Day 4 full text cases

Civil law:

1. G.R. No. 106063 November 21, 1996

EQUATORIAL REALTY DEVELOPMENT, INC. & CARMELO & BAUERMANN, INC., petitioners,

vs.
MAYFAIR THEATER, INC., respondent.

HERMOSISIMA, JR., J.:

Before us is a petition for review of the decision1 of the Court of

Appeals2 involving questions in the resolution of which the respondent appellate court analyzed
and interpreted particular provisions of our laws on contracts and sales. In its assailed decision,
the respondent court reversed the trial court3 which, in dismissing the complaint for specific
performance with damages and annulment of contract,4 found the option clause in the lease
contracts entered into by private respondent Mayfair Theater, Inc. (hereafter, Mayfair) and
petitioner Carmelo & Bauermann, Inc. (hereafter, Carmelo) to be impossible of performance and
unsupported by a consideration and the subsequent sale of the subject property to petitioner
Equatorial Realty Development, Inc. (hereafter, Equatorial) to have been made without any
breach of or prejudice to, the said lease contracts. 5

We reproduce below the facts as narrated by the respondent court, which narration, we note, is
almost verbatim the basis of the statement of facts as rendered by the petitioners in their
pleadings:

Carmelo owned 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 for the latter's
lease of a portion of Carmelo's property particularly described, to wit:

A PORTION OF THE SECOND FLOOR of the two-storey building,

situated at C.M. Recto Avenue, Manila, with a floor area of 1,610 square
meters.

THE SECOND FLOOR AND MEZZANINE of the two-storey building,

situated at C.M. Recto Avenue, Manila, with a floor area of 150 square
meters.

for use by Mayfair as a motion picture theater and for a term of twenty (20) years. Mayfair
thereafter constructed on the leased property a movie house known as "Maxim Theatre."

Two years later, on March 31, 1969, Mayfair entered into a second contract of lease with
Carmelo for the lease of another portion of Carmelo's property, to wit:

A PORTION OF THE SECOND FLOOR of the two-storey building,

situated at C.M. Recto Avenue, Manila, with a floor area of 1,064 square
meters.
 THE TWO (2) STORE SPACES AT THE GROUND FLOOR and
MEZZANINE of the two-storey building situated at C.M. Recto Avenue,
Manila, with a floor area of 300 square meters and bearing street
numbers 1871 and 1875,

for similar use as a movie theater and for a similar term of twenty (20) years. Mayfair put
up another movie house known as "Miramar Theatre" on this leased property.

Both contracts of lease provides (sic) identically worded paragraph 8, which reads:

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 hereof that the
purchaser shall recognize this lease and be bound by all the terms and
conditions thereof.

Sometime in August 1974, Mr. Henry Pascal of Carmelo informed Mr. Henry Yang,
President of Mayfair, through a telephone conversation that Carmelo was desirous of
selling the entire Claro M. Recto property. Mr. Pascal told Mr. Yang that a certain Jose
Araneta was offering to buy the whole property for US Dollars 1,200,000, and Mr. Pascal
asked Mr. Yang if the latter was willing to buy the property for Six to Seven Million Pesos.

Mr. Yang replied that he would let Mr. Pascal know of his decision. On August 23, 1974,
Mayfair replied through a letter stating as follows:

It appears that on August 19, 1974 your Mr. Henry Pascal informed our
client's Mr. Henry Yang through the telephone that your company desires
to sell your above-mentioned C.M. Recto Avenue property.

Under your company's two lease contracts with our client, it is uniformly
provided:

8. 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 is (sic)
herebinds (sic) 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 hereof (sic).

Carmelo did not reply to this letter.

On September 18, 1974, Mayfair sent another letter to Carmelo purporting to express
interest in acquiring not only the leased premises but "the entire building and other
improvements if the price is reasonable. However, both Carmelo and Equatorial
questioned the authenticity of the second letter.

Four years later, on July 30, 1978, Carmelo sold its entire C.M. Recto Avenue land and
building, which included the leased premises housing the "Maxim" and "Miramar"
theatres, to Equatorial by virtue of a Deed of Absolute Sale, for the total sum of
P11,300,000.00.

In September 1978, Mayfair instituted the action a quo for specific performance and
annulment of the sale of the leased premises to Equatorial. In its Answer, Carmelo
alleged as special and affirmative defense (a) that it had informed Mayfair of its desire to
sell the entire C.M. Recto Avenue property and offered the same to Mayfair, but the latter
answered that it was interested only in buying the areas under lease, which was
impossible since the property was not a condominium; and (b) that the option to purchase
invoked by Mayfair is null and void for lack of consideration. Equatorial, in its Answer,
pleaded as special and affirmative defense that the option is void for lack of consideration
(sic) and is unenforceable by reason of its impossibility of performance because the
leased premises could not be sold separately from the other portions of the land and
building. It counterclaimed for cancellation of the contracts of lease, and for increase of
rentals in view of alleged supervening extraordinary devaluation of the currency.
Equatorial likewise cross-claimed against co-defendant Carmelo for indemnification in
respect of Mayfair's claims.

During the pre-trial conference held on January 23, 1979, the parties stipulated on the
following:

1. That there was a deed of sale of the contested premises by the

defendant Carmelo . . . in favor of defendant Equatorial . . .;

2. That in both contracts of lease there appear (sic) the stipulation

granting the plaintiff exclusive option to purchase the leased premises
should the lessor desire to sell the same (admitted subject to the
contention that the stipulation is null and void);

3. That the two buildings erected on this land are not of the condominium
plan;

4. That the amounts stipulated and mentioned in paragraphs 3 (a) and

(b) of the contracts of lease constitute the consideration for the plaintiff's
occupancy of the leased premises, subject of the same contracts of
lease, Exhibits A and B;

xxx xxx xxx

6. That there was no consideration specified in the option to buy

embodied in the contract;

7. That Carmelo & Bauermann owned the land and the two buildings
erected thereon;

8. That the leased premises constitute only the portions actually

occupied by the theaters; and

9. That what was sold by Carmelo & Bauermann to defendant Equatorial

Realty is the land and the two buildings erected thereon.

xxx xxx xxx

 After assessing the evidence, the court a quo rendered the appealed decision, the
decretal portion of which reads as follows:

WHEREFORE, judgment is hereby rendered:

(1) Dismissing the complaint with costs against the plaintiff;

(2) Ordering plaintiff to pay defendant Carmelo & Bauermann P40,000.00

by way of attorney's fees on its counterclaim;

(3) Ordering plaintiff to pay defendant Equatorial Realty P35,000.00 per

month as reasonable compensation for the use of areas not covered by
the contract (sic) of lease from July 31, 1979 until plaintiff vacates said
area (sic) plus legal interest from July 31, 1978; P70,000 00 per month
as reasonable compensation for the use of the premises covered by the
contracts (sic) of lease dated (June 1, 1967 from June 1, 1987 until
plaintiff vacates the premises plus legal interest from June 1, 1987;
P55,000.00 per month as reasonable compensation for the use of the
premises covered by the contract of lease dated March 31, 1969 from
March 30, 1989 until plaintiff vacates the premises plus legal interest
from March 30, 1989; and P40,000.00 as attorney's fees;

(4) Dismissing defendant Equatorial's crossclaim against defendant

Carmelo & Bauermann.

The contracts of lease dated June 1, 1967 and March 31, 1969 are
declared expired and all persons claiming rights under these contracts
are directed to vacate the premises.6

The trial court adjudged the identically worded paragraph 8 found in both aforecited lease
contracts to be an option clause which however cannot be deemed to be binding on Carmelo
because of lack of distinct consideration therefor.

The court a quo ratiocinated:

Significantly, during the pre-trial, it was admitted by the parties that the option in the
contract of lease is not supported by a separate consideration. Without a consideration,
the option is therefore not binding on defendant Carmelo & Bauermann to sell the C.M.
Recto property to the former. The option invoked by the plaintiff appears in the contracts
of lease . . . in effect there is no option, on the ground that there is no consideration.
Article 1352 of the Civil Code, provides:

Contracts without cause or with unlawful cause, produce no effect

whatever. The cause is unlawful if it is contrary to law, morals, good
custom, public order or public policy.

Contracts therefore without consideration produce no effect whatsoever. Article 1324

provides:

When the offeror has allowed the offeree a certain period to accept, the
offer may be withdrawn at any time before acceptance by communicating
such withdrawal, except when the option is founded upon consideration,
as something paid or promised.
 in relation with Article 1479 of the same Code:

A promise to buy and sell a determine thing for a price certain is

reciprocally demandable.

An accepted unilateral promise to buy or to sell a determine thing for a

price certain is binding upon the promissor if the promise is supported by
a consideration distinct from the price.

The plaintiff cannot compel defendant Carmelo to comply with the promise unless the
former establishes the existence of a distinct consideration. In other words, the promisee
has the burden of proving the consideration. The consideration cannot be presumed as in
Article 1354:

Although the cause is not stated in the contract, it is presumed that it

exists and is lawful unless the debtor proves the contrary.

where consideration is legally presumed to exists. Article 1354 applies to contracts in

general, whereas when it comes to an option it is governed particularly and more
specifically by Article 1479 whereby the promisee has the burden of proving the
existence of consideration distinct from the price. Thus, in the case of Sanchez vs. Rigor,
45 SCRA 368, 372-373, the Court said:

(1) Article 1354 applies to contracts in general, whereas the second

paragraph of Article 1479 refers to sales in particular, and, more
specifically, to an accepted unilateral promise to buy or to sell. In other
words, Article 1479 is controlling in the case at bar.

(2) In order that said unilateral promise may be binding upon the
promissor, Article 1479 requires the concurrence of a condition, namely,
that the promise be supported by a consideration distinct from the price.

Accordingly, the promisee cannot compel the promissor to comply with

the promise, unless the former establishes the existence of said distinct
consideration. In other words, the promisee has the burden of proving
such consideration. Plaintiff herein has not even alleged the existence
thereof in his complaint. 7

It follows that plaintiff cannot compel defendant Carmelo & Bauermann to sell the C.M.
Recto property to the former.

Mayfair taking exception to the decision of the trial court, the battleground shifted to the
respondent Court of Appeals. Respondent appellate court reversed the court a quo  and rendered
judgment:

1. Reversing and setting aside the appealed Decision;

2. Directing the plaintiff-appellant Mayfair Theater Inc. to pay and return to Equatorial the
amount of P11,300,000.00 within fifteen (15) days from notice of this Decision, and
ordering Equatorial Realty Development, Inc. to accept such payment;

3. Upon payment of the sum of P11,300,000, directing Equatorial Realty Development,

Inc. to execute the deeds and documents necessary for the issuance and transfer of
 ownership to Mayfair of the lot registered under TCT Nos. 17350, 118612, 60936, and
52571; and

4. Should plaintiff-appellant Mayfair Theater, Inc. be unable to pay the amount as

adjudged, declaring the Deed of Absolute Sale between the defendants-appellants
Carmelo & Bauermann, Inc. and Equatorial Realty Development, Inc. as valid and
binding upon all the parties.8

Rereading the law on the matter of sales and option contracts, respondent Court of Appeals
differentiated between Article 1324 and Article 1479 of the Civil Code, analyzed their application
to the facts of this case, and concluded that since paragraph 8 of the two lease contracts does
not state a fixed price for the purchase of the leased premises, which is an essential element for a
contract of sale to be perfected, what paragraph 8 is, must be a right of first refusal and not an
option contract. It explicated:

Firstly, the court a quo  misapplied the provisions of Articles 1324 and 1479, second
paragraph, of the Civil Code.

Article 1324 speaks of an "offer" made by an offeror which the offeree may or may not
accept within a certain period. Under this article, the offer may be withdrawn by the
offeror before the expiration of the period and while the offeree has not yet accepted the
offer. However, the offer cannot be withdrawn by the offeror within the period if a
consideration has been promised or given by the offeree in exchange for the privilege of
being given that period within which to accept the offer. The consideration is distinct from
the price which is part of the offer. The contract that arises is known as option. In the
case of Beaumont vs. Prieto, 41 Phil. 670, the Supreme court, citing Bouvier, defined an
option as follows: "A contract by virtue of which A, in consideration of the payment of a
certain sum to B, acquires the privilege of buying from or selling to B, certain securities or
properties within a limited time at a specified price," (pp. 686-7).

Article 1479, second paragraph, on the other hand, contemplates of an "accepted

unilateral promise to buy or to sell a determinate thing for a price within (which) is binding
upon the promisee if the promise is supported by a consideration distinct from the price."
That "unilateral promise to buy or to sell a determinate thing for a price certain" is called
an offer. An "offer", in laws, is a proposal to enter into a contract (Rosenstock vs. Burke,
46 Phil. 217). To constitute a legal offer, the proposal must be certain as to the object, the
price and other essential terms of the contract (Art. 1319, Civil Code).

Based on the foregoing discussion, it is evident that the provision granting Mayfair "30-
days exclusive option to purchase" the leased premises is NOT AN OPTION in the
context of Arts. 1324 and 1479, second paragraph, of the Civil Code. Although the
provision is certain as to the object (the sale of the leased premises) the price for which
the object is to be sold is not stated in the provision Otherwise stated, the questioned
stipulation is not by itself, an "option" or the "offer to sell" because the clause does not
specify the price for the subject property.

Although the provision giving Mayfair "30-days exclusive option to purchase" cannot be
legally categorized as an option, it is, nevertheless, a valid and binding stipulation. What
the trial court failed to appreciate was the intention of the parties behind the questioned
proviso.

xxx xxx xxx

 The provision in question is not of the pro-forma type customarily found in a contract of
lease. Even appellees have recognized that the stipulation was incorporated in the two
Contracts of Lease at the initiative and behest of Mayfair. Evidently, the stipulation was
intended to benefit and protect Mayfair in its rights as lessee in case Carmelo should
decide, during the term of the lease, to sell the leased property. This intention of the
parties is achieved in two ways in accordance with the stipulation. The first is by giving
Mayfair "30-days exclusive option to purchase" the leased property. The second is, in
case Mayfair would opt not to purchase the leased property, "that the purchaser (the new
owner of the leased property) shall recognize the lease and be bound by all the terms
and conditions thereof."

In other words, paragraph 8 of the two Contracts of lease, particularly the stipulation
giving Mayfair "30-days exclusive option to purchase the (leased premises)," was meant
to provide Mayfair the opportunity to purchase and acquire the leased property in the
event that Carmelo should decide to dispose of the property. In order to realize this
intention, the implicit obligation of Carmelo once it had decided to sell the leased
property, was not only to notify Mayfair of such decision to sell the property, but, more
importantly, to make an offer to sell the leased premises to Mayfair, giving the latter a fair
and reasonable opportunity to accept or reject the offer, before offering to sell or selling
the leased property to third parties. The right vested in Mayfair is analogous to the right of
first refusal, which means that Carmelo should have offered the sale of the leased
premises to Mayfair before offering it to other parties, or, if Carmelo should receive any
offer from third parties to purchase the leased premises, then Carmelo must first give
Mayfair the opportunity to match that offer.

In fact, Mr. Pascal understood the provision as giving Mayfair a right of first refusal when
he made the telephone call to Mr. Yang in 1974. Mr. Pascal thus testified:

Q Can you tell this Honorable Court how you made the
offer to Mr. Henry Yang by telephone?

A I have an offer from another party to buy the property

and having the offer we decided to make an offer to
Henry Yang on a first-refusal basis. (TSN November 8,
1983, p. 12.).

and on cross-examination:

Q When you called Mr. Yang on August 1974 can you

remember exactly what you have told him in connection
with that matter, Mr. Pascal?

A More or less, I told him that I received an offer from

another party to buy the property and I was offering him
first choice of the enter property. (TSN, November 29,
1983, p. 18).

We rule, therefore, that the foregoing interpretation best renders effectual the intention of
the parties.9

Besides the ruling that paragraph 8 vests in Mayfair the right of first refusal as to which the
requirement of distinct consideration indispensable in an option contract, has no application,
respondent appellate court also addressed the claim of Carmelo and Equatorial that assuming
arguendo that the option is valid and effective, it is impossible of performance because it covered
only the leased premises and not the entire Claro M. Recto property, while Carmelo's offer to sell
pertained to the entire property in question. The Court of Appeals ruled as to this issue in this
wise:

We are not persuaded by the contentions of the defendants-appellees. It is to be noted

that the Deed of Absolute Sale between Carmelo and Equatorial covering the whole
Claro M. Recto property, made reference to four titles: TCT Nos. 17350, 118612, 60936
and 52571. Based on the information submitted by Mayfair in its appellant's Brief (pp. 5
and 46) which has not been controverted by the appellees, and which We, therefore, take
judicial notice of the two theaters stand on the parcels of land covered by TCT No. 17350
with an area of 622.10 sq. m and TCT No. 118612 with an area of 2,100.10 sq. m. The
existence of four separate parcels of land covering the whole Recto property
demonstrates the legal and physical possibility that each parcel of land, together with the
buildings and improvements thereof, could have been sold independently of the other
parcels.

At the time both parties executed the contracts, they were aware of the physical and
structural conditions of the buildings on which the theaters were to be constructed in
relation to the remainder of the whole Recto property. The peculiar language of the
stipulation would tend to limit Mayfair's right under paragraph 8 of the Contract of Lease
to the acquisition of the leased areas only. Indeed, what is being contemplated by the
questioned stipulation is a departure from the customary situation wherein the buildings
and improvements are included in and form part of the sale of the subjacent land.
Although this situation is not common, especially considering the non-condominium
nature of the buildings, the sale would be valid and capable of being performed. A sale
limited to the leased premises only, if hypothetically assumed, would have brought into
operation the provisions of co-ownership under which Mayfair would have become the
exclusive owner of the leased premises and at the same time a co-owner with Carmelo of
the subjacent land in proportion to Mayfair's interest over the premises sold to it. 10

Carmelo and Equatorial now comes before us questioning the correctness and legal basis for the
decision of respondent Court of Appeals on the basis of the following assigned errors:

THE COURT OF APPEALS GRAVELY ERRED IN CONCLUDING THAT THE OPTION

CLAUSE IN THE CONTRACTS OF LEASE IS ACTUALLY A RIGHT OF FIRST
REFUSAL PROVISO. IN DOING SO THE COURT OF APPEALS DISREGARDED THE
CONTRACTS OF LEASE WHICH CLEARLY AND UNEQUIVOCALLY PROVIDE FOR
AN OPTION, AND THE ADMISSION OF THE PARTIES OF SUCH OPTION IN THEIR
STIPULATION OF FACTS.

II

WHETHER AN OPTION OR RIGHT OF FIRST REFUSAL, THE COURT OF APPEALS

ERRED IN DIRECTING EQUATORIAL TO EXECUTE A DEED OF SALE EIGHTEEN
(18) YEARS AFTER MAYFAIR FAILED TO EXERCISE ITS OPTION (OR, EVEN ITS
RIGHT OF FIRST REFUSAL ASSUMING IT WAS ONE) WHEN THE CONTRACTS
LIMITED THE EXERCISE OF SUCH OPTION TO 30 DAYS FROM NOTICE.

III

THE COURT OF APPEALS GRIEVOUSLY ERRED WHEN IT DIRECTED

IMPLEMENTATION OF ITS DECISION EVEN BEFORE ITS FINALITY, AND WHEN IT
 GRANTED MAYFAIR A RELIEF THAT WAS NOT EVEN PRAYED FOR IN THE
COMPLAINT.

IV

THE COURT OF APPEALS VIOLATED ITS OWN INTERNAL RULES IN THE

ASSIGNMENT OF APPEALED CASES WHEN IT ALLOWED THE SAME DIVISION XII,
PARTICULARLY JUSTICE MANUEL HERRERA, TO RESOLVE ALL THE MOTIONS IN
THE "COMPLETION PROCESS" AND TO STILL RESOLVE THE MERITS OF THE
CASE IN THE "DECISION STAGE".11

We shall first dispose of the fourth assigned error respecting alleged irregularities in the raffle of
this case in the Court of Appeals. Suffice it to say that in our Resolution, 12 dated December 9,
1992, we already took note of this matter and set out the proper applicable procedure to be the
following:

On September 20, 1992, counsel for petitioner Equatorial Realty Development, Inc. wrote
a letter-complaint to this Court alleging certain irregularities and infractions committed by
certain lawyers, and Justices of the Court of Appeals and of this Court in connection with
case CA-G.R. CV No. 32918 (now G.R. No. 106063). This partakes of the nature of an
administrative complaint for misconduct against members of the judiciary. While the
letter-complaint arose as an incident in case CA-G.R. CV No. 32918 (now G.R. No.
106063), the disposition thereof should be separate and independent from Case G.R. No.
106063. However, for purposes of receiving the requisite pleadings necessary in
disposing of the administrative complaint, this Division shall continue to have control of
the case. Upon completion thereof, the same shall be referred to the Court En Banc for
proper disposition.13

This court having ruled the procedural irregularities raised in the fourth assigned error of Carmelo
and Equatorial, to be an independent and separate subject for an administrative complaint based
on misconduct by the lawyers and justices implicated therein, it is the correct, prudent and
consistent course of action not to pre-empt the administrative proceedings to be undertaken
respecting the said irregularities. Certainly, a discussion thereupon by us in this case would entail
a finding on the merits as to the real nature of the questioned procedures and the true intentions
and motives of the players therein.

In essence, our task is two-fold: (1) to define the true nature, scope and efficacy of paragraph 8
stipulated in the two contracts of lease between Carmelo and Mayfair in the face of conflicting
findings by the trial court and the Court of Appeals; and (2) to determine the rights and obligations
of Carmelo and Mayfair, as well as Equatorial, in the aftermath of the sale by Carmelo of the
entire Claro M. Recto property to Equatorial.

Both contracts of lease in question provide the identically worded paragraph 8, which reads:

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.14
We agree with the respondent Court of Appeals that the aforecited contractual stipulation
provides for a right of first refusal in favor of Mayfair. It is not an option clause or an option
contract. It is a contract of a right of first refusal.

As early as 1916, in the case of Beaumont vs. Prieto,15 unequivocal was our characterization of

an option contract as one necessarily involving the choice granted to another for a distinct and
separate consideration as to whether or not to purchase a determinate thing at a predetermined
fixed price.

It is unquestionable that, by means of the document Exhibit E, to wit, the letter of

December 4, 1911, quoted at the beginning of this decision, the defendant Valdes
granted to the plaintiff Borck the right to purchase the Nagtajan Hacienda belonging to
Benito Legarda, during the period of three months and for its assessed valuation, a grant
which necessarily implied the offer or obligation on the part of the defendant Valdes to
sell to Borck the said hacienda during the period and for the price mentioned . . . There
was, therefore, a meeting of minds on the part of the one and the other, with regard to the
stipulations made in the said document. But it is not shown that there was any cause or
consideration for that agreement, and this omission is a bar which precludes our holding
that the stipulations contained in Exhibit E is a contract of option, for, . . . there can be no
contract without the requisite, among others, of the cause for the obligation to be
established.

In his Law Dictionary, edition of 1897, Bouvier defines an option as a contract, in the
following language:

A contract by virtue of which A, in consideration of the payment of a

certain sum to B, acquires the privilege of buying from, or selling to B,
certain securities or properties within a limited time at a specified price.
(Story vs. Salamon, 71 N.Y., 420.)

From vol. 6, page 5001, of the work "Words and Phrases," citing the case of Ide
vs. Leiser (24 Pac., 695; 10 Mont., 5; 24 Am. St. Rep., 17) the following quotation has
been taken:

An agreement in writing to give a person the option to purchase lands

within a given time at a named price is neither a sale nor an agreement
to sell. It is simply a contract by which the owner of property agrees with
another person that he shall have the right to buy his property at a fixed
price within a certain time. He does not sell his land; he does not then
agree to sell it; but he does sell something; that is, the right or privilege to
buy at the election or option of the other party. The second party gets in
praesenti, not lands, nor an agreement that he shall have lands, but he
does get something of value; that is, the right to call for and receive lands
if he elects. The owner parts with his right to sell his lands, except to the
second party, for a limited period. The second party receives this right,
or, rather, from his point of view, he receives the right to elect to buy.

But the two definitions above cited refer to the contract of option, or, what amounts to the
same thing, to the case where there was cause or consideration for the obligation, the
subject of the agreement made by the parties; while in the case at bar there was no such
cause or consideration. 16 (Emphasis ours.)
 The rule so early established in this jurisdiction is that the deed of option or the option clause in a
contract, in order to be valid and enforceable, must, among other things, indicate the definite
price at which the person granting the option, is willing to sell.

Notably, in one case we held that the lessee loses his right to buy the leased property for a named price
per square meter upon failure to make the purchase within the time specified; 17 in one other case we
freed the landowner from her promise to sell her land if the prospective buyer could raise P4,500.00 in
three weeks because such option was not supported by a distinct consideration; 18 in the same vein in yet
one other case, we also invalidated an instrument entitled, "Option to Purchase" a parcel of land for the
sum of P1,510.00 because of lack of consideration; 19 and as an exception to the doctrine enumerated in
the two preceding cases, in another case, we ruled that the option to buy the leased premises for
P12,000.00 as stipulated in the lease contract, is not without consideration for in reciprocal contracts, like
lease, the obligation or promise of each party is the consideration for that of the other. 20 In all these
cases, the selling price of the object thereof is always predetermined and specified in the option clause in
the contract or in the separate deed of option. We elucidated, thus, in the very recent case of Ang Yu
Asuncion vs. Court of Appeals21 that:

. . . In sales, particularly, to which the topic for discussion about the case at bench
belongs, the contract is perfected when a person, called the seller, obligates himself, for
a price certain, to deliver and to transfer ownership of a thing or right to another, called
the buyer, over which the latter agrees. Article 1458 of the Civil Code provides:

Art. 1458. By the contract of sale one of the contracting parties obligates
himself to transfer the ownership of and to deliver a determinate thing,
and the other to pay therefor a price certain in money or its equivalent.

A contract of sale may be absolute or conditional.

When the sale is not absolute but conditional, such as in a "Contract to Sell" where
invariably the ownership of the thing sold in retained until the fulfillment of a positive
suspensive condition (normally, the full payment of the purchase price), the breach of the
condition will prevent the obligation to convey title from acquiring an obligatory force. . . .

An unconditional mutual promise to buy and sell, as long as the object is made
determinate and the price is fixed, can be obligatory on the parties, and compliance
therewith may accordingly be exacted.

An accepted unilateral promise which specifies the thing to be sold and the price to be
paid, when coupled with a valuable consideration distinct and separate from the price, is
what may properly be termed a perfected contract of option. This contract is legally
binding, and in sales, it conforms with the second paragraph of Article 1479 of the Civil
Code, viz:

Art. 1479. . . .

An accepted unilateral promise to buy or to sell a determinate thing for a

price certain is binding upon the promisor if the promise is supported by
a consideration distinct from the price. (1451a).

Observe, however, that the option is not the contract of sale itself. The optionee has the
right, but not the obligation, to buy. Once the option is exercised timely, i.e., the offer is
accepted before a breach of the option, a bilateral promise to sell and to buy ensues and
both parties are then reciprocally bound to comply with their respective undertakings.
 Let us elucidate a little. A negotiation is formally initiated by an offer. An imperfect
promise (policitacion) is merely an offer. Public advertisements or solicitations and the
like are ordinarily construed as mere invitations to make offers or only as proposals.
These relations, until a contract is perfected, are not considered binding commitments.
Thus, at any time prior to the perfection of the contract, either negotiating party may stop
the negotiation. The offer, at this stage, may be withdrawn; the withdrawal is effective
immediately after its manifestation, such as by its mailing and not necessarily when the
offeree learns of the withdrawal (Laudico vs. Arias, 43 Phil. 270). Where a period is given
to the offeree within which to accept the offer, the following rules generally govern:

(1) If the period is not itself founded upon or supported by a consideration, the offeror is
still free and has the right to withdraw the offer before its acceptance, or if an acceptance
has been made, before the offeror's coming to know of such fact, by communicating that
withdrawal to the offeree (see Art. 1324, Civil Code; see also Atkins, Kroll & Co. vs. Cua,
102 Phil. 948, holding that this rule is applicable to a unilateral promise to sell under Art.
1479, modifying the previous decision in South Western Sugar vs. Atlantic Gulf, 97 Phil.
249; see also Art. 1319, Civil Code; Rural Bank of Parañaque, Inc. vs. Remolado, 135
SCRA 409; Sanchez vs. Rigos, 45 SCRA 368). The right to withdraw, however, must not
be exercised whimsically or arbitrarily; otherwise, it could give rise to a damage claim
under Article 19 of the Civil Code which ordains that "every person must, in the exercise
of his rights and in the performance of his duties, act with justice, give everyone his due,
and observe honesty and good faith."

(2) If the period has a separate consideration, a contract of "option" deemed perfected,
and it would be a breach of that contract to withdraw the offer during the agreed period.
The option, however, is an independent contract by itself; and it is to be distinguished
from the projected main agreement (subject matter of the option) which is obviously yet to
be concluded. If, in fact, the optioner-offeror withdraws the offer before its acceptance
(exercise of the option) by the optionee-offeree, the latter may not sue for specific
performance on the proposed contract ("object" of the option) since it has failed to reach
its own stage of perfection. The optioner-offeror, however, renders himself liable for
damages for breach of the opinion. . .

In the light of the foregoing disquisition and in view of the wording of the questioned provision in
the two lease contracts involved in the instant case, we so hold that no option to purchase in
contemplation of the second paragraph of Article 1479 of the Civil Code, has been granted to
Mayfair under the said lease contracts.

Respondent Court of Appeals correctly ruled that the said paragraph 8 grants the right of first
refusal to Mayfair and is not an option contract. It also correctly reasoned that as such, the
requirement of a separate consideration for the option, has no applicability in the instant case.

There is nothing in the identical Paragraphs "8" of the June 1, 1967 and March 31, 1969 contracts
which would bring them into the ambit of the usual offer or option requiring an independent
consideration.

An option is a contract granting a privilege to buy or sell within an agreed time and at a
determined price. It is a separate and distinct contract from that which the parties may enter into
upon the consummation of the option. It must be supported by consideration. 22 In the instant
case, the right of first refusal is an integral part of the contracts of lease. The consideration is built
into the reciprocal obligations of the parties.

To rule that a contractual stipulation such as that found in paragraph 8 of the contracts is
governed by Article 1324 on withdrawal of the offer or Article 1479 on promise to buy and sell
would render in effectual or "inutile" the provisions on right of first refusal so commonly inserted in
leases of real estate nowadays. The Court of Appeals is correct in stating that Paragraph 8 was
incorporated into the contracts of lease for the benefit of Mayfair which wanted to be assured that
it shall be given the first crack or the first option to buy the property at the price which Carmelo is
willing to accept. It is not also correct to say that there is no consideration in an agreement of right
of first refusal. The stipulation is part and parcel of the entire contract of lease. The consideration
for the lease includes the consideration for the right of first refusal. Thus, Mayfair is in effect
stating that it consents to lease the premises and to pay the price agreed upon provided the
lessor also consents that, should it sell the leased property, then, Mayfair shall be given the right
to match the offered purchase price and to buy the property at that price. As stated in Vda.  De
Quirino vs.  Palarca,23 in reciprocal contract, the obligation or promise of each party is the
consideration for that of the other.

The respondent Court of Appeals was correct in ascertaining the true nature of the aforecited
paragraph 8 to be that of a contractual grant of the right of first refusal to Mayfair.

We shall now determine the consequential rights, obligations and liabilities of Carmelo, Mayfair
and Equatorial.

The different facts and circumstances in this case call for an amplification of the precedent in Ang
Yu Asuncion vs. Court of Appeals.24

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

What Carmelo and Mayfair agreed to, by executing the two lease contracts, was that Mayfair will
have the right of first refusal in the event Carmelo sells the leased premises. It is undisputed that
Carmelo did recognize this right of Mayfair, for it informed the latter of its intention to sell the said
property in 1974. There was an exchange of letters evidencing the offer and counter-offers made
by both parties. Carmelo, however, did not pursue the exercise to its logical end. While it initially
recognized Mayfair's right of first refusal, Carmelo violated such right when without affording its
negotiations with Mayfair the full process to ripen to at least an interface of a definite offer and a
possible corresponding acceptance within the "30-day exclusive option" time granted Mayfair,
Carmelo abandoned negotiations, kept a low profile for some time, and then sold, without prior
notice to Mayfair, the entire Claro M Recto property to Equatorial.

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.

. . . Contract of Sale was not voidable but rescissible. Under Article 1380 to 1381(3) of
the Civil Code, a contract otherwise valid may nonetheless be subsequently rescinded by
reason of injury to third persons, like creditors. The status of creditors could be validly
accorded the Bonnevies for they had substantial interests that were prejudiced by the
sale of the subject property to the petitioner without recognizing their right of first priority
under the Contract of Lease.

According to Tolentino, rescission is a remedy granted by law to the contracting parties

and even to third persons, to secure reparation for 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 allowed for
the protection of one of the contracting parties and even third persons from all injury and
damage the contract may cause, or to protect some incompatible and preferent right
 created by the contract. Rescission implies a contract which, even if initially valid,
produces a lesion or pecuniary damage to someone that justifies its invalidation for
reasons of equity.

It is true that the acquisition by a third person of the property subject of the contract is an
obstacle to the action for its rescission where it is shown that such third person is in
lawful possession of the subject of the contract and that he did not act in bad faith.
However, this rule is not applicable in the case before us because the petitioner is not
considered a third party in relation to the Contract of Sale nor may its possession of the
subject property be regarded as acquired lawfully and in good faith.

Indeed, Guzman, Bocaling and Co. was the vendee in the Contract of Sale. Moreover,
the petitioner cannot be deemed a purchaser in good faith for the record shows that it
categorically admitted it was aware of the lease in favor of the Bonnevies, who were
actually occupying the subject property at the time it was sold to it. Although the Contract
of Lease was not annotated on the transfer certificate of title in the name of the late Jose
Reynoso and Africa Reynoso, the petitioner cannot deny actual knowledge of such lease
which was equivalent to and indeed more binding than presumed notice by registration.

A purchaser in good faith and for value is one who buys the property of another without
notice that some other person has a right to or interest in such property and pays a full
and fair price for the same at the time of such purchase or before he has notice of the
claim or interest of some other person in the property. Good faith connotes an honest
intention to abstain from taking unconscientious advantage of another. Tested by these
principles, the petitioner cannot tenably claim to be a buyer in good faith as it had notice
of the lease of the property by the Bonnevies and such knowledge should have cautioned
it to look deeper into the agreement to determine if it involved stipulations that would
prejudice its own interests.

The petitioner insists that it was not aware of the right of first priority granted by the
Contract of Lease. Assuming this to be true, we nevertheless agree with the observation
of the respondent court that:

If Guzman-Bocaling failed to inquire about the terms of the Lease

Contract, which includes Par. 20 on priority right given to the Bonnevies,
it had only itself to blame. Having known that the property it was buying
was under lease, it behooved it as a prudent person to have required
Reynoso or the broker to show to it the Contract of Lease in which Par.
20 is contained.25

Petitioners assert the alleged impossibility of performance because the entire property is
indivisible property. It was petitioner Carmelo which fixed the limits of the property it was leasing
out. Common sense and fairness dictate that instead of nullifying the agreement on that basis,
the stipulation should be given effect by including the indivisible appurtenances in the sale of the
dominant portion under the right of first refusal. A valid and legal contract where the ascendant or
the more important of the two parties is the landowner should be given effect, if possible, instead
of being nullified on a selfish pretext posited by the owner. Following the arguments of petitioners
and the participation of the owner in the attempt to strip Mayfair of its rights, the right of first
refusal should include not only the property specified in the contracts of lease but also the
appurtenant portions sold to Equatorial which are claimed by petitioners to be indivisible. Carmelo
acted in bad faith when it sold the entire property to Equatorial without informing Mayfair, a clear
violation of Mayfair's rights. While there was a series of exchanges of letters evidencing the offer
and counter-offers between the parties, Carmelo abandoned the negotiations without giving
Mayfair full opportunity to negotiate within the 30-day period.
Accordingly, even as it recognizes the right of first refusal, this Court should also order that
Mayfair be authorized to exercise its right of first refusal under the contract to include the entirety
of the indivisible property. The boundaries of the property sold should be the boundaries of the
offer under the right of first refusal. As to the remedy to enforce Mayfair's right, the Court
disagrees to a certain extent with the concluding part of the dissenting opinion of Justice Vitug.
The doctrine enunciated in Ang Yu Asuncion vs. Court of Appeals should be modified, if not
amplified under the peculiar facts of this case.

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.

Since Mayfair has a right of first refusal, it can exercise the right only if the fraudulent sale is first
set aside or rescinded. All of these matters are now before us and so there should be no
piecemeal determination of this case and leave festering sores to deteriorate into endless
litigation. The facts of the case and considerations of justice and equity require that we order
rescission here and now. Rescission is a relief allowed for the protection of one of the contracting
parties and even third persons from all injury and damage the contract may cause or to protect
some incompatible and preferred right by the contract. 26 The sale of the subject real property by
Carmelo to Equatorial should now be rescinded considering that Mayfair, which had substantial
interest over the subject property, was prejudiced by the sale of the subject property to Equatorial
without Carmelo conferring to Mayfair every opportunity to negotiate within the 30-day stipulated
period.27

This Court has always been against multiplicity of suits where all remedies according to the facts
and the law can be included. Since Carmelo sold the property for P11,300,000.00 to Equatorial,
the price at which Mayfair could have purchased the property is, therefore, fixed. It can neither be
more nor less. There is no dispute over it. The damages which Mayfair suffered are in terms of
actual injury and lost opportunities. The fairest solution would be to allow Mayfair to exercise its
right of first refusal at the price which it was entitled to accept or reject which is P11,300,000.00.
This is clear from the records.

To follow an alternative solution that Carmelo and Mayfair may resume negotiations for the sale
to the latter of the disputed property would be unjust and unkind to Mayfair because it is once
more compelled to litigate to enforce its right. It is not proper to give it an empty or vacuous
victory in this case. From the viewpoint of Carmelo, it is like asking a fish if it would accept the
choice of being thrown back into the river. Why should Carmelo be rewarded for and allowed to
profit from, its wrongdoing? Prices of real estate have skyrocketed. After having sold the property
for P11,300,000.00, why should it be given another chance to sell it at an increased price?

Under the Ang Yu Asuncion vs. Court of Appeals decision, the Court stated that there was
nothing to execute because a contract over the right of first refusal belongs to a class of
preparatory juridical relations governed not by the law on contracts but by the codal provisions
on human relations. This may apply here if the contract is limited to the buying and selling of the
real property. However, the obligation of Carmelo to first offer the property to Mayfair is embodied
in a contract. It is Paragraph 8 on the right of first refusal which created the obligation. It should
be enforced according to the law on contracts instead of the panoramic and indefinite rule on
human relations. The latter remedy encourages multiplicity of suits. There is something to
execute and that is for Carmelo to comply with its obligation to the property under the right of the
first refusal according to the terms at which they should have been offered then to Mayfair, at the
price when that offer should have been made. Also, Mayfair has to accept the offer. This juridical
 relation is not amorphous nor is it merely preparatory. Paragraphs 8 of the two leases can be
executed according to their terms.

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
intend 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 that 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 considerations 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.

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; 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 and 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.

Regalado, Davide, Jr., Bellosillo, Melo, Puno, Kapunan, Mendoza and Francisco, JJ., concur.

Narvasa, C.J., took no part.

Separate Opinions

PADILLA, J., concurring:

I am of the considered view (like Mr. Justice Jose A. R. Melo) that the Court in this case should
categorically recognize Mayfair's right of first refusal under its contract of lease with Carmelo and
Bauermann, Inc. (hereafter, Carmelo) and, because of Carmelo's and Equatorial's bad faith in riding
"roughshod" over Mayfair's right of first refusal, the Court should order the rescission of the sale of the
Claro M. Recto property by the latter to Equatorial (Art. 1380-1381[3], Civil Code). The Court should, in
this same case, to avoid multiplicity of suits, likewise allow Mayfair to effectively exercise said right of first
refusal, by paying Carmelo the sum of P11,300,000.00 for the entire subject property, without any need of
instituting a separate action for damages against Carmelo and/or Equatorial.

I do not agree with the proposition that, in addition to the aforesaid purchase price, Mayfair should be
required to pay a compounded interest of 12% per annum of said amount computed from 1 August 1978.
Under the Civil Code, a party to a contract may recover interest as indemnity for damages in the following
instances:

Art. 2209. If the obligation consists in the payment of a sum of money, and the debtor
incurs in delay, the indemnity for damages, there being no stipulation to the contrary,
shall be the payment of the interest agreed upon, and in the absence of stipulation, the
legal interest, which is six per cent  per annum.

Art. 2210. Interest may, in the discretion of the court, be allowed upon damages awarded
for breach of contract.

There appears to be no basis in law for adding 12%  per annum compounded interest to the
purchase price of P11,300,000.00 payable by Mayfair to Carmelo since there was no such
stipulation in writing between the parties (Mayfair and Carmelo) but, more importantly, because
Mayfair neither incurred in delay in the performance of its obligation nor committed any breach of
contract. Indeed, why should Mayfair be penalized by way of making it pay 12% per
annum compounded interest when it was Carmelo which violated Mayfair's right of first refusal
under the contract?

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.

ACCORDINGLY, I vote to order the rescission of the contract of sale between Carmelo and Equatorial of
the Claro M. Recto property in question, so that within thirty (30) days from the finality of the Court's
decision, the property should be retransferred and delivered by Equatorial to Carmelo with the latter
simultaneously returning to Equatorial the sum of P11,300, 000.00.

I also vote to allow Mayfair to exercise its right of first refusal, by paying to Carmelo the sum of
P11,300,000.00 without interest for the entire subject property, within thirty (30) days from re-acquisition
by Carmelo of the titles to the property, with the corresponding obligation of Carmelo to sell and transfer
the property to Mayfair within the same period of thirty (30) days.
 

PANGANIBAN, J., concurring:

In the main, I concur with the  ponencia of my esteemed colleague, Mr. Justice Regino C. Hermosisima,
Jr., especially with the following doctrinal pronouncements:

1. That while no option to purchase within the meaning of the second paragraph of Article
1479 of the Civil Code was given to Mayfair Theater, Inc. ("Mayfair"), under the two lease
contracts a right of first refusal was in fact granted, for which no separate consideration is
required by law to be paid or given so as to make it binding upon Carmelo & Bauermann,
Inc. ("Carmelo");

2. That such right was violated by the latter when it sold the entire property to Equatorial
Realty Development, Inc. ("Equatorial") on July 30, 1978, for the sum of P11,300,000.00;

3. That Equatorial is a buyer in bad faith as it was aware of the lease contracts, its own
lawyers having studied said contracts prior to the sale; and

4. That, consequently, the contract of sale is rescissible.

5. That, finally, under the proven facts, the right of first refusal may be enforced by an
action for specific performance.

There appears to be unanimity in the Court insofar as items 1, 2 and 3 above are concerned. It is in items
4 and 5 that there is a marked divergence of opinion. Hence, I shall limit the discussion in this Separate
Concurring Opinion to such issues, namely: Is the contract of sale between Carmelo and Equatorial
rescissible, and corollarily, may the right of first refusal granted to Mayfair be enforced by an action for
specific performance?

It is with a great amount of trepidation that I respectfully disagree with the legal proposition espoused by
two equally well-respected colleagues, Mme. Justice Flerida Ruth P. Romero and Mr. Justice Jose C.
Vitug — who are both acknowledged authorities on Civil Law — that a breach of the covenanted right of
first refusal, while warranting a suit for damages under Article 19 of the Civil Code, cannot sanction an
action for specific performance without thereby negating the indispensable element of con-sensuality in
the perfection of contracts.

Ang Yu Asuncion Not In Point

Such statement is anchored upon a pronouncement in Ang Yu Asuncion vs. CA, 1 which was penned by
Mr. Justice Vitug himself. I respectfully submit, however, that that case turned largely on the issue of
whether or not the sale of an immovable in breach of a right of first refusal that had been decreed in a
final judgment would justify the issuance of certain orders of execution in the same case. The validity of
said orders was the subject of the attack before this Court. These orders had not only directed the
defendants to execute a deed of sale in favor of the plaintiffs, when there was nothing in the judgment
itself decreeing it, but had also set aside the sale made in breach of said right of first refusal and even
canceled the title that had been issued to the buyer, who was not a party to the suit and had obviously not
been given its day in court. It was thus aptly held:

The final judgment in Civil Case No. 87-41058, it must be stressed, has merely accorded
a "right of first refusal" in favor of petitioners. The consequence of such a declaration
entails no more than what has heretofore been said. In fine, if, as it is here so conveyed
to us, petitioners are aggrieved by the failure of private respondents to honor the right of
 first refusal, the remedy is not a writ of execution on the judgment, since there is none to
execute, but an action for damages in a proper forum for the purpose.

Furthermore, whether private respondent Buen Realty Development Corporation, the

alleged purchaser of the property, has acted in good faith or bad faith and whether or not
it should, in any case, be considered bound to respect the registration of the lis
pendens in Civil Case No. 87-41058 are matters that must be independently addressed
in appropriate proceedings. Buen Realty, not having been impleaded in Civil Case No.
87-41058, cannot be held subject to the writ of execution issued by respondent Judge, let
alone ousted from the ownership and possession of the property, without first being duly
afforded its day in court.2

In other words, the question of whether specific performance of one's right of first refusal is available as a
remedy in case of breach thereof was not before the Supreme Court at all in Ang Yu Asuncion.
Consequently, the pronouncements there made bearing on such unlitigated question were mere obiter.
Moreover, as will be shown later, the pronouncement that a breach of the right of first refusal would not
sanction an action for specific performance but only an action for damages (at p. 615) is at best debatable
(and in my humble view, imprecise or incorrect), on top of its being contradicted by extant jurisprudence.

Worth bearing in mind is the fact that two juridical relations, both contractual, are involved in the instant
case: (1) the deed of sale between the petitioners dated July 30, 1978, and (2) the contract clause
establishing Mayfair's right of first refusal which was violated by said sale.

With respect to the sale of the property, Mayfair was not a party. It therefore had no personality to sue for
its annulment, since Art. 1397 of the Civil Code provides, inter alia, that "(t)he action for the annulment of
contracts may be instituted by all who are thereby obliged principally or subsidiarily."

But the facts as alleged and proved clearly in the case at bar make out a case for rescission under Art.
1177, in relation to Art. 1381(3), of the Civil Code, which pertinently read as follows:

Art. 1177. The creditors, after having pursued the property in possession of the debtor to
satisfy their claims, may exercise all the rights and bring all the actions of the latter for the
same purpose, save those which are inherent in his person; they may also impugn the
acts which the debtor may have done to defraud them.

Art. 1381. The following contracts are rescissible:

xxx xxx xxx

(3) Those undertaken in fraud of creditors when the latter cannot in any other manner
collect the claims due them;

xxx xxx xxx

(emphasis supplied)

The term "creditors" as used in these provisions of the Civil Code is broad enough to include the obligee
under an option contract3 as well as under a right of first refusal, sometimes known as a right of first
priority.4 Thus, in Nietes, the Supreme Court, speaking through then Mr. Chief Justice Roberto
Concepcion, repeatedly referred to the grantee or optionee as "the creditor" and to the grantor or optioner
as "the debtor".5 In any case, the personal elements of an obligation are the active and passive subjects
thereof, the former being known as creditors or obligees and the latter as debtors or obligors. 6 Insofar as
the right of first refusal is concerned, Mayfair is the obligee or creditor.
As such creditor, Mayfair had, therefore, the right to impugn the sale in question by way of accion
pauliana under the last clause of Art. 1177, aforequoted, because the sale was an act done by the debtor
to defraud him of his right to acquire the property. 7 Rescission was also available under par. 3, Art. 1381,
abovequoted, as was expressly held in Guzman, Bocaling & Co., a case closely analogous to this one as
it was also an action brought by the lessee to enforce his "right of first priority" — which is just another
name for the right of first refusal — and to annul a sale made by the lessor in violation of such right. In
said case, this Court, speaking through Mr. Justice Isagani A. Cruz, affirmed the invalidation of the sale
and the enforcement of the lessee's right of first priority this wise: 8

The petitioner argues that assuming the Contract of Sale to be voidable, only the parties
thereto could bring an action to annul it pursuant to Article 1397 of the Civil Code. It is
stressed that private respondents are strangers to that agreement and therefore have no
personality to seek its annulment.

The respondent court correctly held that the Contract of Sale was not voidable
but rescissible. Under Article(s) 1380 to 1381 (3) of the Civil Code, a contract otherwise
valid may nonetheless be subsequently rescinded by reason of injury to third persons,
like creditors. The status of creditors could be validly accorded the Bonnevies for they
had substantial interests that were prejudiced by the sale of the subject property to the
petitioner without recognizing their right of first priority under the Contract of Lease.
(emphasis supplied)

By the same token, the status of a defrauded creditor can, and should, be granted to Mayfair, for it
certainly had substantial interests that were prejudiced by the sale of the subject property to petitioner
Equatorial in open violation of Mayfair's right of first refusal under its existing contracts with Carmelo.

In fact, the parity between that case and the present one does not stop there but extends to the crucial
and critical fact that there was manifest bad faith on the part of the buyer. Thus, in Guzman, this Court
affirmed in toto the appealed judgment of the Court of Appeals which, in turn, had affirmed the trial court's
decision insofar as it invalidated the deed of sale in favor of the petitioner-buyer, cancelled its TCT, and
ordered the lessor to execute a deed of sale over the leased property in favor of the lessee for the same
price and "under the same terms and conditions", aside from affirming as well the damages awarded, but
at a reduced amount.9 In other words, the aggrieved party was allowed to acquire the property itself.

The inescapable conclusion from all of the foregoing is not only that rescission is the proper remedy but
also — and more importantly — that specific performance was actually used and given free rein as an
effective remedy to enforce a right of first refusal in the wake of its violation, in the cited case of Guzman.

On the other hand, and as already commented on above, the pronouncement in Ang Yu Asuncion to the
effect that specific performance is unavailable to enforce a violated right of first refusal is at best a
debatable legal proposition, aside from being contradicted by extant jurisprudence. Let me explain why.

The consensuality required for a contract of sale is distinct from, and should not be confused with, the
consensuality attendant to the right of first refusal itself. While indeed, prior to the actual sale of the
property to Equatorial and the filing of Mayfair's complaint for specific performance, no perfected contract
of sale involving the property ever existed between Carmelo as seller and Mayfair as buyer, there already
was, in law and in fact, a perfected contract between them which established a right of first refusal, or of
first priority.

Specific Performance Is
Viable Remedy
The question is: Can this right (of first refusal) be enforced by an action for specific performance upon a
showing of its breach by an actual sale of the property under circumstances showing palpable bad faith
on the part of both seller and buyer?

The answer, I respectfully submit, should be 'yes'.

As already noted, Mayfair's right of first refusal in the case before us is embodied in an express covenant
in the lease contracts between it as lessee and Carmelo as lessor, hence the right created is one
springing from contract. 10 Indubitably, this had the force of law between the parties, who should thus
comply with it in good faith. 11 Such right also established a correlative obligation on the part of Carmelo
to give or deliver to Mayfair a formal offer of sale of the property in the event Carmelo decides to sell it.
The decision to sell was eventually made. But instead of giving or tendering to Mayfair the proper offer to
sell, Carmelo gave it to its now co-petitioner, Equatorial, with whom it eventually perfected and
consummated, on July 30, 1978, an absolute sale of the property, doing so within the period of effectivity
of Mayfair's right of first refusal. Less than two months later, or in September 1978, with the lease still in
full force, Mayfair filed the present suit.

Worth stressing at this juncture is the fact that Mayfair had the right to require that the offer to sell the
property be sent to it by Carmelo, and not to anybody else. This was violated when the offer was made to
Equatorial. Under its covenant with Carmelo, Mayfair had the right, at that point, to sue for either specific
performance or rescission, with damages in either case, pursuant to Arts. 1165 and 1191, Civil
Code. 12 An action for specific performance and damages seasonably filed, fortified by a writ of
preliminary injunction, would have enabled Mayfair to prevent the sale to Equatorial from taking place and
to compel Carmelo to sell the property to Mayfair for the same terms and price, for the reason that the
filing of the action for specific performance may juridically be considered as a solemn, formal, and
unqualified acceptance by Mayfair of the specific terms of the offer of sale. Note that by that time, the
price and other terms of the proposed sale by Carmelo had already been determined, being set forth in
the offer of sale that had wrongfully been directed to Equatorial.

As it turned out, however, Mayfair did not have a chance to file such suit, for it learned of the sale to
Equatorial only after it had taken place. But it did file the present action for specific performance and for
invalidation of the wrongful sale immediately after learning about the latter act. The act of promptly filing
this suit, coupled with the fact that it is one for specific performance, indicates beyond cavil or doubt
Mayfair's unqualified acceptance of the misdirected offer of sale, giving rise, thereby, to a demandable
obligation on the part of Carmelo to execute the corresponding document of sale upon the payment of the
price of P11,300,000.00. In other words, the principle of consensuality of a contract of sale should be
deemed satisfied. The aggrieved party's consent to, or acceptance of, the misdirected offer of sale should
be legally presumed in the context of the proven facts.

To say, therefore, that the wrongful breach of a right of first refusal does not sanction an action for specific
performance simply because, factually, there was no meeting of the minds as to the particulars of the sale
since ostensibly no offer was ever made to, let alone accepted by, Mayfair, is to ignore the proven fact of
presumed consent. To repeat, that consent was deemed given by Mayfair when it sued for invalidation of
the sale and for specific performance of Carmelo's obligation to Mayfair. Nothing in the law as it now
stands will be violated, or even simply emasculated, by this holding. On the contrary, the decision
in Guzman supports it.

Moreover, under the Civil Code provisions on the nature, effect and kinds of obligations, 13 Mayfair's right
of first refusal may be classified as one subject to a suspensive condition — namely, if Carmelo should
decide to sell the leased premises during the life of the lease contracts, then it should make an offer of
sale to Mayfair. Futurity and uncertainty, which are the essential characteristics of a condition, 14 were
distinctly present. Before the decision to sell was made, Carmelo had absolutely no obligation to sell the
property to Mayfair, nor even to make an offer to sell, because in conditional obligations, where the
condition is suspensive, the acquisition of rights depends upon the happening of the event which
constitutes the condition. 15 Had the decision to sell not been made at all, or had it been made after the
expiry of the lease, the parties would have stood as if the conditional obligation had never existed. 16 But
the decision to sell was in fact made. And it was made during the life and efficacy of the lease.
Undoubtedly, the condition was duly fulfilled; the right of first refusal effectively accrued and became
enforceable; and correlatively, Carmelo's obligation to make and send the offer to Mayfair became
immediately due and demandable. 17 That obligation was to deliver to Mayfair an offer to sell a
determinate thing for a determinate price. As things turned out, a definite and specific offer to sell the
entire property for the price of P11,300,000.00 was actually made by Carmelo — but to the wrong party. It
was that particular offer, and no other, which Carmelo should have delivered to Mayfair, but failed to
deliver. Hence, by the time the obligation of Carmelo accrued through the fulfillment of the suspensive
condition, the offer to sell had become a determinate thing.

Art. 1165 of the Civil Code, earlier quoted in footnote 12, indicates the remedies available to the creditor
against the debtor, when it provides that "(w)hen what is to be delivered is a determinate thing, the
creditor, in addition to the right granted him by article 1170, may compel the debtor to make the delivery,"
clearly authorizing not only the recovery of damages under Art. 1170 but also an action for specific
performance.

But even assuming that Carmelo's prestation did not involve the delivery of a determinate offer but only a
generic one, the second paragraph of Art. 1165 explicitly gives to the creditor the right "to ask that the
obligation be complied with at the expense of the debtor." The availability of an action for specific
performance is thus clear and beyond doubt. And the correctness of Guzman becomes all the more
manifest.

Upon the other hand, the obiter in Ang Yu Asuncion is further weakened by the fact that the jurisprudence
upon which it supposedly rests — namely, the cases of Madrigal & CO. vs. Stevenson &
Co. 18 and Salonga vs. Farrales 19 — did NOT involve a right of first refusal or of first priority. Nor did those
two cases involve an option to buy. In Madrigal, plaintiff sued defendant for damages claiming wrongful
breach of an alleged contract of sale of 2,000 tons of coal. The case was dismissed because "the minds
of the parties never met upon a contract of sale by defendant to plaintiff", 20 each party having signed the
broker's memorandum as buyer, erroneously thinking that the other party was the seller! In Salonga, a
lessee, who was one of several lessees ordered by final judgment to vacate the leased premises, sued
the lessor to compel the latter to sell the leased premises to him, but his suit was not founded upon any
right of first refusal and was therefore dismissed on the ground that there was no perfected sale in his
favor. He just thought that because the lessor had decided to sell and in fact sold portions of the property
to her other lessees, she was likewise obligated to sell to him even in the absence of a perfected contract
of sale. In fine, neither of the two cases cited in support of the legal proposition that a breach of the right
of first refusal does not sanction an action for specific performance but, at best, only one for damages,
provides such support.

Finally, the fact that what was eventually sold to Equatorial was the entire property, not just the portions
leased to Mayfair, is no reason to deprive the latter of its right to receive a formal and specific offer. The
offer of a larger property might have led Mayfair to reject the offer, but until and unless such rejection was
actually made, its right of first refusal still stood. Upon the other hand, an acceptance by Mayfair would
have saved all concerned the time, trouble, and expense of this protracted litigation. In any case, the
disquisition by the Court of Appeals on this point can hardly be faulted; in fact, it amply justifies the
conclusions reached in its decision, as well as the dispositions made therein.

IN VIEW OF THE FOREGOING, I vote to DENY the petition and to AFFIRM the assailed Decision.

ROMERO, J.,  concurring and dissenting:

I share the opinion that the right granted to Mayfair Theater under the identical par 8 of the June 1, 1967
and March 31, 1969 contracts constitute a right of first refusal.

An option is a privilege granted to buy a determinate thing at a price certain within a specified time and is
usually supported by a consideration which is why, it may be regarded as a contract in itself. The option
results in a perfected contract of sale once the person to whom it is granted decides to exercise it. The
right of first refusal is unlike an option which requires a certainty as to the object and consideration of the
anticipated contract. When the right of first refusal is exercised, there is no perfected contract of sale
because the other terms of the sale have yet to be determined. Hence, in case the offeror reneges on his
promise to negotiate with offeree, the latter may only recover damages in the belief that a contract could
have been perfected under Article 19 of the New Civil Code.

I beg to disagree, however, with the majority opinion that the contract of sale entered into by Carmelo and
Bauermann, Inc. and Equatorial Realty Inc., should be rescinded. Justice Hermosisima, in citing Art. 1381
(3) as ground for recission apparently relied on the case of Guzman, Bocaling and Co. v. Bonnevie (206
SCRA 668 [1992]) where the offeree was likened to the status of a creditor. The case, in citing Tolentino,
stated that rescission is a remedy granted by law to contracting parties and even to third persons, to
secure reparation for damages caused to them by a contract, even if this should be valid, by means of
restoration of things to their condition prior to celebration of the contract. It is my opinion that "third
persons" should be construed to refer to the wards, creditors, absentees, heirs and others enumerated
under the law who are prejudiced by the contract sought to be rescinded.

It should be borne in mind that rescission is an extreme remedy which may be exercised only in the
specific instances provided by law. Article 1381 (3) specifically refers to contracts undertaken in fraud of
creditors when the latter cannot in any manner collect the claims due them. If rescission were allowed for
analogous cases, the law would have so stated. While Article 1381 (5) itself says that rescission may be
granted to all other contracts specially declared by law to be subject to rescission, there is nothing in the
law that states that an offeree who failed to exercise his right of refusal because of bad faith on the part of
the offeror may rescind the subsequent contract entered into by the offeror and a third person. Hence,
there is no legal justification to rescind the contract between Carmelo and Bauermann, Inc. and Equatorial
Realty.

Neither do I agree with Justice Melo that Mayfair Theater should pay Carmelo and Bauermann, Inc. the
amount of P11,300,000.00 plus compounded interest of 12% p.a. Justice Melo rationalized that had
Carmelo and Bauermann sold the property to Mayfair, the latter would have paid the property for the
same price that Equatorial bought it. It bears emphasis that Carmelo and Bauermann, Inc. and Mayfair
never reached an agreement as to the price of the property in dispute because the negotiations between
the two parties were not pursued to its very end. We cannot, even for reasons of equity, compel Carmelo
to sell the entire property to Mayfair at P11,300,000.00 without violating the consensual nature of
contracts.

I vote, therefore, not to rescind the contract of sale entered into by Carmelo and Bauermann, Inc. and
Equatorial Realty Development Corp.

VITUG, J., dissenting:

I share the opinion that the right granted to Mayfair Theater, Inc., is neither an offer nor an option but
merely a right of first refusal as has been so well and amply essayed in the ponencia of our distinguished
colleague Mr. Justice Regino C. Hermosisima, Jr.

Unfortunately, it would seem that Article 1381 (paragraph 3) of the Civil Code invoked to be the statutory
authority for the rescission of the contract of sale between Carmelo & Bauermann, Inc., and Equatorial
Realty Development, Inc., has been misapplied. The action for rescission under that provision of the law,
unlike in the resolution of reciprocal obligations under Article 1191 of the Code, is merely subsidiary and
relates to the specific instance when a debtor, in an attempt to defraud his creditor, enters into a contract
with another that deprives the creditor to recover his just claim and leaves him with no other legal means,
than by rescission, to obtain reparation. Thus, the rescission is only to the extent necessary to cover the
damages caused (Article 1384, Civil Code) and, consistent with its subsidiary nature, would require the
debtor to be an indispensable party in the action (see Gigante vs. Republic Savings Bank, 135 Phil. 359).

The concept of a right of first refusal as a simple juridical relation, and so governed (basically) by the Civil
Code's title on "Human Relations," is not altered by the fact alone that it might be among the stipulated
items in a separate document or even in another contract. A "breach" of the right of first refusal can only
give rise to an action for damages primarily under Article 19 of the Civil Code, as well as its related
provisions, but not to an action for specific performance set out under Book IV of the Code on
"Obligations and Contracts." That right, standing by itself, is far distant from being the obligation referred
to in Article 1159 of the Code which would have the force of law sufficient to compel compliance per se or
to establish a creditor-debtor or obligee-obligor relation between the parties. If, as it is rightly so, a right of
first refusal cannot even be properly classed as an offer or as an option, certainly, and with much greater
reason, it cannot be the equivalent of, nor be given the same legal effect as, a duly perfected contract. It
is not possible to cross out, such as we have said in Ang Yu Asuncion vs. Court of Appeals (238 SCRA
602), the indispensable element of consensuality in the perfection of contracts. It is basic that without
mutual consent on the object and on the cause, a contract cannot exist (Art. 1305, Civil Code); corollary
to it, no one can be forced, least of all perhaps by a court, into a contract against his will or compelled to
perform thereunder.

It is sufficiently clear, I submit, that, there being no binding contract between Carmelo and Mayfair, neither
the rescission of the contract between Carmelo and Equatorial nor the directive to Carmelo to sell the
property to Mayfair would be legally appropriate.

My brief disquisition should have ended here except for some personal impressions expressed by my
esteemed colleague, Mr. Justice Artemio V. Panganiban, on the Ang Yu decision which perhaps need to
be addressed.

The discussion by the Court in Ang Yu on the right of first refusal is branded as a mere obiter dictum.
Justice Panganiban states: The case "turned largely on the issue of whether or not the sale of an
immovable in breach of a right of first refusal that had been decreed in a final judgment would justify the
issuance of certain orders of execution in the same case. . . . . In other words, the question of whether
specific performance of one's right of first refusal is available as a remedy in case of breach thereof was
not before the Supreme Court at all in Ang Yu Asuncion."

Black defines an obiter dictum as "an opinion entirely unnecessary for the decision of the case" and thus
"are not binding as precedent." (Black's Law Dictionary, 6th edition, 1990). A close look at the
antecedents of Ang Yu as found by the Court of Appeals and as later quoted by this Court would readily
disclose that the "right of first refusal" was a major point in the controversy. Indeed, the trial and the
appellate courts had rule on it. With due respect, I would not deem it "entirely unnecessary" for this Court
to itself discuss the legal connotation and significance of the decreed (confirmatory) right of first refusal. I
should add that when the  ponencia recognized that, in the case of Buen Realty Development Corporation
(the alleged purchaser of the property), the latter could not be held subject of the writ of execution and be
ousted from the ownership and possession of the disputed property without first affording it due process,
the Court decided to simply put a cap in the final disposition of the case but it could not have intended to
thereby mitigate the import of its basic ratio decidendi.

Justice Panganiban opines that the pronouncement in Ang Yu, i.e., that a breach of the right of first
refusal does not sanction an action for specific performance but only an action for damages, "is at best
debatable (. . . imprecise or incorrect), on to top of its being contradicted by extant jurisprudence." He
then comes up with the novel proposition that "Mayfair's right of first refusal may be classified as one
subject to a suspensive condition — namely, if Carmelo should decide to sell the leased premises during
the life of the lease contracts, then it should make an offer of sale to Mayfair," presumably enforceable by
action for specific performance.

It would be perilous a journey, first of all, to try to seek out a common path for such juridical relations as
contracts, options, and rights of first refusal since they differ, substantially enough, in their concepts,
consequences and legal implications. Very briefly, in the area on sales particularly, I borrow from Ang Yu,
a unanimous decision of the Supreme Court En Banc, which held:

In the law on sales, the so-called "right of first refusal" is an innovative juridical relation.
Needless to point out, it cannot be deemed a perfected contract of sale under Article
1458 of the Civil Code. Neither can the right of first refusal, understood in its normal
concept,  per se be brought within the purview of an option under the second paragraph
of Article 1479, aforequoted, or possibly of an offer under Article 1319 of the same Code.
An option or an offer would require, among other things, a clear certainty on both the
object and the cause or consideration of the envisioned contract. In a right of first refusal,
while the object might be made determinate, the exercise of the right, however, would be
dependent not only on the grantor's eventual intention to enter into a binding juridical
relation with another but also on terms, including the price, that obviously are yet to be
later firmed up. Prior thereto, it can at best be so described as merely belonging to a
class of preparatory juridical relations governed not by contracts (since the essential
elements to establish the vinculum juris would still be indefinite and inconclusive) but by,
among other laws of general application, the pertinent scattered provisions of the Civil
Code on human conduct.

An obligation, and so a conditional obligation as well (albeit subject to the occurrence of the condition), in
its context under Book IV of the Civil Code, can only be "a juridical necessity to give, to do or not to do"
(Art. 1156, Civil Code), and one that is constituted by law, contracts, quasi-contracts, delicts and quasi-
delicts (Art. 1157, Civil Code) which all have their respective legal significance rather well settled in law.
The law certainly must have meant to provide congruous, albeit contextual, consequences to its
provisions. Interpretare et concordore legibus est optimus interpretendi. As a valid source of an obligation,
a contract must have the concurrence of (a) consent of the contracting parties, (b) object certain (subject
matter of the contract) and (c) cause (Art. 1318, Civil Code). These requirements, clearly defined, are
essential. The consent contemplated by the law is that which is manifested by the meeting of the offer
and of the acceptance upon the object and the cause of the obligation. The offer must be certain and the
acceptance absolute (Article 1319 of the Civil Code). Thus, a right of first refusal cannot have the effect of
a contract because, by its very essence, certain basic terms would have yet to be determined and fixed.
How its "breach" be also its perfection escapes me. It is only when the elements concur that the juridical
act would have the force of law between the contracting parties that must be complied with in good faith
(Article 1159 of the Civil Code; see also Article 1308, of the Civil Code), and, in case of its breach, would
allow the creditor or obligee (the passive subject) to invoke the remedy that specifically appertains to it.

The judicial remedies, in general, would, of course, include: (a) The principal remedies (i) of specific
performance in obligations to give specific things (Articles 1165 and 1167 of the Civil Code), substitute
performance in an obligation to do or to deliver generic things (Article 1165 of the Civil Code) and
equivalent performance for damages (Articles 1168 and 1170 of the Civil Code); and (ii) of rescission or
resolution of reciprocal obligations; and (b) the subsidiary remedies that may be availed of when the
principal remedies are unavailable or ineffective such as (i) accion subrogatoria or subrogatory action
(Article 1177 of the Civil Code; see also Articles 1729 and 1893 of the Civil Code); and (ii) accion
pauliana or rescissory action (Articles 1177 and 1381 of the Civil Code). And, in order to secure the
integrity of final judgments, such ancillary remedies as attachments, replevin, garnishments, receivership,
examination of the debtor, and similar remedies, are additionally provided for in procedural law.

Might it be possible, however, that Justice Panganiban was referring to how Ang Yu could relate to the
instant case for, verily, his remark, earlier quoted, was followed by an extensive discussion on the factual
and case milieu of the present petition? If it were, then I guess it was the applicability of the Ang
Yu decision to the instant case that he questioned, but that would not make Ang Yu "imprecise" or
"incorrect."

Justice Panganiban would hold the Ang Yu ruling to be inconsistent with Guzman, Bocaling &
Co. vs. Bonnevie (206 SCRA 668). I would not be too hasty in concluding similarly. In Guzman, the
stipulation involved, although loosely termed a "right of first priority," was, in fact, a contract of option. The
provision in the agreement there stated:

20. — In case the LESSOR desires or decides to sell the leased property, the LESSEES
shall be given a first priority to purchase the same, all things and considerations being
equal.(At page 670; emphasis supplied.)

In the above stipulation, the Court ruled, in effect, that the basic terms had been
adequately, albeit briefly, spelled out with the lease consideration being deemed likewise to be
the essential cause for the option. The situation undoubtedly was not the same that prevailed
in Ang Yu or, for that matter, in the case at bar. The stipulation between Mayfair Theater, Inc.,
and Carmelo & Bauermann, Inc., merely read:

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

The provision was too indefinite to allow it to even come close to within the area of
the Guzman ruling.

Justice Panganiban was correct in saying that the "cases of Madrigal & Co. vs. Stevenson & Co. and
Salonga vs. Farrales (cited in Ang Yu) did NOT involve a right of first refusal or of first priority. Nor did
those two cases involve an option to buy." The two cases, to set the record straight, were cited, not
because they were thought to involve a right of first refusal or an option to buy but to emphasize the
indispensability of consensuality over the object and cause of contracts in their perfection which would
explain why, parallel therewith, Articles 1315 and 1318 of the Civil Code were also mentioned.

One final note: A right of first refusal, in its proper usage, is not a contract; when parties instead make
certain the object and the cause thereof and support their understanding with an adequate consideration,
that juridical relation is not to be taken as just a right of first refusal but as a contract in itself (termed an
"option"). There is, unfortunately, in law a limit to an unabated use of common parlance.

With all due respect, I hold that the judgment of the trial court, although not for all the reasons it has
advanced, should be REINSTATED.

Separate Opinions

PADILLA, J., concurring:

I am of the considered view (like Mr. Justice Jose A. R. Melo) that the Court in this case should
categorically recognize Mayfair's right of first refusal under its contract of lease with Carmelo and
Bauermann, Inc. (hereafter, Carmelo) and, because of Carmelo's and Equatorial's bad faith in riding
"roughshod" over Mayfair's right of first refusal, the Court should order the rescission of the sale of the
Claro M. Recto property by the latter to Equatorial (Art. 1380-1381[3], Civil Code). The Court should, in
this same case, to avoid multiplicity of suits, likewise allow Mayfair to effectively exercise said right of first
refusal, by paying Carmelo the sum of P11,300,000.00 for the entire subject property, without any need of
instituting a separate action for damages against Carmelo and/or Equatorial.

I do not agree with the proposition that, in addition to the aforesaid purchase price, Mayfair should be
required to pay a compounded interest of 12% per annum of said amount computed from 1 August 1978.
Under the Civil Code, a party to a contract may recover interest as indemnity for damages in the following
instances:

Art. 2209. If the obligation consists in the payment of a sum of money, and the debtor
incurs in delay, the indemnity for damages, there being no stipulation to the contrary,
shall be the payment of the interest agreed upon, and in the absence of stipulation, the
legal interest, which is six per cent  per annum.

Art. 2210. Interest may, in the discretion of the court, be allowed upon damages awarded
for breach of contract.

There appears to be no basis in law for adding 12%  per annum compounded interest to the
purchase price of P11,300,000.00 payable by Mayfair to Carmelo since there was no such
stipulation in writing between the parties (Mayfair and Carmelo) but, more importantly, because
Mayfair neither incurred in delay in the performance of its obligation nor committed any breach of
contract. Indeed, why should Mayfair be penalized by way of making it pay 12% per
annum compounded interest when it was Carmelo which violated Mayfair's right of first refusal
under the contract?

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.

ACCORDINGLY, I vote to order the rescission of the contract of sale between Carmelo and Equatorial of
the Claro M. Recto property in question, so that within thirty (30) days from the finality of the Court's
decision, the property should be retransferred and delivered by Equatorial to Carmelo with the latter
simultaneously returning to Equatorial the sum of P11,300, 000.00.

I also vote to allow Mayfair to exercise its right of first refusal, by paying to Carmelo the sum of
P11,300,000.00 without interest for the entire subject property, within thirty (30) days from re-acquisition
by Carmelo of the titles to the property, with the corresponding obligation of Carmelo to sell and transfer
the property to Mayfair within the same period of thirty (30) days.

PANGANIBAN, J., concurring:
In the main, I concur with the  ponencia of my esteemed colleague, Mr. Justice Regino C. Hermosisima,
Jr., especially with the following doctrinal pronouncements:

1. That while no option to purchase within the meaning of the second paragraph of Article
1479 of the Civil Code was given to Mayfair Theater, Inc. ("Mayfair"), under the two lease
contracts a right of first refusal was in fact granted, for which no separate consideration is
required by law to be paid or given so as to make it binding upon Carmelo & Bauermann,
Inc. ("Carmelo");

2. That such right was violated by the latter when it sold the entire property to Equatorial
Realty Development, Inc. ("Equatorial") on July 30, 1978, for the sum of P11,300,000.00;

3. That Equatorial is a buyer in bad faith as it was aware of the lease contracts, its own
lawyers having studied said contracts prior to the sale; and

4. That, consequently, the contract of sale is rescissible.

5. That, finally, under the proven facts, the right of first refusal may be enforced by an
action for specific performance.

There appears to be unanimity in the Court insofar as items 1, 2 and 3 above are concerned. It is in items
4 and 5 that there is a marked divergence of opinion. Hence, I shall limit the discussion in this Separate
Concurring Opinion to such issues, namely: Is the contract of sale between Carmelo and Equatorial
rescissible, and corollarily, may the right of first refusal granted to Mayfair be enforced by an action for
specific performance?

It is with a great amount of trepidation that I respectfully disagree with the legal proposition espoused by
two equally well-respected colleagues, Mme. Justice Flerida Ruth P. Romero and Mr. Justice Jose C.
Vitug — who are both acknowledged authorities on Civil Law — that a breach of the covenanted right of
first refusal, while warranting a suit for damages under Article 19 of the Civil Code, cannot sanction an
action for specific performance without thereby negating the indispensable element of con-sensuality in
the perfection of contracts.

Ang Yu Asuncion Not In Point

Such statement is anchored upon a pronouncement in Ang Yu Asuncion vs. CA, 1 which was penned by
Mr. Justice Vitug himself. I respectfully submit, however, that that case turned largely on the issue of
whether or not the sale of an immovable in breach of a right of first refusal that had been decreed in a
final judgment would justify the issuance of certain orders of execution in the same case. The validity of
said orders was the subject of the attack before this Court. These orders had not only directed the
defendants to execute a deed of sale in favor of the plaintiffs, when there was nothing in the judgment
itself decreeing it, but had also set aside the sale made in breach of said right of first refusal and even
canceled the title that had been issued to the buyer, who was not a party to the suit and had obviously not
been given its day in court. It was thus aptly held:

The final judgment in Civil Case No. 87-41058, it must be stressed, has merely accorded
a "right of first refusal" in favor of petitioners. The consequence of such a declaration
entails no more than what has heretofore been said. In fine, if, as it is here so conveyed
to us, petitioners are aggrieved by the failure of private respondents to honor the right of
first refusal, the remedy is not a writ of execution on the judgment, since there is none to
execute, but an action for damages in a proper forum for the purpose.
 Furthermore, whether private respondent Buen Realty Development Corporation, the
alleged purchaser of the property, has acted in good faith or bad faith and whether or not
it should, in any case, be considered bound to respect the registration of the lis
pendens in Civil Case No. 87-41058 are matters that must be independently addressed
in appropriate proceedings. Buen Realty, not having been impleaded in Civil Case No.
87-41058, cannot be held subject to the writ of execution issued by respondent Judge, let
alone ousted from the ownership and possession of the property, without first being duly
afforded its day in court.2

In other words, the question of whether specific performance of one's right of first refusal is available as a
remedy in case of breach thereof was not before the Supreme Court at all in Ang Yu Asuncion.
Consequently, the pronouncements there made bearing on such unlitigated question were mere obiter.
Moreover, as will be shown later, the pronouncement that a breach of the right of first refusal would not
sanction an action for specific performance but only an action for damages (at p. 615) is at best debatable
(and in my humble view, imprecise or incorrect), on top of its being contradicted by extant jurisprudence.

Worth bearing in mind is the fact that two juridical relations, both contractual, are involved in the instant
case: (1) the deed of sale between the petitioners dated July 30, 1978, and (2) the contract clause
establishing Mayfair's right of first refusal which was violated by said sale.

With respect to the sale of the property, Mayfair was not a party. It therefore had no personality to sue for
its annulment, since Art. 1397 of the Civil Code provides, inter alia, that "(t)he action for the annulment of
contracts may be instituted by all who are thereby obliged principally or subsidiarily."

But the facts as alleged and proved clearly in the case at bar make out a case for rescission under Art.
1177, in relation to Art. 1381(3), of the Civil Code, which pertinently read as follows:

Art. 1177. The creditors, after having pursued the property in possession of the debtor to
satisfy their claims, may exercise all the rights and bring all the actions of the latter for the
same purpose, save those which are inherent in his person; they may also impugn the
acts which the debtor may have done to defraud them.

Art. 1381. The following contracts are rescissible:

xxx xxx xxx

(3) Those undertaken in fraud of creditors when the latter cannot in any other manner
collect the claims due them;

xxx xxx xxx

(emphasis supplied)

The term "creditors" as used in these provisions of the Civil Code is broad enough to include the obligee
under an option contract3 as well as under a right of first refusal, sometimes known as a right of first
priority.4 Thus, in Nietes, the Supreme Court, speaking through then Mr. Chief Justice Roberto
Concepcion, repeatedly referred to the grantee or optionee as "the creditor" and to the grantor or optioner
as "the debtor".5 In any case, the personal elements of an obligation are the active and passive subjects
thereof, the former being known as creditors or obligees and the latter as debtors or obligors. 6 Insofar as
the right of first refusal is concerned, Mayfair is the obligee or creditor.

As such creditor, Mayfair had, therefore, the right to impugn the sale in question by way of accion
pauliana under the last clause of Art. 1177, aforequoted, because the sale was an act done by the debtor
to defraud him of his right to acquire the property. 7 Rescission was also available under par. 3, Art. 1381,
abovequoted, as was expressly held in Guzman, Bocaling & Co., a case closely analogous to this one as
it was also an action brought by the lessee to enforce his "right of first priority" — which is just another
name for the right of first refusal — and to annul a sale made by the lessor in violation of such right. In
said case, this Court, speaking through Mr. Justice Isagani A. Cruz, affirmed the invalidation of the sale
and the enforcement of the lessee's right of first priority this wise: 8

The petitioner argues that assuming the Contract of Sale to be voidable, only the parties
thereto could bring an action to annul it pursuant to Article 1397 of the Civil Code. It is
stressed that private respondents are strangers to that agreement and therefore have no
personality to seek its annulment.

The respondent court correctly held that the Contract of Sale was not voidable
but rescissible. Under Article(s) 1380 to 1381 (3) of the Civil Code, a contract otherwise
valid may nonetheless be subsequently rescinded by reason of injury to third persons,
like creditors. The status of creditors could be validly accorded the Bonnevies for they
had substantial interests that were prejudiced by the sale of the subject property to the
petitioner without recognizing their right of first priority under the Contract of Lease.
(emphasis supplied)

By the same token, the status of a defrauded creditor can, and should, be granted to Mayfair, for it
certainly had substantial interests that were prejudiced by the sale of the subject property to petitioner
Equatorial in open violation of Mayfair's right of first refusal under its existing contracts with Carmelo.

In fact, the parity between that case and the present one does not stop there but extends to the crucial
and critical fact that there was manifest bad faith on the part of the buyer. Thus, in Guzman, this Court
affirmed in toto the appealed judgment of the Court of Appeals which, in turn, had affirmed the trial court's
decision insofar as it invalidated the deed of sale in favor of the petitioner-buyer, cancelled its TCT, and
ordered the lessor to execute a deed of sale over the leased property in favor of the lessee for the same
price and "under the same terms and conditions", aside from affirming as well the damages awarded, but
at a reduced amount.9 In other words, the aggrieved party was allowed to acquire the property itself.

The inescapable conclusion from all of the foregoing is not only that rescission is the proper remedy but
also — and more importantly — that specific performance was actually used and given free rein as an
effective remedy to enforce a right of first refusal in the wake of its violation, in the cited case of Guzman.

On the other hand, and as already commented on above, the pronouncement in Ang Yu Asuncion to the
effect that specific performance is unavailable to enforce a violated right of first refusal is at best a
debatable legal proposition, aside from being contradicted by extant jurisprudence. Let me explain why.

The consensuality required for a contract of sale is distinct from, and should not be confused with, the
consensuality attendant to the right of first refusal itself. While indeed, prior to the actual sale of the
property to Equatorial and the filing of Mayfair's complaint for specific performance, no perfected contract
of sale involving the property ever existed between Carmelo as seller and Mayfair as buyer, there already
was, in law and in fact, a perfected contract between them which established a right of first refusal, or of
first priority.

Specific Performance Is
Viable Remedy

The question is: Can this right (of first refusal) be enforced by an action for specific performance upon a
showing of its breach by an actual sale of the property under circumstances showing palpable bad faith
on the part of both seller and buyer?
The answer, I respectfully submit, should be 'yes'.

As already noted, Mayfair's right of first refusal in the case before us is embodied in an express covenant
in the lease contracts between it as lessee and Carmelo as lessor, hence the right created is one
springing from contract. 10 Indubitably, this had the force of law between the parties, who should thus
comply with it in good faith. 11 Such right also established a correlative obligation on the part of Carmelo
to give or deliver to Mayfair a formal offer of sale of the property in the event Carmelo decides to sell it.
The decision to sell was eventually made. But instead of giving or tendering to Mayfair the proper offer to
sell, Carmelo gave it to its now co-petitioner, Equatorial, with whom it eventually perfected and
consummated, on July 30, 1978, an absolute sale of the property, doing so within the period of effectivity
of Mayfair's right of first refusal. Less than two months later, or in September 1978, with the lease still in
full force, Mayfair filed the present suit.

Worth stressing at this juncture is the fact that Mayfair had the right to require that the offer to sell the
property be sent to it by Carmelo, and not to anybody else. This was violated when the offer was made to
Equatorial. Under its covenant with Carmelo, Mayfair had the right, at that point, to sue for either specific
performance or rescission, with damages in either case, pursuant to Arts. 1165 and 1191, Civil
Code. 12 An action for specific performance and damages seasonably filed, fortified by a writ of
preliminary injunction, would have enabled Mayfair to prevent the sale to Equatorial from taking place and
to compel Carmelo to sell the property to Mayfair for the same terms and price, for the reason that the
filing of the action for specific performance may juridically be considered as a solemn, formal, and
unqualified acceptance by Mayfair of the specific terms of the offer of sale. Note that by that time, the
price and other terms of the proposed sale by Carmelo had already been determined, being set forth in
the offer of sale that had wrongfully been directed to Equatorial.

As it turned out, however, Mayfair did not have a chance to file such suit, for it learned of the sale to
Equatorial only after it had taken place. But it did file the present action for specific performance and for
invalidation of the wrongful sale immediately after learning about the latter act. The act of promptly filing
this suit, coupled with the fact that it is one for specific performance, indicates beyond cavil or doubt
Mayfair's unqualified acceptance of the misdirected offer of sale, giving rise, thereby, to a demandable
obligation on the part of Carmelo to execute the corresponding document of sale upon the payment of the
price of P11,300,000.00. In other words, the principle of consensuality of a contract of sale should be
deemed satisfied. The aggrieved party's consent to, or acceptance of, the misdirected offer of sale should
be legally presumed in the context of the proven facts.

To say, therefore, that the wrongful breach of a right of first refusal does not sanction an action for specific
performance simply because, factually, there was no meeting of the minds as to the particulars of the sale
since ostensibly no offer was ever made to, let alone accepted by, Mayfair, is to ignore the proven fact of
presumed consent. To repeat, that consent was deemed given by Mayfair when it sued for invalidation of
the sale and for specific performance of Carmelo's obligation to Mayfair. Nothing in the law as it now
stands will be violated, or even simply emasculated, by this holding. On the contrary, the decision
in Guzman supports it.

Moreover, under the Civil Code provisions on the nature, effect and kinds of obligations, 13 Mayfair's right
of first refusal may be classified as one subject to a suspensive condition — namely, if Carmelo should
decide to sell the leased premises during the life of the lease contracts, then it should make an offer of
sale to Mayfair. Futurity and uncertainty, which are the essential characteristics of a condition, 14 were
distinctly present. Before the decision to sell was made, Carmelo had absolutely no obligation to sell the
property to Mayfair, nor even to make an offer to sell, because in conditional obligations, where the
condition is suspensive, the acquisition of rights depends upon the happening of the event which
constitutes the condition. 15 Had the decision to sell not been made at all, or had it been made after the
expiry of the lease, the parties would have stood as if the conditional obligation had never existed. 16 But
the decision to sell was in fact made. And it was made during the life and efficacy of the lease.
Undoubtedly, the condition was duly fulfilled; the right of first refusal effectively accrued and became
enforceable; and correlatively, Carmelo's obligation to make and send the offer to Mayfair became
immediately due and demandable. 17 That obligation was to deliver to Mayfair an offer to sell a
determinate thing for a determinate price. As things turned out, a definite and specific offer to sell the
entire property for the price of P11,300,000.00 was actually made by Carmelo — but to the wrong party. It
was that particular offer, and no other, which Carmelo should have delivered to Mayfair, but failed to
deliver. Hence, by the time the obligation of Carmelo accrued through the fulfillment of the suspensive
condition, the offer to sell had become a determinate thing.

Art. 1165 of the Civil Code, earlier quoted in footnote 12, indicates the remedies available to the creditor
against the debtor, when it provides that "(w)hen what is to be delivered is a determinate thing, the
creditor, in addition to the right granted him by article 1170, may compel the debtor to make the delivery,"
clearly authorizing not only the recovery of damages under Art. 1170 but also an action for specific
performance.

But even assuming that Carmelo's prestation did not involve the delivery of a determinate offer but only a
generic one, the second paragraph of Art. 1165 explicitly gives to the creditor the right "to ask that the
obligation be complied with at the expense of the debtor." The availability of an action for specific
performance is thus clear and beyond doubt. And the correctness of Guzman becomes all the more
manifest.

Upon the other hand, the obiter in Ang Yu Asuncion is further weakened by the fact that the jurisprudence
upon which it supposedly rests — namely, the cases of Madrigal & CO. vs. Stevenson &
Co. 18 and Salonga vs. Farrales 19 — did NOT involve a right of first refusal or of first priority. Nor did those
two cases involve an option to buy. In Madrigal, plaintiff sued defendant for damages claiming wrongful
breach of an alleged contract of sale of 2,000 tons of coal. The case was dismissed because "the minds
of the parties never met upon a contract of sale by defendant to plaintiff", 20 each party having signed the
broker's memorandum as buyer, erroneously thinking that the other party was the seller! In Salonga, a
lessee, who was one of several lessees ordered by final judgment to vacate the leased premises, sued
the lessor to compel the latter to sell the leased premises to him, but his suit was not founded upon any
right of first refusal and was therefore dismissed on the ground that there was no perfected sale in his
favor. He just thought that because the lessor had decided to sell and in fact sold portions of the property
to her other lessees, she was likewise obligated to sell to him even in the absence of a perfected contract
of sale. In fine, neither of the two cases cited in support of the legal proposition that a breach of the right
of first refusal does not sanction an action for specific performance but, at best, only one for damages,
provides such support.

Finally, the fact that what was eventually sold to Equatorial was the entire property, not just the portions
leased to Mayfair, is no reason to deprive the latter of its right to receive a formal and specific offer. The
offer of a larger property might have led Mayfair to reject the offer, but until and unless such rejection was
actually made, its right of first refusal still stood. Upon the other hand, an acceptance by Mayfair would
have saved all concerned the time, trouble, and expense of this protracted litigation. In any case, the
disquisition by the Court of Appeals on this point can hardly be faulted; in fact, it amply justifies the
conclusions reached in its decision, as well as the dispositions made therein.

IN VIEW OF THE FOREGOING, I vote to DENY the petition and to AFFIRM the assailed Decision.

ROMERO, J.,  concurring and dissenting:

I share the opinion that the right granted to Mayfair Theater under the identical par 8 of the June 1, 1967
and March 31, 1969 contracts constitute a right of first refusal.

An option is a privilege granted to buy a determinate thing at a price certain within a specified time and is
usually supported by a consideration which is why, it may be regarded as a contract in itself. The option
results in a perfected contract of sale once the person to whom it is granted decides to exercise it. The
right of first refusal is unlike an option which requires a certainty as to the object and consideration of the
anticipated contract. When the right of first refusal is exercised, there is no perfected contract of sale
because the other terms of the sale have yet to be determined. Hence, in case the offeror reneges on his
promise to negotiate with offeree, the latter may only recover damages in the belief that a contract could
have been perfected under Article 19 of the New Civil Code.

I beg to disagree, however, with the majority opinion that the contract of sale entered into by Carmelo and
Bauermann, Inc. and Equatorial Realty Inc., should be rescinded. Justice Hermosisima, in citing Art. 1381
(3) as ground for recission apparently relied on the case of Guzman, Bocaling and Co. v. Bonnevie (206
SCRA 668 [1992]) where the offeree was likened to the status of a creditor. The case, in citing Tolentino,
stated that rescission is a remedy granted by law to contracting parties and even to third persons, to
secure reparation for damages caused to them by a contract, even if this should be valid, by means of
restoration of things to their condition prior to celebration of the contract. It is my opinion that "third
persons" should be construed to refer to the wards, creditors, absentees, heirs and others enumerated
under the law who are prejudiced by the contract sought to be rescinded.

It should be borne in mind that rescission is an extreme remedy which may be exercised only in the
specific instances provided by law. Article 1381 (3) specifically refers to contracts undertaken in fraud of
creditors when the latter cannot in any manner collect the claims due them. If rescission were allowed for
analogous cases, the law would have so stated. While Article 1381 (5) itself says that rescission may be
granted to all other contracts specially declared by law to be subject to rescission, there is nothing in the
law that states that an offeree who failed to exercise his right of refusal because of bad faith on the part of
the offeror may rescind the subsequent contract entered into by the offeror and a third person. Hence,
there is no legal justification to rescind the contract between Carmelo and Bauermann, Inc. and Equatorial
Realty.

Neither do I agree with Justice Melo that Mayfair Theater should pay Carmelo and Bauermann, Inc. the
amount of P11,300,000.00 plus compounded interest of 12% p.a. Justice Melo rationalized that had
Carmelo and Bauermann sold the property to Mayfair, the latter would have paid the property for the
same price that Equatorial bought it. It bears emphasis that Carmelo and Bauermann, Inc. and Mayfair
never reached an agreement as to the price of the property in dispute because the negotiations between
the two parties were not pursued to its very end. We cannot, even for reasons of equity, compel Carmelo
to sell the entire property to Mayfair at P11,300,000.00 without violating the consensual nature of
contracts.

I vote, therefore, not to rescind the contract of sale entered into by Carmelo and Bauermann, Inc. and
Equatorial Realty Development Corp.

VITUG, J., dissenting:

I share the opinion that the right granted to Mayfair Theater, Inc., is neither an offer nor an option but
merely a right of first refusal as has been so well and amply essayed in the ponencia of our distinguished
colleague Mr. Justice Regino C. Hermosisima, Jr.

Unfortunately, it would seem that Article 1381 (paragraph 3) of the Civil Code invoked to be the statutory
authority for the rescission of the contract of sale between Carmelo & Bauermann, Inc., and Equatorial
Realty Development, Inc., has been misapplied. The action for rescission under that provision of the law,
unlike in the resolution of reciprocal obligations under Article 1191 of the Code, is merely subsidiary and
relates to the specific instance when a debtor, in an attempt to defraud his creditor, enters into a contract
with another that deprives the creditor to recover his just claim and leaves him with no other legal means,
than by rescission, to obtain reparation. Thus, the rescission is only to the extent necessary to cover the
damages caused (Article 1384, Civil Code) and, consistent with its subsidiary nature, would require the
debtor to be an indispensable party in the action (see Gigante vs. Republic Savings Bank, 135 Phil. 359).

The concept of a right of first refusal as a simple juridical relation, and so governed (basically) by the Civil
Code's title on "Human Relations," is not altered by the fact alone that it might be among the stipulated
items in a separate document or even in another contract. A "breach" of the right of first refusal can only
give rise to an action for damages primarily under Article 19 of the Civil Code, as well as its related
provisions, but not to an action for specific performance set out under Book IV of the Code on
"Obligations and Contracts." That right, standing by itself, is far distant from being the obligation referred
to in Article 1159 of the Code which would have the force of law sufficient to compel compliance per se or
to establish a creditor-debtor or obligee-obligor relation between the parties. If, as it is rightly so, a right of
first refusal cannot even be properly classed as an offer or as an option, certainly, and with much greater
reason, it cannot be the equivalent of, nor be given the same legal effect as, a duly perfected contract. It
is not possible to cross out, such as we have said in Ang Yu Asuncion vs. Court of Appeals (238 SCRA
602), the indispensable element of consensuality in the perfection of contracts. It is basic that without
mutual consent on the object and on the cause, a contract cannot exist (Art. 1305, Civil Code); corollary
to it, no one can be forced, least of all perhaps by a court, into a contract against his will or compelled to
perform thereunder.

It is sufficiently clear, I submit, that, there being no binding contract between Carmelo and Mayfair, neither
the rescission of the contract between Carmelo and Equatorial nor the directive to Carmelo to sell the
property to Mayfair would be legally appropriate.

My brief disquisition should have ended here except for some personal impressions expressed by my
esteemed colleague, Mr. Justice Artemio V. Panganiban, on the Ang Yu decision which perhaps need to
be addressed.

The discussion by the Court in Ang Yu on the right of first refusal is branded as a mere obiter dictum.
Justice Panganiban states: The case "turned largely on the issue of whether or not the sale of an
immovable in breach of a right of first refusal that had been decreed in a final judgment would justify the
issuance of certain orders of execution in the same case. . . . . In other words, the question of whether
specific performance of one's right of first refusal is available as a remedy in case of breach thereof was
not before the Supreme Court at all in Ang Yu Asuncion."

Black defines an obiter dictum as "an opinion entirely unnecessary for the decision of the case" and thus
"are not binding as precedent." (Black's Law Dictionary, 6th edition, 1990). A close look at the
antecedents of Ang Yu as found by the Court of Appeals and as later quoted by this Court would readily
disclose that the "right of first refusal" was a major point in the controversy. Indeed, the trial and the
appellate courts had rule on it. With due respect, I would not deem it "entirely unnecessary" for this Court
to itself discuss the legal connotation and significance of the decreed (confirmatory) right of first refusal. I
should add that when the  ponencia recognized that, in the case of Buen Realty Development Corporation
(the alleged purchaser of the property), the latter could not be held subject of the writ of execution and be
ousted from the ownership and possession of the disputed property without first affording it due process,
the Court decided to simply put a cap in the final disposition of the case but it could not have intended to
thereby mitigate the import of its basic ratio decidendi.

Justice Panganiban opines that the pronouncement in Ang Yu, i.e., that a breach of the right of first
refusal does not sanction an action for specific performance but only an action for damages, "is at best
debatable (. . . imprecise or incorrect), on to top of its being contradicted by extant jurisprudence." He
then comes up with the novel proposition that "Mayfair's right of first refusal may be classified as one
subject to a suspensive condition — namely, if Carmelo should decide to sell the leased premises during
the life of the lease contracts, then it should make an offer of sale to Mayfair," presumably enforceable by
action for specific performance.
It would be perilous a journey, first of all, to try to seek out a common path for such juridical relations as
contracts, options, and rights of first refusal since they differ, substantially enough, in their concepts,
consequences and legal implications. Very briefly, in the area on sales particularly, I borrow from Ang Yu,
a unanimous decision of the Supreme Court En Banc, which held:

In the law on sales, the so-called "right of first refusal" is an innovative juridical relation.
Needless to point out, it cannot be deemed a perfected contract of sale under Article
1458 of the Civil Code. Neither can the right of first refusal, understood in its normal
concept,  per se be brought within the purview of an option under the second paragraph
of Article 1479, aforequoted, or possibly of an offer under Article 1319 of the same Code.
An option or an offer would require, among other things, a clear certainty on both the
object and the cause or consideration of the envisioned contract. In a right of first refusal,
while the object might be made determinate, the exercise of the right, however, would be
dependent not only on the grantor's eventual intention to enter into a binding juridical
relation with another but also on terms, including the price, that obviously are yet to be
later firmed up. Prior thereto, it can at best be so described as merely belonging to a
class of preparatory juridical relations governed not by contracts (since the essential
elements to establish the vinculum juris would still be indefinite and inconclusive) but by,
among other laws of general application, the pertinent scattered provisions of the Civil
Code on human conduct.

An obligation, and so a conditional obligation as well (albeit subject to the occurrence of the condition), in
its context under Book IV of the Civil Code, can only be "a juridical necessity to give, to do or not to do"
(Art. 1156, Civil Code), and one that is constituted by law, contracts, quasi-contracts, delicts and quasi-
delicts (Art. 1157, Civil Code) which all have their respective legal significance rather well settled in law.
The law certainly must have meant to provide congruous, albeit contextual, consequences to its
provisions. Interpretare et concordore legibus est optimus interpretendi. As a valid source of an obligation,
a contract must have the concurrence of (a) consent of the contracting parties, (b) object certain (subject
matter of the contract) and (c) cause (Art. 1318, Civil Code). These requirements, clearly defined, are
essential. The consent contemplated by the law is that which is manifested by the meeting of the offer
and of the acceptance upon the object and the cause of the obligation. The offer must be certain and the
acceptance absolute (Article 1319 of the Civil Code). Thus, a right of first refusal cannot have the effect of
a contract because, by its very essence, certain basic terms would have yet to be determined and fixed.
How its "breach" be also its perfection escapes me. It is only when the elements concur that the juridical
act would have the force of law between the contracting parties that must be complied with in good faith
(Article 1159 of the Civil Code; see also Article 1308, of the Civil Code), and, in case of its breach, would
allow the creditor or obligee (the passive subject) to invoke the remedy that specifically appertains to it.

The judicial remedies, in general, would, of course, include: (a) The principal remedies (i) of specific
performance in obligations to give specific things (Articles 1165 and 1167 of the Civil Code), substitute
performance in an obligation to do or to deliver generic things (Article 1165 of the Civil Code) and
equivalent performance for damages (Articles 1168 and 1170 of the Civil Code); and (ii) of rescission or
resolution of reciprocal obligations; and (b) the subsidiary remedies that may be availed of when the
principal remedies are unavailable or ineffective such as (i) accion subrogatoria or subrogatory action
(Article 1177 of the Civil Code; see also Articles 1729 and 1893 of the Civil Code); and (ii) accion
pauliana or rescissory action (Articles 1177 and 1381 of the Civil Code). And, in order to secure the
integrity of final judgments, such ancillary remedies as attachments, replevin, garnishments, receivership,
examination of the debtor, and similar remedies, are additionally provided for in procedural law.

Might it be possible, however, that Justice Panganiban was referring to how Ang Yu could relate to the
instant case for, verily, his remark, earlier quoted, was followed by an extensive discussion on the factual
and case milieu of the present petition? If it were, then I guess it was the applicability of the Ang
Yu decision to the instant case that he questioned, but that would not make Ang Yu "imprecise" or
"incorrect."
Justice Panganiban would hold the Ang Yu ruling to be inconsistent with Guzman, Bocaling &
Co. vs. Bonnevie (206 SCRA 668). I would not be too hasty in concluding similarly. In Guzman, the
stipulation involved, although loosely termed a "right of first priority," was, in fact, a contract of option. The
provision in the agreement there stated:

20. — In case the LESSOR desires or decides to sell the leased property, the LESSEES
shall be given a first priority to purchase the same, all things and considerations being
equal.(At page 670; emphasis supplied.)

In the above stipulation, the Court ruled, in effect, that the basic terms had been
adequately, albeit briefly, spelled out with the lease consideration being deemed likewise to be
the essential cause for the option. The situation undoubtedly was not the same that prevailed
in Ang Yu or, for that matter, in the case at bar. The stipulation between Mayfair Theater, Inc.,
and Carmelo & Bauermann, Inc., merely read:

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

The provision was too indefinite to allow it to even come close to within the area of
the Guzman ruling.

Justice Panganiban was correct in saying that the "cases of Madrigal & Co. vs. Stevenson & Co. and
Salonga vs. Farrales (cited in Ang Yu) did NOT involve a right of first refusal or of first priority. Nor did
those two cases involve an option to buy." The two cases, to set the record straight, were cited, not
because they were thought to involve a right of first refusal or an option to buy but to emphasize the
indispensability of consensuality over the object and cause of contracts in their perfection which would
explain why, parallel therewith, Articles 1315 and 1318 of the Civil Code were also mentioned.

One final note: A right of first refusal, in its proper usage, is not a contract; when parties instead make
certain the object and the cause thereof and support their understanding with an adequate consideration,
that juridical relation is not to be taken as just a right of first refusal but as a contract in itself (termed an
"option"). There is, unfortunately, in law a limit to an unabated use of common parlance.

With all due respect, I hold that the judgment of the trial court, although not for all the reasons it has
advanced, should be REINSTATED.

2. [G.R. No. L-2724. August 24, 1950.]

JOSE DE LEON, CECILIO DE LEON, ALBINA DE LEON, in their individual capacity, and JOSE DE
LEON and CECILIO DE LEON, as administrators of the intestate estate of Felix de Leon, Petitioner,
v. ASUNCION SORIANO, Respondent.

Lorenzo Sumulong and Jose Santos, for Petitioners.

Vicente J. Francisco, for Respondent.

SYLLABUS

1. OBLIGATIONS AND CONTRACTS; DETERMINATE AND GENERIC THING, DISTINGUISHED. — A

determinate thing is a concrete particularized object indicated by its own individuality, while a generic
thing is one whose determination is confined to that of its nature, to the genus (genero) to which it
pertains, such as a horse, a chair.

2. ID.; AGREEMENT TO DELIVER AMOUNT OF CROPS; WHEN FORTUITOUS CAUSE DID NOT
EXCUSED PERFORMANCE. — Except as to quality and quantity, the first of which is itself generic, the
contract sets no bounds or limits to that palay to be paid, nor was there even any stipulation that the
cereal was to be the produced of any particular land. Any palay of the quality stipulated regardless of
origin or however acquired (lawfully) would be obligatory on the part of the obligee to receive and would
discharge the obligation. It seems therefore plain that the alleged failure of crops through alleged
fortuitous cause did not excuse performance.

DECISION

TUASON, J.:

This is an appeal by certiorari from a decision of the Court of Appeals affirming a judgment of the Court of
First Instance of Bulacan.

Jose de Leon, Cecilio de Leon and Albina de Leon, petitioners herein and defendants in the court below,
were natural children of Felix de Leon, deceased, while Asuncion Soriano, respondent herein and plaintiff
below, is his widow. In the administration and settlement of the decedent’s estate then pending in the
Court of First Instance, the said widow, on the one hand, and the natural children, on the other, reached
on March 23, 1943 an agreement, approved by the probate court, whereby the natural children obligated
themselves, among other things, as follows:jgc:chanrobles.com.ph

"2. At the end of each agricultural year, by which shall be understood for the purposes of this agreement
the month of March of every year, the following amounts of palay shall be given to the party of the FIRST
PART (Asuncion Soriano) by the parties of the SECOND PART (De Leons): in the month of March of the
current year 1943; one thousand two hundred (1,200) cavanes of palay (macan); in the month of March of
1944, one thousand four hundred (1,400) cavanes of palay (macan); in the month of March 1945, one
thousand five hundred (1,500) cavanes of palay (macan); and in the month of March of 1946 and every
succeeding year thereafter, one thousand six hundred (1,600) cavanes of palay (macan). Delivery of the
palay shall be made in the warehouse required by the government, or if there be none such, at the
warehouse to be selected by the party of the FIRST PART, in San Miguel, Bulacan, free from the cost of
hauling, transportation, and from any and all taxes or charges.

"It is expressly stipulated that this annual payment of palay shall cease upon the death of the party of the
FIRST PART and shall not be transmissible to her heirs or to any other person, but during her lifetime this
obligation for the annual payment of the palay hereinabove mentioned shall constitute a first lien upon all
the rice lands of the estate of Dr. Felix de Leon in San Miguel, Bulacan."cralaw virtua1aw library

The defendants made deliveries to the plaintiff of 1,200 cavanes of palay in 1934, 700 in 1944, 200 in
1945, and another 200 in 1946, a total of 2,300 cavanes which was 3,400 cavanes short of the 5,700
cavanes which should have been delivered up to and including 1946. It was to recover this shortage or its
value that this action was commenced.

For answer, the defendants averred that their failure to pay the exact quantities of palay promised for
1944, 1945 and 1946 was due to "the Huk troubles in Central Luzon which rendered impossible full
compliance with the terms of the agreement;" and it was contended that "inasmuch as the obligations of
the defendants to deliver the full amount of the palay is depending upon the produce as this is in the
nature of an annuity, . . . the obligations of the defendants have been fully fulfilled by delivering in good
faith all that could be possible under the circumstances."cralaw virtua1aw library

The court gave judgment for the plaintiff for 3,400 cavanes of palay or its equivalent in cash, which was
found to be 24,900, and legal interest, As above stated, that judgment was affirmed by the appellate
court.
Article 1182 of the Civil Code which was in force at the time the agreement in question was entered into,
provides that "Any obligation which consists in the delivery of a determinate thing shall be extinguished if
such thing should be lost or destroyed without fault on the part of the debtor and before he is in default.
Inversely, the obligation is not extinguished if the thing that perishes is indeterminate.

Manresa explains the distinction between determinate and generic thing in his comment on article 1096 of
the Civil Code of Spain, saying that the first is a concrete, particularized object, indicated by its own
individuality, while a generic thing is one whose determination is confined to that of its nature, to the
genus (genero) to which it pertains, such as a horse, a chair. These definitions are in accord with the
popular meaning of the terms defined.

Except as to quality and quantity, the first of which is itself generic, the contract sets no bounds or limits to
the palay to be paid, nor was there even any stipulation that the cereal was to be the produce of any
particular land. Any palay of the quality stipulated regardless of origin on however acquired (lawfully)
would be obligatory on the part of the obligee to receive and would discharge the obligation. It seems
therefore plain that the alleged failure of crops through alleged fortuitous cause did not excuse
performance.

As Escriche, in his Diccionario Razonado de Legislacion y Jurisprudencia, puts it, speaking of the effects
of the loss of a thing:jgc:chanrobles.com.ph

"Extingue la obligacion del deudor cuando la cosa debida es un cuerpo cierto y determinado: pero si
fuese generica o no estuviese determinada sino en cuanto a la especie, como por ejemplo, una onza de
oro, 50 panegas de trigo o 3 toneladas de vino, siempre se perderia para el deudor, el cual, por
consiguiente, no se libraria de la deuda, ya que se supone que el genero por su naturaleza nunca
parece, ’nun quan genusperit’, ya porque aunque se diga que parece ro puede parecer, sino para su
dueño, que es el deudor ’res domino suo perit’. (Libro 18 y su glosa 1.a Titulo 11, Partida 5.a)

And he gives this example:jgc:chanrobles.com.ph

"Si prestais, pues, a Pedro una onza de oro que luego le roban, tendra que pagartela, porque su
obligacion no consistia en haberte de dar aquella misma onza, sino generalmente una onza."cralaw
virtua1aw library

In the case of Yu Tek & Co., v. Gonzales (29 Phil., 384), it appeared that the plaintiff advanced P3,000 to
defendant in payment of 600 piculs of sugar. The contract in writing did not specify that the sugar was to
come from the crop on defendant’s land which was destroyed. It was held that the sugar to be sold not
having been segregated, the sale was not perfected and the loss of the crop, even though through force
majeure did not extinguish defendant’s obligation to deliver the sugar.

In the more recent decision of this Court, in the case of Reyes v. Caltex (Phil.) Inc. (47 Off. Gaz., 1193; 84
Phil., 654), a question similar to that at bar arose. There, we ruled that the inability of the lessee of a
commercial property to pay the stipulated rent because of war and because the premises had been
occupied by Japanese forces did not affect the lessee’s liability to fulfill its commitments. Shifting to
American authorities, we cited Pollard v. Shaefer (1 Dall. [Pa. ], 210), where the Court said that, "since by
the lease, the lessee was to have the advantage of casual profits of the leased premises, he should run
the hazard of casual losses during the term and not lay the whole burden of them upon the lessor." This
court went on to say:jgc:chanrobles.com.ph

"The general rule on performance of contracts is graphically set forth in American treatises, which is also
the rule, in our opinion, obtaining under the Civil Code.

"Where a person by a contract charges himself with an obligation possible to be performed, he must
perform it, unless its performance is rendered impossible by the act of God, by the law, or by the other
party, it being the rule that in case the party desires to be excused from performance in the event of
contingencies arising, it is his duty to provide therefor in his contract. Hence, performance is not excused
by subsequent’ inability to perform, by unforeseen difficulties, by unusual or unexpected expenses, by
danger, by inevitable accident, by the breaking of machinery, by strikes, by sickness, by failure of a party
to avail himself of the benefits to be had under the contract, by weather conditions, by financial
stringency, or by stagnation of business. Neither is performance excused by the fact that the contract
turns out to be hard and improvident, unprofitable or impracticable, ill advised, or even foolish, or less
profitable, or unexpectedly burdensome. (17 C. J. S. 946-948). "In the absence of a statute to the
contrary, conditions arising from a state of war in which the country is engaged, will not ordinarily
constitute an excuse for non-performance of contract; and impossibility of performance arising from the
acts of the legislature and the executive branch of government in war time does not, without more,
constitute an excuse for non-performance. (17 C. J. S., 953, 954.)

"A few words are in order to straighten out the apparent confusion (of ideas) that exists regarding the
influence of fortuitous events in contracts; when they excuse performance and when not.

"In considering the effect of impossibility of performance on the rights of the parties, it is necessary to
keep in mind the distinction between: (1) Natural impossibility preventing performance from the nature of
the things and (2) impossibility in fact, in the absence of inherent impossibility in the nature of the thing
stipulated to be performed. (17 C. J. S., 951.) In the words of one Court impossibility must consist in the
nature of thing to be done and not in the inability of the party to do it. (City of Montpelier v. National Surety
Co., 122 A., 484; 97 Vt., Ill; 33 A. L. R., 489.) As others have put it, to bring the case within the rule of
impossibility, it must appear that the thing to be done cannot by any means be accomplished, for if it is
only improbable or out of the power of the obligor, it is not in law deemed impossible. (17 C. J. S., 442).
The first class of impossibility goes to the consideration and renders the contract void. The second, which
is the class of impossibility that we have to do here, does not. (17 C. J. S., 951, 952.)

"For illustration, where the entire product of a manufacturer was taken by the government under orders
pursuant to a commandeering statute during the World War, it was held that such action excused non-
performance of a contract to supply civilian trade. (40 S. Ct., 5; 252 U. S., 493; 64 Law. ed., 1031.)
Another example: where a party obligates himself to deliver certain (determinate) things and the things
perish through war or in a shipwreck performance is excused, the destruction operating as a rescission or
dissolution of the covenant. But if the promisor is unable to deliver the goods promised and his inability
arises, not from their destruction but from, say, his inability to raise money to buy them due to sickness,
typhoons, or the like, his liability is not discharged. In the first case, the doing of the thing which the
obligor finds impossible is the foundation of the undertaking. (C. J. S., 951, note.) In the second, the
impossibility partakes of the nature of the risk which the promisor took within the limits of his undertaking
of being able to perform. (C. J. S., supra, 946, note). It is a contingency which he could have taken due
precaution to guard against in the contract.

"Summoning the above principles to our aid, and by way of hypothesis, the defendant-appellee here
would be relieved from the obligation to pay rent if the subject matter of the lease, were this possible had
disappeared, for the personal occupation of the premises is the foundation of the contract, the
consideration that induced it (lessee) to enter into the agreement. But a mere trespass with which the
landlord had nothing to do is a casual disturbance not going to the essence of the undertaking. It is a
collateral incident which might have been provided for by a proper stipulation."cralaw virtua1aw library

See also Lacson Et. Al. v. Diaz, supra, p. 150.

The decision of the Court of Appeals is affirmed with costs against the petitioners and appellants.

3. [G.R. No. 91029. February 7, 1991.]

NORKIS DISTRIBUTORS, INC., Petitioner, v. THE COURT OF APPEALS & ALBERTO

NEPALES, Respondents.

Jose D. Palma for Petitioner.

Public Attorney’s Office for Private Respondent.

DECISION

GRIÑO-AQUINO, J.:

Subject of this petition for review is the decision of the Court of Appeals (Seventeenth Division) in CA-
G.R. No. 09149, affirming with modification the judgment of the Regional Trial Court, Sixth (6th) Judicial
Region, Branch LVI. Himamaylan, Negros Occidental, in Civil Case No. 1272, which was private
respondent Alberto Nepales’ action for specific performance of a contract of sale with damages against
petitioner Norkis Distributors, Inc.

The facts borne out by the record are as follows:chanrob1es virtual 1aw library

Petitioner Norkis Distributors, Inc. (Norkis for brevity), is the distributor of Yamaha motorcycles in Negros
Occidental with office in Bacolod City with Avelino Labajo as its Branch Manager. On September 20,
1979, private respondent Alberto Nepales bought from the Norkis-Bacolod branch a brand new Yamaha
Wonderbike motorcycle Model YL2DX with Engine No. L2-329401K, Frame No. NL2-0329401, Color
Maroon, then displayed in the Norkis showroom. The price of P7,500.00 was payable by means of a
Letter of Guaranty from the Development Bank of the Philippines (DBP), Kabankalan Branch, which
Norkis’ Branch Manager Labajo agreed to accept. Hence, credit was extended to Nepales for the price of
the motorcycle payable by DBP upon release of his motorcycle loan. As security for the loan, Nepales
would execute a chattel mortgage on the motorcycle in favor of DBP. Branch Manager Labajo issued
Norkis Sales Invoice No. 0120 (Exh. 1) showing that the contract of sale of the motorcycle had been
perfected. Nepales signed the sales invoice to signify his conformity with the terms of the sale. In the
meantime, however, the motorcycle remained in Norkis’ possession.

On November 6, 1979, the motorcycle was registered in the Land Transportation Commission in the
name of Alberto Nepales. A registration certificate (Exh. 2) in his name was issued by the Land
Transportation Commission on November 6, 1979 (Exh. 2-b). The registration fees were paid by him,
evidenced by an official receipt, Exhibit 3.

On January 22, 1980, the motorcycle was delivered to a certain Julian Nepales who was allegedly the
agent of Alberto Nepales but the latter denies it (p. 15, t.s.n., August 2, 1984). The record shows that
Alberto and Julian Nepales presented the unit to DBP’s Appraiser-Investigator Ernesto Arriesta at the
DBP offices in Kabankalan, Negros Occidental Branch (p. 12, Rollo). The motorcycle met an accident on
February 3, 1980 at Binalbagan, Negros Occidental. An investigation conducted by the DBP revealed that
the unit was being driven by a certain Zacarias Payba at the time of the accident (p. 33, Rollo). The unit
was a total wreck (p. 36, t.s.n., August 2, 1984; p. 13, Rollo), was returned, and stored inside Norkis’
warehouse.chanrobles.com.ph : virtual law library

On March 20, 1980, DBP released the proceeds of private respondent’s motorcycle loan to Norkis in the
total sum of P7,500. As the price of the motorcycle later increased to P7,828 in March, 1980, Nepales
paid the difference of P328 (p. 13, Rollo) and demanded the delivery of the motorcycle. When Norkis
could not deliver, he filed an action for specific performance with damages against Norkis in the Regional
Trial Court of Himamaylan, Negros Occidental, Sixth (6th) Judicial Region, Branch LVI, where it was
docketed as Civil Case No. 1272. He alleged that Norkis failed to deliver the motorcycle which he
purchased, thereby causing him damages.

Norkis answered that the motorcycle had already been delivered to private respondent before the
accident, hence, the risk of loss or damage had to be borne by him as owner of the unit.

After trial on the merits, the lower court rendered a decision dated August 27, 1985 ruling in favor of
private respondent (p. 28, Rollo) thus:jgc:chanrobles.com.ph
"WHEREFORE, judgment is rendered in favor of the plaintiff and against the defendants. The defendants
are ordered to pay solidarily to the plaintiff the present value of the motorcycle which was totally
destroyed, plus interest equivalent to what the kabankalan Sub-Branch of the Development Bank of the
Philippines will have to charge the plaintiff on his account, plus P50.00 per day from February 3, 1980
until full payment of the said present value of the motorcycle, plus P1,000.00 as exemplary damages, and
costs of the litigation. In lieu of paying the present value of the motorcycle, the defendants can deliver to
the plaintiff a brand-new motorcycle of the same brand, kind, and quality as the one which was totally
destroyed in their possession last February 3, 1980." (pp. 28-29, Rollo.)

On appeal, the Court of Appeals affirmed the appealed judgment on August 21, 1989, but deleted the
award of damages "in the amount of Fifty (P50.00) Pesos a day from February 3, 1980 until payment of
the present value of the damaged vehicle" (p. 35, Rollo). The Court of Appeals denied Norkis’ motion for
reconsideration. Hence, this Petition for Review.

The principal issue in this case is who should bear the loss of the motorcycle. The answer to this question
would depend on whether there had already been a transfer of ownership of the motorcycle to private
respondent at the time it was destroyed.

Norkis’ theory is that:jgc:chanrobles.com.ph

". . . After the contract of sale has been perfected (Art. 1475) and even before delivery, that is, even
before the ownership is transferred to the vendee, the risk of loss is shifted from the vendor to the
vendee. Under Art. 1262, the obligation of the vendor to deliver a determinate thing becomes
extinguished if the thing is lost by fortuitous event (Art. 1174), that is, without the fault or fraud of the
vendor and before he has incurred delay (Art. 1165, par. 3). If the thing sold is generic, the loss or
destruction does not extinguish the obligation (Art. 1263). A thing is determinate when it is particularly
designated or physically segregated from all others of the same class (Art. 1460). Thus, the vendor
becomes released from his obligation to deliver the determinate thing sold while the vendee’s obligation
to pay that price subsists. If the vendee had paid the price in advance the vendor may retain the same.
The legal effect, therefore, is that the vendee assumes the risk of loss by fortuitous event (Art. 1262) after
the perfection of the contract to the time of delivery." (Civil Code of the Philippines, Ambrosio Padilla, Vol.
5, 1987 Ed., p. 87.)

Norkis concedes that there was no "actual" delivery of the vehicle. However, it insists that there was
constructive delivery of the unit upon: (1) the issuance of the Sales Invoice No. 0120 (Exh. 1) in the name
of the private respondent and the affixing of his signature thereon; (2) the registration of the vehicle on
November 6, 1979 with the Land Transportation Commission in private respondent’s name (Exh. 2); and
(3) the issuance of official receipt (Exh. 3) for payment of registration fees (p. 33, Rollo).

That argument is not well taken. As pointed out by the private respondent, the issuance of a sales invoice
does not prove transfer of ownership of the thing sold to the buyer. An invoice is nothing more than a
detailed statement of the nature, quantity and cost of the thing sold and has been considered not a bill of
sale (Am. Jur. 2nd Ed., Vol. 67, p. 378).chanrobles virtual lawlibrary

In all forms of delivery, it is necessary that the act of delivery whether constructive or actual, be coupled
with the intention of delivering the thing. The act, without the intention, is insufficient (De Leon, Comments
and Cases on Sales, 1978 Ed., citing Manresa, p. 94).

When the motorcycle was registered by Norkis in the name of private respondent, Norkis did not intend
yet to transfer the title or ownership to Nepales, but only to facilitate the execution of a chattel mortgage in
favor of the DBP for the release of the buyer’s motorcycle loan. The Letter of Guarantee (Exh. 5) issued
by the DBP, reveals that the execution in its favor of a chattel mortgage over the purchased vehicle is a
pre-requisite for the approval of the buyer’s loan. If Norkis would not accede to that arrangement, DBP
would not approve private respondent’s loan application and, consequently, there would be no sale.
In other words, the critical factor in the different modes of effecting delivery, which gives legal effect to the
act, is the actual intention of the vendor to deliver, and its acceptance by the vendee. Without that
intention, there is no tradition (Abuan v. Garcia, 14 SCRA 759).

In the case of Addison v. Felix and Tioco (38 Phil. 404, 408), this Court held:jgc:chanrobles.com.ph

"The Code imposes upon the vendor the obligation to deliver the thing sold. The thing is considered to be
delivered when it is ‘placed in the hands and possession of the vendee.’ (Civil Code, Art. 1462). It is true
that the same article declares that the execution of a public instrument is equivalent to the delivery of the
thing which is the object of the contract, but, in order that this symbolic delivery may produce the effect of
tradition, it is necessary that the vendor shall have had such control over the thing sold that, at the
moment of the sale, its material delivery could have been made. It is not enough to confer upon the
purchaser the ownership and the right of possession. The thing sold must be placed in his control. When
there is no impediment whatever to prevent the thing sold passing into the tenancy of the purchaser by
the sole will of the vendor, symbolic delivery through the execution of a public instrument is sufficient. But
if, notwithstanding the execution of the instrument, the purchaser cannot have the enjoyment and material
tenancy of the thing and make use of it himself or through another in his name, because such tenancy
and enjoyment are opposed by the interposition of another will, then fiction yields to reality — the delivery
has not been effected." (Emphasis supplied.)

The Court of Appeals correctly ruled that the purpose of the execution of the sales invoice dated
September 20, 1979 (Exh. B) and the registration of the vehicle in the name of plaintiff-appellee (private
respondent) with the Land Registration Commission (Exhibit C) was not to transfer to Nepales the
ownership and dominion over the motorcycle, but only to comply with the requirements of the
Development Bank of the Philippines for processing private respondent’s motorcycle loan. On March 20,
1980, before private respondent’s loan was released and before he even paid Norkis, the motorcycle had
already figured in an accident while driven by one Zacarias Payba. Payba was not shown by Norkis to be
a representative or relative of private Respondent. The latter’s supposed relative, who allegedly took
possession of the vehicle from Norkis did not explain how Payba got hold of the vehicle on February 3,
1980. Norkis’ claim that Julian Nepales was acting as Alberto’s agent when he allegedly took delivery of
the motorcycle (p. 20, Appellants’ Brief), is controverted by the latter. Alberto denied having authorized
Julian Nepales to get the motorcycle from Norkis Distributors or to enter into any transaction with Norkis
relative to said motorcycle. (p. 5, t.s.n., February 6, 1985). This circumstances more than amply rebut the
disputable presumption of delivery upon which Norkis anchors its defense to Nepales’ action (pp. 33-34,
Rollo).

Article 1496 of the Civil Code which provides that "in the absence of an express assumption of risk by the
buyer, the things sold remain at seller’s risk until the ownership thereof is transferred to the buyer," is
applicable to this case, for there was neither an actual nor constructive delivery of the thing sold, hence,
the risk of loss should be borne by the seller, Norkis, which was still the owner and possessor of the
motorcycle when it was wrecked. This is in accordance with the well-known doctrine of res perit
domino.chanrobles virtual lawlibrary

WHEREFORE, finding no reversible error in the decision of the Court of Appeals in CA-G.R. No. 09149,
we deny the petition for review and hereby affirm the appealed decision, with costs against the petitioner.
SO ORDERED.
4. [ G.R. No. L-7756, July 30, 1955 ]

PHILIPPINE LONG DISTANCE TELEPH0NE COMPANY, PETITIONER, VS. CRISPIN JETURIAN, ET

AL., RESPONDENTS.

DECISION

REYES, J.B.L., J.:

Respondents Crispin Jeturian and others, numbering about sixty, filed in 1951 a petition in the Court of
Industrial Relations against the respondent Philippine Long Distance Telephone Co. (case No. 639-V)
claiming, as prewar employees of the said company, (1) monetary benefits allegedly due them under a
pension plan established on September 18, 1923, by the petitioner company's predecessor, Philippine
Telephone and Telegraph Co., later adopted by the Philippine Long Distance Telephone Co., and (2)
salaries allegedly due them from January 1946.

It is not controverted that on September 18, 1923, a "Plan for Employees Pensions" was adopted by the
original company, under which

"(b) All male employees (Natives of Philippine Islands or other brown skinned race) who have reached the
age of fifty years and whose term of employment has been twenty or more years and all female
employees (Natives of Philippine Islands or other brown skinned race) who have reached the age of forty-
five years and whose term of employment has been twenty or more years may, at their own request, ar at
the discretion of the directors, be retired from active service and become eligible to pensions."
(Petition p. 9)

the pension to be 1-1/2% of the average annual pay during the last five years preceding retirement (or in
the discretion of the Directors, the average of five years' highest wages) for each year of the term of
employment, to be paid from date of retirement to the death of the pensioner. Provision was also made
for disability pensions which are not here involved. Section 5 of the plan contained also the following
conditions:

"SECTION 5. General I revisions.

(1) Neither the action of the Board of Directors in establishing this plan for employees' pensions, nor any
action hereafter taken by the Board shall be construed as giving to any officer, agent or employee a right
to be retained in the service of the Company or any right or claim to any pension or other benefits or
allowance after discharge from the "service of the Company, unless the right to such pensions or benefits
has accrued prior to such discharge.

(2) Assignment of pension will not be permitted or recognized.

(3) Pensions may be suspended or terminated, in the discretion of the Directors, in case of gross
misconduct or of any conduct prejudicial to the interest of the Company,

xx xx xx xx

(5) Any absence from the service without pay, other than leave of absence or temporary lay-off as defined
in paragraphs six and seven of this Section, shall be considered as a break in the continuity of services,
unless the Directors specifically determine such absence as a leave of absence, and if any person is re-
employed after such a break in the continuity of his ervice, his term of employment shall be reckoned from
the date of such re-employment,

xx xx xx xx
(7) Temporary lay-off on account of reduction of force shall not be considered a break in the continuity of
the service, but when the period of absence from such cause exceeds four months in any twelve
consecutive months, the entire period of the absence shall be deducted in computing as temporary,
unless the employee is re-employed within such period as the rules "of the Company as adopted from
time to time, may require, not in any case exceeding one year. If the employee is not thus re-employed
the continuity of his service shall be deemed to have been broken."
(Petition pp. 11-12).

The Court below also found that in pursuance of the pension plan, the Company set up in its books a
"Provident Reserve" that as of October 31, 1941, stood at P221,074.14, and which the Court estimated to
be P224,074.14, by December 31, 1941. On November 6, 1945, however, the Board of Directors of the
Company adopted a resolution discontinuing the Employees' Pension plan and all payments thereunder,
effective retroactively as of January 1, 1942,—

"in view of the fact that almost 4 years have elapsed during which the operations of the Company have
been outside the jurisdiction of the elected Management, and since no revenue has been received by the
Company during that period."

None of the petitioners has satisfied the conditions of the plan on January 1, 1942, when the World Wan
broke out; but the Court of Industrial Relations found as a fact that the then Manager of the Telephone
Company, Major Stevenot, instructed the employees to stay with the Company even during the Japanese
Administration, for he would come back and, pursuant thereto, the employees worked with the company
during the occupation. The petitioners, however, were not recalled to service when the Company
resumed control of operations in 1946.

The Company filed at first a motion to dismiss on the ground that the war had terminated the relations
of Jeturian and his fellow petitioners and the Company, and hence, no relation of employer and employee
existed between them. This motion to dismiss having been disallowed, it petitioned for a writ of certiorari
from this Court (G.R. L-5697). The petition was dismissed for lack of merit on June 10, 1952.

Then, after trial on the merits and consideration of the evidence and the relevant facts, and "that an
unforeseen and uncontrollable event had set in to make its compliance impossible" for which no one
should be penalized, the Court below concluded that equity demanded that the Pension plan be liquidated
in favor of those who served the company up to 1941, and ordered pension payments to them to be made
in proportion to their respective ago and length of service, as of October 31, 1941. And as the Company
had not served termination notice of severance pay to its employees not reemployed, it ordered one
month's salary to be paid as severance pay, except for those who died, held other employment, or
refused to reenter the Company's service.

Against the final decision on the merits, the present petition for review was taken and ordered tote given
due course.

It is first submitted by the petitioner Telephone Company that the establishment of the pension plan did
not constitute a binding contract but was a mere offer of a gratuity to its employees; that the latter
acquired no vested right under the plan unless they complied with the conditions established therein and,
therefore, before any of the respondent employees did so, the Company was at liberty to cancel and
discontinue the pension plan.

We can not subscribe to this view. The pension plan was not a mere offer of gratuity by the company,
inspired by no other purpose than to benefit its employees. In reality, the plan sought to induce the
employees to continue indefinitely in the service of the company, and to spur them to greater efforts in its
service and increase zeal in its behalf. While the funds for the plan were wholly to be contributed by the
Telephone company, it does not necessarily follow that the latter would not derive material benefit from
the plan's operation: the company undoubtedly stood to benefit from diminished turnover of skilled labor,
the avoidance of long and costly training of apprentices, and the reduced cost of operation and
equipment, because the goodwill of the laborers tended to make them husband the company's physical
resources to the limit of their ability and control.

“c) Las participaciones que suelen dar los comerciantes a sus factores o dependientes en los productos
de sus Empresas mercantiles o de alguna determinada (dice en su primer Considerando la sentencia de
16 de febrero de 1899) no constituye donacion, en la acepcion legal de la ralabra, porque no tiene su
causa en una leberalidad, sino que, antes bien, obedecen a un movil interesado, cual es el de recabar
por el estimulo de la ganancia una cooperacion mas activa e inteligente que la que humanamente puede
esperarse de la retribucion fija, no acompañada de futuras, aunque aleatorias, ventajas."
(V Manresa, Com., 6th Ed. p. 102).

In our opinion, the plan ripened into a binding contract upon its implied acceptance of the employees. Not
being a donation, there is no statutory requirement that acceptance of the plan should be express. The
assent or acceptance of the employees is inferable from their entering the employ of the company, or
their stay therein after the plan was made known.

"It is plain that the pension plan was an integral part of the program for his employment. To say that it
constituted merely a nebulous inducement, unsupported by an intent to be bound by the provisions
mentioned, is to charge the employer with grossest fraud. This provision constituted a continuing part
consideration for the services rendered by the employee. It was a daily inducement to continuation of
service and to exertion to satisfy, which was successful for more than twenty- five years."
(Wilson vs. Wurlitzer Co. 194 NE. 441).

"A promise which the promisor should reasonably expect to induce action or forbearance of a definite and
substantial character on the part of the promisee and which does induce such action or forbearance is
binding if injustice can be avoided only by enforcement of the promise” (Am. Law Inst., Restatement on
Contracts, sec. 90).

And in Zwolanek vs. Baker Manufacturing Co., 44 LRA (NS) 1214, the Court cited numerous authorities in
support of its rule that:

"It is not necessary that the person performing the service for which a reward is offered should give notice
to the offerer that he accepts the offer; for in such case the party making the offer impliedly dispenses
with actual notice, and the doing of the act completes the contract."

That the right of the beneficiaries to the pension should be subjected to a condition suspensive or
precedent (attainment of age 50 and 20 years of service) and are not fully vested until the conditions are
fulfilled, does not authorize the conclusion that the Company may disregard the plan at will, as if it had
never been contracted, on the ground that until the conditions are met, it has no duties whatever toward
the employees., Under car law, even before the fulfillment of the conditions established by the plan, the
employees acquire an expectancy that is valuable, and one which the law protects. Thus, they may take
such action as may be appropriate to preserve their conditional right (old Civ. C. Art, 1121; new Code, Art,
1188); and if the promisor should voluntarily prevent the fulfillment of the condition, the same shall be
deemed fulfilled (Art. 1186, new Civil Code; Art. 119. old Civil Code). The conditional obligation to pay the
pension is one thing, and the contract or bargain producing such conditional obligation is quite another;
that the former should not arise until the condition is fulfilled, does not mean that the second is non-
existent. Neither does the fact chat the effects of the contract are unilateral mean that one party may
repudiate it at will (Cf. Liebenow vs. Philippine Vegetable Oil Co., 39 Phil. 60, 64).

"If a promise within the terms of sections 86-90 is in terms conditional or performable at a future time the-
promissor is bound thereby, but performance becomes due only upon the happening of the condition or
upon the arrival of the specified time."
(Amer. Law. Inst. Restatement on Contracts, sees. 90, 91,) (Emphasis supplied).

-----------------------
"It tends to induce employees to remain continuously in the employ of the same master, and to render
efficient services so as to minimize the probability of discharge, It also tends to relieve the employer of the
annoyance of hiring and breaking in new men to take the place of those who might otherwise voluntarily
quit, and to insure a full working force at times when jobs are plentiful and labor is scarce. . . . To allow
the employer in such case to repudiate liability on the ground stated would come perilously near conniving
at the perpetration of fraud, and no court should say that in such case the by-law merely affected the
corporation, and not third parties. . . . If corporation desire to have their so-called ‘by-laws' affect only the
corporation and its shareholders, then they should refrain from exploiting them to third persons for the
purpose of inducing such persons to act in reliance thereon."
(Zwolanek vs. Baker Mfg. Co. 44 LRANS. 1214).

-----------------------

"To construe the contract as allowing the defendant then ( before the close of the term) to terminate it
without sufficient cause, and thereby to deprive the plaintiff of the extra compensation, which was being
held back as a guaranty against his Quitting, would be to give the contract an oppressive and unnatural
effect, which can hardly be said to have been within the fair contemplation of the parties."
(Haag vs. Rogers. 72 S.E. 46)

The case at bar is clearly distinguishable from Hughes vs. Encyclopaedia Britannica, 199 Fed. (2d) 295;
in that there is no reservation of the employer’s right to alter or amend the plan at any time,, a privilege
expressly provided for in the case cited.

The situation confronting the Court of Industrial Relations was as follows: On the one hand, the employer
(Telephone Company) professed inability to proceed with the pension plan because of financial losses
incurred during the was, and had in fact decided to discontinue it as of 1942. On the other hand, the
Company's action disappointed legitimate expectations that the employees had built upon the
permanence of the pension plan; their faithfulness and loyalty in the past, resulting in benefits to the
company(as shown earlier in this opinion), demanded "adequate compensation. The Court below
concluded that the equitable solution to this conflict of interest was to provide for the proportional
distribution of the value of the pension rights that would have accrued to the employees had the plan
been carried out as originally intended. It therefore decreed that the prewar employees of the company be
paid according to the "proportion of the length of service rendered and the age of petitioners concerned
as of October 31, 1941, to the service and age limit retirements of the Pension Plan".

We find no reversible error in this conclusion. Actually, the award complained of grants an indemnity to
the employees for the Company's repudiation of a contract upon which the employees had a right to rely.

"And it has been held that where the claimant has performed part of the service, and is prevented by the
offerer, or by these for whose acts he is responsible, from completing the work, he is entitled to the whole
reward or at least to compensation on quantum meruit. 34 Cys. 1750."
(Zwolanek v. Baker Mfg. Co., ante).

The petitioner Company argues that it can not be made liable except upon fulfillment of the condition
expressly set in the pension plan (age 50 and 20 service). But the Company that violated the contract with
its employees, by discontinuing the plan without their consent, is not in a position now to insist upon the
terms of the very contract it has bleached (cf. Bosque vs, Yu Chipeo, 14 Phil. 95).

In Justice to the Company, however, it must be understood that those of its prewar employees who
voluntarily severed their connections and left the service of the company before the outbreak of the war,
should be excluded from the ratable distribution ordered by the Court below. Likewise, those prewar
employees who died before the outbreak of the war? while the plan was in operation, must be regarded
as having forfeited pension privileges, it being apparent that they could not possibly fulfill the established
conditions and earn a pension even if the plan had continued in force, it is worthy of note that the plan, as
originally adopted, did not provide for death benefits of any sort; and even the pensions earned by those
who attained 50 years of age and 20 years of service ceased upon the death of the pensioner, and the
right to pension was not transmitted to their heirs (Sec. 4, par. 4).

The last issue tendered by the appellant Company, to the effect that the outbreak of the war terminated or
dissolved its employer-employee relationship with the respondent workers, has already been resolved
against it by this Court in Case G.R.No. L-5697, Philippine Long Distance Co, vs. Crispin Jeturian, et al.,
dismissing for lack of merit the Compay's petition for certiorari against eh order of the Court of Industrial
Relations, holding that the war produced no such dissolution of employer-employee relations, but merely
suspended the same.

Similarly, excuse that its war losses extinguished the Company's obligation to proceed with the pension
plan is not meritorious. Its obligation was a generic one (to pay money) and such obligations are not
extinguished by loss or inability to raise funds (new Civil Code, Art, 1263; Reyes vs. Caltex (Philippines)
Inc., 47 Off. Gaz. pp. 1193, 1200-1201).

With the sole modification that those prewar employees of the Philippine Long Distance Telephone Co.
who died or voluntarily left its service before the outbreak of the last war should be excluded from the
distribution of pension benefits, the decision of the Court of Industrial Relations is affirmed. Costs against
petitioner-appellant Philippine Long Distance Telephone Company, Inc.

____________________________________________________________________________________

CRIMINAL

1. G.R. No. L-2990         December 17, 1951

OSCAR ESPUELAS Y MENDOZA, petitioner,

vs.
THE PEOPLE OF THE PHILIPPINES, respondent.

Carlos P. Garcia, Cosme P. Garcia and B.E. Enerio for petitioner.

Office of the Solicitor Jesus A. Avanceña for respondent.

BENGZON, J.:

Article 142 of the Revised Penal Code punishes those who shall write, publish or circulate scurrilous libels
against the Government of the Philippines or any of the duly constituted authorities thereof or which
suggest or incite rebellious conspiracies or riots or which tend to stir up the people againts the lawful
authorities or to disturb the peace of the community.

The appellant Oscar Espuelas y Mendoza was, after trial, convicted in the Court of First Instance of Bohol
of a violation of the above article. The conviction was affirmed by the Court of Appeals, because
according to said court.

"About the time compromised between June 9 and June 24, 1947, both dates inclusive, in the town of
Tagbilaran, Bohol, Oscar Espuelas y Mendoza had his picture taken, making it to appear as if he were
hanging lifeless at the end of a piece of rope suspended form the limb of the tree, when in truth and in
fact, he was merely standing on a barrel (Exhibit A, C-I). After securing copies of his photograph,
Espuelas sent copies of same to several newspapers and weeklies of general circulation (Exhibit C, F, G,
H, I), not only in the Province of Bohol but also throughout the Philippines and abroad, for their publication
with a suicide note or letter, wherein he made to appear that it was written by a fictitious suicide, Alberto
Reveniera and addressed to the latter's supposed wife translation of which letter or note in hereunder
reproduced:

Dearest wife and children, bury me five meters deep. Over my grave don't plant a cross or put
floral wreaths, for I don't need them.

Please don't bury me in the lonely place. Bury me in the Catholic cemetery. Although I have
committed suicide, I still have the right to burried among Christians.

But don't pray for me. Don't remember me, and don't feel sorry. Wipe me out of your lives.

My dear wife, if someone asks to you why I committed suicide, tell them I did it because I was not
pleased with the administration of Roxas. Tell the whole world about this.

And if they ask why I did not like the administration of Roxas, point out to them the situation in
Central Luzon, the Leyte.

Dear wife, write to President Truman and Churchill. Tell them that here in the Philippines our
government is infested with many Hitlers and Mussolinis.lawphil.net

Teach our children to burn pictures of Roxas if and when they come across one.

I committed suicide because I am ashamed of our government under Roxas. I cannot hold high
my brows to the world with this dirty government.

I committed suicide because I have no power to put under Juez de Cuchillo all the Roxas people
now in power. So, I sacrificed my own self.

The accused admitted the fact that he wrote the note or letter above quoted and caused its publication in
the Free Press, the Evening News, the Bisayas, Lamdang and other local periodicals and that he had
impersonated one Alberto Reveniera by signing said pseudonymous name in said note or letter and
posed himself as Alberto Reveniera in a picture taken wherein he was shown hanging by the end of a
rope tied to a limb of a tree."

The latter is a scurrilous libel against the Government.  1 It calls our government one of crooks and
dishonest persons (dirty) infested with Nazis and a Fascistis i.e. dictators.

And the communication reveals a tendency to produce dissatisfaction or a feeling incompatible with the
disposition to remain loyal to the government. 2

Writings which tend to overthrow or undermine the security of the government or to weaken the
confidence of the people in the government are against the public peace, and are criminal not only
because they tend to incite to a breach of the peace but because they are conducive to the destruction of
the very government itself (See 19 Am. Law Rep. 1511). Regarded as seditious libels they were the
subject of criminal proceedings since early times in England. (V op. cit.).

As explained by Paterson, 3 ". . . the great factors of government, consisting of the Sovereign, the
Parliament, the ministers of state, the courts of justice, must be recognized as holding functions founded
on sound principles and to be defended and treated with an established and well-nigh unalterable
respect. Each of these great institutions has peculiar virtues and peculiar weaknesses, but whether at any
one time the virtue or the weakness predominates, there must be a certain standard of decorum reserved
for all. Each guarded remonstrance, each fiery invective, each burst of indignation must rest on some
basis of respect and deference towards the depository, for the time being, of every great constitutional
function. Hence another limit of free speech and writing is sedition. And yet within there is ample room
and verge enough for the freest use of the tongue and pen in passing strictures in the judgment and
conduct of every constituted authority."

Naturally, when the people's share in the government was restricted, there was a disposition to punish
even mild criticism of the ruler or the departments of government. But as governments grew to be more
representative, the laws of sedition became less drastic and freedom of expression strife continue to be
prohibited.

The United States punished seditious utterances in the act of July 14, 1798 containing provisions parallel
to our own article 142. Analogous prohibitions are found in the Espionage Act of June 1917 and the
seditious libel amendment thereto in May, 1918.

Of course such legislation despite its general merit is liable to become a weapon of intolerance
constraining the free expression of opinion, or mere agitation for reform. But so long as there is a
sufficient safeguard by requiring intent on the part of the defendant to produce illegal action-such
legislation aimed at anarchy and radicalism presents largely a question of policy. Our Legislature has
spoken in article 142 and the law must be applied.

In disposing of this appeal, careful thought had to be given to the fundamental right to freedom of speech.
Yet the freedom of speech secured by the Constitution "does not confer an absolute right to speak or
publish without responsibility whatever one may choose." It is not "unbridled license that gives immunity
for every possible use of language and prevents the punishment of those who abuse this freedom. 4" So
statutes against sedition have guaranty, although they should not be interpreted so as to agitate for
institutional changes. 5

Not to be restrained is the privilege of any citizen to criticize his government officials and to submit his
criticism to the "free trade of ideas" and to plead for its acceptance in "the competition of the market."
However, let such criticism be specific and therefore constructive, reasoned or tempered, and not a
contemptuous condemnation of the entire government set-up. Such wholesale attack is nothing less than
an invitation to disloyalty to the government. In the article now under examination one will find no
particular objectionable actuation of the government. It is called dirty, it is called a dictatorship, it is called
shameful, but no particular omissions or commissions are set forth. Instead the article drip with male-
violence and hate towards the constituted authorities. It tries to arouse animosity towards all public
servants headed by President Roxas whose pictures this appellant would burn and would teach the
younger generation to destroy.

Analyzed for meaning and weighed in its consequences the article cannot fail to impress thinking persons
that it seeks to sow the seeds of sedition and strife. The infuriating language is not a sincere effort to
persuade, what with the writer's simulated suicide and false claim to martyrdom and what with is failure to
particularize. When the use irritating language centers not on persuading the readers but on creating
disturbances, the rationable of free speech cannot apply and the speaker or writer is removed from the
protection of the constitutional guaranty.

If it be argued that the article does not discredit the entire governmental structure but only President
Roxas and his men, the reply is that article 142 punishes not only all libels against the Government but
also "libels against any of the duly constituted authorities thereof." The "Roxas people" in the Government
obviously refer of least to the President, his Cabinet and the majority of legislators to whom the adjectives
dirty, Hitlers and Mussolinis were naturally directed. On this score alone the conviction could be upheld. 6
As heretofore stated publication suggest or incites rebellious conspiracies or riots and tends to stir up
people against the constituted authorities, or to provoke violence from opposition who may seek to silence
the writer. 7 Which is the sum and substance of the offense under consideration.

The essence of seditious libel may be said to its immediate tendency to stir up general discontent to the
pitch of illegal courses; that is to say to induce people to resort to illegal methods other than those
provided by the Constitution, in order to repress the evils which press upon their minds. 8

"The idea of violence prevades the whole letter" says Justice Paredes of the Court of Appeals. "The mere
fact that a person was so disgusted with his "dirty government" to the point of taking his own life, is not
merely a sign of disillusionment; it is a clear act to arouse its readers a sense of dissatisfaction against its
duly constituted authorities. The mention made in said letter of the situation in Central Luzon, the
Hukbalahaps, Julio Guillen and the banditry in Leyte, which are instances of flagrant and armed attacks
against the law and the duly constituted authorities cannot but be interpreted by the reading public as an
indirect justification of the open defiance by the Hukbalahaps against the constituted government, the
attempt against the life of President Roxas and the ruthless depredations committed by the bandits of
Leyte, thus insinuating that a state on lawlessness, rebellion and anarchy would be very much better than
the maladministration of said President and his men.

To top it all, the appellant proclaimed to his readers that he committed suicide because he had "no power
to put under juez de cuchillo all the Roxas people now in power." Knowing, that the expression Juez de
Cuchillo means to the ordinary layman as the Law of the Knife, a "summary and arbitrary execution by the
knife", the idea intended by the appellant to be conveyed was no other than bloody, violent and
unpeaceful methods to free the government from the administration of Roxas and his men.

The meaning, intent and effect of the article involves maybe a question of fact, making the findings of the
court of appeals conclusive upon us. 9

Anyway, it is clear that the letter suggested the decapitation or assassination of all Roxas officials (at least
members of the Cabinet and a majority of Legislators including the Chief Executive himself). And such
suggestion clinches the case against appellant.

In 1922 Isaac Perez of Sorsogon while discussing political matter with several persons in a public place
uttered theses words: "Filipinos must use bolos for cutting off Wood's head" — referring to the them
Governor-General, Leonard Wood. Perez was found guilty of inciting to sedition in a judgment of this
court published in Volume 45 of the Philippine Reports. That precedent is undeniably opposite. Note that
the opinion was penned by Mr. Justice Malcolm probably of speech. Adopting his own words we could
say, "Here the person maligned by the accused is the Chief Executive of the Philippine Islands. His
official position, like the President of the United States and other high office, under form of government,
instead of affording immunity from promiscuous comment, seems rather to invite abusive attacks. But in
this instance, the attack on the President passes the furthest bounds of free speech and common
decency. More than a figure of speech was intended. There is a seditious tendency in the words used,
which could easily produce disaffection among the people and a state of feeling incompatible with a
disposition to remain loyal to the Government and obedient to the laws."

The accused must therefore be found guilty as charged. And there being no question as to the legality of
the penalty imposed on him, the decision will be affirmed with costs.

Pablo, Padilla, Montemayor and Reyes, JJ., concur.

Jugo, J., concurs in the result.

 
 

Separate Opinions

TUASON, J.,  dissenting:

Article 142 of the Revised Penal Code, as amended, entitled "Inciting to Sedition", provides:

The penalty of prision correccional  in its maximum period and a fine not exceeding 2,000 pesos
shall be imposed upon any person without taking any direct part the crime of sedition, should
incite others to the accomplishment of any of the acts which constitute sedition, by means of
speeches, proclamations, writings, emblems, cartoons, banners, or other representations tending
to the same end, or upon any person or persons who shall utter seditious words or speeches,
write, publish, or circulate scurrilous libels against the Government of the United States or the
Government of the Commonwealth of the Philippines, or any of the duly constituted authorities
thereof, or which tend to disturb or obstruct any lawful officer in executing the functions of his
office, or which tend to instigate others to cabal and meet together for unlawful purposes, or
which suggest or incite rebellious conspiracies or riots, or which lead or tend to stir up the people
against the lawful authorities or to disturb the peace of the community, the safety and order of the
Government, or who shall knowingly conceal such evil practices.

In the case of U.S. vs. Dorr, 2 Phil., 332, this Court traced the origin and history of the predecessor of
Article 142 and expounded its meaning. Mr. Justice Ladd, who wrote the decision, said:

Several allied offenses or modes of committing the same offense are defined in that section, viz:
(1) The uttering of seditious words or speeches; (2) the writing, publishing, or circulating of
scurrilous libels against the Government of the United States or the Insular Government of the
Philippines Islands; (3) the writing, publishing or circulating of libels which tend to disturb or
obstruct any lawful officer in executing his office; (4) or which tend to instigate others to cabal or
meet together for unlawful purposes; (5) or which suggest or incite rebellious conspiracies or
riots; (6) or which tend to stir up the people against the lawful authorities or to disturb the peace of
the community, the safety and order of the Government; (7) knowingly concealing such evil
practices.

Referring to case (2) — scurrilous libels against the Government of the United States or the Insular
Government of the Philippines Islands which the Court said may stand on a somewhat different footing
from the rest-the Court went on to say:

In the determination of the question we have encountered great difficulty, be reason of the almost
entire lack of American precedents which might serve as a guide in the construction of the law.
There are, indeed, numerous English decisions, most of them of the "Government, the
constitution, or the law generally," attacks upon the Houses of Parliament, the Cabinet, the
Established Church, and other governmental organisms, but these decisions are not now
accessible to us, and, if they were, they were made under such different conditions from which
prevail at the present day, and are founded upon the theories of government so foreign to those
which have inspired the legislation of which the enactment in question forms a part, that they
would probably afford but little light in the present inquiry. In England, in the latter part of the
eighteenth century, any "written ensure upon public men for their conduct as such", as well as
any written censure "upon the laws or upon the institutions of the country," would probably have
been regarded as a libel upon the Government. (2 Stephen, History of the Criminal Law of
England, 348.) This has ceased to be the law in England, and it is doubtful whether it was ever
the common law of any American State. "It is true that there are ancient dicta to the effect that
 any publication tending to 'posses the people with an ill opinion of the Government' is a seditious
libel (per Holt, C.J., in R. vs. Tuchin, 1704 St. Tr., 532, and Elenborough, C.J., in R. vs. Cobbet,
1804, 29 How. St. Tr., 49), but no one would accept that doctrine now. Unless the words used
directly tend to foment riot or rebellion or otherwise to disturb the peace and tranquility of the
Kingdom, the utmost lattitude is allowed in the discussion of all public affairs." (11 Enc. of the
Laws of England 450.) Judge Cooley says (Const. Lim., 901): "The English common law rule
which made labels on the constitution or the government indictable, as it was administered by the
courts, seems to us unsuited to the condition and circumstances of the people of America, and
therefore never to have been adopted to the States."

After citing the Act of Congress of July 14, 1798, commonly and historically known as the "Sedition Act,"
and after nothing that "the term 'government' would appear to be used here in the abstract sense of the
existing political system, as distinguished from the concrete organisms of the Government — the House
of Congress and the Executive — which are also specially mentioned," the Court reached the opinion that
"this is the (abstract) sense in which the term is used in the enactment under consideration." The Court
pointed out that, "while libels upon forms government, unconnected with defamation of individuals, must
in the nature of things be of uncommon concurrence, the offenses is by no means imaginary one," and
cited a case (Republic vs. Dennie, 4 Yeates [Pa.], 267) in which the defendant was indicted for bringing
into contempt and hatred the independence of the United States, the constitution  of this Commonwealth
and of the United States; for exciting popular discontent and dissatisfaction against the scheme of polity
instituted; for condemning the principles of the Revolution, and revailing the characters of the patriots and
statesmen; for endangering, subverting, and totally destroying the republican constitutions and  free
governments  of the said United States and the Commonwealth of Pennsylvania.

In consonance with the principles laid down, the Court held that the article published by Dorr, in which he
virulently attacked the policy of the Civil Commission in appointing Filipinos to office, did not come within
the purview of the law, although it "may have had the effect of exciting among certain classes
dissatisfaction with the Commission and its measures." It found that there was nothing in the article which
could "be regarded as having a tendency to produce anything like what mat be called disaffection, or,
other words, a state of feeling incompatible with a disposition to remain loyal to the Government and
obedient to the laws."

The message which the accused herein caused to be published with his picture contained no libel or
criticism against the instituted system of government as distinct from the administration. On the contrary,
the gist of the message was that the author was desperate and was going to kill himself because many
men in the government were following the practices of absolute and despotic rulers in other parts of the
world. He wanted President Truman and Mr. Churchill, leading exponents of such democratic institutions
as are consecrated in the Philippine Constitution, to be informed that President Roxas and others in his
administration were unfaithful to the tenets of constitutional government. He pointed to the turbulent
situation in Central Luzon, the rampant banditry in Leyte, the attempted assassination of President Roxas
by Guillen, etc., not as examples to be emulated to be emulated but as the direct outcome of what he
claimed widespread graft and corruption in the Government. He pretended to have decided to take his life
because he was impotent to remedy or suppress this deplorable state of affairs, and he ashamed of the
way the Government was being conducted. He likened some men in the Government, whom he did not
specify, to Hitler and Mussolini, not that he idolized those notorious characters but because, he felt, evil
forces that undermined the ideas and ideals of the Constitution were at work in our republic. In short, far
from advocation the overthrow or change of the present scheme of polity, the article evinced intense
feeling of devotion to the welfare of the country and its institutions.

President Roxas was the only official named in the article. But the defendant did not counsel violence in
his reference to the President and the unnamed officials. In his statement to the effect that he was going
to kill himself because he could not kill President Roxas and the men who surrounded the Executive, it is
not a necessary deduction that he wished others to do it. Let it be remembered that the message was
addressed to the writer's "wife" and "children" who, it turned out, were imaginary.
At best, the meaning of the sentence is doubtful and the norm is that, where the defendant's intention is
ambiguous he should be given the benefit of the doubt. The courts may not subject an act or utterance to
a microscopic examination in an endeavor to find in it germs of seditious utmost caution is called for lest
the freedom of expression be impaired. Although statutes against sedition have been held not to violate
the constitutional guaranty to the freedom of expression, the courts are warned to so construe or interpret
them as not to abridge that freedom. (33 C.J., 164, citing U.S. vs. Apurado et al., 7 Phil., 422.) It is
axiomatic that the Constitution is the paramount law and that legislation has to be adjusted thereto.
Accordingly in the solution of clashes, which frequently occur, between liberty or free speech and
prosecution for sedition, the criterion, it is submitted, should be the presence or absence of real, not
imaginary, danger of the utterance materializing or inciting others to disloyalty to the Government and its
laws.

There is no inciting to sedition unless, according to Mr. Justice Holmes' theory expressed in connection
with a similar topic, "the words used are used in such circumstances and are of such a nature as to create
clear and present danger that they will bring about the substantive evils that Congress has a right to
prevent." In the very law punishing inciting to sedition there is the requirement that the words alleged to
be seditious or libelous lead  or tend  to the consummation of the evils sought to be prevented. Even in the
ordinary offenses of threat and defamation, words are not taken at face value, but their import or gravity is
gauged by the circumstances surrounding each particular case.

The term "lead" and "tend" are used in Article 142 of the Revised Penal Code in their ordinary
signification. Thus understood, lead as a verb means "to draw or direct by influence" or "to prevail on,"
and tend means "to conduce to an end." (Webster's International Dictionary.)

Judge by these tests, and granting for the present purposes that the defendant did intend to incite others
to sedition, the article was harmless as far as the safety of the Government and its officers was
concerned, and should have been ignored, as many others more serious than this one have been. The
message, like an evil imagining from which no harm proceeds except to the individual himself, was not
conducive to the attainment of the prisoner's aims. If words are "the keys of persuasion" and "the triggers
of action," the article under consideration was far from possessing either of these qualities, taking into
consideration the personality do the man who wrote it and what he "did." that the while thing was comical
if it were not "tragic." The general reaction, it is fairly safe to say, was one of regret for a man of eccentric
and unbalanced mind or ridicule and curiosity for a grosteque stunt. The witnesses for the Government
themselves, some of whom were constabulary officers stationed at Tagbilaran, stated that upon reading
the article and seeing the author's picture they just laughed it off, "thinking that this fellow must be crazy."
That was akin to our own reaction, and there is little or no doubt that it exemplified the general effect upon
the minds of other readers of the article. It is certain that none would commit a rash act upon a vague
suggestion of a man who hanged himself and whom they had never heard of before, while those who had
known him, like the constabulary officers above mentioned, were that the picture was a fake and though
the subject was a crank.

Attack more serious, virulent and inflamatory than the one at bar, by persons well known in politics and
public life and having influence and large following, have frequently appeared in the press or been
launched on the platforms. What the defendant did or said was very tame and mild by comparison.
Nevertheless, those critics have not been brought to court; and it is to the everlasting credit of the
administration and, in the long run, for the good of the Government, that the parties reviled and the
prosecutors have adopted a tolerant attitude. A well-known author on criminal law quoting classical
writers on the same subject has truly said:

Yet while such is no doubt the law, prosecutions of this class have recently fallen, in England as
well as in the United States, for several reasons, into disuse. In the first place, it is now generally
felt that unless criticism be permitted to penetrate even to the foundations of government,
revolution rather than reform may result. Time, says Bacon, is the greatest of destructives; and
truth is to be constantly employed in repairing
the breaches which time makes. The wise conservative, therefore, is often apparently the most
 destructive radical; as he is the most prudent repairer who, when the piers of a bridge are
weakend by a storm, advices that the work of reconstruction should begin at the foundation. To
prevent the application of revolutionary criticism to government is of all modes of government the
most revolutionary. And closely allied with this position is another, that among countries used to
freedom libels only begin to bring the state into contempt when they are prosecuted by the state
as contemptuos. The sedition laws, for instance, were among the Chief causes of the overthrow
of the administration of John Adams; and their repeal one of the chief causes of the popularity of
that of Jefferson. If, however, seditious libels are to be prosecuted, it is well to keep in mind the
noble words of princes from whose edicts the English common law, imbued as it is in so many
other respects with the spirit of freedom, has much, in reference to the law of libel, to learn:
"Imppp. Theodosius, Arcarius et Honorius, A.A.A. Rufino P.P. Si quis modetiae nescius et pudoris
ignarus improbo petulantique maledicto nomina nostra crediderit lacessenda, ac temulentia
trubulentus obtrectator temporum nostrorum fuerit, eum poenae nolumus subiugari neque durum
aliquid nec asperum sustinere, quoniam, si ex levitate processerit, contemnedum est, si ex
insania, miseratione dignissium, si ab injuria, remittendum." (2 Wharton's Criminal Law Section
1947.)

In somewhat parallel vein is the dissent of Mr. Justice Holmes, joined in by Mr. Justice Brandeis, in
U.S. vs. Abrams, 250 U.S., 621, 629. Said Justice Holmes:

Persecution for the expression of opinions seems to me perfectly logical. If you have no doubt of
your premises or your power and want a certain result with all your naturally express your wishes
in law and sweep away all opposition. To allow opposition by speech seems to indicate that you
think the speech impotent, as when a man says that he has squared the circle, or that you do not
care whole heartedly for the result, or that you doubt either your power or your premises. But
when men have realized that time has upset many fighting faiths, they may some to believe even
more than they believe the very foundations of their own conduct that the ultimate good desired is
better reached by free trade in ideas — that the best test of truth is the power of the thought to
get itself accepted in the competition of the market, and that truth is the only ground upon which
their wishes safely can be carried out. That at any rate is the theory of our Constitution. It is an
experiment, as all life is an experiment. Every year if not every day we have to wager our
salvation upon some prophecy based upon imperfect knowledge. While that experiment is part of
our system I think that we should be eternally vigilant against attempts to check the expression of
opinions that we loathe and believe to be fraught with death, unless they so imminently threaten
immediate interference with the lawful and pressing purposes of the law that an immediate check
is required to save the country. I regret that I cannot put into more impressive words my belief
that in their conviction upon this indictment the
defendants were deprived of their rights under the Constitution of the United States.

Moreover, the subject of this prosecution does not reveal personal malice or hatred. Except for the "Juez
de Cuchillo" item which, like words coming from a babe's mouth, did not have the weight or chance to
sway the listeners, the article was but a statement of grievances against officials abuses and
misgovernment that already were of common knowledge and which more influential and responsible
speakers and writers had denounced in terms and ways more dangerous and revolutionary.

Paras, C.J., and Feria, J., concur.

2. [G.R. No. 36278. October 26, 1932.]

THE PEOPLE OF THE PHILIPPINE ISLANDS, Plaintiff-Appellee, v. CRISANTO EVANGELISTA, ET

AL., Defendants-Appellants.

Vicente Sotto for Appellants.

Attorney-General Jaranilla for Appellee.

SYLLABUS

1. COMMUNIST PARTY; SEDITION AND REBELLION; PURPOSE OF THE ASSOCIATION. — Under

the law of the Philippine Islands, the association formed by the appellants, Partido Komunista sa Pilipinas,
is clearly illegal. Article 188 of the Penal Code, as substituted by article 24 of the Royal Decree of
September 12, 1897 (Alcubilla, Diccionario de Administracion, Apendice de 1897, p. 454), says that illegal
associations are those the object of which is against public morals, to commit some crime, or to attack the
fundamental basis of the social order or alter the regularity of its functions. The purpose of such
association is to incite class struggle and to overthrow the present government by peaceful means or by
armed revolution; therefore the purpose of such association is to alter the social order and to commit the
crimes of rebellion and sedition. An association having such an object must necessarily be illegal.
(Decision of October 8, 1884, of the Supreme Court of Spain, 7 Hidalgo, Cod. Pen., 531, 532.)

2. ID.; ID.; PENALTY. — The trial court imposed the penalty of confinamiento for the period of eight years
and one day, as provided by paragraph 5, article 190 of the old Penal Code, as substituted by article 26 of
the Royal Decree of September 12, 1897, in connection with articles 28 and 114 of the same Code. This
was no error because the act took place under the sanction of the old Code and the penalty of
confinamiento therein provided for, is lighter than that provided by the new Code in its article 147, which is
prision correccional and arresto mayor and fine.

DECISION

OSTRAND, J.:

Crisanto Evangelista, Jacinto G. Manahan, Guillermo Capadocia, Mariano P. Balgos, Enrique Torrente,
Urbano Arcega, Catalino Monroy, Francisco Rafael, Sotero Senson, Remigio Tolentino, Dominador B.
Reyes, Emilio S. Juan, Alberto Santos, Juan Lagman, Andres Santiago, Angel Mesina, Felipe Cruz,
Maximo M. Gutierrez, Dominador J. Ambrosio, Cenon Lacanienta, Mateo del Castillo, Norberto Nabong,
Sixto Estrada, Augusto David, Doroteo Cahumban, Jose Ilagan, and Liboro Natividad were accused in
the Court of First Instance of the City of Manila of a crime against the fundamental laws of the State, it
being alleged in the information as follows:jgc:chanrobles.com.ph

"That on or about the 30th day of May, 1931, and for some time prior thereto, the above named accused,
conspiring and confederating together and helping one another, did then and there willfully, unlawfully and
feloniously affiliate to, compose and become members of, the so-called Communist Party of the
Philippines (Partido Komunista sa Pilipinas), an illegal association, whose principal purposes and objects
are to bring about, by the use of force, the downfall of the present form of government and establish of
Russia and run by those affiliated to and in sympathy with said association; to incite a revolt of the
laboring class, advocating and urging struggle between said laboring class and the so-called capitalists,
and other similar objects tending to combat the fundamental basis of the present social order and alter the
regularity of its functions and to the commission of violations of the existing laws, which above-mentioned
association was formed and organized without the legal authorities having been informed of its aforesaid
objects and purposes as well as of the by-laws thereof; and that at the time and place hereinabove
mentioned, in the furtherance of their conspiracy and in utter disregard of the notice or warning given by
the authorities that they could not hold any meeting anywhere, the said accused assembled, gathered
and congregated under the name and auspices of the Katipunan ñg mga Anak pawis sa Pilipinas
(Association of the Sons of the Sweat of the Philippine Islands), another association having the same
illegal aims and purposes as the said Communist Party of the Philippines, at El Retoño Building, in said
City of Manila."cralaw virtua1aw library
After trial the court below convicted the said accused, with the exception of Norberto Nabong, Sixto
Estrada, Augusto David, Doroteo Cahumban, Jose Ilagan, Liboro Natividad, and Mateo del Castillo, who
were acquitted.

Thereafter the convicted accused appealed to this court. The accused were charged with the crime of
illegal association in the Court of First Instance of the City of Manila in that on or about the 30th day of
May, 1931, and for some time prior thereto, the said accused affiliated to, and became members of, the
so-called Communist Party of the Philippines whose principal purposes and object were to bring about by
force the downfall of the present form of government and establish in its place another patterned after the
Soviet Government of Russian, and to incite a revolt of the laboring class.

After trial the court below convicted the said accused, with the exception of Norberto Nabong, Sixto
Estrada, Augusto David, Doroteo Cahumban, Jose Ilagan, Liboro Natividad, and Mateo del Castillo, who
were acquitted.

It appears that the appellants, Evangelista, Manahan, Capadocia, Torrente, Arcega, Monroy, Rafael,
Senson, Tolentino, Reyes, San Juan, Santos, Lagman, Santiago, Mesina, Cruz, Gutierrez, and Ambrosio,
presented themselves as candidates of the Communist Party for different offices — insular, provincial and
municipal — in the last elections; that the accused Mariano P. Balgos, Cenon Lacanienta and some of
those who campaigned for their candidacies as members of the Communist Party, delivered speeches at
several meetings of the Communist Party, advocating the ideas and principles of the said Communist
Party and urging the laborers to join it.

It also appears that the appellant Enrique Torrente appears in the newspaper known as Titis, an organ of
the Communist Party, as the editor thereof.

The appellants have not denied being members of the Communist Party of the Philippines; on the
contrary, Crisanto Evangelista admitted expressly at the trial that the he was affiliated to the said party. As
witness for the defense, he testified that the objects and purposes of the Communist Party of the
Philippines are set out in its constitution and by-laws which purposes and objects, according to said
constitution and by-laws, are to overthrow the present form of government by any means necessary,
especially armed revolution.

The appellant, Catalino Monroy, admitted having gone to Russia as delegate of the Kapisanan nang mga
Anak pawis to the Red International Labor Union Congress.

From the foregoing it is clear that the twenty appellants herein are or were members of the Communist
Party of the Philippines, for all of them, with the exception of Balgos and Lacanienta, presented
themselves as candidates in the last general elections as communists, and said Balgos and Lacanienta,
as well as many of those mentioned, delivered speeches at several meetings held under the auspices of
the said Communist Party, advocating communism and urging the laborers to affiliate to the said party. If
any one of these appellants were not a member of the Communist Party, it would have been very easy for
him to deny it, but no one has so done.

The principal defense set up by the appellants is that the Communist Party of the Philippines is not an
illegal association in that it preaches only a social but not an armed revolution, but a mere reading of the
constitution of the Communist Party will show that such a pretense is obviously useless. Neither is there
any merit in the appellants’ argument that communist is not prohibited in any part of the civilized world.
And as to the validity of the law prohibiting communism, the Supreme Court of the United States upheld
the law of California prohibiting the display of the communist red flag as a sign inciting sedition and
disorderly opposition to the government.
Under the law of the Philippine Islands, the association formed by the appellants is clearly illegal. Article
188 of the Penal Code, as substituted by article 24 of the Royal Decree of September 12, 1897 (Alcubilla,
Diccionario de Administracion, Apendice de 1897, p. 454), says that illegal associations are those the
object of which is against public morals, to commit some crime, or to attack the fundamental basis of the
social order or alter the regularity of its functions. Now, according to appellant Crisanto Evangelista and
the constitution and by-laws of the Communist Party of the Philippines, the purpose of the party is to incite
class struggle and to overthrow the present government by peaceful means or by armed revolution;
therefore the purpose of the party is to alter the social order and to commit the crimes of rebellion and
sedition. An association having such an object must necessarily be illegal (decision of Oct. 8, 1884, of the
Supreme court of Spain, 7 Hidalgo, Cod. Pen., 531-532.) The report submitted by Secretary Hughes to
the Senate of the United States, as well as that made by Hamilton Fish, after an investigation of
communism, leads to the same conclusion, namely, that force and violence are inseparable from
communist programs.

The last point made by the appellants is relative to the penalty imposed. The trial court imposed the
penalty of confinamiento for the period of eight years and one day, as provided by paragraph 5, article
190 of the old Penal Code, as substituted by article 26 of the Royal Decree of September 12, 1897, in
connection with articles 28 and 114 of the same Code. The appellants contend that this is erroneous
because the Revised Penal Code has eliminated this kind of penalty. But there is no merit in this
argument, because the act took place under the sanction of the old Code, and the penalty of
confinamiento, therein provided for, is lighter than that provided by the new Code in its article 147, which
is prision correccional and arresto mayor and fine.

The judgment appealed from is affirmed, with the costs against the twenty defendants. So ordered.

Avanceña, C.J., Street, Malcolm, Villamor, Villa-Real, Hull, Vickers and Imperial, JJ., concur.

3. [G.R. No. 1513. February 12, 1904. ]

THE UNITED STATES, Complainant-Appellee, v. CASIANO SADIAN, Defendant-Appellant.

Juan Sumulong, for Appellant.

Solicitor-General Araneta, for Appellee.

SYLLABUS

1. CRIMINAL LAW; FORMATION AND SECRET POLITICAL SOCIETY. — The accused, together with
several others, organized a secret political society having for its purpose the promotion of rebellion
against the authority of the Government of the Philippine Islands, and induced others to join the society:
Held, that the facts constitute the offense defined and purchased by section 9 of Act No. 292.

DECISION
TORRES, J.  :
The provincial fiscal of Ilocos Norte filed an information in the Court of First Instance of that province,
charging Casiano Sadian, Monico Dada, Roman Dacpo, Basilio Sanchez, and Damian Tabonan with
having formed a secret political society, in the during the latter part of June and early in July, 1903, they
met together with others in the forests of some of the barrios of the town of Paoay, Ilocos Norte, for the
purpose of forming a secret political society entitled "Kanayonan," the purpose of which was to obtain the
independence of the Philippines by means of insurrection, treason, and rebellion against the Government
of the United States of America in these Islands, this against the provisions of Act No. 292 of the Civil
Commission.

The trial having commenced, Ariston Umayan under oath testified that on Sunday, July 5, 1903, upon
going to a house belonging to a brother of his in the barrio called Pias, Casiano Sadian, Sergio Sadang,
and Sergio Sancali came to the house, and that upon the invitation of Sadang they all went out into a
cane field; that shortly after Casiano Sadian arrived and asked the witness if he desired to join them, and
he, being afraid, said that he did. Whereupon, in proof of his affiliation, Casiano made an incision in his
forearm and then wrote the name of the witness with his own blood; the witness making his cross under
his name; that Sadian then told him that he was to defend his mother country and fight the Americans;
that on this occasion Sergio Sadang and the five accused were present, and that they surrounded him, all
armed with clubs; that on the following day, the 6th, they took him into the Cabuit forest, and that shortly
after Gavino Umayam arrived in charge of Valentin Butardo, and that they made a similar incision in his
arm, he being surrounded by the accused, who were at that time armed with bolos and clubs; that after
this operation they went with the witness to Gavino’s hut, and while they were eating the latter told the
witness in private to go and report the facts to the Constabulary stationed at Badoc, which he did. This
witness also testified that Valentin Butardo, as well as Casiano, asked him if he wanted to fight the
Americans, and that he, being afraid, said that he did; that the leader of them was Sergio Sadang.

Valentin Butardo testified under oath that the defendants had joined the society or party organized by him
and his brother Canuto, and that they did this voluntarily; he identified the documents, translations of
which appear in the record — the originals are in other cases. The witness stated that he sought out the
accused to induced them to join his party in preparation for the coming presidential elections, and made
the incision in their arms to bind the obligation so that they should not abandon him on election day, but
denied that he with the others compelled Ariston Umayam and his brother to join the party, and stated
that their names were not on the list, that they had not taken the oath, and that it was not true that they
had gone through the ceremony of incision.

Sergio Sadang testified under oath that Valentin Butardo was the one who made the incision in the arm of
Areston Umayam when the latter took the oath as a member of the party which they had organized, but
immediately afterwards testified that Casiano Sadian was the one who made the incision in Umayam’s
arm while he, the witness, but not the other accused, was present. Sergio Sancali testified that he did not
know whether Areston Umayam was a member of said party, and only knew by hearsay that the accused
were members of it.

The facts upon which the accusations are based, and which have been established by the testimony of a
number of witnesses, constitute the crime defined and punished by section 9 of Act No. 292, dated
November 4, 1901. The evidence plainly shows that Casiano Sadian, with Valentin Butardo, Sergio
Sadang, and others, organized a secret political society for the purpose of fomenting rebellion against the
constituted government of these Islands and to obtain the independence of the Islands by means of
revolution and war, and that with this purpose in view they endeavored to induce others to join the party
and to increase the number of members, making incisions in their arms and obliging them to take an oath
to defend the country and to fight against the Americans. These acts, fully established by the evidence,
fall within the provisions of section 9 of the Act.

The facts related do not constitute the crime of conspiracy defined and punished in section 4 of the same
Act, as no act of conspiracy falling within the section was committed by the defendants.

Casiano Sadian, the teniente of the barrio of Gaang, plead not guilty and testified that Areston Umayam’s
statements were not true; that he was not present at the time to which the witness referred; that he made
the incision in the arm of the witness Valentin Butardo as a sign of fraternity, believing that their purpose
in connection with the election of a president was a proper one, and that several other persons went
through the ceremony of incision, among them the other accused; that at the time this ceremony was
performed an oath was taken to defend the mother country with the last drop of blood; he denied that he
had accompanied Valentin Butardo in making incisions in the arms of other persons, and that the only
persons who had done this by force and violence were Valentin Butardo, Sergio Sadang, Juan Navarro,
and Ruperto Madamba.

Roman Tabaoan, Roman Dacpo, Monico Dado, and Basilio Sanchez testified that at the instance of
Valentin Butardo they joined the party which he and others had formed, and that for this purpose they
took an oath binding themselves to defend the country with their lives, but denied having been present
when the ceremony of incision was performed on Ariston Umayam, and that they were unaware that this
ceremony was peculiar to the revolutionists. These four defendants did not appeal from the judgment of
the court below, and therefore as to them the decision of the court is final, and this appeal is limited to the
appellant, Casiano Sadian.

Notwithstanding the denial of the accused Sadian, the evidence of his guilt is more than sufficient. It
shows that she was one of the men who organized the secret political society entitled "Kanayonan," and
that he was one of those actively engaged in obtaining proselytes among his fellow-townsmen, availing
himself of his office as teniente of the barrio and availing himself of the ignorance of his neighbors. For
the purpose of organizing the society he acted with criminal intent, with full knowledge and the determined
purpose of fomenting a rebellion against the government in these Islands, and consequently he is subject
to the personal and pecuniary penalty established by section 9 of the Act No. 292.

Therefore, for the reason stated, we are of the opinion that the judgment appealed must be reversed in so
far as it concerns Casiano Sadian, and that latter must be convicted and condemned to one year’s
imprisonment and to pay a penalty of 2,000 insular pesos, and in case of insolvency to suffer
imprisonment at the rate of one day for each 2 1/2 pesos which he may be unable to pay, the subsidiary
imprisonment, however, in no case to exceed the third part of the period of the principal penalty, in
accordance with the provisions of article 50 of the Penal Code. He is also condemned to the payment of
one-fifth of the costs of both instances. The case will in due time remanded with a certified copy of this
decision and of the judgment to be entered hereon. So ordered.

Arellano, C.J., Cooper, Willard, Mapa, McDonough and Johnson, JJ., concur.