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THE ROMAN CATHOLIC CHURCH, represented by the Archbishop of Caceres vs.

REGINO PANTE

The Church, represented by the Archbishop of Caceres, owned a 32-square meter lot that measured 2x16 meters located in Barangay Dinaga, Canaman, Camarines
Sur.[5]On September 25, 1992, the Church contracted with respondent Regino Pante for the sale of the lot (thru a Contract to Sell and to Buy [6]) on the belief that the
latter was an actual occupant of the lot. The contract between them fixed the purchase price at P11,200.00, with the initial P1,120.00 payable as down payment,
and the remaining balance payable in three years or until September 25, 1995.

On June 28, 1994, the Church sold in favor of the spouses Nestor and Fidela Rubi (spouses Rubi) a 215-square meter lot that included the lot previously sold to
Pante. The spouses Rubi asserted their ownership by erecting a concrete fence over the lot sold to Pante, effectively blocking Pante and his familys access from their
family home to the municipal road. As no settlement could be reached between the parties, Pante instituted with the RTC an action to annul the sale between the
Church and the spouses Rubi, insofar as it included the lot previously sold to him. [7]

The Church filed its answer with a counterclaim, seeking the annulment of its contract with Pante. The Church alleged that its consent to the contract was obtained
by fraud when Pante, in bad faith, misrepresented that he had been an actual occupant of the lot sold to him, when in truth, he was merely using the 32-square
meter lot as a passageway from his house to the town proper. It contended that it was its policy to sell its lots only to actual occupants. Since the spouses Rubi and
their predecessors-in-interest have long been occupying the 215-square meter lot that included the 32-square meter lot sold to Pante, the Church claimed that the
spouses Rubi were the rightful buyers.

During pre-trial, the following admissions and stipulations of facts were made:

1. The lot claimed by Pante is a strip of land measuring only 2x16 meters;

2. The lot had been sold by the Church to Pante on September 25, 1992;

3. The lot was included in the sale to the spouses Rubi by the Church; and

4. Pante expressly manifested and represented to the Church that he had been actually occupying the lot he offered to buy. [8]

In a decision dated July 30, 1999, [9] the RTC ruled in favor of the Church, finding that the Churchs consent to the sale was secured through Pantes misrepresentation
that he was an occupant of the 32-square meter lot. Contrary to his claim, Pante was only using the lot as a passageway; the Churchs policy, however, was to sell its
lots only to those who actually occupy and reside thereon. As the Churchs consent was secured through its mistaken belief that Pante was a qualified occupant, the
RTC annulled the contract between the Church and Pante, pursuant to Article 1390 of the Civil Code. [10]

The RTC further noted that full payment of the purchase price was made only on September 23, 1995, when Pante consigned the balance of P10,905.00 with the
RTC, after the Church refused to accept the tendered amount. It considered the three-year delay in completing the payment fatal to Pantes claim over the subject
lot; it ruled that if Pante had been prompt in paying the price, then the Church would have been estopped from selling the lot to the spouses Rubi. In light of Pantes
delay and his admission that the subject lot had been actually occupied by the spouses Rubis predecessors, the RTC upheld the sale in favor of the spouses Rubi.
Pante appealed the RTCs decision with the CA. In a decision dated May 18, 2006, [11] the CA granted Pantes appeal and reversed the RTCs ruling. The CA characterized
the contract between Pante and the Church as a contract of sale, since the Church made no express reservation of ownership until full payment of the price is
made. In fact, the contract gave the Church the right to repurchase in case Pante fails to pay the installments within the grace period provided; the CA ruled that the
right to repurchase is unnecessary if ownership has not already been transferred to the buyer.

Even assuming that the contract had been a contract to sell, the CA declared that Pante fulfilled the condition precedent when he consigned the balance within the
three-year period allowed under the parties agreement; upon full payment, Pante fully complied with the terms of his contract with the Church.

After recognizing the validity of the sale to Pante and noting the subsequent sale to the spouses Rubi, the CA proceeded to apply the rules on double sales in Article
1544 of the Civil Code:

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

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

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

Since neither of the two sales was registered, the CA upheld the full effectiveness of the sale in favor of Pante who first possessed the lot by using it as a
passageway since 1963.

The Church filed the present petition for review on certiorari under Rule 45 of the Rules of Court to contest the CAs ruling.

THE PETITION

The Church contends that the sale of the lot to Pante is voidable under Article 1390 of the Civil Code, which states:

Article 1390. The following contracts are voidable or annullable, even though there may have been no damage to the contracting parties:

(1) Those where one of the parties is incapable of giving consent to a contract;

(2) Those where the consent is vitiated by mistake, violence, intimidation, undue influence or fraud.
These contracts are binding, unless they are annulled by a proper action in court. They are susceptible of ratification. [Emphasis ours.]

It points out that, during trial, Pante already admitted knowing that the spouses Rubi have been residing on the lot. Despite this knowledge, Pante misrepresented
himself as an occupant because he knew of the Churchs policy to sell lands only to occupants or residents thereof. It thus claims that Pantes misrepresentation
effectively vitiated its consent to the sale; hence, the contract should be nullified.

For the Church, the presence of fraud and misrepresentation that would suffice to annul the sale is the primary issue that the tribunals below should have
resolved. Instead, the CA opted to characterize the contract between the Church and Pante, considered it as a contract of sale, and, after such characterization,
proceeded to resolve the case in Pantes favor. The Church objects to this approach, on the principal argument that there could not have been a contract at all
considering that its consent had been vitiated.

THE COURTS RULING

The Court resolves to deny the petition. No misrepresentation existed vitiating the sellers consent and invalidating the contract

Consent is an essential requisite of contracts [12] as it pertains to the meeting of the offer and the acceptance upon the thing and the cause which constitute the
contract.[13]To create a valid contract, the meeting of the minds must be free, voluntary, willful and with a reasonable understanding of the various obligations the
parties assumed for themselves. [14] Where consent, however, is given through mistake, violence, intimidation, undue influence, or fraud, the contract is deemed
voidable.[15] However, not every mistake renders a contract voidable. The Civil Code clarifies the nature of mistake that vitiates consent:

Article 1331. In order that mistake may invalidate consent, it should refer to the substance of the thing which is the object of the contract, or to those
conditions which have principally moved one or both parties to enter into the contract.

Mistake as to the identity or qualifications of one of the parties will vitiate consent only when such identity or qualifications have been the
principal cause of the contract.

A simple mistake of account shall give rise to its correction. [Emphasis ours.]

For mistake as to the qualification of one of the parties to vitiate consent, two requisites must concur:

1. the mistake must be either with regard to the identity or with regard to the qualification of one of the contracting parties; and

2. the identity or qualification must have been the principal consideration for the celebration of the contract. [16]

In the present case, the Church contends that its consent to sell the lot was given on the mistaken impression arising from Pantes fraudulent misrepresentation that
he had been the actual occupant of the lot. Willful misrepresentation existed because of its policy to sell its lands only to their actual occupants or residents. Thus, it
considers the buyers actual occupancy or residence over the subject lot a qualification necessary to induce it to sell the lot.
Whether the facts, established during trial, support this contention shall determine if the contract between the Church and Pante should be annulled. In the process
of weighing the evidentiary value of these established facts, the courts should consider both the parties objectives and the subjective aspects of the transaction,
specifically, the parties circumstances their condition, relationship, and other attributes and their conduct at the time of and subsequent to the contract. These
considerations will show what influence the alleged error exerted on the parties and their intelligent, free, and voluntary consent to the contract. [17]

Contrary to the Churchs contention, the actual occupancy or residency of a buyer over the land does not appear to be a necessary qualification that the Church
requires before it could sell its land. Had this been indeed its policy, then neither Pante nor the spouses Rubi would qualify as buyers of the 32-square meter lot, as
none of them actually occupied or resided on the lot. We note in this regard that the lot was only a 2x16-meter strip of rural land used as a passageway from
Pantes house to the municipal road.

We find well-taken Pantes argument that, given the size of the lot, it could serve no other purpose than as a mere passageway; it is unthinkable to consider that a
2x16-meter strip of land could be mistaken as anyones residence. In fact, the spouses Rubi were in possession of the adjacent lot, but they never asserted
possession over the 2x16-meter lot when the 1994 sale was made in their favor; it was only then that they constructed the concrete fence blocking the passageway.

We find it unlikely that Pante could successfully misrepresent himself as the actual occupant of the lot; this was a fact that the Church (which has a parish chapel in
the same barangay where the lot was located) could easily verify had it conducted an ocular inspection of its own property. The surrounding circumstances actually
indicate that the Church was aware that Pante was using the lot merely as a passageway.

The above view is supported by the sketch plan, [18] attached to the contract executed by the Church and Pante, which clearly labeled the 2x16-meter lot as a RIGHT
OF WAY; below these words was written the name of Mr. Regino Pante. Asked during cross-examination where the sketch plan came from, Pante answered that it was
from the Archbishops Palace; neither the Church nor the spouses Rubi contradicted this statement. [19]

The records further reveal that the sales of the Churchs lots were made after a series of conferences with the occupants of the lots. [20] The then parish priest of
Canaman, Fr. Marcaida, was apparently aware that Pante was not an actual occupant, but nonetheless, he allowed the sale of the lot to Pante, subject to the
approval of the Archdioceses Oeconomous. Relying on Fr. Marcaidas recommendation and finding nothing objectionable, Fr. Ragay (the Archdioceses Oeconomous)
approved the sale to Pante.

The above facts, in our view, establish that there could not have been a deliberate, willful, or fraudulent act committed by Pante that misled the
Church into giving its consent to the sale of the subject lot in his favor. That Pante was not an actual occupant of the lot he purchased was a fact that the
Church either ignored or waived as a requirement. In any case, the Church was by no means led to believe or do so by Pantes act; there had been no vitiation of
the Churchs consent to the sale of the lot to Pante.

From another perspective, any finding of bad faith, if one is to be made, should be imputed to the Church. Without securing a court ruling on the validity of its
contract with Pante, the Church sold the subject property to the spouses Rubi. Article 1390 of the Civil Code declares that voidable contracts are binding, unless
annulled by a proper court action. From the time the sale to Pante was made and up until it sold the subject property to the spouses Rubi, the Church made no move
to reject the contract with Pante; it did not even return the down payment he paid. The Churchs bad faith in selling the lot to Rubi without annulling its contract with
Pante negates its claim for damages.

In the absence of any vitiation of consent, the contract between the Church and Pante stands valid and existing. Any delay by Pante in paying the full price could not
nullify the contract, since (as correctly observed by the CA) it was a contract of sale. By its terms, the contract did not provide a stipulation that the Church
retained ownership until full payment of the price. [21] The right to repurchase given to the Church in case Pante fails to pay within the grace period provided [22] would
have been unnecessary had ownership not already passed to Pante.

The rule on double sales

The sale of the lot to Pante and later to the spouses Rubi resulted in a double sale that called for the application of the rules in Article 1544 of the Civil Code:

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

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

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

As neither Pante nor the spouses Rubi registered the sale in their favor, the question now is who, between the two, was first in possession of the property in good
faith.

Jurisprudence has interpreted possession in Article 1544 of the Civil Code to mean both actual physical delivery and constructive delivery.[23] Under either mode of
delivery, the facts show that Pante was the first to acquire possession of the lot.

Actual delivery of a thing sold occurs when it is placed under the control and possession of the vendee. [24] Pante claimed that he had been using the lot as a
passageway, with the Churchs permission, since 1963. After purchasing the lot in 1992, he continued using it as a passageway until he was prevented by the
spouses Rubis concrete fence over the lot in 1994. Pantes use of the lot as a passageway after the 1992 sale in his favor was a clear assertion of his right of
ownership that preceded the spouses Rubis claim of ownership.
Pante also stated that he had placed electric connections and water pipes on the lot, even before he purchased it in 1992, and the existence of these connections
and pipes was known to the spouses Rubi. [25] Thus, any assertion of possession over the lot by the spouses Rubi (e.g., the construction of a concrete fence) would be
considered as made in bad faith because works had already existed on the lot indicating possession by another. [A] buyer of real property in the possession of
persons other than the seller must be wary and should investigate the rights of those in possession. Without such inquiry, the buyer can hardly be regarded as a
buyer in good faith and cannot have any right over the property."[26]

Delivery of a thing sold may also be made constructively. Article 1498 of the Civil Code states that:

Article 1498. When the sale is made through a public instrument, the execution thereof shall be equivalent to the delivery of the thing which
is the object of the contract, if from the deed the contrary does not appear or cannot clearly be inferred.

Under this provision, the sale in favor of Pante would have to be upheld since the contract executed between the Church and Pante was duly notarized, converting
the deed into a public instrument.[27] In Navera v. Court of Appeals,[28] the Court ruled that:

[A]fter the sale of a realty by means of a public instrument, the vendor, who resells it to another, does not transmit anything to the second vendee, and if
the latter, by virtue of this second sale, takes material possession of the thing, he does it as mere detainer, and it would be unjust to protect this detention
against the rights of the thing lawfully acquired by the first vendee.

Thus, under either mode of delivery, Pante acquired prior possession of the lot.

WHEREFORE, we DENY the petition for review on certiorari, and AFFIRM the decision of the Court of Appeals dated May 18, 2006, and its resolution dated August
11, 2006, issued in CA-G.R.-CV No. 65069. Costs against the Roman Catholic Church. SO ORDERED.

ALEJANDRO V. TANKEH vs. DEVELOPMENT BANK OF THE PHILIPPINES, STERLING SHIPPING LINES, INC., RUPERTO V. TANKEH, VICENTE ARENAS, and
ASSET PRIVATIZATION TRUST

Respondent Ruperto V. Tankeh is the president of Sterling Shipping Lines, Inc. It was incorporated on April 23, 1979 to operate ocean-going vessels engaged
primarily in foreign trade.2 Ruperto V. Tankeh applied for a $3.5 million loan from public respondent Development Bank of the Philippines for the partial financing of
an ocean-going vessel named the M/V Golden Lilac. To authorize the loan, Development Bank of the Philippines required that the following conditions be met:

1) A first mortgage must be obtained over the vessel, which by then had been renamed the M/V Sterling Ace;
2) Ruperto V. Tankeh, petitioner Dr. Alejandro V. Tankeh, Jose Marie Vargas, as well as respondents Sterling Shipping Lines, Inc. and Vicente Arenas should become
liable jointly and severally for the amount of the loan;

3) The future earnings of the mortgaged vessel, including proceeds of Charter and Shipping Contracts, should be assigned to Development Bank of the Philippines;
and

4) Development Bank of the Philippines should be assigned no less than 67% of the total subscribed and outstanding voting shares of the company. The percentage
of shares assigned should be maintained at all times, and the assignment was to subsist as long as the assignee, Development Bank of the Philippines, deemed it
necessary during the existence of the loan.3

According to petitioner Dr. Alejandro V. Tankeh, Ruperto V. Tankeh approached him sometime in 1980. 4 Ruperto informed petitioner that he was operating a new
shipping line business. Petitioner claimed that respondent, who is also petitioners younger brother, had told him that petitioner would be given one thousand
(1,000) shares to be a director of the business. The shares were worth P1,000,000.00.5

On May 12, 1981, petitioner signed the Assignment of Shares of Stock with Voting Rights. 6 Petitioner then signed the May 12, 1981 promissory note in December
1981. He was the last to sign this note as far as the other signatories were concerned. 7 The loan was approved by respondent Development Bank of the Philippines
on March 18, 1981. The vessel was acquired on September 29, 1981 for $5.3 million. 8 On December 3, 1981, respondent corporation Sterling Shipping Lines, Inc.
through respondent Ruperto V. Tankeh executed a Deed of Assignment in favor of Development Bank of the Philippines. The deed stated that the assignor, Sterling
Shipping Lines, Inc.:

x x x does hereby transfer and assign in favor of the ASSIGNEE (DBP), its successors and assigns, future earnings of the mortgaged M/V "Sterling Ace," including
proceeds of charter and shipping contracts, it being understood that this assignment shall continue to subsist for as long as the ASSIGNORS obligation with the
herein ASSIGNEE remains unpaid. 9

On June 16, 1983, petitioner wrote a letter to respondent Ruperto V. Tankeh saying that he was severing all ties and terminating his involvement with Sterling
Shipping Lines, Inc.10 He required that its board of directors pass a resolution releasing him from all liabilities, particularly the loan contract with Development Bank
of the Philippines. In addition, petitioner asked that the private respondents notify Development Bank of the Philippines that he had severed his ties with Sterling
Shipping Lines, Inc.11

The accounts of respondent Sterling Shipping Lines, Inc. in the Development Bank of the Philippines were transferred to public respondent Asset Privatization Trust
on June 30, 1986.12

Presently, respondent Asset Privatization Trust is known as the Privatization and Management Office. Asset Privatization Trust was a government agency created
through Presidential Proclamation No. 50, issued in 1986. Through Administrative Order No. 14, issued by former President Corazon Aquino dated February 3, 1987,
assets including loans in favor of Development Bank of the Philippines were ordered to be transferred to the national government. In turn, the management and
facilitation of these assets were delegated to Asset Privatization Trust, pursuant to Presidential Proclamation No. 50. In 1999, Republic Act No. 8758 was signed into
law, and it provided that the corporate term of Asset Privatization Trust would end on December 31, 2000. The same law empowered the President of the Philippines
to determine which office would facilitate the management of assets held by Asset Privatization Trust. Thus, on December 6, 2000, former President Joseph E.
Estrada signed Executive Order No. 323, creating the Privatization Management Office. Its present function is to identify disposable assets, monitor the progress of
privatization activities, and approve the sale or divestment of assets with respect to price and buyer. 13

On January 29, 1987, the M/V Sterling Ace was sold in Singapore for $350,000.00 by Development Bank of the Philippines legal counsel Atty. Prospero N. Nograles.
When petitioner came to know of the sale, he wrote respondent Development Bank of the Philippines to express that the final price was inadequate, and therefore,
the transaction was irregular. At this time, petitioner was still bound as a debtor because of the promissory note dated May 12, 1981, which petitioner signed in
December of 1981. The promissory note subsisted despite Sterling Shipping Lines, Inc.s assignment of all future earnings of the mortgaged M/V Sterling Ace to
Development Bank of the Philippines. The loan also continued to bind petitioner despite Sterling Shipping Lines, Inc.s cash equity contribution of P13,663,200.00
which was used to cover part of the acquisition cost of the vessel, pre-operating expenses, and initial working capital. 14

Petitioner filed several Complaints15 against respondents, praying that the promissory note be declared null and void and that he be absolved from any liability from
the mortgage of the vessel and the note in question.

In the Complaints, petitioner alleged that respondent Ruperto V. Tankeh, together with Vicente L. Arenas, Jr. and Jose Maria Vargas, had exercised deceit and fraud in
causing petitioner to bind himself jointly and severally to pay respondent Development Bank of the Philippines the amount of the mortgage loan. 16 Although he had
been made a stockholder and director of the respondent corporation Sterling Shipping Lines, Inc., petitioner alleged that he had never invested any amount in the
corporation and that he had never been an actual member of the board of directors. 17 He alleged that all the money he had supposedly invested was provided by
respondent Ruperto V. Tankeh. 18 He claimed that he only attended one meeting of the board. In that meeting, he was introduced to two directors representing
Development Bank of the Philippines, namely, Mr. Jesus Macalinag and Mr. Gil Corpus. Other than that, he had never been notified of another meeting of the board of
directors.

Petitioner further claimed that he had been excluded deliberately from participating in the affairs of the corporation and had never been compensated by Sterling
Shipping Lines, Inc. as a director and stockholder. 19According to petitioner, when Sterling Shipping Lines, Inc. was organized, respondent Ruperto V. Tankeh had
promised him that he would become part of the administration staff and oversee company operations. Respondent Ruperto V. Tankeh had also promised petitioner
that the latters son would be given a position in the company. 20 However, after being designated as vice president, petitioner had not been made an officer and had
been alienated from taking part in the respondent corporation. 21

Petitioner also alleged that respondent Development Bank of the Philippines had been inexcusably negligent in the performance of its duties. 22 He alleged that
Development Bank of the Philippines must have been fully aware of Sterling Shipping Lines, Inc.s financial situation. Petitioner claimed that Sterling Shipping Lines,
Inc. was controlled by the Development Bank of the Philippines because 67% of voting shares had been assigned to the latter. 23 Furthermore, the mortgage contracts
had mandated that Sterling Shipping Lines, Inc. "shall furnish the DBP with copies of the minutes of each meeting of the Board of Directors within one week after the
meeting. Sterling Shipping Lines Inc. shall likewise furnish DBP its annual audited financial statements and other information or data that may be needed by DBP as
its accommodations [sic] with DBP are outstanding." 24Petitioner further alleged that the Development Bank of the Philippines had allowed "highly questionable
acts"25 to take place, including the gross undervaluing of the M/V Sterling Aces. 26 Petitioner alleged that one day after Development Bank of the Philippines Atty.
Nograles sold the vessel, the ship was re-sold by its buyer for double the amount that the ship had been bought. 27
As for respondent Vicente L. Arenas, Jr., petitioner alleged that since Arenas had been the treasurer of Sterling Shipping Lines, Inc. and later on had served as its vice
president, he was also responsible for the financial situation of Sterling Shipping Lines, Inc.

Lastly, in the Amended Complaint dated April 16, 1991, petitioner impleaded respondent Asset Privatization Trust for being the agent and assignee of the M/V
Sterling Ace.

In their Answers28 to the Complaints, respondents raised the following defenses against petitioner: Respondent Development Bank of the Philippines categorically
denied receiving any amount from Sterling Shipping Lines, Inc.s future earnings and from the proceeds of the shipping contracts. It maintained that equity
contributions could not be deducted from the outstanding loan obligation that stood at P245.86 million as of December 31, 1986. Development Bank of the
Philippines also maintained that it is immaterial to the case whether the petitioner is a "real stockholder" or merely a "pseudo-stockholder" of the corporation. 29 By
affixing his signature to the loan agreement, he was liable for the obligation. According to Development Bank of the Philippines, he was in pari delicto and could not
be discharged from his obligation. Furthermore, petitioner had no cause of action against Development Bank of the Philippines since this was a case between family
members, and earnest efforts toward compromise should have been complied with in accordance with Article 222 of the Civil Code of the Philippines. 30

Respondent Ruperto V. Tankeh stated that petitioner had voluntarily signed the promissory note in favor of Development Bank of the Philippines and with full
knowledge of the consequences. Respondent Tankeh also alleged that he did not employ any fraud or deceit to secure petitioners involvement in the company, and
petitioner had been fully aware of company operations. Also, all that petitioner had to do to avoid liability had been to sell his shareholdings in the company. 31

Respondent Asset Privatization Trust raised that petitioner had no cause of action against them since Asset Privatization Trust had been mandated under
Proclamation No. 50 to take title to and provisionally manage and dispose the assets identified for privatization or deposition within the shortest possible period.
Development Bank of the Philippines had transferred and conveyed all its rights, titles, and interests in favor of the national government in accordance with
Administrative Order No. 14. In line with that, Asset Privatization Trust was constituted as trustee of the assets transferred to the national government to effect
privatization of these assets, including respondent Sterling Shipping Lines, Inc. 32 Respondent Asset Privatization Trust also filed a compulsory counterclaim against
petitioner and its co-respondents Sterling Shipping Lines, Inc., Ruperto V. Tankeh, and Vicente L. Arenas, Jr. for the amount of P264,386,713.84.

Respondent Arenas did not file an Answer to any of the Complaints of petitioner but filed a Motion to Dismiss that the Regional Trial Court denied. Respondent Asset
Privatization Trust filed a Cross Claim against Arenas. In his Answer 33 to Asset Privatization Trusts Cross Claim, Arenas claimed that he had been released from any
further obligation to Development Bank of the Philippines and its successor Asset Privatization Trust because an extension had been granted by the Development
Bank of the Philippines to the debtors of Sterling Shipping Lines, Inc. and/or Ruperto V. Tankeh, which had been secured without Arenas consent.

The trial proceeded with the petitioner serving as a sole witness for his case. In a January 4, 1996 Decision, 34 the Regional Trial Court ruled:

Here, we find

1. Plaintiff being promised by his younger brother, Ruperto V. Tankeh, 1,000 shares with par value of P1 Million with all the perks and privileges of being
stockholder and director of SSLI, a new international shipping line;
2. That plaintiff will be part of the administration and operation of the business, so with his son who is with the law firm Romulo Ozaeta Law Offices;

3. But this was merely the come-on or appetizer for the Real McCoy or the primordial end of congregating the incorporators proposed - - that he sign the
promissory note (Exhibit "C"), the mortgage contract (Exhibit "A"), and deed of assignment so SSLI could get the US $3.5 M loan from DBP to partially finance
the importation of vessel M.V. "Golden Lilac" renamed M.V. "Sterling ACE";

4. True it is, plaintiff was made a stockholder and director and Vice-President in 1979 but he was never notified of any meeting of the Board except only
once, and only to be introduced to the two (2) directors representing no less than 67% of the total subscribed and outstanding voting shares of the company.
Thereafter, he was excluded from any board meeting, shorn of his powers and duties as director or Vice-President, and was altogether deliberately
demeaned as an outsider.

5. What kind of a company is SSLI who treated one of their incorporators, one of their Directors and their paper Vice-President in 1979 by preventing him
access to corporate books, to corporate earnings, or losses, and to any compensation or remuneration whatsoever? Whose President and Treasurer did not
submit the required SEC yearly report? Who did not remit to DBP the proceeds on charter mortgage contracts on M/V Sterling Ace?

6. The M/V Sterling Ace was already in the Davao Port when it was then diverted to Singapore to be disposed on negotiated sale, and not by public bidding
contrary to COA Circular No. 86-264 and without COAs approval. Sterling Ace was seaworthy but was sold as scrap in Singapore. No foreclosure with public
bidding was made in contravention of the Promissory Note to recover any deficiency should DBP seeks [sic] to recover it on the outstanding mortgage loan.
Moreover the sale was done after the account and asset (nay, now only a liability) were transferred to APT. No approval of SSLI Board of Directors to the
negotiated sale was given.

7. Plaintiffs letter to his brother President, Ruperto V. Tankeh, dated June 15, 1983 (Exhibit "D") his letter thru his lawyer to DBP (Exhibit "J") and another
letter to it (Exhibit "K") show no estoppel on his part as he consistently and continuously assailed the several injurious acts of defendants while assailing the
Promissory Note itself x x x (Citations omitted) applying the maxim: Rencintiatio non praesumitur. By this Dr. Tankeh never waived the right to question the
Promissory Note contract terms. He did not ratify, by concurring acts, express or tacit, after the reasons had surfaced entitling him to render the contract
voidable, defendants acts in implementing or not the conditions of the mortgage, the promissory note, the deed of assignment, the lack of audit and
accounting, and the negotiated sale of MV Sterling Ace. He did not ratify defendants [sic] defective acts (Art. 1396, New Civil Code (NCC).

The foregoing and the following essays, supported by evidence, the fraud committed by plaintiffs brother before the several documents were signed (SEC
documents, Promissory Note, Mortgage (MC) Contract, assignment (DA)), namely:

1. Ruperto V. Tankeh approaches his brother Alejandro to tell the latter of his new shipping business. The project was good business proposal [sic].

2. Ruperto tells Alejandro hes giving him shares worth P1 Million and hes going to be a Director.

3. He tells his brother that he will be part of the companys Administration and Operations and his eldest son will be in it, too.
4. Ruperto tells his brother they need a ship, they need to buy one for the business, and they therefore need a loan, and they could secure a loan from DBP
with the vessel brought to have a first mortgage with DBP but anyway the other two directors and comptroller will be from DBP with a 67% SSLI shares
voting rights.

Without these insidious, devastating and alluring words, without the machinations used by defendant Ruperto V. Tankeh upon the doctor, without the inducement
and promise of ownership of shares and the exercise of administrative and operating functions, and the partial financing by one of the best financial institutions, the
DBP, plaintiff would not have agreed to join his brother; and the safeguarding of the Banks interest by its nominated two (2) directors in the Board added to his
agreeing to the new shipping business. His consent was vitiated by the fraud before the several contracts were consummated.

This alone convenes [sic] this Court to annul the Promissory Note as it relates to plaintiff himself.

Plaintiff also pleads annulment on ground of equity. Article 19, NCC, provides him the way as it requires every person, in the exercise of his rights and performance of
his duties, to act with justice, give everyone his due, and observe honesty and good faith (Velayo vs. Shell Co. of the Phils., G.R. L-7817, October 31, 1956). Not to
release him from the clutch of the Promissory Note when he was never made a part of the operation of the SSLI, when he was not notified of the Board Meetings,
when the corporation nary remitted earnings of M/V Sterling Ace from charter or shipping contracts to DBP, when the SSLI did not comply with the deed of
assignment and mortgage contract, and when the vessel was sold in Singapore (he, learning of the sale only from the newspapers) in contravention of the
Promissory Note, and which he questioned, will be an injustice, inequitable, and even iniquitous to plaintiff. SSLI and the private defendants did not observe honesty
and good faith to one of their incorporators and directors. As to DBP, the Court cannot put demerits on what plaintiffs memorandum has pointed out:

While defendant DBP did not exercise the caution and prudence in the discharge of their functions to protect its interest as expected of them and worst, allowed the
perpetuation of the illegal acts committed in contrast to the virtues they publicly profess, namely: "palabra de honor, delicadeza, katapatan, kaayusan,
pagkamasinop at kagalingan" Where is the vision banking they have for our country?

Had DBP listened to a cry in the wilderness that of the voice of the doctor the doctor would not have allowed the officers and board members to defraud DBP and
he would demand of them to hew and align themselves to the deed of assignment.

Prescinding from the above, plaintiffs consent to be with SSLI was vitiated by fraud. The fact that defendant Ruperto Tankeh has not questioned his liability to DBP or
that Jose Maria Vargas has been declared in default do not detract from the fact that there was attendant fraud and that there was continuing fraud insofar as
plaintiff is concerned.

Ipinaglaban lang ni Doctor ang karapatan niya. Kung wala siyang sense of righteous indignation and fairness, tatahimik na lang siya, sira naman ang
pinangangalagaan niyang pangalan, honor and family prestige [sic] (Emphasis provided). 35

All of the defendants counterclaims and cross-claims x x x including plaintiffs and the other defendants prayer for damages are not, for the moment, sourced and
proven by substantial evidence, and must perforce be denied and dismissed.
WHEREFORE, this Court, finding and declaring the Promissory Note (Exhibit "C") and the Mortgage Contract (Exhibit "A") null and void insofar as plaintiff DR.
ALEJANDRO V. TANKEH is concerned, hereby ANNULS and VOIDS those documents as to plaintiff, and it is hereby further ordered that he be released from any
obligation or liability arising therefrom.

All the defendants counterclaims and cross-claims and plaintiffs and defendants prayer for damages are hereby denied and dismissed, without prejudice. SO
ORDERED.36

Respondents Ruperto V. Tankeh, Asset Privatization Trust, and Arenas immediately filed their respective Notices of Appeal with the Regional Trial Court. The petitioner
filed a Motion for Reconsideration with regard to the denial of his prayer for damages. After this Motion had been denied, he then filed his own Notice of Appeal.

In a Decision37 promulgated on October 25, 2005, the Third Division of the Court of Appeals reversed the trial courts findings. The Court of Appeals held that
petitioner had no cause of action against public respondent Asset Privatization Trust. This was based on the Court of Appeals assessment of the case records and its
findings that Asset Privatization Trust did not commit any act violative of the right of petitioner or constituting a breach of Asset Privatization Trusts obligations to
petitioner. The Court of Appeals found that petitioners claim for damages against Asset Privatization Trust was based merely on his own self-serving allegations. 38

As to the finding of fraud, the Court of Appeals held that:

In all the complaints from the original through the first, second and third amendments, the plaintiff imputes fraud only to defendant Ruperto, to wit:

4. That on May 12, 1981, due to the deceit and fraud exercised by Ruperto V. Tankeh, plaintiff, together with Vicente L. Arenas, Jr. and Jose Maria Vargas signed a
promissory note in favor of the defendant, DBP, wherein plaintiff bound himself to jointly and severally pay the DBP the amount of the mortgage loan. This document
insofar as plaintiff is concerned is a simulated document considering that plaintiff was never a real stockholder of Sterling Shipping Lines, Inc. (Emphasis provided)

More allegations of deceit were added in the Second Amended Complaint, but they are also attributed against Ruperto:

6. That THE DECEIT OF DEFENDANT RUPERTO V. TANKEH IS SHOWN BY THE FACT THAT when the Sterling Shipping Lines, Inc. was organized in 1980, Ruperto V.
Tankeh promised plaintiff that he would be a part of the administration staff so that he could oversee the operation of the company. He was also promised that his
son, a lawyer, would be given a position in the company. None of these promsies [sic] was complied with. In fact he was not even allowed to find out the data about
the income and expenses of the company.

7. THAT THE DECEIT OF RUPERTO V. TANKEH IS ALSO SHOWN BY THE FACT THAT PLAINTIFF WAS INVITED TO ATTEND THE BOARD MEETING OF THE STERLING
SHIPPING LINES INC. ONLY ONCE, WHICH WAS FOR THE SOLE PURPOSE OF INTRODUCING HIM TO THE TWO DIRECTORS OF THE DBP IN THE BOARD OF THE STERLING
SHIPPING LINES, INC., NAMELY, MR. JESUS MACALINAG AND MR. GIL CORPUS. THEREAFTER HE WAS NEVER INVITED AGAIN. PLAINTIFF WAS NEVER COMPENSATED BY
THE STERLING SHIPPING LINES, INC. FOR HIS BEING A SO-CALLED DIRECTOR AND STOCKHOLDER.

8-A THAT A WEEK AFTER SENDING THE ABOVE LETTER PLAINTIFF MADE EARNEST EFFORTS TOWARDS A COMPROMISE BETWEEN HIM AND HIS BROTHER RUPERTO V.
TANKEH, WHICH EFFORTS WERE SPURNED BY RUPERTO V. TANKEH, AND ALSO AFTER THE NEWS OF THE SALE OF THE STERLING ACE WAS PUBLISHED AT THE
NEWSPAPER, PLAINTIFF TRIED ALL EFFORTS TO CONTACT RUPERTO V. TANKEH FOR THE PURPOSE OF ARRIVING AT SOME COMPROMISE, BUT DEFENDANT RUPERTO V.
TANKEH AVOIDED ALL CONTACTS WITH THE PLAINTIFF UNTIL HE WAS FORCED TO SEEK LEGAL ASSISTANCE FROM HIS LAWYER.

In the absence of any allegations of fraud and/or deceit against the other defendants, namely, the DBP, Vicente Arenas, Sterling Shipping Lines, Inc., and the Asset
Privatization Trust, the plaintiffs evidence thereon should only be against Ruperto, since a plaintiff is bound to prove only the allegations of his complaint. In any
case, no evidence of fraud or deceit was ever presented against defendants DBP, Arenas, SSLI and APT.

As to the evidence against Ruperto, the same consists only of the testimony of the plaintiff. None of his documentary evidence would prove that Ruperto was guilty
of fraud or deceit in causing him to sign the subject promissory note. 39

Analyzing closely the foregoing statements, we find no evidence of fraud or deceit. The mention of a new shipping lines business and the promise of a free 1,000-
share and directorship in the corporation do not amount to insidious words or machinations. In any case, the shipping business was indeed established, with the
plaintiff himself as one of the incorporators and stockholders with a share of 4,000, worth P4,000,000.00 of which P1,000,000.00 was reportedly paid up. As such, he
signed the Articles of Incorporation and the corporations By-Laws which were registered with the Securities and Exchange Commission in April 1979. It was not until
May 12, 1981 that he signed the questioned promissory note. From his own declaration at the witness stand, the plaintiff signed the promissory note voluntarily. No
pressure, force or intimidation was made to bear upon him. In fact, according to him, only a messenger brought the paper to him for signature. The promised shares
of stock were given and recorded in the plaintiffs name. He was made a director and Vice-President of SSLI. Apparently, only the promise that his son would be
given a position in the company remained unfulfilled. However, the same should have been threshed out between the plaintiff and his brother, defendant Ruperto,
and its non-fulfillment did not amount to fraud or deceit, but was only an unfulfilled promise.

It should be pointed out that the plaintiff is a doctor of medicine and a seasoned businessman. It cannot be said that he did not understand the import of the
documents he signed. Certainly he knew what he was signing. He should have known that being an officer of SSLI, his signing of the promissory note together with
the other officers of the corporation was expected, as the other officers also did. It cannot therefore be said that the promissory note was simulated. The same is a
contract validly entered into, which the parties are obliged to comply with. 40(Citations omitted)

The Court of Appeals ruled that in the absence of any competent proof, Ruperto V. Tankeh did not commit any fraud. Petitioner Alejandro V. Tankeh was unable to
prove by a preponderance of evidence that fraud or deceit had been employed by Ruperto to make him sign the promissory note. The Court of Appeals reasoned
that:

Fraud is never presumed but must be proved by clear and convincing evidence, mere preponderance of evidence not even being adequate. Contentions must be
proved by competent evidence and reliance must be had on the strength of the partys evidence and not upon the weakness of the opponents defense. The plaintiff
clearly failed to discharge such burden.41 (Citations omitted)

With that, the Court of Appeals reversed and set aside the judgment and ordered that plaintiffs Complaint be dismissed. Petitioner filed a Motion for Reconsideration
dated October 25, 2005 that was denied in a Resolution 42promulgated on February 9, 2006.

Hence, this Petition was filed.


In this Petition, Alejandro V. Tankeh stated that the Court of Appeals seriously erred and gravely abused its discretion in acting and deciding as if the evidence stated
in the Decision of the Regional Trial Court did not exist. He averred that the ruling of lack of cause of action had no leg to stand on, and the Court of Appeals had
unreasonably, whimsically, and capriciously ignored the ample evidence on record proving the fraud and deceit perpetrated on the petitioner by the respondent. He
stated that the appellate court failed to appreciate the findings of fact of the lower court, which are generally binding on appellate courts. He also maintained that he
is entitled to damages and attorney's fees due to the deceit and machinations committed by the respondent.

In his Memorandum, respondent Ruperto V. Tankeh averred that petitioner had chosen the wrong remedy. He ought to have filed a special civil action of certiorari
and not a Petition for Review. Petitioner raised questions of fact, and not questions of law, and this required the review or evaluation of evidence. However, this is not
the function of this Court, as it is not a trier of facts. He also contended that petitioner had voluntarily entered into the loan agreement and the position with Sterling
Shipping Lines, Inc. and that he did not fraudulently induce the petitioner to enter into the contract.

Respondents Development Bank of the Philippines and Asset Privatization Trust also contended that petitioner's mode of appeal had been wrong, and he had
actually sought a special civil action of certiorari. This alone merited its dismissal.

The main issue in this case is whether the Court of Appeals erred in finding that respondent Rupert V. Tankeh did not commit fraud against the petitioner.

The Petition is partly granted.

Before disposing of the main issue in this case, this Court needs to address a procedural issue raised by respondents. Collectively, respondents argue that the
Petition is actually one of certiorari under Rule 65 of the Rules of Court 43 and not a Petition for Review on Certiorari under Rule 45. 44 Thus, petitioners failure to show
that there was neither appeal nor any other plain, speedy or adequate remedy merited the dismissal of the Complaint.

Contrary to respondents imputation, the remedy contemplated by petitioner is clearly that of a Rule 45 Petition for Review. In Tagle v. Equitable PCI Bank, 45 this
Court made the distinction between a Rule 45 Petition for Review on Certiorari and a Rule 65 Petition for Certiorari:

Certiorari is a remedy designed for the correction of errors of jurisdiction, not errors of judgment. 1wphi1 In Pure Foods Corporation v. NLRC, we explained the simple
reason for the rule in this light: When a court exercises its jurisdiction, an error committed while so engaged does not deprive it of the jurisdiction being exercised
when the error is committed x x x. Consequently, an error of judgment that the court may commit in the exercise of its jurisdiction is not correctable through the
original civil action of certiorari.

Even if the findings of the court are incorrect, as long as it has jurisdiction over the case, such correction is normally beyond the province of certiorari. Where the
error is not one of jurisdiction, but of an error of law or fact a mistake of judgment, appeal is the remedy.

In this case, what petitioner seeks to rectify may be construed as errors of judgment of the Court of Appeals. These errors pertain to the petitioners allegation that
the appellate court failed to uphold the findings of facts of the lower court. He does not impute any error with respect to the Court of Appeals exercise of jurisdiction.
As such, this Petition is simply a continuation of the appellate process where a case is elevated from the trial court of origin, to the Court of Appeals, and to this
Court via Rule 45.
Contrary to respondents arguments, the allegations of petitioner that the Court of Appeals "committed grave abuse of discretion" 46 did not ipso facto render the
intended remedy that of certiorari under Rule 65 of the Rules of Court. 47

In any case, even if the Petition is one for the special civil action of certiorari, this Court has the discretion to treat a Rule 65 Petition for Certiorari as a Rule 45
Petition for Review on Certiorari. This is allowed if (1) the Petition is filed within the reglementary period for filing a Petition for review; (2) when errors of judgment
are averred; and (3) when there is sufficient reason to justify the relaxation of the rules. 48 When this Court exercises this discretion, there is no need to comply with
the requirements provided for in Rule 65.

In this case, petitioner filed his Petition within the reglementary period of filing a Petition for Review. 49 His Petition assigns errors of judgment and appreciation of
facts and law on the part of the Court of Appeals. Thus, even if the Petition was designated as one that sought the remedy of certiorari, this Court may exercise its
discretion to treat it as a Petition for Review in the interest of substantial justice.

We now proceed to the substantive issue, that of petitioners imputation of fraud on the part of respondents. We are required by the circumstances of this case to
review our doctrines of fraud that are alleged to be present in contractual relations.

Types of Fraud in Contracts

Fraud is defined in Article 1338 of the Civil Code as:

x x x fraud when, through insidious words or machinations of one of the contracting parties, the other is induced to enter into a contract which, without them, he
would not have agreed to.

This is followed by the articles which provide legal examples and illustrations of fraud.

Art. 1339. Failure to disclose facts, when there is a duty to reveal them, as when the parties are bound by confidential relations, constitutes fraud. (n)

Art. 1340. The usual exaggerations in trade, when the other party had an opportunity to know the facts, are not in themselves fraudulent. (n)

Art. 1341. A mere expression of an opinion does not signify fraud, unless made by an expert and the other party has relied on the former's special knowledge. (n)

Art. 1342. Misrepresentation by a third person does not vitiate consent, unless such misrepresentation has created substantial mistake and the same is mutual. (n)

Art. 1343. Misrepresentation made in good faith is not fraudulent but may constitute error. (n)

The distinction between fraud as a ground for rendering a contract voidable or as basis for an award of damages is provided in Article 1344:

In order that fraud may make a contract voidable, it should be serious and should not have been employed by both contracting parties.
Incidental fraud only obliges the person employing it to pay damages. (1270)

There are two types of fraud contemplated in the performance of contracts: dolo incidente or incidental fraud and dolo causante or fraud serious enough to render a
contract voidable.

In Geraldez v. Court of Appeals,50 this Court held that:

This fraud or dolo which is present or employed at the time of birth or perfection of a contract may either be dolo causante or dolo incidente. The first, or causal
fraud referred to in Article 1338, are those deceptions or misrepresentations of a serious character employed by one party and without which the other party would
not have entered into the contract. Dolo incidente, or incidental fraud which is referred to in Article 1344, are those which are not serious in character and without
which the other party would still have entered into the contract. Dolo causante determines or is the essential cause of the consent, while dolo incidente refers only
to some particular or accident of the obligation. The effects of dolo causante are the nullity of the contract and the indemnification of damages, and dolo incidente
also obliges the person employing it to pay damages. 51

In Solidbank Corporation v. Mindanao Ferroalloy Corporation, et al., 52 this Court elaborated on the distinction between dolo causante and dolo incidente:

Fraud refers to all kinds of deception -- whether through insidious machination, manipulation, concealment or misrepresentation -- that would lead an ordinarily
prudent person into error after taking the circumstances into account. In contracts, a fraud known as dolo causante or causal fraud is basically a deception used by
one party prior to or simultaneous with the contract, in order to secure the consent of the other. Needless to say, the deceit employed must be serious. In
contradistinction, only some particular or accident of the obligation is referred to by incidental fraud or dolo incidente, or that which is not serious in character and
without which the other party would have entered into the contract anyway. 53

Under Article 1344, the fraud must be serious to annul or avoid a contract and render it voidable. This fraud or deception must be so material that had it not been
present, the defrauded party would not have entered into the contract. In the recent case of Spouses Carmen S. Tongson and Jose C. Tongson, et al., v. Emergency
Pawnshop Bula, Inc.,54 this Court provided some examples of what constituted dolo causante or causal fraud:

Some of the instances where this Court found the existence of causal fraud include: (1) when the seller, who had no intention to part with her property, was "tricked
into believing" that what she signed were papers pertinent to her application for the reconstitution of her burned certificate of title, not a deed of sale; (2) when the
signature of the authorized corporate officer was forged; or (3) when the seller was seriously ill, and died a week after signing the deed of sale raising doubts on
whether the seller could have read, or fully understood, the contents of the documents he signed or of the consequences of his act. 55 (Citations omitted)

However, Article 1344 also provides that if fraud is incidental, it follows that this type of fraud is not serious enough so as to render the original contract voidable.

A classic example of dolo incidente is Woodhouse v. Halili. 56 In this case, the plaintiff Charles Woodhouse entered into a written agreement with the defendant
Fortunato Halili to organize a partnership for the bottling and distribution of soft drinks. However, the partnership did not come into fruition, and the plaintiff filed a
Complaint in order to execute the partnership. The defendant filed a Counterclaim, alleging that the plaintiff had defrauded him because the latter was not actually
the owner of the franchise of a soft drink bottling operation. Thus, defendant sought the nullification of the contract to enter into the partnership. This Court
concluded that:

x x x from all the foregoing x x x plaintiff did actually represent to defendant that he was the holder of the exclusive franchise. The defendant was made to believe,
and he actually believed, that plaintiff had the exclusive franchise. x x x The record abounds with circumstances indicative that the fact that the principal
consideration, the main cause that induced defendant to enter into the partnership agreement with plaintiff, was the ability of plaintiff to get the exclusive franchise
to bottle and distribute for the defendant or for the partnership. x x x The defendant was, therefore, led to the belief that plaintiff had the exclusive franchise, but
that the same was to be secured for or transferred to the partnership. The plaintiff no longer had the exclusive franchise, or the option thereto, at the time the
contract was perfected. But while he had already lost his option thereto (when the contract was entered into), the principal obligation that he assumed or undertook
was to secure said franchise for the partnership, as the bottler and distributor for the Mission Dry Corporation. We declare, therefore, that if he was guilty of a false
representation, this was not the causal consideration, or the principal inducement, that led plaintiff to enter into the partnership agreement.

But, on the other hand, this supposed ownership of an exclusive franchise was actually the consideration or price plaintiff gave in exchange for the share of 30
percent granted him in the net profits of the partnership business. Defendant agreed to give plaintiff 30 per cent share in the net profits because he was transferring
his exclusive franchise to the partnership. x x x.

Plaintiff had never been a bottler or a chemist; he never had experience in the production or distribution of beverages. As a matter of fact, when the bottling plant
being built, all that he suggested was about the toilet facilities for the laborers.

We conclude from the above that while the representation that plaintiff had the exclusive franchise did not vitiate defendant's consent to the contract, it was used by
plaintiff to get from defendant a share of 30 per cent of the net profits; in other words, by pretending that he had the exclusive franchise and promising to transfer it
to defendant, he obtained the consent of the latter to give him (plaintiff) a big slice in the net profits. This is the dolo incidente defined in article 1270 of the Spanish
Civil Code, because it was used to get the other party's consent to a big share in the profits, an incidental matter in the agreement. 57

Thus, this Court held that the original agreement may not be declared null and void. This Court also said that the plaintiff had been entitled to damages because of
the refusal of the defendant to enter into the partnership. However, the plaintiff was also held liable for damages to the defendant for the misrepresentation that the
former had the exclusive franchise to soft drink bottling operations.

To summarize, if there is fraud in the performance of the contract, then this fraud will give rise to damages. If the fraud did not compel the imputing party to give his
or her consent, it may not serve as the basis to annul the contract, which exhibits dolo causante. However, the party alleging the existence of fraud may prove the
existence of dolo incidente.

This may make the party against whom fraud is alleged liable for damages.

Quantum of Evidence to Prove the Existence of Fraud and the Liability of the Parties
The Civil Code, however, does not mandate the quantum of evidence required to prove actionable fraud, either for purposes of annulling a contract (dolo causante)
or rendering a party liable for damages (dolo incidente). The definition of fraud is different from the quantum of evidence needed to prove the existence of fraud.
Article 1338 provides the legal definition of fraud. Articles 1339 to 1343 constitute the behavior and actions that, when in conformity with the legal provision, may
constitute fraud.

Jurisprudence has shown that in order to constitute fraud that provides basis to annul contracts, it must fulfill two conditions. First, the fraud must be dolo causante
or it must be fraud in obtaining the consent of the party. Second, this fraud must be proven by clear and convincing evidence. In Viloria v. Continental Airlines, 58 this
Court held that:

Under Article 1338 of the Civil Code, there is fraud when, through insidious words or machinations of one of the contracting parties, the other is induced to enter into
a contract which, without them, he would not have agreed to. In order that fraud may vitiate consent, it must be the causal (dolo causante), not merely the
incidental (dolo incidente), inducement to the making of the contract. In Samson v. Court of Appeals, causal fraud was defined as "a deception employed by one
party prior to or simultaneous to the contract in order to secure the consent of the other." Also, fraud must be serious and its existence must be established by clear
and convincing evidence. (Citations omitted) 59

In Viloria, this Court cited Sierra v. Court of Appeals 60 stating that mere preponderance of evidence will not suffice in proving fraud.

Fraud must also be discounted, for according to the Civil Code:

Art. 1338. There is fraud when, through insidious words or machinations of one of the contracting parties, the other is induced to enter into a contract which without
them, he would not have agreed to.

Art. 1344. In order that fraud may make a contract voidable, it should be serious and should not have been employed by both contracting parties.

To quote Tolentino again, the "misrepresentation constituting the fraud must be established by full, clear, and convincing evidence, and not merely by a
preponderance thereof. The deceit must be serious. The fraud is serious when it is sufficient to impress, or to lead an ordinarily prudent person into error; that which
cannot deceive a prudent person cannot be a ground for nullity. The circumstances of each case should be considered, taking into account the personal conditions of
the victim."61

Thus, to annul a contract on the basis of dolo causante, the following must happen: First, the deceit must be serious or sufficient to impress and lead an ordinarily
prudent person to error. If the allegedly fraudulent actions do not deceive a prudent person, given the circumstances, the deceit here cannot be considered sufficient
basis to nullify the contract. In order for the deceit to be considered serious, it is necessary and essential to obtain the consent of the party imputing fraud. To
determine whether a person may be sufficiently deceived, the personal conditions and other factual circumstances need to be considered.

Second, the standard of proof required is clear and convincing evidence. This standard of proof is derived from American common law. It is less than proof beyond
reasonable doubt (for criminal cases) but greater than preponderance of evidence (for civil cases). The degree of believability is higher than that of an ordinary civil
case. Civil cases only require a preponderance of evidence to meet the required burden of proof. However, when fraud is alleged in an ordinary civil case involving
contractual relations, an entirely different standard of proof needs to be satisfied. The imputation of fraud in a civil case requires the presentation of clear and
convincing evidence. Mere allegations will not suffice to sustain the existence of fraud. The burden of evidence rests on the part of the plaintiff or the party alleging
fraud. The quantum of evidence is such that fraud must be clearly and convincingly shown.

The Determination of the Existence of Fraud in the Present Case

We now determine the application of these doctrines regarding fraud to ascertain the liability, if any, of the respondents.

Neither law nor jurisprudence distinguishes whether it is dolo incidente or dolo causante that must be proven by clear and convincing evidence. It stands to reason
that both dolo incidente and dolo causante must be proven by clear and convincing evidence. The only question is whether this fraud, when proven, may be the
basis for making a contract voidable (dolo causante), or for awarding damages (dolo incidente), or both.

Hence, there is a need to examine all the circumstances thoroughly and to assess the personal circumstances of the party alleging fraud. This may require a review
of the case facts and the evidence on record.

In general, this Court is not a trier of facts. It makes its rulings based on applicable law and on standing jurisprudence. The findings of the Court of Appeals are
generally binding on this Court provided that these are supported by the evidence on record. In the recent case of Medina v. Court of Appeals, 62 this Court held that:

It is axiomatic that a question of fact is not appropriate for a petition for review on certiorari under Rule 45. This rule provides that the parties may raise only
questions of law, because the Supreme Court is not a trier of facts. Generally, we are not duty-bound to analyze again and weigh the evidence introduced in and
considered by the tribunals below. When supported by substantial evidence, the findings of fact of the Court of Appeals are conclusive and binding on the parties
and are not reviewable by this Court, unless the case falls under any of the following recognized exceptions: (1) When the conclusion is a finding grounded entirely
on speculation, surmises and conjectures; (2) When the inference made is manifestly mistaken, absurd or impossible; (3) Where there is a grave abuse of discretion;
(4) When the judgment is based on a misapprehension of facts; (5) When the findings of fact are conflicting; (6) When the Court of Appeals, in making its findings,
went beyond the issues of the case and the same is contrary to the admissions of both appellant and appellee; (7) When the findings are contrary to those of the
trial court; (8) When the findings of fact are conclusions without citation of specific evidence on which they are based; (9) When the facts set forth in the petition as
well as in the petitioners main and reply briefs are not disputed by the respondents; and (10) When the findings of fact of the Court of Appeals are premised on the
supposed absence of evidence and contradicted by the evidence on record. (Emphasis provided) 63

The trial court and the Court of Appeals had appreciated the facts of this case differently.

The Court of Appeals was not correct in saying that petitioner could only raise fraud as a ground to annul his participation in the contract as against respondent
Rupert V. Tankeh, since the petitioner did not make any categorical allegation that respondents Development Bank of the Philippines, Sterling Shipping Lines, Inc.,
and Asset Privatization Trust had acted fraudulently. Admittedly, it was only in the Petition before this Court that the petitioner had made the allegation of a "well-
orchestrated fraud"64 by the respondents. However, Rule 10, Section 5 of the Rules of Civil Procedure provides that:
Amendment to conform to or authorize presentation of evidence. When issues not raised by the pleadings are tried with the express or implied consent of the
parties they shall be treated in all respects as if they had been raised in the pleadings. Such amendment of the pleadings as may be necessary to cause them to
conform to the evidence and to raise these issues may be made upon motion of any party at any time, even after judgment; but failure to amend does not effect the
result of the trial of these issues. If evidence is objected to at the trial on the ground that it is not within the issues made by the pleadings, the court may allow the
pleadings to be amended and shall do so with liberality if the presentation of the merits of the action and the ends of substantial justice will be subserved thereby.
The court may grant a continuance to enable the amendment to be made. (5a)

In this case, the commission of fraud was an issue that had been tried with the implied consent of the respondents, particularly Sterling Shipping Lines, Inc., Asset
Privatization Trust, Development Bank of the Philippines, and Arenas. Hence, although there is a lack of a categorical allegation in the pleading, the courts may still
be allowed to ascertain fraud.

The records will show why and how the petitioner agreed to enter into the contract with respondent Ruperto V. Tankeh:

ATTY. VELAYO: How did you get involved in the business of the Sterling Shipping Lines, Incorporated" [sic]

DR. TANKEH: Sometime in the year 1980, I was approached by Ruperto Tankeh mentioning to me that he is operating a new shipping lines business and he is giving
me free one thousand shares (1,000) to be a director of this new business which is worth one million pesos (P1,000,000.00.),

ATTY. VELAYO: Are you related to Ruperto V. Tankeh?

DR. TANKEH: Yes, sir. He is my younger brother.

ATTY. VELAYO: Did you accept the offer?

DR. TANKEH: I accepted the offer based on his promise to me that I will be made a part of the administration staff so that I can oversee the operation of the business
plus my son, the eldest one who is already a graduate lawyer with a couple of years of experience in the law firm of Romulo Ozaeta Law Offices (TSN, April 28, 1988,
pp. 10-11.).65

The Second Amended Complaint of petitioner is substantially reproduced below to ascertain the claim:

2. That on May 12, 1981, due to the deceit and fraud exercised by Ruperto V. Tankeh, plaintiff, together with Vicente L. Arenas, Jr. and Jose Maria Vargas, signed a
promissory note in favor of the defendant DBP, wherein plaintiff bound himself to jointly and severally pay the DBP the amount of the mortgage loan. This document
insofar as plaintiff is concerned is a simulated document considering that plaintiff was never a real stockholder of the Sterling Shipping Lines, Inc.

3. That although plaintiffs name appears in the records of Sterling Shipping Lines, Inc. as one of its incorporators, the truth is that he had never invested any
amount in said corporation and that he had never been an actual member of said corporation. All the money supposedly invested by him were put by defendant
Ruperto V. Tankeh. Thus, all the shares of stock under his name in fact belongs to Ruperto V. Tankeh. Plaintiff was invited to attend the board meeting of the Sterling
Shipping Lines, Inc. only once, which was for the sole purpose of introducing him to the two directors of the DBP, namely, Mr. Jesus Macalinag and Mr. Gil Corpus.
Thereafter he was never invited again. Plaintiff was never compensated by the Sterling Shipping Lines, Inc. for his being a so-called director and stockholder. It is
clear therefore that the DBP knew all along that plaintiff was not a true stockholder of the company.

4. That THE DECEIT OF DEFENDANT RUPERTO V. TANKEH IS SHOWN BY THE FACT THAT when the Sterling Shipping Lines, Inc. was organized in 1980, Ruperto V.
Tankeh promised plaintiff that he would be a part of the administration staff so that he could oversee the operation of the company. He was also promised that his
son, a lawyer, would be given a position in the company. None of these promises was complied with. In fact, he was not even allowed to find out the data about the
income and expenses of the company.

5. THAT THE DECEIT OF RUPERTO V. TANKEH IS ALSO SHOWN BY THE FACT THAT PLAINTIFF WAS INVITED TO ATTEND THE BOARD MEETING OF THE STERLING
SHIPPING LINES, INC. ONLY ONCE, WHICH WAS FOR THE SOLE PUPOSE OF INTRODUCING HIM TO THE TWO DIRECTORS OF THE DBP IN THE BOARD OF THE STERLING
SHIPPING LINES, INC., NAMELY, MR. JESUS MACALINAG AND MR. GIL CORPUS. THEREAFTER HE WAS NEVER INVITED AGAIN. PLAINTIFF WAS NEVER COMPENSATED BY
THE STERLING SHIPPING LINES, INC. FOR HIS BEING A SO-CALLED DIRECTOR AND STOCKHOLDER.

6. That in 1983, upon realizing that he was only being made a tool to realize the purposes of Ruperto V. Tankeh, plaintiff officially informed the company by means of
a letter dated June 15, 1983 addressed to the company that he has severed his connection with the company, and demanded among others, that the company
board of directors pass a resolution releasing him from any liabilities especially with reference to the loan mortgage contract with the DBP and to notify the DBP of
his severance from the Sterling Shipping Lines, Inc.

8-A. THAT A WEEK AFTER SENDING THE ABOVE LETTER, PLAINTIFF MADE EARNEST EFFORTS TOWARDS A COMPROMISE BETWEEN HIM AND HIS BROTHER RUPERTO V.
TANKEH, WHICH EFFORTS WERE SPURNED BY RUPERTO V. TANKEH, AND ALSO AFTER THE NEWS OF THE SALE OF THE "STERLING ACE" WAS PUBLISHED AT THE
NEWSPAPER [sic], PLAINTIFF TRIED ALL EFFORTS TO CONTACT RUPERTO V. TANKEH FOR THE PURPOSE OF ARRIVING AT SOME COMPROMISE, BUT DEFENDANT
RUPERTO V. TANKEH AVOIDED ALL CONTACTS [sic] WITH THE PLAINTIFF UNTIL HE WAS FORCED TO SEEK LEGAL ASSISTANCE FROM HIS LAWYER. 66

In his Answer, respondent Ruperto V. Tankeh stated that:

COMES NOW defendant RUPERTO V. TANKEH, through the undersigned counsel, and to the Honorable Court, most respectfully alleges:

3. That paragraph 4 is admitted that herein answering defendant together with the plaintiff signed the promissory note in favor of DBP but specifically denied that
the same was done through deceit and fraud of herein answering defendant the truth being that plaintiff signed said promissory note voluntarily and with full
knowledge of the consequences thereof; it is further denied that said document is a simulated document as plaintiff was never a real stockholder of the company,
the truth being those alleged in the special and affirmative defenses;

4. That paragraphs 5,6,7,8 and 8-A are specifically denied specially the imputation of deceit and fraud against herein answering defendant, the truth being those
alleged in the special and affirmative defenses;

SPECIAL AND AFFIRMATIVE DEFENSES


8. The complaint states no cause of action as against herein answering defendant;

9. The Sterling Shipping Lines, Inc. was a legitimate company organized in accordance with the laws of the Republic of the Philippines with the plaintiff as one of the
incorporators;

10. Plaintiff as one of the incorporators and directors of the board was fully aware of the by-laws of the company and if he attended the board meeting only once as
alleged, the reason thereof was known only to him;

11. The Sterling Shipping Lines, Inc. being a corporation acting through its board of directors, herein answering defendant could not have promised plaintiff that he
would be a part of the administration staff;

12. As member of the board, plaintiff had all the access to the data and records of the company; further, as alleged in the complaint, plaintiff has a son who is a
lawyer who could have advised him;

13. Assuming plaintiff wrote a letter to the company to sever his connection with the company, he should have been aware that all he had to do was sell all his
holdings in the company;

14. Herein answering defendant came to know only of plaintiffs alleged predicament when he received the summons and copy of the complaint; x x x. 67

An assessment of the allegations in the pleadings and the findings of fact of both the trial court and appellate court based on the evidence on record led to the
conclusion that there had been no dolo causante committed against the petitioner by Ruperto V. Tankeh.

The petitioner had given his consent to become a shareholder of the company without contributing a single peso to pay for the shares of stock given to him by
Ruperto V. Tankeh. This fact was admitted by both petitioner and respondent in their respective pleadings submitted to the lower court.

In his Amended Complaint, 68 the petitioner admitted that "he had never invested any amount in said corporation and that he had never been an actual member of
said corporation. All the money supposedly invested by him were put up by defendant Ruperto V. Tankeh." 69 This fact alone should have already alerted petitioner to
the gravity of the obligation that he would be undertaking as a member of the board of directors and the attendant circumstances that this undertaking would entail.
It also does not add any evidentiary weight to strengthen petitioners claim of fraud. If anything, it only strengthens the position that petitioners consent was not
obtained through insidious words or deceitful machinations.

Article 1340 of the Civil Code recognizes the reality of some exaggerations in trade which negates fraud. It reads:

Art. 1340. The usual exaggerations in trade, when the other party had an opportunity to know the facts, are not in themselves fraudulent.

Given the standing and stature of the petitioner, he was in a position to ascertain more information about the contract.
Songco v. Sellner70 serves as one of the key guidelines in ascertaining whether a party is guilty of fraud in obtaining the consent of the party claiming that fraud
existed. The plaintiff Lamberto Songco sought to recover earnings from a promissory note that defendant George Sellner had made out to him for payment of
Songcos sugar cane production. Sellner claimed that he had refused to pay because Songco had promised that the crop would yield 3,000 piculs of sugar, when in
fact, only 2,017 piculs of sugar had been produced. This Court held that Sellner would still be liable to pay the promissory note, as follows:

Notwithstanding the fact that Songco's statement as to the probable output of his crop was disingenuous and uncandid, we nevertheless think that Sellner was
bound and that he must pay the price stipulated. The representation in question can only be considered matter of opinion as the cane was still standing in the field,
and the quantity of the sugar it would produce could not be known with certainty until it should be harvested and milled. Undoubtedly Songco had better experience
and better information on which to form an opinion on this question than Sellner. Nevertheless the latter could judge with his own eyes as to the character of the
cane, and it is shown that he measured the fields and ascertained that they contained 96 1/2 hectares.

The law allows considerable latitude to seller's statements, or dealer's talk; and experience teaches that it is exceedingly risky to accept it at its face value. The
refusal of the seller to warrant his estimate should have admonished the purchaser that that estimate was put forth as a mere opinion; and we will not now hold the
seller to a liability equal to that which would have been created by a warranty, if one had been given.

It is not every false representation relating to the subject matter of a contract which will render it void. It must be as to matters of fact substantially affecting the
buyer's interest, not as to matters of opinion, judgment, probability, or expectation. (Long vs. Woodman, 58 Me., 52; Hazard vs. Irwin, 18 Pick. [Mass.], 95; Gordon
vs. Parmelee, 2 Allen [Mass.], 212; Williamson vs. McFadden, 23 Fla., 143, 11 Am. St. Rep., 345.) When the purchaser undertakes to make an investigation of his
own, and the seller does nothing to prevent this investigation from being as full as he chooses to make it, the purchaser cannot afterwards allege that the seller
made misrepresentations. (National Cash Register Co. vs. Townsend, 137 N. C., 652, 70 L. R. A., 349; Williamson vs. Holt, 147 N. C., 515.)

We are aware that where one party to a contract, having special or expert knowledge, takes advantage of the ignorance of another to impose upon him, the false
representation may afford ground for relief, though otherwise the injured party would be bound. But we do not think that the fact that Songco was an experienced
farmer, while Sellner was, as he claims, a mere novice in the business, brings this case within that exception. 71

The following facts show that petitioner was fully aware of the magnitude of his undertaking:

First, petitioner was fully aware of the financial reverses that Sterling Shipping Lines, Inc. had been undergoing, and he took great pains to release himself from the
obligation.

Second, his background as a doctor, as a bank organizer, and as a businessman with experience in the textile business and real estate should have apprised him of
the irregularity in the contract that he would be undertaking. This meant that at the time petitioner gave his consent to become a part of the corporation, he had
been fully aware of the circumstances and the risks of his participation. Intent is determined by the acts.

Finally, the records showed that petitioner had been fully aware of the effect of his signing the promissory note. The bare assertion that he was not privy to the
records cannot counteract the fact that petitioner himself had admitted that after he had severed ties with his brother, he had written a letter seeking to reach an
amicable settlement with respondent Rupert V. Tankeh. Petitioners actions defied his claim of a complete lack of awareness regarding the circumstances and the
contract he had been entering.

The required standard of proof clear and convincing evidence was not met. There was no dolo causante or fraud used to obtain the petitioners consent to enter
into the contract. Petitioner had the opportunity to become aware of the facts that attended the signing of the promissory note. He even admitted that he has a
lawyer-son who the petitioner had hoped would assist him in the administration of Sterling Shipping Lines, Inc. The totality of the facts on record belies petitioners
claim that fraud was used to obtain his consent to the contract given his personal circumstances and the applicable law.

However, in refusing to allow petitioner to participate in the management of the business, respondent Ruperto V. Tankeh was liable for the commission of incidental
fraud. In Geraldez, this Court defined incidental fraud as "those which are not serious in character and without which the other party would still have entered into the
contract."72

Although there was no fraud that had been undertaken to obtain petitioners consent, there was fraud in the performance of the contract. The records showed that
petitioner had been unjustly excluded from participating in the management of the affairs of the corporation. This exclusion from the management in the affairs of
Sterling Shipping Lines, Inc. constituted fraud incidental to the performance of the obligation.

This can be concluded from the following circumstances.

First, respondent raised in his Answer that petitioner "could not have promised plaintiff that he would be a part of the administration staff" 73 since petitioner had
been fully aware that, as a corporation, Sterling Shipping Lines, Inc. acted through its board of directors. Respondent admitted that petitioner had been "an
incorporator and member of the board of directors" 74 and that petitioner "was fully aware of the by-laws of the company." 75 It was incumbent upon respondent to act
in good faith and to ensure that petitioner would not be excluded from the affairs of Sterling Shipping Lines, Inc. After all, respondent asserted that petitioner had
entered into the contract voluntarily and with full consent.

Second, respondent claimed that if petitioner was intent on severing his connection with the company, all that petitioner had to do was to sell all his holdings in the
company. Clearly, the respondent did not consider the fact that the sale of the shares of stock alone did not free petitioner from his liability to Development Bank of
the Philippines or Asset Privatization Trust, since the latter had signed the promissory and had still been liable for the loan. A sale of petitioners shares of stock
would not have negated the petitioners responsibility to pay for the loan.

Third, respondent Ruperto V. Tankeh did not rebuff petitioners claim that the latter only received news about the sale of the vessel M/V Sterling Ace through the
media and not as one of the board members or directors of Sterling Shipping Lines, Inc.

All in all, respondent Ruperto V. Tankehs bare assertion that petitioner had access to the records cannot discredit the fact that the petitioner had been effectively
deprived of the opportunity to actually engage in the operations of Sterling Shipping Lines, Inc. Petitioner had a reasonable expectation that the same level of
engagement would be present for the duration of their working relationship. This would include an undertaking in good faith by respondent Ruperto V. Tankeh to be
transparent with his brother that he would not automatically be made part of the companys administration.
However, this Court finds there is nothing to support the assertion that Sterling Shipping Lines, Inc. and Arenas committed incidental fraud and must be held liable.
Sterling Shipping Lines, Inc. acted through its board of directors, and the liability of respondent Tankeh cannot be imposed on Sterling Shipping Lines, Inc. The
shipping line has a separate and distinct personality from its officers, and petitioners assertion that the corporation conspired with the respondent Ruperto V. Tankeh
to defraud him is not supported by the evidence and the records of the case.

As for Arenas, in Lim Tanhu v. Remolete, 76 this Court held that:

In all instances where a common cause of action is alleged against several defendants, some of whom answer and the others do not, the latter or those in default
acquire a vested right not only to own the defense interposed in the answer of their co-defendant or co-defendants not in default but also to expect a result of the
litigation totally common with them in kind and in amount whether favorable or unfavorable. The substantive unity of the plaintiffs cause against all the defendants
is carried through to its adjective phase as ineluctably demanded by the homogeneity and indivisibility of justice itself. 77

As such, despite Arenas failure to submit his Answer to the Complaint or his declaration of default, his liability or lack thereof is concomitant with the liability
attributed to his co-defendants or co-respondents. However, unlike respondent Ruperto V. Tankehs liability, there is no action or series of actions that may be
attributed to Arenas that may lead to an inference that he was liable for incidental fraud. In so far as the required evidence for both Sterling Shipping Lines, Inc. and
Arenas is concerned, there is no basis to justify the claim of incidental fraud.

In addition, respondents Development Bank of the Philippines and Asset Privatization Trust or Privatization and Management Office cannot be held liable for fraud.
Incidental fraud cannot be attributed to the execution of their actions, which were undertaken pursuant to their mandated functions under the law. "Absent
convincing evidence to the contrary, the presumption of regularity in the performance of official functions has to be upheld." 78

The Obligation to Pay Damages

As such, respondent Ruperto V. Tankeh is liable to his older brother, petitioner Alejandro, for damages. The obligation to pay damages to petitioner is based on
several provisions of the Civil Code.

Article 1157 enumerates the sources of obligations.

Article 1157. Obligations arise from:

(1) Law;

(2) Contracts;

(3) Quasi-contracts;

(4) Acts or omissions punished by law; and


(5) Quasi-delicts. (1089a)

This enumeration does not preclude the possibility that a single action may serve as the source of several obligations to pay damages in accordance with the Civil
Code. Thus, the liability of respondent Ruperto V. Tankeh is based on the law, under Article 1344, which provides that the commission of incidental fraud obliges the
person employing it to pay damages.

In addition to this obligation as the result of the contract between petitioner and respondents, there was also a patent abuse of right on the part of respondent
Tankeh. This abuse of right is included in Articles 19 and 21 of the Civil Code which provide that:

Article 19. 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.

Article 21. Any person who willfully causes loss or injury to another in manner that is contrary to morals, good customs or public policy shall compensate the latter
for the damage.

Respondent Ruperto V. Tankeh abused his right to pursue undertakings in the interest of his business operations. This is because of his failure to at least act in good
faith and be transparent with petitioner regarding Sterling Shipping Lines, Inc.s daily operations.

In National Power Corporation v. Heirs of Macabangkit Sangkay, 79 this Court held that:

When a right is exercised in a manner not conformable with the norms enshrined in Article 19 and like provisions on human relations in the Civil Code, and the
exercise results to [sic] the damage of [sic] another, a legal wrong is committed and the wrongdoer is held responsible. 80

The damage, loss, and injury done to petitioner are shown by the following circumstances.

First, petitioner was informed by Development Bank of the Philippines that it would still pursue his liability for the payment of the promissory note. This would not
have happened if petitioner had allowed himself to be fully apprised of Sterling Shipping Lines, Inc.s financial straits and if he felt that he could still participate in the
companys operations. There is no evidence that respondent Ruperto V. Tankeh showed an earnest effort to at least allow the possibility of making petitioner part of
the administration a reality. The respondent was the brother of the petitioner and was also the primary party that compelled petitioner Alejandro Tankeh to be
solidarily bound to the promissory note. Ruperto V. Tankeh should have done his best to ensure that he had exerted the diligence to comply with the obligations
attendant to the participation of petitioner.

Second, respondent Ruperto V. Tankehs refusal to enter into an agreement or settlement with petitioner after the latters discovery of the sale of the M/V Sterling
Ace was an action that constituted bad faith. Due to Rupertos refusal, his brother, petitioner Alejandro, became solidarily liable for an obligation that the latter could
have avoided if he had been given an opportunity to participate in the operations of Sterling Shipping Lines, Inc. The simple sale of all of petitioners shares would
not have solved petitioners problems, as it would not have negated his liability under the terms of the promissory note.
Finally, petitioner is still bound to the creditors of Sterling Shipping Lines, Inc., namely, public respondents Development Bank of the Philippines and Asset
Privatization Trust. This is an additional financial burden for petitioner. Nothing in the records suggested the possibility that Development Bank of the Philippines or
Asset Privatization Trust through the Privatization Management Office will not pursue or is precluded from pursuing its claim against the petitioner. Although
petitioner Alejandro voluntarily signed the promissory note and became a stockholder and board member, respondent should have treated him with fairness,
transparency, and consideration to minimize the risk of incurring grave financial reverses.

In Francisco v. Ferrer,81 this Court ruled that moral damages may be awarded on the following bases:

To recover moral damages in an action for breach of contract, the breach must be palpably wanton, reckless, malicious, in bad faith, oppressive or abusive.

Under the provisions of this law, in culpa contractual or breach of contract, moral damages may be recovered when the defendant acted in bad faith or was guilty of
gross negligence (amounting to bad faith) or in wanton disregard of his contractual obligation and, exceptionally, when the act of breach of contract itself is
constitutive of tort resulting in physical injuries.

Moral damages may be awarded in breaches of contracts where the defendant acted fraudulently or in bad faith.

Bad faith does not simply connote bad judgment or negligence, it imports a dishonest purpose or some moral obliquity and conscious doing of a wrong, a breach of
known duty through some motive or interest or ill will that partakes of the nature of fraud.

The person claiming moral damages must prove the existence of bad faith by clear and convincing evidence for the law always presumes good faith. It is not enough
that one merely suffered sleepless nights, mental anguish, serious anxiety as the result of the actuations of the other party. Invariably such action must be shown to
have been willfully done in bad faith or will ill motive. Mere allegations of besmirched reputation, embarrassment and sleepless nights are insufficient to warrant an
award for moral damages. It must be shown that the proximate cause thereof was the unlawful act or omission of the [private respondent] petitioners.

An award of moral damages would require certain conditions to be met, to wit: (1) first, there must be an injury, whether physical, mental or psychological, clearly
sustained by the claimant; (2) second, there must be culpable act or omission factually established; (3) third, the wrongful act or omission of the defendant is the
proximate cause of the injury sustained by the claimant; and (4) fourth, the award of damages is predicated on any of the cases stated in Article 2219 of the Civil
Code. (Citations omitted)82

In this case, the four elements cited in Francisco are present. First, petitioner suffered an injury due to the mental duress of being bound to such an onerous debt to
Development Bank of the Philippines and Asset Privatization Trust. Second, the wrongful acts of undue exclusion done by respondent Ruperto V. Tankeh clearly
fulfilled the same requirement. Third, the proximate cause of his injury was the failure of respondent Ruperto V. Tankeh to comply with his obligation to allow
petitioner to either participate in the business or to fulfill his fiduciary responsibilities with candor and good faith. Finally, Article 2219 83 of the Civil Code provides
that moral damages may be awarded in case of acts and actions referred to in Article 21, which, as stated, had been found to be attributed to respondent Ruperto V.
Tankeh.
In the Appellants Brief,84 petitioner asked the Court of Appeals to demand from respondents, except from respondent Asset Privatization Trust, the amount of five
million pesos (P5,000,000.00). This Court finds that the amount of five hundred thousand pesos (P500,000.00) is a sufficient amount of moral damages.

In addition to moral damages, this Court may also impose the payment of exemplary damages.1wphi1 Exemplary damages are discussed in Article 2229 of the Civil
Code, as follows:

ART. 2229. Exemplary or corrective damages are imposed, by way of example or correction of the public good, in addition to moral, temperate, liquidated or
compensatory damages.

Exemplary damages are further discussed in Articles 2233 and 2234, particularly regarding the pre-requisites of ascertaining moral damages and the fact that it is
discretionary upon this Court to award them or not:

ART. 2233. Exemplary damages cannot be recovered as a matter of right; the court will decide whether or not they should be adjudicated.

ART. 2234. While the amount of the exemplary damages need not be proven, the plaintiff must show that he is entitled to moral, temperate or compensatory
damages before the court may consider the question of whether or not exemplary damages should be awarded x x x

The purpose of exemplary damages is to serve as a deterrent to future and subsequent parties from the commission of a similar offense. The case of People v.
Rante85 citing People v. Dalisay86 held that:

Also known as punitive or vindictive damages, exemplary or corrective damages are intended to serve as a deterrent to serious wrong doings, and as a vindication
of undue sufferings and wanton invasion of the rights of an injured or a punishment for those guilty of outrageous conduct. These terms are generally, but not
always, used interchangeably. In common law, there is preference in the use of exemplary damages when the award is to account for injury to feelings and for the
sense of indignity and humiliation suffered by a person as a result of an injury that has been maliciously and wantonly inflicted, the theory being that there should
be compensation for the hurt caused by the highly reprehensible conduct of the defendantassociated with such circumstances as willfulness, wantonness, malice,
gross negligence or recklessness, oppression, insult or fraud or gross fraudthat intensifies the injury. The terms punitive or vindictive damages are often used to
refer to those species of damages that may be awarded against a person to punish him for his outrageous conduct. In either case, these damages are intended in
good measure to deter the wrongdoer and others like him from similar conduct in the future. 87

To justify an award for exemplary damages, the wrongful act must be accompanied by bad faith, and an award of damages would be allowed only if the guilty party
acted in a wanton, fraudulent, reckless or malevolent manner. 88In this case, this Court finds that respondent Ruperto V. Tankeh acted in a fraudulent manner through
the finding of dolo incidente due to his failure to act in a manner consistent with propriety, good morals, and prudence.

Since exemplary damages ensure that future litigants or parties are enjoined from acting in a similarly malevolent manner, it is incumbent upon this Court to impose
the damages in such a way that will serve as a categorical warning and will show that wanton actions will be dealt with in a similar manner. This Court finds that the
amount of two hundred thousand pesos (P200,000.00) is sufficient for this purpose.
In sum, this Court must act in the best interests of all future litigants by establishing and applying clearly defined standards and guidelines to ascertain the existence
of fraud.

WHEREFORE, this Petition is PARTIALLY GRANTED. The Decision of the Court of Appeals as to the assailed Decision in so far as the finding of fraud is SUSTAINED with
the MODIFICATION that respondent RUPERTO V. TANKEH be ordered to pay moral damages in the amount of FIVE HUNDRED THOUSAND PESOS ( P500,000.00) and
the amount of TWO HUNDRED THOUSAND PESOS (P200,000.00) by way of exemplary damages.

SO ORDERED.

ANALITA P. INOCENCIO, substituting for RAMON INOCENCIO (Deceased) vs. HOSPICIO DE SAN JOSE

On 1 March 1946, Hospicio de San Jose (HDSJ) leased a parcel of land located in Pasay City to German Inocencio (German). 4 The lease contract was effective for a
period of one year, and was renewed for one-year periods several times. The last written contract was executed on 31 May 1951. 5 Section 6 of the lease contract
provides:

Este contrato es intransferible, a menos que para ello se obtenga elconsentimiento escrito del arrendador. (This contract is nontransferable unless prior consent of
the lessor is obtained in writing.)6

In 1946, German constructed two buildings on the parcel of land 7 which he subleased. He also designated his son Ramon Inocencio (Ramon)to administer the said
property.8

On 21 September 1990, German received a letter from HDSJ informing him that the increased rentals shall take effect in November 1990instead of August 1990, "to
give him ample time to make the necessary rental adjustments with his sublessees." 9

German passed away in 1997. Evidence on record shows that Ramon did not notify HDSJ of Germans death. After Germans passing, Ramon collected the rentals
from the sublessees, and paid the rentals to HDSJ, and the taxes on the property. On 1 March 2001, HDSJs property administrator, Five Star Multi-Services, Inc.,
notified Ramon that HDSJ is terminating the lease contract effective 31 March 2001:

We acknowledge the fact that Hospicio de San Jose has been accepting the payment of your rentals since the demise of Mr. German Inocencio. Hence, an implied
contract of lease between the two of you exists. However, since there is no stipulation as to the period of the contract and you are paying a monthly rental to our
client, the period for the lease is on a month-to-month basis (Art. 1687). Thus as of this date, your contract should expire on March 31, 2001. 10

Ramon then sent a letter to HDSJ dated 12 March 2001, suggesting that the lease contract be renegotiated for the welfare of the sublessees occupying the parcel of
land.11 On 3 April 2001, HDSJ notified Ramon that the lease contract shall not be renewed because Ramon has "continually subleased the subject premises to about
20 families (in addition to a commercial establishment) x x x without the knowledge and consent of the essor, [HDSJ]." 12 Thereafter, HDSJ refused to accept Ramons
tender of payment of rentals.13
On 3 March 2005, HDSJ sent a letter to Ramon: (1) reiterating its stand that the lease contract was terminated effective 31 March 2001;(2) demanding payment
of P756,449.26 as unrealized fruits; and (3) giving him 30 days to vacate the property. 14 The sublessees were given written notices to vacate within 30 days. 15 HDSJ
also posted a Patalastas stating that it is willing to work out an amicable arrangement with the sublessees, although the latter are not considered as legal occupants
or tenants of the property.16 Because of this, some of the sublessees refused to pay rentals to Ramon. 17

HDSJ also entered into lease contracts with: (1) Harish Chetandas on 25 May 2005; 18 (2) Enrique Negare on 12 April 2005; 19 (3) Lamberto Estefa on 25 May
2005;20 and (4) Sofronio Chavez, Jr. on 21 May 2005.21

On 28 June 2005, HDSJ filed a Complaint before Branch 48 of the Metropolitan Trial Court of Pasay (MeTC-Pasay) for unlawful detainer against Ramon and his
sublessees.22 The complaint alleged that Ramon and his sublessees have been illegally occupying the leased premises since 31 March 2001. HDSJ sought the
following damages:

17.1 Actual damages, in the amount of Php552,195.36, equivalent to the reasonable value of the use and occupation of the premises from the period of 31 March
2001 until the present; and

17.2 Attorneys fees in the amount of Php50,000.00, for defendants refusal to vacate the property and for compelling plaintiff to incur expenses to protect its
interests. Furthermore, it is clear that defendants acted in gross and evident bad faith in refusing to satisfy plaintiffs plainly valid, just, and demandable claim. 23

In his Answer dated 1 August 2005,24 Ramon claimed that:

(1) German was the owner of the two buildings constructed on the leased property as evidenced by the building permits obtained from the government agencies and
the tax declarations covering the buildings;

(2) The Spanish lease contract, which was not translated into English or Filipino should not be admitted as evidence in view of Section 33 of Rule 133 of the Rules on
Evidence;

(3) HDSJ is estopped from raising the issue of non-transferability of the lease contract because it admitted in its letter to Ramon that there is an existing lease
agreement between the parties, even after Germans death:

Your Lease Contract with [HDSJ], which is an implied month-to-month contract, has to be terminate defective March 31, 2001, because by your own admission, you
have continuously subleased the subject premises to about 20 families including a commercial establishment).This was done without the knowledge and consent of
the lessor, [HDSJ], and is in violation of the Lease Contract your father signed with them. 25 x x x.

(4) There is no prohibition against subleasing in the lease contract. Thus, under Article 1650 of the Civil Code, Ramon is permitted to sublease the premises; and

(5) The letters sent by HDSJ to the Inocencios sometime in1990 revealed that the former already knew that the premises were being subleased.
Ramon also claimed that HDSJ interfered with the contractual relations between him and his sublessees. 26

While the case was being tried before the MeTC-Pasay, Ramon passed away. In an Order dated 23 August 2006, the MeTC-Pasay allowed the substitution of Ramon
by his wife, Analita.27

The Ruling of the MeTC-Pasay

The MeTC-Pasay ruled in favor of HDSJ. In its Decision dated 22May 2008, the MeTC-Pasay held that the lease contract could not be transmitted to Ramon as
Germans heir in view of the express stipulation found therein. Since there was "no lease contract between [HDSJ] and Ramon x x x the latter cannot sublease the
property."28The dispositive portion of the MeTC-Pasay Decision reads:

Premises considered, judgment is hereby rendered in favor of plaintiff and against defendant as follows:

1. Ordering defendant Ramon Inocencio, substituted by AnalitaP. Inocencio, and Felipe Enar, and all persons claiming rights under them to immediately vacate the
premises located at 61-CSta. Escolastica cor. F.B. Harrison St., Pasay City and to peacefully turn over the same to plaintiff;

2. Ordering the defendants to pay plaintiff reasonable compensation of P552,195.36 for the use and occupation of the property from 01 April 2001 to 31 March 2005,
and the amount of P10,512.00 a month from 01 April 2005 up to the present, plus twelve per cent 12% interest per annum until the premises shall have been
vacated;

3.Ordering the defendants to pay plaintiff the amount of P50,000.00 as attorneys fees and costs of suit. 29

Aggrieved, Analita filed an appeal before the RTC-Pasay.

The Ruling of the RTC-Pasay

On 21 January 2009, the RTC-Pasay dismissed Analitas appeal and affirmed in toto the decision of the MeTC-Pasay. 30 It held that "even before the termination of the
contract, [Ramon] had no right to sublease the said property due to the intransferability clause in the contract." 31

Analita moved for reconsideration, but it was denied in an Order dated 25 October 2010. 32 Analita then filed a petition for review under Rule 42 of the Rules of Court
before the CA.

The Ruling of the CA

The CA affirmed the decision of the RTC-Pasay but modified the award for damages. The dispositive portion of the Decision reads:

WHEREFORE, foregoing considered, the assailed Decision dated21 January 2009 of the Regional Trial Court, Branch 119, Pasay City is AFFIRMED with the
MODIFICATION that the award for reasonable compensation in paragraph 2 is pegged at Five Hundred Four Thousand Five Hundred Seventy Six Pesos ( P504,576.00)
representing the accumulated rentals for the period from 01 April 2001 up to 31 March2005 with six percent (6%) interest per annum, plus the further amount of Ten
Thousand Five Hundred Twelve Pesos (P10,512.00) per month from 01 April 2005 until possession is restored to respondent, also with six percent (6%) interest per
annum, up to the finality of this Decision. Thereafter, the interest shall be twelve percent (12%) until the amount is fully paid. 33

Hence, this petition.

The Issues

The petition questions the following rulings made by the CA:

(1) The sublease contracts were invalid;

(2) There was no tortious interference on the part of HDSJ;

(3) Ramon did not own the buildings erected on the leased premises;

(4) HDSJ is entitled to reasonable compensation in the amount of P504,576.00 and attorneys fees; and

(5) HDSJs action for unlawful detainer was not barred by prescription.

The Ruling of this Court

Article 1311 of the Civil Code provides:

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.

xxxx

We have previously ruled that lease contracts, by their nature, are not personal. The general rule, therefore, is lease contracts survive the death of the parties and
continue to bind the heirs except if the contract states otherwise. 34 In Sui Man Hui Chan v. Court of Appeals,35 we held that:

A lease contract is not essentially personal in character. Thus, the rights and obligations therein are transmissible to the heirs. The general rule, therefore, is that
heirs are bound by contracts entered into by their predecessors-in-interest except when the rights and obligations arising therefrom are not transmissible by (1) their
nature, (2) stipulation or (3) provision of law. In the subject Contract of Lease, not only were there no stipulations prohibiting any transmission of rights, but its very
terms and conditions explicitly provided for the transmission of the rights of the lessor and of the lessee to their respective heirs and successors. The contract is the
law between the parties. The death of a party does not excuse nonperformance of a contract, which involves a property right, and the rights and obligations
thereunder pass to the successors or representatives of the deceased. Similarly, nonperformance is not excused by the death of the party when the other party has
a property interest in the subject matter of the contract.

Section 6 of the lease contract provides that "this contract is nontransferable unless prior consent of the lessor is obtained in writing." 36 Section 6 refers to transfers
inter vivos and not transmissions mortis causa. What Section 6 seeks to avoid is for the lessee to substitute a third party in place of the lessee without the lessors
consent. This merely reiterates what Article 1649 of the Civil Code provides:

Art. 1649. The lessee cannot assign the lease without the consent of the lessor, unless there is a stipulation to the contrary.

In any case, HDSJ also acknowledged that Ramon is its month-to-month lessee. Thus, the death of German did not terminate the lease contract executed with HDSJ,
but instead continued with Ramon as the lessee. HDSJ recognized Ramon as its lessee in a letter dated 1 March 2001:

We acknowledge the fact that Hospicio de San Jose has been accepting the payment of your rentals since the demise of Mr. [German] Inocencio. Hence, an implied
contract of lease between the two of you exists. However, since there is no stipulation as to the period of the contract and you are paying a monthly rental to our
client, the period for the lease is on a month-to-month basis (Art. 1687). Thus as of this date, your contract should expire on March 31, 2001. 37

Section 6 of the lease contract requires written consent of the lessor before the lease may be assigned or transferred. In Tamio v. Tecson, 38 we explained the nature
of an assignment of lease:

In the case of cession or assignment of lease rights on real property, there is a novation by the substitution of the person of one of the parties the lessee. The
personality of the lessee, who dissociates from the lease, disappears; only two persons remain in the juridical relation the lessor and the assignee who is
converted into the new lessee.39

Assignment or transfer of lease, which is covered by Article 1649 of the Civil Code, is different from a sublease arrangement, which is governed by Article 1650 of
the same Code. In a sublease, the lessee becomes in turn a lessor to a sublessee. The sublessee then becomes liable to pay rentals to the original lessee. However,
the juridical relation between the lessor and lessee is not dissolved. The parties continue to be bound by the original lease contract. Thus, in a sublease
arrangement, there are at least three parties and two distinct juridical relations. 40

Ramon had a right to sublease the premises since the lease contract did not contain any stipulation forbidding subleasing. Article 1650 of the Civil Code states:

Art. 1650. When in the contract of lease of things there is no express prohibition, the lessee may sublet the thing leased, in whole or in part, without prejudice to his
responsibility for the performance of the contract toward the lessor.

Therefore, we hold that the sublease contracts executed by Ramon were valid.

We also find that HDSJ did not commit tortious interference. Article1314 of the Civil Code states:
Art. 1314. Any third person who induces another to violate his contract shall be liable for damages to the other contracting party.

As correctly pointed out by the Inocencios, tortious interference has the following elements: (1) existence of a valid contract; (2) knowledge on the part of the third
person of the existence of the contract; and (3) interference of the third person without legal justification or excuse. 41

The facts of the instant case show that there were valid sublease contracts which were known to HDSJ. However, we find that the third element is lacking in this
case.

In So Ping Bun v. Court of Appeals, 42 we held that there was no tortious interference if the intrusion was impelled by purely economic motives. In So Ping Bun, we
explained that:

Authorities debate on whether interference may be justified where the defendant acts for the sole purpose of furthering his own financial or economic interest. One
view is that, as a general rule, justification for interfering with the business relations of another exists where the actors motive is to benefit himself. Such
justification does not exist where his sole motive is to cause harm to the other. Added to this, some authorities believe that it is not necessary that the interferers
interest outweighs that of the party whose rights are invaded, and that an individual acts under an economic interest that is substantial, not merely de minimis, such
that wrongful and malicious motives are negatived, for he acts in self- protection. Moreover, justification for protecting ones financial position should not be made to
depend on a comparison of his economic interest in the subject matter with that of others. It is sufficient if the impetus of his conduct lies in a proper business
interest rather than in wrongful motives.43

The evidence shows that HDSJ entered into agreements with Ramons former sublessees for purely economic reasons (payment of rentals). HDSJ had a right to
collect the rentals from the sublessees upon termination of the lease contract. It does not appear that HDSJ was motivated by spite or ill will towards the Inocencios.

The Inocencios claim ownership over the buildings since these are separate and distinct from the land on which they are erected. Thus, as owners of the buildings,
they have a right to lease the buildings to third persons, even after termination of the lease contract with HDSJ. To bolster their claim of ownership, the Inocencios
presented the following evidence: (1) the building permit; 44

(2) the receipt for the payment of the permit fee;45 (3) the Tax Declarations; and (4) the proof of payment of insurance. 46 The Inocencios also claimed that:

as the Inocencios owned the Subject Buildings, it is respectfully submitted, and it should be clear that when they entered into lease contracts with tenants for the
lease of portions of the said buildings, these contracts were independent contracts of lease over their own building and not sub-leases of the parcel of land which
they leased from Respondent. It is Respondents inaccurate characterization of the leasing by the Inocencios of portions of their own building that has obfuscated the
legal issues in this case and partially led to the incorrect decisions of the courts a quo. 47

We do not agree. In Duellome v. Gotico 48 and Caleon v. Agus Development Corporation,49

we held that the lease of a building includes the lease of the lot and consequently, the rentals of the building include the rentals of the lot. As correctly pointed out
by HDSJ in its Comment:50
x x x When the Inocencios leased the buildings to third parties, they also "leased" to the third parties the plot of land on which the buildings stood either by
implied transfer of the lease covering the plot of the land, or by sublease. Either way, x x x the Inocencios themselves must have a valid lease contract with [HDSJ]
over the land. However, when the lease contract x x x with HDSJ ended on 31March 2001, Ramon lost his status as lessee of the land, and therefore, had no
authority to transfer the lease or sublease the land. x x x. 51

However, we find that the CA erred in not applying Article 1678 of the Civil Code which provides:

Art. 1678. If the lessee makes, in good faith, useful improvements which are suitable to the use for which the lease is intended, without altering the form or
substance of the property leased, the lessor upon the termination of the lease shall pay the lessee one-half of the value of the improvements at that time. Should
the lessor refuse to reimburse said amount, the lessee may remove the improvements, even though the principal thing may suffer damage thereby. He shall not,
however, cause any more impairment upon the property leased than is necessary.

With regard to ornamental expenses, the lessee shall not be entitled to any reimbursement, but he may remove the ornamental objects, provided no damage is
caused to the principal thing, and the lessor does not choose to retain them by paying their value at the time the lease is extinguished.

The foregoing provision applies if the improvements were: (1) introduced in good faith; (2) useful; and (3) suitable to the use for which the lease is intended, without
altering the form and substance. 52

We find that the aforementioned requisites are satisfied in this case.1wphi1 The buildings were constructed before Germans demise, during the subsistence of a
valid contract of lease. It does not appear that HDSJ prohibited German from constructing the buildings. Thus, HDSJ should have reimbursed German (or his estate)
half of the value of the improvements as of 2001. If HDSJ is not willing to reimburse the Inocencios, then the latter should be allowed to demolish the buildings.

We also find that the action for unlawful detainer was not barred by prescription. Section 1, Rule 70 of the Rules of Court provides that actions for unlawful detainer
must be filed "within one (1) year after such unlawful deprivation or withholding of possession." In interpreting the foregoing provision, this Court, in Republic v.
Sunvar Realty Development Corporation,53 held that:

The one-year period to file an unlawful detainer case is not counted from the expiration of the lease contract on 31 December 2002. Indeed, the last demand for
petitioners to vacate is the reckoning period for determining the one-year period in an action for unlawful detainer. "Such one year period should be counted from
the date of plaintiffs last demand on defendant to vacate the real property, because only upon the lapse of that period does the possession become unlawful." 54

HDSJs last demand was made on 3 March 2005, and it filed the complaint for unlawful detainer on 28 June 2005. Thus, the complaint was filed within the period
provided under the Rules of Court.

WHEREFORE, the petition is PARTLY GRANTED. The Decision dated 12 January 2012 of the Court of Appeals in CA-G.R. SP No. 117009 is AFFIRMED with modification.
The case is hereby REMANDED to the Metropolitan Trial Court of Pasay, Branch 48, for determination of the value or the improvements to be paid to the lnocencios, if
Hospicio de San Jose desires to keep the improvements. Otherwise, the Inocencios shall be allowed to demolish the buildings at their expense. SO ORDERED.
REBECCA FULLIDO vs. GINO GRILLI

Sometime in 1994, Grilli, an Italian national, met Fullido in Bohol and courted her. In 1995, Grilli decided to build a residential house where he and Fullido would stay
whenever he would be vacationing in the country. Grilli financially assisted Fullido in procuring a lot located in Biking I, Dauis, Bohol, from her parents which was
registered in her name under Transfer Certificate of Title (TCT) No. 30626.5 On the said property, they constructed a house, which was funded by Grilli. Upon
completion, they maintained a common-law relationship and lived there whenever Grilli was on vacation in the Philippines twice a year. In 1998, Grilli and Fullido
executed a contract of lease, 6
a memorandum of agreement 7 (MOA) and a special power of attorney 8 (SPA), to define their respective rights over the house and lot.
The lease contract stipulated, among others, that Grilli as the lessee, would rent the lot, registered in the name of Fullido, for a period of fifty (50) years, to be
automatically renewed for another fifty (50) years upon its expiration in the amount of P10,000.00 for the whole term of the lease contract; and that Fullido as the
lessor, was prohibited from selling, donating, or encumbering the said lot without the written consent of Grilli. The pertinent provisions of the lease contract over the
house and lot are as follows:

That for and in consideration of the total amount of rental in the amount of TEN THOUSAND (P10,000.00) PESOS, Philippine Currency, paid by the LESSEE to the
LESSOR, receipt of which is hereby acknowledged, the latter hereby leases to the LESSEE a house and lot, and all the furnishings found therein, land situated at
Biking I, Dauis, Bohol, Philippines, absolutely owned and belonging to the LESSOR and particularly described as follows, to wit:

That the LESSOR and the LESSEE hereby agree as they have agreed to be bound by the following terms and conditions, to wit:

l. That the term of the lease shall be FIFTY (50) YEARS from August 16, 1998 to August 15, 2048, automatically renewed for the same term upon the expiration
thereof;

lease to any third person, without the written consent of the LESSEES. 9

The said lease contract was duly registered in the Register of Deeds of Bohol.

The MOA, on the other hand, stated, among others, that Grilli paid for the purchase price of the house and lot; that ownership of the house and lot was to reside with
him; and that should the common-law relationship be terminated, Fullido could only sell the house and lot to whomever Grilli so desired. Specifically, the pertinent
terms of the MOA read:

NOW WHEREFORE, FOR AND IN CONSIDERATION of the foregoing premises, the parties hereto agree as they hereby covenant to agree that the FIRST PARTY ( Grilli)
shall permanently reside on the property as above-mentioned, subject to the following terms and conditions:

1. That ownership over the above-mentioned properties shall reside absolutely with herein FIRST PARTY, and the SECOND PARTY ( Fullido) hereby acknowledges the
same;
2. That the SECOND PARTY is expressly prohibited to sell the above-stated property, except if said sale is with the conformity of the FIRST PARTY;

3. That the SECOND PARTY hereby grants the FIRST PARTY, the absolute and irrevocable right, to reside in the residential building so constructed during his lifetime,
or any time said FIRST PARTY may so desire;

4. That in the event the common-law relationship terminates, or when the SECOND PARTY marries another, or enters into another common-law relationship with
another, said SECOND PARTY shall be obliged to execute a DEED OF ABSOLUTE SALE over the above-stated parcel of land and residential building, in favor of
whomsoever the FIRST PARTY may so desire, and be further obliged to turn over the entire consideration of the said sale to the FIRST PARTY , or if the law shall allow,
the FIRST PARTY shall retain ownership of the said land, as provided for in paragraph 7 below;

7. That if the cases referred to in paragraph 4 shall occur and in the event that a future law shall be passed allowing foreigners to own real properties in the
Philippines, the ownership of the above-described real properties shall pertain to the FIRST PARTY, and the herein undersigned SECOND PARTY undertakes to execute
all the necessary deeds, documents, and contracts to effect the transfer of title in favor of the FIRST PARTY;

Lastly, the SPA allowed Grilli to administer, manage, and transfer the house and lot on behalf of Fullido.

Initially, their relationship was harmonious, but it turned sour after 16 years of living together. Both charged each other with infidelity. They could not agree who
should leave the common property, and Grilli sent formal letters to Fullido demanding that she vacate the property, but these were unheeded. On September 8,
2010, Grilli filed a complaint for unlawful detainer with prayer for issuance of preliminary injunction against Fullido before the MCTC, docketed as Civil Case No. 244.

Grilli's Position

The complaint stated that the common-law relationship between Grilli and Fullido began smoothly, until Grilli discovered that Fullido was pregnant when he arrived in
the Philippines in 2002. At first, she told him that the child she was carrying was his. After the delivery of the child, however, it became apparent that the child was
not his because of the discrepancy between the child's date of birth and his physical presence in the Philippines and the difference between the baby's physical
features and those of Grilli. Later on, she admitted that the child was indeed sired by another man.

Grilli further claimed that he was so devastated that he decided to end their common-law relationship. Nevertheless, he allowed Fullido to live in his house out of
liberality and generosity, but this time, using another room. He did not demand any rent from Fullido over the use of his property.

After a year, Fullido became more hostile and difficult to handle. Grilli had to make repairs with his house every time he arrived in the Philippines because she was
not maintaining it in good condition. Fullido also let her two children, siblings and parents stay in his house, which caused damage to the property. He even lost his
personal belongings inside his house on several occasions. Grilli verbally asked Fullido to move out of his house because they were not getting along anymore, but
she refused. He could no longer tolerate the hostile attitude shown to him by Fullido and her family, thus, he filed the instant complaint.

Fullido's Position

Fullido countered that she met Grilli sometime in 1993 when she was still 17 years old working as a cashier in Alturas Supermarket. Grilli was then a tourist in Bohol
who persistently courted her.

At first, Fullido was hesitant to the advances of Grilli because she could not yet enter into a valid marriage. When he assured her and her parents that they would
eventually be married in three years, she eventually agreed to have a relationship with him and to live as common-law spouses. Sometime in 1995, Grilli offered to
build a house for her on a parcel of land she exclusively owned which would become their conjugal abode. Fullido claimed that their relationship as common-law
spouses lasted for more than 18 years until she discovered that Grilli had found a new and younger woman in his life. Grilli began to threaten and physically hurt her
by knocking her head and choking her.

When Fullido refused to leave their house even after the unlawful detainer case was filed, Grilli again harassed, intimidated and threatened to hurt her and her
children. Thus, she filed a petition for Temporary Protection Order (TPO) and Permanent Protection Order (PPO) against Grilli under Republic Act (R.A.) No. 9262
before the Regional Trial Court, Branch 3, Bohol (RTC-Branch 3). In an Order,11 dated February 23, 2011, the RTC-Branch 3 granted the TPO in favor of Fullido and
directed that Grilli must be excluded from their home.

Fullido finally asserted that, although it was Grilli who funded the construction of the house, she exclusively owned the lot and she contributed to the value of the
house by supervising its construction and maintaining their household.

The MCTC Ruling

In its decision, dated March 31, 2011, the MCTC dismissed the case after finding that Fullido could not be ejected from their house and lot. The MCTC opined that she
was a co-owner of the house as she contributed to it by supervising its construction. Moreover, the MCTC respected the TPO issued by RTC-Branch 3 which directed
that Grilli be removed from Fullido's residence. The dispositive portion of the MCTC decision reads:

WHEREFORE, judgment is hereby rendered:

1. Dismissing the instant case;

2. Ordering the Plaintiff to pay to Defendant the amount of Fifty Thousand Pesos (P50,000.00) as moral damages, and Twenty Thousand Pesos (P20,000.00) as
exemplary damages, and Twenty Thousand Pesos (P20,000.00) as Attorney's Fees; and

3. Denying the prayer for the issuance of Preliminary Mandatory Injunction.


The RTC Ruling

In its decision, dated April 26, 2012, the RTC reversed and set aside the MCTC decision. The RTC was of the view that Grilli had the exclusive right to use and possess
the house and lot by virtue of the contract of lease executed by the parties. Since the period of lease had not yet expired, Fullido, as lessor, had the obligation to
respect the peaceful and adequate enjoyment of the leased premises by Grilli as lessee. The RTC opined that absent a judicial declaration of nullity of the contract of
lease, its terms and conditions were valid and binding. As to the TPO, the RTC held that the same had no bearing in the present case which merely involved the
possession of the leased property.

Aggrieved, Fullido instituted an appeal before the CA alleging that her land was unlawfully transferred by Grilli to a certain Jacqueline Guibone ( Guibone), his new
girlfriend, by virtue of the SPA earlier executed by Fullido.

The CA Ruling

In its assailed decision, dated May 31, 2013, the CA upheld the decision of the RTC emphasizing that in an ejectment case, the only issue to be resolved would be the
physical possession of the property. The CA was also of the view that as Fullido executed both the MOA and the contract of lease, which gave Grilli the possession
and use of the house and lot, the same constituted as a judicial admission that it was Grilli who had the better right of physical possession. The CA stressed that, if
Fullido would insist that the said documents were voidable as her consent was vitiated, then she must institute a separate action for annulment of contracts. Lastly,
the CA stated that the TPO issued by the RTC-Branch 3 under Section 21 of R.A. No. 9262 was without prejudice to any other action that might be filed by the parties.

ISSUES

I THE HONORABLE COURT OF APPEALS GRAVELY ERRED AND DEPARTED FROM ESTABLISHED LAW AND JURISPRUDENCE IN DENYING THE PETITION
FOR REVIEW AND IN AFFIRMING THE DECISION OF RTC BOHOL BRANCH 47 EJECTING PETITIONER FROM THE SUBJECT PROPERTIES, WHICH
EJECTMENT ORDER IS ANCHORED ON PATENTLY NULL AND VOID CONTRACTS.

II THE HONORABLE COURT OF APPEALS GRAVELY ERRED AND DEPARTED FROM ESTABLISHED LAW IN AFFIRMING THE DECISION OF THE RTC BOHOL
BRANCH 47 EJECTING PETITIONER FROM THEIR CONJUGAL ABODE WHERE RESPONDENT HAS BEEN EARLIER ORDERED TO VACATE BY VIRTUE OF A
PERMANENT PROTECTION ORDER THUS EFFECTIVELY SETTING ASIDE, NEGATING AND/OR VIOLATING AN ORDER ISSUED BY A COURT OF CO-EQUAL
JURISDICTION.

III THE HONORABLE COURT OF APPEALS LIKEWISE ERRED AND DEPARTED FROM ESTABLISHED LAW AND JURISPRUDENCE IN DENYING THE
PETITIONER'S MOTION FOR RECONSIDERATION, AMONG OTHERS, FOR NON-COMPLIANCE WITH SECTION 1 RULE 52 VIS-A-VIS SECTION 13, RULE 13
OF THE 1997 RULES OF CIVIL PROCEDURE.14ChanRoblesVirtualawlibrary

Fullido argues that she could not be ejected from her own lot based on the contract of lease and the MOA because those documents were null and void for being
contrary to the Constitution, the law, public policy, morals and customs; that the MOA prevented her from disposing or selling her own land, while the contract of
lease favoring Grilli, a foreigner, was contrary to the Constitution as it was a for a period of fifty (50) years, and, upon termination, was automatically renewable for
another fifty (50) years; that the TPO, which became a PPO by virtue of the July 5, 2011 Decision 15 of RTC-Branch 3, should not be defeated by the ejectment suit;
and that the CA should have liberally applied its procedural rules and allowed her motion for reconsideration.

In his Comment,16 Grilli countered that he was the rightful owner of the house because a foreigner was not prohibited from owning residential buildings; that the lot
was no longer registered in the name of Fullido as it was transferred to Guibone, covered by TCT No. 101-2011000335; that if Fullido wanted to assail the lease
contract, she should have first filed a separate action for annulment of the said contract, which she did in Civil Case No. 8094, pending before the Regional Trial
Court of Bohol; and that by signing the contracts, Fullido fully agreed with their terms and must abide by the same.

In her Reply,17 Fullido insisted that the contract of lease and the MOA were null and void, thus, these could not be the source of Grilli's de facto possession.

The Court's Ruling

The Court finds the petition meritorious.

Unlawful detainer is an action to recover possession of real property from one who unlawfully withholds possession thereof after the expiration or termination of his
right to hold possession under any contract, express or implied. The possession of the defendant in unlawful detainer is originally legal but became illegal due to the
expiration or termination of the right to possess. The only issue to be resolved in an unlawful detainer case is the physical or material possession of the property
involved, independent of any claim of ownership by any of the parties. 18

In this case, Fullido chiefly asserts that Grilli had no right to institute the action for unlawful detainer because the lease contract and the MOA, which allegedly gave
him the right of possession over the lot, were null and void for violating the Constitution. Contrary to the findings of the CA, Fullido was not only asserting that
the said contracts were merely voidable, but she was consistently invoking that the same were completely void .19 Grilli, on the other hand, contends
that Fullido could not question the validity of the said contracts in the present ejectment suit unless she instituted a separate action for annulment of contracts.
Thus, the Court is confronted with the issue of whether a contract could be declared void in a summary action of unlawful detainer.

Under the circumstances of the case, the Court answers in the affirmative. A void contract cannot be the source of any right; it cannot be utilized in an ejectment
suit

A void or inexistent contract may be defined as one which lacks, absolutely either in fact or in law, one or some of the elements which are essential for its
validity.20 It is one which has no force and effect from the very beginning, as if it had never been entered into; it produces no effect whatsoever either against or in
favor of anyone.21Quod nullum est nullum producit effectum. Article 1409 of the New Civil Code explicitly states that void contracts also cannot be ratified; neither
can the right to set up the defense of illegality be waived. 22 Accordingly, there is no need for an action to set aside a void or inexistent contract

A review of the relevant jurisprudence reveals that the Court did not hesitate to set aside a void contract even in an action for unlawful detainer. In Spouses
Alcantara v. Nido,24 which involves an action for unlawful detainer, the petitioners therein raised a defense that the subject land was already sold to them by the
agent of the owner. The Court rejected their defense and held that the contract of sale was void because the agent did not have the written authority of the owner to
sell the subject land.

Similarly, in Roberts v. Papio,25 a case of unlawful detainer, the Court declared that the defense of ownership by the respondent therein was untenable. The contract
of sale invoked by the latter was void because the agent did not have the written authority of the owner. A void contract produces no effect either against or in favor
of anyone.

In Ballesteros v. Abion,26 which also involves an action for unlawful detainer, the Court disallowed the defense of ownership of the respondent therein because the
seller in their contract of sale was not the owner of the subject property. For lacking an object, the said contract of sale was void ab initio.

Clearly, contracts may be declared void even in a summary action for unlawful detainer because, precisely, void contracts do not produce legal effect and cannot be
the source of any rights. To emphasize, void contracts may not be invoked as a valid action or defense in any court proceeding, including an ejectment suit. The next
issue that must be resolved by the Court is whether the assailed lease contract and MOA are null and void.

The lease contract and the MOA circumvent the constitutional restraint against foreign ownership of lands.

Under Section 1 of Article XIII of the 1935 Constitution, natural resources shall not be alienated, except with respect to public agricultural lands and in such cases,
the alienation is limited to Filipino citizens. Concomitantly, Section 5 thereof states that, save in cases of hereditary succession, no private agricultural land
shall be transferred or assigned except to individuals, corporations, or associations qualified to acquire or hold lands of the public domain in the Philippines. The
prohibition on the transfer of lands to aliens was adopted in the present 1987 Constitution, under Sections 2, 3 and 7 of Article XII thereof. Agricultural lands,
whether public or private, include residential, commercial and industrial lands. The purpose of prohibiting the transfer of lands to foreigners is to uphold the
conservation of our national patrimony and ensure that agricultural resources remain in the hands of Filipino citizens. 27cralawred

The prohibition, however, is not limited to the sale of lands to foreigners. It also covers leases of lands amounting to the transfer of all or substantially all the rights
of dominion. In the landmark case of Philippine Banking Corporation v. Lui She,28 the Court struck down a lease contract of a parcel of land in favor of a foreigner for
a period of ninety-nine (99) years with an option to buy the land for fifty (50) years. Where a scheme to circumvent the Constitutional prohibition against the transfer
of lands to aliens is readily revealed as the purpose for the contracts, then the illicit purpose becomes the illegal cause rendering the contracts void. Thus, if an
alien is given not only a lease of, but also an option to buy, a piece of land by virtue of which the Filipino owner cannot sell or otherwise dispose
of his property, this to last for 50 years, then it becomes clear that the arrangement is a virtual transfer of ownership whereby the owner divests
himself in stages not only of the right to enjoy the land but also of the right to dispose of it rights which constitute ownership. If this can be done, then the
Constitutional ban against alien landholding in the Philippines, is indeed in grave peril.

In Llantino v. Co Liong Chong,30 however, the Court clarified that a lease contract in favor of aliens for a reasonable period was valid as long as it did not have any
scheme to circumvent the constitutional prohibition, such as depriving the lessors of their right to dispose of the land. The Court explained that "[a]liens are not
completely excluded by the Constitution from use of lands for residential purposes. Since their residence in the Philippines is temporary, they may be granted
temporary rights such as a lease contract which is not forbidden by the Constitution. Should they desire to remain here forever and share our fortune and
misfortune, Filipino citizenship is not impossible to acquire." 31 The lessee-foreigner therein eventually acquired Filipino citizenship.

Consequently, Presidential Decree (P.D.) No. 471 was enacted to regulate the lease of lands to aliens. It provides that the maximum period allowable for the duration
of leases of private lands to aliens or alien-owned corporations, associations, or entities not qualified to acquire private lands in the Philippines shall be twenty-five
(25) years, renewable for another period of twenty-five (25) years upon mutual agreement of both lessor and lessee. 32 It also provides that any contract or
agreement made or executed in violation thereof shall be null and void ab initio.

Based on the above-cited constitutional, legal and jurisprudential limitations, the Court finds that the lease contract and the MOA in the present case are null and
void for virtually transferring the reigns of the land to a foreigner.

As can be gleaned from the contract, the lease in favor of Grilli was for a period of fifty (50) years, automatically extended for another fifty (50) years upon the
expiration of the original period. Moreover, it strictly prohibited Fullido from selling, donating, or encumbering her land to anyone without the written consent of
Grilli. For a measly consideration of PI 0,000.00, Grilli would be able to absolutely occupy the land of Fullido for 100 years, and she is powerless to dispose the same.
The terms of lease practically deprived Fullido of her property rights and effectively transferred the same to Grilli.

Worse, the dominion of Grilli over the land had been firmly cemented by the terms of the MOA as it reinforced Grilli's property rights over the land because, first, it
brazenly dictated that ownership of the land and the residential building resided with him. Second, Fullido was expressly prohibited from transferring the same
without Grilli's conformity. Third, Grilli would permanently reside in the residential building. Fourth, Grilli may capriciously dispose Fullido's property once their
common-law relationship is terminated. This right was recently exercised when the land was transferred to Guibone. Lastly, Fullido shall be compelled to transfer the
land to Grilli if a law would be passed allowing foreigners to own real properties in the Philippines.

Evidently, the lease contract and the MOA operated hand-in-hand to strip Fullido of any dignified right over her own property. The term of lease for 100 years was
obviously in excess of the allowable periods under P.D. No. 471. Even Grilli admitted that "this is a case of an otherwise valid contract of lease that went beyond the
period of what is legally permissible."34 Grilli had been empowered to deprive Fullido of her land's possession, control, disposition and even its ownership. The jus
possidendi, jus utendi, jus fruendi, jus abutendi and, more importantly, the jus disponendi - the sum of rights which composes ownership - of the property were
effectively transferred to Grilli who would safely enjoy the same for over a century. The title of Fullido over the land became an empty and useless vessel, visible only
in paper, and was only meant as a dummy to fulfill a foreigner's desire to own land within our soils.

It is disturbing how these documents were methodically formulated to circumvent the constitutional prohibition against land ownership by foreigners. The said
contracts attempted to guise themselves as a lease, but a closer scrutiny of the same revealed that they were intended to transfer the dominion of a land to a
foreigner in violation of Section 7, Article XII of the 1987 Constitution. Even if Fullido voluntary executed the same, no amount of consent from the parties could
legalize an unconstitutional agreement. The lease contract and the MOA do not deserve an iota of validity and must be rightfully struck down as null and void for
being repugnant to the fundamental law. These void documents cannot be the source of rights and must be treated as mere scraps of paper.

Grilli does not have a cause of action for unlawful detainer


Ultimately, the complaint filed by Grilli was an action for unlawful detainer. Section 1 of Rule 70 of the Rules of Court lays down the requirements for filing a
complaint for unlawful detainer, to wit:

Who may institute proceedings, and when. - Subject to the provision of the next succeeding section, a person deprived of the possession of any land or building by
force, intimidation, threat, strategy, or stealth, or a lessor, vendor, vendee, or other person against whom the possession of any land or building is
unlawfully withheld after the expiration or termination of the right to hold possession, by virtue of any contract, express or implied, or the legal representatives or
assigns of any such lessor, vendor, vendee, or other person, may, at any time within one (l) year after such unlawful deprivation or withholding of possession, bring
an action in the proper Municipal Trial Court against the person or persons unlawfully withholding or depriving of possession, or any person or persons claiming
under them, for the restitution of such possession, together with damages and costs.

[Emphasis Supplied]

A complaint sufficiently alleges a cause of action for unlawful detainer if it recites the following: (1) initially, possession of property by the defendant was by contract
with or by tolerance of the plaintiff; (2) eventually, such possession became illegal upon notice by plaintiff to defendant of the termination of the latter's right of
possession; (3) thereafter, the defendant remained in possession of the property and deprived the plaintiff of the enjoyment thereof; and (4) within one year from
the last demand on defendant to vacate the property, the plaintiff instituted the complaint for ejectment.

The Court rules that Grilli has no cause of action for unlawful detainer against Fullido. As can be gleaned from the discussion above, the complainant must either be
a lessor, vendor, vendee, or other person against whom the possession of any land or building is unlawfully withheld. In other words, the complainant in an unlawful
detainer case must have some right of possession over the property.

In the case at bench, the lease contract and the MOA, from which Grilli purportedly drew his right of possession, were found to be null and void for being
unconstitutional. A contract that violates the Constitution and the law is null and void ab initio and vests no rights and creates no obligations. It produces no legal
effect at all.36 Hence, as void contracts could not be the source of rights, Grilli had no possessory right over the subject land. A person who does not have any right
over a property from the beginning cannot eject another person possessing the same. Consequently, Grilli's complaint for unlawful detainer must be dismissed for
failure to prove his cause of action.

In Pari Delicto Doctrine is not applicable

On a final note, the Court deems it proper to discuss the doctrine of in pari delicto. Latin for "in equal fault," in pari delicto connotes that two or more people are at
fault or are guilty of a crime. Neither courts of law nor equity will interpose to grant relief to the parties, when an illegal agreement has been made, and both parties
stand in pari delicto.37

The application of the doctrine of in pari delicto is not always rigid. An accepted exception arises when its application contravenes well-established public policy. In
this jurisdiction, public policy has been defined as that principle of the law which holds that no subject or citizen can lawfully do that which has a tendency to be
injurious to the public or against the public good. 38 Thus, whenever public policy is advanced by either party, they may be allowed to sue for relief against the
transaction.39

In the present case, both Grilli and Fullido were undoubtedly parties to a void contract. Fullido, however, was not barred from filing the present petition before the
Court because the matters at hand involved an issue of public policy, specifically the Constitutional prohibition against land ownership by aliens. As pronounced
in Philippine Banking Corporation v. Lui She, the said constitutional provision would be defeated and its continued violation sanctioned if the lands continue to
remain in the hands of a foreigner.40 Thus, the doctrine of in pari delicto shall not be applicable in this case.

WHEREFORE, the petition is GRANTED. The May 31, 2013 Decision of the Court of Appeals and its September 24, 2014 Resolution in CA-G.R. CEB-SP No. 06946 are
hereby REVERSED and SET ASIDE. The complaint filed by Gino Grilli before the Municipal Circuit Trial Court, Dauis-Panglao, Dauis, Bohol, docketed as Civil Case
No. 244, is DISMISSED for lack of cause of action. SO ORDERED.cralawlawlibrary

HEIRS OF DR. MARIO S. INTAC and ANGELINA MENDOZA-INTAC, Petitioners, v. COURT OF APPEALS and SPOUSES MARCELO ROY, JR. and JOSEFINA
MENDOZA-ROY and SPOUSES DOMINADOR LOZADA and MARTINA MENDOZA-LOZADA

FACTS: During the lifetime of Ireneo Mendoza (Ireneo), he executed a deed of absolute sale involving a property located in Bagong Pag-asa, Quezon City in favor of
spouses Angelina and Mario Intac (spouses Intac). Consequently, TCT No. 242655 was issued in favorof the spouses Intac. The deed was executed because the
spouses Intac needed to borrow the title of the property and to use the same as collateral for their loan application.

Respondents Josefina Mendoza-Roy and Martina Mendoza-Lozada, heirs of the late Ireneo, sought the cancellation of TCT No. 242655 claiming that the sale was only
simulated, and therefore, void.

Both the RTC and the CA declared that the deed of absolute sale was null and void and ordered the cancellation of TCT No. 242655.Hence, this present recourse.

ISSUE: Whether or not the deed of absolute sale was a simulated contract or a valid agreement?

HELD: The Court finds no merit in the petition. Accordingly, for a contract to be valid, it must have three essential elements: (1) consent of the contracting parties;
(2) objectcertain which is the subject matter of the contract; and (3) cause of the obligation which is established. In a contract of sale, its perfection is consummated
at the moment there is a meeting of the minds upon the thing that is the object of the contract and upon the price. Consent is manifested by the meeting of the
offer and the acceptance of the thing and the cause, which are to constitute the contract.

If the parties state a false cause in the contract to conceal their real agreement, the contract is only relatively simulated and the parties are still bound by their real
agreement. Hence, where the essential requisites of a contract are present and the simulation refers only to the content or terms of the contract, the agreement is
absolutely binding and enforceable between the parties and their successors in interest.

In absolute simulation, there is a colorable contract but it has no substance as the parties have no intention to be bound by it. The main characteristic of an absolute
simulation is that the apparent contract is not really desired or intended to produce legal effect or in any way alter the juridical situation of the parties. As a result,
an absolutely simulated or fictitious contract is void, and the parties may recover from each other what they may have given under the contract.
In the case at bench, the Court is one with the courts below that no valid sale of the subject property actually took place between the alleged vendors, Ireneo and
Salvacion; and the alleged vendees, Spouses Intac. There was simply no consideration and no intent to sell it. Petition is DENIED.

FLORANTE VITUG v. EVANGELINE A. ABUDA

On March 17, 1997, Abuda loaned P250,000.00 to Vitug and his wife, Narcisa Vitug. 1 As security for the loan, Vitug mortgaged to Abuda his property in Tondo
Foreshore along R-10, Block A-50-3, Del Pan to Kagitingan Streets, Tondo, Manila. 2 The property was then subject of a conditional Contract to Sell between the
National Housing Authority and Vitug. Pertinent portions of the mortgage deed reads

That, Mortgagor, is the owner, holder of a Conditional Contract to Sell of the National Housing Authority (NHA) over a piece of property located at the Tondo
Foreshore along R-10, Block "A-50-3, Delpan to Kagitingan Streets in the district of Tondo, Manila;

That, with the full consent of wife Narcisa Vitug, hereby mortgage to Evangeline A. Abuda, with full consent of husband Paulino Abuda, said property for TWO
HUNDRED FIFTY THOUSAND PESOS ONLY (P250,000.00), in hand paid by Mortgagee and in hand received to full satisfaction by Mortgagor, for SIX MONTHS (6) within
which to pay back the full amount plus TEN PERCENT (10%) agreed interest per month counted from the date stated hereon;

That, upon consummation and completion of the sale by the NHA of said property, the title-award thereof, shall be received by the Mortgagee by virtue of a Special
Power of Attorney, executed by Mortgagor in her favor, authorizing Mortgagee to expedite, follow-up, cause the release and to received [sic] and take possession of
the title award of the said property from the NHA, until the mortgage amount is fully paid for and settled[.]cralawlawlibrary

On November 17, 1997, the parties executed a "restructured" 4 mortgage contract on the property to secure the amount of P600,000.00 representing the original
P250,000.00 loan, additional loans, 5 and subsequent credit accommodations 6 given by Abuda to Vitug with an interest of five (5) percent per month. 7 By then, the
property was covered by Transfer Certificate of Title No. 234246 under Vitug's name. 8

Spouses Vitug failed to pay their loans despite Abuda's demands. 9

On November 21, 2003, Abuda filed a Complaint for Foreclosure of Property before the Regional Trial Court of Manila. 10

On December 19, 2008, the Regional Trial Court promulgated a Decision in favor of Abuda. 11The dispositive portion of the Decision reads

WHEREFORE, judgment is rendered in favor of the plaintiffs [sic] and against the defendant

1. Ordering the defendant to pay unto the court and/or to the judgment debtor within the reglementary period of Ninety (90) days the principal sum of P600,000.00
with interest at 5% per month from May 31, 2002 to actual date of payment plus P20,000.00 as and for attorney's fees;
2. Upon default of the defendant to fully pay the aforesaid sums, the subject mortgaged property shall be sold at public auction to pay off the mortgage debt and its
accumulated interest plus attorney's fees, expenses and costs; and

3. After the confirmation of the sale, ordering the defendant and all persons claiming rights under her [sic] to immediately vacate the subject premises.

SO ORDERED.12cralawlawlibrary

Vitug appealed the December 19, 2008 Regional Trial Court Decision before the Court of Appeals. 13 He contended that the real estate mortgage contract he and
Abuda entered into was void on the grounds of fraud and lack of consent under Articles 1318, 1319, and 1332 of the Civil Code. 14 He alleged that he was only tricked
into signing the mortgage contract, whose terms he did not really understand. Hence, his consent to the mortgage contract was vitiated. 15

On October 26, 2011, the Court of Appeals promulgated a Decision, 16 the dispositive portion of which reads

WHEREFORE, the instant appeal is PARTIALLY GRANTED. The Decision of the RTC dated December 19, 2008 in Civil Case No. 03-108470 in favor of the appellee
and against the appellant is AFFIRMED with the MODIFICATION that an interest rate of 1% per month or 12% per annum shall be applied to the principal loan of
P600,000.00, computed from the date of judicial demand, i.e., November 21, 2003; and 12% interest per annum on the amount due from the date of the finality of
the Decision until fully paid.

SO ORDERED.17ChanRoblesVirtualawlibrarcralawlawlibrary

The Court of Appeals found that Vitug failed to pay his obligation within the stipulated six-month period under the March 17, 1997 mortgage contract. 18 As a result of
this failure, the parties entered into a restructured mortgage contract on November 17, 1997. 19 The new mortgage contract was signed before a notary public by
Vitug, his wife Narcisa, and witnesses Rolando Vitug, Ferdinand Vitug, and Emily Vitug. 20

The Court of Appeals also found that all the elements of a valid mortgage contract were present in the parties' mortgage contract. 21 The mortgage contract was also
clear in its termsthat failure to pay the P600,000.00 loan amount, with a 5% interest rate per month from November 17, 1997 to November 17, 1998, shall result in
the foreclosure of Vitug's mortgaged property.22 No evidence on record showed that Vitug was defrauded when he entered into the agreement with Abuda. 23

However, the Court of Appeals found that the interest rates imposed on Vitug's loan were "iniquitous, unconscionable[,] and exorbitant." 24 It instead ruled that a legal
interest of 1% per month or 12% per annum should apply from the judicial demand on November 21, 2003. 25cralawred

On November 23, 2011, Vitug moved for the reconsideration of the Court of Appeals' October 26, 2011 Decision. 26 He pointed out that not all the requisites of a valid
mortgage contract were present since he did not have free disposal of his property when he mortgaged it to Abuda. His transfer certificate of title had an annotation
by the National Housing Authority, which restricted his right to dispose or encumber the property. 27 The restriction clause provided that the National Housing
Authority's consent must first be obtained before he may dispose or encumber his property. 28

Abuda, according to Vitug, failed to get the National Housing Authority's consent before the property was mortgaged to him.
Vitug also argued in his Motion for Reconsideration that the property was exempt from execution because it was constituted as a family home before its mortgage.

In the Resolution promulgated on March 8, 2012,29 the Court of Appeals denied Vitug's Motion for Reconsideration.

Vitug filed this Petition for Review on Certiorari under Rule 45 to assail the Court of Appeals' October 26, 2011 Decision and its March 8, 2012 Resolution.

Vitug raises the following issues:

First, whether petitioner Florante Vitug may raise in this Petition issues regarding the National Housing Authority's alleged lack of consent to the mortgage, as well as
the exemption of his property from execution;

Second, whether the restriction clause in petitioner's title rendered invalid the real estate mortgage he and respondent Evangeline Abuda executed; and

Lastly, whether petitioner's property is a family home that is free from execution, forced sale, or attachment under the Family Code. 30

We deny the Petition. Petitioner argues that not all the requisites of a valid mortgage are present. 31 A mortgagor must have free disposal of the mortgaged
property.32 The existence of a restriction clause 33 in his title means that he does not have free disposal of his property. 34 The restriction clause does not allow him to
mortgage the property without the National Housing Authority's approval. 35 Since the National Housing Authority never gave its consent to the mortgage, 36 the
mortgage contract between him and respondent is invalid. 37

On the other hand, respondent argues that the only issue in this case should be the validity of the real estate mortgage executed by petitioner in her
favor.38 Petitioner raised other issues, such as the alleged lack of written consent by the National Housing Authority (and the property's exemption from execution),
only in his Motion for Reconsideration before the Court of Appeals. 39

Respondent also argues that the National Housing Authority issued a Permit to Mortgage the property. This was formally offered in evidence before the Regional Trial
Court as Exhibit "E."40 The National Housing Authority even accepted respondent's personal checks to settle petitioner's mortgage obligations to the National
Housing Authority.41 The National Housing Authority would have already foreclosed petitioner's property if not for the loan that respondent extended to petitioner.

Petitioner counters that the Permit to Mortgage cited by respondent was only valid for 90 days and was subject to the conditions that respondent failed to fulfill.
These conditions are

(1) The Mortgage Contract must provide that

"In the event of foreclosure, the NHA shall be notified of the date, time and place of the auction sale so that it can participate in the foreclosure sale of the property."

(2) The mortgage contract must be submitted to NHA for verification and final approval[.] 43
Thus, according to petitioner, there was neither written consent nor approval by the National Housing Authority of the mortgage contracts. 44cralawlawlibrary

Petitioner further contends that the alleged lack of NHA consent on the mortgage (and, being a family home, his property's exemption from execution) was raised in
his Answer to respondent's complaint for foreclosure filed before the Regional Trial Court, thus

20. Similarly, defendant has constituted their family home over said mortgage property and should that property be sold, defendant and his family will be left with
no place to reside with [sic] within Metro Manila, hence, for humanitarian reason[s], the defendant prayed that he be given ample time within which to settle his
obligation with the plaintiff;

21. Lastly, the Memorandum of Encumbrances contained at the back of defendant's title prohibits her from selling, encumbering, mortgaging, leasing, sub-leasing
or in any manner altering or disposing the lot or right thereon, in whole or in part within the period often (10) years from the time of issuance of said title without
first obtaining the consent of the NHA. As reflected in the title, the same was issued on 25 June 1997 hence, the mortgage executed even prior to the issuance of
said title should be declared void.45ChanRoblesVi

I Due process46 dictates that arguments not raised in the trial court may not be considered by the reviewing court. 47

Petitioner may raise in his Petition the issues of lack of the National Housing Authority's consent to the mortgage and his property's alleged exemption from
execution.

The records show that petitioner mentioned these issues as early as in his Answer to respondent's Complaint 48 and Pre-trial Brief.49 The trial court acknowledged
these issues, but found that his defenses based on these grounds could not be given credence

The defendant further stated that he is willing to pay the obligation is unconscionable. Further, the said property constituted their family home. The defendant
claimed that Memorandum of Encumbrance prohibits her from selling, encumbering, mortgaging, leasing, subleasing or in any manner altering or disposing the lot
or right thereon in whole or in part within ten (10) years from the time of issuance of the said title without obtaining the consent of the NHA.

. . . The court opines that the defendant has failed to raise a legitimate and lawful ground in order to bar the herein plaintiff from asserting its lawful right under the
law.

The contention of the defendant that the subject mortgaged property is their family home is irrelevant as the debt secured by mortgages on the premises before or
after the constitution of the family home does not exempt the same from execution (Rule 106 of the Rules of Court).50cralawlawlibrary

Whether these arguments seasonably raised are valid is, however, a different matter.

II All the elements of a valid mortgage contract were present. For a mortgage contract to be valid, the absolute owner of a property must have free disposal of the
property.51 That property must be used to secure the fulfillment of an obligation. 52 Article 2085 of the Civil Code provides
Art. 2085. The following requisites are essential to contracts of pledge and mortgage

(1) That they be constituted to secure the fulfillment of a principal obligation;

(2) That the pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged;

(3) That the persons constituting the pledge or mortgage have the free disposal of their property, and in the absence thereof, that they be legally authorized for
the purpose.

Petitioner, who held under his name a transfer certificate of title to the property, mortgaged the property to respondent to secure the payment of his loan of
P600,000.00.

Petitioner claims that he only borrowed P250,000.00 and that he was only made to sign another mortgage contract whose terms he did not agree to.

These claims were already found by the trial court and the Court of Appeals to be unsupported by evidence. Petitioner's consent to the mortgage contract dated
November 17, 1997 was not vitiated. He voluntarily signed it in the presence of a notary public, his wife, and other witnesses. 53

Further, the amount of P600,000.00 under the November 17, 1997 mortgage contract represented the initial loan of P250,000.00 and the subsequent loan amounts,
which were found to have been actually released to petitioner. The November 17, 1997 mortgage contract reflected the changes in the parties' obligations after they
executed the March 17, 1997 mortgage contract.

This court is not a trier of facts. As a general rule, findings of fact of the lower court and of the Court of Appeals are not reviewable and are binding upon this
court54 unless the circumstances of the case are shown to be covered by the exceptions. 55 Petitioner failed to show any ground for this court to review the trial
court's and the Court of Appeals' finding that petitioner mortgaged his property in consideration of a loan amounting to P600,000.00.

Petitioner's undisputed title to and ownership of the property is sufficient to give him free disposal of it. As owner of the property, he has the right to enjoy all
attributes of ownership including jus disponendi or the right to encumber, alienate, or dispose his property "without other limitations than those established by
law."56

Petitioner's claim that he lacks free disposal of the property stems from the existence of the restrictions imposed on his title by the National Housing Authority. These
restrictions were annotated on his title, thus

Entry No. 4519/V-013/T-234246 -RESTRICTION-that the Vendee shall not sell, encumber, mortgage, lease, sub-let or in any manner, alter or dispose the lot or right
therein at any time, in whole or in part without obtaining the written consent of the Vendor. Other restrictions set forth in Doc. No. 287; Page No. 59; Book No. 250;
SERIES of 1997 of Notary Public for Quezon City, Liberty S. Perez.
Date of instrument - June 24, 1997 Date of inscription- June 25, 1997- 11:39 a.m

The National Housing Authority's restrictions were provisions in a contract it executed with petitioner. This contract bound petitioner to certain conditions before
transferring or encumbering the property. Specifically, when the National Housing Authority sold the property to petitioner, petitioner became obligated not to sell,
encumber, mortgage, lease, sublease, alter, or dispose the property without the National Housing Authority's consent.

These restrictions do not divest petitioner of his ownership rights. They are mere burdens or limitations on petitioner's jus disponendi. Thus, petitioner may dispose
or encumber his property. However, the disposition or encumbrance of his property is subject to the limitations and to the rights that may accrue to the National
Housing Authority. When annotated to the title, these restrictions serve as notice to the whole world that the National Housing Authority has claims over the
property, which it may enforce against others.

Contracts entered into in violation of restrictions on a property owner's rights do not always have the effect of making them void ab initio.58 This has been clarified as
early as 1956 in Municipality of Camiling v. Lopez.

The Municipality of Camiling sought to collect from Diego Z. Lopez payments for the lease of "certain fisheries." As. a defense, Diego Z. Lopez invoked the alleged
nullity of the lease contract he entered into with the Municipality of Camiling

Citing Municipality of Hagonoy v. Evangelista,60 the trial court ruled that the lease contract between the Municipality of Camiling and Diego Z. Lopez was void since it
"was not approved by the provincial governor in violation of section 2196 of the Revised Administrative Code." 61 This court reversed the trial court's Decision and
noted the incorrect interpretation in Municipality of Hagonoy of the term "nulos" under Article 4 of the then Civil Code: "Son nulos los actos ejecutados contra lo
dispuesto en la ley, salvo los casos en que la naisma ley or dene su validez."62

In Municipality of Camiling, this court explained that void acts declared in Article 4 of the Old Civil Code 63 refer to those made in violation of the law. Not all those
acts are void from the beginning. Void acts may be "those that are ipso facto void and those which are merely voidable.

The lease contract executed by the Municipality of Camiling and Diego Z. Lopez was not treated as ipso facto void. Section 2196 of the Administrative Code required
the provincial governor's approval before the municipal council entered into contracts. However, the same provision did not prohibit the municipal council from
entering into contracts involving the properties of the municipality. 65 The municipal council's exercise of power to enter into these contracts might have been limited,
but its power was recognized. This court found that aside from the lack of approval, the contract had no badge of illegality that would make it ipso facto void. The
execution of the contract was not tainted with violation of public order, morality, or public policy. The contract could have been ratified. Hence, this court said that it
was "merely voidable at the option of the party who in law is granted the right to invoke its invalidity." 66

The same doctrine was repeated in Sarmiento v. Salud,67 which involved a property in Kamuning, Quezon City. The property was sold by Philippine Homesite and
Housing Corp. to Spouses Francisco and Marcelina Sarmiento. The transfer certificate of title that covered the property contained an annotation stating that the
property was sold on the condition that it could not be resold within 25 years from contract date. Sale could be made within the period only to People's Homesite and
Housing Corporation.68 Spouses Sarmiento later mortgaged the property to Jorge Salud. Because Spouses Sarmiento failed to redeem the property, the sheriff
auctioned and sold the property to Jorge Salud, who was issued a certificate of sale.
Spouses Sarmiento sought to prevent the foreclosure of the property by filing an action for annulment of the foreclosure proceedings, sale, and certificate of sale on
the ground that the prohibition against sale of the property within 25 years was violated.

This court did not declare the contract void for violating the condition that the property could not be resold within 25 years. Instead, it recognized People's Homesite
and Housing Corporation's right to cause the annulment of the contract. Since the condition was made in favor of People's Homesite and Housing Corporation, it was
the Corporation, not Spouses Sarmiento, who had a cause of action for annulment. 69 In effect, this court considered the contract between Spouses Sarmiento and
Jorge Salud as merely voidable at the option of People's Homesite and Housing Corporation.

Thus, contracts that contain provisions in favor of one party may be void ab initio or voidable. 70Contracts that lack consideration,71 those that are against public order
or public policy,72 and those that are attended by illegality73 or immorality74 are void ab initio.

Contracts that only subject a property owner's property rights to conditions or limitations but otherwise contain all the elements of a valid contract are merely
voidable by the person in whose favor the conditions or limitations are made.

The mortgage contract entered into by petitioner and respondent contains all the elements of a valid contract of mortgage. The trial court and the Court of Appeals
found no irregularity in its execution. There was no showing that it was attended by fraud, illegality, immorality, force or intimidation, and lack of consideration.

At most, therefore, the restrictions made the contract entered into by the parties voidable 76 by the person in whose favor they were madein this case, by the
National Housing Authority.77 Petitioner has no actionable right or cause of action based on those restrictions.

Having the right to assail the validity of the mortgage contract based on violation of the restrictions, the National Housing Authority may seek the annulment of the
mortgage contract.79 Without any action from the National Housing Authority, rights and obligations, including the right to foreclose the property in case of non-
payment of the secured loan, are still enforceable between the parties that executed the mortgage contract.

The voidable nature of contracts entered into in violation of restrictions or conditions necessarily implies that the person in whose favor the restrictions were made
has two (2) options. It may either: (1) waive 80 its rights accruing from such restrictions, in which case, the duly executed subsequent contract remains valid; or (2)
assail the subsequent contract based on the breach of restrictions imposed in its favor.

In Sarmiento, this court recognized that the right to waive follows from the right to invoke any violation of conditions under the contract. Only the person who has
the right to invoke this violation has the cause of action for annulment of contract. The validity or invalidity of the contract on the ground of the violation is
dependent on whether that person will invoke this right. Hence, there was effectively a waiver on the part of People's Homesite and Housing Corporation when it did
not assail the validity of the mortgage in that case

It follows that on the assumption that the mortgage to appellee Salud and the foreclosure sale violated the condition in the Sarmiento contract, only the PHHC was
entitled to invoke the condition aforementioned, and not the Sarmientos. The validity or invalidity of the sheriffs foreclosure sale to appellant Salud thus depended
exclusively on the PHHC; the latter could attack the sale as violative of its right of exclusive reacquisition; but it (PHHC) also could waive the condition and treat the
sale as good, in which event, the sale can not be assailed [for] breach of the condition aforestated. Since it does not appear anywhere in the record that the PHHC
treated the mortgage and foreclosure sale as an infringement of the condition, the validity of the mortgage, with all its consequences, including its foreclosure and
sale thereat, can not be an issue between the parties to the present case. In the last analysis, the appellant, as purchaser at the foreclosure sale, should be regarded
as the owner of the lot, subject only to the right of PHHC to have his acquisition of the land set aside if it so desires

There is no showing that the National Housing Authority assailed the validity of the mortgage contract on the ground of violation of restrictions on petitioner's title.
The validity of the mortgage contract based on the restrictions is not an issue between the parties. Petitioner has no cause of action against respondent based on
those restrictions. The mortgage contract remains binding upon petitioner and respondent.

In any case, there was at least substantial compliance with the consent requirement given the National Housing Authority's issuance of a Permit to Mortgage.

Petitioner insists that the Permit cannot be treated as consent by the National Housing Authority because of respondent's failure to comply with its conditions.

However, a reading of the mortgage contract executed by the parties on November 17, 1997 shows otherwise. The November 17, 1997 mortgage contract had
references to the above conditions imposed by the National Housing Authority, thus

It is the essence of this Contract, that if and should the Mortgagor fails to comply and pay the principal obligations hereon within the period of the Contract, the
Mortgage shall be foreclosed according to law and in which case the NHA shall be duly notified of the matter.

That this mortgage contract shall be submitted to the NHA for verifixation [sic] and final approval in accordance with NHA permit to mortgage the
property.83(Emphasis supplied)

Assuming there was non-compliance with the conditions set forth in the Permit, petitioner cannot blame respondent. The restrictions were part of the contract
between the National Housing Authority and petitioner. It was petitioner, not respondent, who had the obligation to notify and obtain the National Housing
Authority's consent within the prescribed period before sale or encumbrance of the property. Petitioner cannot invoke his own mistake to assail the validity of a
contract he voluntarily entered into.84

III Even if the mortgage contract were illegal or wrongful, neither of the parties may assail the contract's validity as against the other because they were equally at
fault.85 This is the principle of in pari delicto (or in delicto) as embodied in Articles 1411 and 1412 of the Civil Code

Art. 1411. When the nullity proceeds from the illegality of the cause or object of the contract, and the act constitutes a criminal offense, both parties being in pari
delicto, they shall have no action against each other, and both shall be prosecuted. Moreover, the provisions of the Penal Code relative to the disposal of effects or
instruments of a crime shall be applicable to the things or the price of the contract.

This rule shall be applicable when only one of the parties is guilty; but the innocent one may claim what he has given, and shall not be bound to comply with his
promise.
Art. 1412. If the act in which the unlawful or forbidden cause consists does not constitute a criminal offense, the following rules shall be observed

(1) When the fault is on the part of both contracting parties, neither may recover what he has given by virtue of the contract, or demand the performance of the
other's undertaking;

(2) When only one of the contracting parties is at fault, he cannot recover what he has given by reason of the contract, or ask for the fulfillment of what has been
promised him. The other, who is not at fault, may demand the return of what he has given without any obligation to comply his promise.

Under this principle, courts shall not aid parties in their illegal acts. 86 The court shall leave them as they are. 87 It is an equitable principle that bars parties from
enforcing their illegal acts, assailing the validity of their acts, or using its invalidity as a defense.

In the 1906 case of Batarra v. Marcos,89 this court declared that a person cannot enforce a promise to marry based on the consideration of "carnal connection." This
court ruled that whether or not such consideration was a crime, neither of the parties can recover because the acts "were common to both parties.

In Bough v. Cantiveros,91 this court refused to enforce in favor of the guilty parties a contract of sale that was not only simulated but also executed to defeat any
attempt by a husband to recover properties from his wife.

Another case, Liguez v. Court of Appeals,92 involves a party's claim over a property based on a deed of donation executed in her favor when she was 16 years old.
The heirs of the donor assailed the donation on the ground of having an illicit causa.

The donor in that case was found to have had sexual relations with the claimant. The donation was done to secure the claimant's continuous cohabitation with the
donor, as well as to gratify the donor's sexual impulses. At the time of the donation, the donor was married to another woman. The donated property was part of
their conjugal property.

This court held that the donation was founded on an illicit causa. While this court found the principle of in pari delicto inapplicable in that case given the claimant's
minority at the time of donation, it had the occasion to say that the parties were barred "from pleading the illegality of the bargain either as a cause of action or as a
defense."93 The claimant was declared entitled to the donated property, without prejudice to the share and legitimes of the donor's forced heirs.

In the later case of Villegas v. Rural Bank of Tanjay, Inc.,94 this court ruled that the petitioners in that case were not entitled to relief because they did not come to
court with clean hands.

This court found that they "readily participated in a ploy to circumvent the Rural Banks Act and offered no objection when their original loan of P350,000.00 was
divided into small separate loans not exceeding P50,000.00 each." 95 They and respondent bank were in pari delicto. They could not be given affirmative relief
against each other.96 Hence, Spouses Villegas may not seek the annulment of the loan and mortgage contracts they voluntarily executed with respondent bank on
the ground that these contracts were simulated to make it appear that the loans were sugar crop loans, allowing respondent bank to approve it pursuant to Republic
Act No. 720, otherwise known as the Rural Banks Act.
The principle of in pari delicto admits exceptions. It does not apply when the result of its application is clearly against statutory law, morals, good customs, and
public policy.97

In Philippine Banking Corporation, representing the Estate of Justina Santos v. Lui She,98 this court refused to apply the principle of in pari delicto. Applying the
principle meant that this court had to declare as valid between the parties a 50-year lease contract with option to buy, which was executed by a Filipino and a
Chinese citizen. This court ruled that the policy to conserve land in favor of Filipinos would be defeated if the principle of in pari delicto was applied instead of setting
aside the contracts executed by the parties. 99

Petitioner in this case did not come to this court with clean hands. He was aware of the restrictions in his title when he executed the loan and mortgage contracts
with respondent. He voluntarily executed the contracts with respondent despite this knowledge. He also availed himself of the benefits of the loan and mortgage
contract. He cannot now assail the validity of the mortgage contract to escape the obligations incurred because of it. 100

Petitioner also failed to show that upholding the validity of the mortgage contract would be contrary to law, morals, good customs, and public policy.

Petitioner's contract with the National Housing Authority is not a law prohibiting the transfer or encumbrance of his property. It does not render subsequent
transactions involving the property a violation of morals, good customs, and public policy. Violation of its terms does not render subsequent transactions involving
the property void ab initio.101 It merely provides the National Housing Authority with a cause of action to annul subsequent transactions involving the property.

IV Petitioner argues that the property should be exempt from forced sale, attachment, and execution, based on Article 155 of the Family Code. 102 Petitioner and his
family have been neighbors with respondent since 1992, before the execution of the mortgage contract.

Even though petitioner's property has been constituted as a family home, it is not exempt from execution. Article 155 of the Family Code explicitly provides that
debts secured by mortgages are exempted from the rule against execution, forced sale, or attachment of family home

Art. 155. The family home shall be exempt from execution, forced sale or attachment except

(3) For debts secured by mortgages on the premises before or after such constitution[.]

Since petitioner's property was voluntarily used by him as security for a loan he obtained from respondent, it may be subject to execution and attachment.

V The Court of Appeals correctly found that the interest rates of 5% or 10% per month imposed on petitioner's loan were unconscionable.

Parties are free to stipulate interest rates in their loan contracts in view of the suspension of the implementation of the Usury Law ceiling on interest effective
January 1, 1983.104

The freedom to stipulate interest rates is granted under the assumption that we have a perfectly competitive market for loans where a borrower has many options
from whom to borrow. It assumes that parties are on equal footing during bargaining and that neither of the parties has a relatively greater bargaining power to
command a higher or lower interest rate. It assumes that the parties are equally in control of the interest rate and equally have options to accept or deny the other
party's proposals. In other words, the freedom is granted based on the premise that parties arrive at interest rates that they are willing but are not compelled to take
either by force of another person or by force of circumstances. 105

However, the premise is not always true. There are imperfections in the loan market. One party may have more bargaining power than the other. A borrower may be
in need of funds more than a lender is in need of lending them. In that case, the lender has more commanding power to set the price of borrowing than the borrower
has the freedom to negotiate for a lower interest rate.

Hence, there are instances when the state must step in to correct market imperfections resulting from unequal bargaining positions of the parties.

Article 1306 of the Civil Code limits the freedom to contract to promote public morals, safety, and welfare

Art. 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.

In stipulating interest rates, parties must ensure that the rates are neither iniquitous nor unconscionable. Iniquitous or unconscionable interest rates are illegal and,
therefore, void for being against public morals. 107 The lifting of the ceiling on interest rates may not be read as "grant[ing] lenders carte blanche [authority] to raise
interest rates to levels which will either enslave their borrowers or lead to a hemorrhaging of their assets." 108

Voluntariness of stipulations on interest rates is not sufficient to make the interest rates valid. 109 In Castro v. Tan

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.111cralawlawlibrary

Thus, even if the parties voluntarily agree to an interest rate, courts are given the discretionary power to equitably reduce it if it is later found to be iniquitous or
unconscionable.112 Courts approximate what the prevailing market rate would have been under the circumstances had the parties had equal bargaining power.

An interest rate is not inherently conscionable or unconscionable. Interest rates become unconscionable in light of the context in which they were imposed or
applied. In Medel v. Court of Appeals,113 this Court ruled that the stipulated interest of 5.5% or 66% per annum was unconscionable and contrary to morals. It was
declared void. This court reduced the interest rate to 1% per month or 12% per annum.

This court also ruled that the interest rates of 3%, 5%, and 10% per month were unconscionable, thus justifying the need to reduce the interest rates to 12% per
annum.115

On the other hand, despite rulings that interest rates of 3% and 5% per month are unconscionable, this court in Toledo v. Hydenu116 found that the interest rate of
6% to 7% per month was not unconscionable. This court noted circumstances that differentiated that case from Medel and found that the borrower in Toledo was not
in dire need of money when she obtained a loan; this implied that the interest rates were agreed upon by the parties on equal footing. This court also found that it
was the borrower in Toledo who was guilty of inequitable acts

Noteworthy is the fact that in Medel, the defendant-spouses were never able to pay their indebtedness from the very beginning and when their obligations ballooned
into a staggering sum, the creditors filed a collection case against them. In this case, there was no urgency of the need for money on the part of Jocelyn, the debtor,
which compelled her to enter into said loan transactions. She used the money from the loans to make advance payments for prospective clients of educational plans
offered by her employer. In this way, her sales production would increase, thereby entitling her to 50% rebate on her sales. This is the reason why she did not mind
the 6% to 7% monthly interest. Notably too, a business transaction of this nature between Jocelyn and Marilou continued for more than five years. Jocelyn religiously
paid the agreed amount of interest until she ordered for stop payment on some of the checks issued to Marilou. The checks were in fact sufficiently funded when she
ordered the stop payment and then filed a case questioning the imposition of a 6% to 7% interest rate for being allegedly iniquitous or unconscionable and, hence,
contrary to morals.

It was clearly shown that before Jocelyn availed of said loans, she knew fully well that the same carried with it an interest rate of 6% to 7% per month, yet she did
not complain. In fact, when she availed of said loans, an advance interest of 6% to 7% was already deducted from the loan amount, yet she never uttered a word of
protest.

After years of benefiting from the proceeds of the loans bearing an interest rate of 6% to 7% per month and paying for the same , Jocelyn cannot now go to court to
have the said interest rate annulled on the ground that it is excessive, iniquitous, unconscionable, exorbitant, and absolutely revolting to the conscience of man.
"This is so because among the maxims of equity are (1) he who seeks equity must do equity, and (2) he who comes into equity must come with clean hands. The
latter is a frequently stated maxim which is also expressed in the principle that he who has done inequity shall not have equity. It signifies that a litigant may be
denied relief by a court of equity on the ground that his conduct has been inequitable, unfair and dishonest, or fraudulent, or deceitful as to the controversy in
issue."

We are convinced that Jocelyn did not come to court for equitable relief with equity or with clean hands. It is patently clear from the above summary of the facts that
the conduct of Jocelyn can by no means be characterized as nobly fair, just, and reasonable. This Court likewise notes certain acts of Jocelyn before filing the case
with the RTC. In September 1998, she requested Marilou not to deposit her checks as she can cover the checks only the following month. On the next month, Jocelyn
again requested for another extension of one month. It turned out that she was only sweet-talking Marilou into believing that she had no money at that time. But as
testified by Serapio Romarate, an employee of the Bank of Commerce where Jocelyn is one of their clients, there was an available balance of P276,203.03 in the
latter's account and yet she ordered for the stop payments of the seven checks which can actually be covered by the available funds in said account. She then
caught Marilou by surprise when she surreptitiously filed a case for declaration of nullity of the document and for damages. 117 (Emphases supplied, citations omitted)

Under the circumstances of this case, we find no reason to uphold the stipulated interest rates of 5% to 10% per month on petitioner's loan. Petitioner obtained the
loan out of extreme necessity. As pointed out by respondent, the property would have been earlier foreclosed by the National Housing Authority if not for the loan.
Moreover, it would be unjust to impose a heavier burden upon petitioner, who would already be losing his and his family's home. Respondent would not be unjustly
deprived if the interest rate is reduced. After all, respondent still has the right to foreclose the property. Thus, we affirm the Court of Appeals Decision to reduce the
interest rate to 1% per month or 12% per annum.
However, we modify the rates in accordance with the guidelines set forth in Nacar v. Gallery Frames

II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate of interest, as well as the accrual thereof, is
imposed, as follows

1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the interest due should be that
which may have been stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In the
absence of stipulation, the rate of interest shall be 6% per annum to be computed from default, i.e., from judicial or extrajudicial demand under and subject
to the provisions of Article 1169 of the Civil Code.

2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of damages awarded may be imposed at the
discretion of the court at the rate of 6% per annum. No interest, however, shall be adjudged on unliquidated claims or damages, except when or until the
demand can be established with reasonable certainty. Accordingly, where the demand is established with reasonable certainty, the interest shall begin to
run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code), but when such certainty cannot be so reasonably established at the
time the demand is made, the interest shall begin to run only from the date the judgment of the court is made (at which time the quantification of damages
may be deemed to have been reasonably ascertained). The actual base for the computation of legal interest shall, in any case, be on the amount finally
adjudged.

3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest, whether the case falls under paragraph 1
or paragraph 2, above, shall be 6% per annum from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a
forbearance of credit.

And, in addition to the above, judgments that have become final and executory prior to July 1, 2013, shall not be disturbed and shall continue to be implemented
applying the rate of interest fixed therein.

Thus, the interest rate for petitioner's loan should be further reduced to 6% per annum from July 1, 2013 until full satisfaction.

WHEREFORE, the Petition is DENIED. The Court of Appeals Decision dated October 26, 2011 and its Resolution dated March 8, 2012 are AFFIRMED. The interest
rate for the loan of P600,000.00 is further reduced to 6% per annum from July 1, 2013 until fully paid.

SO ORDERED.
ANGEL V. TALAMPAS, JR. vs. MOLDEX REALTY, INC.

The petitioner is the owner and general manager of Angel V. Talampas, Jr. Construction (AVTJ Construction), a business engaged in general engineering and building. 5

On December 16, 1992, the petitioner entered into a contract 6 with the respondent to develop a residential subdivision on a land owned by the latter, located at Km.
41, Aguinaldo Highway, Cavite, and known as the Metrogate Silang Estates.

The petitioner undertook to perform roadworks, earthworks and site-grading, 7 and to procure materials, labor, equipment, tools and facilities, 8 for the contract price
of P10,500,000.00,9 to be paid by the respondent through progress billings. The respondent made an initial down payment of P500,000.00 at the start of the
contract.10

Construction works on the Metrogate project started on January 14, 1993 11 and was projected to be completed by the petitioner within three hundred (300) calendar
days from this starting date.12

On May 14, 1993, Metrogates Project Manager, Engr. Honorio Boidi Almeida, asked the petitioner tosuspend construction work on the site for one week due to a
change in the projects subdivision plan. 13 The suspension lasted for more than one week, leaving the petitioners personnel and equipment idle at the site for three
weeks. In a letter14 dated June 1, 1993, the petitioner inquired from Engr. Almeida whether the respondent would still push through with the project.

On June 16, 1993, the petitioner received from the respondents Vice President, Engr. Jose Po, an antedated April 23, 1993 letter 15 that contained the respondents
decision to terminate the parties contract. The April 23, 1993 letter stated:

Gentlemen:

This has reference to our site development contract for METROGATE SILANG ESTATES dated 16 December 1992.

Please be informed that we have decided to suspend implementation of the site development works for the subject project. Consequently, we are constrained to cause the
termination of the abovecited contract effective immediately.

We wish to stress that this development is mainly due to a business decision. Please rest assured that you shall remain to be a partner in our endeavors and that once we finally decide
to resume development works, you will be duly notified. (emphasis supplied)

The letter bore the signature of Engr. Almeida and gave the petitioner the go signal to demobilize his equipment from the site. 16

In a letter17 dated August 18, 1993, the petitioner demanded from the respondent the payment of the following amounts: (a) P1,485,000.00as equipment rentals
incurred from May 14, 1993 to June16, 1993 the period of suspension of construction works on the Metrogate project, and (b) P2,100,000.00or twenty percent (20%)
of the P10,500,000.00 contract price as cost of opportunity lost due to the respondents early termination of their contract. The respondent received the letter on
August 18, 1993,18 but refused to heed the petitioners demands.

On November 5, 1993, the petitioner filed a complaint for breach of contract and damages against the respondent before the RTC. He alleged that the respondent
committed the following acts: (1) breach of contract for unilaterally terminating their agreement, and (2) fraud for failing to disclose the Metrogate projects lack of a
conversion clearance certificate from the Department of Agrarian Reform (DAR), which he claimed to be the real reason why the respondent terminated their
contract.

In a decision19 dated September 9, 1999, the RTC found the respondent liable for breach of contract because the respondents reason for termination, i.e., "project
redesign," was not a stipulated ground for the unilateral termination under the parties contract. 20 The RTC further found the respondent liable for fraud for failing to
disclose to the petitioner the lack of a conversion clearance certificate for the Metrogate subdivision. The RTC considered the conversion clearance to be a material
consideration for the petitioner in entering the contract with the respondent. 21

Consequently, the RTC ordered the respondent to pay: (a) P1,485,000.00 as unpaid construction equipment rentals from May 14, 1993 to June 16, 1993;
(b) P2,100,000.00 as unrealized profits; (c) P300,000.00 as moral damages; (d) P150,000.00 as exemplary damages; (e) attorneys fees equivalent to ten percent
(10%) of the sum total of items (a) and (b); and (f) double costs of suit. 22

On appeal, the CA reversed and set aside the RTCs ruling and dismissed the petitioners complaint for breach of contract for lack of cause of action. 23 The CA held:

The pieces of evidence presented and offered by the plaintiff-appellee do not clearly prove that the subject contract was unilaterally terminated by the defendant-
appellant. While the trial court cited the letter of defendant-appellant dated April 23, 1993 as an evidence of unilateral rescission, said court however, failed to
consider the letter of the plaintiff-appellee dated June 15, 1993, showing that he agreed to terminate the contract.

This letter of June 15, 1993 of Angel Talampas, Jr. to Engr. Jose Po, Sr., Vice-President of Moldex Realty, Inc., confirms that previous to said date or specifically on May
21, 1993, Engr. Jose Po, Sr. met with Jose Angel Talampas, the Project Manager of the plaintiff-appellee, to discuss the possibility of either suspending or terminating
the contract due to a redesign of the project necessitated by the acquisition of a larger tract of land adjacent to the original project. Engr. Talampas opted for the
termination of the contract instead of its suspension.

This letter was never considered by the court a quo. 24 (emphasis supplied)

The CA, likewise, dismissed the petitioners allegation of fraud, under the following reasoning: The alleged lack of conversion clearance does not in itself amount to
fraud. While the duty to seek conversion clearance from DAR is an obligation of the defendant-appellant, failure to obtain the same at the time of the execution of
the contract would not convincingly show that the plaintiff-appellee was defrauded. The omission to obtain conversion clearance could be in good faith since the
records show that it was eventually obtained. Fraud must be established by clear and convincing evidence. Mere preponderance of evidence is not enough. Besides,
it cannot be said by the plaintiff-appellee that the alleged lack of conversion clearance was concealed by defendant-appellant from plaintiff-appellee. Plaintiff-
appellee had every opportunity to verify this before submitting his bid. Plaintiff-appellee must sufficiently connect that such lack of conversion clearance was the
real reason for the termination of the contract. Sadly, the records fail to show that head equately established that the failure of the defendant-appellant to seek
conversion clearance of the subject property was the real reason for the termination of the contract. On the contrary, the June 15, 1993 letter of Angel V. Talampas
admits that the reason for the termination was "due to business decision." 25

The petitioner moved to reconsider the CAs decision, but the CA denied his motion in a resolution 26 dated October 21, 2005. The denial opened the way for the filing
of the present petition for review on certiorari with this Court.

The Petition

The petitioner raised the following issues:

1. Whether, as found by the trial court, the subject development contract was unilaterally abrogated by respondent without justifiable cause, or whether, as
opined by the Court of Appeals, the contract termination was upon the mutual agreement of the parties.

2. Whether, as found by the trial court, the lack of DAR conversion clearance which was not disclosed to the petitioner prior to the bidding and execution of
the subject contract, was the true reason of the respondent in ordering stoppage of work and in eventually terminating the subject contract, or whether, as
opined by the Court of Appeals, the reason for the contract termination was "due to business decision" of the respondent.

3. Whether or not it was respondents responsibility prior to the bidding or execution of the contract, to disclose to the petitioner, the lack of conversion
clearance certificate from DAR and/or its agrarian problem; and if in the affirmative, whether such non-disclosure constitutes bad faith or fraud on the part of
respondent.

4. Whether, as concluded by the trial court, the subject development contract was an integrated whole, not divisible contract, or whether, as opined by the
Court of Appeals, subject contract is a divisible contract.

5. Whether or not petitioner is entitled to the damages awarded to him by the trial court for breach of contract by respondent. 27

In a resolution28 dated June 28, 2006, this Court gave due course to the petition and required the parties to submit their respective memoranda.

The Case for the Respondent

The respondent argues that the petitioner is no longer entitled to the payment of the amounts he demanded because he had already agreed/consented to terminate
their contract;29 that, in a meeting held on May 21, 1993, the petitioners son, Engr. Jose Angel Talampas, the Project Manager and Vice-President of AVTJ
Construction, agreed, even opted, to terminate their contract. 30 The respondent posits that the petitioners consent is confirmed by his request for an official letter of
termination from the respondent, as the petitioner would not have requested for such letter had he not earlier agreed/consented to the termination. 31

Moreover, the respondent argues that the petitioner is estopped to claim further damages, as he had already been paid the amounts of: (a) P297,090.43representing
the contractors unpaid actual work accomplishment at the time of termination (paid on August 13, 1993); (b) P109,551.00representing unrecouped costs of
equipment mobilization and demobilization, and unrecouped payment of insurance bond (paid on September 14, 1993); and (c) P209,606.56 representing the
release of all retention fees.32 The respondent contends that the petitioner, by accepting these payments, ratified, if not consented to, the termination of their
contract.33

The respondent strongly denies the petitioners allegation of fraud and maintains that the real reason for the termination of their contract was the redesign of the
Metrogate Silang Estates project, not the projects lack of conversion clearance from the DAR. 34

The Court's Ruling

The petitioners issues are largely factual in nature and are therefore not the proper subjects of a Rule 45 petition. 35 Specifically, the determination of the existence
of a breach of contract is a factual matter that we do not review in a Rule 45 petition. 36 But due to the conflicts in the factual findings of the RTC and the CA, we see
the need to re-examine the facts and the parties evidence to fully resolve their present dispute. 37

In an April 23, 1993 letter 38 addressed to the petitioner, the respondent declared that it was "constrained to cause the termination of the parties contract effective
immediately" due to a "business decision," but the termination was not immediately implemented.

On May 14, 1993, the respondent, through Engr. Almeida, ordered the suspension of construction work on the site, instead of terminating the project in accordance
with the respondents instructions in its (belatedly received) April 23, 1993 letter to the petitioner.

The respondent alleged that, on May 21, 1993, its Vice-President Engr. Po and Engr. Talampas of AVTJ Construction met to discuss the possible termination of their
contract or the suspension of construction works on the Metrogate project. In this meeting, Engr. Talampas chose to terminate their contract.

On June 1, 1993, the petitioner wrote Engr. Almeida to ask for the confirmation of the Metrogate projects status.

On June 10, 1993, the petitioner received from the respondent the amount of P474,679.28 as payment for Progress Billing No. 3 39 (which billing the petitioner
requested in a letter40 to the respondent dated May 31, 1993).

On June 15, 1993, the petitioner wrote Engr. Po, informing the latter that he had not yet received from the respondent the letter officially terminating their contract.

On June 16, 1993, the petitioner received from the respondent a letter dated April 23, 1993, expressing the respondents decision to terminate the parties contract.
The petitioner alleged that it was only then (June 16, 1993) that he was formally informed of the respondents decision to terminate their contract.

On August 13, 1993, the petitioner received from the respondent the amount of P297,090.43 as payment for earthworks and road base preparations done on the
Metrogate subdivision as of July 12, 1993 (Progress Billing No. 4). 41
On August 18, 1993, the petitioner sent a demand letter to the respondent for the payment of P1,485,000.00 for unpaid construction equipment rentals from May
14, 1993 to June 16, 1993, and P2,100,000.00 as unrealized profits, among others.

Meanwhile, the petitioner received from the respondent the amount of P209,606.56 for the release of all "retention fees" 42 withheld by the respondent from the
petitioners billings.43

On November 5, 1993, the petitioner filed a complaint for breach of contract against the respondent. This is the root-complaint of the present case.

The parties contract is the law between them

and must be complied with in good faith.

Contracts have the force of law between the parties and must be complied with in good faith. 44 A contracting partys failure, without legal reason, to comply with
contract stipulations breaches their contract and can be the basis for the award of damages to the other contracting party. 45

In the present case, we find that the respondent failed to comply with its contractual stipulations on the unilateral termination when it terminated their contract due
to the redesign of the Metrogate Silang Estates subdivision plan.

Paragraph 8 of the parties contract limits the instances when the respondent (referred to as owner in the contract) or the petitioner (referred to as contractor in the
contract) may unilaterally terminate their agreement. On the part of the owner, paragraph 8.1 of the contract specifically provides:

8.1. The OWNER may terminate this CONTRACT upon ten (10) days written notice to the CONTRACTOR in the event of any default by the CONTRACTOR. It shall be
considered a default by the CONTRACTOR whenever he shall:

a) declare bankruptcy, become insolvent, dissolve the corporation, or assign its assets for the benefit of his creditors;

b) disregard, violate or not comply with important provisions of the Plans and Specifications or the OWNERs instructions, or incur a delay of more than fifteen
percent (15%) in the prosecution of the work as evaluated against the work schedule to be submitted by the CONTRACTOR; or

c) fail to provide a qualified superintendent, competent workmen, or materials or equipment meeting the requirements of the Plans and Specifications.

The respondent could not have validly and unilaterally terminated its contract with the petitioner, as the latter has not committed any of the stipulated acts of
default. In fact, the petitioner at that time was willing and able to perform his obligations under their contract; he expressed this in his June 1, 1993 letter to the
respondent, which stated:

Dear Sir:
Please be advised that as per last meeting, you made mention that works at Silang Estates, Cavite will be temporarily stopped for reason/reasons of redesigning of the subdivision plan.
Stoppage will only be for one week and that we will be informed in writing of your decision. It has been three weeks now, going a month that we have not received your decision on the
matter. Meantime, our timetable for the completion of the work is hampered, considering also the good weather condition prevailing in the area which is also a big factor for our early
completion of our contract with you. Kindly inform us in writing regarding this matter, so that we can act accordingly.

Thus, the respondents termination of the subject contract violated the parties agreement as the reason for the termination, i.e., the redesign of the projects
subdivision plan, was not a stipulated cause for the unilateral termination under Paragraph 8.1 of their contract.

The respondent failed to prove the petitioners consent, express or implied, to the termination of the subject contract.

The respondent alleged that there had been mutual termination of the parties contract during a meeting held between Engr. Po of Moldex Realty Inc. and Engr.
Talampas of AVTJ Construction on May 21, 1993. However, this claim is not supported by evidence.

In the first place, the respondent failed to fully establish that a meeting took place as alleged. Except for the self-serving testimony of Engr. Po that the May 21, 1993
meeting took place, the respondent presented no other evidence to prove that Engr. Po and Engr. Talampas met on that date to discuss the fate of their contract. No
document or record the minutes of their May 21, 1993 meeting appeared to have been made despite the importance of their alleged discussion. The questions that
this evidentiary gap raised cannot but be resolved against the respondent.

Even assuming that the May 21, 1993 meeting between Engr. Po and Engr. Talampas did indeed take place, we cannot discern from the developments the
petitioners claimed agreement or consent to the termination of the construction contract.

The respondent contended that the petitioners request for an official letter of termination was proof that the latter consented to the termination of their contract.
We disagree with this view. The request for an official letter of termination does not necessarily mean consent to the termination; by itself, the request for an official
letter of termination does not really signify an agreement; it was nothing more than a request for a final decision from the respondent.

A close reading of petitioners June15, 1993 letter shows that the petitioners intent was solely to confirm whether the respondent would still push through with its
decision to terminate the contract. The petitioners June 15, 1993 letter to the respondent stated:

Sir:

Please be informed that as of this writing, we have not received your official letter regarding the untimely termination of our contract with you, due to reason that stoppage of work is
due to business decision. In order for us to demobilize our personnel, construction equipments, we need your official letter of termination soonest possible time. Thank you.

To our mind, the petitioner fully disclosed the intent behind his letter and it was not consent. Thus, we find it erroneous to conclude, based on this letter, that the
petitioner had consented to the termination of the construction contract.
The respondent also contended that the petitioner ratified the termination of their contract by accepting payments for progress billings, costs of equipment
mobilization/demobilization, refund of insurance bond payments, and the release of retention fees. However, we do not see the petitioners receipt of these
payments to be acts of ratification or consent to the contracts termination.

Consent is manifested by the meeting of the offer and the acceptance upon the thing and the cause which are to constitute the contract. 47 The offer must be certain,
and the acceptance, whether express or implied, must be absolute. 48 An acceptance is considered absolute and unqualified when it is identical in all respects with
that of the offer so as to produce consent or a meeting of the minds. 49

We find no such meeting of the minds between the parties on the matter of termination because the petitioners acceptance of the respondents offer to terminate
was not absolute.

To terminate their contract, the respondent offered to pay the petitioner billings for accomplished works, unrecouped costs of equipment mobilization and
demobilization, unrecouped payment of insurance bond, and the release of all retention fees payments that the petitioner accepted or received.

But despite receipt of payments, no absolute acceptance of the respondents offer took place because the petitioner still demanded the payment of equipment
rentals, cost of opportunity lost, among others. In fact, the payments received were for finished or delivered works and for expenses incurred for the respondents
account. By making the additional demands, the petitioner effectively made a qualified acceptance or a counteroffer, 50which the respondent did not accept. Under
these circumstances, we see no full consent.

The petitioner is entitled to the payment of: (a) equipment rentals during the period of work suspension, and (b) cost of opportunity lost.

A. On equipment rentals incurred during the suspension of construction works

The respondent does not deny that the petitioners equipment was idled from May 14, 1993 to June 16, 1993,but refused to pay the petitioner equipment rentals
because the idling was allegedly due to the petitioners fault; the respondent posits that the petitioner should have demobilized his equipment as soon as the latter
gave his consent to terminate their contract. Also, it questioned the petitioners use of ACEL 51 rates in the computation of the accrued rent.

The petitioner cannot be faulted for the idling of his equipment on the project site. First and foremost, the order to suspend the construction work on May 14, 1993
came from the respondent. Second, the suspension of construction works was supposedly temporary; thus, the petitioners equipment were placed on standby at
the site. Third, it was only on June 16, 1993, that the respondent gave the final word and formal authority for the demobilization of the petitioners equipment.

Hence, even assuming that the petitioner had earlier given his consent, such consent was for the suspension of the contract, not for its termination. The petitioner
could not have properly demobilized his equipment earlier than June 16, 1993 without an official and definite letter of termination from the respondent.

The petitioner undeniably lost expected profits when he placed the rented equipment on idle since progress billings under the contract were to be paid by the
respondent based on the petitioners actual work accomplished. Due to the uncertainty of the end date of the suspension (initially represented to be only for one
week but which lasted for three weeks), the petitioner was compelled to keep his personnel and his rented equipment on standby at the site, and was prevented
from renting out his own equipment to others.

Under these facts, the petitioner should be entitled to the payment of the rent for his equipment amounting to P1,485,000.00, incurred from May 14, 1993 to June
16, 1993.

We uphold the amount of rent arrived at by the petitioner as the use of prevailing ACEL rates in the computation of the rent was reasonable based on industry
standards.

B. On cost of opportunity lost

Article 2200 of the Civil Code provides that indemnification for damages shall include, not only the value of the loss suffered, but also the profits that the obligee
failed to obtain. On this basis, we find the petitioner entitled to the payment for the opportunity lost because of the respondents unilateral termination of the
parties contract.

Significantly, the respondent itself impliedly accepted this legal consequence by contending that the cost of opportunity lost should not be based on the total
contract price of P10,500,000.00 as the petitioner had already been compensated for a part of the construction work done.

We find merit in the respondents contention that the basis of the cost of opportunity lost should not be the total contract price, as the cost of opportunity lost must
represent only the profits that the petitioner failed to obtain due to the contracts early termination. Thus, from the total contract price, the amounts paid to the
petitioner for work accomplished must be subtracted, including the P500,000.00 down payment that the respondent gave at the start of the contract; the difference
would be the basis for determining the cost of opportunity lost.

On record, the petitioner received the following amounts for work accomplished: (a) P292,682.90, paid by the respondent on March 10, 1993; (b) P319,922.32, paid
on May 14, 1993; (c) P474,679.28, paid on June 10, 1993; and (d) P297,090.43, paid on August 13, 1993. By subtracting these amounts and the P500,000.00 down
payment from the total contract price of P10,500,000.00, we arrive at the amount of P8,615,625.07, which represents the petitioners unrealized gross earnings from
the contract.

The twenty percent (20%) rate of cost of opportunity lost is, to our mind, reasonable under the circumstances, considering that one hundred fifty (150) days had
lapsed (out of the three hundred (300) days-completion period under the contract) at the time the petitioner received the respondents letter confirming the
termination of their contract on June 16, 1993.

In these lights, we award the petitioner the amount of P1,723,125.01(equivalent of 20% of P8,615,625.07) as cost of opportunity lost.

The petitioner alleges that the respondent deliberately failed to inform him of the Metrogate projects lack of a conversion clearance from the DAR, and that the non-
disclosure of this fact amounted to fraud: he would not have contracted with the respondent had he known beforehand of the projects lack of a conversion
clearance.
The petitioner presented evidence to confirm that the respondent actually failed to secure a conversion clearance before it entered into a contract with the petitioner
for the development of the Metrogate Silang Estates. However, nothing in the evidence showed that the respondent was under any legal or contractual obligation to
disclose the projects conversion clearance status to the petitioner, or that the presence of a conversion clearance was a consideration for the petitioners entry into
the contract with the respondent.

Article 1339 of the Civil Code provides that "failure to disclose facts, when there is a duty to reveal them, as when the parties are bound by confidential relations,
constitutes fraud." Otherwise stated, the innocent non-disclosure of facts, when no duty to reveal them exists, does not amount to fraud.

We cannot award moral and exemplary damages to the petitioner in the absence of fraud on the respondents part. To recover moral damages in an action for
breach of contract, the breach must be palpably wanton, reckless, malicious, in bad faith, oppressive or abusive. 52 In the same manner, to warrant the award of
exemplary damages, the wrongful act must be accompanied by bad faith, such as when the guilty party acted in a wanton, fraudulent, reckless or malevolent
manner.53

We cannot also award attorneys fees to the petitioner. Attorneys fees are not awarded every time a party wins a suit. 54 Attorneys fees cannot be awarded even if a
claimant is compelled to litigate or to incur expenses to protect his rights due to the defendants act or omission, 55 where no sufficient showing of bad faith exists; a
partys persistence based solely on its erroneous conviction of the righteousness of his cause, does not necessarily amount to bad faith. 56 In the present case, the
respondent was not shown to have acted in bad faith in appealing and zealously pursuing its case. Under the circumstances, it was merely protecting its interests.

WHEREFORE, premises considered, we GRANT the appeal and REVERSE and SET ASIDE the decision dated June 27, 2005, and resolution dated October 21, 2005, of
the Court of Appeals in CA-G.R. CV No. 64715.

Accordingly, we ORDER the respondent to pay the petitioner the following amounts of: (a) P1,485,000.00, for the rent of petitioner's equipment from May 14, 1993 to
June 16, 1993, and (b) P1,723,125.01, as cost of opportunity lost. The sum of these amounts shall earn legal interest of six percent (6%) per annum from the finality
of this Decision until full payment.

ECE REALTY AND DEVELOPMENT INC. vs. RACHEL G. MANDAP

Herein petitioner is a corporation engaged in the building and development of condominium units. Sometime in 1995, it started the construction of a condominium
project called Central Park Condominium Building located along Jorge St., Pasay City. However, printed advertisements were made indicating therein that the said
project was to be built in Makati City. 3 In December 1995, respondent, agreed to buy a unit from the above project by paying a reservation fee and, thereafter,
downpayment and monthly installments. On June 18, 1996, respondent and the representatives of petitioner executed a Contract to Sell. 4 In the said Contract, it was
indicated that the condominium project is located in Pasay City.

More than two years after the execution of the Contract to Sell, respondent, through her counsel, wrote petitioner a letter dated October 30, 1998 demanding the
return of P422,500.00, representing the payments she made, on the ground that she subsequently discovered that the condominium project was being built in Pasay
City and not in Makati City as indicated in its printed advertisements. 5
However, instead of answering respondent's letter, petitioner sent her a written communication dated November 30, 1998 informing her that her unit is ready for
inspection and occupancy should she decide to move in. 6

Treating the letter as a form of denial of her demand for the return of the sum she had paid to petitioner, respondent filed a complaint with the Expanded National
Capital Region Field Office (ENCRFO) of the Housing and Land Use Regulatory Board (HLURB) seeking the annulment of her contract with petitioner, the return of her
payments, and damages.7

On September 30, 2005, the ENCRFO dismissed respondent's complaint for lack of merit and directedthe parties to resume the fulfillment of the terms and
conditions of their sales contract. The ENCRFO held that respondent "failed to show or substantiate the legal grounds that consist of a fraudulent or malicious
dealing with her by the [petitioner], such as, the latter's employment of insidious words or machinations which induced or entrapped her into the contract and which,
without them, would not have encouraged her to buy the unit." 8

Respondent filed a petition for review with the HLURB Board of Commissioners questioning the decision of the ENCRFO. On April 25, 2006, the HLURB Board of
Commissioners rendered judgment dismissing respondent's complaint and affirming the decision of the ENCRFO. 9 Giving credence to the Contract to Sell executed
by petitioner and respondent, the Board of Commissioners held that when the parties reduced their contract in writing, their rights and duties must befound in their
contract and neither party can place a greater obligation than what the contract provides.

Aggrieved, respondent filed an appeal with the Office of the President. On June 21, 2007, the Office of the President dismissed respondent's appeal and affirmed in
totothe decision of the HLURB Board of Commissioners. 10 Respondent filed a Motion for Reconsideration, 11 but the Office of the President denied it in a
Resolution12 dated August 29, 2007.

Respondent then filed a petition for review with the CA.13

On July 21, 2010, the CA promulgated its assailed Decision, the dispositive portion of which reads, thus:

WHEREFORE, premises considered, We hereby REVERSEand SET ASIDEthe Decision and the Resolution dated June 21, 2007 and August 29, 2007, respectively,
issued by the Office of the President in OP Case No. 06-F-224. Accordingly, the contract between Rachel G. Mandap and ECE Realty is hereby ANNULLED.
Consequently, ECE Realty is ordered to return the total amountof P422,500.00 representing payments made by Rachel G. Mandap on reservation fee,
[downpayment] and monthly installments on the condominium unit, with legal interest thereon at twelve percent (12%) per annumfrom the date of filing of action
until fully paid.

No costs. SO ORDERED.14

The CA held that petitioner employed fraud and machinations to induce respondent to enter into a contract with it. The CA also expressed doubt on the due
execution of the Contract to Sell between the parties.

Petitioner filed a Motion for Reconsideration, but the CA denied it in its March 15, 2011 Resolution.
Hence, the present petition for review on certiorariwith the following Assignment of Errors:

I The Court of Appeals gravely erred in ruling that there was fraud in the execution of the subject contract to sell and declaring the same as annulled and ordering
petitioner ECE to refund all payments made by respondent.

II The Court of Appeals erred in ordering the award of legal interest at the rate of 12% per annum starting from the filing of the complaint until fully paid when legal
interest should have been pegged at 6%.15

The Court finds the petition meritorious.

The basic issue in the present caseis whether petitioner was guilty of fraud and if so, whether such fraud is sufficient ground to nullify its contract with respondent.

Article 1338 of the Civil Code provides that "[t]here is fraud when through insidious words or machinationsof one of the contracting parties, the other is induced to
enter into a contract which, without them, he would not have agreed to."

In addition, under Article 1390 of the same Code, a contract is voidable or annullable "where the consent is vitiated by mistake, violence, intimidation, undue
influence or fraud."

Also, Article 1344 of the same Codeprovides that "[i]n order that fraud may make a contract voidable, it should be serious and should not have been employed by
both contracting parties." Jurisprudence has shown that in order to constitute fraud that provides basis to annul contracts, it must fulfill two conditions.

First, the fraud must be dolo causanteor it must be fraud in obtaining the consent of the party. 16 This is referred to as causal fraud. The deceit must be serious. The
fraud is serious when it is sufficient to impress, or to lead an ordinarily prudent person into error; that which cannot deceive a prudent person cannot be a ground for
nullity.17The circumstances of each case should be considered, taking into account the personal conditions of the victim. 18

Second, the fraud must be proven by clear and convincing evidence and not merely by a preponderance thereof. 19

In the present case, this Court finds that petitioner is guilty of false representation of a fact. This is evidenced by its printed advertisements indicating that its subject
condominium project is located in Makati City when, in fact, it is in Pasay City. The Court agrees with the Housing and Land Use Arbiter, the HLURB Board
ofCommissioners, and the Office of the President, in condemning petitioner's deplorable act of making misrepresentations in its advertisementsand in issuing a stern
warning that a repetition of this act shall bedealt with more severely.

However, insofar as the present case is concerned, the Court agrees with the Housing and Land Use Arbiter, the HLURB Board of Commissioners, and the Office of
the President, that the misrepresentation made by petitioner in its advertisements does not constitute causal fraud which would have been a valid basis in annulling
the Contract to Sell between petitioner and respondent.
In his decision, the Housing and Land Use Arbiter found that respondent failed to show that "the essential and/or moving factor that led the [respondent] to give her
consent and agree to buy the unit was precisely the project's advantageous or uniquelocation in Makati [City] to the exclusion of other places or cityx x x." Both
the HLURB Board of Commissioners and the Office of the President affirmed the finding of the Arbiter and unanimously held that respondent failed to prove that the
location of the said project was the causal consideration or the principal inducement which led her into buyingher unit in the said condominium project. The Court
finds no cogent reason to depart from the foregoing findings and conclusion of the above agencies. Indeed, evidence shows that respondent proceeded to sign the
Contract to Sell despite information contained therein that the condominium is located in Pasay City. This only means that she still agreed to buy the subject
property regardless of the fact that it is located in a place different from what she was originally informed. If she had a problem with the property's location, she
should not havesigned the Contract to Sell and, instead, immediately raised this issue with petitioner. But she did not. As correctly observed by the Office of the
President, it took respondent more than two years from the execution of the Contract to Sell to demand the return of the amount she paid on the ground that she
was misled into believing that the subject property islocated in Makati City. In the meantime, she continued to make payments.

The Court is not persuaded by the ruling of the CA which expresses doubt on the due execution of the Contractto Sell. The fact remains that the said Contract to Sell
was notarized. Itis settled that absent any clear and convincing proof to the contrary, a notarized document enjoys the presumption of regularity and is conclusive as
to the truthfulness of its contents. 20 Neither does the Court agree thatthe presumption of regularity accorded to the notarized Contract to Sell was overcome by
evidence to the contrary. Respondent's allegation that she signed the said Contract to Sell with several blank spaces, and which allegedly did not indicate the
location of the condominium, was not supported by proof. The basic rule is that mere allegation is not evidence and is not equivalent to proof. 21 In addition, the fact
that respondent made several payments prior to the execution of the subject Contract to Sell is not the kind of evidence needed to overcome such presumption of
regularity.

With respect to the foregoing discussions, the Court quotes with approval the disquisition of the Office of the President on the credibility of the claims of petitioner
and respondent, to wit:

We give credence to the version of [petitioner] ECE Realty considering that there is no cogent reason why this Office could not rely on the truth and veracity of the
notarized Contract to Sell. "Being a notarized document, it had in its favorthe presumption of regularity, and to overcome the same, there must be evidence that is
clear, convincing and more than merely preponderant; otherwise, the document should be upheld. [Respondent] Mandap failed to overcome this presumption.

The contention that Mandap signed the Contract to Sell in-blank, and [that] it was ECE Realty that supplied the details on it is remarkably threadbare for no evidence
was submitted to support such claim in all the proceedings before the ENCRFO and the Board of Commissioners. It is only now that Mandap has belatedly submitted
the Affidavit of Lorenzo G. Tipon. This cannot be done without running afoul with the well-settled principle barring a party from introducing fresh defenses and facts
at the appellate stage. Moreover, the infirmity of affidavits as evidence is a matter of judicial experience. It issettled that no undue importance shall be given to a
sworn statement or affidavit as a piece of evidence because being taken ex parte, an affidavit is almost always incomplete and inaccurate. Thus, absent, as here, of
(sic) any controverting evidence, it is reasonable to presume that Mandap knew the contents of the Contract to Sell which was executed with legal formalities. The
ruling in Bernardo vs. Court of Appeals is enlightening in this wise:

x x x. The rule that one who signs a contract is presumed to know its contentshas been applied even to contract of illiterate persons on the ground that if such
persons are unable to read, they are negligent if they fail to have the contract read to them. If a person cannot read the instrument, it is as much his duty to procure
some reliable persons to read and explain it tohim, before he signs it, as it would be to read it before he signed it if he were able to do so and his failure to obtain a
reading and explanation of it is such gross negligence as will estop him from avoiding it on the ground that he was ignorant of its contents. 22

In any case, even assuming that petitioners misrepresentation consists of fraud which could bea ground for annulling their Contract to Sell, respondent's act of
affixing her signatureto the said Contract, after having acquired knowledge of the property's actual location, can be construed as an implied ratification thereof.

Ratification of a voidable contract is defined under Article 1393 of the Civil Code as follows:

Art. 1393. Ratification may be effected expressly or tacitly.1wphi1 It is understood that there is a tacit ratification if, with knowledge of the reason which renders the
contract voidable and such reason having ceased, the person who has a right to invoke it should execute an act which necessarily implies an intention to waive his
right.

Implied ratification may take diverse forms, such as by silence or acquiescence; by acts showing approval or adoption of the contract; or by acceptance and
retention of benefits flowing therefrom.23

Under Article 1392 of the Civil Code, "ratification extinguishes the action to annul a voidable contract." In addition, Article 1396 of the same Code provides that
"[r]atification cleanses the contract from all its defects from the moment it was constituted."

Hence, based on the foregoing, the findings and conclusions of the Housing and Land Use Arbiter, the HLURB Board of Commissioners and the Office of the
President, should be sustained.

WHEREFORE, the instant petition is GRANTED. The Decision and Resolution of the Court of Appeals, dated July 21, 2010 and March 15, 2011, respectively, are
REVERSEDand SET ASIDE. The September 30, 2005 Decision of the Expanded National Capital Region Field Office of the Housing and Land Use Regulatory Board,
which dismisses respondent's complaint and directs petitioner and respondent to resume the fulfillment of their sales contract, is REINSTATED. SO ORDERED.

SPOUSES FERNANDO and LOURDES VILORIA vs. CONTINENTAL AIRLINES, INC.

On April 3, 2006, the Regional Trial Court of Antipolo City, Branch 74 (RTC) rendered a Decision, giving due course to the complaint for sum of money and damages
filed by petitioners Fernando Viloria (Fernando) and Lourdes Viloria (Lourdes), collectively called Spouses Viloria, against respondent Continental Airlines, Inc. (CAI).
As culled from the records, below are the facts giving rise to such complaint.

On or about July 21, 1997 and while in the United States, Fernando purchased for himself and his wife, Lourdes, two (2) round trip airline tickets from San Diego,
California to Newark, New Jersey on board Continental Airlines. Fernando purchased the tickets at US$400.00 each from a travel agency called Holiday Travel and
was attended to by a certain Margaret Mager (Mager). According to Spouses Viloria, Fernando agreed to buy the said tickets after Mager informed them that there
were no available seats at Amtrak, an intercity passenger train service provider in the United States. Per the tickets, Spouses Viloria were scheduled to leave for
Newark on August 13, 1997 and return to San Diego on August 21, 1997.

Subsequently, Fernando requested Mager to reschedule their flight to Newark to an earlier date or August 6, 1997. Mager informed him that flights to Newark via
Continental Airlines were already fully booked and offered the alternative of a round trip flight via Frontier Air. Since flying with Frontier Air called for a higher fare of
US$526.00 per passenger and would mean traveling by night, Fernando opted to request for a refund. Mager, however, denied his request as the subject tickets are
non-refundable and the only option that Continental Airlines can offer is the re-issuance of new tickets within one (1) year from the date the subject tickets were
issued. Fernando decided to reserve two (2) seats with Frontier Air.

As he was having second thoughts on traveling via Frontier Air, Fernando went to the Greyhound Station where he saw an Amtrak station nearby. Fernando made
inquiries and was told that there are seats available and he can travel on Amtrak anytime and any day he pleased. Fernando then purchased two (2) tickets for
Washington, D.C.

From Amtrak, Fernando went to Holiday Travel and confronted Mager with the Amtrak tickets, telling her that she had misled them into buying the Continental
Airlines tickets by misrepresenting that Amtrak was already fully booked. Fernando reiterated his demand for a refund but Mager was firm in her position that the
subject tickets are non-refundable.

Upon returning to the Philippines, Fernando sent a letter to CAI on February 11, 1998, demanding a refund and alleging that Mager had deluded them into
purchasing the subject tickets.3

In a letter dated February 24, 1998, Continental Micronesia informed Fernando that his complaint had been referred to the Customer Refund Services of Continental
Airlines at Houston, Texas.4

In a letter dated March 24, 1998, Continental Micronesia denied Fernandos request for a refund and advised him that he may take the subject tickets to any
Continental ticketing location for the re-issuance of new tickets within two (2) years from the date they were issued. Continental Micronesia informed Fernando that
the subject tickets may be used as a form of payment for the purchase of another Continental ticket, albeit with a re-issuance fee. 5

On June 17, 1999, Fernando went to Continentals ticketing office at Ayala Avenue, Makati City to have the subject tickets replaced by a single round trip ticket to Los
Angeles, California under his name. Therein, Fernando was informed that Lourdes ticket was non-transferable, thus, cannot be used for the purchase of a ticket in
his favor. He was also informed that a round trip ticket to Los Angeles was US$1,867.40 so he would have to pay what will not be covered by the value of his San
Diego to Newark round trip ticket.
In a letter dated June 21, 1999, Fernando demanded for the refund of the subject tickets as he no longer wished to have them replaced. In addition to the dubious
circumstances under which the subject tickets were issued, Fernando claimed that CAIs act of charging him with US$1,867.40 for a round trip ticket to Los Angeles,
which other airlines priced at US$856.00, and refusal to allow him to use Lourdes ticket, breached its undertaking under its March 24, 1998 letter. 6

On September 8, 2000, Spouses Viloria filed a complaint against CAI, praying that CAI be ordered to refund the money they used in the purchase of the subject
tickets with legal interest from July 21, 1997 and to pay P1,000,000.00 as moral damages, P500,000.00 as exemplary damages and P250,000.00 as attorneys fees.7

CAI interposed the following defenses: (a) Spouses Viloria have no right to ask for a refund as the subject tickets are non-refundable; (b) Fernando cannot insist on
using the ticket in Lourdes name for the purchase of a round trip ticket to Los Angeles since the same is non-transferable; (c) as Mager is not a CAI employee, CAI is
not liable for any of her acts; (d) CAI, its employees and agents did not act in bad faith as to entitle Spouses Viloria to moral and exemplary damages and attorneys
fees. CAI also invoked the following clause printed on the subject tickets:

3. To the extent not in conflict with the foregoing carriage and other services performed by each carrier are subject to: (i) provisions contained in this ticket,
(ii) applicable tariffs, (iii) carriers conditions of carriage and related regulations which are made part hereof (and are available on application at the offices of
carrier), except in transportation between a place in the United States or Canada and any place outside thereof to which tariffs in force in those countries
apply.8

According to CAI, one of the conditions attached to their contract of carriage is the non-transferability and non-refundability of the subject tickets.

The RTCs Ruling

Following a full-blown trial, the RTC rendered its April 3, 2006 Decision, holding that Spouses Viloria are entitled to a refund in view of Magers misrepresentation in
obtaining their consent in the purchase of the subject tickets. 9 The relevant portion of the April 3, 2006 Decision states:

Continental Airlines agent Ms. Mager was in bad faith when she was less candid and diligent in presenting to plaintiffs spouses their booking options. Plaintiff
Fernando clearly wanted to travel via AMTRAK, but defendants agent misled him into purchasing Continental Airlines tickets instead on the fraudulent
misrepresentation that Amtrak was fully booked. In fact, defendant Airline did not specifically denied (sic) this allegation.

Plainly, plaintiffs spouses, particularly plaintiff Fernando, were tricked into buying Continental Airline tickets on Ms. Magers misleading misrepresentations.
Continental Airlines agent Ms. Mager further relied on and exploited plaintiff Fernandos need and told him that they must book a flight immediately or risk
not being able to travel at all on the couples preferred date. Unfortunately, plaintiffs spouses fell prey to the airlines and its agents unethical tactics for
baiting trusting customers.10

Citing Articles 1868 and 1869 of the Civil Code, the RTC ruled that Mager is CAIs agent, hence, bound by her bad faith and misrepresentation. As far as the RTC is
concerned, there is no issue as to whether Mager was CAIs agent in view of CAIs implied recognition of her status as such in its March 24, 1998 letter.
The act of a travel agent or agency being involved here, the following are the pertinent New Civil Code provisions on agency:

Art. 1868. By the contract of agency a person binds himself to render some service or to do something in representation or on behalf of another, with the consent or
authority of the latter.

Art. 1869. Agency may be express, or implied from the acts of the principal, from his silence or lack of action, or his failure to repudiate the agency, knowing that
another person is acting on his behalf without authority.

Agency may be oral, unless the law requires a specific form.

As its very name implies, a travel agency binds itself to render some service or to do something in representation or on behalf of another, with the consent or
authority of the latter. This court takes judicial notice of the common services rendered by travel agencies that represent themselves as such, specifically the
reservation and booking of local and foreign tours as well as the issuance of airline tickets for a commission or fee.

The services rendered by Ms. Mager of Holiday Travel agency to the plaintiff spouses on July 21, 1997 were no different from those offered in any other travel
agency. Defendant airline impliedly if not expressly acknowledged its principal-agent relationship with Ms. Mager by its offer in the letter dated March 24,
1998 an obvious attempt to assuage plaintiffs spouses hurt feelings. 11

Furthermore, the RTC ruled that CAI acted in bad faith in reneging on its undertaking to replace the subject tickets within two (2) years from their date of issue when
it charged Fernando with the amount of US$1,867.40 for a round trip ticket to Los Angeles and when it refused to allow Fernando to use Lourdes ticket. Specifically:

Tickets may be reissued for up to two years from the original date of issue. When defendant airline still charged plaintiffs spouses US$1,867.40 or more than
double the then going rate of US$856.00 for the unused tickets when the same were presented within two (2) years from date of issue, defendant airline
exhibited callous treatment of passengers.12

The Appellate Courts Ruling

On appeal, the CA reversed the RTCs April 3, 2006 Decision, holding that CAI cannot be held liable for Magers act in the absence of any proof that a principal-agent
relationship existed between CAI and Holiday Travel. According to the CA, Spouses Viloria, who have the burden of proof to establish the fact of agency, failed to
present evidence demonstrating that Holiday Travel is CAIs agent. Furthermore, contrary to Spouses Vilorias claim, the contractual relationship between Holiday
Travel and CAI is not an agency but that of a sale.
Plaintiffs-appellees assert that Mager was a sub-agent of Holiday Travel who was in turn a ticketing agent of Holiday Travel who was in turn a ticketing agent
of Continental Airlines. Proceeding from this premise, they contend that Continental Airlines should be held liable for the acts of Mager. The trial court held
the same view.

We do not agree. By the contract of agency, a person binds him/herself to render some service or to do something in representation or on behalf of another, with the
consent or authority of the latter. The elements of agency are: (1) consent, express or implied, of the parties to establish the relationship; (2) the object is the
execution of a juridical act in relation to a third person; (3) the agent acts as a representative and not for him/herself; and (4) the agent acts within the scope of
his/her authority. As the basis of agency is representation, there must be, on the part of the principal, an actual intention to appoint, an intention naturally inferable
from the principals words or actions. In the same manner, there must be an intention on the part of the agent to accept the appointment and act upon it. Absent
such mutual intent, there is generally no agency. It is likewise a settled rule that persons dealing with an assumed agent are bound at their peril, if they would hold
the principal liable, to ascertain not only the fact of agency but also the nature and extent of authority, and in case either is controverted, the burden of proof is upon
them to establish it. Agency is never presumed, neither is it created by the mere use of the word in a trade or business name. We have perused the evidence and
documents so far presented. We find nothing except bare allegations of plaintiffs-appellees that Mager/Holiday Travel was acting in behalf of Continental Airlines.
From all sides of legal prism, the transaction in issue was simply a contract of sale, wherein Holiday Travel buys airline tickets from Continental Airlines and then,
through its employees, Mager included, sells it at a premium to clients. 13

The CA also ruled that refund is not available to Spouses Viloria as the word non-refundable was clearly printed on the face of the subject tickets, which constitute
their contract with CAI. Therefore, the grant of their prayer for a refund would violate the proscription against impairment of contracts.

Finally, the CA held that CAI did not act in bad faith when they charged Spouses Viloria with the higher amount of US$1,867.40 for a round trip ticket to Los Angeles.
According to the CA, there is no compulsion for CAI to charge the lower amount of US$856.00, which Spouses Viloria claim to be the fee charged by other airlines.
The matter of fixing the prices for its services is CAIs prerogative, which Spouses Viloria cannot intervene. In particular:

It is within the respective rights of persons owning and/or operating business entities to peg the premium of the services and items which they provide at a price
which they deem fit, no matter how expensive or exhorbitant said price may seem vis--vis those of the competing companies. The Spouses Viloria may not
intervene with the business judgment of Continental Airlines. 14

The Petitioners Case

In this Petition, this Court is being asked to review the findings and conclusions of the CA, as the latters reversal of the RTCs April 3, 2006 Decision allegedly lacks
factual and legal bases. Spouses Viloria claim that CAI acted in bad faith when it required them to pay a higher amount for a round trip ticket to Los Angeles
considering CAIs undertaking to re-issue new tickets to them within the period stated in their March 24, 1998 letter. CAI likewise acted in bad faith when it
disallowed Fernando to use Lourdes ticket to purchase a round trip to Los Angeles given that there is nothing in Lourdes ticket indicating that it is non-transferable.
As a common carrier, it is CAIs duty to inform its passengers of the terms and conditions of their contract and passengers cannot be bound by such terms and
conditions which they are not made aware of. Also, the subject contract of carriage is a contract of adhesion; therefore, any ambiguities should be construed against
CAI. Notably, the petitioners are no longer questioning the validity of the subject contracts and limited its claim for a refund on CAIs alleged breach of its
undertaking in its March 24, 1998 letter.

The Respondents Case

In its Comment, CAI claimed that Spouses Vilorias allegation of bad faith is negated by its willingness to issue new tickets to them and to credit the value of the
subject tickets against the value of the new ticket Fernando requested. CAI argued that Spouses Vilorias sole basis to claim that the price at which CAI was willing to
issue the new tickets is unconscionable is a piece of hearsay evidence an advertisement appearing on a newspaper stating that airfares from Manila to Los Angeles
or San Francisco cost US$818.00.15 Also, the advertisement pertains to airfares in September 2000 and not to airfares prevailing in June 1999, the time when
Fernando asked CAI to apply the value of the subject tickets for the purchase of a new one. 16 CAI likewise argued that it did not undertake to protect Spouses Viloria
from any changes or fluctuations in the prices of airline tickets and its only obligation was to apply the value of the subject tickets to the purchase of the newly
issued tickets.

With respect to Spouses Vilorias claim that they are not aware of CAIs restrictions on the subject tickets and that the terms and conditions that are printed on them
are ambiguous, CAI denies any ambiguity and alleged that its representative informed Fernando that the subject tickets are non-transferable when he applied for the
issuance of a new ticket. On the other hand, the word non-refundable clearly appears on the face of the subject tickets.

CAI also denies that it is bound by the acts of Holiday Travel and Mager and that no principal-agency relationship exists between them. As an independent
contractor, Holiday Travel was without capacity to bind CAI.

Issues

To determine the propriety of disturbing the CAs January 30, 2009 Decision and whether Spouses Viloria have the right to the reliefs they prayed for, this Court
deems it necessary to resolve the following issues:

a. Does a principal-agent relationship exist between CAI and Holiday Travel?

b. Assuming that an agency relationship exists between CAI and Holiday Travel, is CAI bound by the acts of Holiday Travels agents and employees such as
Mager?

c. Assuming that CAI is bound by the acts of Holiday Travels agents and employees, can the representation of Mager as to unavailability of seats at Amtrak be
considered fraudulent as to vitiate the consent of Spouse Viloria in the purchase of the subject tickets?

d. Is CAI justified in insisting that the subject tickets are non-transferable and non-refundable?

e. Is CAI justified in pegging a different price for the round trip ticket to Los Angeles requested by Fernando?

f. Alternatively, did CAI act in bad faith or renege its obligation to Spouses Viloria to apply the value of the subject tickets in the purchase of new ones when
it refused to allow Fernando to use Lourdes ticket and in charging a higher price for a round trip ticket to Los Angeles?
This Courts Ruling

I. A principal-agent relationship exists between CAI and Holiday Travel.

With respect to the first issue, which is a question of fact that would require this Court to review and re-examine the evidence presented by the parties below, this
Court takes exception to the general rule that the CAs findings of fact are conclusive upon Us and our jurisdiction is limited to the review of questions of law. It is
well-settled to the point of being axiomatic that this Court is authorized to resolve questions of fact if confronted with contrasting factual findings of the trial court
and appellate court and if the findings of the CA are contradicted by the evidence on record. 17

According to the CA, agency is never presumed and that he who alleges that it exists has the burden of proof. Spouses Viloria, on whose shoulders such burden
rests, presented evidence that fell short of indubitably demonstrating the existence of such agency.

We disagree. The CA failed to consider undisputed facts, discrediting CAIs denial that Holiday Travel is one of its agents. Furthermore, in erroneously characterizing
the contractual relationship between CAI and Holiday Travel as a contract of sale, the CA failed to apply the fundamental civil law principles governing agency and
differentiating it from sale.

In Rallos v. Felix Go Chan & Sons Realty Corporation,18 this Court explained the nature of an agency and spelled out the essential elements thereof:

Out of the above given principles, sprung the creation and acceptance of the relationship of agency whereby one party, called the principal (mandante),
authorizes another, called the agent (mandatario), to act for and in his behalf in transactions with third persons. The essential elements of agency are: (1)
there is consent, express or implied of the parties to establish the relationship; (2) the object is the execution of a juridical act in relation to a third person;
(3) the agent acts as a representative and not for himself, and (4) the agent acts within the scope of his authority.

Agency is basically personal, representative, and derivative in nature. The authority of the agent to act emanates from the powers granted to him by his
principal; his act is the act of the principal if done within the scope of the authority. Qui facit per alium facit se. "He who acts through another acts himself."19

Contrary to the findings of the CA, all the elements of an agency exist in this case. The first and second elements are present as CAI does not deny that it concluded
an agreement with Holiday Travel, whereby Holiday Travel would enter into contracts of carriage with third persons on CAIs behalf. The third element is also present
as it is undisputed that Holiday Travel merely acted in a representative capacity and it is CAI and not Holiday Travel who is bound by the contracts of carriage
entered into by Holiday Travel on its behalf. The fourth element is also present considering that CAI has not made any allegation that Holiday Travel exceeded the
authority that was granted to it. In fact, CAI consistently maintains the validity of the contracts of carriage that Holiday Travel executed with Spouses Viloria and that
Mager was not guilty of any fraudulent misrepresentation. That CAI admits the authority of Holiday Travel to enter into contracts of carriage on its behalf is easily
discernible from its February 24, 1998 and March 24, 1998 letters, where it impliedly recognized the validity of the contracts entered into by Holiday Travel with
Spouses Viloria. When Fernando informed CAI that it was Holiday Travel who issued to them the subject tickets, CAI did not deny that Holiday Travel is its authorized
agent.

Prior to Spouses Vilorias filing of a complaint against it, CAI never refuted that it gave Holiday Travel the power and authority to conclude contracts of carriage on its
behalf. As clearly extant from the records, CAI recognized the validity of the contracts of carriage that Holiday Travel entered into with Spouses Viloria and
considered itself bound with Spouses Viloria by the terms and conditions thereof; and this constitutes an unequivocal testament to Holiday Travels authority to act
as its agent. This Court cannot therefore allow CAI to take an altogether different position and deny that Holiday Travel is its agent without condoning or giving
imprimatur to whatever damage or prejudice that may result from such denial or retraction to Spouses Viloria, who relied on good faith on CAIs acts in recognition of
Holiday Travels authority. Estoppel is primarily based on the doctrine of good faith and the avoidance of harm that will befall an innocent party due to its injurious
reliance, the failure to apply it in this case would result in gross travesty of justice. 20 Estoppel bars CAI from making such denial.

As categorically provided under Article 1869 of the Civil Code, [a]gency may be express, or implied from the acts of the principal, from his silence or lack of action,
or his failure to repudiate the agency, knowing that another person is acting on his behalf without authority.

Considering that the fundamental hallmarks of an agency are present, this Court finds it rather peculiar that the CA had branded the contractual relationship
between CAI and Holiday Travel as one of sale. The distinctions between a sale and an agency are not difficult to discern and this Court, as early as 1970, had
already formulated the guidelines that would aid in differentiating the two (2) contracts. In Commissioner of Internal Revenue v. Constantino, 21 this Court
extrapolated that the primordial differentiating consideration between the two (2) contracts is the transfer of ownership or title over the property subject of the
contract. In an agency, the principal retains ownership and control over the property and the agent merely acts on the principals behalf and under his instructions in
furtherance of the objectives for which the agency was established. On the other hand, the contract is clearly a sale if the parties intended that the delivery of the
property will effect a relinquishment of title, control and ownership in such a way that the recipient may do with the property as he pleases.

Since the company retained ownership of the goods, even as it delivered possession unto the dealer for resale to customers, the price and terms of which
were subject to the company's control, the relationship between the company and the dealer is one of agency, tested under the following criterion:

The difficulty in distinguishing between contracts of sale and the creation of an agency to sell has led to the establishment of rules by the application of which this
difficulty may be solved. The decisions say the transfer of title or agreement to transfer it for a price paid or promised is the essence of sale. If such transfer puts the
transferee in the attitude or position of an owner and makes him liable to the transferor as a debtor for the agreed price, and not merely as an agent who must
account for the proceeds of a resale, the transaction is a sale; while the essence of an agency to sell is the delivery to an agent, not as his property, but as the
property of the principal, who remains the owner and has the right to control sales, fix the price, and terms, demand and receive the proceeds less the agent's
commission upon sales made. 1 Mechem on Sales, Sec. 43; 1 Mechem on Agency, Sec. 48; Williston on Sales, 1; Tiedeman on Sales, 1. (Salisbury v. Brooks, 94 SE
117, 118-119)22
As to how the CA have arrived at the conclusion that the contract between CAI and Holiday Travel is a sale is certainly confounding, considering that CAI is the one
bound by the contracts of carriage embodied by the tickets being sold by Holiday Travel on its behalf. It is undisputed that CAI and not Holiday Travel who is the
party to the contracts of carriage executed by Holiday Travel with third persons who desire to travel via Continental Airlines, and this conclusively indicates the
existence of a principal-agent relationship. That the principal is bound by all the obligations contracted by the agent within the scope of the authority granted to him
is clearly provided under Article 1910 of the Civil Code and this constitutes the very notion of agency.

II. In actions based on quasi-delict, a principal can only be held liable for the tort committed by its agents employees if it has been established
by preponderance of evidence that the principal was also at fault or negligent or that the principal exercise control and supervision over them.

Considering that Holiday Travel is CAIs agent, does it necessarily follow that CAI is liable for the fault or negligence of Holiday Travels employees? Citing China Air
Lines, Ltd. v. Court of Appeals, et al.,23 CAI argues that it cannot be held liable for the actions of the employee of its ticketing agent in the absence of an employer-
employee relationship.

An examination of this Courts pronouncements in China Air Lines will reveal that an airline company is not completely exonerated from any liability for the tort
committed by its agents employees. A prior determination of the nature of the passengers cause of action is necessary. If the passengers cause of action against
the airline company is premised on culpa aquiliana or quasi-delict for a tort committed by the employee of the airline companys agent, there must be an
independent showing that the airline company was at fault or negligent or has contributed to the negligence or tortuous conduct committed by the employee of its
agent. The mere fact that the employee of the airline companys agent has committed a tort is not sufficient to hold the airline company liable. There is no vinculum
juris between the airline company and its agents employees and the contractual relationship between the airline company and its agent does not operate to create
a juridical tie between the airline company and its agents employees. Article 2180 of the Civil Code does not make the principal vicariously liable for the tort
committed by its agents employees and the principal-agency relationship per se does not make the principal a party to such tort; hence, the need to prove the
principals own fault or negligence.

On the other hand, if the passengers cause of action for damages against the airline company is based on contractual breach or culpa contractual, it is not
necessary that there be evidence of the airline companys fault or negligence. As this Court previously stated in China Air Lines and reiterated in Air France vs.
Gillego,24 in an action based on a breach of contract of carriage, the aggrieved party does not have to prove that the common carrier was at fault or was negligent.
All that he has to prove is the existence of the contract and the fact of its non-performance by the carrier.

Spouses Vilorias cause of action on the basis of Magers alleged fraudulent misrepresentation is clearly one of tort or quasi-delict, there being no pre-existing
contractual relationship between them. Therefore, it was incumbent upon Spouses Viloria to prove that CAI was equally at fault.

However, the records are devoid of any evidence by which CAIs alleged liability can be substantiated. Apart from their claim that CAI must be held liable for Magers
supposed fraud because Holiday Travel is CAIs agent, Spouses Viloria did not present evidence that CAI was a party or had contributed to Magers complained act
either by instructing or authorizing Holiday Travel and Mager to issue the said misrepresentation.
It may seem unjust at first glance that CAI would consider Spouses Viloria bound by the terms and conditions of the subject contracts, which Mager entered into with
them on CAIs behalf, in order to deny Spouses Vilorias request for a refund or Fernandos use of Lourdes ticket for the re-issuance of a new one, and
simultaneously claim that they are not bound by Magers supposed misrepresentation for purposes of avoiding Spouses Vilorias claim for damages and maintaining
the validity of the subject contracts. It may likewise be argued that CAI cannot deny liability as it benefited from Magers acts, which were performed in compliance
with Holiday Travels obligations as CAIs agent.

However, a persons vicarious liability is anchored on his possession of control, whether absolute or limited, on the tortfeasor. Without such control, there is nothing
which could justify extending the liability to a person other than the one who committed the tort. As this Court explained in Cangco v. Manila Railroad Co.:25

With respect to extra-contractual obligation arising from negligence, whether of act or omission, it is competent for the legislature to elect
and our Legislature has so elected to limit such liability to cases in which the person upon whom such an obligation is imposed is morally culpable or, on
the contrary, for reasons of public policy, to extend that liability, without regard to the lack of moral culpability, so as to
include responsibility for the negligence of those persons whose acts or omissions are imputable, by a legal fiction, to others who are in a
position to exercise an absolute or limited control over them. The legislature which adopted our Civil Code has elected to limit extra-contractual
liability with certain well-defined exceptions to cases in which moral culpability can be directly imputed to the persons to be charged. This moral
responsibility may consist in having failed to exercise due care in one's own acts, or in having failed to exercise due care in the selection and control of one's
agent or servants, or in the control of persons who, by reasons of their status, occupy a position of dependency with respect to the person made liable for
their conduct.26 (emphasis supplied)

It is incumbent upon Spouses Viloria to prove that CAI exercised control or supervision over Mager by preponderant evidence. The existence of control or supervision
cannot be presumed and CAI is under no obligation to prove its denial or nugatory assertion. Citing Belen v. Belen,27 this Court ruled in Jayme v. Apostol,28 that:

In Belen v. Belen, this Court ruled that it was enough for defendant to deny an alleged employment relationship. The defendant is under no obligation to prove the
negative averment. This Court said:

It is an old and well-settled rule of the courts that the burden of proving the action is upon the plaintiff, and that if he fails satisfactorily to show the facts upon
which he bases his claim, the defendant is under no obligation to prove his exceptions. This [rule] is in harmony with the provisions of Section 297 of the Code of
Civil Procedure holding that each party must prove his own affirmative allegations, etc. 29 (citations omitted)

Therefore, without a modicum of evidence that CAI exercised control over Holiday Travels employees or that CAI was equally at fault, no liability can be imposed on
CAI for Magers supposed misrepresentation.
III. Even on the assumption that CAI may be held liable for the acts of Mager, still, Spouses Viloria
are not entitled to a refund. Magers statement cannot be considered a causal fraud that would
justify the annulment of the subject contracts that would oblige CAI to indemnify Spouses Viloria
and return the money they paid for the subject tickets.

Article 1390, in relation to Article 1391 of the Civil Code, provides that if the consent of the contracting parties was obtained through fraud, the contract is
considered voidable and may be annulled within four (4) years from the time of the discovery of the fraud. Once a contract is annulled, the parties are obliged under
Article 1398 of the same Code to restore to each other the things subject matter of the contract, including their fruits and interest.

On the basis of the foregoing and given the allegation of Spouses Viloria that Fernandos consent to the subject contracts was supposedly secured by Mager through
fraudulent means, it is plainly apparent that their demand for a refund is tantamount to seeking for an annulment of the subject contracts on the ground of vitiated
consent.

Whether the subject contracts are annullable, this Court is required to determine whether Magers alleged misrepresentation constitutes causal fraud. Similar to the
dispute on the existence of an agency, whether fraud attended the execution of a contract is factual in nature and this Court, as discussed above, may scrutinize the
records if the findings of the CA are contrary to those of the RTC.

Under Article 1338 of the Civil Code, there is fraud when, through insidious words or machinations of one of the contracting parties, the other is induced to enter into
a contract which, without them, he would not have agreed to. In order that fraud may vitiate consent, it must be the causal ( dolo causante), not merely the
incidental (dolo incidente), inducement to the making of the contract. 30 In Samson v. Court of Appeals, 31 causal fraud was defined as a deception employed by one
party prior to or simultaneous to the contract in order to secure the consent of the other. 32

Also, fraud must be serious and its existence must be established by clear and convincing evidence. As ruled by this Court in Sierra v. Hon. Court of Appeals, et
al.,33 mere preponderance of evidence is not adequate:

Fraud must also be discounted, for according to the Civil Code:

Art. 1338. There is fraud when, through insidious words or machinations of one of the contracting parties, the other is induced to enter into a
contract which without them, he would not have agreed to.

Art. 1344. In order that fraud may make a contract voidable, it should be serious and should not have been employed by both contracting parties.
To quote Tolentino again, the misrepresentation constituting the fraud must be established by full, clear, and convincing evidence, and not merely by a
preponderance thereof. The deceit must be serious. The fraud is serious when it is sufficient to impress, or to lead an ordinarily prudent person into error;
that which cannot deceive a prudent person cannot be a ground for nullity. The circumstances of each case should be considered, taking into account the
personal conditions of the victim.34

After meticulously poring over the records, this Court finds that the fraud alleged by Spouses Viloria has not been satisfactorily established as causal in nature to
warrant the annulment of the subject contracts. In fact, Spouses Viloria failed to prove by clear and convincing evidence that Magers statement was fraudulent.
Specifically, Spouses Viloria failed to prove that (a) there were indeed available seats at Amtrak for a trip to New Jersey on August 13, 1997 at the time they spoke
with Mager on July 21, 1997; (b) Mager knew about this; and (c) that she purposely informed them otherwise.

This Court finds the only proof of Magers alleged fraud, which is Fernandos testimony that an Amtrak had assured him of the perennial availability of seats at
Amtrak, to be wanting. As CAI correctly pointed out and as Fernando admitted, it was possible that during the intervening period of three (3) weeks from the time
Fernando purchased the subject tickets to the time he talked to said Amtrak employee, other passengers may have cancelled their bookings and reservations with
Amtrak, making it possible for Amtrak to accommodate them. Indeed, the existence of fraud cannot be proved by mere speculations and conjectures. Fraud is never
lightly inferred; it is good faith that is. Under the Rules of Court, it is presumed that "a person is innocent of crime or wrong" and that "private transactions have been
fair and regular."35 Spouses Viloria failed to overcome this presumption.

IV. Assuming the contrary, Spouses Viloria are nevertheless deemed to have ratified the subject
contracts.

Even assuming that Magers representation is causal fraud, the subject contracts have been impliedly ratified when Spouses Viloria decided to exercise their right to
use the subject tickets for the purchase of new ones. Under Article 1392 of the Civil Code, ratification extinguishes the action to annul a voidable contract.

Ratification of a voidable contract is defined under Article 1393 of the Civil Code as follows:

Art. 1393. Ratification may be effected expressly or tacitly. It is understood that there is a tacit ratification if, with knowledge of the reason which renders the
contract voidable and such reason having ceased, the person who has a right to invoke it should execute an act which necessarily implies an intention to
waive his right.

Implied ratification may take diverse forms, such as by silence or acquiescence; by acts showing approval or adoption of the contract; or by acceptance and
retention of benefits flowing therefrom.36

Simultaneous with their demand for a refund on the ground of Fernandos vitiated consent, Spouses Viloria likewise asked for a refund based on CAIs supposed bad
faith in reneging on its undertaking to replace the subject tickets with a round trip ticket from Manila to Los Angeles.
In doing so, Spouses Viloria are actually asking for a rescission of the subject contracts based on contractual breach. Resolution, the action referred to in Article
1191, is based on the defendants breach of faith, a violation of the reciprocity between the parties 37 and in Solar Harvest, Inc. v. Davao Corrugated Carton
Corporation,38 this Court ruled that a claim for a reimbursement in view of the other partys failure to comply with his obligations under the contract is one for
rescission or resolution.

However, annulment under Article 1390 of the Civil Code and rescission under Article 1191 are two (2) inconsistent remedies. In resolution, all the elements to make
the contract valid are present; in annulment, one of the essential elements to a formation of a contract, which is consent, is absent. In resolution, the defect is in the
consummation stage of the contract when the parties are in the process of performing their respective obligations; in annulment, the defect is already present at the
time of the negotiation and perfection stages of the contract. Accordingly, by pursuing the remedy of rescission under Article 1191, the Vilorias had impliedly
admitted the validity of the subject contracts, forfeiting their right to demand their annulment. A party cannot rely on the contract and claim rights or obligations
under it and at the same time impugn its existence or validity. Indeed, litigants are enjoined from taking inconsistent positions. 39

V. Contracts cannot be rescinded for a slight or casual breach.

CAI cannot insist on the non-transferability of the subject tickets.

Considering that the subject contracts are not annullable on the ground of vitiated consent, the next question is: Do Spouses Viloria have the right to rescind the
contract on the ground of CAIs supposed breach of its undertaking to issue new tickets upon surrender of the subject tickets?

Article 1191, as presently worded, states:

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 fulfillment, if the latter should become impossible.

The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period.

This is understood to be without prejudice to the rights of third persons who have acquired the thing, in accordance with articles 1385 and 1388 and the
Mortgage Law.

According to Spouses Viloria, CAI acted in bad faith and breached the subject contracts when it refused to apply the value of Lourdes ticket for Fernandos purchase
of a round trip ticket to Los Angeles and in requiring him to pay an amount higher than the price fixed by other airline companies.
In its March 24, 1998 letter, CAI stated that non-refundable tickets may be used as a form of payment toward the purchase of another Continental ticket for $75.00,
per ticket, reissue fee ($50.00, per ticket, for tickets purchased prior to October 30, 1997).

Clearly, there is nothing in the above-quoted section of CAIs letter from which the restriction on the non-transferability of the subject tickets can be inferred. In fact,
the words used by CAI in its letter supports the position of Spouses Viloria, that each of them can use the ticket under their name for the purchase of new tickets
whether for themselves or for some other person.

Moreover, as CAI admitted, it was only when Fernando had expressed his interest to use the subject tickets for the purchase of a round trip ticket between Manila
and Los Angeles that he was informed that he cannot use the ticket in Lourdes name as payment.

Contrary to CAIs claim, that the subject tickets are non-transferable cannot be implied from a plain reading of the provision printed on the subject tickets stating
that [t]o the extent not in conflict with the foregoing carriage and other services performed by each carrier are subject to: (a) provisions contained in this ticket, x x
x (iii) carriers conditions of carriage and related regulations which are made part hereof (and are available on application at the offices of carrier) x x x. As a
common carrier whose business is imbued with public interest, the exercise of extraordinary diligence requires CAI to inform Spouses Viloria, or all of its passengers
for that matter, of all the terms and conditions governing their contract of carriage. CAI is proscribed from taking advantage of any ambiguity in the contract of
carriage to impute knowledge on its passengers of and demand compliance with a certain condition or undertaking that is not clearly stipulated. Since the
prohibition on transferability is not written on the face of the subject tickets and CAI failed to inform Spouses Viloria thereof, CAI cannot refuse to apply the value of
Lourdes ticket as payment for Fernandos purchase of a new ticket.

CAIs refusal to accept Lourdes ticket for the purchase of a new ticket for Fernando is only a casual
breach.

Nonetheless, the right to rescind a contract for non-performance of its stipulations is not absolute. The general rule is that rescission of a contract will not be
permitted for a slight or casual breach, but only for such substantial and fundamental violations as would defeat the very object of the parties in making the
agreement.40 Whether a breach is substantial is largely determined by the attendant circumstances. 41

While CAIs refusal to allow Fernando to use the value of Lourdes ticket as payment for the purchase of a new ticket is unjustified as the non-transferability of the
subject tickets was not clearly stipulated, it cannot, however be considered substantial. The endorsability of the subject tickets is not an essential part of the
underlying contracts and CAIs failure to comply is not essential to its fulfillment of its undertaking to issue new tickets upon Spouses Vilorias surrender of the
subject tickets. This Court takes note of CAIs willingness to perform its principal obligation and this is to apply the price of the ticket in Fernandos name to the price
of the round trip ticket between Manila and Los Angeles. CAI was likewise willing to accept the ticket in Lourdes name as full or partial payment as the case may be
for the purchase of any ticket, albeit under her name and for her exclusive use. In other words, CAIs willingness to comply with its undertaking under its March 24,
1998 cannot be doubted, albeit tainted with its erroneous insistence that Lourdes ticket is non-transferable.
Moreover, Spouses Vilorias demand for rescission cannot prosper as CAI cannot be solely faulted for the fact that their agreement failed to consummate and no new
ticket was issued to Fernando. Spouses Viloria have no right to insist that a single round trip ticket between Manila and Los Angeles should be priced at around
$856.00 and refuse to pay the difference between the price of the subject tickets and the amount fixed by CAI. The petitioners failed to allege, much less prove, that
CAI had obliged itself to issue to them tickets for any flight anywhere in the world upon their surrender of the subject tickets. In its March 24, 1998 letter, it was
clearly stated that [n]on-refundable tickets may be used as a form of payment toward the purchase of another Continental ticket 42 and there is nothing in it
suggesting that CAI had obliged itself to protect Spouses Viloria from any fluctuation in the prices of tickets or that the surrender of the subject tickets will be
considered as full payment for any ticket that the petitioners intend to buy regardless of actual price and destination. The CA was correct in holding that it is CAIs
right and exclusive prerogative to fix the prices for its services and it may not be compelled to observe and maintain the prices of other airline companies. 43

The conflict as to the endorsability of the subject tickets is an altogether different matter, which does not preclude CAI from fixing the price of a round trip ticket
between Manila and Los Angeles in an amount it deems proper and which does not provide Spouses Viloria an excuse not to pay such price, albeit subject to a
reduction coming from the value of the subject tickets. It cannot be denied that Spouses Viloria had the concomitant obligation to pay whatever is not covered by
the value of the subject tickets whether or not the subject tickets are transferable or not.

There is also no showing that Spouses Viloria were discriminated against in bad faith by being charged with a higher rate. The only evidence the petitioners
presented to prove that the price of a round trip ticket between Manila and Los Angeles at that time was only $856.00 is a newspaper advertisement for another
airline company, which is inadmissible for being hearsay evidence, twice removed. Newspaper clippings are hearsay if they were offered for the purpose of proving
the truth of the matter alleged. As ruled in Feria v. Court of Appeals,:44

[N]ewspaper articles amount to hearsay evidence, twice removed and are therefore not only inadmissible but without any probative value at all whether
objected to or not, unless offered for a purpose other than proving the truth of the matter asserted. In this case, the news article is admissible only as
evidence that such publication does exist with the tenor of the news therein stated. 45(citations omitted)

The records of this case demonstrate that both parties were equally in default; hence, none of them can seek judicial redress for the cancellation or resolution of the
subject contracts and they are therefore bound to their respective obligations thereunder. As the 1 st sentence of Article 1192 provides:

Art. 1192. In case both parties have committed a breach of the obligation, the liability of the first infractor shall be equitably tempered by
the courts. If it cannot be determined which of the parties first violated the contract, the same shall be deemed extinguished, and each shall bear his own
damages. (emphasis supplied)

Therefore, CAIs liability for damages for its refusal to accept Lourdes ticket for the purchase of Fernandos round trip ticket is offset by Spouses Vilorias liability for
their refusal to pay the amount, which is not covered by the subject tickets. Moreover, the contract between them remains, hence, CAI is duty bound to issue new
tickets for a destination chosen by Spouses Viloria upon their surrender of the subject tickets and Spouses Viloria are obliged to pay whatever amount is not covered
by the value of the subject tickets.
This Court made a similar ruling in Central Bank of the Philippines v. Court of Appeals.46 Thus:

Since both parties were in default in the performance of their respective reciprocal obligations, that is, Island Savings Bank failed to comply with its
obligation to furnish the entire loan and Sulpicio M. Tolentino failed to comply with his obligation to pay his P17,000.00 debt within 3 years as stipulated, they
are both liable for damages.

Article 1192 of the Civil Code provides that in case both parties have committed a breach of their reciprocal obligations, the liability of the first infractor shall
be equitably tempered by the courts. WE rule that the liability of Island Savings Bank for damages in not furnishing the entire loan is offset by the liability of
Sulpicio M. Tolentino for damages, in the form of penalties and surcharges, for not paying his overdue P17,000.00 debt. x x x.47

Another consideration that militates against the propriety of holding CAI liable for moral damages is the absence of a showing that the latter acted
fraudulently and in bad faith. Article 2220 of the Civil Code requires evidence of bad faith and fraud and moral damages are generally not recoverable in culpa
contractual except when bad faith had been proven. 48The award of exemplary damages is likewise not warranted. Apart from the requirement that the defendant
acted in a wanton, oppressive and malevolent manner, the claimant must prove his entitlement to moral damages. WHEREFORE, premises considered, the instant
Petition is DENIED. SO ORDERED.

STARBRIGHT SALES ENTERPRISES, INC. vs. PHILIPPINE REALTY CORPORATION, MSGR. DOMINGO A. CIRILOS, TROPICANA PROPERTIES AND
DEVELOPMENT CORPORATION and STANDARD REALTY

On April 17, 1988 Ramon Licup wrote Msgr. Domingo A. Cirilos, offering to buy three contiguous parcels of land in Paraaque that The Holy See and Philippine Realty
Corporation (PRC) owned for P1,240.00 per square meter. Licup accepted the responsibility for removing the illegal settlers on the land and enclosed a check
for P100,000.00 to close the transaction. [1] He undertook to pay the balance of the purchase price upon presentation of the title for transfer and once the property
has been cleared of its occupants.

Msgr. Cirilos, representing The Holy See and PRC, signed his name on the conforme portion of the letter and accepted the check. But the check could not be
encashed due to Licups stop-order payment. Licup wrote Msgr. Cirilos on April 26, 1988, requesting that the titles to the land be instead transferred to petitioner
Starbright Sales Enterprises, Inc. (SSE). He enclosed a new check for the same amount. SSEs representatives, Mr. and Mrs. Cu, did not sign the letter.

On November 29, 1988 Msgr. Cirilos wrote SSE, requesting it to remove the occupants on the property and, should it decide not to do this, Msgr. Cirilos would return
to it the P100,000.00 that he received. On January 24, 1989 SSE replied with an updated proposal. [2] It would be willing to comply with Msgr. Cirilos condition
provided the purchase price is lowered to P1,150.00 per square meter.
On January 26, 1989 Msgr. Cirilos wrote back, rejecting the updated proposal. He said that other buyers were willing to acquire the property on an as is, where is
basis at P1,400.00 per square meter. He gave SSE seven days within which to buy the property at P1,400.00 per square meter, otherwise, Msgr. Cirilos would take it
that SSE has lost interest in the same. He enclosed a check for P100,000.00 in his letter as refund of what he earlier received.

On February 4, 1989 SSE wrote Msgr. Cirilos that they already had a perfected contract of sale in the April 17, 1988 letter which he signed and that, consequently, he
could no longer impose amendments such as the removal of the informal settlers at the buyers expense and the increase in the purchase price.

SSE claimed that it got no reply from Msgr. Cirilos and that the next thing they knew, the land had been sold to Tropicana Properties on March 30, 1989. On May 15,
1989 SSE demanded rescission of that sale. Meanwhile, on August 4, 1989 Tropicana Properties sold the three parcels of land to Standard Realty.

Its demand for rescission unheeded, SSE filed a complaint for annulment of sale and reconveyance with damages before the Regional Trial Court (RTC) of Makati,
Branch 61, against The Holy See, PRC, Msgr. Cirilos, and Tropicana Properties in Civil Case 90-183. SSE amended its complaint on February 24, 1992, impleading
Standard Realty as additional defendant.

The Holy See sought dismissal of the case against it, claiming that as a foreign government, it cannot be sued without its consent. The RTC held otherwise but, on
December 1, 1994,[3] the Court reversed the ruling of the RTC and ordered the case against The Holy See dismissed. By Order of January 26, 1996 the case was
transferred to the Paraaque RTC, Branch 258.

SSE alleged that Licups original letter of April 17, 1988 to Msgr. Cirilos constituted a perfected contract. Licup even gave an earnest money of P100,000.00 to close
the transaction. His offer to rid the land of its occupants was a mere gesture of accommodation if only to expedite the transfer of its title. [4] Further, SSE claimed that,
in representing The Holy See and PRC, Msgr. Cirilos acted in bad faith when he set the price of the property at P1,400.00 per square meter when in truth, the
property was sold to Tropicana Properties for only P760.68 per square meter.

Msgr. Cirilos maintained, on the other hand, that based on their exchange of letters, no contract of sale was perfected between SSE and the parties he
represented. And, only after the negotiations between them fell through did he sell the land to Tropicana Properties.

In its Decision of February 14, 2000, the Paraaque RTC treated the April 17, 1988 letter between Licum and Msgr. Cirilos as a perfected contract of sale between the
parties. Msgr. Cirilos attempted to change the terms of contract and return SSEs initial deposit but the parties reached no agreement regarding such change. Since
such agreement was wanting, the original terms provided in the April 17, 1988 letter continued to bind the parties.

On appeal to the Court of Appeals (CA), the latter rendered judgment on November 10, 2006, [5] reversing the Paraaque RTC decision. The CA held that no perfected
contract can be gleaned from the April 17, 1988 letter that SSE had relied on. Indeed, the subsequent exchange of letters between SSE and Msgr. Cirilos show that
the parties were grappling with the terms of the sale. Msgr. Cirilos made no unconditional acceptance that would give rise to a perfected contract.

As to the P100,000.00 given to Msgr. Cirilos, the CA considered it an option money that secured for SSE only the privilege to buy the property even if Licup called it a
deposit. The CA denied SSEs motion for reconsideration on May 2, 2007.

The Issue Presented


The only issue in this case is whether or not the CA erred in holding that no perfected contract of sale existed between SSE and the land owners, represented by
Msgr. Cirilos.

The Courts Ruling

Three elements are needed to create a perfected contract: 1) the consent of the contracting parties; (2) an object certain which is the subject matter of the contract;
and (3) the cause of the obligation which is established. [6] Under the law on sales, a contract of sale is perfected when the seller, obligates himself, for a price
certain, to deliver and to transfer ownership of a thing or right to the buyer, over which the latter agrees. [7] From that moment, the parties may demand reciprocal
performance.

The Court believes that the April 17, 1988 letter between Licup and Msgr. Cirilos, the representative of the propertys owners, constituted a perfected contract. When
Msgr. Cirilos affixed his signature on that letter, he expressed his conformity to the terms of Licups offer appearing on it. There was meeting of the minds as to the
object and consideration of the contract.

But when Licup ordered a stop-payment on his deposit and proposed in his April 26, 1988 letter to Msgr. Cirilos that the property be instead transferred to SSE, a
subjective novation took place.

A subjective novation results through substitution of the person of the debtor or through subrogation of a third person to the rights of the creditor. To accomplish a
subjective novation through change in the person of the debtor, the old debtor needs to be expressly released from the obligation and the third person or new
debtor needs to assume his place in the relation. [8]

Novation serves two functions one is to extinguish an existing obligation, the other to substitute a new one in its place requiring concurrence of four requisites: 1) a
previous valid obligation; 2) an agreement of all parties concerned to a new contract; 3) the extinguishment of the old obligation; and 4) the birth of a valid new
obligation.[9]

Notably, Licup and Msgr. Cirilos affixed their signatures on the original agreement embodied in Licups letter of April 26, 1988. No similar letter agreement can be
found between SSE and Msgr. Cirilos.

The proposed substitution of Licup by SSE opened the negotiation stage for a new contract of sale as between SSE and the owners. The succeeding exchange of
letters between Mr. Stephen Cu, SSEs representative, and Msgr. Cirilos attests to an unfinished negotiation. Msgr. Cirilos referred to his discussion with SSE regarding
the purchase as a pending transaction.[10]

Cu, on the other hand, regarded SSEs first letter to Msgr. Cirilos as an updated proposal. [11] This proposal took up two issues: which party would undertake to evict
the occupants on the property and how much must the consideration be for the property. These are clear indications that there was no meeting of the minds
between the parties. As it turned out, the parties reached no consensus regarding these issues, thus producing no perfected sale between them.

Parenthetically, Msgr. Cirilos did not act in bad faith when he sold the property to Tropicana even if it was for a lesser consideration. More than a month had passed
since the last communication between the parties on February 4, 1989. It is not improbable for prospective buyers to offer to buy the property during that time.
The P100,000.00 that was given to Msgr. Cirilos as deposit cannot be considered as earnest money. Where the parties merely exchanged offers and counter-offers,
no contract is perfected since they did not yet give their consent to such offers. [12] Earnest money applies to a perfected sale.

SSE cannot revert to the original terms stated in Licups letter to Msgr. Cirilos dated April 17, 1988 since it was not privy to such contract. The parties to it were Licup
and Msgr. Cirilos. Under the principle of relativity of contracts, contracts can only bind the parties who entered into it. It cannot favor or prejudice a third person.
[13]
Petitioner SSE cannot, therefore, impose the terms Licup stated in his April 17, 1988 letter upon the owners.

WHEREFORE, the Court DISMISSES the petition and AFFIRMS the Court of Appeals Decision dated November 10, 2006 in CA-G.R. CV 67366. SO ORDERED.