a public instrument evidencing the sale.

It must be understood that a retainer contract is the law that governs the relationship between a
client and a lawyer.62 Unless expressly stipulated, rendition of professional services by a lawyer is for
a fee or compensation and is not gratuitous.63 Whether the lawyer’s services were solicited or they
were offered to the client for his assistance, inasmuch as these services were accepted and made
use of by the latter, we must consider that there was a tacit and mutual consent as to the rendition of
the services, and thus gives rise to the obligation upon the person benefited by the services to make
compensation therefor.64 Lawyers are thus as much entitled to judicial protection against injustice on
the part of their clients as the clients are against abuses on the part of the counsel. The duty of the
court is not only to see that lawyers act in a proper and lawful manner, but also to see that lawyers
are paid their just and lawful fees.65 If lawyers are entitled to fees even if there is no written contract,
with more reason that they are entitled thereto if their relationship is governed by a written contract of
attorney’s fee.

In her fourth assigned error, petitioner claims that the CA failed to rule on the propriety of the
dismissal of respondent as Camacho’s counsel.
We do not agree. We uphold the following pronouncement of the CA on the matter:

In this case, the grounds relied upon by plaintiff Camacho as justifications for the discharge of
Intervenor are not sufficient to deprive the latter of his attorney’s fees.

Intervenor may see the case in an angle different from that seen by plaintiff Camacho. The
procedures adopted by Intervenor may not be what plaintiff Camacho believes to be the best. But
these do not in any way prove that Intervenor was working to the prejudice of plaintiff Camacho.

Failure of plaintiff Camacho to prove that Intervenor intended to damage her, We consider the
charges of plaintiff Camacho as mere honest difference of opinions.

As to the charge that Intervenor failed to account the money he collected in behalf of plaintiff
Camacho, the same is not supported by any evidence. Suffice it to say that mere allegations cannot
prove a claim.66

The ruling of the CA on the award of moral damages is likewise in accordance with the facts and
established jurisprudence:

The act of plaintiff Camacho is a clear case of breach of contract.1avvphi1.net Worst, when
Intervenor demanded payment, plaintiff Camacho adopted all sorts of strategies to delay payment.
This case dragged on for twenty (20) years. And until this time, plaintiff Camacho continues to
unjustifiably refuse the payment of the attorney’s fees due to intervenor.

For these, one can readily imagine the worries and anxiety gone through by Intervenor. Award of
moral damages is but proper.

Moral damages may be granted if the party had proven that he suffered mental anguish, serious
anxiety and moral shock as a consequence of the act of the other party. Moral damages can be
awarded when a party acted in bad faith as in this case by Camacho.67

IN LIGHT OF ALL THE FOREGOING, the appealed decision is AFFIRMED with the MODIFICATION
that the award of a 1,000-square-meter portion of Lot 261 to respondent Atty. Angelito Banzon as
attorney’s fees is DELETED.

SO ORDERED.
G.R. No. 142830 March 24, 2006

WILLIAM GOLANGCO CONSTRUCTION CORPORATION, Petitioner,

vs.
PHILIPPINE COMMERCIAL INTERNATIONAL BANK*, Respondent

DECISION

CORONA, J.:

The facts of this case are straightforward.1

William Golangco Construction Corporation (WGCC) and the Philippine Commercial International
Bank (PCIB) entered into a contract for the construction of the extension of PCIB Tower II
(denominated as PCIB Tower II, Extension Project [project])2 on October 20, 1989. The project
included, among others, the application of a granitite wash-out finish3 on the exterior walls of the
building.

PCIB, with the concurrence of its consultant TCGI Engineers (TCGI), accepted the turnover of the
completed work by WGCC in a letter dated June 1, 1992. To answer for any defect arising within a
period of one year, WGCC submitted a guarantee bond dated July 1, 1992 issued by Malayan
Insurance Company, Inc. in compliance with the construction contract.4

The controversy arose when portions of the granitite wash-out finish of the exterior of the building
began peeling off and falling from the walls in 1993. WGCC made minor repairs after PCIB
requested it to rectify the construction defects. In 1994, PCIB entered into another contract with
Brains and Brawn Construction and Development Corporation to re-do the entire granitite wash-out
finish after WGCC manifested that it was "not in a position to do the new finishing work," though it
was willing to share part of the cost. PCIB incurred expenses amounting to P11,665,000 for the
repair work.

PCIB filed a request for arbitration with the Construction Industry Arbitration Commission (CIAC) for
the reimbursement of its expenses for the repairs made by another contractor. It complained of
WGCC’s alleged non-compliance with their contractual terms on materials and workmanship. WGCC
interposed a counterclaim for P5,777,157.84 for material cost adjustment.

The CIAC declared WGCC liable for the construction defects in the project.5 WGCC filed a petition
for review with the Court of Appeals (CA) which dismissed it for lack of merit.6Its motion for
reconsideration was similarly denied.7

In this petition for review on certiorari, WGCC raises this main question of law: whether or not
petitioner WGCC is liable for defects in the granitite wash-out finish that occurred after the lapse of
the one-year defects liability period provided in Art. XI of the construction contract.8

We rule in favor of WGCC.

The controversy pivots on a provision in the construction contract referred to as the defects liability
period:

ARTICLE XI – GUARANTEE

Unless otherwise specified for specific works, and without prejudice to the rights and causes of
action of the OWNER under Article 1723 of the Civil Code, the CONTRACTOR hereby guarantees
the work stipulated in this Contract, and shall make good any defect in materials and
workmanship which [becomes] evident within one (1) year after the final acceptance of the
work. The CONTRACTOR shall leave the work in perfect order upon completion and present the
final certificate to the ENGINEER promptly.

If in the opinion of the OWNER and ENGINEER, the CONTRACTOR has failed to act promptly in
rectifying any defect in the work which appears within the period mentioned above, the OWNER and
the ENGINEER may, at their own discretion, using the Guarantee Bond amount for corrections, have
the work done by another contractor at the expense of the CONTRACTOR or his bondsmen.

However, nothing in this section shall in any way affect or relieve the CONTRACTOR’S
responsibility to the OWNER. On the completion of the [w]orks, the CONTRACTOR shall clear
away and remove from the site all constructional plant, surplus materials, rubbish and temporary
works of every kind, and leave the whole of the [s]ite and [w]orks clean and in a workmanlike
condition to the satisfaction of the ENGINEER and OWNER.9 (emphasis ours)

Although both parties based their arguments on the same stipulations, they reached conflicting
conclusions. A careful reading of the stipulations, however, leads us to the conclusion that WGCC’s
arguments are more tenable.

Autonomy of contracts

The autonomous nature of contracts is enunciated in Article 1306 of the Civil Code.

Article 1306. The contracting parties may establish such stipulations, clauses, terms and conditions
as they may deem convenient, provided they are not contrary to law, morals, good customs, public
order, or public policy.

Obligations arising from contracts have the force of law between the parties and should be complied
with in good faith.10 In characterizing the contract as having the force of law between the parties, the
law stresses the obligatory nature of a binding and valid agreement.

The provision in the construction contract providing for a defects liability period was not shown as
contrary to law, morals, good customs, pubic order or public policy. By the nature of the obligation in
such contract, the provision limiting liability for defects and fixing specific guaranty periods was not
only fair and equitable; it was also necessary. Without such limitation, the contractor would be
expected to make a perpetual guarantee on all materials and workmanship.

The adoption of a one-year guarantee, as done by WGCC and PCIB, is established usage in the
Philippines for private and government construction contracts.11 The contract did not specify a
different period for defects in the granitite wash-out finish; hence, any defect therein should have
been brought to WGCC’s attention within the one-year defects liability period in the contract.
We cannot countenance an interpretation that undermines a contractual stipulation freely and validly
agreed upon. The courts will not relieve a party from the effects of an unwise or unfavorable contract
freely entered into.12

[T]he inclusion in a written contract for a piece of work [,] such as the one in question, of a provision
defining a warranty period against defects, is not uncommon. This kind of a stipulation is of particular
importance to the contractor, for as a general rule, after the lapse of the period agreed upon therein,
he may no longer be held accountable for whatever defects, deficiencies or imperfections that may
be discovered in the work executed by him.13

Interpretation of contracts

To challenge the guarantee period provided in Article XI of the contract, PCIB calls our attention to
Article 62.2 which provides:

62.2 Unfulfilled Obligations

Notwithstanding the issue of the Defects Liability Certificate[,] the Contractor and the Owner shall
remain liable for the fulfillment of any obligation[,] incurred under the provisions of the
Contract prior to the issue of the Defects Liability Certificate[,] which remains unperformed at
the time such Defects Liability Certificate is issued[. And] for the purpose of determining the
nature and extent of any such obligation, the Contract shall be deemed to remain in force between
the parties of the Contract. (emphasis ours)

The defects in the granitite wash-out finish were not the "obligation" contemplated in Article 62.2. It
was not an obligation that remained unperformed or unfulfilled at the time the defects liability
certificate was issued. The alleged defects occurred more than a year from the final acceptance by
PCIB.

An examination of Article 1719 of the Civil Code is enlightening:

Art. 1719. Acceptance of the work by the employer relieves the contractor of liability for any defect in
the work, unless:

(1) The defect is hidden and the employer is not, by his special knowledge, expected to
recognize the same; or

(2) The employer expressly reserves his rights against the contractor by reason of the defect.

The lower courts conjectured that the peeling off of the granitite wash-out finish was probably due to
"defective materials and workmanship." This they characterized as hidden or latent defects. We,
however, do not agree with the conclusion that the alleged defects were hidden.

First, PCIB’s team of experts14 (who were specifically employed to detect such defects early on)
supervised WGCC’s workmanship. Second, WGCC regularly submitted progress reports and
photographs. Third, WGCC worked under fair and transparent circumstances. PCIB had access to
the site and it exercised reasonable supervision over WGCC’s work. Fourth, PCIB issued several
"punch lists" for WGCC’s compliance before the issuance of PCIB’s final certificate of acceptance.
Fifth, PCIB supplied the materials for the granitite wash-out finish. And finally, PCIB’s team of
experts gave their concurrence to the turnover of the project.
The purpose of the defects liability period was precisely to give PCIB additional, albeit limited,
opportunity to oblige WGCC to make good any defect, hidden or otherwise, discovered within one
year.

Contrary to the CA’s conclusion, the first sentence of the third paragraph of Article XI on guarantee
previously quoted did not operate as a blanket exception to the one-year guarantee period under the
first paragraph. Neither did it modify, extend, nullify or supersede the categorical terms of the defects
liability period.

Under the circumstances, there were no hidden defects for which WGCC could be held liable.
Neither was there any other defect for which PCIB made any express reservation of its rights against
WGCC. Indeed, the contract should not be interpreted to favor the one who caused the confusion, if
any. The contract was prepared by TCGI for PCIB.15

WHEREFORE, the petition is hereby GRANTED. The decision of the Court of Appeals in CA-G.R.
SP No. 41152 is ANNULED and SET ASIDE.

SO ORDERED.
G.R. No. 168940 November 24, 2009

SPS. ISAGANI CASTRO and DIOSDADA CASTRO,

vs.
ANGELINA DE LEON TAN, SPS. CONCEPCION T. CLEMENTE and ALEXANDER C.
CLEMENTE, SPS. ELIZABETH T. CARPIO and ALVIN CARPIO, SPS. MARIE ROSE T. SOLIMAN
and ARVIN SOLIMAN and JULIUS AMIEL TAN, Respondents.

DECISION

DEL CASTILLO, J.:

The imposition of an unconscionable rate of interest on a money debt, even if knowingly and
voluntarily assumed, is immoral and unjust. It is tantamount to a repugnant spoliation and an
iniquitous deprivation of property, repulsive to the common sense of man. It has no support in law, in
principles of justice, or in the human conscience nor is there any reason whatsoever which may
justify such imposition as righteous and as one that may be sustained within the sphere of public or
private morals.1

In this Petition for Review on Certiorari,2 petitioners assail the October 29, 2004 Decision3 and July
18, 2005 Resolution4 of the Court of Appeals (CA) in CA-G.R. CV No. 76842, affirming the June 11,
2002 Decision5 of the Regional Trial Court of Bulacan, Branch 79, which equitably reduced the
stipulated interest rate in an agreement entered into by the parties from 60% per annum (or 5% per
month) to 12% per annum, with the modification that herein respondents may redeem the mortgaged
property notwithstanding the lapse of redemption period on grounds of equity and substantial justice.

Factual antecedents

Respondent Angelina de Leon Tan, and her husband Ruben Tan were the former registered owners
of a 240-square meter residential lot, situated at Barrio Canalate, Malolos, Bulacan and covered by
Transfer Certificate of Title No. T-8540. On February 17, 1994, they entered into an agreement with
petitioners spouses Isagani and Diosdada Castro denominated as Kasulatan ng Sanglaan ng Lupa
at Bahay (Kasulatan) to secure a loan ofP30,000.00 they obtained from the latter. Under
the Kasulatan, the spouses Tan undertook to pay the mortgage debt within six months or until
August 17, 1994, with an interest rate of 5% per month, compounded monthly.

When her husband died on September 2, 1994, respondent Tan was left with the responsibility of
paying the loan. However, she failed to pay the same upon maturity. Thereafter, she offered to pay
petitioners the principal amount of P30,000.00 plus a portion of the interest but petitioners refused
and instead demanded payment of the total accumulated sum of P359,000.00.

On February 5, 1999, petitioners caused the extrajudicial foreclosure of the real estate mortgage and
emerged as the only bidder in the auction sale that ensued. The period of redemption expired
without respondent Tan having redeemed the property; thus title over the same was consolidated in
favor of petitioners. After a writ of possession was issued, the Sheriff ejected respondents from the
property and delivered the possession thereof to petitioners.

Proceedings before the Regional Trial Court

On September 26, 2000, respondent Tan, joined by respondents Sps. Concepcion T. Clemente and
Alexander C. Clemente, Sps. Elizabeth T. Carpio and Alvin Carpio, Sps. Marie Rose T. Soliman and
Arvin Soliman and Julius Amiel Tan filed a Complaint for Nullification of Mortgage and Foreclosure
and/or Partial Rescission of Documents and Damages6 before the Regional Trial Court of Malolos,
Bulacan. They alleged, inter alia, that the interest rate imposed on the principal amount
of P30,000.00 is unconscionable.7

On June 11, 2002, the trial court rendered judgment in favor of respondents, viz:

PREMISES CONSIDERED, this Court cannot declare the mortgage and foreclosure null and void
but the x x x Kasulatan ng Sanglaan ng Lupa x x x herebelow quoted:

2. Na ang nasabing pagkakautang ay aming babayaran sa loob ng anim (6) na buwan simula sa
petsa ng kasulatang ito o dili kaya ay sa bago dumating ang Agosto 17, 1994 na may pakinabang na
5% bawat buwan. Na ang tubo ay aani pa rin ng tubong 5% bawat buwan.

Is partially rescinded to only 12% interest per annum and additional one percent a month penalty
charges – as liquidated damages beginning February 17, 1994 up to June 21, 2000 per Delivery of
Possession x x x and/or for the defendants to accept the offer of P200,000.00 by the plaintiffs to
redeem or reacquire the property in litis.

The Court is not inclined to award moral damages since plaintiffs failed to buttress her claim of moral
damages and/or proof of moral damages. x x x

No award of attorney’s fees because the general rule is that no [premium] should be placed on the
right to litigate. x x x

The counterclaim of the defendants is hereby DISMISSED for lack of merit.

Costs against the defendants.

SO ORDERED."8

Proceedings before the Court of Appeals

Petitioners appealed to the Court of Appeals which affirmed the trial court’s finding that the interest
rate stipulated in the Kasulatan is iniquitous or unconscionable and, thus, its equitable reduction to
the legal rate of 12% per annum is warranted.9 At the same time, the appellate court declared that
respondents may redeem the mortgaged property notwithstanding the expiration of the period of
redemption, in the interest of substantial justice and equity.10 The dispositive portion of said Decision
reads:

WHEREFORE, the appealed judgment is hereby AFFIRMED with the MODIFICATION that plaintiffs-
appellees may redeem the mortgaged property by paying the defendants-appellants spouses
Isagani and Diosdada Castro the amount of P30,000.00, with interest thereon at 12% per annum
from February 17, 1994 until fully paid plus penalty charges at the same rate from February 17, 1994
to June 21, 2000.

SO ORDERED.11
Petitioners’ Motion for Reconsideration was denied by the Court of Appeals in a Resolution dated
July 18, 2005.

Issues

Hence, the present Petition for Review on Certiorari raising the following issues:

1. THE COURT OF APPEALS GROSSLY ERRED IN NULLIFYING THE INTEREST RATE

VOLUNTARILY AGREED UPON BY THE PETITIONERS AND RESPONDENTS AND EXPRESSLY
STIPULATED IN THE CONTRACT OF MORTGAGE ENTERED INTO BETWEEN THEM.

2. THE COURT OF APPEALS GROSSLY ERRED IN MAKING A CONTRACT BETWEEN THE

PETITIONERS AND RESPONDENTS BY UNILATERALLY CHANGING THE TERMS AND
CONDITIONS OF THE CONTRACT OF MORTGAGE ENTERED INTO BETWEEN THEM.

3. THE COURT OF APPEALS GROSSLY ERRED IN EXTENDING THE PERIOD OF

REDEMPTION IN FAVOR OF THE RESPONDENTS IN VIOLATION OF THE CLEAR AND
UNEQUIVOCAL PROVISIONS OF ACT NO. 3135 PROVIDING A PERIOD OF ONLY ONE YEAR
FOR THE REDEMPTION OF A FORECLOSED REAL PROPERTY.12

Petitioners’ Arguments

Petitioners contend that with the removal by the Bangko Sentral of the ceiling on the rate of interest
that may be stipulated in a contract of loan,13 the lender and the borrower could validly agree on any
interest rate on loans. Thus, the Court of Appeals gravely erred when it declared the stipulated
interest in the Kasulatan as null as if there was no express stipulation on the compounded interest.14

Respondents’ Arguments

On the other hand, respondents assert that the appellate court correctly struck down the said
stipulated interest for being excessive and contrary to morals, if not against the law.15 They also point
out that a contract has the force of law between the parties, but only when the terms, clauses and
conditions thereof are not contrary to law, morals, public order or public policy.16

Our Ruling

The petition lacks merit.

The Court of Appeals correctly found that the 5% monthly interest, compounded monthly, is
unconscionable and should be equitably reduced to the legal rate of 12% per annum.

While we agree with petitioners that parties to a loan agreement have wide latitude to stipulate on
any interest rate in view of the Central Bank Circular No. 905 s. 1982 which suspended the Usury
Law ceiling on interest effective January 1, 1983, it is also worth stressing that interest rates
whenever unconscionable may still be declared illegal. There is certainly nothing in said circular
which grants lenders carte blanche authority to raise interest rates to levels which will either enslave
their borrowers or lead to a hemorrhaging of their assets.17

In several cases, we have ruled that stipulations authorizing iniquitous or unconscionable interests
are contrary to morals, if not against the law. In Medel v. Court of Appeals,18 we annulled a stipulated
5.5% per month or 66% per annum interest on a P500,000.00 loan and a 6% per month or 72% per
annum interest on a P60,000.00 loan, respectively, for being excessive, iniquitous, unconscionable
and exorbitant. In Ruiz v. Court of Appeals,19 we declared a 3% monthly interest imposed on four
separate loans to be excessive. In both cases, the interest rates were reduced to 12% per annum.

In this case, the 5% monthly interest rate, or 60% per annum, compounded monthly, stipulated in the
Kasulatan is even higher than the 3% monthly interest rate imposed in the Ruiz case. Thus, we
similarly hold the 5% monthly interest to be excessive, iniquitous, unconscionable and exorbitant,
contrary to morals, and the law. It is therefore void ab initio for being violative of Article 130620 of the
Civil Code. With this, and in accord with the Medel and Ruiz cases, we hold that the Court of
Appeals correctly imposed the legal interest of 12% per annum in place of the excessive interest
stipulated in the Kasulatan.

The Court of Appeals did not unilaterally change the terms and conditions of the Contract of
Mortgage entered into between the petitioners and the respondents.

Petitioners allege that the Kasulatan was entered into by the parties freely and voluntarily.21 They
maintain that there was already a meeting of the minds between the parties as regards the principal
amount of the loan, the interest thereon and the property given as security for the payment of the
loan, which must be complied with in good faith.22 Hence, they assert that the Court of Appeals
should have given due respect to the provisions of theKasulatan.23 They also stress that it is a settled
principle that the law will not relieve a party from the effects of an unwise, foolish or disastrous
contract, entered into with all the required formalities and with full awareness of what he was doing.24

Petitioners’ contentions deserve scant consideration. In Abe v. Foster Wheeler Corporation,25 we

held that the freedom of contract is not absolute. The same is understood to be subject to
reasonable legislative regulation aimed at the promotion of public health, morals, safety and welfare.
One such legislative regulation is found in Article 1306 of the Civil Code which allows the contracting
parties to "establish such stipulations, clauses, terms and conditions as they may deem convenient,
provided they are not contrary to law, morals, good customs, public order or public policy."

To reiterate, we fully agree with the Court of Appeals in holding that the compounded interest rate of
5% per month, is iniquitous and unconscionable. Being a void stipulation, it is deemed inexistent
from the beginning. The debt is to be considered without the stipulation of the iniquitous and
unconscionable interest rate. Accordingly, the legal interest of 12% per annum must be imposed in
lieu of the excessive interest stipulated in the agreement, in line with our ruling in Ruiz v. Court of
Appeals,26 thus:

The foregoing rates of interests and surcharges are in accord with Medel vs. Court of Appeals,
Garcia vs. Court of Appeals, Bautista vs. Pilar Development Corporation, and the recent case of
Spouses Solangon vs. Salazar. This Court invalidated a stipulated 5.5% per month or 66% per
annum interest on a P500,000.00 loan in Medel and a 6% per month or 72% per annum interest on
a P60,000.00 loan in Solangon for being excessive, iniquitous, unconscionable and exorbitant. In
both cases, we reduced the interest rate to 12% per annum. We held that while the Usury Law has
been suspended by Central Bank Circular No. 905, s. 1982, effective on January 1, 1983, and
parties to a loan agreement have been given wide latitude to agree on any interest rate, still
stipulated interest rates are illegal if they are unconscionable. Nothing in the said circular grants
lenders carte blanche authority to raise interest rates to levels which will either enslave their
borrowers or lead to a hemorrhaging of their assets. On the other hand, in Bautista vs. Pilar
Development Corp., this Court upheld the validity of a 21% per annum interest on a P142,326.43
loan, and in Garcia vs. Court of Appeals, sustained the agreement of the parties to a 24% per annum
interest on an P8,649,250.00 loan. It is on the basis of these cases that we reduce the 36% per
annum interest to 12%. An interest of 12% per annum is deemed fair and reasonable. While it is true
that this Court invalidated a much higher interest rate of 66% per annum in Medel and 72% in
Solangon it has sustained the validity of a much lower interest rate of 21% in Bautista and 24% in
Garcia. We still find the 36% per annum interest rate in the case at bar to be substantially greater
than those upheld by this Court in the two (2) aforecited cases. (Emphasis supplied, citations
omitted)

From the foregoing, it is clear that there is no unilateral alteration of the terms and conditions of the
Kasulatan entered into by the parties. Surely, it is more consonant with justice that the subject
interest rate be equitably reduced and the legal interest of 12% per annum is deemed fair and
reasonable.27

The additional 1% per month penalty awarded as liquidated damages does not have any legal basis.

In its June 11, 2002 Decision,28 the trial court granted an additional 1% per month penalty as
liquidated damages29 beginning February 17, 1994 up to June 21, 2000.30 Since respondents did not
file their appellees’ brief despite notice, the appellate court declared this to be not in issue.31

Although the issue of the liquidated damages was not presented squarely in either Memorandum of
the parties, this does not prevent us from ruling on the matter. In the exercise of our appellate
jurisdiction, we are clothed with ample authority to review findings and rulings of lower courts even if
they are not assigned as errors. This is especially so if we find that their consideration is necessary
in arriving at a just decision of the case. We have consistently held that an unassigned error closely
related to an error properly assigned, or upon which a determination of the question raised by the
error properly assigned is dependent, will be considered notwithstanding the failure to assign it as an
error.32 On this premise, we deem it proper to pass upon the matter of liquidated damages.

Article 2226 of the Civil Code provides that "[L]iquidated damages are those agreed upon by the
parties to a contract, to be paid in case of breach thereof."

In the instant case, a cursory reading of the Kasulatan would show that it is devoid of any stipulation
with respect to liquidated damages. Neither did any of the parties allege or prove the existence of
any agreement on liquidated damages. Hence, for want of any stipulation on liquidated damages in
the Kasulatan entered into by the parties, we hold that the liquidated damages awarded by the trial
court and affirmed by the Court of Appeals to be without legal basis and must be deleted.

The foreclosure proceedings held on March 3, 1999 cannot be given effect.

The Court of Appeals modified the judgment of the trial court by holding that respondents, in the
interest of substantial justice and equity, may redeem the mortgaged property notwithstanding the
lapse of the period of redemption.

Petitioners argue that this cannot be done because the right of redemption had long expired and
same is no longer possible beyond the one-year period provided under Act No. 3135.33

On the other hand, respondents insist that to disallow them to redeem the property would render
meaningless the declaration that the stipulated interest is null and void.

It is undisputed that sometime after the maturity of the loan, respondent Tan attempted to pay the
mortgage debt of P30,000.00 as principal and some interest. Said offer was refused by petitioners
because they demanded payment of the total accumulated amount of P359,000.00.34 Moreover, the
trial court also mentioned an offer by respondent Tan of the amount of P200,000.00 to petitioners in
order for her to redeem or re-acquire the property in litis.35
From these, it is evident that despite considerable effort on her part, respondent Tan failed to
redeem the mortgaged property because she was unable to raise the total amount of P359,000.00,
an amount grossly inflated by the excessive interest imposed. Thus, it is only proper that
respondents be given the opportunity to repay the real amount of their indebtedness.

In the case of Heirs of Zoilo Espiritu v. Landrito,36 which is on all fours with the instant case, we held
that:

Since the Spouses Landrito, the debtors in this case, were not given an opportunity to settle their
debt, at the correct amount and without the iniquitous interest imposed, no foreclosure proceedings
may be instituted. A judgment ordering a foreclosure sale is conditioned upon a finding on the
correct amount of the unpaid obligation and the failure of the debtor to pay the said amount. In this
case, it has not yet been shown that the Spouses Landrito had already failed to pay the correct
amount of the debt and, therefore, a foreclosure sale cannot be conducted in order to answer for the
unpaid debt. The foreclosure sale conducted upon their failure to payP874,125.00 in 1990 should be
nullified since the amount demanded as the outstanding loan was overstated; consequently it has
not been shown that the mortgagors – the Spouses Landrito, have failed to pay their outstanding
obligation. x x x

As a result, the subsequent registration of the foreclosure sale cannot transfer any rights over the
mortgaged property to the Spouses Espiritu. The registration of the foreclosure sale, herein declared
invalid, cannot vest title over the mortgaged property. x x x (Emphasis supplied)

On this basis, we nullify the foreclosure proceedings held on March 3, 1999 since the amount
demanded as the outstanding loan was overstated. Consequently, it has not been shown that the
respondents have failed to pay the correct amount of their outstanding obligation. Accordingly, we
declare the registration of the foreclosure sale invalid and cannot vest title over the mortgaged
property.

Anent the allegation of petitioners that the Court of Appeals erred in extending the period of
redemption, same has been rendered moot in view of the nullification of the foreclosure proceedings.

WHEREFORE, the instant petition is DENIED. The assailed Decision of the Court of Appeals dated
October 29, 2004 as well as the Resolution dated July 18, 2005 are AFFIRMED with
the MODIFICATION that the award of 1% liquidated damages per month be DELETED and that
petitioners are ORDERED to reconvey the subject property to respondents conditioned upon the
payment of the loan together with the rate of interest fixed herein.

SO ORDERED.
G.R. No. 107569 November 8, 1994

PHILIPPINE NATIONAL BANK, petitioner,

vs.
COURT OF APPEALS, REMEDIOS JAYME-FERNANDEZ and AMADO
FERNANDEZ, respondents.

Vidad, Corpus & Associates for petitioner.

Remedios Jayme-Fernandez for privaate respondents.

PUNO, J.:

Petitioner bank seeks the review of the decision, dated October 15, 1992, of the Court of Appeals 1 in
CA G.R. CV No. 27195, the dispositive portion of which reads as follows:

WHEREFORE, the judgment appealed from is hereby SET ASIDE and a new one is
entered ordering defendant-appellee PNB to re-apply the interest rate of 12% per
annum to plaintiffs-appellants' (referring to herein private respondents) indebtedness
and to accordingly take the appropriate charges from plaintiffs-appellants' (private
respondents') payment of P81,000.00 made on December 26, 1985. Any balance on
the indebtedness should, likewise, be charged interest at the rate of 12%per annum.

SO ORDERED.

The parties do not dispute the facts as laid down by respondent court in its impugned decision, viz.:

On April 7, 1982, (private respondents) as owners of a NACIDA-registered enterprise,

obtained a loan under the Cottage Industry Guaranty Loan Fund (CIGLF) from the
Philippine National Bank (PNB) in the amount of Fifty Thousand (P50,000.00) Pesos,
as evidenced by a Credit Agreement. Under the Promissory Note covering the loan, the
loan was to be amortized over a period of three (3) years to end on March 29, 1985, at
twelve (12%) percent interest annually.

To secure the loan, (private respondents) executed a Real Estate Mortgage over a
1.5542-hectare parcel of unregistered agricultural land located at Cambang-ug, Toledo
City, which was appraised by the PNB at P1,062.52 and given a loan value of P531.26
by the Bank. In addition, (private respondents) executed a Chattel Mortgage over a
thermo plastic-forming machine, which had an appraisal value of P8,800 and a loan
value of P4,400.00.

The Credit Agreement provided inter alia, that —

(a) The BANK reserves the right to increase the interest rate within the
limits allowed by law at any time depending on whatever policy it may
adopt in the future; Provided, that the interest rate on this accommodation
shall be correspondingly decreased in the event that the applicable
 maximum interest is reduced by law or by the Monetary Board. In either
case, the adjustment in the interest rate agreed upon shall take effect on
the effectivity date of the increase or decrease in the maximum interest
rate.

The Promissory Note, in turn, authorized the PNB to raise the rate of interest, at any
time without notice, beyond the stipulated rate of 12% but only "within the limits allowed
by law."

The Real Estate Mortgage contract likewise provided that —

(k) INCREASE OF INTEREST RATE: The rate of interest charged on the

obligation secured by this mortgage as well as the interest on the amount
which may have been advanced by the MORTGAGE, in accordance with
the provision hereof, shall be subject during the life of this contract to
such an increase within the rate allowed by law, as the Board of Directors
of the MORTGAGEE may prescribe for its debtors.

On February 17, 1983, (private respondents) were granted an additional NACIDA loan
of Fifty Thousand (P50,000.00) Pesos by the PNB, for which (private respondents)
executed another Promissory Note, which was to mature on April 1, 1985. Other than
the date of maturity, the second promissory note contained the same terms and
stipulations as the previous note. The parties likewise executed a new Credit
Agreement, changing the amount of the loan from P50,000.00 to P100,000.00, but
otherwise preserving the stipulations contained in the original agreement.

As additional security for the loan, (private respondents) constituted another real estate
mortgage over 2 parcels of registered land, with a combined area of 311 square
meters, located at Guadalupe, Cebu City. The land, upon which several buildings are
standing, was appraised by the PNB to have a value of P40,000.00 and a loan value of
P28,000.00.

In a letter dated August 1, 1984, the PNB informed (private respondents) "that the
interest rate of your CIGLF loan account with us is now 25% per annum plus a penalty
of 6% per annum on past dues." The PNB further increased this interest rate to 30% on
October 15, 1984; and to 42% on October 25, 1984.

The records show that as of December 1985, (private respondents) had an outstanding
principal account of P81,000.00 of which P18,523.14 was credited to the principal,
P57,488.89 to the interest, and the rest to penalty and other charges. Thus, as of said
date, the unpaid principal obligation of (private respondent) amounted to P62,830.32.

Thereafter, (private respondents) exerted efforts to get the PNB to re-adopt the 12%
interest and to condone the present interest and penalties due; but to no
avail. 2 (Citations omitted.)

On December 15, 1987, private respondents filed a suit for specific performance against petitioner
PNB and the NACIDA. It was docketed as Civil Case No. CEB-5610, and raffled to the Regional Trial
Court, 7th Judicial Region, Cebu City, Br. 7. 3 Private respondents prayed the trial court to order:

1. The PNB and NACIDA to issue in (private respondents') favor, a release of

mortgage;
 2. The PNB to pay pecuniary consequential damages for the destruction of (private
respondents') enterprise;

3. The PNB to pay moral and exemplary damages as well as the costs of suit; and

4. Granting (private respondents') such other relief as may be found just and equitable
in the premises. 4

On February 26, 1990, the trial court dismissed private respondents' complaint in Civil Case No.
CEB-5610. On October 15, 1992, the Court of Appeals reversed the dismissal with respect to
petitioner bank, and disallowed the increases in interest rates.

Petitioner bank now contends that "respondent Court of Appeals committed grave error when it ruled
(1) that the increase in interest rates are unauthorized; (2) that the Credit Agreement and the
Promissory Notes are not the law between the parties; (3) that CB Circular No. 773 and CB Circular
No. 905 are not applicable; and (4) that private respondents are not estopped from questioning the
increase of rate interest made by petitioner." 5

The petition is bereft of merit.

In making the unilateral increases in interest rates, petitioner bank relied on the escalation clause
contained in their credit agreement which provides, as follows:

The Bank reserves the right to increase the interest rate within the limits allowed by law
at any time depending on whatever policy it may adopt in the future and provided, that,
the interest rate on this accommodation shall be correspondingly decreased in the
event that the applicable maximum interest rate is reduced by law or by the Monetary
Board. In either case, the adjustment in the interest rate agreed upon shall take effect
on the effectivity date of the increase or decrease in maximum interest rate.

This clause is authorized by Section 2 of Presidential Decree (P.D.)

No. 1684 which further amended Act No. 2655 ("The Usury Law"), as amended, thus:

Section 2. The same Act is hereby amended by adding a new section after Section 7,
to read as follows:

Sec. 7-a. Parties to an agreement pertaining to a loan or forbearance of money, goods

or credits may stipulate that the rate of interest agreed upon may be increased in the
event that the applicable maximum rate of interest is increased by law or by the
Monetary Board; Provided, That such stipulation shall be valid only if there is also a
stipulation in the agreement that the rate of interest agreed upon shall be reduced in
the event that the applicable maximum rate of interest is reduced by law or by the
Monetary Board; Provided further, That the adjustment in the rate of interest agreed
upon shall take effect on or after the effectivity of the increase or decrease in the
maximum rate of interest.

Section 1 of P.D. No. 1684 also empowered the Central Bank's Monetary Board to prescribe the
maximum rates of interest for loans and certain forbearances. Pursuant to such authority, the
Monetary Board issued Central Bank (C.B.) Circular No. 905, series of 1982, Section 5 of which
provides:
 Sec. 5. Section 1303 of the Manual of Regulations (for Banks and Other Financial
Intermediaries) is hereby amended to read as follows:

Sec. 1303. Interest and Other Charges. — The rate of interest, including
commissions, premiums, fees and other charges, on any loan, or
forbearance of any money, goods or credits, regardless of maturity and
whether secured or unsecured, shall not be subject to any ceiling
prescribed under or pursuant to the Usury Law, as amended.

P.D. No. 1684 and C.B. Circular No. 905 no more than allow contracting parties to stipulate freely
regarding any subsequent adjustment in the interest rate that shall accrue on a loan or forbearance
of money, goods or credits. In fine, they can agree to adjust, upward or downward, the interest
previously stipulated. However, contrary to the stubborn insistence of petitioner bank, the said law
and circular did not authorize either party to unilaterally raise the interest rate without the other's
consent.

It is basic that there can be no contract in the true sense in the absence of the element of
agreement, or of mutual assent of the parties. If this assent is wanting on the part of the one who
contracts, his act has no more efficacy than if it had been done under duress or by a person of
unsound mind. 6

Similarly, contract changes must be made with the consent of the contracting parties. The minds of
all the parties must meet as to the proposed modification, especially when it affects an important
aspect of the agreement. In the case of loan contracts, it cannot be gainsaid that the rate of interest
is always a vital component, for it can make or break a capital venture. Thus, any change must
be mutually agreed upon, otherwise, it is bereft of any binding effect.

We cannot countenance petitioner bank's posturing that the escalation clause at bench gives it
unbridled right tounilaterally upwardly adjust the interest on private respondents' loan. That
would completely take away from private respondents the right to assent to an important modification
in their agreement, and would negate the element of mutuality in contracts. In Philippine National
Bank v. Court of Appeals, et al., 196 SCRA 536, 544-545 (1991) we held —

. . . The unilateral action of the PNB in increasing the interest rate on the private
respondent's loan violated the mutuality of contracts ordained in Article 1308 of the
Civil Code:

Art. 1308. The contract must bind both contracting parties; its validity or
compliance cannot be left to the will of one of them.

In order that obligations arising from contracts may have the force or law between the
parties, there must be mutuality between the parties based on their essential equality.
A contract containing a condition which makes its fulfillment dependent exclusively
upon the uncontrolled will of one of the contracting parties, is void . . . . Hence, even
assuming that
the . . . loan agreement between the PNB and the private respondent gave the PNB a
license (although in fact there was none) to increase the interest rate at will during the
term of the loan, that license would have been null and void for being violative of the
principle of mutuality essential in contracts. It would have invested the loan agreement
with the character of a contract of adhesion, where the parties do not bargain on equal
footing, the weaker party's (the debtor) participation being reduced to the alternative "to
 take it or leave it" . . . . Such a contract is a veritable trap for the weaker party whom
the courts of justice must protect against abuse and imposition. (Citation omitted.)

Private respondents are not also estopped from assailing the unilateral increases in interest rate
made by petitioner bank. No one receiving a proposal to change a contract to which he is a party, is
obliged to answer the proposal, and his silence per se cannot be construed as an acceptance. 7 In
the case at bench, the circumstances do not show that private respondents implicitly agreed to the
proposed increases in interest rate which by any standard were too sudden and too stiff.

IN VIEW THEREOF, the instant petition is DENIED for lack of merit, and the decision of the Court of
Appeals in CA-G.R. CV No. 27195, dated October 15, 1992, is AFFIRMED. Costs against petitioner.

SO ORDERED.
G.R. No. 124290 January 16, 1998

ALLIED BANKING CORPORATION, petitioner,

vs.
COURT OF APPEALS , HON. JOSE C. DE GUZMAN, OSCAR D. TAN-QUECO, LUCIA D.
TANQUECO-MATIAS, RUBEN D. TANQUECO and NESTOR D. TANQUECO, respondents.

BELLOSILLO, J.:

There are two (2) main issues in this petition for review: namely, (a) whether a stipulation in a
contract of lease to the effect that the contract "may be renewed for a like term at the option of the
lessee" is void for being potestative or violative of the principle of mutuality of contracts under Art.
1308 of the Civil Code and, corollarily, what is the meaning of the clause "may be renewed for a like
term at the option of the lessee;" and, (b) whether a lessee has the legal personality to assail the
validity of a deed of donation executed by the lessor over the leased premises.

Spouses Filemon Tanqueco and Lucia Domingo-Tanqueco owned a 512-square meter lot located at
No. 2 Sarmiento Street corner Quirino Highway, Novaliches, Quezon City, covered by TCT No.
136779 in their name. On 30 June 1978 they leased the property to petitioner Allied Banking
Corporation (ALLIED) for a monthly rental of P1,000.00 for the first three (3) years, adjustable by
25% every three (3) years thereafter. 1 The lease contract specifically states in its Provision No. 1
that "the term of this lease shall be fourteen (14) years commencing from April 1, 1978 and may be
renewed for a like term at the option of the lessee."

Pursuant to their lease agreement, ALLIED introduced an improvement on the property consisting of
a concrete building with a floor area of 340-square meters which it used as a branch office. As
stipulated, the ownership of the building would be transferred to the lessors upon the expiration of
the original term of the lease.

Sometime in February 1988 the Tanqueco spouses executed a deed of donation over the subject
property in favor of their four (4) children, namely, private respondents herein Oscar D. Tanqueco,
Lucia Tanqueco-Matias, Ruben D. Tanqueco and Nestor D. Tanqueco, who accepted the donation
in the same public instrument.

On 13 February 1991, a year before the expiration of the contract of lease, the Tanquecos notified
petitioner ALLIED that they were no longer interested in renewing the lease. 2 ALLIED replied that it
was exercising its option to renew their lease under the same terms with additional
proposals. 3 Respondent Ruben D. Tanqueco, acting in behalf of all the donee-lessors, made a
counter-proposal. 4 ALLIED however rejected the counter-proposal and insisted on Provision No. 1 of
their lease contract.

When the lease contract expired in 1992 private respondents demanded that ALLIED vacate the
premises. But the latter asserted its sole option to renew the lease and enclosed in its reply letter a
cashier's check in the amount of P68,400.00 representing the advance rental payments for six (6)
months taking into account the escalation clause. Private respondents however returned the check
to ALLIED, prompting the latter to consign the amount in court.
An action for ejectment was commenced before the Metropolitan Trial Court of Quezon City. After
trial, the MeTC-Br. 33 declared Provision No. 1 of the lease contract void for being violative of Art.
1308 of the Civil Code thus —

. . . but such provision [in the lease contract], to the mind of the Court, does not add
luster to defendant's cause nor constitutes as an unbridled or unlimited license or
sanctuary of the defendants to perpetuate its occupancy on the subject property. The
basic intention of the law in any contract is mutuality and equality. In other words, the
validity of a contract cannot be left at (sic) the will of one of the contracting parties.
Otherwise, it infringes (upon) Article 1308 of the New Civil Code, which provides: The
contract must bind both contracting parties; its validity or compliance cannot be left to
the will of one of them . . . Using the principle laid down in the case of Garcia
v. Legarda as cornerstone, it is evident that the renewal of the lease in this case cannot
be left at the sole option or will of the defendant notwithstanding provision no. 1 of their
expired contract. For that would amount to a situation where the continuance and
effectivity of a contract will depend only upon the sole will or power of the lessee, which
is repugnant to the very spirit envisioned under Article 1308 of the New Civil Code . . . .
the theory adopted by this Court in the case at bar finds ample affirmation from the
principle echoed by the Supreme Court in the case of Lao Lim v. CA, 191 SCRA 150,
154, 155.

On appeal to the Regional Trial Court, and later to the Court of Appeals, the assailed decision was
affirmed. 5

On 20 February 1993, while the case was pending in the Court of Appeals ALLIED vacated the
leased premises by reason of the controversy. 6

ALLIED insists before us that Provision No. 1 of the lease contract was mutually agreed upon hence
valid and binding on both parties, and the exercise by petitioner of its option to renew the contract
was part of their agreement and in pursuance thereof.

We agree with petitioner. Article 1308 of the Civil Code expresses what is known in law as
the principle of mutuality of contracts. It provides that "the contract must bind both the contracting
parties; its validity or compliance cannot be left to the will of one of them." This binding effect of a
contract on both parties is based on the principle that the obligations arising from the contracts have
the force of law between the contracting parties, and there must be mutuality between them based
essentially on their equality under which it is repugnant to have one party bound by the contract
while leaving the other free therefrom. The ultimate purpose is to render void a contract containing a
condition which makes its fulfillment dependent solely upon the uncontrolled will of one of the
contracting parties.

An express agreement which gives the lessee the sole option to renew the lease is frequent and
subject to statutory restrictions, valid and binding on the parties. This option, which is provided in the
same lease agreement, is fundamentally part of the consideration in the contract and is no different
from any other provision of the lease carrying an undertaking on the part of the lessor to act
conditioned on the performance by the lessee. It is a purely executory contract and at most confers a
right to obtain a renewal if there is compliance with the conditions on which the rights is made to
depend. The right of renewal constitutes a part of the lessee's interest in the land and forms a
substantial and integral part of the agreement.

The fact that such option is binding only on the lessor and can be exercised only by the lessee does
not render it void for lack of mutuality. After all, the lessor is free to give or not to give the option to
the lessee. And while the lessee has a right to elect whether to continue with the lease or not, once
he exercises his option to continue and the lessor accepts, both parties are thereafter bound by the
new lease agreement. Their rights and obligations become mutually fixed, and the lessee is entitled
to retain possession of the property for the duration of the new lease, and the lessor may hold him
liable for the rent therefor. The lessee cannot thereafter escape liability even if he should
subsequently decide to abandon the premises. Mutuality obtains in such a contract and equality
exists between the lessor and the lessee since they remain with the same faculties in respect to
fulfillment. 7

The case of Lao Lim v. Court of Appeals 8 relied upon by the trial court is not applicable here. In that
case, the stipulation in the disputed compromise agreement was to the effect that the lessee would
be allowed to stay in the premises "as long as he needs it and can pay the rents." In the present
case, the questioned provision states that the lease "may be renewed for a like term at the option of
the lessee." The lessor is bound by the option he has conceded to the lessee. The lessee likewise
becomes bound only when he exercises his option and the lessor cannot thereafter be executed
from performing his part of the agreement.

Likewise, reliance by the trial court on the 1967 case of Garcia v. Rita Legarda, Inc., 9 is misplaced.
In that case, what was involved was a contract to sell involving residential lots, which gave the
vendor the right to declare the contract called and of no effect upon the failure of the vendee to fulfill
any of the conditions therein set forth. In the instant case, we are dealing with a contract of lease
which gives the lessee the right to renew the same.

With respect to the meaning of the clause "may be renewed for a like term at the option of the
lessee," we sustain petitioner's contention that its exercise of the option resulted in the automatic
extension of the contract of lease under the same terms and conditions. The subject contract simply
provides that "the term of this lease shall be fourteen (14) years and may be renewed for a like term
at the option of the lessee." As we see it, the only term on which there has been a clear agreement is
the period of the new contract, i.e., fourteen (14) years, which is evident from the clause "may be
renewed for a like term at the option of the lessee," the phrase "for a like term"referring to the period.
It is silent as to what the specific terms and conditions of the renewed lease shall be. Shall it be the
same terms and conditions as in the original contract, or shall it be under the terms and conditions as
may be mutually agreed upon by the parties after the expiration of the existing lease?

In Ledesma v. Javellana 10 this Court was confronted with a similar problem. In the case the lessee
was given the sole option to renew the lease, but the contract failed to specify the terms and
conditions that would govern the new contract. When the lease expired, the lessee demanded an
extension under the same terms and conditions. The lessor expressed conformity to the renewal of
the contract but refused to accede to the claim of the lessee that the renewal should be under the
same terms and conditions as the original contract. In sustaining the lessee, this Court made the
following pronouncement:

. . . in the case of Hicks v. Manila Hotel Company, a similar issue was resolved by this
Court. It was held that "such a clause relates to the very contract in which it is placed,
and does not permit the defendant upon the renewal of the contract in which the clause
is found, to insist upon different terms and those embraced in the contract to be
renewed;" and that "a stipulation to renew always relates to the contract in which it is
found and the rights granted thereunder, unless it expressly provides for variations in
the terms of the contract to be renewed."

The same principle is upheld in American Law regarding the renewal of lease
contracts. In 50 Am. Jur. 2d, Sec. 1159, at p. 45, we find the following citations: "The
 rule is well-established that a general covenant to renew or extend a lease which
makes no provision as to the terms of a renewal or extension implies a renewal or
extension upon the same terms as provided in the original lease."

In the lease contract under consideration, there is no provision to indicate that the
renewal will be subject to new terms and conditions that the parties may yet agree
upon. It is to renewal provisions of lease contracts of the kind presently considered that
the principles stated above squarely apply. We do not agree with the contention of the
appellants that if it was intended by the parties to renew the contract under the same
terms and conditions stipulated in the contract of lease, such should have expressly so
stated in the contract itself. The same argument could easily be interposed by the
appellee who could likewise contend that if the intention was to renew the contract of
lease under such new terms and conditions that the parties may agree upon, the
contract should have so specified. Between the two assertions, there is more logic in
the latter.

The settled rule is that in case of uncertainty as to the meaning of a provision granting
extension to a contract of lease, the tenant is the one favored and not the landlord. "As
a general rule, in construing provisions relating to renewals or extensions, where there
is any uncertainty, the tenants is favored, and not the landlord, because the latter,
having the power of stipulating in his own favor, has neglected to do so; and also upon
the principle that every man's grant is to be taken most strongly against himself (50 Am
Jur. 2d, Sec. 1162, p. 48; see also 51 C.J.S. 599).

Besides, if we were to adopt the contrary theory that the terms and conditions to be embodied in the
renewed contract were still subject to mutual agreement by and between the parties, then the option
— which is an integral part of the consideration for the contract — would be rendered worthless. For
then, the lessor could easily defeat the lessee's right of renewal by simply imposing unreasonable
and onerous conditions to prevent the parties from reaching an agreement, as in the case at bar. As
in a statute no word, clause, sentence, provision or part of a contract shall be considered surplusage
or superfluous, meaningless, void, insignificant or nugatory, if that can be reasonably avoided. To
this end, a construction which will render every word operative is to be preferred over that which
would make some words idle and nugatory. 11

Fortunately for respondent lessors, ALLIED vacated the premises on 20 February 1993 indicating its
abandonment of whatever rights it had under the renewal clause. Consequently, what remains to be
done is for ALLIED to pay rentals for the continued use of premises until it vacated the same,
computed from the expiration of the original term of the contract on 31 March 1992 to the time it
actually left the premises on 20 February 1993, deducting therefrom the amount of P68,400.00
consigned in court by ALLIED and any other amount which it may have deposited or advanced in
connection with the lease. Since the old lease contract was deemed renewed under the same terms
and conditions upon the exercise by ALLIED of its option, the basis of the computation of rentals
should be the rental rate provided for in the existing contract.

Finally, ALLIED cannot assail the validity of the deed of donation, not being a party thereto. A person
who is not principally or subsidiarily bound has no legal capacity to challenge the validity of the
contract. 12 He must first have an interest in it. "Interest" within the meaning of the term means
material interest, an interest to be affected by the deed, as distinguished from a mere incidental
interest. Hence, a person who is not a party to a contract and for whose benefit it was not expressly
made cannot maintain an action on it, even if the contract, if performed by the parties thereto would
incidentally affect him, 13 except when he is prejudiced in his rights with respect to one of the
contracting parties and can show the detriment which could positively result to him from the contract
in which he had no intervention. 14 We find none in the instant case.

WHEREFORE, the Decision of the Court of Appeals is REVERSED and SET ASIDE. Considering
that petitioner ALLIED BANKING CORPORATION already vacated the leased premises as of 20
February 1993, the renewed lease contract is deemed terminated as of that date. However,
petitioner is required to pay rentals to respondent lessors at the rate provided in their existing
contract, subject to computation in view of the consignment in court of P68,400.00 by petitioner, and
of such other amounts it may have deposited or advanced in connection with the lease.

SO ORDERED.
EQUITABLE PCI BANK,* G.R. No. 171545
AIMEE YU and BEJAN
LIONEL APAS,
Petitioners, Present:

PUNO, C.J., Chairperson,

-versus- SANDOVAL-GUTIERREZ,
CORONA,
AZCUNA and
LEONARDO-DE CASTRO, JJ.

NG SHEUNG NGOR** doing

business under the name
and style “KEN MARKETING,” Promulgated:
KEN APPLIANCE DIVISION,
INC. and BENJAMIN E. GO,
Respondents. December 19, 2007

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

DECISION

CORONA, J.:

This petition for review on certiorari[1] seeks to set aside the decision[2] of the Court of Appeals
(CA) in CA-G.R. SP No. 83112 and its resolution[3] denying reconsideration.

On October 7, 2001, respondents Ng Sheung Ngor,[4] Ken Appliance Division, Inc. and
Benjamin E. Go filed an action for annulment and/or reformation of documents and
contracts[5] against petitioner Equitable PCI Bank (Equitable) and its employees, Aimee Yu and
Bejan Lionel Apas, in the Regional Trial Court (RTC), Branch 16 of Cebu City. [6] They claimed that
Equitable induced them to avail of its peso and dollar credit facilities by offering low interest
rates[7] so they accepted Equitable's proposal and signed the bank's pre-printed promissory notes on
various dates beginning 1996. They, however, were unaware that the documents contained identical
escalation clauses granting Equitable authority to increase interest rates without their consent.[8]

Equitable, in its answer, asserted that respondents knowingly accepted all the terms and
conditions contained in the promissory notes.[9] In fact, they continuously availed of and benefited
from Equitable's credit facilities for five years.[10]

After trial, the RTC upheld the validity of the promissory notes. It found that, in 2001 alone,
Equitable restructured respondents' loans amounting to US$228,200 and P1,000,000.[11] The trial
court, however, invalidated the escalation clause contained therein because it violated the principle
of mutuality of contracts.[12]Nevertheless, it took judicial notice of the steep depreciation of the peso
during the intervening period[13] and declared the existence of extraordinary deflation.
[14]
Consequently, the RTC ordered the use of the 1996 dollar exchange rate in computing
respondents' dollar-denominated loans.[15] Lastly, because the business reputation of
respondents was (allegedly) severely damaged when Equitable froze their accounts,[16] the trial court
awarded moral and exemplary damages to them.[17]

The dispositive portion of the February 5, 2004 RTC decision[18] provided:

WHEREFORE, premises considered, judgment is hereby rendered:

A) Ordering [Equitable] to reinstate and return the amount of [respondents']

deposit placed on hold status;

B) Ordering [Equitable] to pay [respondents] the sum of P12 [m]illion [p]esos as

moral damages;

C) Ordering [Equitable] to pay [respondents] the sum of P10 [m]illion [p]esos as

exemplary damages;

D) Ordering defendants Aimee Yu and Bejan [Lionel] Apas to pay [respondents],

jointly and severally, the sum of [t]wo [m]illion [p]esos as moral and exemplary
damages;

E) Ordering [Equitable, Aimee Yu and Bejan Lionel Apas], jointly and severally,
to pay [respondents'] attorney's fees in the sum of P300,000; litigation expenses
in the sum of P50,000 and the cost of suit;

F) Directing plaintiffs Ng Sheung Ngor and Ken Marketing to pay [Equitable] the
unpaid principal obligation for the peso loan as well as the unpaid obligation for
the dollar denominated loan;

G) Directing plaintiff Ng Sheung Ngor and Ken Marketing to pay [Equitable]

interest as follows:

1) 12% per annum for the peso loans;

2) 8% per annum for the dollar loans. The basis for the payment of the dollar
obligation is the conversion rate of P26.50 per dollar availed of at the time of
incurring of the obligation in accordance with Article 1250 of the Civil Code of
the Philippines;

H) Dismissing [Equitable's] counterclaim except the payment of the aforestated

unpaid principal loan obligations and interest.

SO ORDERED.[19]

Equitable and respondents filed their respective notices of appeal.[20]

In the March 1, 2004 order of the RTC, both notices were denied due course because
Equitable and respondents “failed to submit proof that they paid their respective appeal fees.”[21]

WHEREFORE, premises considered, the appeal interposed by defendants from

the Decision in the above-entitled case is DENIED due course. As of February 27,
2004, the Decision dated February 5, 2004, is considered final and executory in
 so far as [Equitable, Aimee Yu and Bejan Lionel Apas] are concerned.
[22]
(emphasis supplied)

Equitable moved for the reconsideration of the March 1, 2004 order of the RTC [23] on the
ground that it did in fact pay the appeal fees. Respondents, on the other hand, prayed for the
issuance of a writ of execution.[24]

On March 24, 2004, the RTC issued an omnibus order denying Equitable's motion for
reconsideration for lack of merit[25] and ordered the issuance of a writ of execution in favor of
respondents.[26] According to the RTC, because respondents did not move for the reconsideration of
the previous order (denying due course to the parties’ notices of appeal), [27] the February 5, 2004
decision became final and executory as to both parties and a writ of execution against Equitable was
in order.[28]

A writ of execution was thereafter issued[29] and three real properties of Equitable were levied
[30]
upon.

On March 26, 2004, Equitable filed a petition for relief in the RTC from the March 1, 2004
order. It, however, withdrew that petition on March 30, 2004 [32]and instead filed a petition for
[31]

certiorari with an application for an injunction in the CA to enjoin the implementation and execution of
the March 24, 2004 omnibus order.[33]

On June 16, 2004, the CA granted Equitable's application for injunction. A writ of preliminary
injunction was correspondingly issued.[34]

Notwithstanding the writ of injunction, the properties of Equitable previously levied upon were
sold in a public auction on July 1, 2004. Respondents were the highest bidders and certificates of
sale were issued to them.[35]

On August 10, 2004, Equitable moved to annul the July 1, 2004 auction sale and to cite the
sheriffs who conducted the sale in contempt for proceeding with the auction despite the injunction
order of the CA.[36]

On October 28, 2005, the CA dismissed the petition for certiorari.[37] It found Equitable guilty of
forum shopping because the bank filed its petition for certiorari in the CA several hours before
withdrawing its petition for relief in the RTC.[38] Moreover, Equitable failed to disclose, both in the
statement of material dates and certificate of non-forum shopping (attached to its petition for
certiorari in the CA), that it had a pending petition for relief in the RTC.[39]

Equitable moved for reconsideration[40] but it was denied.[41] Thus, this petition.

Equitable asserts that it was not guilty of forum shopping because the petition for relief was
withdrawn on the same day the petition for certiorari was filed.[42] It likewise avers that its petition for
certiorari was meritorious because the RTC committed grave abuse of discretion in issuing the
March 24, 2004 omnibus order which was based on an erroneous assumption. The March 1, 2004
order denying its notice of appeal for non payment of appeal fees was erroneous because it had in
fact paid the required fees.[43] Thus, the RTC, by issuing its March 24, 2004 omnibus order,
effectively prevented Equitable from appealing the patently wrongFebruary 5, 2004 decision.[44]

This petition is meritorious.

EQUITABLE WAS NOT GUILTY OF FORUM
SHOPPING

Forum shopping exists when two or more actions involving the same transactions, essential
facts and circumstances are filed and those actions raise identical issues, subject matter and causes
of action.[45] The test is whether, in two or more pending cases, there is identity of parties, rights or
causes of actions and reliefs.[46]

Equitable's petition for relief in the RTC and its petition for certiorari in the CA did not have
identical causes of action. The petition for relief from the denial of its notice of appeal was based on
the RTC’s judgment or final order preventing it from taking an appeal by “fraud, accident, mistake or
excusable negligence.”[47] On the other hand, its petition for certiorari in the CA, a special civil action,
sought to correct the grave abuse of discretion amounting to lack of jurisdiction committed by the
RTC.[48]

In a petition for relief, the judgment or final order is rendered by a court with competent
jurisdiction. In a petition for certiorari, the order is rendered by a court without or in excess of its
jurisdiction.

Moreover, Equitable substantially complied with the rule on non-forum shopping when it
moved to withdraw its petition for relief in the RTC on the same day (in fact just four hours and forty
minutes after) it filed the petition for certiorari in the CA. Even if Equitable failed to disclose that it had
a pending petition for relief in the RTC, it rectified what was doubtlessly a careless oversight by
withdrawing the petition for relief just a few hours after it filed its petition for certiorari in the CA ― a
clear indication that it had no intention of maintaining the two actions at the same time.

THE TRIAL COURT COMMITTED GRAVE

ABUSE OF DISCRETION IN ISSUING ITS
MARCH 1, 2004 AND MARCH 24, 2004
ORDERS

Section 1, Rule 65 of the Rules of Court provides:

Section 1. Petition for Certiorari. When any tribunal, board or officer exercising
judicial or quasi-judicial function has acted without or in excess of its or his
jurisdiction, or with grave abuse of discretion amounting to lack or excess of
jurisdiction, and there is no appeal, nor any plain, speedy or adequate remedy in
the ordinary course of law, a person aggrieved thereby may file a verified petition in
the proper court, alleging the facts with certainty and praying that judgment be
rendered annulling or modifying the proceedings of such tribunal, board or officer, and
granting such incidental reliefs as law and justice may require.

The petition shall be accompanied by a certified true copy of the judgment,

order or resolution subject thereof, copies of all pleadings and documents relevant and
pertinent thereto, and a sworn certificate of non-forum shopping as provided in the third
paragraph of Section 3, Rule 46.
There are two substantial requirements in a petition for certiorari. These are:

1. that the tribunal, board or officer exercising judicial or quasi-judicial functions

acted without or in excess of his or its jurisdiction or with grave abuse of
discretion amounting to lack or excess of jurisdiction; and

2. that there is no appeal or any plain, speedy and adequate remedy in the
ordinary course of law.

For a petition for certiorari premised on grave abuse of discretion to prosper, petitioner must
show that the public respondent patently and grossly abused his discretion and that abuse amounted
to an evasion of positive duty or a virtual refusal to perform a duty enjoined by law or to act at all in
contemplation of law, as where the power was exercised in an arbitrary and despotic manner by
reason of passion or hostility.[49]

The March 1, 2004 order denied due course to the notices of appeal of both Equitable and
respondents. However, it declared that the February 5, 2004 decision was final and executory only
with respect to Equitable.[50] As expected, the March 24, 2004 omnibus order denied Equitable's
motion for reconsideration and granted respondents' motion for the issuance of a writ of execution.
[51]

The March 1, 2004 and March 24, 2004 orders of the RTC were obviously intended to prevent
Equitable, et al. from appealing the February 5, 2004 decision.Not only that. The execution of the
decision was undertaken with indecent haste, effectively obviating or defeating Equitable's right to
avail of possible legal remedies.No matter how we look at it, the RTC committed grave abuse of
discretion in rendering those orders.

With regard to whether Equitable had a plain, speedy and adequate remedy in the ordinary
course of law, we hold that there was none. The RTC denied due course to its notice of appeal in the
March 1, 2004 order. It affirmed that denial in the March 24, 2004 omnibus order. Hence, there was
no way Equitable could have possibly appealed the February 5, 2004 decision.[52]
Although Equitable filed a petition for relief from the March 24, 2004 order, that petition was
not a plain, speedy and adequate remedy in the ordinary course of law.[53] A petition for relief under
Rule 38 is an equitable remedy allowed only in exceptional circumstances or where there is no other
available or adequate remedy.[54]

Thus, we grant Equitable's petition for certiorari and consequently give due course to its
appeal.

EQUITABLE RAISED PURE QUESTIONS OF

LAW IN ITS PETITION FOR REVIEW

The jurisdiction of this Court in Rule 45 petitions is limited to questions of law. [55] There is a
question of law “when the doubt or controversy concerns the correct application of law or
jurisprudence to a certain set of facts; or when the issue does not call for the probative value of the
evidence presented, the truth or falsehood of facts being admitted.”[56]

Equitable does not assail the factual findings of the trial court. Its arguments essentially focus
on the nullity of the RTC’s February 5, 2004 decision. Equitable points out that that decision was
patently erroneous, specially the exorbitant award of damages, as it was inconsistent with
existing law and jurisprudence.[57]

THE PROMISSORY NOTES WERE VALID

The RTC upheld the validity of the promissory notes despite respondents’ assertion that those
documents were contracts of adhesion.

A contract of adhesion is a contract whereby almost all of its provisions are drafted by one
party.[58] The participation of the other party is limited to affixing his signature or his “adhesion” to the
contract.[59] For this reason, contracts of adhesion are strictly construed against the party who drafted
it.[60]

It is erroneous, however, to conclude that contracts of adhesion are invalid per se. They are,
on the contrary, as binding as ordinary contracts. A party is in reality free to accept or reject it. A
contract of adhesion becomes void only when the dominant party takes advantage of the weakness
of the other party, completely depriving the latter of the opportunity to bargain on equal footing.[61]

That was not the case here. As the trial court noted, if the terms and conditions offered by
Equitable had been truly prejudicial to respondents, they would have walked out and negotiated with
another bank at the first available instance. But they did not. Instead, they continuously availed of
Equitable's credit facilities for five long years.

While the RTC categorically found that respondents had outstanding dollar- and peso-
denominated loans with Equitable, it, however, failed to ascertain the total amount due (principal,
interest and penalties, if any) as of July 9, 2001. The trial court did not explain how it arrived at the
amounts of US$228,200 andP1,000,000.[62] In Metro Manila Transit Corporation v. D.M. Consunji,
[63]
we reiterated that this Court is not a trier of facts and it shall pass upon them only for compelling
reasons which unfortunately are not present in this case.[64] Hence, we ordered the partial remand of
the case for the sole purpose of determining the amount of actual damages.[65]

ESCALATION CLAUSE VIOLATED THE

PRINCIPLE OF
MUTUALITY OF CONTRACTS

Escalation clauses are not void per se. However, one “which grants the creditor an unbridled
right to adjust the interest independently and upwardly, completely depriving the debtor of the right to
assent to an important modification in the agreement” is void. Clauses of that nature violate the
principle of mutuality of contracts.[66] Article 1308[67] of the Civil Code holds that a contract must bind
both contracting parties; its validity or compliance cannot be left to the will of one of them.[68]

For this reason, we have consistently held that a valid escalation clause provides:
 1. that the rate of interest will only be increased if the applicable maximum
rate of interest is increased by law or by the Monetary Board; and

2. that the stipulated rate of interest will be reduced if the applicable

maximum rate of interest is reduced by law or by the Monetary Board (de-
escalation clause).[69]

The RTC found that Equitable's promissory notes uniformly stated:

If subject promissory note is extended, the interest for subsequent extensions shall be
at such rate as shall be determined by the bank.[70]

Equitable dictated the interest rates if the term (or period for repayment) of the loan was
extended. Respondents had no choice but to accept them. This was a violation of Article 1308 of the
Civil Code. Furthermore, the assailed escalation clause did not contain the necessary provisions for
validity, that is, it neither provided that the rate of interest would be increased only if allowed by law
or the Monetary Board, nor allowed de-escalation. For these reasons, the escalation clause was
void.

With regard to the proper rate of interest, in New Sampaguita Builders v. Philippine National
[71]
Bank we held that, because the escalation clause was annulled, the principal amount of the loan
was subject to the original or stipulated rate of interest. Upon maturity, the amount due was subject
to legal interest at the rate of 12% per annum.[72]

Consequently, respondents should pay Equitable the interest rates of 12.66% p.a. for their
dollar-denominated loans and 20% p.a. for their peso-denominated loans from January 10, 2001 to
July 9, 2001. Thereafter, Equitable was entitled to legal interest of 12% p.a. on all amounts due.

THERE WAS NO
EXTRAORDINARY DEFLATION

Extraordinary inflation exists when there is an unusual decrease in the purchasing power of
currency (that is, beyond the common fluctuation in the value of currency) and such decrease could
not be reasonably foreseen or was manifestly beyond the contemplation of the parties at the time of
the obligation. Extraordinary deflation, on the other hand, involves an inverse situation.[73]

Article 1250 of the Civil Code provides:

Article 1250. In case an extraordinary inflation or deflation of the currency stipulated

should intervene, the value of the currency at the time of the establishment of the
obligation shall be the basis of payment, unless there is an agreement to the contrary.

For extraordinary inflation (or deflation) to affect an obligation, the following requisites must be
proven:
1. that there was an official declaration of extraordinary inflation or deflation
from the Bangko Sentral ng Pilipinas (BSP);[74]
 2. that the obligation was contractual in nature;[75] and

3. that the parties expressly agreed to consider the effects of the extraordinary
inflation or deflation.[76]

Despite the devaluation of the peso, the BSP never declared a situation of extraordinary
inflation. Moreover, although the obligation in this instance arose out of a contract, the parties did
not agree to recognize the effects of extraordinary inflation (or deflation). [77] The RTC never
mentioned that there was a such stipulation either in the promissory note or loan agreement.
Therefore, respondents should pay their dollar-denominated loans at the exchange rate fixed by the
BSP on the date of maturity.[78]

THE AWARD OF MORAL AND EXEMPLARY

DAMAGES LACKED BASIS

Moral damages are in the category of an award designed to compensate the claimant for
actual injury suffered, not to impose a penalty to the wrongdoer.[79] To be entitled to moral damages,
a claimant must prove:

1. That he or she suffered besmirched reputation, or physical, mental or

psychological suffering sustained by the claimant;

2. That the defendant committed a wrongful act or omission;

3. That the wrongful act or omission was the proximate cause of the damages
the claimant sustained;

4. The case is predicated on any of the instances expressed or envisioned by

Article 2219[80] and 2220[81]. [82]

In culpa contractual or breach of contract, moral damages are recoverable only if the
defendant acted fraudulently or in bad faith or in wanton disregard of his contractual obligations.
[83]
The breach must be wanton, reckless, malicious or in bad faith, and oppressive or abusive.[84]

The RTC found that respondents did not pay Equitable the interest due on February 9, 2001
(or any month thereafter prior to the maturity of the loan)[85] or the amount due (principal plus interest)
due on July 9, 2001.[86] Consequently, Equitable applied respondents' deposits to their loans upon
maturity.

The relationship between a bank and its depositor is that of creditor and debtor. [87] For this
reason, a bank has the right to set-off the deposits in its hands for the payment of a depositor's
indebtedness.[88]

Respondents indeed defaulted on their obligation. For this reason, Equitable had the option to
exercise its legal right to set-off or compensation. However, the RTC mistakenly (or, as it now
appears, deliberately) concluded that Equitable acted “fraudulently or in bad faith or in wanton
disregard” of its contractual obligations despite the absence of proof. The undeniable fact was that,
whatever damage respondents sustained was purely the consequence of their failure to pay
their loans. There was therefore absolutely no basis for the award of moral damages to them.

Neither was there reason to award exemplary damages. Since respondents were not entitled
to moral damages, neither should they be awarded exemplary damages. [89] And if respondents were
not entitled to moral and exemplary damages, neither could they be awarded attorney's fees and
litigation expenses.[90]

ACCORDINGLY, the petition is hereby GRANTED.

The October 28, 2005 decision and February 3, 2006 resolution of the Court of Appeals in CA-
G.R. SP No. 83112 are hereby REVERSED and SET ASIDE.

The March 24, 2004 omnibus order of the Regional Trial Court, Branch 16, Cebu City in Civil
Case No. CEB-26983 is hereby ANNULLED for being rendered with grave abuse of discretion
amounting to lack or excess of jurisdiction. All proceedings undertaken pursuant thereto are likewise
declared null and void.

The March 1, 2004 order of the Regional Trial Court, Branch 16 of Cebu City in Civil Case No.
CEB-26983 is hereby SET ASIDE. The appeal of petitioners Equitable PCI Bank, Aimee Yu and
Bejan Lionel Apas is therefore given due course.

The February 5, 2004 decision of the Regional Trial Court, Branch 16 of Cebu City in Civil
Case No. CEB-26983 is accordingly SET ASIDE. New judgment is hereby entered:

1. ordering respondents Ng Sheung Ngor, doing business under the name and style
of “Ken Marketing,” Ken Appliance Division, Inc. and Benjamin E. Go to pay petitioner
Equitable PCI Bank the principal amount of their dollar- and peso-denominated loans;
2. ordering respondents Ng Sheung Ngor, doing business under the name and style
of “Ken Marketing,” Ken Appliance Division, Inc. and Benjamin E. Go to pay petitioner
Equitable PCI Bank interest at:
a) 12.66% p.a. with respect to their dollar-denominated loans from January
10, 2001 to July 9, 2001;
b) 20% p.a. with respect to their peso-denominated loans from January 10,
2001 to July 9, 2001;[91]
c) pursuant to our ruling in Eastern Shipping Lines v. Court of Appeals,[92] the
total amount due on July 9, 2001 shall earn legal interest at 12% p.a.from the
time petitioner Equitable PCI Bank demanded payment, whether judicially or
extra-judicially; and
d) after this Decision becomes final and executory, the applicable rate shall
be 12% p.a. until full satisfaction;
3. all other claims and counterclaims are dismissed.
As a starting point, the Regional Trial Court, Branch 16 of Cebu City shall compute the exact
amounts due on the respective dollar-denominated and peso-denominated loans, as of July 9, 2001,
of respondents Ng Sheung Ngor, doing business under the name and style of “Ken Marketing,” Ken
Appliance Division and Benjamin E. Go.

SO ORDERED.
G.R. No. 122947 July 22, 1999

TIMOTEO BALUYOT, JAIME BENITO, BENIGNO EUGENIO, ROLANDO GONZALES,

FORTUNATO FULGENCIO and CRUZ-NA-LIGAS HOMESITE ASSOCIATION, INC., petitioners,
vs.
THE HONORABLE COURT OF APPEALS, THE QUEZON CITY GOVERNMENT and
UNIVERSITY OF THE PHILIPPINES, respondents.

MENDOZA, J.:

This is a petition for review of the decision of the Court of Appeals, dated November 24, 1995,
setting aside an order of the Regional Trial Court of Quezon City, Branch 89, and dismissing the
complaint filed by petitioners against private respondents University of the Philippines and the
Quezon City government.

The facts are as follows:

Petitioners Timoteo Baluyot, Jaime Benito, Benigno Eugenio, Rolando Gonzales, and Fortunato
Fulgencio are residents of Barangay Cruz-na-Ligas, 1 Diliman, Quezon City. The Cruz-na-Ligas
Homesite Association, Inc. is a non-stock corporation of which petitioners and other residents of
Barangay Cruz-na-Ligas are members. On March 13, 1992, petitioners filed a complaint for specific
performance and damages against, private respondent University of the Philippines before the
Regional Trial Court of Quezon City, docketed as Civil Case No. 4-92-11663. The complaint was
later on amended to include private respondent Quezon City government as defendant. As
amended, the complaint alleges: 2

5. That plaintiffs and their ascendants have been in open, peaceful, adverse and
continuous possession in the concept of an owner since memory can no longer recall
of that parcel of riceland known [as] Sitio Libis, Barrio Cruz-na-Ligas, Quezon City (now
Diliman, Quezon City), as delineated in the Plan herein attached as Annex "B" while
the members of the plaintiff Association and their ascendants have possessed since
time immemorial openly, adversely, continuously and also in the concept of an owner,
the rest of the area embraced by and within the Barrio Cruz-na-Ligas, Diliman, Quezon
City as shown in that Plan herein attached as Annex "C" in all consisting of at least
forty (42) hectares;

6. That since October 1972, the claims of the plaintiffs and/or members of plaintiff
Association have been the subject of quasi-judicial proceedings and administrative
investigations in the different branches of the government penultimately resulting in the
issuance of that Indorsement dated May 7, 1975 by the Bureau of Lands, a copy of
which is made an integral pan of Annex "D", and ultimately, in the issuance of the
Indorsement of February 12, 1985, by the office of the President of the Republic of the
Philippines, a copy of which is herein attached as Annex "E" confirming the rights of the
bonafide residents of Barrio Cruz-na-Ligas to the parcel of land they have been
possessing or occupying as originally found and recommended in that Brief dated
November 2, 1972 and Recommendation dated November 7, 1972, copies of which
are made integral parts hereof as Annexes "F" and "G";
7. That defendant UP, pursuant to the said Indorsement (Annex E) from the Office of
the President of the Republic of the Philippines, issued that Reply Indorsement dated
September 19, 1984, a copy of which is herein attached as Annex "H", pertinent portion
of which is quoted as follows:

2. In 1979, the U.P. Board of Regents approved the donation of about 9.2
hectares of the site, directly to the residents of Brgy. Krus Na Ligas. After
several negotiations with the residents, the area was increased to
15.8 hectares (158,379 square meters); (emphasis supplied).1âwphi1.nêt

3. Notwithstanding the willingness of U.P. to proceed with the donation,

Execution of the legal instrument to formalize it failed because of the
unreasonable demand of the residents for an area bigger than 15.8
hectares.

8. That upon advise of counsel and close study of the said offer of defendant UP to
Donate 15.8379 hectares, plaintiff Association proposed to accept and the defendant
UP manifested in writing [its] consent to the intended donation directly to the plaintiff
Association for the benefit of the bonafide residents of Barrio Cruz-na-Ligas and
plaintiffs' Association have agreed to comply with the terms and conditions of the
donation;

9. That, however, defendant UP backed-out from the arrangement to Donate directly to

the plaintiff Association for the benefit of the qualified residents and high-handedly
resumed to negotiate the donation thru the defendant Quezon City Government under
the terms disadvantageous or contrary to the rights of the bonafide residents of the
Barrio as shown in the Draft of Deed of Donation herein attached as Annex "I";

10. That plaintiff Association forthwith amended [its] petition in the pending case LRC
No. 3151 before Branch 100 of the Regional Trial Court of Quezon City by adding the
additional cause of action for specific performance aside from the exclusion from the
technical description of certificate of title of defendant UP the area embraced in the
Barrio Cruz-na-Ligas, consisting of at least forty-two (42) hectares, more or less, and
praying in the said Amended Petition for a writ of preliminary injunction to restrain
defendant UP from donating the area to the defendant Quezon City Government, a
copy of the said Amended Petition is herein attached as Annex "J";

11. That, after due notice and hearing, the application for writ of injunction as well as
the opposition of defendant UP, the Order dared January 24, 1986 granting the writ of
preliminary injunction was issued, a copy of which is herein attached as Annex "K";

12. That in the hearing of the Motion for Reconsideration filed by defendant UP.
Reconsideration is herein copy of the said Motion for attached as Annex "L", plaintiff
Association finally agreed to the lifting of the said Order (Annex K) granting the
injunction after defendant UP made an assurance in their said Motion for
Reconsideration that the donation to the defendant Quezon City Government will be for
the benefit of the residents of Cruz-Na-Ligas as shown in the following:

6. The execution of the Deed of Donation in favor of the Quezon City

government will not work any injustice to the petitioners.
 As well stated in Respondent's Opposition to the Prayer for Issuance of a
Writ of Preliminary Injunction, it is to the best interest of the Petitioners
that such a deed be executed.

The plan to Donate said property to the residents of Bgy. Krus-na-Ligas,

that is, throughthe Quezon City government, is to their best interests. Left
alone, the present land and physical development of the area leaves
much to be desired. Road and drainage networks have to be constructed,
water and electric facilities installed, and garbage collection provided for.
The residents, even collectively, do not have the means and resources to
provide for themselves such basis facilities which are necessary if only to
upgrade their living condition.

Should the proposed donation push through, the residents would be the
first to benefit.

thus, Branch 100 of this Honorable Court issued that Order dated April 2, 1986, lifting
the injunction, a copy of which is hereby attached as Annex "M";

13. That, however, defendant UP took exception to the aforesaid Order lifting the Order
of Injunction and insisted [on] the dismissal of the case; thus, it was stated that:

2. Respondent has consistently taken the position that efforts to expedite

the formalization of a Deed of Donation for the benefit of the residents of
Barangay Kruz-na-Ligas should not only be pre-conditioned on the lifting
of the Writ of Preliminary Injunction, but also the dismissal of the Petition;

in defendant UP's Motion for Reconsideration of the Order dated April 2, 1986, a copy
of the said Motion is herein attached as Annex "N";

14. That plaintiff Association in [its] "Comment" on the Motion for Reconsideration of
the Order dated April 2, 1986, filed on June 2, 1986, manifested [its] willingness to the
dismissal of the case, aside from [its] previous consent to the lifting of the preliminary
injunction; provided, that the area to be Donated thru the defendant Quezon City
government be subdivided into lots to be given to the qualified residents together with
the certificate of titles, without cost, a copy of the said Comment is hereby attached as
Annex "O";

15. That, that was why, in the hearing re-scheduled on June 13, 1986 of defendant
UP's Motion for Reconsideration of the Order dated April 2, 1986 (Annex N), the Order
dated June 13, 1986, was issued, the full text of which is quoted as follows:

After hearing the manifestation of Atty. Angeles for the petitioners and
Atty. Raval for the respondent University of the Philippines, since the
petitioners' counsel was the first to make a manifestation that this case
which is now filed before this court should be dismissed first without
prejudice but because of the vehement objection of the University of the
Philippines, thru counsel, that a dismissal without prejudice creates a
cloud on the title of the University of the Philippines and even with or
without this case filed, the University of the Philippines has already
decided to have the property subject of litigation Donated to the residents
 of Cruz-na-ligas with, of course, the conditions set therein, let this case
be DISMISSED without pronouncement as to cost.

As to the charging lien filed by Petitioners thru counsel, it will be a sole

litigation between the petitioners and the oppositors both represented by
counsel, with the University of the Philippines being neutral in this case.

and a copy of the said Order is herein attached as Annex "P";

16. That, true to [its] commitment stated in the aforesaid Order of June 13, 1986,
defendant UP executed that Deed of Donation on August 5, 1986, in favor of the
defendant Quezon City Government for the benefit of the qualified residents of Cruz-
na-Ligas; however, neither the plaintiffs herein nor plaintiff Association officers had
participated in any capacity in the act of execution of the said deed of donation, a copy
of the said executed Deed of Donation is herein attached as Annex "Q";

17. That under the said deed of donation, the 15.8379 hectares were ceded,
transferred and conveyed and the defendant Quezon City Government accepted the
Donation under the terms and conditions, pertinent portions of which are quoted as
follows:

This donation is subject to the following conditions:

xxx xxx xxx

2. The DONEE shall, within eighteen (18) months from the signing hereof,
undertake at its expense the following:

a. Cause the removal of structures built on the boundaries

of the Donated lot;

b. Relocate inside the Donated lot all families who are

presently outside of the Donated lot;

c. Relocate all families who cannot be relocated within the

boundaries of the Donated lot to a site outside of the
University of the Philippines campus in Diliman, Quezon
City;

d. Construct a fence on the boundaries adjoining Kruz-na-

Ligas and the University.

In the construction of the fence, the DONEE shall establish a ten-meter

setback in the area adjacent to Pook Amorsolo and the Peripheral Road
(C.P. Garcia Street);

e. Construct a drainage canal within the area Donated along

the boundary line between Kruz- na-ligas and Pook
Amorsolo.
 In the construction of the fence and the drainage canal, the DONEE shall
conform to the plans and specifications prescribed by the DONOR.

xxx xxx xxx

5. The DONEE shall, after the lapse of three (3) years, transfer to the
qualified residents by way of donation the individual lots occupied by
each of them, subject to whatever conditions the DONEE may wish to
impose on said donation;

6. Transfer of the use of any lot in the property Donated during the period
of three (3) years referred to in Item 4 above, shall be allowed only in
these cases where transfer is to be effected to immediate members of the
family in the ascending and descending line and said Transfer shall be
made known to the DONOR. Transfer shall be affected by the Donee;

7. The costs incidental to this Deed, including the registration of the

property Donated shall be at the expense of the DONEE.

The Donee shall also be responsible for any other legitimate obligation in
favor of any third person arising out of, in connection with, or by reason
of, this donation.

18. That the defendant Quezon City Government immediately prepared the
groundworks in compliance with the afore-quoted terms and conditions; however,
defendant UP under the officer-in-charge then and even under the incumbent
President, Mr. Jose Abueva, had failed to deliver the certificate of title covering the
property to be Donated to enable the defendant Quezon City Government to register
the said Deed of Donation so that corresponding certificate of title be issued under its
name;

19. That defendant UP had continuously and unlawfully refused, despite requests and
several conferences made, to comply with their reciprocal duty, to deliver the certificate
of title to enable the Donee, the defendant Quezon City Government, to register the
ownership so that the defendant Quezon City Government can legally and fully comply
with their obligations under the said deed of donation;

20. That upon expiration of the period of eighteen (18) [months], for alleged non-
compliance of the defendant Quezon City Government with terms and conditions
quoted in par. 16 hereof, defendant UP thru its President, Mr. Jose Abueva,
unilaterally, capriciously, whimsically and unlawfully issued that Administrative Order
No. 21 declaring the deed of donation revoked and the Donated property be reverted to
defendant UP;

21. That the said revocation and reversion without judicial declaration is illegal and
prejudicial to the rights of the plaintiffs who are the bonafide residents or who represent
the bonafide residents of the Barrio Cruz-na-Ligas because: firstly, they were not made
bound to comply with the terms and conditions of the said donation allegedly violated
by the defendant Quezon City Government;secondly, defendant UP, as averred in the
preceding paragraphs 9 and 11, was the one who insisted that the donation be coursed
through the defendant Quezon City Government; and the said revocation or reversion
are likewise pre-judicial to third parties who acquired rights therefrom;
22. That, as it apparently turned out, the plaintiff Association, who duly represented the
qualified or bonafide resident of Barrio Cruz-na-Ligas, was deceived into consenting to
the lifting of the injunction in said LRC Case No. Q-3151 and in agreeing to the
dismissal of the said LRC Case No. Q-3151 when defendant unjustifiably revoked the
donation which they undertook as a condition to the dismissal of LRC Case No. 3151;

23. That by reason of the deception, the herein plaintiffs hereby reiterate their claims
and the claims of the bonafide residents and resident/farmers of Barrio Cruz-na-Ligas
[to] the ownership of forty-two (42) hectares area they and their predecessors-in-
interest have occupied and possessed; parenthetically, the said 42 hectares portion are
included in the tax declaration under the name of defendant UP who is exempted from
paying real estate tax; hence, there is no assessment available;

24. That by reason of bad faith and deceit by defendant UP in the execution and in
compliance with [its] obligations under the said Deed of Donation (Annex Q hereof)
plaintiffs have suffered moral damages in the amount of at least P300,000.00;

25. That because of wanton and fraudulent acts of defendant UP in refusing to comply
with what is incumbent upon [it] under the Deed of Donation (Annex Q) and in
whimsically and oppressively declaring the revocation of the said deed of donation and
the reversion of the 15.8 hectares Donated, [it] should be made liable to pay exemplary
damages in the sum of P50,000.00 to serve as example in the interest of public good;

26. That because of said defendant UP's unlawful acts, plaintiffs have been compelled
to retain the services of their attorneys to prosecute this case with whom they agreed to
pay the sum of Fifty Thousand Pesos (P50,000.00) as attorney's fees; and by way of:

APPLICATION FOR WRIT OF

PRELIMINARY INJUNCTION

(a) Plaintiffs hereby reallege and reproduce herein by reference all the material and
relevant allegations in the preceding paragraphs;

(b) Having legally established and duly recognized rights on the said parcel of lands as
shown in the documents marked herein as Annexes "D"; E; F; G; and M, plaintiffs have
the rights to be protected by an injunctive writ or at least a restraining order to restrain
and to order defendant UP from:

1) Ejecting the plaintiffs-farmers and from demolishing the improvements

in the parcel of riceland or farmlands situated at Sitio Libis of Barrio Cruz-
na-Ligas, embraced in the claims of the plaintiffs as shown in these
photographs herein attached as Annexes "R" to "R-3";

2) Executing another deed of donation with different terms and conditions

in favor of another and for the benefit of additional occupants who are not
bonafide residents of the Barrio or Barangay Cruz-na-Ligas;

(c) Defendant UP has already started ejecting the plaintiffs and demolishing their
improvements on the said riceland and farmlands in order to utilize the same for the
residential house project to the irreparable damages and injuries to the plaintiffs-
 farmers, unless restrained or enjoined to desist, plaintiffs will continue to suffer
irreparable damages and injuries;

(d) Plaintiffs are ready and willing to file the injunctive bond in such amount that may be
reasonably fixed;

PRAYER

WHEREFORE, it is respectfully prayed to this Honorable Court that before the conduct
of the proper proceedings, a writ of preliminary injunction or at least a temporary
restraining order be issued, ordering defendant UP to observe status quo; thereafter,
after due notice and hearing, a writ of preliminary injunction be issued; (a) to restrain
defendant UP or to their representative from ejecting the plaintiffs from and
demolishing their improvements on the riceland or farmland situated at Sitio Libis; (b) to
order defendant UP to refrain from executing another deed of donation in favor another
person or entity and in favor of non-bonafide residents of Barrio Cruz-na-Ligas different
from the Deed of Donation (Annex Q hereof), and after trial on the merits, judgment be
rendered:

1. Declaring the Deed of Donation (Annex Q) as valid and subsisting and

ordering the defendant UP to abide by the terms and conditions thereof;

2. Adjudging the defendant University of the Philippines to segregate the

riceland or farmlands as additional area embraced by the Barrio Cruz-na-
Ligas, pursuant to the First Indorsement of August 10, 1984 (Annex E)
and pursuant to Findings, Reports and Recommendation (Annex G) of
the Bureau of Lands with an estimated assessed value of P700,000.00;

3. Ordering defendant UP to pay for plaintiffs' moral damages of

P300,000.00, exemplary damages of P50,000.00, and costs of suit;

4. Enjoining defendant UP to pay professional fees of P50,000.00 of the

undersigned attorneys for the plaintiffs; and

Plaintiffs further respectfully pray for other just and equitable reliefs.

Earlier, on May 15, 1992, the trial court denied petitioners' application for preliminary injunction. Its
order stated: 3

ORDER

Acting on plaintiffs' application for the issuance of a temporary restraining

order/preliminary injunction and the opposition thereto of the defendant filed on April 3,
1992, as well as plaintiffs' reply therewith filed on April 23, 1992, considered in the light
of the affidavit executed on April 23, 1992 by Timoteo Baluyot, Sr. and by Jaime
Benito, Benigno Eugenio, Rolando Gonzales and Fortunato Fulgencio executed on
April 21, 1929, for the plaintiffs; and, the affidavit of merit executed on April 28, 1992,
by Atty. Carmelita Yadao-Guno, for the defendant, it appearing that the principal action
in this case is one for the specific performance, apparently, of the Deed of Donation
executed on August 8, 1986, by defendant University of the Philippines in favor of the
Quezon City Government, involving the land in question, in virtue of which, it is clear
that the plaintiffs are not parties to the said deed of donation, by reason of which,
 consequently, there has not been established by the plaintiffs a clear legal right to the
enforcement of the said deed of donation, especially as the said deed was already
validly revoked by the University of the Philippines, thru its president, Jose Abueva, in
his Administrative Order No. 21, for which reason the same could no longer be
enforced, plaintiffs' prayer for the issuance of a temporary restraining order/writ of
preliminary injunction, is DENIED.

SO ORDERED.

Petitioners moved for a reconsideration of the above order. Without resolving petitioners' motion, the
trial court ordered petitioners to amend their complaint to implead respondent Quezon City
government as defendant. 4Hence, the amended complaint was filed on June 10, 1992, in which it is
alleged:

4. That the Quezon City Government . . . which should be joined as party plaintiff is
instead impleaded herein as party defendant, because its consent can not be secured
within a reasonable time;

On July 27, 1992, respondent city government filed its Answer to the Amended Complaint with
Cross-Claim. 5However, on November 29, 1993, it moved to withdraw its cross-claim against UP 6 on
the ground that, after conferring with university officials, the city government had recognized "the
propriety, validity and legality of the revocation of the Deed of Donation." 7

The motion was granted by the trial court in its order, dated December 22, 1994. 8 On the same day,
a Joint Motion to Dismiss was filed by UP and the Quezon City government on the ground that the
complaint fails to state a cause of action. 9 Petitioners opposed the motion.

On April 26, 1995, the trial court denied respondents' motion to dismiss on the ground that "a perusal
of [petitioners'] amended complaint, specifically paragraph 5 thereof, . . . shows that it necessarily
alleges facts entitling [petitioners] to acquire ownership over the land in question, by reason of
laches, which cannot be disposed of and resolved at this stage without a trial on the merits." 10 The
trial court, however, reiterated its ruling that petitioners did not have a cause of action for specific
performance on the ground that the deed of donation had already been revoked as stated in its order
denying injunction.

On August 14, 1995, respondents filed a petition for certiorari with the Court of Appeals, charging the
trial court with grave abuse of discretion in refusing to dismiss the complaint filed by petitioners.
Respondents contended that —

1. Respondent Judge himself had declared that [petitioners] clearly are not parties to
the deed of donation sought to be enforced thus they had not shown clear legal right to
the enforcement of said deed of donation which is their principal cause of action; and

2. Under the factual circumstances obtaining, the respondent judge gravely erred in
denying the joint motion to dismiss and declaring that [petitioners] are entitled to
acquire ownership over the land in question by reason of laches through a trial on the
merits; such constitutes a collateral attack on [respondent UP's] title in the same suit
for specific performance.

On November 24, 1995, the appellate court rendered a decision setting aside the trial court's order of
April 26, 1995 and ordering the dismissal of Civil Case No. 4-92-11663. The appellate court ruled
that —
1. Petitioners' complaint did not allege any claim for the annulment of UP's title over the portion of
land concerned or the reconveyance thereof to petitioners;

2. The alleged cause of action based on ownership of the land by petitioners was tantamount to a
collateral attack on the title of UP which is not allowed under the law; and

3. There is no acquisition of ownership by laches.

Hence, this petition for review on certiorari based on the following grounds:

I. THE RESPONDENT COURT OF APPEALS WAS IN ERROR IN CONCLUDING

THAT THE TRIAL COURT ACTED WITH GRAVE ABUSE OF DISCRETION IN
DENYING THE JOINT MOTION TO DISMISS.

II. IN DISMISSING THE AMENDED COMPLAINT, THE RESPONDENT APPELLATE

COURT HAS ACTED IN EXCESS [OF] JURISDICTION WHEN IT MADE [THE]
FINDING AND CONCLUSION THAT THE REVOCATION OF THE DONATION IS
VALID WHEN THAT IS THE PRIMARY AND CONTROVERTED ISSUE INVOLVING
VARIED QUESTIONS OF FACTS.

Petitioners argue that, on its face, their amended complaint alleges facts constituting a cause of
action which must be fully explored during trial. They cite paragraphs 18, 19, and 20 of their
complaint questioning the validity of the revocation of the donation and seek the enforcement of the
donation through specific performance. 11

On the other hand, respondents contend that by seeking specific performance of the deed of
donation as their primary cause of action, petitioners cannot at the same time claim ownership over
the property subject of the donation by virtue of laches or acquisitive prescription. Petitioners cannot
base their case on inconsistent causes of action. Moreover, as the trial court already found the deed
to have been validly revoked, the primary cause of action was already thereby declared in existent.
Hence, according to respondents, the Court of Appeals correctly dismissed the complaint. 12

First. The question is whether the complaint states a cause of action. The trial court held that
inasmuch as the donation made by UP to the Quezon City government had already been revoked,
petitioners, for whose benefit the donation had been made, had no cause of action for specific
performance. Nevertheless, it denied respondents' joint motion to dismiss petitioners' action on the
ground that respondent UP was barred from contesting petitioners' right to remain in possession on
the ground of laches.

This is error. While prescription does not run against registered lands, nonetheless a registered
owner's action to recover possession of his land may be barred by laches. As held in Mejia de Lucas
v. Gamponia: 13

[W]hile no legal defense to the action lies, an equitable one lies in favor of the
defendant and that is, the equitable defense of laches. No hold that the defense of
prescription or adverse possession in derogation of the title of the registered owner
Domingo Mejia does not lie, but that of the equitable defense of laches. Otherwise
stated, we hold that while defendant may not be considered as having acquired title by
virtue of his and his predecessors' long continued possession for 37 years, the original
owner's right to recover back the possession of the property and the title thereto from
the defendant has, by the long period of 37 years and by patentee's inaction and
neglect, been converted into a stale demand.
Thus, laches is a defense against a registered owner suing to recover possession of the land
registered in its name. But UP is not suing in this case. It is petitioners who are, and their suit is
mainly to seek enforcement of the deed of donation made by UP in favor of the Quezon City
government. The appellate court therefore correctly overruled the trial court on this point. Indeed,
petitioners do not invoke laches. What they allege in their complaint is that they have been
occupying the land in question from time immemorial, adversely, and continuously in the concept of
owner, but they are not invoking laches. If at all, they are claiming ownership by prescription which,
as already stated, is untenable considering that the land in question is a registered land. Nor can
petitioners question the validity of UP's title to the land. For as the Court of Appeals correctly held,
this constitutes a collateral attack on registered title which is not permitted.

On the other hand, we think that the Court of Appeals erred in dismissing petitioners' complaint for
failure to state a cause of action.

A cause of action exists if the following elements are present, namely: (1) a right in favor of the
plaintiff by whatever means and under whatever law it arises or is created; (2) an obligation on the
part of the defendant to respect or not to violate such right; and (3) an act or omission on the part of
such defendant in violation of the right of the plaintiff or constituting a breach of the obligations of the
defendant to the plaintiff for which the latter may maintain an action for recovery of damages. 14

We find all the elements of a cause of action contained in the amended complaint of petitioners.
While, admittedly, petitioners were not parties to the deed of donation, they anchor their right to seek
its enforcement upon their allegation that they are intended beneficiaries of the donation to the
Quezon City government. Art. 1311, second paragraph, of the Civil Code provides:

If a contract should contain some stipulation in favor of a third person, he may demand
its fulfillment provided he communicated his acceptance to the obliger before its
revocation. A mere incidental benefit or interest of a person is not sufficient. The
contracting parties must have clearly and deliberately conferred a favor upon a third
person.

Under this provision of the Civil Code, the following requisites must be present in order to have a
stipulation pour autrui: 15

(1) there must be a stipulation in favor of a third person;

(2) the stipulation must be a part, not the whole of the contract;

(3) the contracting parties must have clearly and deliberately conferred a favor upon a
third person, not a mere incidental benefit or interest;

(4) the third person must have communicated his acceptance to the obliger before its
revocation; and

(5) neither of the contracting parties bears the legal representation or authorization of
the third party.

The allegations in the following paragraphs of the amended complaint are sufficient to bring
petitioners' action within the purview of the second paragraph of Art. 1311 on stipulations pour autrui:
1. Paragraph 17, that the deed of donation contains a stipulation that the Quezon City government,
as donee, is required to transfer to qualified residents of Cruz-na-Ligas, by way of donations, the lots
occupied by them;

2. The same paragraph, that this stipulation is part of conditions and obligations imposed by UP, as
donor, upon the Quezon City government, as donee;

3. Paragraphs 15 and 16, that the intent of the parties to the deed of donation was to confer a favor
upon petitioners by transferring to the latter the lots occupied by them;

4. Paragraph 19, that conferences were held between the parties to convince UP to surrender the
certificates of title to the city government, implying that the donation had been accepted by
petitioners by demanding fulfillment thereof 16 and that private respondents were aware of such
acceptance; and

5. All the allegations considered together from which it can be fairly inferred that neither of private
respondents acted in representation of the other; each of the private respondents had its own
obligations, in view of conferring a favor upon petitioners.

The amended complaint further alleges that respondent UP has an obligation to transfer the subject
parcel of land to the city government so that the latter can in turn comply with its obligations to make
improvements on the land and thereafter transfer the same to petitioners but that, in breach of this
obligation, UP failed to deliver the title to the land to the city government and then revoked the deed
of donation after the latter failed to fulfill its obligations within the time allowed in the contract.

For the purpose of determining the sufficiency of petitioners' cause of action, these allegations of the
amended complaint must be deemed to be hypothetically true. So assuming the truth of the
allegations, we hold that petitioners have a cause of action against UP. Thus, in Kauffman
v. National Bank, 17 where the facts were —

Stated in bare simplicity the admitted facts show that the defendant bank for a valuable
consideration paid by the Philippine Fiber and Produce Company agreed on October 9,
1918, to cause a sum of money to be paid to the plaintiff in New York City; and the
question is whether the plaintiff can maintain an action against the bank for the non
performance of said undertaking. In other words, is the lack of privity with the contract
on the part of the plaintiff fatal to the maintenance of an action by him? 18

it was held:

In the light of the conclusions thus stated, the right of the plaintiff to maintain the
present action is clear enough; for it is undeniable that the bank's promise to cause a
definite sum of money to be paid to the plaintiff in New York City is a stipulation in his
favor within the meaning of the paragraph above quoted; and the circumstances under
which that promise was given disclose an evident intention on the part of the
contracting parties that the plaintiff should have that money upon demand in New York
City. The recognition of this unqualified right in the plaintiff to receive the money implies
in our opinion the right in him to maintain an action to recover it; and indeed if the
provision in question were not applicable to the facts now before us, it would be difficult
to conceive of a case arising under it.

It will be noted that under the paragraph cited a third person seeking to enforce
compliance with a stipulation in his favor must signify his acceptance before it has been
 revoked. In this case the plaintiff clearly signified his acceptance to the bank by
demanding payment; and although the Philippine National Bank had already directed
its New York agency to withhold payment when this demand was made, the rights of
the plaintiff cannot be considered to have been prejudiced by that fact. The word
"revoked," as there used, must be understood to imply revocation by the mutual
consent of the contracting parties, or at least by direction of the party purchasing the
exchange. 19

It is hardly necessary to state that our conclusion that petitioners' complaint states a cause of action
against respondents is in no wise a ruling on the merits. That is for the trial court to determine in light
of respondent UP's defense that the donation to the Quezon City government, upon which
petitioners rely, has been validly revoked.

Respondents contend, however, that the trial court has already found that the donation (on which
petitioners base their action) has already been revoked. This contention has no merit. The trial
court's ruling on this point was made in connection with petitioners' application for a writ of
preliminary injunction to stop respondent UP from ejecting petitioners. The trial court denied
injunction on the ground that the donation had already been revoked and therefore petitioners had
no clear legal right to be protected. It is evident that the trial court's ruling on this question was only
tentative, without prejudice to the final resolution of the question after the presentation by the parties
of their
evidence. 20

Second. It is further contended that the amended complaint alleges inconsistent causes of action for
specific performance of the deed of donation. Respondents make much of the fact that while
petitioners claim to be the beneficiaries-donees of 15.8 hectares subject of the deed, 21 they at the
same time seek recovery/delivery of title to the 42 hectares of land included in UP's certificate of
title. 22

These are not inconsistent but, rather, alternative causes of action which Rule 8, §2 of the Rules of
Court allows:

Alternative causes of action or defenses. — A party may set forth two or more
statements of a claim or defense alternatively or hypothetically, either in one cause of
action or defense or in separate causes of action or defenses. When two or more
statements are made in the alternative and one of them if made independently would
be sufficient, the pleading is not made insufficient by the insufficiency of one or more of
the alternative statements.

Thus, the parties are allowed to plead as many separate claims as they may have, regardless
of consistency, provided that no rules regarding venue and joinder of parties are violated. 23

Moreover, the subjects of these claims are not exactly and entirely the same parcel of land;
petitioners' causes of action consist of two definite and distinct claims. The rule is that a trial court
judge cannot dismiss a complaint which contained two or more causes of action where one of them
clearly states a sufficient cause of action against the defendant. 24

WHEREFORE, the decision of the Court of Appeals is REVERSED and the case is REMANDED to
the Regional Trial Court of Quezon City, Branch 89, for trial on the merits.

SO ORDERED.
 G.R. No. 115117. June 8, 2000]

INTEGRATED PACKAGING CORP., petitioner, vs. COURT OF APPEALS and FIL-ANCHOR

PAPER CO., INC. respondents.

DECISION

QUISUMBING, J.:

This is a petition to review the decision of the Court of Appeals rendered on April 20,
1994 reversing the judgment of the Regional Trial Court of Caloocan City in an action for recovery of
sum of money filed by private respondent against petitioner. In said decision, the appellate court
decreed:

"WHEREFORE, in view of all the foregoing, the appealed judgment is hereby

REVERSED and SET ASIDE. Appellee [petitioner herein] is hereby ordered to pay
appellant [private respondent herein] the sum of P763,101.70, with legal interest
thereon, from the date of the filing of the Complaint, until fully paid.

SO ORDERED."[1]

The RTC judgment reversed by the Court of Appeals had disposed of the complaint as follows:

"WHEREFORE, judgment is hereby rendered:

Ordering plaintiff [herein private respondent] to pay defendant [herein petitioner] the
sum of P27,222.60 as compensatory and actual damages after deducting P763,101.70
(value of materials received by defendant) from P790,324.30 representing
compensatory damages as defendant’s unrealized profits;

Ordering plaintiff to pay defendant the sum of P100,000.00 as moral damages;

Ordering plaintiff to pay the sum of P30,000.00 for attorney’s fees; and to pay the costs
of suit.

SO ORDERED."[2]

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

Petitioner and private respondent executed on May 5, 1978, an order agreement whereby private
respondent bound itself to deliver to petitioner 3,450 reams of printing paper, coated, 2 sides basis,
80 lbs., 38" x 23", short grain, worth P1,040,060.00 under the following schedule: May and June
1978—450 reams at P290.00/ream; August and September 1978—700 reams at P290/ream;
January 1979—575 reams at P307.20/ream; March 1979—575 reams at P307.20/ream; July 1979—
575 reams at P307.20/ream; and October 1979—575 reams at P307.20/ream. In accordance with
the standard operating practice of the parties, the materials were to be paid within a minimum of
thirty days and maximum of ninety days from delivery.
Later, on June 7, 1978, petitioner entered into a contract with Philippine Appliance Corporation
(Philacor) to print three volumes of "Philacor Cultural Books" for delivery on the following dates: Book
VI, on or before November 1978; Book VII, on or before November 1979 and; Book VIII, on or before
November 1980, with a minimum of 300,000 copies at a price of P10.00 per copy or a total cost of
P3,000,000.00.

As of July 30, 1979, private respondent had delivered to petitioner 1,097 reams of printing paper out
of the total 3,450 reams stated in the agreement. Petitioner alleged it wrote private respondent to
immediately deliver the balance because further delay would greatly prejudice petitioner. From June
5, 1980 and until July 23, 1981, private respondent delivered again to petitioner various quantities of
printing paper amounting to P766,101.70. However, petitioner encountered difficulties paying private
respondent said amount. Accordingly, private respondent made a formal demand upon petitioner to
settle the outstanding account. On July 23 and 31, 1981 and August 27, 1981, petitioner made
partial payments totalling P97,200.00 which was applied to its back accounts covered by delivery
invoices dated September 29-30, 1980 and October 1-2, 1980.[3]

Meanwhile, petitioner entered into an additional printing contract with Philacor. Unfortunately,
petitioner failed to fully comply with its contract with Philacor for the printing of books VIII, IX, X and
XI. Thus, Philacor demanded compensation from petitioner for the delay and damage it suffered on
account of petitioner’s failure.

On August 14, 1981, private respondent filed with the Regional Trial Court of Caloocan City a
collection suit against petitioner for the sum of P766,101.70, representing the unpaid purchase price
of printing paper bought by petitioner on credit.

In its answer, petitioner denied the material allegations of the complaint. By way of counterclaim,
petitioner alleged that private respondent was able to deliver only 1,097 reams of printing paper
which was short of 2,875 reams, in total disregard of their agreement; that private respondent failed
to deliver the balance of the printing paper despite demand therefor, hence, petitioner suffered actual
damages and failed to realize expected profits; and that petitioner’s complaint was prematurely filed.

After filing its reply and answer to the counterclaim, private respondent moved for admission of its
supplemental complaint, which was granted. In said supplemental complaint, private respondent
alleged that subsequent to the enumerated purchase invoices in the original complaint, petitioner
made additional purchases of printing paper on credit amounting to P94,200.00. Private respondent
also averred that petitioner failed and refused to pay its outstanding obligation although it made
partial payments in the amount of P97,200.00 which was applied to back accounts, thus, reducing
petitioner’s indebtedness to P763,101.70.

On July 5, 1990, the trial court rendered judgment declaring that petitioner should pay private
respondent the sum of P763,101.70 representing the value of printing paper delivered by private
respondent from June 5, 1980 to July 23, 1981. However, the lower court also found petitioner’s
counterclaim meritorious. It ruled that were it not for the failure or delay of private respondent to
deliver printing paper, petitioner could have sold books to Philacor and realized profit of P790,324.30
from the sale. It further ruled that petitioner suffered a dislocation of business on account of loss of
contracts and goodwill as a result of private respondent’s violation of its obligation, for which the
award of moral damages was justified.

On appeal, the respondent Court of Appeals reversed and set aside the judgment of the trial court.
The appellate court ordered petitioner to pay private respondent the sum of P763,101.70
representing the amount of unpaid printing paper delivered by private respondent to petitioner, with
legal interest thereon from the date of the filing of the complaint until fully paid.[4] However, the
appellate court deleted the award of P790,324.30 as compensatory damages as well as the award of
moral damages and attorney’s fees, for lack of factual and legal basis.

Expectedly, petitioner filed this instant petition contending that the appellate court’s judgment is
based on erroneous conclusions of facts and law. In this recourse, petitioner assigns the following
errors:

[I]

"THE COURT OF APPEALS ERRED IN CONCLUDING THAT PRIVATE

RESPONDENT DID NOT VIOLATE THE ORDER AGREEMENT.

[II]

THE COURT OF APPEALS ERRED IN CONCLUDING THAT RESPONDENT IS NOT

LIABLE FOR PETITIONER’S BREACH OF CONTRACT WITH PHILACOR.

[III]

THE COURT OF APPEALS ERRED IN CONCLUDING THAT PETITIONER IS NOT

ENTITLED TO DAMAGES AGAINST PRIVATE RESPONDENT."[5]

In our view, the crucial issues for resolution in this case are as follows:

(1)....Whether or not private respondent violated the order agreement, and;

(2)....Whether or not private respondent is liable for petitioner’s breach of contract with
Philacor.

Petitioner’s contention lacks factual and legal basis, hence, bereft of merit.

Petitioner contends, firstly, that private respondent violated the order agreement when the latter
failed to deliver the balance of the printing paper on the dates agreed upon.

The transaction between the parties is a contract of sale whereby private respondent (seller)
obligates itself to deliver printing paper to petitioner (buyer) which, in turn, binds itself to pay therefor
a sum of money or its equivalent (price).[6] Both parties concede that the order agreement gives rise
to a reciprocal obligations[7] such that the obligation of one is dependent upon the obligation of the
other. Reciprocal obligations are to be performed simultaneously, so that the performance of one is
conditioned upon the simultaneous fulfillment of the other.[8] Thus, private respondent undertakes to
deliver printing paper of various quantities subject to petitioner’s corresponding obligation to pay, on
a maximum 90-day credit, for these materials. Note that in the contract, petitioner is not even
required to make any deposit, down payment or advance payment, hence, the undertaking of private
respondent to deliver the materials is conditional upon payment by petitioner within the prescribed
period. Clearly, petitioner did not fulfill its side of the contract as its last payment in August 1981
could cover only materials covered by delivery invoices dated September and October 1980.

There is no dispute that the agreement provides for the delivery of printing paper on different dates
and a separate price has been agreed upon for each delivery. It is also admitted that it is the
standard practice of the parties that the materials be paid within a minimum period of thirty (30) days
and a maximum of ninety (90) days from each delivery.[9]Accordingly, the private respondent’s
suspension of its deliveries to petitioner whenever the latter failed to pay on time, as in this case, is
legally justified under the second paragraph of Article 1583 of the Civil Code which provides that:

"When there is a contract of sale of goods to be delivered by stated installments, which

are to be separately paid for, and the seller makes defective deliveries in respect of
one or more installments, or the buyer neglects or refuses without just cause to take
delivery of or pay for one or more installments, it depends in each case on the terms of
the contract and the circumstances of the case, whether the breach of contract is so
material as to justify the injured party in refusing to proceed furtherand suing for
damages for breach of the entire contract, or whether the breach is severable, giving
rise to a claim for compensation but not to a right to treat the whole contract as
broken." (Emphasis supplied)

In this case, as found a quo petitioner’s evidence failed to establish that it had paid for the printing
paper covered by the delivery invoices on time. Consequently, private respondent has the right to
cease making further delivery, hence the private respondent did not violate the order agreement. On
the contrary, it was petitioner which breached the agreement as it failed to pay on time the materials
delivered by private respondent. Respondent appellate court correctly ruled that private respondent
did not violate the order agreement.

On the second assigned error, petitioner contends that private respondent should be held liable for
petitioner’s breach of contract with Philacor. This claim is manifestly devoid of merit.

As correctly held by the appellate court, private respondent cannot be held liable under the contracts
entered into by petitioner with Philacor. Private respondent is not a party to said agreements. It is
also not a contract pour autrui. Aforesaid contracts could not affect third persons like private
respondent because of the basic civil law principle of relativity of contracts which provides that
contracts can only bind the parties who entered into it, and it cannot favor or prejudice a third person,
[10]
even if he is aware of such contract and has acted with knowledge thereof.[11]

Indeed, the order agreement entered into by petitioner and private respondent has not been shown
as having a direct bearing on the contracts of petitioner with Philacor. As pointed out by private
respondent and not refuted by petitioner, the paper specified in the order agreement between
petitioner and private respondent are markedly different from the paper involved in the contracts of
petitioner with Philacor.[12] Furthermore, the demand made by Philacor upon petitioner for the latter to
comply with its printing contract is dated February 15, 1984, which is clearly made long after private
respondent had filed its complaint on August 14, 1981. This demand relates to contracts with
Philacor dated April 12, 1983 and May 13, 1983, which were entered into by petitioner after private
respondent filed the instant case.

To recapitulate, private respondent did not violate the order agreement it had with petitioner.
Likewise, private respondent could not be held liable for petitioner’s breach of contract with Philacor.
It follows that there is no basis to hold private respondent liable for damages. Accordingly, the
appellate court did not err in deleting the damages awarded by the trial court to petitioner.

The rule on compensatory damages is well established. True, indemnification for damages
comprehends not only the loss suffered, that is to say actual damages (damnum emergens), but also
profits which the obligee failed to obtain, referred to as compensatory damages (lucrum cessans).
However, to justify a grant of actual or compensatory damages, it is necessary to prove with a
reasonable degree of certainty, premised upon competent proof and on the best evidence obtainable
by the injured party, the actual amount of loss.[13] In the case at bar, the trial court erroneously
concluded that petitioner could have sold books to Philacor at the quoted selling price of
P1,850,750.55 and by deducting the production cost of P1,060,426.20, petitioner could have earned
profit of P790,324.30. Admittedly, the evidence relied upon by the trial court in arriving at the amount
are mere estimates prepared by petitioner.[14] Said evidence is highly speculative and manifestly
hypothetical. It could not provide sufficient legal and factual basis for the award of P790,324.30 as
compensatory damages representing petitioner’s self-serving claim of unrealized profit.

Further, the deletion of the award of moral damages is proper, since private respondent could not be
held liable for breach of contract. Moral damages may be awarded when in a breach of contract the
defendant acted in bad faith, or was guilty of gross negligence amounting to bad faith, or in wanton
disregard of his contractual obligation.[15] Finally, since the award of moral damages is eliminated, so
must the award for attorney’s fees be also deleted.[16]

WHEREFORE, the instant petition is DENIED. The decision of the Court of Appeals is AFFIRMED.
Costs against petitioner.

SO ORDERED.
 [G.R. No. 172268, October 10, 2007]

A & C MINIMART CORPORATION, PETITIONER, VS. PATRICIA S. VILLAREAL, TRICIA ANN

VILLAREAL AND CLAIRE HOPE VILLAREAL, RESPONDENT.

DECISION

CHICO-NAZARIO, J.:

This is a Petition for Review on Certiorari under Rule 45 of the Rules of Court, assailing the
Decision[1] dated 13 October 2004, rendered by the Court of Appeals in CA-G.R. SP No. 81875,
modifying the Order[2] dated 29 December 2003, of Branch 194 of the Regional Trial Court (RTC) of
Parañaque City. The appellate court ordered petitioner A & C Minimart Corporation to pay
respondents Patricia Villareal, Tricia Ann Villareal and Claire Hope Villareal, a monthly interest of 3%
on the total amount of rental and other charges not paid on time, in addition to the unpaid rental and
other charges which the trial court ordered petitioner to pay.

The subject property is a one-storey commercial building constructed on a parcel of land located at
Aguirre St., BF Homes, Parañaque, Metro Manila. Petitioner leased the six stalls/units of the
subject property from Joaquin Bonifacio, under a lease agreement dated 3 August 1992, and which
expired on 3 August 1997.[3] A Lease Contract, dated 22 January 1998, was executed between
petitioner and Teresita Bonifacio renewing the earlier contract for another five years.[4]

However, ownership of the subject property is under dispute. Respondents and spouses Joaquin
and Teresita Bonifacio (spouses Bonifacio) claim ownership over the subject property.

The respondents claim ownership based on a sale of property on execution pending appeal in a
separate case. Civil Case No. 16194 is an independent action for damages filed by respondents
against spouses Eliseo and Erna Sevilla (spouses Sevilla), original owners of the disputed property,
arising from the murder of Jose Villareal, the husband of respondent Patricia Villareal and father of
respondents Tricia Ann and Claire Hope Villareal. In its Decision dated 2 April 1990, Branch 132 of
the RTC of Makati awarded damages to respondents in the amount of P10,882,040.00.[5]Thereafter,
the Makati RTC, Branch 132, issued a writ of execution pending appeal. Deputy Sheriff Eulalio
Juanson levied on two parcels of land registered under the name of the Sevillas covered by Transfer
Certificates of Title (TCT) No. 41338 and No. 41339, issued by the Register of Deeds of Parañaque
City, and a one-storey commercial building built thereon. On 17 September 1990, Deputy Sheriff
Juanson sold the subject property at a public auction to respondent Patricia Villareal, the sole and
highest bidder therein. The Certificate of Sale, dated 17 September 1990, was registered and
annotated in TCT No. 41338 and No. 41339 as Entry 6621 on 18 September 1990.[6] The spouses
Sevilla filed an appeal questioning the damages awarded and execution orders issued by the Makati
RTC, Branch 132 in Civil Case No. 16194, which is now pending before the Supreme Court and
docketed as G.R. No. 150824.

On the other hand, the spouses Bonifacio claim to have purchased the property from the spouses
Sevilla. Twice they challenged the Villareals’ ownership of the property. The first was on 12
September 1990, when they filed Civil Case No. 90-2551 against respondent Patricia Villareal before
Branch 58, later unloaded to Branch 63, of the Makati RTC, for declaration of nullity of levy on real
property, damages and injunction with prayer for issuance of a temporary restraining order against
the sheriff of the Makati RTC, Branch 132. They allegedly bought the property from the spouses
Sevilla on 17 June 1986, but were unable to transfer the titles to their names when they discovered
that notice of levy on execution was already annotated in the TCTs.[7] On 8 November 1994, the
Makati RTC, Branch 63, declared that the Deed of Sale in favor of the Bonifacios was null and void
and thus dismissed the complaint filed by the spouses Bonifacio for lack of merit. The spouses
Bonifacio filed an appeal, docketed as C.A. G.R. CV No. 48478, which was dismissed by the Court
of Appeals. The dismissal of the said case became final and executory on 27 December 1997.[8]

Despite the final and executory decision dismissing the claim of the Bonifacios, the latter, for the
second time filed on 25 January 1999, Civil Case No. 99-037 against respondent Patricia Villareal for
Declaration of Ownership, Annulment and Cancellation of Attachment, Notice of Levy, and Execution
Sale with Damages at Branch 257 of the Parañaque RTC, which was dismissed in an Order dated
8 November 1999.[9] They filed an appeal of the dismissal with the Court of Appeals, docketed as
CA-G.R. SP No. 60176, which was likewise dismissed in a Decision, dated 22 October 2004.[10] An
appeal was filed before the Supreme Court, docketed as G.R. No. 175857, but the same was denied
in a Resolution dated 14 March 2007.[11]

Meanwhile, upon learning that the spouses Bonifacio’s claim of ownership over the subject
property had been seriously challenged and denied in the Decision dated 8 November 1994 of the
Makati RTC, Branch 63, in Civil Case No. 90-2551, petitioner stopped paying its rentals on the
subject property on 2 March 1999, in violation of the renewed Lease Contract dated 22 January
1998.[12]

On 19 July 1999, respondents filed a case for Unlawful Detainer with Damages, against the
petitioner before Branch 78 of the Metropolitan Trial Court (MTC) of Parañaque City. Respondents
also filed a case against the spouses Bonifacio for the recovery of the advanced rentals paid to the
latter by the petitioner. The spouses Bonifacio also filed a separate case against the petitioner for
Unlawful Detainer. The cases were consolidated and heard by the Parañaque MTC, Branch 78,
docketed as Civil Cases No. 11200, 11201, and 11262. The Parañaque MTC, Branch 78,
dismissed the cases on the ground that the issue of possession in this case was intertwined with the
issue of ownership, and that it lacked the jurisdiction to determine the issue of ownership.[13]

Respondents appealed before Branch 194 of the Parañaque RTC, the dismissal ordered by the
Parañaque MTC, Branch 78, in Civil Cases No. 11200, 11201, and 11262. The cases were
docketed as Civil Cases No. 02-0538 to 40. The Parañaque RTC, Branch 194, affirmed the
decision of the Parañaque MTC, Branch 78, as to its lack of jurisdiction, and then treated the
complaint as if it were originally filed with the RTC, in accordance with Section 8, Rule 40 of the
Rules of Court.[14] Thereafter, in its Decision dated 25 June 2003, the Parañaque RTC, Branch 194,
found that the spouses Bonifacio did not acquire ownership over the subject property. It further ruled
that the petitioner had the obligation to pay the rentals for use of the subject property and directed
the petitioner to deposit its rental payments to a Land Bank account established by the Makati RTC,
Branch 132, where the rentals accruing on the subject property will be held in trust for the rightful
owners, whether it be the respondents or the spouses Sevilla, pending the final determination of
G.R. No. 150824. The Decision of the Parañaque RTC, Branch 194, in Civil Case Nos. 02-0538 to
40 reads:
WHEREFORE foregoing considered, judgment is hereby ordered:

1. Directing and ordering defendant Spouses Bonifacios (sic) to deposit the amount of
P315,000.00 paid by A & C Minimart to Account No. 1831-0166-91, with the Land Bank of the
Philippines, J.P. Rizal Branch, Makati City.

2. Ordering defendant A & C Minimart to deposit with Account No. 1831-0166-91, Land Bank of
the Philippines, J.P. Rizal Branch, Makati City, the monthly rentals due from the premises
 form (sic) the last rental payment consigned with the Clerk of Court, Metropolitan Trial Court,
Parañaque City.

3. Ordering defendant A & C Minimart to furnish the Villareals copies of the Lease Contract it
entered into with the Bonifacios.

4. And for convenience, ordering the Clerk of Court, Metropolitan Trial Court, Parañaque City
to transfer and deposit the rental payments made by A & C Minimart together with the accrued
interest to Account No. 1831-0166-91 with Land Bank of the Philippines, J.P. Rizal Branch,
Makati City.

No pronouncement as to costs, attorney’s fees and damages.[15]

On 1 October 2003, upon petitioners’ Motion for Partial Reconsideration, the Parañaque RTC,
Branch 194, modified its decision. It ruled that the rental should accrue in favor of the respondents
only after the turnover of the possession of the subject property to them sometime on 2 March 1999.
Moreover, it found that petitioner did not act in bad faith when it refused to pay rentals and, thus,
should not be liable for damages. Additionally, it also ordered the petitioner to pay 12% interest per
annum on the monthly rentals due from its receipt of the respondents’ demand letter on 25 June
1999, until full payment; to pay respondents’ attorney’s fees in the amount of P100,000.00
and the costs of suit; and to vacate the subject property, to wit:

1. [O]rdering defendant A & C Minimart to deposit with account no. 1831-0166-91 of the Land
Bank of the Philippines, J.P. Rizal Branch[,] Makati City, the monthly rentals due from March
2, 1999, in accordance with the Lease Contract until it delivers possession thereof to the
Villareals plus 12% interest per annum from the date of receipt of the demand letter in 25
June 1999 until full satisfaction less the rental payment consigned to the Clerk of Court,
Metropolitan Trial Court, Parañaque City.

2. [F]or convenience, ordering the Clerk of Court, Metropolitan Trial Court, Parañaque City to
transfer and deposit the rental payments made by A & C Minimart together with the accrued
interest to Account No. 1831-0166-91 with the Land Bank of the Philippines, J. P. Rizal
Branch, Makati City.

3. [D]irecting and ordering defendant A & C Minimart to pay the Plaintiff Attorney’s fees in
the amount of ONE HUNDRED THOUSAND PESOS (P100,000.00) and the cost of suit.

4. [O]rdering defendant A & C Minimart Corp. to vacate the portion of the building located at 340
Aguirre Avenue, BF Homes, Parañaque City where it conducts its business of a grocery
store and other activities, and deliver the same peacefully and in good condition to the
Villareals.[16]

On 27 October 2003, upon motion of the respondents, the Parañaque RTC, Branch 194, issued a
Writ of Execution requiring petitioner to deposit in Land Bank Account No. 1831-0166-91 the amount
of P3,186,154.68, plus 12% yearly interest, computed from the date of petitioner’s receipt of the
demand letter on 25 June 1999.[17]

On 4 November 2003, respondents filed a Motion for Recomputation of the amount of rentals as the
writ of execution allegedly did not conform to the Decision dated 1 October 2003. Respondents
claimed that the computation should include a monthly interest of 3% on the total amount of rental
and other charges not paid on time, in accordance with paragraph 6(g) of the Contract of Lease,
dated 22 January 1998, between petitioner and Teresita Bonifacio, to wit:
g) To pay the LESSOR three (3%) percent interest per month on the total amount of rental and other
charges not paid on time under this contract with said amount accruing automatically upon default
without necessity of any demand.[18]
Respondents anchored their claim on the Amended Decision dated 1 October 2003, and the Writ of
Execution dated 27 October 2003, in Civil Cases No. 02-0538 to 40, which both used the phrase
“in accordance with the Lease Contract,” when referring to the monthly rentals due and were
to be deposited in the bank by the petitioner.

In an Order dated 29 December 2003, the Parañaque RTC, Branch 194, denied respondents’
claim for interest penalty at the rate of 3% per month on the total amount of rent in default.[19]

Respondents filed a Petition for Certiorari under Rule 65, before the Court of Appeals, which ruled in
favor of the respondents. In the assailed Decision, the appellate court found that petitioner
consigned the rental payments after they fell due and, thus, it ruled that the 3% interest stipulated in
the Contract of Lease dated 22 January 1998 should be imposed. The dispositive part of the
assailed Decision,[20] dated 13 October 2004, reads:
WHEREFORE, there being merit in the petition, it is GRANTED. The assailed Order is MODIFIED in
that respondent A and C Minimart is additionally DIRECTED to pay a monthly interest of 3% on the
total amount of rental and other charges not paid on time pursuant to the contract of lease. This case
is REMANDED to the court of origin for proper computation and execution.
Petitioner filed a Motion for Reconsideration of the foregoing Decision, which the Court of Appeals
denied in a Resolution dated 27 March 2006.

Hence, the present Petition, where petitioner raises the following issues:

I
THE HONORABLE COURT OF APPEALS ERRED IN NOT DISMISSING VILLAREALS’
PETITION FOR CERTIORARI CONSIDERING THAT APPEAL IS THE PROPER AND ADEQUATE
REMEDY TO QUESTION THE DECISION OF THE RTC (BRANCH 194) OF PARAÑAQUE CITY.

II

THE HONORABLE COURT OF APPEALS ERRED IN SUSTAINING THE CLAIM OF THE

VILLAREALS’ THAT THEY ARE ENTITLED TO THE BENEFITS (RENTALS AND INTERESTS)
OF THE CONTRACT OF LEASE ENTERED INTO BETEWEN “A & C MINIMART CORP.”
AND TERESITA BONIFACIO.

III

THE HONRABLE COURT OF APPEALS ERRED IN NOT DISMISSING THE PETITION FOR
CERTIORARI (SPECIAL CIVIL ACTION) FILED BY THE VILLAREALS CONSIDERING THAT THE
LATTER HAVE NO RIGHTS AND INTEREST OVER THE CONTRACT OF LEASE BETWEEN THE
SPOUSES BONIFACIOS (sic) AND THE “A & C MINIMART CORP.”

IV

THE HONORABLE COURT OF APPEALS ERRED IN NOT DISMISSING C.A.-G.R. SP NO. 81875
CONSIDERING THAT THE VILLAREALS’ CLAIM OF OWNERSHIP OVER THE PROPERTY IS
STILL THE SUBJECT OF A PENDING CASE WHICH PRO TANTO RENDERED THE EJECTMENT
SUIT FILED BY THE VILLAREALS AGAINST THE PETITIONER OBVIOUSLYPREMATURE.

V
THE HONORABLE COURT OF APPEALS ERRED IN NOT OVERRULLING THE RTC OF
PARANAQUE (BR. 194) WHICH REVERSED THE DECISION OF THE MTC OF PARANAQUE
CITY DISMISSING THE CONSOLIDATED EJECTMENT CASES (02-0538; 02-0539; 02-540) FOR
LACK OF JURISDICTION CONSIDERING THAT THE FUNDAMENTAL ISSUE INVOLVED
IS OWNERSHIP OF THE SUBJECT PREMISES WHICH ISSUE REQUIRES FULL-BLOWN TRIAL
IN A DIRECT ACTION BEFORE A COURT OF GENERAL JURISDICTION FOR FULL
DETERMINATION.[21]
The petition is partly meritorious.

Petitioner avers that the respondents should have filed with the Court of Appeals an ordinary appeal
instead of a special civil action for certiorari, when it questioned the computation made by the
Parañaque RTC, Branch 194, of the rentals due the owner of the subject property.

Such contention runs counter to Section 1, Rule 41 of the Rules of Court, which provides:
Section 1. Subject of appeal. – An appeal may be taken from a judgment or final order that
completely disposes of the case, or of a particular matter therein when declared by these Rules to be
appealable.

No appeal may be taken from:

xxxx

(f) an order of execution;

xxxx

In all the above instances where the judgment or final order is not appealable, the aggrieved party
may file an appropriate special civil action under Rule 65.
It is explicit from the afore-quoted provision that no appeal may be taken from an order of execution;
instead, such order may be challenged by the aggrieved party viaa special civil action
for certiorari under Rule 65 of the Rules of Court. Respondents filed the petition in CA-G.R. SP No.
81875, to question the Writ of Execution dated 27 October 2003, issued by the Parañaque RTC,
Branch 194, which computed the rentals to be paid by the petitioner to whoever is declared the
owner of the subject property, without including the 3% penalty interest stipulated in the Lease
Contract dated 22 January 2002. Contrary to the position taken by the petitioner, respondents’
recourse to an appeal would have been unavailing under Section 1, Rule 41, of the Rules of Court.
The filing of a special civil action for certiorari under Rule 65 of the Rules of Court was the proper
remedy questioning an order of execution.

Petitioner argues that respondents are not entitled to the 3% penalty stipulated under the Lease
Contract dated 22 January 1998, which becomes payable to the lessor whenever the petitioner
incurs delay in the payment of its rentals. This argument is well-taken.

It is a well-known rule that a contractual obligation or liability, or an action ex-contractu, must be

founded upon a contract, oral or written, either express or implied. If there is no contract, there is no
corresponding liability and no cause of action may arise therefrom.[22] This is provided for in Article
1311 of the Civil Code:
Article 1311. Contracts take effect only between the parties, their assigns and heirs, except in case
where the rights and obligations arising from the contract are not transmissible by their nature, or by
stipulation or by provision of law. The heir is not liable beyond the value of the property he received
from the decedent.
The Lease Contract dated 22 January 1998, was executed between the spouses Bonifacio and
petitioner. It is undisputed that none of the respondents had taken part, directly or indirectly, in the
contract in question. Respondents also did not enter into contract with either the lessee or the lessor,
as to an assignment of any right under the Lease Contract in question. The Lease Contract,
including the stipulation for the 3% penalty interest, was bilateral between petitioner and Teresita
Bonifacio. Respondents claim ownership over the subject property, but not as a successor-in-interest
of the spouses Bonifacios. They purchased the property in an execution sale from the spouses
Sevilla. Thus, respondents cannot succeed to any contractual rights which may accrue to the
spouses Bonifacio.

Contracts produce an effect as between the parties who execute them. A contract cannot be binding
upon and cannot be enforced by one who is not party to it. Although the respondents were adjudged
to be entitled to rentals accruing from 2 March 1999, until the time the petitioner vacated the
premises, the obligation to pay rent was not derived from the Lease Contract dated 22 January
1998, but from a quasi-contract. Article 2142 of the Civil Code reads:
Art. 2142. Certain lawful, voluntary and unilateral acts give rise to the juridical relation of quasi-
contract to the end that no one shall be unjustly enriched or benefited at the expense of another.
In the present case, the spouses Bonifacio, who were named as the lessors in the Lease Contracts,
dated 3 August 1992 and 22 January 1998, are already adjudged not to be the real owners of the
subject property. In Civil Case No. 90-2551, Branch 63 of the Makati RTC declared that the Deed of
Sale, executed on 17 June 1986, between the spouses Bonifacio and the spouses Sevilla was a
forgery and, hence, did not validly transfer ownership to the spouses Bonifacio. At present, there is a
pending appeal before the Supreme Court docketed as G.R. No. 150824, which would determine
who between the respondents and the spouses Sevilla are the rightful owners of the property.

Since the spouses Bonifacio are not the owners of the subject property, they cannot unjustly benefit
from it by collecting rent which should accrue to the rightful owners of the same. Hence, the Makati
RTC, Branch 132, had set up a bank account where the rent due on the subject property should be
deposited and kept in trust for the real owners thereto.

The last two issues raised by the petitioner on whether the Parañaque RTC, Branch 194, should
have dismissed the case for being premature or for any other ground cannot be raised in this
petition. Such issues should be, and were, in fact, raised by petitioner in CA-G.R. No. 86157, which
was an appeal of the Amended Decision dated 1 October 2003, rendered by the Parañaque RTC,
Branch 194, in Civil Cases No. 02-0538 to 40. Pending the resolution of the said case by the Court
of Appeals, this Court refrains from ruling thereon. What is on appeal in the present petition is the
Decision rendered by the Court of Appeals in CA-G.R. SP No. 81875, where the sole issue raised
was the correctness of the computation made during the execution of the Amended Decision dated 1
October 2003 of the Parañaque RTC, Branch 194.

IN VIEW OF THE FOREGOING, the instant Petition is partially GRANTED. The assailed Decision of
the Court of Appeals in CA-G.R. SP No. 81875, promulgated on 13 October 2004,
is REVERSED and SET ASIDE. The petitioner A & C Minimart Corporation is not obligated to pay
the penalty interest of 3% per month on the total amount of rental and other charges not paid on time
pursuant to the Contract of Lease dated 22 January 1998. This Court AFFIRMS the computation of
the rent and interest due from petitioner A&C Minimart Corporation in the Writ of Execution dated 27
October 2003, issued by Branch 194 of the Parañaque Regional Trial Court, in Civil Cases No. 02-
0538 to 40.

SO ORDERED.
 [G.R. No. 169846, March 28, 2008]

SPS. NESTOR AND MA. NONA BORROMEO, Petitioners, vs. HONORABLE COURT OF
APPEALS and EQUITABLE SAVINGS BANK , Respondents.

DECISION

CHICO-NAZARIO, J.:

This is a Petition for Review on Certiorari under Rule 45 of the Rules of Court, assailing the Decision,
[1]
dated 29 April 2005, thereafter, upheld in a Resolution[2]dated 16 September 2005, both rendered
by the Court of Appeals in CA-G.R. SP No. 85114. The Court of Appeals, in its assailed Decision,
reversed the Order dated 3 March 2004 of Branch 215 of the Regional Trial Court (RTC) of Quezon
City in Civil Case No. Q-03-51184, and denied the issuance of a Writ of Preliminary Injunction
enjoining respondent Equitable Savings Bank (ESB) from executing the extra-judicial foreclosure of
the mortgaged property owned by petitioners, Spouses Nestor and Nona Borromeo.

Respondent is a domestic savings bank corporation with principal office and place of business at
EPCIB Tower 2, Makati Avenue, Salcedo Village, Makati City.[3] At the time the dispute began, it was
a subsidiary of Equitable PCI Bank (EPCIB), a domestic universal banking corporation with principal
office at Makati Avenue, Salcedo Village, Makati City. After the merger of EPCIB and Banco De Oro
(BDO), they have adopted the corporate name "Banco De Oro."[4]

Petitioners were client-depositors of EPCIB for more than 12 years. Petitioners alleged that
sometime in mid-1999, the branch manager of EPCIB, J.P. Rizal Branch, offered a loan to the
petitioners under its "Own-a-Home Loan Program." Petitioners applied for a loan of P4,000,000.00
and were informed of the approval of their loan application sometime in October 1999. It was in the
early part of 2000 that petitioners signed blank loan documents consisting of the Loan Agreement,
Promissory Notes, a Real Estate Mortgage (REM) and Disclosure Statements.[5]

To secure the payment of the loan, petitioners executed an REM over their land, registered under
Transfer Certificate of Title (TCT) No. N-203923, located at Loyola Grand Villas, Quezon City,
consisting of 303 square meters; and the proposed house that was to be built thereon.[6] Petitioners
asserted that even if the loan documents were signed in blank, it was understood that they executed
the REM in favor of EPCIB.[7]

From April 2001 to September 2002, respondent released a total amount of P3,600,000.00 in four
installments, while the balance of P400,000.00 was not drawn by petitioners.[8] On the other hand,
petitioners started to pay their monthly amortizations on 21 April 2001.[9]

Petitioners made repeated verbal requests to EPCIB to furnish them their copies of the loan
documents.[10] On 6 August 2003, they sent the president of EPCIB a letter[11] which reiterated their
request for copies of the loan documents. In addition, petitioners stated that the interest rate of 14%
to 17% that was charged against them was more than the interest rate of 11% or 11.5% that the
parties agreed upon. They further claimed that they purposely did not draw the remaining balance of
the loan in the amount of P400,000.00 and stopped paying their loan amortizations to protest
EPCIB's continued failure to provide them copies of the loan documents and its imposition of an
interest rate higher than that agreed upon. From the time petitioners began paying their monthly
amortizations on 21 April 2001 until the time they stopped, petitioners made total payments of
approximately P500,000.00.[12]
In reply to the petitioners' letter dated 6 August 2003, the Vice President of EPCIB, Gary Vargas,
sent to the petitioners a letter[13] dated 27 August 2003 explaining that as a matter of practice, their
clients were given original copies of the loan documents only upon full release of the amount loaned.
EPCIB clarified that since petitioners' loan had not been fully released, the original documents were
not yet sent to them. Petitioners were also informed that the applicable interest rate was set at the
time the loan was released, not at the time the loan was approved, and that the prevailing interest
when the first four installments of the loan were released ranged from 9.5% to 16%.

In the meantime, on 13 August 2003, respondent, through counsel, also sent a letter[14] to the
petitioners demanding payment for their obligation, which, as of 15 August 2003, amounted to
P4,097,261.04, inclusive of interest and other charges. Respondent informed petitioners that failure
to pay their obligation would result in its pursuing legal action against petitioners, including
foreclosure proceedings on their REM.

In a letter dated 18 September 2003,[15] respondent, through counsel, reiterated to petitioners its
demand for the full settlement of their obligation on or before 30 September 2003.

Finally, on 3 October 2003, petitioners received copies of the loan documents which they had earlier
signed in blank.[16] According to petitioners, they were surprised to find out that the Loan Agreement
and REM designated respondent ESB as lender and mortgagor, instead of EPCIB with whom they
allegedly entered into the agreement. However, in contrast to the Loan Agreement and the REM, the
four Promissory Notes designated EPCIB as the lender. Petitioners also alleged that instead of the
prevailing interest rates of 8% to 10% annually, which the parties agreed upon,[17] the four
Promissory Notes were set at the following interest rates:[18]
DATE AMOUNT INTEREST RATE
25 April 2001 P1,200,000.00 16%
18 January 2002 P 800,000.00 14.0%
29 June 2001 P 800,000.00 15%
19 September 2002 P 800,000.00 9.0%
When the petitioners failed to pay for the loan in full by 30 September 2003, respondent sought to
extra-judicially foreclose the REM. Upon the respondent's petition for foreclosure, the Office of
the Ex-Officio Sheriff of Quezon City issued a Notice of Extrajudicial Sale dated 16 October 2003,
wherein the mortgage debt was set at P5,114,601.00.[19] The Extrajudicial Sale was set to take place
on 26 November 2003. On 14 November 2003, petitioners received Notice of Extrajudicial Sale of
their property.[20]

On 20 November 2003, petitioners filed with the RTC a Complaint for Injunction, Annulment of
Mortgage with Damages and with Prayer for Temporary Restraining Order and Preliminary and
Mandatory Injunction against EPCIB and respondent, docketed as Civil Case No. Q-03-51184. In
their Complaint, petitioners alleged that the loan documents failed to reflect the true agreement
between the parties. Firstly, the agreement was between the petitioners and EPCIB and,
consequently, respondent had no interest in the REM. Secondly, the interest rates reflected in the
Promissory Notes were not the interest rates on which the parties had settled. They also averred in
their Complaint that EPCIB committed a breach of contract when it failed to release the fifth and last
installment of the loan to petitioners. [21]

Petitioners sought to prevent the Extrajudicial Sale from taking place on 26 November 2003.
Petitioners maintained that EPCIB acted in bad faith when it foreclosed the subject property simply
because petitioners complained that the interest rates unilaterally imposed by EPCIB were
excessive. It further averred that their deposit accounts with EPCIB were more than sufficient to pay
for the amortizations due on the housing loan.[22]
The scheduled date for the Extrajudicial Foreclosure, namely, 26 November 2003, fell on the
holiday Eid-el-Fitr, and as a result, it did not push through. In an Order dated 5 December 2003, the
RTC determined that there was no longer any need to issue a temporary restraining order (TRO)
and/or preliminary injunction.[23]

On 14 December 2003, respondent re-filed its petition for extrajudicial foreclosure of the REM. The
Ex-Officio Sheriff of Quezon City set the auction sale on 14 January 2004.

Petitioners reacted by filing with the RTC a Motion for Reconsideration of its Order dated 5
December 2003, again praying for the issuance of a TRO and/or preliminary injunction to forestall
the extrajudicial sale of their property scheduled for 14 January 2004.[24]

On 3 March 2004, the RTC granted petitioners' motion for reconsideration and ordered the issuance
of a preliminary injunction after declaring that the validity of the REM was yet to be determined. It
found that petitioners were bound to suffer grave injustice if they were deprived of their property
before the RTC could rule on the validity of the REM constituted on the same. On the other hand, it
held that respondent's interest was amply protected, since petitioners' mortgaged property was
valued at P12,000,000.00, which was more than sufficient to answer for petitioner's obligation
pegged at P4,097,261.00, and respondent's REM over said property remained in effect. Moreover,
petitioners posted a bond in the amount of P3,500,000.00 to cover their unpaid liabilities.[25] In its
Order dated 3 March 2004, the RTC ordered that[26]:
With all the foregoing disquisitions and finding merit in plaintiffs' application, the same [is] hereby
GRANTED. Let a writ of preliminary injunction issue upon plaintiffs' posting of a bond in the amount
of three million five hundred thousand (P3,500,000.00) pesos.
Respondent filed a Motion for Reconsideration of the afore-quoted Order, which was denied for lack
of merit by the RTC in an Order dated 29 April 2004.

Thereafter, respondent filed on 14 July 2004 a Special Civil Action for Certiorari before the Court of
Appeals, docketed as CA-G.R. SP No. 85114.

During the proceedings before the Court of Appeals, petitioner presented a letter dated 19
December 2002, with supporting documents, written and compiled by EPCIB for Home Guaranty
Corporation, wherein EPCIB included petitioners' loan among its housing loans for which it sought
insurance coverage.[27]

In reversing the RTC Order dated 3 March 2004, the Court of Appeals decreed that pending the
RTC's determination of the validity of the REM, its validity should be presumed. It further ruled that
the intended foreclosure of the mortgage by respondent was a proper exercise of its right after
petitioners admittedly stopped paying their loan amortizations. Moreover, it held that the foreclosure
of the REM would not result in any grave and irreparable damage to the petitioners since petitioners,
as mortgagors, may redeem the subject property or avail themselves of the remedy of claiming
damages or nullifying the sale.[28] The dispositive portion of the Court of Appeals Decision, dated 29
April 2005, reads:[29]
WHEREFORE, in view of the foregoing, the assailed Orders dated March 3, 2004 and April 29, 2004
issued by the Regional Trial Court of Quezon City, Branch 215 in Civil Case No. Q-03-51184 are
hereby ANNULLED and SET ASIDE.
Petitioners filed a Motion for Reconsideration of the foregoing Decision, which the Court of Appeals
denied in a Resolution dated 16 September 2005.[30]

Hence, the present Petition, in which the following issues are raised[31]:
I
WHETHER OR NOT THE PRIVATE RESPONDENT SAVINGS BANK IS THE REAL PARTY-IN-
INTEREST.

II

WHETHER OR NOT PETITIONERS ARE ENTITLED TO THE RELIEF DEMANDED, THAT THE
FORECLOSURE AND PUBLIC AUCTION OF THE PROPERTY BELONGING TO PETITIONERS
DURING THE LITIGATION PROCEEDINGS IN THE LOWER COURT WOULD PROBABLY WORK
INJUSTICE TO THEM SUCH THAT THE JUDGMENT WHICH MAY BE ISSUED BY THE SAID
COURT WILL BE RENDERED INEFFECTUAL BY SUCH FORECLOSURE AND PUBLIC AUCTION
OF SAID PROPERTY.

III

WHETHER OR NOT THE LOWER COURT WAS CORRECT IN GRANTING THE WRIT OF
PRELIMINARY INJUNCTION, ALL REQUISITES BEING PRESENT
The petition is meritorious.

The only issue that needs to be determined in this case is whether or not a writ of preliminary
injunction should be issued to enjoin the foreclosure and public auction of petitioner's property during
the proceedings and pending determination of the main cause of action for annulment of the REM on
said property. By no means is this a final determination of the merits of the main case still before the
RTC.[32]

Section 3, Rule 58 of the Rules of Court provides that:

SEC. 3. Grounds for issuance of preliminary injunctions.--A preliminary injunction may be granted
when it is established:

(a) That the applicant is entitled to the relief demanded, and the whole or part of such relief
consists in restraining the commission or continuance of the act or acts complained of, or in
requiring the performance of an act or acts, either for a limited period or perpetually;
(b) That the commission, continuance or non-performance of the act or acts complained of during
the litigation would probably work injustice to the applicant; or
(c) That a party, court, agency or a person is doing, threatening, or is attempting to do, or is
procuring or suffering to be done, some act or acts probably in violation of the rights of the
applicant respecting the subject of the action or proceeding, and tending to render the judgment
ineffectual.
As such, a writ of preliminary injunction may be issued only upon clear showing of an actual existing
right to be protected during the pendency of the principal action. The twin requirements of a valid
injunction are the existence of a right and its actual or threatened violations. Thus, to be entitled to
an injunctive writ, the right to be protected and the violation against that right must be shown.[33]

In this case, petitioners' rights to their property is restricted by the REM they executed over it. Upon
their default on the mortgage debt, the right to foreclose the property would be vested upon the
creditor-mortgagee.[34] Nevertheless, the right of foreclosure cannot be exercised against the
petitioners by any person other than the creditor-mortgagee or its assigns. According to the pertinent
provisions of the Civil Code:
Art. 1311. Contracts take effect only between the parties, their assigns and heirs, except in case
where the rights and obligations arising from the contract are not transmissible by their nature, or by
stipulation or by provision of law. The heir is not liable beyond the value of the property he received
from the decedent.
If a contract should contain some stipulation in favor of a third person, he may demand its fulfillment
provided he communicated his acceptance to the obligor before its revocation. A mere incidental
benefit or interest of a person is not sufficient. The contracting parties must have clearly and
deliberately conferred a favor upon a third person. (Emphasis ours.)
An extrajudicial foreclosure instituted by a third party to the Loan Agreement and the REM would,
therefore, be a violation of petitioners' rights over their property.

It is clear that under Article 1311 of the Civil Code, contracts take effect only between the parties
who execute them.[35] Where there is no privity of contract, there is likewise no obligation or liability to
speak about.[36] The civil law principle of relativity of contracts provides that contracts can only bind
the parties who entered into it, and it cannot favor or prejudice a third person, even if he is aware of
such contract and has acted with knowledge thereof.[37] Since a contract may be violated only by the
parties thereto as against each other, a party who has not taken part in it cannot sue for
performance, unless he shows that he has a real interest affected thereby.[38]

In the instant case, petitioners assert that their creditor-mortgagee is EPCIB and not respondent.
While ESB claims that petitioners have had transactions with it, particularly the five check payments
made in the name of ESB, it fails to categorically state that ESB and not EPCIB is the real creditor-
mortgagor in this loan and mortgage transaction. This Court finds the position taken by the
petitioners to be more credible. The four Promissory Notes designate EPCIB as the "lender."[39] In a
letter dated 19 December 2002, addressed to Home Guaranty Corporation, EPCIB Vice President
Gary Vargas even specified petitioners' loan as one of its housing loans for which it sought insurance
coverage.[40] Records also show that petitioners repeatedly dealt with EPCIB. When the petitioners
complained of not receiving the loan documents and the allegedly excessive interest charges, they
addressed their letter dated 3 August 2003 to the president of EPCIB.[41] The response, which
explained the loan transactions in detail in a letter dated 27 August 2003, was written by Gary
Vargas, EPCIB Vice President.[42] Of almost three years' amortizations, the checks were issued by
petitioners in the name of EPCIB, except only for five checks which were issued in respondent's
name.[43]

Respondent, although a wholly-owned subsidiary of EPCIB, has an independent and separate

juridical personality from its parent company. The fact that a corporation owns all of the stocks of
another corporation, taken alone, is not sufficient to justify their being treated as one entity. If used to
perform legitimate functions, a subsidiary's separate existence shall be respected, and the liability of
the parent corporation, as well as the subsidiary, shall be confined to those arising from their
respective businesses. A corporation has a separate personality distinct from its stockholders and
other corporations to which it may be conducted.[44] Any claim or suit of the parent corporation cannot
be pursued by the subsidiary based solely on the reason that the former owns the majority or even
the entire stock of the latter.

From a perusal of the records, petitioners did not enter into a Loan Agreement and REM with
respondent. Respondent, therefore, has no right to foreclose the subject property even after default,
since this right can only be claimed by the creditor-mortgagor, EPCIB; and, consequently, the
extrajudicial foreclosure of the REM by respondent would be in violation of petitioners' property
rights.

This Court takes note of the fact that in several cases[45] the Court denied the application for a Writ of
Preliminary Injunction that would enjoin an extrajudicial foreclosure of a mortgage, and declared that
foreclosure is proper when the debtors are in default of the payment of their obligation. Where the
parties stipulated in their credit agreements, mortgage contracts and promissory notes that the
mortgagee is authorized to foreclose the mortgaged properties in case of default by the mortgagors,
the mortgagee has a clear right to foreclosure in case of default, making the issuance of a Writ of
Preliminary Injunction improper. However, the doctrine in these cases is not applicable to the case at
bar where the identity of the creditor-mortgagor is highly disputable.

This Court emphasizes that the determination of who is the creditor-mortgagee is only for purposes
of determining the propriety of issuing a writ of preliminary injunction, based on the evidence
presented before the hearing for the issuance of a preliminary injunction. It will not bar the RTC from
making its own determination as to who is the true creditor-mortgagee after trial and presentation of
evidence on the main case. To establish the essential requisites for a preliminary injunction, the
evidence submitted by the plaintiff need not be conclusive and complete. The plaintiffs are only
required to show that they have an ostensible right to the final relief prayed for in their complaint.
[46]
In Urbanes, Jr. v. Court of Appeals, this Court expounded that:
A writ of preliminary injunction is generally based solely on initial and incomplete evidence. The
evidence submitted during the hearing on an application for a writ of preliminary injunction is not
conclusive or complete for only a sampling is needed to give the trial court an idea of the
justification for the preliminary injunction pending the decision of the case on the merits. As such, the
findings of fact and opinion of a court when issuing the writ of preliminary injunction
are interlocutoryin nature and made even before the trial on the merits is commenced or
terminated. There are vital facts that have yet to be presented during the trial which may not be
obtained or presented during the hearing on the application for the injunctive writ. The trial court
needs to conduct substantial proceedings in order to put the main controversy to rest. It does not
necessarily proceed that when a writ of preliminary injunction is issued, a final injunction will follow.
[47]
(Emphasis provided.)
The extrajudicial foreclosure of the petitioners' property pending the final determination by the RTC
of their complaint for annulment of the REM and claim for damages would result in an injustice to the
petitioners. If the RTC would subsequently declare that respondent was entitled to have petitioners'
property foreclosed, it may still foreclose the subject property which is valued at P12,000,000.00,
[48]
to answer for the debt which is estimated at P5,000,000.00, and further claim the P3,500,000.00
surety bond posted by petitioners with the RTC. On the other hand, if the RTC later finds that
respondent is not the creditor-mortgagee and, therefore, the foreclosure of the property is invalid,
petitioners would be placed in an oppressively unjust situation where they will be tied up in litigation
for the recovery of their property while their debt to the real creditor-mortgagee, EPCIB, would
remain unpaid and continue to accrue interest and other charges.

The sole object of a preliminary injunction is to maintain the status quo until the merits can be heard.
A preliminary injunction is an order granted at any stage of an action prior to judgment of final order,
requiring a party, court, agency, or person to refrain from a particular act or acts. It is a preservative
remedy to ensure the protection of a party's substantive rights or interests pending the final judgment
on the principal action. A plea for an injunctive writ lies upon the existence of a claimed emergency
or extraordinary situation which should be avoided for, otherwise, the outcome of a litigation would
be useless as far as the party applying for the writ is concerned.[49]

IN VIEW OF THE FOREGOING, the instant Petition is GRANTED. This CourtREVERSES the
assailed Decision dated 29 April 2005 of the Court of Appeals in CA-G.R. SP No. 85114,
and REINSTATES the Order dated 3 March 2004 of Branch 215 of the Regional Trial Court of
Quezon City in Civil Case No. Q-03-51184 ordering the issuance of a Writ of Preliminary Injunction.

SO ORDERED.
G.R. No. 145736 March 4, 2009

ESTATE OF ORLANDO LLENADO and WENIFREDA T. LLENADO, in her capacity as (a)

Administratrix of the Estate of Orlando A. Llenado and (b) Judicial Guardian of the Minor
children of Orlando A. Llenado, and (c) in her Own behalf as the Surviving Spouse and Legal
Heir of Orlando A. Llenado, Petitioners,
vs.
EDUARDO LLENADO, JORGE LLENADO, FELIZA GALLARDO VDA. DE LLENADO and
REGISTER OF DEEDS of Valenzuela City, Metro Manila, Respondents.

DECISION

YNARES-SANTIAGO, J.:

This petition for review on certiorari assails the May 30, 2000 Decision1 of the Court of Appeals in
CA-G.R. CV No. 58911 which reversed the May 5, 1997 Decision2 of the Regional Trial Court of
Valenzuela City, Branch 75 in Civil Case No. 4248-V-93, and the October 6, 2000 Resolution3 which
denied the motion for reconsideration. The appellate court dismissed for lack of merit the complaint
for annulment of deed of conveyance, title and damages filed by petitioner against herein
respondents.

The subject of this controversy is a parcel of land denominated as Lot 249-D-1 (subject lot)
consisting of 1,554 square meters located in Barrio Malinta, Valenzuela, Metro Manila and registered
in the names of Eduardo Llenado (Eduardo) and Jorge Llenado (Jorge) under Transfer of Certificate
of Title (TCT) No. V-1689.4 The subject lot once formed part of Lot 249-D owned by and registered in
the name of their father, Cornelio Llenado (Cornelio), under TCT No. T-16810.

On December 2, 1975, Cornelio leased Lot 249-D-1 to his nephew, Romeo Llenado (Romeo), for a
period of five years, renewable for another five years at the option of Cornelio. On March 31, 1978,
Cornelio, Romeo and the latter’s cousin Orlando Llenado (Orlando) executed an
Agreement5 whereby Romeo assigned all his rights to Orlando over the unexpired portion of the
aforesaid lease contract. The parties further agreed that Orlando shall have the option to renew the
lease contract for another three years commencing from December 3, 1980, up to December 2,
1983, renewable for another four years or up to December 2, 1987, and that "during the period that
[this agreement] is enforced, the x x x property cannot be sold, transferred, alienated or conveyed in
whatever manner to any third party."

Shortly thereafter or on June 24, 1978, Cornelio and Orlando entered into a Supplementary
Agreement6amending the March 31, 1978 Agreement. Under the Supplementary Agreement,
Orlando was given an additional option to renew the lease contract for an aggregate period of 10
years at five-year intervals, that is, from December 3, 1987 to December 2, 1992 and from
December 3, 1992 to December 2, 1997. The said provision was inserted in order to comply with the
requirements of Mobil Philippines, Inc. for the operation of a gasoline station which was
subsequently built on the subject lot.

Upon the death of Orlando on November 7, 1983, his wife, Wenifreda Llenado (Wenifreda), took
over the operation of the gasoline station. Meanwhile, on January 29, 1987, Cornelio sold Lot 249-D
to his children, namely, Eduardo, Jorge, Virginia and Cornelio, Jr., through a deed of sale,
denominated as "Kasulatan sa Ganap Na Bilihan,"7 for the sum of P160,000.00. As stated earlier,
the subject lot, which forms part of Lot 249-D, was sold to Eduardo and Jorge, and titled in their
names under TCT No. V-1689. Several months thereafter or on September 7, 1987, Cornelio passed
away.

Sometime in 1993, Eduardo informed Wenifreda of his desire to take over the subject lot. However,
the latter refused to vacate the premises despite repeated demands. Thus, on September 24, 1993,
Eduardo filed a complaint for unlawful detainer before the Metropolitan Trial Court of Valenzuela,
Metro Manila against Wenifreda, which was docketed as Civil Civil Case No. 6074.

On July 22, 1996, the Metropolitan Trial Court rendered its Decision in favor of Eduardo and ordered
Wenifreda to: (1) vacate the leased premises; (2) pay Eduardo reasonable compensation for the use
and occupation of the premises plus attorney’s fees, and (3) pay the costs of the suit.

Wenifreda appealed to the Regional Trial Court of Valenzuela, Metro Manila, which reversed the
decision of the court a quo. Thus, Eduardo appealed to the Court of Appeals which rendered a
Decision8 on March 31, 1998 reversing the decision of the Regional Trial Court and reinstating the
decision of the Metropolitan Trial Court. It also increased the amount of reasonable compensation
awarded to Eduardo for the use of the leased premises. Wenifreda’s appeal to this Court, docketed
as G.R. No. 135001, was dismissed in a Resolution9 dated December 2, 1998. Accordingly, an Entry
of Judgment10 was made in due course on July 8, 1999.

Previously, after Eduardo instituted the aforesaid unlawful detainer case on September 24, 1993,
herein petitioner Wenifreda, in her capacity as administratrix of the estate of Orlando Llenado,
judicial guardian of their minor children, and surviving spouse and legal heir of Orlando, commenced
the subject Complaint,11 later amended, on November 10, 1993 for annulment of deed of
conveyance, title and damages against herein respondents Eduardo, Jorge, Feliza Llenado (mother
of the Llenado brothers), and the Register of Deeds of Valenzuela, Metro Manila. The case was
docketed as Civil Case No. 4248-V-93 and raffled to Branch 75 of the Regional Trial Court of
Valenzuela, Metro Manila.

Petitioner alleged that the transfer and conveyance of the subject lot by Cornelio in favor of
respondents Eduardo and Jorge, was fraudulent and in bad faith considering that the March 31,
1978 Agreement provided that while the lease is in force, the subject lot cannot be sold, transferred
or conveyed to any third party; that the period of the lease was until December 3, 1987 with the
option to renew granted to Orlando; that the subject lot was transferred and conveyed to
respondents Eduardo and Jorge on January 29, 1987 when the lease was in full force and effect
making the sale null and void; that Cornelio verbally promised Orlando that in case he (Cornelio)
decides to sell the subject lot, Orlando or his heirs shall have first priority or option to buy the subject
lot so as not to prejudice Orlando’s business and because Orlando is the owner of the property
adjacent to the subject lot; and that this promise was wantonly disregarded when Cornelio sold the
said lot to respondents Jorge and Eduardo.

In their Answer,12 respondents Eduardo and Jorge claimed that they bought the subject lot from their
father, Cornelio, for value and in good faith; that the lease agreement and its supplement were not
annotated at the back of the mother title of the subject lot and do not bind them; that said
agreements are personal only to Cornelio and Orlando; that the lease expired upon the death of
Orlando on November 7, 1983; that they were not aware of any verbal promise to sell the subject lot
granted by Cornelio to Orlando and, even if there was, said option to buy is unenforceable under the
statute of frauds.

After the parties presented their respective evidence, the Regional Trial Court rendered judgment on
May 5, 1997 in favor of petitioner, viz:
WHEREFORE, PREMISES CONSIDERED, this Court finds the [petitioner’s] civil action duly
established by preponderance of evidence, renders judgment (adjudicates) in favor of the
[petitioner], Estate of Orlando Llenado represented by Wenifreda Llenado, and against [respondents]
e.g. Jorge, Eduardo, Felisa Gallardo, all surnamed Llenado, and the Register of Deeds of
Valenzuela, Metro Manila, as follows:

1) It hereby judicially declare as non-existence (sic) and null and void, the following:

a) The Kasulatan Sa Ganap na Kasunduan or Deed of Sale;

b) TCT- Transfer Certificate of Title No. V-9440, in the name of [respondent] Eduardo
Llenado, TCT- Transfer Certificate of Title No. V-1689, in the name of Jorge Llenado,
and Eduardo Llenado, and all deeds, documents or proceedings leading to the
issuance of said title, and all subsequent title issued therefrom and likewise whatever
deeds, documents or proceedings leading to the issuance of said subsequent titles;

2) It hereby orders the reconveyance of the said properties embraced in the said TCTs-
Transfer Certificate of Title Nos. V-9440 and V-1689 to the [petitioner] for the same
consideration, or purchase price, paid by [respondents] Eduardo Llenado and Jorge Llenado
for the same properties;

3) It hereby orders [respondent], Register of Deeds of Valenzuela, Metro Manila, to cause the
issuance of new transfer certificates of title over the said property in the name of the
[petitioner];

4) And, because this Court is not only a court of law, but of equity, it hereby rendered the
following damages to be paid by the [respondents], as the [respondents] litigated under
bonafide assertions that they have meritorious defense, viz:

a) P400,000.00 as moral damages;

b) 10,000.00 as nominal damages;

c) 10,000.00 as temperate damages;

d) 10,000.00 as exemplary damages;

e) 10,000.00 attorney’s fees on the basis of quantum merit; and

f) costs of suit.

SO ORDERED.13

The Regional Trial Court found that upon the death of Orlando on November 7, 1983, his rights
under the lease contract were transmitted to his heirs; that since the lease was in full force and effect
at the time the subject lot was sold by Cornelio to his sons, the sale violated the prohibitory clause in
the said lease contract. Further, Cornelio’s promise to sell the subject lot to Orlando may be
established by parole evidence since an option to buy is not covered by the statute of frauds. Hence,
the same is binding on Cornelio and his heirs.
Respondents appealed before the Court of Appeals which rendered the assailed May 30, 2000
Decision reversing the judgment of the Regional Trial Court and dismissing the Complaint. The
appellate court held that the death of Orlando did not extinguish the lease agreement and had the
effect of transmitting his lease rights to his heirs. However, the breach of the non-alienation clause of
the said agreement did not nullify the sale between Cornelio and his sons because the heirs of
Orlando are mere lessees on the subject lot and can never claim a superior right of ownership over
said lot as against the registered owners thereof. It further ruled that petitioner failed to establish by a
preponderance of evidence that Cornelio made a verbal promise to Orlando granting the latter the
right of first refusal if and when the subject lot was sold.

Upon the denial of its motion for reconsideration, petitioner is now before this Court on the following
assignment of errors:

[T]he Court of Appeals erred:

1.- In finding and concluding that there is no legal basis to annul the deed of conveyance
involved in the case and in not applying R.A. No. 3516, further amending R.A. No. 1162; and

2.- In not finding and holding as null and void the subject deed of conveyance, the same
having been executed in direct violation of an expressed covenant in said deed and in total
disregard of the pre-emptive, or preferential rights of the herein petitioners to buy the property
subject of their lease contract under said R.A. No. 3516, further amending R.A. No. 1162.14

The petition lacks merit.

Petitioner contends that the heirs of Orlando are entitled to the rights of a tenant under Republic Act
(R.A.) No. 1162,15 as amended by R.A. No. 3516.16 The right of first refusal or preferential right to
buy the leased premises is invoked pursuant to Section 517 of said law and this Court’s ruling in
Mataas Na Lupa Tenants Association, Inc. v. Dimayuga.18

This issue is being raised for the first time on appeal. True, in Mataas Na Lupa Tenants Association,
Inc., the Court explained that Section 1 of R.A. No. 1162, as amended by R.A. No. 3516, authorizes
the expropriation of any piece of land in the City of Manila, Quezon City and suburbs which have
been and are actually being leased to tenants for at least 10 years, provided said lands have at least
40 families of tenants thereon.19 Prior to and pending the expropriation, the tenant shall have a right
of first refusal or preferential right to buy the leased premises should the landowner sell the same.
However, compliance with the conditions for the application of the aforesaid law as well as the
qualifications of the heirs of Orlando to be beneficiaries thereunder were never raised before the trial
court, or even the Court of Appeals, because petitioner solely anchored its claim of ownership over
the subject lot on the alleged violation of the prohibitory clause in the lease contract between
Cornelio and Orlando, and the alleged non-performance of the right of first refusal given by Cornelio
to Orlando. The rule is settled, impelled by basic requirements of due process, that points of law,
theories, issues and arguments not adequately brought to the attention of the lower court will not be
ordinarily considered by a reviewing court as they cannot be raised for the first time on appeal.20 As
the issue of the applicability of R.A. No. 1162, as amended, was neither averred in the pleadings nor
raised during the trial below, the same cannot be raised for the first time on appeal.

At any rate, the allegations in the Complaint and the evidence presented during the trial below do not
establish that Orlando or his heirs are covered by R.A. No. 1162, as amended. It was not alleged nor
shown that the subject lot is part of the landed estate or haciendas in the City of Manila which were
authorized to be expropriated under said law; that the Solicitor General has instituted the requisite
expropriation proceedings pursuant to Section 221thereof; that the subject lot has been actually
leased for a period of at least ten (10) years; and that the subject lot has at least forty (40) families of
tenants thereon. Instead, what was merely established during the trial is that the subject lot was
leased by Cornelio to Orlando for the operation of a gasoline station, thus, negating petitioner’s claim
that the subject lot is covered by the aforesaid law. In Mataas Na Lupa Tenants Association, Inc., the
Court further explained that R.A. No. 1162, as amended, has been superseded by Presidential
Decree (P.D.) No. 151722 entitled "Proclaiming Urban Land Reform in the Philippines and Providing
for the Implementing Machinery Thereof."23 However, as held in Tagbilaran Integrated Settlers
Association Incorporated v. Court of Appeals,24P.D. No. 1517 is applicable only in specific areas
declared, through presidential proclamation,25 to be located within the so-called urban
zones.26 Further, only legitimate tenants who have resided on the land for ten years or more who
have built their homes on the land and residents who have legally occupied the lands by contract,
continuously for the last ten years, are given the right of first refusal to purchase the land within a
reasonable time.27 Consequently, those lease contracts entered into for commercial use are not
covered by said law.28 Thus, considering that petitioner failed to prove that a proclamation has been
issued by the President declaring the subject lot as within the urban land reform zone and
considering further that the subject lot was leased for the commercial purpose of operating a
gasoline station, P.D. No. 1517 cannot be applied to this case.

In fine, the only issue for our determination is whether the sale of the subject lot by Cornelio to his
sons, respondents Eduardo and Jorge, is invalid for (1) violating the prohibitory clause in the lease
agreement between Cornelio, as lessor-owner, and Orlando, as lessee; and (2) contravening the
right of first refusal of Orlando over the subject lot.

It is not disputed that the lease agreement contained an option to renew and a prohibition on the sale
of the subject lot in favor of third persons while the lease is in force. Petitioner claims that when
Cornelio sold the subject lot to respondents Eduardo and Jorge the lease was in full force and effect,
thus, the sale violated the prohibitory clause rendering it invalid. In resolving this issue, it is
necessary to determine whether the lease agreement was in force at the time of the subject sale
and, if it was in force, whether the violation of the prohibitory clause invalidated the sale.

Under Article 1311 of the Civil Code, the heirs are bound by the contracts entered into by their
predecessors-in-interest except when the rights and obligations therein are not transmissible by their
nature, by stipulation or by provision of law. A contract of lease is, therefore, generally transmissible
to the heirs of the lessor or lessee. It involves a property right and, as such, the death of a party does
not excuse non-performance of the contract.29The rights and obligations pass to the heirs of the
deceased and the heir of the deceased lessor is bound to respect the period of the lease.30 The
same principle applies to the option to renew the lease. As a general rule, covenants to renew a
lease are not personal but will run with the land.31 Consequently, the successors-in-interest of the
lessee are entitled to the benefits, while that of the lessor are burdened with the duties and
obligations, which said covenants conferred and imposed on the original parties.

The foregoing principles apply with greater force in this case because the parties expressly
stipulated in the March 31, 1978 Agreement that Romeo, as lessee, shall transfer all his rights and
interests under the lease contract with option to renew "in favor of the party of the Third Part
(Orlando), the latter’s heirs, successors and assigns"32indicating the clear intent to allow the
transmissibility of all the rights and interests of Orlando under the lease contract unto his heirs,
successors or assigns. Accordingly, the rights and obligations under the lease contract with option to
renew were transmitted from Orlando to his heirs upon his death on November 7, 1983.

It does not follow, however, that the lease subsisted at the time of the sale of the subject lot on
January 29, 1987. When Orlando died on November 7, 1983, the lease contract was set to expire 26
days later or on December 3, 1983, unless renewed by Orlando’s heirs for another four years. While
the option to renew is an enforceable right, it must necessarily be first exercised to be given
effect.33 As the Court explained in Dioquino v. Intermediate Appellate Court:34

A clause found in an agreement relative to the renewal of the lease agreement at the option of the
lessee gives the latter an enforceable right to renew the contract in which the clause is found for
such time as provided for. The agreement is understood as being in favor of the lessee, and the
latter is authorized to renew the contract and to continue to occupy the leased property after
notifying the lessor to that effect. A lessor’s covenant or agreement to renew gives a privilege to the
tenant, but is nevertheless an executory contract, and until the tenant has exercised the privilege by
way of some affirmative act, he cannot be held for the additional term. In the absence of a stipulation
in the lease requiring notice of the exercise of an option or an election to renew to be given within a
certain time before the expiration of the lease, which of course, the lessee must comply with, the
general rule is that a lessee must exercise an option or election to renew his lease and notify the
lessor thereof before, or at least at the time of the expiration of his original term, unless there is a
waiver or special circumstances warranting equitable relief.1avvphi1.zw+

There is no dispute that in the instant case, the lessees (private respondents) were granted the
option to renew the lease for another five (5) years after the termination of the original period of
fifteen years. Yet, there was never any positive act on the part of private respondents before or after
the termination of the original period to show their exercise of such option. The silence of the lessees
after the termination of the original period cannot be taken to mean that they opted to renew the
contract by virtue of the promise by the lessor, as stated in the original contract of lease, to allow
them to renew. Neither can the exercise of the option to renew be inferred from their persistence to
remain in the premises despite petitioners’ demand for them to vacate. x x x.35

Similarly, the election of the option to renew the lease in this case cannot be inferred from petitioner
Wenifreda’s continued possession of the subject lot and operation of the gasoline station even after
the death of Orlando on November 7, 1983 and the expiration of the lease contract on December 3,
1983. In the unlawful detainer case against petitioner Wenifreda and in the subject complaint for
annulment of conveyance, respondents consistently maintained that after the death of Orlando, the
lease was terminated and that they permitted petitioner Wenifreda and her children to remain in
possession of the subject property out of tolerance and respect for the close blood relationship
between Cornelio and Orlando. It was incumbent, therefore, upon petitioner as the plaintiff with the
burden of proof during the trial below to establish by some positive act that Orlando or his heirs
exercised the option to renew the lease. After going over the records of this case, we find no
evidence, testimonial or documentary, of such nature was presented before the trial court to prove
that Orlando or his heirs exercised the option to renew prior to or at the time of the expiration of the
lease on December 3, 1983. In particular, the testimony of petitioner Wenifreda is wanting in detail
as to the events surrounding the implementation of the subject lease agreement after the death of
Orlando and any overt acts to establish the renewal of said lease.

Given the foregoing, it becomes unnecessary to resolve the issue on whether the violation of the
prohibitory clause invalidated the sale and conferred ownership over the subject lot to Orlando’s
heirs, who are mere lessees, considering that at the time of said sale on January 29, 1987 the lease
agreement had long been terminated for failure of Orlando or his heirs to validly renew the same. As
a result, there was no obstacle to the sale of the subject lot by Cornelio to respondents Eduardo and
Jorge as the prohibitory clause under the lease contract was no longer in force.

Petitioner also anchors its claim over the subject lot on the alleged verbal promise of Cornelio to
Orlando that should he (Cornelio) sell the same, Orlando would be given the first opportunity to
purchase said property. According to petitioner, this amounted to a right of first refusal in favor of
Orlando which may be proved by parole evidence because it is not one of the contracts covered by
the statute of frauds. Considering that Cornelio sold the subject lot to respondents Eduardo and
Jorge without first offering the same to Orlando’s heirs, petitioner argues that the sale is in violation
of the latter’s right of first refusal and is, thus, rescissible.

The question as to whether a right of first refusal may be proved by parole evidence has been
answered in the affirmative by this Court in Rosencor Development Corporation v. Inquing:36

We have previously held that not all agreements "affecting land" must be put into writing to attain
enforceability. Thus, we have held that the setting up of boundaries, the oral partition of real
property, and an agreement creating a right of way are not covered by the provisions of the statute of
frauds. The reason simply is that these agreements are not among those enumerated in Article 1403
of the New Civil Code.

A right of first refusal is not among those listed as unenforceable under the statute of frauds.
Furthermore, the application of Article 1403, par. 2(e) of the New Civil Code presupposes the
existence of a perfected, albeit unwritten, contract of sale. A right of first refusal, such as the one
involved in the instant case, is not by any means a perfected contract of sale of real property. At
best, it is a contractual grant, not of the sale of the real property involved, but of the right of first
refusal over the property sought to be sold.

It is thus evident that the statute of frauds does not contemplate cases involving a right of first
refusal. As such, a right of first refusal need not be written to be enforceable and may be proven by
oral evidence.37

In the instant case, the Regional Trial Court ruled that the right of first refusal was proved by oral
evidence while the Court of Appeals disagreed by ruling that petitioner merely relied on the
allegations in its Complaint to establish said right. We have reviewed the records and find that no
testimonial evidence was presented to prove the existence of said right. The testimony of petitioner
Wenifreda made no mention of the alleged verbal promise given by Cornelio to Orlando. The two
remaining witnesses for the plaintiff, Michael Goco and Renato Malindog, were representatives from
the Register of Deeds of Caloocan City who naturally were not privy to this alleged promise. Neither
was it established that respondents Eduardo and Jorge were aware of said promise prior to or at the
time of the sale of the subject lot. On the contrary, in their answer to the Complaint, respondents
denied the existence of said promise for lack of knowledge thereof.38 Within these parameters,
petitioner’s allegations in its Complaint cannot substitute for competent proof on such a crucial
factual issue. Necessarily, petitioner’s claims based on this alleged right of first refusal cannot be
sustained for its existence has not been duly established.

WHEREFORE, the petition is DENIED. The May 30, 2000 Decision of the Court of Appeals in CA-
G.R. CV No. 58911 dismissing the complaint for annulment of deed of conveyance, title and
damages, and the October 6, 2000 Resolution denying the motion for reconsideration, are
AFFIRMED.

Costs against petitioner.

SO ORDERED.
G.R. No. 128066 June 19, 2000

JARDINE DAVIES INC., petitioner,

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

G.R. No. 128069 June 19, 2000

PURE FOODS CORPORATION, petitioner,

vs.

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

BELLOSILLO, J.:

This is rather a simple case for specific performance with damages which could have been resolved
through mediation and conciliation during its infancy stage had the parties been earnest in expediting
the disposal of this case. They opted however to resort to full court proceedings and denied
themselves the benefits of alternative dispute resolution, thus making the process more arduous and
long-drawn.

The controversy started in 1992 at the height of the power crisis which the country was then
experiencing. To remedy and curtail further losses due to the series of power failures, petitioner
PURE FOODS CORPORATION (hereafter PUREFOODS) decided to install two (2) 1500 KW
generators in its food processing plant in San Roque, Marikina City.

Sometime in November 1992 a bidding for the supply and installation of the generators was held.
Several suppliers and dealers were invited to attend a pre-bidding conference to discuss the
conditions, propose scheme and specifications that would best suit the needs of PUREFOODS. Out
of the eight (8) prospective bidders who attended the pre-bidding conference, only three (3) bidders,
namely, respondent FAR EAST MILLS SUPPLY CORPORATION (hereafter FEMSCO), MONARK
and ADVANCE POWER submitted bid proposals and gave bid bonds equivalent to 5% of their
respective bids, as required.

Thereafter, in a letter dated 12 December 1992 addressed to FEMSCO President Alfonso Po,
PUREFOODS confirmed the award of the contract to FEMSCO —

Gentlemen:

This will confirm that Pure Foods Corporation has awarded to your firm the project:
Supply and Installation of two (2) units of 1500 KW/unit Generator Sets at the
Processed Meats Plant, Bo. San Roque, Marikina, based on your proposal number PC
28-92 dated November 20, 1992, subject to the following basic terms and conditions:

1. Lump sum contract of P6,137,293.00 (VAT included), for the supply of materials and
labor for the local portion and the labor for the imported materials, payable by progress
 billing twice a month, with ten percent (10%) retention. The retained amount shall be
released thirty (30) days after acceptance of the completed project and upon posting of
Guarantee Bond in an amount equivalent to twenty percent (20%) of the contract price.
The Guarantee Bond shall be valid for one (1) year from completion and acceptance of
project. The contract price includes future increase/s in costs of materials and labor;

2. The projects shall be undertaken pursuant to the attached specifications. It is

understood that any item required to complete the project, and those not included in
the list of items shall be deemed included and covered and shall be performed;

3. All materials shall be brand new;

4. The project shall commence immediately and must be completed within twenty (20)
working days after the delivery of Generator Set to Marikina Plant, penalty equivalent to
1/10 of 1% of the purchase price for every day of delay;

5. The Contractor shall put up Performance Bond equivalent to thirty (30%) of the
contract price, and shall procure All Risk Insurance equivalent to the contract price
upon commencement of the project. The All Risk Insurance Policy shall be endorsed in
favor of and shall be delivered to Pure Foods Corporation;

6. Warranty of one (1) year against defective material and/or workmanship.

Once finalized, we shall ask you to sign the formal contract embodying the foregoing
terms and conditions.

Immediately, FEMSCO submitted the required performance bond in the amount of P1,841,187.90
and contractor's all-risk insurance policy in the amount of P6,137,293.00 which PUREFOODS
through its Vice President Benedicto G. Tope acknowledged in a letter dated 18 December 1992.
FEMSCO also made arrangements with its principal and started the PUREFOODS project by
purchasing the necessary materials. PUREFOODS on the other hand returned FEMSCO's Bidder's
Bond in the amount of P1,000,000.00, as requested.

Later, however, in a letter dated 22 December 1992, PUREFOODS through its Senior Vice President
Teodoro L. Dimayuga unilaterally canceled the award as "significant factors were uncovered and
brought to (their) attention which dictate (the) cancellation and warrant a total review and re-bid of
(the) project." Consequently, FEMSCO protested the cancellation of the award and sought a meeting
with PUREFOODS. However, on 26 March 1993, before the matter could be resolved,
PUREFOODS already awarded the project and entered into a contract with JARDINE NELL, a
division of Jardine Davies, Inc. (hereafter JARDINE), which incidentally was not one of the
bidders.1âwphi1.nêt

FEMSCO thus wrote PUREFOODS to honor its contract with the former, and to JARDINE to cease
and desist from delivering and installing the two (2) generators at PUREFOODS. Its demand letters
unheeded, FEMSCO sued both PUREFOODS and JARDINE: PUREFOODS for reneging on its
contract, and JARDINE for its unwarranted interference and inducement. Trial ensued. After
FEMSCO presented its evidence, JARDINE filed a Demurrer to Evidence.

On 27 June 1994 the Regional Trial Court of Pasig, Br. 68, 1 granted JARDINE's Demurrer to
Evidence. The trial court concluded that "[w]hile it may seem to the plaintiff that by the actions of the
two defendants there is something underhanded going on, this is all a matter of perception, and
unsupported by hard evidence, mere suspicions and suppositions would not stand up very well in a
court of law." 2 Meanwhile trial proceeded as regards the case against PUREFOODS.

On 28 July 1994 the trial court rendered a decision ordering PUREFOODS: (a) to indemnify
FEMSCO the sum of P2,300,000.00 representing the value of engineering services it rendered; (b)
to pay FEMSCO the sum of US$14,000.00 or its peso equivalent, and P900,000.00 representing
contractor's mark-up on installation work, considering that it would be impossible to compel
PUREFOODS to honor, perform and fulfill its contractual obligations in view of PUREFOOD's
contract with JARDINE and noting that construction had already started thereon; (c) to pay attorney's
fees in an amount equivalent to 20% of the total amount due; and, (d) to pay the costs. The trial
court dismissed the counterclaim filed by PUREFOODS for lack of factual and legal basis.

Both FEMSCO and PUREFOODS appealed to the Court of Appeals. FEMSCO appealed the 27
June 1994 Resolution of the trial court which granted the Demurrer to Evidence filed by JARDINE
resulting in the dismissal of the complaint against it, while PUREFOODS appealed the 28 July 1994
Decision of the same court which ordered it to pay FEMSCO.

On 14 August 1996 the Court of Appeals affirmed in toto the 28 July 1994 Decision of the trial
court. 3 It also reversed the 27 June 1994 Resolution of the lower court and ordered JARDINE to pay
FEMSCO damages for inducing PUREFOODS to violate the latter's contract with FEMSCO. As
such, JARDINE was ordered to pay FEMSCO P2,000,000.00 for moral damages. In addition,
PUREFOODS was also directed to pay FEMSCO P2,000,000.00 as moral damages and
P1,000,000.00 as exemplary damages as well as 20% of the total amount due as attorney's fees.

On 31 January 1997 the Court of Appeals denied for lack of merit the separate motions for
reconsideration filed by PUREFOODS and JARDINE. Hence, these two (2) petitions for review filed
by PUREFOODS and JARDINE which were subsequently consolidated.

PUREFOODS maintains that the conclusions of both the trial court and the appellate court are
premised on a misapprehension of facts. It argues that its 12 December 1992 letter to FEMSCO was
not an acceptance of the latter's bid proposal and award of the project but more of a qualified
acceptance constituting a counter-offer which required FEMSCO's express conforme. Since
PUREFOODS never received FEMSCO's conforme, PUREFOODS was very well within reason to
revoke its qualified acceptance or counter-offer. Hence, no contract was perfected between
PUREFOODS and FEMSCO. PUREFOODS also contends that it was never in bad faith when it
dealt with FEMSCO. Hence moral and exemplary damages should not have been awarded.

Corollarily, JARDINE asserts that the records are bereft of any showing that it had prior knowledge of
the supposed contract between PUREFOODS and FEMSCO, and that it induced PUREFOODS to
violate the latter's alleged contract with FEMSCO. Moreover, JARDINE reasons that FEMSCO, an
artificial person, is not entitled to moral damages. But granting arguendo that the award of moral
damages is proper, P2,000,000.00 is extremely excessive.

In the main, these consolidated cases present two (2) issues: first, whether there existed a perfected
contract between PUREFOODS and FEMSCO; and second, granting there existed a perfected
contract, whether there is any showing that JARDINE induced or connived with PUREFOODS to
violate the latter's contract with FEMSCO.

A contract is defined as "a juridical convention manifested in legal form, by virtue of which one or
more persons bind themselves in favor of another or others, or reciprocally, to the fulfillment of a
prestation to give, to do, or not to do." 4 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; and, (c) cause of the obligation which is established. 5A contract binds both contracting
parties and has the force of law between them.

Contracts are perfected by mere consent, upon the acceptance by the offeree of the offer made by
the offeror. From that moment, the parties are bound not only to the fulfillment of what has been
expressly stipulated but also to all the consequences which, according to their nature, may be in
keeping with good faith, usage and law. 6 To produce a contract, the acceptance must not qualify the
terms of the offer. However, the acceptance may be express or implied. 7 For a contract to arise, the
acceptance must be made known to the offeror. Accordingly, the acceptance can be withdrawn or
revoked before it is made known to the offeror.

In the instant case, there is no issue as regards the subject matter of the contract and the cause of
the obligation. The controversy lies in the consent — whether there was an acceptance of the offer,
and if so, if it was communicated, thereby perfecting the contract.

To resolve the dispute, there is a need to determine what constituted the offer and the acceptance.
Since petitioner PUREFOODS started the process of entering into the contract by conducting a
bidding, Art. 1326 of the Civil Code, which provides that "[a]dvertisements for bidders are simply
invitations to make proposals," applies. Accordingly, the Terms and Conditions of the Bidding
disseminated by petitioner PUREFOODS constitutes the "advertisement" to bid on the project. The
bid proposals or quotations submitted by the prospective suppliers including respondent FEMSCO,
are the offers. And, the reply of petitioner PUREFOODS, the acceptance or rejection of the
respective offers.

Quite obviously, the 12 December 1992 letter of petitioner. PUREFOODS to FEMSCO constituted
acceptance of respondent FEMSCO's offer as contemplated by law. The tenor of the letter, i.e., "This
will confirm that Pure Foods has awarded to your firm (FEMSCO) the project," could not be more
categorical. While the same letter enumerated certain "basic terms and conditions," these conditions
were imposed on the performance of the obligation rather than on the perfection of the contract.
Thus, the first "condition" was merely a reiteration of the contract price and billing scheme based on
the Terms and Conditions of Bidding and the bid or previous offer of respondent FEMSCO. The
second and third "conditions" were nothing more than general statements that all items and materials
including those excluded in the list but necessary to complete the project shall be deemed included
and should be brand new. The fourth "condition" concerned the completion of the work to be
done, i.e., within twenty (20) days from the delivery of the generator set, the purchase of which was
part of the contract. The fifth "condition" had to do with the putting up of a performance bond and an
all-risk insurance, both of which should be given upon commencement of the project. The sixth
"condition" related to the standard warranty of one (1) year. In fine, the enumerated "basic terms and
conditions" were prescriptions on how the obligation was to be performed and implemented. They
were far from being conditions imposed on the perfection of the contract.

In Babasa v. Court of Appeals 8 we distinguished between a condition imposed on the perfection of a

contract and a condition imposed merely on the performance of an obligation. While failure to comply
with the first condition results in the failure of a contract, failure to comply with the second merely
gives the other party options and/or remedies to protect his interests.

We thus agree with the conclusion of respondent appellate court which affirmed the trial court —

As can be inferred from the actual phrase used in the first portion of the letter, the
decision to award the contract has already been made. The letter only serves as a
confirmation of such decision. Hence, to the Court's mind, there is already an
acceptance made of the offer received by Purefoods. Notwithstanding the terms and
 conditions enumerated therein, the offer has been accepted and/or amplified the
details of the terms and conditions contained in the Terms and Conditions of Bidding
given out by Purefoods to prospective bidders.9

But even granting arguendo that the 12 December 1992 letter of petitioner PUREFOODS constituted
a "conditional counter-offer," respondent FEMCO's submission of the performance bond and
contractor's all-risk insurance was an implied acceptance, if not a clear indication of its acquiescence
to, the "conditional counter-offer," which expressly stated that the performance bond and the
contractor's all-risk insurance should be given upon the commencement of the contract. Corollarily,
the acknowledgment thereof by petitioner PUREFOODS, not to mention its return of FEMSCO's
bidder's bond, was a concrete manifestation of its knowledge that respondent FEMSCO indeed
consented to the "conditional counter-offer." After all, as earlier adverted to, an acceptance may
either be express or implied, 10 and this can be inferred from the contemporaneous and subsequent
acts of the contracting parties.

Accordingly, for all intents and purposes, the contract at that point has been perfected, and
respondent FEMSCO's conforme would only be a mere surplusage. The discussion of the price of
the project two (2) months after the 12 December 1992 letter can be deemed as nothing more than a
pressure being exerted by petitioner PUREFOODS on respondent FEMSCO to lower the price even
after the contract had been perfected. Indeed from the facts, it can easily be surmised that petitioner
PUREFOODS was haggling for a lower price even after agreeing to the earlier quotation, and was
threatening to unilaterally cancel the contract, which it eventually did. Petitioner PUREFOODS also
makes an issue out of the absence of a purchase order (PO). Suffice it to say that purchase orders
or POs do not make or break a contract. Thus, even the tenor of the subsequent letter of petitioner
PUREFOODS, i.e., "Pure Foods Corporation is hereby canceling the award to your company of the
project," presupposes that the contract has been perfected. For, there can be no cancellation if the
contract was not perfected in the first place.

Petitioner PUREFOODS also argues that it was never in bad faith. On the contrary, it believed in
good faith that no such contract was perfected. We are not convinced. We subscribe to the factual
findings and conclusions of the trial court which were affirmed by the appellate court —

Hence, by the unilateral cancellation of the contract, the defendant (petitioner PURE
FOODS) has acted with bad faith and this was further aggravated by the subsequent
inking of a contract between defendant Purefoods and erstwhile co-defendant Jardine.
It is very evident that Purefoods thought that by the expedient means of merely writing
a letter would automatically cancel or nullify the existing contract entered into by both
parties after a process of bidding. This, to the Court's mind, is a flagrant violation of the
express provisions of the law and is contrary to fair and just dealings to which every
man is due. 11

This Court has awarded in the past moral damages to a corporation whose reputation has been
besmirched. 12 In the instant case, respondent FEMSCO has sufficiently shown that its reputation
was tarnished after it immediately ordered equipment from its suppliers on account of the urgency of
the project, only to be canceled later. We thus sustain respondent appellate court's award of moral
damages. We however reduce the award from P2,000,000.00 to P1,000,000.00, as moral damages
are never intended to enrich the recipient. Likewise, the award of exemplary damages by way of
example for the public good is excessive and should be reduced to P100,000.00.

Petitioner JARDINE maintains on the other hand that respondent appellate court erred in ordering it
to pay moral damages to respondent FEMSCO as it supposedly induced PUREFOODS to violate the
contract with FEMSCO. We agree. While it may seem that petitioners PUREFOODS and JARDINE
connived to deceive respondent FEMSCO, we find no specific evidence on record to support such
perception. Likewise, there is no showing whatsoever that petitioner JARDINE induced petitioner
PUREFOODS. The similarity in the design submitted to petitioner PUREFOODS by both petitioner
JARDINE and respondent FEMSCO, and the tender of a lower quotation by petitioner JARDINE are
insufficient to show that petitioner JARDINE indeed induced petitioner PUREFOODS to violate its
contract with respondent FEMSCO.

WHEREFORE, judgment is hereby rendered as follows:

(a) The petition in G.R. No. 128066 is GRANTED. The assailed Decision of the Court of Appeals
reversing the 27 June 1994 resolution of the trial court and ordering petitioner JARDINE DAVIES,
INC., to pay private respondent FAR EAST MILLS SUPPLY CORPORATION P2,000,000.00 as
moral damages is REVERSED and SET ASIDE for insufficiency of evidence; and

(b) The petition in G.R. No. 128069 is DENIED. The assailed Decision of the Court of Appeals
ordering petitioner PUREFOODS CORPORATION to pay private respondent FAR EAST MILLS
SUPPLY CORPORATION the sum of P2,300,000.00 representing the value of engineering services
it rendered, US$14,000.00 or its peso equivalent, and P900,000.00 representing the contractor's
mark-up on installation work, as well as attorney's fees equivalent to twenty percent (20%) of the
total amount due, is AFFIRMED. In addition, petitioner PURE FOODS CORPORATION is ordered to
pay private respondent FAR EAST MILLS SUPPLY CORPORATION moral damages in the amount
of P1,000,000.00 and exemplary damages in the amount of P1,000,000.00. Costs against
petitioner.1âwphi1.nêt

SO ORDERED.
G.R. No. 123892 May 21, 2001

JASMIN SOLER, petitioner,

vs.
COURT OF APPEALS, COMMERCIAL BANK OF MANILA, and NIDA LOPEZ, respondents.

PARDO, J.:

Appeal via certiorari from a decision of the Court of Appeals,1 declaring that there was no perfected
contract between petitioner Jazmin Soler and The Commercial Bank of Manila (COMBANK FOR
BREVITY, formerly Boston Bank of the Philippines) for the renovation of its Ermita Branch, thereby
denying her claim for payment of professional fees for services rendered.

The antecedent facts are as follows:

Petitioner Jazmin Soler is a Fine Arts graduate of the University of Sto. Tomas, Manila. She is a well
known licensed professional interior designer. In November 1986, her friend Rosario Pardo asked
her to talk to Nida Lopez, who was manager of the COMBANK Ermita Branch for they were planning
to renovate the branch offices.2

Even prior to November 1986, petitioner and Nida Lopez knew each other because of Rosario
Pardo, the latter's sister. During their meeting, petitioner was hesitant to accept the job because of
her many out of town commitments, and also considering that Ms. Lopez was asking that the
designs be submitted by December 1986, which was such a short notice. Ms. Lopez insisted,
however, because she really wanted petitioner to do the design for renovation. Petitioner acceded to
the request. Ms. Lopez assured her that she would be compensated for her services. Petitioner even
told Ms. Lopez that her professional fee was ten thousand pesos (P10,000.00), to which Ms. Lopez
acceded.3

During the November 1986 meeting between petitioner and Ms. Lopez, there were discussions as to
what was to be renovated, which included a provision for a conference room, a change in the
carpeting and wall paper, provisions for bookshelves, a clerical area in the second floor, dressing up
the kitchen, change of the ceiling and renovation of the tellers booth. Ms. Lopez again assured
petitioner that the bank would pay her fees.4

After a few days, petitioner requested for the blueprint of the building so that the proper design, plans
and specifications could be given to Ms. Lopez in time for the board meeting in December 1986.
Petitioner then asked her draftsman Jackie Barcelon to go to the jobsite to make the proper
measurements using the blue print. Petitioner also did her research on the designs and individual
drawings of what the bank wanted. Petitioner hired Engineer Ortanez to make the electrical layout,
architects Frison Cruz and De Mesa to do the drafting. For the services rendered by these
individuals, petitioner paid the engineer P4,000.00, architects Cruz and de Mesa P5,000.00 and
architect Barcelon P6,000.00. Petitioner also contacted the suppliers of the wallpaper and the sash
makers for their quotation. So come December 1986, the lay out and the design were submitted to
Ms. Lopez. She even told petitioner that she liked the designs.5

Subsequently, petitioner repeatedly demanded payment for her services but Ms. Lopez just ignored
the demands. In February 1987, by chance petitioner and Ms. Lopez saw each other in a concert at
the Cultural Center of the Philippines. Petitioner inquired about the payment for her services, Ms.
Lopez curtly replied that she was not entitled to it because her designs did not conform to the bank's
policy of having a standard design, and that there was no agreement between her and the bank.6

To settle the controversy, petitioner referred the matter to her lawyers, who wrote Ms. Lopez on May
20, 1987, demanding payment for her professional fees in the amount of P10,000.00 which Ms.
Lopez ignored. Hence, on June 18, 1987, the lawyers wrote Ms. Lopez once again demanding the
return of the blueprint copies petitioner submitted which Ms. Lopez refused to return.7

On October 13, 1987, petitioner filed at the Regional Trial Court of Pasig, Branch 153 a complaint
against COMBANK and Ms. Lopez for collection of professional fees and damages.8

In its answer, COMBANK stated that there was no contract between COMBANK and petitioner;9 that
Ms. Lopez merely invited petitioner to participate in a bid for the renovation of the COMBANK Ermita
Branch; that any proposal was still subject to the approval of the COMBANK's head office.10

After due trial, on November 19, 1990, the trial court rendered a decision, the dispositive portion of
which reads:

"WHEREFORE, premises considered, judgment is hereby rendered in favor of plaintiff and

against defendants, ordering defendants jointly and severally, to pay plaintiff the following, to
wit:

"1. P15,000.00 representing the actual and compensatory damages or at least a reasonable
compensation for the services rendered based on a quantum meruit;

"2. P5,000.00 as attorney's fees, and P2,000.00 as litigation expenses;

"3. P5,000.00 as exemplary damages; and

"4. The cost of suit.

"SO ORDERED."11

On November 29, 1990, COMBANK, and Ms. Nida Lopez, filed their notice of appeal.12 On
December 5, 1990, the trial court ordered13 the records of the case elevated to the Court of
Appeals.14

In the appeal, COMBANK reiterated that there was no contract between petitioner, Nida Lopez and
the bank.15 Whereas, petitioner maintained that there was a perfected contract between her and the
bank which was facilitated through Nida Lopez. According to petitioner there was an offer and an
acceptance of the service she rendered to the bank.16

On October 26, 1995, the Court of Appeals rendered its decision the relevant portions of which state:

"After going over the record of this case, including the transcribed notes taken during the
course of the trial, We are convinced that the question here is not really whether the alleged
contract purportedly entered into between the plaintiff and defendant Lopez is enforceable,
but whether a contract even exists between the parties.

"Article 1318 of the Civil Code provides that there is no contract unless the following requisites
concur:
 "(1) consent of the contracting parties;

"(2) object certain which is the subject matter of the contract;

"(3) cause of the obligation which is established.

xxx

"The defendant bank never gave its imprimatur or consent to the contract considering that the
bidding or the question of renovating the ceiling of the branch office of defendant bank was
deferred because the commercial bank is for sale. It is under privatization. xxx

"At any rate, we find that the appellee failed to prove the allegations in her complaint. xxx

"WHEREFORE, premises considered, the appealed decision (dated November 19, 1990) of
the Regional Trial Court (Branch 153) in Pasig (now 55238, is hereby REVERSED. No
pronouncement as to costs.

"SO ORDERED."17

Hence, this petition.18

Petitioner forwards the argument that:

1. The Court of Appeals erred in ruling that there was no contract between petitioner and
respondents, in the absence of the element of consent;

2. The Court of Appeals erred in ruling that respondents merely invited petitioner to present
her proposal;

3. The Court of Appeals erred in ruling that petitioner knew that her proposal was still subject
to bidding and approval of the board of directors of the bank;

4. The Court of Appeals erred in reversing the decision of the trial court.

We find the petition meritorious.

We see that the issues raised boil down to whether or not there was a perfected contract between
petitioner Jazmin Soler and respondents COMBANK and Nida Lopez, and whether or not Nida
Lopez, the manager of the bank branch, had authority to bind the bank in the transaction.

The discussions between petitioner and Ms. Lopez was to the effect that she had authority to
engage the services of petitioner. During their meeting, she even gave petitioner specifications as to
what was to be renovated in the branch premises and when petitioners requested for the blueprints
of the building, Ms. Lopez supplied the same.

Ms. Lopez was aware that petitioner hired the services of people to help her come up with the
designs for the December, 1986 board meeting of the bank. Ms. Lopez even insisted that the
designs be rushed in time for presentation to the bank. With all these discussion and transactions, it
was apparent to petitioner that Ms. Lopez indeed had authority to engage the services of
petitioner.1âwphi1.nêt
The next issue is whether there was a perfected contract between petitioner and the Bank.

"A contract is a meeting of the minds between two persons whereby one binds himself to give
something or to render some service to bind himself to give something to render some service to
another for consideration. There is no contract unless the following requisites concur: 1. Consent of
the contracting parties; 2. Object certain which is the subject matter of the contract; and 3. Cause of
the obligation which is established.19

"A contract undergoes three stages:

"(a) preparation, conception, or generation, which is the period of negotiation and bargaining,
ending at the moment of agreement of the parties;

"(b) perfection or birth of the contract, which is the moment when the parties come to agree on
the terms of the contract; and

"(c) consummation or death, which is the fulfillment or performance of the terms agreed upon
in the contract."20

In the case at bar, there was a perfected oral contract. When Ms. Lopez and petitioner met in
November 1986, and discussed the details of the work, the first stage of the contract commenced.
When they agreed to the payment of the ten thousand pesos (P10,000.00) as professional fees of
petitioner and that she should give the designs before the December 1986 board meeting of the
bank, the second stage of the contract proceeded, and when finally petitioner gave the designs to
Ms. Lopez, the contract was consummated.

Petitioner believed that once she submitted the designs she would be paid her professional fees. Ms.
Lopez assured petitioner that she would be paid.

It is familiar doctrine that if a corporation knowingly permits one of its officers, or any other agent, to
act within the scope of an apparent authority, it holds him out to the public as possessing the power
to do those acts; and thus, the corporation will, as against anyone who has in good faith dealt with it
through such agent, be estopped from denying the agent's authority.21

Also, petitioner may be paid on the basis of quantum meruit. "It is essential for the proper operation
of the principle that there is an acceptance of the benefits by one sought to be charged for the
services rendered under circumstances as reasonably to notify him that the lawyer performing the
task was expecting to be paid compensation therefor. The doctrine of quantum meruit is a device to
prevent undue enrichment based on the equitable postulate that it is unjust for a person to retain
benefit without paying for it."22

We note that the designs petitioner submitted to Ms. Lopez were not returned. Ms. Lopez, an officer
of the bank as branch manager used such designs for presentation to the board of the bank. Thus,
the designs were in fact useful to Ms. Lopez for she did not appear to the board without any designs
at the time of the deadline set by the board.

IN VIEW WHEREOF, the decision appealed from is REVERSED and SET ASIDE.

The decision of the trial court23 is REVIVED, REINSTATED and AFFIRMED.

No costs.
SO ORDERED.
G.R. No. 126236 January 26, 2007

DOMINGO REALTY, INC. and AYALA STEEL MANUFACTURING CO., INC., Petitioners,
vs.
COURT OF APPEALS and ANTONIO M. ACERO, Respondents.

DECISION

VELASCO, JR., J.:

Good judgment comes from experience, and often experience comes from bad judgment.

–– Rita Mae Brown

The Case

This Petition for Review on Certiorari, under Rule 45 of the Revised Rules of Court, seeks the
reversal of the October 31, 1995 Decision1 of the Court of Appeals (CA) in CA-G.R. SP No. 33407,
entitled Antonio M. Acero v. Hon. Sofronio G. Sayo, et al., which annulled the December 7, 1987
Decision based on a Compromise Agreement among petitioner Domingo Realty, Inc. (Domingo
Realty), respondent Antonio M. Acero, and defendant Luis Recato Dy in Civil Case No. 9581-P
before the Pasay City Regional Trial Court (RTC), Branch CXI; and the August 28, 1996
Resolution2 of the CA which denied petitioners’ Motion for Reconsideration of its October 31, 1995
Decision.

The Facts

On November 19, 1981, petitioner Domingo Realty filed its November 15, 1981 Complaint3 with the
Pasay City RTC against Antonio M. Acero, who conducted business under the firm name A.M. Acero
Trading,4 David Victorio, John Doe, and Peter Doe, for recovery of possession of three (3) parcels of
land located in Cupang, Muntinlupa, Metro Manila, covered by (1) Transfer Certificate of Title (TCT)
No. (75600) S-107639-Land Records of Rizal; (2) TCT No. (67006) S-107640-Land Records of
Rizal; and (3) TCT No. (67007) S-107643-Land Records of Rizal (the "subject properties"). The said
lots have an aggregate area of 26,705 square meters, more or less, on a portion of which Acero had
constructed a factory building for the manufacture of hollow blocks, as alleged by Domingo Realty.

On January 4, 1982, defendants Acero and Victorio filed their December 21, 1981 Answer5 to the
Complaint in Civil Case No. 9581-P. Acero alleged that he merely leased the land from his co-
defendant David Victorio, who, in turn, claimed to own the property on which the hollow blocks
factory of Acero stood. In the Answer, Victorio assailed the validity of the TCTs of Domingo Realty,
alleging that the said TCTs emanated from spurious deeds of sale, and claimed that he and his
predecessors-in-interest had been in possession of the property for more than 70 years.

On December 3, 1987, Mariano Yu representing Domingo Realty, Luis Recato Dy6, and Antonio M.
Acero, all assisted by counsels, executed a Compromise Agreement, which contained the following
stipulations, to wit:
 1. That defendants admit and recognize the ownership of the plaintiff over the property
subject of this case, covered by TCT No. S-107639 (75600), S-107643 (67007), and S-
107640 (67006) with a total area of 26,705 square meters;

2. That defendant Luis Recato Dy admits and recognizes that his title covered by TCT No.
108027 has been proven not to be genuine and that the area indicated therein is inside the
property of the plaintiff;

3. That defendant Acero admits that the property he is presently occupying by way of lease is
encroaching on a portion of the property of the plaintiff and assume[s] and undertakes to
vacate, remove and clear any and all structures erected inside the property of the plaintiff by
himself and other third parties, duly authorized and/or who have an existing agreement with
defendant Acero, and shall deliver said portion of the property of the plaintiff free and clear of
any unauthorized structures, shanties, occupants, squatters or lessees within a period of sixty
(60) days from date of signing of this compromise agreement. Should defendant Acero fail in
his obligation to vacate, remove and clear the structures erected inside the property of the
plaintiff within the period of 60 days afore-mentioned, plaintiff shall be entitled to a writ of
execution for the immediate demolition or removal of said structure to fully implement this
agreement; and ejectment of all squatters and occupants and lessees, including the
dependents to fully implement this agreement;

4. That plaintiff admits and recognizes that defendant Luis Recato Dy bought and occupied
the property in good faith and for value whereas defendant Acero leased the portion of said
property likewise in good faith and for value hereby waives absolutely and unconditionally all
claims including attorney’s fees against both defendants in all cases pending in any court
whether by virtue of any judgment or under the present complaint and undertake to withdraw
and/or move to dismiss the same under the spirit of this agreement;

5. That defendants likewise waive all claims for damages including attorney’s fees against the
plaintiff;

6. That plaintiff acknowledges the benefit done by defendant Luis Recato Dy on the property
by incurring expenses in protecting and preserving the property by way of construction of
perimeter fence and maintaining a caretaker therein and plaintiff has agreed to pay Luis
Recato Dy the amount of P100,000.00 upon approval of this agreement by this Honorable
Court.7

Acting on the Compromise Agreement, the Pasay City RTC rendered the December 7, 1987
Decision which adopted the aforequoted six (6) stipulations and approved the Compromise
Agreement.

To implement the said Decision, Domingo Realty filed its January 21, 1988 Motion8 asking the trial
court for permission to conduct a re-survey of the subject properties, which was granted in the
January 22, 1988 Order.9

On February 2, 1988, respondent Acero filed his January 29, 1988 Motion to Nullify the Compromise
Agreement,10 claiming that the January 22, 1988 Order authorizing the survey plan of petitioner
Domingo Realty as the basis of a resurvey would violate the Compromise Agreement since the
whole area he occupied would be adjudged as owned by the realty firm.

On March 18, 1988, Acero filed a Motion to Resurvey,11 whereby it was alleged that the parties
agreed to have the disputed lots re-surveyed by the Bureau of Lands. Thus, the trial court issued the
March 21, 1988 Order12 directing the Director of Lands to conduct a re-survey of the subject
properties.

In his June 9, 1989 Report, Elpidio T. De Lara, Chief of the Technical Services Division of the Lands
Management Section of the National Capital Region - Department of Environment and Natural
Resources, submitted to the trial court Verification Survey Plan No. Vs-13-000135. In the said
Verification Survey Plan, petitioners’ TCTs covered the entire land occupied by the respondent’s
hollow block factory.13

On April 10, 1990, petitioner Ayala Steel Manufacturing Co., Inc. (Ayala Steel) filed its March 30,
1990 Motion for Substitution alleging that it had purchased the subject lots, attaching to the motion
TCT Nos. 152528, 152529, and 152530 all in its name, as proof of purchase.14

The said motion was opposed by Acero claiming that "this case has already been terminated in
accordance with the compromise agreement of the parties, hence, substitution will no longer be
necessary and justified under the circumstances."15 The motion was not resolved which explains why
both transferor Domingo Realty and transferee Ayala Steel are co-petitioners in the instant petition.

In its December 28, 1990 Order,16 the trial court directed Acero to conduct his own re-survey of the
lots based on the technical description appearing in the TCTs of Domingo Realty and to have the re-
survey plans approved by the Bureau of Lands. The Order resulted from Acero’s contention that he
occupied only 2,000 square meters of petitioners’ property.

Acero employed the services of Engr. Eligio L. Cruz who came up with Verification Survey Plan No.
Vs-13-000185. However, when the said Verification Survey Plan was presented to the Bureau of
Lands for approval, it was rejected because Engr. Cruz failed to comply with the requirements of the
Bureau.17

On April 8, 1991, petitioners filed a Manifestation with Motion praying for the denial of respondent’s
Motion to Nullify the Compromise Agreement and for the approval of Verification Survey Plan No.
Vs-13-000135 prepared by Engr. Lara of the Bureau of Lands. The Pasay City RTC issued the
December 6, 1991 Order18 denying respondent Acero’s Motion to Nullify the Compromise
Agreement. As a consequence, petitioners filed a Motion for Execution on December 10, 1991.19

On January 6, 1992, respondent filed an undated Manifestation20 claiming, among others, that it was
on record that the Compromise Agreement was only as to a portion of the land being occupied by
respondent, which is about 2,000 square meters, more or less. He reiterated the same contentions in
his December 21, 1991 Manifestation.21

On January 13, 1992, respondent filed a Motion to Modify Order Dated 6 December ‘91,22 claiming
that the said Order modified the Compromise Agreement considering that it allegedly involved only
1,357 square meters and not the entire lot;23 and if not amended, the Order would deviate from the
principle that "no man shall enrich himself at the expense of the other."

In its January 15, 1992 Order,24 the trial court approved the issuance of a Writ of Execution to
enforce the December 7, 1987 Decision. On February 3, 1992, respondent Acero subsequently filed
a Motion for Reconsideration25 of the January 15, 1992 Order arguing that the Order was premature
and that Verification Survey Plan No. Vs-13-000135 violated the Compromise Agreement.

On January 18, 1992, the Pasay City Hall was gutted by fire, destroying the records of the lower
court, including those of this case. Thus, after reconstituting the records, the trial court issued the
October 6, 1992 Order,26 reiterating its January 15, 1992 Order and ordering the issuance of a Writ
of Execution.

On October 23, 1992, respondent filed a Manifestation and Compliance,27 alleging that Verification
Survey Plan No. Vs-13-000185 had been approved by the Regional Director of the DENR; thus, he
moved for the annulment of the October 6, 1992 Order granting the Writ of Execution in favor of
petitioners.

Given the conflicting Verification Survey Plans of the parties, the trial court issued the October 11,
1993 Order28 requiring the Bureau of Lands Director to determine which of the two survey plans was
correct.

Subsequently, Regional Technical Director Eriberto V. Almazan of the Land Registration Authority
issued the November 24, 1993 Order29 cancelling Verification Survey Plan No. Vs-13-000185,
submitted by Engineer Eligio Cruz, who was hired by respondent Acero, and declared Verification
Survey Plan No. Vs-13-000135, submitted by Engineer Lara of the Bureau of Lands, as the correct
Plan.

Thereafter, petitioners filed their January 12, 1994 Ex-parte Manifestation with Motion,30 praying for
the implementation of the Writ of Execution against the disputed lands, which was granted in the
January 12, 1994 Order.31

Respondent’s Motion for Reconsideration32 of the January 12, 1994 Order was denied in the
February 1, 1994 Order33 of the Pasay City RTC.

Aggrieved, respondent Acero filed before the CA his February 23, 1994 Petition for Certiorari and
Mandamus with Urgent Prayer for Issuance of a Temporary Restraining Order,34 under Rule 65 of
the Rules of Court, against petitioners and Judge Sofronio G. Sayo as presiding judge of the lower
court. In the petition, respondent sought to nullify and set aside the RTC Orders dated December 6,
1991, January 15, 1992, October 6, 1992, January 12, 1994, and February 1, 1994, all of which
pertain to the execution of the December 7, 1987 Decision on the Compromise Agreement.
Significantly, respondent did not seek the annulment of said judgment but merely reiterated the issue
that under the Compromise Agreement, he would only be vacating a portion of the property he was
occupying.

The Ruling of the Court of Appeals

On October 31, 1995, the CA promulgated the assailed Decision, the fallo of which reads:

IN VIEW OF THE FOREGOING, the petition for certiorari is GRANTED and the Orders of
respondent court dated December 6, 1991, January 15, 1992, October 6, 1992, and January 12,
1994, and February 1, 1994 are SET ASIDE. In the interest of justice, and consistent with the views
expressed by this Court, the Compromise Judgment dated December 7, 1987 of respondent court is
likewise SET ASIDE. Respondent Court is likewise directed to proceed with the hearing of Civil Case
No. 9581-P on the merits and determine, once and for all, the respective proprietary rights of the
litigants thereto.

SO ORDERED.35

In discarding the December 7, 1987 Decision based on the Compromise Agreement, the appellate
court ratiocinated that David Victorio, the alleged lessor of Acero, was not a party to the Compromise
Agreement; thus, there would always remain the probability that he might eventually resurface and
assail the Compromise Agreement, giving rise to another suit. Moreover, the CA found the
Compromise Agreement vague, not having stipulated a mutually agreed upon surveyor, "who would
survey the properties using as a basis, survey plans acceptable to both, and to thereafter submit a
report to the court."36

Likewise, the CA sustained Acero’s belief that he would only have to vacate a portion of the property
he was presently occupying, which was tantamount to a mistake that served as basis for the
nullification of the Compromise Agreement entered into.

On January 17, 1996, petitioners filed a Motion for Reconsideration37 of the adverse Decision, which
was consequently rejected in the CA’s August 28, 1996 Resolution.

Thus, the instant petition is in our hands.

The Issues

The issues as stated in the petition are as follows:

1. The respondent Court of Appeals erred in nullifying and setting aside judgment on
Compromise Agreement and the Compromise Agreement itself as well as the subsequent
orders of the court a quo though there is no motion to set aside the judgment on the
Compromise Agreement before the court a quo on the ground of fraud, mistake or duress;

2. The respondent Court of Appeals erred in nullifying and setting aside the judgment on
Compromise Agreement and the Compromise Agreement itself as well as the subsequent
Orders of the Court of quo [sic] though in the Petition for Certiorari and Mandamus before
respondent Court of Appeals, private respondent argued that judgment on Compromise
Agreement is final, executory, immutable and unalterable;

3. The respondent Court of Appeals erred in nullifying and setting aside Judgment on
Compromise Agreement and the Compromise Agreement itself as well as the subsequent
Orders of the Court a quo based on fraud or mistake though said issues were not raised
before the Court a quo, and no evidence was introduced to substantiate fraud or mistake
before the court a quo;

4. The respondent Court of Appeals erred when it ruled that the non-inclusion of one of the
parties in this case, and the vagueness of the Compromise Agreement are grounds to nullify
and set aside the Compromise Agreement; and

5. The respondent Court of Appeals erred when it entertained the Petition for Certiorari and
Mandamus though it was filed beyond reasonable time if not barred by laches.38

Restated, the issues are:

I.

WHETHER THE PETITION BEFORE THE COURT OF APPEALS WAS FILED OUT OF TIME OR
BARRED BY LACHES;

II.
WHETHER THE NON-INCLUSION OF DAVID VICTORIO WOULD NULLIFY THE COMPROMISE
AGREEMENT;

III.

WHETHER THE JUDGMENT ON COMPROMISE AGREEMENT SHOULD BE SET ASIDE ON THE

GROUND OF VAGUENESS; AND

IV.

WHETHER THE JUDGMENT ON COMPROMISE AGREEMENT SHOULD BE SET ASIDE ON THE

GROUND OF MISTAKE.

The Court’s Ruling

The petition is meritorious.

The preliminary issue involves the query of what proper remedy is available to a party who believes
that his consent in a compromise agreement was vitiated by mistake upon which a judgment was
rendered by a court of law.

There is no question that a contract where the consent is given through mistake, violence,
intimidation, undue influence, or fraud is voidable under Article 1330 of the Civil Code. If the contract
assumes the form of a Compromise Agreement between the parties in a civil case, then a judgment
rendered on the basis of such covenant is final, unappealable, and immediately executory. If one of
the parties claims that his consent was obtained through fraud, mistake, or duress, he must file a
motion with the trial court that approved the compromise agreement to reconsider the judgment and
nullify or set aside said contract on any of the said grounds for annulment of contract within 15 days
from notice of judgment. Under Rule 37, said party can either file a motion for new trial or
reconsideration. A party can file a motion for new trial based on fraud, accident or mistake,
excusable negligence, or newly discovered evidence.

On the other hand, a party may decide to seek the recall or modification of the judgment by means of
a motion for reconsideration on the ground that "the decision or final order is contrary to law" if the
consent was procured through fraud, mistake, or duress. Thus, the motion for a new trial or motion
for reconsideration is the readily available remedy for a party to challenge a judgment if the 15-day
period from receipt of judgment for taking an appeal has not yet expired. This motion is the most
plain, speedy, and adequate remedy in law to assail a judgment based on a compromise agreement
which, even if it is immediately executory, can still be annulled for vices of consent or forgery.39

Prior to the effectivity of the 1997 Rules of Civil Procedure on July 1, 1997, an order denying a
motion for new trial or reconsideration was not appealable since the judgment in the case is not yet
final. The remedy is to appeal from the challenged decision and the denial of the motion for
reconsideration or new trial is assigned as an error in the appeal.40 Under the present [1997] Rules of
Civil Procedure, the same rule was maintained that the order denying said motion is still
unappealable and the rule is still to appeal from the judgment and not from the order rejecting the
motion for reconsideration/new trial.

If the 15-day period for taking an appeal has lapsed, then the aggrieved party can avail of Rule 38 by
filing a petition for relief from judgment which should be done within 60 days after the petitioner
learns of the judgment, but not more than six (6) months after such judgment or final order was
entered. Prior to the effectivity of the 1997 Rules of Civil Procedure in 1997, if the court denies the
petition under Rule 38, the remedy is to appeal from the order of denial and not from the judgment
since said decision has already become final and already unappealable.41 However, in the appeal
from said order, the appellant may likewise assail the judgment. Under the 1997 Rules of Civil
Procedure, the aggrieved party can no longer appeal from the order denying the petition since this is
proscribed under Section 1 of Rule 41. The remedy of the party is to file a special civil action for
certiorari under Rule 65 from the order rejecting the petition for relief from judgment.

The records of the case reveal the following:

1. December 3, 1987 – the parties signed the Compromise Agreement;

2. December 7, 1987 – a decision/judgment was rendered based on the December 3, 1987

Compromise Agreement;

3. February 2, 1988 – Acero filed a Motion to Nullify the Compromise Agreement;

4. December 6, 1991 – the trial court denied Acero’s Motion to Nullify the Compromise
Agreement;

5. December 11, 1991 – defendant Acero received the December 6, 1991 Order which denied
said motion;42

6. December 26, 1991 – the 15-day period to appeal to the CA expired by the failure of
defendant Acero to file an appeal with said appellate court;

7. January 15, 1992 – the trial court issued the Order which granted petitioners’ motion for the
issuance of a Writ of Execution;

8. October 6, 1992 – the trial court reiterated its January 15, 1992 Order directing the
issuance of a Writ of Execution after the records of the case were lost in a fire that gutted the
Pasay City Hall;

9. January 12, 1994 – the trial court issued the Order which directed the implementation of the
Writ of Execution prayed for by petitioners;

10. February 1, 1994 – the trial court issued the Order which denied respondent’s Motion for
Reconsideration of its January 12, 1994 Order; and

11. April 4, 1994 – Acero filed with the CA a petition for certiorari in CA-G.R. SP No. 33407
entitled Antonio M. Acero v. Domingo Realty, Inc., et al.

In his undated Manifestation, respondent Acero admitted having received a copy of the December 7,
1987 Decision on December 11, 1987. However, it was only on February 2, 1988 when he filed a
Motion to Nullify the Compromise Agreement which was discarded for lack of merit by the trial court
on December 6, 1991. If the Motion to Nullify the Compromise Agreement is treated as a motion for
reconsideration and/or for new trial, then Acero should have filed an appeal from the December 7,
1987 Decision and assigned as error the December 6, 1991 Order denying said motion pursuant to
the rules existing prior to the 1997 Rules of Civil Procedure. He failed to file such appeal but instead
filed a petition for certiorari under Rule 65 with the CA on April 4, 1994. This is prejudicial to
respondent Acero as the special civil action of certiorari is not the proper remedy. If the aggrieved
party does not interpose a timely appeal from the adverse decision, a special civil action for certiorari
is not available as a substitute for a lost appeal.43

What respondent Acero should have done was to file a petition for relief from judgment when he
became aware that he lost his right of appeal on December 26, 1991. Even with this approach,
defendant Acero was also remiss.

In sum, the petition for certiorari instituted by respondent Acero with the CA is a wrong remedy; a
simple appeal to the CA would have sufficed. Since the certiorari action is an improper legal action,
the petition should have been rejected outright by the CA.

Assuming arguendo that a petition for certiorari with the CA is the appropriate remedy, still, said
petition was filed out of time.

The petition before the CA was filed prior to the effectivity of the 1997 Rules of Court when there was
still no prescribed period within which to file said petition, unlike in the present Section 4 of Rule 65
wherein a Petition for Certiorari and Mandamus must be filed within 60 days from notice of the
judgment, final order, or resolution appealed from, or of the denial of the petitioners’ motion for new
trial or reconsideration after notice of judgment.

Section 4, Rule 65 previously read:

Section 4. Where petition filed.—The petition may be filed in the Supreme Court, or, if it relates to the
acts or omissions of an inferior court, or of a corporation, board or officer or person, in a Court of
First Instance having jurisdiction thereof. It may also be filed in the Court of Appeals if it is in aid of its
appellate jurisdiction.

Petitions for certiorari under Rules 43, 44 and 45 shall be filed with the Supreme Court.

Before the 1997 Rules of Civil Procedure became effective on July 1, 1997, the yardstick to
determine the timeliness of a petition for certiorari under Rule 65 was the reasonableness of the time
that had elapsed from receipt of notice of the assailed order/s of the trial court up to the filing of the
appeal with the CA.44 In a number of cases, the Court ruled that reasonable time can be pegged at
three (3) months.45

In the present case, the Order denying the Motion to Nullify the Compromise Agreement was issued
on December 6, 1991. The petition for certiorari was filed on April 4, 1994. The period of two (2)
years and four (4) months cannot be considered fair and reasonable. With respect to the January 15,
1992 Order granting the writ of execution and the October 6, 1992 Order directing the issuance of
the writ, it is evident that the petition before the CA was filed more than three (3) months after the
receipt by respondent Acero of said orders and the filing of the petition is likewise unreasonably
delayed.

On the second issue, petitioners assail the ruling of the appellate court that David Victorio who is
claimed to be the lessor of Acero, and who is impleaded as a defendant in Civil Case No. 9581-P,
was not made a party to the Compromise Agreement and hence, he may later "assail the
compromise agreement as not binding upon him, thereby giving rise to another suit."46

We find merit in petitioners’ position.

The CA was unable to cite a law or jurisprudence that supports the annulment of a compromise
agreement if one of the parties in a case is not included in the settlement. The only legal effect of the
non-inclusion of a party in a compromise agreement is that said party cannot be bound by the terms
of the agreement. The Compromise Agreement shall however be "valid and binding as to the parties
who signed thereto."47

The issue of ownership between petitioners and David Victorio can be threshed out by the trial court
in Civil Case No. 9581-P. The proper thing to do is to remand the case for continuation of the
proceedings between petitioners and defendant David Victorio but not to annul the partial judgment
between petitioners and respondent Acero which has been pending execution for 20 years.

With regard to the third issue, petitioners assail the ruling of the CA that the Compromise Agreement
is vague as there is still a need to determine the exact metes and bounds of the encroachment on
the petitioners’ lot.

The object of a contract, in order to be considered as "certain," need not specify such object with
absolute certainty. It is enough that the object is determinable in order for it to be considered as
"certain." Article 1349 of the Civil Code provides:

Article 1349. The object of every contract must be determinate as to its kind. The fact that the
quantity is not determinate shall not be an obstacle to the existence of the contract, provided it is
possible to determine the same, without the need of a new contract between the parties.

In the instant case, the title over the subject property contains a technical description that provides
the metes and bounds of the property of petitioners. Such technical description is the final
determinant of the extent of the property of petitioners. Thus, the area of petitioners’ property is
determinable based on the technical descriptions contained in the TCTs.

Notably, the determination made by the Bureau of Lands—that Verification Survey Plan No. Vs-13-
000135 is the correct Plan—is controlling and shall prevail over Verification Survey Plan No. Vs-13-
000185 submitted by Acero. Findings of fact by administrative agencies, having acquired expertise in
their field of specialization, must be given great weight by this Court.48 Even if the exact area of
encroachment is not specified in the agreement, it can still be determined from the technical
description of the title of plaintiff which defendant Acero admitted to be correct. Thus, the object of
the Compromise Agreement is considered determinate and specific.

Moreover, "vagueness" is defined in Black’s Law Dictionary as: "indefinite, uncertain; not susceptible
of being understood."

A perusal of the entire Compromise Agreement will negate any contention that there is vagueness in
its provisions. It must be remembered that in the interpretation of contracts, an instrument must be
construed so as to give effect to all the provisions of these contracts.49 Thus, the Compromise
Agreement must be considered as a whole.

The alleged vagueness revolves around the term "portion" in paragraph three (3) of the Compromise
Agreement,50 taken together with paragraph one (1) which we quote:

1. That defendants admit and recognize the ownership of the plaintiff over the property subject of this
case, covered by TCT No. S-107639 (75600), S-107643 (67007), and S-107640 (67006) with a total
area of 26,705 square meters;

xxxx
3. That defendant Acero admits that the property he is presently occupying by way of lease is
encroaching on a portion of the property of the plaintiff and assume and undertakes to vacate,
remove and clear any and all structures erected inside the property of the plaintiff by himself and
other third parties, duly authorized and/or who have an existing agreement with defendant Acero,
and shall deliver said portion of the property of the plaintiff free and clear of any unauthorized
structures, shanties, occupants, squatters or lessees within a period of sixty (60) days from date of
signing of this compromise agreement. Should defendant Acero fail in his obligation to vacate,
remove and clear the structures erected inside the property of the plaintiff within the period of 60
days afore-mentioned, plaintiff shall be entitled to a writ of execution for the immediate demolition or
removal of said structure to fully implement this agreement; and ejectment of all squatters and
occupants and lessees, including the dependents to fully implement this agreement. (Emphasis
supplied.)

Respondent harps on their contention that the term "portion" in paragraph 3 of the Compromise
Agreement refers to the property which they are occupying. Respondent’s interpretation of
paragraph 3 of the Compromise Agreement is mistaken as it is anchored on his belief that the
encroachment on the property of petitioners is only a portion and not the entire lot he is occupying.
This is apparent from his Supplement to his Petition for Certiorari and Mandamus where he
explained:

Petitioner [Acero] entered into this agreement because of his well-founded belief and conviction
that a portion of the property he is occupying encroaches only a portion of the property of private
respondent. In fine, only a portion of the property petitioner is occupying (not all of it) encroaches on
a portion of the property of private respondent.51

This contention is incorrect. The agreement is clear that respondent Acero admitted that "the
property he is presently occupying by way of lease is encroaching on a portion of the property of the
plaintiff." Thus, whether it is only a portion or the entire lot Acero is leasing that will be affected by the
agreement is of no importance. What controls is the encroachment on the lot of petitioner Domingo
Realty regardless of whether the entire lot or only a portion occupied by Acero will be covered by the
encroachment.

While it may be the honest belief of respondent Acero that only a portion of the lot he is occupying
encroaches on the 26,705-square meter lot of petitioner Domingo Realty and later, Ayala Steel, the
Court finds that the true and real agreement between the parties is that any encroachment by
respondent Acero on the lot of petitioners will be surrendered to the latter. This is apparent from the
undertaking in paragraph 3 that defendant Acero "undertakes to vacate, remove and clear any and
all structures erected inside the property of the plaintiff." This prestation results from the admission
against the interest of respondent Acero that he "admits and recognizes the ownership of the plaintiff
(Domingo Realty)" over the subject lot. The controlling word therefore is "encroachment"—whether it
involves a portion of or the entire lot claimed by defendant David Victorio. To reiterate, the word
"portion" refers to petitioners’ lot and not that of Acero’s. Contrary to the disposition of the CA, we
rule that the terms of the Compromise Agreement are clear and leave no doubt upon the intent of the
parties that respondent Acero will vacate, remove, and clear any and all structures erected inside
petitioners’ property, the ownership of which is not denied by him. The literal meaning of the
stipulations in the Compromise Agreement will control under Article 1370 of the Civil Code. Thus, the
alleged vagueness in the object of the agreement cannot be made an excuse for its nullification.

Finally, with regard to the fourth issue, petitioners question the finding of the CA that the compromise
judgment can be set aside on the ground of mistake under Article 2038 of the Civil Code, because
respondent Acero gave his consent to the Compromise Agreement in good faith that he would only
vacate a portion of his lot in favor of petitioner Domingo Realty.
We rule otherwise.

Articles 2038 and 1330 of the Civil Code allow a party to a contract, on the ground of mistake, to
nullify a compromise agreement, viz:

Article 2038. A compromise in which there is mistake, fraud, violence, intimidation, undue influence,
or falsity of documents, is subject to the provisions of Article 1330 of this Code.

Article 1330. A contract where the consent is given through mistake, violence, intimidation, undue
influence, or fraud is voidable (emphasis supplied).

"Mistake" has been defined as a "misunderstanding of the meaning or implication of something" or "a
wrong action or statement proceeding from a faulty judgment x x x."52

Article 1333 of the Civil Code of the Philippines however states that "there is no mistake if the party
alleging it knew the doubt, contingency or risk affecting the object of the contract."

Under this provision of law, it is presumed that the parties to a contract know and understand the
import of their agreement. Thus, civil law expert Arturo M. Tolentino opined that:

To invalidate consent, the error must be excusable. It must be real error, and not one that could have
been avoided by the party alleging it. The error must arise from facts unknown to him. He cannot
allege an error which refers to a fact known to him, or which he should have known by ordinary
diligent examination of the facts. An error so patent and obvious that nobody could have made it, or
one which could have been avoided by ordinary prudence, cannot be invoked by the one who made
it in order to annul his contract. A mistake that is caused by manifest negligence cannot invalidate a
juridical act.53 (Emphasis supplied.)

Prior to the execution of the Compromise Agreement, respondent Acero was already aware of the
technical description of the titled lots of petitioner Domingo Realty and more so, of the boundaries
and area of the lot he leased from David Victorio. Before consenting to the agreement, he could
have simply hired a geodetic engineer to conduct a verification survey and determine the actual
encroachment of the area he was leasing on the titled lot of petitioner Domingo Realty. Had he
undertaken such a precautionary measure, he would have known that the entire area he was
occupying intruded into the titled lot of petitioners and possibly, he would not have signed the
agreement.

In this factual milieu, respondent Acero could have easily averted the alleged mistake in the contract;
but through palpable neglect, he failed to undertake the measures expected of a person of ordinary
prudence. Without doubt, this kind of mistake cannot be resorted to by respondent Acero as a
ground to nullify an otherwise clear, legal, and valid agreement, even though the document may
become adverse and even ruinous to his business.

Moreover, respondent failed to state in the Compromise Agreement that he intended to vacate only a
portion of the property he was leasing. Such provision being beneficial to respondent, he, in the
exercise of the proper diligence required, should have made sure that such matter was specified in
the Compromise Agreement. Respondent Acero’s failure to have the said stipulation incorporated in
the Compromise Agreement is negligence on his part and insufficient to abrogate said agreement.

In Torres v. Court of Appeals,54 which was also cited in LL and Company Development and Agro-
Industrial Corporation v. Huang Chao Chun,55 it was held that:
Under Article 1315 of the Civil Code, contracts bind the parties not only to what has been expressly
stipulated, but also to all necessary consequences thereof, as follows:

ART. 1315. Contracts are perfected by mere consent, and from that moment the parties are bound
not only to the fulfillment of what has been expressly stipulated but also to all the consequences
which, according to their nature, may be in keeping with good faith, usage and law.

It is undisputed that petitioners are educated and are thus presumed to have understood the terms
of the contract they voluntarily signed. If it was not in consonance with their expectations, they
should have objected to it and insisted on the provisions they wanted.

Courts are not authorized to extricate parties from the necessary consequences of their acts, and the
fact that the contractual stipulations may turn out to be financially disadvantageous will not relieve
parties thereto of their obligations. They cannot now disavow the relationship formed from such
agreement due to their supposed misunderstanding of its terms.

The mere fact that the Compromise Agreement favors one party does not render it invalid. We ruled
in Amarante v. Court of Appeals that:

Compromises are generally to be favored and cannot be set aside if the parties acted in good faith
and made reciprocal concessions to each other in order to terminate a case. This holds true even if
all the gains appear to be on one side and all the sacrifices on the other (emphasis supplied).56

One final note. While the Court can commiserate with respondent Acero in his sad plight,
nonetheless we have no power to make or alter contracts in order to save him from the adverse
stipulations in the Compromise Agreement. Hopefully this case will serve as a precaution to
prospective parties to a contract involving titled lands for them to exercise the diligence of a
reasonably prudent person by undertaking measures to ensure the legality of the title and the
accurate metes and bounds of the lot embraced in the title. It is advisable that such parties (1) verify
the origin, history, authenticity, and validity of the title with the Office of the Register of Deeds and
the Land Registration Authority; (2) engage the services of a competent and reliable geodetic
engineer to verify the boundary, metes, and bounds of the lot subject of said title based on the
technical description in the said title and the approved survey plan in the Land Management Bureau;
(3) conduct an actual ocular inspection of the lot; (4) inquire from the owners and possessors of
adjoining lots with respect to the true and legal ownership of the lot in question; (5) put up signs that
said lot is being purchased, leased, or encumbered; and (6) undertake such other measures to make
the general public aware that said lot will be subject to alienation, lease, or encumbrance by the
parties. Respondent Acero, for all his woes, may have a legal recourse against lessor David Victorio
who inveigled him to lease the lot which turned out to be owned by another.

WHEREFORE, the petition is hereby GRANTED and the assailed Decision and Resolution of the CA
are REVERSED. The questioned Orders of the Pasay City RTC dated December 6, 1991, January
15, 1992, October 6, 1992, January 12, 1994, and February 1, 1994, including the Decision dated
December 7, 1987, are AFFIRMED. The case is remanded to the Pasay RTC, Branch III for further
proceedings with respect to petitioner Domingo Realty’s November 15, 1981 Complaint57 against one
of the defendants, David Victorio. No costs.

SO ORDERED.
SPOUSES NESTOR CASTILLO and ROSIE G.R. No. 170917
REYES-CASTILLO,
Petitioners, Present:

YNARES-SANTIAGO,
Acting C.J., Chairperson,
- versus - AUSTRIA-MARTINEZ,
CHICO-NAZARIO,
NACHURA, and
REYES, JJ.

SPOUSES RUDY REYES and Promulgated:

CONSOLACION REYES,
Respondents. November 28, 2007

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

RESOLUTION

NACHURA, J.:

Before the Court is a petition for review on certiorari under Rule 45 of the Rules of Court
assailing the December 6, 2005 Decision[1] of the Court of Appeals (CA) in CA-G.R. CV No. 79385.

On November 7, 1997, Emmaliza Bohler and respondents negotiated for the sale of the
former’s house and lot located at Poblacion, New Washington, Aklan, to the latter for the
consideration of P165,000.00.[2] On the following day, November 8, they signed an Agreement which
pertinently reads as follows:

We, the undersigned, agree to the following terms and conditions regarding the
sale of the house and lot located at Poblacion, New Washington, Aklan:

1. That the total amount to be paid shall be One Hundred Sixty-Five Thousand
Pesos (P165,000.00) to be paid in full on or before the 15th of December 1997;

2. That a partial payment (sic) a total amount of One Hundred Thirty Thousand
Pesos (P130,000.00) shall be made today, the 8th of November 1997;

3. That the remaining balance in the amount (sic) of Thirty-Five Thousand

Pesos (P35,000.00) shall be made as per #1 above;

4. That the buyers, represented by the Spouses Rudy and Consolacion Reyes
(sic) shall be responsible for all the legal and other related documents and procedures
regarding this sale;
 5. That the seller, represented by Ms. Emmaliza M. Bohler, shall vacate the
said house and lot on or (sic) the 31st of January, 1998;

6. That the tenants, represented by the Spouses Romeo and Epifania Vicente,
shall vacate the same on or before the 30th of April, 1998; and

7. That all parties concerned shall agree to all the terms and conditions
stipulated herein.[3]

Upon the signing of the said contract, respondents handed to Bohler P20,000.00 cash and
allegedly a P110,000.00-check. Bohler nonetheless insisted that the entire partial payment should be
in cash as she needed it to redeem the subject property from the bank on the following Monday. She
hence demanded for its payment up to midnight on that day otherwise she would cancel the sale.
Because the respondents failed to make good the P110,000.00, Bohler subsequently sold the
property to the petitioners.[4]

Having learned of the subsequent sale, the respondents immediately tendered the check,
asked the bank for a certification that it was funded and consulted their lawyer who sent a notice
of lis pendens to the Register of Deeds and the Provincial Assessor.[5] Civil Case No. 6070 for
annulment of sale, specific performance and damages was subsequently filed by the respondents
with the Regional Trial Court (RTC) of Kalibo, Aklan against Bohler and the petitioners.

On February 21, 2003, the RTC rendered its Decision[6] declaring the November 8,
1997 Agreement a contract to sell. Considering that no actual sale happened between Bohler and
the respondents, the former could validly sell the property to the petitioners. Thus, the trial court
dismissed the complaint.

Aggrieved, respondents appealed the case to the CA. In the challenged December 6,
2005 Decision,[7] the appellate court reversed the trial court’s ruling, declared the November 8,
1997 Agreement a contract of sale, and annulled the subsequent sale to the petitioners. The CA
ruled, among others, that the wordings of the agreement and the conduct of the parties suggest that
they intended to enter into a contract of sale. Ownership was not reserved by the vendor and non-
payment of the purchase price was not made a condition for the contract’s effectivity.[8]

Petitioners, thus, filed the instant petition for review on certiorari imputing the following errors
to the CA:

1. The appellate court erred in declaring the contract styled AGREEMENT

dated 08 November 1997 as a “contract of sale” and not a contract to sell.

2. The appellate court erred in declaring the petitioners in bad faith when they
bought the subject matter house and lot on 02 March 1998 from Emmaliza H. Bohler.[9]

The pivotal question to be addressed by the Court in this petition is whether the transaction
between Bohler and the respondents is a perfected contract of saleor a mere contract to sell.

Sale is a consensual contract and is perfected by mere consent, which is manifested by a

meeting of the minds as to the offer and acceptance thereof on the subject matter, price and terms of
payment of the price.[10] In the instant case, the November 8, 1997 Agreement clearly indicates that
Bohler and the Spouses Reyes had a meeting of the minds on the subject matter of the contract, the
house and lot; on the price, P165,000.00; and on the terms of payment, an initial payment
ofP130,000.00 on the date of execution of the agreement and the remaining balance on or before
December 15, 1997. At that precise moment when the consent of both parties was given,
the contract of sale was perfected.

The said agreement cannot be considered a contract to sell. In a contract of sale, the title to
the property passes to the vendee upon the delivery of the thing sold; in a contract to sell, ownership
is, by agreement, reserved in the vendor and is not to pass to the vendee until full payment of the
purchase price. Otherwise stated, in acontract of sale, the vendor loses ownership over the property
and cannot recover it until and unless the contract is resolved or rescinded; whereas, in
a contract tosell, title is retained by the vendor until full payment of the price. In the latter contract,
payment of the price is a positive suspensive condition, failure of which is not a breach but an event
that prevents the obligation of the vendor to convey title from becoming effective.[11] The November
8, 1997 Agreement herein cannot be characterized as a contract to sell because the seller made no
express reservation of ownership or title to the subject house and lot. [12] Instead, the Agreement
contains all the requisites of a contract of sale.

WHEREFORE, premises considered, the petition for review on certiorari is DENIED DUE
COURSE.

SO ORDERED.
ADELAIDA AMADO AND THE HEIRS G.R. No. 171401
AND/OR ESTATE OF THE LATE
JUDGE NOE AMADO, Present:
Petitioners,
YNARES-SANTIAGO, J.,
Chairperson,
AUSTRIA-MARTINEZ,
CHICO-NAZARIO,
- versus - NACHURA, and
REYES, JJ.

RENATO SALVADOR, Promulgated:

Respondent.
December 13, 2007
x---------------------------- ---------------------x

DECISION

CHICO-NAZARIO, J.:

This is a Petition for Review on Certiorari under Rule 45 of the Rules of Court, assailing the
Decision dated 25 August 2005 rendered by the Court of Appeals in CA-G.R. CV No. 71816.[1] In
reversing the Decision,[2] dated 28 November 2000, of the Regional Trial Court (RTC), Branch 76,
of San Mateo, Rizal, the Court of Appeals declared that the late Judge Noe Amado (Judge Amado),
the petitioners’ predecessor-in-interest, already sold the subject property to
respondent, RenatoSalvador (Salvador).

Petitioners are the heirs of the late Judge Amado, who was the owner of a parcel of land
situated at Barangay Burgos, Rodriguez, Rizal, with an area of 5,928 square meters.[3] The property
subject of the present controversy is a portion thereof, consisting of 1,106 square meters and
registered under Original Certificate of Title (OCT) No. N-191954-A with the Registry of Deeds
of Rizal[4] in the name of Judge Amado.

Salvador alleges that in or around September 1979, Judge Amado agreed to sell to him the
subject property for P60.00 per square meter, or in the total sum ofP66,360.00, payable in cash or
construction materials which would be delivered to Judge Amado, or to whomsoever the latter
wished during his lifetime.[5] Salvadorthough failed to state the terms of payment, such as the period
within which the payment was supposed to be completed, or how much of the payment should be
made in cash. In view of the sale in his favor, Salvador undertook the transfer and relocation of
about five squatter families residing on the subject property. Thereafter,
Judge Amado allowed Salvador to take possession of the subject property and to build thereon a
residential structure, office, warehouse, perimeter fence and a deep well pump. [6] Salvador claims
that by October 1980, he had already given Judge Amado total cash advances of P30,310.93 and
delivered construction materials amounting to P36,904.45, the total of which exceeded the agreed
price for the subject property.[7]

According to the petitioners, on the other hand, Judge Amado let Salvador use the subject
property, upon the request of the latter’s father and grandfather, who were
Judge Amado’s friends. Salvador used the subject property for his business of manufacturing hollow
blocks.[8]

The petitioners maintain that the cash advances and the various construction materials were
received by Judge Amado from Salvador in connection with a loan agreement, and not as payment
for the sale of the subject property. Petitioners offered in evidence a loan agreement executed on 15
August 1980 wherein Salvador and Judge Amado and their respective spouses appeared as co-
borrowers with Capitol City Development Bank as lender. The property belonging to
Judge Amado was used as collateral, while Salvador undertook the obligation to construct a
perimeter fence over Judge Amado’s land covered by OCT No. N-191954-A and to deliver hollow
blocks to Judge Amado’s son, Valeriano Amado. Petitioners aver that Salvador and
Judge Amado agreed to divide the proceeds of the loan among themselves. Since the bank
delivered the proceeds of the loan to Salvador, Judge Amado’s share in the proceeds were paid to
him in several installments, some of which Salvador alleged were payments for the sale of the
subject property.[9]

Petitioners assert that when Salvador’s business folded up, he failed to pay his share of the
monthly amortization of the loan with the bank. Judge Amado paid the loan to prevent the
foreclosure of his mortgaged property. Salvador also allowed his brother Lamberto Salvador to
occupy the premises without the consent of Judge Amado.[10]

On 4 November 1983, Judge Amado sent a demand letter to Salvador directing the latter to
vacate the subject property,[11] which Salvador merely ignored.[12]

Judge Amado filed an ejectment suit against Salvador before the Municipal Trial Court (MTC)
of Rodriguez, Rizal, docketed as Civil Case No. 700. During the hearing before the MTC, Salvador
and his brother, Lamberto Salvador, defendants therein, stated in their Answer with Counterclaim
that a balance of P4,040.62 from the purchase price of the subject property was left unpaid due to
the failure of Judge Amado to execute and deliver a deed of sale.[13] In a Decision dated 16 July
1990, the MTC dismissed the ejectment suit on the ground of lack of jurisdiction because
of Salvador’s claim of ownership over the subject property.[14] The case was appealed to the RTC
and docketed as Civil Case No. 704. The RTC affirmed the dismissal of
Judge Amado’s ejectment suit by the MTC based on lack of jurisdiction.[15]

On 22 August 1996, Salvador filed before the RTC Civil Case No. 1252, an action for specific
performance with damages against the petitioners.[16] As evidence that the sale of the subject
property was perfected between Judge Amado and himself, Salvador presented a note written by
Judge Amado, which reads[17]:

San Mateo
October 1, 1980
Dear Reny,

Meron naniningil sa akin ng P500.00 kaya’t ako ay bigyan ng ganoong halaga ng

ayon.

Hindi ko nilagdaan iyong papel na dala ni Kapitan Maeng at ito ay nasa akin pa.
 Saka ko na ibabalik iyon pa
gang aking plano ay napaayos ko na. Ang lupa ay gagawin kong dalawang lote.

Ako,
Noe Amado

Salvador also offered in evidence the testimony of Ismael Angeles to prove that
Judge Amado agreed to sell the subject property to him.

To prove that he paid the purchase price, Salvador submitted the following documents
showing he paid cash and delivered construction materials to JudgeAmado: (1) a statement of
account of cash advances made from 1 September 1979 to 23 September 1980 in the total amount
of P30,310.93[18]; (2) statements of account of construction materials delivered from 23 August 1979
to 20 October 1979 with a total cost of P17,656.85, from 26 December 1979 to 25 August 1980 with
a total cost of P1,711.20, and from 26 August 1980 to 24 September 1980 with a total cost
of P10,447.40[19]; (3) Invoice No. 50 dated 8 December 1980 for construction materials
worth P924.00[20]; and (4) delivery receipts of construction materials from 21 November 1979 to 6
January 1981 with a total cost ofP1,665.00.[21]

The RTC dismissed Salvador’s complaint in Civil Case No. 1252. The trial court observed
that it was not indicated in the documentary evidence presented bySalvador that the money and
construction materials were intended as payment for the subject property. It gave little probative
value to tax declarations in the name ofSalvador since they referred to the improvements on the land
and not the land itself. The testimonial evidence given by Ismael Angeles was considered
insufficient to prove the fact of sale because the witness failed to categorically state that a sale
transaction had taken place between Salvador and Judge Amado. Moreover, the RTC held
that Salvador was disqualified under the Dead Man’s Statute[22] from testifying on any matter of fact
involving a transaction between him and Judge Amado which occurred before the death of the latter.
[23]

Salvador appealed the Decision of the RTC in Civil Case No. 1252 before the Court of
Appeals.

In reversing the decision of the RTC of San Mateo, the Court of Appeals found
that Salvador paid for the subject land with cash advances and construction materials, since
petitioners failed to present any evidence showing that the construction materials Salvador delivered
to Judge Amado had been paid for. It construed as adequate proof of the sale the handwritten note
of Judge Amado wherein the latter promised to sign an unidentified deed after the subdivision of an
unnamed property, in light of Ismael Angeles’ testimony that Judge Amado had promised to sign a
deed of sale over the subject property in favor of Salvador. According to the appellate court, the
testimony of Salvador was not barred by Section 23, Rule 130 of the Rules of Court, also known as
the Dead Man’s Statute, and was, therefore, admissible because the petitioners filed a counterclaim
against Salvador. It also gave great weight to the tax declarations presented by Salvador and his
efforts to relocate the five squatter families which previously resided on the subject property as proof
of ownership. Lastly, the Court of Appeals awarded Salvador P100,000.00 as moral damages
and P100,000.00 as exemplary damages. The dispositive part of the said Decision reads:

1. Ordering [herein petitioners] to execute a Deed of Sale in favor of [herein respondent

Salvador] covering the parcel of land with an area of 1,106 square meters located at
18 Amado-Liamzon Street, Brgy. Burgos, Rodriguez, Rizal which is a portion of the
 5,928 square meter parcel of land in the name of Judge Noe Amado, married
to Adelaida A. Amado in the Registration Book as Original Certificate of Title No. ON-
191954-A of the Register of Deeds of Rizal, Marikina Branch;

2. Ordering the [petitioners] to deliver to [Salvador] the Original Certificate of Title No.
ON-191954-A of the Register of Deeds of Rizal, Marikina Branch, bearing page number
54-A, Book A-6, and execute receipts and other documents which may be necessary for
the registration and titling of the parcel of land in [Salvador]’s name; and

3. Ordering the [petitioners] to pay [Salvador] P100,000.00 as moral

damages, P100,000.00 as exemplary damages, and costs of suits.[24]

Hence, the present petition. Petitioners rely on the following grounds:[25]

THE COURT A QUO ERRED ON A QUESTION OF LAW IN REVERSING THE TRIAL

COURT’S DECISION AND HOLDING THAT RESPONDENT HAS SUCCESSFULLY
DISCHARGED THE BURDEN OF EVIDENCE THAT THERE WAS A SALE OF LOT,
THE CONSIDERATION OF WHICH WAS TO BE PAID IN CASH AND
CONSTRUCTION MATERIALS

II

THE COURT A QUO ERRED ON A QUESTION OF LAW IN HOLDING THAT

RESPONDENT WAS NOT DISQUALIFIED TO TESTIFY UNDER THE DEAD MAN’S
STATUTE AS PROVIDED IN SECTION 23, RULE 130 OF THE RULES OF COURT

III

THE COURT A QUO ERRED ON A QUESTION OF LAW IN RULING THAT

PETITIONERS ARE LIABLE FOR MORAL OR EXEMPLARY DAMAGES IN THE
TOTAL AMOUNT OF P200,000.00[26]

The petition at bar is meritorious.

The main controversy in the petition is whether or not there was a perfected contract of sale of
the subject property. In resolving this issue, this Court would necessarily re-examine the factual
findings of the Court of Appeals, as well as the contrary findings of the trial court. It is a recognized
principle that while this Court is not a trier of facts and does not normally embark on the evaluation of
evidence adduced during trial, this rule allows exceptions,[27] such as when the findings of the trial
court and the Court of Appeals are conflicting or contradictory.[28]

A contract of sale is perfected by mere consent, upon a meeting of the minds in the offer and
the acceptance thereof based on subject matter, price and terms of payment.[29] Until the contract of
sale is perfected, it cannot, as an independent source of obligation, serve as a binding juridical
relation between the parties.[30]

Consent is essential for the existence of a contract, and where it is absent, the contract is
non-existent. Consent in contracts presupposes the following requisites: (1) it should be intelligent
or with an exact notion of the matter to which it refers; (2) it should be free; and (3) it should be
spontaneous.[31] Moreover, a definite agreement on the manner of payment of the price is an
essential element in the formation of a binding and enforceable contract of sale. [32] This is so
because the agreement as to 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 or consideration.[33]

In the present case, Salvador fails to allege the manner of payment of the purchase price on
which the parties should have agreed. No period was set within which the payment must be
made. Of the purchase price of P66,360.00, which the parties purportedly agreed upon, the amount
which should be paid in cash and the amount for construction materials was not determined. This
means that the parties had no exact notion of the consideration for the contract to which they
supposedly gave their consent. Thus, such failure is fatal to Salvador’s claim that a sale had been
agreed upon by the parties.

Furthermore, after carefully examining the records, serious doubts became apparent as to
whether cash advances and deliveries of construction materials evidenced by numerous statements
of accounts and delivery receipts were actually intended as payment for the land.

First of all, the statements of accounts and the delivery receipts do not indicate that the
construction materials or the cash advances were made in connection with the sale of the subject
property. Any doubt as to the real meaning of the contract must be resolved against the person who
drafted the instrument and is responsible for the ambiguity thereof.[34] Since Salvador prepared
these statements of accounts and therefore caused the ambiguity, he cannot benefit from the
resulting ambiguity.Salvador is hardly an ignorant and illiterate person; rather, he is a businessman
engaged in manufacturing and distributing construction materials and operates no less than two
branches. It should have been noted in the statement of accounts, or even in another document,
that the cash advances and deliveries of construction materials were made in connection with a
transaction as important as a sale of land. As they are, the statements of accounts and especially
the straightforward delivery receipts are insufficient proof that Judge Amado sold his property
to Salvador.

Secondly, one of the delivery receipts presented by Salvador as Annex “I” of his Complaint in
RTC Civil Case No. 1252 was partially paid.[35] If Judge Amadohad already agreed that the
construction materials delivered to him and his family constituted the payment for the subject
property, the act of partially paying for construction materials would be incongruous to such intention.

Thirdly, Salvador himself gave conflicting statements on whether he has completed

payment. Among the findings of fact made by the MTC in its Decision dated 16 July 1990 in Civil
Case No. 700, based on the very statements made by the Salvador brothers in their Answer with
Counterclaim, was that Salvador paid JudgeAmado P62,319.38 in cash and construction materials
for the subject property, and a balance of P4,040.62 was left unpaid due to the failure of
Judge Amado to execute and deliver the deed of sale.[36] However, in the proceedings before the
RTC in Civil Case No. 1252, Salvador claimed that he paid Judge AmadoP67,215.38 in cash and
construction materials, which was more than the purchase price of P66,360.00 upon which they
agreed.[37]

Lastly, Salvador again contradicts himself as to the date he supposedly completed the
payments for the subject property. In his Complaint in Civil Case No. 1252, he alleges that
by October 1980, he had already fully paid Judge Amado P67,215.38 in cash and construction
materials.[38] Yet in the same pleading, he included 11 separate deliveries of construction materials
made from 8 December 1980 to 6 January 1981 as evidence of payment.[39]
 This Court cannot presume the existence of a sale of land, absent any direct proof of it. The
construction of the terms of a contract, which would amount to impairment or loss of rights, is not
favored. Conservation and preservation, not waiver or abandonment or forfeiture of a right, is the
rule.[40] While it is apparent thatSalvador paid cash advances and delivered construction materials to
Judge Amado, this fact alone does not attest to the existence of a sale of land. In truth, the
inconsistent statements made by Salvador regarding the amount paid to Judge Amado, the date
when he was supposed to have completed the payment, and the dissimilarity between the price
allegedly agreed upon and the amount supposedly paid show the absence of a uniform intention to
apply these cash advances and construction materials as payment for the purchase of the subject
property. Absent any tangible connection with the sale of land, these transactions stand by
themselves as loans and purchases of construction materials.

Other than the statements of accounts and delivery receipts scrutinized above, the other
pieces of evidence that Salvador offered are similarly inadequate to establish his allegation of a
perfected sale.

Salvador presented as evidence of a perfected sale a handwritten note dated 1 October 1980
as Annex “GG” of the Complaint dated 16 August 1996, written by Judge Amado, wherein the latter
asked Salvador for P500.00. In the same note, Judge Amado informed Salvador that he had not yet
signed an unidentified document, which he promised to sign after his plan to divide a certain parcel
of land was completed.[41] This note is not conclusive proof of the existence of a perfected sale.
What this note proves is that Judge Amado was hesitant to sign the unidentified document and was
still waiting for the completion of his plan to divide the land referred to in the note. To say that the
document is the deed of sale and the land is the subject property claimed by Salvador would be
based on pure surmise and conjecture without a more specific reference to them in the
note. Moreover, the P500.00 which Judge Amado was demanding from Salvador could not have
been payment pursuant to the purported sale of the subject property. The list of cash advances,
which were supposedly part of the payment for the subject property, made by Salvador to
Judge Amado from 1 September 1979 to 23 September 1980 and attached as Annex “D” of his
Complaint in Civil Case No. 1252, did not include theP500.00 which Judge Amado demanded from
Salvador on 1 October 1980.

The testimony of Ismael Angeles is likewise insufficient to support the allegation that
Judge Amado agreed to sell the subject property to Salvador. The factual findings of the trial court,
especially as regards the credibility of witnesses, are conclusive upon this court.[42] The findings of
fact and assessment of credibility of witnesses is a matter best left to the trial court because of its
unique position of having observed that elusive and incommunicable evidence of the witnesses’
deportment on the stand while testifying, which opportunity is denied to the appellate courts. Only
the trial judge can observe the furtive glance, blush of conscious shame, hesitation, flippant or
sneering tone, calmness, sigh or the scant or full realization of an oath--all of which are useful for an
accurate determination of a witness’ honesty and sincerity.[43] Thus, the assessment by the RTC of
Angeles’ testimony, which it deemed insufficient, is entitled to great respect:

Moreover, [herein respondent Salvador]’s corroborative testimonial evidence, that

is, the testimony of one Ismael Angeles, is likewise deemed insufficient as even that
witness failed to categorically state any sale transaction of the lot between [respondent]
Salvador and the late Judge Amado, as in fact, Mr. Angeles manifested uncertainty when
he said “siguro nagkaroon silang bilihan.”
 The findings of the trial court are well supported by the records of this case. At the time that
Judge Amado and Salvador allegedly entered into the sale agreement, Ismael Angeles testified that
“I was inside the house, but I did not hear their conversation because I was far from them.”[44]

Even if Ismael Angeles’ testimony was given full credence, it would still be insufficient to
establish that a sale agreement was perfected between Salvador and Judge Amado. His testimony
that Judge Amado ordered the preparation of the deed of sale only proves that
Judge Amado and Salvador were in the process of negotiating the sale of the subject property, not
that they had already set and agreed to the terms and conditions of the sale.[45] In
fact, Ismael Angeles’ testimony that Judge Amado refused to sign the contract reinforces the fact
that the latter had not consented to the sale of the subject property.[46]

In addition, Salvador’s act of relocating the squatter families formerly residing on the subject
property[47] is not substantial proof of ownership. Such act is only consistent with the petitioners’
allegations that Salvador was allowed to use the subject property for his business, and it would
redound to his benefit to relocate the squatters previously occupying it.

From the evidence presented, an agreement of sale of the subject property between him and
Judge Amado had not yet reached the stage of perfection. The stages of a contract are, thus,
explained:

A contract undergoes various stages that include its negotiation or preparation, its
perfection and, finally, its consummation. Negotiation covers the period from the time the
prospective contracting parties indicate interest in the contract to the time the contract is
concluded (perfected). The perfection of the contract takes place upon the concurrence
of the essential elements thereof. A contract which is consensual as to perfection is so
established upon a mere meeting of the minds, i.e. the concurrence of offer and
acceptance, on the object and on the cause thereof. x x x. The stage of consummation
begins when the parties perform their respective undertakings under the contract
culminating in the extinguishment thereof.

Until the contract is perfected, it cannot, as an independent source of obligation,

serve as a binding juridical relation. In sales, particularly, to which the topic for
discussion about the case at bench belongs, the contract is perfected when a person,
called the seller, obligates himself, for a price certain, to deliver and to transfer ownership
of a thing or right to another, called the buyer, over which the latter agrees.[48]

In the present case, the terms of payment have not even been alleged. No positive proof was
adduced that Judge Amado had fully accepted Salvador’s sketchy proposal. Even if the handwritten
note actually referred to the subject property, it merely points to the fact that the parties were, at
best, negotiating a contract of sale. At the time it was written, on 1 October 1980, Judge Amado had
not expressed his unconditional acceptance of Salvador’s offer. He merely expressed that he was
considering the sale of the subject property, but it was nevertheless clear that he still was
unprepared to sign the contract. Salvador himself admitted before the MTC in Civil Case No. 700
that the sale agreement did not push through as he testified that “I considered that dead investment
because our sale did not materialize because he always made promises.”[49]

Absent the valid sale agreement between Salvador and Judge Amado,
the former’s possession of the subject property hinges on the permission and goodwill of
Judge Amado and the petitioners, as his successors-in-interest. In the demand letter dated 4
November 1983, Judge Amado had already directed Salvador to vacate the subject property. Thus,
there is no more basis for Salvador and his brother, Lamberto Salvador, to retain possession over it,
and such possession must now be fully surrendered to the petitioners.

The Court of Appeals imposed moral damages and exemplary damages in view of the
petitioners’ refusal to execute a Deed of Sale and the social humiliation suffered by Salvador due to
his ouster from the property.[50] Since petitioners had no demandable obligation to deliver the subject
property, the award of moral and exemplary damages, as well as cost of suit, in favor of Salvador is
without legal basis.

Moral damages may be recovered if they were the proximate result of defendants’ wrongful
acts or omissions.[51] Two elements are required. First, the act or omission must be the proximate
result of the physical suffering, mental anguish, fright, serious anxiety, besmirched reputation,
wounded feelings, moral shock, social humiliation and similar injury. Second, the act must be
wrongful.[52] In this case, petitioners were not under any obligation to execute a Deed of Sale or
guaranteeSalvador’s possession of the property. Absent any wrongful act which may be attributed
to petitioners, an award of moral damages is inappropriate.

The award of exemplary damages is also improper. Exemplary damages are awarded only
when a wrongful act is accompanied by bad faith or when the guilty party acted in a wanton,
fraudulent, reckless or malevolent manner.[53] Moreover, where a party is not entitled to actual or
moral damages, an award of exemplary damages is likewise baseless.[54] As this Court has found,
petitioners’ refusal to turn over the subject property to Salvador is justified and cannot be the basis
for the award of exemplary damages.

IN VIEW OF THE FOREGOING, the instant Petition is GRANTED and the assailed Decision
of the Court of Appeals in CA-G.R. No. 71816, promulgated on 25 August 2005, is REVERSED AND
SET ASIDE. The Order dated 28 November 2000 of the Rizal RTC
is REINSTATED. Renato Salvador and LambertoSalvador are ordered to vacate the subject
property.

SO ORDERED.
CORNELIA BALADAD (Represented by G.R. No. 160743
Heinrich M. Angeles and Rex Aaron A.
Baladad),
Petitioner,
Present:

YNARES-SANTIAGO, J.,
Chairperson,
- versus - CHICO-NAZARIO,
VELASCO,
NACHURA, and
PERALTA, JJ.

SERGIO A. RUBLICO and SPOUSES Promulgated:

LAUREANO F. YUPANO,
Respondents. August 4, 2009

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

DECISION

NACHURA, J.:

Before us is a petition for review of the November 5, 2002 Decision[1] of the Court of Appeals
(CA), as well as its November 10, 2003 Resolution[2] in CA-G.R. CV No. 34979, which reversed and
set aside the September 9, 1991 Decision[3] of Branch 133 of the Regional Trial Court (RTC) of
Makati City, in a complaint for annulment of sale, cancellation of title and damages [4] filed by
petitioner Cornelia Baladad against herein respondents.

Below are the antecedent facts.

Two parcels of land located in what was then called the Municipality of Makati, Province of
Rizal were registered in the name of Julian Angeles on December 20, 1965 under Transfer
Certificate of Title (TCT) No. 155768.[5] On December 3, 1968, Julian and Corazon Rublico, after co-
habiting for some time, got married. Julian was already 65 years old then, while Corazon was
already 67.[6] At that time, Corazon already had a son, respondent Sergio A. Rublico, by Teofilo
Rublico, who died sometime before the outbreak of the Second World War.[7] After Teofilo’s death,
Corazon cohabited with Panfilo de Jesus and then, later, with Julian. Julian died on February 2,
1969[8] leaving no compulsory heirs[9] except his wife and his brother, Epitacio.

On February 4, 1985, while on her death bed, Cornelia was surrounded by four individuals –
her niece, petitioner Cornelia Baladad; her nephew, Vicente Angeles; a certain Rosie Francisco; and
notary public Atty. Julio Francisco who had been called, accompanied by Cornelia herself to
Corazon’s house, to notarize a deed entitled Extrajudicial Settlement of Estate with Absolute Sale.
In his testimony, Atty. Francisco said that Corazon imprinted her thumbmark on the document after
he read and explained the contents thereof in Tagalog to her.[10] In the said document, Corazon and
Epitacio adjudicated unto themselves the two lots registered in the name of Julian – with three-
fourths (¾) of the property going to Corazon
and the remaining one-fourth (¼) to Epitacio. The document also stated that both Corazon and
Epitacio conveyed by way of absolute sale both their shares in the said lots in favor of Cornelia,
Epitacio’s daughter, in exchange for the amount of P107,750.00. Corazon’s thumbmark was
imprinted at the bottom of the said deed, while Vicente, Epitacio’s son, signed in behalf of Epitacio by
virtue of a power of attorney.[11] There was no signature of Cornelia on the said document.

Two days later, Corazon passed away.

Title over the said lots remained in the name of Julian, but on July 20, 1987, more than two
years after Corazon’s death, respondent Sergio executed an Affidavit of Adjudication by Sole Heir of
Estate of Deceased Person[12] adjudicating unto himself the same parcels of land which had been
subject of the deed of sale between Corazon and Cornelia. On October 27, 1987, Sergio filed a
petition for reconstitution of the owner’s copy of TCT No. 155768 averring that after the death of
Corazon, he tried to locate the copy of the title but to no avail. [13] The petition was granted on
January 11, 1988[14] and a new owner’s duplicate title (TCT No. 155095) was issued in the name of
Sergio on April 18, 1988.[15]

On May 31, 1988, Sergio sold the two lots to spouses Laureano and Felicidad Yupano
for P100,000.00.[16] Sergio’s certificate of title was cancelled and TCT No. 155338 was issued in
favor of the Yupanos. On July 26, 1988, the said title was also cancelled and TCT Nos.
156312[17] and 156313[18] separately covering the two parcels of land were issued. On July 17, 1990,
Cornelia caused the annotation on the said TCTs of her adverse claim over the said properties.

Meanwhile, there were seven families who occupied the lots and paid rentals to Julian and,
later, to Corazon. After Corazon’s death, they paid rentals to Cornelia through Pacifica Alvaro, and
later to Cornelia’s brother, Vicente, when Cornelia transferred her residence to the United
States. When the Yupanos demanded payment of rentals from the tenants, the latter filed a
complaint for interpleader on May 19, 1989. The case was docketed as Civil Case No. 89-3947. On
September 3, 1990, Branch 148 of the Makati RTC rendered a Decision[19] declaring the Yupanos as
the legal and lawful owners of the two lots.

On August 3, 1990, a month before the promulgation of the decision, Cornelia filed a
complaint for annulment of sale, cancellation of title and damages, which is now the subject of this
Rule 45 petition. Cornelia argued that Sergio knew of the sale made by Corazon in her favor and
was even given part of the proceeds. Cornelia also averred that the Yupanos could not be
considered as buyers in good faith, because they only lived a block from the disputed properties and
had knowledge that the two lots had been sold to Cornelia prior to Corazon’s death.[20]

For their part, respondents argued that the Extrajudicial Settlement with Absolute Sale dated
February 4, 1985 could not have been executed because at the time, Corazon was already
dying. Ignacio Rublico, Sergio’s son, also testified that he saw Vicente Angeles holding the hand of
Corazon to affix her thumbmark on a blank sheet of paper.[21] Sergio also argued that the property
was originally bought by his mother, but was only registered in the name of Julian in keeping with the
tradition at that time.[22]

After the trial, Branch 133 of the Makati RTC ruled in favor of Cornelia. [23] Upon appeal, the CA
reversed the RTC ruling[24] prompting Cornelia to file a motion for reconsideration,[25] but the same
was denied for lack of merit.[26] Hence, this petition.

The determinative issue is the validity of the Extrajudicial Settlement of Estate with Absolute
Sale purportedly executed by Corazon prior to her death.
 We find in favor of petitioner.

The Extrajudicial Settlement of Estate with Absolute Sale executed by Corazon and Epitacio
through the latter’s attorney-in-fact, Vicente Angeles, partakes of the nature of a contract. To be
precise, the said document contains two contracts, to wit: the extrajudicial adjudication of the estate
of Julian Angeles between Corazon and Epitacio as Julian’s compulsory heirs, and the absolute sale
of the adjudicated properties to Cornelia. While contained in one document, the two are severable
and each can stand on its own. Hence, for its validity, each must comply with the requisites
prescribed in Article 1318 of the Civil Code, namely (1) consent of the contracting parties; (2) object
certain, which is the subject matter of the contract; and (3) cause of the obligation which is
established.

During the trial, respondents argued that the document was not valid because at the time it
was executed, Corazon was already weak and could not have voluntarily given her consent
thereto. One of the witnesses for the defense even testified that it was Vicente who placed
Corazon’s thumbprint on a blank document, which later turned out to be the Extrajudicial
Adjudication with Absolute Sale. We are, however, inclined to agree with the RTC’s finding on this
matter, viz:

Ignacio is not a reliable witness. He was very certain the event took place on
February 4, 1985 and Corazon was already dead. This was his testimony on cross-
examination. He had forgotten that Corazon died on February 6, 1985 or two days
after. So, when confronted with this contradiction, he had to change his stance and
claim that Corazon was still alive when it happened.[27]

It is also noteworthy that in the course of the trial, respondents did not question Corazon’s
mental state at the time she executed the said document.
Respondents only focused on her physical weakness, arguing that she could not have executed the
deed because she was already dying and, thus, could not appear before a notary public. [28] Impliedly,
therefore, respondents indulged the presumption that Corazon was still of sound and disposing mind
when she agreed to adjudicate and sell the disputed properties on February 4, 1985.

Respondents also failed to refute the testimony of Atty. Francisco, who notarized the deed,
that he personally read to Corazon the contents of the Extrajudicial Settlement of Estate with
Absolute Sale, and even translated its contents to Tagalog.

And, most important of all is the fact that the subject deed is, on its face, unambiguous. When
the terms of a contract are lawful, clear and unambiguous, facial challenge cannot be allowed. We
should not go beyond the provisions of a clear and unambiguous contract to determine the intent of
the parties thereto, because we will run the risk of substituting our own interpretation for the true
intent of the parties.

It is immaterial that Cornelia’s signature does not appear on the Extrajudicial Settlement of
Estate with Absolute Sale. A contract of sale is perfected the moment there is a meeting of the
minds upon the thing which is the object of the contract and upon the price. [29] The fact that it was
Cornelia herself who brought Atty. Francisco to Corazon’s house to notarize the deed shows that she
had previously given her consent to the sale of the two lots in her favor. Her subsequent act of
exercising dominion over the subject properties further strengthens this assumption.

Based on these findings, we are constrained to uphold the validity of the disputed
deed. Accordingly, respondent Sergio Rublico never had the right to sell the subject properties to
the Yupanos, because he never owned them to begin with. Nemo dat quod non habet. Even before
he could inherit any share of the properties from his mother, Corazon, the latter had already sold
them to Cornelia.

The Yupanos, for their part, cannot feign ignorance of all these, and argue that Sergio’s
certificate of title was clean on its face. Even prior to May 31, 1988, when they bought the properties
from Sergio, it had been widely known in the neighborhood and among the tenants residing on the
said lots that ownership of the two parcels of land had been transferred to Cornelia as, in fact, it was
Cornelia’s brother, Vicente, who had been collecting rentals on the said properties. The Yupanos
lived only a block away from the disputed lots.[30] The husband, Laureano Yupano, was relatively
close to Julian and to Epitacio and had known Cornelia before the latter left to live in the United
States from 1979 to 1983.[31] Before he bought the property from Sergio, Laureano himself verified
that there were tenants who had been paying rentals to Vicente.[32] All these should have alerted him
to doubt the validity of Sergio’s title over the said lots. Yet, the Yupanos chose to ignore these
obvious indicators.

In Abad v. Guimba,[33] we explained:

[A]s a rule, the purchaser is not required to explore further than what the Certificate
indicates on its face. This rule, however, applies only to innocent purchasers for value
and in good faith; it excludes a purchaser who has knowledge of a defect in the title of
the vendor, or of facts sufficient to induce a reasonable prudent man to inquire into the
status of the property.[34]

We thus declare the Affidavit of Adjudication by Sole Heir of Estate of Deceased person
executed by Sergio Rublico to be void and without any effect. The sale made by him to spouses
Yupano is, likewise, declared null and void. Respondent Sergio Rublico is ordered to return the
amount of P100,000.00 paid to him by spouses Laureano Yupano, less the amount spent on the
acquisition of the invalid title procured by him with the acquiescence of the Yupanos.

WHEREFORE, premises considered, the Decision of the Court of Appeals in CA-G.R. CV No.
34979 dated November 5, 2002 is hereby REVERSED andSET ASIDE. Accordingly, the Decision of
the Regional Trial Court of Makati dated September 9, 1991 is REINSTATED with
MODIFICATION in that:

1. the Extrajudicial Adjudication of Estate with Absolute Sale dated February

4, 1985 as VALID;
2. the sale between respondent Sergio Rublico and Spouses Laureano
Yupano is NULL and VOID. Respondent Sergio Rublico is ordered to return
theP100,000.00 paid by the Yupanos, less the amount spent on the acquisition of
the invalid title procured by him with the acquiescence of the Yupanos; and
3. the Register of Deeds of Makati is ordered to CANCEL Transfer Certificate
of Title Nos. 156312 and 156313 in the name of Laureano Yupano and, in lieu
thereof, RESTORE Transfer Certificate No. 155768.

SO ORDERED.
HEIRS OF CAYETANO PANGAN G.R. No. 157374
and CONSUELO PANGAN,*
Petitioners,
Present:

QUISUMBING, J., Chairperson,

CARPIO-MORALES,
- versus -
BRION,
DEL CASTILLO, and
ABAD, JJ.

SPOUSES ROGELIO PERRERAS Promulgated:

and PRISCILLA PERRERAS,
Respondents.

August 27, 2009

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

DECISION

BRION, J.:

The heirs[1] of spouses Cayetano and Consuelo Pangan (petitioners-heirs) seek the reversal of
the Court of Appeals’ (CA) decision[2] of June 26, 2002, as well its resolution of February 20, 2003, in
CA-G.R. CV Case No. 56590 through the present petition for review on certiorari.[3] The CA
decision affirmed the Regional Trial Court’s (RTC) ruling[4] which granted the complaint for specific
performance filed by spouses Rogelio and Priscilla Perreras (respondents) against the petitioners-
heirs, and dismissed the complaint for consignation instituted by Consuelo Pangan (Consuelo)
against the respondents.

THE FACTUAL ANTECEDENTS

 The spouses Pangan were the owners of the lot and two-door apartment (subject properties)
located at 1142 Casañas St., Sampaloc, Manila.[5] On June 2, 1989, Consuelo agreed to sell to the
respondents the subject properties for the price of P540,000.00. On the same day, Consuelo
received P20,000.00 from the respondents as earnest money, evidenced by a receipt (June 2, 1989
receipt)[6] that also included the terms of the parties’ agreement.

Three days later, or on June 5, 1989, the parties agreed to increase the purchase price
from P540,000.00 to P580,000.00.

In compliance with the agreement, the respondents issued two Far East Bank and Trust
Company checks payable to Consuelo in the amounts of P200,000.00 and P250,000.00 on June 15,
1989. Consuelo, however, refused to accept the checks. She justified her refusal by saying that her
children (the petitioners-heirs) – co-owners of the subject properties – did not want to sell the subject
properties. For the same reason, Consuelo offered to return the P20,000.00 earnest money she
received from the respondents, but the latter rejected it. Thus, Consuelo filed a complaint for
consignation against the respondents on September 5, 1989, docketed as Civil Case No. 89-50258,
before the RTC of Manila, Branch 28.

The respondents, who insisted on enforcing the agreement, in turn instituted an action for
specific performance against Consuelo before the same court onSeptember 26, 1989. This case
was docketed as Civil Case No. 89-50259. They sought to compel Consuelo and the petitioners-
heirs (who were subsequently impleaded as co-defendants) to execute a Deed of Absolute Sale over
the subject properties.

In her Answer, Consuelo claimed that she was justified in backing out from the agreement on
the ground that the sale was subject to the consent of the petitioners-heirs who became co-owners of
the property upon the death of her husband, Cayetano. Since the petitioners-heirs disapproved of
the sale, Consuelo claimed that the contract became ineffective for lack of the requisite consent. She
nevertheless expressed her willingness to return the P20,000.00 earnest money she received from
the respondents.

The RTC ruled in the respondents’ favor; it upheld the existence of a perfected contract of sale,
at least insofar as the sale involved Consuelo’s conjugal and hereditary shares in the subject
properties. The trial court found that Consuelo’s receipt of the P20,000.00 earnest money was an
“eloquent manifestation of the perfection of the contract.” Moreover, nothing in the June 2,
1989 receipt showed that the agreement was conditioned on the consent of the petitioners-
heirs. Even so, the RTC declared that the sale is valid and can be enforced against Consuelo; as a
co-owner, she had full-ownership of the part pertaining to her share which she can alienate, assign,
or mortgage. The petitioners-heirs, however, could not be compelled to transfer and deliver their
shares in the subject properties, as they were not parties to the agreement between Consuelo and
the respondents. Thus, the trial court ordered Consuelo to convey one-half (representing
Consuelo’s conjugal share) plus one-sixth (representing Consuelo’s hereditary share) of the subject
properties, and to pay P10,000.00 as attorney’s fees to the respondents. Corollarily, it dismissed
Consuelo’s consignation complaint.

Consuelo and the petitioners-heirs appealed the RTC decision to the CA claiming that the trial
court erred in not finding that the agreement was subject to a suspensive condition – the consent of
the petitioners-heirs to the agreement. The CA, however, resolved to dismiss the appeal and,
therefore, affirmed the RTC decision. As the RTC did, the CA found that the payment and receipt of
earnest money was the operative act that gave rise to a perfected contract, and that there was
nothing in the parties’ agreement that would indicate that it was subject to a suspensive condition. It
declared:

Nowhere in the agreement of the parties, as contained in the June 2, 1989 receipt
issued by [Consuelo] xxx, indicates that [Consuelo] reserved titled on [sic] the property,
nor does it contain any provision subjecting the sale to a positive suspensive
condition.

Unconvinced by the correctness of both the RTC and the CA rulings, the petitioners-heirs filed
the present appeal by certiorari alleging reversible errors committed by the appellate court.

THE PETITION

The petitioners-heirs primarily contest the finding that there was a perfected contract executed
by the parties. They allege that other than the finding that Consuelo received P20,000.00 from the
respondents as earnest money, no other evidence supported the conclusion that there was a
perfected contract between the parties; they insist that Consuelo specifically informed the
respondents that the sale still required the petitioners-heirs’ consent as co-owners. The refusal of
the petitioners-heirs to sell the subject properties purportedly amounted to the absence of the
requisite element of consent.
Even assuming that the agreement amounted to a perfected contract, the petitioners-heirs
posed the question of the agreement’s proper characterization – whether it is a contract of sale or
a contract to sell. The petitioners-heirs posit that the agreement involves a contract to sell, and the
respondents’ belated payment of part of the purchase price, i.e., one day after the June 14, 1989
due date, amounted to the non-fulfillment of a positive suspensive condition that prevented the
contract from acquiring obligatory force. In support of this contention, the petitioners-heirs cite the
Court’s ruling in the case of Adelfa Rivera, et al. v. Fidela del Rosario, et al.: [7]

In a contract of sale, the title to the property passes to the vendee upon the
delivery of the thing sold; while in a contract to sell, ownership is, by agreement,
reserved in the vendor and is not to pass to the vendee until full payment of the
purchase price. In a contract to sell, the payment of the purchase price is a
positive suspensive condition, the failure of which is not a breach, casual or
 serious, but a situation that prevents the obligation of the vendor to convey title
from acquiring an obligatory force.

[Rivera], however, failed to complete payment of the second installment. The

non-fulfillment of the condition rendered the contract to sell ineffective and without force
and effect. [Emphasis in the original.]

From these contentions, we simplify the basic issues for resolution to three questions:

1. Was there a perfected contract between the parties?

2. What is the nature of the contract between them? and
3. What is the effect of the respondents’ belated payment on their contract?

THE COURT’S RULING

There was a perfected contract between the parties

since all the essential requisites of a contract were
present

Article 1318 of the Civil Code declares that no contract exists unless the following requisites
concur: (1) consent of the contracting parties; (2) object certain which is the subject matter of the
contract; and (3) cause of the obligation established. Since the object of the parties’ agreement
involves properties co-owned by Consuelo and her children, the petitioners-heirs insist that their
approval of the sale initiated by their mother, Consuelo, was essential to its perfection. Accordingly,
their refusal amounted to the absence of the required element of consent.

That a thing is sold without the consent of all the co-owners does not invalidate the sale or
render it void. Article 493 of the Civil Code[8] recognizes the absolute right of a co-owner to freely
dispose of his pro indiviso share as well as the fruits and other benefits arising from that share,
independently of the other co-owners. Thus, when Consuelo agreed to sell to the respondents the
subject properties, what she in fact sold was her undivided interest that, as quantified by the RTC,
consisted of one-half interest, representing her conjugal share, and one-sixth interest, representing
her hereditary share.
 The petitioners-heirs nevertheless argue that Consuelo’s consent was predicated on their
consent to the sale, and that their disapproval resulted in the withdrawal of Consuelo’s consent. Yet,
we find nothing in the parties’ agreement or even conduct – save Consuelo’s self-serving testimony
– that would indicate or from which we can infer that Consuelo’s consent depended on her children’s
approval of the sale. The explicit terms of the June 8, 1989 receipt[9] provide no occasion for any
reading that the agreement is subject to the petitioners-heirs’ favorable consent to the sale.

The presence of Consuelo’s consent and, corollarily, the existence of a perfected contract
between the parties are further evidenced by the payment and receipt of P20,000.00, an earnest
money by the contracting parties’ common usage. The law on sales, specifically Article 1482 of the
Civil Code, provides that whenever earnest money is given in a contract of sale, it shall be
considered as part of the price and proof of the perfection of the contract. Although the
presumption is not conclusive, as the parties may treat the earnest money differently, there is
nothing alleged in the present case that would give rise to a contrary presumption. In cases where
the Court reached a conclusion contrary to the presumption declared in Article 1482, we found that
the money initially paid was given to guarantee that the buyer would not back out from the sale,
considering that the parties to the sale have yet to arrive at a definite agreement as to its terms –
that is, a situation where the contract has not yet been perfected.[10] These situations do not obtain in
the present case, as neither of the parties claimed that the P20,000.00 was given merely as
guarantee by the respondents, as vendees, that they would not back out from the sale. As we have
pointed out, the terms of the parties’ agreement are clear and explicit; indeed, all the essential
elements of a perfected contract are present in this case. While the respondents required that the
occupants vacate the subject properties prior to the payment of the second installment, the
stipulation does not affect the perfection of the contract, but only its execution.

In sum, the case contains no element, factual or legal, that negates the existence of a
perfected contract between the parties.

The characterization of the contract can be considered

irrelevant in this case in light of Article 1592 and the
Maceda Law, and the petitioners-heirs’ payment

The petitioners-heirs posit that the proper characterization of the contract entered into by the
parties is significant in order to determine the effect of the respondents’ breach of the contract (which
purportedly consisted of a one-day delay in the payment of part of the purchase price) and the
remedies to which they, as the non-defaulting party, are entitled.

The question of characterization of the contract involved here would necessarily call for a
thorough analysis of the parties’ agreement as embodied in the June 2, 1989 receipt, their
contemporaneous acts, and the circumstances surrounding the contract’s perfection and
execution. Unfortunately, the lower courts’ factual findings provide insufficient detail for the
purpose. A stipulation reserving ownership in the vendor until full payment of the price is, under
case law, typical in a contract to sell.[11] In this case, the vendor made no reservation on the
ownership of the subject properties. From this perspective, the parties’ agreement may be
considered a contract of sale. On the other hand, jurisprudence has similarly established that the
need to execute a deed of absolute sale upon completion of payment of the price generally indicates
that it is a contract to sell, as it implies the reservation of title in the vendor until the vendee has
completed the payment of the price. When the respondents instituted the action for specific
performance before the RTC, they prayed that Consuelo be ordered to execute a Deed of Absolute
Sale; this act may be taken to conclude that the parties only entered into a contract to sell.

Admittedly, the given facts, as found by the lower courts, and in the absence of additional
details, can be interpreted to support two conflicting conclusions. The failure of the lower courts to
pry into these matters may understandably be explained by the issues raised before them, which did
not require the additional details. Thus, they found the question of the contract’s characterization
immaterial in their discussion of the facts and the law of the case. Besides, the petitioners-heirs
raised the question of the contract’s characterization and the effect of the breach for the first
time through the present Rule 45 petition.

Points of law, theories, issues and arguments not brought to the attention of the lower court
need not be, and ordinarily will not be, considered by the reviewing court, as they cannot be raised
for the first time at the appellate review stage. Basic considerations of fairness and due process
require this rule.[12]

At any rate, we do not find the question of characterization significant to fully pass upon the
question of default due to the respondents’ breach; ultimately, the breach was cured and the contract
revived by the respondents’ payment a day after the due date.

In cases of breach due to nonpayment, the vendor may avail of the remedy
of rescission in a contract of sale. Nevertheless, the defaulting vendee may defeat the vendor’s
right to rescind the contract of sale if he pays the amount due before he receives a demand for
rescission, either judicially or by a notarial act, from the vendor. This right is provided under Article
1592 of the Civil Code:

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

Nonpayment of the purchase price in contracts to sell, however, does not constitute a
breach; rather, nonpayment is a condition that prevents the obligation from acquiring obligatory force
and results in its cancellation. We stated in Ong v. CA[13] that:
 In a contract to sell, the payment of the purchase price is a positive
suspensive condition, the failure of which is not a breach, casual or serious, but
a situation that prevents the obligation of the vendor to convey title from
acquiring obligatory force. The non-fulfillment of the condition of full payment
rendered the contract to sell ineffective and without force and effect. [Emphasis
supplied.]

As in the rescission of a contract of sale for nonpayment of the price, the defaulting vendee in
a contract to sell may defeat the vendor’s right to cancel by invoking the rights granted to him under
Republic Act No. 6552 or the Realty Installment Buyer Protection Act (also known as the Maceda
Law); this law provides for a 60-day grace period within which the defaulting vendee (who has paid
less than two years of installments) may still pay the installments due. Only after the lapse of the
grace period with continued nonpayment of the amounts due can the actual cancellation of the
contract take place. The pertinent provisions of the Maceda Law provide:
xxxx

Section 2. It is hereby declared a public policy to protect buyers of real estate

on installment payments against onerous and oppressive conditions.

Sec. 3. In all transactions or contracts involving the sale or financing of

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

xxxx

Section 4. In case where less than two years of installments were paid, the
seller shall give the buyer a grace period of not less than 60 days from the date
the installment became due. If the buyer fails to pay the installments due at the
expiration of the grace period, the seller may cancel the contract after thirty days from
the receipt by the buyer of the notice of cancellation or the demand for rescission of the
contract by notarial act. [Emphasis supplied.]

Significantly, the Court has consistently held that the Maceda Law covers not only sales on
installments of real estate, but also financing of such acquisition; its Section 3 is comprehensive
enough to include both contracts of sale and contracts to sell, provided that the terms on payment of
the price require at least two installments. The contract entered into by the parties herein can very
well fall under the Maceda Law.
 Based on the above discussion, we conclude that the respondents’ payment on June 15,
1989 of the installment due on June 14, 1989 effectively defeated the petitioners-heirs’ right to have
the contract rescinded or cancelled. Whether the parties’ agreement is characterized as one of
sale or to sell is not relevant in light of the respondents’ payment within the grace period provided
under Article 1592 of the Civil Code and Section 4 of the Maceda Law. The petitioners-heirs’
obligation to accept the payment of the price and to convey Consuelo’s conjugal and hereditary
shares in the subject properties subsists.

WHEREFORE, we DENY the petitioners-heirs’ petition for review on certiorari,

and AFFIRM the decision of the Court of Appeals dated June 24, 2002 and its resolution dated
February 20, 2003 in CA-G.R. CV Case No. 56590. Costs against the petitioners-heirs.

SO ORDERED.
CONCHITA TAN, doing business G.R. No. 172239
under the name MARMAN
TRADING, Present:
Petitioner,
AUSTRIA-MARTINEZ,* J.,
Acting Chairperson,
cralawTINGA,**
- versus - cralawcralaw CHICO-NAZARIO,
NACHURA, and
REYES, JJ.

Promulgated:
PLANTERS PRODUCTS, INC.,
Respondent. March 28, 2008
x--------------------------------------------------x

DECISION

REYES, R.T., J.:

STRICT application of technical rules of procedure should be shunned when they hinder rather than
promote substantial justice. Clear stipulation in a lease contract should be interpreted literally in
accordance with the intent of the parties.

These principles are relevant in this petition for review on certiorari of the Decision[1] of the Court of
Appeals (CA) which affirmed with modification the Order[2] of the Regional Trial Court (RTC) in
Makati City in a complaint for specific performance filed by petitioner Conchita Tan doing business
under the name Marman Trading (Marman) against respondent Planters Products, Inc. (PPI).

The Facts

On April 27, 1992 and June 10, 1992, respondent PPI, as lessor, and petitioner Marman, as lessee,
entered into two contracts of lease[3] of sulfuric acid tanks and ammonium tanks in Limay, Bataan for
a period of ten years. The two contracts have identical stipulations on renewal of the lease at the
expiration of the ten-year term, to wit:

The LESSEE has the option to renew his leasehold interest in the leased premises for
an additional ten (10) years at the expiration of the term of his lease under such terms
and conditions as may be agreed upon by the parties provided that the LESSEE shall
give the LESSOR, prior to the expiration of the term of this Lease, 180 days notice, in
writing, of his desire to procure such new Lease.[4]

On December 4, 2001, Marman manifested to PPI its intention to renew the lease contracts. [5] Two
months later, Marman communicated to PPI its proposed terms for the renewal of the lease. [6] PPI
replied with a counter offer which included, among others, lessening the period of the lease and
increase in the variable fee, escalation rate and minimum required volume per year.[7]
On April 16, 2002, Marman wrote a letter urging PPI to adhere to the ten year renewal period under
the original lease contracts. Marman also manifested its willingness to discuss the other points
raised by PPI in the counter offer.[8]

PPI stood firm on its counter offer and informed Marman of additional items that it wanted clarified
and completed prior to renewal,[9] namely:

a.cralawProposed repair plan, estimated cost and timetable of completion of the middle
dock,

b.cralawProposed relocation plan of sulfuric acid pipelines and timetable of completion

duly approved by PPI, and

c.cralawPayment of past due accounts.

On October 21, 2002, a meeting was held between PPI and Marman wherein the counter offer terms
of PPI were discussed. Marman acknowledged the terms of the counter offer and manifested that
new lease contracts will be executed only upon reaching mutual agreement on all its terms and
conditions.[10] In the meeting, Marman agreed to the commercial terms of the counter offer (rents,
variable fee and minimum escalation volume). No agreement, however, was reached on the non-
commercial terms of the contract (relocation of ammonia tanks and pipelines and the immediate
repair of the middle dock facilities).

cralawOn January 15, 2003, PPI wrote a letter[11] to Marman expressing its inclination not to renew
the lease contracts because of alleged violations of the original contracts of lease, specifically
Marmans failure to conduct due maintenance of the pier facilities and overextension of its pipeline
from the middle dock to the causeway area. Nonetheless, PPI manifested in its letter that it was
giving utmost consideration to a possible renewal but it stands firm on all its proposed counter offer
terms. At that time, the original lease contract had expired.

On February 28, 2003, Marman filed a complaint for specific performance[12] against PPI with
the RTC in Makati. Marman prayed, among others, that PPI execute new lease contracts for ten
years pursuant to its option under Section 1 of the original contracts of lease.

cralawPPI filed its Answer[13] alleging, as affirmative defenses, lack of jurisdiction and failure to state
a cause of action. It also raised as counterclaim the payment of unpaid rent, cost of repair of the
middle dock facility and damages.

cralawOn April 13, 2004, Marman filed a motion for summary judgment.[14] PPI countered by filing a
motion for preliminary hearing of its affirmative defenses,[15] which was treated as a motion to
dismiss. Both motions were jointly heard and after due proceedings the RTC required the parties to
submit their respective memoranda.

RTC Disposition

cralawOn June 11, 2004, the RTC issued an Order[16] granting Marmans motion for summary
judgment and denying PPIs motion to dismiss, disposing as follows:
 WHEREFORE, defendants motion to dismiss the case on the grounds cited as
affirmative defenses in its Answer is denied for lack of merit. Summary judgment is
hereby rendered in favor of plaintiff Marman Trading and against defendant Planters
Products, Inc. as follows:

1. Ordering defendant to honor and recognize that the lease contracts had been
renewed for another ten (10) years from their original expiration, and ordering
defendant to execute the written contract of renewal of the lease contracts for another
ten (10) years from their expiration, the rental rate to be determined by applying the
agreed escalation rate of 7.75% to the rental rate last paid by plaintiff;
2. Ordering defendant to pay plaintiff exemplary damages in the amount
of P200,000.00;

3. Ordering defendant to pay plaintiff attorney's fees and cost of litigation in the amount
ofP200,000.00.

All counterclaims are hereby DISMISSED for lack of merit.

cralaw
SO ORDERED.[17]

cralawIn granting specific performance, the RTC ratiocinated:

cralawWhile defendant correctly pointed out that a renewal provision, even if construed
for the benefit of one party, cannot be unilateral in the sense that there still has to be a
mutual agreement between the parties. Yet, it is equally true that the contract cannot
be renewed on the mere whim of the plaintiff since there has to be a mutual agreement
as to the terms and conditions of the renewal. However, it should be noted that the
provision had already specified a period of time for the renewal, particularly ten
years. To follow defendant's line of thinking would be to disregard completely a
contractual agreement between the parties. Clearly, the term of the renewal had
already been pre-agreed upon, and can no longer be the subject of further
negotiation. Moreover, this Court finds that the cases of Heirs of Dalisay v. Court of
Appeals(201 SCRA 751) and Fernandez v. Court of Appeals (166 SCRA 577) cited by
defendant are not directly applicable to the instant case since the antecedent facts
therein are much different from the facts in this case.

xxxx

Moreover, this Court has the legal duty to uphold and enforce to the letter the
contractual obligations of the parties, absent any showing that such obligations are
contrary to laws, morals, good customs and public policy. More so where the terms
being insisted on by defendant would make it impossible for plaintiff to recover its
investments. Plaintiff correctly pointed out that the imposition of unreasonable terms
and exorbitant terms is equivalent to an outright rejection of plaintiff's right to seek the
renewal of the lease contracts. This is tantamount to negotiating in bad faith. The case
of Tuason v. Del Asis (107 Phil. 131) establishes the power of this Court to determine
whether the terms demanded by a lessor are exorbitant and to determine what is a
reasonable rent given the circumstances.

cralawUsing such discretion, this Court finds that plaintiff is entitled to the renewal of
the lease contracts under the commercial terms mutually agreed upon for an additional
 period of ten years, counted from the time of the expiration of the original
contracts. First of all, the length of the term is already stated in the lease contracts,
thus can no longer be altered by one party without the consent of the other. The terms
of the renewal provisions cannot be disregarded ten years is ten years no matter how
you look at it. Thus, the intent of the parties when the contracts were perfected should
stand. Furthermore, this Court finds that the shortening of the term despite the
increased rental rates and minimum volume constitutes unreasonable and exorbitant
terms that would leave one party unable to recoup its investments while leaving the
other party unjustly enriched at the expense of plaintiff. This Court cannot permit such
an injustice to take place.[18]

cralawIn denying PPIs counterclaims for non-payment of docket fees, the RTC stated:

As regards the affirmative defenses raised by the defendants as grounds for a motion
to dismiss, after much consideration this Court finds the same bereft of merit. While it is
true that the failure to pay the docket fees would be reasonable cause to have the
complaint expunged from the records, this court finds no defect in the amount of docket
fees paid by plaintiff. The Manchester case cited by defendant clearly states that all
complaints should specify the amount of damages being prayed for not only in the body
of the pleading but also in the prayer.However, despite reading plaintiff's third
alternative cause of action several times over, this Court finds no indication that plaintiff
ever directly sought or prayed for the market value of the improvements from
defendant. The fact that plaintiff stated in its complaint the alleged market value of the
improvements does not necessarily mean that it is praying for the compensation of
such amount, more so when it is clearly stated that what is sought is merely a
declaration of ownership. Besides, the claim is only an alternative cause of action and
does not have any bearing on the resolution of the main complaint.

cralawAnent the contention that the complaint fails to state a cause of action since
there is no showing that plaintiff is entitled to the renewal of the lease contracts, suffice
it to say that this Court has already found, through summary judgment, plaintiff to be
entitled to the renewal of the lease contracts. This Court has already given its reasons
for finding that plaintiff had a valid cause of action for specific performance against
defendant. Thus, the ground raised by defendant is evidently bereft of any legal basis
at this point.[19]

cralawMarman moved for partial reconsideration[20] but its motion was denied.[21] PPI appealed to the
CA.

CA Disposition

On November 23, 2005, the CA issued a Decision[22] affirming with modification the RTC decision,
with a falloreading:

cralawWHEREFORE, the appeal is PARTIALLY GRANTED. The Order dated June

11, 2004 of the Regional Trial Court of Makati City, Branch 150 is
hereby AFFIRMED with the MODIFICATIONthat the complaint filed by Conchita Tan,
doing business under the name Marman Trading is hereby DISMISSED.
cralaw
SO ORDERED.[23]
The CA reversed the RTC order compelling PPI to execute written contracts of renewal of lease. The
appellate court reasoned that mere acceptance by Marman of the commercial terms of the counter
offer of PPI (i.e., rents, variable fee and minimum escalation volume) did not result in the perfection
of new lease contracts absent agreement on other terms of the counter offer, thus:

cralawAs We see it, as far the provisions granting an option to renew are concerned,
the only term on which there has been a clear agreement is the period of the renewed
contract, i.e., ten (10) years. The provisions are silent as to the other terms and
conditions as these were still subject to agreement by both PPI and Marman.

cralawUnder Article 1318 of the Civil Code, there is no contract unless there is consent
of the contracting parties. Article 1319 of the same Code further states that consent is
manifested by the meeting of the offer and the acceptance upon the thing and the
cause which are to constitute the contract. Thus, as a general rule, if the parties come
to an agreement on the essential points of a contract, that is, on the object and the
cause, there is already perfection even if there are other points that have yet to be
agreed upon or have been reserved for future agreement.

cralawThis being the case, should the acceptance by Marman of the economic
conditions proposed by PPI, a renewed contract of lease had already been perfected
as the other terms and conditions that have yet to be agreed upon were irrelevant to
the instant case. We disagree.

cralawIn A. Magsaysay, Inc. vs. Cebu Portland Cement Co., the Supreme Court laid
down an exception to the general rule that an agreement on the essential points of a
contract already amounts to perfection. Thus:

cralawWhile Article 1319 of the New Civil Code prescribes that consent is
manifested by the meeting of the offer and the acceptance upon the thing
and the cause which are to constitute the contract, this rule does not
apply to a situation like the one before us, wherein one or both parties
consider that other matters or details, in addition to the subject matter and
consideration, should be stipulated and agreed upon. In that case, the
area of agreement must extend to all points that the parties deem
material or there is no contract.

cralawCivil law commentator Arturo M. Tolentino has a similar opinion.

cralawIf the intention of one or both parties is that there be concurrence

on all points, the contract is not perfected if there is a point of
disagreement, even if there is already agreement on the essential
elements of the contract. x x x.

cralawIf there is no declaration that agreement on an accessory or

subordinate matter is necessary, the contract will be perfected as soon as
there is concurrence on the object and the cause. The regulation of the
accessory points will then be determined by future agreement, and, if
there is no agreement thereon, by the general rules established by law for
the particular case in the absence of agreement, such as the place of
performance, expenses for the delivery of the thing, etc.
 cralawIn the present case, the intention of both PPI and Marman is clearly to have an
agreement on all the points being discussed before there can be a renewal. This is
evident from Marmans letter to PPI dated November 8, 2002 wherein it was explicitly
stated that both parties had agreed that there must be a concurrence on all the points
being discussed in the negotiations, including the points that the trial court found
irrelevant, before there can be a renewal, x x x.[24](Citations omitted)

The CA however affirmed the RTC dismissal of PPIs counterclaim for non payment of docket fee,
thus:

cralawA counterclaim is either compulsory or permissive in nature.

cralawA compulsory counterclaim is one which, being cognizable by the regular courts
of justice, arises out of or is connected with the transaction or occurrence constituting
the subject matter of the opposing partys claim and does not require for its adjudication
the presence of third parties of whom the court cannot acquire jurisdiction.

cralawAs to permissive counterclaims, in Valencia vs. Court of Appeals, the Supreme

Court stated certain criteria or tests by which the compulsory or permissive nature of
specific counterclaims can be determined, summarized as follows:

1.cralawAre the issues of fact and law raised by the claim and
counterclaim largely the same?
2.cralawWould res judicata bar a subsequent suit on defendant's claim
absent the compulsory counterclaim rule?
3.cralawWill substantially the same evidence support or refute plaintiffs
claim as well as defendant's counterclaim?
4.cralawIs there any logical relation between the claim and the
counterclaim?

Tested against these standards, We agree with the trial court that PPIs counterclaim is
clearly permissive. The issues of fact and law alone between Marmans complaint and
PPIs counterclaim are completely different. This being the case, the trial court was
correct in dismissing PPIs counterclaim for PPIs failure to pay the prescribed docket
fees. It is settled that it is not only the filing of the complaint or appropriate initiatory
pleading, but the payment of the prescribed docket fees, that vests the court with
jurisdiction over the subject matter of the action. The same rule applies to permissive
counterclaims.

Nonetheless, PPI claims that its counterclaim cannot be dismissed in the absence of a
motion to dismiss being filed by Marman. We disagree. As the trial court never
acquired jurisdiction over the permissive counterclaim filed by PPI, under Section 1,
Rule 9 of the Rules of Civil Procedure, the same may be dismissed motu proprio or
even without a motion to dismiss having been filed by Marman.

Respecting the issues concerning whether the complaint filed by Marman stated a
cause of action and whether Marman paid the prescribed filing fees, We find that these
issues had been rendered moot and academic in the light of the foregoing disquisition.
[25]
(Citations omitted)

Marman sought partial reconsideration[26] of the CA decision but it was denied.[27] Hence, this petition
beforeUs.
 Issues

cralawPetitioner Marman raises triple issues[28] for Our consideration, viz.:

I.
THE COURT OF APPEALS COMMITTED SERIOUS REVERSIBLE ERROR OF
LAW WHEN IT FAILED TO DISMISS THE APPEAL OUTRIGHT FOR NOT BEING
FILED IN ACCORDANCE WITH THE RULES OF COURT.

II.
THE COURT OF APPEALS COMMITTED GRIEVIOUS (SIC) REVERSIBLE ERROR
OF LAW WHEN IT RULED THAT THE PARTIES HAD NOT YET AGREED ON THE
SUBSTANTIAL PORTIONS OF THE RENEWAL OF THE LEASE CONTRACTS.

III.
THE COURT OF APPEALS COMMITTED GRIEVOUS REVERSIBLE ERROR OF
LAW WHEN IT DISMISSED THE COMPLAINT FILED BY MARMAN WITH THE RTC.

Our Ruling

The petition is without merit.

The petition essentially raises only two issues for Our consideration because the second and third
assignments of errors are interrelated. The first involves the procedural issue of whether or not the
CA erred in not dismissing the appeal of respondent PPI for failure to cite the page reference of the
original records in its appellate brief. The second is the substantive issue of whether or not the CA
erred in reversing the RTCdecision compelling PPI to execute new lease contracts.

We shall first deal with the procedural issue.

Lack of page reference in the appellants brief is a mere

formal defect which does not warrant dismissal of the
appeal; liberal application of rules of procedure should
be applied.

Marman argues that the CA should have dismissed the appeal of petitioner outright because PPIs
appellate brief did not make any page reference to the records or rollo of the case as required under
Section 13, Rule 44 of the 1997 Rules of Civil Procedure.[29] Marman claims that the absence of the
required page reference rendered the appellate brief nothing more than a pleading filled with
unsupported allegations and contentions.[30] Marman insists on strict compliance with the rules of
procedure in accordance with the legal principle that an appeal is a mere statutory privilege, which
must be exercised only in accordance with law or appropriate procedures.

Admitting the defect, PPI counters that the absence of page reference in its appellants brief is a
mere minor procedural lapse which cannot result in the dismissal of its appeal. PPI asserts that
dismissal based purely on procedural technicalities is frowned upon and that rules of procedure
should not be applied in a very rigid and technical sense when it overrides substantial justice. PPI
prays for a liberal construction of the rules of procedure.[31]
It is true that appeals are mere statutory privileges which should be exercised only in the manner
required by law. To be sure, strict compliance with rules of procedure is essential to the
administration of justice.Nonetheless, technical rules of procedures are mere tools designed to
facilitate the attainment of justice.Their strict and rigid application should be relaxed when they
hinder rather than promote substantial justice. Cases should, as much as possible, be resolved on
the merits, not on mere technicalities. In Barnes v. Padilla,[32] this Court held:

Let it be emphasized that the rules of procedure should be viewed as mere tools
designed to facilitate the attainment of justice. Their strict and rigid application, which
would result in technicalities that tend to frustrate rather than promote substantial
justice, must always be eschewed. Even the Rules of Court reflect this principle. The
power to suspend or even disregard rules can be so pervasive and compelling as to
alter even that which this Court itself has already declared to be final x x x.

The emerging trend in the rulings of this Court is to afford every party litigant the
amplest opportunity for the proper and just determination of his cause, free from the
constraints of technicalities. Time and again, this Court has consistently held that rules
must not be applied rigidly so as not to override substantial justice.[33]

In this case, We find that the procedural lapse committed is only minor and even negligible. It
involves a mere formal defect of failure to cite the page reference of the original records of the case
in PPIs appellant brief. The defect is not even jurisdictional, such as failure to pay docket fee or
failure to appeal within the reglementary period. Marman did not suffer any damage from the
procedural lapse. The CA correctly exercised its sound discretion in proceeding to rule on the merits
of the appeal rather than dismissing it on a mere formal defect.

We shall now resolve the meat of the petition.

The CA did not err in ruling that PPI cannot be

compelled to execute a new contract of lease in favor
of Marman.

Marman argues that the CA erred in reversing the RTC Order compelling PPI to execute new lease
contracts. It argues that the new contracts were already perfected when it agreed on their
commercial terms (rent, variable fee and minimum escalation volume), although the parties did not
reach any agreement on the non-commercial terms of the contract (relocation of ammonia tanks and
pipelines and the immediate repair of the middle dock facilities). Marman submits that these non-
commercial terms, while necessary to the continued operation of the lease, are not integral to its
option to renew.[34] Hence, the failure of the parties to agree on them did not affect the perfection of
the new contracts.

PPI counters that there was no perfected new lease contract because the parties failed to agree on
all its terms and conditions. It argues that a plain and simple reading of the original contract reveals
that the parties intended a renewal to depend upon the parties agreement on all its terms and
conditions, not merely those pertaining to its commercial terms.[35] Since the parties failed to agree
on all terms and conditions of the new lease, PPI cannot be compelled to execute new lease
contracts in favor of Marman.
We agree with PPI. The crux of the petition lies in determining whether the contracts of lease
between PPI and Marman were, indeed, renewed. The resolution of the issue hinges on the
interpretation of the pertinent renewal provision of the lease contracts. Section 1 of the lease
contracts provide:

The LESSEE has the option to renew his leasehold interest in the leased premises for
an additional ten (10) years at the expiration of the term of his lease under such terms
and conditions as may be agreed upon by the parties provided that the LESSEE shall
give the LESSOR, prior to the expiration of the term of the term of this Lease, 180 days
notice, in writing, of his desire to procure such new Lease.

The renewal of the original lease is subject to terms and conditions as may be agreed upon by the
parties.The stipulation is couched in general and mutual terms. It is clear that the renewal of the
lease is not automatic. The parties will still negotiate and bargain on the terms and conditions of the
new contract. These terms and conditions are not specified. Thus, they may include commercial
terms, such as rent and escalation clause, as well as non-commercial terms such as covenants to fix
and repair the leased premises. The only term that cannot be negotiated or bargained under the new
contract is the period of renewal of the lease which is fixed in the original lease at ten years. All other
terms and conditions are subject to negotiation.

While the original lease contracts speak of renewal, what the parties actually intended was a new
contract of lease. This is evident from the words of the Section 1 which speaks of a contract under
such terms and conditions as may be agreed upon by the parties. The contract is renewed only in
the sense that it is for the same period of ten years as that of the original lease contract.

The clause provided that the lessee shall give the lessor, prior to the expiration of the term of this
lease, 180 days notice, in writing, of his desire to procure such new lease, on the other hand,
pertains to a condition for the exercise of the option to renew. Simply put, it is a requirement for the
renewal of the lease. If no written notice is given, PPI may assume that Marman has no more
intention to renew the lease and that the original contract will automatically terminate upon its
expiration.

But mere notice by Marman to PPI does not automatically result in a new lease contract. As stated,
the parties will still negotiate and agree on all terms and conditions of the new contract, except for
the period of the new lease which is fixed at ten years. In other words, the notice only triggers the
parties to negotiate on the terms and conditions of the renewal. If the parties fail to agree on all
terms and conditions of the new contract, there is no perfected new contract as between them.

The evident intention of PPI and Marman is for the new lease contract to be perfected only upon
mutual agreement on all terms and conditions of the new lease. This means that there must be an
agreement on both the commercial and non-commercial terms of the new lease contracts. This is
clear from the general language of the renewal clause. If the parties intended differently, they could
have simply deleted the phraseunder such terms and conditions as may be agreed upon by the
parties, which would automatically renew the original contract for another period of ten years upon
mere notice to PPI. Alternatively, they could have included a stipulation in the original lease contract
which would limit the terms and conditions that the parties may validly negotiate in order for the
contract to be renewed.

Here, records disclose that PPI and Marman did not agree on all terms of the new lease
contracts. PPI only accepted the counter offer of PPI with respect to the commercial terms of the
new lease. It did not accept the other non-commercial terms and conditions of the new contract,
specifically the repair of the middle dock facility and the relocation of the sulfuric acid pipelines. The
new lease contract was not perfected because the parties did not agree on all terms of the
lease. The CA correctly ruled that PPI cannot be compelled to execute a new lease contract in favor
of Marman.

Agreement on non-commercial terms of the lease is

essential to the perfection of the lease contracts;
Marman is estopped from claiming otherwise.

Marman is also estopped from claiming that the non-commercial terms of the lease contract are not
essential to the perfection of the new lease contracts. Marman manifested to PPI in its letter
of November 8, 2002 that new lease contracts will be executed only when the parties agree on all
terms of the contract. The pertinent portion of the letter of Marman to PPI reads:

Planters Products, Inc.

Planters Products Building
109 Esteban Street
Legaspi Village, Makati

cralawAttention: Mr. Llewellyn F. Fortuna

VP Finance and Treasurer

cralawRe: Matters discussed in the meeting on October 21, 2002

Dear Mr. Fortuna:

cralawIn connection with subject matter, we would like to confirm the outstanding items
which we discussed in our meeting last October 21, 2002, to wit:

1) With regard to the relocation of ammonia bullet tank and Marman

Tradings office which are both located near the proposed area to be
leased out to PPIs new locator, we prefer that both the tank and office not
be relocated since it will totally disrupt our operations. More specifically, it
is quite difficult to cut the tank into several pieces for relocation. Thus, if
possible, both tank and office should be left in their present locations. If
this is not possible, the new lessee should be made to shoulder any
relocation costs.

xxxx

6) The proposed relocation of both sulfuric acid and ammonia

pipelines will be done only after the renewal of the lease contracts.

7) We are going to address the issue of the repair and rehabilitation

of the middle-dock facilities. We have already referred to you two (2)
independent underwater surveyors/contractors who are willing to
undertake the repairs.

8) We are already amenable to your proposed escalation rates and

minimum volumes.
 9) Upon reaching mutual agreement on all the foregoing terms and
conditions, you agree to renew the Lease Contracts for an
additional period of ten (10) years as mentioned and provided under
our existing Lease Contracts.[36] (Emphasis supplied)

The letter of Marman to PPI is clear. The new contract of lease is perfected only upon agreement of
all terms and conditions of the new contract, including the relocation of the sulfuric and ammonia
pipelines and the repair of the middle dock facilities. The parties failed to reach any agreement on all
terms and conditions of the new lease contract. Hence, no new lease was perfected as between
them.

In A. Magsaysay, Inc. v. Cebu Portland Cement Co.,[37] this Court stated:

x x x While Article 1319 of the new Civil Code prescribes that consent is manifested by
the meeting of the offer and the acceptance upon the thing and the cause which are to
constitute the contract, this rule does not apply to a situation where one or both parties
consider that the matters or details, in addition to the subject matter and the
consideration, should be stipulated and agreed upon. The area of agreement must
extend to all points that the parties deem material or there is no contract. x x x[38]

In the recent case of Leonardo v. Court of Appeals,[39] this Court reiterated:

The essence of consent is the agreement of the parties on the terms of the contract,
the acceptance by one of the offer made by the other. It is the concurrence of the
minds of the parties on the object and the cause which constitutes the contract. The
area of agreement must extend to all points that the parties deem material or there is
no consent at all.[40](Emphasis supplied)

cralawWHEREFORE, the appealed Decision is AFFIRMED IN FULL.

SO ORDERED.
G.R. No. 109125 December 2, 1994

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

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

Antonio M. Albano for petitioners.

Umali, Soriano & Associates for private respondent.

VITUG, J.:

Assailed, in this petition for review, is the decision of the Court of Appeals, dated 04 December 1991,
in CA-G.R. SP No. 26345 setting aside and declaring without force and effect the orders of execution
of the trial court, dated 30 August 1991 and 27 September 1991, in Civil Case No. 87-41058.

The antecedents are recited in good detail by the appellate court thusly:

On July 29, 1987 a Second Amended Complaint for Specific Performance was filed by
Ang Yu Asuncion and Keh Tiong, et al., against Bobby Cu Unjieng, Rose Cu Unjieng
and Jose Tan before the Regional Trial Court, Branch 31, Manila in Civil Case No. 87-
41058, alleging, among others, that plaintiffs are tenants or lessees of residential and
commercial spaces owned by defendants described as Nos. 630-638 Ongpin Street,
Binondo, Manila; that they have occupied said spaces since 1935 and have been
religiously paying the rental and complying with all the conditions of the lease contract;
that on several occasions before October 9, 1986, defendants informed plaintiffs that
they are offering to sell the premises and are giving them priority to acquire the same;
that during the negotiations, Bobby Cu Unjieng offered a price of P6-million while
plaintiffs made a counter offer of P5-million; that plaintiffs thereafter asked the
defendants to put their offer in writing to which request defendants acceded; that in
reply to defendant's letter, plaintiffs wrote them on October 24, 1986 asking that they
specify the terms and conditions of the offer to sell; that when plaintiffs did not receive
any reply, they sent another letter dated January 28, 1987 with the same request; that
since defendants failed to specify the terms and conditions of the offer to sell and
because of information received that defendants were about to sell the property,
plaintiffs were compelled to file the complaint to compel defendants to sell the property
to them.

Defendants filed their answer denying the material allegations of the complaint and
interposing a special defense of lack of cause of action.

After the issues were joined, defendants filed a motion for summary judgment which
was granted by the lower court. The trial court found that defendants' offer to sell was
never accepted by the plaintiffs for the reason that the parties did not agree upon the
terms and conditions of the proposed sale, hence, there was no contract of sale at all.
Nonetheless, the lower court ruled that should the defendants subsequently offer their
property for sale at a price of P11-million or below, plaintiffs will have the right of first
refusal. Thus the dispositive portion of the decision states:

WHEREFORE, judgment is hereby rendered in favor of the defendants

and against the plaintiffs summarily dismissing the complaint subject to
the aforementioned condition that if the defendants subsequently decide
to offer their property for sale for a purchase price of Eleven Million Pesos
or lower, then the plaintiffs has the option to purchase the property or of
first refusal, otherwise, defendants need not offer the property to the
plaintiffs if the purchase price is higher than Eleven Million Pesos.

SO ORDERED.

Aggrieved by the decision, plaintiffs appealed to this Court in

CA-G.R. CV No. 21123. In a decision promulgated on September 21, 1990 (penned by
Justice Segundino G. Chua and concurred in by Justices Vicente V. Mendoza and
Fernando A. Santiago), this Court affirmed with modification the lower court's
judgment, holding:

In resume, there was no meeting of the minds between the parties

concerning the sale of the property. Absent such requirement, the claim
for specific performance will not lie. Appellants' demand for actual, moral
and exemplary damages will likewise fail as there exists no justifiable
ground for its award. Summary judgment for defendants was properly
granted. Courts may render summary judgment when there is no genuine
issue as to any material fact and the moving party is entitled to a
judgment as a matter of law (Garcia vs. Court of Appeals, 176 SCRA
815). All requisites obtaining, the decision of the court a quo is legally
justifiable.

WHEREFORE, finding the appeal unmeritorious, the judgment appealed

from is hereby AFFIRMED, but subject to the following modification: The
court a quo in the aforestated decision gave the plaintiffs-appellants the
right of first refusal only if the property is sold for a purchase price of
Eleven Million pesos or lower; however, considering the mercurial and
uncertain forces in our market economy today. We find no reason not to
grant the same right of first refusal to herein appellants in the event that
the subject property is sold for a price in excess of Eleven Million pesos.
No pronouncement as to costs.

SO ORDERED.

The decision of this Court was brought to the Supreme Court by petition for review
on certiorari. The Supreme Court denied the appeal on May 6, 1991 "for insufficiency in
form and substances" (Annex H, Petition).

On November 15, 1990, while CA-G.R. CV No. 21123 was pending consideration by
this Court, the Cu Unjieng spouses executed a Deed of Sale (Annex D, Petition)
transferring the property in question to herein petitioner Buen Realty and Development
Corporation, subject to the following terms and conditions:
 1. That for and in consideration of the sum of FIFTEEN MILLION PESOS
(P15,000,000.00), receipt of which in full is hereby acknowledged, the
VENDORS hereby sells, transfers and conveys for and in favor of the
VENDEE, his heirs, executors, administrators or assigns, the above-
described property with all the improvements found therein including all
the rights and interest in the said property free from all liens and
encumbrances of whatever nature, except the pending ejectment
proceeding;

2. That the VENDEE shall pay the Documentary Stamp Tax, registration
fees for the transfer of title in his favor and other expenses incidental to
the sale of above-described property including capital gains tax and
accrued real estate taxes.

As a consequence of the sale, TCT No. 105254/T-881 in the name of the Cu Unjieng
spouses was cancelled and, in lieu thereof, TCT No. 195816 was issued in the name of
petitioner on December 3, 1990.

On July 1, 1991, petitioner as the new owner of the subject property wrote a letter to
the lessees demanding that the latter vacate the premises.

On July 16, 1991, the lessees wrote a reply to petitioner stating that petitioner brought
the property subject to the notice of lis pendens regarding Civil Case No. 87-41058
annotated on TCT No. 105254/T-881 in the name of the Cu Unjiengs.

The lessees filed a Motion for Execution dated August 27, 1991 of the Decision in Civil
Case No. 87-41058 as modified by the Court of Appeals in CA-G.R. CV No. 21123.

On August 30, 1991, respondent Judge issued an order (Annex A, Petition) quoted as
follows:

Presented before the Court is a Motion for Execution filed by plaintiff

represented by Atty. Antonio Albano. Both defendants Bobby Cu Unjieng
and Rose Cu Unjieng represented by Atty. Vicente Sison and Atty.
Anacleto Magno respectively were duly notified in today's consideration
of the motion as evidenced by the rubber stamp and signatures upon the
copy of the Motion for Execution.

The gist of the motion is that the Decision of the Court dated September
21, 1990 as modified by the Court of Appeals in its decision in CA G.R.
CV-21123, and elevated to the Supreme Court upon the petition for
review and that the same was denied by the highest tribunal in its
resolution dated May 6, 1991 in G.R. No.
L-97276, had now become final and executory. As a consequence, there
was an Entry of Judgment by the Supreme Court as of June 6, 1991,
stating that the aforesaid modified decision had already become final and
executory.

It is the observation of the Court that this property in dispute was the
subject of theNotice of Lis Pendens and that the modified decision of this
Court promulgated by the Court of Appeals which had become final to the
effect that should the defendants decide to offer the property for sale for a
 price of P11 Million or lower, and considering the mercurial and uncertain
forces in our market economy today, the same right of first refusal to
herein plaintiffs/appellants in the event that the subject property is sold for
a price in excess of Eleven Million pesos or more.

WHEREFORE, defendants are hereby ordered to execute the necessary

Deed of Sale of the property in litigation in favor of plaintiffs Ang Yu
Asuncion, Keh Tiong and Arthur Go for the consideration of P15 Million
pesos in recognition of plaintiffs' right of first refusal and that a new
Transfer Certificate of Title be issued in favor of the buyer.

All previous transactions involving the same property notwithstanding the

issuance of another title to Buen Realty Corporation, is hereby set aside
as having been executed in bad faith.

SO ORDERED.

On September 22, 1991 respondent Judge issued another order, the dispositive
portion of which reads:

WHEREFORE, let there be Writ of Execution issue in the above-entitled

case directing the Deputy Sheriff Ramon Enriquez of this Court to
implement said Writ of Execution ordering the defendants among others
to comply with the aforesaid Order of this Court within a period of one (1)
week from receipt of this Order and for defendants to execute the
necessary Deed of Sale of the property in litigation in favor of the plaintiffs
Ang Yu Asuncion, Keh Tiong and Arthur Go for the consideration of
P15,000,000.00 and ordering the Register of Deeds of the City of Manila,
to cancel and set aside the title already issued in favor of Buen Realty
Corporation which was previously executed between the latter and
defendants and to register the new title in favor of the aforesaid plaintiffs
Ang Yu Asuncion, Keh Tiong and Arthur Go.

SO ORDERED.

On the same day, September 27, 1991 the corresponding writ of execution (Annex C,
Petition) was issued. 1

On 04 December 1991, the appellate court, on appeal to it by private respondent, set aside and
declared without force and effect the above questioned orders of the court a quo.

In this petition for review on certiorari, petitioners contend that Buen Realty can be held bound by the
writ of execution by virtue of the notice of lis pendens, carried over on TCT No. 195816 issued in the
name of Buen Realty, at the time of the latter's purchase of the property on 15 November 1991 from
the Cu Unjiengs.

We affirm the decision of the appellate court.

A not too recent development in real estate transactions is the adoption of such arrangements as the
right of first refusal, a purchase option and a contract to sell. For ready reference, we might point out
some fundamental precepts that may find some relevance to this discussion.
An obligation is a juridical necessity to give, to do or not to do (Art. 1156, Civil Code). The obligation
is constituted upon the concurrence of the essential elements thereof, viz: (a) The vinculum
juris or juridical tie which is the efficient cause established by the various sources of obligations (law,
contracts, quasi-contracts, delicts and quasi-delicts); (b) the object which is the prestation or
conduct; required to be observed (to give, to do or not to do); and (c) the subject-persons who,
viewed from the demandability of the obligation, are the active (obligee) and the passive (obligor)
subjects.

Among the sources of an obligation is a contract (Art. 1157, Civil Code), which is a meeting of minds
between two persons whereby one binds himself, with respect to the other, to give something or to
render some service (Art. 1305, Civil Code). A contract undergoes various stages that include its
negotiation or preparation, its perfection and, finally, its consummation. Negotiation covers the
period from the time the prospective contracting parties indicate interest in the contract to the time
the contract is concluded (perfected). The perfection of the contract takes place upon the
concurrence of the essential elements thereof. A contract which is consensual as to perfection is so
established upon a mere meeting of minds, i.e., the concurrence of offer and acceptance, on the
object and on the cause thereof. A contract which requires, in addition to the above, the delivery of
the object of the agreement, as in a pledge or commodatum, is commonly referred to as
a real contract. In a solemn contract, compliance with certain formalities prescribed by law, such as
in a donation of real property, is essential in order to make the act valid, the prescribed form being
thereby an essential element thereof. The stage of consummationbegins when the parties perform
their respective undertakings under the contract culminating in the extinguishment thereof.

Until the contract is perfected, it cannot, as an independent source of obligation, serve as a binding
juridical relation. In sales, particularly, to which the topic for discussion about the case at bench
belongs, the contract is perfected when a person, called the seller, obligates himself, for a price
certain, to deliver and to transfer ownership of a thing or right to another, called the buyer, over
which the latter agrees. Article 1458 of the Civil Code provides:

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

A contract of sale may be absolute or conditional.

When the sale is not absolute but conditional, such as in a "Contract to Sell" where invariably the
ownership of the thing sold is retained until the fulfillment of a positive suspensive condition
(normally, the full payment of the purchase price), the breach of the condition will prevent the
obligation to convey title from acquiring an obligatory force. 2 In Dignos vs. Court of Appeals (158
SCRA 375), we have said that, although denominated a "Deed of Conditional Sale," a sale is still
absolute where the contract is devoid of any proviso that title is reserved or the right to unilaterally
rescind is stipulated, e.g., until or unless the price is paid. Ownership will then be transferred to the
buyer upon actual or constructive delivery (e.g., by the execution of a public document) of the
property sold. Where the condition is imposed upon the perfection of the contract itself, the failure of
the condition would prevent such perfection. 3 If the condition is imposed on the obligation of a party
which is not fulfilled, the other party may either waive the condition or refuse to proceed with the sale
(Art. 1545, Civil Code). 4

An unconditional mutual promise to buy and sell, as long as the object is made determinate and the
price is fixed, can be obligatory on the parties, and compliance therewith may accordingly be
exacted. 5
An accepted unilateral promise which specifies the thing to be sold and the price to be paid, when
coupled with a valuable consideration distinct and separate from the price, is what may properly be
termed a perfected contract ofoption. This contract is legally binding, and in sales, it conforms with
the second paragraph of Article 1479 of the Civil Code, viz:

Art. 1479. . . .

An accepted unilateral promise to buy or to sell a determinate thing for a price certain is
binding upon the promissor if the promise is supported by a consideration distinct from
the price. (1451a) 6

Observe, however, that the option is not the contract of sale itself. 7 The optionee has the right, but
not the obligation, to buy. Once the option is exercised timely, i.e., the offer is accepted before a
breach of the option, a bilateral promise to sell and to buy ensues and both parties are then
reciprocally bound to comply with their respective undertakings. 8

Let us elucidate a little. A negotiation is formally initiated by an offer. An imperfect

promise (policitacion) is merely an offer. Public advertisements or solicitations and the like are
ordinarily construed as mere invitations to make offers or only as proposals. These relations, until a
contract is perfected, are not considered binding commitments. Thus, at any time prior to the
perfection of the contract, either negotiating party may stop the negotiation. The offer, at this stage,
may be withdrawn; the withdrawal is effective immediately after its manifestation, such as by its
mailing and not necessarily when the offeree learns of the withdrawal (Laudico vs. Arias, 43 Phil.
270). Where a period is given to the offeree within which to accept the offer, the following rules
generally govern:

(1) If the period is not itself founded upon or supported by a consideration, the offeror is still free and
has the right to withdraw the offer before its acceptance, or, if an acceptance has been made, before
the offeror's coming to know of such fact, by communicating that withdrawal to the offeree (see Art.
1324, Civil Code; see also Atkins, Kroll & Co. vs. Cua, 102 Phil. 948, holding that this rule is
applicable to a unilateral promise to sell under Art. 1479, modifying the previous decision in South
Western Sugar vs. Atlantic Gulf, 97 Phil. 249; see also Art. 1319, Civil Code; Rural Bank of
Parañaque, Inc., vs. Remolado, 135 SCRA 409; Sanchez vs. Rigos, 45 SCRA 368). The right to
withdraw, however, must not be exercised whimsically or arbitrarily; otherwise, it could give rise to a
damage claim under Article 19 of the Civil Code which ordains that "every person must, in the
exercise of his rights and in the performance of his duties, act with justice, give everyone his due,
and observe honesty and good faith."

(2) If the period has a separate consideration, a contract of "option" is deemed perfected, and it
would be a breach of that contract to withdraw the offer during the agreed period. The option,
however, is an independent contract by itself, and it is to be distinguished from the projected main
agreement (subject matter of the option) which is obviously yet to be concluded. If, in fact, the
optioner-offeror withdraws the offer before its acceptance(exercise of the option) by the optionee-
offeree, the latter may not sue for specific performance on the proposed contract ("object" of the
option) since it has failed to reach its own stage of perfection. The optioner-offeror, however, renders
himself liable for damages for breach of the option. In these cases, care should be taken of the real
nature of the consideration given, for if, in fact, it has been intended to be part of the consideration
for the main contract with a right of withdrawal on the part of the optionee, the main contract could be
deemed perfected; a similar instance would be an "earnest money" in a contract of sale that can
evidence its perfection (Art. 1482, Civil Code).
In the law on sales, the so-called "right of first refusal" is an innovative juridical relation. Needless to
point out, it cannot be deemed a perfected contract of sale under Article 1458 of the Civil Code.
Neither can the right of first refusal, understood in its normal concept, per se be brought within the
purview of an option under the second paragraph of Article 1479, aforequoted, or possibly of an offer
under Article 1319 9 of the same Code. An option or an offer would require, among other things, 10 a
clear certainty on both the object and the cause or consideration of the envisioned contract. In a right
of first refusal, while the object might be made determinate, the exercise of the right, however, would
be dependent not only on the grantor's eventual intention to enter into a binding juridical relation with
another but also on terms, including the price, that obviously are yet to be later firmed up. Prior
thereto, it can at best be so described as merely belonging to a class of preparatory juridical
relations governed not by contracts (since the essential elements to establish the vinculum
juris would still be indefinite and inconclusive) but by, among other laws of general application, the
pertinent scattered provisions of the Civil Code on human conduct.

Even on the premise that such right of first refusal has been decreed under a final judgment, like
here, its breach cannot justify correspondingly an issuance of a writ of execution under a judgment
that merely recognizes its existence, nor would it sanction an action for specific performance without
thereby negating the indispensable element of consensuality in the perfection of contracts. 11 It is not
to say, however, that the right of first refusal would be inconsequential for, such as already intimated
above, an unjustified disregard thereof, given, for instance, the circumstances expressed in Article
19 12 of the Civil Code, can warrant a recovery for damages.

The final judgment in Civil Case No. 87-41058, it must be stressed, has merely accorded a "right of
first refusal" in favor of petitioners. The consequence of such a declaration entails no more than what
has heretofore been said. In fine, if, as it is here so conveyed to us, petitioners are aggrieved by the
failure of private respondents to honor the right of first refusal, the remedy is not a writ of execution
on the judgment, since there is none to execute, but an action for damages in a proper forum for the
purpose.

Furthermore, whether private respondent Buen Realty Development Corporation, the alleged
purchaser of the property, has acted in good faith or bad faith and whether or not it should, in any
case, be considered bound to respect the registration of the lis pendens in Civil Case No. 87-41058
are matters that must be independently addressed in appropriate proceedings. Buen Realty, not
having been impleaded in Civil Case No. 87-41058, cannot be held subject to the writ of execution
issued by respondent Judge, let alone ousted from the ownership and possession of the property,
without first being duly afforded its day in court.

We are also unable to agree with petitioners that the Court of Appeals has erred in holding that the
writ of execution varies the terms of the judgment in Civil Case No. 87-41058, later affirmed in CA-
G.R. CV-21123. The Court of Appeals, in this regard, has observed:

Finally, the questioned writ of execution is in variance with the decision of the trial court
as modified by this Court. As already stated, there was nothing in said decision 13 that
decreed the execution of a deed of sale between the Cu Unjiengs and respondent
lessees, or the fixing of the price of the sale, or the cancellation of title in the name of
petitioner (Limpin vs. IAC, 147 SCRA 516; Pamantasan ng Lungsod ng Maynila vs.
IAC, 143 SCRA 311; De Guzman vs. CA, 137 SCRA 730; Pastor vs. CA, 122 SCRA
885).

It is likewise quite obvious to us that the decision in Civil Case No. 87-41058 could not have decreed
at the time the execution of any deed of sale between the Cu Unjiengs and petitioners.
WHEREFORE, we UPHOLD the Court of Appeals in ultimately setting aside the questioned Orders,
dated 30 August 1991 and 27 September 1991, of the court a quo. Costs against petitioners.

SO ORDERED.
G.R. No. 135929 April 20, 2001

LOURDES ONG LIMSON, petitioner,

vs.
COURT OF APPEALS, SPOUSES LORENZO DE VERA and ASUNCION SANTOS-DE VERA,
TOMAS CUENCA, JR. and SUNVAR REALTY DEVELOPMENT CORPORATION, respondents.

BELLOSILLO, J.:

Filed under Rule 45 of the Rules of Court this Petition for Review on Certiorari seeks to review,
reverse and set aside the Decision1 of the Court of Appeals dated 18 May 1998 reversing that of the
Regional Trial Court dated 30 June 1993. The petitioner likewise assails the Resolution2 of the
appellate court of 19 October 1998 denying petitioner’s Motion for Reconsideration.

Petitioner Lourdes Ong Limson, in her 14 may 1979 Complaint filed before the trial court,3 alleged
that in July 1978 respondent spouses Lorenzo de Vera and Asuncion Santos-de Vera, through their
agent Marcosa Sanchez, offered to sell to petitioner a parcel of land consisting of 48, 260 square
meters, more or less, situated in Barrio San Dionisio, Parañaque, Metro Manila; that respondent
spouses informed her that they were the owners of the subject property; that on 31 July 1978 she
agreed to buy the property at the price of P34.00 per square meter and gave the sum of P20,000.00
to respondent spouses as "earnest money;" that respondent spouses signed a receipt therefor and
gave her a 10-day option period to purchase the property; that respondent Lorenzo de Vera then
informed her that the subject property was mortgaged to Emilio Ramos and Isidro Ramos; that
respondent Lorenzo de Vera asked her to pay the balance of the purchase price to enable him and
his wife to settle their obligation with the Ramoses.1âwphi1.nêt

Petitioner also averred that she agreed to meet respondent spouses and the Ramoses on 5 August
1978 at the Office of the Registry of deeds of Makati, Metro Manila, to consummate the transaction
but due to the failure of respondent Asuncion Santos-de Vera and the Ramoses to appear, no
transaction was formalized. In a second meeting scheduled on 11 August 1978 she claimed that she
was willing and ready to pay the balance of the purchase price but the transaction again did not
materialize as respondent spouses failed to pay the back taxes of subject property. Subsequently,
on 23 August 1978 petitioner allegedly gave respondent Lorenzo de Vera three (3) checks in the
total amount of P36, 170.00 for the settlement of the back taxes of the property and for the payment
of the quitclaims of the three (3) tenants of subject land. The amount was purportedly considered
part of purchase price and respondent Lorenzo de Vera signed the receipts therefor.

Petitioner alleged that on 5 September 1978 she was surprised to learn from the agent of
respondent spouses that the property was the subject of a negotiation for the sale to respondent
Sunvar Realty Development Corporation (SUNVAR) represented by respondent Tomas Cuenca, Jr.
On 15 September 1978 petitioner discovered that although respondent spouses purchased the
property from the Ramoses on 20 March 1970 it was only on 15 September 1978 that TCT No. S-
72946 covering the property was issued to respondent spouses. As a consequence, she file on the
same day an affidavit of Adverse Claim with the Office of the Registry of Deeds of Makati, Metro,
which was annotated on TCT No. S-72946. She also claimed that on the same day she informed
respondent Cuenca of her "contract" to purchase the property.

The Deed of Sale between respondent spouses and respondent SUNVAR was executed on 15
September 1978 and TCT N0. S-72377 was issued in favor of the latter on 26 September 1978 with
the adverse Claim of petitioner annotated thereon. Petitioner claimed that when respondent spouses
sold the property in dispute to SUNVAR, her valid and legal right to purchase it was ignored if not
violated. Moreover, she maintained that SUNVAR was in bad faith, as it knew of her "contract" to
purchase the subject property fro respondent spouse.

Finally, for the alleged unlawful and unjust acts of respondent spouses, which caused her damage,
prejudice and injury, petitioner claimed that the Deed of Sale, should be annuled and TCT No. S-
72377 in the name of respondent SUNVAR canceled and TCT No. S-72946 restored. She also
insisted that a Deed of Sale between her an respondent spouses be now executed upon her
payment of the balance of the purchase price agreed upon, plus damages and attorney’s fees.

In their Answer4 respondent spouses maintained that petitioner had no sufficient cause of action
against them; that she was not the real party in interest; that the option to buy the property had long
expired; that there was no perfected contract to sell between them; and, that petitioner had no legal
capacity to sue. Additionally, respondent spouses claimed actual, moral and exemplary damages,
and attorney’s fees against petitioner.

On the other hand, respondents SUNVAR and Cuenca, in their Answer5 alleged that petitioner was
not the proper party in interest and/or had no cause of action against them. But, even assuming that
petitioner was the proper party in interest, they claimed that she could only be entitled to the return of
any amount received by respondent spouses. In the alternative, they argued that petitioner had lost
her option to buy the property for failure to comply with the terms and conditions of the agreement as
embodied in the receipt issued therefor. Moreover, they contended that at the time of the execution
of the Deed of Sale and the payment of consideration to respondent spouses, they "did not know nor
was informed" of petitioner’s interest or claim over the subject property. They claimed furthermore
that it was only after the signing of the Deed of Sale and the payment of the corresponding amounts
to respondent spouses that they came to know of the claim of petitioner as it was only then that they
were furnished copy to the title to the properly where the Adverse Claim of petitioner was annotated.
Consequently, they also instituted a Cross-Claim against respondent spouses for bad faith in
encouraging the negotiations between them without telling them of the claim of petitioner. The same
respondents maintained that had they known of the claim of petitioner, they would not have initiated
negotiations with respondent spouses for the purchase of the property. Thus, they prayed for
reimbursement of all amounts and monies received from them by respondent spouses, attorney’s
fees and expenses for litigation in the event that the trial court should annul the Deed of Sale and
deprive them of their ownership and possessio of the subject land.

In their Answer to the Cross-Claim6 of respondents SUNVAR and Cuenca, respondent spouses
insisted that they negotiated with the former only after expiration of the option period given to
petitioner and her failure with her commitments thereunder. Respondent spouses contended that
they acted legally and validly, in all honesty and good faith. According to them, respondent SUNVAR
made a verification of the title with the office of the register of Deeds of Metro Manila District IV
before the execution of the Deed of Absolute Sale. Also, they claimed that the Cross-Claim was
written executed by respondent SUNVAR in their favor. Thus, respondent spouses prayed for actual
damages for the unjustified filling of the Cross-Claim, moral damages for the mental anguish and
similar injuries they suffered by reason thereof, exemplary damages "to prevent others from
emulation the bad example" of respondents SUNVAR and Cuenca, plus attorney’s fees.

After a protracted trial and reconstitution of the court records due to the fire that razed the Pasay City
Hall on 18 January 1992, the Regional Trial Court rendered its 30 June 1993 Decision7 in favor of
petitioner. It ordered (a) the annulment and rescission of the Deed of Absolute Sale executed on 15
September 1978 by respondent spouses in favor of respondent SUNVAR; (b) the cancellation and
revocation of TCT No. S-75377 of the Registry of Deeds, Makati, Metro Manila, issued in the name
of respondent Sunvar Realty Development Corporation, and the restoration or reinstatement of TCT
No. S-72946 of the same Registry issued in the name of respondent spouses; (c) respondent
spouses to execute a deed of sale conveying ownership of the property covered by TCT No. S-
72946 in favor of petitioner upon her payment of the balance of the purchase price agreed upon;
and, (d) respondent spouses to pay petitioner P50,000.00 as and for attorney’s fees, and to pay the
costs.

On appeal, the Court of Appeals completely reversed the decision of the trial court. It ordered (a) the
Register of Deeds of Makati City to lift the Adverse Claim and such other encumbrances petitioner
might have filed or caused to be annotated on TCT No. S-75377; and, (b) petitioner to pay (1)
respondent SUNVAR P50,000.00 as nominal damages, P30,000.00 as exemplary damages and
P20,000 as attorney’s fees; (2) respondent spouses, P15,000.00 as nominal damages, P10,000.00
as exemplary damages and P10,000.00 as attorney’s fees; and, (3) the costs.

Petitioner timely filed a Motion for Reconsideration which was denied by the Court of Appeals on 19
October 1998. Hence, this petition.

At issue for resolution by the Court is the nature of the contract entered into between petitioner
Lourdes Ong Limson on one hand, and respondent spouses Lorenzo de Vera and Asuncion Santos-
de Vera on the other.

The main argument of petitioner is that there was a perfected contract to sell between her and
respondent spouses. On the other hand, respondent spouses and respondents SUNVAR and
Cuenca argue that what was perfected between petitioner and respondent spouses was a mere
option.

A scrutiny of the facts as well as the evidence of the parties overwhelmingly leads to the conclusion
that the agreement between the parties was a contract of option and not a contract to sell.

An option, as used in the law of sales, is a continuing offer or contract by which the owner sitpulates
with another that the latter shall have the right to buy the property at a fixed price within a time
certain, or under, or in compliance with, certain terms and conditions, or which gives to the owner of
the property the right to sell or demand a sale. It is also sometimes called an "unaccepted offer." An
option is not itself a purchase, but merely secures the privilege to buy.8 It is not a sale of property but
a sale of right to purchase.9 It is simply a contract by which the owner of property agrees with
another person that he shall have the right to buy his property at a fixed price within a certain time.
He does not sell his land; he does not then agree to sell it; but he does not sell something, i.e., the
right or privilege to buy at the election or option of the other party.10 Its distinguishing characteristic is
that it imposes no binding obligation on the person holding the option, aside from the consideration
for the offer. Until acceptance, it is not, properly speaking, a contract, and does not vest, transfer, or
agree to transfer, any title to, or any interest or right in the subject matter, but is merely a contract by
which the owner of the property gives the optionee the right or privilege of accepting the offer and
buying the property on certain terms.11

On the other hand, a contract, like a contract to sell, involves the meeting of minds between two
persons whereby one binds himself, with respect to the other, to give something or to render some
service.12 Contracts, in general, are perfected by mere consent,13 which is manifested by the meeting
of the offer and the acceptance upon the thing and the cause which are to constitute the contract.
The offer must be certain and the acceptance absolute.14

The Receipt15 that contains the contract between petitioner and respondent spouses provides –
 Received from Lourdes Limson the sum of Twenty Thousand Peso (P20,000.00) under
Check No. 22391 dated July 31, 1978 as earnest money with option to purchase a parcel of
land owned by Lorenzo de Vera located at Barrio San Dionisio, Municipality of Parañaque,
Province of Rizal with an area of forty eight thousand two hundred sixty square meters more
or less at the price of Thirty Four Pesos (34.00)16 cash subject to the condition and stipulation
that have been agreed upon by the buyer and me which will form part of the receipt. Should
the transaction of the property not materialize not on the fault of the buyer, I obligate myself to
return the full amount of P20,000.00 earnest money with option to buy or forfeit on the fault of
the buyer. I guarantee to notify the buyer Lourdes Limson or her representative and get her
conformity should I sell or encumber this property to a third person. This option to buy is good
within ten (10) days until the absolute deed of sale is finally signed by the parties or the failure
of the buyer to comply with the terms of the option to buy as herein attached.

In the interpretation of contracts, the ascertainment of the intention of the contracting parties is to be
discharged by looking to the words they used to project that intention in their contracts, all the words
standing alone.17 The aboveReceipt readily shows that respondent spouses and petitioner only
entered into a contract of option; a contract by which respondent spouses agreed with petitioner that
the latter shall have the right to buy the former's property at a fixed price of P34.00 per square meter
within ten (10) days from 31 July 1978. Respondent spouses did not sell their property; they did not
also agree to sell it; but they sold something, i.e., the privilege to buy at the election or option of
petitioner. The agreement imposed no binding obligation on petitioner, aside from the consideration
for the offer.

The consideration of P20,000.00 paid by petitioner to respondent spouses was referred to as

"earnest money." However, a careful examination of the words used indicated that the money is not
earnest money but option money."Earnest money" and "option money" are not the same but
distinguished thus; (a) earnest money is part of the purchase price, while option money is the money
given as a distinct consideration for an option contract; (b) earnest money given only where there is
already a sale, while option money applies to a sale not yet perfected; and, (c) when earnest money
is given, the buyer is bound to pay the balance, while when the would-be buyer gives option money,
he is not required to buy,18 but may even forfeit it depending on the terms of the option.

There is nothing in the Receipt which indicates that the P20,000.00 was part of the purchase price.
Moreover, it was not shown that there was a perfected sale between the parties where earnest
money was given. Finally, when petitioner gave the "earnest money" the Receipt did not reveal that
she was bound to pay the balance of the purchase price. In fact, she could even forfeit the money
given if the terms of the option were not met. Thus, the P20,000.00 could only be money given as
consideration for the option contract. That the contract between the parties is one of option is
buttressed by the provision therein that should the transaction of the provision therein that should the
transaction of the property not materialize without fault of petitioner as buyer, respondent Lorenzo de
Vera obligates himself to return the full amount of P20,000.00 "earnest money" with option to buy or
forfeit the same on the fault of petitioner. It is further bolstered by the provision therein that
guarantees petitioner that she or her representative would be notified in case the subject property
was sold or encumbered to a third person. Finally, the Receipt provided for a period within which the
option to buy was to be exercised, i.e., "within ten (10) days" from 31 July 1978.

Doubtless, the agreement between respondent spouses and petitioner was an "option contract" or
what is sometimes called an "unaccepted offer." During the option period the agreement was not
converted into a bilateral promise to sell and to buy where both respondent spouses and petitioner
were then reciprocally bound to comply with their respective undertakings as petitioner did not timely,
affirmatively and clearly accept the offer of respondent spouses.
The rule is that except where a formal acceptance is not required, although the acceptance must be
affirmatively and clearly made and evidenced by some acts or conduct communicated to the offeror,
it may be made either in a formal or an informal manner, and may be shown by acts, conduct or
words by the accepting party that clearly manifest a present intention or determination to accept the
offer to buy the property of respondent spouses within the 10-day option period. The only occasion
within the option period when petitioner could have demonstrated her acceptance was on 5 August
1978 when, according to her, she agreed to meet respondent spouses and the Ramoses at the
Office of the Registrar of Deeds of Makati. Petitioner’s agreement to meet with respondent spouses
presupposes an invitation from the latter, which only emphasizes their persistence in offering the
property to the former. But whether that showed acceptance by petitioner of the offer is hazy and
dubious.

On or before 10 August 1978, the last day of the option period, no affirmative or clear manifestation
was made by petitioner to accept the offer. Certainly, there was no concurrence of private
respondent spouses’ offer and petitioner’s acceptance thereof within the option period.
Consequently, there was no perfected contract to sell between the parties.

On 11 August 1978 the option period expired and the exclusive right of petitioner to buy the property
of respondent spouses ceased. The subsequent meetings and negotiations, specifically on 11 and
23 August 1978, between the parties only showed the desire of respondent spouses to sell their
property to petitioner. Also, on 14 September 1978 when respondent spouses sent a telegram to
petitioner demanding full payment of the purchase price on even date simply demonstrated an
inclination to give her preference to buy subject property. Collectively, these instances did not
indicate that petitioner still had the exclusive right to purchase subject property. Verily, the
commencement of negotiations between respondent spouses and respondent SUNVAR clearly
manifested that their offer to sell subject property to petitioner was no longer exclusive to her.

We cannot subscribe to the argument of petitioner that respondent spouses extended the option
period when they extended the authority of their until 31 August 1978. The extension of the contract
of agency could not operate to extend the option period between the parties in the instant case. The
extension must not be implied but categorical and must show the clear intention of the
parties.1âwphi1.nêt

As to whether respondent spouses were at fault for the non-consummation of their contract with
petitioner, we agree with the appellate court that they were not to be blammed. First, within the
option period, or on 4 August 1978, it was respondent spouses and not petitioner who initiated the
meeting at the Office of The Register of Deeds of Makati. Second, that the Ramoses filed to appear
on 4 August 1978 was beyond the control of respondent spouses.Third, the succeeding meetings
that transpired to consummate the contract were all beyond the option period and, as declared by
the Court of Appeals, the question of who was at fault was already immaterial. Fourth, even
assuming that the meetings were within the option period, the presence of petitioner was not enough
as she was not even prepared to pay the purchase price in cash as agreed upon. Finally, even
without the presence of the Ramoses, petitioner could have easily made the necessary payment in
cash as the price of the property was already set at P34.00 per square meter and payment of the
mortgage could every well be left to respondent spouses.

Petitioner further claims that when respondent spouses sent her a telegram demanding full payment
of the purchase price on 14 September 1978 it was an acknowledgment of their contract to sell, thus
denying them the right to claim otherwise.

We do not agree. As explained above, there was no contract to sell between petitioner and
respondent spouses to speak of. Verily, the telegram could not operate to estop them from claiming
that there was such contract between them and petitioner. Neither could it mean that respondent
spouses extended the option period. The telegram only showed that respondent spouses were
willing to give petitioner a chance to buy subject property even if it no longer exclusive.

The option period having expired and acceptance was not effectively made by petitioner, the
purchase of subject property by respondent SUNVAR was perfectly valid and entered into in good
faith. Petitioner claims that in August 1978 Hermigildo Sanchez, the son of respondent spouses’
agent, Marcosa Snachez, informed Marixi Prieto, a member of the Board of Directors of respondent
SUNVAR, that the property was already sold to petitioner. Also, petitioner maintains that on 5
September 1978 respondent Cuenca met with her and offered to buy the property from her at
P45.00 per square meter. Petitioner contends that these incidents, including the annotation of
her Adverse Claim on the title of subject property on 15 September 1978 show that respondent
SUNVAR was aware of the perfected sale between her and respondent spouses, thus making
respondent SUNVAR a buyer in bad faith.

Petitioner is not correct. The dates mentioned, at least 5 and 15 September 1978, are immaterial as
they were beyond the option period given to petitioner. On the other hand, the referral to sometime in
August 1978 in the testimony of Hermigildo Sanchez as emphasized by petitioner in her petition is
very vague. It could be within or beyond the option period. Clearly then, even assuming that the
meeting with Marixi Prieto actually transpired, it could not necessarily mean that she knew of the
agreement between petitioner and respondent spouses for the purchase of subject property as the
meeting could have occurred beyond the option period. In which case, no bad faith could be
attributed to respondent SUNVAR. If, on the other hand, the meeting was within the option period,
petitioner was remiss in her duty to prove so. Necessarily, we are left with the conclusion that
respondent SUNVAR bought subject property from respondent spouses in good faith, for value and
without knowledge of any flaw or defect in its title.

The appellate court awarded nominal and exemplary damages plus attorney’s fees to respondent
spouses and respondent SUNVAR. But nominal damages are adjudicated to vindicate or recognize
the right of the plaintiff that has been violated or invaded by the defendant.19 In the instant case, the
Court recognizes the rights of all the parties and finds no violation or invasion of the rights of
respondents by petitioner. Petitioner, in filing her complaint, only seeks relief, in good faith, for what
she believes she was entitled to and should not be awarded to respondents as they are imposed
only by way of example or correction for the public good and only in addition to the moral, temperate,
liquidated or compensatory damages.20 No such kinds of damages were awarded by the Court of
Appeals, only nominal, which was not justified in this case. Finally, attorney’s fees could not also be
recovered as the Court does not deem it just and equitable under the circumtances.

WHEREFORE, the petition is DENIED. The decision of the Court of Appeals ordering the Register of
Deeds of Makati City to lift the adverse claim and such other encumbrances petitioners Lourdes Ong
Limson may have filed or caused to be annotated on TCT No. S-75377 is AFFIRMED, with
the MODIFICATION that the award of nominal and exemplary damages as well as attorney’s fees
is DELETED.

SO ORDERED.
G.R. No. 134971 March 25, 2004

HERMINIO TAYAG, petitioner,

vs.
AMANCIA LACSON, ROSENDO LACSON, ANTONIO LACSON, JUAN LACSON,
TEODISIA LACSON-ESPINOSA and THE COURT OF APPEALS, respondents.

DECISION

CALLEJO, SR., J.:

Before us is a petition for review on certiorari of the Decision1 and the Resolution2 of
respondent Court of Appeals in CA-G.R. SP No. 44883.

The Case for the Petitioner

Respondents Angelica Tiotuyco Vda. de Lacson,3 and her children Amancia, Antonio,
Juan, and Teodosia, all surnamed Lacson, were the registered owners of three parcels of
land located in Mabalacat, Pampanga, covered by Transfer Certificates of Title (TCT) Nos.
35922-R, 35923-R, and 35925-R, registered in the Register of Deeds of San Fernando,
Pampanga. The properties, which were tenanted agricultural lands,4 were administered by
Renato Espinosa for the owner.

On March 17, 1996, a group of original farmers/tillers, namely, Julio Tiamson, Renato
Gozun, Rosita Hernandez, Bienvenido Tongol, Alfonso Flores, Norma Quiambao, Rosita
Tolentino, Jose Sosa, Francisco Tolentino, Sr., Emiliano Laxamana, Ruben Torres, Meliton
Allanigue, Dominga Laxamana, Felicencia de Leon, Emiliano Ramos, and another group,
namely, Felino G. Tolentino, Rica Gozun, Perla Gozun, Benigno Tolentino, Rodolfo
Quiambao, Roman Laxamana, Eddie San Luis, Ricardo Hernandez, Nicenciana Miranda,
Jose Gozun, Alfredo Sosa, Jose Tiamson, Augusto Tolentino, Sixto Hernandez, Alex
Quiambao, Isidro Tolentino, Ceferino de Leon, Alberto Hernandez, Orlando Flores, and
Aurelio Flores,5 individually executed in favor of the petitioner separate Deeds of
Assignment6 in which the assignees assigned to the petitioner their respective rights as
tenants/tillers of the landholdings possessed and tilled by them for and in consideration of
P50.00 per square meter. The said amount was made payable "when the legal
impediments to the sale of the property to the petitioner no longer existed." The petitioner
was also granted the exclusive right to buy the property if and when the respondents, with
the concurrence of the defendants-tenants, agreed to sell the property. In the interim, the
petitioner gave varied sums of money to the tenants as partial payments, and the latter
issued receipts for the said amounts.

On July 24, 1996, the petitioner called a meeting of the defendants-tenants to work out the
implementation of the terms of their separate agreements.7 However, on August 8, 1996,
the defendants-tenants, through Joven Mariano, wrote the petitioner stating that they were
not attending the meeting and instead gave notice of their collective decision to sell all their
rights and interests, as tenants/lessees, over the landholding to the
respondents.8 Explaining their reasons for their collective decision, they wrote as follows:

Kami ay nagtiwala sa inyo, naging tapat at nanindigan sa lahat ng ating napagkasunduan,

hindi tumanggap ng ibang buyer o ahente, pero sinira ninyo ang aming pagtitiwala sa
pamamagitan ng demanda ninyo at pagbibigay ng problema sa amin na hindi naman
nagbenta ng lupa.

Kaya kami ay nagpulong at nagpasya na ibenta na lang ang aming karapatan o ang aming
lupang sinasaka sa landowner o sa mga pamilyang Lacson, dahil ayaw naming magkaroon
ng problema.

Kaya kung ang sasabihin ninyong ito’y katangahan, lalo sigurong magiging katangahan
kung ibebenta pa namin sa inyo ang aming lupang sinasaka, kaya pasensya na lang Mister
Tayag. Dahil sinira ninyo ang aming pagtitiwala at katapatan.9

On August 19, 1996, the petitioner filed a complaint with the Regional Trial Court of San
Fernando, Pampanga, Branch 44, against the defendants-tenants, as well as the
respondents, for the court to fix a period within which to pay the agreed purchase price of
P50.00 per square meter to the defendants, as provided for in the Deeds of Assignment.
The petitioner also prayed for a writ of preliminary injunction against the defendants and
the respondents therein.10 The case was docketed as Civil Case No. 10910.

In his complaint, the petitioner alleged, inter alia, the following:

4. That defendants Julio Tiamson, Renato Gozun, Rosita Hernandez, Bienvenido

Tongol, Alfonso Flores, Norma Quiambao, Rosita Tolentino, Jose Sosa, Francisco
Tolentino, Sr., Emiliano Laxamana, Ruben Torres, Meliton Allanigue, Dominga
Laxamana, Felicencia de Leon, Emiliano Ramos are original farmers or direct tillers
of landholdings over parcels of lands covered by Transfer Certificate of Title Nos.
35922-R, 35923-R and 35925-R which are registered in the names of defendants
LACSONS; while defendants Felino G. Tolentino, Rica Gozun, Perla Gozun,
Benigno Tolentino, Rodolfo Quiambao, Roman Laxamana, Eddie San Luis, Alfredo
Gozun, Jose Tiamson, Augusto Tolentino, Sixto Hernandez, Alex Quiambao, Isidro
Tolentino, Ceferino de Leon, Alberto Hernandez, and Aurelio Flores are sub-tenants
over the same parcel of land.

5. That on March 17, 1996 the defendants TIAMSON, et al., entered into Deeds
of Assignment with the plaintiff by which the defendants assigned all their rights
and interests on their landholdings to the plaintiff and that on the same date
(March 17, 1996), the defendants received from the plaintiff partial payments in
the amounts corresponding to their names. Subsequent payments were also
received:

1st 2nd CHECK

TOTAL
PAYMENT PAYMENT NO.
P
1.Julio Tiamson - - - - - - P 20,000 P 10,621.54 231281
30,621.54
2. Renato Gozun - - - - - - P 10,000 96,000 106,000.00
[son of Felix Gozun
(deceased)]
3. Rosita Hernandez - - - P
P 5,000 14,374.24 231274
- 19,374.24
4. Bienvenido Tongol - - P 10,000 14,465.90 231285 24,465.90
-
[Son of Abundio Tongol
(deceased)]
5. Alfonso Flores - - - - - - P 30,000 26,648.40 231271 56,648.40
6. Norma Quiambao - - -
P 10,000 41,501.10 231279 51,501.10
-
7. Rosita Tolentino - - - -
P 10,000 22,126.08 231284 32,126.08
-
8. Jose Sosa - - - - - - - -
P 10,000 14,861.31 231291 24,861.31
-
9. Francisco Tolentino,
P 10,000 24,237.62 231283 34,237.62
Sr.
10. Emiliano Laxamana -
P 10,000 ------ ------ ------
-
11. Ruben Torres - - - - -
- P
P 10,000 P 33,587.31 ------
[Son of Mariano Torres 43,587.31
(deceased)]
P
12. Meliton Allanigue P 10,000 12,944.77 231269
22,944.77
13. Dominga Laxamana P 5,000 22,269.02 231275 27,269.02
14. Felicencia de Leon 10,000 ------ ------ ------
15. Emiliano Ramos 5,000 18,869.60 231280 23,869.60
16. Felino G. Tolentino 10,000 ------ ------ ------
17. Rica Gozun 5,000 ------ ------ ------
18. Perla Gozun 10,000 ------ ------ ------
19. Benigno Tolentino 10,000 ------ ------ ------
20. Rodolfo Quiambao 10,000 ------ ------ ------
21. Roman Laxamana 10,000 ------ ------ ------
22. Eddie San Luis 10,000 ------ ------ ------
23. Ricardo Hernandez 10,000 ------ ------ ------
24. Nicenciana Miranda 10,000 ------ ------ ------
25. Jose Gozun 10,000 ------ ------ ------
26. Alfredo Sosa 5,000 ------ ------ ------
27. Jose Tiamson 10,000 ------ ------ ------
28. Augusto Tolentino 5,000 ------ ------ ------
29. Sixto Hernandez 10,000 ------ ------ ------
30. Alex Quiambao 10,000 ------ ------ ------
31. Isidro Tolentino 10,000 ------ ------ ------
32. Ceferino de Leon ------ 11,378.70 231270 ------
33. Alberto Hernandez 10,000 ------ ------ ------
34. Orlando Florez 10,000 ------ ------ ------
35. Aurelio Flores 10,000 ------ ------ ------

6. That on July 24, 1996, the plaintiff wrote the defendants TIAMSON, et al., inviting
them for a meeting regarding the negotiations/implementations of the terms of their
Deeds of Assignment;

7. That on August 8, 1996, the defendants TIAMSON, et al., through Joven Mariano,
replied that they are no longer willing to pursue with the negotiations, and instead
they gave notice to the plaintiff that they will sell all their rights and interests to the
registered owners (defendants LACSONS).

A copy of the letter is hereto attached as Annex "A" etc.;

8. That the defendants TIAMSON, et. al., have no right to deal with the defendants
LACSON or with any third persons while their contracts with the plaintiff are
subsisting; defendants LACSONS are inducing or have induced the defendants
TIAMSON, et. al., to violate their contracts with the plaintiff;

9. That by reason of the malicious acts of all the defendants, plaintiff suffered moral
damages in the forms of mental anguish, mental torture and serious anxiety which in
the sum of P500,000.00 for which defendants should be held liable jointly and
severally.11

In support of his plea for injunctive relief, the petitioner, as plaintiff, also alleged the
following in his complaint:

11. That to maintain the status quo, the defendants TIAMSON, et al., should be
restrained from rescinding their contracts with the plaintiff, and the defendants
LACSONS should also be restrained from accepting any offer of sale or alienation
with the defendants TIAMSON, et al., in whatever form, the latter’s rights and
interests in the properties mentioned in paragraph 4 hereof; further, the LACSONS
should be restrained from encumbering/alienating the subject properties covered by
TCT No. 35922-R, 35923-R and TCT No. 35925-R, Registry of Deeds of San
Fernando, Pampanga;

12. That the defendants TIAMSON, et al., threaten to rescind their contracts with the
plaintiff and are also bent on selling/alienating their rights and interests over the
subject properties to their co-defendants (LACSONS) or any other persons to the
damage and prejudice of the plaintiff who already invested much money, efforts and
time in the said transactions;
 13. That the plaintiff is entitled to the reliefs being demanded in the complaint;

14. That to prevent irreparable damages and prejudice to the plaintiff, as the latter
has no speedy and adequate remedy under the ordinary course of law, it is essential
that a Writ of Preliminary Injunction be issued enjoining and restraining the
defendants TIAMSON, et al., from rescinding their contracts with the plaintiff and
from selling/alienating their properties to the LACSONS or other persons;

15. That the plaintiff is willing and able to put up a reasonable bond to answer for the
damages which the defendants would suffer should the injunction prayed for and
granted be found without basis.12

The petitioner prayed, that after the proceedings, judgment be rendered as follows:

1. Pending the hearing, a Writ of Preliminary Injunction be issued prohibiting,

enjoining and restraining defendants Julio Tiamson, Renato Gozun, Rosita
Hernandez, Bienvenido Tongol, Alfonso Flores, Norma Quiambao, Rosita Tolentino,
Jose Sosa, Francisco Tolentino Sr., Emiliano Laxamana, Ruben Torres, Meliton
Allanigue, Dominga Laxamana, Felicencia de Leon, Emiliano Ramos, Felino G.
Tolentino, Rica Gozun, Perla Gozun, Benigno Tolentino, Rodolfo Quiambao, Roman
Laxamana, Eddie San Luis, Ricardo Hernandez, Nicenciana Miranda, Jose Gozun,
Alfredo Sosa, Jose Tiamson, Augusto Tolentino, Ceferino de Leon, Alberto
Hernandez, Orlando Flores, and Aurelio Flores from rescinding their contracts with
the plaintiff and from alienating their rights and interest over the aforementioned
properties in favor of defendants LACSONS or any other third persons; and
prohibiting the defendants LACSONS from encumbering/alienating TCT Nos.
35922-R, 35923-R and 35925-R of the Registry of Deeds of San Fernando,
Pampanga.

2. And pending the hearing of the Prayer for a Writ of Preliminary Injunction, it is
prayed that a restraining order be issued restraining the aforementioned defendants
(TIAMSON, et al.) from rescinding their contracts with the plaintiff and from
alienating the subject properties to the defendants LACSONS or any third persons;
further, restraining and enjoining the defendants LACSONS from
encumbering/selling the properties covered by TCT Nos. 35922-R, 35923-R, and
35925-R of the Registry of Deeds of San Fernando, Pampanga.

3. Fixing the period within which plaintiff shall pay the balance of the purchase price
to the defendants TIAMSON, et al., after the lapse of legal impediment, if any.

4. Making the Writ of Preliminary Injunction permanent;

5. Ordering the defendants to pay the plaintiff the sum of P500,000.00 as moral
damages;

6. Ordering the defendants to pay the plaintiff attorney’s fees in the sum of
P100,000.00 plus litigation expenses of P50,000.00;

Plaintiff prays for such other relief as may be just and equitable under the premises.13
In their answer to the complaint, the respondents as defendants asserted that (a) the
defendant Angelica Vda. de Lacson had died on April 24, 1993; (b) twelve of the
defendants were tenants/lessees of respondents, but the tenancy status of the rest of the
defendants was uncertain; (c) they never induced the defendants Tiamson to violate their
contracts with the petitioner; and, (d) being merely tenants-tillers, the defendants-tenants
had no right to enter into any transactions involving their properties without their knowledge
and consent. They also averred that the transfers or assignments of leasehold rights made
by the defendants-tenants to the petitioner is contrary to Presidential Decree (P.D.) No. 27
and Republic Act No. 6657, the Comprehensive Agrarian Reform Program (CARP).14 The
respondents interposed counterclaims for damages against the petitioner as plaintiff.

The defendants-tenants Tiamson, et al., alleged in their answer with counterclaim for
damages, that the money each of them received from the petitioner were in the form of
loans, and that they were deceived into signing the deeds of assignment:

a) That all the foregoing allegations in the Answer are hereby repleaded and
incorporated in so far as they are material and relevant herein;

b) That the defendants Tiamson, et al., in so far as the Deeds of Assignment are
concern[ed] never knew that what they did sign is a Deed of Assignment. What they
knew was that they were made to sign a document that will serve as a receipt for the
loan granted [to] them by the plaintiff;

c) That the Deeds of Assignment were signed through the employment of fraud,
deceit and false pretenses of plaintiff and made the defendants believe that what
they sign[ed] was a mere receipt for amounts received by way of loans;

d) That the documents signed in blank were filled up and completed after the
defendants Tiamson, et al., signed the documents and their completion and
accomplishment was done in the absence of said defendants and, worst of all,
defendants were not provided a copy thereof;

e) That as completed, the Deeds of Assignment reflected that the defendants

Tiamson, et al., did assign all their rights and interests in the properties or
landholdings they were tilling in favor of the plaintiff. That if this is so, assuming
arguendo that the documents were voluntarily executed, the defendants Tiamson, et
al., do not have any right to transfer their interest in the landholdings they are tilling
as they have no right whatsoever in the landholdings, the landholdings belong to
their co-defendants, Lacson, et al., and therefore, the contract is null and void;

f) That while it is admitted that the defendants Tiamson, et al., received sums of
money from plaintiffs, the same were received as approved loans granted by plaintiff
to the defendants Tiamson, et al., and not as part consideration of the alleged
Deeds of Assignment; and by way of:…15

At the hearing of the petitioner’s plea for a writ of preliminary injunction, the respondents’
counsel failed to appear. In support of his plea for a writ of preliminary injunction, the
petitioner adduced in evidence the Deeds of Assignment,16 the receipts17 issued by the
defendants-tenants for the amounts they received from him; and the letter18 the petitioner
received from the defendants-tenants. The petitioner then rested his case.

The respondents, thereafter, filed a Comment/Motion to dismiss/deny the petitioner’s plea

for injunctive relief on the following grounds: (a) the Deeds of Assignment executed by the
defendants-tenants were contrary to public policy and P.D. No. 27 and Rep. Act No. 6657;
(b) the petitioner failed to prove that the respondents induced the defendants-tenants to
renege on their obligations under the "Deeds of Assignment;" (c) not being privy to the said
deeds, the respondents are not bound by the said deeds; and, (d) the respondents had the
absolute right to sell and dispose of their property and to encumber the same and cannot
be enjoined from doing so by the trial court.

The petitioner opposed the motion, contending that it was premature for the trial court to
resolve his plea for injunctive relief, before the respondents and the defendants-tenants
adduced evidence in opposition thereto, to afford the petitioner a chance to adduce rebuttal
evidence and prove his entitlement to a writ of preliminary injunction. The respondents
replied that it was the burden of the petitioner to establish the requisites of a writ of
preliminary injunction without any evidence on their part, and that they were not bound to
adduce any evidence in opposition to the petitioner’s plea for a writ of preliminary
injunction.

On February 13, 1997, the court issued an Order19 denying the motion of the respondents
for being premature. It directed the hearing to proceed for the respondents to adduce their
evidence. The court ruled that the petitioner, on the basis of the material allegations of the
complaint, was entitled to injunctive relief. It also held that before the court could resolve
the petitioner’s plea for injunctive relief, there was need for a hearing to enable the
respondents and the defendants-tenants to adduce evidence to controvert that of the
petitioner. The respondents filed a motion for reconsideration, which the court denied in its
Order dated April 16, 1997. The trial court ruled that on the face of the averments of the
complaint, the pleadings of the parties and the evidence adduced by the petitioner, the
latter was entitled to injunctive relief unless the respondents and the defendants-tenants
adduced controverting evidence.

The respondents, the petitioners therein, filed a petition for certiorari in the Court of
Appeals for the nullification of the February 13, 1997 and April 16, 1997 Orders of the trial
court. The case was docketed as CA-G.R. SP No. 44883. The petitioners therein prayed in
their petition that:

1. An order be issued declaring the orders of respondent court dated February 13,
1997 and April 16, 1997 as null and void;

2. An order be issued directing the respondent court to issue an order denying the
application of respondent Herminio Tayag for the issuance of a Writ of Preliminary
Injunction and/or restraining order.

3. In the meantime, a Writ of Preliminary Injunction be issued against the

respondent court, prohibiting it from issuing its own writ of injunction against
Petitioners, and thereafter making said injunction to be issued by this Court
permanent.

Such other orders as may be deemed just & equitable under the premises also prayed
for.20

The respondents asserted that the Deeds of Assignment executed by the assignees in
favor of the petitioner were contrary to paragraph 13 of P.D. No. 27 and the second
paragraph of Section 70 of Rep. Act No. 6657, and, as such, could not be enforced by the
petitioner for being null and void. The respondents also claimed that the enforcement of the
deeds of assignment was subject to a supervening condition:

3. That this exclusive and absolute right given to the assignee shall be exercised only when
no legal impediments exist to the lot to effect the smooth transfer of lawful ownership of the
lot/property in the name of the ASSIGNEE.21

The respondents argued that until such condition took place, the petitioner would not
acquire any right to enforce the deeds by injunctive relief. Furthermore, the petitioner’s plea
in his complaint before the trial court, to fix a period within which to pay the balance of the
amounts due to the tenants under said deeds after the "lapse" of any legal impediment,
assumed that the deeds were valid, when, in fact and in law, they were not. According to
the respondents, they were not parties to the deeds of assignment; hence, they were not
bound by the said deeds. The issuance of a writ of preliminary injunction would restrict and
impede the exercise of their right to dispose of their property, as provided for in Article 428
of the New Civil Code. They asserted that the petitioner had no cause of action against
them and the defendants-tenants.

On April 17, 1998, the Court of Appeals rendered its decision against the petitioner,
annulling and setting aside the assailed orders of the trial court; and permanently enjoining
the said trial court from proceeding with Civil Case No. 10901. The decretal portion of the
decision reads as follows:

However, even if private respondent is denied of the injunctive relief he demands in the
lower court still he could avail of other course of action in order to protect his interest such
as the institution of a simple civil case of collection of money against TIAMSON, et al.

For all the foregoing considerations, the orders dated 13 February 1997 and 16 April 1997
are hereby NULLIFIED and ordered SET ASIDE for having been issued with grave abuse
of discretion amounting to lack or excess of jurisdiction. Accordingly, public respondent is
permanently enjoined from proceeding with the case designated as Civil Case No. 10901.22

The CA ruled that the respondents could not be enjoined from alienating or even
encumbering their property, especially so since they were not privies to the deeds of
assignment executed by the defendants-tenants. The defendants-tenants were not yet
owners of the portions of the landholdings respectively tilled by them; as such, they had
nothing to assign to the petitioner. Finally, the CA ruled that the deeds of assignment
executed by the defendants-tenants were contrary to P.D. No. 27 and Rep. Act No. 6657.

On August 4, 1998, the CA issued a Resolution denying the petitioner’s motion for
reconsideration.23

Hence, the petitioner filed his petition for review on certiorari before this Court, contending
as follows:
 I

A MERE ALLEGATION IN THE ANSWER OF THE TENANTS COULD NOT BE USED AS

EVIDENCE OR BASIS FOR ANY CONCLUSION, AS THIS ALLEGATION, IS STILL THE
SUBJECT OF TRIAL IN THE LOWER COURT (RTC).24

II

THE COURT OF APPEALS CANNOT ENJOIN THE HEARING OF A PETITION FOR

PRELIMINARY INJUNCTION AT A TIME WHEN THE LOWER COURT (RTC) IS STILL
RECEIVING EVIDENCE PRECISELY TO DETERMINE WHETHER OR NOT THE WRIT
OF PRELIMINARY INJUNCTION BEING PRAYED FOR BY TAYAG SHOULD BE
GRANTED OR NOT.25

III

THE COURT OF APPEALS CANNOT USE "FACTS" NOT IN EVIDENCE, TO SUPPORT

ITS CONCLUSION THAT THE TENANTS ARE NOT YET "AWARDEES OF THE LAND
REFORM.26

IV

THE COURT OF APPEALS CANNOT CAUSE THE PERMANENT STOPPAGE OF THE

ENTIRE PROCEEDINGS BELOW INCLUDING THE TRIAL ON THE MERITS OF THE
CASE CONSIDERING THAT THE ISSUE INVOLVED ONLY THE PROPRIETY OF
MAINTAINING THE STATUS QUO.27

THE COURT OF APPEALS CANNOT INCLUDE IN ITS DECISION THE CASE OF THE
OTHER 35 TENANTS WHO DO NOT QUESTION THE JURISDICTION OF THE LOWER
COURT (RTC) OVER THE CASE AND WHO ARE IN FACT STILL PRESENTING THEIR
EVIDENCE TO OPPOSE THE INJUNCTION PRAYED FOR, AND TO PROVE AT THE
SAME TIME THE COUNTER-CLAIMS THEY FILED AGAINST THE PETITIONER.28

VI

THE LOWER COURT (RTC) HAS JURISDICTION OVER THE CASE FILED BY TAYAG
FOR "FIXING OF PERIOD" UNDER ART. 1197 OF THE NEW CIVIL CODE AND FOR
"DAMAGES" AGAINST THE LACSONS UNDER ART. 1314 OF THE SAME CODE. THIS
CASE CANNOT BE SUPPRESSED OR RENDERED NUGATORY
UNCEREMONIOUSLY.29

The petitioner faults the Court of Appeals for permanently enjoining the trial court from
proceeding with Civil Case No. 10910. He opines that the same was too drastic,
tantamount to a dismissal of the case. He argues that at that stage, it was premature for
the appellate court to determine the merits of the case since no evidentiary hearing thereon
was conducted by the trial court. This, the Court of Appeals cannot do, since neither party
moved for the dismissal of Civil Case No. 10910. The petitioner points out that the Court of
Appeals, in making its findings, went beyond the issue raised by the private respondents,
namely, whether or not the trial court committed a grave abuse of discretion amounting to
excess or lack of jurisdiction when it denied the respondent’s motion for the
denial/dismissal of the petitioner’s plea for a writ of preliminary injunction. He, likewise,
points out that the appellate court erroneously presumed that the leaseholders were not
DAR awardees and that the deeds of assignment were contrary to law. He contends that
leasehold tenants are not prohibited from conveying or waiving their leasehold rights in his
favor. He insists that there is nothing illegal with his contracts with the leaseholders, since
the same shall be effected only when there are no more "legal impediments."

At bottom, the petitioner contends that, at that stage, it was premature for the appellate
court to determine the merits of his case since no evidentiary hearing on the merits of his
complaint had yet been conducted by the trial court.

The Comment/Motion of the

Respondents to Dismiss/Deny
Petitioner’s Plea for a Writ
of Preliminary Injunction
Was Not Premature.

Contrary to the ruling of the trial court, the motion of the respondents to dismiss/deny the
petitioner’s plea for a writ of preliminary injunction after the petitioner had adduced his
evidence, testimonial and documentary, and had rested his case on the incident, was
proper and timely. It bears stressing that the petitioner had the burden to prove his right to
a writ of preliminary injunction. He may rely solely on the material allegations of his
complaint or adduce evidence in support thereof. The petitioner adduced his evidence to
support his plea for a writ of preliminary injunction against the respondents and the
defendants-tenants and rested his case on the said incident. The respondents then had
three options: (a) file a motion to deny/dismiss the motion on the ground that the petitioner
failed to discharge his burden to prove the factual and legal basis for his plea for a writ of
preliminary injunction and, if the trial court denies his motion, for them to adduce evidence
in opposition to the petitioner’s plea; (b) forgo their motion and adduce testimonial and/or
documentary evidence in opposition to the petitioner’s plea for a writ of preliminary
injunction; or, (c) waive their right to adduce evidence and submit the incident for
consideration on the basis of the pleadings of the parties and the evidence of the petitioner.
The respondents opted not to adduce any evidence, and instead filed a motion to deny or
dismiss the petitioner’s plea for a writ of preliminary injunction against them, on their claim
that the petitioner failed to prove his entitlement thereto. The trial court cannot compel the
respondents to adduce evidence in opposition to the petitioner’s plea if the respondents opt
to waive their right to adduce such evidence. Thus, the trial court should have resolved the
respondents’ motion even without the latter’s opposition and the presentation of evidence
thereon.

The RTC Committed a Grave

Abuse of Discretion Amounting
to Excess or Lack of Jurisdiction
in Issuing its February 13, 1997
and April 16, 1997 Orders

In its February 13, 1997 Order, the trial court ruled that the petitioner was entitled to a writ
of preliminary injunction against the respondents on the basis of the material averments of
the complaint. In its April 16, 1997 Order, the trial court denied the respondents’ motion for
reconsideration of the previous order, on its finding that the petitioner was entitled to a writ
of preliminary injunction based on the material allegations of his complaint, the evidence on
record, the pleadings of the parties, as well as the applicable laws:

… For the record, the Court denied the LACSONS’ COMMENT/MOTION on the basis of
the facts culled from the evidence presented, the pleadings and the law applicable
unswayed by the partisan or personal interests, public opinion or fear of criticism (Canon 3,
Rule 3.02, Code of Judicial Ethics).30

Section 3, Rule 58 of the Rules of Court, as amended, enumerates the grounds for the
issuance of a writ of preliminary injunction, thus:

(a) That the applicant is entitled to the relief demanded, and the whole or part of
such relief consists in restraining the commission or continuance of the act or acts
complained of, or in requiring the performance of an act or acts, either for a limited
period or perpetually;

(b) That the commission, continuance or non-performance of the act or acts

complained of during the litigation would probably work injustice to the applicant; or

(c) That a party, court, agency or a person is doing, threatening, or is attempting to

do, or is procuring or suffering to be done, some act or acts probably in violation of
the rights of the applicant respecting the subject of the action or proceeding, and
tending to render the judgment ineffectual.

A preliminary injunction is an extraordinary event calculated to preserve or maintain the

status quo of things ante litem and is generally availed of to prevent actual or threatened
acts, until the merits of the case can be heard. Injunction is accepted as the strong arm of
equity or a transcendent remedy.31 While generally the grant of a writ of preliminary
injunction rests on the sound discretion of the trial court taking cognizance of the case,
extreme caution must be observed in the exercise of such discretion.32 Indeed, in Olalia v.
Hizon,33 we held:

It has been consistently held that there is no power the exercise of which is more delicate,
which requires greater caution, deliberation and sound discretion, or more dangerous in a
doubtful case, than the issuance of an injunction. It is the strong arm of equity that should
never be extended unless to cases of great injury, where courts of law cannot afford an
adequate or commensurate remedy in damages.

Every court should remember that an injunction is a limitation upon the freedom of action of
the defendant and should not be granted lightly or precipitately. It should be granted only
when the court is fully satisfied that the law permits it and the emergency demands it.34

The very foundation of the jurisdiction to issue writ of injunction rests in the existence of a
cause of action and in the probability of irreparable injury, inadequacy of pecuniary
compensation and the prevention of the multiplicity of suits. Where facts are not shown to
bring the case within these conditions, the relief of injunction should be refused.35

For the court to issue a writ of preliminary injunction, the petitioner was burdened to
establish the following: (1) a right in esse or a clear and unmistakable right to be protected;
(2) a violation of that right; (3) that there is an urgent and permanent act and urgent
necessity for the writ to prevent serious damage.36 Thus, in the absence of a clear legal
right, the issuance of the injunctive writ constitutes a grave abuse of discretion. Where the
complainant’s right is doubtful or disputed, injunction is not proper. Injunction is a
preservative remedy aimed at protecting substantial rights and interests. It is not designed
to protect contingent or future rights. The possibility of irreparable damage without proof of
adequate existing rights is not a ground for injunction.37

We have reviewed the pleadings of the parties and found that, as contended by the
respondents, the petitioner failed to establish the essential requisites for the issuance of a
writ of preliminary injunction. Hence, the trial court committed a grave abuse of its
discretion amounting to excess or lack of jurisdiction in denying the respondents’
comment/motion as well as their motion for reconsideration.

First. The trial court cannot enjoin the respondents, at the instance of the petitioner, from
selling, disposing of and encumbering their property. As the registered owners of the
property, the respondents have the right to enjoy and dispose of their property without any
other limitations than those established by law, in accordance with Article 428 of the Civil
Code. The right to dispose of the property is the power of the owner to sell, encumber,
transfer, and even destroy the property. Ownership also includes the right to recover the
possession of the property from any other person to whom the owner has not transmitted
such property, by the appropriate action for restitution, with the fruits, and for
indemnification for damages.38 The right of ownership of the respondents is not, of course,
absolute. It is limited by those set forth by law, such as the agrarian reform laws. Under
Article 1306 of the New Civil Code, the respondents may enter into contracts covering their
property with another under such terms and conditions as they may deem beneficial
provided they are not contrary to law, morals, good conduct, public order or public policy.

The respondents cannot be enjoined from selling or encumbering their property simply and
merely because they had executed Deeds of Assignment in favor of the petitioner, obliging
themselves to assign and transfer their rights or interests as agricultural
farmers/laborers/sub-tenants over the landholding, and granting the petitioner the exclusive
right to buy the property subject to the occurrence of certain conditions. The respondents
were not parties to the said deeds. There is no evidence that the respondents agreed,
expressly or impliedly, to the said deeds or to the terms and conditions set forth therein.
Indeed, they assailed the validity of the said deeds on their claim that the same were
contrary to the letter and spirit of P.D. No. 27 and Rep. Act No. 6657. The petitioner even
admitted when he testified that he did not know any of the respondents, and that he had
not met any of them before he filed his complaint in the RTC. He did not even know that
one of those whom he had impleaded as defendant, Angelica Vda. de Lacson, was already
dead.

Q: But you have not met any of these Lacsons?

A: Not yet, sir.

Q: Do you know that two (2) of the defendants are residents of the United States?
 A: I do not know, sir.

Q: You do not know also that Angela Tiotuvie (sic) Vda. de Lacson had already
been dead?

A: I am aware of that, sir.39

We are one with the Court of Appeals in its ruling that:

We cannot see our way clear on how or why injunction should lie against petitioners. As
owners of the lands being tilled by TIAMSON, et al., petitioners, under the law, have the
right to enjoy and dispose of the same. Thus, they have the right to possess the lands, as
well as the right to encumber or alienate them. This principle of law notwithstanding, private
respondent in the lower court sought to restrain the petitioners from encumbering and/or
alienating the properties covered by TCT No. 35922-R, 35923-R and TCT No. 35925-R of
the Registry of Deeds of San Fernando, Pampanga. This cannot be allowed to prosper
since it would constitute a limitation or restriction, not otherwise established by law on their
right of ownership, more so considering that petitioners were not even privy to the alleged
transaction between private respondent and TIAMSON, et al.40

Second. A reading the averments of the complaint will show that the petitioner clearly has
no cause of action against the respondents for the principal relief prayed for therein, for the
trial court to fix a period within which to pay to each of the defendants-tenants the balance
of the P50.00 per square meter, the consideration under the Deeds of Assignment
executed by the defendants-tenants. The respondents are not parties or privies to the
deeds of assignment. The matter of the period for the petitioner to pay the balance of the
said amount to each of the defendants-tenants is an issue between them, the parties to the
deed.

Third. On the face of the complaint, the action of the petitioner against the respondents and
the defendants-tenants has no legal basis. Under the Deeds of Assignment, the obligation
of the petitioner to pay to each of the defendants-tenants the balance of the purchase price
was conditioned on the occurrence of the following events: (a) the respondents agree to
sell their property to the petitioner; (b) the legal impediments to the sale of the landholding
to the petitioner no longer exist; and, (c) the petitioner decides to buy the property. When
he testified, the petitioner admitted that the legal impediments referred to in the deeds were
(a) the respondents’ refusal to sell their property; and, (b) the lack of approval of the
Department of Agrarian Reform:

Q : There is no specific agreement prior to the execution of those documents as

when they will pay?

A : We agreed to that, that I will pay them when there are no legal impediment, sir.

Q : Many of the documents are unlattered (sic) and you want to convey to this
Honorable Court that prior to the execution of these documents you have those
tentative agreement for instance that the amount or the cost of the price is to be paid
when there are no legal impediment, you are using the word "legal impediment," do
you know the meaning of that?
 A : When there are (sic) no more legal impediment exist, sir.

Q : Did you make how (sic) to the effect that the meaning of that phrase that you
used the unlettered defendants?

A : We have agreed to that, sir.

ATTY. OCAMPO:

May I ask, Your Honor, that the witness please answer my question not to answer in
the way he wanted it.

COURT:

Just answer the question, Mr. Tayag.

WITNESS:

Yes, Your Honor.

ATTY. OCAMPO:

Q : Did you explain to them?

A : Yes, sir.

Q : What did you tell them?

A : I explain[ed] to them, sir, that the legal impediment then especially if the Lacsons
will not agree to sell their shares to me or to us it would be hard to (sic) me to pay
them in full. And those covered by DAR. I explain[ed] to them and it was clearly
stated in the title that there is [a] prohibited period of time before you can sell the
property. I explained every detail to them.41

It is only upon the occurrence of the foregoing conditions that the petitioner would be
obliged to pay to the defendants-tenants the balance of the P50.00 per square meter under
the deeds of assignment. Thus:

2. That in case the ASSIGNOR and LANDOWNER will mutually agree to sell the
said lot to the ASSIGNEE, who is given an exclusive and absolute right to buy the
lot, the ASSIGNOR shall receive the sum of FIFTY PESOS (P50.00) per square
meter as consideration of the total area actually tilled and possessed by the
ASSIGNOR, less whatever amount received by the ASSIGNOR including
commissions, taxes and all allowable deductions relative to the sale of the subject
properties.

3. That this exclusive and absolute right given to the ASSIGNEE shall be exercised
only when no legal impediments exist to the lot to effect the smooth transfer of lawful
ownership of the lot/property in the name of the ASSIGNEE;
 4. That the ASSIGNOR will remain in peaceful possession over the said property
and shall enjoy the fruits/earnings and/or harvest of the said lot until such time that
full payment of the agreed purchase price had been made by the ASSIGNEE.42

There is no showing in the petitioner’s complaint that the respondents had agreed to sell
their property, and that the legal impediments to the agreement no longer existed. The
petitioner and the defendants-tenants had yet to submit the Deeds of Assignment to the
Department of Agrarian Reform which, in turn, had to act on and approve or disapprove the
same. In fact, as alleged by the petitioner in his complaint, he was yet to meet with the
defendants-tenants to discuss the implementation of the deeds of assignment. Unless and
until the Department of Agrarian Reform approved the said deeds, if at all, the petitioner
had no right to enforce the same in a court of law by asking the trial court to fix a period
within which to pay the balance of the purchase price and praying for injunctive relief.

We do not agree with the contention of the petitioner that the deeds of assignment
executed by the defendants-tenants are perfected option contracts.43 An option is a
contract by which the owner of the property agrees with another person that he shall have
the right to buy his property at a fixed price within a certain time. It is a condition offered or
contract by which the owner stipulates with another that the latter shall have the right to
buy the property at a fixed price within a certain time, or under, or in compliance with
certain terms and conditions, or which gives to the owner of the property the right to sell or
demand a sale. It imposes no binding obligation on the person holding the option, aside
from the consideration for the offer. Until accepted, it is not, properly speaking, treated as a
contract.44 The second party gets in praesenti, not lands, not an agreement that he shall
have the lands, but the right to call for and receive lands if he elects.45 An option contract is
a separate and distinct contract from which the parties may enter into upon the conjunction
of the option.46

In this case, the defendants-tenants-subtenants, under the deeds of assignment, granted

to the petitioner not only an option but the exclusive right to buy the landholding. But the
grantors were merely the defendants-tenants, and not the respondents, the registered
owners of the property. Not being the registered owners of the property, the defendants-
tenants could not legally grant to the petitioner the option, much less the "exclusive right" to
buy the property. As the Latin saying goes, "NEMO DAT QUOD NON HABET."

Fourth. The petitioner impleaded the respondents as parties-defendants solely on his

allegation that the latter induced or are inducing the defendants-tenants to violate the
deeds of assignment, contrary to the provisions of Article 1314 of the New Civil Code which
reads:

Art. 1314. Any third person who induces another to violate his contract shall be liable for
damages to the other contracting party.

In So Ping Bun v. Court of Appeals,47 we held that for the said law to apply, the pleader is
burdened to prove the following: (1) the existence of a valid contract; (2) knowledge by the
third person of the existence of the contract; and (3) interference by the third person in the
contractual relation without legal justification.

Where there was no malice in the interference of a contract, and the impulse behind one’s
conduct lies in a proper business interest rather than in wrongful motives, a party cannot be
a malicious interferer. Where the alleged interferer is financially interested, and such
interest motivates his conduct, it cannot be said that he is an officious or malicious
intermeddler.48

In fine, one who is not a party to a contract and who interferes thereon is not necessarily an
officious or malicious intermeddler. The only evidence adduced by the petitioner to prove
his claim is the letter from the defendants-tenants informing him that they had decided to
sell their rights and interests over the landholding to the respondents, instead of honoring
their obligation under the deeds of assignment because, according to them, the petitioner
harassed those tenants who did not want to execute deeds of assignment in his favor, and
because the said defendants-tenants did not want to have any problem with the
respondents who could cause their eviction for executing with the petitioner the deeds of
assignment as the said deeds are in violation of P.D. No. 27 and Rep. Act No. 6657.49 The
defendants-tenants did not allege therein that the respondents induced them to breach
their contracts with the petitioner. The petitioner himself admitted when he testified that his
claim that the respondents induced the defendants-assignees to violate contracts with him
was based merely on what "he heard," thus:

Q: Going to your last statement that the Lacsons induces (sic) the defendants, did
you see that the Lacsons were inducing the defendants?

A: I heard and sometime in [the] first week of August, sir, they went in the barrio
(sic). As a matter of fact, that is the reason why they sent me letter that they will sell
it to the Lacsons.

Q: Incidentally, do you knew (sic) these Lacsons individually?

A: No, sir, it was only Mr. Espinosa who I knew (sic) personally, the alleged
negotiator and has the authority to sell the property.50

Even if the respondents received an offer from the defendants-tenants to assign and
transfer their rights and interests on the landholding, the respondents cannot be enjoined
from entertaining the said offer, or even negotiating with the defendants-tenants. The
respondents could not even be expected to warn the defendants-tenants for executing the
said deeds in violation of P.D. No. 27 and Rep. Act No. 6657. Under Section 22 of the latter
law, beneficiaries under P.D. No. 27 who have culpably sold, disposed of, or abandoned
their land, are disqualified from becoming beneficiaries.

From the pleadings of the petitioner, it is quite evident that his purpose in having the
defendants-tenants execute the Deeds of Assignment in his favor was to acquire the
landholding without any tenants thereon, in the event that the respondents agreed to sell
the property to him. The petitioner knew that under Section 11 of Rep. Act No. 3844, if the
respondents agreed to sell the property, the defendants-tenants shall have preferential
right to buy the same under reasonable terms and conditions:

SECTION 11. Lessee’s Right of Pre-emption. – In case the agricultural lessor desires to
sell the landholding, the agricultural lessee shall have the preferential right to buy the same
under reasonable terms and conditions: Provided, That the entire landholding offered for
sale must be pre-empted by the Land Authority if the landowner so desires, unless the
majority of the lessees object to such acquisition: Provided, further, That where there are
two or more agricultural lessees, each shall be entitled to said preferential right only to the
extent of the area actually cultivated by him. …51

Under Section 12 of the law, if the property was sold to a third person without the
knowledge of the tenants thereon, the latter shall have the right to redeem the same at a
reasonable price and consideration. By assigning their rights and interests on the
landholding under the deeds of assignment in favor of the petitioner, the defendants-
tenants thereby waived, in favor of the petitioner, who is not a beneficiary under Section 22
of Rep. Act No. 6657, their rights of preemption or redemption under Rep. Act No. 3844.
The defendants-tenants would then have to vacate the property in favor of the petitioner
upon full payment of the purchase price. Instead of acquiring ownership of the portions of
the landholding respectively tilled by them, the defendants-tenants would again become
landless for a measly sum of P50.00 per square meter. The petitioner’s scheme is
subversive, not only of public policy, but also of the letter and spirit of the agrarian laws.
That the scheme of the petitioner had yet to take effect in the future or ten years hence is
not a justification. The respondents may well argue that the agrarian laws had been
violated by the defendants-tenants and the petitioner by the mere execution of the deeds of
assignment. In fact, the petitioner has implemented the deeds by paying the defendants-
tenants amounts of money and even sought their immediate implementation by setting a
meeting with the defendants-tenants. In fine, the petitioner would not wait for ten years to
evict the defendants-tenants. For him, time is of the essence.

The Appellate Court Erred

In Permanently Enjoining
The Regional Trial Court
From Continuing with the
Proceedings in Civil Case No. 10910.

We agree with the petitioner’s contention that the appellate court erred when it permanently
enjoined the RTC from continuing with the proceedings in Civil Case No. 10910. The only
issue before the appellate court was whether or not the trial court committed a grave abuse
of discretion amounting to excess or lack of jurisdiction in denying the respondents’ motion
to deny or dismiss the petitioner’s plea for a writ of preliminary injunction. Not one of the
parties prayed to permanently enjoin the trial court from further proceeding with Civil Case
No. 10910 or to dismiss the complaint. It bears stressing that the petitioner may still amend
his complaint, and the respondents and the defendants-tenants may file motions to dismiss
the complaint. By permanently enjoining the trial court from proceeding with Civil Case No.
10910, the appellate court acted arbitrarily and effectively dismissed the complaint motu
proprio, including the counterclaims of the respondents and that of the defendants-tenants.
The defendants-tenants were even deprived of their right to prove their special and
affirmative defenses.

IN LIGHT OF ALL THE FOREGOING, the petition is PARTIALLY GRANTED. The Decision
of the Court of Appeals nullifying the February 13, 1996 and April 16, 1997 Orders of the
RTC is AFFIRMED. The writ of injunction issued by the Court of Appeals permanently
enjoining the RTC from further proceeding with Civil Case No. 10910 is hereby LIFTED
and SET ASIDE. The Regional Trial Court of Mabalacat, Pampanga, Branch 44, is
ORDERED to continue with the proceedings in Civil Case No. 10910 as provided for by the
Rules of Court, as amended.
SO ORDERED.
G.R. No. 167884 January 20, 2009

ENRICO S. EULOGIO, Petitioner,

vs.
SPOUSES CLEMENTE APELES1 and LUZ APELES, Respondents.

DECISION

CHICO-NAZARIO, J.:

Petitioner Enrico S. Eulogio (Enrico) filed this instant Petition for Review on Certiorari under Rule 45
of the Revised Rules of Court assailing the Decision2 dated 20 December 2004 of the Court of
Appeals in CA-G.R. CV No. 76933 which reversed the Decision3 dated 8 October 2002 of the
Regional Trial Court (RTC) of Quezon City, Branch 215, in Civil Case No. Q-99-36834. The RTC
directed respondents, spouses Clemente and Luz Apeles (spouses Apeles) to execute a Deed of
Sale over a piece of real property in favor of Enrico after the latter’s payment of full consideration
therefor.

The factual and procedural antecedents of the present case are as follows:

The real property in question consists of a house and lot situated at No. 87 Timog Avenue, Quezon
City (subject property). The lot has an area of 360.60 square meters, covered by Transfer Certificate
of Title No. 253990 issued by the Registry of Deeds of Quezon City in the names of the spouses
Apeles.4

In 1979, the spouses Apeles leased the subject property to Arturo Eulogio (Arturo), Enrico’s father.
Upon Arturo’s death, his son Enrico succeeded as lessor of the subject property. Enrico used the
subject property as his residence and place of business. Enrico was engaged in the business of
buying and selling imported cars.5

On 6 January 1987, the spouses Apeles and Enrico allegedly entered into a Contract of Lease6 with
Option to Purchase involving the subject property. According to the said lease contract, Luz Apeles
was authorized to enter into the same as the attorney-in-fact of her husband, Clemente, pursuant to
a Special Power of Attorney executed by the latter in favor of the former on 24 January 1979. The
contract purportedly afforded Enrico, before the expiration of the three-year lease period, the option
to purchase the subject property for a price not exceedingP1.5 Million. The pertinent provisions of
the Contract of Lease are reproduced below:

3. That this Contract shall be effective commencing from January 26, 1987 and shall remain
valid and binding for THREE (3) YEARS from the said date. The LESSOR hereby gives the
LESSEE under this Contract of Lease the right and option to buy the subject house and lot
within the said 3-year lease period.

4. That the purchase price or total consideration of the house and lot subject of this Contract
of Lease shall, should the LESSEE exercise his option to buy it on or before the expiration of
the 3-year lease period, be fixed or agreed upon by the LESSOR and the LESSEE, Provided,
that the said purchase price, as it is hereby agreed, shall not be more than ONE MILLION
FIVE HUNDRED THOUSAND PESOS (P1,500,000.00) and, provided further, that the
monthly rentals paid by the LESSEE to the LESSOR during the 3-year lease period shall form
 part of or be deducted from the purchase price or total consideration as may hereafter be
mutually fixed or agreed upon by the LESSOR and the LESSEE.

5. That if the LESSEE shall give oral or written notice to the LESSOR on or before the expiry
date of the 3-year lease period stipulated herein of his desire to exercise his option to buy or
purchase the house and lot herein leased, the LESSOR upon receipt of the purchase
price/total consideration as fixed or agreed upon less the total amount of monthly rentals paid
the LESSEE during the 3-year lease period shall execute the appropriate Deed to SELL,
TRANSFER and CONVEY the house and lot subject of this Contract in favor of the LESSEE,
his heirs, successors and assigns, together with all the fixtures and accessories therein, free
from all liens and encumbrances.

Before the expiration of the three-year lease period provided in the lease contract, Enrico exercised
his option to purchase the subject property by communicating verbally and in writing to Luz his
willingness to pay the agreed purchase price, but the spouses Apeles supposedly ignored Enrico’s
manifestation. This prompted Enrico to seek recourse from the barangay for the enforcement of his
right to purchase the subject property, but despite several notices, the spouses Apeles failed to
appear before the barangay for settlement proceedings. Hence, thebarangay issued to Enrico a
Certificate to File Action.7

In a letter dated 26 January 1997 to Enrico, the spouses Apeles demanded that he pay his rental
arrears from January 1991 to December 1996 and he vacate the subject property since it would be
needed by the spouses Apeles themselves.

Without heeding the demand of the spouses Apeles, Enrico instituted on 23 February 1999 a
Complaint for Specific Performance with Damages against the spouses Apeles before the RTC,
docketed as Civil Case No. Q-99-36834. Enrico’s cause of action is founded on paragraph 5 of the
Contract of Lease with Option to Purchase vesting him with the right to acquire ownership of the
subject property after paying the agreed amount of consideration.

Following the pre-trial conference, trial on the merits ensued before the RTC.

Enrico himself testified as the sole witness for his side. He narrated that he and Luz entered into the
Contract of Lease with Option to Purchase on 26 January 1987, with Luz signing the said Contract at
Enrico’s office in Timog Avenue, Quezon City. The Contract was notarized on the same day as
evidenced by the Certification on the Notary Public’s Report issued by the Clerk of Court of the RTC
of Manila.8

On the other hand, the spouses Apeles denied that Luz signed the Contract of Lease with Option to
Purchase, and posited that Luz’s signature thereon was a forgery. To buttress their contention, the
spouses Apeles offered as evidence Luz’s Philippine Passport which showed that on 26 January
1987, the date when Luz allegedly signed the said Contract, she was in the United States of
America. The spouses Apeles likewise presented several official documents bearing her genuine
signatures to reveal their remarkable discrepancy from the signature appearing in the disputed lease
contract. The spouses Apeles maintained that they did not intend to sell the subject property.9

After the spouses Apeles established by documentary evidence that Luz was not in the country at
the time the Contract of Lease with Option to Purchase was executed, Enrico, in rebuttal, retracted
his prior declaration that the said Contract was signed by Luz on 26 January 1996. Instead, Enrico
averred that Luz signed the Contract after she arrived in the Philippines on 30 May 1987. Enrico
further related that after Luz signed the lease contract, she took it with her for notarization, and by
the time the document was returned to him, it was already notarized.10
On 8 October 2002, the RTC rendered a Decision in Civil Case No. Q-99-36834 in favor of Enrico.
Since none of the parties presented a handwriting expert, the RTC relied on its own examination of
the specimen signatures submitted to resolve the issue of forgery. The RTC found striking similarity
between Luz’s genuine signatures in the documents presented by the spouses Apeles themselves
and her purportedly forged signature in the Contract of Lease with Option to Purchase. Absent any
finding of forgery, the RTC bound the parties to the clear and unequivocal stipulations they made in
the lease contract. Accordingly, the RTC ordered the spouses Apeles to execute a Deed of Sale in
favor of Enrico upon the latter’s payment of the agreed amount of consideration. Thefallo of the RTC
Decision reads:

WHEREFORE, this Court finds [Enrico’s] complaint to be substantiated by preponderance of

evidence and accordingly orders –

(1) [The spouses Apeles] to comply with the provisions of the Contract of Lease with Option to
Purchase; and upon payment of total consideration as stipulated in the said CONTRACT for
[the spouses Apeles] to execute a Deed of Absolute Sale in favor of [Enrico], over the parcel
of land and the improvements existing thereon located at No. 87 Timog Avenue, Quezon City.

(2) [The spouses Apeles] to pay [Enrico] moral and exemplary damages in the respective
amounts ofP100,000.00 and P50,000.00.

(3) [The spouses Apeles] to pay attorney’s fees of P50,000.00 and costs of the suit.11

The spouses Apeles challenged the adverse RTC Decision before the Court of Appeals and urged
the appellate court to nullify the assailed Contract of Lease with Option to Purchase since Luz’s
signature thereon was clearly a forgery. The spouses Apeles argued that it was physically impossible
for Luz to sign the said Contract on 26 January 1987 since she was not in the Philippines on that
date and returned five months thereafter. The spouses Apeles called attention to Enrico’s
inconsistent declarations as to material details involving the execution of the lease contract, thereby
casting doubt on Enrico’s credibility, as well as on the presumed regularity of the contract as a
notarized document.

On 20 December 2004, the Court of Appeals rendered a Decision in CA-G.R. CV No. 76933 granting
the appeal of the spouses Apeles and overturning the judgment of the RTC. In arriving at its assailed
decision, the appellate court noted that the Notary Public did not observe utmost care in certifying
the due execution of the Contract of Lease with Option to Purchase. The Court of Appeals chose not
to accord the disputed Contract full faith and credence. The Court of Appeals held, thus:

WHEREFORE, the foregoing premises considered, the appealed decision dated October 8, 2002 of
the Regional Trial Court of Quezon City, Branch 215 in Civil Case No. Q-99-36834 for specific
performance with damages is hereby REVERSED and a new is one entered dismissing [Enrico’s]
complaint.12

Enrico’s Motion for Reconsideration was denied by the Court of Appeals in a Resolution13 dated 25
April 2005.

Enrico is presently before this Court seeking the reversal of the unfavorable judgment of the Court of
Appeals, assigning the following errors thereto:

I.
THE COURT OF APPEALS COMMITTED (sic) REVERSIBLE ERROR WHEN IT BRUSHED ASIDE
THE RULING OF THE COURT A QUO UPHOLDING THE VALIDITY OF THE CONTRACT OF
LEASE WITH OPTION TO PURCHASE AND IN LIEU THEREOF RULED THAT THE SAID
CONTRACT OF LEASE WAS A FORGERY AND THUS, NULL AND VOID.

II.

THE COURT OF APPEALS COMMITTED (sic) REVERSIBLE ERROR WHEN CONTRARY TO THE
FINDINGS OF THE COURT A QUO IT RULED THAT THE DEFENSE OF FORGERY WAS
SUBSTANTIALLY AND CONVINCINGLY PROVEN BY COMPETENT EVIDENCE.

Simply, Enrico faults the Court of Appeals for disturbing the factual findings of the RTC in disregard
of the legal aphorism that the factual findings of the trial court should be accorded great weight and
respect on appeal.

We do not agree.

Enrico’s insistence on the infallibility of the findings of the RTC seriously impairs the discretion of the
appellate tribunal to make independent determination of the merits of the case appealed before it.
Certainly, the Court of Appeals cannot swallow hook, line, and sinker the factual conclusions of the
trial court without crippling the very office of review. Although we have indeed held that the factual
findings of the trial courts are to be accorded great weight and respect, they are not absolutely
conclusive upon the appellate court.14

The reliance of appellate tribunals on the factual findings of the trial court is based on the postulate
that the latter had firsthand opportunity to hear the witnesses and to observe their conduct and
demeanor during the proceedings. However, when such findings are not anchored on their credibility
and their testimonies, but on the assessment of documents that are available to appellate
magistrates and subject to their scrutiny, reliance on the trial court finds no application.15

Moreover, appeal by writ of error to the Court of Appeals under Rule 41 of the Revised Rules of
Court, the parties may raise both questions of fact and/or of law. In fact, it is imperative for the Court
of Appeals to review the findings of fact made by the trial court. The Court of Appeals even has the
power to try cases and conduct hearings, receive evidence and perform any and all acts necessary
to resolve factual issues raised in cases falling within its original and appellate jurisdiction.16

Enrico assiduously prays before this Court to sustain the validity of the Contract of Lease with Option
to Purchase. Enrico asserts that the said Contract was voluntarily entered into and signed by Luz
who had it notarized herself. The spouses Apeles should be obliged to respect the terms of the
agreement, and not be allowed to renege on their commitment thereunder and frustrate the sanctity
of contracts.

Again, we are not persuaded. We agree with the Court of Appeals that in ruling out forgery, the RTC
heavily relied on the testimony proffered by Enrico during the trial, ignoring blatant contradictions that
destroy his credibility and the veracity of his claims. On direct examination, Enrico testified that Luz
signed the Contract of Lease with Option to Purchase on 26 January 1987 in his presence,17 but he
recanted his testimony on the matter after the spouses Apeles established by clear and convincing
evidence that Luz was not in the Philippines on that date.18 In rebuttal, Enrico made a complete
turnabout and claimed that Luz signed the Contract in question on 30 May 1987 after her arrival in
the country.19 The inconsistencies in Enrico’s version of events have seriously impaired the probative
value of his testimony and cast serious doubt on his credibility. His contradictory statements on
important details simply eroded the integrity of his testimony.
While it is true that a notarized document carries the evidentiary weight conferred upon it with
respect to its due execution, and has in its favor the presumption of regularity, this presumption,
however, is not absolute. It may be rebutted by clear and convincing evidence to the
contrary.20 Enrico himself admitted that Luz took the document and had it notarized without his
presence. Such fact alone overcomes the presumption of regularity since a notary public is enjoined
not to notarize a document unless the persons who signed the same are the very same persons who
executed and personally appeared before the said notary public to attest to the contents and truth of
what are stated therein.

Although there is no direct evidence to prove forgery, preponderance of evidence inarguably favors
the spouses Apeles. In civil cases, the party having the burden of proof must establish his case by a
preponderance of evidence. Preponderance of evidence is the weight, credit, and value of the
aggregate evidence on either side and is usually considered to be synonymous with the term
"greater weight of the evidence" or "greater weight of the credible evidence." Preponderance of
evidence is a phrase which, in the last analysis, means probability of the truth. It is evidence which is
more convincing to the court as worthier of belief than that which is offered in opposition thereto.21 In
the case at bar, the spouses Apeles were able to overcome the burden of proof and prove by
preponderant evidence in disputing the authenticity and due execution of the Contract of Lease with
Option to Purchase. In contrast, Enrico seemed to rely only on his own self-serving declarations,
without asserting any proof of corroborating testimony or circumstantial evidence to buttress his
claim.

Even assuming for the sake of argument that we agree with Enrico that Luz voluntarily entered into
the Contract of Lease with Option to Purchase and personally affixed her signature to the said
document, the provision on the option to purchase the subject property incorporated in said Contract
still remains unenforceable.

There is no dispute that what Enrico sought to enforce in Civil Case No. Q-99-36834 was his
purported right to acquire ownership of the subject property in the exercise of his option to purchase
the same under the Contract of Lease with Option to Purchase. He ultimately wants to compel the
spouses Apeles to already execute the Deed of Sale over the subject property in his favor.

An option is a contract by which the owner of the property agrees with another person that the latter
shall have the right to buy the former’s property at a fixed price within a certain time. It is a condition
offered or contract by which the owner stipulates with another that the latter shall have the right to
buy the property at a fixed price within a certain time, or under, or in compliance with certain terms
and conditions; or which gives to the owner of the property the right to sell or demand a sale.22 An
option is not of itself a purchase, but merely secures the privilege to buy. It is not a sale of property
but a sale of the right to purchase. It is simply a contract by which the owner of the property agrees
with another person that he shall have the right to buy his property at a fixed price within a certain
time. He does not sell his land; he does not then agree to sell it; but he does sell something, i.e., the
right or privilege to buy at the election or option of the other party. Its distinguishing characteristic is
that it imposes no binding obligation on the person holding the option, aside from the consideration
for the offer.23

It is also sometimes called an "unaccepted offer" and is sanctioned by Article 1479 of the Civil Code:

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

An accepted unilateral promise to buy or to sell a determinate thing for a price certain is binding
upon the promissor if the promise is supported by a consideration distinct from the price.
The second paragraph of Article 1479 provides for the definition and consequent rights and
obligations under an option contract. For an option contract to be valid and enforceable against the
promissor, there must be a separate and distinct consideration that supports it.24

In the landmark case of Southwestern Sugar and Molasses Company v. Atlantic Gulf and Pacific
Co.,25 we declared that for an option contract to bind the promissor, it must be supported by
consideration:

There is no question that under Article 1479 of the new Civil Code "an option to sell," or "a promise
to buy or to sell," as used in said article, to be valid must be "supported by a consideration distinct
from the price." This is clearly inferred from the context of said article that a unilateral promise to buy
or to sell, even if accepted, is only binding if supported by a consideration. In other words, "an
accepted unilateral promise" can only have a binding effect if supported by a consideration,
which means that the option can still be withdrawn, even if accepted, if the same is not
supported by any consideration. Here it is not disputed that the option is without
consideration. It can therefore be withdrawn notwithstanding the acceptance made of it by
appellee. (Emphasis supplied.)

The doctrine requiring the payment of consideration in an option contract enunciated in

Southwestern Sugar is resonated in subsequent cases and remains controlling to this day. Without
consideration that is separate and distinct from the purchase price, an option contract cannot be
enforced; that holds true even if the unilateral promise is already accepted by the optionee.

The consideration is "the why of the contracts, the essential reason which moves the contracting
parties to enter into the contract." This definition illustrates that the consideration contemplated to
support an option contract need not be monetary. Actual cash need not be exchanged for the option.
However, by the very nature of an option contract, as defined in Article 1479, the same is an onerous
contract for which the consideration must be something of value, although its kind may vary.26

We have painstakingly examined the Contract of Lease with Option to Purchase, as well as the
pleadings submitted by the parties, and their testimonies in open court, for any direct evidence or
evidence aliunde to prove the existence of consideration for the option contract, but we have found
none. The only consideration agreed upon by the parties in the said Contract is the supposed
purchase price for the subject property in the amount not exceeding P1.5 Million, which could not be
deemed to be the same consideration for the option contract since the law and jurisprudence
explicitly dictate that for the option contract to be valid, it must be supported by a consideration
separate and distinct from the price.

In Bible Baptist Church v. Court of Appeals,27 we stressed that an option contract needs to be
supported by a separate consideration. The consideration need not be monetary but could consist of
other things or undertakings. However, if the consideration is not monetary, these must be things or
undertakings of value, in view of the onerous nature of the option contract. Furthermore, when a
consideration for an option contract is not monetary, said consideration must be clearly specified as
such in the option contract or clause.

In the present case, it is indubitable that no consideration was given by Enrico to the spouses Apeles
for the option contract. The absence of monetary or any material consideration keeps this Court from
enforcing the rights of the parties under said option contract.

WHEREFORE, in view of the foregoing, the instant Petition is DENIED. The Decision dated 20
December 2004 and Resolution dated 25 April 2005 of the Court of Appeals in CA-G.R. CV No.
76933 are hereby AFFIRMED. No costs.
SO ORDERED.
 [G.R. No. 146222. January 15, 2004]

ERLINDA DELA CRUZ, PRISCILLA DE MESA, ZENAIDA LAMBERTO, FLORA DRISKELL and
ANGELITO DELA CRUZ, petitioners, vs. FORTUNATO DELA CRUZ, DIVINA GUTIERREZ
and CLARK GUTIERREZ, respondents.

DECISION
QUISUMBING, J.:

This petition seeks to annul and set aside the decision[1] of the Court of Appeals, promulgated on
September 14, 2000, in CA-G.R. CV No. 53679, affirming the decision[2] of the Regional Trial Court
(RTC) of Malolos, Bulacan, Branch 17, dated December 14, 1995, in Civil Case No. 37-M-89. The
trial court dismissed the complaint in Civil Case No. 37-M-89 and held that herein respondents Clark
and Divina Gutierrez are the lawful owners of the property in dispute. Petitioners also seek to annul
the appellate court’s resolution,[3] dated November 28, 2000, denying their motion for
reconsideration.
As culled from the records, the following are the facts of the case:
Paciencia dela Cruz, the original plaintiff in Civil Case No. 37-M-89, was the owner of a parcel of
land with an area of two (2) ares[4] and ninety (90) centares,[5] located at Lolomboy, Bocaue, Bulacan.
Said parcel was registered in her name under Transfer Certificate of Title (TCT) No. T-14.585 (M). A
flea market (talipapa) with fifty or so vendors was located on the property and Paciencia collected
from them their daily stall rentals. Paciencia had six (6) children, namely Priscilla, Erlinda, Fortunato,
Flora, Angelita and Zenaida, all surnamed dela Cruz.
On September 25, 1980, Paciencia allegedly executed a Deed of Sale whereby for and in
consideration of P21,000, she conveyed said parcel in favor of her son, Fortunato dela Cruz.[6] On
November 26, 1980, the Register of Deeds of Bulacan issued TCT No. T-34.723 (M) in Fortunato’s
name.[7] Fortunato declared the property for taxation purposes and paid realty taxes due thereon.
[8]
Sometime between August 1985 to September 1988, Fortunato mortgaged the property three (3)
times to one Erlinda de Guzman for the sums ofP25,000, P50,000 and P100,000.[9] Fortunato was
unable to pay these loans.
On January 11, 1989, Fortunato executed a “Kasulatan ng Bilihang Patuluyan”[10] in favor of
Clark and Divina Gutierrez, the children of Claudio and Adoracion Gutierrez, to whom he earlier
offered to sell the property. The Kasulatan alleged the purchase price to be P58,000 only but the
amount actually paid by the Gutierrezes to Fortunato was P600,000 as evidenced by a receipt
showing the true consideration for the sale.[11] That same day, the sale was registered, leading to the
cancellation of TCT No. T-34.723 (M) in the name of Fortunato. Seven days later, a new certificate of
title, TCT No. T-101011 (M) was issued in the name of Clark and Divina Gutierrez. Thereafter, the
Gutierrezes took possession of the property, had the talipapa repaired, and collected the daily stall
rentals from the vendors.
On January 20, 1989, Paciencia instituted an action for reconveyance of property with
preliminary injunction against Fortunato and the spouses Claudio and Adoracion Gutierrez, before
the RTC of Malolos, Bulacan, which docketed the complaint as Civil Case No. 37-M-89.
 On February 8, 1989, the Complaint was amended to implead Clark and Divina Gutierrez, the
children of spouses Claudio and Adoracion Gutierrez, as defendants who had the subject property
titled in their names.
In her Complaint, Paciencia alleged that sometime in 1980, her son Fortunato, took advantage of
his close ties with her to induce her to sign an instrument which appeared to be a Deed of
Sale. Paciencia alleged that Fortunato assured her that she would remain the owner thereof while
Fortunato would hold the property in trust for her and upon her death, all her children would share in
the property. Fortunato allegedly did not pay her any consideration for such sale. She also claimed
that she continued to collect the daily stall rentals from the talipapa tenants until sometime in 1986
when she fell ill and had to be hospitalized. As a result, Fortunato took over the collection of the
rentals. After Paciencia had recovered, she sought to resume collecting the daily rentals but upon
the plea of Fortunato who had no means of income at that time, Paciencia allowed him to continue
collecting the stall rentals. Fortunato, however, was remiss in remitting the daily collections to
Paciencia.
Sometime in December 1988, Paciencia was shocked to learn that Fortunato was offering the
property for sale. She then demanded that the property be reconveyed to her but Fortunato refused
to do so. Meanwhile upon learning that Fortunato was negotiating the sale of the land with the
Gutierrez spouses, Paciencia sent her daughter, Erlinda dela Cruz, to warn them that Paciencia
owned the property, and not Fortunato. However, the Gutierrez couple insisted on buying the
property and registered the same in favor of their children, Divina and Clark
Gutierrez. Consequently, the Gutierrezes took over the collection of stall rentals from the tenants of
the subject property.
In sum, Paciencia alleged that the sale of the property to the Gutierrezes was null and void and
fraudulently made as Fortunato had neither right nor authority from her to sell or convey the subject
property, as he only held it in trust for her.
In his Answer, Fortunato averred that he lawfully acquired the subject property from Paciencia,
who absolutely conveyed the same to him, delivered to him the owner’s duplicate of the title, and
upon her instructions, caused the registration of the property in his name.
For their part, Clark and Divina Gutierrez alleged that: (1) the subject property was titled in the
name of Fortunato dela Cruz; (2) Fortunato was also the one collecting the daily rentals from the
market vendors; (3) Fortunato feared he would lose the property due to his inability to pay his
mortgage indebtedness to Erlinda de Guzman; and (4) he pleaded with them to help him, as a result
of which they turned to their parents who withdrew their lifetime savings just to be able to buy the
property. Clark and Divina likewise alleged that Fortunato disclosed to them that Paciencia herself
did not like this instant suit as she had already given to all her children her properties through similar
transfers.
On December 14, 1995, the trial court decided Civil Case No. 37-M-89 in this wise:

WHEREFORE, premises considered, judgment is hereby rendered:

1) dismissing the case and declaring defendants Clark and Divina Gutierrez as the lawful owners
of the property now covered by TCT No. T-101011(M);

2) ordering the plaintiff to pay defendant Fortunato dela Cruz litigation expenses of P2,000.00 and
to pay the costs of the suit;

3) dismissing the counterclaim of defendants Gutierrezes for moral damages and attorney’s fees.
SO ORDERED.[12]

Paciencia then moved for reconsideration, but the trial court denied the motion. She then
interposed an appeal with the Court of Appeals, docketed as CA-G.R. CV No. 53679.
On January 22, 1997, Paciencia dela Cruz died and was substituted by her children, namely:
petitioners Erlinda dela Cruz, Priscilla de Mesa y dela Cruz, Zenaida Lamberto y dela Cruz, Flora
Driskell y dela Cruz and Angelita dela Cruz.
On September 14, 2000, the Court of Appeals affirmed the trial court’s decision, thus:

WHEREFORE, premises considered, the appealed decision in Civil Case No. 37-M-89 is hereby
AFFIRMED. No costs.

SO ORDERED.[13]

Herein petitioners then moved for reconsideration, but it was denied by the appellate court.
Hence, this instant petition grounded on the following issues:

1. WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN RULING

THAT THE DECEASED PACIENCIA DELA CRUZ VOLUNTARILY EXECUTED THE
DEED OF ABSOLUTE SALE IN FAVOR OF RESPONDENT DELA CRUZ.

2. WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN RULING

THAT THE RESPONDENTS GUTIERREZES ARE BUYERS IN GOOD FAITH.

3. WHETHER OR NOT THE EVIDENCE ON RECORD SUPPORTS THE DECISION OF

THE HONORABLE COURT OF APPEALS SUBJECT MATTER OF THE INSTANT
PETITION FOR REVIEW.[14]

Simply put, we find that the core issue in this case is whether the Deed of Absolute Sale
executed by the mother, Paciencia dela Cruz, in favor of her son – respondent Fortunato dela Cruz –
is simulated and must be declared void.
Petitioners contend that the Court of Appeals erred in holding that Paciencia dela Cruz, now
deceased, had voluntarily executed the Deed of Absolute Sale in favor of her son, Fortunato. They
fault the court a quo for failing to appreciate the fact that the Deed was entirely and completely
written in English, a language neither known nor understood by his mother, Paciencia. Hence, the
appellate court went against the dictates of Articles 1330 and 1332 of the Civil Code. [15] Petitioners
stress that there is no showing that the terms of the Deed had been fully explained to Paciencia who
allegedly executed the document.
Petitioners also contend that respondents Clark and Divina Gutierrez are not buyers in good
faith. A buyer in good faith is one who buys a thing for value and is not aware of any defect in the
title of the seller. Their father, Claudio Gutierrez, was the actual buyer of the subject property, and
was aware of the defect in the title of Fortunato. Hence, Claudio could not be a buyer in good
faith. Neither could his children — respondents Clark and Divina Gutierrez — qualify and be
deemed as buyers in good faith, since the said property was actually bought by their father, who
then caused the registration of the property in their names.
Respondents, for their part, maintain that the Court of Appeals did not err in affirming the trial
court’s ruling that Paciencia dela Cruz voluntarily executed the Deed of Sale in Fortunato’s favor.
They aver there was nothing amiss in said Deed. The Gutierrezes were innocent purchasers in good
faith entitled to the full protection of the law. In order that the purchaser of land with a Torrens title
may be considered in good faith, according to respondents, it is enough that he examined the latest
certificate of title, which was issued in the name of the immediate transferor. This the Gutierrezes
did. Moreover, they had reason to believe that respondent Fortunato dela Cruz’s title was free from
flaws and defects upon learning that the latter was the one collecting the daily stall rentals from the
tenants and the fact that respondent Fortunato had mortgaged the said property three (3) times and
was then selling the property to pay off his loans.
We find for respondents. Petitioners’ arguments are less than persuasive, to say the least. As a
rule, when the terms of a contract are clear and unambiguous as to the intention of the contracting
parties, the literal meaning of its stipulations shall control. It is only when the words appear to
contravene the evident intention of the parties that the latter shall prevail over the former. The real
nature of a contract may be determined from the express terms of the agreement and from the
contemporaneous and subsequent acts of the parties thereto.[16] When they have no intention to be
bound at all, the purported contract is absolutely simulated and void. Hence, the parties may
recover what they gave under the simulated contract. If, on the other hand, the parties state a false
cause in the contract to conceal their real agreement, the contract is relatively simulated and the
parties’ real agreement may be held binding between them.[17]
In the present case, it is not disputed that Paciencia dela Cruz executed a Deed of Sale in favor
of her son, respondent Fortunato dela Cruz. However, petitioners insist that the said document does
not reflect the true intention and agreement of the parties. According to petitioners, Fortunato was to
merely hold the property in trust for their mother and that ownership thereof would remain with the
mother. Petitioners, however, failed to produce even one credible witness who could categorically
testify that such was the intent of Paciencia and Fortunato. There is nothing on record to support
sufficiently petitioners’ contention. Instead, the evidence is unclear on whether Paciencia in her
lifetime, or later the petitioners themselves, actually asserted or attempted to assert rights of
ownership over the subject property after the alleged sale thereof to Fortunato. The lot in dispute
was thrice mortgaged by Fortunato with nary a protest or complaint from petitioners. When they
learned that Fortunato mortgaged the property to Erlinda de Guzman on three occasions: August 26,
1985, April 6, 1987 and September 7, 1988, they refused to redeem the property. They reasoned
that if they would redeem the property and pay the debts of Fortunato, the property would merely
return to him.[18] Indeed, how could Fortunato have thrice obtained a mortgage over the property,
without having dominion over it? Fortunato declared the property in his name for taxation purposes
and paid the realty taxes, without any protest from Paciencia or petitioners. His actions are contrary
to petitioners’ allegation that the parties never intended to be bound by the assailed contract. Tax
receipts and declaration of ownership for taxation purposes are strong evidence of ownership. It has
been ruled that although tax declarations or realty tax payments are not conclusive evidence of
ownership, nevertheless, they are good indicia of possession in the concept of owner for no one in
his right mind will be paying taxes for a property that is not in his actual or constructive possession.[19]
As the Court of Appeals well observed, for nine (9) years, Paciencia allowed Fortunato to benefit
from the property. It was only when she learned of its impending sale to the Gutierrez spouses, that
she took action to forestall the transfer of the property to a third person. She then caused the
annotation of her adverse claim on the certificate of title on the same day the deed in favor of the
Gutierrez children was registered. This was rather belated, for the deed was already done.
Petitioners harp on the fact that the assailed Deed was in English and that it was not explained
to Paciencia. But we find that the petitioners failed to prove their allegation that Pacencia could not
speak, read, or understand English. Moreover, Paciencia’s bare testimony[20] on this point is
uncorroborated. For Article 1332 to apply, it must first be convincingly established that the illiterate
or disadvantaged party could not read or understand the language in which the contract was written,
[21]
or that the contract was left unexplained to said party. Petitioners failed to discharge this burden.
 The Deed of Absolute Sale dated September 25, 1980 was duly acknowledged before a notary
public. As a notarized document, it has in its favor the presumption of regularity and it carries the
evidentiary weight conferred upon it with respect to its due execution. It is admissible in evidence
without further proof of its authenticity and is entitled to full faith and credit upon its face.[22]
Coming now to whether the Gutierrezes were buyers in good faith, we note that both the trial and
appellate courts found that when Fortunato executed the “Kasulatan ng Bilihang Patuluyan” on
January 11, 1989 in favor of respondents Clark and Divina Gutierrez, the name of the registered
owner appearing in the certificate of title was that of Fortunato dela Cruz. This Kasulatan was duly
executed and acknowledged before a notary public. At the time of its execution, there was no
annotation on Fortunato’s certificate of title to indicate any adverse claim of any third person. Only
two cautionary entries regarding Section 4,[23] Rule 74 of the Rules of Court appear thereon. Nothing
more substantial appears in the certificate of title to indicate a scintilla of flaw or defect in Fortunato’s
title. Hence, we cannot fairly rule that in relying upon said title, the respondent Gutierrezes were in
bad faith. A person dealing with registered land may safely rely upon the correctness of the
certificate of title issued therefor and the law will in no way oblige him to go behind the certificate to
determine the condition of the property. The law considers said person as an innocent purchaser for
value. An innocent purchaser for value is one who buys the property of another, without notice that
some other person has a right or interest in such property and pays the full price for the same, at the
time of such purchase or before he has notice of the claims or interest of some other person in the
property.[24]
We note, furthermore, that the Gutierrezes did not simply rely upon the face of Fortunato’s
Certificate of Title to the property. They also employed the services of counsel Atty. Crisanta
Abarrientos, who verified the title with the Registry of Deeds. Thus, they took all the necessary
precautions to ascertain the true ownership of the property, even engaging the services of legal
counsel for that specific purpose, and it was only after said counsel assured them that everything
was in order did they finalize the arrangements to purchase the property. Hence, we entertain no
doubt that the respondent Gutierrezes were purchasers for value and in good faith.[25]
WHEREFORE, the instant petition is DENIED for lack of merit. The assailed decision dated
September 14, 2000 of the Court of Appeals in CA-G.R. CV No. 53679, which sustained the decision
of the Regional Trial Court of Malolos, Bulacan, Branch 17, dated December 14, 1995, in Civil Case
No. 37-M-89, as well as the appellate court’s resolution of November 28, 2000, is AFFIRMED. Costs
against petitioners.
SO ORDERED.
G.R. No. 162593 September 26, 2006

REMEGIA Y. FELICIANO, Substituted by the Heirs of REMEGIA Y. FELICIANO, as represented

by NILO Y. FELICIANO, petitioners,
vs.
SPOUSES AURELIO and LUZ ZALDIVAR, respondents.

DECISION

CALLEJO, SR., J.:

Before the Court is the petition for review on certiorari filed by the Heirs of Remegia Y. Feliciano (as
represented by Nilo Y. Feliciano) seeking the reversal of the Decision1 dated July 31, 2003 of the
Court of Appeals (CA) in CA-G.R. CV No. 66511 which ordered the dismissal of the complaint filed
by Remegia Y. Feliciano2 for declaration of nullity of title and reconveyance of property. The assailed
decision of the appellate court reversed and set aside that of the Regional Trial Court (RTC) of
Cagayan de Oro City, Branch 25 in Civil Case No. 92-423.

The factual and procedural antecedents of the present case are as follows:

Remegia Y. Feliciano filed against the spouses Aurelio and Luz Zaldivar a complaint for declaration
of nullity of Transfer Certificate of Title (TCT) No. T-17993 and reconveyance of the property covered
therein consisting of 243 square meters of lot situated in Cagayan de Oro City. The said title is
registered in the name of Aurelio Zaldivar.

In her complaint, Remegia alleged that she was the registered owner of a parcel of land situated in
the District of Lapasan in Cagayan de Oro City with an area of 444 square meters, covered by TCT
No. T-8502. Sometime in 1974, Aurelio, allegedly through fraud, was able to obtain TCT No. T-
17993 covering the 243-sq-m portion of Remegia’s lot as described in her TCT No. T-8502.

According to Remegia, the 243-sq-m portion (subject lot) was originally leased from her by Pio
Dalman, Aurelio’s father-in-law, for P5.00 a month, later increased to P100.00 a month in 1960. She
further alleged that she was going to mortgage the subject lot to Ignacio Gil for P100.00, which,
however, did not push through because Gil took back the money without returning the receipt she
had signed as evidence of the supposed mortgage contract. Thereafter, in 1974, Aurelio filed with
the then Court of First Instance of Misamis Oriental a petition for partial cancellation of TCT No. T-
8502. It was allegedly made to appear therein that Aurelio and his spouse Luz acquired the subject
lot from Dalman who, in turn, purchased it from Gil. The petition was granted and TCT No. T-17993
was issued in Aurelio’s name.

Remegia denied that she sold the subject lot either to Gil or Dalman. She likewise impugned as
falsified the joint affidavit of confirmation of sale that she and her uncle, Narciso Labuntog,
purportedly executed before a notary public, where Remegia appears to have confirmed the sale of
the subject property to Gil. She alleged that she never parted with the certificate of title and that it
was never lost. As proof that the sale of the subject lot never transpired, Remegia pointed out that
the transaction was not annotated on TCT No. T-8502.

In their answer, the spouses Zaldivar denied the material allegations in the complaint and raised the
affirmative defense that Aurelio is the absolute owner and possessor of the subject lot as evidenced
by TCT No. 17993 and Tax Declaration No. 26864 covering the same. Aurelio claimed that he
acquired the subject lot by purchase from Dalman who, in turn, bought the same from Gil on April 4,
1951. Gil allegedly purchased the subject lot from Remegia and this sale was allegedly conformed
and ratified by the latter and her uncle, Narciso Labuntog, before a notary public on December 3,
1965.

After Aurelio obtained a loan from the Government Service Insurance System (GSIS), the spouses
Zaldivar constructed their house on the subject lot. They alleged that they and their predecessors-in-
interest had been occupying the said property since 1947 openly, publicly, adversely and
continuously or for over 41 years already. Aurelio filed a petition for the issuance of a new owner’s
duplicate copy of TCT No. T-8502 because when he asked Remegia about it, the latter claimed that
it had been lost.

After due trial, the RTC rendered judgment in favor of Remegia. It declared that TCT No. 17993 in
the name of Aurelio was null and void for having been obtained through misrepresentation, fraud or
evident bad faith by claiming in his affidavit that Remegia’s title (TCT No. T-8502) had been lost,
when in fact it still existed.

The court a quo explained that "the court that orders a title reconstituted when the original is still
existing has not acquired jurisdiction over the case. A judgment otherwise final may be annulled not
only on extrinsic fraud but also for lack of jurisdiction." 3 Aurelio’s use of a false affidavit of loss,
according to the court a quo, was similar to the use during trial of a forged document or perjured
testimony that prevented the adverse party, Remegia, from presenting her case fully and fairly.

The RTC likewise noted that no public instrument was presented in evidence conveyancing or
transferring title to the subject lot from Remegia to Dalman, the alleged predecessor-in-interest of the
spouses Zaldivar. The only evidence presented by the said spouses was a joint affidavit of
confirmation of sale purportedly signed by Remegia and her uncle, the execution of which was
denied by the latter’s children. The certificate of title of the spouses Zaldivar over the subject
property was characterized as irregular because it was issued in a calculated move to deprive
Remegia of dominical rights over her own property. Further, the spouses Zaldivar could not set up
the defense of indefeasibility of Torrens title since this defense does not extend to a transferor who
takes the certificate of title with notice of a flaw therein. Registration, thus, did not vest title in favor of
the spouses; neither could they rely on their adverse or continuous possession over the subject lot
for over 41 years, as this could not prevail over the title of the registered owner pursuant to Sections
504 and 515 of Act No. 496, otherwise known as The Land Registration Act.

The dispositive portion of the decision of the court a quo reads:

IN THE LIGHT OF THE FOREGOING, and by preponderance of evidence, judgment is hereby

rendered canceling TCT T-17993 and reconveyance of 243 square meters the title and possession
of the same, by vacating and turning over possession of the 243 square meters of the subject
property to the plaintiff [referring to Remegia] which is part of the land absolutely owned by the
plaintiff covered by [TCT] T-8502 and to solidarily pay the plaintiff Fifty Thousand Pesos
(P50,000.00) as moral damages; Ten Thousand Pesos (P10,000.00) as exemplary damages; Fifty
Thousand Pesos (P50,000.00) as attorney’s fees and Ten Thousand Pesos (P10,000.00) expenses
for litigation to the plaintiff.

SO ORDERED.6

On appeal, the CA reversed the decision of the RTC and ruled in favor of the spouses Zaldivar. In
holding that Remegia sold to Gil a 243 sq m portion of the lot covered by TCT No. T-8502, the
appellate court gave credence to Exhibit "5," the deed of sale presented by the spouses Zaldivar to
prove the transaction. The CA likewise found that Gil thereafter sold the subject property to Dalman
who took actual possession thereof. By way of a document denominated as joint affidavit of
confirmation of sale executed before notary public Francisco Velez on December 3, 1965, Remegia
and her uncle, Narciso Labuntog, confirmed the sale by Remegia of the subject lot to Gil and its
subsequent conveyance to Dalman. Per Exhibit "6," the CA likewise found that Dalman had declared
the subject lot for taxation purposes in his name. In 1965, Dalman sold the same to the spouses
Zaldivar who, in turn, had it registered in their names for taxation purposes beginning 1974. Also in
the same year, Aurelio filed with the then CFI of Misamis Oriental a petition for the issuance of a new
owner’s duplicate copy of TCT No. T-8502, alleging that the owner’s duplicate copy was lost; the CFI
granted the petition on March 20, 1974. Shortly, Aurelio filed with the same CFI another petition, this
time for the partial cancellation of TCT No. T-8502 and for the issuance of a new certificate of title in
Aurelio’s name covering the subject lot. The CFI issued an order granting the petition and, on the
basis thereof, the Register of Deeds of Cagayan de Oro City issued TCT No. T-17993 covering the
subject lot in Aurelio’s name.

Based on the foregoing factual findings, the appellate court upheld the spouses Zaldivar’s ownership
of the subject lot. The CA stated that Remegia’s claim that she did not sell the same to Gil was
belied by Exhibit "5," a deed which showed that she transferred ownership thereof in favor of Gil. The
fact that the said transaction was not annotated on Remegia’s title was not given significance by the
CA since the lack of annotation would merely affect the rights of persons who are not parties to the
said contract. The CA also held that the joint affidavit of confirmation of sale executed by Remegia
and Narciso Labuntog before a notary public was a valid instrument, and carried the evidentiary
weight conferred upon it with respect to its due execution.7 Moreover, the CA found that the notary
public (Atty. Francisco Velez) who notarized the said document testified not only to its due execution
and authenticity but also to the truthfulness of its contents. The contradiction between the
testimonies of the children of Narciso Labuntog and the notary public (Atty. Velez), according to the
CA, casts doubt on the credibility of the former as it was ostensible that their version of the story was
concocted.8

The CA further accorded in favor of the judge who issued the order for the issuance of the new
owner’s duplicate copy of TCT No. T-8502 the presumption of regularity in the performance of his
official duty. It noted that the same was issued by the CFI after due notice and hearing.

Moreover, prescription and laches or estoppel had already set in against Remegia. The appellate
court pointed out that TCT No. T-17993 in the name of Aurelio was issued on September 10, 1974,
while Remegia’s complaint for annulment and reconveyance of property was filed more than 17
years thereafter or on August 10, 1992. Consequently, Remegia’s action was barred by prescription
because an action for reconveyance must be filed within 10 years from the issuance of the title since
such issuance operates as a constructive notice.9 The CA also noted that the spouses Zaldivar
constructed their house on the subject lot some time in 1974-1975, including a 12-foot firewall made
of hollow blocks, and Remegia took no action to prevent the said construction.

The dispositive portion of the assailed CA decision reads:

WHEREFORE, foregoing premises considered, the December 3, 1999 Decision of the Regional Trial
Court of Misamis Oriental, Cagayan de Oro City, in Civil Case No. 92-423, is REVERSED and SET
ASIDE and a new one is entered DISMISSING the said civil case.

SO ORDERED.10
When their motion for reconsideration was denied by the CA in the assailed Resolution dated
February 4, 2004, the heirs of Remegia (the petitioners) sought recourse to the Court. In their
petition for review, they allege that the appellate court gravely erred –

A.

IN NOT DISMISSING THE APPEAL OF THE RESPONDENTS (DEFENDANTS-APELLANTS)

MOTU PROPIO OR EXPUNGING THE BRIEF FOR DEFENDANTS-APPELLANTS FROM
RECORD FOR FAILURE TO FILE THE REQUIRED BRIEF FOR THE DEFENDANTS-
APPELLANTS ON TIME BUT BEYOND THE LAST AND FINAL EXTENDED PERIOD WITHIN
WHICH TO FILE THE SAID BRIEF IN VIOLATION TO Section 7 and section 12, rule 44 of the
revised rules of court and in contradiction to the ruling enunciated in catalina roxas, et al. vs. court of
appeals, g.r. no. L-76549, december 10, 1987.

B.

in denying the motion for reconsideration which was filed within the fifteen-day reglementary period
in violation to the rules of court.

c.

in ruling that the court who ordered the issuance of new certificate of title despite existence of
owner’s duplicate copy that was never lost has jurisdiction over the case.

d.

in concluding that petitioner’s (Plaintiff-appellee) claim of ownership over the subject lot was barred
by estoppel or laches.

e.

in concluding that the respondents (defendants-appellants) are the absolute owners of the subject lot
based on tct no. 17993 issued to them.

f.

in obviating essential and relevant facts, had it been properly appreciated, would maintain absolute
ownership of petitioner (plaintiff-appellee) over the subject lot as evidenced by existing tct no. t-
8502.11

The Court finds the petition meritorious.

It should be recalled that respondent Aurelio Zaldivar filed with the then CFI of Misamis Oriental a
petition for issuance of a new owner’s duplicate copy of TCT No.T-8502, alleging that the owner’s
duplicate copy was lost. In the Order dated March 20, 1974, the said CFI granted the petition and
consequently, a new owner’s duplicate copy of TCT No. T-8502 was issued.

However, as the trial court correctly held, the CFI which granted respondent Aurelio’s petition for the
issuance of a new owner’s duplicate copy of TCT No. T-8502 did not acquire jurisdiction to issue
such order. It has been consistently ruled that "when the owner’s duplicate certificate of title has not
been lost, but is in fact in the possession of another person, then the reconstituted certificate is void,
because the court that rendered the decision had no jurisdiction. Reconstitution can validly be made
only in case of loss of the original certificate." 12 In such a case, the decision authorizing the issuance
of a new owner’s duplicate certificate of title may be attacked any time.13

The new owner’s duplicate TCT No. T-8502 issued by the CFI upon the petition filed by respondent
Aurelio is thus void. As Remegia averred during her testimony, the owner’s duplicate copy of TCT
No. T-8502 was never lost and was in her possession from the time it was issued to her:

Q A while ago, you said that you were issued a title in 1968, can you tell the Honorable Court who
was in possession of the title?

A I am the one in possession and I am the one keeping the title.

Q Even up to the present?

A Yes, Sir.

Q Was there any instance that this title was borrowed from you?

A No, Sir.

Q Was there any instance that this title was lost from your possession?

A No, Sir.

Q Was there any instance that this title was surrendered to the Register of Deeds of the City of
Cagayan de Oro?

A No, Sir. There never was an instance … There never was an instance that this title was
surrendered to the Register of Deeds.

Q As there any instance that you petitioned to the Honorable Court for the issuance of a new
owner’s duplicate copy of this title in lieu of the lost copy of said title?

A No, Sir. There was never an instance because this title was never lost.14

Consequently, the court a quo correctly nullified TCT No. T-17993 in Aurelio’s name, emanating as it
did from the new owner’s duplicate TCT No. T-8502, which Aurelio procured through fraud.
Respondent Aurelio cannot raise the defense of indefeasibility of title because "the principle of
indefeasibility of a Torrens title does not apply where fraud attended the issuance of the title. The
Torrens title does not furnish a shield for fraud."15 As such, a title issued based on void documents
may be annulled.16

The appellate court’s reliance on the joint affidavit of confirmation of sale purportedly executed by
Remegia and her uncle, Narciso Labuntog, is not proper. In the first place, respondent Aurelio
cannot rely on the joint affidavit of confirmation of sale to prove that they had validly acquired the
subject lot because, by itself, an affidavit is not a mode of acquiring ownership.17 Moreover, the
affidavit is written entirely in English in this wise:

JOINT AFFIDAVIT OF CONFIRMATION OF SALE18

We, NARCISO LABUNTOG and REMEGIA YAPE DE FELICIANO, both of legal age, Filipino
citizens and residents of Lapasan, Cagayan de Oro City, Philippines, after being duly sworn
according to law, depose and say:

1. That the late FRANCISCO LABUNTOG is our common ancestor, the undersigned NARCISO
LABUNTOG being one of his sons and the undersigned REMEGIA YAPE DE FELICIANO being the
daughter of the late Emiliana Labuntog, sister of Narciso Labuntog;

2. That after his death, the late Francisco Labuntog left behind a parcel of land known as Lot No.
2166 C-2 of the Cagayan Cadastre situated at Lapasan, City of Cagayan de Oro, Philippines which
is being administered by the undersigned Narciso Labuntog under Tax Decl. No. 27633;

3. That the entire Cadastral Lot No. 2166 C-2 has been subdivided and apportioned among the heirs
of the late Francisco Labuntog, both of the undersigned affiants having participated and shared in
the said property, Remegia Yape de Feliciano having inherited the share of her mother Emiliana
Labuntog, sister of Narciso Labuntog;

4. That on April 4, 1951, Remegia Yape de Feliciano sold a portion of her share to one Ignacio Gil
and which portion is more particularly described and bounded as follows:

"On the North for 13 ½ meters by Agustin Cabaraban;

On the South for 13 ½ meters by Antonio Babanga;

On the East for 18 meters by Clotilde Yape; and

On the West for 18meters by Agustin Cabaraban;"

5. That sometime in the year 1960, the said Ignacio Gil conveyed the same portion to Pio Dalman,
who is of legal age, Filipino citizen and likewise a resident of Lapasan, Cagayan de Oro City and that
since 1960 up to the present, the said Pio Dalman has been in continuous, open, adverse and
exclusive possession of the property acquired by him in concept of owner;

6. That we hereby affirm, ratify and confirm the acquisition of the above described portion acquired
by Pio Dalman inasmuch as the same is being used by him as his residence and family home and
we hereby request the Office of the City Assessor to segregate this portion from our Tax Decl. No.
27633 and that a new tax declaration be issued in the name of PIO DALMAN embracing the area
acquired and occupied by him.

IN WITNESS WHEREOF, we have hereunto affixed our signatures on this 3rd day of December,
1965 at Cagayan de Oro City, Philippines.

(SGD.) Narciso Labuntog (SGD.)Remegia Yape de Feliciano

NARCISO LABUNTOG REMEGIA YAPE DE FELICIANO

Affiant Affiant

SUBSCRIBED & SWORN to before me this 3rd day of December, 1965 at Cagayan de Oro City,
Philippines, affiants exhibited their Residence Certificates as follows: NARCISO LABUNTOG, A-
1330509 dated Oct. 5, 1965 and REMEGIA YAPE DE FELICIANO, A-1811104 dated Dec. 3, 1965
both issued at Cagayan de Oro City.

(SGD.) ILLEGIBLE

FRANCISCO X. VELEZ

Notary Public

However, based on Remegia’s testimony, she could not read and understand English:

COURT:

Can you read English?

A No, I cannot read and understand English.

ATTY. LEGASPI:

Q What is your highest educational attainment?

A Grade 3.

Q But you can read and understand Visayan?

A Yes, I can read Visayan, but I cannot understand well idiomatic visayan terms (laglom nga
visayan).19

On this point, Article 1332 of the Civil Code is relevant:

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

The principle that a party is presumed to know the import of a document to which he affixes his
signature is modified by the foregoing article. Where a party is unable to read or when the contract is
in a language not understood by the party and mistake or fraud is alleged, the obligation to show that
the terms of the contract had been fully explained to said party who is unable to read or understand
the language of the contract devolves on the party seeking to enforce the contract to show that the
other party fully understood the contents of the document. If he fails to discharge this burden, the
presumption of mistake, if not, fraud, stands unrebutted and controlling.20

Applying the foregoing principles, the presumption is that Remegia, considering her limited
educational attainment, did not understand the full import of the joint affidavit of confirmation of sale
and, consequently, fraud or mistake attended its execution. The burden is on respondents, the
spouses Zaldivar, to rebut this presumption. They tried to discharge this onus by presenting Atty.
Francisco Velez (later RTC Judge) who notarized the said document. Atty. Velez testified that he
"read and interpreted" the document to the affiants and he asked them whether the contents were
correct before requiring them to affix their signatures thereon.21 The bare statement of Atty. Velez
that he "read and interpreted" the document to the affiants and that he asked them as to the
correctness of its contents does not necessarily establish that Remegia actually comprehended or
understood the import of the joint affidavit of confirmation of sale. Nowhere is it stated in the affidavit
itself that its contents were fully explained to Remegia in the language that she understood before
she signed the same. Thus, to the mind of the Court, the presumption of fraud or mistake attending
the execution of the joint affidavit of confirmation of sale was not sufficiently overcome.

Moreover, the purported joint affidavit of confirmation of sale failed to state certain important
information. For example, it did not mention the consideration or price for the alleged sale by
Remegia of the subject lot to Ignacio Gil. Also, while it stated that the subject lot was conveyed by
Ignacio Gil to Pio Dalman, it did not say whether the conveyance was by sale, donation or any other
mode of transfer. Finally, it did not also state how the ownership of the subject lot was transferred
from Pio Dalman to respondent Aurelio or respondents.

Respondents’ claim that they had been occupying the subject lot since 1947 openly, publicly,
adversely and continuously or for over 41 years is unavailing. In a long line of cases, 22 the Court has
consistently ruled that lands covered by a title cannot be acquired by prescription or adverse
possession. A claim of acquisitive prescription is baseless when the land involved is a registered
land following Article 112623 of the Civil Code in relation to Section 46 of Act No. 496 or the Land
Registration Act (now Section 4724 of P.D. No 1529):

Appellants’ claim of acquisitive prescription is likewise baseless. Under Article 1126 of the Civil
Code, prescription of ownership of lands registered under the Land Registration Act shall be
governed by special laws. Correlatively, Act No. 496 provides that no title to registered land in
derogation of that of the registered owner shall be acquired by adverse possession. Consequently,
proof of possession by the defendants is both immaterial and inconsequential.25

Neither can the respondents spouses Zaldivar rely on the principle of indefeasibility of TCT No.
17793 which was issued on September 10, 1974 in favor of respondent Aurelio. As it is, the subject
lot is covered by two different titles: TCT No. T-8502 in Remegia’s name covering an area of 444 sq
m including therein the subject lot, and TCT No. 17793 in the name of respondent Aurelio covering
the subject lot. Aurelio’s title over the subject lot has not become indefeasible, by virtue of the fact
that TCT No. T-8502 in the name of Remegia has remained valid. The following disquisition is
apropos:

The claim of indefeasibility of the petitioner’s title under the Torrens land title system would be
correct if previous valid title to the same parcel of land did not exist. The respondent had a valid title
x x x It never parted with it; it never handed or delivered to anyone its owner’s duplicate of the
transfer certificate of title; it could not be charged with negligence in the keeping of its duplicate
certificate of title or with any act which could have brought about the issuance of another certificate
upon which a purchaser in good faith and for value could rely. If the petitioner’s contention as to
indefeasibility of his title should be upheld, then registered owners without the least fault on their part
could be divested of their title and deprived of their property. Such disastrous results which would
shake and destroy the stability of land titles had not been foreseen by those who had endowed with
indefeasibility land titles issued under the Torrens system.26

Remegia’s TCT No. T-8502, thus, prevails over respondent Aurelio’s TCT No. 17793, especially
considering that, as earlier opined, the latter was correctly nullified by the RTC as it emanated from
the new owner’s duplicate TCT No. T-8502, which in turn, respondent Aurelio was able to procure
through fraudulent means.

Contrary to the appellate court’s holding, laches has not set in against Remegia. She merely
tolerated the occupation by the respondents of the subject lot:
Q You also stated in the direct that the defendants in this case, Mr. and Mrs. Zaldivar, were issued a
title over a portion of this land which you described a while ago?

A We knew about that only recently.

Q When was that when you knew that the defendants were issued title over a portion of the land you
described a while ago?

A In June, 1992.

Q In what way did you discover that a portion of the land was titled in the name of the defendants?

A I discovered that my property was titled by Mr. and Mrs. Zaldivar when I went to the Register of
Deeds for the purpose of partitioning my property among my children.

Q And you were surprised why it is titled in their names?

A Yes.

Q Is it not a fact that the defendants have constructed their house on a portion of the land you
described a while ago?

A Yes. I knew that the Zaldivars built a house on the property I described a while ago, but I did not
bother because I know that I can get that property because I own that property.

Q And the defendants constructed that house in 1974-75, am I correct?

A Yes.

Q And as a matter of fact, you have also a house very near to the house that was constructed by the
defendants in this case?

A Yes.

Q Can you tell us what is the distance between your house and the house constructed by the
defendants in 1974?

A They are very near because they constructed their house in my lot.

Q How many meters, more or less?

A It is very near, very close.

Q When they constructed their house, meaning the defendants, did you not stop the defendants from
the construction?

A I did not bother in stopping the Zaldivars in constructing the house because I am certain that I can
get the land because I own the land.

Q Aside from not protesting to the construction, did you not bring this matter to the attention of the
barangay captain or to the police authorities?
A No, because I did not bring this matter to the barangay captain nor to the police authorities. It is
only now that we discovered that it is already titled.

Q When you said now, it is in 1992?

A Yes.

Q Is it not a fact that after the house was finished the defendants and their family resided in that
house which they constructed?

A Yes, after the house was finished, they resided in that house.

Q As a matter of fact, from that time on up to the present, the defendants are still residing in that
house which they constructed in 1974 or 1975, am I correct?

A Yes.

Q As a matter of fact also the defendants fenced the lot in which their house was constructed with
hollow blocks, am I correct?

A Yes, the house of the Zaldivars was fenced by them with hollow blocks and I did not stop them to
avoid trouble.

Q As a matter of fact, the boundary between your house and the house of Zaldivar, there was
constructed a firewall made of hollow blocks about twelve feet in height, am I correct?

A Yes.

Q Such that you cannot see their house and also the Zaldivars cannot see your house because of
that high firewall, am I correct?

A We can still see each other because the firewall serves as the wall of their house.

Q When did the Zaldivars construct that hollow blocks fence? After the house was finished?

A I cannot remember.

Q But it could be long time ago?

ATTY. VEDAD:

Q That would be repetitious. She answered she could not remember.

ATTY. LEGASPI:

Q It could be many years ago?

A I cannot remember when they constructed the fence.

Q Did you [file] any protest or complaint when the Zaldivars constructed the hollow blocks fence?
A No.

Q Neither did you bring any action in court or with the barangay captain or the police authorities
when the Zaldivars constructed that hollow blocks fence?

A No, I did not complain the fencing by the Zaldivars. Only now that we know that we bring this
matter to the barangay captain.

Q And in the [office of the] barangay captain, you were able to meet the defendants, am I correct?

A No. When we went to the barangay captain, the Zaldivars did not appear there; therefore, we hired
a lawyer and filed this case.27

Case law teaches that if the claimant’s possession of the land is merely tolerated by its lawful owner,
the latter’s right to recover possession is never barred by laches:

As registered owners of the lots in question, the private respondents have a right to eject any person
illegally occupying their property. This right is imprescriptible. Even if it be supposed that they were
aware of the petitioner’s occupation of the property, and regardless of the length of that possession,
the lawful owners have a right to demand the return of their property at any time as long as the
possession was unauthorized or merely tolerated, if at all. This right is never barred by laches.28

Nonetheless, the Court is not unmindful of the fact that respondents had built their house on the
subject lot and, despite knowledge thereof, Remegia did not lift a finger to prevent it. Article 453 of
the Civil Code is applicable to their case:

ART. 453. If there was bad faith, not only on the part of the person who built, planted or sowed on
the land of another, but also on the part of the owner of such land, the rights of one and the other
shall be the same as though both had acted in good faith.

It is understood that there is bad faith on the part of the landowner whenever the act was done with
his knowledge and without opposition on his part.

Under the circumstances, respondents and Remegia are in mutual bad faith and, as such, would
entitle the former to the application of Article 448 of the Civil Code governing builders in good faith:

ART. 448. The owner of the land on which anything has been built, sown or planted in good faith,
shall have the right to appropriate as his own the works, sowing or planting, after payment of the
indemnity provided for in Articles 54629 and 548,30 or to oblige the one who built or planted to pay the
price of the land, and the one who sowed, the proper rent. However, the builder or planter cannot be
obliged to buy the land if its value is considerably more than that of the building or trees. In such a
case, he shall pay reasonable rent, if the owner of the land does not choose to appropriate the
building or trees after the proper indemnity. The parties shall agree upon the terms of the lease and
in case of disagreement, the court shall fix the terms thereof.

Following the above provision, the owner of the land on which anything has been built, sown or
planted in good faith shall have the right to appropriate as his own the building, planting or sowing,
after payment to the builder, planter or sower of the necessary and useful expenses, and in the
proper case, expenses for pure luxury or mere pleasure.31
The owner of the land may also oblige the builder, planter or sower to purchase and pay the price of
the land. If the owner chooses to sell his land, the builder, planter or sower must purchase the land,
otherwise the owner may remove the improvements thereon. The builder, planter, or sower,
however, is not obliged to purchase the land if its value is considerably more than the building,
planting or sowing. In such case, the builder, planter or sower must pay rent to the owner of the land.
If the parties cannot come to terms over the conditions of the lease, the court must fix the terms
thereof. 32

The right to choose between appropriating the improvement or selling the land on which the
improvement of the builder, planter or sower stands, is given to the owner of the land, 33 Remegia, in
this case, who is now substituted by petitioners as her heirs.

Consequently, the petitioners are obliged to exercise either of the following options: (1) to
appropriate the improvements, including the house, built by the respondents on the subject lot by
paying the indemnity required by law, or (2) sell the subject lot to the respondents. Petitioners cannot
refuse to exercise either option and compel respondents to remove their house from the land.34 In
case petitioners choose to exercise the second option, respondents are not obliged to purchase the
subject lot if its value is considerably more than the improvements thereon and in which case,
respondents must pay rent to petitioners. If they are unable to agree on the terms of the lease, the
court shall fix the terms thereof.

In light of the foregoing disquisition, the Court finds it unnecessary to resolve the procedural issues
raised by petitioners.

WHEREFORE, the petition is GRANTED. The Decision dated July 31, 2003 and Resolution dated
February 4, 2004 of the Court of Appeals in CA-G.R. CV No. 66511 are REVERSED and SET
ASIDE. The Decision dated December 3, 1999 of the Regional Trial Court of Cagayan de Oro City,
Branch 25 in Civil Case No. 92-423 is REINSTATED with the MODIFICATION that petitioners are
likewise ordered to exercise the option under Article 448 of the Civil Code.

SO ORDERED.
G.R. No. 123547 May 21, 2001

REV. FR. DANTE MARTINEZ, petitioner,

vs.
HONORABLE COURT OF APPEALS, HONORABLE JUDGE JOHNSON BALLUTAY, PRESIDING
JUDGE, BRANCH 25, REGIONAL TRIAL COURT OF CABANA TUAN CITY, HONORABLE
JUDGE ADRIANO TUAZON, JR., PRESIDING JUDGE, BRANCH 28, REGIONAL TRIAL COURT
OF CABANATUAN CITY, SPOUSES REYNALDO VENERACION and SUSAN VENERACION,
SPOUSES MAXIMO HIPOLITO and MANUELA DE LA PAZ and GODOFREDO DE LA
PAZ, respondents.

MENDOZA, J.:

This is a petition for review on certiorari of the decision, dated 7, 1995, and resolution, dated January
31, 1996, of the Court of Appeals, which affirmed the decisions of the Regional Trial Court, Branches
251 and 28,2 Cabanatuan City, finding private respondents spouses Reynaldo and Susan Veneracion
owners of the land in dispute, subject to petitioner's rights as a builder in good faith.

The facts are as follows:

Sometime in February 1981, private respondents Godofredo De la Paz and his sister Manuela De la
Paz, married to Maximo Hipolito, entered into an oral contract with petitioner Rev. Fr. Dante
Martinez, then Assistant parish priest of Cabanatuan City, for the sale of Lot No. 1337-A-3 at the
Villa Fe Subdivision in Cabanatuan City for the sum of P15,000.00. The lot is located along
Maharlika Road near the Municipal Hall of Cabanatuan City. At the time of the sale, the lot was still
registered in the name of Claudia De la Paz, mother of private respondents, although the latter had
already sold it to private respondent Manuela de la Paz by virtue of a Deed of Absolute Sale dated
May 26, 1976 (Exh. N/Exh. 2-Veneracion).3 Private respondent Manuela subsequently registered the
sale in her name on October 22, 1981 and was issued TCT No. T-40496 (Exh. 9).4 When the land
was offered for sale to petitioner, private respondents De la Paz were accompanied by their mother,
since petitioner dealt ' with the De la Fazes as a family and not individually. He was assured by them
that the lot belonged to Manuela De la Paz. It was agreed that petitioner would give a downpayment
of P3,000.00 to private respondents De la Paz and that the balance would be payable by installment.
After giving the P3,000.00 downpayment, petitioner started the construction of a house on the lot
after securing a building permit from the City Engineer's Office on April 23, 1981, with the written
consent of the then registered owner, Claudia de la Paz (Exh. B/Exh, 1).5 Petitioner likewise began
paying the real estate taxes on said property (Exh. D, D-l, D-2).6 Construction on the house was
completed on October 6, 1981 (Exh. V).7 Since then, petitioner and his family have maintained their
residence there.8

On January 31, 1983, petitioner completed payment of the lot for which private respondents De la
Paz executed two documents. The first document (Exh. A) read:

1-31-83

Ang halaga ng Lupa sa Villa Fe Subdivision na ipinagbili kay Fr. Dante Martinez ay
P15,000.00 na pinangangako namin na ibibigay ang Deed of Sale sa ika-25 ng Febrero 1983.

[SGD.] METRING HIPOLITO

 [SGD.] JOSE GODOFREDO DE LA PAZ9

The second writing (Exh. O) read:

Cabanatuan City

March 19, 1986

TO WHOM IT MAY CONCERN:

This is to certify that Freddie dela Paz has agreed to sign tomorrow (March 20) the affidavit of
sale of lot located at Villa Fe Subdivision sold to Fr. Dante Martinez.

[Sgd.] Freddie dela Paz

FREDDIE DELA PAZ10

However, private respondents De la Paz never delivered the Deed of Sale they promised to
petitioner.

In the meantime, in a Deed of. Absolute Sale with Right to Repurchase dated October 28, 1981
(Exh. 10),11 private respondents De la Paz sold three lots with right to repurchase the same within
one year to private respondents spouses Reynaldo and Susan Veneracion for the sum of
P150,000.00. One of the lots sold was the lot previously sold to petitioner.12

Reynaldo Veneracion had been a resident of Cabanatuan City since birth. He used to pass along
Maharlika Highway in going to the Municipal Hall or in going to and from Manila. Two of the lots
subject of the sale were located along Maharlika Highway, one of which was the lot sold earlier by
the De la Pazes to petitioner. The third lot (hereinafter referred to as the Melencio lot) was occupied
by private respondents De la Paz. Private respondents Veneracion never took actual possession of
any of these lots during the period of redemption, but all titles to the lots were given to him.13

Before the expiration of the one year period, private respondent Godofredo De la Paz informed
private respondent Reynaldo Veneracion that he was selling the three lots to another person for
P200,000.00. Indeed, private respondent Veneracion received a call from a Mr. Tecson verifying if
he had the titles to the properties, as private respondents De la Paz were offering to sell the two lots
along Maharlika Highway to him (Mr. Tecson) for P180,000.00 The offer included the lot purchased
by petitioner in February, 1981. Private respondent Veneracion offered to purchase the same two
lots from the De la razes for the same amount, The offer was accepted by private respondents De la
Paz. Accordingly, on June 2, 1983, a Deed of Absolute Sale was executed over the two lots (Exh.
I/Exh. 5-Veneracion).14 Sometime in January, 1984, private respondent Reynaldo Veneracion asked
a certain Renato Reyes, petitioner's neighbor, who the owner of the building erected on the subject
lot was. Reyes told him that it was Feliza Martinez, petitioner's mother, who was in possession of the
property. Reynaldo Veneracion told private respondent Godofredo about the matter and was
assured that Godofredo would talk to Feliza. Based on that assurance, private respondents
Veneracion registered the lots with the Register of Deeds of Cabanatuan on March 5, 1984. The lot
in dispute was registered under TCT No. T-44612 (Exh. L/Exh. 4-Veneracion).15

Petitioner discovered that the lot he was occupying with his family had been sold to the spouses
Veneracion after receiving a letter, (Exh. P/Exh. 6-Veneracion) from private respondent Reynaldo
Veneracion on March 19, 1986, claiming ownership of the land and demanding that they vacate the
property and remove their improvements thereon.16 Petitioner, in turn, demanded through counsel
the execution of the deed of sale from private respondents De la Paz and informed Reynaldo
Veneracion that he was the owner of the property as he had previously purchased the same from
private respondents De la Paz.17

The matter was then referred to the Katarungang Pambarangay of San Juan, Cabanatuan City for
conciliation, but the parties failed to reach an agreement (Exh. M/Exh. 13). 18 As a consequence, on
May 12, 1986, private respondent Reynaldo Veneracion brought an action for ejectment in the
Municipal Trial Court, Branch III, Cabanatuan City against petitioner and his mother (Exh. 14).19

On the other hand, on June 10, 1986, petitioner caused a notice of lis pendens to be recorded on
TCT No. T-44612 with the Register of Deeds of Cabanatuan City (Exh. U).20

During the pre-trial conference, the parties agreed to have the case decided under the Rules on
Summary Procedure and defined the issues as follows:

1. Whether of not defendant (now petitioner) may be judicially ejected.

2. Whether or not the main issue in this case is ownership.

3. Whether or not damages may be awarded.21

On January 29, 1987, the trial court rendered its decision, pertinent portions of which are quoted as
follows:

With the foregoing findings of the Court, defendants [petitioner Rev. Fr. Dante Martinez and
his mother] are the rightful possessors and in good faith and in concept of owner, thus cannot
be ejected from the land in question. Since the main issue is ownership, the better remedy of
the plaintiff [herein private respondents Veneracion] is Accion Publiciana in the Regional Trial
Court, having jurisdiction to adjudicate on ownership.

Defendants' counterclaim will not be acted upon it being more than P20,000.00 is beyond this
Court's power to adjudge.

WHEREFORE, judgment is hereby rendered, dismissing plaintiff's complaint and ordering

plaintiff to pay Attorney's fee of P5,000.00 and cost of suit.

SO ORDERED.22

On March 3, 1987, private respondents Veneracion filed a notice of appeal with the Regional Trial
Court, but failed to pay the docket fee. On June 6, 1989, or over two years after the filing of the
notice of appeal, petitioner filed a Motion for Execution of the Judgment, alleging finality of judgment
for failure of private respondents Veneracion to perfect their appeal and failure to prosecute the
appeal for an unreasonable length of time.

Upon objection of private respondents Veneracion, the trial court denied on June 28, 1989 the
motion for execution and ordered the records of the case to be forwarded to the appropriate
Regional Trial Court. On July 11, 1989, petitioner appealed from this order. The appeal of private
respondents Veneracion from the decision of the MTC and the appeal of petitioner from the order
denying petitioner's motion for execution were forwarded to the Regional Trial Court, Branch 28,
Cabanatuan City. The cases were thereafter consolidated under Civil Case No. 670-AF.
On February 20, 1991, the Regional Trial Court rendered its decision finding private respondents
Veneracion as the true owners of the lot in dispute by virtue of their prior registration with the
Register of Deeds, subject to petitioner's rights as builder in good faith, and ordering petitioner and
his privies to Vacate the lot after receipt of the cost of the construction of the house, as well as to pay
the sum of P5,000.00 as attorney's fees and the costs of the suit. It, however, failed to rule on
petitioner's appeal of the Municipal Trial Court's order denying their Motion for Execution of
Judgment.

Meanwhile, on May 30, 1986, while the ejectment case was pending before the Municipal Trial
Court, petitioner Martinez filed a complaint for annulment of sale with damages against the
Veneracions and De la Pazes with the Regional Trial Court, Branch 25, Cabanatuan City. On March
5, 1990, the trial court rendered its decision finding private respondents Veneracion owners of the
land in dispute, subject to the rights of petitioner as a builder in good faith, and ordering private
respondents De la Paz to pay petitioner the sum of P50,000.00 as moral damages and P10,000.00
as attorney's fees, and for private respondents to pay the costs of the suit.

On March 20, 1991, petitioner then filed a petition for review with the Court of Appeals of the RTC's
decision in Civil Case No. 670-AF (for ejectment). Likewise, on April 2, 1991, petitioner appealed the
trial court's decision in Civil Case No. 44-[AF]-8642-R (for annulment of sale and damages) to the
Court of Appeals. The cases were designated as CA G.R. SP. No. 24477 and CA G.R. CY No.
27791, respectively, and were subsequently consolidated. The Court of Appeals affirmed the trial
courts' decisions, without ruling on petitioner's appeal from the Municipal Trial Court's order denying
his Motion for Execution of Judgment. It declared the Veneracions to be owners of the lot in dispute
as they were the first registrants in good faith, in accordance with Art. 1544 of the Civil Code.
Petitioner Martinez failed to overcome the presumption of good faith for the following reasons:

1. when private respondent Veneracion discovered the construction on the lot, he immediately
informed private respondent Godofredo about it and relied on the latter's assurance that he
will take care of the matter.

2. the sale between petitioner Martinez and private respondents De la Paz was not notarized,
as required by Arts. 1357 and 1358 of the Civil Code, thus it cannot be said that the private
respondents Veneracion had knowledge of the first sale.23

Petitioner's motion for reconsideration was likewise denied in a resolution dated January 31,
1996.24 Hence this petition for review. Petitioner raises the following assignment of errors:

I THE PUBLIC RESPONDENTS HONORABLE COURT OF APPEALS AND REGIONAL

TRIAL COURT JUDGES JOHNSON BALLUTAY AND ADRIANO TUAZON ERRED IN
HOLDING THAT PRIVATE RESPONDENTS REYNALDO VENERACION AND WIFE ARE
BUYERS AND REGISTRANTS IN GOOD FAITH IN RESOLVING THE ISSUE OF
OWNERSHIP AND POSSESSION OF THE LAND IN DISPUTE.

II THAT PUBLIC RESPONDENTS ERRED IN NOT RESOLVING AND DECIDING THE

APPLICABILITY OF THE DECISION OF THIS HONORABLE COURT IN THE CASES OF
SALVORO VS. TANEGA, ET AL., G. R. NO. L 32988 AND IN ARCENAS VS. DEL ROSARIO,
67 PHIL 238, BY TOTALLY IGNORING THE SAID DECISIONS OF THIS HONORABLE
COURT IN THE ASSAILED DECISIONS OF THE PUBLIC RESPONDENTS.

III THAT THE HONORABLE COURT OF APPEALS ERRED IN NOT GIVING DUE COURSE
TO THE PETITION FOR REVIEW IN CA G. R. SP. NO. 24477.
 IV THAT THE HONORABLE COURT OF APPEALS IN DENYING PETITIONER'S PETITION
FOR REVIEW AFORECITED INEVITABLY SANCTIONED AND/OR WOULD ALLOW A
VIOLATION OF LAW AND DEPARTURE FROM THE USUAL COURSE OF JUDICIAL
PROCEEDINGS BY PUBLIC RESPONDENT HONORABLE JUDGE ADRIANO TUAZON
WHEN THE LATTER RENDERED A DECISION IN CIVIL CASE NO. 670-AF [ANNEX "D"]
REVERSING THE DECISION OF THE MUNICIPAL TRIAL COURT JUDGE SENDON
DELIZO IN CIVIL CASE NO. 9523 [ANNEX "C"] AND IN NOT RESOLVING IN THE SAME
CASE THE APPEAL INTERPOSED BY DEFENDANTS ON THE ORDER OF THE SAME
COURT DENYING THE MOTION FOR EXECUTION.

V THAT THE RESOLUTION [ANNEX "B"] (OF THE COURT OF APPEALS) DENYING
PETITIONER'S MOTION FOR RECONSIDERATION [ANNEX "1"] WITHOUT STATING
CLEARLY THE FACTS AND THE LAW ON WHICH SAID RESOLUTION WAS BASED, (IS
ERRONEOUS).

These assignment of errors raise the following issues:

1. Whether or not private respondents Veneracion are buyers in good faith of the lot in dispute
as to make them the absolute owners thereof in accordance with Art. 1544 of the Civil Code
on double sale of immovable property.

2. Whether or not payment of the appellate docket fee within the period to appeal is not
necessary for the perfection of the appeal after a notice of appeal has been filed within such
period.

3. Whether or not the resolution of the Court of Appeals denying petitioner's motion for
reconsideration is contrary to the constitutional requirement that a denial of a motion for
reconsideration must state the legal reasons on which it is based.

First. It is apparent from the first and second assignment of errors that petitioner is assailing the
findings of fact and the appreciation of the evidence made by the trial courts and later affirmed by the
respondent court. While, as a general rule, only questions of law may be raised in a petition for
review under Rule 45 of the Rules of Court, review may nevertheless be granted under certain
exceptions, namely: (a) when the conclusion is a finding grounded entirely on speculation, surmises,
or conjectures; (b) when the inference made is manifestly mistaken, absurd, or impossible; (c) where
there is a grave abuse of discretion; (d) when the judgment is based on a misapprehension of facts;
(e) when the findings of fact are conflicting; (f) when the Court of Appeals, in making its findings,
went beyond the issue of the case and the same is contrary to the admissions of both appellant and
appellee; (g) when the findings of the Court of Appeals are contrary to those of the trial court; (h)
when the findings of fact are conclusions without citation of specific evidence on which they are
based; (I) when the facts set forth in the petition as well as in the petitioner's main and reply briefs
are not disputed by the respondents; (j) when the finding of fact of the Court of Appeals is premised
on the supposed absence of evidence but is contradicted by the evidence on record; and (k) when
the Court of Appeals manifestly overlooked certain relevant facts not disputed by the parties and
which, if properly considered, would justify a different conclusion.25

In this case, the Court of Appeals based its ruling that private respondents Veneracion are the
owners of the disputed lot on their reliance on private respondent Godofredo De la Paz's assurance
that he would take care of the matter concerning petitioner's occupancy of the disputed lot as
constituting good faith. This case, however, involves double sale and, on this matter, Art. 1544 of the
Civil Code provides that where immovable property is the subject of a double sale, ownership shall
be transferred (1) to the person acquiring it who in good faith first recorded it to the Registry of
Property; (2) in default thereof, to the person who in good faith was first in possession; and (3) in
default thereof, to the person who presents the oldest title. 26 The requirement of the law, where title
to the property is recorded in the Register of Deeds, is two-fold: acquisition in good faith and
recording in good faith. To be entitled to priority, the second purchaser must not only prove prior
recording of his title but that he acted in good faith, i.e., without knowledge or notice of a prior sale to
another. The presence of good faith should be ascertained from the circumstances surrounding the
purchase of the land.27

1. With regard to the first sale to private respondents Veneracion, private respondent Reynaldo
Veneracion testified that on October 10, 1981, 18 days before the execution of the first Deed of Sale
with Right to Repurchase, he inspected the premises and found it vacant.28 However, this is belied
by the testimony of Engr. Felix D. Minor, then building inspector of the Department of Public Works
and Highways, that he conducted on October 6, 1981 an ocular inspection of the lot in dispute in the
performance of his duties as a building inspector to monitor the progress of the construction of the
building subject of the building permit issued in favor of petitioner on April 23, 1981, and that he
found it 100 % completed (Exh. V).29 In the absence of contrary evidence, he is to be presumed to
have regularly performed his official duty.30 Thus, as early as October, 1981, private respondents
Veneracion already knew that there was construction being made on the property they purchased.

2. The Court of Appeals failed to determine the nature of the first contract of sale between the private
respondents by considering their contemporaneous and subsequent acts.31 More specifically, it
overlooked the fact that the first contract of sale between the private respondents shows that it is in
fact an equitable mortgage.

The requisites for considering a contract of sale with a right of repurchase as an equitable mortgage
are (1) that the parties entered into a contract denominated as a contract of sale and (2) that their
intention was to secure an existing debt by way of mortgage.32 A contract of sale with right to
repurchase gives rise to the presumption that it is an equitable mortgage in any of the following
cases: (1) when the price of a sale with a right to repurchase is unusually inadequate; (2) when the
vendor remains in possession as lessee or otherwise; (3) when, upon or after the expiration of the
right to repurchase, another instrument extending the period of redemption or granting a new period
is executed; (4) when the purchaser retains for himself a part of the purchase price; (5) when the
vendor binds himself to pay the taxes on the thing sold; (6) in any other case where it may be fairly
inferred that the real intention of the parties is that the transaction shall secure the payment of a debt
or the performance of any other obligation.33 In case of doubt, a contract purporting to be a sale with
right to repurchase shall be construed as an equitable mortgage.34

In this case, the following circumstances indicate that the private respondents intended the
transaction to be an equitable mortgage and not a contract of sale: (1) Private respondents
Veneracion never took actual possession of the three lots; (2) Private respondents De la Paz
remained in possession of the Melencio lot which was co-owned by them and where they resided;
(3) During the period between the first sale and the second sale to private respondents Veneracion,
they never made any effort to take possession of the properties; and (4) when the period of
redemption had expired and private respondents Veneracion were informed by the De la Pazes that
they are offering the lots for sale to another person for P200,000.00, they never objected. To the
contrary, they offered to purchase the two lots for P180,000.00 when they found that a certain Mr.
Tecson was prepared to purchase it for the same amount. Thus, it is clear from these circumstances
that both private respondents never intended the first sale to be a contract of sale, but merely that of
mortgage to secure a debt of P150,000.00.

With regard to the second sale, which is the true contract of sale between the parties, it should be
noted that this Court in several cases,35 has ruled that a purchaser who is aware of facts which
should put a reasonable man upon his guard cannot turn a blind eye and later claim that he acted in
good faith. Private respondent Reynaldo himself admitted during the pre-trial conference in the MTC
in Civil Case No. 9523 (for ejectment) that petitioner was already in possession of the property in
dispute at the time the second Deed of Sale was executed on June 1, 1983 and registered on March
4, 1984. He, therefore, knew that there were already occupants on the property as early as 1981.
The fact that there are persons, other than the vendors, in actual possession of the disputed lot
should have put private respondents on inquiry as to the nature of petitioner's right over the property.
But he never talked to petitioner to verify the nature of his right. He merely relied on the assurance of
private respondent Godofredo De la Paz, who was not even the owner of the lot in question, that he
would take care of the matter. This does not meet the standard of good faith.

3. The appellate court's reliance on Arts. 1357 and 1358 of the Civil Code to determine private
respondents Veneracion's lack of knowledge of petitioner's ownership of the disputed lot is
erroneous.

Art. 135736 and Art. 1358,37 in relation to Art. 1403(2)38 of the Civil Code, requires that the sale of real
property must be in writing for it to be enforceable. It need not be notarized. If the sale has not been
put in writing, either of the contracting parties can compel the other to observe such
requirement.39 This is what petitioner did when he repeatedly demanded that a Deed of Absolute
Sale be executed in his favor by private respondents De la Paz. There is nothing in the above
provisions which require that a contract of sale of realty must be executed in a public document. In
any event, it has been shown that private respondents Veneracion had knowledge of facts which
would put them on inquiry as to the nature of petitioner's occupancy of the disputed lot.

Second. Petitioner contends that the MTC in Civil Case No. 9523 (for ejectment) erred in denying
petitioner's Motion for Execution of the Judgment, which the latter filed on June 6, 1989, two years
after private respondents Veneracion filed a notice of appeal with the MTC on March 3, 1987 without
paying the appellate docket fee. He avers that the trial court's denial of his motion is contrary to this
Court's ruling in the cases of Republic v. Director of Lands,40 and Aranas v. Endona41 in which it was
held that where the appellate docket fee is not paid in full within the reglementary period, the
decision of the MTC becomes final and unappealable as the payment of docket fee is not only a
mandatory but also a jurisdictional requirement.

Petitioner's contention has no merit. The case of Republic v. Director of Lands deals with the
requirement for appeals from the Courts of First Instance, the Social Security Commission, and the
Court of Agrarian Relations to the Court of Appeals. The case of Aranas v. Endona, on the other
hand, was decided under the 1964 Rules of Court and prior to the enactment of the Judiciary
Reorganization Act of 1981 (B. P. Blg. 129) and the issuance of its Interim Rules and Guidelines by
this Court on January 11, 1983. Hence, these cases are not applicable to the matter at
issue.1âwphi1.nêt

On the other hand, in Santos v. Court of Appeals,42 it was held that although an appeal fee is
required to be paid in case of an appeal taken from the municipal trial court to the regional trial court,
it is not a prerequisite for the perfection of an appeal under §2043 and §2344 of the Interim Rules and
Guidelines issued by this Court on January 11, 1983 implementing the Judiciary Reorganization Act
of 1981 (B.P. Blg. 129). Under these sections, there are only two requirements for the perfection of
an appeal, to wit: (a) the filing of a notice of appeal within the reglementary period; and (b) the
expiration of the last day to appeal by any party. Even in the procedure for appeal to the regional trial
courts,45 nothing is mentioned about the payment of appellate docket fees.

Indeed, this Court has ruled that, in appealed cases, the failure to pay the appellate docket fee does
not automatically result in the dismissal of the appeal, the dismissal being discretionary on the part of
the appellate court.46 Thus, private respondents Veneracions' failure to pay the appellate docket fee
is not fatal to their appeal.

Third. Petitioner contends that the resolution of the Court of Appeals denying his motion for
reconsideration was rendered in violation of the Constitution because it does not state the legal basis
thereof.

This contention is likewise without merit.

Art. VIII, Sec. 14 of the Constitution provides that "No petition for review or motion for
reconsideration of a decision of the court shall be refused due course or denied without stating the
basis therefor." This requirement was fully complied with when the Court of Appeals, in denying.
reconsideration of its decision, stated in its resolution that it found no reason to change its ruling
because petitioner had not raised anything new.47 Thus, its resolution denying petitioner's motion for
reconsideration states:

For resolution is the Motion for Reconsideration of Our Decision filed by the petitioners.

Evidently, the motion poses nothing new. The points and arguments raised by the movants
have been considered and passed upon in the Decision sought to be reconsidered. Thus, We
find no reason to disturb the same.

WHEREFORE, the motion is hereby DENIED.

SO ORDERED.48

Attorney's. fees should be awarded as petitioner was compelled to litigate to protect his interest due
to private respondents' act or omission.49

WHEREFORE, the decision of the Court of Appeals is REVERSED and a new one is RENDERED:

(1) declaring as null and void the deed of sale executed by private respondents Godofredo
and Manuela De la Paz in favor of private respondents spouses Reynaldo and Susan
Veneracion;

(2) ordering private respondents Godofredo and Manuela De la Paz to execute a deed of
absolute sale in favor of petitioner Rev. Fr. Dante Martinez;

(3) ordering private respondents Godofredo and Manuela De la Paz to reimburse private
respondents spouses Veneracion the amount the latter may have paid to the former;

(4) ordering the Register of Deeds of Cabanatuan City to cancel TCT No. T-44612 and issue
a new one in the name of petitioner Rev. Fr. Dante Martinez; and

(5) ordering private respondents to pay petitioner jointly and severally the sum of P20,000.00
as attorney's fees and to pay the costs of the suit.

SO ORDERED.1âwphi1.
G.R. No. 128991 April 12, 2000

YOLANDA ROSELLO-BENTIR, SAMUEL PORMIDA and CHARITO PORMIDA, petitioners,

vs.
HONORABLE MATEO M. LEANDA, in his capacity as Presiding Judge of RTC, Tacloban City,
Branch 8, and LEYTE GULF TRADERS, INC., respondents.

KAPUNAN, J.:

Reformation. of an instrument is that remedy in equity by means of which a written instrument is

made or construed so as to express or conform to the real intention of the parties when some error
or mistake has been committed. 1 It is predicated on the equitable maxim that equity treats as done
that which ought to be done. 2 Therationale of the doctrine is that it would be unjust and unequitable
to allow the enforcement of a written instrument which does not reflect or disclose the real meeting of
the minds of the parties. 3 However, an action for reformation must be brought within the period
prescribed by law, otherwise, it will be barred by the mere lapse of time. The issue in this case is
whether or not the complaint for reformation filed by respondent Leyte Gulf Traders, Inc. has
prescribed and in the negative, whether or not it is entitled to the remedy of reformation sought.

On May 15, 1992, respondent Leyte Gulf Traders, Inc. (herein referred to as respondent corporation)
filed a complaint for reformation of instrument, specific performance, annulment of conditional sale
and damages with prayer for writ of injunction against petitioners Yolanda Rosello-Bentir and the
spouses Samuel and Charito Pormida. The case was docketed as Civil Case No. 92-05-88 and
raffled to Judge Pedro S. Espina, RTC, Tacloban City, Branch 7. Respondent corporation alleged
that it entered into a contract of lease of a parcel of land with petitioner Bentir for a period of twenty
(20) years starting May 5, 1968. According to respondent corporation, the lease was extended for
another four (4) years or until May 31, 1992. On May 5, 1989, petitioner Bentir sold the leased
premises to petitioner spouses Samuel Pormada and Charito Pormada. Respondent corporation
questioned the sale alleging that it had a right of first refusal. Rebuffed, it filed Civil Case No. 92-05-
88 seeking the reformation of the expired contract of lease on the ground that its lawyer inadvertently
omitted to incorporate in the contract of lease executed in 1968, the verbal agreement or
understanding between the parties that in the event petitioner Bentir leases or sells the lot after the
expiration of the lease, respondent corporation has the right to equal the highest offer.

In due time, petitioners filed their answer alleging that the inadvertence of the lawyer who prepared
the lease contract is not a ground for reformation. They further contended that respondent
corporation is guilty of laches for not bringing the case for reformation of the lease contract within the
prescriptive period of ten (10) years from its execution.

Respondent corporation then filed its reply and on November 18, 1992, filed a motion to admit
amended complaint. Said motion was granted by the lower court. 4

Thereafter, petitioners filed a motion to dismiss reiterating that the complaint should be dismissed on
the ground of prescription.

On December 15, 1995, the trial court through Judge Pedro S. Espina issued an order dismissing
the complaint premised on its finding that the action for reformation had already prescribed. The
order reads:
 ORDER

Resolved here is the defendants' MOTION TO DISMISS PLAINTIFF'S complaint on

ground of prescription of action.

It is claimed by plaintiff that he and defendant Bentir entered into a contract of lease of
a parcel of land on May 5, 1968 for a period of 20 years (and renewed for an additional
4 years thereafter) with the verbal agreement that in case the lessor decides to sell the
property after the lease, she shall give the plaintiff the right to equal the offers of other
prospective buyers. It was claimed that the lessor violated this tight of first refusal of the
plaintiff when she sureptitiously (sic) sold the land to co-defendant Pormida on May 5,
1989 under a Deed of Conditional Sale. Plaintiffs right was further violated when after
discovery of the final sale, plaintiff ordered to equal the price of co-defendant Pormida
was refused and again defendant Bentir surreptitiously executed a final deed of sale in
favor of co-defendant Pormida in December 11, 1991.

The defendant Bentir denies that she bound herself to give the plaintiff the right of first
refusal in case she sells the property. But assuming for the sake of argument that such
right of first refusal was made, it is now contended that plaintiffs cause of action to
reform the contract to reflect such right of first refusal, has already prescribed after 10
years, counted from May 5, 1988 when the contract of lease incepted. Counsel for
defendant cited Conde vs. Malaga, L-9405 July 31, 1956 and Ramos vs. Court of
Appeals, 180 SCRA 635, where the Supreme Court held that the prescriptive period for
reformation of a written contract is ten (10) years under Article 1144 of the Civil Code.

This Court sustains the position of the defendants that this action for reformation of
contract has prescribed and hereby orders the dismissal of the case.

SO ORDERED. 5

On December 29, 1995, respondent corporation filed a motion for reconsideration of the order
dismissing the complaint.

On January 11, 1996, respondent corporation filed an urgent ex-parte motion for issuance of an
order directing the petitioners, or their representatives or agents to refrain from taking possession of
the land in question.

Considering that Judge Pedro S. Espina, to whom the case was raffled for resolution, was assigned
to the RTC, Malolos, Bulacan, Branch 19, Judge Roberto A. Navidad was designated in his place.

On March 28, 1996, upon motion of herein petitioners, Judge Navidad inhibited himself from hearing
the case. Consequently, the case was re-raffled and assigned to RTC, Tacloban City, Branch 8,
presided by herein respondent judge Mateo M. Leanda.

On May 10, 1996, respondent judge issued an order reversing the order of dismissal on the grounds
that the action for reformation had not yet prescribed and the dismissal was "premature and
precipitate", denying respondent corporation of its right to procedural due process. The order reads:

ORDER

Stated briefly, the principal objectives of the twin motions submitted by the plaintiffs, for
resolution are:
 (1) for the reconsideration of the Order of 15 December 1995 of the Court
(RTC, Br. 7), dismissing this case, on the sole ground of prescription of
one (1) of the five (5) causes of action of plaintiff in its complaint for
"reformation" of a contract of lease; and,

(2) for issuance by this Court of an Order prohibiting the defendants and
their privies-in-interest, from taking possession of the leased premises,
until a final court order issues for their exercise of dominical or
possessory right thereto.

The records of this case reveal that co-defendant BENTER (Yolanda) and plaintiff
Leyte Gulf Traders Incorporation, represented by Chairman Benito Ang, entered into a
contract of lease of a parcel of land, denominated as Lot No. 878-D, located at
Sagkahan District, Tacloban City, on 05 May 1968, for a period of twenty (20) years,
(later renewed for an additional two (2) years). Included in said covenant of lease is the
verbal understanding and agreement between the contracting parties, that when the
defendant (as lessor) will sell the subject property, the plaintiff as (lessee) has the "right
of first refusal", that is, the right to equal the offer of any other prospective third-party
buyer. This agreement (sic) is made apparent by paragraph 4 of the lease agreement
stating:

4. IMPROVEMENT. The lessee shall have the right to erect on the leased
premises any building or structure that it may desire without the consent
or approval of the Lessor . . . provided that any improvements existing at
the termination of the lease shall remain as the property of the Lessor
without right to reimbursement to the Lessee of the cost or value thereof.

That the foregoing provision has been included in the lease agreement if only to
convince the defendant-lessor that plaintiff desired a priority right to acquire the
property (ibid) by purchase, upon expiration of the effectivity of the deed of lease.

In the course of the interplay of several procedural moves of the parties herein, the
defendants filed their motion to admit their amended answer to plaintiff's amended
complaint. Correspondingly, the plaintiff filed its opposition to said motion. The former
court branch admitted the amended answer, to which order of admission, the plaintiff
seasonably filed its motion for reconsideration. But, before the said motion for
reconsideration was acted upon by the court, the latter issued an Order on 15
December 1995, DISMISSING this case on the lone ground of prescription of the
cause of action of plaintiff's complaint on "reformation" of the lease contract, without
anymore considering the remaining cause of action, viz.: (a) on Specific Performance;
(b) an Annulment of Sale and Title; (c) on Issuance of a Writ of Injunction, and (d) on
Damages.

With due respect to the judicial opinion of the Honorable Presiding Judge of Branch 7
of this Court, the undersigned, to whom this case was raffled to after the inhibition of
Judge Roberto Navidad, as acting magistrate of Branch 7, feels not necessary any
more to discuss at length that even the cause of action for "reformation" has not, as
yet, prescribed.

To the mind of this Court, the dismissal order adverted to above, was obviously
premature and precipitate, thus resulting denial upon the right of plaintiff that
procedural due process. The other remaining four (4) causes of action of the complaint
 must have been deliberated upon before that court acted hastily in dismissing this
case.

WHEREFORE, in the interest of substantial justice, the Order of the court, (Branch 7,
RTC) dismissing this case, is hereby ordered RECONSIDERED and SET ASIDE.

Let, therefore, the motion of plaintiff to reconsider the Order admitting the amended
answer and the Motion to Dismiss this case (ibid), be set for hearing on May 24, 1996,
at 8:30 o'clock in the morning. Service of notices must be effected upon parties and
counsel as early as possible before said scheduled date.

Concomitantly, the defendants and their privies-in-interest or agents, are hereby

STERNLY WARNED not to enter, in the meantime, the litigated premises, before a
final court order issues granting them dominical as well as possessory right thereto.

To the motion or petition for contempt, filed by plaintiff, thru Atty. Bartolome C. Lawsin,
the defendants may, if they so desire, file their answer or rejoinder thereto, before the
said petition will be set for hearing. The latter are given ten (10) days to do so, from the
date of their receipt of a copy of this Order.

SO ORDERED. 6

On June 10, 1996, respondent judge issued an order for status quo ante, enjoining petitioners to
desist from occupying the property. 7

Aggrieved, petitioners herein filed a petition for certiorari to the Court of Appeals seeking the
annulment of the order of respondent court with prayer for issuance of a writ of preliminary injunction
and temporary restraining order to restrain respondent judge from further hearing the case and to
direct respondent corporation to desist from further possessing the litigated premises and to turn
over possession to petitioners.

On January 17, 1997, the Court of Appeals, after finding no error in the questioned order nor grave
abuse of discretion on the part of the trial court that would amount to lack, or in excess of jurisdiction,
denied the petition and affirmed the questioned order. 8 A reconsideration of said decision was,
likewise, denied on April 16, 1997. 9

Thus, the instant petition for review based on the following assigned errors, viz:

6:01 THE COURT OF APPEALS ERRED IN HOLDING THAT AN ACTION FOR

REFORMATION IS PROPER AND JUSTIFIED UNDER THE CIRCUMSTANCES OF
THE PRESENT CASE;

6.02 THE COURT OF APPEALS ERRED IN HOLDING THAT THE ACTION FOR
REFORMATION HAS NOT YET PRESCRIBED;

6.03 THE COURT OF APPEALS ERRED IN HOLDING THAT AN OPTION TO BUY IN

A CONTRACT OF LEASE IS REVIVED FROM THE IMPLIED RENEWAL OF SUCH
LEASE; AND,
 6.04 THE COURT OF APPEALS ERRED IN HOLDING THAT A STATUS QUO
ANTE ORDER IS NOT AN INJUNCTIVE RELIEF THAT SHOULD COMPLY WITH
THE PROVISIONS OF RULE 58 OF THE RULES OF COURT. 10

The petition has merit.

The core issue that merits our consideration is whether the complaint for reformation of instrument
has prescribed.

The remedy of reformation of an instrument is grounded on the principle of equity where, in order to
express the true intention of the contracting parties, an instrument already executed is allowed by
law to be reformed. The right of reformation is necessarily an invasion or limitation of the parol
evidence rule since, when a writing is reformed, the result is that an oral agreement is by court
decree made legally effective. 11 Consequently, the courts, as the agencies authorized by law to
exercise the power to reform an instrument, must necessarily exercise that power sparingly and with
great caution and zealous care. Moreover, the remedy, being an extraordinary one, must be subject
to limitations as may be provided by law. Our law and jurisprudence set such limitations, among
which is laches. A suit for reformation of an instrument may be barred by lapse of time. The
prescriptive period for actions based upon a written contract and for reformation of an instrument is
ten (10) years under Article 1144 of the Civil Code. 12 Prescription is intended to suppress stale and
fraudulent claims arising from transactions like the one at bar which facts had become so obscure
from the lapse of time or defective memory. 13 In the case at bar, respondent corporation had ten
(10) years from 1968, the time when the contract of lease was executed, to file an action for
reformation. Sadly, it did so only on May 15, 1992 or twenty-four (24) years after the cause of action
accrued, hence, its cause of action has become stale, hence, time-barred.

In holding that the action for reformation has not prescribed, the Court of Appeals upheld the ruling
of the Regional Trial Court that the 10-year prescriptive period should be reckoned not from the
execution of the contract of lease in 1968, but from the date of the alleged 4-year extension of the
lease contract after it expired in 1988. Consequently, when the action for reformation of instrument
was filed in 1992 it was within ten (10) years from the extended period of the lease. Private
respondent theorized, and the Court of Appeals agreed, that the extended period of lease was an
"implied new lease" within the contemplation of Article 1670 of the Civil Code, 14under which
provision, the other terms of the original contract were deemed revived in the implied new lease.

We do not agree. First, if, according to respondent corporation, there was an agreement between the
parties to extend the lease contract for four (4) years after the original contract expired in 1988, then
Art. 1670 would not apply as this provision speaks of an implied new lease (tacita reconduccion)
where at the end of the contract, the lessee continues to enjoy the thing leased "with the
acquiescence of the lessor", so that the duration of the lease is "not for the period of the original
contract, but for the time established in Article 1682 and 1687." In other words, if the extended period
of lease was expressly agreed upon by the parties, then the term should be exactly what the parties
stipulated, not more, not less. Second, even if the supposed 4-year extended lease be considered as
an implied new lease under Art. 1670, "the other terms of the original contract" contemplated in said
provision are only those terms which are germane to the lessee's right of continued enjoyment of the
property leased. 15 The prescriptive period of ten (10) years provided for in Art. 1144 16 applies by
operation of law, not by the will of the parties. Therefore, the right of action for reformation accrued
from the date of execution of the contract of lease in 1968.

Even if we were to assume for the sake of argument that the instant action for reformation is not
time-barred, respondent corporation's action will still not prosper. Under Section 1, Rule 64 of the
New Rules of Court, 17 an action for the reformation of an instrument is instituted as a special civil
action for declaratory relief. Since the purpose of an action for declaratory relief is to secure an
authoritative statement of the rights and obligations of the parties for their guidance in the
enforcement thereof, or compliance therewith, and not to settle issues arising from an alleged breach
thereof, it may be entertained only before the breach or violation of the law or contract to which it
refers. 18 Here, respondent corporation brought the present action for reformation after an alleged
breach or violation of the contract was already committed by petitioner Bentir. Consequently, the
remedy of reformation no longer lies.

We no longer find it necessary to discuss the other issues raised considering that the same are
predicated upon our affirmative resolution on the issue of the prescription of the action for
reformation.

WHEREFORE, the petition is hereby GRANTED. The Decision of the Court of Appeals dated
January 17, 1997 is REVERSED and SET ASIDE. The Order of the Regional Trial Court of Tacloban
City, Branch 7, dated December 15, 1995 dismissing the action for reformation is
REINSTATED.1âwphi1.nêt

SO ORDERED.
G.R. No. 158901 March 9, 2004

PROCESO QUIROS and LEONARDA VILLEGAS, petitioners,

vs.
MARCELO ARJONA, TERESITA BALARBAR, JOSEPHINE ARJONA, and CONCHITA
ARJONA, respondents.

DECISION

YNARES-SANTIAGO, J.:

Assailed in this petition for review is the decision of the Court of Appeals in an action for the
execution/enforcement of amicable settlement between petitioners Proceso Quiros and Leonarda
Villegas and respondent Marcelo Arjona. Appellate court reversed the decision of the Regional Trial
Court of Dagupan City-Branch 44 and reinstated the decision of the Municipal Trial Court of San
Fabian-San Jacinto, Pangasinan.

On December 19, 1996, petitioners Proceso Quiros and Leonarda Villegas filed with the office of the
barangay captain of Labney, San Jacinto, Pangasinan, a complaint for recovery of ownership and
possession of a parcel of land located at Labney, San Jacinto, Pangasinan. Petitioners sought to
recover from their uncle Marcelo Arjona, one of the respondents herein, their lawful share of the
inheritance from their late grandmother Rosa Arjona Quiros alias Doza, the same to be segregated
from the following parcels of land:

a) A parcel of land (Lot 1, plan Psu-189983, L.R. Case No. D-614, LRC Record No. N-
22630), situated in the Barrio of Labney, Torud, Municipality of San Jacinto, Province of
Pangasinan x x x Containing an area of Forty Four Thousand Five Hundred and Twenty
(44,520) square meters, more or less, covered by Tax Decl. No. 607;

b) A parcel of Unirrig. riceland situated at Brgy. Labney, San Jacinto, San Jacinto,
Pangasinan with an area of 6450 sq. meters, more or less declared under Tax Decl. No. 2066
of the land records of San Jacinto, Pangasinan assessed at P2390.00 x x x;

c) A parcel of Unirrig. riceland situated at Brgy. Labney, San Jacinto, Pangasinan with an area
of 6450 sq. meters, more or less, declared under Tax Declaration No. 2047 of the land
records of San Jacinto, Pangasinan assessed at P1700.00 x x x

d) A parcel of Unirrig. riceland situated at Brgy. Labney, San Jacinto, Pangasinan assessed at
P5610.00 x x x;

e) A parcel of Cogon land situated at Brgy. Labney, San Jacinto, Pangasinan, with an area of
14133 sq. meters, more or less declared under Tax Declaration No. 14 of the land records of
San Jacinto, Pangasinan assessed at P2830.00 x x x.1

On January 5, 1997, an amicable settlement was reached between the parties. By reason thereof,
respondent Arjona executed a document denominated as "PAKNAAN" ("Agreement", in Pangasinan
dialect), which reads:

AGREEMENT
I, MARCELO ARJONA, of legal age, resident of Barangay Sapang, Buho, Palayan City, Nueva Ecija,
have a land consisting of more or less one (1) hectare which I gave to Proceso Quiros and Leonarda
Villegas, this land was inherited by Doza that is why I am giving the said land to them for it is in my
name, I am affixing my signature on this document for this is our agreement besides there are
witnesses on the 5th day (Sunday) of January 1997.

Signed in the presence of:

(Sgd) Avelino N. De la Masa, Jr.

(Sgd) Marcelo Arjona

Witnesses:

1) (Sgd.) Teresita Balarbar

2) (Sgd.) Josephine Arjona

3) (Sgd.) Conchita Arjona

On the same date, another "PAKNAAN" was executed by Jose Banda, as follows:

AGREEMENT

I, JOSE BANDA, married to Cecilia L. Banda, of legal age, and resident of Sitio Torrod, Barangay
Labney, San Jacinto, Pangasinan. There is a land in which they entrusted to me and the same land
is situated in Sitio Torrod, Brgy. Labney, San Jacinto, Pangasinan, land of Arjona family.

I am cultivating/tilling this land but if ever Leonarda Villegas and Proceso Quiros would like to get this
land, I will voluntarily surrender it to them.

In order to attest to the veracity and truthfulness of this agreement, I affixed (sic) my signature
voluntarily below this document this 5th day (Sunday) of January 1997.

(Sgd.) Jose Banda

Signed in the presence of:

(Sgd) Avelino N. de la Masa, Sr.

Barangay Captain
Brgy. Labney, San Jacinto
Pangasinan

Witnesses:

1) Irene Banda

(sgd.)
2) Jose (illegible) x x x
Petitioners filed a complaint with the Municipal Circuit Trial Court with prayer for the issuance of a
writ of execution of the compromise agreement which was denied because the subject property
cannot be determined with certainty.

The Regional Trial Court reversed the decision of the municipal court on appeal and ordered the
issuance of the writ of execution.

Respondents appealed to the Court of Appeals, which reversed the decision of the Regional Trial
Court and reinstated the decision of the Municipal Circuit Trial Court.2

Hence, this petition on the following errors:

THE PAKNAAN BEING A FINAL AND EXECUTORY JUDGMENT UNDER THE LAW IS AN
IMMUTABLE JUDGMENT CAN NOT BE ALTERED, MODIFIED OR CHANGED BY THE COURT
INCLUDING THE HIGHEST COURT; and

II

THE SECOND PAKNAAN ALLEGEDLY EXECUTED IN CONJUNCTION WITH THE FIRST

PAKNAAN WAS NEVER ADDUCED AS EVIDENCE BY EITHER OF THE PARTIES, SO IT IS
ERROR OF JURISDICTION TO CONSIDER THE SAME IN THE DECISION MAKING.

The pivotal issue is the validity and enforceability of the amicable settlement between the parties and
corollary to this, whether a writ of execution may issue on the basis thereof.

In support of their stance, petitioners rely on Section 416 of the Local Government Code which
provides that an amicable settlement shall have the force and effect of a final judgment upon the
expiration of 10 days from the date thereof, unless repudiated or nullified by the proper court. They
argue that since no such repudiation or action to nullify has been initiated, the municipal court has no
discretion but to execute the agreement which has become final and executory.

Petitioners likewise contend that despite the failure of the Paknaan to describe with certainty the
object of the contract, the evidence will show that after the execution of the agreement, respondent
Marcelo Arjona accompanied them to the actual site of the properties at Sitio Torod, Labney, San
Jacinto, Pangasinan and pointed to them the 1 hectare property referred to in the said agreement.

In their Comment, respondents insist that respondent Arjona could not have accompanied petitioners
to the subject land at Torrod, Labney because he was physically incapacitated and there was no
motorized vehicle to transport him to the said place.

The Civil Code contains salutary provisions that encourage and favor compromises and do not even
require judicial approval. Thus, under Article 2029 of the Civil Code, the courts must endeavor to
persuade the litigants in a civil case to agree upon some fair compromise. Pursuant to Article 2037 of
the Civil Code, a compromise has upon the parties the effect and authority of res judicata, and this is
true even if the compromise is not judicially approved. Articles 2039 and 2031 thereof also provide
for the suspension of pending actions and mitigation of damages to the losing party who has shown
a sincere desire for a compromise, in keeping with the Code’s policy of encouraging amicable
settlements.3
Cognizant of the beneficial effects of amicable settlements, the Katarungang Pambarangay Law
(P.D. 1508) and later the Local Government Code provide for a mechanism for conciliation where
party-litigants can enter into an agreement in the barangay level to reduce the deterioration of the
quality of justice due to indiscriminate filing of court cases. Thus, under Section 416 of the said
Code, an amicable settlement shall have the force and effect of a final judgment of the court upon
the expiration of 10 days from the date thereof, unless repudiation of the settlement has been made
or a petition to nullify the award has been filed before the proper court

Petitioners submit that since the amicable settlement had not been repudiated or impugned before
the court within the 10-day prescriptive period in accordance with Section 416 of the Local
Government Code, the enforcement of the same must be done as a matter of course and a writ of
execution must accordingly be issued by the court.

Generally, the rule is that where no repudiation was made during the 10-day period, the amicable
settlement attains the status of finality and it becomes the ministerial duty of the court to implement
and enforce it. However, such rule is not inflexible for it admits of certain exceptions. In Santos v.
Judge Isidro,4 the Court observed that special and exceptional circumstances, the imperatives of
substantial justice, or facts that may have transpired after the finality of judgment which would render
its execution unjust, may warrant the suspension of execution of a decision that has become final
and executory. In the case at bar, the ends of justice would be frustrated if a writ of execution is
issued considering the uncertainty of the object of the agreement. To do so would open the
possibility of error and future litigations.

The Paknaan executed by respondent Marcelo Arjona purports to convey a parcel of land consisting
of more or less 1 hectare to petitioners Quiros and Villegas. Another Paknaan, prepared on the
same date, and executed by one Jose Banda who signified his intention to vacate the parcel of land
he was tilling located at Torrod, Brgy. Labney, San Jacinto, Pangasinan, for and in behalf of the
Arjona family. On ocular inspection however, the municipal trial court found that the land referred to
in the second Paknaan was different from the land being occupied by petitioners. Hence, no writ of
execution could be issued for failure to determine with certainty what parcel of land respondent
intended to convey.

In denying the issuance of the writ of execution, the appellate court ruled that the contract is null and
void for its failure to describe with certainty the object thereof. While we agree that no writ of
execution may issue, we take exception to the appellate court’s reason for its denial.

Since an amicable settlement, which partakes of the nature of a contract, is subject to the same legal
provisions providing for the validity, enforcement, rescission or annulment of ordinary contracts,
there is a need to ascertain whether the Paknaan in question has sufficiently complied with the
requisites of validity in accordance with Article 1318 of the Civil Code.5

There is no question that there was meeting of the minds between the contracting parties. In
executing the Paknaan, the respondent undertook to convey 1 hectare of land to petitioners who
accepted. It appears that while the Paknaan was prepared and signed by respondent Arjona,
petitioners acceded to the terms thereof by not disputing its contents and are in fact now seeking its
enforcement. The object is a 1-hectare parcel of land representing petitioners’ inheritance from their
deceased grandmother. The cause of the contract is the delivery of petitioners’ share in the
inheritance. The inability of the municipal court to identify the exact location of the inherited property
did not negate the principal object of the contract. This is an error occasioned by the failure of the
parties to describe the subject property, which is correctible by reformation and does not indicate the
absence of the principal object as to render the contract void. It cannot be disputed that the object is
determinable as to its kind, i.e.1 hectare of land as inheritance, and can be determined without need
of a new contract or agreement.6 Clearly, the Paknaan has all the earmarks of a valid contract.

Although both parties agreed to transfer one-hectare real property, they failed to include in the
written document a sufficient description of the property to convey. This error is not one for
nullification of the instrument but only for reformation.

Article 1359 of the Civil Code provides:

When, there having been a meeting of the minds of the parties to a contract, their true intention is
not expressed in the instrument purporting to embody the agreement by reason of mistake, fraud,
inequitable conduct or accident, one of the parties may ask for the reformation of the instrument to
the end that such true intention may be expressed.

If mistake, fraud, inequitable conduct, or accident has prevented a meeting of the minds of the
parties, the proper remedy is not reformation of the instrument but annulment of the contract.

Reformation is a remedy in equity whereby a written instrument is made or construed so as to

express or conform to the real intention of the parties where some error or mistake has been
committed.7 In granting reformation, the remedy in equity is not making a new contract for the
parties, but establishing and perpetuating the real contract between the parties which, under the
technical rules of law, could not be enforced but for such reformation.

In order that an action for reformation of instrument as provided in Article 1359 of the Civil Code may
prosper, the following requisites must concur: (1) there must have been a meeting of the minds of
the parties to the contract; (2) the instrument does not express the true intention of the parties; and
(3) the failure of the instrument to express the true intention of the parties is due to mistake, fraud,
inequitable conduct or accident.8

When the terms of an agreement have been reduced to writing, it is considered as containing all the
terms agreed upon and there can be, between the parties and their successors in interest, no
evidence of such terms other than the contents of the written agreement, except when it fails to
express the true intent and agreement of the parties thereto, in which case, one of the parties may
bring an action for the reformation of the instrument to the end that such true intention may be
expressed.9

Both parties acknowledge that petitioners are entitled to their inheritance, hence, the remedy of
nullification, which invalidates the Paknaan, would prejudice petitioners and deprive them of their just
share of the inheritance. Respondent can not, as an afterthought, be allowed to renege on his legal
obligation to transfer the property to its rightful heirs. A refusal to reform the Paknaan under such
circumstances would have the effect of penalizing one party for negligent conduct, and at the same
time permitting the other party to escape the consequences of his negligence and profit thereby. No
person shall be unjustly enriched at the expense of another.

WHEREFORE, in view of the foregoing, the petition is DENIED. The Decision dated March 21, 2003
of the Court of Appeals, which reversed the decision of the Regional Trial Court and reinstated the
decision of the Municipal Trial Court, is AFFIRMED. This is without prejudice to the filing by either
party of an action for reformation of the Paknaan executed on January 5, 1997.

SO ORDERED.
SPOUSES ELVIRA AND CESAR DUMLAO, G.R. No. 131491
Petitioners,
Present:

PUNO, C.J., Chairperson,

SANDOVAL-GUTIERREZ,
-versus- CORONA,
AZCUNA, and
GARCIA, JJ.

MARLON REALTY CORPORATION, Promulgated:

Respondent.
August 17, 2007
x-----------------------------------------------------------------------------------------x

DECISION

SANDOVAL-GUTIERREZ, J.:

For our resolution is the instant Petition for Review on Certiorari under Rule 45 of the 1997
Rules of Civil Procedure, as amended, assailing the Decision[1]dated August 25, 1997 and
Resolution[2] dated November 13, 1997 rendered by the Court of Appeals in CA-G.R. SP No. 43366,
entitled “MARLON REALTY CORPORATION, petitioner, v. HON. JUDGE REGIONAL TRIAL
COURT OF PARAÑAQUE, BRANCH 258 and ELVIRA D. DUMLAO, ET AL., respondents.”

The following facts are undisputed:

On November 26, 1991, spouses Elvira and Cesar Dumlao, petitioners, and Marlon Realty
Corporation, respondent, entered into a Contract to Sell[3] involving a 109 square meter lot
in Welcome Village, Parañaque City. The terms of payment are:

1. Petitioners shall pay respondent P218,000.00 as cost of the lot;

 2. The sum of P61,000.00 shall be paid upon the signing of the contract; and

3. The balance of P157,000.00 shall be paid with interest at 24% per annum
within six (6) months.

Petitioners paid P61,000.00 as downpayment upon the signing of the contract. In the
meantime, interest began to accrue on the P157,000.00 balance of the purchase price.

On November 4, 1992, the Urban Bank informed respondent corporation that petitioners’ loan
of P148,000.00, intended as payment for their obligation, was approved. However, the bank
imposed the following conditions: the amount shall be released only after its mortgage lien shall have
been registered in the Registry of Deeds and annotated on petitioners’ land title; and that respondent
must first execute a deed of absolute sale in favor of petitioners.

On November 26, 1992, the parties entered into a Compromise Agreement[4] whereby
petitioners agreed to pay respondent, on or before March 26, 1993, the amount
of P38,203.33 representing the accrued interest as of that date on the P157,000.00 balance of the
purchase price; and that respondent shall execute a Deed of Sale to facilitate the transfer of title to
petitioners. On the same day, petitioners paid the buyer’s equity of P9,000.00.

On December 1, 1992, respondent, pursuant to the Compromise Agreement, executed

a Deed of Sale[5] in favor of petitioners. But they refused to pay the interest agreed upon despite
respondent’s repeated demand.

On January 26, 1995, respondent filed with the Metropolitan Trial Court (MTC), Branch
78, Parañaque City a complaint for a sum of money against petitioners. The MTC, in its
Decision[6] dated June 17, 1996, dismissed the complaint, holding that it is for specific performance
cognizable by the Regional Trial Court (RTC).

On appeal by respondent, the RTC, Branch 258, Parañaque City rendered its Decision
dated November 19, 1996 affirming the MTC judgment dismissing the complaint “not on the ground
of lack of jurisdiction, but for lack of cause of action.” [7]

Petitioners filed a motion for reconsideration but it was denied by the RTC in its Order
of February 04, 1997.

On February 28, 1997, respondent filed with the Court of Appeals a petition for review. In its
Decision dated August 25, 1997, the appellate court held that respondent’s complaint is for a sum of
money, the Contract to Sell being a “unilateral acknowledgment of an existing debt” on petitioners’
part. The dispositive portion of the Decision reads:
 WHEREFORE, premises considered, the petition is hereby given DUE
COURSE and the assailed Decision dated November 19, 1996 of the RTC of
Parañaque, Branch 258, and its Order dated February 4, 1997 denying therein
plaintiff’s Motion for Reconsideration, as well as the Decision dated June 17, 1996 of
the Metropolitan Trial Court of Parañaque, Branch 78, are REVERSED and SET
ASIDE.

A new judgment is hereby entered ordering defendant spouses Cesar and Elvira
Dumlao to pay the sum of P109,929.79 representing the accumulated interests as
of January 6, 1995with interest at 2% per month computed from January 6, 1995.

SO ORDERED.[8]

Petitioners filed a motion for reconsideration but it was denied by the Court of Appeals in its
Resolution dated November 13, 1997.

Hence, this petition.

The issue for our resolution is whether petitioners are liable to pay interest on the balance of
the purchase price.

Petitioners insist that they are not liable to pay interest since the loan proceeds were released,
not to petitioners, but directly to respondent; and that pending the release, no interest should accrue.

Petitioners’ arguments are misplaced.

Obligations arising from contracts have the force of law between the contracting parties and
should be complied with in good faith.[9] We must look into the terms of the contract to determine
the respective obligations of the parties thereto. If the terms of a contract are clear and leave no
doubt upon the contracting parties’ intention, then such terms should be applied in their literal
meaning.[10]

In this case, there is no question that the parties voluntarily entered into a Contract to Sell a
parcel of land. The terms of payment of the purchase price are clear and unambiguous, thus:

SECOND – That in consideration of the agreement to sell the above described

property, the VENDEE obligates himself/herself to pay the VENDOR the sum of TWO
HUNDRED EIGHTEEN THOUSAND (P218,000.00) PESOS, Philippine Currency from
the date of execution of this contract until paid as follows:

a) The amount of SIXTY ONE THOUSAND xxx (P61,000.00) PESOS when

this contract is signed, and
 b) The balance of ONE HUNDRED FIFTY SEVEN THOUSAND
(P157,000.00) PESOS shall be paid with interest at 24% per annum to be
computed based on the outstanding and payable balance, as of the date
of downpayment, within a period of SIX (6) MONTHS x x x. Any installment
not paid on or before the due date, or within the grace period of five (5) days
thereafter, shall bear a penalty of 2% per month based on the remaining
unpaid monthly installments. Note: As per agreement, the amount
of P148,000.00 is receivable thru an URBAN BANK Letter of Guaranty (Pag-
ibig Loan)

THIRD – That demand for payment by the VENDOR is not necessary to make
the VENDEE incur delay (default). Note: Buyer’s equity is P9,000.00.

Pursuant to the above agreement, it is clear that a 24% interest per annum on the balance
of P157,000.00 shall be paid to respondent by petitioners. Having signed the contract, petitioners
are bound to comply with its terms and conditions in good faith. We reiterate that the contract is the
law between them.

We observe that respondent, faithful to its part of the bargain, executed a deed of sale in favor
of petitioners. In fact, a Transfer Certificate of Title was already issued in their names. Fairness
demands that petitioners also fulfill their obligation to pay interest on the balance of the purchase
price.

WHEREFORE, we DENY the petition. The assailed Decision and Resolution of the Court of
Appeals in CA-G.R. SP No. 43366 are AFFIRMED.