Toribio v.

Foz (Article 1233)

G.R. No. 11039 September 13, 1916
Petitioners: Respondents:

Felisa Toribio Dolores Foz

FACTS

Felisa Toribio is the owner of a property located at Sta. Cruz, Manila with a certificate of title No. 2263,
which she sold to Carlos Rodriguez Pomar. Stipulated in the sale is the right of Felisa to redeem the
property and the right to continue to occupy the house on the condition of her paying a monthly rental fee
of Php38.00. Thereafter, she sold her right of redemption and right to lease to his brother Buenaventura
Toribio and sister-in-law, Dolores Foz for the amount of Php 2,200 minus Php 700.00 which the plaintiff
owed the defendants.

On January 26, 1914, Foz, in her own name and representing her husband, executed an instrument of
indebtedness to the plaintiff in which she acknowledged their debt of Php1,500. However, after repeated
demands for payment by the plaintiff, the spouses refused to pay. Hence, the plaintiff filed an action to the
Court of First Instance of Manila, praying the court to enter judgement rescinding the contract of the sale
of rights or else to order the defendants to pay the sum of Php1,500.00, together with legal interest and
attorney’s fees.

During trial, the spouses denied having failed to pay their debt. They presented a deed of sale notarized by
Ramon Muyot, a notary public, as evidence and a receipt of payment in the amount of
Php307.00.Contained in the notarized instrument is the statement that the plaintiff received the total
amount of sale. The plaintiff admitted having executed the deed of sale, but she allegedly did so to help
further certain financial transactions which her brother and sister-in-law intended to make.

The Court rendered judgement in favor of the plaintiff. Hence this appeal by bill of exception, filed by the
defendants.

RULING
MAIN ISSUE/S: 1. YES
1. Whether or not the existence of a certificate of indebtedness in the hands of the 2. NO
creditor is proof that the debt has not been settled.
2. Whether or not a deed of sale prevails against conclusive proof of non-
payment.

RATIONALE

1. 1. Yes, the existence of a certificate of indebtedness in the hands of the creditor is evidence that the debt
has not been settled, unless the contrary shall have been fully proven by the debtor. In the case at bar, the
defendants were only able to show payment via a receipt of Php307.00. The rest, in the amount of Php
1,193, were not given proof of payment. The defendant’s statement that she made partial payments to
the plaintiff in the amount of Php 693 and Php500 at different dates in the presence of the notary public,
and that being in a hurry, she forgot to require receipts and to require the return of the certificate of
indebtedness cannot prosper since the notary public Muyot denied having seen the defendant make any
payment to the plaintiff.

2. No. The defendants’ contention that the deed of sale is evidence enough that they fully paid their1 debt
 cannot prosper since the Court stated that:

“When the vendor denies that he has been paid the sale price and the purchaser adduces no proof that it
was paid, a statement of the vendor contained in the deed of sale cannot prevail against the conclusive
proof shown in the record that the price was not actually paid and that the payment was made to appear in
the deed only for the purpose of furthering certain transactions which the purchasers intended to make.”

The defendants could only show a conclusive proof of partial payment in the guise of the Php307.00
receipt. The rest were not proven.

Ong Yiu v. CA (Contract- General Provisions)

G.R. No. L-40597 June 29, 1979
Petitioners: Respondents:

Agustino B. Ong Yiu CA and PAL

FACTS

Ong Yiu, a practicing lawyer, the herein petitioner, engaged on the service of PAL as a paying passenger. On
August 26, 1967, Ong Yiu was bound for Butuan City from Cebu City, for a scheduled trial. As a passenger,
he checked in one piece of luggage which he was issued a Claim Check. Upon arrival at Butuan City, he
found out that his luggage was missing. He then approached the porter clerk about the matter. It was then
found out that the said luggage was transported to Manila, instead of doing so to Butuan City. The porter
clerk informed Ong Yiu that the said luggage will be transported from Manila to Cebu to Butuan City on the
following day. The next day, Ong Yiu went back to Butuan City airport to check if the luggage has already
arrived. Knowing that the same was not yet delivered at the Butuan City airport, Ong Yiu left the premises.
After few hours, the luggage arrived but since the latter has already left, the driver who used to drive the
petitioner delivered the luggage to the latter with the notification that the luggage has arrived with its lock
opened. Upon inspection, Ong Yiu noticed that a folder containing documents was missing.

As a consequence, Ong Yiu requested for the postponement of the trial he was supposed to attend in
Butuan City. Petitioner asked for the investigation of his missing folder but the PAL failed to trace where
the folder is. Petitioner then demanded for damages for breach of contract of transportation against PAL.
The trial court awarded the sum of P80,000 for moral damages and P30,000 for exemplary damages. Both
parties appealed on the CA which the latter, on its decision, found out that PAL did not act in bad faith,
hence, removed the moral and exemplary damages in favor of Ong Yiu and ordered PAL to pay the latter
with P100, in pursuance to the stipulation written on the ticket issued by PAL to Ong Yiu; thus, this appeal.

RULING
MAIN ISSUE/S: 1. NO
1. Whether or not PAL acted in bad faith and Ong Yiu should be paid for
moral and exemplary damages due to breach of contract of
transportation.
RATIONALE

Although PAL is guilty of negligence, the SC found out that the latter is guilty of simple negligence only. The
efforts of PAL on locating the luggage proved that it acted in good faith and with due diligence of duty.
2
Moreover, it was stated that Ong Yiu should have received and checked his luggage upon the latter’s arrival
on the airport if the former waited a little longer. Furthermore, petitioner is not entitled of the moral and
exemplary damages due to following findings:
(a) Ong Yiu failed to declare a higher value of the luggage;
(b) Ong Yiu did not pay for any additional transportation charge;
(c) while it may be true that petitioner had not signed the plane ticket, he is bound by the provisions
thereof.

The plane ticket is regarded as a contract. Nevertheless, it is a contract of adhesion. A contract of adhesion
is that where one party imposes a ready- made form of contact on the other. It is not entirely prohibited by
the law. The one who adhered to the contract is in reality free to reject it entirely; if he adheres, he gives
his consent. Therefore, the Supreme Court ruled that Ong Yiu cannot claim damages higher than P100
because of his failure to declare a greater value of the luggage and in accordance with the stipulation of the
contract of adhesion, in which he consented, as in this case, the place ticket which was issued to him.

Cornejo v. Calupitan et.al Article 1319- Consent

G.R. No. L-2342 October 27, 1950
Petitioners: Respondents:

Silverio Q. Cornejo Manuel B. Calupitan, D.B. Castaneda and Eustacio

Barrera

FACTS

On January 1945- owner of a parcel of land in the barrio of Mayatobo, Candelaria, Taayabas, an area of
110.9125 hectares authorized his co-defendants D.B. Castaneda, Eustacio Barrera, real estate broker
operating in manila to sell the said parcel.

On January 4, 1945, defendant Calupitan accepted the offer made by the plaintiff Cornejo, at the price of
P650,000 in Japanese military notes.

On January 6, 1945, Cornejo delivered only P65,000 to defendant broker Castaneda & Barrera to deliver for
Calupitan and the balance to paid on January 25, 1945. Calupitan wrote out a letter receipt of acceptance
specifying the terms of payment of the balance approving the stipulated date on or before January 25,
1945.

On January 22, 1945, After supposedly failing to deliver the balance of P585,000, Cornejo deposited the
sum with the clerk of court, securing corresponding receipt and filed the corresponding complain against
Calupitan and the two real estate brokers for specific performance and for payment of damages.

The trial court absolve the defendant-appelle and held that Cornejo repudiated the original agreement by
proposing money be reduced from P70,000 to P65,000 and the balance adjusted from 19th of January to
25, 1945.

RULING
MAIN ISSUE/S: 2. YES
1. Whether or not that the condition being offered to the plaintiff by the
3
 appellant is Justifiable in terms of the status of the situation or the en-
viewed coming events of war.
RATIONALE

Yes, its up to the prospective purchaser to accept or reject it, but he should return the value of the said
amount P65,000 Japanese notes at the time to the plaintiff. Exhibit B between Cornejo and Calupitan had
been abandoned and rendered void by Cornejo himself, and that as to new proposition made by Cornejo,
there was no meeting of minds of the parties for it was not accepted entirely by Calupitan, consequently
the contract of sale of the land in question was not perfected and so Calupitan may not be compelled to
convey said land to plaintiff-appllant. Calupitan is ordered to return to the plaintiff the value of the P65,000
Japanese war notes he received, which value is to be ascertained according to the ballantyne schedule as of
January 6, 1945 in Manila. Said value is hereby fixed at P541.66 with legal interest from January 6, 1945
until paid.

The decision of the trial court is affirmed.

Solidarios v. Alampay Forms of Contracts

G.R. No. L-39592 January 28, 1975
Petitioners: Respondents:

Sps. Antonio Jayme and Ana Solidarios Hon. Judge Nestor Alampay and Benito Ong

FACTS

Spouses Antonio Jayme and Ana Solidarios entered into a contract of mortgage with Benito Ong, but they
signed a deed of sale. In a complaint filed with the lower court, petitioners Sps. Jayme and Solidarios asked
that the deed of absolute sale which they executed in favor of private respondent be reformed into a
contract of mortgage. According to them, that was actually their true agreement.

Upon motion of private respondent, however, respondent Judge dismissed the action for the reason that
the proper remedy is annulment, which has already prescribed, and that the existing mortgage over the
property impairs the action for reformation. Denied reconsideration, petitioners instituted the present
petition for review on certiorari, which the Supreme Court considered as a special civil action.

RULING
MAIN ISSUE/S: 1. YES
1. May the action for reformation still prosper when a third party is
already involve?
RATIONALE

Article 1365 of the Civil Code- expressly recognizes the right to reformation.

Petitioners’ action for reformation and recovery of title was brought on November 29, 1972 less than eight
years after the execution of the questioned deed on December 24, 1964 and had therefore not prescribed.

It is obvious that the mortgage rights over the property are recognized but that would in no way defeat
petitioners’ action for reformation and recovery of title of the property. If petitioners prevail, they simply
would recover the title of the property, subject to the mortgage thereon in favor of Del Castillo or as
prayed for by them, respondents maybe duly sentenced “to deliver title to the plaintiffs free from any
4
encumbrances including the mortgage of the defendant del Castillo” which merely means that respondent
would in such be obliged and sentenced to discharge del Castillo’s mortgage credit (which mortgage loan
he obtained after all for his own exclusive benefit.
Mondragon v. Santos Reformation of Instruments
G.R. No. L-1724 October 12, 1950
Petitioners: Respondents:

Nieves Vda. De Gonzales De Mondragon Roman Santos

FACTS

Don Joaquin Gonzales Mondragon, who died on December 16, 1940 in Manila, left a large tract of land
known as Hacienda Esperanza, situated in three municipalities of Pangasinan and covered by five
certificates of titles. The deceased had executed a will and codicil in which he provided for the distribution
and disposition of his estate among his widow, Doña Nieves Balmori Vda. de Gonzales Mondragon, the
plaintiff herein, and various children. To his widow, the testator devised 33/34 of the hacienda, among
other legacies.

In 1941, the widow and her children made a partition of the inheritance, allotting to each heir separate and
specific portions but leaving pro-indiviso the residential lots and roads in the barrios situated within the
estate. They employed a surveyor, and a sub-division plan, introduced in evidence as Exhibit 10, was
drawn, on which the area of the widow’s approximately one-third share was stated to be 1,023 hectares.

Subsequent to the partition, negotiations were started, or resumed, for the purchase by Don Roman
Santos, the defendant, of the plaintiff’s share and those of her children who were willing to sell. Offers and
counter-offers were made until, finally, the parties closed the deal and executed the deed.

Sometime after the sale, a new survey was made and the new plan gave the area of the plaintiff’s
approximately one-third share of the hacienda as 1,091.24 instead of 1,023.

It was the restoration of the difference between these two figures or the payment of its equivalent in cash
that the first complaint was filed, it being alleged that the plaintiff had sold her land on the basis of P450
per hectare. Explaining why she signed the deed without objecting to the form in which it was written, the
plaintiff declared that she did not read the document because she was then sick suffering from a heart
ailment. The defendant countered with the allegation that he bought all the plaintiff’s right and interest to
and in the hacienda for lump sum and not for a specified price for each hectare, as the plaintiff claims.

The trial court did not favor the Gonzales’ evidence, underlining the fact that the sale was not arrived at in
haste. It took note of the circumstance that the plaintiff was surrounded by her children and co-vendors, all
of whom are highly intelligent, cultured and experienced in business. The evidence on record favored that
of defendant’s allegation and that even Mondragon Gonzales, impliedly, that she was selling her entire
participation and the exact are was still uncertain at that time of her participation.

RULING
MAIN ISSUE/S:
1. Whether reformation is applicable in the said case
RATIONALE

The plaintiff has the burden of proof to overcome the strong presumption that the document she and her
co-sellers signed, expressed their true intention. Our view of the plaintiff’s evidence is that it is neither
5
predominant nor conclusive. The best that can be said in its favor is that it does not rule out the opposite
theory. Much less does it establish, in order to show that the mistakes was mutual, that the buyer shared
the vendor’s intention and belief that the sale was by the hectare and not for a sum in gross as stated in
the document of sale.

The plaintiff’s evidence being as it is, the integrity of the document Exhibit A will, of necessity, have to be
maintained and equitable relief denied. This would be true even if there were doubts. Decisions of this
court and of American courts abound in favor of the salutary doctrine that contracts solemnly and
deliberately entered into may not be overturned by inconclusive proof or by reason of mistakes of one of
the parties to which the other in no way has contributed.

Moran’s comments on the Rules of Court, Vol. III, p. 195, summing up the rulings laid down in various
decisions of the court and one of the United States Supreme Court, says: “Relief by way of reformation of a
written agreement will not be granted unless the proof of mutual mistake is of the clearest and most
satisfactory character. The amount of evidence necessary to sustain a prayer for relief where it is sought to
impugn a fact in a document is always more than a mere preponderance of the evidence.”

In the case of Joaquin vs. Mitsumine (34 Phil., 858), this court held that “An alleged defect in a contract
perfectly valid and binding on its face, must be conclusively proved. The validity and fulfillment of contracts
can not be left to the will of one of the parties.”

In the case of Irureta Goyena vs. Tambunting (1 Phil., 490), it appeared that the defendant bought a piece
of land and agreed to pay $3,200 for it. It so happened that the land was less than what the parties
supposed, and the buyer refused to pay the price agreed upon unless the corresponding reduction was
made.

It is to be noted that in the last-cited case, the mistake was caused, intentionally or innocently, by the
agent of the plaintiff who was favored by the shortage, whereas in the case at bar the error was in the plain
of the plaintiff herself who was prejudiced by the excess.

It seems plain from all the attending circumstances that the dominant and paramount thought in the minds
of the parties during and at the end of the negotiation was a sale of the entire property owned by the
sellers for a gross amount. Not only does this conclusion tally with the explicit and categorical language of
the deed of conveyance, drawn by an able and neutral attorney in close consultations with the defendant
and some of the plaintiff's children, but the form of the sale as thus finally drafted and sealed and signed
was by far more convenient to all concerned. In a sale involving an extensive agricultural estate containing
undetermined lots of different classes, unappraised improvements, barrio lots and roads and standing
crop, it was well-nigh difficult, not to say impossible, to conclude a transaction technically and strictly by
the hectare. Such form of sale would leave the parties in uncertainty on the amount to be added to or
taken from the price in the ensuing re-adjustment in the event of discrepancy in the assumed area. Such
form of sale would be fraught, as the parties ought to have realized, with extreme difficulties and harassing
controversies.

For the reasons stated, the excess in the area shown in the plan Exhibit 10 cannot operate to change the
contract. The error, the possibility of which neither party could have ignored, was a hazard which they
must be presumed to have assumed. The hazard was not one-sided but worked both ways. The share of
each of the plaintiff's children who sold their own holdings was believed to contain 150 hectares but on a
re-survey turned out to have a superficial area of only 140 hectares.
6
 Labasan v. Lacuesta Reformation of Instruments
G.R. No. L-25931 October 30, 1978
Petitioners: Respondents:

Roberto, Avelino, Josefina Labasan and Adela, Dominga and Norberto Lacuesta
Marcela Coloma

FACTS

Spouses Lacuesta were the owners of an unregistered, irrigated riceland in Ilocos Norte. They conveyed by
means of a written document the land with the right to repurchase after 10 years. They failed to exercise
their right within the stipulated period.

They filed a petition seeking the reconveyance of the parcel of land, allegedly as security for a loan. The
trial court ruled that the document executed by the Lacuestas was a pacto de retro sale and that they lost
their right to redeem the land for not having taken any step within the agreed 10 years.

On appeal, the Court of Appeals set aside the judgement of the trial court and declared the contract an
equitable mortgage and ordered the Labasans to reconvey the land, and that the loan by the Lacuestas be
deemed paid from the fruits of the property which the Labasans had been receiving for the past 32 years.

RULING
MAIN ISSUE/S: 1. Equitable
1. Whether or not the contract is a pacto de retro sale or an equitable Mortgage
mortgage.
RATIONALE

It is a basic fundamental rule in the interpretation of a contract that if the terms thereof are clear and leave
no doubt upon the intention of the contracting parties the literal meaning of the stipulation shall control,
but when the words appear to be contrary to the evident intention of the parties, the latter shall prevail
over the former (Article 1370, NCC).

In case of doubt concerning the surrounding circumstances in the execution of a contract, the least
transmission of rights and interest shall prevail if the contract is gratuitous, and if onerous, the doubt is to
be settled in favor of the greatest reciprocity of interest.

Sps. Cannu v. Sps. Galang Rescissible Contracts

G.R. No. 139523 May 26, 2005
Petitioners: Respondents:

Sps. Felipe and Leticia Cannu Sps. Gil and Fernandina Galang and NHMFC

FACTS

Respondents obtained a loan from Fortune Savings & Loan Association an amount of P173,800.00 in7order
to purchase a house and lot in Pulanglupa, Las Piñas City. To secure payment, a real estate mortgage was
constituted on the said house and lot in favor of Fortune Savings & Loan Association. In 1990, NHMFC
purchased the mortgage loan of respondents-spouses from Fortune Savings & Loan Association for
P173,800.00. Respondent authorized to sell the subject house and lot. Petitioner agreed to buy the
property for P120,000.00 and to assume the balance of the mortgage obligations with the NHMFC and with
CERF Realty (the Developer of the property). A Deed of Sale with Assumption of Mortgage Obligation was
executed between Galang (vendors) and Cannu (vendees) over the house and lot in question which
contains, inter alia, the following: “It is a special condition of this contract that the Vendees shall assume
and continue with the payment of the amortization with the National Home Mortgage Finance Corporation
Inc.”

Petitioners immediately took possession and occupied the house and lot. Despite requests from Galang to
pay the balance of P45,000.00 or in the alternative to vacate the property in question, the petitioners
refused to do so. Because the Cannus failed to fully comply with their obligations, respondent Galang paid
P233,957.64 as full payment of her remaining mortgage loan with NHMFC.

Petitioners opposed the release in favor of respondents-spouses insisting that the subject property had
already been sold to them. Thereupon, a Complaint for Specific Performance and Damages was filed
asking, among other things, that petitioners (plaintiffs therein) be declared the owners of the property
involved subject to reimbursements of the amount made by respondents-spouses (defendants therein) in
preterminating the mortgage loan with NHMFC.

It claimed that petitioners have no cause of action against it because they have not submitted the formal
requirements to be considered assignees and successors-in-interest of the property under litigation. After
trial, plaintiffs have no cause of action either against the spouses Galang or the NHMFC. In this case,
NHMFC has not been duly informed due to lack of formal requirements to acknowledge plaintiffs as legal
assignees, or legitimate tranferees and, therefore, successors-in-interest to the property, plaintiffs should
have no legal personality to claim any right to the same property. A Motion for Reconsideration was filed,
but same was denied.

RULING
MAIN ISSUE/S: 1. YES
1. Whether or not the petitioners’ breach of obligation was substantial. 2. NO
3. NO
2. Whether or not there was no substantial compliance with the obligation to
pay the monthly amortization with the NHMFC.
3. Whether or not the action for rescission was subsidiary.
RATIONALE

1. Yes. Settled is the rule that rescission or, more accurately, resolution, of a party to an obligation under
Article 1191 is predicated on a breach of faith by the other party that violates the reciprocity between
them. Rescission will not be permitted for a slight or casual breach of the contract. Rescission may be had
only for such breaches that are substantial and fundamental as to defeat the object of the parties in making
the agreement. The question of whether a breach of contract is substantial depends upon the attending
circumstances and not merely on the percentage of the amount not paid. In the case at bar, we find
petitioners' failure to pay the remaining balance of P45,000.00 to be substantial. Taken together with the
fact that the last payment made was eighteen months before the respondent Fernandina Galang paid the
outstanding balance of the mortgage loan with NHMFC, the intention of petitioners to renege on their
8
obligation is utterly clear.

2. We do not agree. There is sufficient evidence showing that demands were made from petitioners to
comply with their obligation. Due to the fact that full payment has not been paid and that the monthly
amortizations with the NHMFC have not been fully updated, she made her intentions clear with petitioner
Leticia Cannu that she will rescind or annul the Deed of Sale with Assumption of Mortgage. Their reliance
on Article 1383 is misplaced. Subsidiary character of the action for rescission applies to contracts
enumerated in Articles 1381. The contract involved in the case before us is not one of those mentioned
therein.

3. No. The provision that applies in the case at bar is Article 1191. From the foregoing, it is clear that
rescission under Article 1191 is a principal action, while rescission under Article 1383 is a subsidiary action.
The former is based on breach by the other party that violates the reciprocity between the parties, while
the latter is not. In the case at bar, the reciprocity between the parties was violated when petitioners failed
to fully pay the balance of P45,000.00 to respondents-spouses and their failure to update their
amortizations with the NHMFC. As a consequence of the rescission or, more accurately, resolution of the
Deed of Sale with Assumption of Mortgage, it is the duty of the court to require the parties to surrender
whatever they may have received from the other. The parties should be restored to their original situation.

WHEREFORE, premises considered, the decision of the Court of Appeals is hereby AFFIRMED with
MODIFICATION. Spouses Gil and Fernandina Galang are hereby ordered to return the partial payments
made by petitioners

Felix Ullman v. Vicente Hernaez Voidable Contracts

G.R. No. L-9816 March 10, 1915
Petitioners: Respondents:

Felix Ullman Vicente Hernaez

FACTS

Vicente Hernaez contracted a debt in favor of Felix Ullman on April 5, 1900, amounting to 3,525 pesos
Mexican currency, to be paid, says Hernaez, “as soon as I receive the portion that as an heir must come to
me from the estate of Juana Espinosa, widow of Hernaez: without prejudice to paying on it, during the time
that may elapse until I get possession of said property, interest at six per cent a year, but not, however,
compound interest.”

On June 2, 1913, Ullman filed suit against Vicente Hernaez, alleging therein, as the fifth fact:

‘That the defendant did on January 5, 1913, cede, alienate, and convey to Rosendo Hernaez for the sum of
twenty-five thousand pesos (P25,000) Philippine currency, all his rights and rights of action in the property
left by the deceased Juana Espinosa.’

This fact was expressly admitted by the defendant in the agreement of facts. Moreover, the instrument of
indebtedness was inserted in the complaint and has not been denied under oath in the reply.

9
The Court of First Instance of Occidental Negros decided the case by sentencing the defendant to pay to
the plaintiff P3,525, with interest at 6 per cent a year from April 5, 1913. But on a rehearing requested by
the plaintiff the court again rendered judgment, amending the portion relating to the interest, and
sentenced the defendant to pay interest on the debt on the basis of 6 per cent a year from April 5, 1900,
and the costs.

RULING
MAIN ISSUE/S: 1. NO
1. Can the right of action for nullity of the defendant prosper?
RATIONALE

No. True it is that the defendant lacked three months and fifteen days when he executed the note for the
sum stated, the price of some jewelry he had bought from the plaintiff; but he attained his majority on July
20 of the same year 1900, and he did not then nor in the four years following attempt to enforce the nullity
that he now assigns as a ground of error.

The right of action for nullity shall only last four years. The right of action was not exercised from April 5,
1905, until June 2, 1913, nor was any move made during this time. But a right of action that has not yet
arisen cannot prescribe. In time obligations, as that at bar, to pay "as soon as I receive the portion that as
an heir must come to me from the estate of Juana Espinosa," the right of action only arises when the date
fixed has arrived; the obligation is enforcible only when the day comes. This day arrived on January 25,
1913, when the defendant sold to Rosendo Hernaez his right to inherit. When it refers to contracts
executed by minors or incompetents, from the date when they were released from guardianship. (Civil
Code, art. 1301.)

Bumanlag v. Alzate Unenforceable Contracts

GR No. L-39119, September 26, 1986
Petitioners: Respondents:

Feliciana and Flaviano Bumanlag Hon. Alzate, Tomasa Bumanlag and Silvino Espugado

FACTS

On the first case which entitled Bumanlag, et. al. v. Bumanlag, et. al. the petitioner sued herein the private
respondents for partition of the lots inherited by both parties from their deceased father, respondents
however moved to dismiss on the ground that some years before a final and executory judgment (based on
a compromise agreement) involving the same parties, same subject matter, and same causes of action had
already been rendered by a court of competent jurisdiction and that therefore the doctrine of res judicata
clearly bars the present case; petitioners contend that said judgment is void because the compromise
agreement had been signed in their behalf by their lawyer who had not been authorized by them to enter
into such agreement, consequently there can be no res judicata.

RULING
MAIN ISSUE/S: 2. NO
1. Whether or not the lawyer who signed a compromised agreement in
behalf of his client without the consent of the latter is void?
RATIONALE

No, the compromise is not void but only unenforceable and may therefore be ratified by the client
expressly or impliedly which stated on “Art. 1403 The following contracts are unenforceable, unless they
are ratified: 10
1. Those entered into in the name of another person by one who has been given no authority or legal
representation, or who has acted beyond his powers.”

GoChan v. Young Inexistent Contracts

354 SCRA 207 March 12, 2001
Petitioners: Respondents:

Virginia O. Gochan, Felix Y. Gochan Iii, Mae
Gochan-Efann, Louise Y. Gochan, Esteban Y.
Gochan Jr., Dominic Y. Gochan, Felix O. Gochan
Iii, Mercedes R. Gochan, Alfredo R. Gochan,
Angelina R. Gochan-Hernaez, Maria Merced R.
Gochan, Crispo R. Gochan Jr., Marion R.
Gochan, Mactan Realty Development
Corporation And Felix Gochan & Sons Realty
Corporation
Richard G. Young, David G. Young, Jane G. Young-Llaban,
John D. Young Jr., Mary G. Young-Hsu And Alexander
Thomas G. Young As Heirs Of Alice Gochan; The Intestate
Estate Of John D. Young Sr.; And Cecilia Gochan-Uy And
Miguel C. Uy, For Themselves And On Behalf And For The
Benefit Of Felix Gochan & Sons Realty Corporation

FACTS

Felix Gochan and Sons Realty Corporation (Gochan Realty, for brevity) was registered with the SEC on June,
1951, with Felix Gochan, Sr., Maria Pan Nuy Go Tiong, Pedro Gochan, Tomasa Gochan, Esteban Gochan and
Crispo Gochan as its incorporators. Felix Gochan Sr.’s daughter, Alice, mother of [herein respondents],
inherited 50 shares of stock in Gochan Realty from the former. Alice died in 1955, leaving the 50 shares to
her husband, John Young, Sr.

In 1962, the Regional Trial Court of Cebu adjudicated 6/14 of these shares to her children, herein
[respondents] Richard Young, David Young, Jane Young Llaban, John Young Jr., Mary Young Hsu and
Alexander Thomas Young. Having earned dividends, these stocks numbered 179 by 20 September 1979.
Five days later (25 September), at which time all the children had reached the age of majority, their father
John Sr., requested Gochan Realty to partition the shares of his late wife by cancelling the stock certificates
in his name and issuing in lieu thereof, new stock certificates in the names of [herein respondents].

On 17 October 1979, respondent Gochan Realty refused, citing as reason, the right of first refusal granted
to the remaining stockholders by the Articles of Incorporation.

On 21, 1990, [sic] John, Sr. died, leaving the shares to the [respondents].

On 8 February 1994, [respondents] Cecilia Gochan Uy and Miguel Uy filed a complaint with the SEC for
issuance of shares of stock to the rightful owners, nullification of shares of stock, reconveyance of property
impressed with trust, accounting, removal of officers and directors and damages against respondents. A
Notice of Lis Pendens was annotated as [sic] real properties of the corporation.

On 16 March 1994, [herein petitioners] moved to dismiss the complaint alleging that: (1) the SEC ha[d] no
jurisdiction over the nature of the action; (2) the [respondents] [were] not the real parties-in-interest and
ha[d] no capacity to sue; and (3) [respondents] causes of action [were] barred by the Statute of Limitations.

The motion was opposed by herein [respondents].

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On 29 March 1994, [petitioners] filed a Motion for cancellation of Notice of Lis Pendens. [Respondents]
opposed the said motion.

On 9 December 1994, the SEC, through its Hearing Officer, granted the motion to dismiss and ordered the
cancellation of the notice of lis pendens annotated upon the titles of the corporate lands. In its order, the
SEC opined:

In the instant case, the complaint admits that complainants Richard G. Young, David G. Young, Jane G.
Young Llaban, John D. Young, Jr., Mary G. Young Hsu and Alexander Thomas G. Young, who are the children
of the late Alice T. Gochan and the late John D. Young, Sr. are suing in their own right and as heirs of and/or
as the beneficial owners of the shares in the capital stock of FGSRC held in trust for them during his lifetime
by the late John D. Young. Moreover, it has been shown that said complainants ha[d] never been x x x
stockholder[s] of record of FGSRC to confer them with the legal capacity to bring and maintain their action.
Conformably, the case cannot be considered as an intra-corporate controversy within the jurisdiction of
this Commission.

The complainant heirs base what they perceived to be their stockholders rights upon the fact of their
succession to all the rights, property and interest of their father, John D. Young, Sr. While their heirship is
not disputed, their right to compel the corporation to register John D. Youngs Sr. shares of stock in their
names cannot go unchallenged because the devolution of property to the heirs by operation of law in
succession is subject to just obligations of the deceased before such property passes to the heirs.
Conformably, until therefore the estate is settled and the payment of the debts of the deceased is
accomplished, the heirs cannot as a matter of right compel the delivery of the shares of stock to them and
register such transfer in the books of the corporation to recognize them as stockholders. The complainant
heirs succeed to the estate of [the] deceased John D. Young, Sr. but they do not thereby become
stockholders of the corporation.

Complainants further contend that the alleged wrongful acts of the corporation and its directors constitute
fraudulent devices or schemes which may be detrimental to the stockholders. Again, the injury [is]
perceived[,] as is alleged[,] to have been suffered by complainants as stockholders, which they are not.
Admittedly, the SEC has no jurisdiction over a controversy wherein one of the parties involved is not or not
yet a stockholder of the corporation. [SEC vs. CA, 201 SCRA 134].

The rule is in accord with well settled jurisprudence holding that a stockholder bringing a derivative action
must have been [so] at the time the transaction or act complained of [took] place. (Pascual vs. Orozco, 19
Phil. 82; Republic vs. Cuaderno, 19 SCRA 671; San Miguel Corporation vs. Khan, 176 SCRA 462-463) The
language of the rule is mandatory, strict compliance with the terms thereof thus being a condition
precedent, a jurisdictional requirement to the filing of the instant action.

Otherwise stated, proof of compliance with the requirement must be sufficiently established for the action
to be given due course by this Commission. The failure to comply with this jurisdictional requirement on
derivative action must necessarily result in the dismissal of the instant complaint. (pp. 77-79, Rollo)
RULING
MAIN ISSUE/S: 1. NO
1. Whether or not the Spouses Uy have the personality to file an action
before the SEC against Gochan Realty Corporation
RATIONALE

No. As a general rule, the jurisdiction of a court or tribunal over the subject matter is determined by the
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allegations in the complaint. For purposes of resolving a motion to dismiss, Cecilia Uy’s averment in the
Complaint — that the purchase of her stocks by the corporation was null and void ab initio is deemed
admitted. It is elementary that a void contract produces no effect either against or in favor of anyone; it
cannot create, modify or extinguish the juridical relation to which it refers. Thus, Cecilia remains a
stockholder of the corporation in view of the nullity of the Contract of Sale. Although she was no longer
registered as a stockholder in the corporate records as of the filing of the case before the SEC, the admitted
allegations in the Complaint made her still a bona fide stockholder of Felix Gochan & Sons Realty
Corporation (FGSRC), as between said parties. In any event, the present controversy, whether intra-
corporate or not, is no longer cognizable by the SEC, in view of RA 8799, which transferred to Regional Trial
Courts the former jurisdiction over cases involving intra-corporate disputes.

Petitioners contend that the statute of limitations already bars the Uy spouses action, be it one for
annulment of a voidable contract or one based upon a written contract. The Complaint, however, contains
respondents allegation that the sale of the shares of stock was not merely voidable, but was void ab initio.
Below we quote its relevant portion:

That on November 21, 1979, respondent Felix Gochan & Sons Realty Corporation did not have unrestricted
retained earnings in its books to cover the purchase price of the 208 shares of stock it was then buying
from complainant Cecilia Gochan Uy, thereby rendering said purchase null and void ab initio for being
violative of the trust fund doctrine and contrary to law, morals good customs, public order and public
policy; Necessarily, petitioners contention that the action has prescribed cannot be sustained. Prescription
cannot be invoked as a ground if the contract is alleged to be void ab initio. It is axiomatic that the action or
defense for the declaration of nullity of a contract does not prescribe.

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