*WARRANTY AGAINST EVICTION

SECOND DIVISION

G.R. No. 182280 July 29, 2013

TERESA C. AGUILAR, CESAR D. RAAGAS, VILLAMOR VILLEGAS, and THE REGISTER OF DEEDS FOR THE CITY
OF MAKATI,* Petitioners,

vs.

MICHAEL J. O'PALLICK, Respondent.

DECISION

DEL CASTILLO, J.:

"The principle that a person cannot be prejudiced by a ruling rendered in an action or proceeding in
which he was not made a party conforms to the constitutional guarantee of due process of law."

This Petition for Review on Certiorari assails the October 25, 2007 Decision of the Court of Appeals (CA)
in CA-G.R. CV No. 83027 which set aside the December 8, 2003 Order of the Regional Trial Court, Makati
City, Branch 61, in Civil Case No. 01-572, as well as the CA Resolution dated March 12, 2008 denying
petitioners’ Motion for Reconsideration.

Factual Antecedents

On March 20, 1995, a Contract To Sell was executed between Primetown Property Group, Inc. (PPGI) on
the one hand, and Reynaldo Poblete and Tomas Villanueva (Poblete and Villanueva) on the other, over
Unit 3301 of the Makati Prime Citadel Condominium in Makati City (the unit), and covered by
Condominium Certificate of Title No. 25156 (CCT No. 25156). Poblete and Villanueva in turn executed in
favor of herein respondent Michael J. O’Pallick (O’Pallick) a Deed of Assignment covering the unit. In
October 1995, PPGI issued a Deed of Sale in favor of O’Pallick after the latter paid the purchase price in
full.

Although O’Pallick took possession of the unit, the Deed of Sale in his favor was never registered nor
annotated on CCT No. 25156.

Meanwhile, in a case between PPGI and herein petitioner Teresa C. Aguilar (Aguilar) filed in the Housing
and Land Use Regulatory Board (HLURB), Aguilar was able to obtain a final and executory Decision in her
favor, and as a result, Sheriff Cesar D. Raagas (Raagas) of the Regional Trial Court (RTC) of Makati City,
caused several properties of PPGI to be levied, including the herein subject condominium unit. The sale
at public auction was scheduled to be held on March 30, 2000. Raagas issued a Sheriff’s Notice of Sale
dated February 17, 2000, posted it, and sent a copy thereof to PPGI. The notice was likewise published.
But before the scheduled auction sale, or on March 21, 2000, O’Pallick filed an Affidavit of Third-Party
Claim. Raagas conducted the public auction sale on March 30, 2000, where Aguilar was declared the
highest bidder for the subject unit. A certificate of sale was issued in her favor.

Because PPGI failed to redeem the property, a final Deed of Sale was issued in favor of Aguilar on April
20, 2001. CCT No. 25156 was cancelled, and CCT No. 74777 was issued in her name. Aguilar moved for
the issuance of a Writ of Possession, and in a December 21, 2001 Order, the HLURB granted the motion.

On April 6, 2001, O’Pallick instituted Civil Case No. 01-572 with the RTC Makati for quieting of title and to
set aside the levy on execution of the subject unit, to annul the certificate of sale issued in favor of
Aguilar, as well as to recover the unit. In his Complaint against Aguilar and Raagas, O’Pallick claimed that
when PPGI executed a Deed of Sale in his favor, all rights and interests over the unit were transferred to
him, and the subsequent levy and sale thereof to Aguilar created a cloud on his title. In addition,
O’Pallick prayed for moral damages, attorney’s fees and costs of litigation.

Petitioners sought the dismissal of the case, arguing essentially that when the levy and sale on execution
were conducted, PPGI remained the registered owner of the unit, and the title covering the same
remained clean and free of annotations indicating claims by third persons, including O’Pallick; and that
O’Pallick’s unregistered Deed of Sale cannot bind and prejudice third parties, including Aguilar.

Eventually, the case was re-raffled to Branch 61 of the RTC Makati. O’Pallick likewise filed an Amended
Complaint, impleading Villamor Villegas (Villegas) and the Office of the Makati Register of Deeds, and
alleging further that at the time of the levy, Aguilar knew that PPGI no longer owned the unit, as she had
been informed of such fact by PPGI during the proceedings in the HLURB case; that Aguilar obtained her
title through unlawful means; that his eviction from the premises was illegal; that he suffered actual
damages in the amount of ₱4,953,410.00; that as a result of the eviction of his tenant, he suffered
unrealized monthly rental income in the amount of ₱30,000.00; and that he should be awarded
exemplary damages. O’Pallick also prayed for the cancellation of Aguilar’s CCT No. 74777.

During the proceedings, petitioners filed a Motion to Dismiss on the ground that the trial court had no
jurisdiction over the subject matter of the case; and that since the subject matter was a condominium
unit, the HLURB possessed exclusive jurisdiction over the dispute. A Motion for Preliminary Hearing on
the Affirmative Defenses was likewise filed. Despite Opposition, the motion was granted, and a hearing
thereon was conducted.

Ruling of the Regional Trial Court

On December 8, 2003, the trial court issued the assailed Order dismissing Civil Case No. 01-572. The trial
court held that it had no jurisdiction to annul the levy and sale on execution ordered by the HLURB, an
agency under the Office of the President. The trial court concluded that because the Office of the
President is a co-equal body, it had no power to interfere with the latter’s decisions nor could it issue
injunctive relief to enjoin the execution of decisions of any of its administrative agencies; the case for
quieting of title or reconveyance constitutes such prohibited interference. The dispositive portion of the
Order reads:
WHEREFORE, premises considered, the court finds for the defendants and hereby DISMISSES the case.

SO ORDERED.

O’Pallick’s Motion for Reconsideration was denied, thus he interposed an appeal with the CA.

Ruling of the Court of Appeals

In CA-G.R. CV No. 83027, the CA sustained O’Pallick’s argument that since he was not a party to the
HLURB case, he could not be bound by its disposition as well as the incidents and actions taken therein;
thus, he had the right to file a separate action to protect and vindicate his claim. It held that since the
execution sale proceeded despite O’Pallick’s third-party claim, the latter had no other recourse but to file
an independent vindicatory action to prove his claim. Citing the Court’s pronouncement in The
Consolidated Bank & Trust Corporation (Solidbank) v. Court of Appeals, the appellate court held that "the
issue as to whether or not there was illegal levy on properties on execution can be threshed out in a
separate action." The appellate court likewise echoed Spouses Estonina v. Court of Appeals, stating that
the filing of an independent action with a court other than that which issued the Writ of Execution may
be allowed where the plaintiff in the independent action is a stranger to the case where the Writ of
Execution was issued. The CA thus ordered the remand of the case to the RTC, viz:

WHEREFORE, the appealed Order of Branch 61, Regional Trial Court of Makati City dated 8 December
2003, is hereby SET ASIDE. ACCORDINGLY, the instant case is REMANDED to said court for trial on the
merits.

SO ORDERED.

Unable to obtain a reconsideration of the appellate court’s Decision, petitioners filed the present
Petition.

Issues

Petitioners argue that the CA erred in ruling that:

RESPONDENT WAS NOT A PARTY TO THE PROCEEDINGS BETWEEN AGUILAR AND PPGI.

THE AFFIDAVIT OF THIRD-PARTY CLAIM WAS SERVED BY RESPONDENT ON PETITIONER AGUILAR.

THERE WAS ILLEGAL LEVY ON THE PROPERTY UNDER EXECUTION, THUS THE SAME MAY BE THRESHED
OUT IN A SEPARATE ACTION.

THE ESTONINA CASE APPLIES TO THE PRESENT CASE.

THE CASE SHOULD BE REMANDED TO BRANCH 61, RTC MAKATI FOR TRIAL ON THE MERITS.

Petitioners’ Arguments
Petitioners argue that Aguilar’s title had been the subject of final determination in G.R. No. 157801,
where this Court held that Aguilar is the absolute owner of the unit, and is entitled to a writ of
possession over the same.

Petitioners add that contrary to O’Pallick’s claim, Aguilar was never served a copy of his third-party claim,
and came to know of it only on October 11, 2001 while following up on the consolidation of her title.

Petitioners also argue that because PPGI remained the registered owner of the unit and title was never
transferred to O’Pallick, there was no irregularity in the conduct of the levy and execution sale thereof,
as well as the registration thereof and the subsequent cancellation of CCT No. 25156 and issuance of CCT
No. 74777 in Aguilar’s name.

Petitioners further contend that a remand of the case is unnecessary on account of the ruling of this
Court in G.R. No. 157801, which declared Aguilar as the absolute owner of the subject unit; thus,
remanding the case for further proceedings would only render the final and executory Decision in G.R.
No. 157801 nugatory. Besides, the trial court has no power over the HLURB because the latter is a quasi-
judicial agency co-equal with the former.

Finally, petitioners claim that O’Pallick’s proper recourse, if there be any, is to go after PPGI, presumably
to sue for damages.

Petitioners thus pray that the CA Decision be reversed, and that the December 8, 2003 Order of the
Makati RTC be accordingly reinstated.

Respondent’s Arguments

Respondent, on the other hand, insists that petitioners committed procedural lapses with regard to the
Petition, which lacks an affidavit of proof of service and a certification against non-forum shopping,
which warrant dismissal.

Respondent further supports the ruling of the CA that the case for quieting of title must subsist and he
must be given the opportunity to be heard, since he was not impleaded in the HLURB case where his
claim over the subject unit could have been litigated.

As regards the disposition of this Court in G.R. No. 157801, respondent cites the Court’s pronouncement
therein that the issue of whether title or ownership had been wrongfully vested in Aguilar as a result of
her purchase of the subject unit at the execution sale may be raised in a separate proceeding; that is,
that Aguilar’s title may be questioned precisely in a proceeding such as one for quieting of title.

Respondent further argues that Aguilar’s claim that she was not served a copy of his third-party claim,
and came to know about it only on October 11, 2001 while following up on the consolidation of her title,
is a matter best resolved after trial on the merits in Civil Case No. 01-572.

Finally, respondent insists that Aguilar is not a buyer in good faith.

Our Ruling
The Petition must be denied.

The Court finds it unnecessary to address the procedural issues raised by the respondent, considering its
resolve to deny the Petition for lack of merit. For this case, we shall afford the party litigants the amplest
opportunity for the proper and just determination of their cause, free from the constraints of
technicalities.

It is true, as O’Pallick claims, that in G.R. No. 157801 the Court did not foreclose the possibility that a
separate action questioning Aguilar’s title may be instituted, either by PPGI or anyone claiming a right to
the subject condominium unit. Thus, we held:

Fourth. The buyer in a foreclosure sale becomes the absolute owner of the property purchased if it is not
redeemed during the period of one year after the registration of the sale. The issuance of the writ of
possession had become ministerial on the part of HLURB since the respondent Aguilar had sufficiently
shown her proof of title over the subject condominium. Being the registered owner of the condominium
unit, she is entitled to its possession. The case at bar is akin to foreclosure proceedings where the
issuance of a writ of possession becomes a ministerial act of the court after title to the property has
been consolidated in the mortgage.

It must be stressed that the Register of Deeds had already cancelled CCT No. 25156 and issued CCT No.
74777 in the name of the respondent. Thus, the argument of the petitioner [PPGI] that the title or
ownership had been wrongfully vested with the respondent is a collateral attack on the latter’s title
which is more appropriate in a direct proceeding. (Emphasis and words in parentheses supplied)

Thus, contrary to petitioners’ claim, this Court’s pronouncement in G.R. No. 157801 can in no way
constitute a final determination of O’Pallick’s claim. In his Amended Complaint, O’Pallick averred that
Aguilar obtained her title through unlawful means. More particularly, he prayed for the nullification of
Aguilar’s CCT No. 74777. Clearly, therefore, although captioned as one for Quieting of Title, O’Pallick’s
suit is actually a suit for annulment of title. Basic is the rule that

"the cause of action in a Complaint is not determined by the designation given to it by the parties. The
allegations in the body of the Complaint define or describe it. The designation or caption is not
controlling more than the allegations in the Complaint. It is not even an indispensable part of the
Complaint."

"The principle that a person cannot be prejudiced by a ruling rendered in an action or proceeding in
which he was not made a party conforms to the constitutional guarantee of due process of law." Thus,
we agree with the CA’s pronouncement that since respondent was not impleaded in the HLURB case, he
could not be bound by the decision rendered therein. Because he was not impleaded in said case; he
was not given the opportunity to present his case therein. But, more than the fact that O’Pallick was not
impleaded in the HLURB case, he had the right to vindicate his claim in a separate action, as in this case.
As a prior purchaser of the very same condominium unit, he had the right to be heard on his claim.
Finally, the CA’s application of the Consolidated Bank & Trust Corporation and Spouses Estonina cases are
likewise well-taken, and may be viewed in light of the fact that what O’Pallick instituted was a case for
annulment of title, which could remain pending independently of the proceedings in the HLURB.

WHEREFORE, premises considered, the Petition is DENIED. The assailed October 25, 2007 Decision and
the March 12, 2008 Resolution of the Court of Appeals in CA-G.R. CV No. 83027 are AFFIRMED.

SO ORDERED.
*WARRANTY AGAINST EVICTION
SECOND DIVISION

G.R. No. 173441 December 3, 2009

HEIRS OF SOFIA QUIRONG, Represented by ROMEO P. QUIRONG, Petitioners,

vs.

DEVELOPMENT BANK OF THE PHILIPPINES, Respondent.

DECISION

ABAD, J.:

This case is about the prescriptive period of an action for rescission of a contract of sale where the buyer
is evicted from the thing sold by a subsequent judicial order in favor of a third party.

The Facts and the Case

The facts are not disputed. When the late Emilio Dalope died, he left a 589-square meter untitled lot in
Sta. Barbara, Pangasinan, to his wife, Felisa Dalope (Felisa) and their nine children, one of whom was
Rosa Dalope-Funcion. To enable Rosa and her husband Antonio Funcion (the Funcions) get a loan from
respondent Development Bank of the Philippines (DBP), Felisa sold the whole lot to the Funcions. With
the deed of sale in their favor and the tax declaration transferred in their names, the Funcions
mortgaged the lot with the DBP.

On February 12, 1979, after the Funcions failed to pay their loan, the DBP foreclosed the mortgage on
the lot and consolidated ownership in its name on June 17, 1981.

Four years later or on September 20, 1983 the DBP conditionally sold the lot to Sofia Quirong for the
price of P78,000.00. In their contract of sale, Sofia Quirong waived any warranty against eviction. The
contract provided that the DBP did not guarantee possession of the property and that it would not be
liable for any lien or encumbrance on the same. Quirong gave a down payment of P14,000.00.

Two months after that sale or on November 28, 1983 Felisa and her eight children (collectively, the
Dalopes) filed an action for partition and declaration of nullity of documents with damages against the
DBP and the Funcions before the Regional Trial Court (RTC) of Dagupan City, Branch 42, in Civil Case D-
7159.

On December 27, 1984, notwithstanding the suit, the DBP executed a deed of absolute sale of the
subject lot in Sofia Quirong’s favor. The deed of sale carried substantially the same waiver of warranty
against eviction and of any adverse lien or encumbrance.

On May 11, 1985, Sofia Quirong having since died, her heirs (petitioner Quirong heirs) filed an answer in
intervention in Civil Case D-7159 in which they asked the RTC to award the lot to them and, should it
instead be given to the Dalopes, to allow the Quirong heirs to recover the lot’s value from the DBP. But,
because the heirs failed to file a formal offer of evidence, the trial court did not rule on the merits of
their claim to the lot and, alternatively, to relief from the DBP.

On December 16, 1992 the RTC rendered a decision, declaring the DBP’s sale to Sofia Quirong valid only
with respect to the shares of Felisa and Rosa Funcion in the property. It declared Felisa’s sale to the
Funcions, the latter’s mortgage to the DBP, and the latter’s sale to Sofia Quirong void insofar as they
prejudiced the shares of the eight other children of Emilio and Felisa who were each entitled to a tenth
share in the subject lot.

The DBP received a copy of the decision on January 13, 1993 and, therefore, it had until January 28, 1993
within which to file a motion for its reconsideration or a notice of appeal from it. But the DBP failed to
appeal supposedly because of excusable negligence and the withdrawal of its previous counsel of record.

When the RTC judgment became final and the court issued a writ of execution, the DBP resisted the writ
by motion to quash, claiming that the decision could not be enforced because it failed to state by metes
and bounds the particular portions of the lot that would be assigned to the different parties in the case.
The RTC denied the DBP’s motion, prompting the latter to seek recourse by special civil action of
certiorari directly with this Court in G.R. 116575, Development Bank of the Philippines v. Fontanilla. On
September 7, 1994 the Court issued a resolution, denying the petition for failure of the DBP to pay the
prescribed fees. This resolution became final and executory on January 17, 1995.

On June 10, 1998 the Quirong heirs filed the present action against the DBP before the RTC of Dagupan
City, Branch 44, in Civil Case CV-98-02399-D for rescission of the contract of sale between Sofia Quirong,
their predecessor, and the DBP and praying for the reimbursement of the price of P78,000.00 that she
paid the bank plus damages. The heirs alleged that they were entitled to the rescission of the sale
because the decision in Civil Case D-7159 stripped them of nearly the whole of the lot that Sofia
Quirong, their predecessor, bought from the DBP. The DBP filed a motion to dismiss the action on ground
of prescription and res judicata but the RTC denied their motion.

On June 14, 2004, after hearing the case, the RTC rendered a decision, rescinding the sale between Sofia
Quirong and the DBP and ordering the latter to return to the Quirong heirs the P78,000.00 Sofia Quirong
paid the bank. On appeal by the DBP, the Court of Appeals (CA) reversed the RTC decision and dismissed
the heirs’ action on the ground of prescription. The CA concluded that, reckoned from the finality of the
December 16, 1992 decision in Civil Case D-7159, the complaint filed on June 10, 1998 was already
barred by the four-year prescriptive period under Article 1389 of the Civil Code. The Quirong heirs filed a
motion for reconsideration of the decision but the appellate court denied it, thus, this petition.

The Issues Presented

The issues presented in this case are:

1. Whether or not the Quirong heirs’ action for rescission of respondent DBP’s sale of the subject
property to Sofia Quirong was already barred by prescription; and
2. In the negative, whether or not the heirs of Quirong were entitled to the rescission of the DBP’s sale of
the subject lot to the late Sofia Quirong as a consequence of her heirs having been evicted from it.

The Court’s Rulings

The CA held that the Quirong heirs’ action for rescission of the sale between DBP and their predecessor,
Sofia Quirong, is barred by prescription reckoned from the date of finality of the December 16, 1992 RTC
decision in Civil Case D-7159 and applying the prescriptive period of four years set by Article 1389 of the
Civil Code.

Unfortunately, the CA did not state in its decision the date when the RTC decision in Civil Case D-7159
became final and executory, which decision resulted in the Quirong heirs’ loss of 80% of the lot that the
DBP sold to Sofia Quirong. Petitioner heirs claim that the prescriptive period should be reckoned from
January 17, 1995, the date this Court’s resolution in G.R. 116575 became final and executory.

But the incident before this Court in G.R. 116575 did not deal with the merit of the RTC decision in Civil
Case D-7159. That decision became final and executory on January 28, 1993 when the DBP failed to
appeal from it within the time set for such appeal. The incident before this Court in G.R. 116575 involved
the issuance of the writ of execution in that case. The DBP contested such issuance supposedly because
the dispositive portion of the decision failed to specify details that were needed for its implementation.
Since this incident did not affect the finality of the decision in Civil Case D-7159, the prescriptive period
remained to be reckoned from January 28, 1993, the date of such finality.

The next question that needs to be resolved is the applicable period of prescription. The DBP claims that
it should be four years as provided under Article 1389 of the Civil Code. Article 1389 provides that "the
action to claim rescission must be commenced within four years." The Quirong heirs, on the other hand,
claim that it should be 10 years as provided under Article 1144 which states that actions "upon a written
contract" must be brought "within 10 years from the date the right of action accrues."

Now, was the action of the Quirong heirs "for rescission" or "upon a written contract"? There is no
question that their action was for rescission, since their complaint in Civil Case CV-98-02399-D asked for
the rescission of the contract of sale between Sofia Quirong, their predecessor, and the DBP and the
reimbursement of the price of P78,000.00 that Sofia Quirong paid the bank plus damages. The
prescriptive period for rescission is four years.

But it is not that simple. The remedy of "rescission" is not confined to the rescissible contracts
enumerated under Article 1381.Article 1191 of the Civil Code gives the injured party in reciprocal
obligations, such as what contracts are about, the option to choose between fulfillment and "rescission."
Arturo M. Tolentino, a well-known authority in civil law, is quick to note, however, that the equivalent of
Article 1191 in the old code actually uses the term "resolution" rather than the present "rescission." The
calibrated meanings of these terms are distinct.

"Rescission" is a subsidiary action based on injury to the plaintiff’s economic interests as described in
Articles 1380 and 1381. "Resolution," the action referred to in Article 1191, on the other hand, is based
on the defendant’s breach of faith, a violation of the reciprocity between the parties. As an action based
on the binding force of a written contract, therefore, rescission (resolution) under Article 1191 prescribes
in 10 years. Ten years is the period of prescription of actions based on a written contract under Article
1144.

The distinction makes sense. Article 1191 gives the injured party an option to choose between, first,
fulfillment of the contract and, second, its rescission. An action to enforce a written contract (fulfillment)
is definitely an "action upon a written contract," which prescribes in 10 years (Article 1144). It will not be
logical to make the remedy of fulfillment prescribe in 10 years while the alternative remedy of rescission
(or resolution) is made to prescribe after only four years as provided in Article 1389 when the injury from
which the two kinds of actions derive is the same.

Here, the Quirong heirs alleged in their complaint that they were entitled to the rescission of the
contract of sale of the lot between the DBP and Sofia Quirong because the decision in Civil Case D-7159
deprived her heirs of nearly the whole of that lot. But what was the status of that contract at the time of
the filing of the action for rescission? Apparently, that contract of sale had already been fully performed
when Sofia Quirong paid the full price for the lot and when, in exchange, the DBP executed the deed of
absolute sale in her favor. There was a turnover of control of the property from DBP to Sofia Quirong
since she assumed under their contract, "the ejectment of squatters and/or occupants" on the lot, at her
own expense.

Actually, the cause of action of the Quirong heirs stems from their having been ousted by final judgment
from the ownership of the lot that the DBP sold to Sofia Quirong, their predecessor, in violation of the
warranty against eviction that comes with every sale of property or thing. Article 1548 of the Civil Code
provides:

Article 1548. Eviction shall take place whenever by a final judgment based on a right prior to the sale or
an act imputable to the vendor, the vendee is deprived of the whole or of a part of thing purchased.

With the loss of 80% of the subject lot to the Dalopes by reason of the judgment of the RTC in Civil Case
D-7159, the Quirong heirs had the right to file an action for rescission against the DBP pursuant to the
provision of Article 1556 of the Civil Code which provides.

Article 1556. Should the vendee lose, by reason of the eviction, a part of the thing sold of such
importance, in relation to the whole, that he would not have bought it without said part, he may
demand the rescission of the contract; but with the obligation to return the thing without other
encumbrances than those which it had when he acquired it.

And that action for rescission, which is based on a subsequent economic loss suffered by the buyer, was
precisely the action that the Quirong heirs took against the DBP. Consequently, it prescribed as Article
1389 provides in four years from the time the action accrued. Since it accrued on January 28, 1993 when
the decision in Civil Case D-7159 became final and executory and ousted the heirs from a substantial
portion of the lot, the latter had only until January 28, 1997 within which to file their action for
rescission. Given that they filed their action on June 10, 1998, they did so beyond the four-year period.
With the conclusion that the Court has reached respecting the first issue presented in this case, it would
serve no useful purpose for it to further consider the issue of whether or not the heirs of Quirong would
have been entitled to the rescission of the DBP’s sale of the subject lot to Sofia Quirong as a
consequence of her heirs having been evicted from it. As the Court has ruled above, their action was
barred by prescription. The CA acted correctly in reversing the RTC decision and dismissing their action.

Parenthetically, the Quirong heirs were allowed by the RTC to intervene in the original action for
annulment of sale in Civil Case D-7159 that the Dalopes filed against the DBP and the Funcions. Not only
did the heirs intervene in defense of the sale, they likewise filed a cross claim against the DBP. And they
were apparently heard on their defense and cross claim but the RTC did not adjudicate their claim for
the reason that they failed to make a formal offer of their documentary exhibits. Yet, they did not appeal
from this omission or from the judgment of the RTC, annulling the DBP’s sale of the subject lot to Sofia
Quirong. This point is of course entirely academic but it shows that the Quirong heirs have themselves to
blame for the loss of whatever right they may have in the case.

WHEREFORE, the Court DENIES the petition and AFFIRMS the November 30, 2005 decision of the Court
of Appeals in CA-G.R. CV 83897.

SO ORDERED.

* WARRANTY AGAINST HIDDEN DEFECTS

THIRD DIVISION

G.R. No. 116111 January 21, 1999

REPUBLIC OF THE PHILIPPINES, (Represented by the Acting Commissioner of Land Registration),

petitioner,

vs.

COURT OF APPEALS, Spouses CATALINO SANTOS and THELMA BARRERO SANTOS, ST. JUDE'S
ENTERPRISES, INC., Spouses DOMINGO CALAGUIAN and FELICIDAD CALAGUIAN, VIRGINIA DELA FUENTE
and LUCY MADAYA, respondents.

PANGANIBAN, J.:

Is the immunity of the government from laches and estoppel absolute? May it still recover the
ownership of lots sold in good faith by a private developer to innocent purchaser for value,
notwithstanding its approval of the subdivision plan issuance of seperate individual certificates of the
title thereto?

The Case

These are the main questions raised in the Petition for Review before us, seeking to set aside the
November 29, 1993 Decision of the Court of Appeals in CA-G.R CV No. 34647. The assailed Decision
affirmed the ruling of the Regional Trial Court in Caloocan City, Branch 125, in Civil Case No. C-111708,
which dismissed petitioner's Complaint for the cancellation of Transfer Certificates of Title (TCTs) to
several lots in Caloocan City, issued in the name of private respondents.

In a Resolution dated July 7, 1994, the Court of Appeals denied the Republic's motion for
reconsideration.

The Fact

The facts of the case are not disputed. The trial court's summary, which was adopted by the Court of
Appeals, is reproduced below:

Defendant St. Jude's Enterprises, Inc. is the registered owner of a parcel of land known as Lot 865-B-1 of
the subdivision plan (LRC) PSD-52368, being a portion of Lot 865-B located in Caloocan City containing an
area of 40,623 square meters. For Lot 865-B-1 defendant St. Jude's Enterprises, Inc. was issued TCT No.
22660 on July 25, 1995.

Sometime in March 1966. defendant St. Jude's Enterprises, Inc. subdivided Lot No. 865-B-1 under
subdivision plan (LRC) PSD-55643 and as a result thereof the Register of Deeds of Caloocan City
cancelled TCT No. 22660 and in lieu thereof issued Certificates of Title Nos. 23967 up to 24068 inclusive,
all in the name of defendant St. Jude's Enterprises, Inc. The subdivision of lot 865-B-1 [which was]
covered [by] TCT No. 22660 was later found to have expanded and enlarged from its original area of
40,523 square meters to 42,044 square meters or an increase of 1,421 square meters. This expansion or
increase in area was confirmed by the Land Registration Commission [to have been made] on the
northern portion of Lot 865-B-1.

Subsequently, defendant St. Jude's Enterprises, Inc. sold the lots covered by TCT Nos. 24013 and 24014
to defendant Sps. Catalino Santos and Thelma Barreto Santos[;] TCT No. 24019 to defendant Sps.
Domingo Calaguian and Felicidad de Jesus[;] TCT No. 24022 to defendant Virginia dela Fuente[;] and TCT
No. 2402[3] to defendant Lucy Madaya. Accordingly, these titles were cancelled and said defendants
were issued the following: TCT No. C-43319 issued in the name of Sps. Santos containing an area of 344
square meters[;] TCT No. 55513 issued in the name of defendants Sps. Calaguian containing an area of
344 square meters[;] TCT 13309 issued in the name of Sps. Santos[;] TCT No. 24069 issued in the name
of Virginia dela Fuente containing an area of 350 square meters[;] and TCT No. C-46648 issued in the
name of defendant Lucy Madaya with an area of 350 square meters.

[On January 29, 1985, then Solicitor General Estelito Mendoza filed] an action seeking . . . the annulment
and cancellation of Transfer Certificates of Title (TCT) Nos. 24015, 24017, 24018, 24020, 24021, 24024,
24025 and 24068 issued in the name of defendant St. Jude's Enterprises, Inc.[;] Transfer Certificates of
Title Nos. 13309 and C-43319 both registered in the name of Sps. Catalino Santos and Thelma B.
Santos[;] and TCT No. 55513 registered in the name of Sps. Domingo Calaguian and Felicidad de Jesus[;]
TCT No. 24069 registered in the name of Virginia dela Fuente[;] and TCT No. C-46648 registered in the
name of Lucy Madaya, principally on the ground that said Certificates of Title were issued on the
strength of [a] null and void subdivision plan (LRC) PSD-55643 which expanded the original area of TCT
No. 22660 in the name of St. Jude's Enterprises, Inc. from 40,623 square meters to 42,044 square meters
upon its subdivision.

Defendants Virginia dela Fuente and Lucy Mandaya were declared in default for failure to file their
respective answer within the reglementary period.

Defendants Sps. Catalino Santos and Thelma Barreto Santos, St. Jude's Enterprises, Inc. and Sps.
Domingo Calaguian and Felicidad Calaguian filed separate answers to the complaint. Defendants Sps.
Domingo Calaguian and Sps. Catalino Santos interposed defenses, among others, that they acquired the
lots in question in good faith from their former owner, defendant St. Jude's Enterprises, Inc. and for
value and that the titles issued to the said defendants were rendered incontrovertible, conclusive and
indefeasible after one year from the date of the issuance of the titles by the Register of Deeds of
Caloocan City.

On the other hand, defendant St. Jude's Enterprises, Inc. interposed defenses, among others, that the
cause of action of plaintiff is barred by prior judgement; that the subdivision plan submitted having been
approved by the LRC, the government is now in estoppel to question the approved subdivision plan; and
the plaintiff's allegation that the area of the subdivision increased by 1,421 square meters is without any
basis in fact and in law.

Ruling of the Trial Court

On April 30, 1991, the trial court dismissed the Complaint. While the plaintiff sufficiently proved the
enlargement or expansion of the area of the disputed property, it presented no proof that Respondent
St. Jude Enterprises, Inc. ("St. Jude") had committed fraud when it submitted the subdivision plan to the
Land Registration Commission (LRC) for approval. Because the plan was presumed to have been
subjected to investigation, study and verification by the LRC, there was no one to blame for the increase
in the area "but the plaintiff[,] for having allowed and approved the subdivision plan." Thus, the court
concluded, the government was already "in estoppel to question the approved subdivision plan."

The trial court also took into account the "absence of complaints from adjoining owners whose
supposed lots [were] encroached upon by the defendants," as well as the fact that an adjoining owner
had categorically stated that there was no such encroachment. Finding that Spouses Santos, Spouses
Calaguian, Dela Fuente and Madaya had bought their respective lots from St. Jude for value and good
faith, the court held that their titles could no longer be questioned, because under the Torrens system,
such titles had become absolute and irrevocable. As regards the Republic's allegation that it had filed the
case to protect the integrity of the said system, the court said:

. . . [S]ustaining the position taken by the government would certainly lead to disastrous consequences.
Buyers in good faith would lose their titles. Adjoining owners who were deprived of a portion of their lot
would be forced to accept the portion of the property allegedly encroached upon. Actions for recovery
will be filed right and left[;] thus instead of preserving the integrity of the Torrens System it would
certainly cause chaos rather than stability. Finally, if only to strengthen the Torrens System and in the
interest of justice, the boundaries of the affected properties of the defendants should not be disturbed
and the status quo should be

maintained.

The solicitor general appealed the trial court's Decision to the Court of Appeals.

Ruling of the Appelate Court

Citing several cases upholding the indefeasibility of the titles issued under the Torrens system, the
appelate court affirmed the trial court. It berated petitioner for bringing the suit only after nineteen (19)
years had passed since the issuance of St. Jude's title and the approval of the subdivision plan. The
pertinent portion of the assailed Decision reads:

. . . Rather than make the Torrens system reliable and stable, [its] act of filing the instant suit rocks the
system, as it gives the impression to Torrens title holders, like appellees, that their titles to properties can
be questioned by the same authority who had approved the same even after a long period of time. In
that case, no Torrens title holder shall be at peace with the ownership and possession of his land, for the
Commission of Land Registration can question his title anytime it makes a finding unfavorable to said
Torrens title holder.

Undauted, petitioner seeks a review by this Court.

The Issues
In this petition, the Republic raises the following issues for our resolution:

1. Whether or not the government is estopped from questioning the approved subdivision plan
which expanded the areas covered by the transfer certificates of title in question;

2. Whether or not the Court of Appeals erred when it did not consider the Torrens System as
merely a means of registering title to land;

3. Whether or not the Court of Appeals erred when it failed to consider that petitioner's complaint
before the lower court was filed to preserve the integrity of the Torrens System.

We shall discuss the second and third questions together. Hence, the issues shall be (1) the applicability
of estoppel against the State and (2) the Torrens system.

The Court's Ruling

The petition is bereft of merit.

First Issue:

Estoppel Against the Government

The general rule is that the State cannot be put in estoppel by the mistakes or errors of its officials or
agents.However, like all general rules, this is also subject to exception, viz.:

Estoppels against the public are little favored. They should not be invoked except in a rare and unusual
circumstances, and may not be invoked where they would operate to defeat the effective operation of a
policy adopted to protect the public. They must be applied with circumspection and should be applied
only in those special cases where the interests of justice clearly require it. Nevertheless, the government
must not be allowed to deal dishonorably or capriciously with its citizens, and must not play an ignoble
part or do a shabby thing; and subject to limitations . . ., the doctrine of equitable estoppel may be
invoked against public authorities as well as against private individuals.

In Republic v. Sandiganbayan,the government, in its effort to recover ill-gotten wealth, tried to skirt the
application of estoppel against it by invoking a specific constitutional provision. The Court countered:

We agree with the statement that the State is immune from estoppel, but this concept is understood to
refer to acts and mistakes of its officials especially those which are irregular (Sharp International
Marketing vs. Court of Appeals, 201 SCRA 299; 306 [1991]; Republic v. Aquino, 120 SCRA 186 [1983]),
which peculiar circumstances are absent in this case at bar. Although the State's right of action to
recover ill-gotten wealth is not vulnerable to estoppel[;] it is non sequitur to suggest that a contract,
freely and in good faith executed between the parties thereto is susceptible to disturbance ad infinitum.
A different interpretation will lead to the absurd scenario of permitting a party to unilaterally jettison a
compromise agreement which is supposed to have the authority of res judicata (Article 2037, New Civil
Code), and like any other contract, has the force of law between parties thereto (Article 1159, New Civil
Code; Hernaez vs. Kao, 17 SCRA 296 [1996]; 6 Padilla, Civil Code Annotated, 7th ed., 1987, p. 711; 3
Aquino, Civil Code, 1990 ed., p. 463). . . .

The Court further declared that "(t)he real office of the equitable norm of estoppel is limited to
supply[ing] deficiency in the law, but it should not supplant positive law."

In the case at bar, for nearly twenty years (starting from the issuance of St. Jude's titles in 1996 up to the
filing of the Complaint in 1985), petitioner failed to correct and recover the alleged increase in the land
area of St. Jude. Its prolonged inaction strongly militates against its cause, as it is tantamount to laches,
which means "the failure or neglect, for an unreasonable and unexplained length of time, to do what
which by exercising due diligence could or should have been done earlier; it is negligence or omission to
assert a right within a reasonable time, warranting a presumption that the party entitled to assert it
either has abandoned it or declined to assert it."

The Court notes private repondents' argument that, prior to the subdivision, the surveyors erred in the
original survey of the whole tract of land covered by TCT No. 22660, so that less than the actual land
area was indicated on the title. Otherwise, the adjoining owners would have complained upon the
partition of the land in accordance with the LRC-approved subdivision plan. As it is, Florenci Quintos, the
owner of the 9,146 square-meter Quintos Village adjoining the northern potion of St. Jude's property
(the portion allegedly "expanded"), even attested on August 16, 1973 that "there [was] no everlapping of
boundaries as per my approved plan (LRC) PSD 147766 dated September 8, 1971."None of the other
neighboring owners ever complained against St. Jude or the purchaser of its property. It is clear,
therefore, that there was no actual damage to third persons caused by the resurvey and the subdivision.

Significantly, the other private respondents — Spouses Santos, Spouses Calaguian, Dela Fuente and
Madaya — bought such "expanded" lots in good faith, relying on the clean certificates of St. Jude, which
had no notice of any flaw in them either. It is only fair and reasonable to apply the equitable principle of
estoppel by laches against the government to avoid an injustice to the innocent purchasers for value.

Likewise time-settled is the doctrine that where innocent third persons, relying on the correctness of the
certificate of title, acquire rights over the property, courts cannot disregard such rights and order the
cancellation of the certificate. Such cancellation would impair public confidence in the certificate of title,
for everyone dealing with property registered under the Torrens system would have to inquire in very
instance whether the title has been regularly issued or not. This would be contrary to the very purpose
of the law, which is to stabilize land titles. Verily, all persons dealing with registered land may safely rely
on the correctness of the certificate of title issued therefor, and the law or the courts do not oblige them
to go behind the certificate in order to investigate again the true condition of the property. They are only
charged with notice of the liens and encumbrances on the property that are noted on the certificate.

When private respondent-purchasers bought their lots from St. Jude, they did not have to go behind the
titles thereto to verify their contents or search for hidden defects or inchoate rights that could defeat
their rights to said lots. Although they were bound by liens and encumbrances annonated on the titles,
private respondents-purchasers could not have had notice of defects that only an inquiry beyond the
face of the titles could have satisfied. The rationale for this presumption has been stated thus:
The main purpose of the Torrens System is to avoid possible conflicts of title to real estate and to
facilitate transactions relative thereto by giving the public the right to rely upon the face of a Torrens
Certificate of the Title and to dispense with the need of inquiring further, except when the party
concerned had actual knowledge of facts and circumtances that should impel a reasonably cautious man
to make such further inquiry (Pascua v. Capuyoc, 77 SCRA 78). Thus, where innocent third persons
relying on the correctness of the certificate thus issued, acquire rights over the property, the court
cannot disregard such rights (Director of Land v. Abache, et al., 73 Phil. 606).

In another case, this Court further said:

The Torrens System was adopted in this country because it was believed to be the most effective
measure to guarantee the integrity of land titles and to protect their indefeasibility once the claim of
ownership is established and recognized. If a person purchases a piece of land on the assurance that the
seller's title thereto is valid, he should not run the risk of being told later that his acquisition was
ineffectual after all. This would not only be unfair to him. What is worse is that if there were permitted,
public confidence in the system would be eroded and land transactions would have to be attended by
complicated and not necessarily conclusive investigations and proof of ownership. The further
consequence would be that land conflicts could be even more abrasive, if not even violent. The
Government, recognizing the worthy purposes of the Torrens System, should be the first to accept the
validity of the titles issued thereunder once the conditions laid down by the law are satisfied [Emphasis
supplied.]

Petitioner never presented proof that the private respondents who had bought their lots from St. Jude
were buyers in bad faith. Consequently, their claim of good faith prevails. A purchaser in good faith and
for value is one who buys the property of another without notice that some other person has right to or
an interest in such property; and who pays a full and fair price for the same at the time of such purchase
or before he or she has notice of the claims or interest of some other person. Good faith is the honest
intention to abstain from taking any unconsientious advantage of another.

Furthermore, it should be stressed that the total area of forty thousand six hundred twenty-three
(40,623) square meters indicated on St. Jude's original title (TCT No, 22660) was not an exact area. Such
figure was followed by the phrase "more or less." This plainly means that the land area indicated was not
precise. Atty. Antonio H. Noblejas, who became the counsel of St. Jude subsequent to his tenure as0
Land Registration Commissioner, offers a sensible explanation. In his letter 28 to the LRC dated
November 8, 1982, he gave the following information:

a. Records show that our client owned a large tract of land situated in an area cutting the boundary
of Quezon City and Caloocan City, then known as Lot 865-B, Psd 60608, and described in T.C.T. No.
100412, containing an area of 96.931 sq. meters, more or less.

b. It will be noted that on the northern portion of this lot 865-B, Psd-60608, is . . . Lot 865-A, Psd-
60608, which means that at previous point of time, these 2 lots composed one whole tract of land.
c. On December 23, 1995, Lot 865-B, Psd-60608, was subdivided into 2 lots, denominated as Lot
865-B-1, with an area of 40,622 sq. meters, more or less, on the Caloocan side, and Lot 865-B-2, with an
area of 56,308 sq. meters, more or less, Quezon City side, under plan (LRC) Psd-52368.

d. On March 1-10, 1966, Lot 865-B-1, Psd-52368, then covered by T.C.T. No. N-22660, was
subdivided into residential lots under Plan (LRC)Psd-55643, with a total area of 42,044 sq. meters, more
or less.

e. It will be noted that Lot 865-B, Psd-60608, covered by T.C.T. No. 100412, contained an area of
96,931 sq. meters, more or less, but when subdivided under Plan (LRC) Psd-52368, into 2 lots its total
area shrank by 1 sq. meter, to wit:

Lot 865-B-1, Psd-52368 = 40,622 sq. meters

Lot 865-B-2, Psd-52368 = 56,308 sq. meters

96,930 sq. meters

f. There is no allegation whatever in the Perez report that there was no error in laying out the
metes and bound of Lot 865-B-1 in Plan (LRC) Psd-55643 as specified in Technical Description of the said
lot set forth in T.C.T. No. N-22660 covering the same. There is likewise no allegation, on the contrary
there is no confirmation from the boundary owner on the northern side. Mr. Florencio Quintos, that
there is no overlapping of boundaries on the northern side of Lot 865-B-1, Psd-55643.

g. We respectfully submit that the area of 42, 044 sq. meters stated in Plan (LRC) Psd-55643 as the
size of Lot 865-B-a, is the more accurate area, confirmed by the Perez report 'as per surveyor[']s findings
on the ground, which rectifies previous surveyor's error in computing its area as 40,622 sq. meters in
Plan (LRC) Psd-52368, which is about 3.5% tolerable error (1,422 divided by 40,622 = 035).

[h.] It is well settled that in the identification of a parcel of land covered by certificate of title, what is
controlling are the metes and bounds as set forth in its Technical Description and not the area stated
therein, which is merely an approximation as indicated in the more or less phrase placed after the
number of square meters.

i. There is thus no unauthorized expansion of the survey occasioned by the subdivision of Lot 865-
B-1 under Plan (LRC) Psd-55643; consequently, LRC Circular No. 167, Series of 1967, finds no application
thereto, as to bar the processing and registration in due course of transactions involving the subdivision
lots of our client, subject hereof. This is apart from the fact that LRC Circular No. 167 has not been
implemented by the Register of Deeds of Caloocan City or any proper government authority since its
issuance in 1967, and that, in the interest of justice and equity, its restrictive and oppressive effect on
transactions over certificates of titles of subdivisions that allegedly expanded on re-surveys, cannot be
allowed to continue indefinitely. (Emphasis supplied.)

The discrepancy in the figures could have been caused by the inadvertence or the negligence of the
surveyors. There is no proof, though, that the land area indicated was intentionally and fraudulently
increased. The property originally registered was the same property that was subdivided. It is well-
settled that what defines a piece of titled property is not the numerical data indicated as the area of the
land, but the boundaries or "metes and bounds" of the property specified in its technical description as
enclosing it and showing its limits.29

Petitioner miserably failed to prove any fraud, either on the part of Private Respondent St. Jude or on the
part of land registration officials who had approved the subdivision plan and issued the questioned TCTs.
Other than its peremptory statement in the Complaint that the "expansion" of the area was "motivated
by bad faith with intent to defraud, to the damage and prejudice of the government and public interest,"
petitioner did not allege specifically how fraud was perpetrated to cause an increase in the actual land
size indicated. Nor was any evidence proffered to substantiate the allegation. That the land registration
authorities supposedly erred or committed an irregularity was merely a conclusion drawn from the
"table survey" showing that the aggregate area of the subdivision lots exceeded the area indicated on
the title of the property before its subdivision. Fraud cannot be presumed, and the failure of petitioner
to prove it defeats its own cause

Second Issue:

The Torrens System

True, the Torrens system is not a means of acquiring titles to lands; it is merely a system of registration of
titles to lands. Consequently, land erroneously included in a Torrens certificate of title is not necessarily
acquired by the holder of such certificate.

But in the interest of justice and equity, neither may the title holder be made to bear the unfavorable
effect of the mistake or negligence of the State's agents, in the absence of proof of his complicity in a
fraud or of manifest damage to third persons. First, the real purpose of the Torrens system is to quiet
title to land to put a stop forever to any question as to the legality of the title, except claims that were
noted in the certificate at the time of the registration or that may arise subsequent thereto. Second, as
we discussed earlier, estoppel by laches now bars petitioner from questioning private respondent's titles
to the subdivision lots. Third, it was never proven that Private Respondent St. Jude was a party to the
fraud that led to the increase in the area of the property after its subdivision. Finally, because petitioner
even failed to give sufficient proof of any error that might have been committed by its agent who had
surveyed the property, the presumption of regularity in the performance of their functions must be
respected. Otherwise, the integrity of the Torrens system, which petitioner purportedly aims to protect
by filing this case, shall forever be sullied by the ineptitude and inefficiency of land registration officials,
who are ordinarily presumed to have regularly performed their duties.

We cannot, therefore, adhere to petitioner's submission that, in filing this suit, it seeks to preserve the
integrity of the Torrens system. To the contrary, it is rather evident from our foregoing discussion that
petitioner's action derogates the very integrity of the system. Time and again, we have said that a
Torrens certificate is evidence of an indefeasible title to property in favor of the person whose name
appears thereon.
WHEREFORE, the petition is hereby DENIED and the assailed Decision is AFFIRMED.

SO ORDERED.
*WARRANTY AGAINST HIDDEN DEFECTS
SECOND DIVISION

G.R. No. 142830 March 24, 2006

WILLIAM GOLANGCO CONSTRUCTION CORPORATION, Petitioner,

vs.

PHILIPPINE COMMERCIAL INTERNATIONAL BANK*, Respondent

DECISION

CORONA, J.:

The facts of this case are straightforward.

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

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

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

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

The CIAC declared WGCC liable for the construction defects in the project. WGCC filed a petition for
review with the Court of Appeals (CA) which dismissed it for lack of merit. Its motion for reconsideration
was similarly denied.
In this petition for review on certiorari, WGCC raises this main question of law: whether or not petitioner
WGCC is liable for defects in the granitite wash-out finish that occurred after the lapse of the one-year
defects liability period provided in Art. XI of the construction contract.

We rule in favor of WGCC.

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

ARTICLE XI – GUARANTEE

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

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

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

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

Autonomy of contracts

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

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

Obligations arising from contracts have the force of law between the parties and should be complied
with in good faith. In characterizing the contract as having the force of law between the parties, the law
stresses the obligatory nature of a binding and valid agreement.
The provision in the construction contract providing for a defects liability period was not shown as
contrary to law, morals, good customs, pubic order or public policy. By the nature of the obligation in
such contract, the provision limiting liability for defects and fixing specific guaranty periods was not only
fair and equitable; it was also necessary. Without such limitation, the contractor would be expected to
make a perpetual guarantee on all materials and workmanship.

The adoption of a one-year guarantee, as done by WGCC and PCIB, is established usage in the Philippines
for private and government construction contracts. The contract did not specify a different period for
defects in the granitite wash-out finish; hence, any defect therein should have been brought to WGCC’s
attention within the one-year defects liability period in the contract.

We cannot countenance an interpretation that undermines a contractual stipulation freely and validly
agreed upon. The courts will not relieve a party from the effects of an unwise or unfavorable contract
freely entered into.

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

Interpretation of contracts

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

62.2 Unfulfilled Obligations

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

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

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

Art. 1719. Acceptance of the work by the employer relieves the contractor of liability for any defect in
the work, unless:
(1) The defect is hidden and the employer is not, by his special knowledge, expected to recognize the
same; or

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

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

First, PCIB’s team of experts14 (who were specifically employed to detect such defects early on)
supervised WGCC’s workmanship. Second, WGCC regularly submitted progress reports and photographs.
Third, WGCC worked under fair and transparent circumstances. PCIB had access to the site and it
exercised reasonable supervision over WGCC’s work. Fourth, PCIB issued several "punch lists" for
WGCC’s compliance before the issuance of PCIB’s final certificate of acceptance. Fifth, PCIB supplied the
materials for the granitite wash-out finish. And finally, PCIB’s team of experts gave their concurrence to
the turnover of the project.

The purpose of the defects liability period was precisely to give PCIB additional, albeit limited,
opportunity to oblige WGCC to make good any defect, hidden or otherwise, discovered within one year

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

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

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

SO ORDERED.
OBLIGATION OF THE VENDEE
THIRD DIVISION

G.R. No. 108346 July 11, 2001

Spouses MARIANO Z. VELARDE and AVELINA D. VELARDE, petitioners,

vs.

COURT OF APPEALS, DAVID A. RAYMUNDO and GEORGE RAYMUNDO, respondents.

PANGANIBAN, J.:

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

The Case

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

The dispositive portion of the assailed Decision reads:

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

The Facts

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

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

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

'That for and in consideration of the amount of EIGHT HUNDRED THOUSAND PESOS (P800,000.00),
Philippine currency, receipt of which in full is hereby acknowledged by the VENDOR from the VENDEE, to
his entire and complete satisfaction, by these presents the VENDOR hereby SELLS, CEDES, TRANSFERS,
CONVEYS AND DELIVERS, freely and voluntarily, with full warranty of a legal and valid title as provided by
law, unto the VENDEE, her heirs, successors and assigns, the parcel of land mentioned and described
above, together with the house and other improvements thereon.

'That the aforesaid parcel of land, together with the house and other improvements thereon, were
mortgaged by the VENDOR to the BANK OF THE PHILIPPINE ISLANDS, Makati, Metro Manila to secure the
payment of a loan of ONE MILLION EIGHT HUNDRED THOUSAND PESOS (P1,800,000.00), Philippine
currency, as evidenced by a Real Estate Mortgage signed and executed by the VENDOR in favor of the
said Bank of the Philippine Islands, on _____ and which Real Estate Mortgage was ratified before Notary
Public for Makati, _____, as Doc. No. ______, Page No. _____, Book No. ___, Series of 1986 of his
Notarial Register.

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

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

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

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

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

'WHEREAS, this undertaking is being executed in favor of Mr. David A. Raymundo, for purposes of
attesting and confirming our private understanding concerning the said mortgage obligations to be
assumed.
'NOW, THEREFORE, for and in consideration of the foregoing premises, and the assumption of the
mortgage obligations of ONE MILLION EIGHT HUNDRED THOUSAND PESOS (P1,800,000.00), Philippine
currency, with the bank of the Philippine Islands, I, Mrs, Avelina D, Velarde with the consent of my
husband, Mariano Z. Velardo, do hereby bind and obligate myself, my heirs, successors and assigns, to
strictly and faithfully comply with the following terms and conditions:

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

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

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

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

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

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

"Pursuant to said agreements, plaintiffs paid BPI the monthly interest on the loan secured by the
aforementioned mortgage for three (3) months as follows: September 19, 1986 at P27,225.00; October
20, 1986 at P23,000.00; and November 19, 1986 at P23,925.00 (Exh. 'E', 'H' & 'J', pp. 15, 17and 18,
Record).
"On December 15, 1986, plaintiffs were advised that the Application for Assumption of Mortgage with
BPI, was not approved (Exh. 'J', p. 133, Record). This prompted plaintiffs not to make any further
payment.

"On January 5, 1987, defendants, thru counsel, wrote plaintiffs informing the latter that their non-
payment to the mortgage bank constitute[d] non-performance of their obligation (Exh. '3', p. 220,
Record).

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

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

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

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

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

Private respondents appealed to the CA.

Ruling of the Court of Appeal

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

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

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

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

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

Hence, this appeal.

The Issues

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

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

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

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

The Court's Ruling

The Petition is partially meritorious.

First Issue:

Breach of Contract

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

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

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

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

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

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

Second Issue

Validity of the Rescission

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

As pointed out earlier, the breach committed by petitioners was not so much their nonpayment of the
mortgage obligations, as their nonperformance of their reciprocal obligation to pay the purchase price
under the contract of sale. Private respondents' right to rescind the contract finds basis in Article 1191 of
the Civil Code, which explicitly provides as follows:

"Art. 1191. -- The power to rescind obligations is implied in reciprocal ones, in case one of the obligors
should not comply with what is incumbent upon him.
The injured party may choose between fulfillment and the rescission of the obligation, with the payment
of damages in either case. He may also seek rescission even after he has chosen fulfillment, if the latter
should become impossible."

The right of rescission of a party to an obligation under Article 1191 of the Civil Code is predicated on a
breach of faith by the other party who violates the reciprocity between them. The breach contemplated
in the said provision is the obligor's failure to comply with an existing obligation. When the obligor
cannot comply with what is incumbent upon it, the obligee may seek rescissio n and, in the absence of
any just cause for the court to determine the period of compliance, the court shall decree the rescission.

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

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

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

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

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

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

Mutual Restitution

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

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

Rescission creates the obligation to return the object of the contract. It can be carried out only when the
one who demands rescission can return whatever he may be obliged to restore.20 To rescind is to
declare a contract void at its inception and to put an end to it as though it never was. It is not merely to
terminate it and release the parties from further obligations to each other, but to abrogate it from the
beginning and restore the parties to their relative positions as if no contract has been made.

Third Issue

Attempt to Novate

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

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

SO ORDERED.
Art. 1583
EN BANC

G.R. No. 176579 June 28, 2011

WILSON P. GAMBOA, Petitioner,

vs.

FINANCE SECRETARY MARGARITO B. TEVES, FINANCE UNDERSECRETARY JOHN P. SEVILLA, AND

COMMISSIONER RICARDO ABCEDE OF THE PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT
(PCGG) IN THEIR CAPACITIES AS CHAIR AND MEMBERS, RESPECTIVELY, OF THE PRIVATIZATION COUNCIL,
CHAIRMAN ANTHONI SALIM OF FIRST PACIFIC CO., LTD. IN HIS CAPACITY AS DIRECTOR OF METRO
PACIFIC ASSET HOLDINGS INC., CHAIRMAN MANUEL V. PANGILINAN OF PHILIPPINE LONG DISTANCE
TELEPHONE COMPANY (PLDT) IN HIS CAPACITY AS MANAGING DIRECTOR OF FIRST PACIFIC CO., LTD.,
PRESIDENT NAPOLEON L. NAZARENO OF PHILIPPINE LONG DISTANCE TELEPHONE COMPANY, CHAIR FE
BARIN OF THE SECURITIES EXCHANGE COMMISSION, and PRESIDENT FRANCIS LIM OF THE PHILIPPINE
STOCK EXCHANGE, Respondents.

PABLITO V. SANIDAD and ARNO V. SANIDAD, Petitioners-in-Intervention.

DECISION

CARPIO, J.:

The Case

This is an original petition for prohibition, injunction, declaratory relief and declaration of nullity of the
sale of shares of stock of Philippine Telecommunications Investment Corporation (PTIC) by the
government of the Republic of the Philippines to Metro Pacific Assets Holdings, Inc. (MPAH), an affiliate
of First Pacific Company Limited (First Pacific).

The Antecedents

The facts, according to petitioner Wilson P. Gamboa, a stockholder of Philippine Long Distance Telephone
Company (PLDT), are as follows:

On 28 November 1928, the Philippine Legislature enacted Act No. 3436 which granted PLDT a franchise
and the right to engage in telecommunications business. In 1969, General Telephone and Electronics
Corporation (GTE), an American company and a major PLDT stockholder, sold 26 percent of the
outstanding common shares of PLDT to PTIC. In 1977, Prime Holdings, Inc. (PHI) was incorporated by
several persons, including Roland Gapud and Jose Campos, Jr. Subsequently, PHI became the owner of
111,415 shares of stock of PTIC by virtue of three Deeds of Assignment executed by PTIC stockholders
Ramon Cojuangco and Luis Tirso Rivilla. In 1986, the 111,415 shares of stock of PTIC held by PHI were
sequestered by the Presidential Commission on Good Government (PCGG). The 111,415 PTIC shares,
which represent about 46.125 percent of the outstanding capital stock of PTIC, were later declared by
this Court to be owned by the Republic of the Philippines.

In 1999, First Pacific, a Bermuda-registered, Hong Kong-based investment firm, acquired the remaining
54 percent of the outstanding capital stock of PTIC. On 20 November 2006, the Inter-Agency Privatization
Council (IPC) of the Philippine Government announced that it would sell the 111,415 PTIC shares, or
46.125 percent of the outstanding capital stock of PTIC, through a public bidding to be conducted on 4
December 2006. Subsequently, the public bidding was reset to 8 December 2006, and only two bidders,
Parallax Venture Fund XXVII (Parallax) and Pan-Asia Presidio Capital, submitted their bids. Parallax won
with a bid of ₱25.6 billion or US$510 million.

Thereafter, First Pacific announced that it would exercise its right of first refusal as a PTIC stockholder
and buy the 111,415 PTIC shares by matching the bid price of Parallax. However, First Pacific failed to do
so by the 1 February 2007 deadline set by IPC and instead, yielded its right to PTIC itself which was then
given by IPC until 2 March 2007 to buy the PTIC shares. On 14 February 2007, First Pacific, through its
subsidiary, MPAH, entered into a Conditional Sale and Purchase Agreement of the 111,415 PTIC shares,
or 46.125 percent of the outstanding capital stock of PTIC, with the Philippine Government for the price
of ₱25,217,556,000 or US$510,580,189. The sale was completed on 28 February 2007.

Since PTIC is a stockholder of PLDT, the sale by the Philippine Government of 46.125 percent of PTIC
shares is actually an indirect sale of 12 million shares or about 6.3 percent of the outstanding common
shares of PLDT. With the sale, First Pacific’s common shareholdings in PLDT increased from 30.7 percent
to 37 percent, thereby increasing the common shareholdings of foreigners in PLDT to about 81.47
percent. This violates Section 11, Article XII of the 1987 Philippine Constitution which limits foreign
ownership of the capital of a public utility to not more than 40 percent.

On the other hand, public respondents Finance Secretary Margarito B. Teves, Undersecretary John P.
Sevilla, and PCGG Commissioner Ricardo Abcede allege the following relevant facts:

On 9 November 1967, PTIC was incorporated and had since engaged in the business of investment
holdings. PTIC held 26,034,263 PLDT common shares, or 13.847 percent of the total PLDT outstanding
common shares. PHI, on the other hand, was incorporated in 1977, and became the owner of 111,415
PTIC shares or 46.125 percent of the outstanding capital stock of PTIC by virtue of three Deeds of
Assignment executed by Ramon Cojuangco and Luis Tirso Rivilla. In 1986, the 111,415 PTIC shares held
by PHI were sequestered by the PCGG, and subsequently declared by this Court as part of the ill-gotten
wealth of former President Ferdinand Marcos. The sequestered PTIC shares were reconveyed to the
Republic of the Philippines in accordance with this Court’s decision4 which became final and executory
on 8 August 2006.

The Philippine Government decided to sell the 111,415 PTIC shares, which represent 6.4 percent of the
outstanding common shares of stock of PLDT, and designated the Inter-Agency Privatization Council
(IPC), composed of the Department of Finance and the PCGG, as the disposing entity. An invitation to bid
was published in seven different newspapers from 13 to 24 November 2006. On 20 November 2006, a
pre-bid conference was held, and the original deadline for bidding scheduled on 4 December 2006 was
reset to 8 December 2006. The extension was published in nine different newspapers.

During the 8 December 2006 bidding, Parallax Capital Management LP emerged as the highest bidder
with a bid of ₱25,217,556,000. The government notified First Pacific, the majority owner of PTIC shares,
of the bidding results and gave First Pacific until 1 February 2007 to exercise its right of first refusal in
accordance with PTIC’s Articles of Incorporation. First Pacific announced its intention to match Parallax’s
bid.

On 31 January 2007, the House of Representatives (HR) Committee on Good Government conducted a
public hearing on the particulars of the then impending sale of the 111,415 PTIC shares. Respondents
Teves and Sevilla were among those who attended the public hearing. The HR Committee Report No.
2270 concluded that: (a) the auction of the government’s 111,415 PTIC shares bore due diligence,
transparency and conformity with existing legal procedures; and (b) First Pacific’s intended acquisition of
the government’s 111,415 PTIC shares resulting in First Pacific’s 100% ownership of PTIC will not violate
the 40 percent constitutional limit on foreign ownership of a public utility since PTIC holds only 13.847
percent of the total outstanding common shares of PLDT.5 On 28 February 2007, First Pacific completed
the acquisition of the 111,415 shares of stock of PTIC.

Respondent Manuel V. Pangilinan admits the following facts: (a) the IPC conducted a public bidding for
the sale of 111,415 PTIC shares or 46 percent of the outstanding capital stock of PTIC (the remaining 54
percent of PTIC shares was already owned by First Pacific and its affiliates); (b) Parallax offered the
highest bid amounting to ₱25,217,556,000; (c) pursuant to the right of first refusal in favor of PTIC and
its shareholders granted in PTIC’s Articles of Incorporation, MPAH, a First Pacific affiliate, exercised its
right of first refusal by matching the highest bid offered for PTIC shares on 13 February 2007; and (d) on
28 February 2007, the sale was consummated when MPAH paid IPC ₱25,217,556,000 and the
government delivered the certificates for the 111,415 PTIC shares. Respondent Pangilinan denies the
other allegations of facts of petitioner.

On 28 February 2007, petitioner filed the instant petition for prohibition, injunction, declaratory relief,
and declaration of nullity of sale of the 111,415 PTIC shares. Petitioner claims, among others, that the
sale of the 111,415 PTIC shares would result in an increase in First Pacific’s common shareholdings in
PLDT from 30.7 percent to 37 percent, and this, combined with Japanese NTT DoCoMo’s common
shareholdings in PLDT, would result to a total foreign common shareholdings in PLDT of 51.56 percent
which is over the 40 percent constitutional limit.

Petitioner asserts:

If and when the sale is completed, First Pacific’s equity in PLDT will go up from 30.7 percent to 37.0
percent of its common – or voting- stockholdings, x x x. Hence, the consummation of the sale will put the
two largest foreign investors in PLDT – First Pacific and Japan’s NTT DoCoMo, which is the world’s largest
wireless telecommunications firm, owning 51.56 percent of PLDT common equity. x x x With the
completion of the sale, data culled from the official website of the New York Stock Exchange
(www.nyse.com) showed that those foreign entities, which own at least five percent of common equity,
will collectively own 81.47 percent of PLDT’s common equity.

as the annual disclosure reports, also referred to as Form 20-K reports which PLDT submitted to the New
York Stock Exchange for the period 2003-2005, revealed that First Pacific and several other foreign
entities breached the constitutional limit of 40 percent ownership as early as 2003.

Petitioner raises the following issues: (1) whether the consummation of the then impending sale of
111,415 PTIC shares to First Pacific violates the constitutional limit on foreign ownership of a public
utility; (2) whether public respondents committed grave abuse of discretion in allowing the sale of the
111,415 PTIC shares to First Pacific; and (3) whether the sale of common shares to foreigners in excess of
40 percent of the entire subscribed common capital stock violates the constitutional limit on foreign
ownership of a public utility.

On 13 August 2007, Pablito V. Sanidad and Arno V. Sanidad filed a Motion for Leave to Intervene and
Admit Attached Petition-in-Intervention. In the Resolution of 28 August 2007, the Court granted the
motion and noted the Petition-in-Intervention.

Petitioners-in-intervention "join petitioner Wilson Gamboa x x x in seeking, among others, to enjoin

and/or nullify the sale by respondents of the 111,415 PTIC shares to First Pacific or assignee."
Petitioners-in-intervention claim that, as PLDT subscribers, they have a "stake in the outcome of the
controversy where the Philippine Government is completing the sale of government owned assets in
[PLDT], unquestionably a public utility, in violation of the nationality restrictions of the Philippine
Constitution."

The Issue

This Court is not a trier of facts. Factual questions such as those raised by petitioner, which indisputably
demand a thorough examination of the evidence of the parties, are generally beyond this Court’s
jurisdiction. Adhering to this well-settled principle, the Court shall confine the resolution of the instant
controversy solely on the threshold and purely legal issue of whether the term "capital" in Section 11,
Article XII of the Constitution refers to the total common shares only or to the total outstanding capital
stock (combined total of common and non-voting preferred shares) of PLDT, a public utility.

The Ruling of the Court

The petition is partly meritorious.

Petition for declaratory relief treated as petition for mandamus

At the outset, petitioner is faced with a procedural barrier. Among the remedies petitioner seeks, only
the petition for prohibition is within the original jurisdiction of this court, which however is not exclusive
but is concurrent with the Regional Trial Court and the Court of Appeals. The actions for declaratory
relief, injunction, and annulment of sale are not embraced within the original jurisdiction of the Supreme
Court. On this ground alone, the petition could have been dismissed outright.
While direct resort to this Court may be justified in a petition for prohibition, the Court shall
nevertheless refrain from discussing the grounds in support of the petition for prohibition since on 28
February 2007, the questioned sale was consummated when MPAH paid IPC ₱25,217,556,000 and the
government delivered the certificates for the 111,415 PTIC shares.

However, since the threshold and purely legal issue on the definition of the term "capital" in Section 11,
Article XII of the Constitution has far-reaching implications to the national economy, the Court treats the
petition for declaratory relief as one for mandamus.

In Salvacion v. Central Bank of the Philippines, the Court treated the petition for declaratory relief as one
for mandamus considering the grave injustice that would result in the interpretation of a banking law. In
that case, which involved the crime of rape committed by a foreign tourist against a Filipino minor and
the execution of the final judgment in the civil case for damages on the tourist’s dollar deposit with a
local bank, the Court declared Section 113 of Central Bank Circular No. 960, exempting foreign currency
deposits from attachment, garnishment or any other order or process of any court, inapplicable due to
the peculiar circumstances of the case. The Court held that "injustice would result especially to a citizen
aggrieved by a foreign guest like accused" that would "negate Article 10 of the Civil Code which provides
that ‘in case of doubt in the interpretation or application of laws, it is presumed that the lawmaking body
intended right and justice to prevail.’" The Court therefore required respondents Central Bank of the
Philippines, the local bank, and the accused to comply with the writ of execution issued in the civil case
for damages and to release the dollar deposit of the accused to satisfy the judgment.

In Alliance of Government Workers v. Minister of Labor,14 the Court similarly brushed aside the
procedural infirmity of the petition for declaratory relief and treated the same as one for mandamus. In
Alliance, the issue was whether the government unlawfully excluded petitioners, who were government
employees, from the enjoyment of rights to which they were entitled under the law. Specifically, the
question was: "Are the branches, agencies, subdivisions, and instrumentalities of the Government,
including government owned or controlled corporations included among the four ‘employers’ under
Presidential Decree No. 851 which are required to pay their employees a thirteenth (13th) month pay ?"
The Constitutional principle involved therein affected all government employees, clearly justifying a
relaxation of the technical rules of procedure, and certainly requiring the interpretation of the assailed
presidential decree.

In short, it is well-settled that this Court may treat a petition for declaratory relief as one for mandamus
if the issue involved has far-reaching implications. As this Court held in Salvacion:

The Court has no original and exclusive jurisdiction over a petition for declaratory relief. However,
exceptions to this rule have been recognized. Thus, where the petition has far-reaching implications and
raises questions that should be resolved, it may be treated as one for mandamus. (Emphasis supplied)

In the present case, petitioner seeks primarily the interpretation of the term "capital" in Section 11,
Article XII of the Constitution. He prays that this Court declare that the term "capital" refers to common
shares only, and that such shares constitute "the sole basis in determining foreign equity in a public
utility." Petitioner further asks this Court to declare any ruling inconsistent with such interpretation
unconstitutional.

The interpretation of the term "capital" in Section 11, Article XII of the Constitution has far-reaching
implications to the national economy. In fact, a resolution of this issue will determine whether Filipinos
are masters, or second class citizens, in their own country. What is at stake here is whether Filipinos or
foreigners will have effective control of the national economy. Indeed, if ever there is a legal issue that
has far-reaching implications to the entire nation, and to future generations of Filipinos, it is the
threshold legal issue presented in this case.

The Court first encountered the issue on the definition of the term "capital" in Section 11, Article XII of
the Constitution in the case of Fernandez v. Cojuangco, docketed as G.R. No. 157360. That case involved
the same public utility (PLDT) and substantially the same private respondents. Despite the importance
and novelty of the constitutional issue raised therein and despite the fact that the petition involved a
purely legal question, the Court declined to resolve the case on the merits, and instead denied the same
for disregarding the hierarchy of courts. There, petitioner Fernandez assailed on a pure question of law
the Regional Trial Court’s Decision of 21 February 2003 via a petition for review under Rule 45. The
Court’s Resolution, denying the petition, became final on 21 December 2004.

The instant petition therefore presents the Court with another opportunity to finally settle this purely
legal issue which is of transcendental importance to the national economy and a fundamental
requirement to a faithful adherence to our Constitution. The Court must forthwith seize such
opportunity, not only for the benefit of the litigants, but more significantly for the benefit of the entire
Filipino people, to ensure, in the words of the Constitution, "a self-reliant and independent national
economy effectively controlled by Filipinos."Besides, in the light of vague and confusing positions taken
by government agencies on this purely legal issue, present and future foreign investors in this country
deserve, as a matter of basic fairness, a categorical ruling from this Court on the extent of their
participation in the capital of public utilities and other nationalized businesses.

Despite its far-reaching implications to the national economy, this purely legal issue has remained
unresolved for over 75 years since the 1935 Constitution. There is no reason for this Court to evade this
ever recurring fundamental issue and delay again defining the term "capital," which appears not only in
Section 11, Article XII of the Constitution, but also in Section 2, Article XII on co-production and joint
venture agreements for the development of our natural resources, in Section 7, Article XII on ownership
of private lands, in Section 10, Article XII on the reservation of certain investments to Filipino citizens, in
Section 4(2), Article XIV on the ownership of educational institutions, and in Section 11(2), Article XVI on
the ownership of advertising companies.

Petitioner has locus standee

There is no dispute that petitioner is a stockholder of PLDT. As such, he has the right to question the
subject sale, which he claims to violate the nationality requirement prescribed in Section 11, Article XII
of the Constitution. If the sale indeed violates the Constitution, then there is a possibility that PLDT’s
franchise could be revoked, a dire consequence directly affecting petitioner’s interest as a stockholder.
More importantly, there is no question that the instant petition raises matters of transcendental
importance to the public. The fundamental and threshold legal issue in this case, involving the national
economy and the economic welfare of the Filipino people, far outweighs any perceived impediment in
the legal personality of the petitioner to bring this action.

In Chavez v. PCGG, the Court upheld the right of a citizen to bring a suit on matters of transcendental
importance to the public, thus:

In Tañada v. Tuvera, the Court asserted that when the issue concerns a public right and the object of
mandamus is to obtain the enforcement of a public duty, the people are regarded as the real parties in
interest; and because it is sufficient that petitioner is a citizen and as such is interested in the execution
of the laws, he need not show that he has any legal or special interest in the result of the action. In the
aforesaid case, the petitioners sought to enforce their right to be informed on matters of public concern,
a right then recognized in Section 6, Article IV of the 1973 Constitution, in connection with the rule that
laws in order to be valid and enforceable must be published in the Official Gazette or otherwise
effectively promulgated. In ruling for the petitioners’ legal standing, the Court declared that the right
they sought to be enforced ‘is a public right recognized by no less than the fundamental law of the land.’

Legaspi v. Civil Service Commission, while reiterating Tañada, further declared that ‘when a mandamus
proceeding involves the assertion of a public right, the requirement of personal interest is satisfied by
the mere fact that petitioner is a citizen and, therefore, part of the general ‘public’ which possesses the
right.’

Further, in Albano v. Reyes, we said that while expenditure of public funds may not have been involved
under the questioned contract for the development, management and operation of the Manila
International Container Terminal, ‘public interest [was] definitely involved considering the important role
[of the subject contract] . . . in the economic development of the country and the magnitude of the
financial consideration involved.’ We concluded that, as a consequence, the disclosure provision in the
Constitution would constitute sufficient authority for upholding the petitioner’s standing. (Emphasis
supplied)

Clearly, since the instant petition, brought by a citizen, involves matters of transcendental public
importance, the petitioner has the requisite locus standi.

Definition of the Term "Capital" in Section 11, Article XII of the 1987 Constitution

Section 11, Article XII (National Economy and Patrimony) of the 1987 Constitution mandates the
Filipinization of public utilities, to wit:

Section 11. No franchise, certificate, or any other form of authorization for the operation of a public
utility shall be granted except to citizens of the Philippines or to corporations or associations organized
under the laws of the Philippines, at least sixty per centum of whose capital is owned by such citizens;
nor shall such franchise, certificate, or authorization be exclusive in character or for a longer period than
fifty years. Neither shall any such franchise or right be granted except under the condition that it shall be
subject to amendment, alteration, or repeal by the Congress when the common good so requires. The
State shall encourage equity participation in public utilities by the general public. The participation of
foreign investors in the governing body of any public utility enterprise shall be limited to their
proportionate share in its capital, and all the executive and managing officers of such corporation or
association must be citizens of the Philippines. (Emphasis supplied)

The above provision substantially reiterates Section 5, Article XIV of the 1973 Constitution, thus:

Section 5. No franchise, certificate, or any other form of authorization for the operation of a public utility
shall be granted except to citizens of the Philippines or to corporations or associations organized under
the laws of the Philippines at least sixty per centum of the capital of which is owned by such citizens, nor
shall such franchise, certificate, or authorization be exclusive in character or for a longer period than fifty
years. Neither shall any such franchise or right be granted except under the condition that it shall be
subject to amendment, alteration, or repeal by the National Assembly when the public interest so
requires. The State shall encourage equity participation in public utilities by the general public. The
participation of foreign investors in the governing body of any public utility enterprise shall be limited to
their proportionate share in the capital thereof. (Emphasis supplied)

The foregoing provision in the 1973 Constitution reproduced Section 8, Article XIV of the 1935
Constitution:

Section 8. No franchise, certificate, or any other form of authorization for the operation of a public utility
shall be granted except to citizens of the Philippines or to corporations or other entities organized under
the laws of the Philippines sixty per centum of the capital of which is owned by citizens of the
Philippines, nor shall such franchise, certificate, or authorization be exclusive in character or for a longer
period than fifty years. No franchise or right shall be granted to any individual, firm, or corporation,
except under the condition that it shall be subject to amendment, alteration, or repeal by the Congress
when the public interest so requires. (Emphasis supplied)

Father Joaquin G. Bernas, S.J., a leading member of the 1986 Constitutional Commission, reminds us that
the Filipinization provision in the 1987 Constitution is one of the products of the spirit of nationalism
which gripped the 1935 Constitutional Convention. The 1987 Constitution "provides for the Filipinization
of public utilities by requiring that any form of authorization for the operation of public utilities should
be granted only to ‘citizens of the Philippines or to corporations or associations organized under the laws
of the Philippines at least sixty per centum of whose capital is owned by such citizens.’ The provision is
[an express] recognition of the sensitive and vital position of public utilities both in the national economy
and for national security."The evident purpose of the citizenship requirement is to prevent aliens from
assuming control of public utilities, which may be inimical to the national interest. This specific provision
explicitly reserves to Filipino citizens control of public utilities, pursuant to an overriding economic goal
of the 1987 Constitution: to "conserve and develop our patrimony" and ensure "a self-reliant and
independent national economy effectively controlled by Filipinos."

Any citizen or juridical entity desiring to operate a public utility must therefore meet the minimum
nationality requirement prescribed in Section 11, Article XII of the Constitution. Hence, for a corporation
to be granted authority to operate a public utility, at least 60 percent of its "capital" must be owned by
Filipino citizens.

The crux of the controversy is the definition of the term "capital." Does the term "capital" in Section 11,
Article XII of the Constitution refer to common shares or to the total outstanding capital stock (combined
total of common and non-voting preferred shares)?

Petitioner submits that the 40 percent foreign equity limitation in domestic public utilities refers only to
common shares because such shares are entitled to vote and it is through voting that control over a
corporation is exercised. Petitioner posits that the term "capital" in Section 11, Article XII of the
Constitution refers to "the ownership of common capital stock subscribed and outstanding, which class
of shares alone, under the corporate set-up of PLDT, can vote and elect members of the board of
directors." It is undisputed that PLDT’s non-voting preferred shares are held mostly by Filipino citizens.
This arose from Presidential Decree No. 217, issued on 16 June 1973 by then President Ferdinand
Marcos, requiring every applicant of a PLDT telephone line to subscribe to non-voting preferred shares to
pay for the investment cost of installing the telephone line.

Petitioners-in-intervention basically reiterate petitioner’s arguments and adopt petitioner’s definition of

the term "capital."Petitioners-in-intervention allege that "the approximate foreign ownership of
common capital stock of PLDT already amounts to at least 63.54% of the total outstanding common
stock," which means that foreigners exercise significant control over PLDT, patently violating the 40
percent foreign equity limitation in public utilities prescribed by the Constitution.

Respondents, on the other hand, do not offer any definition of the term "capital" in Section 11, Article
XII of the Constitution. More importantly, private respondents Nazareno and Pangilinan of PLDT do not
dispute that more than 40 percent of the common shares of PLDT are held by foreigners.

In particular, respondent Nazareno’s Memorandum, consisting of 73 pages, harps mainly on the

procedural infirmities of the petition and the supposed violation of the due process rights of the
"affected foreign common shareholders." Respondent Nazareno does not deny petitioner’s allegation of
foreigners’ dominating the common shareholdings of PLDT. Nazareno stressed mainly that the petition
"seeks to divest foreign common shareholders purportedly exceeding 40% of the total common
shareholdings in PLDT of their ownership over their shares." Thus, "the foreign natural and juridical PLDT
shareholders must be impleaded in this suit so that they can be heard." Essentially, Nazareno invokes
denial of due process on behalf of the foreign common shareholders.

While Nazareno does not introduce any definition of the term "capital," he states that "among the
factual assertions that need to be established to counter petitioner’s allegations is the uniform
interpretation by government agencies (such as the SEC), institutions and corporations (such as the
Philippine National Oil Company-Energy Development Corporation or PNOC-EDC) of including both
preferred shares and common shares in "controlling interest" in view of testing compliance with the 40%
constitutional limitation on foreign ownership in public utilities."
Similarly, respondent Manuel V. Pangilinan does not define the term "capital" in Section 11, Article XII of
the Constitution. Neither does he refute petitioner’s claim of foreigners holding more than 40 percent of
PLDT’s common shares. Instead, respondent Pangilinan focuses on the procedural flaws of the petition
and the alleged violation of the due process rights of foreigners. Respondent Pangilinan emphasizes in
his Memorandum (1) the absence of this Court’s jurisdiction over the petition; (2) petitioner’s lack of
standing; (3) mootness of the petition; (4) non-availability of declaratory relief; and (5) the denial of due
process rights. Moreover, respondent Pangilinan alleges that the issue should be whether "owners of
shares in PLDT as well as owners of shares in companies holding shares in PLDT may be required to
relinquish their shares in PLDT and in those companies without any law requiring them to surrender
their shares and also without notice and trial."

Respondent Pangilinan further asserts that "Section 11, [Article XII of the Constitution] imposes no
nationality requirement on the shareholders of the utility company as a condition for keeping their
shares in the utility company." According to him, "Section 11 does not authorize taking one person’s
property (the shareholder’s stock in the utility company) on the basis of another party’s alleged failure to
satisfy a requirement that is a condition only for that other party’s retention of another piece of property
(the utility company being at least 60% Filipino-owned to keep its franchise)."

The OSG, representing public respondents Secretary Margarito Teves, Undersecretary John P. Sevilla,
Commissioner Ricardo Abcede, and Chairman Fe Barin, is likewise silent on the definition of the term
"capital." In its Memorandum dated 24 September 2007, the OSG also limits its discussion on the
supposed procedural defects of the petition, i.e. lack of standing, lack of jurisdiction, non-inclusion of
interested parties, and lack of basis for injunction. The OSG does not present any definition or
interpretation of the term "capital" in Section 11, Article XII of the Constitution. The OSG contends that
"the petition actually partakes of a collateral attack on PLDT’s franchise as a public utility," which in effect
requires a "full-blown trial where all the parties in interest are given their day in court."

Respondent Francisco Ed Lim, impleaded as President and Chief Executive Officer of the Philippine Stock
Exchange (PSE), does not also define the term "capital" and seeks the dismissal of the petition on the
following grounds: (1) failure to state a cause of action against Lim; (2) the PSE allegedly implemented its
rules and required all listed companies, including PLDT, to make proper and timely disclosures; and (3)
the reliefs prayed for in the petition would adversely impact the stock market.

In the earlier case of Fernandez v. Cojuangco, petitioner Fernandez who claimed to be a stockholder of
record of PLDT, contended that the term "capital" in the 1987 Constitution refers to shares entitled to
vote or the common shares. Fernandez explained thus:

The forty percent (40%) foreign equity limitation in public utilities prescribed by the Constitution refers
to ownership of shares of stock entitled to vote, i.e., common shares, considering that it is through
voting that control is being exercised.

Obviously, the intent of the framers of the Constitution in imposing limitations and restrictions on fully
nationalized and partially nationalized activities is for Filipino nationals to be always in control of the
corporation undertaking said activities. Otherwise, if the Trial Court’s ruling upholding respondents’
arguments were to be given credence, it would be possible for the ownership structure of a public utility
corporation to be divided into one percent (1%) common stocks and ninety-nine percent (99%) preferred
stocks. Following the Trial Court’s ruling adopting respondents’ arguments, the common shares can be
owned entirely by foreigners thus creating an absurd situation wherein foreigners, who are supposed to
be minority shareholders, control the public utility corporation.

Thus, the 40% foreign ownership limitation should be interpreted to apply to both the beneficial
ownership and the controlling interest.

Clearly, therefore, the forty percent (40%) foreign equity limitation in public utilities prescribed by the
Constitution refers to ownership of shares of stock entitled to vote, i.e., common shares. Furthermore,
ownership of record of shares will not suffice but it must be shown that the legal and beneficial
ownership rests in the hands of Filipino citizens. Consequently, in the case of petitioner PLDT, since it is
already admitted that the voting interests of foreigners which would gain entry to petitioner PLDT by the
acquisition of SMART shares through the Questioned Transactions is equivalent to 82.99%, and the
nominee arrangements between the foreign principals and the Filipino owners is likewise admitted,
there is, therefore, a violation of Section 11, Article XII of the Constitution.

Parenthetically, the Opinions dated February 15, 1988 and April 14, 1987 cited by the Trial Court to
support the proposition that the meaning of the word "capital" as used in Section 11, Article XII of the
Constitution allegedly refers to the sum total of the shares subscribed and paid-in by the shareholder
and it allegedly is immaterial how the stock is classified, whether as common or preferred, cannot stand
in the face of a clear legislative policy as stated in the FIA which took effect in 1991 or way after said
opinions were rendered, and as clarified by the above-quoted Amendments. In this regard, suffice it to
state that as between the law and an opinion rendered by an administrative agency, the law indubitably
prevails. Moreover, said Opinions are merely advisory and cannot prevail over the clear intent of the
framers of the Constitution.

In the same vein, the SEC’s construction of Section 11, Article XII of the Constitution is at best merely
advisory for it is the courts that finally determine what a law means.

On the other hand, respondents therein, Antonio O. Cojuangco, Manuel V. Pangilinan, Carlos A. Arellano,
Helen Y. Dee, Magdangal B. Elma, Mariles Cacho-Romulo, Fr. Bienvenido F. Nebres, Ray C. Espinosa,
Napoleon L. Nazareno, Albert F. Del Rosario, and Orlando B. Vea, argued that the term "capital" in
Section 11, Article XII of the Constitution includes preferred shares since the Constitution does not
distinguish among classes of stock, thus:

16. The Constitution applies its foreign ownership limitation on the corporation’s "capital," without
distinction as to classes of shares.

In this connection, the Corporation Code – which was already in force at the time the present (1987)
Constitution was drafted – defined outstanding capital stock as follows:
Section 137. Outstanding capital stock defined. – The term "outstanding capital stock", as used in this
Code, means the total shares of stock issued under binding subscription agreements to subscribers or
stockholders, whether or not fully or partially paid, except treasury shares.

Section 137 of the Corporation Code also does not distinguish between common and preferred shares,
nor exclude either class of shares, in determining the outstanding capital stock (the "capital") of a
corporation. Consequently, petitioner’s suggestion to reckon PLDT’s foreign equity only on the basis of
PLDT’s outstanding common shares is without legal basis. The language of the Constitution should be
understood in the sense it has in common use.

17. But even assuming that resort to the proceedings of the Constitutional Commission is necessary,
there is nothing in the Record of the Constitutional Commission (Vol. III) – which petitioner misleadingly
cited in the Petition – which supports petitioner’s view that only common shares should form the basis
for computing a public utility’s foreign equity.

18. In addition, the SEC – the government agency primarily responsible for implementing the
Corporation Code, and which also has the responsibility of ensuring compliance with the Constitution’s
foreign equity restrictions as regards nationalized activities x x x – has categorically ruled that both
common and preferred shares are properly considered in determining outstanding capital stock and the
nationality composition thereof.

We agree with petitioner and petitioners-in-intervention. The term "capital" in Section 11, Article XII of
the Constitution refers only to shares of stock entitled to vote in the election of directors, and thus in the
present case only to common shares, and not to the total outstanding capital stock comprising both
common and non-voting preferred shares.

The Corporation Code of the Philippines classifies shares as common or preferred, thus:

Sec. 6. Classification of shares. - The shares of stock of stock corporations may be divided into classes or
series of shares, or both, any of which classes or series of shares may have such rights, privileges or
restrictions as may be stated in the articles of incorporation: Provided, That no share may be deprived of
voting rights except those classified and issued as "preferred" or "redeemable" shares, unless otherwise
provided in this Code: Provided, further, That there shall always be a class or series of shares which have
complete voting rights. Any or all of the shares or series of shares may have a par value or have no par
value as may be provided for in the articles of incorporation: Provided, however, That banks, trust
companies, insurance companies, public utilities, and building and loan associations shall not be
permitted to issue no-par value shares of stock.

Preferred shares of stock issued by any corporation may be given preference in the distribution of the
assets of the corporation in case of liquidation and in the distribution of dividends, or such other
preferences as may be stated in the articles of incorporation which are not violative of the provisions of
this Code: Provided, That preferred shares of stock may be issued only with a stated par value. The Board
of Directors, where authorized in the articles of incorporation, may fix the terms and conditions of
preferred shares of stock or any series thereof: Provided, That such terms and conditions shall be
effective upon the filing of a certificate thereof with the Securities and Exchange Commission.

Shares of capital stock issued without par value shall be deemed fully paid and non-assessable and the
holder of such shares shall not be liable to the corporation or to its creditors in respect thereto:
Provided; That shares without par value may not be issued for a consideration less than the value of five
(₱5.00) pesos per share: Provided, further, That the entire consideration received by the corporation for
its no-par value shares shall be treated as capital and shall not be available for distribution as dividends.

A corporation may, furthermore, classify its shares for the purpose of insuring compliance with
constitutional or legal requirements.

Except as otherwise provided in the articles of incorporation and stated in the certificate of stock, each
share shall be equal in all respects to every other share.

Where the articles of incorporation provide for non-voting shares in the cases allowed by this Code, the
holders of such shares shall nevertheless be entitled to vote on the following matters:

1. Amendment of the articles of incorporation;

2. Adoption and amendment of by-laws;

3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate
property;

4. Incurring, creating or increasing bonded indebtedness;

5. Increase or decrease of capital stock;

6. Merger or consolidation of the corporation with another corporation or other corporations;

7. Investment of corporate funds in another corporation or business in accordance with this Code; and

8. Dissolution of the corporation.

Except as provided in the immediately preceding paragraph, the vote necessary to approve a particular
corporate act as provided in this Code shall be deemed to refer only to stocks with voting rights.

Indisputably, one of the rights of a stockholder is the right to participate in the control or management of
the corporation. This is exercised through his vote in the election of directors because it is the board of
directors that controls or manages the corporation. In the absence of provisions in the articles of
incorporation denying voting rights to preferred shares, preferred shares have the same voting rights as
common shares. However, preferred shareholders are often excluded from any control that is, deprived
of the right to vote in the election of directors and on other matters, on the theory that the preferred
shareholders are merely investors in the corporation for income in the same manner as bondholders. In
fact, under the Corporation Code only preferred or redeemable shares can be deprived of the right to
vote. Common shares cannot be deprived of the right to vote in any corporate meeting, and any
provision in the articles of incorporation restricting the right of common shareholders to vote is invalid.

Considering that common shares have voting rights which translate to control, as opposed to preferred
shares which usually have no voting rights, the term "capital" in Section 11, Article XII of the Constitution
refers only to common shares. However, if the preferred shares also have the right to vote in the election
of directors, then the term "capital" shall include such preferred shares because the right to participate
in the control or management of the corporation is exercised through the right to vote in the election of
directors. In short, the term "capital" in Section 11, Article XII of the Constitution refers only to shares of
stock that can vote in the election of directors.

This interpretation is consistent with the intent of the framers of the Constitution to place in the hands
of Filipino citizens the control and management of public utilities. As revealed in the deliberations of the
Constitutional Commission, "capital" refers to the voting stock or controlling interest of a corporation, to
wit:

MR. NOLLEDO. In Sections 3, 9 and 15, the Committee stated local or Filipino equity and foreign equity;
namely, 60-40 in Section 3, 60-40 in Section 9 and 2/3-1/3 in Section 15.

MR. VILLEGAS. That is right.

MR. NOLLEDO. In teaching law, we are always faced with this question: "Where do we base the equity
requirement, is it on the authorized capital stock, on the subscribed capital stock, or on the paid-up
capital stock of a corporation"? Will the Committee please enlighten me on this?

MR. VILLEGAS. We have just had a long discussion with the members of the team from the UP Law
Center who provided us a draft. The phrase that is contained here which we adopted from the UP draft is
"60 percent of voting stock."

MR. NOLLEDO. That must be based on the subscribed capital stock, because unless declared delinquent,
unpaid capital stock shall be entitled to vote.

MR. VILLEGAS. That is right.

MR. NOLLEDO. Thank you.

With respect to an investment by one corporation in another corporation, say, a corporation with 60-40
percent equity invests in another corporation which is permitted by the Corporation Code, does the
Committee adopt the grandfather rule?

MR. VILLEGAS. Yes, that is the understanding of the Committee.

MR. NOLLEDO. Therefore, we need additional Filipino capital?

MR. VILLEGAS. Yes.

MR. AZCUNA. May I be clarified as to that portion that was accepted by the Committee.

MR. VILLEGAS. The portion accepted by the Committee is the deletion of the phrase "voting stock or
controlling interest."

MR. AZCUNA. Hence, without the Davide amendment, the committee report would read: "corporations
or associations at least sixty percent of whose CAPITAL is owned by such citizens."

MR. VILLEGAS. Yes.

MR. AZCUNA. So if the Davide amendment is lost, we are stuck with 60 percent of the capital to be
owned by citizens.

MR. VILLEGAS. That is right.

MR. AZCUNA. But the control can be with the foreigners even if they are the minority. Let us say 40
percent of the capital is owned by them, but it is the voting capital, whereas, the Filipinos own the
nonvoting shares. So we can have a situation where the corporation is controlled by foreigners despite
being the minority because they have the voting capital. That is the anomaly that would result here.

MR. BENGZON. No, the reason we eliminated the word "stock" as stated in the 1973 and 1935
Constitutions is that according to Commissioner Rodrigo, there are associations that do not have stocks.
That is why we say "CAPITAL."

MR. AZCUNA. We should not eliminate the phrase "controlling interest."

MR. BENGZON. In the case of stock corporations, it is assumed. (Emphasis supplied)

Thus, 60 percent of the "capital" assumes, or should result in, "controlling interest" in the corporation.
Reinforcing this interpretation of the term "capital," as referring to controlling interest or shares entitled
to vote, is the definition of a "Philippine national" in the Foreign Investments Act of 1991, to wit:

SEC. 3. Definitions. - As used in this Act:

a. The term "Philippine national" shall mean a citizen of the Philippines; or a domestic partnership or
association wholly owned by citizens of the Philippines; or a corporation organized under the laws of the
Philippines of which at least sixty percent (60%) of the capital stock outstanding and entitled to vote is
owned and held by citizens of the Philippines; or a corporation organized abroad and registered as doing
business in the Philippines under the Corporation Code of which one hundred percent (100%) of the
capital stock outstanding and entitled to vote is wholly owned by Filipinos or a trustee of funds for
pension or other employee retirement or separation benefits, where the trustee is a Philippine national
and at least sixty percent (60%) of the fund will accrue to the benefit of Philippine nationals: Provided,
That where a corporation and its non-Filipino stockholders own stocks in a Securities and Exchange
Commission (SEC) registered enterprise, at least sixty percent (60%) of the capital stock outstanding and
entitled to vote of each of both corporations must be owned and held by citizens of the Philippines and
at least sixty percent (60%) of the members of the Board of Directors of each of both corporations must
be citizens of the Philippines, in order that the corporation, shall be considered a "Philippine national."
(Emphasis supplied)

In explaining the definition of a "Philippine national," the Implementing Rules and Regulations of the
Foreign Investments Act of 1991 provide:

b. "Philippine national" shall mean a citizen of the Philippines or a domestic partnership or association
wholly owned by the citizens of the Philippines; or a corporation organized under the laws of the
Philippines of which at least sixty percent [60%] of the capital stock outstanding and entitled to vote is
owned and held by citizens of the Philippines; or a trustee of funds for pension or other employee
retirement or separation benefits, where the trustee is a Philippine national and at least sixty percent
[60%] of the fund will accrue to the benefit of the Philippine nationals; Provided, that where a
corporation its non-Filipino stockholders own stocks in a Securities and Exchange Commission [SEC]
registered enterprise, at least sixty percent [60%] of the capital stock outstanding and entitled to vote of
both corporations must be owned and held by citizens of the Philippines and at least sixty percent [60%]
of the members of the Board of Directors of each of both corporation must be citizens of the Philippines,
in order that the corporation shall be considered a Philippine national. The control test shall be applied
for this purpose.

Compliance with the required Filipino ownership of a corporation shall be determined on the basis of
outstanding capital stock whether fully paid or not, but only such stocks which are generally entitled to
vote are considered.

For stocks to be deemed owned and held by Philippine citizens or Philippine nationals, mere legal title is
not enough to meet the required Filipino equity. Full beneficial ownership of the stocks, coupled with
appropriate voting rights is essential. Thus, stocks, the voting rights of which have been assigned or
transferred to aliens cannot be considered held by Philippine citizens or Philippine nationals.

Individuals or juridical entities not meeting the aforementioned qualifications are considered as non-
Philippine nationals. (Emphasis supplied)

Mere legal title is insufficient to meet the 60 percent Filipino-owned "capital" required in the
Constitution. Full beneficial ownership of 60 percent of the outstanding capital stock, coupled with 60
percent of the voting rights, is required. The legal and beneficial ownership of 60 percent of the
outstanding capital stock must rest in the hands of Filipino nationals in accordance with the
constitutional mandate. Otherwise, the corporation is "considered as non-Philippine national[s]."

Under Section 10, Article XII of the Constitution, Congress may "reserve to citizens of the Philippines or
to corporations or associations at least sixty per centum of whose capital is owned by such citizens, or
such higher percentage as Congress may prescribe, certain areas of investments." Thus, in numerous
laws Congress has reserved certain areas of investments to Filipino citizens or to corporations at least
sixty percent of the "capital" of which is owned by Filipino citizens. Some of these laws are: (1)
Regulation of Award of Government Contracts or R.A. No. 5183; (2) Philippine Inventors Incentives Act or
R.A. No. 3850; (3) Magna Carta for Micro, Small and Medium Enterprises or R.A. No. 6977; (4) Philippine
Overseas Shipping Development Act or R.A. No. 7471; (5) Domestic Shipping Development Act of 2004
or R.A. No. 9295; (6) Philippine Technology Transfer Act of 2009 or R.A. No. 10055; and (7) Ship
Mortgage Decree or P.D. No. 1521. Hence, the term "capital" in Section 11, Article XII of the Constitution
is also used in the same context in numerous laws reserving certain areas of investments to Filipino
citizens.

To construe broadly the term "capital" as the total outstanding capital stock, including both common and
non-voting preferred shares, grossly contravenes the intent and letter of the Constitution that the "State
shall develop a self-reliant and independent national economy effectively controlled by Filipinos." A
broad definition unjustifiably disregards who owns the all-important voting stock, which necessarily
equates to control of the public utility.

We shall illustrate the glaring anomaly in giving a broad definition to the term "capital." Let us assume
that a corporation has 100 common shares owned by foreigners and 1,000,000 non-voting preferred
shares owned by Filipinos, with both classes of share having a par value of one peso (₱1.00) per share.
Under the broad definition of the term "capital," such corporation would be considered compliant with
the 40 percent constitutional limit on foreign equity of public utilities since the overwhelming majority,
or more than 99.999 percent, of the total outstanding capital stock is Filipino owned. This is obviously
absurd.

In the example given, only the foreigners holding the common shares have voting rights in the election of
directors, even if they hold only 100 shares. The foreigners, with a minuscule equity of less than 0.001
percent, exercise control over the public utility. On the other hand, the Filipinos, holding more than
99.999 percent of the equity, cannot vote in the election of directors and hence, have no control over
the public utility. This starkly circumvents the intent of the framers of the Constitution, as well as the
clear language of the Constitution, to place the control of public utilities in the hands of Filipinos. It also
renders illusory the State policy of an independent national economy effectively controlled by Filipinos.

The example given is not theoretical but can be found in the real world, and in fact exists in the present
case.

Holders of PLDT preferred shares are explicitly denied of the right to vote in the election of directors.
PLDT’s Articles of Incorporation expressly state that "the holders of Serial Preferred Stock shall not be
entitled to vote at any meeting of the stockholders for the election of directors or for any other purpose
or otherwise participate in any action taken by the corporation or its stockholders, or to receive notice of
any meeting of stockholders."

On the other hand, holders of common shares are granted the exclusive right to vote in the election of
directors. PLDT’s Articles of Incorporation state that "each holder of Common Capital Stock shall have
one vote in respect of each share of such stock held by him on all matters voted upon by the
stockholders, and the holders of Common Capital Stock shall have the exclusive right to vote for the
election of directors and for all other purposes."
In short, only holders of common shares can vote in the election of directors, meaning only common
shareholders exercise control over PLDT. Conversely, holders of preferred shares, who have no voting
rights in the election of directors, do not have any control over PLDT. In fact, under PLDT’s Articles of
Incorporation, holders of common shares have voting rights for all purposes, while holders of preferred
shares have no voting right for any purpose whatsoever.

It must be stressed, and respondents do not dispute, that foreigners hold a majority of the common
shares of PLDT. In fact, based on PLDT’s 2010 General Information Sheet (GIS), which is a document
required to be submitted annually to the Securities and Exchange Commission, foreigners hold
120,046,690 common shares of PLDT whereas Filipinos hold only 66,750,622 common shares. In other
words, foreigners hold 64.27% of the total number of PLDT’s common shares, while Filipinos hold only
35.73%. Since holding a majority of the common shares equates to control, it is clear that foreigners
exercise control over PLDT. Such amount of control unmistakably exceeds the allowable 40 percent limit
on foreign ownership of public utilities expressly mandated in Section 11, Article XII of the Constitution.

Moreover, the Dividend Declarations of PLDT for 2009, as submitted to the SEC, shows that per share the
SIP preferred shares earn a pittance in dividends compared to the common shares. PLDT declared
dividends for the common shares at ₱70.00 per share, while the declared dividends for the preferred
shares amounted to a measly ₱1.00 per share. So the preferred shares not only cannot vote in the
election of directors, they also have very little and obviously negligible dividend earning capacity
compared to common shares.

As shown in PLDT’s 2010 GIS, as submitted to the SEC, the par value of PLDT common shares is ₱5.00 per
share, whereas the par value of preferred shares is ₱10.00 per share. In other words, preferred shares
have twice the par value of common shares but cannot elect directors and have only 1/70 of the
dividends of common shares. Moreover, 99.44% of the preferred shares are owned by Filipinos while
foreigners own only a minuscule 0.56% of the preferred shares.61 Worse, preferred shares constitute
77.85% of the authorized capital stock of PLDT while common shares constitute only 22.15%.62 This
undeniably shows that beneficial interest in PLDT is not with the non-voting preferred shares but with
the common shares, blatantly violating the constitutional requirement of 60 percent Filipino control and
Filipino beneficial ownership in a public utility.

The legal and beneficial ownership of 60 percent of the outstanding capital stock must rest in the hands
of Filipinos in accordance with the constitutional mandate. Full beneficial ownership of 60 percent of the
outstanding capital stock, coupled with 60 percent of the voting rights, is constitutionally required for
the State’s grant of authority to operate a public utility. The undisputed fact that the PLDT preferred
shares, 99.44% owned by Filipinos, are non-voting and earn only 1/70 of the dividends that PLDT
common shares earn, grossly violates the constitutional requirement of 60 percent Filipino control and
Filipino beneficial ownership of a public utility.

In short, Filipinos hold less than 60 percent of the voting stock, and earn less than 60 percent of the
dividends, of PLDT. This directly contravenes the express command in Section 11, Article XII of the
Constitution that "[n]o franchise, certificate, or any other form of authorization for the operation of a
public utility shall be granted except to corporations organized under the laws of the Philippines, at least
sixty per centum of whose capital is owned by such citizens."

To repeat, (1) foreigners own 64.27% of the common shares of PLDT, which class of shares exercises the
sole right to vote in the election of directors, and thus exercise control over PLDT; (2) Filipinos own only
35.73% of PLDT’s common shares, constituting a minority of the voting stock, and thus do not exercise
control over PLDT; (3) preferred shares, 99.44% owned by Filipinos, have no voting rights; (4) preferred
shares earn only 1/70 of the dividends that common shares earn;63 (5) preferred shares have twice the
par value of common shares; and (6) preferred shares constitute 77.85% of the authorized capital stock
of PLDT and common shares only 22.15%. This kind of ownership and control of a public utility is a
mockery of the Constitution.

Incidentally, the fact that PLDT common shares with a par value of ₱5.00 have a current stock market
value of ₱2,328.00 per share,64 while PLDT preferred shares with a par value of ₱10.00 per share have a
current stock market value ranging from only ₱10.92 to ₱11.06 per share,65 is a glaring confirmation by
the market that control and beneficial ownership of PLDT rest with the common shares, not with the
preferred shares.

Indisputably, construing the term "capital" in Section 11, Article XII of the Constitution to include both
voting and non-voting shares will result in the abject surrender of our telecommunications industry to
foreigners, amounting to a clear abdication of the State’s constitutional duty to limit control of public
utilities to Filipino citizens. Such an interpretation certainly runs counter to the constitutional provision
reserving certain areas of investment to Filipino citizens, such as the exploitation of natural resources as
well as the ownership of land, educational institutions and advertising businesses. The Court should
never open to foreign control what the Constitution has expressly reserved to Filipinos for that would be
a betrayal of the Constitution and of the national interest. The Court must perform its solemn duty to
defend and uphold the intent and letter of the Constitution to ensure, in the words of the Constitution,
"a self-reliant and independent national economy effectively controlled by Filipinos."

Section 11, Article XII of the Constitution, like other provisions of the Constitution expressly reserving to
Filipinos specific areas of investment, such as the development of natural resources and ownership of
land, educational institutions and advertising business, is self-executing. There is no need for legislation
to implement these self-executing provisions of the Constitution. The rationale why these constitutional
provisions are self-executing was explained in Manila Prince Hotel v. GSIS, thus:

Hence, unless it is expressly provided that a legislative act is necessary to enforce a constitutional
mandate, the presumption now is that all provisions of the constitution are self-executing. If the
constitutional provisions are treated as requiring legislation instead of self-executing, the legislature
would have the power to ignore and practically nullify the mandate of the fundamental law. This can be
cataclysmic. That is why the prevailing view is, as it has always been, that —

. . . in case of doubt, the Constitution should be considered self-executing rather than non-self-executing.
. . . Unless the contrary is clearly intended, the provisions of the Constitution should be considered self-
executing, as a contrary rule would give the legislature discretion to determine when, or whether, they
shall be effective. These provisions would be subordinated to the will of the lawmaking body, which
could make them entirely meaningless by simply refusing to pass the needed implementing statute.
(Emphasis supplied)

In Manila Prince Hotel, even the Dissenting Opinion of then Associate Justice Reynato S. Puno, later Chief
Justice, agreed that constitutional provisions are presumed to be self-executing. Justice Puno stated:

Courts as a rule consider the provisions of the Constitution as self-executing, rather than as requiring
future legislation for their enforcement. The reason is not difficult to discern. For if they are not treated
as self-executing, the mandate of the fundamental law ratified by the sovereign people can be easily
ignored and nullified by Congress. Suffused with wisdom of the ages is the unyielding rule that legislative
actions may give breath to constitutional rights but congressional inaction should not suffocate them.

Thus, we have treated as self-executing the provisions in the Bill of Rights on arrests, searches and
seizures, the rights of a person under custodial investigation, the rights of an accused, and the privilege
against self-incrimination. It is recognized that legislation is unnecessary to enable courts to effectuate
constitutional provisions guaranteeing the fundamental rights of life, liberty and the protection of
property. The same treatment is accorded to constitutional provisions forbidding the taking or damaging
of property for public use without just compensation. (Emphasis supplied)

Thus, in numerous cases, this Court, even in the absence of implementing legislation, applied directly the
provisions of the 1935, 1973 and 1987 Constitutions limiting land ownership to Filipinos. In Soriano v.
Ong Hoo,this Court ruled:

As the Constitution is silent as to the effects or consequences of a sale by a citizen of his land to an alien,
and as both the citizen and the alien have violated the law, none of them should have a recourse against
the other, and it should only be the State that should be allowed to intervene and determine what is to
be done with the property subject of the violation. We have said that what the State should do or could
do in such matters is a matter of public policy, entirely beyond the scope of judicial authority. (Dinglasan,
et al. vs. Lee Bun Ting, et al., 6 G. R. No. L-5996, June 27, 1956.) While the legislature has not definitely
decided what policy should be followed in cases of violations against the constitutional prohibition,
courts of justice cannot go beyond by declaring the disposition to be null and void as violative of the
Constitution. (Emphasis supplied)

To treat Section 11, Article XII of the Constitution as not self-executing would mean that since the 1935
Constitution, or over the last 75 years, not one of the constitutional provisions expressly reserving
specific areas of investments to corporations, at least 60 percent of the "capital" of which is owned by
Filipinos, was enforceable. In short, the framers of the 1935, 1973 and 1987 Constitutions miserably
failed to effectively reserve to Filipinos specific areas of investment, like the operation by corporations of
public utilities, the exploitation by corporations of mineral resources, the ownership by corporations of
real estate, and the ownership of educational institutions. All the legislatures that convened since 1935
also miserably failed to enact legislations to implement these vital constitutional provisions that
determine who will effectively control the national economy, Filipinos or foreigners. This Court cannot
allow such an absurd interpretation of the Constitution.
This Court has held that the SEC "has both regulatory and adjudicative functions."Under its regulatory
functions, the SEC can be compelled by mandamus to perform its statutory duty when it unlawfully
neglects to perform the same. Under its adjudicative or quasi-judicial functions, the SEC can be also be
compelled by mandamus to hear and decide a possible violation of any law it administers or enforces
when it is mandated by law to investigate such violation.

Under Section 17of the Corporation Code, the SEC has the regulatory function to reject or disapprove
the Articles of Incorporation of any corporation where "the required percentage of ownership of the
capital stock to be owned by citizens of the Philippines has not been complied with as required by
existing laws or the Constitution." Thus, the SEC is the government agency tasked with the statutory duty
to enforce the nationality requirement prescribed in Section 11, Article XII of the Constitution on the
ownership of public utilities. This Court, in a petition for declaratory relief that is treated as a petition for
mandamus as in the present case, can direct the SEC to perform its statutory duty under the law, a duty
that the SEC has apparently unlawfully neglected to do based on the 2010 GIS that respondent PLDT
submitted to the SEC.

Under Section 5(m) of the Securities Regulation Code, the SEC is vested with the "power and function" to
"suspend or revoke, after proper notice and hearing, the franchise or certificate of registration of
corporations, partnerships or associations, upon any of the grounds provided by law." The SEC is
mandated under Section 5(d) of the same Code with the "power and function" to "investigate the
activities of persons to ensure compliance" with the laws and regulations that SEC administers or
enforces. The GIS that all corporations are required to submit to SEC annually should put the SEC on
guard against violations of the nationality requirement prescribed in the Constitution and existing laws.
This Court can compel the SEC, in a petition for declaratory relief that is treated as a petition for
mandamus as in the present case, to hear and decide a possible violation of Section 11, Article XII of the
Constitution in view of the ownership structure of PLDT’s voting shares, as admitted by respondents and
as stated in PLDT’s 2010 GIS that PLDT submitted to SEC.

WHEREFORE, we PARTLY GRANT the petition and rule that the term "capital" in Section 11, Article XII of
the 1987 Constitution refers only to shares of stock entitled to vote in the election of directors, and thus
in the present case only to common shares, and not to the total outstanding capital stock (common and
non-voting preferred shares). Respondent Chairperson of the Securities and Exchange Commission is
DIRECTED to apply this definition of the term "capital" in determining the extent of allowable foreign
ownership in respondent Philippine Long Distance Telephone Company, and if there is a violation of
Section 11, Article XII of the Constitution, to impose the appropriate sanctions under the law.

SO ORDERED.
Art. 1590

THIRD DIVISION

G.R. No. 168402 August 6, 2008

ABOITIZ SHIPPING CORPORATION, petitioner,

vs.

INSURANCE COMPANY OF NORTH AMERICA, respondent.

DECISION

REYES, R.T., J.:

THE RIGHT of subrogation attaches upon payment by the insurer of the insurance claims by the assured.
As subrogee, the insurer steps into the shoes of the assured and may exercise only those rights that the
assured may have against the wrongdoer who caused the damage.

Before Us is a petition for review on certiorari of the Decision of the Court of Appeals (CA) which
reversed the Decision of the Regional Trial Court (RTC). The CA ordered petitioner Aboitiz Shipping
Corporation to pay the sum of P280,176.92 plus interest and attorney's fees in favor of respondent
Insurance Company of North America (ICNA).

The Facts

Culled from the records, the facts are as follows:

On June 20, 1993, MSAS Cargo International Limited and/or Associated and/or Subsidiary Companies
(MSAS) procured a marine insurance policy from respondent ICNA UK Limited of London. The insurance
was for a transshipment of certain wooden work tools and workbenches purchased for the consignee
Science Teaching Improvement Project (STIP), Ecotech Center, Sudlon Lahug, Cebu City, Philippines. ICNA
issued an "all-risk" open marine policy, stating:

This Company, in consideration of a premium as agreed and subject to the terms and conditions printed
hereon, does insure for MSAS Cargo International Limited &/or Associated &/or Subsidiary Companies
on behalf of the title holder: - Loss, if any, payable to the Assured or order.

The cargo, packed inside one container van, was shipped "freight prepaid" from Hamburg, Germany on
board M/S Katsuragi. A clean bill of lading was issued by Hapag-Lloyd which stated the consignee to be
STIP, Ecotech Center, Sudlon Lahug, Cebu City.

The container van was then off-loaded at Singapore and transshipped on board M/S Vigour Singapore.
On July 18, 1993, the ship arrived and docked at the Manila International Container Port where the
container van was again off-loaded. On July 26, 1993, the cargo was received by petitioner Aboitiz
Shipping Corporation (Aboitiz) through its duly authorized booking representative, Aboitiz Transport
System. The bill of lading issued by Aboitiz contained the notation "grounded outside warehouse."

The container van was stripped and transferred to another crate/container van without any notation on
the condition of the cargo on the Stuffing/Stripping Report. On August 1, 1993, the container van was
loaded on board petitioner's vessel, MV Super Concarrier I. The vessel left Manila en route to Cebu City
on August 2, 1993.

On August 3, 1993, the shipment arrived in Cebu City and discharged onto a receiving apron of the Cebu
International Port. It was then brought to the Cebu Bonded Warehousing Corporation pending clearance
from the Customs authorities. In the Stripping Report dated August 5, 1993, petitioner's checker noted
that the crates were slightly broken or cracked at the bottom.

On August 11, 1993, the cargo was withdrawn by the representative of the consignee, Science Teaching
Improvement Project (STIP) and delivered to Don Bosco Technical High School, Punta Princesa, Cebu City.
It was received by Mr. Bernhard Willig. On August 13, 1993, Mayo B. Perez, then Claims Head of
petitioner, received a telephone call from Willig informing him that the cargo sustained water damage.
Perez, upon receiving the call, immediately went to the bonded warehouse and checked the condition of
the container and other cargoes stuffed in the same container. He found that the container van and
other cargoes stuffed there were completely dry and showed no sign of wetness.

Perez found that except for the bottom of the crate which was slightly broken, the crate itself appeared
to be completely dry and had no water marks. But he confirmed that the tools which were stored inside
the crate were already corroded. He further explained that the "grounded outside warehouse" notation
in the bill of lading referred only to the container van bearing the cargo.

In a letter dated August 15, 1993, Willig informed Aboitiz of the damage noticed upon opening of the
cargo. The letter stated that the crate was broken at its bottom part such that the contents were
exposed. The work tools and workbenches were found to have been completely soaked in water with
most of the packing cartons already disintegrating. The crate was properly sealed off from the inside
with tarpaper sheets. On the outside, galvanized metal bands were nailed onto all the edges. The letter
concluded that apparently, the damage was caused by water entering through the broken parts of the
crate.

The consignee contacted the Philippine office of ICNA for insurance claims. On August 21, 1993, the
Claimsmen Adjustment Corporation (CAC) conducted an ocular inspection and survey of the damage.
CAC reported to ICNA that the goods sustained water damage, molds, and corrosion which were
discovered upon delivery to consignee.

On September 21, 1993, the consignee filed a formal claim with Aboitiz in the amount of P276,540.00 for
the damaged condition of the following goods:

ten (10) wooden workbenches

three (3) carbide-tipped saw blades

one (1) set of ball-bearing guides

one (1) set of overarm router bits

twenty (20) rolls of sandpaper for stroke sander

In a Supplemental Report dated October 20, 1993, CAC reported to ICNA that based on official weather
report from the Philippine Atmospheric, Geophysical and Astronomical Services Administration, it would
appear that heavy rains on July 28 and 29, 1993 caused water damage to the shipment. CAC noted that
the shipment was placed outside the warehouse of Pier No. 4, North Harbor, Manila when it was
delivered on July 26, 1993. The shipment was placed outside the warehouse as can be gleaned from the
bill of lading issued by Aboitiz which contained the notation "grounded outside warehouse." It was only
on July 31, 1993 when the shipment was stuffed inside another container van for shipment to Cebu.

Aboitiz refused to settle the claim. On October 4, 1993, ICNA paid the amount of P280,176.92 to
consignee. A subrogation receipt was duly signed by Willig. ICNA formally advised Aboitiz of the claim
and subrogation receipt executed in its favor. Despite follow-ups, however, no reply was received from
Aboitiz.

RTC Disposition

ICNA filed a civil complaint against Aboitiz for collection of actual damages in the sum of P280,176.92,
plus interest and attorney's fees. ICNA alleged that the damage sustained by the shipment was
exclusively and solely brought about by the fault and negligence of Aboitiz when the shipment was left
grounded outside its warehouse prior to delivery.

Aboitiz disavowed any liability and asserted that the claim had no factual and legal bases. It countered
that the complaint stated no cause of action, plaintiff ICNA had no personality to institute the suit, the
cause of action was barred, and the suit was premature there being no claim made upon Aboitiz.

On November 14, 2003, the RTC rendered judgment against ICNA. The dispositive portion of the
decision17 states:

WHEREFORE, premises considered, the court holds that plaintiff is not entitled to the relief claimed in
the complaint for being baseless and without merit. The complaint is hereby DISMISSED. The
defendant's counterclaims are, likewise, DISMISSED for lack of basis.

The RTC ruled that ICNA failed to prove that it is the real party-in-interest to pursue the claim against
Aboitiz. The trial court noted that Marine Policy No. 87GB 4475 was issued by ICNA UK Limited with
address at Cigna House, 8 Lime Street, London EC3M 7NA. However, complainant ICNA Phils. did not
present any evidence to show that ICNA UK is its predecessor-in-interest, or that ICNA UK assigned the
insurance policy to ICNA Phils. Moreover, ICNA Phils.' claim that it had been subrogated to the rights of
the consignee must fail because the subrogation receipt had no probative value for being hearsay
evidence. The RTC reasoned:

While it is clear that Marine Policy No. 87GB 4475 was issued by Insurance Company of North America
(U.K.) Limited (ICNA UK) with address at Cigna House, 8 Lime Street, London EC3M 7NA, no evidence has
been adduced which would show that ICNA UK is the same as or the predecessor-in-interest of plaintiff
Insurance Company of North America ICNA with office address at Cigna-Monarch Bldg., dela Rosa cor.
Herrera Sts., Legaspi Village, Makati, Metro Manila or that ICNA UK assigned the Marine Policy to ICNA.
Second, the assured in the Marine Policy appears to be MSAS Cargo International Limited &/or
Associated &/or Subsidiary Companies. Plaintiff's witness, Francisco B. Francisco, claims that the
signature below the name MSAS Cargo International is an endorsement of the marine policy in favor of
Science Teaching Improvement Project. Plaintiff's witness, however, failed to identify whose signature it
was and plaintiff did not present on the witness stand or took (sic) the deposition of the person who
made that signature. Hence, the claim that there was an endorsement of the marine policy has no
probative value as it is hearsay.

Plaintiff, further, claims that it has been subrogated to the rights and interest of Science Teaching
Improvement Project as shown by the Subrogation Form (Exhibit "K") allegedly signed by a
representative of Science Teaching Improvement Project. Such representative, however, was not
presented on the witness stand. Hence, the Subrogation Form is self-serving and has no probative value.
(Emphasis supplied)

The trial court also found that ICNA failed to produce evidence that it was a foreign corporationduly
licensed to do business in the Philippines. Thus, it lacked the capacity to sue before Philippine Courts, to
wit:

Prescinding from the foregoing, plaintiff alleged in its complaint that it is a foreign insurance company
duly authorized to do business in the Philippines. This allegation was, however, denied by the defendant.
In fact, in the Pre-Trial Order of 12 March 1996, one of the issues defined by the court is whether or not
the plaintiff has legal capacity to sue and be sued. Under Philippine law, the condition is that a foreign
insurance company must obtain licenses/authority to do business in the Philippines. These
licenses/authority are obtained from the Securities and Exchange Commission, the Board of Investments
and the Insurance Commission. If it fails to obtain these licenses/authority, such foreign corporation
doing business in the Philippines cannot sue before Philippine courts. Mentholatum Co., Inc. v.
Mangaliman, 72 Phil. 524. (Emphasis supplied)

CA Disposition

ICNA appealed to the CA. It contended that the trial court failed to consider that its cause of action is
anchored on the right of subrogation under Article 2207 of the Civil Code. ICNA said it is one and the
same as the ICNA UK Limited as made known in the dorsal portion of the Open Policy.

On the other hand, Aboitiz reiterated that ICNA lacked a cause of action. It argued that the formal claim
was not filed within the period required under Article 366 of the Code of Commerce; that ICNA had no
right of subrogation because the subrogation receipt should have been signed by MSAS, the assured in
the open policy, and not Willig, who is merely the representative of the consignee.

On March 29, 2005, the CA reversed and set aside the RTC ruling, disposing as follows:

WHEREFORE, premises considered, the present appeal is hereby GRANTED. The appealed decision of the
Regional Trial Court of Makati City in Civil Case No. 94-1590 is hereby REVERSED and SET ASIDE. A new
judgment is hereby rendered ordering defendant-appellee Aboitiz Shipping Corporation to pay the
plaintiff-appellant Insurance Company of North America the sum of P280,176.92 with interest thereon at
the legal rate from the date of the institution of this case until fully paid, and attorney's fees in the sum
of P50,000, plus the costs of suit.

The CA opined that the right of subrogation accrues simply upon payment by the insurance company of
the insurance claim. As subrogee, ICNA is entitled to reimbursement from Aboitiz, even assuming that it
is an unlicensed foreign corporation. The CA ruled:

At any rate, We find the ground invoked for the dismissal of the complaint as legally untenable. Even
assuming arguendo that the plaintiff-insurer in this case is an unlicensed foreign corporation, such
circumstance will not bar it from claiming reimbursement from the defendant carrier by virtue of
subrogation under the contract of insurance and as recognized by Philippine courts.

Plaintiff insurer, whether the foreign company or its duly authorized Agent/Representative in the
country, as subrogee of the claim of the insured under the subject marine policy, is therefore the real
party in interest to bring this suit and recover the full amount of loss of the subject cargo shipped by it
from Manila to the consignee in Cebu City.

The CA ruled that the presumption that the carrier was at fault or that it acted negligently was not
overcome by any countervailing evidence. Hence, the trial court erred in dismissing the complaint and in
not finding that based on the evidence on record and relevant provisions of law, Aboitiz is liable for the
loss or damage sustained by the subject cargo.

Issues

The following issues are up for our consideration:

(1) THE HONORABLE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR IN RULING THAT ICNA HAS A
CAUSE OF ACTION AGAINST ABOITIZ BY VIRTUE OF THE RIGHT OF SUBROGATION BUT WITHOUT
CONSIDERING THE ISSUE CONSISTENTLY RAISED BY ABOITIZ THAT THE FORMAL CLAIM OF STIP WAS NOT
MADE WITHIN THE PERIOD PRESCRIBED BY ARTICLE 366 OF THE CODE OF COMMERCE; AND, MORE SO,
THAT THE CLAIM WAS MADE BY A WRONG CLAIMANT.

(2) THE HONORABLE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR IN RULING THAT THE SUIT
FOR REIMBURSEMENT AGAINST ABOITIZ WAS PROPERLY FILED BY ICNA AS THE LATTER WAS AN
AUTHORIZED AGENT OF THE INSURANCE COMPANY OF NORTH AMERICA (U.K.) ("ICNA UK").
(3) THE HONORABLE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR IN RULING THAT THERE
WAS PROPER INDORSEMENT OF THE INSURANCE POLICY FROM THE ORIGINAL ASSURED MSAS CARGO
INTERNATIONAL LIMITED ("MSAS") IN FAVOR OF THE CONSIGNEE STIP, AND THAT THE SUBROGATION
RECEIPT ISSUED BY STIP IN FAVOR OF ICNA IS VALID NOTWITHSTANDING THE FACT THAT IT HAS NO
PROBATIVE VALUE AND IS MERELY HEARSAY AND A SELF-SERVING DOCUMENT FOR FAILURE OF ICNA TO
PRESENT A REPRESENTATIVE OF STIP TO IDENTIFY AND AUTHENTICATE THE SAME.

(4) THE HONORABLE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR IN RULING THAT THE
EXTENT AND KIND OF DAMAGE SUSTAINED BY THE SUBJECT CARGO WAS CAUSED BY THE FAULT OR
NEGLIGENCE OF ABOITIZ. (Underscoring supplied)

Elsewise stated, the controversy rotates on three (3) central questions: (a) Is respondent ICNA the real
party-in-interest that possesses the right of subrogation to claim reimbursement from petitioner Aboitiz?
(b) Was there a timely filing of the notice of claim as required under Article 366 of the Code of
Commerce? (c) If so, can petitioner be held liable on the claim for damages?

Our Ruling

We answer the triple questions in the affirmative.

A foreign corporation not licensed to do business in the Philippines is not absolutely incapacitated from
filing a suit in local courts. Only when that foreign corporation is "transacting" or "doing business" in the
country will a license be necessary before it can institute suits. It may, however, bring suits on isolated
business transactions, which is not prohibited under Philippine law. Thus, this Court has held that a
foreign insurance company may sue in Philippine courts upon the marine insurance policies issued by it
abroad to cover international-bound cargoes shipped by a Philippine carrier, even if it has no license to
do business in this country. It is the act of engaging in business without the prescribed license, and not
the lack of license per se, which bars a foreign corporation from access to our courts.

In any case, We uphold the CA observation that while it was the ICNA UK Limited which issued the
subject marine policy, the present suit was filed by the said company's authorized agent in Manila. It was
the domestic corporation that brought the suit and not the foreign company. Its authority is expressly
provided for in the open policy which includes the ICNA office in the Philippines as one of the foreign
company's agents.

As found by the CA, the RTC erred when it ruled that there was no proper indorsement of the insurance
policy by MSAS, the shipper, in favor of STIP of Don Bosco Technical High School, the consignee.

The terms of the Open Policy authorize the filing of any claim on the insured goods, to be brought
against ICNA UK, the company who issued the insurance, or against any of its listed agents worldwide.
MSAS accepted said provision when it signed and accepted the policy. The acceptance operated as an
acceptance of the authority of the agents. Hence, a formal indorsement of the policy to the agent in the
Philippines was unnecessary for the latter to exercise the rights of the insurer.
Likewise, the Open Policy expressly provides that:

The Company, in consideration of a premium as agreed and subject to the terms and conditions printed
hereon, does insure MSAS Cargo International Limited &/or Associates &/or Subsidiary Companies in
behalf of the title holder: - Loss, if any, payable to the Assured or Order.

The policy benefits any subsequent assignee, or holder, including the consignee, who may file claims on
behalf of the assured. This is in keeping with Section 57 of the Insurance Code which states:

A policy may be so framed that it will inure to the benefit of whosoever, during the continuance of the
risk, may become the owner of the interest insured. (Emphasis added)

Respondent's cause of action is founded on it being subrogated to the rights of the consignee of the
damaged shipment. The right of subrogation springs from Article 2207 of the Civil Code, which states:

Article 2207. If the plaintiff's property has been insured, and he has received indemnity from the
insurance company for the injury or loss arising out of the wrong or breach of contract complained of,
the insurance company shall be subrogated to the rights of the insured against the wrongdoer or the
person who has violated the contract. If the amount paid by the insurance company does not fully cover
the injury or loss, the aggrieved party shall be entitled to recover the deficiency from the person causing
the loss or injury. (Emphasis added)

As this Court held in the case of Pan Malayan Insurance Corporation v. Court of Appeals, payment by the
insurer to the assured operates as an equitable assignment of all remedies the assured may have against
the third party who caused the damage. Subrogation is not dependent upon, nor does it grow out of, any
privity of contract or upon written assignment of claim. It accrues simply upon payment of the insurance
claim by the insurer.

Upon payment to the consignee of indemnity for damage to the insured goods, ICNA's entitlement to
subrogation equipped it with a cause of action against petitioner in case of a contractual breach or
negligence. This right of subrogation, however, has its limitations. First, both the insurer and the
consignee are bound by the contractual stipulations under the bill of lading. Second, the insurer can be
subrogated only to the rights as the insured may have against the wrongdoer. If by its own acts after
receiving payment from the insurer, the insured releases the wrongdoer who caused the loss from
liability, the insurer loses its claim against the latter.

The giving of notice of loss or injury is a condition precedent to the action for loss or injury or the right to
enforce the carrier's liability. Circumstances peculiar to this case lead Us to conclude that the notice
requirement was complied with. As held in the case of Philippine American General Insurance Co., Inc. v.
Sweet Lines, Inc., this notice requirement protects the carrier by affording it an opportunity to make an
investigation of the claim while the matter is still fresh and easily investigated. It is meant to safeguard
the carrier from false and fraudulent claims.
Under the Code of Commerce, the notice of claim must be made within twenty four (24) hours from
receipt of the cargo if the damage is not apparent from the outside of the package. For damages that are
visible from the outside of the package, the claim must be made immediately. The law provides:

Article 366. Within twenty four hours following the receipt of the merchandise, the claim against the
carrier for damages or average which may be found therein upon opening the packages, may be made,
provided that the indications of the damage or average which give rise to the claim cannot be
ascertained from the outside part of such packages, in which case the claim shall be admitted only at the
time of receipt.

After the periods mentioned have elapsed, or the transportation charges have been paid, no claim shall
be admitted against the carrier with regard to the condition in which the goods transported were
delivered. (Emphasis supplied)

The periods above, as well as the manner of giving notice may be modified in the terms of the bill of
lading, which is the contract between the parties. Notably, neither of the parties in this case presented
the terms for giving notices of claim under the bill of lading issued by petitioner for the goods.

The shipment was delivered on August 11, 1993. Although the letter informing the carrier of the damage
was dated August 15, 1993, that letter, together with the notice of claim, was received by petitioner only
on September 21, 1993. But petitioner admits that even before it received the written notice of claim,
Mr. Mayo B. Perez, Claims Head of the company, was informed by telephone sometime in August 13,
1993. Mr. Perez then immediately went to the warehouse and to the delivery site to inspect the goods in
behalf of petitioner.

In the case of Philippine Charter Insurance Corporation (PCIC) v. Chemoil Lighterage Corporation, the
notice was allegedly made by the consignee through telephone. The claim for damages was denied. This
Court ruled that such a notice did not comply with the notice requirement under the law. There was no
evidence presented that the notice was timely given. Neither was there evidence presented that the
notice was relayed to the responsible authority of the carrier.

As adverted to earlier, there are peculiar circumstances in the instant case that constrain Us to rule
differently from the PCIC case, albeit this ruling is being made pro has vice, not to be made a precedent
for other cases.

Stipulations requiring notice of loss or claim for damage as a condition precedent to the right of recovery
from a carrier must be given a reasonable and practical construction, adapted to the circumstances of
the case under adjudication, and their application is limited to cases falling fairly within their object and
purpose.

Bernhard Willig, the representative of consignee who received the shipment, relayed the information
that the delivered goods were discovered to have sustained water damage to no less than the Claims
Head of petitioner, Mayo B. Perez. Immediately, Perez was able to investigate the claims himself and he
confirmed that the goods were, indeed, already corroded.
Provisions specifying a time to give notice of damage to common carriers are ordinarily to be given a
reasonable and practical, rather than a strict construction. We give due consideration to the fact that the
final destination of the damaged cargo was a school institution where authorities are bound by rules and
regulations governing their actions. Understandably, when the goods were delivered, the necessary
clearance had to be made before the package was opened. Upon opening and discovery of the damaged
condition of the goods, a report to this effect had to pass through the proper channels before it could be
finalized and endorsed by the institution to the claims department of the shipping company.

The call to petitioner was made two days from delivery, a reasonable period considering that the goods
could not have corroded instantly overnight such that it could only have sustained the damage during
transit. Moreover, petitioner was able to immediately inspect the damage while the matter was still
fresh. In so doing, the main objective of the prescribed time period was fulfilled. Thus, there was
substantial compliance with the notice requirement in this case.

To recapitulate, We have found that respondent, as subrogee of the consignee, is the real party in
interest to institute the claim for damages against petitioner; and pro hac vice, that a valid notice of
claim was made by respondent.

We now discuss petitioner's liability for the damages sustained by the shipment. The rule as stated in
Article 1735 of the Civil Code is that in cases where the goods are lost, destroyed or deteriorated,
common carriers are presumed to have been at fault or to have acted negligently, unless they prove that
they observed extraordinary diligence required by law.38 Extraordinary diligence is that extreme
measure of care and caution which persons of unusual prudence and circumspection use for securing
and preserving their own property rights. This standard is intended to grant favor to the shipper who is
at the mercy of the common carrier once the goods have been entrusted to the latter for shipment.

Here, the shipment delivered to the consignee sustained water damage. We agree with the findings of
the CA that petitioner failed to overturn this presumption:

Upon delivery of the cargo to the consignee Don Bosco Technical High School by a representative from
Trabajo Arrastre, and the crates opened, it was discovered that the workbenches and work tools suffered
damage due to "wettage" although by then they were already physically dry. Appellee carrier having
failed to discharge the burden of proving that it exercised extraordinary diligence in the vigilance over
such goods it contracted for carriage, the presumption of fault or negligence on its part from the time
the goods were unconditionally placed in its possession (July 26, 1993) up to the time the same were
delivered to the consignee (August 11, 1993), therefore stands. The presumption that the carrier was at
fault or that it acted negligently was not overcome by any countervailing evidence.(Emphasis added)

The shipment arrived in the port of Manila and was received by petitioner for carriage on July 26, 1993.
On the same day, it was stripped from the container van. Five days later, on July 31, 1993, it was re-
stuffed inside another container van. On August 1, 1993, it was loaded onto another vessel bound for
Cebu. During the period between July 26 to 31, 1993, the shipment was outside a container van and kept
in storage by petitioner.

The bill of lading issued by petitioner on July 31, 1993 contains the notation "grounded outside
warehouse," suggesting that from July 26 to 31, the goods were kept outside the warehouse. And since
evidence showed that rain fell over Manila during the same period, We can conclude that this was when
the shipment sustained water damage.

To prove the exercise of extraordinary diligence, petitioner must do more than merely show the
possibility that some other party could be responsible for the damage. It must prove that it used "all
reasonable means to ascertain the nature and characteristic of the goods tendered for transport and
that it exercised due care in handling them. Extraordinary diligence must include safeguarding the
shipment from damage coming from natural elements such as rainfall.

Aside from denying that the "grounded outside warehouse" notation referred not to the crate for
shipment but only to the carrier van, petitioner failed to mention where exactly the goods were stored
during the period in question. It failed to show that the crate was properly stored indoors during the
time when it exercised custody before shipment to Cebu. As amply explained by the CA:

On the other hand, the supplemental report submitted by the surveyor has confirmed that it was
rainwater that seeped into the cargo based on official data from the PAGASA that there was, indeed,
rainfall in the Port Area of Manila from July 26 to 31, 1993. The Surveyor specifically noted that the
subject cargo was under the custody of appellee carrier from the time it was delivered by the shipper on
July 26, 1993 until it was stuffed inside Container No. ACCU-213798-4 on July 31, 1993. No other
inevitable conclusion can be deduced from the foregoing established facts that damage from "wettage"
suffered by the subject cargo was caused by the negligence of appellee carrier in grounding the
shipment outside causing rainwater to seep into the cargoes.

Appellee's witness, Mr. Mayo tried to disavow any responsibility for causing "wettage" to the subject
goods by claiming that the notation "GROUNDED OUTSIDE WHSE." actually refers to the container and
not the contents thereof or the cargoes. And yet it presented no evidence to explain where did they
place or store the subject goods from the time it accepted the same for shipment on July 26, 1993 up to
the time the goods were stripped or transferred from the container van to another container and loaded
into the vessel M/V Supercon Carrier I on August 1, 1993 and left Manila for Cebu City on August 2,
1993. If the subject cargo was not grounded outside prior to shipment to Cebu City, appellee provided
no explanation as to where said cargo was stored from July 26, 1993 to July 31, 1993. What the records
showed is that the subject cargo was stripped from the container van of the shipper and transferred to
the container on August 1, 1993 and finally loaded into the appellee's vessel bound for Cebu City on
August 2, 1993. The Stuffing/Stripping Report (Exhibit "D") at the Manila port did not indicate any such
defect or damage, but when the container was stripped upon arrival in Cebu City port after being
discharged from appellee's vessel, it was noted that only one (1) slab was slightly broken at the bottom
allegedly hit by a forklift blade (Exhibit "F"). (Emphasis added)
Petitioner is thus liable for the water damage sustained by the goods due to its failure to satisfactorily
prove that it exercised the extraordinary diligence required of common carriers.

WHEREFORE, the petition is DENIED and the appealed Decision AFFIRMED.

SO ORDERED.

Pacto de retro

THIRD DIVISION
G.R. No. 149756 February 11, 2005

MYRNA RAMOS, petitioner,

vs.

SUSANA S. SARAO and JONAS RAMOS, respondents.

DECISION

PANGANIBAN, J.:

Although the parties in the instant case denominated their contract as a "DEED OF SALE UNDER PACTO
DE RETRO," the "sellers" have continued to possess and to reside at the subject house and lot up to the
present. This evident factual circumstance was plainly overlooked by the trial and the appellate courts,
thereby justifying a review of this case. This overlooked fact clearly shows that the petitioner intended
merely to secure a loan, not to sell the property. Thus, the contract should be deemed an equitable
mortgage.

The Case

Before us is a Petition for Review under Rule 45 of the Rules of Court, assailing the August 31, 2001
Decision of the Court of Appeals (CA) in CA-GR CV No. 50095, which disposed as follows:

"WHEREFORE, the instant appeal is DISMISSED for lack of merit. The decision dated January 19, 1995 of
the Regional Trial Court, Branch 145, Makati City is AFFIRMEDin toto."

The Facts

On February 21, 1991, Spouses Jonas Ramos and Myrna Ramos executed a contract over their conjugal
house and lot in favor of Susana S. Sarao for and in consideration of ₱1,310,430. Entitled "DEED OF SALE
UNDER PACTO DE RETRO," the contract, inter alia, granted the Ramos spouses the option to repurchase
the property within six months from February 21, 1991, for ₱1,310,430 plus an interest of 4.5 percent a
month. It was further agreed that should the spouses fail to pay the monthly interest or to exercise the
right to repurchase within the stipulated period, the conveyance would be deemed an absolute sale.

On July 30, 1991, Myrna Ramos tendered to Sarao the amount of ₱1,633,034.20 in the form of two
manager’s checks, which the latter refused to accept for being allegedly insufficient. On August 8, 1991,
Myrna filed a Complaint for the redemption of the property and moral damages plus attorney’s fees. The
suit was docketed as Civil Case No. 91-2188 and raffled to Branch 145 of the Regional Trial Court (RTC) of
Makati City. On August 13, 1991, she deposited with the RTC two checks that Sarao refused to accept.

On December 21, 1991, Sarao filed against the Ramos spouses a Petition "for consolidation of ownership
in pacto de retro sale" docketed as Civil Case No. 91-3434 and raffled to Branch 61 of the RTC of Makati
City.10 Civil Case Nos. 91-2188 and 91-3434 were later consolidated and jointly tried before Branch 145
of the said Makati RTC.11
The two lower courts narrated the trial in this manner:

" Myrna [Ramos] testified as follows: On February 21, 1991, she and her husband borrowed from Sarao
the amount of ₱1,234,000.00, payable within six (6) months, with an interest thereon at 4.5%
compounded monthly from said date until August 21, 1991, in order for them to pay [the] mortgage on
their house. For and in consideration of the said amount, they executed a deed of sale under a [pacto de
retro] in favor of Sarao over their conjugal house and lot registered under TCT No. 151784 of the Registry
of Deeds of Makati (Exhibit A). She further claimed that Sarao will keep the torrens title until the lapse of
the 6-month period, in which case she will redeem [the] subject property and the torrens title covering
it. When asked why it was the amount of ₱1,310,430 instead of the aforestated amount which appeared
in the deed, she explained that upon signing of the deed in question, the sum of ₱20,000.00
representing attorney’s fees was added, and its total amount was multiplied with 4.5% interest rate, so
that they could pay in advance the compounded interest. She also stated that although the market value
of the subject property as of February 1991 [was] calculated to [be] more or less ₱10 million, it was
offered [for] only ₱1,310,430.00 for the reason that they intended nothing but to redeem the same. In
May 1991, she wrote a letter to Atty. Mario Aguinaldo requesting him to give a computation of the loan
obligation, and [expressed] her intention to redeem the subject property, but she received no reply to
her letter. Instead, she, through her husband, secured directly from Sarao a handwritten computation of
their loan obligation, the total of which amount[ed] to ₱1,562,712.14. Later, she sent several letters to
Sarao, [furnishing] Atty. Aguinaldo with copies, asking them for the updated computation of their loan
obligation as of July 1991, but [no reply was again received]. During the hearing of February 17, 1992,
she admitted receiving a letter dated July 23, 1991 from Atty. Aguinaldo which show[ed] the
computation of their loan obligation [totaling] to ₱2,911,579.22 (Exhs. 6, 6-A). On July 30, 1991, she
claimed that she offered the redemption price in the form of two (2) manager’s checks amounting to
₱1,633,034.20 (Exhs. H-1 & H-2) to Atty. Aguinaldo, but the latter refused to accept them because they
[were] not enough to pay the loan obligation. Having refused acceptance of the said checks covering the
redemption price, on August 13, 1991 she came to Court to consign the checks (Exhs. L-4 and L-5).
Subsequently, she proceeded to the Register of Deeds to cause the annotation of lis pendens on TCT No.
151784 (Exh. B-1-A). Hence, she filed the x x x civil case against Sarao.

"On the other hand, Sarao testified as follows: On February 21, 1991, spouses Ramos together with a
certain Linda Tolentino and her husband, Nestor Tolentino approached her and offered transaction
involv[ing a] sale of property[. S]he consulted her lawyer, Atty. Aguinaldo, and on the same date a
corresponding deed of sale under pacto de retro was executed and signed (Exh. 1 ). Later on, she sent,
through her lawyer, a demand letter dated June 10, 1991 (Exh. 6) in view of Myrna’s failure to pay the
monthly interest of 4.5% as agreed upon under the deed[. O]n June 14, 1991 Jonas replied to said
demand letter (Exh. 8); in the reply Jonas admitted that he no longer ha[d] the capacity to redeem the
property and to pay the interest. In view of the said reply of Jonas, [Sarao] filed the corresponding
consolidation proceedings. She [further claimed] that before filing said action she incurred expenses
including payment of real estate taxes in arrears, x x x transfer tax and capital [gains] tax, and [expenses]
for [the] consolidated proceedings, for which these expenses were accordingly receipted (Exhs. 6, 6-1 to
6-0). She also presented a modified computation of the expenses she had incurred in connection with
the execution of the subject deed (Exh. 9). She also testified that Myrna did not tender payment of the
correct and sufficient price for said real property within the 6-month period as stipulated in the contract,
despite her having been shown the computation of the loan obligation, inclusive of capital gains tax, real
estate tax, transfer tax and other expenses. She admitted though that Myrna has tendered payment
amounting to ₱1,633,034.20 in the form of two manager’s checks, but these were refused acceptance
for being insufficient. She also claimed that several letters (Exhs. 2, 4 and 5) were sent to Myrna and her
lawyer, informing them of the computation of the loan obligation inclusive of said expenses. Finally, she
denied the allegations made in the complaint that she allied herself with Jonas, and claimed that she
ha[d] no knowledge about said allegation."

After trial, the RTC dismissed the Complaint and granted the prayer of Sarao to consolidate the title of
the property in her favor. Aggrieved, Myrna elevated the case to the CA.

Ruling of the Court of Appeals

The appellate court sustained the RTC’s finding that the disputed contract was a bonafide pacto de retro
sale, not a mortgage to secure a loan. It ruled that Myrna Ramos had failed to exercise the right of
repurchase, as the consignation of the two manager’s checks was deemed invalid. She allegedly failed (1)
to deposit the correct repurchase price and (2) to comply with the required notice of consignation.

Hence, this Petition.

The Issues

Petitioner raises the following issues for our consideration:

"1. Whether or not the honorable appellate court erred in ruling the subject Deed of Sale under Pacto de
Retro was, and is in reality and under the law an equitable mortgage;

"2. Whether or not the honorable appellate court erred in affirming the ruling of the court a quo that
there was no valid tender of payment of the redemption price neither [sic] a valid consignation in the
instant case; and

"3. Whether or not [the] honorable appellate court erred in affirming the ruling of the court a quo
denying the claim of petitioner for damages and attorney’s fees."

The Court’s Ruling

The Petition is meritorious in regard to Issues 1 and 2.

First Issue:

A Pacto de Retro Sale

or an Equitable Mortgage?
Respondent Sarao avers that the herein Petition should have been dismissed outright, because
petitioner (1) failed to show proof that she had served a copy of it to the Court of Appeals and (2) raised
questions of fact that were not proper issues in a petition under Rule 45 of the Rules of Court. This
Court, however, disregarded the first ground; otherwise, substantial injustice would have been inflicted
on petitioner. Since the Court of Appeals is not a party here, failure to serve it a copy of the Petition
would not violate any right of respondent. Service to the CA is indeed mentioned in the Rules, but only
to inform it of the pendency of the appeal before this Court.

As regards Item 2, there are exceptions to the general rule barring a review of questions of fact. The
Court reviewed the factual findings in the present case, because the CA had manifestly overlooked
certain relevant and undisputed facts which, after being considered, justified a different conclusion.

Pacto de Retro Sale Distinguished

from Equitable Mortgage

The pivotal issue in the instant case is whether the parties intended the contract to be a bona fide pacto
de retro sale or an equitable mortgage.

In a pacto de retro, ownership of the property sold is immediately transferred to the vendee a retro,
subject only to the repurchase by the vendor a retro within the stipulated period. The vendor a retro’s
failure to exercise the right of repurchase within the agreed time vests upon the vendee a retro, by
operation of law, absolute title to the property. Such title is not impaired even if the vendee a retro fails
to consolidate title under Article 1607 of the Civil Code.

On the other hand, an equitable mortgage is a contract that -- although lacking the formality, the form or
words, or other requisites demanded by a statute -- nevertheless reveals the intention of the parties to
burden a piece or pieces of real property as security for a debt. The essential requisites of such a
contract are as follows: (1) the parties enter into what appears to be a contract of sale, but (2) their
intention is to secure an existing debt by way of a mortgage. The nonpayment of the debt when due
gives the mortgagee the right to foreclose the mortgage, sell the property, and apply the proceeds of the
sale to the satisfaction of the loan obligation.

This Court has consistently decreed that the nomenclature used by the contracting parties to describe a
contract does not determine its nature. The decisive factor is their intention -- as shown by their
conduct, words, actions and deeds -- prior to, during, and after executing the agreement. This juristic
principle is supported by the following provision of law:

Article 1371. In order to judge the intention of the contracting parties, their contemporaneous and
subsequent acts shall be principally considered.

Even if a contract is denominated as a pacto de retro, the owner of the property may still disprove it by
means of parol evidence, provided that the nature of the agreement is placed in issue by the pleadings
filed with the trial court.
There is no single conclusive test to determine whether a deed absolute on its face is really a simple loan
accommodation secured by a mortgage. However, the law enumerates several instances that show when
a contract is presumed to be an equitable mortgage, as follows:

Article 1602. The contract shall be presumed to be an equitable mortgage, in any of the following cases:

(1) When the price of a sale with right to repurchase is unusually inadequate;

(2) When the vendor remains in possession as lessee or otherwise;

(3) When upon or after the expiration of the right to repurchase another instrument extending the
period of redemption or granting a new period is executed;

(4) When the purchaser retains for himself a part of the purchase price;

(5) When the vendor binds himself to pay the taxes on the thing sold;

(6) In any other case where it may be fairly inferred that the real intention of the parties is that the
transaction shall secure the payment of a debt or the performance of any other obligation.

In any of the foregoing cases, any money, fruits, or other benefit to be received by the vendee as rent or
otherwise shall be considered as interest which shall be subject to the usury laws.

Furthermore, a contract purporting to be a pacto de retro is construed as an equitable mortgage when

the terms of the document and the surrounding circumstances so require. The law discourages the use
of a pacto de retro, because this scheme is frequently used to circumvent a contract known as a pactum
commissorium. The Court has frequently noted that a pacto de retro is used to conceal a contract of loan
secured by a mortgage. Such construction is consistent with the doctrine that the law favors the least
transmission of rights.

Equitable Mortgage Presumed

to be Favored by Law

Jurisprudence has consistently declared that the presence of even just one of the circumstances set forth
in the forgoing Civil Code provision suffices to convert a contract to an equitable mortgage. Article 1602
specifically states that the equitable presumption applies to any of the cases therein enumerated.

In the present factual milieu, the vendor retained possession of the property allegedly sold. Petitioner
and her children continued to use it as their residence, even after Jonas Ramos had abandoned them. In
fact, it remained as her address for the service of court orders and copies of Respondent Sarao’s
pleadings.

The presumption of equitable mortgage imposes a burden on Sarao to present clear evidence to rebut it.
Corollary to this principle, the favored party need not introduce proof to establish such presumption; the
party challenging it must overthrow it, lest it persist. To overturn that prima facie fact that operated
against her, Sarao needed to adduce substantial and credible evidence to prove that the contract was a
bona fide pacto de retro. This evidentiary burden she miserably failed to discharge.

Contrary to Sarao’s bare assertions, a meticulous review of the evidence reveals that the alleged contract
was executed merely as security for a loan.

The July 23, 1991 letter of Respondent Sarao’s lawyer had required petitioner to pay a computed amount
-- under the heading "House and Lot Loan" -- to enable the latter to repurchase the property. In effect,
respondent would resell the property to petitioner, once the latter’s loan obligation would have been
paid. This explicit requirement was a clear indication that the property was to be used as security for a
loan.

The loan obligation was clear from Sarao’s evidence as found by the trial court, which we quote:

" [Sarao] also testified that Myrna did not tender payment of the correct and sufficient price for said real
property within the 6-month period as stipulated in the contract, despite her having been shown the
computation of the loan obligation, inclusive of capital gains tax, real estate tax, transfer tax and other
expenses. She admitted though that Myrna has tendered payment amounting to ₱1,633,034.20 in the
form of two manager’s checks, but these were refused acceptance for being insufficient. She also
claimed that several letters (Exhs. 2, 4 and 5) were sent to Myrna and her lawyer, informing them of the
computation of the loan obligation inclusive of said expenses."

Respondent herself stressed that the pacto de retro had been entered into on the very same day that
the property was to be foreclosed by a commercial bank. Such circumstance proves that the spouses
direly needed funds to avert a foreclosure sale. Had they intended to sell the property just to realize
some profit, as Sarao suggests, they would not have retained possession of the house and continued to
live there. Clearly, the spouses had entered into the alleged pacto de retro sale to secure a loan
obligation, not to transfer ownership of the property.

Sarao contends that Jonas Ramos admitted in his June 14, 1991 letter to her lawyer that the contract was
a pacto de retro. That letter, however, cannot override the finding that the pacto de retro was executed
merely as security for a loan obligation. Moreover, on May 17, 1991, prior to the transmittal of the letter,
petitioner had already sent a letter to Sarao’s lawyer expressing the former’s desire to settle the
mortgage on the property. Considering that she had already denominated the transaction with Sarao as
a mortgage, petitioner cannot be prejudiced by her husband’s alleged admission, especially at a time
when they were already estranged.

Inasmuch as the contract between the parties was an equitable mortgage, Respondent Sarao’s remedy
was to recover the loan amount from petitioner by filing an action for the amount due or by foreclosing
the property.

Second Issue:

Propriety of Tender of
Payment and Consignation

Tender of payment is the manifestation by debtors of their desire to comply with or to pay their
obligation. If the creditor refuses the tender of payment without just cause, the debtors are discharged
from the obligation by the consignation of the sum due. Consignation is made by depositing the proper
amount to the judicial authority, before whom the tender of payment and the announcement of the
consignation shall be proved. All interested parties are to be notified of the consignation. Compliance
with these requisites is mandatory.

The trial and the appellate courts held that there was no valid consignation, because petitioner had
failed to offer the correct amount and to provide ample consignation notice to Sarao. This conclusion is
incorrect.

Note that the principal loan was ₱1,310,430 plus 4.5 per cent monthly interest compounded for six
months. Expressing her desire to pay in the fifth month, petitioner averred that the total amount due
was ₱1,633,034.19, based on the computation of Sarao herself.56 The amount of ₱2,911,579.22 that the
latter demanded from her to settle the loan obligation was plainly exorbitant, since this sum included
other items not covered by the agreement. The property had been used solely as secure ty for the
₱1,310,430 loan; it was therefore improper to include in that amount payments for gasoline and
miscellaneous expenses, taxes, attorney’s fees, and other alleged loans. When Sarao unjustly refused the
tender of payment in the amount of ₱1,633,034.20, petitioner correctly filed suit and consigned the
amount in order to be released from the latter’s obligation.

The two lower courts cited Article 1257 of the Civil Code to justify their ruling that petitioner had failed
to notify Respondent Sarao of the consignation. This provision of law states that the obligor may be
released, provided the consignation is first announced to the parties interested in the fulfillment of the
obligation.

The facts show that the notice requirement was complied with. In her August 1, 1991 letter, petitioner
said that should the respondent fail to accept payment, the former would consign the amount. This
statement was an unequivocal announcement of consignation. Concededly, sending to the creditor a
tender of payment and notice of consignation -- which was precisely what petitioner did -- may be done
in the same act.

Because petitioners’ consignation of the amount of ₱1,633,034.20 was valid, it produced the effect of
payment. "The consignation, however, has a retroactive effect, and the payment is deemed to have been
made at the time of the deposit of the thing in court or when it was placed at the disposal of the judicial
authority. "The rationale for consignation is to avoid making the performance of an obligation more
onerous to the debtor by reason of causes not imputable to him.

Third Issue:

Moral Damages and Attorney’s Fees

Petitioner seeks moral damages in the amount of ₱500,000 for alleged sleepless nights and anxiety over
being homeless. Her bare assertions are insufficient to prove the legal basis for granting any award under
Article 2219 of the Civil Code. Verily, an award of moral damages is uncalled for, considering that it was
Respondent Sarao’s accommodation that settled the earlier obligation of the spouses with the
commercial bank and allowed them to retain ownership of the property.

Neither have attorney’s fees been shown to be proper. As a general rule, in the absence of a contractual
or statutory liability therefor, sound public policy frowns on penalizing the right to litigate. This policy
applies especially to the present case, because there is a need to determine whether the disputed
contract was a pacto de retro sale or an equitable mortgage.

Other Matters

In a belated Manifestation filed on October 19, 2004, Sarao declared that she was the "owner of the
one-half share of Jonas Ramos in the conjugal property," because of his alleged failure to file a timely
appeal with the CA. Such declaration of ownership has no basis in law, considering that the present suit
being pursued by petitioner pertains to a mortgage covering the whole property.

Besides, it is basic that defenses and issues not raised below cannot be considered on appeal.

The Court, however, observes that Respondent Sarao paid real property taxes amounting to ₱67,567.10
to halt the auction sale scheduled for October 8, 2004, by the City of Muntinlupa. Her payment was
made in good faith and benefited petitioner. Accordingly, Sarao should be reimbursed; otherwise,
petitioner would be unjustly enriched, under Article 2175 of the Civil Code which provides:

Art. 2175. Any person who is constrained to pay the taxes of another shall be entitled to reimbursement
from the latter.

WHEREFORE, the Petition is partly GRANTED and the assailed Decision SET ASIDE. Judgment is hereby
rendered:

(1) DECLARING (a) the disputed contract as an equitable mortgage, (b) petitioner’s loan to Respondent
Sarao to be in the amount of ₱1,633,034.19 as of July 30, 1991; and (c) the mortgage on the property --
covered by TCT No. 151784 in the name of the Ramos spouses and issued by the Register of Deeds of
Makati City --as discharged

(2) ORDERING the RTC to release to Sarao the consigned amount of ₱1,633,034.19

(3) COMMANDING Respondent Sarao to return to petitioner the owner’s copy of TCT No. 151784 in the
name of the Ramos spouses and issued by the Register of Deeds of Makati City

(4) DIRECTING the Register of Deeds of Makati City to cancel Entry No. 24057, the annotation appearing
on TCT No. 151784

(5) ORDERING petitioner to pay Sarao in the amount of ₱67,567.10 as reimbursement for real property
taxes
No pronouncement as to costs.

SO ORDERED.

2 or more things

EN BANC

G.R. No. 133879 November 21, 2001

EQUATORIAL REALTY DEVELOPMENT, INC., petitioner,

vs.
MAYFAIR THEATER, INC., respondent.

PANGANIBAN, J.:

General propositions do not decide specific cases. Rather, laws are interpreted in the context of the
peculiar factual situation of each proceeding. Each case has its own flesh and blood and cannot be ruled
upon on the basis of isolated clinical classroom principles.

While we agree with the general proposition that a contract of sale is valid until rescinded, it is equally
true that ownership of the thing sold is not acquired by mere agreement, but by tradition or delivery.
The peculiar facts of the present controversy as found by this Court in an earlier relevant Decision show
that delivery was not actually effected; in fact, it was prevented by a legally effective impediment. Not
having been the owner, petitioner cannot be entitled to the civil fruits of ownership like rentals of the
thing sold. Furthermore, petitioner's bad faith, as again demonstrated by the specific factual milieu of
said Decision, bars the grant of such benefits. Otherwise, bad faith would be rewarded instead of
punished.

The Case

Filed before this Court is a Petition for Review under Rule 45 of the Rules of Court, challenging the March
11, 1998 Order of the Regional Trial Court of Manila (RTC), Branch 8, in Civil Case No. 97-85141. The
dispositive portion of the assailed Order reads as follows:

"WHEREFORE, the motion to dismiss filed by defendant Mayfair is hereby GRANTED, and the complaint
filed by plaintiff Equatorial is hereby DISMISSED."

Also questioned is the May 29, 1998 RTC Order4 denying petitioner's Motion for Reconsideration.

The Facts

The main factual antecedents of the present Petition are matters of record, because it arose out of an
earlier case decided by this Court on November 21, 1996, entitled Equatorial Realty Development, Inc. v.
Mayfair Theater, Inc.(henceforth referred to as the "mother case"), docketed as G.R No. 106063.

Carmelo & Bauermann, Inc. ("Camelo" ) used to own a parcel of land, together with two 2-storey
buildings constructed thereon, located at Claro M. Recto Avenue, Manila, and covered by TCT No. 18529
issued in its name by the Register of Deeds of Manila.

On June 1, 1967, Carmelo entered into a Contract of Lease with Mayfair Theater Inc. ("Mayfair") for a
period of 20 years. The lease covered a portion of the second floor and mezzanine of a two-storey
building with about 1,610 square meters of floor area, which respondent used as a movie house known
as Maxim Theater.

Two years later, on March 31, 1969, Mayfair entered into a second Contract of Lease with Carmelo for
the lease of another portion of the latter's property — namely, a part of the second floor of the two-
storey building, with a floor area of about 1,064 square meters; and two store spaces on the ground
floor and the mezzanine, with a combined floor area of about 300 square meters. In that space, Mayfair
put up another movie house known as Miramar Theater. The Contract of Lease was likewise for a period
of 20 years.

Both leases contained a provision granting Mayfair a right of first refusal to purchase the subject
properties. However, on July 30, 1978 — within the 20-year-lease term — the subject properties were
sold by Carmelo to Equatorial Realty Development, Inc. ("Equatorial") for the total sum of P11,300,000,
without their first being offered to Mayfair.

As a result of the sale of the subject properties to Equatorial, Mayfair filed a Complaint before the
Regional Trial Court of Manila (Branch 7) for (a) the annulment of the Deed of Absolute Sale between
Carmelo and Equatorial, (b) specific performance, and (c) damages. After trial on the merits, the lower
court rendered a Decision in favor of Carmelo and Equatorial. This case, entitled "Mayfair" Theater, Inc. v.
Carmelo and Bauermann, Inc., et al.," was docketed as Civil Case No. 118019.

On appeal (docketed as CA-GR CV No. 32918), the Court of Appeals (CA) completely reversed and set
aside the judgment of the lower court.

The controversy reached this Court via G.R No. 106063. In this mother case, it denied the Petition for
Review in this wise:

"WHEREFORE, the petition for review of the decision of the Court of Appeals, dated June 23, 1992, in CA-
G.R. CV No. 32918, is HEREBY DENIED. The Deed of Absolute Sale between petitioners Equatorial Realty
Development, Inc. and Carmelo & Bauermann, Inc. is hereby deemed rescinded; Carmelo & Bauermann
is ordered to return to petitioner Equatorial Realty Development the purchase price. The latter is
directed to execute the deeds and documents necessary to return ownership to Carmelo & Bauermann
of the disputed lots. Carmelo & Bauermann is ordered to allow Mayfair Theater, Inc. to buy the aforesaid
lots for P11,300,000.00."

The foregoing Decision of this Court became final and executory on March 17, 1997. On April 25, 1997,
Mayfair filed a Motion for Execution, which the trial court granted.

However, Carmelo could no longer be located. Thus, following the order of execution of the trial court,
Mayfair deposited with the clerk of court a quo its payment to Carmelo in the sum of P11,300,000 less;
P847,000 as withholding tax. The lower court issued a Deed of Reconveyance in favor of Carmelo and a
Deed of Sale in favor of Mayfair. On the basis of these documents, the Registry of Deeds of Manila
canceled Equatorial's titles and issued new Certificates of Title in the name of Mayfair.

Ruling on Equatorial's Petition for Certiorari and Petition contesting the foregoing manner of execution,
the CA in its Resolution of November 20, 1998, explained that Mayfair had no right to deduct the
P847,000 as withholding tax. Since Carmelo could no longer be located, the appellate court ordered
Mayfair to deposit the said sum with the Office of the Clerk of Court, Manila, to complete the full
amount of P11,300,000 to be turned over to Equatorial.
Equatorial questioned the legality of the above CA ruling before this Court in G.R No. 136221 entitled
"Equatorial Realty Development, Inc. v. Mayfair Theater, Inc." In a Decision promulgated on May 12,
2000, this Court directed the trial court to follow strictly the Decision in GR. No. 106063, the mother
case. It explained its ruling in these words:

"We agree that Carmelo and Bauermann is obliged to return the entire amount of eleven million three
hundred thousand pesos (P11,300,000.00) to Equatorial. On the other hand, Mayfair may not deduct
from the purchase price the amount of eight hundred forty-seven thousand pesos (P847,000.00) as
withholding tax. The duty to withhold taxes due, if any, is imposed on the seller Carmelo and
Bauermann, Inc."

Meanwhile, on September 18, 1997 — barely five months after Mayfair had submitted its Motion for
Execution before the RTC of Manila, Branch 7 — Equatorial filed with the Regional Trial Court of Manila,
Branch 8, an action for the collection of a sum of money against Mayfair, claiming payment of rentals or
reasonable compensation for the defendant's use of the subject premises after its lease contracts had
expired. This action was the progenitor of the present case.

In its Complaint, Equatorial alleged among other things that the Lease Contract covering the premises
occupied by Maxim Theater expired on May 31, 1987, while the Lease Contract covering the premises
occupied by Miramar Theater lapsed on March 31, 1989.10 Representing itself as the owner of the
subject premises by reason of the Contract of Sale on July 30, 1978, it claimed rentals arising from
Mayfair's occupation thereof.

Ruling of the RTC Manila, Branch 8

As earlier stated, the trial court dismissed the Complaint via the herein assailed Order and denied the
Motion for Reconsideration filed by Equatorial.

The lower court debunked the claim of petitioner for unpaid back rentals, holding that the rescission of
the Deed of Absolute Sale in the mother case did not confer on Equatorial any vested or residual
proprietary rights, even in expectancy.

In granting the Motion to Dismiss, the court a quo held that the critical issue was whether Equatorial was
the owner of the subject property and could thus enjoy the fruits or rentals therefrom. It declared the
rescinded Deed of Absolute Sale as avoid at its inception as though it did not happen."

The trial court ratiocinated as follows:

"The meaning of rescind in the aforequoted decision is to set aside. In the case of Ocampo v. Court of
Appeals, G.R. No. 97442, June 30, 1994, the Supreme Court held that, 'to rescind is to declare a contract
void in its inception and to put an end as though it never were. It is not merely to terminate it and
release parties from further obligations to each other but to abrogate it from the beginning and restore
parties to relative positions which they would have occupied had no contract ever been made.'
"Relative to the foregoing definition, the Deed of Absolute Sale between Equatorial and Carmelo dated
July 31, 1978 is void at its inception as though it did not happen.

"The argument of Equatorial that this complaint for back rentals as 'reasonable compensation for use of
the subject property after expiration of the lease contracts presumes that the Deed of Absolute Sale
dated July 30, 1978 from whence the fountain of Equatorial's all rights flows is still valid and existing.

"The subject Deed of Absolute Sale having been rescinded by the Supreme Court, Equatorial is not the
owner and does not have any right to demand backrentals from the subject property.

The trial court added: "The Supreme Court in the Equatorial case, G.R No. 106063, has categorically
stated that the Deed of Absolute Sale dated July 31, 1978 has been rescinded subjecting the present
complaint to res judicata."

Hence, the present recourse.

Issues

Petitioner submits, for the consideration of this Court, the following issues:

"A. The basis of the dismissal of the Complaint by the Regional Trial Court not only disregards basic
concepts and principles in the law on contracts and in civil law, especially those on rescission and its
corresponding legal effects, but also ignores the dispositive portion of the Decision of the Supreme Court
in G.R. No. 106063 entitled 'Equatorial Realty Development, Inc. & Carmelo & Bauermann, Inc. vs.
Mayfair Theater, Inc.'

"B. The Regional Trial Court erred in holding that the Deed of Absolute Sale in favor of petitioner by
Carmelo & Bauermann, Inc., dated July 31, 1978, over the premises used and occupied by respondent,
having been 'deemed rescinded' by the Supreme Court in G.R. No. 106063, is 'void at its inception as
though it did not happen.'

"C. The Regional Trial Court likewise erred in holding that the aforesaid Deed of Absolute Sale, dated July
31, 1978, having been 'deemed rescinded' by the Supreme Court in G.R. No. 106063, petitioner 'is not
the owner and does not have any right to demand backrentals from the subject property,' and that the
rescission of the Deed of Absolute Sale by the Supreme Court does not confer to petitioner 'any vested
right nor any residual proprietary rights even in expectancy.'

"D. The issue upon which the Regional Trial Court dismissed the civil case, as stated in its Order of March
11, 1998, was not raised by respondent in its Motion to Dismiss.

"E. The sole ground upon which the Regional Trial Court dismissed Civil Case No. 97-85141 is not one of
the grounds of a Motion to Dismiss under Sec. 1 of Rule 16 of the 1997 Rules of Civil Procedure."
Basically, the issues can be summarized into two: (1) the substantive issue of whether Equatorial is
entitled to back rentals; and (2) the procedural issue of whether the court a quo's dismissal of Civil Case
No. 97-85141 was based on one of the grounds raised by respondent in its Motion to Dismiss and
covered by Rule 16 of the Rules of Court.

This Court's Ruling

The Petition is not meritorious.

First Issue:

Ownership of Subject Properties

We hold that under the peculiar facts and circumstances of the case at bar, as found by this Court en
banc in its Decision promulgated in 1996 in the mother case, no right of ownership was transferred from
Carmelo to Equatorial in view of a patent failure to deliver the property to the buyer.

Rental — a Civil

Fruit of Ownership

To better understand the peculiarity of the instant case, let us begin with some basic parameters. Rent is
a civil fruit that belongs to the owner of the property producing it by right of accession. Consequently
and ordinarily, the rentals that fell due from the time of the perfection of the sale to petitioner until its
rescission by final judgment should belong to the owner of the property during that period.

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

Ownership of the thing sold is a real right, which the buyer acquires only upon delivery of the thing to
him "in any of the ways specified in articles 1497 to 1501, or in any other manner signifying an
agreement that the possession is transferred from the vendor to the vendee." This right is transferred,
not merely by contract, but also by tradition or delivery. Non nudis pactis sed traditione dominia rerum
transferantur. And there is said to be delivery if and when the thing sold "is placed in the control and
possession of the vendee." Thus, it has been held that while the execution of a public instrument of sale
is recognized by law as equivalent to the delivery of the thing sold, such constructive or symbolic
delivery, being merely presumptive, is deemed negated by the failure of the vendee to take actual
possession of the land sold.

Delivery has been described as a composite act, a thing in which both parties must join and the minds of
both parties concur. It is an act by which one party parts with the title to and the possession of the
property, and the other acquires the right to and the possession of the same. In its natural sense,
delivery means something in addition to the delivery of property or title; it means transfer of possession.
In the Law on Sales, delivery may be either actual or constructive, but both forms of delivery
contemplate "the absolute giving up of the control and custody of the property on the part of the
vendor, and the assumption of the same by the vendee."

Possession Never

Acquired by Petitioner

Let us now apply the foregoing discussion to the present issue. From the peculiar facts of this case, it is
clear that petitioner never took actual control and possession of the property sold, in view of
respondent's timely objection to the sale and the continued actual possession of the property. The
objection took the form of a court action impugning the sale which, as we know, was rescinded by a
judgment rendered by this Court in the mother case. It has been held that the execution of a contract of
sale as a form of constructive delivery is a legal fiction. It holds true only when there is no impediment
that may prevent the passing of the property from the hands of the vendor into those of the vendee.
When there is such impediment, "fiction yields to reality — the delivery has not been effected."

Hence, respondent's opposition to the transfer of the property by way of sale to Equatorial was a legally
sufficient impediment that effectively prevented the passing of the property into the latter's hands.

This was the same impediment contemplated in Vda. de Sarmiento v. Lesaca, in which the Court held as
follows:

"The question that now arises is: Is there any stipulation in the sale in question from which we can infer
that the vendor did not intend to deliver outright the possession of the lands to the vendee? We find
none. On the contrary, it can be clearly seen therein that the vendor intended to place the vendee in
actual possession of the lands immediately as can be inferred from the stipulation that the vendee 'takes
actual possession thereof . . . with full rights to dispose, enjoy and make use thereof in such manner and
form as would be most advantageous to herself.' The possession referred to in the contract evidently
refers to actual possession and not merely symbolical inferable from the mere execution of the
document.

"Has the vendor complied with this express commitment? she did not. As provided in Article 1462, the
thing sold shall be deemed delivered when the vendee is placed in the control and possession thereof,
which situation does not here obtain because from the execution of the sale up to the present the
vendee was never able to take possession of the lands due to the insistent refusal of Martin Deloso to
surrender them claiming ownership thereof. And although it is postulated in the same article that the
execution of a public document is equivalent to delivery, this legal fiction only holds true when there is
no impediment that may prevent the passing of the property from the hands of the vendor into those of
the vendee.

The execution of a public instrument gives rise, therefore, only to a prima facie presumption of delivery.
Such presumption is destroyed when the instrument itself expresses or implies that delivery was not
intended; or when by other means it is shown that such delivery was not effected, because a third
person was actually in possession of the thing. In the latter case, the sale cannot be considered
consummated.

However, the point may be raised that under Article 1164 of the Civil Code, Equatorial as buyer acquired
a right to the fruits of the thing sold from the time the obligation to deliver the property to petitioner
arose. That time arose upon the perfection of the Contract of Sale on July 30, 1978, from which moment
the laws provide that the parties to a sale may reciprocally demand performance. Does this mean that
despite the judgment rescinding the sale, the right to the fruits34 belonged to, and remained
enforceable by, Equatorial?

Article 1385 of the Civil Code answers this question in the negative, because "[r]escission creates the
obligation to return the things which were the object of the contract, together with their fruits, and the
price with its interest; " Not only the land and building sold, but also the rental payments paid, if any,
had to be returned by the buyer.

Another point. The Decision in the mother case stated that "Equatorial has received rents" from Mayfair
"during all the years that this controversy has been litigated." The Separate Opinion of Justice Teodoro
Padilla in the mother case also said that Equatorial was "deriving rental income" from the disputed
property. Even herein ponente's Separate Concurring Opinion in the mother case recognized these
rentals. The question now is: Do all these statements concede actual delivery?

The answer is "No." The fact that Mayfair paid rentals to Equatorial during the litigation should not be
interpreted to mean either actual delivery or ipso facto recognition of Equatorial's title.

The CA Records of the mother case 35 show that Equatorial — as alleged buyer of the disputed
properties and as alleged successor-in-interest of Carmelo's rights as lessor — submitted two ejectment
suits against Mayfair. Filed in the Metropolitan Trial Court of Manila, the first was docketed as Civil Case
No. 121570 on July 9, 1987; and the second, as Civil Case No. 131944 on May 28, 1990. Mayfair
eventually won them both. However, to be able to maintain physical possession of the premises while
awaiting the outcome of the mother case, it had no choice but to pay the rentals.

The rental payments made by Mayfair should not be construed as a recognition of Equatorial as the new
owner. They were made merely to avoid imminent eviction. It is in this context that one should
understand the aforequoted factual statements in the ponencia in the mother case, as well as the
Separate Opinion of Mr. Justice Padilla and the Separate Concurring Opinion of the herein ponente.

At bottom, it may be conceded that, theoretically, a rescissible contract is valid until rescinded. However,
this general principle is not decisive to the issue of whether Equatorial ever acquired the right to collect
rentals. What is decisive is the civil law rule that ownership is acquired, not by mere agreement, but by
tradition or delivery. Under the factual environment of this controversy as found by this Court in the
mother case, Equatorial was never put in actual and effective control or possession of the property
because of Mayfair's timely objection.
As pointed out by Justice Holmes, general propositions do not decide specific cases. Rather, "laws are
interpreted in the context of the peculiar factual situation of each case. Each case has its own flesh and
blood and cannot be decided on the basis of isolated clinical classroom principles."

In short, the sale to Equatorial may have been valid from inception, but it was judicially rescinded before
it could be consummated. Petitioner never acquired ownership, not because the sale was void, as
erroneously claimed by the trial court, but because the sale was not consummated by a legally effective
delivery of the property sold.

Benefits Precluded by

Petitioner's Bad Faith

Furthermore, assuming for the sake of argument that there was valid delivery, petitioner is not entitled
to any benefits from the "rescinded" Deed of Absolute Sale because of its bad faith. This being the law of
the mother case decided in 1996, it may no longer be changed because it has long become final and
executory. Petitioner's bad faith is set forth in the following pertinent portions of the mother case:

"First and foremost is that the petitioners acted in bad faith to render Paragraph 8 'inutile.'

"Since Equatorial is a buyer in bad faith, this finding renders the sale to it of the property in question
rescissible. We agree with respondent Appellate Court that the records bear out the fact that Equatorial
was aware of the lease contracts because its lawyers had, prior to the sale, studied the said contracts. As
such, Equatorial cannot tenably claim to be a purchaser in good faith, and, therefore, rescission lies.

"As also earlier emphasized, the contract of sale between Equatorial and Carmelo is characterized by bad
faith, since it was knowingly entered into in violation of the rights of and to the prejudice of Mayfair. In
fact, as correctly observed by the Court of Appeals, Equatorial admitted that its lawyers had studied the
contract of lease prior to the sale. Equatorial's knowledge of the stipulations therein should have
cautioned it to look further into the agreement to determine if it involved stipulations that would
prejudice its own interests.

"On the part of Equatorial, it cannot be a buyer in good faith because it bought the property with notice
and full knowledge that Mayfair had a right to or interest in the property superior to its own. Carmelo
and Equatorial took unconscientious advantage of Mayfair." (Italics supplied)

Thus, petitioner was and still is entitled solely to he return of the purchase price it paid to Carmelo; no
more, no less. This Court has firmly ruled in the mother case that neither of them is entitled to any
consideration of equity, as both "took unconscientious advantage of Mayfair."

In the mother case, this Court categorically denied the payment of interest, a fruit of ownership. By the
same token, rentals, another fruit of ownership, cannot be granted without mocking this Court's en banc
Decision, which has long become final.
Petitioner's claim of reasonable compensation for respondent's use and occupation of the subject
property from the time the lease expired cannot be countenanced. If it suffered any loss, petitioner must
bear it in silence, since it had wrought that loss upon itself. Otherwise, bad faith would be rewarded
instead of punished.

We uphold the trial court's disposition, not for the reason it gave, but for (a) the patent failure to deliver
the property and (b) petitioner's bad faith, as above discussed.

Second Issue:

Ground in Motion to Dismiss

Procedurally, petitioner claims that the trial court deviated from the accepted and usual course of
judicial proceedings when it dismissed Civil Case No. 97-85141 on a ground not raised in respondent's
Motion to Dismiss. Worse, it allegedly based its dismissal on a ground not provided for in a motion to
dismiss as enunciated in the Rules of Court.

We are not convinced A review of respondent's Motion to Dismiss Civil Case No. 97-85141 shows that
there were two grounds invoked, as follows:

"(A) Plaintiff is guilty of forum-shopping.itc-alf

"(B) Plaintiff's cause of action, if any, is barred by prior judgment."

The court a quo ruled, inter alia, that the cause of action of petitioner plaintiff in the case below) had
been barred by a prior judgment of this Court in G.R No. 106063, the mother case.

Although it erred in its interpretation of the said Decision when it argued that the rescinded Deed of
Absolute Sale was avoid," we hold, nonetheless, that petitioner's cause of action is indeed barred by a
prior judgment of this Court. As already discussed, our Decision in G.R No. 106063 shows that petitioner
is not entitled to back rentals, because it never became the owner of the disputed properties due to a
failure of delivery. And even assuming arguendo that there was a valid delivery, petitioner's bad faith
negates its entitlement to the civil fruits of ownership, like interest and rentals.

Under the doctrine of res judicata or bar by prior judgment, a matter that has been adjudicated by a
court of competent jurisdiction must be deemed to have been finally and conclusively settled if it arises
in any subsequent litigation between the same parties and for the same cause. Thus, "[a] final judgment
on the merits rendered by a court of competent jurisdiction is conclusive as to the rights of the parties
and their privies and constitutes an absolute bar to subsequent actions involving the same claim,
demand, or cause of action." Res judicata is based on the ground that the "party to be affected, or some
other with whom he is in privity, has litigated the same matter in a former action in a court of competent
jurisdiction, and should not be permitted to litigate it again.
It frees the parties from undergoing all over again the rigors of unnecessary suits and repetitive trials. At
the same time, it prevents the clogging of court dockets. Equally important, it stabilizes rights and
promotes the rule of law.

We find no need to repeat the foregoing disquisitions on the first issue to show satisfaction of the
elements of res judicata. Suffice it to say that, clearly, our ruling in the mother case bars petitioner from
claiming back rentals from respondent. Although the court a quo erred when it declared "void from
inception" the Deed of Absolute Sale between Carmelo and petitioner, our foregoing discussion supports
the grant of the Motion to Dismiss on the ground that our prior judgment in G.R No. 106063 has already
resolved the issue of back rentals.

On the basis of the evidence presented during the hearing of Mayfair's Motion to Dismiss, the trial court
found that the issue of ownership of the subject property has been decided by this Court in favor of
Mayfair.

"The Supreme Court in the Equatorial case, G.R. No. 106063 has categorically stated that the Deed of
Absolute Sale dated July 31, 1978 has been rescinded subjecting the present complaint to res judicata."
(Emphasis in the original)

Hence, the trial court decided the Motion to Dismiss on the basis of res judicata, even if it erred in
interpreting the meaning of "rescinded" as equivalent to "void" In short, it ruled on the ground raised;
namely, bar by prior judgment. By granting the Motion, it disposed correctly, even if its legal reason for
nullifying the sale was wrong. The correct reasons are given in this Decision.

WHEREFORE, the Petition is hereby DENIED. Costs against petitioner.

SO ORDERED.

While I express my conformity to the ponencia of our distinguished colleague, Mr. Justice Artemio V.
Panganiban, I would just like to make the following observations:

1. The issue in this case was squarely resolved in our 1996 En Banc decision in the main case. What
petitioner is asking us to do now is to reverse or modify a judgment which is accurate in every respect,
conformable to law and jurisprudence, and faithful to principles of fairness and justice.

2. Petitioner's submissions are deceiving. It is trying to collect unjustified and unbelievably

increased rentals by provoking a purely academic discussion, as far as respondent is concerned, of a non-
applicable provision of the Civil Code on contracts.
3. To grant the petition is to reward bad faith, for petitioner has deprived respondent of the latter's
property rights for twenty-three (23) years and has forced it to defend its interests in case after case
during that lengthy period. Petitioner now tries to inflict further injury in the fantastic and groundless
amount of P115,947,867.00. To remand this case to the lower court in order to determine the back
rentals allegedly due to petitioner Equatorial Realty Development Corporation, Inc. is to encourage
continuation of crafty tactics and to allow the further dissipation of scarce judicial time and resources.

The instant petition arose from a complaint for back rentals, increased rentals and interests filed by
petitioner Equatorial Realty Development, Inc. (Equatorial) against respondent Mayfair Theater, Inc.
(Mayfair). It has to be adjudicated in the context of three earlier petitions decided by this Court.

A dispute between the two parties over the ownership of a commercial lot and building along Claro M.
Recto Avenue in Manila has led to 23 years of protracted litigation, including the filing of 4 petitions with
the Court, namely, G.R. No. L-106063, decided on November 21, 1996 (264 SCRA 483); G.R. No. 103311
decided on March 4, 1992; G.R. No. 136221, decided on May 12, 2000; and the present petition, G.R. No.
133879.

The case at bar is a classic illustration of how a dubious interpretation of the dispositive portion of the
1996 decision for petitioner could lead to 5 more years of bitter litigation after the initial 18 years of legal
proceedings over the first case.

Lease contracts over the subject property were executed on June 1, 1967 and March 31, 1969 by original
owner Carmelo and Bauermann, Inc. (Carmelo) in favor of herein respondent Mayfair. The leases expired
on May 31, 1987 and March 31, 1989, respectively. The lease contracts embodied provisions giving
Mayfair a right-of-first-refusal should Carmelo sell the property.

In an act characterized as bad faith by this Court, the property, in violation of the right of first refusal,
was sold by Carmelo to herein petitioner Equatorial, on July 31, 1978 for P11,300,000.00. On September
13, 1978, Mayfair filed the first case for annulment of the contract of sale, specific performance of the
right-of-first-refusal provision, and damages. The Regional Trial Court (RTC) of Manila decided the case in
favor of Equatorial on February 7, 1991. Counterclaims for compensation arising from the use of the
premises were awarded to Equatorial by the 1991 RTC decision.
On June 23, 1992, the Court of Appeals reversed the RTC decision, thus leading to the first petition, G.R.
No. 106063, filed against Mayfair by both Equatorial and Carmelo.

On November 21, 1996, this Court En Banc rendered its decision (264 SCRA 483 [1996]), disposing:

WHEREFORE, the petition for review of the decision of the Court of Appeals dated June 23, 1992, in CA-
G.R. CV No. 32918, is HEREBY DENIED. The Deed of Absolute Sale between petitioners Equatorial Realty
Development, Inc. and Carmelo & Bauermann, Inc. is hereby rescinded; petitioner Carmelo &
Bauermann is ordered to return to petitioner Equatorial Realty Development the purchase price. The
latter is directed to execute the deeds and documents necessary to return ownership to Carmelo &
Bauermann of the disputed lots. Carmelo and Bauermann is ordered to allow Mayfair Theater, Inc. to
buy the aforesaid lots for P11,300,000.00.

In the Court of Appeals decision (CA-G.R. CV No. 32918, June 23, 1992) in the main case, raised to this
Court, Mayfair was ordered to directly pay P11,300,000.00 to Equatorial whereupon Equatorial would
execute the deeds and documents necessary for the transfer of ownership to Mayfair and the
registration of the property in its name. The execution of documents and the transfer of the property
were directly between Equatorial and Mayfair. Our decision in 1996 (G.R. No. 106063) affirmed the
appellate decision. However, while the 1978 deed of sale questioned by Mayfair was rescinded, we
ordered Carmelo to first return to Equatorial the purchase price of the property, whereupon Equatorial
would return ownership to Carmelo, after which Mayfair would buy the lot for P11,300,000.00 from
Carmelo.

When the case was remanded to the RTC for execution of the decision, it was ascertained that Carmelo
and Bauermann, Inc. was no longer in existence. The Sheriff could not enforce the portions of the
judgment calling for acts to be performed by Carmelo. Mayfair, therefore, deposited the amount of
P11,300,000.00 with the RTC for payment to Equatorial, hoping that the latter would faithfully comply
with this Court's decision. In this regard, it may be mentioned that buyer Mayfair also paid P847,000.00
in taxes which the vendors should have paid. The RTC ordered the execution of deeds of transfer, the
cancellation of Equatorial's titles to the property, and the issuance of new titles in favor of Mayfair.
Accordingly, the property was registered in the name of Mayfair and titles issued in its favor.

Equatorial, however, saw an opening for further litigation. It questioned the method employed by the
RTC to execute the Court's judgment, arguing that the directives involving Carmelo's participation were
ignored by the trial court. The litigation over the alleged incorrectness of the execution eventually led to
the second petition earlier mentioned — G.R. No. 136221.

It may be mentioned at this point that on July 9, 1987, while the right-of-first-refusal and cancellation
case was pending, Equatorial filed an action for ejectment against Mayfair. Because the issue of
ownership was still pending in the case for rescission of deed of sale including the enforcement of the
right-of-first-refusal provision, the ejectment case was dismissed. Appeals to the RTC and the Court of
Appeals were denied.

On March 26, 1990, still another ejectment case was filed by Equatorial. In decisions which reached all
the way to this Court in G.R. No. 103311, the cases for ejectment did not prosper. Mayfair won the cases
on March 4, 1992.

The three cases decided by the Court in these litigations between Equatorial and Mayfair, all of them in
favor of Mayfair, are antecedents of the present and fourth petition. Equatorial has been adjudged as
having unlawfully and in bad faith acquired property that should have belonged to Mayfair since 1978.
Ownership and title have been unquestionably transferred to Mayfair.

Seemingly, Equatorial now seeks to profit from its bad faith. While the case involving the allegedly
incorrect execution of the 1996 decision on cancellation of the deed of sale in G.R. No. 106063 was being
litigated, Equatorial filed on September 18, 1997 with the RTC of Manila two complaints for payment of
back and increased rentals arising from the use by Mayfair of the lot, building, and other fixed
improvements. From the time the property was sold by Carmelo to Equatorial, lessee Mayfair had been
paying to Equatorial the rentals fixed in the 1967 and 1969 lease contracts with the original owner. This
was during the pendency of the complaint for annulment of the contract of sale, specific performance of
the right-of-first-refusal provision, and damages.

As found in our 1998 decision in G.R. No. 106063, the disputed property should have actually belonged
to Mayfair at the time. However, to avoid the ejectment cases, which Equatorial nonetheless later filed,
Mayfair was forced to pay rentals to Equatorial. It paid the rentals based on the rates fixed by Carmelo in
the lease contracts.

Equatorial, claiming the 1967 and 1969 rentals to be inadequate, claimed increased amounts as
reasonable compensation. Because the amounts fixed by the lease contract with Carmelo but paid to
Equatorial were only at the rate of P17,966.21 monthly while Equatorial wanted P210,000.00 every
month plus legal interests, the suit was for the payment of P115,947,867.68 as of June 19, 1997.

Citing the 1996 decision in G.R. No. 106063, Mayfair contended that it owned the property under the
decision. It stated that the sale by Carmelo to Equatorial had been cancelled, and, as owner, Mayfair
owed no increased rentals to Equatorial based on said decision.

The present case on back rentals could not be conclusively decided because the execution and finality of
the issue of ownership were being contested for 5 years in the petition on the proper execution filed in
G.R. No. 136221. This petition had to wait for the resolution of G.R. No. 136221.

In its decision dated May 12, 2000, in G.R. No. 136221 (First Division, per Mr. Justice Pardo; Davide, Jr.,
C.J., Kapunan, and Ynares-Santiago, JJ., concurring), this Court reiterated the judgment in G.R. No.
106063. It emphasized that the 1996 decision awarding the property to Mayfair was clear. It stated that
the decision having attained finality, there was nothing left for the parties to do but to adhere to the
mandates of the decision.

In the dispositive portion, however, the Court ordered the trial court "to carry out the execution
following strictly the terms" of the 1996 decision. However, as earlier stated, this could not be done
because Carmelo had ceased to exist. There was no longer any Carmelo which could return the
P11,300,000.00 consideration of the 1978 sale to Equatorial as ordered in the dispositive portion of the
1996 decision. Equatorial could not and would not also execute the deeds returning the property to
Carmelo, as directed in the decision. Neither could the defunct Carmelo sell the property to Mayfair at
the sale price in 1978 when the right of first refusal was violated.

Mayfair had to file a motion for partial reconsideration, emphasizing that it was impossible for a
corporation which has gone out of existence to obey the specific orders of this Court. A resolution was,
therefore, rendered on June 25, 2001 putting an end to the controversy over the proper implementation
of the 1996 judgment.

This June 25, 2001 Resolution in G.R. No. 136221 validated the issuance of new titles in the name of the
adjudicated owner, Mayfair. The Court ordered the direct release to Equatorial of the P11,300,000.00
deposited in court for the account of the defunct Carmelo.
In the follow-up Resolution of the First Division in G.R. No. 136221 dated June 25, 2001, the Court, after
describing the case as a Promethean one involving the execution of a decision which has been long final,
and after calling the efforts to stave off execution as a travesty of justice, instructed the trial court:

1. To execute the Court's Decision strictly in accordance with the ruling in G.R. No. 106063 by
validating the acts of the sheriff of Manila and the titles in the name of Mayfair Theater, Inc. issued by
the Register of Deeds of Manila consistent therewith;

2. In case of failure of Carmelo and Bauermann to accept the amount of P11,300,000.00 deposited
by Mayfair Theater, Inc. with the Clerk of Court, Regional Trial Court, Manila, to authorize the Clerk of
Court to RELEASE the amount of P11,300,000.00 deposited with the court for the account of Carmelo
and Bauermann, Inc. to petitioner;

3. To devolve upon the trial court the determination of other issues that may remain unresolved
among the parties, relating to the execution of this Court's final decision in G.R. No. 106063.

In light of the Court's judgments in G.R. No. 106063 and G.R. No. 136221, the present petition in G.R.
No. 133879 for back rentals should now be finally resolved, applying the rulings in those earlier
decisions.

Indubitably, the 1978 deed of sale executed by Carmelo in favor of Equatorial over the disputed property
has been set aside by this Court. Equatorial was declared a buyer in bad faith. The contract was
characterized as a fraudulent sale and the entirety of the indivisible property sold to Equatorial was the
property we ordered to be conveyed to Mayfair for the same price paid by Equatorial to Carmelo.

It is also beyond question that the method of execution of the 1996 decision by the RTC, the direct
payment by Mayfair to Equatorial, bypassing and detouring the defunct Carmelo corporation, has been
validated by this Court. There are no longer any procedural obstacles to the full implementation of the
decision.
And finally, the property sold to Equatorial in violation of Mayfair's right of first refusal is now
indisputably possessed by, and owned and titled in the name of, respondent Mayfair.

Parenthetically, the issue on the payment of back and increased rentals, plus interests, was actually
settled in the 1996 decision in G.R. No. 106063. It could not be enforced at the time only because of the
controversy unfortunately raised by Equatorial over the proper execution of the 1996 decision.

It is now time to reiterate the 1996 decision on interests and settle the dispute between Mayfair and
Equatorial once and for all.

Thus, we reiterate that:

On the question of interest payments on the principal amount of P11,300.000.00, it must be borne in
mind that both Carmelo and Equatorial acted in bad faith. Carmelo knowingly and deliberately broke a
contract entered into with Mayfair. It sold the property to Equatorial with purpose and intent to withhold
any notice or knowledge of the sale coming to the attention of Mayfair. All the circumstances point to a
calculated and contrived plan of non-compliance with the agreement of first refusal.

On the part of Equatorial, it cannot be a buyer in good faith because it bought the property with notice
and full knowledge the Mayfair had a right to or interest in the property superior to its own. Carmelo
and Equatorial took unconscientious advantage of Mayfair.

Neither may Carmelo and Equatorial avail of consideration based on equity which might warrant the
grant of interests. The vendor received as payment from the vendee what, at the time, was a full and fair
price for the property. It has used the P11,300,000.00 all these years earning income or interest from the
amount. Equatorial, on the other hand, has received rents and otherwise profited from the use of the
property turned over to it by Carmelo. In fact, during all the years that this controversy was being
litigated. Mayfair paid rentals regularly to the buyer who had an inferior right to purchase the property.
Mayfair is under no obligation to pay any interests arising from this judgment to either Carmelo or
Equatorial (264 SCRA 483, pp. 511-512).

Worthy quoting too is the concurring opinion in our 1996 decision of Mr. Justice Teodoro R. Padilla as
follows:
The equities of the case support the foregoing legal disposition. During the intervening years between 1
August 1978 and this date, Equatorial (after acquiring the C.M. Recto property for the price of
P11,300,000.00) had been leasing the property and deriving rental income therefrom. In fact, one of the
lessees in the property was Mayfair. Carmelo had, in turn, been using the proceeds of the sale,
investment-wise and/or operation wise in its own business.

It may appear, at first blush, that Mayfair is unduly favored by the solution submitted by this opinion,
because the price of P11,300,000.00 which it has to pay Carmelo in the exercise of its right of first
refusal, has been subjected to the inroads of inflation so that its purchasing power today is less than
when the same amount was paid by Equatorial to Carmelo. But then it cannot be overlooked that it was
Carmelo's breach of Mayfair's right of first refusal that prevented Mayfair from paying the price of
P11,300,000.00 to Carmelo at about the same time the amount was paid by Equatorial to Carmelo.
Moreover, it cannot be ignored that Mayfair had also incurred consequential or "opportunity" losses by
reason of its failure to acquire and use the property under its right of first refusal. In fine, any loss in
purchasing power of the price of P11,300,000.00 is for Carmelo to incur or absorb on account of its bad
faith in breaching Mayfair's contractual right of first refusal to the subject property. (ibid., pp. 511-512).

It can be seen from the above ruling that the issue of rentals and interests was fully discussed and
passed upon in 1996. Equatorial profited from the use of the building for all the years when it had no
right or, as stated in our decision, had an inferior right over the property. Mayfair, which had the superior
right, continued to pay rent but it was the rate fixed in the lease contract with Carmelo. We see no
reason for us to now deviate from the reasoning given in our main decision. The decision has been final
and executory for five (5) years and petitioner has failed to present any valid and reasonable ground to
reconsider, modify or reverse it. Let that which has been fairly adjudicated remain final.

My second observation relates to the clever but, to my mind, deceptive argument foisted by Equatorial
on the Court.

Equatorial relies on the Civil Code provision on rescissible contracts to bolster its claim. Its argument is
that a rescissible contract remains valid and binding upon the parties thereto until the same is rescinded
in an appropriate judicial proceeding.
Equatorial conveniently fails to state that the July 31, 1978 Deed of Absolute Sale was between
Equatorial and Carmelo only. Respondent Mayfair was not a party to the contract. The deed of sale was
surreptitiously entered into between Carmelo and Equatorial behind the back and in violation of the
rights of Mayfair. Why should the innocent and wronged party now be made to bear the consequences
of an unlawful contract to which it was not privy? Insofar as Equatorial and Carmelo are concerned, their
1978 contract may have validly transferred ownership from one to the other. But not as far as Mayfair is
concerned.

Mayfair starts its arguments with a discussion of Article 1381 of the Civil Code that contracts entered
into in fraud of creditors are rescissible. There is merit in Mayfair's contention that the legal effects are
not restricted to the contracting parties only. On the contrary, the rescission is for the benefit of a third
party, a stranger to the contract. Mayfair correctly states that as far as the injured third party is
concerned, the fraudulent contract, once rescinded, is non-existent or void from its inception. Hence,
from Mayfair's standpoint, the deed of absolute sale which should not have been executed in the first
place by reason of Mayfair's superior right to purchase the property and which deed was cancelled for
that reason by this Court, is legally non-existent. There must be a restoration of things to the condition
prior to the celebration of the contract (Respondent relies on Almeda vs. J. M. & Company, 43072-R,
December 16, 1975, as cited in the Philippine Law Dictionary; IV Arturo M. Tolentino, Civil Code of the
Philippines, 570, 1990 Ed., citing Manresa; IV Edgardo L. Paras, Civil Code of the Philippines, 717-718,
1994 Ed.).

It is hard not to agree with the explanations of Mayfair, to wit:

4.22. As a consequence of the rescission of the Deed of Absolute Sale, it was as if Equatorial never
bought and became the lessor of the subject properties. Thus, the court a quo did not err in ruling that
Equatorial is not the owner and does not have any right to demand back rentals from [the] subject
property.

4.23. Tolentino, supra, at 577-578 further explains that the effects of rescission in an accion pauliana
retroact to the date when the credit or right being enforced was acquired.

"While it is necessary that the credit of the plaintiff in the accion pauliana must be prior to the
fraudulent alienation, the date of the judgment enforcing it is immaterial. Even if the judgment be
subsequent to the alienation, it is merely declaratory, with retroactive effect to the date when the credit
was constituted . . ." (emphasis supplied)
4.24. The clear rationale behind this is to prevent conniving parties, such as Equatorial and Carmelo,
from benefiting in any manner from their unlawful act of entering into a contract in fraud of innocent
parties with superior rights like Mayfair. Thus, to allow Equatorial to further collect rentals from Mayfair
is to allow the former to profit from its own act of bad faith. Ex dolo malo non oritur actio. (Respondent's
Comment, pp. 338-339, Rollo).

This brings me to my third and final observation in this case. This Court emphasized in the main case that
the contract of sale between Equatorial and Carmelo was characterized by bad faith. The Court
described the sale as "fraudulent" in its 1996 decision. It stated that the damages which Mayfair suffered
are in terms of actual injury and lost opportunities, emphasizing that Mayfair should not be given an
empty or vacuous victory. Moreover, altogether too many suits have been filed in this case. Four
separate petitions have come before us, necessitating full length decisions in at least 3 of them. The
1996 decision stressed that the Court has always been against multiplicity of suits.

There was bad faith from the execution of the deed of sale because Equatorial and Carmelo affirmatively
operated with furtive design or with some motive of self-interest or ill-will or for ulterior purposes (Air
France vs. Carrascoso, 18 SCRA 166 [1966]). There was breach of a known duty by the two parties to the
unlawful contract arising from motives of interests or ill-will calculated to cause damage to another
(Lopez vs. Pan American World Airways, 123 Phil. 264 [1966]).

The presence of bad faith is clear from the records. Our resolution of this issue in 1996 (G.R. 106063) is
res judicata.

We stated:

First and foremost is that the petitioners (referring to Equatorial and Carmelo) acted in bad faith to
render Paragraph 8 "inutile".

Since Equatorial is a buyer in bad faith, this finding renders the sale to it of the property in question
rescissible. We agree with respondent Appellate Court that the records bear out the fact that Equatorial
was aware of the lease contracts because its lawyers had, prior to the sale, studied the said contracts. As
such Equatorial cannot tenably claim to be a purchaser in good faith and, therefore, rescission lies.

As also earlier emphasized, the contract of sale between Equatorial and Carmelo is characterized by bad
faith, since it was knowingly entered into in violation of the rights of and to the prejudice of Mayfair. In
fact, as correctly observed by the Court of Appeals, Equatorial admitted that its lawyers had studied the
contract of lease prior to the sale. Equatorial's knowledge of the stipulations therein should have
cautioned it to look further into the agreement to determine if it involved stipulations that would
prejudice its own interests.

On the part of Equatorial, it cannot be a buyer in good faith because it bought the property with notice
and full knowledge that Mayfair had a right to or interest in the property superior to its own. Carmelo
and Equatorial took unconscientious advantage of Mayfair (264 SCRA 506, 507-511).

We ruled that because of bad faith, neither may Carmelo and Equatorial avail themselves of
considerations based on equity which might warrant the grant of interests and, in this case,
unconscionably increased rentals.

Verily, if Mayfair were a natural person it could very well have asked for moral damages instead of facing
a lengthy and expensive suit to pay rentals many times higher than those stipulated in the contract of
lease. Under the Civil Code, Mayfair is the victim in a breach of contract where Carmelo and Equatorial
acted fraudulently and in bad faith.

Considering the judgments in our 3 earlier decisions, Mayfair is under no obligation to pay any interests,
whether based on law or equity, to Carmelo or Equatorial. Mayfair is the wronged entity, the one which
has suffered injury since 1978 or for the 23 years it was deprived of the property.

Equatorial has received rentals and other benefits from the use of the property during these 23 years,
rents and benefits which would have accrued to Mayfair if its rights had not been violated.
There is no obligation on the part of respondent Mayfair to pay any increased, additional, back or future
rentals or interests of any kind to petitioner Equatorial under the circumstances of this case.

I, therefore, concur with the majority opinion in denying due course and dismissing the petition.

"Stare decisis et non quieta movere — follow past precedents and do not disturb what has been settled.
Adherence to this principle is imperative if this Court is to maintain stability in jurisprudence.

I regret that I am unable to agree with the majority opinion.

The principal issue in this case is whether a rescissible contract is void and ineffective from its inception.
This issue is not a novel one. Neither is it difficult to resolve as it involves the application of elementary
principles in the law on contracts, specifically on rescissible contracts, as distinguished from void or
inexistent contracts.

The facts are simple.

On June 1, 1967, respondent Mayfair Theater, Inc. (Mayfair) leased portions of the ground, mezzanine
and second floors of a two storey commercial building located along C.M. Recto Avenue Manila. The
building together with the land on which it was constructed was then owned by Carmelo & Bauermann,
Inc. (Carmelo). Respondent used these premises as "Maxim Theater." The lease was for a period of
twenty (20) years.

On March 31, 1969, Mayfair leased from Carmelo another portion of the second floor, as well as two (2)
store spaces on the ground and mezzanine floors of the same building. Respondent Mayfair used the
premises as a movie theater known as "Miramar Theater."

Both leases contained the following identical provisions:

"That if the LESSOR should desire to sell the leased premises, the LESSEE shall be given 30-days exclusive
option to purchase the same.

In the event, however, that the leased premises is sold to someone other than the LESSEE, the LESSOR is
bound and obligated, as it hereby binds and obligates itself, to stipulate in the Deed of Sale thereof that
the purchaser shall recognize this lease and be bound by all the terms and conditions thereof.

On July 31, 1978, Carmelo entered into a Deed of Absolute Sale whereby it sold the subject land and
two-storey building to petitioner Equatorial Realty Development, Inc. (Equatorial) for P11,300,000.00.
Having acquired from Carmelo ownership of the subject property, Equatorial received rents from Mayfair
for sometime.

Subsequently, Mayfair, claiming it had been denied its right to purchase the leased property in
accordance with the provisions of its lease contracts with Carmelo, filed with the Regional Trial Court,
Branch 7, Manila, a suit for specific performance and annulment of sale with prayer to enforce its
"exclusive option to purchase" the property. The dispute between Mayfair, on the one hand, and
Carmelo and Equatorial on the other, reached this Court in G.R. No. 106063, "Equatorial Realty
Development, Inc. & Carmelo & Bauermann, Inc. vs. Mayfair Theater, Inc."1 On November 21, 1996, this
Court rendered a Decision, the dispositive portion of which reads:

"WHEREFORE, the petition for review of the decision of the Court of Appeals, dated June 23, 1992, in CA-
G.R. CV No. 32918, is HEREBY DENIED. The Deed of Absolute Sale between petitioners Equatorial Realty-
Development, Inc. and Carmelo & Bauermann, Inc. is hereby deemed rescinded; Carmelo & Bauermann
is ordered to return to petitioner Equatorial Realty Development the purchase price. The latter is
directed to execute the deeds and documents necessary to return ownership to Carmelo & Bauermann
of the disputed lots. Carmelo & Bauermann is ordered to allow Mayfair Theater, Inc. to buy the aforesaid
lots for P11,300,000.00.

SO ORDERED."

The Decision of this Court in G.R. No. 106063 became final and executory on March 17, 1997.

On April 25, 1997, Mayfair filed with the trial court a motion for execution which was granted.
However, Carmelo could no longer be located. Thus, Mayfair deposited with the trial court its payment
to Carmelo in the sum of P11,300,000.00 less P847,000.00 as withholding tax.

The Clerk of Court of the Manila Regional Trial Court, as sheriff, executed a deed of re-conveyance in
favor of Carmelo and a deed of sale in favor of Mayfair. On the basis of these documents, the Registry of
Deeds of Manila cancelled Equatorial's titles and issued new Certificates of Title in the name of Mayfair.

In G.R. No. 136221, "Equatorial Realty Development, Inc. vs. Mayfair Theater, Inc.," this Court instructed
the trial court to execute strictly this Court's Decision in G.R. No. 106063.

On September 18, 1997, or after the execution of this Court's Decision in G.R. No. 106063, Equatorial
filed with the Regional Trial Court of Manila, Branch 8, an action for collection of a sum of money against
Mayfair, docketed as Civil Case No. 97-85141. Equatorial prayed that the trial court render judgment
ordering Mayfair to pay:

(1) the sum of P11,548,941.76 plus legal interest, representing the total amount of unpaid monthly
rentals/reasonable compensation from June 1, 1987 (Maxim Theater) and March 31,1989 (Miramar
Theater) to July 31, 1997;

(2) the sums of P849,567.12 and P458,853.44 a month, plus legal interest, as rental/reasonable
compensation for the use and occupation of the subject property from August 1, 1997 to May 31, 1998
(Maxim Theater) and March 31, 1998 (Miramar Theater);

(3) the sum of P500,000.00 as and for attorney's fees, plus other expenses of litigation; and

(4) the costs of the suit.

On October 14, 1997, before filing its answer, Mayfair filed a "Motion to Dismiss" Civil Case No. 97-85141
on the following grounds:

"(A)

PLAINTIFF IS GUILTY OF FORUM SHOPPING.

(B)

PLAINTIFF'S CAUSE OF ACTION, IF ANY, IS BARRED BY PRIOR JUDGMENT."

On March 11, 1998, the court a quo issued an order dismissing Civil Case No. 97-85141 on the ground
that since this Court, in G.R. No. 106063, rescinded the Deed of Absolute Sale between Carmelo and
Equatorial, the contract is void at its inception. Correspondingly, Equatorial is not the owner of the
subject property and, therefore, does not have any right to demand from Mayfair payment of rentals or
reasonable compensation for its use and occupation of the premises.

Equatorial filed a motion for reconsideration but was denied.

Hence, the present petition.

At this stage, I beg to disagree with the ruling of the majority that (1) Equatorial did not acquire
ownership of the disputed property from Carmelo because of lack of delivery; and that (2) Equatorial is
not entitled to the payment of rentals because of its bad faith.

Firmly incorporated in our Law on Sales is the principle that ownership is transferred to the vendee by
means of delivery, actual or constructive. There is actual delivery when the thing sold is placed in the
control and possession of the vendee. Upon the other hand, there is constructive delivery when the
delivery of the thing sold is represented by other signs or acts indicative thereof. Article 1498 of the Civil
Code is in point. It provides that "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.

Contrary to the majority opinion, the facts and circumstances of the instant case clearly indicate that
there was indeed actual and constructive delivery of the disputed property from Carmelo to Equatorial.

Let me substantiate my claim.

First, I must take exception to the majority's statement that this Court found in G.R. No. 10606310 that,
"no right of ownership was transferred from Carmelo to Equatorial in view of a patent failure to deliver
the property to the buyer."

A perusal of the Decision dated November 21, 1996 would reveal otherwise.

To say that this Court found no transfer of ownership between Equatorial and Carmelo is very inaccurate.
For one, this Court, in disposing of G.R. No. 106063, explicitly ordered Equatorial to "execute the deeds
and documents necessary to return ownership to Carmelo & Bauermann of the disputed lots." I suppose
this Court would not have made such an order if it did not recognize the transfer of ownership from
Carmelo to Equatorial under the contract of sale. For why would the Court order Equatorial to execute
the deeds and documents necessary to return ownership to Carmelo if, all along, it believed that
ownership remained with Carmelo?

Furthermore, is Court explicitly stated in the Decision that Equatorial received rentals from Mayfair
during the pendency of the case. Let me quote the pertinent portion of the Decision, thus:

". . . Equatorial, on the other hand, has received rents and otherwise profited from the use of the
property turned over to it by Carmelo. In fact, during all the years that this controversy was being
litigated, Mayfair paid rentals regularly to the buyer (Equatorial) who had an inferior right to purchase
the property. Mayfair is under no obligation to pay any interests arising from this judgment to either
Carmelo or Equatorial."

Justice Teodoro R. Padilla, in his Separate Opinion, made the following similar observations:

"The equities of the case support the foregoing legal disposition. During the intervening years between 1
August 1978 and this date, Equatorial (after acquiring the C.M. Recto property for the price of
P11,300,000.00) had been leasing the property and deriving rental income therefrom. In fact, one of the
lessees in the property was Mayfair. Carmelo had, in turn, been using the proceeds of the sale,
investment-wise and/or operation-wise in its own business."

Obviously, this Court acknowledged the delivery of the property from Carmelo to Equatorial. As aptly
described by Justice Panganiban himself, the sale between Carmelo and Equatorial had not only been
"perfected" but also "consummated".

That actual possession of the property was turned over by Carmelo to Equatorial is clear from the fact
that the latter received rents from Mayfair. Significantly, receiving rentals is an exercise of actual
possession. Possession, as defined in the Civil Code, is the holding of a thing or the enjoyment of a right.
It may either be by material occupation or by merely subjecting the thing or right to the action of our
will. Possession may therefore be exercised through one's self or through another. It is not necessary
that the person in possession should himself be the occupant of the property, the occupancy can be
held by another in the name of the one who claims possession. In the case at bench, Equatorial
exercised possession over the disputed property through Mayfair. When Mayfair paid its monthly rentals
to Equatorial, the said lessee recognized the superior right of Equatorial to the possession of the
property. And even if Mayfair did not recognize Equatorial's superior right over the disputed property,
the fact remains that Equatorial was then enjoying the fruits of its possession.

At this juncture, it will be of aid to lay down the degrees of possession. The first degree is the mere
holding, or possession without title whatsoever, and in violation of the right of the owner. Here, both the
possessor and the public know that the possession is wrongful. An example of this is the possession of a
thief or a usurper of land. The second is possession with juridical title, but not that of ownership. This is
possession peaceably acquired, such that of a tenant, depositary, or pledge. The third is possession with
a just title, or a title sufficient to transfer ownership, but not from the true owner. An example is the
possession of a vendee of a piece of land from one who pretends to be the owner but is in fact not the
owner thereof. And the fourth is possession with a just title from the true owner. This is possession that
springs from ownership. Undoubtedly, Mayfair's possession is by virtue of juridical title under the
contract of lease, while that of Equatorial is by virtue of its right of ownership under the contract of sale.

Second, granting arguendo that there was indeed no actual delivery, would Mayfair's alleged "timely
objection to the sale and continued actual possession of the property" constitute an "impediment" that
may prevent the passing of the property from Carmelo to Equatorial?

I believe the answer is no.

The fact that Mayfair has remained in "actual possession of the property," after the perfection of the
contract of sale between Carmelo and Equatorial up to the finality of this Court's Decision in G.R. No.
106063 (and even up to the present), could not prevent the consummation of such contract. As I have
previously intimated, Mayfair's possession is not under a claim of ownership. It cannot in any way clash
with the ownership accruing to Equatorial by virtue of the sale. The principle has always been that the
one who possesses as a mere holder acknowledges in another a superior right or right of ownership. A
tenant possesses the thing leased as a mere holder, so does the usufructuary of the thing in usufruct;
and the borrower of the thing loaned in commodatum. None of these holders asserts a claim of
ownership in himself over the thing. Similarly, Mayfair does not claim ownership, but only possession as
a lessee with the prior right to purchase the property.

In G.R. No. 106063, Mayfair's main concern in its action for specific performance was the recognition of
its right of first refusal. Hence, the most that Mayfair could secure from the institution of its suit was to
be allowed to exercise its right to buy the property upon rescission of the contract of sale. Not until
Mayfair actually exercised what it was allowed to do by this Court in G.R. No. 106063, specifically to buy
the disputed property for P11,300,000.00, would it have any right of ownership. How then, at that early
stage, could Mayfair's action be an impediment in the consummation of the contract between Carmelo
and Equatorial?

Pertinently, it does not always follow that, because a transaction is prohibited or illegal, title, as between
the parties to the transaction, does not pass from the seller, donor, or transferor to the vendee, donee or
transferee.

And third, conformably to the foregoing disquisition, I maintain that Equatorial has the right to be paid
whatever monthly rentals during the period that the contract of sale was in existence minus the rents
already paid. In Guzman v. Court of Appeals, this Court decreed that upon the purchase of the leased
property and proper notice by the vendee, the lessee must pay the agreed monthly rentals to the new
owner since, by virtue of the sale the vendee steps into the shoes of the original lessor to whom the
lessee bound himself to pay. His belief that the subject property should have been sold to him does not
justify the unilateral withholding of rental payments due to the new owner of the property. It must be
stressed that under Article 1658 of the Civil Code, there are only two instances wherein the lessee may
suspend payment of rent, namely: in case the lessor fails to make the necessary repairs or to maintain
the lessee in peaceful and adequate enjoyment of the property leased. In this case, the fact remains that
Mayfair occupied the leased property. It derived benefit from such occupation, thus, it should pay the
corresponding rentals due. Nemo cum alterius detrimento locupletari potest. No one shall enrich himself
at the expense of another.

Neither should the presence of bad faith prevent the award of rent to Equatorial. While Equatorial
committed bad faith in entering into the contract with Camelo, it has been equitably punished when this
Court rendered the contract rescissible. That such bad faith was the very reason why the contract was
declared rescissible is evident from the Decision itself. To utilize it again, this time, to deprive Equatorial
of its entitlement to the rent corresponding to the period during which the contract was supposed to
validly exist, would not only be unjust, it would also disturb the very nature of a rescissible contract.

Let me elucidate on the matter.

Articles 1380 through 1389 of the Civil Code deal with rescissible contracts. A rescissible contract is one
that is validly entered into, but is subsequently terminated or rescinded for causes provided for by law.

This is the clear implication of Article 1380 of the same Code which provides:

"Art. 1380. Contracts validly agreed upon may be rescinded in the cases established by law."

Rescission has been defined as follows:

"Rescission is a remedy granted by law to the contracting parties and even to third persons, to secure the
reparation of damages caused to them by a contract, even if this should be valid, by means of the
restoration of things to their condition at the moment prior to the celebration of said contract. It is a
relief for the protection of one of the contracting parties and third persons from all injury and damage
the contract may cause, or to protect some incompatible and preferential right created by the contract.
It implies a contract which, even if initially valid, produces a lesion or pecuniary damage to someone. It
sets aside the act or contract for justifiable reasons of equity."

Necessarily, therefore, a rescissible contract remains valid and binding upon the parties thereto until the
same is rescinded in an appropriate judicial proceeding.

On the other hand, a void contract, which is treated in Articles 1409 through 1422 of the Civil Code, is
inexistent and produces no legal effect whatsoever. The contracting parties are not bound thereby and
such contract is not subject to ratification.

In dismissing petitioner Equatorial's complaint in Civil Case No. 97-85141, the trial court was apparently
of the impression that a rescissible contract has the same effect as a void contract, thus:

"However, the words in the dispositive portion of the Supreme Court "is hereby deemed rescinded" does
not allow any other meaning. The said Deed of Absolute Sale is void at its inception.

The subject Deed of Absolute Sale having been rescinded by the Supreme Court, Equatorial is not the
owner and does not have any right to demand back rentals from subject property. The law states that
only an owner can enjoy the fruits of a certain property or jus utendi which includes the right to receive
from subject property what it produces, . . ."

The trial court erred. In G.R. No. 106063 (involving Mayfair's suit for specific performance), this Court
clearly characterized the Deed of Absolute Sale between Carmelo and petitioner Equatorial as a
rescissible contract. We stated therein that:

"Since Equatorial is a buys in bad faith. this finding renders the sale to it of the property in question
rescissible. We agree with respondent Appellate Court that the records bear out the fact that Equatorial
was aware of the lease contracts because its lawyers had, prior to the sale, studied the said contracts. As
such, Equatorial cannot tenably claim to be a purchaser in good faith, and therefore, rescission lies."

This Court did not declare the Deed of Absolute Sale between Carmelo and Equatorial void but merely
rescissible. Consequently, the contract was, at inception, valid and naturally, it validly transferred
ownership of the subject property to Equatorial. It bears emphasis that Equatorial was not automatically
divested of its ownership. Rather, as clearly directed in the dispositive portion of our Decision, Carmelo
should return the purchase price to Equatorial which, in turn, must execute such deeds and documents
necessary to enable Carmelo to reacquire its ownership of the property.

As mentioned earlier, Mayfair deposited with the Regional Trial Court, Branch 7, Manila, the purchase
price of P10,452,000.00 (P11,300,000.00 less P847,000.00 as withholding tax). In turn, the Clerk of Court
executed the deed of sale of the subject property in favor of Mayfair.

In the meantime, Mayfair has continued to occupy and use the premises, the reason why Equatorial filed
against it Civil Case No. 97-85141 for sum of money representing rentals and reasonable compensation.

At this point, I must reiterate that Equatorial purchased the subject property from Carmelo and became
its owner on July 31, 1978. While the contract of sale was "deemed rescinded" by this Court in G.R. No.
106063, nevertheless the sale had remained valid and binding between the contracting parties until
March 17, 1997 when the Decision in G.R. No. 106063 became final. Consequently, being the owner,
Equatorial has the right to demand from Mayfair payment of rentals corresponding to the period from
July 31, 1978 up to March 17, 1997.

Records show that the rentals and reasonable compensation which Equatorial demands from Mayfair
are those which accrued from the year 1987 to 1998. As earlier stated, prior thereto, Mayfair had been
paying the rents to Equatorial.

In line with this Court's finding that Equatorial was the owner of the disputed property from July 31,
1978 to March 17, 1997, it is, therefore, entitled to the payment of rentals accruing to such period.

Consequently, whether or not Mayfair paid Equatorial the rentals specified in the lease contracts from
June 1, 1987 to March 17, 1997 is for the trial court to resolve.

One last word. In effect, the majority have enunciated that:

1. A lessor, in a contract of sale, cannot transfer ownership of his property, occupied by the lessee,
to the buyer because there can be no delivery of such property to the latter; and

2. Not only a possessor, but also an owner, can be in bad faith.

I cannot subscribe to such doctrines.

WHEREFORE, I vote to GRANT the petition.

2 or more Animals
SECOND DIVISION

G.R. No. 182332 February 23, 2011

MILESTONE FARMS, INC., Petitioner,

vs.

OFFICE OF THE PRESIDENT, Respondent.

DECISION

NACHURA, J.:

Before this Court is a Petition for Review on Certiorari under Rule 45 of the Rules of Civil Procedure,
seeking the reversal of the Court of Appeals (CA) Amended Decision dated October 4, 2006 and its
Resolution dated March 27, 2008.

The Facts

Petitioner Milestone Farms, Inc. (petitioner) was incorporated with the Securities and Exchange
Commission on January 8, 1960. Among its pertinent secondary purposes are: (1) to engage in the
raising of cattle, pigs, and other livestock; to acquire lands by purchase or lease, which may be needed
for this purpose; and to sell and otherwise dispose of said cattle, pigs, and other livestock and their
produce when advisable and beneficial to the corporation; (2) to breed, raise, and sell poultry; to
purchase or acquire and sell, or otherwise dispose of the supplies, stocks, equipment, accessories,
appurtenances, products, and by-products of said business; and (3) to import cattle, pigs, and other
livestock, and animal food necessary for the raising of said cattle, pigs, and other livestock as may be
authorized by law.

On June 10, 1988, a new agrarian reform law, Republic Act (R.A.) No. 6657, otherwise known as the
Comprehensive Agrarian Reform Law (CARL), took effect, which included the raising of livestock, poultry,
and swine in its coverage. However, on December 4, 1990, this Court, sitting en banc, ruled in Luz Farms
v. Secretary of the Department of Agrarian Reform6 that agricultural lands devoted to livestock, poultry,
and/or swine raising are excluded from the Comprehensive Agrarian Reform Program (CARP).

Thus, in May 1993, petitioner applied for the exemption/exclusion of its 316.0422-hectare property,
covered by Transfer Certificate of Title Nos. (T-410434) M-15750, (T-486101) M-7307, (T-486102) M-
7308, (T-274129) M-15751, (T-486103) M-7309, (T-486104) M-7310, (T-332694) M-15755, (T-486105) M-
7311, (T-486106) M-7312, M-8791, (T-486107) M-7313, (T-486108) M-7314, M-8796, (T-486109) M-
7315, (T-486110) M-9508, and M-6013, and located in Pinugay, Baras, Rizal, from the coverage of the
CARL, pursuant to the aforementioned ruling of this Court in Luz Farms.
Meanwhile, on December 27, 1993, the Department of Agrarian Reform (DAR) issued Administrative
Order No. 9, Series of 1993 (DAR A.O. No. 9), setting forth rules and regulations to govern the exclusion
of agricultural lands used for livestock, poultry, and swine raising from CARP coverage. Thus, on January
10, 1994, petitioner re-documented its application pursuant to DAR A.O. No. 9.7

Acting on the said application, the DAR’s Land Use Conversion and Exemption Committee (LUCEC) of
Region IV conducted an ocular inspection on petitioner’s property and arrived at the following findings:

[T]he actual land utilization for livestock, swine and poultry is 258.8422 hectares; the area which served
as infrastructure is 42.0000 hectares; ten (10) hectares are planted to corn and the remaining five (5)
hectares are devoted to fish culture; that the livestock population are 371 heads of cow, 20 heads of
horses, 5,678 heads of swine and 788 heads of cocks; that the area being applied for exclusion is far
below the required or ideal area which is 563 hectares for the total livestock population; that the
approximate area not directly used for livestock purposes with an area of 15 hectares, more or less, is
likewise far below the allowable 10% variance; and, though not directly used for livestock purposes, the
ten (10) hectares planted to sweet corn and the five (5) hectares devoted to fishpond could be
considered supportive to livestock production.

The LUCEC, thus, recommended the exemption of petitioner’s 316.0422-hectare property from the
coverage of CARP. Adopting the LUCEC’s findings and recommendation, DAR Regional Director Percival
Dalugdug (Director Dalugdug) issued an Order dated June 27, 1994, exempting petitioner’s 316.0422-
hectare property from CARP.

The Southern Pinugay Farmers Multi-Purpose Cooperative, Inc. (Pinugay Farmers), represented by
Timiano Balajadia, Sr. (Balajadia), moved for the reconsideration of the said Order, but the same was
denied by Director Dalugdug in his Order dated November 24, 1994. Subsequently, the Pinugay Farmers
filed a letter-appeal with the DAR Secretary.

Correlatively, on June 4, 1994, petitioner filed a complaint for Forcible Entry against Balajadia and
company before the Municipal Circuit Trial Court (MCTC) of Teresa-Baras, Rizal, docketed as Civil Case
No. 781-T.10 The MCTC ruled in favor of petitioner, but the decision was later reversed by the Regional
Trial Court, Branch 80, of Tanay, Rizal. Ultimately, the case reached the CA, which, in its Decision dated
October 8, 1999, reinstated the MCTC’s ruling, ordering Balajadia and all defendants therein to vacate
portions of the property covered by TCT Nos. M-6013, M-8796, and M-8791. In its Resolution dated July
31, 2000, the CA held that the defendants therein failed to timely file a motion for reconsideration, given
the fact that their counsel of record received its October 8, 1999 Decision; hence, the same became final
and executory.

In the meantime, R.A. No. 6657 was amended by R.A. No. 7881, which was approved on February 20,
1995. Private agricultural lands devoted to livestock, poultry, and swine raising were excluded from the
coverage of the CARL. On October 22, 1996, the fact-finding team formed by the DAR Undersecretary for
Field Operations and Support Services conducted an actual headcount of the livestock population on the
property. The headcount showed that there were 448 heads of cattle and more than 5,000 heads of
swine.
The DAR Secretary’s Ruling

On January 21, 1997, then DAR Secretary Ernesto D. Garilao (Secretary Garilao) issued an Order
exempting from CARP only 240.9776 hectares of the 316.0422 hectares previously exempted by Director
Dalugdug, and declaring 75.0646 hectares of the property to be covered by CARP.

Secretary Garilao opined that, for private agricultural lands to be excluded from CARP, they must already
be devoted to livestock, poultry, and swine raising as of June 15, 1988, when the CARL took effect. He
found that the Certificates of Ownership of Large Cattle submitted by petitioner showed that only 86
heads of cattle were registered in the name of petitioner’s president, Misael Vera, Jr., prior to June 15,
1988; 133 were subsequently bought in 1990, while 204 were registered from 1992 to 1995. Secretary
Garilao gave more weight to the certificates rather than to the headcount because "the same explicitly
provide for the number of cattle owned by petitioner as of June 15, 1988."

Applying the animal-land ratio (1 hectare for grazing for every head of cattle/carabao/horse) and the
infrastructure-animal ratio (1.7815 hectares for 21 heads of cattle/carabao/horse, and 0.5126 hectare for
21 heads of hogs) under DAR A.O. No. 9, Secretary Garilao exempted 240.9776 hectares of the property,
as follows:

1. 86 hectares for the 86 heads of cattle existing as of 15 June 1988;

2. 8 hectares for infrastructure following the ratio of 1.7815 hectares for every 21 heads of cattle;

3. 8 hectares for the 8 horses;

4. 0.3809 square meters of infrastructure for the 8 horses; [and]

5. 138.5967 hectares for the 5,678 heads of swine.

Petitioner filed a Motion for Reconsideration, submitting therewith copies of Certificates of Transfer of
Large Cattle and additional Certificates of Ownership of Large Cattle issued to petitioner prior to June 15,
1988, as additional proof that it had met the required animal-land ratio. Petitioner also submitted a copy
of a Disbursement Voucher dated December 17, 1986, showing the purchase of 100 heads of cattle by
the Bureau of Animal Industry from petitioner, as further proof that it had been actively operating a
livestock farm even before June 15, 1988. However, in his Order dated April 15, 1997, Secretary Garilao
denied petitioner’s Motion for Reconsideration.

Aggrieved, petitioner filed its Memorandum on Appeal18 before the Office of the President (OP).

The OP’s Ruling

On February 4, 2000, the OP rendered a decision19 reinstating Director Dalugdug’s Order dated June 27,
1994 and declared the entire 316.0422-hectare property exempt from the coverage of CARP.

However, on separate motions for reconsideration of the aforesaid decision filed by farmer-groups
Samahang Anak-Pawis ng Lagundi (SAPLAG) and Pinugay Farmers, and the Bureau of Agrarian Legal
Assistance of DAR, the OP issued a resolution dated September 16, 2002, setting aside its previous
decision. The dispositive portion of the OP resolution reads:

WHEREFORE, the Decision subject of the instant separate motions for reconsideration is hereby SET
ASIDE and a new one entered REINSTATING the Order dated 21 January 1997 of then DAR Secretary
Ernesto D. Garilao, as reiterated in another Order of 15 April 1997, without prejudice to the outcome of
the continuing review and verification proceedings that DAR, thru the appropriate Municipal Agrarian
Reform Officer, may undertake pursuant to Rule III (D) of DAR Administrative Order No. 09, series of
1993.

SO ORDERED.

The OP held that, when it comes to proof of ownership, the reference is the Certificate of Ownership of
Large Cattle. Certificates of cattle ownership, which are readily available – being issued by the
appropriate government office – ought to match the number of heads of cattle counted as existing
during the actual headcount. The presence of large cattle on the land, without sufficient proof of
ownership thereof, only proves such presence.

Taking note of Secretary Garilao’s observations, the OP also held that, before an ocular investigation is
conducted on the property, the landowners are notified in advance; hence, mere reliance on the physical
headcount is dangerous because there is a possibility that the landowners would increase the number of
their cattle for headcount purposes only. The OP observed that there was a big variance between the
actual headcount of 448 heads of cattle and only 86 certificates of ownership of large cattle.

Consequently, petitioner sought recourse from the CA.

The Proceedings Before the CA and Its Rulings

On April 29, 2005, the CA found that, based on the documentary evidence presented, the property
subject of the application for exclusion had more than satisfied the animal-land and infrastructure-
animal ratios under DAR A.O. No. 9. The CA also found that petitioner applied for exclusion long before
the effectivity of DAR A.O. No. 9, thus, negating the claim that petitioner merely converted the property
for livestock, poultry, and swine raising in order to exclude it from CARP coverage. Petitioner was held to
have actually engaged in the said business on the property even before June 15, 1988. The CA disposed
of the case in this wise:

WHEREFORE, the instant petition is hereby GRANTED. The assailed Resolution of the Office of the
President dated September 16, 2002 is hereby SET ASIDE, and its Decision dated February 4, 2000
declaring the entire 316.0422 hectares exempt from the coverage of the Comprehensive Agrarian
Reform Program is hereby REINSTATED without prejudice to the outcome of the continuing review and
verification proceedings which the Department of Agrarian Reform, through the proper Municipal
Agrarian Reform Officer, may undertake pursuant to Policy Statement (D) of DAR Administrative Order
No. 9, Series of 1993.

SO ORDERED.
Meanwhile, six months earlier, or on November 4, 2004, without the knowledge of the CA – as the
parties did not inform the appellate court – then DAR Secretary Rene C. Villa (Secretary Villa) issued DAR
Conversion Order No. CON-0410-001624 (Conversion Order), granting petitioner’s application to convert
portions of the 316.0422-hectare property from agricultural to residential and golf courses use. The
portions converted – with a total area of 153.3049 hectares – were covered by TCT Nos. M-15755 (T-
332694), M-15751 (T-274129), and M-15750 (T-410434). With this Conversion Order, the area of the
property subject of the controversy was effectively reduced to 162.7373 hectares.

On the CA’s decision of April 29, 2005, Motions for Reconsideration were filed by farmer-groups, namely:
the farmers represented by Miguel Espinas (Espinas group), the Pinugay Farmers, and the SAPLAG.27
The farmer-groups all claimed that the CA should have accorded respect to the factual findings of the OP.
Moreover, the farmer-groups unanimously intimated that petitioner already converted and developed a
portion of the property into a leisure-residential-commercial estate known as the Palo Alto Leisure and
Sports Complex (Palo Alto).

Subsequently, in a Supplement to the Motion for Reconsideration on Newly Secured Evidence pursuant
to DAR Administrative Order No. 9, Series of 199328 (Supplement) dated June 15, 2005, the Espinas
group submitted the following as evidence:

1) Conversion Order29 dated November 4, 2004, issued by Secretary Villa, converting portions of the
property from agricultural to residential and golf courses use, with a total area of 153.3049 hectares;
thus, the Espinas group prayed that the remaining 162.7373 hectares (subject property) be covered by
the CARP;

2) Letter30 dated June 7, 2005 of both incoming Municipal Agrarian Reform Officer (MARO) Bismark M.
Elma (MARO Elma) and outgoing MARO Cesar C. Celi (MARO Celi) of Baras, Rizal, addressed to Provincial
Agrarian Reform Officer (PARO) II of Rizal, Felixberto Q. Kagahastian, (MARO Report), informing the latter,
among others, that Palo Alto was already under development and the lots therein were being offered for
sale; that there were actual tillers on the subject property; that there were agricultural improvements
thereon, including an irrigation system and road projects funded by the Government; that there was no
existing livestock farm on the subject property; and that the same was not in the possession and/or
control of petitioner; and

3) Certification31 dated June 8, 2005, issued by both MARO Elma and MARO Celi, manifesting that the
subject property was in the possession and cultivation of actual occupants and tillers, and that, upon
inspection, petitioner maintained no livestock farm thereon.

Four months later, the Espinas group and the DAR filed their respective Manifestations. In its
Manifestation dated November 29, 2005, the DAR confirmed that the subject property was no longer
devoted to cattle raising. Hence, in its Resolution dated December 21, 2005, the CA directed petitioner
to file its comment on the Supplement and the aforementioned Manifestations. Employing the services
of a new counsel, petitioner filed a Motion to Admit Rejoinder, and prayed that the MARO Report be
disregarded and expunged from the records for lack of factual and legal basis.
With the CA now made aware of these developments, particularly Secretary Villa’s Conversion Order of
November 4, 2004, the appellate court had to acknowledge that the property subject of the controversy
would now be limited to the remaining 162.7373 hectares. In the same token, the Espinas group prayed
that this remaining area be covered by the CARP.

On October 4, 2006, the CA amended its earlier Decision. It held that its April 29, 2005 Decision was
theoretically not final because DAR A.O. No. 9 required the MARO to make a continuing review and
verification of the subject property. While the CA was cognizant of our ruling in Department of Agrarian
Reform v. Sutton, wherein we declared DAR A.O. No. 9 as unconstitutional, it still resolved to lift the
exemption of the subject property from the CARP, not on the basis of DAR A.O. No. 9, but on the
strength of evidence such as the MARO Report and Certification, and the Katunayan issued by the
Punong Barangay, Alfredo Ruba (Chairman Ruba), of Pinugay, Baras, Rizal, showing that the subject
property was no longer operated as a livestock farm. Moreover, the CA held that the lease agreements,
which petitioner submitted to prove that it was compelled to lease a ranch as temporary shelter for its
cattle, only reinforced the DAR’s finding that there was indeed no existing livestock farm on the subject
property. While petitioner claimed that it was merely forced to do so to prevent further slaughtering of
its cattle allegedly committed by the occupants, the CA found the claim unsubstantiated. Furthermore,
the CA opined that petitioner should have asserted its rights when the irrigation and road projects were
introduced by the Government within its property. Finally, the CA accorded the findings of MARO Elma
and MARO Celi the presumption of regularity in the performance of official functions in the absence of
evidence proving misconduct and/or dishonesty when they inspected the subject property and rendered
their report. Thus, the CA disposed:

WHEREFORE, this Court’s Decision dated April 29, 2005 is hereby amended in that the exemption of the
subject landholding from the coverage of the Comprehensive Agrarian Reform Program is hereby lifted,
and the 162.7373 hectare-agricultural portion thereof is hereby declared covered by the Comprehensive
Agrarian Reform Program.

SO ORDERED.

Unperturbed, petitioner filed a Motion for Reconsideration. On January 8, 2007, MARO Elma, in
compliance with the Memorandum of DAR Regional Director Dominador B. Andres, tendered another
Report reiterating that, upon inspection of the subject property, together with petitioner’s counsel-
turned witness, Atty. Grace Eloisa J. Que (Atty. Que), PARO Danilo M. Obarse, Chairman Ruba, and
several occupants thereof, he, among others, found no livestock farm within the subject property. About
heads of cattle were shown, but MARO Elma observed that the same were inside an area adjacent to
Palo Alto. Subsequently, upon Atty. Que’s request for reinvestigation, designated personnel of the DAR
Provincial and Regional Offices (Investigating Team) conducted another ocular inspection on the subject
property on February 20, 2007. The Investigating Team, in its Report42 dated February 21, 2007, found
that, per testimony of petitioner’s caretaker, Rogelio Ludivices (Roger),43 petitioner has 43 heads of
cattle taken care of by the following individuals: i) Josefino Custodio (Josefino) – 18 heads; ii) Andy
Amahit – 15 heads; and iii) Bert Pangan – 2 heads; that these individuals pastured the herd of cattle
outside the subject property, while Roger took care of 8 heads of cattle inside the Palo Alto area; that 21
heads of cattle owned by petitioner were seen in the area adjacent to Palo Alto; that Josefino confirmed
to the Investigating Team that he takes care of 18 heads of cattle owned by petitioner; that the said
Investigating Team saw 9 heads of cattle in the Palo Alto area, 2 of which bore "MFI" marks; and that the
9 heads of cattle appear to have matched the Certificates of Ownership of Large Cattle submitted by
petitioner.

Because of the contentious factual issues and the conflicting averments of the parties, the CA set the
case for hearing and reception of evidence on April 24, 2007. Thereafter, as narrated by the CA, the
following events transpired:

On May 17, 2007, [petitioner] presented the Judicial Affidavits of its witnesses, namely, [petitioner’s]
counsel, [Atty. Que], and the alleged caretaker of [petitioner’s] farm, [Roger], who were both cross-
examined by counsel for farmers-movants and SAPLAG. [Petitioner] and SAPLAG then marked their
documentary exhibits.

On May 24, 2007, [petitioner’s] security guard and third witness, Rodolfo G. Febrada, submitted his
Judicial Affidavit and was cross-examined by counsel for fa[r]mers-movants and SAPLAG. Farmers-
movants also marked their documentary exhibits.

Thereafter, the parties submitted their respective Formal Offers of Evidence. Farmers-movants and
SAPLAG filed their objections to [petitioner’s] Formal Offer of Evidence. Later, [petitioner] and farmers-
movants filed their respective Memoranda.

In December 2007, this Court issued a Resolution on the parties’ offer of evidence and considered
[petitioner’s] Motion for Reconsideration submitted for resolution.

Finally, petitioner’s motion for reconsideration was denied by the CA in its Resolution46 dated March 27,
2008. The CA discarded petitioner’s reliance on Sutton. It ratiocinated that the MARO Reports and the
DAR’s Manifestation could not be disregarded simply because DAR A.O. No. 9 was declared
unconstitutional. The Sutton ruling was premised on the fact that the Sutton property continued to
operate as a livestock farm. The CA also reasoned that, in Sutton, this Court did not remove from the
DAR the power to implement the CARP, pursuant to the latter’s authority to oversee the implementation
of agrarian reform laws under Section 5047 of the CARL. Moreover, the CA found:

Petitioner-appellant claimed that they had 43 heads of cattle which are being cared for and pastured by
4 individuals. To prove its ownership of the said cattle, petitioner-appellant offered in evidence 43
Certificates of Ownership of Large Cattle. Significantly, however, the said Certificates were all dated and
issued on November 24, 2006, nearly 2 months after this Court rendered its Amended Decision lifting
the exemption of the 162-hectare portion of the subject landholding. The acquisition of such cattle after
the lifting of the exemption clearly reveals that petitioner-appellant was no longer operating a livestock
farm, and suggests an effort to create a semblance of livestock-raising for the purpose of its Motion for
Reconsideration.
On petitioner’s assertion that between MARO Elma’s Report dated January 8, 2007 and the Investigating
Team’s Report, the latter should be given credence, the CA held that there were no material
inconsistencies between the two reports because both showed that the 43 heads of cattle were found
outside the subject property.

Hence, this Petition assigning the following errors:

I.

THE HONORABLE COURT OF APPEALS GRAVELY ERRED WHEN IT HELD THAT LANDS DEVOTED TO
LIVESTOCK FARMING WITHIN THE MEANING OF LUZ FARMS AND SUTTON, AND WHICH ARE THEREBY
EXEMPT FROM CARL COVERAGE, ARE NEVERTHELESS SUBJECT TO DAR’S CONTINUING VERIFICATION AS
TO USE, AND, ON THE BASIS OF SUCH VERIFICATION, MAY BE ORDERED REVERTED TO AGRICULTURAL
CLASSIFICATION AND COMPULSORY ACQUISITION[;]

II.

GRANTING THAT THE EXEMPT LANDS AFORESAID MAY BE SO REVERTED TO AGRICULTURAL

CLASSIFICATION, STILL THE PROCEEDINGS FOR SUCH PURPOSE BELONGS TO THE EXCLUSIVE ORIGINAL
JURISDICTION OF THE DAR, BEFORE WHICH THE CONTENDING PARTIES MAY VENTILATE FACTUAL ISSUES,
AND AVAIL THEMSELVES OF USUAL REVIEW PROCESSES, AND NOT TO THE COURT OF APPEALS
EXERCISING APPELLATE JURISDICTION OVER ISSUES COMPLETELY UNRELATED TO REVERSION [; AND]

III.

IN ANY CASE, THE COURT OF APPEALS GRAVELY ERRED AND COMMITTED GRAVE ABUSE OF DISCRETION
WHEN IT HELD THAT THE PROPERTY IN DISPUTE IS NO LONGER BEING USED FOR LIVESTOCK FARMING.

Petitioner asseverates that lands devoted to livestock farming as of June 15, 1988 are classified as
industrial lands, hence, outside the ambit of the CARP; that Luz Farms, Sutton, and R.A. No. 7881 clearly
excluded such lands on constitutional grounds; that petitioner’s lands were actually devoted to livestock
even before the enactment of the CARL; that livestock farms are exempt from the CARL, not by reason of
any act of the DAR, but because of their nature as industrial lands; that petitioner’s property was
admittedly devoted to livestock farming as of June 1988 and the only issue before was whether or not
petitioner’s pieces of evidence comply with the ratios provided under DAR A.O. No. 9; and that DAR A.O.
No. 9 having been declared as unconstitutional, DAR had no more legal basis to conduct a continuing
review and verification proceedings over livestock farms. Petitioner argues that, in cases where reversion
of properties to agricultural use is proper, only the DAR has the exclusive original jurisdiction to hear and
decide the same; hence, the CA, in this case, committed serious errors when it ordered the reversion of
the property and when it considered pieces of evidence not existing as of June 15, 1988, despite its lack
of jurisdiction; that the CA should have remanded the case to the DAR due to conflicting factual claims;
that the CA cannot ventilate allegations of fact that were introduced for the first time on appeal as a
supplement to a motion for reconsideration of its first decision, use the same to deviate from the issues
pending review, and, on the basis thereof, declare exempt lands reverted to agricultural use and
compulsorily covered by the CARP; that the "newly discovered [pieces of] evidence" were not introduced
in the proceedings before the DAR, hence, it was erroneous for the CA to consider them; and that
piecemeal presentation of evidence is not in accord with orderly justice. Finally, petitioner submits that,
in any case, the CA gravely erred and committed grave abuse of discretion when it held that the subject
property was no longer used for livestock farming as shown by the Report of the Investigating Team.
Petitioner relies on the 1997 LUCEC and DAR findings that the subject property was devoted to livestock
farming, and on the 1999 CA Decision which held that the occupants of the property were squatters,
bereft of any authority to stay and possess the property.

On one hand, the farmer-groups, represented by the Espinas group, contend that they have been
planting rice and fruit-bearing trees on the subject property, and helped the National Irrigation
Administration in setting up an irrigation system therein in 1997, with a produce of 1,500 to 1,600 sacks
of palay each year; that petitioner came to court with unclean hands because, while it sought the
exemption and exclusion of the entire property, unknown to the CA, petitioner surreptitiously filed for
conversion of the property now known as Palo Alto, which was actually granted by the DAR Secretary;
that petitioner’s bad faith is more apparent since, despite the conversion of the 153.3049-hectare
portion of the property, it still seeks to exempt the entire property in this case; and that the fact that
petitioner applied for conversion is an admission that indeed the property is agricultural. The farmer-
groups also contend that petitioner’s reliance on Luz Farms and Sutton is unavailing because in these
cases there was actually no cessation of the business of raising cattle; that what is being exempted is the
activity of raising cattle and not the property itself; that exemptions due to cattle raising are not
permanent; that the declaration of DAR A.O. No. 9 as unconstitutional does not at all diminish the
mandated duty of the DAR, as the lead agency of the Government, to implement the CARL; that the DAR,
vested with the power to identify lands subject to CARP, logically also has the power to identify lands
which are excluded and/or exempted therefrom; that to disregard DAR’s authority on the matter would
open the floodgates to abuse and fraud by unscrupulous landowners; that the factual finding of the CA
that the subject property is no longer a livestock farm may not be disturbed on appeal, as enunciated by
this Court; that DAR conducted a review and monitoring of the subject property by virtue of its powers
under the CARL; and that the CA has sufficient discretion to admit evidence in order that it could arrive
at a fair, just, and equitable ruling in this case.

On the other hand, respondent OP, through the Office of the Solicitor General (OSG), claims that the CA
correctly held that the subject property is not exempt from the coverage of the CARP, as substantial
pieces of evidence show that the said property is not exclusively devoted to livestock, swine, and/or
poultry raising; that the issues presented by petitioner are factual in nature and not proper in this case;
that under Rule 43 of the 1997 Rules of Civil Procedure, questions of fact may be raised by the parties
and resolved by the CA; that due to the divergence in the factual findings of the DAR and the OP, the CA
was duty bound to review and ascertain which of the said findings are duly supported by substantial
evidence; that the subject property was subject to continuing review and verification proceedings due to
the then prevailing DAR A.O. No. 9; that there is no question that the power to determine if a property is
subject to CARP coverage lies with the DAR Secretary; that pursuant to such power, the MARO rendered
the assailed reports and certification, and the DAR itself manifested before the CA that the subject
property is no longer devoted to livestock farming; and that, while it is true that this Court’s ruling in Luz
Farms declared that agricultural lands devoted to livestock, poultry, and/or swine raising are excluded
from the CARP, the said ruling is not without any qualification.

In its Reply53 to the farmer-groups’ and to the OSG’s comment, petitioner counters that the farmer-
groups have no legal basis to their claims as they admitted that they entered the subject property
without the consent of petitioner; that the rice plots actually found in the subject property, which were
subsequently taken over by squatters, were, in fact, planted by petitioner in compliance with the
directive of then President Ferdinand Marcos for the employer to provide rice to its employees; that
when a land is declared exempt from the CARP on the ground that it is not agricultural as of the time the
CARL took effect, the use and disposition of that land is entirely and forever beyond DAR’s jurisdiction;
and that, inasmuch as the subject property was not agricultural from the very beginning, DAR has no
power to regulate the same. Petitioner also asserts that the CA cannot uncharacteristically assume the
role of trier of facts and resolve factual questions not previously adjudicated by the lower tribunals; that
MARO Elma rendered the assailed MARO reports with bias against petitioner, and the same were
contradicted by the Investigating Team’s Report, which confirmed that the subject property is still
devoted to livestock farming; and that there has been no change in petitioner’s business interest as an
entity engaged in livestock farming since its inception in 1960, though there was admittedly a decline in
the scale of its operations due to the illegal acts of the squatter-occupants.

Our Ruling

The Petition is bereft of merit.

Let it be stressed that when the CA provided in its first Decision that continuing review and verification
may be conducted by the DAR pursuant to DAR A.O. No. 9, the latter was not yet declared
unconstitutional by this Court. The first CA Decision was promulgated on April 29, 2005, while this Court
struck down as unconstitutional DAR A.O. No. 9, by way of Sutton, on October 19, 2005. Likewise, let it
be emphasized that the Espinas group filed the Supplement and submitted the assailed MARO reports
and certification on June 15, 2005, which proved to be adverse to petitioner’s case. Thus, it could not be
said that the CA erred or gravely abused its discretion in respecting the mandate of DAR A.O. No. 9,
which was then subsisting and in full force and effect.

While it is true that an issue which was neither alleged in the complaint nor raised during the trial
cannot be raised for the first time on appeal as it would be offensive to the basic rules of fair play, justice,
and due process,54 the same is not without exception,55 such as this case. The CA, under Section 3,56
Rule 43 of the Rules of Civil Procedure, can, in the interest of justice, entertain and resolve factual issues.
After all, technical and procedural rules are intended to help secure, and not suppress, substantial
justice. A deviation from a rigid enforcement of the rules may thus be allowed to attain the prime
objective of dispensing justice, for dispensation of justice is the core reason for the existence of
courts.57 Moreover, petitioner cannot validly claim that it was deprived of due process because the CA
afforded it all the opportunity to be heard.58 The CA even directed petitioner to file its comment on the
Supplement, and to prove and establish its claim that the subject property was excluded from the
coverage of the CARP. Petitioner actively participated in the proceedings before the CA by submitting
pleadings and pieces of documentary evidence, such as the Investigating Team’s Report and judicial
affidavits. The CA also went further by setting the case for hearing. In all these proceedings, all the
parties’ rights to due process were amply protected and recognized.

With the procedural issue disposed of, we find that petitioner’s arguments fail to persuade. Its invocation
of Sutton is unavailing. In Sutton, we held:

In the case at bar, we find that the impugned A.O. is invalid as it contravenes the Constitution. The A.O.
sought to regulate livestock farms by including them in the coverage of agrarian reform and prescribing a
maximum retention limit for their ownership. However, the deliberations of the 1987 Constitutional
Commission show a clear intent to exclude, inter alia, all lands exclusively devoted to livestock, swine
and poultry-raising. The Court clarified in the Luz Farms case that livestock, swine and poultry-raising are
industrial activities and do not fall within the definition of "agriculture" or "agricultural activity." The
raising of livestock, swine and poultry is different from crop or tree farming. It is an industrial, not an
agricultural, activity. A great portion of the investment in this enterprise is in the form of industrial fixed
assets, such as: animal housing structures and facilities, drainage, waterers and blowers, feedmill with
grinders, mixers, conveyors, exhausts and generators, extensive warehousing facilities for feeds and
other supplies, anti-pollution equipment like bio-gas and digester plants augmented by lagoons and
concrete ponds, deepwells, elevated water tanks, pumphouses, sprayers, and other technological
appurtenances.

Clearly, petitioner DAR has no power to regulate livestock farms which have been exempted by the
Constitution from the coverage of agrarian reform. It has exceeded its power in issuing the assailed A.O.

Indeed, as pointed out by the CA, the instant case does not rest on facts parallel to those of Sutton
because, in Sutton, the subject property remained a livestock farm. We even highlighted therein the fact
that "there has been no change of business interest in the case of respondents."60 Similarly, in
Department of Agrarian Reform v. Uy,61 we excluded a parcel of land from CARP coverage due to the
factual findings of the MARO, which were confirmed by the DAR, that the property was entirely devoted
to livestock farming. However, in A.Z. Arnaiz Realty, Inc., represented by Carmen Z. Arnaiz v. Office of the
President; Department of Agrarian Reform; Regional Director, DAR Region V, Legaspi City; Provincial
Agrarian Reform Officer, DAR Provincial Office, Masbate, Masbate; and Municipal Agrarian Reform
Officer, DAR Municipal Office, Masbate, Masbate,62 we denied a similar petition for exemption and/or
exclusion, by according respect to the CA’s factual findings and its reliance on the findings of the DAR and
the OP that

the subject parcels of land were not directly, actually, and exclusively used for pasture.

Petitioner’s admission that, since 2001, it leased another ranch for its own livestock is fatal to its
cause.64 While petitioner advances a defense that it leased this ranch because the occupants of the
subject property harmed its cattle, like the CA, we find it surprising that not even a single police and/or
barangay report was filed by petitioner to amplify its indignation over these alleged illegal acts.
Moreover, we accord respect to the CA’s keen observation that the assailed MARO reports and the
Investigating Team’s Report do not actually contradict one another, finding that the 43 cows, while
owned by petitioner, were actually pastured outside the subject property.

Finally, it is established that issues of Exclusion and/or Exemption are characterized as Agrarian Law
Implementation (ALI) cases which are well within the DAR Secretary’s competence and jurisdiction.65
Section 3, Rule II of the 2003 Department of Agrarian Reform Adjudication Board Rules of Procedure
provides:

Section 3. Agrarian Law Implementation Cases.

The Adjudicator or the Board shall have no jurisdiction over matters involving the administrative
implementation of RA No. 6657, otherwise known as the Comprehensive Agrarian Reform Law (CARL) of
1988 and other agrarian laws as enunciated by pertinent rules and administrative orders, which shall be
under the exclusive prerogative of and cognizable by the Office of the Secretary of the DAR in
accordance with his issuances, to wit:

3.8 Exclusion from CARP coverage of agricultural land used for livestock, swine, and poultry raising.

Thus, we cannot, without going against the law, arbitrarily strip the DAR Secretary of his legal mandate to
exercise jurisdiction and authority over all ALI cases. To succumb to petitioner’s contention that "when a
land is declared exempt from the CARP on the ground that it is not agricultural as of the time the CARL
took effect, the use and disposition of that land is entirely and forever beyond DAR’s jurisdiction" is
dangerous, suggestive of self-regulation. Precisely, it is the DAR Secretary who is vested with such
jurisdiction and authority to exempt and/or exclude a property from CARP coverage based on the factual
circumstances of each case and in accordance with law and applicable jurisprudence. In addition, albeit
parenthetically, Secretary Villa had already granted the conversion into residential and golf courses use
of nearly one-half of the entire area originally claimed as exempt from CARP coverage because it was
allegedly devoted to livestock production.

In sum, we find no reversible error in the assailed Amended Decision and Resolution of the CA which
would warrant the modification, much less the reversal, thereof.

WHEREFORE, the Petition is DENIED and the Court of Appeals Amended Decision dated October 4, 2006
and Resolution dated March 27, 2008 are AFFIRMED. No costs.

SO ORDERED.