CONFUSION OR MERGER OF RIGHTS

G.R. No. L-15874

September 19, 1961

RICARDO L. MANALILI, Plaintiff-Appellant, vs. GOVERNMENT SERVICE INSURANCE

SYSTEM, Respondent-Appellee.
Ricardo L. Manalili for and in his own behalf as plaintiff-appellant.
Monasterial and Silang for respondent-appellee.
DE LEON, J:
Appellant Ricardo Manalili is a world war II USAFFE veteran and as such a holder of a
backpay certificate of indebtedness issued by the Treasurer of the Philippines under Republic Act No.
304 with a remaining face value of P8,007.29 after several partial redemptions by the Government.
The certificate was supposed to have been completely redeemed by the Government on June 8,
1958.chanroblesvirtualawlibrarychanrobles virtual law library
On April 12, 1957 and again on December 16, 1957, appellant was, upon application, granted
real estate loans by appellee Government Service Insurance System (hereinafter referred to as GSIS,
for short) in the aggregate amount of P13,600.00, payable in monthly amortizations. The loans were
secured with a mortgage on appellant's property situated in Tayug, Pangasinan, the mortgage contract
providing, among other things, that "If the mortgagor shall at any time, fail or refuse to pay any of the
amortizations on the indebtedness or the interest when due, or whatever other obligation herein
agreed, then all the amortizations and other obligations of the Mortgagor of any nature, shall become
due, payable and defaulted and the Mortgagee may immediately foreclose this mortgage judicially or
extrajudicially . .
As appellant failed to pay the monthly amortizations from December, 1957, despite repeated
demands by the GSIS, the latter, on February 28, 1959, applied for the extrajudicial foreclosure of his
mortgaged property.
To settle his obligations with the GSIS, appellant made representations to the Army Finance
Service, the Executive Secretary and finally direct to the National Treasurer for the speedy release of
his backpay check, but his efforts were to no avail. On April 10, 1959, he also wrote to Colonel
Vicente Tiongson, a member of the GSIS Board of Trustees, requesting that his backpay certificate of
indebtedness be applied in payment of his overdue unpaid amortizations, but the request was denied
by the Board of Trustees on the same date.
In order to compel the GSIS to accept his backpay certificate of indebtedness, appellant on
April 14, 1959 filed with the Court of First Instance of Pangasinan the present proceedings for
mandamus.
Resisting the action, the GSIS alleged, in effect, that it cannot be compelled by mandamus to
accept appellant's backpay certificate in payment of his obligations because his indebtedness to the
GSIS was not subsisting at the time of the approval of Republic Act No. 304, otherwise known as the
Backpay Law, as well as of the Amendatory Act, Republic Act No. 897.
After the parties had submitted a stipulation of facts and filed their respective memorandum, the
lower court on June 24, 1959 rendered decision dismissing appellant's complaint. Reconsideration of
the decision having been denied, appellant appealed directly to this Court.
The pertinent provisions of section 2 of both Republic Act No. 304 and Republic Act No. 897,
which were approved on June 18, 1948 and June 20, 1953, respectively, read:

A. SEC. 2. The Treasurer of the Philippines shall, upon application, and within one year from the
approval of this Act, and under such rules and regulations as may be promulgated by the Secretary of
Finance, acknowledge and file requests for the recognition of the right to the salaries or wages as
provided in section one hereof, and notice of such acknowledgement shall be issued to the applicant,
which state the total amount of such salaries or wages due the applicant and certify that it shall be
redeemed by the Government of the Philippines within ten years from the date of their issuance
without interest: Provided, That upon application and subject to such rules and regulations as may be
approved by the Secretary of Finance, a certificate of indebtedness may be issued by the Treasurer of
the Philippines covering the whole or a part of the total salaries or wages the right to which has been
duly acknowledged and recognized, provided that the face value of such certificate of indebtedness
shall not exceed the amount that the applicant may need for the payment of (1) obligations subsisting
at the time of the approval of this Act for which the applicant may directly be liable to the
Government or to any of its branches or instrumentalities, the corporations owned or controlled by the
Government, or to any citizen of the Philippines, or to any association or corporation organized under
the laws of the Philippines, who may be willing to accept the same for such settlement; . . . And
provided, also, That investment funds or banks or other financial institutions owned or controlled by
the Government shall, subject to availability of loanable funds, and any provisions of their charters,
articles of incorporations, by-laws, or rules and regulations to the contrary notwithstanding, accept or
discount at not more than two per centum per annum for ten years such certificate for the following
purposes only: (1) the acquisition of real property for use as the applicant's home or (2) the building or
construction or reconstruction of the residential house of the payee of such certificate . . .. (Republic
Act No. 304.)
B. SEC. 2. Section two of the said Act (Republic Act 304) as amended by Republic Act Numbered
Eight Hundred, is further amended to read:
C. "SEC. 2. . . . Provided, That upon application and subject to such rules and regulations as may be
approved by the Secretary of Finance a certificate of indebtedness may be issued by the Treasurer of
the Philippines covering the whole or a part of the total salaries or wages the right to which has been
duly acknowledged and recognized, provided that the face value of such certificate of indebtedness
shall not exceed the amount that the applicant may need for the payment of (1) obligations subsisting
at the time of the approval of this amendatory Act for which the applicant may directly be liable to the
Government or to any of its branches or instrumentalities, or the corporation owned or controlled by
the Government, or to any citizen of the Philippines, or to any association or corporation organized
under the laws of the Philippines, who may be willing to accept the same for such settlement. . . ..
(Republic Act No. 897.)
Under the provisions of section 2, Republic Act No. 304, this Court in the case of Diokno vs.
Rehabilitation Finance Corporation (48 Off. Gaz p. 2717), has ruled that the acceptance or discount of
backpay certificates in the payment of outstanding obligations to a government owned or controlled
corporation is merely discretionary on the part of the latter and consequently cannot be compelled by
mandamus. Speaking through Justice Labrador, this Court said:
. . . we are of the opinion that the law in question (section 2 of the Backpay Law), insofar as the
discount and acceptance of backpay certificates are concerned, should be interpreted to be directory
merely, not mandatory, as claimed by plaintiff-appellant, the same to be construed as a directive for
the Rehabilitation Finance Corporation to invest a reasonable portion of its funds for the discount of
backpay certificates, from time to time and in its sound discretion, as circumstances and its resources
may warrant.
Having come to the conclusion that section 2 of the Backpay Law is directory merely, we now
address ourselves to the propriety of the action, which the plaintiff appellant labels as specific
performance. As the action is not based on any contractual relation between the plaintiff-appellant and
the defendant-appellee, it may be one for specific performance; it is in effect predicated on a supposed
legal duty imposed by law and is properly designated as a special civil action of mandamus, because

the appellant seeks to compel the appellee to accept his backpay certificate in payment of his
outstanding obligation. We are not impressed by the defense, technical in a sense, that the
Rehabilitation Finance Corporation is not expressly authorized to accept certificates in payment of
outstanding loans. There is no provision expressly authorizing this procedure or system; but neither is
there one prohibiting it. We believe the legislature could not have intended to discriminate against
those who have already built their houses, who have contracted obligations in so doing. We prefer to
predicate our ruling that this special action does not lie on the ground that the duty imposed by the
Backpay Law upon the appellee as to the acceptance or discount of backpay certificates is neither
clear nor ministerial, but discretionary merely and that mandamus does not issue to control the
exercise of discretion of a public officer . . ..
We must admit, however, that appellant's case is not entirely without any merit or justification;
similar situations have already been favorably acted upon by the Congress, when it ordered that
certificates be accepted in payment of outstanding obligations, and by the Rehabilitation Finance
Corporation in its abovementioned resolution. But we feel we are powerless to enforce his claim, as
the acceptance and discount of backpay certificates has been placed within the sound discretion of the
Rehabilitation Finance Corporation, and subject to the availability of loanable funds, and said
discretion may not be reviewed or controlled by us. It is clear that his remedy must be available in
other quarters, not in the court of justice." (Emphasis supplied.) .
In the above cited case, plaintiff Diokno's indebtedness to the Rehabilitation Finance
Corporation was incurred on January 27, 1950. He could not, therefore, avail himself of the
provisions of section 2 of Republic Act No. 304, approved on June 18, 1948, because said section
provides that the application for recognition of backpay must have been filed within one year after the
approval of said Act, and the debt must be subsisting at the time of said approval.
The same construction, in effect, has been given to the provisions of section 2 of the
Amendatory Act (Republic Act No. 897). Thus, in the case of Florentino, et al. vs. Philippine National
Bank (52 Off. Gaz. 2522), where petitioner Florentino incurred his debt to the Philippine National
Bank on January 2, 1953, so that his obligation was subsisting when the Amendatory Act 897 was
approved (on June 21, 1953), it was held that the bank had no option but to accept backpay
certificates in payment of debt owed to it by the ex-USAFFE and guerrilia holders of certificates. This
ruling was reiterated in the case of Sabelino vs. Rehabilitation Finance Corporation (G.R. No. L11790, September 30, 1958). Again, in the case of Philippine National Bank vs. Ereneta, et al., (G.R.
No. L-13058, August 28, 1959), where the plaintiff bank refused to accept the backpay certificate of
defendant Ramon Ereneta on the ground that its policy was to refuse acceptance of certificates of
indebtedness in payment of obligations subsisting at the time of the approval of Republic Act No. 897,
this Court held that the acceptance of such backpay certificates in payment of loans to government
corporations is obligatory upon the appellee bank. Of course, added the Court, after the enactment of
Republic Act No. 1596 dated June 16, 1956, which adds a new provision, section 9-a, to Republic Act
No. 1300, otherwise known as the Revised Charter of the Philippine National Bank, the obligation
imposed upon the bank has been removed. To the same effect is our latest ruling in the case of Buyco
vs. Philippine National Bank (G.R. No. L-14406, June 30, 1961).
Conformably with the ruling in the above cited cases, particularly the case of Diokno vs.
Rehabilitation Finance Corporation, supra, we are constrained to find and so hold that the provisions
of the Backpay Law, Republic Act No. 304, as to herein appellee GSIS is merely directory or
discretionary and not mandatory, appellant's indebtedness having been incurred only in April and
December of 1957, that is, long after the approval of either Republic Act No. 304 or its Amendatory
Act No. 897. Consequently, mandamus will not lie, the duty imposed upon the appellee GSIS as to the
acceptance or discount of appellant's backpay certificate being neither clear nor ministerial.
Appellant also claims in his brief that his obligation to appellee GSIS has been extinguished due
to confusion or merger of rights, or compensated with what the Government of the Philippines owes
him under his backpay certificate of indebtedness, which became due and demandable as of June 18,

1958. The claim, apparently, is predicated on the theory that the Government of the Philippines and
the GSIS are one and identical and that a claim against one is necessarily a claim against the other.
But while appellant may be considered a creditor to the Government insofar as his backpay claim is
concerned, he does not enjoy the same standing as regards the GSIS, herein appellee. It can readily be
gleaned from the GSIS charter that it is a private corporation with a personality separate and distinct
from the Government. Indeed, this Court has had occasion to rule in the case of Abad Santos vs.
Auditor General (79 Phil. 190) that "the Government Service Insurance System is not the government
itself, but is a separate institution, with its existence, own personality, autonomous and independent."
Under the circumstances, there can be no compensation, much less confusion or merger of rights, as
to extinguish appellant's outstanding obligation to the GSIS.
For all the foregoing considerations, the judgment appealed from is hereby affirmed, with costs
against the appellant.
Bengzon, C.J., Padilla, Labrador, Reyes, J.B.L., Barrera, Paredes, Dizon and Natividad, JJ., concur.
Bautista Angelo, J., on leave, took no part.
Concepcion, J., took no part.

RELATIVITY OF CONTRACTS
SECOND DIVISION
[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 defendants
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 attorneys 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
1978450 reams at P290.00/ream; August and September 1978700 reams at P290/ream; January
1979575 reams at P307.20/ream; March 1979575 reams at P307.20/ream; July 1979575 reams at
P307.20/ream; and October 1979575 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 petitioners 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 petitioners 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 petitioners
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 petitioners
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 respondents 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 attorneys fees, for lack of factual and legal basis.
Expectedly, petitioner filed this instant petition contending that the appellate courts 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 PETITIONERS 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 petitioners breach of contract with Philacor.
Petitioners 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 petitioners 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 respondents 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
further and 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 petitioners 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
petitioners 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 petitioners 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 petitioners 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 attorneys 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.
Bellosillo, (Chairman), Mendoza, Buena, and De Leon, Jr., JJ., concur.

FALSE CLAUSE
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-2277

December 29, 1950

MONICO CONCEPCION, plaintiff-appellant, vs. PACIENCIA STA. ANA, defendant-appellee.

Yap and Garcia for appellant.
Tomas Yumol for appellee.
FERIA, J.:
An action was instituted by Monico Concepcion vs. Paciencia Sta. Ana to annul the sale made by the
late Perpetua Concepcion, sister of the plaintiff, of three parcels of land with the improvements
thereon to the defendant. The complaint alleges, among others, that the plaintiff is the only surviving
legitimate brother of Perpetua Concepcion, who died on or about January 28, 1948, without issue and
without leaving any will; that in her life time or on about June 29, 1945, said Perpetua Concepcion, in
connivance with the defendant and with intent to defraud the plaintiff, sold and conveyed three
parcels of land for a false and fictitious consideration to the defendant, who secured transfer
certificates of title of said lands issued under her name; and that the defendant has been in possession
of the properties sold since the death of Perpetua Concepcion, thereby causing damages to the
plaintiff in the amount of not less than two hundred (P200) pesos.
Defendant filed a motion to dismiss the complaint on the ground that it does not state a cause of
action, because the deceased being the owner of the properties sold had the right to enjoy and dispose
of them without further limitation than those established by law.
The Court of First Instance of Manila granted the motion to dismiss and dismissed the complaint on
the ground that "the plaintiff is not a party to the deed of sale executed by Perpetua Concepcion in
favor of the defendant. Even in the assumption that the consideration of the contract is fictitious, the
plaintiff has no right of action against the defendant. Under article 1302 of the Civil Code, "the action
to annul a contract may be brought by any person principally or subsidiarily bound thereby." The
plaintiff is not bound by the deed of sale executed by the deceased in favor of the defendant. He has
no obligation under the deed."
Plaintiff appealed from the order of the court dismissing his complaint, and now assigns as erroneous
the order appealed from on the following grounds: (1) that a simulated or fictitious sale for a fictitious
or false consideration is null and void per se or non-existence, hence it cannot transfer ownership; and
(2) that according to article 1302 of the same code, "the action to annul a contract may be brought by
a person principally or subsidiarily bound thereby," and as under article 1257 of the Civil Code
"contracts shall be binding only upon the parties who make them and their heirs," the plaintiff as heir
of the deceased contracting party can bring action to annul the contract of sale under consideration.
(1) The plaintiff's contention that a simulated or fictitious contract of sale with a false consideration is
null and void per se, or is a contrato inexistente, not merely a contrato nulo, is not correct. Article
1276 of the Civil Code 1 expressly provides that "the statement of a false consideration in contract
shall be ground for annulment," and article 1301 of the same code provided for the limitation of
actions for annulment of a contract.

In support of his contention that the contract of sale under consideration being a fictitious contract or
contract with a false consideration is null per se or non-existent, plaintiff quotes Manresa's comment
on article 1274 to 1277, Vol. 8, p. 623, which says: "Recognizing this analogy, it was held by the
Supreme Court of Spain that a fictitious contract, or contract entered into with false consideration
does not confer any right or produce any legal effect, citing the judgments of the Supreme Court of
Spain of October 31, 1865, of March 21, 1884, and of November 23, 1877." Appellant's conclusion is
not correct. By stating that contracts with false consideration confer no right and produce no legal
effect, Manresa does not mean to say that they are null and void per se or non-existent as
contradistinguished from annullable, for the effects of both non-existent and annullable contracts that
have been annulled are the same: they confer no right and produce no legal effect. What Manresa says
on page 700 of the same volume, commenting on article 1301, is the following: "The expression of a
false cause or consideration in the contract does not make it non-existent, and it shall only be a ground
for an action for nullity as provided by article 1276 and confirmed by article 1301 of the Civil Code.
There are some who consider this somewhat confused under the Code; for us it is very clear, for the
code repeatedly provides that the effect of a false consideration is limited to making the contract
voidable, and we have already pointed out that in this particular, our Civil Code has deviated
deliberately from the French Code, which includes indistinctly in one and the same provision
contracts without consideration and contracts in which the consideration is illicit or false."
In the case of De Belen vs. Collector of Customs and Sheriff of Manila (46 Phil. 241), this court,
through Mr. Justice Street, said that "The distinction between entire absence of contract (inexistencia)
and the situation requiring an action of rescission or nullity is fully expounded by Manresa in his
comment on article 1300 of the Civil Code (q.v.)."
(2) As to the appellant's second and last contention, under the law action to annul a contract entered
into with all the requisites mentioned in article 1261 whenever they are tainted with the vice which
invalidate them in accordance with law, may be brought, not only by any person principally bound or
who made them, but also by his heir to whom the right and obligation arising from the contract are
transmitted. Hence if no such rights, actions or obligations have been transmitted to the heir, the latter
can not bring an action to annul the contract in representation of the contracting party who made it. In
Wolfson vs. Estate of Martinez, 20 Phil., 340, this Supreme Court quoted with approval the judgment
of the Supreme Court of Spain of April 18, 1901, in which it was held that "he who is not a party to a
contract, or an assignee thereunder, or does not represent those who took part therein, has under
articles 1257 and 1302 of the Civil Code no legal capacity to challenge the validity of such contract."
And in Irlanda vs. Pitargue (22 Phil. 383) we held that "the testamentary or legal heir continues in law
as the juridical personality of his predecessor in interest, who transmit to him from the moment of his
death such of his rights, actions and obligations as are not extinguished thereby."lawphil.net
The question to be resolved is, therefore, whether the deceased Perpetua Concepcion has transmitted
to the plaintiff any right arising from the contract under consideration in order that he can bring an
action to annul the sale voluntarily made by her to the defendant with a false consideration. We are of
the opinion and so hold, that the late Perpetua Concepcion has not transmitted to the plaintiff any right
arising from the contract of conveyance or sale of her lands to the defendant, and therefore the
plaintiff cannot file an action to annul such contract as representative of the deceased.
According to the complaint, the deceased, in connivance with the defendant and with intent to defraud
the plaintiff, (that is, in order not to leave the properties above mentioned upon her death to the
plaintiff) sold and conveyed them to the latter, for a false and fictitious consideration. It is, therefore
obvious, that the conveyance or sale of said properties to the defendant was voluntarily made by the
deceased to said defendant. As the deceased had no forced heir, she was free to dispose of all her
properties as absolute owner thereof, without further limitation than those established by law, and the
right to dispose of a thing involves the right to give or to convey it to another without any
consideration. The only limitation established by law on her right to convey said properties to the
defendant without any consideration is, that she could not dispose of or transfer her property to
another in fraud of her creditors. And this court, in Solis vs. Chua Pua Hermanos (50 Phil. 636),

through Mr. Justice Street, held that "a voluntary conveyance, without any consideration whatever, is
prima facie good as between the parties, and such an instrument can not be declared fraudulent as
against creditors in the absence of proof, that there was at the time of the execution of the conveyance
a creditor who could be defrauded by the conveyance, 27 C. J., 470."
Even a forced heir of the deceased Perpetua Concepcion would have no right to institute as
representative of the decedent, an action of nullity of a contract made by the decedent to defraud his
creditors, because such a contract being considered illicit under article 1306 of the Civil Code,
Perpetua Concepcion herself had no right of action to annul it and recover the properties she had
conveyed to the defendant. But the forced heir could in such case bring an action to rescind the
contract under article 1291 (3) of the Civil Code. Manresa in his comments on articles 1305 and 1306
of the Civil Code (4th edition, volume 8, pp. 717, 718), says: "As to heirs, it is interesting that the
judgment of May 6, 1902, of the Supreme Court of Spain which denied a forced heir the right to
institute an action to annul contracts considered a illicit, for having been entered into by his
predecessor in interest for the purpose of depriving the forced heir of his legitime. The judgment
purported to hold that the proper action would have been an action to rescind conformity with what
we indicated in commenting on article 1291, and declared that 'even forced heirs who accept an
inheritance under the benefit of inventory are within the rule 2 of article 1806, that denies to the guilty
party the right to recover anything he may have given, or to enforce the performance of any
undertaking in his favor, when the other party has nothing to do with the illicit consideration; a
doctrine laid down in the judgment of July 4, 1896.'"
The reason why a forced heir has the right to institute an action of rescission is that the right to the
legitime is similar to a credit of a creditor. As the same Spanish author correctly states in commenting
on article 1291 of the Civil Code: "The rights of a forced heir to the legitime are undoubtedly similar
to a credit of a creditor in so far as the rights to the legitime may be defeated by fraudulent contracts,
and are superior to the will of those bound to respect them. In its judgment of October 28, 1897, the
Supreme Court of Spain held that the forced heirs instituted as such by their father to the latter's
testament have the undeniable right to institute an action to annul contracts entered into by the father
to their prejudice. As it is seen the action is called action of nullity, but it is rather an action of
rescission taking into account the purpose for which it is instituted and the confusion of ideas that has
prevailed in this matter. The doctrine we shall expound in commenting on articles 1302 and 1306 will
confirm what we have just stated." (Manresa Codigo Civil, 4th edition, Vol. 8, pp. 667 and 668.)
Therefore, as the plaintiff in the present case, not being a forced heir of the late Perpetua Concepcion,
can not institute an action to annul under article 1300 or to rescind under article 1291 (3) of the Civil
Code the contract under consideration entered into by the deceased with the defendant.
In view of the foregoing, the judgment of the lower court is affirmed with costs against the appellant.
So ordered.
Moran, C.J., Bengzon, Padilla, Tuason, Reyes, and Bautista Angelo, JJ., concur.
Montemayor, and Jugo, JJ., concur in the result.
PABLO, M.:
Concurro con la parte dispositiva.

RESCISSIBLE CONTRACTS
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 73893 June 30, 1987
MARGARITA SURIA AND GRACIA R. JOVEN, petitioners,
vs.
HON. INTERMEDIATE APPELLATE COURT, HON. JOSE MAR GARCIA (Presiding Judge of the
RTC of Laguna, Branch XXIV, Bian, Laguna), and SPOUSES HERMINIO A. CRISPIN and
NATIVIDAD C. CRISPIN, respondents.
De Castro & Cagampang Law Offices for petitioners.
Nelson A. Loyola for private respondents.
RESOLUTION
GUTIERREZ, JR., J.:
This is a petition for review on certiorari of the decision of the Court of Appeals dismissing for lack of
merit the petition for certiorari filed therein.
As factual background, we quote from the Court of Appeals' decision:
The factual and procedural antecedents of this case may be briefly stated as follows:
On June 20, 1983, private-respondents filed a complaint before the Regional Trial Court of Laguna,
Branch XXIV, for rescission of contract and damages, alleging among others:
1.

xxx

2.
That on March 31, 1975, plaintiffs being the owners of a parcel of land situated at Barrio San
Antonio, San Pedro, Laguna, entered into a contract denominated as DEED OF SALE WITH
MORTGAGE, with herein defendants, a true copy of said contract (which is made an integral part
hereof) is hereto attached as ANNEX ."A":
3.

xxx

4.
That the defendants violated the terms and conditions of the contract by failing to pay the
stipulated installments and in fact only one installment due in July 1975 (paid very late in the month
of September, 1975) was made all the others remaining unsettled to the present time;
5.
That repeated verbal and written demands were made by plaintiff upon the defendants for the
payment of the installments, some of said written demands having been made on September 24, 1981,
February 7, 1982, February 24, 1983, March 13, 1983, and April 12, 1983, but defendants for no
justifiable reason failed to comply with the demands of plaintiffs;
6.

xxx

On November 14, 1983, petitioners filed their answer with counterclaim.

On July 16, 1984, petitioners filed a motion to disniiss complaint, alleging that:
1.
That plaintiffs are not entitled to the subsidiary remedy of rescission because of the presence
of remedy of foreclosure in the Deed of Sale with Mortgage (Annex "A", Complaint);
2.
That, assuming arguendo that rescission were a proper remedy, it is apparent in the face of the
Complaint that the plaintiffs failed to comply with the requirements of law, hence the rescission was
ineffective, illegal, null and void, and invalid.
On July 26, 1984, private-respondents filed their opposition to the above motion.
In the meantime, on August 6, 1984, petitioners formerly offered to pay private-respondents all the
outstanding balance under the Deed of Sale with Mortgage, which offer was rejected by private
respondents on August 7, 1984.
On November 26, 1984, the respondent-Court denied the motion to dismiss. The order reads:
Defendants through counsel filed a Second Motion to Dismiss dated July 24, 1984 based on an
affirmative defense raised in their answer, that is, that the complaint fails to state a cause of action for
rescission against defendants because (1) plaintiffs are not entitled to the subsidiary remedy of
rescission because of the presence of the remedy of foreclosure in the Deed of Sale with Mortgage
(Annex "A", Complaint) and (2) assuming arguendo that rescission were a proper remedy, it is
apparent from the face of the Complaint that the plaintiffs failed to comply with the requirements of
law, hence the rescission was ineffective, illegal, null and void, and invalid.
After a careful perusal of the allegations of the complaint considered in the light of existing applicable
law and jurisprudence touching on the matters in issue, and mindful of the settled rule that in a motion
to dismiss grounded on lack of cause of action the allegations of the complaint must be assumed to be
true, the Court finds and holds that the motion to dismiss dated July 24, 1984 filed by defendants
lacks merit and therefore denied the same.
SO ORDERED.
On January 31, 1985, petitioners filed a motion for reconsideration to which private-respondents filed
their opposition on February 11, 1985. On February 19, 1985, petitioners filed their reply.
On March 13, 1985, the respondent-Court denied the motion for reconsideration. The order reads in
part:
xxx

xxx

xxx

Perusing the grounds invoked by the defendants in their Motion for Reconsideration and Reply as
well as the objections raised by plaintiffs in their opposition, and it appearing that in its Order dated
November 26, 1984, the Court has sufficiently, althou (sic) succinctly stated its reason for denying the
motion to dismiss dated July 16, 1984, that is, for lack of merit, the Court finds no overriding reason
or justification from the grounds invoked in the said Motion for Reconsideration for it to reconsider,
change, modify, or set aside its Order dated November 26, 1984. The Court still believes that the two
(2) grounds invoked by defendants in their Motion to Dismiss dated July 16, 1984 are not meritorious
when considered in the light of prevailing law and jurisprudence and the hypothetically admitted
allegations of the complaint, and for that reason it denied the motion to dismiss in its said order of
November 26, 1984.
The instant Motion for Reconsideration is therefore denied for lack of merit. (Pp, 29-32, Rollo)

The questions raised by petitioner are as follows:

I
IN A DEED OF SALE, WHICH IS COUPLED WITH A MORTGAGE TO SECURE PAYMENT OF
THE BALANCE OF THE PURCHASE PRICE, MAY THE SELLER RESORT TO THE REMEDY
OF RESCISSION UNDER ARTICLE 1191 OF THE CIVIL CODE WHICH PROVIDES FOR THE
SUBSIDIARY AND EQUITABLE REMEDY OF RESCISSION IN CASE OF BREACH OF
RECIPROCAL OBLIGATIONS?
Otherwise stated,
IS THE SUBSIDIARY AND EQUITABLE REMEDY OF RESCISSION AVAILABLE IN THE
PRESENCE OF A REMEDY OF FORECLOSURE IN THE LIGHT OF THE EXPRESS
PROVISION OF ARTICLE 1383 OF THE CIVIL CODE THAT: 'THE ACTION FOR RESCISSION
IS SUBSIDIARY; IT CANNOT BE INSTITUTED EXCEPT WHEN THE PARTY SUFFERING
DAMAGE HAS NO OTHER LEGAL MEANS TO OBTAIN REPARATION FOR THE SAME?
xxx

xxx

xxx

II
MAY THE SELLER LEGALLY DEMAND RESCISSION OF THE DEED OF SALE WITH
MORTGAGE WITHOUT OFFERING TO RESTORE TO THE BUYER WHAT HE HAS PAID, AS
REQUIRED BY ARTICLE 1385, OR COMPLYING WITH THE REQUIREMENTS OF THE
MACEDA LAW (REPUBLIC ACT 6552) GRANTING THE BUYER A GRACE PERIOD TO PAY
WITHOUT INTEREST, AND, IN CASE OF CANCELLATION IN CASE THE BUYER STILL
COULD NOT PAY WITHIN THE GRACE PERIOD, REQUIRING THE SELLER TO ORDER
PAYMENT OF THE CASH SURRENDER VALUE BEFORE THE CANCELLATION MAY
LEGALLY TAKE EFFECT (SEC. 3[b], LAST PAR., REP. ACT 6552)?
The petition was denied in a minute resolution on June 13, 1986 but was given due course on
September 29, 1986 on a motion for reconsideration.
The petition is impressed with merit.
The respondent court rejected the petitioners' reliance on paragraph (H) of the contract which grants
to the vendors mortgagees the right to foreclose "in the event of the failure of the vendees-mortgagors
to comply with any provisions of this mortgage." According to the appellate court, this stipulation
merely recognizes the right of the vendors to foreclose and realize on the mortgage but does not
preclude them from availing of other remedies under the law, such as rescission of contract and
damages under Articles 1191 and 1170 of the Civil Code in relation to Republic Act No. 6552.
The appellate court committed reversible error. As will be explained later, Art. 1191 on reciprocal
obligations is not applicable under the facts of this case. Moreover, Art. 1383 of the Civil Code
provides:
The action for rescission is subsidiary; it cannot be instituted except when the party suffering damage
has no other legal means to obtain reparation for the same.
The concurring opinion of Justice J.B.L. Reyes in Universal Food Corp. v. Court of Appeals (33
SCRA 22) was cited by the appellate court.
In that case, Justice J.B.L. Reyes explained:

xxx

xxx

xxx

... The rescission on account of breach of stipulations is not predicated on injury to economic interests
of the party plaintiff but on the breach of faith by the defendant, that violates the reciprocity between
the parties. It is not a subsidiary action, and Article 1191 may be scanned without disclosing anywhere
that the action for rescission thereunder is subordinated to anything other than the culpable breach of
his obligations by the defendant. This rescission is a principal action retaliatory in character, it being
unjust that a party be held bound to fulfill his promises when the other violates his. As expressed in
the old Latin aphorism: "Non servanti fidem, non est fides servanda," Hence, the reparation of
damages for the breach is purely secondary.
On the contrary, in the rescission by reason of lesion or economic prejudice, the cause of action is
subordinated to the existence of that prejudice, because it is the raison d 'etre as well as the measure of
the right to rescind. Hence, where the defendant makes good the damages caused, the action cannot be
maintained or continued, as expressly provided in Articles 1383 and 1384. But the operation of these
two articles is limited to the cases of rescission for lesion enumerated in Article 1381 of the Civil
Code of the Philippines, and does not apply to cases under Article 1191.
It is probable that the petitioner's confusion arose from the defective technique of the new Code that
terms both instances as "rescission" without distinctions between them; unlike the previous Spanish
Civil Code of 1889 that differentiated "resolution" for breach of stipulations from "rescission" by
reason of lesion or damage. But the terminological vagueness does not justify confusing one case with
the other, considering the patent difference in causes and results of either action.
According to the private respondents, the applicable law is Article 1191 of the Civil Code which
provides:
The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not
comply with what is incumbent upon him.
The injured party may choose between the fulfilment and the rescission of the obligation, with the
payment of damages in either case. He may also seek rescission, even after he has chosen fulfilment,
if the latter should become impossible.
The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a
period.
This is understood to be without prejudice to the rights of third persons who have acquired the thing,
in accordance with articles 1385 and 1388 and the Mortgage Law.
There is no dispute that the parties entered into a contract of sale as distinguished from a contract to
sell.
By the contract of sale, the vendor obligates himself to transfer the ownership of and to deliver a
determinate thing to the buyer, who in turn, is obligated to pay a price certain in money or its
equivalent (Art. 1458, Civil Code). From the respondents' own arguments, we note that they have
fully complied with their part of the reciprocal obligation. As a matter of fact, they have already
parted with the title as evidenced by the transfer certificate of title in the petitioners' name as of June
27, 1975.
The buyer, in tum, fulfilled his end of the bargain when he executed the deed of mortgage. The
payments on an installment basis secured by the execution of a mortgage took the place of a cash
payment. In other words, the relationship between the parties is no longer one of buyer and seller
because the contract of sale has been perfected and consummated. It is already one of a mortgagor and

a mortgagee. In consideration of the petitioners' promise to pay on installment basis the sum they owe
the respondents, the latter have accepted the mortgage as security for the obligation.
The situation in this case is, therefore, different from that envisioned in the cited opinion of Justice
J.B.L. Reyes. The petitioners' breach of obligations is not with respect to the perfected contract of sale
but in the obligations created by the mortgage contract. The remedy of rescission is not a principal
action retaliatory in character but becomes a subsidiary one which by law is available only in the
absence of any other legal remedy. (Art. 1384, Civil Code).
Foreclosure here is not only a remedy accorded by law but, as earlier stated, is a specific provision
found in the contract between the parties.
The petitioners are correct in citing this Court's ruling in Villaruel v. Tan King (43 Phil. 251) where
we Stated:
At the outset it must be said that since the subject-matter of the sale in question is real property, it
does not come strictly within the provisions of article 1124 of the Civil Code, but is rather subjected
to the stipulations agreed upon by the contracting parties and to the provisions of Article 1504 of the
Civil Code.
The "pacto comisorio" of "ley comisoria" is nothing more than a condition subsequent of the contract
of purchase and sale. Considered carefully, it is the very condition subsequent that is always attached
to all bilateral obligations according to article 1124; except that when applied to real property it is not
within the scope of said article 1124, and it is subordinate to the stipulations made by the contracting
parties and to the provisions of the article on which we are now commenting" (article 1504).
(Manresa, Civil Code, volume 10, page 286, second edition.)
Now, in the contract of purchase and sale before us, the parties stipulated that the payment of the
balance of one thousand pesos (P1,000) was guaranteed by the mortgage of the house that was sold.
This agreement has the two-fold effect of acknowledging indisputably that the sale had been
consummated, so much so that the vendee was disposing of it by mortgaging it to the vendor, and of
waiving the pacto comisorio, that is, the resolution of the sale in the event of failure to pay the one
thousand pesos (P1,000) such waiver being proved by the execution of the mortgage to guarantee the
payment, and in accord therewith the vendor's adequate remedy, in case of nonpayment, is the
foreclosure of such mortgage. (at pp. 255-256).
xxx

xxx

xxx

There is, therefore, no cause for the resolution of the sale as prayed for by the plaintiff. His action, at
all events, should have been one for the foreclosure of the mortgage, which is not the action brought
in this case.
Article 1124 of the Civil Code, as we have seen, is not applicable to this case. Neither is the doctrine
enunciated in the case of Ocejo, Perez & Co. v. International Banking Corporation (37 Phil. 631),
which plaintiff alleges to be applicable, because that principle has reference to the sale of personal
property. (at p. 257)
The petitioners have offered to pay au past due accounts. Considering the lower purchasing value of
the peso in terms of prices of real estate today, the respondents are correct in stating they have
suffered losses. However, they are also to blame for trusting persons who could not or would not
comply with their obligations in time. They could have foreclosed on the mortgage immediately when
it fell due instead of waiting all these years while trying to enforce the wrong remedy.
WHEREFORE, the petition is hereby GRANTED. The Intermediate Appellate Court's decision dated
November 8, 1985 and the resolution dated December 6, 1985 and February 28, 1986 are

REVERSED and SET ASIDE. The petitioners are ordered to pay the balance of their indebtedness
under the Deed of Absolute Sale with Mortgage with legal interests from the second installment due
on October 24, 1975 until fully paid, failing which the respondents may resort to foreclosure.
SO ORDERED.
Fernan (Chairman), Paras, Padilla, Bidin and Cortes, JJ., concur.

UNENFORCEABLE CONTRACTS
G.R. No. L-23351, Paredes v. Espino, 22 SCRA 1000
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
March 13, 1968
G.R. No. L-23351
CIRILO PAREDES, plaintiff-appellant,
vs.
JOSE L. ESPINO, defendant-appellee.
Simeon Capule for plaintiff-appellant.
Iigo R. Pea for defendant-appellee.
REYES, J.B.L., Actg. C.J.:
Appeal from an order of the Court of First Instance of Palawan in its Civil Case No. 453, granting a
motion to dismiss the complaint.
Appellant Cirilo Parades had filed an action to compel defendant-appellee Jose L. Espino to execute a
deed of sale and to pay damages. The complaint alleged that the defendant "had entered into the sale"
to plaintiff of Lot No. 67 of the Puerto Princesa Cadastre at P4.00 a square meter; that the deal had
been "closed by letter and telegram" but the actual execution of the deed of sale and payment of the
price were deferred to the arrival of defendant at Puerto Princesa; that defendant upon arrival had
refused to execute the deed of sale altho plaintiff was able and willing to pay the price, and continued
to refuse despite written demands of plaintiff; that as a result, plaintiff had lost expected profits from a
resale of the property, and caused plaintiff mental anguish and suffering, for which reason the
complaint prayed for specific performance and damages.
Defendant filed a motion to dismiss upon the ground that the complaint stated no cause of action, and
that the plaintiff's claim upon which the action was founded was unenforceable under the Statute of
Frauds.
Plaintiff opposed in writing the motion to dismiss and annexed to his opposition a copy of a letter
purportedly signed by defendant (Annex "A"), wherein it was stated (Record on Appeal, pp. 19-20)
106 GonzagaSt.
Tuguegarao,Cagayan
May18,1964
Mr.CiriloParedes
Pto.Princesa,Palawan
Dear Mr. Paredes:
So far I received two letters from you, one dated April 17 and the other April 29, both 1964. In reply
thereto, please be informed that after consulting with my wife, we both decided to accept your last
offer of Four (P4.00) pesos per square meter of the lot which contains 1826 square meters and on cash
basis.

In order that we can facilitate the transaction of the sale in question, we (Mrs. Espino and I), are going
there (Puerto Princess, Pal.) to be there during the last week of the month, May. I will send you a
telegram, as per your request, when I will reach Manila before taking the boat for Pto. Princess. As it
is now, there is no schedule yet of the boats plying between Manila and Pto. Princess for next week.
Plaintiff also appended as Annex "A-1", a telegram apparently from defendant advising plaintiff of his
arrival by boat about the last week of May 1964 (Annex "A-1" Record on Appeal, p. 21), as well as a
previous letter of defendant (Appendix B, Record on Appeal, p. 35) referring to the lot as the one
covered by Certificate of Title No. 62.
These allegations and documents notwithstanding, the Court below dismissed the complaint on the
ground that there being no written contract, under Article 1403 of the Civil Code of the Philippines
Although the contract is valid in itself, the same can not be enforced by virtue of the Statute of
Frauds. (Record on Appeal, p. 37).
Plaintiff duly appealed to this Court.
The sole issue here is whether enforcement of the contract pleaded in the complaint is barred by the
Statute of Frauds; and the Court a quo plainly erred in holding that it was unenforceable.
The Statute of Frauds, embodied in Article 1403 of the Civil Code of the Philippines, does not require
that the contract itself be in writing. The plain text of Article 1403, paragraph (2) is clear that a written
note or memorandum, embodying the essentials of the contract and signed by the party charged, or his
agent, suffices to make the verbal agreement enforceable, taking it out of the operation of the statute.
Art. 1403. The following contracts are unenforceable, unless they are ratified:
(1) . .
(2) Those that do not comply with the Statute of Frauds as set forth in this number. In the following
cases an agreement hereafter made shall be unenforceable by action, unless the same, or some note or
memorandum thereof, be in writing, and subscribed by the party charged, or by his agent; evidence,
therefore, of the agreement cannot be received without the writing, or a secondary evidence of its
contents:
xxxxxxxxx
(e) An agreement for the leasing for a longer period than one year, or for the sale of real property or of
an interest therein.
xxxxxxxxx
In the case at bar, the complaint in its paragraph 3 pleads that the deal had been closed by letter and
telegram" (Record on Appeal, p. 2), and the letter referred to was evidently the one copy of which was
appended as Exhibit A to plaintiff's opposition to the motion dismiss. This letter, transcribed above in
part, together with that one marked as Appendix B, constitute an adequate memorandum of the
transaction. They are signed by the defendant-appellee; refer to the property sold as a lot in Puerto
Princesa, Palawan, covered, by TCT No. 62; give its area as 1826 square meters and the purchase
price of four (P4.00) pesos per square meter payable in cash. We have in them therefore, all the
essential terms of the contract, and they satisfy the requirements of the Statute of Frauds. We have
ruled in Berg vs. Magdalena Estate, Inc., 92 Phil. 110, 115, that a sufficient memorandum may be
contained in two or more documents.

Defendant-appellee argues that the authenticity of the letters has not been established. That is not
necessary for the purpose of showing prima facie that the contract is enforceable. For as ruled by us in
Shaffer vs. Palma, L-24115, March 1, 1968, whether the agreement is in writing or not, is a question
of evidence; and the authenticity of the writing need not be established until the trial is held. The
plaintiff having alleged that the contract is backed by letter and telegram, and the same being a
sufficient memorandum, his cause of action is thereby established, especially since the defendant has
not denied the letters in question. At any rate, if the Court below entertained any doubts about the
existence of the written memorandum, it should have called for a preliminary hearing on that point,
and not dismissed the complaint.
WHEREFORE, the appealed order is hereby set aside, and the case remanded to the Court of origin
for trial and decision. Costs against defendant-appellee Jose L. Espino. So ordered.
Dizon, Makalintal, Bengzon, J.P., Zaldivar, Sanchez, Castro, Angeles and Fernando, JJ., concur.

VOIDABLE CONTRACTS
THIRD DIVISION
[G.R. No. 139532. August 9, 2001]
REGAL FILMS, INC., petitioner, vs. GABRIEL CONCEPCION, respondent.
DECISION
VITUG, J.:
The case involves a compromise judgment issued by the Regional Trial Court of Quezon City, later
affirmed by the Court of Appeals, and now being assailed in the instant petition for review.
Culled from the records, the facts that led to the controversy would not appear to be in serious dispute.
In 1991, respondent Gabriel "Gabby" Concepcion, a television artist and movie actor, through his
manager Lolita Solis, entered into a contract with petitioner Regal Films, Inc., for services to be
rendered by respondent in petitioners motion pictures. Petitioner, in turn, undertook to give two
parcels of land to respondent, one located in Marikina and the other in Cavite, on top of the talent fees
it had agreed to pay.
In 1993, the parties renewed the contract, incorporating the same undertaking on the part of petitioner
to give respondent the two parcels of land mentioned in the first agreement. Despite the appearance of
respondent in several films produced by petitioner, the latter failed to comply with its promise to
convey to respondent the two aforementioned lots.
On 30 May 1994, respondent and his manager filed an action against petitioner before the Regional
Trial Court of Quezon City, docketed Civil Case No. Q-94-20714 and raffled to Branch 76, for
rescission of contract with damages. In his complaint, respondent contended that he was entitled to
rescind the contract, plus damages, and to be released from further commitment to work exclusively
for petitioner owing to the latters failure to honor the agreement.
Instead of filing an answer to the complaint, petitioner moved for its dismissal on the allegation that
the parties had settled their differences amicably. Petitioner averred that both parties had executed an
agreement, dated 17 June 1994, which was to so operate as an addendum to the 1991 and 1993
contracts between them. The agreement was signed by a representative of petitioner and by Solis
purportedly acting for and in behalf of respondent Concepcion.
The preliminary conference held by the trial court failed to produce a settlement between the parties;
thereupon, the trial court ordered Solis and respondent to comment on petitioner's motion to dismiss.
On 30 September 1994, Solis filed a motion to dismiss the complaint reiterating that she, acting for
herself and for respondent Concepcion, had already settled the case amicably with petitioner. On 17
October 1994, respondent Concepcion himself opposed the motion to dismiss contending that the
addendum, containing provisions grossly disadvantageous to him, was executed without his
knowledge and consent. Respondent stated that Solis had since ceased to be his manager and had no
authority to sign the addendum for him.
During the preliminary conference held on 23 June 1995, petitioner intimated to respondent and his
counsel its willingness to allow respondent to be released from his 1991 and 1993 contracts with
petitioner rather than to further pursue the addendum which respondent had challenged.
On 03 July 1995, respondent filed a manifestation with the trial court to the effect that he was now
willing to honor the addendum to the 1991 and 1993 contracts and to have it considered as a
compromise agreement as to warrant a judgment in accordance therewith. The manifestation elicited a
comment from both petitioner and Solis to the effect that the relationship between the parties had by

then become strained, following the notorious Manila Film Festival scam involving respondent, but
that it was still willing to release respondent from his contract.
On 24 October 1995, the trial court issued an order rendering judgment on compromise based on the
subject addendum which respondent had previously challenged but later agreed to honor pursuant to
his manifestation of 03 July 1995.
Petitioner moved for reconsideration; having been denied, it then elevated the case to the Court of
Appeals arguing that the trial court erred in treating the addendum of 17 June 1994 as being a
compromise agreement and in depriving it of its right to procedural due process.
On 30 July 1999, the appellate court rendered judgment affirming the order of the trial court of 24
October 1995; it ruled:
"In the instant case, there was an Addendum to the contract signed by Lolita and Regal Films'
representative to which addendum Concepcion through his Manifestation expressed his conformity.
There was, therefore, consent of all the parties.
The addendum/compromise agreement was perfected and is binding on the parties and may not later
be disowned simply because of a change of mind of Regal Films and/or Lolita by claiming, in their
Opposition/Reply to Concepcion's Manifestation, that after the 1995 Metro Manila Films Festival
scam/fiasco in which Concepcion was involved, the relationship between the parties had become
bitter to render compliance with the terms and conditions of the Addendum no longer possible and
consequently release Concepcion from the 1991 and 1993 contracts."[1]
Dissatisfied, petitioner appealed to this Court claiming in its petition for review that "I.
THE COURT OF APPEALS ERRED IN AFFIRMING THE TRIAL COURT'S ACTION IN
RENDERING JUDGMENT ON A COMPROMISE BASED ON THE ADDENDUM WHEN
PETITIONER REGAL FILMS SUBMITTED THIS DOCUMENT TO THE TRIAL COURT
MERELY TO SERVE AS BASIS FOR ITS MOTION TO DISMISS;
II.
THE COURT OF APPEALS ERRED IN RENDERING JUDGMENT ON A COMPROMISE WHEN
THE PARTIES DID NOT AGREE TO SUCH A COMPROMISE;
III.
THE COURT OF APPEALS ERRED IN HOLDING THAT THE MINDS OF THE PARTIES HAD
MET TO ELEVATE THE PREVIOUSLY REJECTED ADDENDUM TO THE LEVEL OF A
JUDGMENT ON A COMPROMISE."[2]
The petition is meritorious.
Petitioner argues that the subject addendum could not be the basis of the compromise judgment. The
Court agrees.
A compromise is an agreement between two or more persons who, for preventing or putting an end to
a lawsuit, adjust their respective positions by mutual consent in the way they feel they can live with.
Reciprocal concessions are the very heart and life of every compromise agreement,[3] where each
party approximates and concedes in the hope of gaining balanced by the danger of losing.[4] It is, in
essence, a contract. Law and jurisprudence recite three minimum elements for any valid contract - (a)

consent; (b) object certain which is the subject matter of the contract; and (c) cause of the obligation
which is established.[5] Consent is manifested by the meeting of the offer and the acceptance upon the
thing and the cause which are to constitute the agreement. The offer, however, must be certain and the
acceptance seasonable and absolute; if qualified, the acceptance would merely constitute a counteroffer.[6]
In this instance, the addendum was flatly rejected by respondent on the theses (a) that he did not give
his consent thereto nor authorized anyone to enter into the agreement, and (b) that it contained
provisions grossly disadvantageous to him. The outright rejection of the addendum made known to
the other ended the offer. When respondent later filed his Manifestation, stating that he was, after all,
willing to honor the addendum, there was nothing to still accept.
Verily, consent could be given not only by the party himself but by anyone duly authorized and acting
for and in his behalf. But by respondent's own admission, the addendum was entered into without his
knowledge and consent. A contract entered into in the name of another by one who ostensibly might
have but who, in reality, had no real authority or legal representation, or who, having such authority,
acted beyond his powers, would be unenforceable.[7] The addendum, let us then assume, resulted in
an unenforceable contract, might it not then be susceptible to ratification by the person on whose
behalf it was executed? The answer would obviously be in the affirmative; however, that ratification
should be made before its revocation by the other contracting party.[8] The adamant refusal of
respondent to accept the terms of the addendum constrained petitioner, during the preliminary
conference held on 23 June 1995, to instead express its willingness to release respondent from his
contracts prayed for in his complaint and to thereby forego the rejected addendum. Respondent's
subsequent attempt to ratify the addendum came much too late for, by then, the addendum had already
been deemed revoked by petitioner.
WHEREFORE, the petition is GRANTED, and the appealed judgment of the Court of Appeals
affirming that of the trial court is SET ASIDE, and the case is remanded to the trial court for further
proceedings. No costs.
SO ORDERED.
Melo, (Chairman), Panganiban, Gonzaga-Reyes, and Sandoval-Gutierrrez, JJ., concur.

SECOND DIVISION
[G.R. No. 139982. November 21, 2002]
JULIAN FRANCISCO (Substituted by his Heirs, namely: CARLOS ALTEA FRANCISCO; the heirs
of late ARCADIO FRANCISCO, namely: CONCHITA SALANGSANG-FRANCISCO (surviving
spouse), and his children namely: TEODULO S. FRANCISCO, EMILIANO S. FRANCISCO,
MARIA THERESA S. FRANCISCO, PAULINA S. FRANCISCO, THOMAS S. FRANCISCO;
PEDRO ALTEA FRANCISCO; CARINA FRANCISCO-ALCANTARA; EFREN ALTEA
FRANCISCO; DOMINGA LEA FRANCISCO-REGONDON; BENEDICTO ALTEA FRANCISCO
and ANTONIO ALTEA FRANCISCO), petitioner, vs. PASTOR HERRERA, respondent.
DECISION
QUISUMBING, J.:
This is a petition for review on certiorari of the decision[1] of the Court of Appeals, dated August 30,
1999, in CA-G.R. CV No. 47869, which affirmed in toto the judgment[2] of the Regional Trial Court
(RTC) of Antipolo City, Branch 73, in Civil Case No. 92-2267. The appellate court sustained the trial
courts ruling which: (a) declared null and void the deeds of sale of the properties covered by Tax
Declaration Nos. 01-00495 and 01-00497; and (b) directed petitioner to return the subject properties
to respondent who, in turn, must refund to petitioner the purchase price of P1,750,000.
The facts, as found by the trial court and affirmed by the Court of Appeals, are as follows:
Eligio Herrera, Sr., the father of respondent, was the owner of two parcels of land, one consisting of
500 sq. m. and another consisting of 451 sq. m., covered by Tax Declaration (TD) Nos. 01-00495 and
01-00497, respectively. Both were located at Barangay San Andres, Cainta, Rizal.[3]
On January 3, 1991, petitioner bought from said landowner the first parcel, covered by TD No. 0100495, for the price of P1,000,000, paid in installments from November 30, 1990 to August 10, 1991.
On March 12, 1991, petitioner bought the second parcel covered by TD No. 01-00497, for P750,000.
Contending that the contract price for the two parcels of land was grossly inadequate, the children of
Eligio, Sr., namely, Josefina Cavestany, Eligio Herrera, Jr., and respondent Pastor Herrera, tried to
negotiate with petitioner to increase the purchase price. When petitioner refused, herein respondent
then filed a complaint for annulment of sale, with the RTC of Antipolo City, docketed as Civil Case
No. 92-2267. In his complaint, respondent claimed ownership over the second parcel, which is the lot
covered by TD No. 01-00497, allegedly by virtue of a sale in his favor since 1973. He likewise
claimed that the first parcel, the lot covered by TD No. 01-00495, was subject to the co-ownership of
the surviving heirs of Francisca A. Herrera, the wife of Eligio, Sr., considering that she died intestate
on April 2, 1990, before the alleged sale to petitioner. Finally, respondent also alleged that the sale of
the two lots was null and void on the ground that at the time of sale, Eligio, Sr. was already
incapacitated to give consent to a contract because he was already afflicted with senile dementia,
characterized by deteriorating mental and physical condition including loss of memory.
In his answer, petitioner as defendant below alleged that respondent was estopped from assailing the
sale of the lots. Petitioner contended that respondent had effectively ratified both contracts of sales, by
receiving the consideration offered in each transaction.
On November 14, 1994, the Regional Trial Court handed down its decision, the dispositive portion of
which reads:
WHEREFORE, in view of all the foregoing, this court hereby orders that:

1. The deeds of sale of the properties covered by Tax Dec. Nos. 01-00495 and 01-00497 are declared
null and void;
2. The defendant is to return the lots in question including all improvements thereon to the plaintiff
and the plaintiff is ordered to simultaneously return to the defendant the purchase price of the lots sold
totalling to P750,000.00 for lot covered by TD 01-00497 and P1,000,000.00 covered by TD 0100495;
3. The court also orders the defendant to pay the cost of the suit.
4. The counter-claim of the defendant is denied for lack of merit.
SO ORDERED.[4]
Petitioner then elevated the matter to the Court of Appeals in CA-G.R. CV No. 47869. On August 30,
1999, however, the appellate court affirmed the decision of the Regional Trial Court, thus:
WHEREFORE, premises considered, the decision appealed from is hereby AFFIRMED in toto. Costs
against defendant-appellant.
SO ORDERED.[5]
Hence, this petition for review anchored on the following grounds:
I. THE COURT OF APPEALS COMPLETELY IGNORED THE BASIC DIFFERENCE BETWEEN
A VOID AND A MERELY VOIDABLE CONTRACT THUS MISSING THE ESSENTIAL
SIGNIFICANCE OF THE ESTABLISHED FACT OF RATIFICATION BY THE RESPONDENT
WHICH EXTINGUISHED WHATEVER BASIS RESPONDENT MAY HAVE HAD IN HAVING
THE CONTRACT AT BENCH ANNULLED.
II. THE DECISION OF THE COURT OF APPEALS ON SENILE DEMENTIA:
A. DISREGARDED THE FACTUAL BACKGROUND OF THE CASE;
B. WAS CONTRARY TO ESTABLISHED JURISPRUDENCE; AND
C. WAS PURELY CONJECTURAL, THE CONJECTURE BEING ERRONEOUS.
III. THE COURT OF APPEALS WAS IN GROSS ERROR AND IN FACT VIOLATED
PETITIONERS RIGHT TO DUE PROCESS WHEN IT RULED THAT THE CONSIDERATION
FOR THE QUESTIONED CONTRACTS WAS GROSSLY INADEQUATE.[6]
The resolution of this case hinges on one pivotal issue: Are the assailed contracts of sale void or
merely voidable and hence capable of being ratified?
Petitioner contends that the Court of Appeals erred when it ignored the basic distinction between void
and voidable contracts. He argues that the contracts of sale in the instant case, following Article
1390[7] of the Civil Code are merely voidable and not void ab initio. Hence, said contracts can be
ratified. Petitioner argues that while it is true that a demented person cannot give consent to a contract
pursuant to Article 1327,[8] nonetheless the dementia affecting one of the parties will not make the
contract void per se but merely voidable. Hence, when respondent accepted the purchase price on
behalf of his father who was allegedly suffering from senile dementia, respondent effectively ratified
the contracts. The ratified contracts then become valid and enforceable as between the parties.

Respondent counters that his act of receiving the purchase price does not imply ratification on his
part. He only received the installment payments on his senile fathers behalf, since the latter could no
longer account for the previous payments. His act was thus meant merely as a safety measure to
prevent the money from going into the wrong hands. Respondent also maintains that the sales of the
two properties were null and void. First, with respect to the lot covered by TD No. 01-00497, Eligio,
Sr. could no longer sell the same because it had been previously sold to respondent in 1973. As to lot
covered by TD No. 01-00495, respondent contends that it is co-owned by Eligio, Sr. and his children,
as heirs of Eligios wife. As such, Eligio, Sr. could not sell said lot without the consent of his coowners.
We note that both the trial court and the Court of Appeals found that Eligio, Sr. was already suffering
from senile dementia at the time he sold the lots in question. In other words, he was already mentally
incapacitated when he entered into the contracts of sale. Settled is the rule that findings of fact of the
trial court, when affirmed by the appellate court, are binding and conclusive upon the Supreme Court.
[9]
Coming now to the pivotal issue in this controversy. A void or inexistent contract is one which has no
force and effect from the very beginning. Hence, it is as if it has never been entered into and cannot be
validated either by the passage of time or by ratification. There are two types of void contracts: (1)
those where one of the essential requisites of a valid contract as provided for by Article 1318[10] of
the Civil Code is totally wanting; and (2) those declared to be so under Article 1409[11] of the Civil
Code. By contrast, a voidable or annullable contract is one in which the essential requisites for
validity under Article 1318 are present, but vitiated by want of capacity, error, violence, intimidation,
undue influence, or deceit.
Article 1318 of the Civil Code states that no contract exists unless there is a concurrence of consent of
the parties, object certain as subject matter, and cause of the obligation established. Article 1327
provides that insane or demented persons cannot give consent to a contract. But, if an insane or
demented person does enter into a contract, the legal effect is that the contract is voidable or
annullable as specifically provided in Article 1390.[12]
In the present case, it was established that the vendor Eligio, Sr. entered into an agreement with
petitioner, but that the formers capacity to consent was vitiated by senile dementia. Hence, we must
rule that the assailed contracts are not void or inexistent per se; rather, these are contracts that are
valid and binding unless annulled through a proper action filed in court seasonably.
An annullable contract may be rendered perfectly valid by ratification, which can be express or
implied. Implied ratification may take the form of accepting and retaining the benefits of a contract.
[13] This is what happened in this case. Respondents contention that he merely received payments on
behalf of his father merely to avoid their misuse and that he did not intend to concur with the
contracts is unconvincing. If he was not agreeable with the contracts, he could have prevented
petitioner from delivering the payments, or if this was impossible, he could have immediately
instituted the action for reconveyance and have the payments consigned with the court. None of these
happened. As found by the trial court and the Court of Appeals, upon learning of the sale, respondent
negotiated for the increase of the purchase price while receiving the installment payments. It was only
when respondent failed to convince petitioner to increase the price that the former instituted the
complaint for reconveyance of the properties. Clearly, respondent was agreeable to the contracts, only
he wanted to get more. Further, there is no showing that respondent returned the payments or made an
offer to do so. This bolsters the view that indeed there was ratification. One cannot negotiate for an
increase in the price in one breath and in the same breath contend that the contract of sale is void.
Nor can we find for respondents argument that the contracts were void as Eligio, Sr., could not sell the
lots in question as one of the properties had already been sold to him, while the other was the subject
of a co-ownership among the heirs of the deceased wife of Eligio, Sr. Note that it was found by both
the trial court and the Court of Appeals that Eligio, Sr., was the declared owner of said lots. This

finding is conclusive on us. As declared owner of said parcels of land, it follows that Eligio, Sr., had
the right to transfer the ownership thereof under the principle of jus disponendi.
In sum, the appellate court erred in sustaining the judgment of the trial court that the deeds of sale of
the two lots in question were null and void.
WHEREFORE, the instant petition is GRANTED. The decision dated August 30, 1999 of the Court
of Appeals in CA-G.R. CV No. 47869, affirming the decision of the Regional Trial Court in Civil
Case No. 92-2267 is REVERSED. The two contracts of sale covering lots under TD No. 01-00495
and No. 01-00497 are hereby declared VALID. Costs against respondent.
SO ORDERED.
Bellosillo, (Chairman), Mendoza, and Callejo, Sr., JJ., concur.
Austria-Martinez, J., on leave.