1.

CHRYSLER PHILIPPINES CORPORATION, petitioner,

vs.
THE HONORABLE COURT OF APPEALS and SAMBOK MOTORS CO. (BACOLOD), respondents,

Reyes, Santayana, Tayao & Picazo Law Office for petitioner.

Alampay, Alvero & Alampay Law Office for private respondent.

MELENCIO-HERRERA, J:

Subject of this Petition for Review is the Decision of the then Court of Appeals in CA-G.R. No. 65328-R
reversing the judgment of the then Court of First Instance of Rizal, Branch XX, in Civil Case No. 16624, and
dismissing petitioner Chrysler Philippines Corporation's suit for Damages against private respondent Sambok
Motors Company (Bacolod) arising from breach of contract.

Petitioner is a domestic corporation engaged in the assembling and sale of motor vehicles and other automotive
products. Respondent Sambok Motors Co., a general partnership, during the period relevant to these
proceedings, was its dealer for automotive products with offices at Bacolod (Sambok, Bacolod) and Iloilo
(Sambok, Iloilo). The two offices were run by relatives. Miguel Ng was Assistant Manager for Sambok, Bacolod,
while an elder brother, Pepito Ng, was the President. 1

On September 7, 1972, petitioner filed with the Court of First Instance of Rizal, Branch XX, Pasig, Rizal, a
Complaint for Damages against Allied Brokerage Corporation, Negros Navigation Company and Sambok,
Bacolod, alleging that on October 2, 1970, Sambok, Bacolod, ordered from petitioner various automotive
products worth P30,909.61, payable in 45 days; that on November 25, 1970, petitioner delivered said products
to its forwarding agent, Allied Brokerage Corporation, for shipment; that Allied Brokerage loaded the goods on
board the M/S Doña Florentina, a vessel owned and operated by Negros Navigation Company, for delivery to
Sambok, Bacolod; that when petitioner tried to collect from the latter the amount of P31,037.56, representing the
price of the spare parts plus handling charges, Sambok, Bacolod, refused to pay claiming that it had not
received the merchandise; that petitioner also demanded the return of the merchandise or their value from Allied
Brokerage and Negros Navigation, but both denied any liability.

In its Answer, Sambok, Bacolod, denied having received from petitioner or from any of its co-defendants, the
automotive products referred to in the Complaint, and professed no knowledge of having ordered from petitioner
said articles.

Upon a Joint Motion to Dismiss filed by petitioner and Allied Brokerage, the Trial Court. on October 23, 1975,
dismissed the case with prejudice against Allied Brokerage for lack of cause of action, and also dismissed the
latter's counterclaim against petitioner.

On July 31, 1978, the Trial Court rendered its Decision dismissing the Complaint against Negros Navigation for
lack of cause of action, but finding Sambok, Bacolod, liable for the claim of petitioner, thus:

PREMISES CONSIDERED, the Court renders judgment as follows:

(1) The complaint against defendant Negros Navigation is dismissed for lack of cause of action.

(2) Defendant Sambok Motors Co. (Bacolod) is ordered to pay plaintiff Chrysler Philippines
Corporation:

(a) The sum of Thirty-One Thousand Thirty Seven Pesos and Fifty Six Centavos
(P31,037.56) with interest at the rate of twelve percent (12) per annum from
January 1, 1971 until fully paid;

(b) The sum of Five Thousand Pesos as and for attorney's fees and expenses of
litigation;

(c) The costs of the suit.

 (3) The counterclaim of defendant Negros Navigation and Sambok Motors Co. (Bacolod) are
dismissed for lack of merit.

The case against Negros Navigation was dismissed for failure of petitioner and Sambok, Bacolod, to file the
necessary notices and claims as conditions precedent for a judicial action. 2

On the other hand, the Trial Court found that the act of Sambok, Bacolod, "in refusing to take delivery of the
shipment for no justifiable reason from Negros Navigation despite having received the Bill of Lading constituted
wrongful neglect or refusal to accept and pay for the subject shipment, by reason of which defendant Sambok
Motors may be held liable for damages."

Sambok, Bacolod, appealed. On November 26, 1980, respondent Appellate Court set aside the appealed
judgment and dismissed petitioner's Complaint, after finding that the latter had not performed its part of the
obligation under the contract by not delivering the goods at Sambok, Iloilo, the place designated in the Parts
Order Form (Exhibits "A", "A-1" to "A-6"), and must, therefore, suffer the loss. In other words, respondent
Appellate Court found. that there was misdelivery.

Hence, this Petition for Review on Certiorari, with the following errors assigned to respondent Court:

The Respondent Court of Appeals erred in finding that the issue of misshipment or misdelivery of
the automotive spare parts involved in the litigation was raised by the private respondent
Sambok Motors Co. (Bacolod) in the Trial Court.

II

The Respondent Court of Appeals erred in refusing to apply the provisions of Section 18, Rule 46
of the Revised Rules of Court quoted below, that since the question of misshipment or
misdelivery was not raised by the private respondent in the Trial Court, this issue cannot for the
first time be raised on appeal.

Section 18. Questions that may be raised on appeal. Whether or not the
appellant has filed a motion for new trial in the court below, he may include in his
assignment of errors any question of law or fact that has been raised in the court
below and which is within the issues framed by the parties.

III

The Respondent Court of Appeals erred in finding that the private respondent gave the alleged
instruction to the petitioner to ship the automotive spare parts to Iloilo City and not to Bacolod
City.

IV

The Respondent Court of Appeals erred in finding that the defendant Negros Navigation notified
the private respondent of the arrival of the shipment at Bacolod City.

The Respondent Court of Appeals erred in reversing the decision of the Trial Court that the act of
the private respondent in refusing to take delivery of the automotive spare parts that it purchased
from the petitioner after having been notified of the shipment constitutes wrongful neglect
resulting in the loss of the cargo for which it should be liable in damages to the petitioner.

To our minds, the matter of misdelivery is not the decisive factor for relieving Sambok, Bacolod, of liability
herein. While it may be that the Parts Order Form (E exhibits "A", "A-1" to "A-6") specifically indicated Iloilo as
the destination, as testified to by Ernesto Ordonez, Parts Sales Representative of petitioner,   Sambok, Bacolod,
3

and Sambok, Iloilo, are actually one. In fact, admittedly, the order for spare parts was made by the President of
Sambok, Pepito Ng, through its marketing consultant. Notwithstanding, upon receipt of the Bill of Lading,
Sambok, Bacolod, initiated, but did not pursue, steps to take delivery as they were advised by Negros
Navigation that because some parts were missing. they would just be informed as soon as the missing parts
were located.  4

It was only four years later, however, or in 1974, when a warehouseman of Negros Navigation, Severino
Aguarte, found in their off-shore bodega, parts of the shipment.- in question, but already deteriorated and
valueless.  5

Under the circumstances, Sambok, Bacolod, cannot be faulted for not accepting or refusing to accept the
shipment from Negros Navigation four years after shipment. The evidence is clear that Negros Navigation could
not produce the merchandise nor ascertain its whereabouts at the time Sambok, Bacolod, was ready to take
delivery. Where the seller delivers to the buyer a quantity of goods less than he contracted to sell, the buyer may
reject them.  6

From the evidentiary record, Negros Navigation was the party negligent in failing to deliver the complete
shipment either to Sambok, Bacolod, or to Sambok, Iloilo, but as the Trial Court found, petitioner failed to comply
with the conditions precedent to the filing of a judicial action. Thus, in the last analysis, it is petitioner that must
shoulder the resulting loss. The general rule that before, delivery, the risk of loss is home by the seller who is still
the owner, under the principle of "res petit domino",   is applicable in petitioner's case.
7

In sum, the judgment of respondent Appellate Court, will have to be sustained not on the basis of misdelivery but
on non-delivery since the merchandise was never placed in the control and possession of Sambok, Bacolod, the
vendee.  8

WHEREFORE, we hereby affirm the Decision of the then Court of Appeals in CA-G.R. No. 65328-R, without
pronouncement as to costs.

2. LAWYERS COOPERATIVE PUBLISHING COMPANY, plaintiff-appellee,

vs.
PERFECTO A. TABORA, defendant-appellant.

Paredes, Poblador, Cruz and Nazareno for plaintiff-appellee.

Tabora and Concon for defendant-appellant.

BAUTISTA ANGELO, J.:

On May 3, 1955, Perfecto A. Tabora bought from the Lawyers Cooperative Publishing Company one complete
set of American Jurisprudence consisting of 48 volumes with 1954 pocket parts, plus one set of American
Jurisprudence, General Index, consisting of 4 volumes, for a total price of P1,675.50 which, in addition to the
cost of freight of P6.90, makes a total of P1,682.40. Tabora made a partial payment of P300.00, leaving a
balance of P1,382.40. The books were duly delivered and receipted for by Tabora on May 15, 1955 in his law
office Ignacio Building, Naga City.

In the midnight of the same date, however, a big fire broke out in that locality which destroyed and burned all the
buildings standing on one whole block including at the law office and library of Tabora As a result, the books
bought from the company as above stated, together with Tabora's important documents and papers, were
burned during the conflagration. This unfortunate event was immediately reported by Tabora to the company in a
letter he sent on May 20, 1955. On May 23, the company replied and as a token of goodwill it sent to Tabora
free of charge volumes 75, 76, 77 and 78 of the Philippine Reports. As Tabora failed to pay he monthly
installments agreed upon on the balance of the purchase price notwithstanding the long time that had elapsed,
the company demanded payment of the installments due, and having failed, to pay the same, it commenced the
present action before the Court of First Instance of Manila for the recovery of the balance of the obligation.
Plaintiff also prayed that defendant be ordered to pay 25% of the amount due as liquidated damages, and the
cost of action.

Defendant, in his answer, pleaded force majeure as a defense. He alleged that the books bought from the
plaintiff were burned during the fire that broke out in Naga City on May 15, 1955, and since the loss was due
to force majeure he cannot be held responsible for the loss. He prayed that the complaint be dismissed and that
he be awarded moral damages in the amount of P15,000.00.
After due hearing, the court a quo rendered judgment for the plaintiff. It ordered the defendant to pay the sum of
P1,382.40, with legal interest thereon from the filing of the complaint, plus a sum equivalent to 25% of the total
amount due as liquidated damages, and the cost of action.

Defendant took the case to the Court of Appeals, but the same is now before us by virtue of a certification issued
by that Court that the case involves only questions of law.

Appellant bought from appellee one set of American Jurisprudence, including one set of general index, payable
on installment plan. It was provided in the contract that "title to and ownership of the books shall remain with the
seller until the purchase price shall have been fully paid. Loss or damage to the books after delivery to the buyer
shall be borne by the buyer." The total price of the books, including the cost of freight, amounts to P1,682.40.
Appellant only made a down payment of P300.00 thereby leaving a balance of P1,382.40. This is now the import
of the present action aside from liquidated damages.

Appellant now contends that since it was agreed that the title to and the ownership of the books shall remain
with the seller until the purchase price shall have been fully paid, and the books were burned or destroyed
immediately after the transaction, appellee should be the one to bear the loss for, as a result, the loss is always
borne by the owner. Moreover, even assuming that the ownership of the books were transferred to the buyer
after the perfection of the contract the latter should not answer for the loss since the same occurred
through force majeure. Here, there is no evidence that appellant has contributed in any way to the occurrence of
the conflagration.1äwphï1.ñët

This contention cannot be sustained. While as a rule the loss of the object of the contract of sale is borne by the
owner or in case of force majeure the one under obligation to deliver the object is exempt from liability, the
application of that rule does not here obtain because the law on the contract entered into on the matter argues
against it. It is true that in the contract entered into between the parties the seller agreed that the ownership of
the books shall remain with it until the purchase price shall have been fully paid, but such stipulation cannot
make the seller liable in case of loss not only because such was agreed merely to secure the performance by
the buyer of his obligation but in the very contract it was expressly agreed that the "loss or damage to the books
after delivery to the buyer shall be borne by the buyer." Any such stipulation is sanctioned by Article 1504 of our
Civil Code, which in part provides:

(1) Where delivery of the goods has been made to the buyer or to a bailee for the buyer, in pursuance of
the contract and the ownership in the goods has been retained by the seller merely to secure
performance by the buyer of his obligations under the contract, the goods are at the buyer's risk from the
time of such delivery.

Neither can appellant find comfort in the claim that since the books were destroyed by fire without any fault on
his part he should be relieved from the resultant obligation under the rule that an obligor should be held exempt
from liability when the loss occurs thru a fortuitous event. This is because this rule only holds true when the
obligation consists in the delivery of a determinate thing and there is no stipulation holding him liable even in
case of fortuitous event. Here these qualifications are not present. The obligation does not refer to a determinate
thing, but is pecuniary in nature, and the obligor bound himself to assume the loss after the delivery of the goods
to him. In other words, the obligor agreed to assume any risk concerning the goods from the time of their
delivery, which is an exception to the rule provided for in Article 1262 of our Civil Code.

Appellant likewise contends that the court a quo erred in sentencing him to pay attorney's fees. This is merely
the result of a misapprehension for what the court a quo ordered appellant to pay is not 25% of the amount due
as attorney's fees, but as liquidated damages, which is in line with an express stipulation of the contract. We
believe, however, that the appellant should not be made to pay any damages because his denial to pay the
balance of the account is not due to bad faith.

WHEREFORE, the decision appealed from is modified by eliminating that portion which refers to liquidated
damages. No costs.
3. FIRST UNITED CONSTRUCTORS CORPORATION and BLUE STAR CONSTRUCTION
CORPORATION, Petitioners,
vs.
BAYANIHAN AUTOMOTIVE CORPORATION, Respondent.

DECISION

BERSAMIN, J.:

This case concerns the applicability of the legal principles of recoupment and compensation.

The Case

Under review is the decision promulgated on July 26, 2004,  whereby the Court of Appeals CA) affirmed the
1

judgment rendered on May 14 1996 by the Regional Trial Court, Branch 107, in Quezon City adjudging the
petitioners defendants) liable to pay to the respondent plaintiff) various sums of money and damages. 2

Antecedents

Petitioner First United Constructors Corporation (FUCC) and petitioner Blue Star Construction Corporation (Blue
Star) were associate construction firms sharing financial resources, equipment and technical personnel on a
case-to-case basis. From May 27, 1992 to July 8, 1992, they ordered six units of dump trucks from the
respondent, a domestic corporation engaged in the business of importing and reconditioning used Japan-made
trucks, and of selling the trucks to interested buyers who were mostly engaged in the construction business, to
wit:

TO WHOM
UNIT DATE OF DELIVERY
DELIVERY
Isuzu Dump Truck FUCC 27 May 1992
Isuzu Dump Truck FUCC 27 May 1992
Isuzu Dump Truck FUCC 10 June 1992
Isuzu Dump Truck FUCC 18 June 1992
Isuzu Dump Truck Blue Star 4 July 1992
Isuzu Dump Truck FUCC 8 July 1992

The parties established a good business relationship, with the respondent extending service and repair work to
the units purchased by the petitioners. The respondent also practiced liberality towards the petitioners in the
latter’s manner of payment by later on agreeing to payment on terms for subsequent purchases.

On September 19, 1992, FUCC ordered from the respondent one unit of Hino Prime Mover that the respondent
delivered on the same date. On September 29, 1992, FUCC again ordered from the respondent one unit of
Isuzu Transit Mixer that was also delivered to the petitioners. For the two purchases, FUCC partially paid in
cash, and the balance through post-dated checks, as follows:

BANK/CHECK NO. DATE AMOUNT

Pilipinas Bank 18027379 23 November 1992 ₱360,000.00
Pilipinas Bank 18027384 1 December 1992 ₱375,000.00

Upon presentment of the checks for payment, the respondent learned that FUCC had ordered the payment
stopped. The respondent immediately demanded the full settlement of their obligation from the petitioners, but to
no avail. Instead, the petitioners informed the respondent that they were withholding payment of the checks due
to the breakdown of one of the dump trucks they had earlier purchased from respondent, specifically the second
dump truck delivered on May 27, 1992.
Due to the refusal to pay, the respondent commenced this action for collection on April 29, 1993, seeking
payment of the unpaid balance in the amount of ₱735,000.00 represented by the two checks.

In their answer, the petitioners averred that they had stopped the payment on the two checks worth ₱735,000.00
because of the respondent’s refusal to repair the second dump truck; and that they had informed the respondent
of the defects in that unit but the respondent had refused to comply with its warranty, compelling them to incur
expenses for the repair and spare parts. They prayed that the respondent return the price of the defective dump
truck worth ₱830,000.00 minus the amounts of their two checks worth ₱735,000.00, with 12% per annum
interest on the difference of ₱90,000.00 from May 1993 until the same is fully paid; that the respondent should
also reimburse them the sum of ₱247,950.00 as their expenses for the repair of the dump truck, with 12% per
annum interest from December 16, 1992, the date of demand, until fully paid; and that the respondent pay
exemplary damages as determined to be just and reasonable but not less than ₱500,000, and attorney’s fees of
₱50,000 plus ₱1,000.00 per court appearance and other litigation expenses.

It was the position of the respondent that the petitioners were not legally justified in withholding payment of the
unpaid balance of the purchase price of the Hino Prime Mover and the Isuzu Transit Mixer due the alleged
defects in second dump truck because the purchase of the two units was an entirely different transaction from
the sale of the dump trucks, the warranties for which having long expired.

Judgment of the RTC

On May 14, 1996, the RTC rendered its judgment,  finding the petitioners liable to pay for the unpaid balance of
3

the purchase price of the Hino Prime Mover and the Isuzu Transit Mixer totaling ₱735,000.00 with legal interest
and attorney’s fees; and declaring the respondent liable to pay to the petitioners the sum of ₱71,350.00 as costs
of the repairs incurred by the petitioners. The RTC held that the petitioners could not avail themselves of legal
compensation because the claims they had set up in the counterclaim were not liquidated and demandable. The
fallo of the judgment states:

WHEREFORE, judgment is hereby rendered:

1. Ordering defendants, jointly and severally to pay plaintiff the sum of ₱360,000.00 and ₱375,000.00
with interest at the legal rate of 12% per annum computed from February 11, 1993, which is the date of
the first extrajudicial demand, until fully paid;

2. Ordering the defendants, jointly and severally, to pay plaintiff the sum equivalent to 10% of the
principal amount due, for attorney’s fees;

3. On the counterclaim, ordering plaintiff to pay defendants the sum of ₱71,350.00 with interest at the
legal rate of 12% per annum computed from the date of this decision until fully paid;

4. Ordering plaintiff to pay the defendants attorney’s fees equivalent to 10% of the amount due;

5. No pronouncement as to costs.

SO ORDERED. 4

Decision of the CA

The petitioners appealed, stating that they could justifiably stop the payment of the checks in the exercise of
their right of recoupment because of the respondent’s refusal to settle their claim for breach of warranty as to the
purchase of the second dump truck.

In its decision promulgated on July 26, 2004,  however, the CA affirmed the judgment of the RTC. It held that the
5

remedy of recoupment could not be properly invoked by the petitioners because the transactions were different;
that the expenses incurred for the repair and spare parts of the second dump truck were not a proper subject of
recoupment because they did not arise out of the purchase of the Hino Prime Mover and the Isuzu Transit Mixer;
and that the petitioners’ claim could not also be the subject of legal compensation or set-off, because the debts
in a set-off should be liquidated and demandable.

Issues
The petitioners are now before the Court asserting in their petition for review on certiorari that the CA erred in:

x x x NOT UPHOLDING THE RIGHT OF PETITIONER[S] TO RECOUPMENT UNDER PAR. (1) OF

ART. 1599 OF THE CIVIL CODE, WHICH PROVIDES [FOR] THE RIGHTS AND REMEDIES
AVAILABLE TO A BUYER AGAINST A SELLER’S BREACH OF WARRANTY.

II

x x x RULING THAT PETITIONERS CANNOT AVAIL OF COMPENSATION ALLEGEDLY BECAUSE

THEIR CLAIMS AGAINST RESPONDENT ARE NOT LIQUIDATED AND DEMANDABLE.

III

x x x NOT HOLDING RESPONDENT LIABLE TO PETITIONERS FOR LEGAL INTEREST COMPUTED

FROM THE FIRST EXTRAJUDICIAL DEMAND, AND FOR ACTUAL EXEMPLARY DAMAGES. 6

The petitioners submit that they were justified in stopping the payment of the two checks due to the respondent’s
breach of warranty by refusing to repair or replace the defective second dump truck earlier purchased; that the
withholding of payments was an effective exercise of their right of recoupment as allowed by Article 1599(1) of
the Civil Code; due to the seller’s breach of warranty that the CA’s interpretation (that recoupment in diminution
or extinction of price in case of breach of warranty by the seller should refer to the reduction or extinction of the
price of the same item or unit sold and not to a different transaction or contract of sale) was not supported by
jurisprudence; that recoupment should not be restrictively interpreted but should include the concept of
compensation or set-off between two parties who had claims arising from different transactions; and that the
series of purchases and the obligations arising therefrom, being inter-related, could be considered as a single
and ongoing transaction for all intents and purposes.

The respondent counters that the petitioners could not refuse to pay the balance of the purchase price of the
Hino Prime Mover and the Isuzu Transit Mixer on the basis of the right of recoupment under Article 1599 of the
Civil Code; that the buyer’s remedy of recoupment related only to the same transaction; and that compensation
was not proper because the claims of the petitioners as alleged in their counterclaim were not liquidated and
demandable.

There is no longer any question that the petitioners were liable to the respondent for the unpaid balance of the
purchase price of the Hino Prime Mover and the Isuzu Transit Mixer. What remain to be resolved are strictly
legal, namely: one, whether or not the petitioners validly exercised the right of recoupment through the
withholding of payment of the unpaid balance of the purchase price of the Hino Prime Mover and the Isuzu
Transit Mixer; and, two, whether or not the costs of the repairs and spare parts for the second dump truck
delivered to FUCC on May 27, 1992 could be offset for the petitioners’ obligations to the respondent.

Ruling

We affirm the decision of the CA with modification.

1.
Petitioners could not validly resort to recoupment against respondent

Recoupment (reconvencion) is the act of rebating or recouping a part of a claim upon which one is sued by
means of a legal or equitable right resulting from a counterclaim arising out of the same transaction.  It is the
7

setting up of a demand arising from the same transaction as the plaintiff’s claim, to abate or reduce that claim.

The legal basis for recoupment by the buyer is the first paragraph of Article 1599 of the Civil Code, viz:

Article 1599. Where there is a breach of warranty by the seller, the buyer may, at his election:

(1) Accept or keep the goods and set up against the seller, the breach of warranty by way of recoupment
in diminution or extinction of the price;
 (2) Accept or keep the goods and maintain an action against the seller for damages for the breach of
warranty;

(3) Refuse to accept the goods, and maintain an action against the seller for damages for the breach of
warranty;

(4) Rescind the contract of sale and refuse to receive the goods or if the goods have already been
received, return them or offer to return them to the seller and recover the price or any part thereof which
has been paid.

When the buyer has claimed and been granted a remedy in anyone of these ways, no other remedy can
thereafter be granted, without prejudice to the provisions of the second paragraph of article 1191. (Emphasis
supplied)

xxxx

In its decision, the CA applied the first paragraph of Article 1599 of the Civil Code to this case, explaining thusly:

Paragraph (1) of Article 1599 of the Civil Code which provides for the remedy of recoupment in diminution or
extinction of price in case of breach of warranty by the seller should therefore be interpreted as referring to the
reduction or extinction of the price of the same item or unit sold and not to a different transaction or contract of
sale. This is more logical interpretation of the said article considering that it talks of breach of warranty with
respect to a particular item sold by the seller. Necessarily, therefore, the buyer’s remedy should relate to the
same transaction and not to another.

Defendants-appellants’ act of ordering the payment on the prime mover and transit mixer stopped was improper
considering that the said sale was a different contract from that of the dump trucks earlier purchased by
defendants-appellants.

The claim of defendants-appellants for breach of warranty, i.e. the expenses paid for the repair and spare parts
of dump truck no. 2 is therefore not a proper subject of recoupment since it does not arise out of the contract or
transaction sued on or the claim of plaintiff-appellee for unpaid balances on the last two (2) purchases, i. e. the
prime mover and the transit mixer. 8

The CA was correct. It was improper for petitioners to set up their claim for repair expenses and other spare
parts of the dump truck against their remaining balance on the price of the prime mover and the transit mixer
they owed to respondent.  Recoupment must arise out of the contract or transaction upon which the plaintiff’s
1avvphi1

claim is founded.  To be entitled to recoupment, therefore, the claim must arise from the same transaction, i.e.,
9

the purchase of the prime mover and the transit mixer and not to a previous contract involving the purchase of
the dump truck. That there was a series of purchases made by petitioners could not be considered as a single
transaction, for the records show that the earlier purchase of the six dump trucks was a separate and distinct
transaction from the subsequent purchase of the Hino Prime Mover and the Isuzu Transit Mixer. Consequently,
the breakdown of one of the dump trucks did not grant to petitioners the right to stop and withhold payment of
their remaining balance on the last two purchases.

2.
Legal compensation was permissible

Legal compensation takes place when the requirements set forth in Article 1278 and Article 1279 of the Civil
Code are present, to wit:

Article 1278. Compensation shall take place when two persons, in their own right, are creditors and debtors of
each other."

Article 1279. In order that compensation may be proper, it is necessary:

(1) That each of the obligors be bound principally, and that he be at the same time a principal creditor of
the other;

(2) That both debts consists in a sum of money, or if the things due are consumable, they be of the same
kind, and also of the same quality if the latter has been stated;
 (3) That the two debts be due;

(4) That they be liquidated and demandable;

(5) That over neither of them there be any retention or controversy, commenced by third persons and
communicated in due time to the debtor.

As to whether petitioners could avail themselves of compensation, both the RTC and CA ruled that they could
not because the claims of petitioners against respondent were not liquidated and demandable.

The Court cannot uphold the CA and the RTC.

The RTC already found that petitioners were entitled to the amount of ₱71,350.00 stated in their counterclaim,
and the CA concurred in the finding, stating thusly:

It is noteworthy that in the letter of December 16, 1992 (Exh. "1") defendants were charging plaintiff only for the
following items of repair:

1. Cost of repair and spare parts - ₱46,800.00

2. Cost of repair and spare parts - 24,550.00

₱71,350.00

Said amounts may be considered to have been spent for repairs covered by the warranty period of three (3)
months. While the invoices (Exhs. "2-B" and "3-A") dated September 26, 1992 and September 18, 1992, this
delay in repairs is attributable to the fact that when defects were brought to the attention of the plaintiff in the
letter of August 14, 1992 (Exh. "8") which was within the warranty period, the plaintiff did not respond with the
required repairs and actual repairs were undertaken by defendants. Thereafter, the spare parts covered by
Exhibits "2-B" and "3-A" pertain to the engine, which was covered by the warranty.

x x x. Defendants in their letter of August 14, 1992 (Exhb. "8") demanded correction of defects. In their letter of
August 22, 1992 (Exh. "9") they demanded replacement. In their letter of August 27, 1992 (Exh. "10"), they
demanded ‘replacement/repair’. In September, 1992, they undertook repairs themselves (Exhs. "2-B" and "3-A")
and demanded payment for the expenses in their letter of December 16, 1992 (Exh. "1"). All other items of
expenses connected with subsequent breakdowns are no longer chargeable to plaintiff which granted only a 3-
month warranty. x x x 10

Considering that preponderant evidence showing that petitioners had spent the amount of ₱71,350.00 for the
repairs and spare parts of the second dump truck within the warranty period of three months supported the
finding of the two lower courts, the Court accepts their finding. Verily, factual findings of the trial court, when
affirmed by the CA, are conclusive on the Court when supported by the evidence on record. 11

A debt is liquidated when its existence and amount are determined.  Accordingly, an unliquidated claim set up
12

as a counterclaim by a defendant can be set off against the plaintiff’s claim from the moment it is liquidated by
judgment.  Article 1290 of the Civil Code provides that when all the requisites mentioned in Article 1279 of the
13

Civil Code are present, compensation takes effect by operation of law, and extinguishes both debts to the
concurrent amount. With petitioners’ expenses for the repair of the dump truck being already established and
determined with certainty by the lower courts, it follows that legal compensation could take place because all the
requirements were present. Hence, the amount of ₱71,350.00 should be set off against petitioners’ unpaid
obligation of ₱735,000.00, leaving a balance of ₱663,650.00, the amount petitioners still owed to respondent.

We deem it necessary to modify the interest rate imposed by the trial and appellate courts.  The legal interest
1âwphi1

rate to be imposed from February 11, 1993, the time of the extrajudicial demand by respondent, should be 6%
per annum in the absence of any stipulation in writing in accordance with Article 2209 of the Civil Code, which
provides:

Article 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.
WHEREFORE, the Court AFFIRMS the decision promulgated on July 26, 2004 in all respects subject to the
MODIFICATION that petitioners are ordered, jointly and severally, to pay to respondent the sum of 1
663,650.00, plus interest of 6% per annum computed from February

11, 1993, the date of the first extrajudicial demand, until fully paid; and ORDERS the petitioners to pay the costs
of suit.

4. LEVY HERMANOS, INC., plaintiff-appellant,

vs.
LAZARO BLAS GERVACIO, defendant-appellee.

Felipe Caniblas for appellant.

Abreu, Lichaucco and Picazo for appellee.

MORAN, J.:

On February 9-4, 1938, plaintiff filed a complaint in the Court of First Instance of Manila, which substantially
recites the following facts:

On March 10, 1937, plaintiff Levy Hermanos, Inc., sold to defendant Lazaro Blas Gervacio, a Packard car.
Defendant, after making the initial payment, executed a promissory note for the balance of P2,400, payable on
or before June 15, 1937, with interest at 12 per cent per annum, to secure the payment of the note, he
mortgaged the car to the plaintiff. Defendant failed to pay the note it its maturity. Wherefore, plaintiff foreclosed
the mortgage and the car was sold at public auction, at which plaintiff was the highest bidder for P1,800. The
present action is for the collection of the balance of P1,600 and interest.

Defendant admitted the allegations of the complaint, and with this admission, the parties submitted the case for
decision. The lower court applied, the provisions of Act No. 4122, inserted as articles 1454-A of the Civil Code,
and rendered judgment in favor of the defendant. Plaintiff appealed.

Article 1454-A of the Civil Code reads as follows:

In a contract for the sale of personal property payable in installments shall confer upon the vendor the
right to cancel the sale or foreclose the mortgage if one has been given on the property, without
reimbursement to the purchaser of the installments already paid, if there be an agreement to this effect.

However, if the vendor has chosen to foreclose the mortgage he shall have no further action against the
purchaser for the recovery of any unpaid balance owing by the same and any agreement to the contrary
shall be null and void.

In Macondray and Co. vs. De Santos (33 Off. Gaz., 2170), we held that "in order to apply the provisions of article
1454-A of the Civil Code it must appear that there was a contract for the sale of personal property payable in
installments and that there has been a failure to pay two or more installments." The contract, in the instant case,
while a sale of personal property, is not, however, one on installments, but on straight term, in which the
balance, after payment of the initial sum, should be paid in its totality at the time specified in the promissory note.
The transaction is not is not, therefore, the one contemplated in Act No. 4122 and accordingly the mortgagee is
not bound by the prohibition therein contained as to the right to the recovery of the unpaid balance.

Undoubtedly, the law is aimed at those sales where the price is payable in several installments, for, generally, it
is in these cases that partial payments consist in relatively small amounts, constituting thus a great temptation
for improvident purchasers to buy beyond their means. There is no such temptation where the price is to be paid
in cash, or, as in the instant case, partly in cash and partly in one term, for, in the latter case, the partial
payments are not so small as to place purchasers off their guard and delude them to a miscalculation of their
ability to pay. The oretically, perhaps, there is no difference between paying the price in tow installments, in so
far as the size of each partial payment is concerned; but in actual practice the difference exists, for, according to
the regular course of business, in contracts providing for payment of the price in two installments, there is
generally a provision for initial payment. But all these considerations are immaterial, the language of the law
being so clear as to require no construction at all. lâwphi1.nêt

The suggestion that the cash payment made in this case should be considered as an installment in order to
bring the contract sued upon under the operation of the law, is completely untenable. A cash payment cannot be
considered as a payment by installment, and even if it can be so considered, still the law does not apply, for it
requires non-payment of two or more installments in order that its provisions may be invoked. Here, only one
installment was unpaid.

Judgment is reversed, and the defendant-appellee is hereby sentenced to pay plaintiff-appellant the sum of
P1,600 with interest at the rate of 12 per cent per annum from June 15, 1937, and the sum of P52.08 with
interest at the rate of 6 per cent from the date of the filing of the complaint, with costs in both instances against
the appellee.

5. Delta motor sales v. niu kim duan

Elevated to this Court by the Court of Appeals, in its Resolution of May 20, 1982, on a pure
question of law, 1 is the appeal therein by defendants-appellants, Niu Kim Duan and Chan Fue
Eng assailing the trial court’s decision promulgated on October 11, 1977, 2 which ordered them to
pay plaintiff-appellee, Delta Motor Sales Corporation, the amount of P6,188.29 with a 14% per
annum interest which was due on the three (3) "Daikin" air-conditioners defendants-appellants
purchased from plaintiff-appellee under a Deed of Conditional Sale, after the same was declared
rescinded by the trial court. They were likewise ordered to pay plaintiff-appellee P1,000.00 for and
as attorney’s fees. chanrobles virtual lawlibrary

The events which led to the filing of the case in the lower court were summarized by the Court of
Appeals, as follows: jgc:chanrobles.com.ph

"‘On July 5, 1975, the defendants purchased from the plaintiff three (3) units of ‘DAIKIN’ air-
conditioner all valued at P19,350.00 as evidenced by the Deed of Conditional Sale, Exhibit A; that
the aforesaid deed of sale had the following terms and conditions: chanrob1es virtual 1aw library

‘(a) the defendants shall pay a down payment of P774.00 and the balance of P18,576.00 shall
[be] paid by them in twenty four (24) installments; (b) the title to the properties purchased shall
remain with the plaintiff until the purchase price thereof is fully paid; (c) if any two installments
are not paid by the defendants on their due dates, the whole of the principal sum remaining
unpaid shall become due, with interest at the rate of 14% per annum: and (d) in case of a suit,
the defendants shall pay an amount equivalent to 25% of the remaining unpaid obligation as
damages, penalty and attorney’s fees; that to secure the payment of the balance of P18,576.00
the defendants jointly and severally executed in favor of the plaintiff a promissory note, Exhibit C;
that the three (3) air-conditioners were delivered to and received by the defendants as shown by
the delivery receipt, Exhibit B; that after paying the amount of P6,966.00, the defendants failed to
pay at least two (2) monthly installments; that as of January 6, 1977, the remaining unpaid
obligation of the defendants amounted to P12,920.08; that statements of accounts were sent to
the defendants and the plaintiff’s collectors personally went to the former to effect collections but
they failed to do so; that because of the unjustified refusal of the defendants to pay their
outstanding account and their wrongful detention of the properties in question, the plaintiff tried
to recover the said properties extra-judicially but it failed to do so; that the matter was later
referred by the plaintiff to its legal counsel for legal action; that in its verified complaint dated
January 28, 1977, the plaintiff prayed for the issuance of a writ of replevin, which the Court
granted in its Order dated February 28, 1977, after the plaintiff posted the requisite bond; that on
April 11, 1977, the plaintiff, by virtue of the aforesaid writ, succeeded in retrieving the properties
in question: that as of October 3, 1977, the outstanding account of the defendants is only in the
amount of P6,188.29 as shown by the computation, Exhibit F, after deducting the interests in
arrears, cover charges, replevin bond premiums, the value of the units repossessed and the like;
and, that in view of the failure of the defendants to pay their obligations, the amount of P6,966.00
which had been paid by way of installments were treated as rentals for the units in question for
two (2) years pursuant to the provisions of paragraph 5 of the Deed of Conditional Sale, Exhibit
A.’ (pp. 5-7, Record; pp. 4-6, Appellant’s Brief)."  chanrobles law library

As above-stated, the trial court ruled in favor of Plaintiff-Appellee.

Defendants-appellants assail the Deed of Conditional Sale under which they purchased the three
(3) Daikin air-conditioners from plaintiff-appellee as being contrary to law, morals, good custom,
public order or public policy. In particular, they point to the contract’s paragraphs 5 and 7 as
iniquitous, which paragraphs state that: jgc:chanrobles.com.ph

"5. Should BUYER fail to pay any of the monthly installments when due, or otherwise fail to
comply with any of the terms and conditions herein stipulated, this contract shall automatically
become null and void and all sums so paid by BUYER by reason thereof shall be considered as
rental and the SELLER shall then and there be free to take possession thereof without liability for
trespass or responsibility for any article left in or attached to the PROPERTY: chanrob1es virtual 1aw library

x           x          x

"7. Should SELLER rescind this contract for any of the reasons stipulated in the preceding
paragraph, the BUYER, by these presents obligates himself to peacefully deliver the PROPERTY to
the SELLER in case of rescission, and should a suit be brought in court by the SELLER to seek
judicial declaration of rescission and take possession of the PROPERTY, the BUYER hereby
obligates himself to pay all the expenses to be incurred by reason of such suit and in addition to
pay the sum equivalent to 25% of the remaining unpaid obligation as damages, penalty and
attorney’s fees;" 3

Defendants-appellants claim that for the use of the plaintiff-appellee’s three air-conditioners, from
July 5, 1975 4 to April 11, 1977, 5 or for a period of about 22 months, they, in effect, paid rentals
in the amount of P6,429,92, 6 or roughly one-third (1/3) of the entire price of said air-
conditioners which was P19,350.00. They also complain that for the said period the trial court is
ordering them to pay P6,188.29 as the balance due for the three air-conditioners repossessed.
Defendants-appellants were likewise ordered to pay P1,000.00 as attorney’s fees when plaintiff-
appellee never sought for attorney’s fees in its complaint. They satirically pointed out that by
putting "a few touches here and there, the same units can be sold again to the next imprudent
customer" 7 by plaintiff-appellee. Thus, enforcement of the Deed of Conditional Sale will unjustly
enrich plaintiff-appellee at the expense of defendants-appellants. chanrobles law library : red

Defendants-appellants cannot complain that their downpayment of P774.00 and installment

payments of P5,655.92 8 were treated as rentals — even though the total amount of P6,429,92
which they had paid, approximates one-third (1/3) of the cost of the three (3) air-conditioners. A
stipulation in a contract that the installments paid shall not be returned to the vendee is valid
insofar as the same may not be unconscionable under the circumstances is sanctioned by Article
1486 of the New Civil Code. 9 The monthly installment payable by defendants-appellants was
P774.00. 10 The P5,655.92 installment payments correspond only to seven (7) monthly
installments. Since they admit having used the air-conditioners for twenty-two (22) months, this
means that they did not pay fifteen (15) monthly installments on the said air-conditioners and
were thus using the same FREE for said period — to the prejudice of plaintiff-appellee. Under the
circumstances, the treatment of the installment payments as rentals cannot be said to be
unconscionable.
 II

The vendor in a sale of personal property payable in installments may exercise one of three
remedies, namely, (1) exact the fulfillment of the obligation, should the vendee fail to pay; (2)
cancel the sale upon the vendee’s failure to pay two or more installments; (3) foreclose the
chattel mortgage, if one has been constituted on the property sold, upon the vendee’s failure to
pay two or more installments. The third option or remedy, however, is subject to the limitation
that the vendor cannot recover any unpaid balance of the price and any agreement to the
contrary is void (Art. 1484) 11

The three (3) remedies are alternative and NOT cumulative. If the creditor chooses one remedy,
he cannot avail himself of the other two. chanrobles lawlibrary : rednad

It is not disputed that the plaintiff-appellee had taken possession of the three air-conditioners,
through a writ of replevin when defendants-appellants refused to extra-judicially surrender the
same. This was done pursuant to paragraphs 5 and 7 of its Deed of Conditional Sale when
defendants-appellants failed to pay at least two (2) monthly installments, so much so that as of
January 6, 1977, the total amount they owed plaintiff-appellee, inclusive of interest, was
P12,920.08. 12 The case plaintiff-appellee filed was to seek a judicial declaration that it had
validly rescinded the Deed of Conditional Sale. 13

Clearly, plaintiff-appellee chose the second remedy of Article 1484 in seeking enforcement of its
contract with defendants-appellants. This is shown from the fact that its Exhibit "F" which showed
the computation of the outstanding account of defendants-appellants as of October 3, 1977 took
into account "the value of the units repossessed." 14 Having done so, it is barred from exacting
payment from defendants-appellants of the balance of the price of the three air-conditioning units
which it had already repossessed. It cannot have its cake and eat it too. 15

WHEREFORE, the judgment of the trial court in Civil Case No. 25578 is hereby SET ASIDE and the
complaint filed by plaintiff-appellee Delta Motor Sales Corporation is hereby DISMISSED. No costs.

6. AMADOR TAJANLANGIT, ET AL., plaintiff-appellants,

vs.
SOUTHERN MOTORS, INC., ET AL., defendants-appellees.

Almacen and Almacen for appellants.

Diosdado Garingalao for appellees.

BENGZON, J.:

The case. Appellants seek to reverse the order of Hon. Pantaleon Pelayo, Judge of the Iloilo court of first
instance refusing to interfere with the alias writ of execution issued in Civil Case No. 2942 pending in another
sala of the same court.

The facts. In April 1953 Amador Tajanlangit and his wife Angeles, residents of Iloilo, bought, from the Southern
Motors Inc. of Iloilo two tractors and a thresher. In payment for the same, they executed the promissory note
Annex A whereby they undertook to satisfy the total purchase price of P24,755.75 in several installments (with
interest) payable on stated dates from May 18, 1953 December 10, 1955. The note stipulated that if default be
made in the payment of interest or of any installment, then the total principal sum still unpaid with interest shall at
once become demandable etc. The spouse failed to meet any installment. Wherefore, they were sued, in the
above Civil Case No. 2942, for the amount of the promissory note. 1 The spouses defaulted, and the court, after
listening to the Southern Motors' evidence entered Judgment for it in the total sum of P24,755.75 together with
interest at 12 per cent, plus 10 per cent of the total amount due as attorney's fees and costs of collection.

Carrying out the order of execution, the sheriff levied on the same machineries and farm implements which had
been bought by the spouses; and later sold them at public auction to the highest bidder — which turned out to
be the Southern Motors itself — for the total sum of P10,000.

As its judgment called for much more, the Southern Motors subsequently asked and obtained, an alias writ of
execution; and pursuant thereto, the provincial sheriff levied attachment on the Tajanlangits' rights and interests
in certain real properties — with a view to another sale on execution.

To prevent such sale, the Tajanlangits instituted this action in the Iloilo court of first instance for the purpose
among others, of annulling the alias writ of execution and all proceedings subsequent thereto. Their two main
theories: (1) They had returned the machineries and farm implements to the Southern Motors Inc., the latter
accepted them, and had thereby settled their accounts; for that reason, said spouses did not contest the action
in Civil Case No. 2942; and (2) as the Southern Motors Inc. had repossessed the machines purchased on
installment (and mortgaged) the buyers were thereby relieved from further responsibility, in view of the Recto
Law, now article 1484 of the New Civil Code.

For answer, the company denied the alleged "settlement and understanding" during the pendency of civil case
No. 2949. It also denied having repossessed the machineries, the truth being that they were attached by the
sheriff and then deposited by the latter in its shop for safekeeping, before the sale at public auction.

The case was submitted for decision mostly upon a stipulation of facts. Additional testimony was offered
together with documentary evidence. Everything considered the court entered judgment, saying in part;

The proceedings in Civil Case No. 2942 above referred to, were had in the Court of First Instance
(Branch 1) of the Province and of the City of Iloilo. While this court (Branch IV) sympathizes with
plaintiffs, it cannot grant, in this action, the relief prayed for the complaint because courts of similar
jurisdiction cannot invalidate the judgments and orders of each other. Plaintiffs have not pursued the
proper remedy. This court is without authority and jurisdiction to declare null and void the order directing
the issuance of alias writ of execution because it was made by another court of equal rank and category
(see Cabiao and Izquierdo vs. Del Rosario and Lim, 44 Phil., 82-186).

WHEREFORE, judgement is hereby rendered dismissing the complaint with costs against plaintiffs costs
against plaintiffs. Let the writ of preliminiary injunction issued on August 26, 1954, be lifted.

The plaintiffs reasonably brought the matter to the Court of Appeals, but the latter forwarded the expediente,
being of the opinion that the appeal involved questions of jurisdiction and/or law

Discussion. Appellants' brief elaborately explains in the nine errors assigned, their original two theories although
their "settlement" idea appears to be somewhat modified.

"What is being sought in this present action" say appellants "is to prohibit and forbid the appellee Sheriff of Iloilo
from attaching and selling at public auction sale the real properties of appellants because that is now forbidden
by our law after the chattels that have been purchased and duly mortgagee had already been repossessed by
the same vendor-mortgagee and later on sold at public auction sale and purchased by the same at such meager
sum of P10,000."

"Our law" provides,

ART. 1484. In a contract of sale of personal property the price of which is payable in installments, the
vendor may exercise of the following remedies:

(1) Exact fulfillment of the obligation, should the vendee fail to pay;

(2) Cancel the sale, should the vendee's failure to pay cover two or more installments;

(3) Foreclose the chattel mortgage on the thing sold, if one has been constituted, should the vendee's
failure to pay cover two or more installments. In this case, he shall have no further action against the
 purchaser to recover any unpaid balance of the price. Any agreement to the contrary shall be void. (New
Civil Code.)

Appellants would invoke the last paragraph. But there has been no foreclosure of the chattel mortgage nor a
foreclosure sale. Therefore the prohibition against further collection does not apply.

At any rate it is the actual sale of the mortgaged chattel in accordance with section 14 Act No. 1508 that
would bar the creditor (who chooses to foreclose) from recovering any unpaid balance. (Pacific Com.
Co. vs. De la Rama, 72 Phil. 380.) (Manila Motor Co. vs. Fernandez, 99 Phil., 782.).

It is true that there was a chattel mortgage on the goods sold. But the Southern Motors elected to sue on the
note exclusively, i.e. to exact fulfillment of the obligation to pay. It had a right to select among the three remedies
established in Article 1484. In choosing to sue on the note, it was not thereby limited to the proceeds of the sale,
on execution, of the mortgaged good.2

In Southern Motors Inc. vs. Magbanua, (100 Phil., 155) a similar situation arose in connection with the purchase
on installment of a Chevrolet truck by Magbanua. Upon the latter's default, suit on the note was filed, and the
truck levied on together with other properties of the debtor. Contending that the seller was limited to the truck,
the debtor obtained a discharge of the other properties. This court said:

By praying that the defendant be ordered to pay the sum of P4,690 together with the stipulated interest
at 12% per annum from 17 March 1954 until fully paid, plus 10 per cent of the total amount due as
attorney's fees and cost of collection, the plaintiff acted to exact the fulfillment of the obligation and not to
foreclose the mortgage on the truck. . . .

As the plaintiff has chosen to exact the fulfillment of the defendant's obligation, the former may enforce
execution of the judgement rendered in its favor on the personal and real properties of the latter not
exempt from execution sufficient to satisfy the judgment. That part of the judgement depriving the plaintiff
of its right to enforce judgment against the properties of the defendant except the mortgaged truck and
discharging the writ of attachment on his other properties is erroneous. (Emphasis ours.)

Concerning their second theory, — settlement or cancellation — appellants allege that the very implements sold
"were duly returned" by them, and "were duly received and accepted by the said vendor-mortgagee". Therefore
they argue, "upon the return of the same chattels and due acceptance of the same by the vendor-mortgagee,
the conditional sale is ipso facto cancelled, with the right of the vendor-mortgagee to appropriate whatever
downpayment and posterior monthly installments made by the purchaser as it did happen in the present case at
bar."

The trouble with the argument is that it assumes that acceptance of the goods by the Southern Motors Co, with a
view to "cancellation" of the sale. The company denies such acceptance and cancellation, asserting the goods,
were deposited in its shop when the sheriff attached them in pursuance of the execution. Its assertion is backed
up by the sheriff, of whose credibility there is no reason to doubt. Anyway this cancellation or settlement theory
may not be heeded now, because it would contravene the decision in Civil Case No. 2942 above-mentioned — it
would show the Tajanlangits owned nothing to Southern Motors Inc. Such decision is binding upon them, unless
and until they manage to set it aside in a proper proceeding — and this is not it.

There are other points involved in the case, such as the authority of the judge of one branch of a court of first
instance to enjoin proceedings in another branch of the same court. As stated, Judge Pelayo refused to interfere
on that ground. Appellants insist this was error on several counts. We deem it unnecessary to deal with this
procedural aspect, inasmuch as we find that, on the merits, plaintiffs are not entitled to the relief demanded.

Judgment. The decision dismissing the complaint, is affirmed, with costs against appellants. So ordered.

7. ELISCO TOOL MANUFACTURING CORPORATION, petitioner,

vs.
COURT OF APPEALS, ROLANDO LANTAN, and RINA LANTAN, respondents.
 

MENDOZA, J.:

This is a petition for review of the decision  of the Court of Appeals which affirmed in toto the decision of the
1

Regional Trial Court of Pasig, Branch 51, declaring respondent spouses Rolando Lantan and Rina Lantan
owners of a 1979 model 2-door Colt Lancer car which they had acquired under a car plan for top employees of
the Elizalde group of companies.

The facts are as follows:

Private respondent Rolando Lantan was employed at the Elisco Tool Manufacturing Corporation as head of its
cash department. On January 9, 1980, he entered into an agreement with the company which provided as
follows:
2

That, EMPLOYER is the owner of a car Colt Lancer 2 door, Model 1979, with Serial No. 3403
under LTC Registration Certificate No. 0526558;

That, for and in consideration of a monthly rental of ONE THOUSAND TEN & 65/100 ONLY
(P1,010.65) Philippine Currency, EMPLOYER desire to lease and EMPLOYEE accept in lease
the motor vehicle aforementioned for a period of FIVE (5) years;

That, the EMPLOYEE agree as he hereby agreed to pay the lease rental thru salary deduction
from his monthly remuneration in the amount as above specified for a period of FIVE (5) years;

That, for the duration of the lease contract, all expenses and costs of registration, insurance,
repair and maintenance, gasoline, oil, part replacement inclusive of all expenses necessary to
maintain the vehicle in top condition shall be for the account of the EMPLOYEE;

That, at the end of FIVE (5) year period or upon payment of the 60th monthly rental, EMPLOYEE
may exercise the option to purchase the motor vehicle from the EMPLOYER and all monthly
rentals shall be applied to the payment of the full purchase price of the car and further, should
EMPLOYEE desire to exercise this option before the 5-year period lapse, he may do so upon
payment of the remaining balance on the five year rental unto the EMPLOYER, it being
understood however that the option is limited to the EMPLOYEE;

That, upon failure of the EMPLOYEE to pay THREE (3) accumulated monthly rentals will vest
upon the EMPLOYER the full right to lease the vehicle to another EMPLOYEE;

That, in the event of resignation and or dismissal from the service, the EMPLOYEE shall return
the subject motor vehicle to the EMPLOYER in its compound at Kalawaan Sur, Pasig, Metro
Manila in good working and body condition.

On the same day, January 9, 1980, private respondent executed a promissory note reading as follows: 3

PROMISSORY NOTE

P60,639.00

FOR VALUE RECEIVED, we promise to pay [to] the order of ELISCO TOOL MFG. CORP. —
SPECIAL PROJECT, at its office at Napindan, Taguig, Metro Manila, Philippines, the sum of
ONE THOUSAND TEN & 65/100 PESOS (P1,010.65), Philippine Currency, beginning January 9,
1980, without the necessity of notice or demand in accordance with the schedule of payment
hereto attached as an integral part hereof.

In case of default, in the payment of any installment on the stipulated due date, we agree to pay
as liquidated damages 2% of the amount due and unpaid for every thirty (30) days of default or
fraction thereof. Where the default covers two successive installments, the entire unpaid balance
shall automatically become due and payable.
 It is further agreed that if upon such default attorney's services are availed of, an additional sum
equal to TWENTY (20%) percent of the total amount due thereon, but in no case be less than
P1,000.00 shall be paid to holder(s) hereof as attorney's fees in addition to the legal costs
provided for by law. We agree to submit to the jurisdiction of the proper courts of Makati, Metro
Manila or the Province of Rizal, at the option of the holder(s) waiving for this purpose any other
venue. 1âwphi1.nêt

In case extraordinary inflation or deflation of the currency stipulated should occur before this
obligation is paid in full, the value of the currency at the time of the establishment of the
obligation will be the basis of payment.

Holder(s) may accept partial payment reserving his right of recourse against each and all
endorsers who hereby waive DEMAND PRESENTMENT and NOTICE.

Acceptance by the holder(s) of payment or any part thereof after due date shall not be
considered as extending the time for the payment of the aforesaid obligation or as a modification
of any of the condition hereof.

After taking possession of the car, private respondent installed accessories therein worth P15,000.00.

In 1981, Elisco Tool ceased operations, as a result of which private respondent Rolando Lantan was laid off.
Nonetheless, as of December 4, 1984, private respondent was able to make payments for the car in the total
amount of P61,070.94.

On June 6, 1986, petitioner filed a complaint, entitled "replevin plus sum of money," against private respondent
Rolando Lantan, his wife Rina, and two other persons, identified only as John and Susan Doe, before the
Regional Trial Court of Pasig, Metro Manila. Petitioner alleged that private respondents failed to pay the monthly
rentals which, as of May 1986, totalled P39,054.86; that despite demands, private respondents failed to settle
their obligation thereby entitling petitioner to the possession of the car; that petitioner was ready to post a bond
in an amount double the value of the car, which was P60,000; and that in case private respondents could not
return the car, they should be held liable for the amount of P60,000 plus the accrued monthly rentals thereof,
with interest at the rate of 14% per annum, until fully paid. Petitioner's complaint contained the following prayer:

WHEREFORE, plaintiffs prays that judgment be rendered as follows:

ON THE FIRST CAUSE OF ACTION

Ordering defendant Rolando Lantan to pay the plaintiff the sum of P39,054.86 plus legal interest
from the date of demand until the whole obligation is fully paid;

ON THE SECOND CAUSE OF ACTION

To forthwith issue a Writ of Replevin ordering the seizure of the motor vehicle more particularly
described in paragraph 3 of the Complaint, from defendant Rolando Lantan and/or defendants
Rina Lantan, John Doe, Susan Doe and other person or persons in whose possession the said
motor vehicle may be found, complete with accessories and equipment, and direct deliver thereof
to plaintiff in accordance with law, and after due hearing to confirm said seizure and plaintiff's
possession over the same;

ON THE ALTERNATIVE CAUSE OF ACTION

In the event that manual delivery of the subject motor vehicle cannot be effected for any reason,
to render judgment in favor of plaintiff and against defendant Rolando Lantan ordering the latter
to pay the sum of SIXTY THOUSAND PESOS (P60,000.00) which is the estimated actual value
of the above-described motor vehicle, plus the accrued monthly rentals thereof with interests at
the rate of fourteen percent (14%) per annum until fully paid;

PRAYER COMMON TO ALL CAUSES OF ACTION

1. Ordering the defendant Rolando Lantan to pay the plaintiff an amount equivalent to twenty-five
percent (25%) of his outstanding obligation, for and as attorney's fees;
 2. Ordering defendants to pay the cost or expenses of collection, repossession, bonding fees and
other incidental expenses to be proved during the trial; and

3. Ordering defendants to pay the costs of suit.

Plaintiff also prays for such further reliefs as this Honorable Court may deem just and equitable
under the premises.

Upon petitioner's posting a bond in the amount of P120,000, the sheriff took possession of the car in question
and after five (5) days turned it over to petitioner.
4

In due time, private respondents filed their answer. They claimed that the agreement on which the complaint was
based had not been signed by petitioner's representative, Jose Ma. S. del Gallego, although it had been signed
by private respondent Rolando Lantan; that their true agreement was "to buy and sell and not lease with option
to buy" the car in question at a monthly amortization of P1,000; and that petitioner accepted the installment
payments made by them and, in January 1986, agreed that the balance of the purchase price would be paid on
or before December 31, 1986. Private respondents cited the provision of the agreement making respondent
Rolando Lantan liable for the expenses for registration, insurance, repair and maintenance, gasoline, oil and part
replacements, inclusive of all necessary expenses, as evidence that the transaction was one of sale. Private
respondents further alleged that, in any event, petitioner had waived its rights under the agreement because of
the following circumstances: (a) while the parties agreed that payment was to be made through salary deduction,
petitioner accepted payments in cash or checks; (b) although they agreed that upon the employee's resignation,
the car should be returned to the employer, private respondent Rolando Lantan was not required to do so when
he resigned in September 1982; (c) petitioner did not lease the vehicle to another employee after private
respondent Rolando Lantan had allegedly failed to pay three monthly "rentals"; and (d) petitioner failed to
enforce the manner of payment under the agreement by its acceptance of payments in various amounts and on
different dates.

In its reply, petitioner maintained that the contract between the parties was one of lease with option to purchase
and that the promissory note was merely a "nominal security" for the agreement. It contended that the mere
acceptance of the amounts paid by private respondents and for indefinite periods of time was not evidence that
the parties' agreement was one of purchase and sale. Neither was it guilty of laches because, under the law, an
action based on a written contract can be brought within ten (10) years from the time the action accrues. On
August 31, 1987, the trial court  rendered its decision.
5

The trial court sustained private respondents' claim that the agreement in question was one of sale and held that
the latter had fully paid the price of the car having paid the total amount of P61,070.94 aside from installing
accessories in the car worth P15,000.00. Said the trial court:

Plaintiff now comes claiming ownership of the car in question and has succeeded in
repossessing the same by virtue of the writ of seizure issued in this case on July 29, 1986. Not
content with recovering possession of the said car, plaintiff still asks that defendants should pay it
the sum of P39,054.86, allegedly representing the rentals due on the car from the time of the last
payment made by defendants to its repossession thereof. This is indeed a classic case of one
having his cake and eating it too! Under the Recto law (Arts. 1484 & 1485, Civil Code), the
vendor who repossesses the goods sold on installments, has no right to sue the vendee for the
unpaid balance thereof.

The Court can take judicial notice of the practice wherein executives enjoy car plans in
progressive companies. The agreement of January 9, 1980 between the parties is one such car
plan. If defendant Rolando Lantan failed to keep up with his amortizations on the car in question,
it was not because of his own liking but rather he was pushed to it by circumstances when his
employer folded up and sent him to the streets. That plaintiff was giving all the chance to
defendants to pay the value of the car and acquire full ownership thereof is shown by the delay in
instituting the instant case. . . .

The court likewise found that the amount of P61,070.94 included a 2% penalty for late payments for which there
was no stipulation in the agreement:

. . . The agreement and defendant Rolando Lantan's promissory note of January 9, 1980 do not
provide even for interest on the remaining balance of the purchase price of the car. This privilege
extended by corporations to their top executives is considered additional emolument to them.
 And so the reason for the lack of provision for interest, much less penalty charges. Therefore, all
payments made by defendant should be applied to the principal account. Since the principal was
only P60,639.00, the defendants have made an overpayment of P431.94 which should be
returned to defendant by plaintiff.

For this reason, it ordered petitioner to pay private respondents the amount of P431.94 as excess
payment, as well as rentals at the rate of P1,000 a month for depriving private respondents of the use of
their car, and moral damages for the worry, embarrassment, and mental torture suffered by them on
account of the repossession of the car.

The dispositive portion of the trial court's decision reads as follows:

WHEREFORE, judgment is hereby rendered in favor of defendants and against plaintiff,

dismissing plaintiff's complaint; declaring defendants the lawful owners of that Colt Lancer 2-
door, Model 1979 with Serial No. 3403 under Registration Certificate No. 0526558; ordering
plaintiff to deliver to defendants the aforesaid motor vehicle complete with all the accessories
installed therein by defendants; should for any reason plaintiff is unable to deliver the said car to
defendants, plaintiff is ordered to pay to defendants the value of said car in the sum of
P60,639.00 plus P15,000.00, the value of the accessories, plus interest of 12% on the said sums
from August 6, 1986; and sentencing plaintiff to pay defendants the following sums:

a) P12,431.94 as actual damages broken down as follows:

1) P431.94 overpayment made by defendants to plaintiff; and

2) P12,000.00 rental on the car in question from August 6, 1986

to August 5, 1987, plus the sum of P1,000.00 a month beginning
August 6, 1987 until the car is returned by plaintiff to, and is
received by, defendant;

b) the sum of P20,000.00 as moral damages;

c) the sum of P5,000.00 as exemplary damages; and

d) the sum of P5,000.00 as attorney's fees.

Costs against the plaintiff.

SO ORDERED.

Petitioner appealed to the Court of Appeals. On the other hand, private respondents filed a motion for execution
pending appeal. In its resolution of March 9, 1989, the Court of Appeals granted private respondents' motion
and, upon the filing of a bond, in the amount of P70,000.00, it issued a writ of execution, pursuant to which the
car was delivered to private respondents on April 16, 1989. 6

On August 26, 1992, the Court of Appeals rendered its decision, affirming in toto the decision of the trial court.
Hence, the instant petition for review on certiorari.

Petitioner contends that the Court of Appeals erred —

(a) in disregarding the admission in the pleadings as to what documents contain

the terms of the parties' agreement.

(b) in holding that the interest stipulation in respondents' Promissory Note was
not valid and binding.

(c) in holding that respondents had fully paid their obligations.

It further argues that —

 On the assumption that the Lease Agreement with option to buy in this case may
be treated as a sale on installments, the respondent Court of Appeals
nonetheless erred in not finding that the parties have validly agreed that the
petitioner as seller may [i] cancel the contract upon the respondent's default on
three or more installments, [ii] retake possession of the personality, and [iii] keep
the rents already paid.

First. Petitioner does not deny that private respondent Rolando Lantan acquired the vehicle in question under a
car plan for executives of the Elizalde group of companies. Under a typical car plan, the company advances the
purchase price of a car to be paid back by the employee through monthly deductions from his salary. The
company retains ownership of the motor vehicle until it shall have been fully paid for.  However, retention of
7

registration of the car in the company's name is only a form of a lien on the vehicle in the event that the
employee would abscond before he has fully paid for it. There are also stipulations in car plan agreements to the
effect that should the employment of the employee concerned be terminated before all installments are fully
paid, the vehicle will be taken by the employer and all installments paid shall be considered rentals per
agreement.  8

This Court has long been aware of the practice of vendors of personal property of denominating a contract of
sale on installment as one of lease to prevent the ownership of the object of the sale from passing to the vendee
until and unless the price is fully paid. As this Court noted in Vda. de Jose v. Barrueco: 9

Sellers desirous of malting conditional sales of their goods, but who do not wish openly to make
a bargain in that form, for one reason or another, have frequently resorted to the device of
making contracts in the form of leases either with options to the buyer to purchase for a small
consideration at the end of term, provided the so-called rent has been duly paid, or with
stipulations that if the rent throughout the term is paid, title shall thereupon vest in the lessee. It is
obvious that such transactions are leases only in name. The so-called rent must necessarily be
regarded as payment of the price in installments since the due payment of the agreed amount
results, by the terms of the bargain, in the transfer of title to the lessee.

In an earlier case, Manila Gas Corporation v. Calupitan,   which involved a lease agreement of a stove and a
10

water heater, the Court said:

. . . [W]e are of the opinion, and so hold, that when in a so-called contract of lease of personal
property it is stipulated that the alleged lessee shall pay a certain amount upon signing the
contract, and on or before the 5th of every month, another specific amount, by way of rental,
giving the alleged lessee the right of option to buy the said personal property before the
expiration of the period of lease, which is the period necessary for the payment of the said
amount at the rate of so much a month, deducting the payments made by way of advance and
alleged monthly rentals, and the said alleged lessee makes the advance payment and other
monthly installments, noting in his account and in the receipts issued to him that said payments
are on account of the price of the personal property allegedly leased, said contract is one of sale
on installment and not of lease.  11

In U.S. Commercial v. Halili,   a lease agreement was declared to be in fact a sale of personal property by
12

installment. Said the Court: 13

. . . There can hardly be any question that the so-called contracts of lease on which the present
action is based were veritable leases of personal property with option to purchase, and as such
come within the purview of the above article [Art. 1454-A of the old Civil Code on sale of personal
property by installment]. In fact the instruments (exhibits "A" and "B") embodying the contracts
bear the heading or title "Lease-Sale (Lease-Sale of Transportation and/or Mechanical
Equipment)." The contracts fix the value of the vehicles conveyed to the lessee and expressly
refer to the remainder of said value after deduction of the down payment made by the lessee as
"the unpaid balance of the purchase price of the leased equipment." The contracts also provide
that upon the full value (plus stipulated interest) being paid, the lease would terminate and title to
the leased property would be transferred to the lessee. Indeed, as the defendant-appellant points
out, the inclusion of a clause waiving benefit of article 1454-A of the old Civil Code is conclusive
proof of the parties" understanding that they were entering into a lease contract with option to
purchase which come within the purview of said article.
 Being leases of personal property with option to purchase as contemplated in the above article,
the contracts in question are subject to the provision that when the lessor in such case "has
chosen to deprive the lessee of the enjoyment of such personal property," "he shall have no
further action" against the lessee "for the recovery of any unpaid balance" owing by the latter,
"agreement to the contrary being null and void."

It was held that in choosing to deprive the defendant of possession of the leased vehicles, the plaintiff waived its
right to bring an action to recover unpaid rentals on the said vehicles.

In the case at bar, although the agreement provides for the payment by private respondents of "monthly rentals,"
the fifth paragraph thereof gives them the option to purchase the motor vehicle at the end of the 5th year or upon
payment of the 60th monthly rental when "all monthly rentals shall be applied to the payment of the full purchase
price of the car." It is clear that the transaction in this case is a lease in name only. The so-called monthly rentals
are in truth monthly amortizations on the price of the car.

Second. The contract being one of sale on installment, the Court of Appeals correctly applied to it the following
provisions of the Civil Code:

Art. 1484. In a contract of sale of personal property the price of which is payable in installments,
the vendor may exercise any of the following remedies:

(1) Exact fulfillment of the obligation, should the vendee fail to

pay;

(2) Cancel the sale, should the vendee's failure to pay cover two
or more installments;

(3) Foreclose the chattel mortgage on the thing sold, if one has
been constituted, should the vendee's failure to pay cover two or
more installments. In this case, he shall have no further action
against the purchaser to recover any unpaid balance of the price.
Any agreement to the contrary shall be void.

Art. 1485. The preceding article shall be applied to contracts purporting to be leases of personal
property with option to buy, when the lessor has deprived the lessee of the possession or
enjoyment of the thing.

The remedies provided for in Art. 1484 are alternative, not cumulative. The exercise of one bars the exercise of
the others.   This limitation applies to contracts purporting to be leases of personal property with option to buy by
14

virtue of Art. 1485.   The condition that the lessor has deprived the lessee of possession or enjoyment of the
15

thing for the purpose of applying Art. 1485 was fulfilled in this case by the filing by petitioner of the complaint for
replevin to recover possession of movable property. By virtue of the writ of seizure issued by the trial court, the
deputy sheriff seized the vehicle on August 6, 1986 and thereby deprived private respondents of its use.   The 16

car was not returned to private respondent until April 16, 1989, after two (2) years and eight (8) months, upon
issuance by the Court of Appeals of a writ of execution.  17

Petitioner prayed that private respondents be made to pay the sum of P39,054.86, the amount that they were
supposed to pay as of May 1986, plus interest at the legal rate.   At the same time, it prayed for the issuance of
18

a writ of replevin or the delivery to it of the motor vehicle "complete with accessories and equipment."   In the
19

event the car could not be delivered to petitioner, it was prayed that private respondent Rolando Lantan be made
to pay petitioner the amount of P60,000.00, the "estimated actual value" of the car, "plus accrued monthly
rentals thereof with interests at the rate of fourteen percent (14%) per annum until fully paid."   This prayer of
20

course cannot be granted, even assuming that private respondents have defaulted in the payment of their
obligation. This led the trial court to say that petitioner wanted to eat its cake and have it too.

Notwithstanding this impossibility in petitioner's choice of remedy, this case should be considered as one for
specific performance, pursuant to Art. 1484(1), consistent with its prayer with respect to the unpaid installments
as of May 1986. In this view, the prayer for the issuance of a writ of replevin is only for the purpose of insuring
specific performance by private respondents.
Both the trial court and the Court of Appeals correctly ruled that private respondents could no longer be held
liable for the amounts of P39,054.86 or P60,000.00 because private respondents had fulfilled their part of the
obligation. The agreement does not provide for the payment of interest on unpaid monthly "rentals" or
installments because it was entered into in pursuance of a car plan adopted by the company for the benefit of its
deserving employees. As the trial court correctly noted, the car plan was intended to give additional benefits to
executives of the Elizalde group of companies.

Petitioner contends that the promissory note provides for such interest payment. However, as the Court of
Appeals held:

The promissory note in which the 2% monthly interest on delayed payments appears does not
form part of the contract. There is no consideration for the promissory note. There is nothing to
show that plaintiff advanced the purchase price of the vehicle for Lantan so as to make the latter
indebted to the former for the amount stated in the promissory note. Thus, as stated in the
complaint: "That sometime in January, 1980, defendant Rolando Lantan entered into an
agreement with the plaintiff for the lease of a motor vehicle supplied by the latter, with the option
to purchase at the end of the period of lease . . . ." In other words, plaintiff did not buy the vehicle
for Rolando Lantan, advancing the purchase price for that purpose. There is nothing in the
complaint or in the evidence to show such arrangement. Therefore, there was no indebtedness
secured by a promissory note to speak of. There being no consideration for the promissory note,
the same, including the penalty clause contained thereon, has no binding effect.  21

There is no evidence that private respondents received the amount of P60,639.00 indicated in the promissory
note as its value. What was proven below is the fact that private respondents received from petitioner the 2-door
Colt Lancer car which was valued at P60,000 and for which private respondent Rolando Lantan paid monthly
amortizations of P1,010.65 through salary deductions.

Indeed, as already stated, private respondents' default in paying installments was due to the cessation of
operations of Elizalde Steel Corporation, petitioner's sister company. Petitioner's acceptance of payments made
by private respondents through cash and checks could have been impelled solely by petitioner's inability to
deduct the amortizations from private respondent Rolando Lantan's salary which he stopped receiving when his
employment was terminated in September 1982. Apparently, to minimize the adverse consequences of the
termination of private respondent's employment, petitioner accepted even late payments. That petitioner
accepted payments from private respondent Rolando Lantan more than two (2) years after the latter's
employment had been terminated constitutes a waiver of petitioner's right to collect interest upon the delayed
payments. The 2% surcharge is not provided for in the agreement. Its collection by the company would in fact
run counter to the purpose of providing "added emoluments" to its deserving employees. Consequently, the total
amount of P61,070.94 already paid to petitioner should be considered payment of the full purchase price of the
car or the total installments paid.

Third. Private respondents presented evidence that they "felt bad, were worried, embarrassed and mentally
tortured" by the repossession of the car.   This has not been rebutted by petitioner. There is thus a factual basis
22

for the award of moral damages. In addition, petitioner acted in a wanton, fraudulent, reckless and oppressive
manner in filing the instant case, hence, the award of exemplary damages is justified.   The award of attorney's
23

fees is likewise proper considering that private respondents were compelled to incur expenses to protect their
rights. 
24

WHEREFORE, the decision of the Court of Appeals is AFFIRMED with costs against petitioner. 1âwphi1.nêt

8. EQUITABLE SAVINGS V. PLACES

Assailed in this petition for review on certiorari1 are the Decision2 dated February 13, 2014 and
the Resolution3 dated October 8, 2014 of the Court of Appeals (CA) in CA-G.R. CV No. 96008,
which partially affirmed the Decision4 dated May 20, 2010 of the Regional Trial Court of Pasay
City, Branch 114 (RTC) in Civil Case No. 07-03 86-CFM and ordered petitioner Equitable Savings
Bank, now BDO Unibank, Inc. (petitioner), to reimburse respondent Rosalinda C. Palces
(respondent) the installments she made in March 2007 amounting to P103,000.00.
 The Facts

On August 15, 2005, respondent purchased a Hyundai Starex GRX Jumbo (subject vehicle)
through a loan granted by petitioner in the amount of P1,196,100.00. In connection therewith,
respondent executed a Promissory' Note with Chattel Mortgage 5 in favor of petitioner,
stating, inter alia, that: (a) respondent shall pay petitioner the aforesaid amount in 36-monthly
installments of P33,225.00 per month, beginning September 18, 2005 and every 18 th of the
month thereafter until full payment of the loan; (b) respondent's default in paying any installment
renders the remaining balance due and payable; and (c) respondent's failure to pay any
installments shall give petitioner the right to declare the entire obligation due and payable and
may likewise, at its option, x x x foreclose this mortgage; or file an ordinary civil action for
collection and/or such other action or proceedings as may be allowed under the law. 6

From September 18, 2005 to December 21, 2006, respondent paid the monthly installment of
P33,225.00 per month. However, she failed to pay the monthly installments in January and
February 2007, thereby triggering the acceleration clause contained in the Promissory Note with
Chattel Mortgage7 and prompting petitioner to send a demand letter8 dated February 22, 2007 to
compel respondent to pay the remaining balance of the loan in the amount of P664,500.00. 9 As
the demand went unheeded, petitioner filed on March 7, 2007 the instant Complaint for Recovery
of Possession with Replevin with Alternative Prayer for Sum of Money and Damages 10 against
respondent before the RTC, praying that the court a quo: (a) issue a writ of replevin ordering the
seizure of the subject vehicle and its delivery to petitioner; or (b) in the alternative as when the
recovery of the subject vehicle cannot be effected, to render judgment ordering respondent to pay
the remaining balance of the loan, including penalties, charges, and other costs appurtenant
thereto.11

Pending respondent's answer, summons12 and a writ of replevin13 were issued and served to her
personally on April 26, 2007, and later on, a Sheriffs Return 14 dated May 8, 2007 was submitted
as proof of the implementation of such writ. 15

In her defense,16 while admitting that she indeed defaulted on her installments for January and
February 2007, respondent nevertheless insisted that she called petitioner regarding such delay in
payment and spoke to a bank officer, a certain Rodrigo Dumagpi, who gave his consent thereto.
Respondent then maintained that in order to update her installment payments, she paid petitioner
the amounts of P70,000.00 on March 8, 2007 and P33,000.00 on March 20, 2007, or a total of
P103,000.00. Despite the aforesaid payments, respondent was surprised when petitioner filed the
instant complaint, resulting in the sheriff taking possession of the subject vehicle. 17

The RTC Ruling

In a Decision18 dated May 20, 2010, the RTC ruled in petitioner's favor and, accordingly,
confirmed petitioner's right and possession over the subject vehicle and ordered respondent to
pay the former the amount of P15,000.00 as attorney's fees as well as the costs of suit. 19

The RTC found that respondent indeed defaulted on her installment payments in January and
February 2007, thus, rendering the entire balance of the loan amounting to P664,500.00 due and
demandable. In this relation, the RTC observed that although respondent made actual payments
of the installments due, such payments were all late and irregular, and the same were not enough
to fully pay her outstanding obligation, considering that petitioner had already declared the entire
balance of the loan due and demandable. However, since the writ of replevin over the subject
vehicle had already been implemented, the RTC merely confirmed petitioner's right to possess the
same and ruled that it is no longer entitled to its alternative prayer, i.e., the payment of the
remaining balance of the loan, including penalties, charges, and other costs appurtenant
thereto.20

Respondent moved for reconsideration,21 but was denied in an Order22 dated August 31, 2010.
Dissatisfied, respondent appealed23 to the CA, contending that petitioner acted in bad faith in
seeking to recover more than what is due by attempting to collect the balance of the loan and, at
the same time, recover the subject vehicle.24

The CA Ruling

In a Decision25 dated February 13, 2014, the CA affirmed the RTC ruling with modification: (a)
ordering petitioner to return the amount of P103,000.00 to respondent; and (b) deleting the
award of attorney's fees in favor of petitioner for lack of sufficient basis. It held that while
respondent was indeed liable to petitioner under the Promissory Note with Chattel Mortgage,
petitioner should not have accepted respondent's late partial payments in the aggregate amount
of P103,000.00. In this regard, the CA opined that by choosing to recover the subject
vehicle via a writ of replevin, petitioner already waived its right to recover any unpaid
installments, pursuant to Article 1484 of the Civil Code. As such, the CA concluded that
respondent is entitled to the recovery of the aforesaid amount. 26

Aggrieved, petitioner moved for partial reconsideration 27 - specifically praying for the setting aside
of the order to return the amount of P103,000.00 to respondent - which was, however, denied in
a Resolution28 dated October 8, 2014; hence, this petition.

The Issues Before The Court

The issues raised for the Court's resolution are whether or not the CA correctly: (a) ordered
petitioner to return to respondent the amount of P103,000.00 representing the latter's late
installment payments; and (b) deleted the award of attorney's fees in favor of petitioner.

The Court's Ruling

The petition is partly meritorious.

Citing Article 1484 of the Civil Code, specifically paragraph 3 thereof, the CA ruled that petitioner
had already waived its right to recover any unpaid installments when it sought - and was granted
- a writ of replevin in order to regain possession of the subject vehicle. As such, petitioner is no
longer entitled to receive respondent's late partial payments in the aggregate amount of
P103,000.00.

The CA is mistaken on this point.

Article 1484 of the Civil Code, which governs the sale of personal properties in installments, states
in full:
chanRoblesvirtualLawlibrary

Article 1484. In a contract of sale of personal property the price of which is payable in
installments, the vendor may exercise any of the following remedies:

(1) Exact fulfilment of the obligation, should the vendee fail to pay;

(2) Cancel the sale, should the vendee's failure to pay cover two or more installments;

(3) Foreclose the chattel mortgage on the thing sold, if one has been constituted, should
the vendee's failure to pay cover two or more installments. In this case, he shall have no further
action against the purchaser to recover any unpaid balance of the price. Any agreement to the
contrary shall be void. (Emphases and underscoring supplied)
In this case, there was no vendor-vendee relationship between respondent and petitioner. A
judicious perusal of the records would reveal that respondent never bought the subject vehicle
from petitioner but from a third party, and merely sought financing from petitioner for its full
purchase price. In order to document the loan transaction between petitioner and respondent, a
Promissory Note with Chattel Mortgage 29 dated August 18, 2005 was executed wherein, inter alia,
respondent acknowledged her indebtedness to petitioner in the amount of P1,196,100.00 and
placed the subject vehicle as a security for the loan. 30 Indubitably, a loan contract with the
accessory chattel mortgage contract - and not a contract of sale of personal property in
installments - was entered into by the parties with respondent standing as the debtor-mortgagor
and petitioner as the creditor-mortgagee. Therefore, the conclusion of the CA that Article 1484
finds application in this case is misplaced, and thus, must be set aside.

The Promissory Note with Chattel Mortgage subject of this case expressly stipulated, among
others, that: (a) monthly installments shall be paid on due date without prior notice or
demand;31 (b) in case of default, the total unpaid principal sum plus the agreed charges shall
become immediately due and payable; 32 and (c) the mortgagor's default will allow the mortgagee
to exercise the remedies available to it under the law. In light of the foregoing provisions,
petitioner is justified in filing his Complaint 33 before the RTC seeking for either the recovery of
possession of the subject vehicle so that it can exercise its rights as a mortgagee, i.e., to conduct
foreclosure proceedings over said vehicle; 34 or in the event that the subject vehicle cannot be
recovered, to compel respondent to pay the outstanding balance of her loan. 35 Since it is
undisputed that petitioner had regained possession of the subject vehicle, it is only appropriate
that foreclosure proceedings, if none yet has been conducted/concluded, be commenced in
accordance with the provisions of Act No. 1508,36 otherwise known as "The Chattel Mortgage
Law," as intended. Otherwise, respondent will be placed in an unjust position where she is
deprived of possession of the subject vehicle while her outstanding debt remains unpaid, either in
full or in part, all to the undue advantage of petitioner - a situation which law and equity will
never permit.37

Further, there is nothing in the Promissory Note with Chattel Mortgage that bars petitioner from
receiving any late partial payments from respondent. If at all, petitioner's acceptance of
respondent's late partial payments in the aggregate amount of P103,000.00 will only operate to
reduce her outstanding obligation to petitioner from P664,500.00 to P561,500.00. Such a
reduction in respondent's outstanding obligation should be accounted for when petitioner conducts
the impending foreclosure sale of the subject vehicle. Once such foreclosure sale has been made,
the proceeds thereof should be applied to the reduced amount of respondent's outstanding
obligation, and the excess of said proceeds, if any, should be returned to her. 38

In sum, the CA erred in ordering petitioner to return the amount of P103,000.00 to respondent. In
view of petitioner's prayer for and subsequent possession of the subject vehicle in preparation for
its foreclosure, it is only proper that petitioner be ordered to commence foreclosure proceedings,
if none yet has been conducted/concluded, over the vehicle in accordance with the provisions of
the Chattel Mortgage Law, i.e., within thirty (30) days from the finality of this Decision. 39

Finally, anent the issue of attorney's fees, it is settled that attorney's fees "cannot be recovered as
part of damages because of the policy that no premium should be placed on the right to litigate.
They are not to be awarded every time a party wins a suit. The power of the court to award
attorney's fees under Article 220840 of the Civil Code demands factual, legal, and equitable
justification. Even when a claimant is compelled to litigate with third persons or to incur expenses
to protect his rights, still, attorney's fees may not be awarded where no sufficient showing of bad
faith could be reflected in a party's persistence in a case other than an erroneous conviction of the
righteousness of his cause."41 In this case, suffice it to say that the CA correctly ruled that the
award of attorney's fees and costs of suit should be deleted for lack of sufficient basis. chanrobleslaw
WHEREFORE, the petition is PARTLY GRANTED. The Decision dated February 13, 2014 and the
Resolution dated October 8, 2014 of the Court of Appeals in CA-G.R. CV No. 96008 are
hereby SET ASIDE. In case foreclosure proceedings on the subject chattel mortgage has not yet
been conducted/concluded, petitioner Equitable Savings Bank, now BDO Unibank, Inc.,
is ORDERED to commence foreclosure proceedings on the subject vehicle in accordance with the
Chattel Mortgage Law, i.e., within thirty (30) days from the finality of this Decision. The proceeds
therefrom should be applied to the reduced outstanding balance of respondent Rosalinda C. Palces
in the amount of P561,500.00, and the excess, if any, should be returned to her.

SO ORDERED. cralawlawlibrary

9.

9. 9. BELARDO VALARAO, GLORIOSA VALARAO and CARLOS VALARAO, petitioners,

DD

vs.
COURT OF APPEALS and MEDEN A. ARELLANO, respondents.

PANGANIBAN, J.:

Art. 1592 of the Civil Code applies only to contracts of sale, and not to contracts to sell or conditional sales
where title passes to the vendee only upon full payment of the purchase price. Furthermore, in order to enforce
the automatic forfeiture clause in a deed of conditional sale, the vendors have the burden of proving a
contractual breach on the part of the vendee.

The Case

Before us is a Petition for Review assailing the June 13, 1997 Decision of the Court of Appeals (CA)   which
1

reversed and set aside the October 10, 1994 Decision   of the Regional Trial Court (RTC) of Quezon City,
2

Branch 82. The dispositive portion of the assailed CA Decision reads:

WHEREFORE, the decision appealed from is REVERSED and SET ASIDE, and a new one is
entered (1) ordering [herein private respondent] to pay the amount of [o]ne [m]illion [o]ne
[h]undred [n]inety [s]even [t]housand [p]esos (P1,197,000.00) in favor of [herein petitioners], with
legal interest thereon from December 31, 1992; (2) and directing [herein petitioners] to execute in
favor of [herein respondent], upon receipt of the aforesaid amount, the final and absolute deed of
sale of the subject property with all the improvements. 3

Also assailed by petitioners is the August 21, 1997 CA Resolution denying reconsideration.

The aforementioned RTC Decision, which was reversed and set aside by the CA, disposed as follows:

WHEREFORE, premises considered, judgment is hereby rendered declaring the aforesaid Deed
of Conditional Sale as automatically rescinded and all payments made thereunder by the [private
respondent] to the [petitioners] as forfeited in favor of the latter, by way of rentals and as
liquidated damages, as well as declaring all improvements introduced on the property subject to
the said Deed of Condition[al] Sale to belong to the [petitioners] without any right of
reimbursement. Further, the [private respondent] and all persons claiming right under her are
hereby ordered to vacate the said property and to turnover possession thereof to the
[petitioners]. FINALLY, the [private respondent] is hereby ordered to pay to the [petitioners] the
amount of P50,000.00 as attorney's fees and for expenses of litigation, as well as to pay the
costs of the suit. The Writ of Preliminary Injunction previously issued is hereby ordered LIFTED
and DISSOLVED, and the bond posted for its issuance held liable for the satisfaction of the
money judgment herein made in favor of the
[petitioners].  4
 The Facts

The undisputed facts of the case as narrated by the Court of Appeals are as follows:

On September 4, 1987, spouses Abelardo and Gloriosa Valarao, thru their son Carlos Valarao as
their attorney-in-fact, sold to [Private Respondent] Meden Arellano under a Deed of Conditional
Sale a parcel of land situated in the District of Diliman, Q. C., covered by TCT No. 152879 with
an area of 1,504 square meters, for the sum of THREE MILLION TWO HUNDRED TWENTY
FIVE THOUSAND PESOS (P3,225,000.00) payable under a schedule of payment stated therein.

In the same Deed of Conditional Sale, the [private respondent] vendee obligated herself to
encumber by way of real estate mortgage in favor of [petitioners] vendors her separate piece of
property with the condition that upon full payment of the balance of P2,225.000.00, the said
mortgage shall become null and void and without further force and effect. (Item No. 3, pp. 2-3 of
Deed of Conditional Sale).

It was further stipulated upon that should the vendee fail to pay three (3) successive monthly
installments or anyone year-end lump sum payment within the period stipulated, the sale shall be
considered automatically rescinded without the necessity of judicial action and all payments
made by the vendee shall be forfeited in favor of the vendors by way of rental for the use and
occupancy of the property and as liquidated damages. All improvements introduced by the
vendee to the property shall belong to the vendors without any right of reimbursement. (Par. (2),
Item No. 3, p. 3 of Deed of Conditional Sale).

[Private respondent] appellant alleged that as of September, 1990, she had already paid the
amount of [t]wo [m]illion [t]wenty-[e]ight [t]housand (P2,028,000.00) [p]esos, although she
admitted having failed to pay the installments due in October and November, 1990. Petitioner,
however, [had] tried to pay the installments due [in] the said months, including the amount due
[in] the month of December, 1990 on December 30 and 31, 1990, but was turned down by the
vendors-[petitioners] thru their maid, Mary Gonzales, who refused to accept the payment offered.
[Private respondent] maintains that on previous occasions, the same maid was the one who
[had] received payments tendered by her. It appears that Mary Gonzales refused to receive
payment allegedly on orders of her employers who were not at home.

[Private respondent] then reported the matter to, and sought the help of, the local barangay
officials. Efforts to settle the controversy before the barangay proved unavailing as vendors-
[petitioners] never appeared in the meetings arranged by the barangay lupon.

[Private respondent] tried to get in touch with [petitioners] over the phone and was able to talk
with [Petitioner] Gloriosa Valarao who told her that she [would] no longer accept the payments
being offered and that [private respondent] should instead confer with her lawyer, a certain Atty.
Tuazon. When all her efforts to make payment were unsuccessful, [private respondent] sought
judicial action. by filing this petition for consignation on January 4, 1991.

On the other hand, vendors-[petitioners], thru counsel, sent [private respondent] a letter dated 4
January 1991 (Exh. "C") notifying her that they were enforcing the provision on automatic
rescission as a consequence of which the Deed of Conditional Sale [was deemed] null and void,
and . . . all payments made, as well as the improvements introduced on the property, [were]
thereby forfeited. The letter also made a formal demand on the [private respondent] to vacate the
property should she not heed the demand of [petitioners] to sign a contract of lease for her
continued stay in the property (p. 2 of Letter dated Jan. 4, 1991; Exh. "C").

In reply, [private respondent] sent a letter dated January 14, 1991 (Exh. "D"), denying that she
[had] refused to pay the installments due [in] the months of October, November and December,
and countered that it was [petitioners] who refused to accept payment, thus constraining her to
file a petition for consignation before the Regional Trial Court of Quezon City docketed as Civil
Case No. Q-91-7603.

Notwithstanding their knowledge of the filing by [private respondent] of a consignation case

against them in the Regional Trial Court of Quezon City docketed as Civil Case No. Q-91-7603,
[petitioners], through counsel, sent the [private respondent] another letter dated January 19,
1991 (Exh. "F"), denying the allegations of her attempts to tender payment on December 30 and
 31, 1990, and demanding that [private respondent] vacate and turnover the property and pay a
monthly compensation for her continued occupation of the subject property at the rate of
P20,000.00, until she shall have vacated the same.

Ruling of the Court of Appeals

In reversing the Regional Trial Court, the Court of Appeals held that the refusal of herein petitioners "to accept
the tender of payment was unjustified." Notwithstanding the stipulation in the Deed of Conditional Sale that "the
rescission of the contract shall of right take place" upon the failure of the vendee to pay three successive
monthly installments, the appellate court observed that a judicial demand or a notarial act was still required
pursuant to Article 1592 of the Civil Code. Thus, petitioners' letter informing private respondent of the rescission
of the contract did not suffice, for it was not notarized. The CA also observed that "the alleged breach of contract
arising from the failure of the vendee to pay the monthly installments for October and November 1990 within the
stipulated time is rather slight and not substantial, and to authorize the automatic rescission on account thereof
will work injustice to the other party, who has paid a total of P2,028,000.00 out of a total obligation of
P3,225,000.00. The rule is that rescission cannot be availed of as to unjustly enrich one party."

The Issues

In their Memorandum before us, petitioners raise the following issues:  5

I Whether the Answer [— (a)] categorically indicating willingness to accept the amount already
due if the [private respondent] would update the account, [(b)] praying that "if she fail[ed] to do so
immediately, . . . the Deed of Conditional Sale be declared rescinded, pursuant to the second
paragraph of Section 3 thereof, with costs against the [private respondent], [(c)] ordering the
latter to vacate and turnover possession of the premises to the [petitioners], and to pay the latter
attorney's fees in the amount of P50,000.00 and the expenses of litigation" [—] is tantamount to a
judicial demand and notice of rescission under Art. 1592 of the Civil Code.

II Whether the automatic forfeiture clause is valid and binding between the parties.

III Whether the action for consignation may prosper without actual deposit [in court] of the
amount due . . . [so as] to produce the effect of payment.

The Court's Ruling

The petition   is devoid of merit.

6

Preliminary Matter:

Notarial or Judicial Demand

Citing Article 1592 of the Civil Code, the Court of Appeals ruled that the petitioners' letter dated January 4, 1991,
could not effect the rescission of the Deed of Conditional Sale, because the said letter was not notarized. On the
other hand, petitioners argue that they made a judicial demand, which was embodied in their Manifestation filed
on May 1, 1991, and Answer submitted on July 1,1991.  7

We believe, however, that the issue of whether the requirement of a judicial demand or a notarial act has been
fulfilled is immaterial to the resolution of the present case. Article 1592 of the Civil Code. states:

Art. 1592. In the sale of immovable property, even though it may have been stipulated that upon
failure to pay the price at the time agreed upon the rescission of the contract shall of right take
place, the vendee may pay, even after the expiration of the period, as long as no demand for
rescission of the contract has been made upon him either judicially or by notarial act. After the
demand, the court may not grant him a new term.

It is well-settled that the above-quoted provision applies only to a contract of sale,   and not to a sale on
8

installment   or a contract to sell.   Thus, in Luzon Brokerage v. Maritime Building,   this Court ruled that "Art.
9 10 11

1592 of the new Civil Code (Art. 1504 of the old Civil Code) requiring demand by suit or notarial act in case the
vendor of realty wants to rescind does not apply to a contract to sell or promise to sell, where title remains with
the vendor until" full payment of the price. The Court stresses the difference between these two types of
contract. In a contract to sell, "the title over the subject property is transferred to the vendee only upon the full
payment of the stipulated consideration. Unlike in a contract of sale, the title does not pass to the vendee upon
the execution of the agreement or the delivery of the thing sold."  12

In the present case, the Deed of Conditional Sale is of the same nature as a sale on installment or a contract to
sell, which is not covered by Article 1592. The aforementioned agreement provides:

x x x           x x x          x x x

Should the VENDEE fail to pay three (3) successive monthly installments or any
one year-end lump sum payment within the period stipulated herein, this Deed of
Conditional Sale shall be considered . . . automatically rescinded without the
necessity of judicial action[,] and all payments made by the VENDEE shall be
forfeited in favor of the VENDORS by way of rental for the use and occupancy of
the property and as liquidated damages. All improvements introduced by the
VENDEE to the property shall belong to the VENDORS without any right of
reimbursement. The VENDORS and/or their agents or representatives shall have
the right to enter the premises of the property and to eject the VENDEE and all
persons claiming right under her therefrom with the use of reasonable force if
necessary.

That upon full payment to the VENDORS of the total consideration of P3,225,000.00, the
VENDORS shall immediately and without delay execute in favor of the VENDEE the final and
absolute deed of sale of the property and all its improvements.

Petitioners-vendors unmistakably reserved for themselves the title to the property until full payment of the
purchase price by the vendee. Clearly, the agreement was not a deed of sale, but more in he nature of a
contract to sell or of a sale on installments.   Even after the execution of the Deed of Conditional Sale, the
13

Torrens Certificate of Title remained with and in the name of the vendors. In rejecting the application of Article
1592 to a contract to sell, the Court held in Luzon Brokerage   that "the full payment of the price (through the
14

punctual performance of the monthly payments) was a condition precedent to the execution of the final sale and
to the transfer of the property from [the vendor] to the [vendee]; so that there was to be no actual sale until and
unless full payment was to be no actual sale until and unless full payment was made."

Main Issue: Enforcement of the

Automatic Forfeiture Clause

As a general rule, a contract is the law between the parties.   Thus, "from the moment the contract is perfected,
15

the parties are bound not only to the fulfillment of what has been expressly stipulated but also to all
consequences which, according to their nature, may be in keeping with good faith, usage and law."   Also, "the
16

stipulations of the contract being the law between the parties, courts have no alternative but to enforce them as
they were agreed [upon] and written, there being no law or public policy against the stipulated forfeiture of
payments already made."   However, it must be shown that private respondent-vendee failed to perform her
17

obligation, thereby giving petitioners-vendors the right to demand the enforcement of the contract.

We concede the validity of the automatic forfeiture clause, which deems any previous payments forfeited and the
contract automatically rescinded upon the failure of the vendee to pay three successive monthly installments or
any one yearend lump sum payment. However, petitioners failed to prove the conditions that would warrant the
implementation of this clause.

Both the appellate and the trial courts agree on the following:

1. The Deed of Conditional Sale provided for automatic rescission in case the vendee failed to pay three (3)
successive monthly installments or any one yearend lump sum payment within the stipulated period therein.

2. Each monthly installment was due at the end of the month.

3. The installments for October and November 1990 were not paid.
4. The private respondent-vendee, Meden Arellano, went to the house of the petitioners-vendors on December
30, 1990.

5. Arellano offered to pay P48,000 (total amount of installments due in October, November, and December
1990) to Mary Gonzales, the petitioner's maid, but the latter refused to accept it upon instruction of petitioners.

6. Arellano returned the next day, December 31, 1990, and insisted on paying, but again the maid refused to
accept it.

7. Arellano proceeded to the barangay office around 10:00 a.m. to file a case against petitioners for their refusal
to accept the payments.

8. Four (4) days later, on January 4, 1991, private respondents filed a Petition for Consignation.

9. Despite the said petition, the money was nevertheless not deposited in court.

10. Negotiations between both parties went under way, culminating in the vendee's filing a Motion to Deposit the
entire balance due, which was duly opposed by the vendor, and hence was denied by the trial court.

From the foregoing, it is clear that petitioners were not justified in refusing to accept the tender of payment made
by private respondent on December 30 and 31, 1990. Had they accepted it on either of said dates, she would
have paid all three monthly installments due. In other words, there was no deliberate failure on her part to meet
her responsibility to pay.   The Court takes note of her willingness and persistence to do so, and, petitioners
18

cannot now say otherwise. The fact is: they refused to accept her payment and thus have no reason to demand
the enforcement of the automatic forfeiture clause. They cannot be rewarded for their own misdeed.

Because their maid had received monthly payments in the past,   it is futile for petitioners to insist now that she
19

could not have accepted the aforementioned tender of payment, on the ground that she did not have a special
power of attorney to do so. Clearly, they are estopped from denying that she had such authority. Under Article
1241 of the Civil Code, payment through a third person is valid "[i]f by the creditor's conduct, the debtor has
been led to believe that the third person had authority to receive the payment."

Failure to Consign the

Amount Due

Petitioners also maintain that the consignation was not valid because the amount tendered was not deposited
with the trial court. True, there is no showing that she deposited the money with the proper judicial authority
which, taken together with the other requisites for a valid consignation,   would have released her from her
20

obligation to pay. However, she does not deny her obligation and, in fact, is willing to pay not only the three
monthly installments due but also the entire residual amount of the purchase price. Verily, she even filed a
Motion to Deposit the said entire balance with the trial court, which however denied said motion upon opposition
of the petitioners. 
21

Accordingly, we agree with the Court of Appeals that it would be inequitable to allow the forfeiture of the amount
of more than two million pesos already paid by private respondent, a sum which constitutes two thirds of the total
consideration. Because she did make a tender of payment which was unjustifiably refused, we hold that
petitioners cannot enforce the automatic forfeiture clause of the contract.

Application of the Maceda Law

In any event, the rescission of the contract and the forfeiture of the payments already made could not be
effected, because the case falls squarely under Republic Act No. 6552,   otherwise known as the "Maceda Law."
22

Section 3 of said law provides:

Sec. 3. In all transactions or contracts involving the sale or financing of real estate on installment
payments, including residential condominium apartments but excluding industrial lots,
commercial buildings and sales to tenants under Republic Act. Numbered Thirty-eight hundred
Forty-four as amended by Republic Act Numbered Sixty-three hundred eighty-nine, where the
buyer has paid at least two years of installments, the buyer is entitled to the following rights in
case he defaults in the payment of succeeding installments:
 (a) To pay, without additional interest, the unpaid installments due within the total grace period
earned by him, which is hereby fixed at the rate of one month grace period for every year of
installment payments made: Provided, That this right shall be exercised by the buyer only once in
every five years of the life of the contract and its extensions, if any.

(b) If the contract is cancelled, the seller shall refund to the buyer the cash surrender value on
the payments on the property equivalent to fifty percent of the total payments made and, after
five years of installments, an additional five percent every year but not to exceed ninety percent
of the total payments made: Provided, That the actual cancellation of the contract shall take
place after thirty days from receipt by the buyer of the notice of cancellation or the demand for
rescission of the contract by a notarial act and upon full payment of the cash surrender value to
the buyer.

Down payments, deposits or options on the contract shall be included in the computation of the
total number of installments made.

Hence, the private respondent was entitled to a one-month grace period for every year of installments paid,
which means that she had a total grace period of three months from December 31, 1990. Indeed, to rule in favor
of petitioner would result in patent injustice and unjust enrichment. This tribunal is not merely a court of law, but
also a court of justice.

WHEREFORE, the Petition is DENIED and the dispositive portion of the appealed Decision of the Court of
Appeals is hereby AFFIRMED. The CA's discussion on the need for judicial or notarial demand is MODIFIED in
accordance with this Decision. Costs against petitioners.

10. SPOUSES FAUSTINO AND JOSEFINA GARCIA, SPOUSES MELITON GALVEZ AND HELEN GALVEZ,
and CONSTANCIA ARCAIRA represented by their Attorney-in-Fact JULIANA O. MOTAS, Petitioners,
vs.
COURT OF APPEALS, EMERLITA DE LA CRUZ, and DIOGENES G. BARTOLOME, Respondents.

DECISION

CARPIO, J.:

G.R. No. 172036 is a petition for review1 assailing the Decision2 promulgated on 25 January 2006 as well as the
Resolution3 promulgated on 16 March 2006 of the Court of Appeals (appellate court) in CA-G.R. CV No. 63651.
The appellate court reversed and set aside the decision of Branch 23 of the Regional Trial Court of Trece
Martires City, Cavite (trial court) in Civil Case No. TM-622. The appellate court ordered Emerlita Dela Cruz (Dela
Cruz) to return to spouses Faustino and Josefina Garcia, spouses Meliton and Helen Galvez, and Constancia
Arcaira (collectively, petitioners) the amount in excess of one-half percent of ₱1,500,000. Dela Cruz’s co-
defendant, Diogenes Bartolome (Bartolome), did not incur any liability.

The appellate court narrated the facts as follows:

On May 28, 1993, plaintiffs spouses Faustino and Josefina Garcia and spouses Meliton and Helen Galvez
(herein appellees) and defendant Emerlita dela Cruz (herein appellant) entered into a Contract to Sell wherein
the latter agreed to sell to the former, for Three Million One Hundred Seventy Thousand Two Hundred Twenty
(₱3,170,220.00) Pesos, five (5) parcels of land situated at Tanza, Cavite particularly known as Lot Nos. 47,
2768, 2776, 2767, 2769 and covered by Transfer Certificate of Title Nos. T-340674, T-340673, T-29028, T-
29026, T-29027, respectively. At the time of the execution of the said contract, three of the subject lots, namely,
Lot Nos. 2776, 2767, and 2769 were registered in the name of one Angel Abelida from whom defendant
allegedly acquired said properties by virtue of a Deed of Absolute Sale dated March 31, 1989.

As agreed upon, plaintiffs shall make a down payment of Five Hundred Thousand (₱500,000.00) Pesos upon
signing of the contract. The balance of Two Million Six Hundred Seventy Thousand Two Hundred Twenty
(₱2,670,220.00) Pesos shall be paid in three installments, viz: Five Hundred Thousand (₱500,000.00) Pesos on
June 30, 1993; Five Hundred Thousand (₱500,000.00) Pesos on August 30, 1993; One Million Six Hundred
Seventy Thousand Two Hundred Twenty (₱1,670,220.00) Pesos on December 31, 1993.

On its due date, December 31, 1993, plaintiffs failed to pay the last installment in the amount of One Million Six
Hundred Seventy Thousand Two Hundred Twenty (₱1,670,220.00) Pesos. Sometime in July 1995, plaintiffs
offered to pay the unpaid balance, which had already been delayed by one and [a] half year, which defendant
refused to accept. On September 23, 1995, defendant sold the same parcels of land to intervenor Diogenes G.
Bartolome for Seven Million Seven Hundred Ninety Three Thousand (₱7,793,000.00) Pesos.

In order to compel defendant to accept plaintiffs’ payment in full satisfaction of the purchase price and,
thereafter, execute the necessary document of transfer in their favor, plaintiffs filed before the RTC a complaint
for specific performance.

In their complaint, plaintiffs alleged that they discovered the infirmity of the Deed of Absolute Sale covering Lot
Nos. 2776, 2767 and 2769, between their former owner Angel Abelida and defendant, the same being spurious
because the signature of Angel Abelida and his wife were falsified; that at the time of the execution of the said
deed, said spouses were in the United States; that due to their apprehension regarding the authenticity of the
document, they withheld payment of the last installment which was supposedly due on December 31, 1993; that
they tendered payment of the unpaid balance sometime in July 1995, after Angel Abelida ratified the sale made
in favor [of] defendant, but defendant refused to accept their payment for no jusitifiable reason.

In her answer, defendant denied the allegation that the Deed of Absolute Sale was spurious and argued that
plaintiffs failed to pay in full the agreed purchase price on its due date despite repeated demands; that the
Contract to Sell contains a proviso that failure of plaintiffs to pay the purchase price in full shall cause the
rescission of the contract and forfeiture of one-half (1/2%) percent of the total amount paid to defendant; that a
notarized letter stating the indended rescission of the contract to sell and forfeiture of payments was sent to
plaintiffs at their last known address but it was returned with a notation "insufficient address."

Intervenor Diogenes G. Bartolome filed a complaint in intervention alleging that the Contract to Sell dated May
31, 1993 between plaintiffs and defendant was rescinded and became ineffective due to unwarranted failure of
the plaintiffs to pay the unpaid balance of the purchase price on or before the stipulated date; that he became
interested in the subject parcels of land because of their clean titles; that he purchased the same from defendant
by virtue of an Absolute Deed of Sale executed on September 23, 1995 in consideration of the sum of Seven
Million Seven Hundred Ninety Three Thousand (₱7,793,000.00) Pesos.4

The Decision of the Trial Court

In its Decision dated 15 April 1999, the trial court ruled that Dela Cruz’s rescission of the contract was not valid.
The trial court applied Republic Act No. 6552 (Maceda Law) and stated that Dela Cruz is not allowed to
unilaterally cancel the Contract to Sell. The trial court found that petitioners are justified in withholding the
payment of the balance of the consideration because of the alleged spurious sale between Angel Abelida and
Emerlita Dela Cruz. Moreover, intervenor Diogenes Bartolome (Bartolome) is not a purchaser in good faith
because he was aware of petitioners’ interest in the subject parcels of land.

The dispositive portion of the trial court’s decision reads:

ACCORDINGLY, defendant Emerlita dela Cruz is ordered to accept the balance of the purchase price in the
amount of ₱1,670,220.00 within ten (10) days after the judgment of this Court in the above-entitled case has
become final and executory and to execute immediately the final deed of sale in favor of plaintiffs.

Defendant is further directed to pay plaintiffs the amount of ₱400,000.00 as moral damages and ₱100,000.00 as
exemplary damages.

The deed of sale executed by defendant Emerlita dela Cruz in favor of Atty. Diogenes Bartolome is declared null
and void and the amount of ₱7,793,000.00 which was paid by intervenor Bartolome to Emerlita dela Cruz as the
consideration of the sale of the five (5) parcels of land is hereby directed to be returned by Emerlita dela Cruz to
Atty. Diogenes Bartolome within ten (10) days from the finality of judgment.

Further, defendant is directed to pay plaintiff the sum of ₱100,000.00 as attorney’s fees.

SO ORDERED.5
Dela Cruz and Bartolome appealed from the judgment of the trial court.

The Decision of the Appellate Court

The appellate court reversed the trial court’s decision and dismissed Civil Case No. TM-622. Dela Cruz’s
obligation under the Contract to Sell did not arise because of petitioners’ undue failure to pay in full the agreed
purchase price on the stipulated date. Moreover, judicial action for the rescission of a contract is not necessary
where the contract provides that it may be revoked and cancelled for violation of any of its terms and conditions.
The dispositive portion of the appellate court’s decision reads:

WHEREFORE, in view of all the foregoing, the appealed decision of the Regional Trial Court is hereby
REVERSED and SET ASIDE and Civil Case No. TM-622 is, consequently, DISMISSED. Defendant is however
ordered to return to plaintiffs the amount in excess of one-half (1/2%) percent of One Million Five Hundred
Thousand (₱1,500,000.00) Pesos which was earlier paid by plaintiffs.

SO ORDERED.6

The appellate court likewise resolved to deny petitioners’ Motion for Reconsideration for lack of merit. 7

Hence, this petition.

Issues

Petitioners raised the following grounds for the grant of their petition:

I. The Honorable Court of Appeals erred when it failed to consider the provisions of Republic Act 6552,
otherwise known as the Maceda Law.

II. The Honorable Court of Appeals erred when it failed to consider that Respondent Dela Cruz could not
pass title over the three (3) properties at the time she entered to a Contract to Sell as her purported
ownership was tainted with fraud, thereby justifying Petitioners Spouses Garcia, Spouses Galvez and
Arcaira’s suspension of payment.

III. The Honorable Court of Appeals gravely erred when it failed to consider that Respondent Dela Cruz’s
"rescission" was done in evident bad faith and malice on account of a second sale she entered with
Respondent Bartolome for a much bigger amount.

IV. The Honorable Court of Appeals erred when it failed to declare Respondent Bartolome is not an
innocent purchaser for value despite the presence of evidence as to his bad faith. 8

The Court’s Ruling

The petition has no merit.

Both parties admit the following: (1) the contract between petitioners and Dela Cruz was a contract to sell; (2)
petitioners failed to pay in full the agreed purchase price of the subject property on the stipulated date; and (3)
Dela Cruz did not want to accept petitioners’ offer of payment and did not want to execute a document of
transfer in petitioners’ favor.

The pertinent provisions of the contract, denominated Contract to Sell, between the parties read:

Failure on the part of the vendees to comply with the herein stipulation as to the terms of payment shall cause
the rescission of this contract and the payments made shall be returned to the vendees subject however, to
forfeiture in favor of the Vendor equivalent to 1/2% of the total amount paid.

xxx

It is hereby agreed and covenanted that possession shall be retained by the VENDOR until a Deed of Absolute
Sale shall be executed by her in favor of the Vendees. Violation of this provision shall authorize/empower the
VENDOR [to] demolish any construction/improvement without need of judicial action or court order.
That upon and after the full payment of the balance, a Deed of Absolute Sale shall be executed by the Vendor in
favor of the Vendees.

That the duplicate original of the owner’s copy of the Transfer Certificate of Title of the above subject parcels of
land shall remain in the possession of the Vendor until the execution of the Deed of Absolute Sale. 9

Contracts are law between the parties, and they are bound by its stipulations. It is clear from the above-quoted
provisions that the parties intended their agreement to be a Contract to Sell: Dela Cruz retains ownership of the
subject lands and does not have the obligation to execute a Deed of Absolute Sale until petitioners’ payment of
the full purchase price. Payment of the price is a positive suspensive condition, failure of which is not a breach
but an event that prevents the obligation of the vendor to convey title from becoming effective. Strictly speaking,
there can be no rescission or resolution of an obligation that is still non-existent due to the non-happening of the
suspensive condition.10 Dela Cruz is thus not obliged to execute a Deed of Absolute Sale in petitioners’ favor
because of petitioners’ failure to make full payment on the stipulated date.

We ruled thus in Pangilinan v. Court of Appeals:11

Article 1592 of the New Civil Code, requiring demand by suit or by notarial act in case the vendor of realty wants
to rescind does not apply to a contract to sell but only to contract of sale. In contracts to sell, where ownership is
retained by the seller and is not to pass until the full payment, such payment, as we said, is a positive
suspensive condition, the failure of which is not a breach, casual or serious, but simply an event that prevented
the obligation of the vendor to convey title from acquiring binding force. To argue that there was only a casual
breach is to proceed from the assumption that the contract is one of absolute sale, where non-payment is a
resolutory condition, which is not the case.

The applicable provision of law in instant case is Article 1191 of the New Civil Code which provides as follows:

Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not
comply with what is incumbent upon him.

The injured party may choose between the fulfillment and the rescission of the obligation, with the payment of
damages in either case. He may also seek rescission, even after he has chosen fulfillment, if the latter should
become impossible.

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

This is understood to be without prejudice to the rights of third persons who have acquired the thing, in
accordance with Articles 1385 and 1388 and the Mortgage Law. (1124)

Pursuant to the above, the law makes it available to the injured party alternative remedies such as the power to
rescind or enforce fulfillment of the contract, with damages in either case if the obligor does not comply with what
is incumbent upon him. There is nothing in this law which prohibits the parties from entering into an agreement
that a violation of the terms of the contract would cause its cancellation even without court intervention. The
rationale for the foregoing is that in contracts providing for automatic revocation, judicial intervention is
necessary not for purposes of obtaining a judicial declaration rescinding a contract already deemed rescinded by
virtue of an agreement providing for rescission even without judicial intervention, but in order to determine
whether or not the rescission was proper. Where such propriety is sustained, the decision of the court will be
merely declaratory of the revocation, but it is not in itself the revocatory act. Moreover, the vendor’s right in
contracts to sell with reserved title to extrajudicially cancel the sale upon failure of the vendee to pay the
stipulated installments and retain the sums and installments already received has long been recognized by the
well-established doctrine of 39 years standing. The validity of the stipulation in the contract providing for
automatic rescission upon non-payment cannot be doubted. It is in the nature of an agreement granting a party
the right to rescind a contract unilaterally in case of breach without need of going to court. Thus, rescission
under Article 1191 was inevitable due to petitioners’ failure to pay the stipulated price within the original period
fixed in the agreement.

Petitioners justify the delay in payment by stating that they had notice that Dela Cruz is not the owner of the
subject land, and that they took pains to rectify the alleged defect in Dela Cruz’s title. Be that as it may, Angel
Abelida’s (Abelida) affidavit12 confirming the sale to Dela Cruz only serves to strengthen Dela Cruz’s claim that
she is the absolute owner of the subject lands at the time the Contract to Sell between herself and petitioners
was executed. Dela Cruz did not conceal from petitioners that the title to Lot Nos. 2776, 2767 and 2769
still remained under Abelida’s name, and the Contract to Sell13 even provided that petitioners should
shoulder the attendant expenses for the transfer of ownership from Abelida to Dela Cruz.

The trial court erred in applying R.A. 6552,14 or the Maceda Law, to the present case. The Maceda Law applies
to contracts of sale of real estate on installment payments, including residential condominium apartments but
excluding industrial lots, commercial buildings and sales to tenants. The subject lands, comprising five (5)
parcels and aggregating 69,028 square meters, do not comprise residential real estate within the contemplation
of the Maceda Law.15 Moreover, even if we apply the Maceda Law to the present case, petitioners’ offer of
payment to Dela Cruz was made a year and a half after the stipulated date. This is beyond the sixty-day grace
period under Section 4 of the Maceda Law.16 Petitioners still cannot use the second sentence of Section 4 of the
Maceda Law against Dela Cruz for Dela Cruz’s alleged failure to give an effective notice of cancellation or
demand for rescission because Dela Cruz merely sent the notice to the address supplied by petitioners in the
Contract to Sell.

It is undeniable that petitioners failed to pay the balance of the purchase price on the stipulated date of the
Contract to Sell. Thus, Dela Cruz is within her rights to sell the subject lands to Bartolome. Neither Dela Cruz nor
Bartolome can be said to be in bad faith.

WHEREFORE, we DENY the petition. We AFFIRM in toto the Court of Appeals’ Decision promulgated on 25

January 2006 as well as the Resolution promulgated on 16 March 2006 in CA-G.R. CV No. 63651.

Costs against petitioners.

11. ACTIVE REALTY & DEVELOPMENT CORPORATION, petitioner,

vs.
NECITA G. DAROYA, represented by Attorney-In-Fact Shirley Daroya-Quinones, respondents.

PUNO, J.:

This is a petition for review on certiorari under Rule 45 of the Revised Rules of Court which seeks to reverse and
set aside the Resolution of the Court of Appeals, dated August 3, 1999, denying due course to petitioner’s
appeal for insufficiency of form and substance. 1âwphi1.nêt

Petitioner ACTIVE REALTY & DEVELOPMENT CORPORATION is the owner and developer of Town & Country
Hills Executive Village in Antipolo, Rizal. On January 2, 1985, it entered into a Contract to Sell 1 with respondent
NECITA DAROYA, a contract worker in the Middle East, whereby the latter agreed to buy a 515 sq. m. lot
for P224,025.00 in petitioner’s subdivision.

The contract to sell stipulated that the respondent shall pay the initial amount of P53,766.00 upon execution of
the contract and the balance of P170,259.00 in sixty (60) monthly installments of P4,893.35. Adding the down
payment and installment payments, it would appear that the total amount is P346,367.00, a figure higher than
that stated as the contract price.

On May 5, 1989, petitioner accepted respondent’s amortization in the amount of P40,000.00. By August 8, 1989,
respondent was in default of P15,282.85 representing three (3) monthly amortizations. Petitioner sent
respondent a notice of cancellation2 of their contract to sell, to take effect thirty (30) days from receipt of the
letter. It does not appear from the records, however, when respondent received the letter. Nonetheless, when
respondent offered to pay for the balance of the contract price, petitioner refused as it has allegedly sold the lot
to another buyer.

On August 26, 1991, respondent filed a complaint for specific performance and damages 3 against petitioner
before the Arbitration Branch of the Housing and Land Use Regulatory Board (HLURB). It sought to compel the
petitioner to execute a final Deed of Absolute Sale in respondent’s favor after she pays any balance that may still
be due from her. Respondent claimed that she is entitled to the final deed of sale after she offered to pay the
balance of P24,048.47, considering that she has already paid the total sum of P314,816.76, which amount
is P90,835.76 more than the total contract price of P224,025.00.
On June 14, 1993, HLURB Arbiter Alfredo M. Tan II found for the respondent. He ruled that the cancellation of
the contract to sell was void as petitioner failed to pay the cash surrender value to respondent as mandated by
law. However, as the subject lot was already sold to a third party and the respondent had agreed to a full refund
of her installment payments, petitioner was ordered to refund to respondent all her payments in the amount
of P314,816.70, with 12% interest per annum from August 26, 1991 (the date of the filing of the
complaint) until fully paid and to pay P10,000.00 as attorney’s fees. 4

On appeal, the HLURB Board of Commissioners set aside the Arbiter’s Decision. The Board refused to apply
the remedies provided under the Maceda Law and instead deemed it fit to formulate an "equitable" solution to
the case. It ruled that, as both parties were at fault, i.e., respondent incurred in delay in her installment payments
and respondent failed to send a notarized notice of cancellation, petitioner was ordered to refund to the
respondent one half of the total amount she has paid or P157,408.35, which was allegedly akin to the
remedy provided under the Maceda Law.5

Respondent appealed to the Office of the President. On June 2, 1998, then Chief Presidential Counsel
Renato C. Corona, acting by authority of the President, modified the Decision of the HLURB as he found that
it was not in accord with the provisions of the Maceda Law. He held that as petitioner did not comply with the
legal requisites for a valid cancellation of the contract, the contract to sell between the parties subsisted and
concluded that respondent was entitled to the lot after payment of her outstanding balance. However, as the
petitioner disclosed that the lot was already sold to another person and that the actual value of the lot as of the
date of the contract was P1,700.00 per square meter, petitioner was ordered to refund to the respondent the
amount of P875,000.00, the true and actual value of the lot as of the date of the contract, with interest at
12% per annum computed from August 26, 1991 until fully paid, or to deliver a substitute lot at the
choice of respondent.6

Upon denial of its motion for reconsideration, petitioner assailed the Decision in the Court of Appeals. However,
its petition for review7 was denied due course for insufficiency in form and substance, 8 because: 1) no affidavit of
service was attached to the petition; 2) except for certified true copies of the decision and resolution of the Office
of the President, no other material portions of the record, as would support the allegations in the petition, were
attached; and, 3) the certification of forum-shopping was signed by the head counsel and vice-president of the
petitioner corporation who was not authorized by a Board Resolution to represent petitioner.

Petitioner moved for reconsideration. The Court of Appeals denied it on an entirely new ground, i.e., for untimely
filing of the petition for review.9

Petitioner now impugns the decision of the Court of Appeals and raises the following procedural issues:

THE HONORABLE COURT OF APPEALS GROSSLY ERRED IN RELYING TOO MUCH ON FORM
RATHER THAN ON THE MERITS OF THE PETITION THEREBY DENYING PETITIONER OF ITS
RIGHT TO DUE PROCESS.

II

THE HONORABLE COURT OF APPEALS ANCHORED THE DENIAL OF PETITIONER’S MOTION

FOR RECONSIDERATION ON INCONSISTENT AND CONFLICTING RULINGS NOT BORNE BY THE
FACTS AND THE RECORDS OF THE CASE.

On the procedural points raised, we find for the petitioner.

Our perusal of the record reveals that petitioner substantially complied with the formal requirements of Rule 43
of the Rules of Court.10 First, as to the non-attachment of the affidavit of service, the records bear that the
petition was accompanied by the original registry receipts issued by the post office, showing that the petition and
its annexes were served upon the parties. Moreover, respondent’s counsel of record, Atty. Sergio Guadiz,
actually received a copy of the petition.11 Second, petitioner likewise complied with Section 6 (c) of Rule 43
requiring the submission of copies of the award, judgment, final order and resolution appealed from. Its petition
was accompanied by the duplicate original of the appealed Decision of the Chief Presidential Legal Counsel and
his Resolution denying petitioner’s motion for reconsideration, the Decision of the HLURB Board of
Commissioners and that of the HLURB arbiter. A perusal of these documents will reveal that they contained all
the relevant facts of the case from which the appellate body can form its own decision. Its failure to submit the
other documents, like the Complaint, Answer, Position Papers and Appeal Memoranda of the parties before the
HLURB, was due to the refusal of the Office of the President to give them a certified true copy of these
documents which were submitted with said Office. Third, as to the lack of Board Resolution by petitioner
corporation authorizing Atty. Rene Katigbak, its Chief Legal Counsel and Vice-President for Legal Affairs, to
represent it in the filing of the appeal, petitioner admits that this was due to its honest belief that such authority is
not required as it was not mentioned in Section 6(c) of Rule 43. 12 To make up for such omission, petitioner
submitted a Secretary’s Certificate13 confirming and ratifying the authority of Atty. Katigbak to represent
petitioner. Finally, we find that the Court of Appeals erred in denying petitioner’s motion for reconsideration due
to untimely filing as the records clearly show that it was filed on June 25, 1999, a day before the expiration of the
period to appeal granted by the Court of Appeals. 14

In denying due course to the petition, the appellate court gave premium to form and failed to consider the
important rights of the parties in the case at bar.15 At the very least, petitioner substantially complied with the
procedural requirements for appeal, hence, it is best to give due course to the petition at bar to clarify the rights
and duties of a buyer in contracts to sell real estate on installment basis.

The issue to be resolved is whether or not the petitioner can be compelled to refund to the respondent the value
of the lot or to deliver a substitute lot at respondent’s option.

We find for the respondent and rule in the affirmative. 1âwphi1.nêt

The contract to sell in the case at bar is governed by Republic Act No. 6552 -- "The Realty Installment Buyer
Protection Act," or more popularly known as the Maceda Law -- which came into effect in September 1972. Its
declared public policy is to protect buyers of real estate on installment basis against onerous and oppressive
conditions.16 The law seeks to address the acute housing shortage problem in our country that has prompted
thousands of middle and lower class buyers of houses, lots and condominium units to enter into all sorts of
contracts with private housing developers involving installment schemes. Lot buyers, mostly low income earners
eager to acquire a lot upon which to build their homes, readily affix their signatures on these contracts, without
an opportunity to question the onerous provisions therein as the contract is offered to them on a "take it or leave
it" basis.17 Most of these contracts of adhesion, drawn exclusively by the developers, entrap innocent buyers by
requiring cash deposits for reservation agreements which oftentimes include, in fine print, onerous default
clauses where all the installment payments made will be forfeited upon failure to pay any installment due even if
the buyers had made payments for several years.18 Real estate developers thus enjoy an unnecessary
advantage over lot buyers who they often exploit with iniquitous results. They get to forfeit all the installment
payments of defaulting buyers and resell the same lot to another buyer with the same exigent conditions. To
help especially the low income lot buyers, the legislature enacted R.A. No. 6552 delineating the rights and
remedies of lot buyers and protect them from one-sided and pernicious contract stipulations.

More specifically, Section 3 of R.A. No. 6552 provided for the rights of the buyer in case of default in the
payment of succeeding installments, where he has already paid at least two (2) years of installments, thus:

"(a) To pay, without additional interest, the unpaid installments due within the total grace period
earned by him, which is hereby fixed at the rate of one month grace period for every one year of
installment payments made; x x x

(b) If the contract is cancelled, the seller shall refund to the buyer the cash surrender value of the
payments on the property equivalent to fifty per cent of the total payments made; provided, that the
actual cancellation of the contract shall take place after thirty days from receipt by the buyer of
the notice of cancellation or the demand for rescission of the contract by a notarial act and upon
full payment of the cash surrender value to the buyer."

In this case, respondent has already paid in four (4) years a total of P314,860.76 or P90,835.76 more than
the contract price of P224,035.00. In April 1989, petitioner decided to cancel the contract when the respondent
incurred in delay in the payment of P15,282.85, representing three (3) monthly amortizations. Petitioner
refused to accept respondent’s subsequent tender of payment of the outstanding balance alleging that it has
already cancelled the contract and sold the subject lot to another buyer. However, the records clearly show that
the petitioner failed to comply with the mandatory twin requirements for a valid and effective cancellation
under the law,19 i.e., he failed to send a notarized notice of cancellation and refund the cash surrender value. At
no time, from the date it gave a notice of cancellation up to the time immediately before the respondent filed the
case against petitioner, did the latter exert effort to pay the cash surrender value. In fact, the records disclose
that it was only during the preliminary hearing of the case before the HLURB arbiter when petitioner offered to
pay the cash surrender value. Petitioner justifies its inaction on the ground that the respondent was always out of
the country. Even then, the records are bereft of evidence to show that petitioner attempted to pay the cash
surrender value to respondent through her last known address. The omission is surprising considering that even
during the times respondent was out of the country, petitioner has been sending her written notices to remind
her to pay her installment arrears through her last known address. Clearly, had respondent not filed a case
demanding a final deed of sale in her favor, petitioner would not have lifted a finger to give respondent what was
due her – actual payment of the cash surrender value, among others. In disregard of basic equitable principles,
petitioner’s stance would enable it to resell the property, keep respondent’s installment payments, not to mention
the cash surrender value which it was obligated to return. The Layug20 case cited by petitioner is inapropos.
In Layug, the lot buyer did not pay for the outstanding balance of his account and the Court found that notarial
rescission or cancellation was no longer necessary as the seller has already filed in court a case for rescission of
the contract to sell. In the case at bar, respondent offered to pay for her outstanding balance of the contract price
but respondent refused to accept it. Neither did petitioner adduce proof that the respondent’s offer to pay was
made after the effectivity date stated in its notice of cancellation. Moreover, there was no formal notice of
cancellation or court action to rescind the contract. Given the circumstances, we find it illegal and iniquitous that
petitioner, without complying with the mandatory legal requirements for canceling the contract, forfeited both
respondent’s land and hard-earned money after she has paid for, not just the contract price, but more than the
consideration stated in the contract to sell.

Thus, for failure to cancel the contract in accordance with the procedure provided by law, we hold that
the contract to sell between the parties remains valid and subsisting. Following Section 3(a) of R.A. No.
6552, respondent has the right to offer to pay for the balance of the purchase price, without interest,
which she did in this case. Ordinarily, petitioner would have had no other recourse but to accept payment.
However, respondent can no longer exercise this right as the subject lot was already sold by the petitioner to
another buyer which lot, as admitted by the petitioner, was valued at P1,700.00 per square meter. As
respondent lost her chance to pay for the balance of the P875,000.00 lot, it is only just and equitable that the
petitioner be ordered to refund to respondent the actual value of the lot resold, i.e., P875,000.00, with 12%
interest per annum computed from August 26, 1991 until fully paid or to deliver a substitute lot at the option of
the respondent.

On a final note, it would not be amiss to stress that the HLURB Board Decision ordering petitioner to refund to
respondent one half of her total payments is not an equitable solution as it punished the respondent for her
delinquent payments but totally disregarded petitioner’s failure to comply with the mandatory requisites for a
valid cancellation of the contract to sell. The Board failed to consider that the Maceda law was enacted to
remedy the plight of low and middle-income lot buyers, save them from the exacting default clauses in real
estate sales and assure them of a home they can call their own. Neither would the Decision of the HLURB
Arbiter ordering a full refund of the installment payments of respondent in the amount of P314,816.70 be justified
as, under the law, respondent is entitled to the lot she purchased after payment of her outstanding balance
which she was ready and willing to do. Thus, to penalize the petitioner for failing in its obligation to deliver the
subject lot and to give the respondent what is rightly hers, the petitioner was correctly ordered to refund to the
respondent the actual value of the land (P875,000.00) she lost to another buyer, plus interest at the rate of 12%
per annum from August 26, 1991 until fully paid or to deliver a substitute lot at the choice of the respondent.1âwphi1.nêt

IN VIEW WHEREOF, the Decision of then Chief Presidential Legal Assistant Renato Corona, Office of the
President, dated June 2, 1998, is AFFIRMED in toto. Costs against petitioner.

12. MANUEL C. PAGTALUNAN, petitioner,

vs.
RUFINA DELA CRUZ VDA. DE MANZANO, respondent.

DECISION

AZCUNA, J.:

This is a petition for review on certiorari under Rule 45 of the Rules of Court of the Court of Appeals’ (CA)
Decision promulgated on October 30, 2000 and its Resolution dated March 23, 2001 denying petitioner’s motion
for reconsideration. The Decision of the CA affirmed the Decision of the Regional Trial Court (RTC) of Malolos,
Bulacan, dated June 25, 1999 dismissing the case of unlawful detainer for lack of merit.

The facts are as follows:

On July 19, 1974, Patricio Pagtalunan (Patricio), petitioner’s stepfather and predecessor-in-interest, entered into
a Contract to Sell with respondent, wife of Patricio’s former mechanic, Teodoro Manzano, whereby the former
agreed to sell, and the latter to buy, a house and lot which formed half of a parcel of land, covered by Transfer
Certificate of Title (TCT) No. T-10029 (now TCT No. RT59929 [T-254773]), with an area of 236 square meters.
The consideration of P17,800 was agreed to be paid in the following manner: P1,500 as downpayment upon
execution of the Contract to Sell, and the balance to be paid in equal monthly installments of P150 on or before
the last day of each month until fully paid.

It was also stipulated in the contract that respondent could immediately occupy the house and lot; that in case of
default in the payment of any of the installments for 90 days after its due date, the contract would be
automatically rescinded without need of judicial declaration, and that all payments made and all improvements
done on the premises by respondent would be considered as rentals for the use and occupation of the property
or payment for damages suffered, and respondent was obliged to peacefully vacate the premises and deliver the
possession thereof to the vendor.

Petitioner claimed that respondent paid only P12,950. She allegedly stopped paying after December 1979
without any justification or explanation. Moreover, in a "Kasunduan"1 dated November 18, 1979, respondent
borrowed P3,000 from Patricio payable in one year either in one lump sum payment or by installments, failing
which the balance of the loan would be added to the principal subject of the monthly amortizations on the land.

Lastly, petitioner asserted that when respondent ceased paying her installments, her status of buyer was
automatically transformed to that of a lessee. Therefore, she continued to possess the property by mere
tolerance of Patricio and, subsequently, of petitioner.

On the other hand, respondent alleged that she paid her monthly installments religiously, until sometime in 1980
when Patricio changed his mind and offered to refund all her payments provided she would surrender the house.
She refused. Patricio then started harassing her and began demolishing the house portion by portion.
Respondent admitted that she failed to pay some installments after December 1979, but that she resumed
paying in 1980 until her balance dwindled to P5,650. She claimed that despite several months of delay in
payment, Patricio never sued for ejectment and even accepted her late payments.

Respondent also averred that on September 14, 1981, she and Patricio signed an agreement (Exh. 2) whereby
he consented to the suspension of respondent’s monthly payments until December 1981. However, even before
the lapse of said period, Patricio resumed demolishing respondent’s house, prompting her to lodge a complaint
with the Barangay Captain who advised her that she could continue suspending payment even beyond
December 31, 1981 until Patricio returned all the materials he took from her house. This Patricio failed to do until
his death.

Respondent did not deny that she still owed Patricio P5,650, but claimed that she did not resume paying her
monthly installment because of the unlawful acts committed by Patricio, as well as the filing of the ejectment
case against her. She denied having any knowledge of the Kasunduan of November 18, 1979.

Patricio and his wife died on September 17, 1992 and on October 17, 1994, respectively. Petitioner became their
sole successor-in-interest pursuant to a waiver by the other heirs. On March 5, 1997, respondent received a
letter from petitioner’s counsel dated February 24, 1997 demanding that she vacate the premises within five
days on the ground that her possession had become unlawful. Respondent ignored the demand. The Punong
Barangay failed to settle the dispute amicably.

On April 8, 1997, petitioner filed a Complaint for unlawful detainer against respondent with the Municipal Trial
Court (MTC) of Guiguinto, Bulacan praying that, after hearing, judgment be rendered ordering respondent to
immediately vacate the subject property and surrender it to petitioner; forfeiting the amount of P12,950 in favor
of petitioner as rentals; ordering respondent to pay petitioner the amount of P3,000 under the Kasunduan and
the amount of P500 per month from January 1980 until she vacates the property, and to pay petitioner attorney’s
fees and the costs.
On December 22, 1998, the MTC rendered a decision in favor of petitioner. It stated that although the Contract
to Sell provides for a rescission of the agreement upon failure of the vendee to pay any installment, what the
contract actually allows is properly termed a resolution under Art. 1191 of the Civil Code.

The MTC held that respondent’s failure to pay not a few installments caused the resolution or termination of the
Contract to Sell. The last payment made by respondent was on January 9, 1980 (Exh. 71). Thereafter,
respondent’s right of possession ipso facto ceased to be a legal right, and became possession by mere
tolerance of Patricio and his successors-in-interest. Said tolerance ceased upon demand on respondent to
vacate the property.

The dispositive portion of the MTC Decision reads:

Wherefore, all the foregoing considered, judgment is hereby rendered, ordering the defendant:

a. to vacate the property covered by Transfer Certificate of Title No. T-10029 of the Register of
Deeds of Bulacan (now TCT No. RT-59929 of the Register of Deeds of Bulacan), and to
surrender possession thereof to the plaintiff;

b. to pay the plaintiff the amount of P113,500 representing rentals from January 1980 to the
present;

c. to pay the plaintiff such amount of rentals, at P500/month, that may become due after the date
of judgment, until she finally vacates the subject property;

d. to pay to the plaintiff the amount of P25,000 as attorney’s fees.

SO ORDERED.2

On appeal, the RTC of Malolos, Bulacan, in a Decision dated June 25, 1999, reversed the decision of the MTC
and dismissed the case for lack of merit. According to the RTC, the agreement could not be automatically
rescinded since there was delivery to the buyer. A judicial determination of rescission must be secured by
petitioner as a condition precedent to convert the possession de facto of respondent from lawful to unlawful.

The dispositive portion of the RTC Decision states:

WHEREFORE, judgment is hereby rendered reversing the decision of the Municipal Trial Court of
Guiguinto, Bulacan and the ejectment case instead be dismissed for lack of merit. 3

The motion for reconsideration and motion for execution filed by petitioner were denied by the RTC for lack of
merit in an Order dated August 10, 1999.

Thereafter, petitioner filed a petition for review with the CA.

In a Decision promulgated on October 30, 2000, the CA denied the petition and affirmed the Decision of the
RTC. The dispositive portion of the Decision reads:

WHEREFORE, the petition for review on certiorari is Denied. The assailed Decision of the Regional Trial
Court of Malolos, Bulacan dated 25 June 1999 and its Order dated 10 August 1999 are hereby
AFFIRMED.

SO ORDERED. 4

The CA found that the parties, as well as the MTC and RTC failed to advert to and to apply Republic Act (R.A.)
No. 6552, more commonly referred to as the Maceda Law, which is a special law enacted in 1972 to protect
buyers of real estate on installment payments against onerous and oppressive conditions.

The CA held that the Contract to Sell was not validly cancelled or rescinded under Sec. 3 (b) of R.A. No. 6552,
and recognized respondent’s right to continue occupying unmolested the property subject of the contract to sell.

The CA denied petitioner’s motion for reconsideration in a Resolution dated March 23, 2001.
Hence, this petition for review on certiorari.

Petitioner contends that:

A. Respondent Dela Cruz must bear the consequences of her deliberate withholding of, and refusal to
pay, the monthly payment. The Court of Appeals erred in allowing Dela Cruz who acted in bad faith from
benefiting under the Maceda Law.

B. The Court of Appeals erred in resolving the issue on the applicability of the Maceda Law, which issue
was not raised in the proceedings a quo.

C. Assuming arguendo that the RTC was correct in ruling that the MTC has no jurisdiction over a
rescission case, the Court of Appeals erred in not remanding the case to the RTC for trial. 5

Petitioner submits that the Maceda Law supports and recognizes the right of vendors of real estate to cancel the
sale outside of court, without need for a judicial declaration of rescission, citing Luzon Brokerage Co., Inc., v.
Maritime Building Co., Inc.6

Petitioner contends that respondent also had more than the grace periods provided under the Maceda Law
within which to pay. Under Sec. 37 of the said law, a buyer who has paid at least two years of installments has a
grace period of one month for every year of installment paid. Based on the amount of P12,950 which respondent
had already paid, she is entitled to a grace period of six months within which to pay her unpaid installments after
December, 1979. Respondent was given more than six months from January 1980 within which to settle her
unpaid installments, but she failed to do so. Petitioner’s demand to vacate was sent to respondent in February
1997.

There is nothing in the Maceda Law, petitioner asserts, which gives the buyer a right to pay arrearages after the
grace periods have lapsed, in the event of an invalid demand for rescission. The Maceda Law only provides that
actual cancellation shall take place after 30 days from receipt of the notice of cancellation or demand for
rescission and upon full payment of the cash surrender value to the buyer.

Petitioner contends that his demand letter dated February 24, 1997 should be considered the notice of
cancellation since the demand letter informed respondent that she had "long ceased to have any right to
possess the premises in question due to [her] failure to pay without justifiable cause." In support of his
contention, he cited Layug v. Intermediate Appellate Court8 which held that "the additional formality of a demand
on [the seller’s] part for rescission by notarial act would appear, in the premises, to be merely circuitous and
consequently superfluous." He stated that in Layug, the seller already made a written demand upon the buyer.

In addition, petitioner asserts that whatever cash surrender value respondent is entitled to have been applied
and must be applied to rentals for her use of the house and lot after December, 1979 or after she stopped
payment of her installments.

Petitioner argues that assuming Patricio accepted respondent’s delayed installments in 1981, such act cannot
prevent the cancellation of the Contract to Sell. Installments after 1981 were still unpaid and the applicable grace
periods under the Maceda Law on the unpaid installments have long lapsed. Respondent cannot be allowed to
hide behind the Maceda Law. She acted with bad faith and must bear the consequences of her deliberate
withholding of and refusal to make the monthly payments.

Petitioner also contends that the applicability of the Maceda Law was never raised in the proceedings below;
hence, it should not have been applied by the CA in resolving the case.

The Court is not persuaded.

The CA correctly ruled that R.A No. 6552, which governs sales of real estate on installment, is applicable in the
resolution of this case.

This case originated as an action for unlawful detainer. Respondent is alleged to be illegally withholding
possession of the subject property after the termination of the Contract to Sell between Patricio and respondent.
It is, therefore, incumbent upon petitioner to prove that the Contract to Sell had been cancelled in accordance
with R.A. No. 6552.
The pertinent provision of R.A. No. 6552 reads:

Sec. 3. In all transactions or contracts involving the sale or financing of real estate on installment
payments, including residential condominium apartments but excluding industrial lots, commercial
buildings and sales to tenants under Republic Act Numbered Thirty-eight hundred forty-four as amended
by Republic Act Numbered Sixty-three hundred eighty-nine, where the buyer has paid at least two years
of installments, the buyer is entitled to the following rights in case he defaults in the payment of
succeeding installments:

(a) To pay, without additional interest, the unpaid installments due within the total grace period earned by
him, which is hereby fixed at the rate of one month grace period for every one year of installment
payments made: Provided, That this right shall be exercised by the buyer only once in every five years of
the life of the contract and its extensions, if any.

(b) If the contract is cancelled, the seller shall refund to the buyer the cash surrender value of the
payments on the property equivalent to fifty percent of the total payments made and, after five years of
installments, an additional five percent every year but not to exceed ninety percent of the total payments
made: Provided, That the actual cancellation of the contract shall take place after thirty days from
receipt by the buyer of the notice of cancellation or the demand for rescission of the contract by
a notarial act and upon full payment of the cash surrender value to the buyer.9

R.A. No. 6552, otherwise known as the "Realty Installment Buyer Protection Act," recognizes in conditional sales
of all kinds of real estate (industrial, commercial, residential) the right of the seller to cancel the contract upon
non-payment of an installment by the buyer, which is simply an event that prevents the obligation of the vendor
to convey title from acquiring binding force.10 The Court agrees with petitioner that the cancellation of the
Contract to Sell may be done outside the court particularly when the buyer agrees to such cancellation.

However, the cancellation of the contract by the seller must be in accordance with Sec. 3 (b) of R.A. No. 6552,
which requires a notarial act of rescission and the refund to the buyer of the full payment of the cash surrender
value of the payments on the property. Actual cancellation of the contract takes place after 30 days from receipt
by the buyer of the notice of cancellation or the demand for rescission of the contract by a notarial act and upon
full payment of the cash surrender value to the buyer.

Based on the records of the case, the Contract to Sell was not validly cancelled or rescinded under Sec. 3 (b) of
R.A. No. 6552.

First, Patricio, the vendor in the Contract to Sell, died on September 17, 1992 without canceling the Contract to
Sell.

Second, petitioner also failed to cancel the Contract to Sell in accordance with law.

Petitioner contends that he has complied with the requirements of cancellation under Sec. 3 (b) of R.A. No.
6552. He asserts that his demand letter dated February 24, 1997 should be considered as the notice of
cancellation or demand for rescission by notarial act and that the cash surrender value of the payments on the
property has been applied to rentals for the use of the house and lot after respondent stopped payment after
January 1980.

The Court, however, finds that the letter 11 dated February 24, 1997, which was written by petitioner’s counsel,
merely made formal demand upon respondent to vacate the premises in question within five days from receipt
thereof since she had "long ceased to have any right to possess the premises x x x due to [her] failure to pay
without justifiable cause the installment payments x x x."

Clearly, the demand letter is not the same as the notice of cancellation or demand for rescission by a notarial
act required by R.A No. 6552. Petitioner cannot rely on Layug v. Intermediate Appellate Court12 to support his
contention that the demand letter was sufficient compliance. Layug held that "the additional formality of a
demand on [the seller’s] part for rescission by notarial act would appear, in the premises, to be merely circuitous
and consequently superfluous" since the seller therein filed an action for annulment of contract, which is a
kindred concept of rescission by notarial act.13 Evidently, the case of unlawful detainer filed by petitioner does not
exempt him from complying with the said requirement.
In addition, Sec. 3 (b) of R.A. No. 6552 requires refund of the cash surrender value of the payments on the
property to the buyer before cancellation of the contract. The provision does not provide a different requirement
for contracts to sell which allow possession of the property by the buyer upon execution of the contract like the
instant case. Hence, petitioner cannot insist on compliance with the requirement by assuming that the cash
surrender value payable to the buyer had been applied to rentals of the property after respondent failed to pay
the installments due.

There being no valid cancellation of the Contract to Sell, the CA correctly recognized respondent’s right to
continue occupying the property subject of the Contract to Sell and affirmed the dismissal of the unlawful
detainer case by the RTC.

The Court notes that this case has been pending for more than ten years. Both parties prayed for other reliefs
that are just and equitable under the premises. Hence, the rights of the parties over the subject property shall be
resolved to finally dispose of that issue in this case.

Considering that the Contract to Sell was not cancelled by the vendor, Patricio, during his lifetime or by petitioner
in accordance with R.A. No. 6552 when petitioner filed this case of unlawful detainer after 22 years of continuous
possession of the property by respondent who has paid the substantial amount of P12,300 out of the purchase
price of P17,800, the Court agrees with the CA that it is only right and just to allow respondent to pay her arrears
and settle the balance of the purchase price.

For respondent’s delay in the payment of the installments, the Court, in its discretion, and applying Article
220914 of the Civil Code, may award interest at the rate of 6% per annum 15 on the unpaid balance considering
that there is no stipulation in the Contract to Sell for such interest. For purposes of computing the legal interest,
the reckoning period should be the filing of the complaint for unlawful detainer on April 8, 1997.

Based on respondent’s evidence16 of payments made, the MTC found that respondent paid a total of P12,300
out of the purchase price of P17,800. Hence, respondent still has a balance of P5,500, plus legal interest at the
rate of 6% per annum on the unpaid balance starting April 8, 1997.

The third issue is disregarded since petitioner assails an inexistent ruling of the RTC on the lack of jurisdiction of
the MTC over a rescission case when the instant case he filed is for unlawful detainer.

WHEREFORE, the Decision of the Court of Appeals dated October 30, 2000 sustaining the dismissal of the
unlawful detainer case by the RTC is AFFIRMED with the following MODIFICATIONS:

1. Respondent Rufina Dela Cruz Vda. de Manzano shall pay petitioner Manuel C. Pagtalunan the
balance of the purchase price in the amount of Five Thousand Five Hundred Pesos (P5,500) plus
interest at 6% per annum from April 8, 1997 up to the finality of this judgment, and thereafter, at the rate
of 12% per annum;

2. Upon payment, petitioner Manuel C. Pagtalunan shall execute a Deed of Absolute Sale of the subject
property and deliver the certificate of title in favor of respondent Rufina Dela Cruz Vda. de Manzano; and

3. In case of failure to pay within 60 days from finality of this Decision, respondent Rufina Dela Cruz Vda.
de Manzano shall immediately vacate the premises without need of further demand, and the
downpayment and installment payments of P12,300 paid by her shall constitute rental for the subject
property.

No costs.

13. PLANTERS DEVELOPMENT BANK, Petitioner,

vs.
JULIE CHANDUMAL, Respondent.

DECISION
REYES, J.:

In this petition for review under Rule 45 of the Rules of Court, Planters Development Bank (PDB) questions the
Decision dated July 27, 2010 of the Court of Appeals (CA), as well as its Resolution dated February 16, 2011,
1  2 

denying the petitioner's motion for reconsideration in CA-G.R. CV No. 82861. The assailed decision nullified the
Decision dated May 31, 2004 of the Regional Trial Court (RTC), Las Piñas City, Branch 255 in Civil Case No.
3 

LP-99-0137.

Antecedent Facts

The instant case stemmed from a contract to sell a parcel of land, together with improvements, between BF
Homes, Inc. (BF Homes) and herein respondent Julie Chandumal (Chandumal). The property subject of the
contract is located in Talon Dos, Las Piñas City and covered by Transfer Certificate of Title No. T-10779. On
February 12, 1993, BF Homes sold to PDB all its rights, participations and interests over the contract.

Chandumal paid her monthly amortizations from December 1990 until May 1994 when she began to default in
her payments. In a Notice of Delinquency and Rescission of Contract with Demand to Vacate dated July 14,
4 

1998, PDB gave Chandumal a period of thirty (30) days from receipt within which to settle her installment
arrearages together with all its increments; otherwise, all her rights under the contract shall be deemed
extinguished and terminated and the contract declared as rescinded. Despite demand, Chandumal still failed to
settle her obligation.

On June 18, 1999, an action for judicial confirmation of notarial rescission and delivery of possession was filed
by PDB against Chandumal, docketed as Civil Case No. LP-99-0137. PDB alleged that despite demand,
Chandumal failed and/or refused to pay the amortizations as they fell due; hence, it caused the rescission of the
contract by means of notarial act, as provided in Republic Act (R.A.) No. 6552. According to PDB, it tried to
5 

deliver the cash surrender value of the subject property, as required under R.A. No. 6552, in the amount of ₱
10,000.00; however, the defendant was unavailable for such purpose. 6

Consequently, summons was issued and served by deputy sheriff Roberto T. Galing (Sheriff Galing). According
to his return, Sheriff Galing attempted to personally serve the summons upon Chandumal on July 15, 19 and 22,
1999 but it was unavailing as she was always out of the house on said dates. Hence, the sheriff caused
substituted service of summons on August 5, 1999 by serving the same through Chandumal’s mother who
acknowledged receipt thereof. 7

For her failure to file an answer within the prescribed period, PDB filed on April 24, 2000 an ex parte motion to
declare Chandumal in default. On January 12, 2001, the RTC issued an Order granting the motion of PDB. 8

On February 23, 2001, Chandumal filed an Urgent Motion to Set Aside Order of Default and to Admit Attached
Answer. She maintained that she did not receive the summons and/or was not notified of the same. She further
alleged that her failure to file an answer within the reglementary period was due to fraud, mistake or excusable
negligence. In her answer, Chandumal alleged the following defenses: (a) contrary to the position of PDB, the
latter did not make any demand for her to pay the unpaid monthly amortization; and (b) PDB did not tender or
offer to give the cash surrender value of the property in an amount equivalent to fifty percent (50%) of the actual
total payment made, as provided for under Section 3(b) of R.A. No. 6552. Moreover, Chandumal claimed that
since the total payment she made amounts to ₱ 782,000.00, the corresponding cash surrender value due her
should be ₱ 391,000.00. 9

Per Order dated August 2, 2001, the RTC denied Chandumal’s motion to set aside the order of default. Her
10 

motion for reconsideration was also denied for lack of merit. Conformably, the RTC allowed PDB to present its
11 

evidence ex parte. On May 31, 2004, the RTC rendered a

12 

Decision in favor of PDB, the dispositive portion of which reads:

13 

WHEREFORE, the foregoing considered, judgment is hereby rendered in favor of the plaintiff Planters
Development Bank and against defendant Julie Chandumal as follows, to wit:

1. Declaring the notarial rescission of the Contract to Sell dated 03 January 1990 made by the plaintiff per the
Notice of Delinquency and Rescission of Contract with Demand to Vacate dated 14 July 1998 as judicially
confirmed and ratified;
2. Requiring the plaintiff to deposit in the name of the defendant the amount of ₱ 10,000.00 representing the
cash surrender value for the subject property with the Land Bank of the Philippines, Las Pi[ñ]as City Branch in
satisfaction of the provisions of R.A. No. 6552; and,

3. Ordering the defendant to pay the plaintiff the amount of ₱ 50,000.00 as and by way of attorney’s fees,
including the costs of suit.

SO ORDERED. 14

From the foregoing judgment, Chandumal appealed to the CA.

On July 27, 2010, the CA, without ruling on the propriety of the judicial confirmation of the notarial rescission,
rendered the assailed decision nullifying the RTC decision due to invalid and ineffective substituted service of
summons. The dispositive portion of the CA decision provides:

WHEREFORE, premises considered, the decision of Branch 255 of the Regional Trial Court of Las Piñas City,
dated May 31, 2004, in Civil Case No. LP-99-0137 is hereby NULLIFIED and VACATED.

SO ORDERED. 15

PDB filed a motion for reconsideration but it was denied by the CA in its Resolution dated February 16, 2011.

Hence, this petition based on the following assignment of errors:

The Honorable Court of Appeals erred in reversing the decision of the trial court on the ground of improper
service of summons;

II

The decision of the trial court is valid as it duly acquired jurisdiction over the person of respondent Chandumal
through voluntary appearance; and

III

The trial court did not err in confirming and ratifying the notarial rescission of the subject contract to sell. 16

PDB contends that the RTC properly acquired jurisdiction over the person of Chandumal.  According to PDB,
1âwphi1

there was proper service of summons since the sheriff complied with the proper procedure governing substituted
service of summons as laid down in Section 7, Rule 14 of the Rules of Court. PDB alleges that it is clear from
the sheriff’s return that there were several attempts on at least three (3) different dates to effect personal service
within a reasonable period of nearly a month, before he caused substituted service of summons. The sheriff
likewise stated the reason for his failure to effect personal service and that on his fourth attempt, he effected the
service of summons through Chandumal’s mother who is unarguably, a person of legal age and with sufficient
discretion. PDB also argues that Chandumal voluntarily submitted herself to the jurisdiction of the court when
she filed an Urgent Motion to Set Aside Order of Default and to Admit Attached Answer.

For her part, Chandumal asserts that she never received a copy of the summons or was ever notified of it and
she only came to know of the case sometime in July or August 2000, but she was already in the United States of
America by that time, and that the CA correctly ruled that there was no valid service of summons; hence, the
RTC never acquired jurisdiction over her person.

Issues

1. Whether there was a valid substituted service of summons;

2. Whether Chandumal voluntarily submitted to the jurisdiction of the trial court; and

3. Whether there was proper rescission by notarial act of the contract to sell.
 Our Ruling

The fundamental rule is that jurisdiction over a defendant in a civil case is acquired either through service of
summons or through voluntary appearance in court and submission to its authority. If a defendant has not been
properly summoned, the court acquires no jurisdiction over its person, and a judgment rendered against it is null
and void.17

Where the action is in personam and the defendant is in the Philippines, service of summons may be made
18 

through personal service, that is, summons shall be served by handing to the defendant in person a copy
thereof, or if he refuses to receive and sign for it, by tendering it to him. If the defendant cannot be personally
19 

served with summons within a reasonable time, it is then that substituted service may be made. Personal
20 

service of summons should and always be the first option, and it is only when the said summons cannot be
served within a reasonable time can the process server resort to substituted service. 21

No valid substituted service of

summons

In this case, the sheriff resorted to substituted service of summons due to his failure to serve it personally. In
Manotoc v. Court of Appeals, the Court detailed the requisites for a valid substituted service of summons,
22 

summed up as follows: (1) impossibility of prompt personal service – the party relying on substituted service or
the sheriff must show that the defendant cannot be served promptly or there is impossibility of prompt service;
(2) specific details in the return – the sheriff must describe in the Return of Summons the facts and
circumstances surrounding the attempted personal service; (3) a person of suitable age and discretion – the
sheriff must determine if the person found in the alleged dwelling or residence of defendant is of legal age, what
the recipient’s relationship with the defendant is, and whether said person comprehends the significance of the
receipt of the summons and his duty to immediately deliver it to the defendant or at least notify the defendant of
said receipt of summons, which matters must be clearly and specifically described in the Return of Summons;
and (4) a competent person in charge, who must have sufficient knowledge to understand the obligation of the
defendant in the summons, its importance, and the prejudicial effects arising from inaction on the
summons. These were reiterated and applied in Pascual v. Pascual, where the substituted service of summon
23  24 

made was invalidated due to the sheriff’s failure to specify in the return the necessary details of the failed
attempts to effect personal service which would justify resort to substituted service of summons.

In applying the foregoing requisites in the instant case, the CA correctly ruled that the sheriff’s return failed to
justify a resort to substituted service of summons. According to the CA, the Return of Summons does not
specifically show or indicate in detail the actual exertion of efforts or any positive step taken by the officer or
process server in attempting to serve the summons personally to the defendant. The return merely states the
alleged whereabouts of the defendant without indicating that such information was verified from a person who
had knowledge thereof. Indeed, the sheriff’s return shows a mere perfunctory attempt to cause personal service
25 

of the summons on Chandumal. There was no indication if he even asked Chandumal’s mother as to her
specific whereabouts except that she was "out of the house", where she can be reached or whether he even
tried to await her return. The "efforts" exerted by the sheriff clearly do not suffice to justify substituted service and
his failure to comply with the requisites renders such service ineffective. 26

Respondent voluntarily submitted

to the jurisdiction of the trial court

Despite that there was no valid substituted service of summons, the Court, nevertheless, finds that Chandumal
voluntarily submitted to the jurisdiction of the trial court.

Section 20, Rule 14 of the Rules of Court states:

Sec. 20. Voluntary appearance. – The defendant’s voluntary appearance in the action shall be equivalent to
service of summons. The inclusion in a motion to dismiss of other grounds aside from lack of jurisdiction over the
person of the defendant shall not be deemed a voluntary appearance.

When Chandumal filed an Urgent Motion to Set Aside Order of Default and to Admit Attached Answer, she
effectively submitted her person to the jurisdiction of the trial court as the filing of a pleading where one seeks an
affirmative relief is equivalent to service of summons and vests the trial court with jurisdiction over the
defendant’s person. Thus, it was ruled that the filing of motions to admit answer, for additional time to file
answer, for reconsideration of a default judgment, and to lift order of default with motion for reconsideration is
considered voluntary submission to the trial court’s jurisdiction. The Court notes that aside from the allegation
27 
that she did not receive any summons, Chandumal’s motion to set aside order of default and to admit attached
answer failed to positively assert the trial court’s lack of jurisdiction. In fact, what was set forth therein was the
substantial claim that PDB failed to comply with the requirements of R.A. No. 6552 on payment of cash
surrender value, which already delves into the merits of PDB’s cause of action. In addition, Chandumal even
28 

appealed the RTC decision to the CA, an act which demonstrates her recognition of the trial court’s jurisdiction
to render said judgment.

Given Chandumal’s voluntary submission to the jurisdiction of the trial court, the RTC, Las Piñas City, Branch
255, had all authority to render its Decision dated May 31, 2004. The CA, therefore, erred in nullifying said RTC
decision and dispensing with the resolution of the substantial issue raised herein, i.e., validity of the notarial
rescission. Instead, however, of remanding this case to the CA, the Court will resolve the same considering that
the records of the case are already before us and in order to avoid any further delay. 29

There is no valid rescission of the

contract to sell by notarial act
pursuant to Section 3(b), R.A. No. 6552

That the RTC had jurisdiction to render the decision does not necessarily mean, however, that its ruling on the
validity of the notarial rescission is in accord with the established facts of the case, the relevant law and
jurisprudence. 1âwphi1

PDB claims that it has validly rescinded the contract by notarial act as provided under R.A. No. 6552. Basically,
PDB instituted Civil Case No. LP-99-0137 in order to secure judicial confirmation of the rescission and to recover
possession of the property subject of the contract.

In Leaño v. Court of Appeals, it was held that:

30 

R. A. No. 6552 recognizes in conditional sales of all kinds of real estate (industrial, commercial, residential) the
right of the seller to cancel the contract upon non-payment of an installment by the buyer, which is simply an
event that prevents the obligation of the vendor to convey title from acquiring binding force. The law also
provides for the rights of the buyer in case of cancellation. Thus, Sec. 3 (b) of the law provides that:

"If the contract is cancelled, the seller shall refund to the buyer the cash surrender value of the payments on the
property equivalent to fifty percent of the total payments made and, after five years of installments, an additional
five percent every year but not to exceed ninety percent of the total payments made: Provided, That the actual
cancellation of the contract shall take place after thirty days from receipt by the buyer of the notice of
cancellation or the demand for rescission of the contract by a notarial act and upon full payment of the cash
surrender value to the buyer." (Citation omitted and emphasis ours)
31 

R.A. No. 6552 recognizes the right of the seller to cancel the contract but any such cancellation must be done in
conformity with the requirements therein prescribed. In addition to the notarial act of rescission, the seller is
required to refund to the buyer the cash surrender value of the payments on the property. The actual
cancellation of the contract can only be deemed to take place upon the expiry of a thirty (30)-day period
following the receipt by the buyer of the notice of cancellation or demand for rescission by a notarial act and the
full payment of the cash surrender value. 32

In this case, it is an admitted fact that PDB failed to give Chandumal the full payment of the cash surrender
value. In its complaint, PDB admitted that it tried to deliver the cash surrender value of the subject property as
33 

required under R.A. No. 6552 but Chandumal was "unavailable" for such purpose. Thus, it prayed in its
complaint that it be ordered to "deposit with a banking institution in the Philippines, for the account of Defendants
(sic), the amount of Ten Thousand Pesos (₱ 10,000.00), Philippine Currency, representing the cash surrender
value of the subject property; x x x." The allegation that Chandumal made herself unavailable for payment is not
34 

an excuse as the twin requirements for a valid and effective cancellation under the law, i.e., notice of
cancellation or demand for rescission by a notarial act and the full payment of the cash surrender value, is
mandatory. Consequently, there was no valid rescission of the contract to sell by notarial act undertaken by
35 

PDB and the RTC should not have given judicial confirmation over the same.

WHEREFORE, the petition is DENIED. The Decision dated July 27, 2010 of the Court of Appeals, as well as its
Resolution dated February 16, 2011, denying the Motion for Reconsideration in CA-G.R. CV No. 82861
are AFFIRMED in so far as there was no valid service of summons. Further, the Court DECLARES that there
was no valid rescission of contract pursuant to R.A. No. 6552. Accordingly, the Decision dated May 31, 2004 of
the Regional Trial Court, Las Piñas City, Branch 255 in Civil Case No. LP-99-0 137 is REVERSED and SET
ASIDE, and is therefore, DISMISSED for lack of merit.

14. OPTIMUM DEVELOPMENT BANK, Petitioner,

vs.
SPOUSES BENIGNO V. JOVELLANOS and LOURDES R. JOVELLANOS, Respondents.

DECISION

PERLAS-BERNABE, J.:

Assailed in this petition for review on certiorari  are the Decision  dated May 29, 2009 and Resolution   dated
1 2 3

August 10, 2009 of the Court of Appeals (CA) in CA-G.R. SP No. 104487 which reversed the Decision  dated 4

December 27, 2007 of the Regional Trial Court of Caloocan City, Branch 128 (RTC) in Civil Case No. C-21867
that, in turn, affirmed the Decision  dated June 8, 2007 of the Metropolitan Trial Court, Branch 53 of that same
5

city (MeTC) in Civil Case No. 06-28830 ordering respondents-spouses Benigno and Lourdes Jovellanos (Sps.
Jovellanos) to, inter alia, vacate the premises of the property subject of this case.

The Facts

On April 26, 2005, Sps. Jovellanos entered into a Contract to Sell  with Palmera Homes, Inc. (Palmera Homes)
6

for the purchase of a residential house and lot situated in Block 3, Lot 14, Villa Alegria Subdivision, Caloocan
City (subject property) for a total consideration of ₱1,015,000.00. Pursuant to the contract, Sps. Jovellanos took
possession of the subject property upon a down payment of ₱91,500.00, undertaking to pay the remaining
balance of the contract price in equal monthly installments of ₱13,107.00 for a period of 10 years starting June
12, 2005.7

On August 22, 2006, Palmera Homes assigned all its rights, title and interest in the Contract to Sell in favor of
petitioner Optimum Development Bank (Optimum) through a Deed of Assignment of even date. 8

On April 10, 2006, Optimum issued a Notice of Delinquency and Cancellation of Contract to Sell  for Sps.
9

Jovellanos’s failure to pay their monthly installments despite several written and verbal notices.10

In a final Demand Letter dated May 25, 2006,  Optimum required Sps. Jovellanos to vacate and deliver
11

possession of the subject property within seven (7) days which, however, remained unheeded. Hence, Optimum
filed, on November 3, 2006, a complaint for unlawful detainer  before the MeTC, docketed as Civil Case No. 06-
12

28830. Despite having been served with summons, together with a copy of the complaint,  Sps. Jovellanos
13

failed to file their answer within the prescribed reglementary period, thus prompting Optimum to move for the
rendition of judgment.14

Thereafter, Sps. Jovellanos filed their opposition with motion to admit answer, questioning the jurisdiction of the
court, among others. Further, they filed a Motion to Reopen and Set the Case for Preliminary Conference, which
the MeTC denied.

The MeTC Ruling

In a Decision  dated June 8, 2007, the MeTC ordered Sps. Jovellanos to vacate the subject property and pay
15

Optimum reasonable compensation in the amount of ₱5,000.00 for its use and occupation until possession has
been surrendered. It held that Sps. Jovellanos’s possession of the said property was by virtue of a Contract to
Sell which had already been cancelled for non-payment of the stipulated monthly installment payments. As such,
their "rights of possession over the subject property necessarily terminated or expired and hence, their continued
possession thereof constitute[d] unlawful detainer." 16

Dissatisfied, Sps. Jovellanos appealed to the RTC, claiming that Optimum counsel made them believe that a
compromise agreement was being prepared, thus their decision not to engage the services of counsel and their
concomitant failure to file an answer. 17
They also assailed the jurisdiction of the MeTC, claiming that the case did not merely involve the issue of
physical possession but rather, questions arising from their rights under a contract to sell which is a matter that
is incapable of pecuniary estimation and, therefore, within the jurisdiction of the RTC. 18

The RTC Ruling

In a Decision  dated December 27, 2007, the RTC affirmed the MeTC’s judgment, holding that the latter did not
19

err in refusing to admit Sps. Jovellanos’ s belatedly filed answer considering the mandatory period for its filing. It
also affirmed the MeTC’s finding that the action does not involve the rights of the respective parties under the
contract but merely the recovery of possession by Optimum of the subject property after the spouses’ default. 20

Aggrieved, Sps. Jovellanos moved for reconsideration which was, however, denied in a Resolution  dated June 21

27, 2008. Hence, the petition before the CA reiterating that the RTC erred in affirming the decision of the MeTC
with respect to:

(a) the non-admission of their answer to the complaint; and

(b) the jurisdiction of the MeTC over the complaint for unlawful detainer. 22

The CA Ruling

In an Amended Decision  dated May 29, 2009, the CA reversed and set aside the RTC’s decision, ruling to
23

dismiss the complaint for lack of jurisdiction. It found that the controversy does not only involve the issue of
possession but also the validity of the cancellation of the Contract to Sell and the determination of the rights of
the parties thereunder as well as the governing law, among others, Republic Act No. (RA) 6552. 24

Accordingly, it concluded that the subject matter is one which is incapable of pecuniary estimation and thus,
within the jurisdiction of the RTC. 25

Undaunted, Optimum moved for reconsideration which was denied in a Resolution  dated August 10, 2009.
26

Hence, the instant petition, submitting that the case is one for unlawful detainer, which falls within the exclusive
original jurisdiction of the municipal trial courts, and not a case incapable of pecuniary estimation cognizable
solely by the regional trial courts.

The Court’s Ruling

The petition is meritorious. What is determinative of the nature of the action and the court with jurisdiction over it
are the allegations in the complaint and the character of the relief sought, not the defenses set up in an answer. 27

A complaint sufficiently alleges a cause of action for unlawful detainer if it recites that:

(a) initially, possession of the property by the defendant was by contract with or by tolerance of the
plaintiff;

(b) eventually, such possession became illegal upon notice by plaintiff to defendant of the termination of
the latter's right of possession;

(c) thereafter, defendant remained in possession of the property and deprived plaintiff of the enjoyment
thereof; and

(d) within one year from the last demand on defendant to vacate the property, plaintiff instituted the
complaint for ejectment. 28

Corollarily, the only issue to be resolved in an unlawful detainer case is physical or material possession of the
property involved, independent of any claim of ownership by any of the parties involved. 29

In its complaint, Optimum alleged that it was by virtue of the April 26, 2005 Contract to Sell that Sps. Jovellanos
were allowed to take possession of the subject property. However, since the latter failed to pay the stipulated
monthly installments, notwithstanding several written and verbal notices made upon them, it cancelled the said
contract as per the Notice of Delinquency and Cancellation dated April 10, 2006. When Sps. Jovellanos refused
to vacate the subject property despite repeated demands, Optimum instituted the present action for unlawful
detainer on November 3, 2006, or within one year from the final demand made on May 25, 2006.

While the RTC upheld the MeTC’s ruling in favor of Optimum, the CA, on the other hand, declared that the
MeTC had no jurisdiction over the complaint for unlawful detainer, reasoning that the case involves a matter
which is incapable of pecuniary estimation – i.e., the validity of the cancellation of the Contract to Sell and the
determination of the rights of the parties under the contract and law – and hence, within the jurisdiction of the
RTC. The Court disagrees. Metropolitan Trial Courts are conditionally vested with authority to resolve the
question of ownership raised as an incident in an ejectment case where the determination is essential to a
complete adjudication of the issue of possession.  Concomitant to the ejectment court’s authority to look into the
30

claim of ownership for purposes of resolving the issue of possession is its authority to interpret the contract or
agreement upon which the claim is premised. Thus, in the case of Oronce v. CA,  wherein the litigants’ opposing
31

claims for possession was hinged on whether their written agreement reflected the intention to enter into a sale
or merely an equitable mortgage, the Court affirmed the propriety of the ejectment court’s examination of the
terms of the agreement in question by holding that, "because metropolitan trial courts are authorized to look into
the ownership of the property in controversy in ejectment cases, it behooved MTC Branch 41 to examine the
bases for petitioners’ claim of ownership that entailed interpretation of the Deed of Sale with Assumption of
Mortgage."  Also, in Union Bank of the Philippines v. Maunlad Homes, Inc.  (Union Bank), citing Sps. Refugia v.
32 33

CA,  the Court declared that MeTCs have authority to interpret contracts in unlawful detainer cases, viz.:
34 35

The authority granted to the MeTC to preliminarily resolve the issue of ownership to determine the issue of
possession ultimately allows it to interpret and enforce the contract or agreement between the plaintiff and the
defendant. To deny the MeTC jurisdiction over a complaint merely because the issue of possession requires the
interpretation of a contract will effectively rule out unlawful detainer as a remedy. As stated, in an action for
unlawful detainer, the defendant’s right to possess the property may be by virtue of a contract, express or
implied;

corollarily, the termination of the defendant’s right to possess would be governed by the terms of the same
contract.

Interpretation of the contract between the plaintiff and the defendant is inevitable because it is the contract that
initially granted the defendant the right to possess the property; it is this same contract that the plaintiff
subsequently claims was violated or extinguished, terminating the defendant’s right to possess. We ruled in Sps.
Refugia v. CA that – where the resolution of the issue of possession hinges on a determination of the validity
and interpretation of the document of title or any other contract on which the claim of possession is premised,
the inferior court may likewise pass upon these issues.

The MeTC’s ruling on the rights of the parties based on its interpretation of their contract is, of course, not
conclusive, but is merely provisional and is binding only with respect to the issue of possession. (Emphases
supplied; citations omitted)

In the case at bar, the unlawful detainer suit filed by Optimum against Sps. Jovellanos for illegally withholding
possession of the subject property is similarly premised upon the cancellation or termination of the Contract to
Sell between them. Indeed, it was well within the jurisdiction of the MeTC to consider the terms of the parties’
agreement in order to ultimately determine the factual bases of Optimum’s possessory claims over the subject
property. Proceeding accordingly, the MeTC held that Sps. Jovellanos’s non-payment of the installments due
had rendered the Contract to Sell without force and effect, thus depriving the latter of their right to possess the
property subject of said contract.  The foregoing disposition aptly squares with existing jurisprudence. As the
36

Court similarly held in the Union Bank case, the seller’s cancellation of the contract to sell necessarily
extinguished the buyer’s right of possession over the property that was the subject of the terminated
agreement. 37

Verily, in a contract to sell, the prospective seller binds himself to sell the property subject of the agreement
exclusively to the prospective buyer upon fulfillment of the condition agreed upon which is the full payment of the
purchase price but reserving to himself the ownership of the subject property despite delivery thereof to the
prospective buyer. 38

The full payment of the purchase price in a contract to sell is a suspensive condition, the non-fulfillment of which
prevents the prospective seller’s obligation to convey title from becoming effective,  as in this case. Further, it is
39

significant to note that given that the Contract to Sell in this case is one which has for its object real property to
be sold on an installment basis, the said contract is especially governed by – and thus, must be examined under
the provisions of – RA 6552, or the "Realty Installment Buyer Protection Act", which provides for the rights of the
buyer in case of his default in the payment of succeeding installments. Breaking down the provisions of the law,
the Court, in the case of Rillo v. CA,  explained the mechanics of cancellation under RA 6552 which are based
40

mainly on the amount of installments already paid by the buyer under the subject contract, to wit: 41

Given the nature of the contract of the parties, the respondent court correctly applied Republic Act No. 6552.
Known as the Maceda Law, R.A. No. 6552 recognizes in conditional sales of all kinds of real estate (industrial,
commercial, residential) the right of the seller to cancel the contract upon non-payment of an installment by the
buyer, which is simply an event that prevents the obligation of the vendor to convey title from acquiring binding
force. It also provides the right of the buyer on installments in case he defaults in the payment of succeeding
installments, viz.:

(1) Where he has paid at least two years of installments,

(a) To pay, without additional interest, the unpaid installments due within the total grace period earned by
him, which is hereby fixed at the rate of one month grace period for every one year of installment
payments made:

Provided, That this right shall be exercised by the buyer only once in every five years of the life of the contract
and its extensions, if any. (b) If the contract is cancelled, the seller shall refund to the buyer the cash surrender
value of the payments on the property equivalent to fifty per cent of the total payments made and, after five
years of installments, an additional five per cent every year but not to exceed ninety per cent of the total
payments made:

Provided, That the actual cancellation of the contract shall take place after cancellation or the demand for
rescission of the contract by a notarial act and upon full payment of the cash surrender value to the buyer.

Down payments, deposits or options on the contract shall be included in the computation of the total number of
installments made.

(2) Where he has paid less than two years in installments, Sec. 4. x x x the seller shall give the buyer a grace
period of not less than sixty days from the date the installment became due. If the buyer fails to pay the
installments due at the expiration of the grace period, the seller may cancel the contract after thirty days from
receipt by the buyer of the notice of cancellation or the demand for rescission of the contract by a notarial act.
(Emphasis and underscoring supplied)

Pertinently, since Sps. Jovellanos failed to pay their stipulated monthly installments as found by the MeTC, the
Court examines Optimum’s compliance with Section 4 of RA 6552, as above-quoted and highlighted, which is
the provision applicable to buyers who have paid less than two (2) years-worth of installments. Essentially, the
said provision provides for three (3) requisites before the seller may actually cancel the subject contract: first, the
seller shall give the buyer a 60-day grace period to be reckoned from the date the installment became
due; second, the seller must give the buyer a notice of cancellation/demand for rescission by notarial act if
the buyer fails to pay the installments due at the expiration of the said grace period; and third, the seller may
actually cancel the contract only after thirty (30) days from the buyer’s receipt of the said notice of
cancellation/demand for rescission by notarial act. In the present case, the 60-day grace period automatically
operated  in favor of the buyers, Sps. Jovellanos, and took effect from the time that the maturity dates of the
42

installment payments lapsed. With the said grace period having expired bereft of any installment payment on the
part of Sps. Jovellanos,  Optimum then issued a notarized Notice of Delinquency and Cancellation of Contract
43

on April 10, 2006. Finally, in proceeding with the actual cancellation of the contract to sell, Optimum gave Sps.
Jovellanos an additional thirty (30) days within which to settle their arrears and reinstate the contract, or sell or
assign their rights to another.
44

It was only after the expiration of the thirty day (30) period did Optimum treat the contract to sell as effectively
cancelled – making as it did a final demand upon Sps. Jovellanos to vacate the subject property only on May 25,
2006. Thus, based on the foregoing, the Court finds that there was a valid and effective cancellation of the
Contract to Sell in accordance with Section 4 of RA 6552 and since Sps. Jovellanos had already lost their right
to retain possession of the subject property as a consequence of such cancellation, their refusal to vacate and
turn over possession to Optimum makes out a valid case for unlawful detainer as properly adjudged by the
MeTC.

WHEREFORE, the petition is GRANTED. The Decision dated May 29, 2009 and Resolution dated August 10,
2009 of the Court of Appeals in CA-G.R. SP No. 104487 are SET ASIDE. The Decision dated June 8, 2007 of
Metropolitan Trial Court, Branch 53, Caloocan City in Civil Case No. 06-28830 is hereby REINSTATED.
15. SPOUSES MICHELLE M. NOYNAY and NOEL S. NOYNAY, Petitioners,
vs.
CITIHOMES BUILDER AND DEVELOPMENT, INC., Respondent.

DECISION

MENDOZA, J.:

In this petition for review on certiorari  under Rule 45 of the Rules of Court, Spouses Noel and Michelle Noynay
1

(Spouses Noynay) assail the July 16, 2012 Decision  of the Court of Appeals (CA) and October 15, 2012
2

Resolution,  which affirmed with modification the September 17, 20 I 0 Decision  of the Regional Trial CoUii,
3 4

Branch 21, Malolos, Bulacan ( RTCJ. Earlier, the RTC reversed the March 26, 2010 Decision  of the Municipal
5

Trial Court for Cities, San Jose Del Monte, Bulacan (MTCC). which dismissed the complaint  for unlawful
6

detainer filed by Citihomes Builder and Development, Inc. (Citihomes) against Spouses Noynay for lack of cause
of action.

The Facts:

On December 29, 2004, Citihomes and Spouses Noynay executed a contract to sell  covering the sale of a
7

house and lot located in San Jose Del Monte, Bulacan, and covered by Transfer Certificate of Title (TCT) No. T-
43469. Under the terms of the contract, the price of the property was fixed at ₱915,895.00, with a downpayment
of ₱183,179.00, and the remaining balance to be paid in 120 equal monthly installments with an annual interest
rate of 21% commencing on February 8, 2005 and every 8th day of the month thereafter.

Subsequently, on May 12, 2005, Citihomes executed the Deed of Assignment of Claims and
Accounts  (Assignment)in favor of United Coconut Planters Bank (UCPB) on May 12, 2005. Under the said
8

agreement, UCPB purchased from Citihomes various accounts, including the account of Spouses Noynay, for a
consideration of ₱100,000,000.00. In turn, Citihomes assigned its rights, titles, interests, and participation in
various contracts to sell with its buyers to UCPB.

In February of 2007, Spouses Noynay allegedly started to default in their payments. Months later, Citihomes
decided to declare Spouses Noynay delinquent and to cancel the contract considering that nine months of
agreed amortizations were left unpaid. On December 8, 2007, the notarized Notice of Delinquency and
Cancellation of the Contract To Sell,  dated November 21, 2007, was received by Spouses Noynay. They were
9

given 30 days within which to pay the arrears and failure to do so would authorize Citihomes to consider the
contract as cancelled.

On June 15, 2009, Citihomes sent its final demand letter asking Spouses Noynay to vacate the premises due to
their continued failure to pay the arrears. Spouses Noynay did not heed the demand, forcing Citihomes to file the
complaint for unlawful detainerbefore the MTCC on July 29, 2009.

In the said complaint, Citihomes alleged that as per Statement of Account as of March 18, 2009,
SpousesNoynay had a total arrears in the amount of ₱272,477.00, inclusive of penalties. Thus, Citihomes
prayed that Spouses Noynay be ordered to vacate the subject property and pay the amount of ₱8,715.97 a
month as a reasonable compensation for the use and occupancy to commence from January 8, 2007 until
Spouses Noynay vacate the same.

In its March 26, 2010 Decision,  the MTCC dismissed the complaint. It considered the annotation in the
10

certificate of title, which was dated prior to the filing of the complaint, which showed that Citihomes had executed
the Assignment favor of UCPB, as having the legal effect of divesting Citihomes of its interest and right over the
subject property. As far as the MTCC was concerned, Citihomes did not have a cause of action against Spouses
Noynay.

The RTC, however, reversedthe ruling of the MTCC. In its September 17, 2010 Decision,  the RTC stated that
11

the MTCC erred in interpreting the deed of assignment as having the effect of relinquishing all of Citihomes’
rights over the subject property. The RTC explained that the assignment was limited only to the installment
accounts receivables due from Spouses Noynay and did not include the transfer of title or ownership over the
property. It pointed out that Citihomes remained as the registered owner of the subject property, and so it had
the right to ask for the eviction of Spouses Noynay. As to the issue of who had the better right of possession, the
RTC ordered that the records be remanded to the MTCC for the proper determination.

Spouses Noynay then went to the CA. On July 16, 2012, the CA affirmed the conclusion of the RTC that
Citihomes still had the right and interest over the property in its capacity as the registered owner. Moreover, the
issue on who, between the parties had a better possessory right over the property, was resolved infavor of
Citihomes.

In disposing the issue of possession, the CA primarily recognized the relevance of Republic Act (R.A.)No. 6552,
otherwise known as the Realty Installment Buyer Act (Maceda Law), in determining the limits of the right to
possess of Spouses Noynay in their capacity as defaulting buyers in a realty installment scheme. Under the said
law, the cancellation of a contract would only follow if the requirements set forth therein had been complied with,
particularly the giving of a "notice of delinquency and cancellation of the contract" to the defaulting party and,in
some cases, the payment to the buyer of the cash surrender value if at least two years of installments had been
paid. The CA noted that Spouses Noynay failed to complete the minimum two (2) years of installment, despite
the allegation that three (3) years of amortizations had already been paid. As an effect, the CA pronounced that
the termination of the contract was validly effected by the expiration of the 30-day period from the time the notice
of cancellation was received by Spouses Noynay. From thatmoment, the CA treated Spouses Noynay to have
lost the right to possess the property. In addition, the CA made Spouses Noynay liable for the payment of
monthly rentals from the time their possession became illegal.

Spouses Noynay moved for reconsideration, but the CA denied their motion.

Hence, this petition.

ISSUE

The lone issue presented for resolution is whether Citihomes has a cause of action for ejectment against
Spouses Noynay. In effect, Spouses Noynay would have this Court determine whether Citihomes may rightfully
evict them.

Position of Spouses Noynay

Spouses Noynay insist that by virtue of the assignment of rights which Citihomes executed in favor of UCPB,
Citihomes did not have a cause of action against them because it no longerhad an interest over the subject
property. Contrary to the findings of the CA, the monthly installments amounting to three years were already
paid, by reason of which, Section 3(b) of the Maceda Law should apply. This means that for the cancellation to
be effective, the cash surrender value should have been paid first to them by Citihomes; and that because no
payment was made, it follows that no valid cancellation could also be effected. Thisallegedly strengthened their
right to the possession of the property even to this day.

Position of Citihomes

Citihomes counters that it has the right to ask for the eviction of the petitioners in its capacity as the registered
owner despite the assignment of rights it made to UCPB. It believes that because Spouses Noynay failed to pay
at least two (2) years of installments, the cancellation became effective upon the expiration of the 30-day
periodfollowing the receipt of the notice of delinquency and cancellation notice and without the need for the
payment of the cash surrender value under Section 3(b) of the Maceda Law.

Ruling of the Court

Cause of action has been defined as an act or omission by which a party violates a right of another.  It requires
12

the existence of a legal right on the part of the plaintiff, a correlative obligation of the defendant to respect such
right, and an act or omission of such defendant in violation of the plaintiff’s rights.  A complaint should not be
13

dismissed for insufficiency of cause of action if it appears clearly from the complaint and its attachments that the
plaintiff is entitled to relief.  The complaint, however, may be dismissed for lack of cause of action laterafter
14

questions of fact have been resolved on the basis of stipulations, admissions or evidence presented. 15

Relative thereto, a plaintiff in an unlawful detainer case which seeks recovery of the property must prove one’s
legal right to evict the defendant, a correlative obligation on the part of such defendant to respect the plaintiff’s
right to evict, and the defendant’s act or omission in the form of refusal to vacate upon demand when his
possession ultimately becomes illegal.

At first glance, the main thrust of the discussion in the lower courts is the issue on whether Citihomes had
suchright to evict Spouses Noynay. At its core is the ruling of the MTCC thatthe right to demand the eviction of
Spouses Noynay was already transferred to UCPB from the moment the Assignment was executed by
Citihomes, which was done prior to the institution of the unlawful detainer case. Thus, based on the evidence
presented during the trial, the MTCC held that Citihomes did not have a cause of action against Spouses
Noynay.The RTC held otherwise justifying that Citihomes may still be the right party to evict Spouses Noynay in
its capacity as the registered owner of the property. The CA affirmed the RTC on this point.

The Court, however, agrees with the MTCC.

The determination of whether Citihomes has a right to ask for the eviction of Spouses Noynay entirely depends
on the review of the Assignment of Claims and Accounts it executed in favor of UCPB. If it turns out that what
was assigned merely covered the collectible amounts or receivables due from Spouses Noynay, Citihomes
would necessarily have the right to demand the latter’s eviction asonly an aspect of the contract to sell passed
on to UCPB. Simply put, because an assignment covered only credit dues, the relation between Citihomes as
the seller and Spouses Noynay as the buyer under their Contract to Sell remained. If on the other hand, it
appears that the assignment covered all of Citihomes’ rights, obligations and benefits in favor ofUCPB, the
conclusion would certainly be different.

Under the provisions of the Assignment, it was stipulated that:

NOW, THEREFORE, for and in consideration of the foregoing premises, the ASSIGNOR hereby agrees as
follows:

1. The ASSIGNOR hereby assigns, transfers and sets over unto the ASSIGNEE all its rights, titles and interest
in and to, excluding its obligations under the Contract/s to Sellenumerated and described in the List of Assigned
Receivables which is hereto attached and marked as Annex "A" hereof, including any and all sum of money due
and payable to the ASSIGNOR, the properties pertaining thereto,all replacements, substitution, increases and
accretion thereof and thereto which the ASSIGNOR has executed with the Buyers, as defined in the Agreement,
and all moneysdue, or which may grow upon the sales therein set forth.

2. For purposes of this ASSIGNMENT, the ASSIGNOR hereby delivers to the ASSIGNEE, which hereby
acknowledges receipt of the following documents evidencing the ASSIGNOR’s title, right, interest, participation
and benefit in the assigned Installment Account Receivables listed in Annex "A" and made as integral part
hereof.

a) Original Contracts to Sell

b) Transfer Certificates of Title

3. The ASSIGNOR, hereby irrevocably appoints the ASSIGNEE to be its true and lawful agent or
representativefor it and in its name and stead, but for such ASSIGNEE’s own benefit: (1) to sell, assign, transfer,
set over, pledge, compromise or discharge the whole, or any part, of said assignment; (2) to do all acts and
things necessary, or proper, for any such purpose; (3) to ask, collect, receive and sue for the moneys due, or
which may grow due, upon the said Assignment;and (4) to substitute one person, or more, with like powers;
hereby ratifying and confirming all that said agent or representative, or his substitute, or substitutes, shall lawfully
do, by virtue hereof.16

[Emphases supplied]

Clearly, the conclusion of the MTCC had factual and legal bases. Evident from the tenor of the agreement was
the intent on the part of Citihomes, as assignor, to assign all of its rights and benefits in favor of UCPB.
Specifically, what Citihomes did was an assignment or transfer of all contractual rights arising from various
contracts to sell, including the subject contract to sell, with all the rights, obligations and benefits appurtenant
thereto in favor of UCPB for a consideration of ₱100,000,000.00. Indeed, the intent was more than just an
assignment of credit. This intent to assign all rights under the contract to sell was even fortified by the delivery of
documents such as the pertinent contracts to sell and the TCTs. Had it been the intent of Citihomes to assign
merely its interest in the receivables due from Spouses Noynay, the tenor of the deed of assignment would have
been couched in very specific terms.

Included in those matters which were handed over to UCPB were the provisions outlined in Section 6 of the
Contract to Sell. In the said provision, Citihomes, as the seller has been given the right to cancel the contract to
sell in cases of continuing default by Spouses Noynay, to wit: SECTION 6. If for any reason, whatsoever, the
BUYER fails to pay three (3) consecutive monthly installments, the provision of RA No. 6552 shall apply.

Where the BUYER has paid less than two (2) years of installments and defaults in the payment of three (3)
consecutive monthly installment, he shall be given a grace period of not less than sixty (60) days from the date
the installment payments became due and payable within which to pay the installments and/or make payments
in arrears together with the installments corresponding to the months of the grace period. In the event the
BUYER continues to default in the payment of the installments within or at the expiration of the grace period
herein provided, the SELLER shall have the right to cancel this agreement thirty (30) days from the BUYER’s
receipt of the notice of cancellation or demand for rescission by a notarial act. Thereafter, the SELLER may
dispose of the residential house and lot subject of this agreement in favor of other persons as if this agreement
had never been entered into.

WHERE the BUYER has paid atleast two (2) years of installments and he defaults in the payment of three (3)
consecutive monthly installments, the SELLER shall be entitled:

a. To pay, without additional interest, the unpaid installment due within the total grace period earned by
the BUYER which is fixed at the rate of one (1) month grace period for every one (1) year of installment
payment made; Provided, that this right shall be exercised by the BUYER only once for every five (5)
years of the life of this agreement.

b. If this agreement is cancelled, the SELLER shall refund to the BUYER the cash surrender value of the
payments equivalent to fifty percent thereof and, after five years of installments, an additional five
percent (5%) for every year but not to exceed ninety (90%) of the total payments made; Provided, that
the actual cancellation of this agreement shall take place after thirty (30) days from receipt by the
BUYER of the notice of cancellation or demand for rescission by a notarial act and upon full payment of
the cash surrender value to the BUYER.

x x x           x x x          x x x

The BUYER, at the termination of the contract, shall promptly surrender the said property to the SELLER, and
should the former fail to comply with the provision, on top of the remedy provided for above, the BUYER hereby
expressly appoints the SELLER as their duly authorized attorney-in-fact with power and authority to open, enter
and take full possession of the property in the presence of any peace officer and to take an inventory of the
equipment, furniture, merchandise and effect. In case the BUYER fails to claim the said equipment, furniture,
merchandise and effects and/or liquidate their liabilities with the SELLER within thirty (30) days from the date of
transfer of possession of the property to the latter, the SELLER is hereby given the right to dispose of said
property in a private or public sale and to apply the proceeds to whatever expenses it may have incurred in line
with the warehousing of the equipment, furniture, merchandise and effects. 17

The exercise of such right to cancel necessarily determines the existence of the right to evict Spouses Noynay.
The existence of the right to evict is the first constitutive element ofthe cause of action in this unlawful detainer
case. Considering,however, that the right to cancel was already assigned prior to the commencement of this
controversy with the execution of the Assignment, its legal consequences cannotbe avoided.

Well-established is the rule that the assignee is deemed subrogated to the rights as well as to the obligations of
the seller/assignor. By virtue of the deed of assignment, the assignee is deemed subrogated to the rights and
obligations of the assignor and is bound by exactly the same conditions as those which bound the
assignor.  What can be inferred from here is the effect on the status of the assignor relative to the relations
18

established by a contract which has been subsequently assigned; that is, the assignor becomes a complete
stranger to all the mattersthat have been conferred to the assignee.

In this case, the execution of the Assignment in favor of UCPB relegated Citihomes to the status of a mere
stranger to the jural relations established under the contractto sell. With UCPB as the assignee, it is clear that
Citihomes has ceased tohave any right to cancel the contract to sell with Spouses Noynay. Without this
right,which has been vested in UCPB, Citihomes undoubtedly had no cause ofaction against Spouses Noynay.
This is not to say that Citihomes lost all interest over the property. To be clear, what were assigned covered only
the rights inthe Contract to Sell and not the property rights over the house and lot, which remained registered
under Citihomes’ name. Considering, however, that the unlawful detainer case involves mere physical or
materialpossession of the property and is independent of any claim of ownership by any of the parties,  the 19

invocation of ownership by Citihomes is immaterial in the just determination of the case.

Granting that the MTCC erred in ruling that Citihomes had no cause of action by reason of the Assignment it
made in favor of UCPB, the Court still upholds the right of the Spouses Noynay to remain undisturbed in the
possession of the subject property. The reason is simple – Citihomes failed to comply with the procedures for
the proper cancellation of the contract to sell as prescribed by Maceda Law.

In Pagtalunan v. Manzano,  the Court stressed the importance of complying with the provisions of the Maceda
20

Law as to the cancellation of contracts to sell involving realty installment schemes. There it was held that the
cancellation of the contract by the seller must be in accordance with Section 3 (b) of the Maceda Law, which
requires the notarial act of rescission and the refund to the buyer of the full payment of the cash surrender value
of the payments made on the property. The actual cancellation of the contract takes place after thirty (30) days
from receipt by the buyer of the notice of cancellation or the demand for rescission of the contract by a notarial
act and upon fullpayment of the cash surrender value to the buyer, to wit: (b) If the contract is cancelled, the
seller shall refund to the buyer the cash surrender value of the payments on the propertyequivalent to fifty
percent of the total payments made and, after five years of installments, an additional five percent every year but
not to exceed ninety percent of the total payments made: Provided, That the actual cancellation of the contract
shall take place after thirty days from receipt by the buyer of the notice of cancellation or the demand for
rescission of the contract bya notarial act and upon full payment of the cash surrender value to the buyer.

[Emphases supplied]

According to the lower courts, Spouses Noynay failed to complete the two-year minimum period of paid
amortizations, thus, the cancellation of the contract to sell no longer required the payment of the cash surrender
value. This conclusion rests on the allegation that the amortization payments commenced only on May 31, 2005.
If indeedit were true that the payments started only on that date, Spouses Noynay would not have completed the
required two-year period to be entitled to the payment of cash surrender value. Records, however, show
otherwise. The Contract to Sell, dated December 29, 2004, was very particularon the matter. It stipulated as
follows:

SECTION 1. NOW, THEREFORE, for and in consideration of the sume of NINE HUNDRED FIFTEEN
THOUSAND EIGHT HUNDRED NINETY FIVE PESOS ONLY, (915,895.00) Philippine Currency, inclusive of
miscellaneous charges hereunder set forth, and of the foregoing premises, the SELLER hereby agrees to sell,
cede and convey to the BUYER, their heirs, administrators, and successors-in-interest, the aforedescribed
residential house and lot or lot only under the following terms and conditions:

a. The amount of ONE HUNDRED EIGHTY THREE THOUSAND ONE HUNDRED SEVENTY NINE
PESOS ONLY (₱183,179.00), Philippine Currency, representing full downpayment shall be paid upon
signing of this contract.

b. The balanceof the total purchase price in the amount of SEVEN HUNDRED THIRTY TWO
THOUSAND SEVEN HUNDRED SIXTEEN PESOS ONLY, (₱732,716..00), Philippine Currency shall be
paid by the BUYER in 120 equal monthly installments in the amount of ₱14,649.31 per month with an
interest of 21% per annum to commenceon 02.08.05 and every 8th day of the month thereafter. 21

Citihomes claimed that the period ofthe payment of the amortizations started from May 31, 2005.  As can be
22

gleaned from the contract to sell, however, it appears that the payment of the downpayment started from the
signing thereof on December 29, 2004.

To this end, the factual admissions made by the parties during the preliminary conference would shed light on
the matter. It must be remembered that these judicial admissions are legally binding on the party making the
admissions. Similar to pre-trial admissions in a pre-trial order in ordinary civil cases, the contents of the record of
a preliminary conference control the subsequent course of the action, thereby, defining and limiting the issues to
be tried. A contrary ruling would render useless the proceedings during the preliminary conference and would, in
fact, be antithetical to the very purpose of a preliminary conference, which is, among others, to allow the parties
to admit and stipulate on a given set of facts and to simplify the issues involved. 23

The fairly recent case of Oscar Constantino v. Heirs of Oscar Constantino,  is most instructive:
24
In Bayas, et al. v. Sandiganbayan, et al., this Court emphasized that:

Once the stipulations are reduced into writing and signed by the parties and their counsels, they become binding
on the parties who made them. They become judicial admissionsof the fact or facts stipulated. Even if placed at
a disadvantageous position, a party may not be allowed to rescind them unilaterally, it must assume the
consequences of the disadvantage.(citations omitted)

Moreover, in Alfelor v. Halasan,this Court declared that:

A party who judicially admits a fact cannot later challenge the fact as judicial admissions are a waiver of proof;
production of evidence is dispensed with. A judicial admissionalso removes an admitted fact from the field of
controversy. Consequently, an admission made in the pleadings cannot be controverted by the party making
such admission and are conclusive as to such party, and all proofs to the contrary or inconsistent therewith
should be ignored, whether objection is interposed by the party or not. The allegations, statements or
admissions contained in a pleading are conclusive as against the pleader. A party cannot subsequently take a
position contrary of or inconsistent with what was pleaded. (Citations omitted)

[Emphases supplied]

Here, Spouses Noynay proposed for stipulation the factual allegation that they had been paying Citihomesthe
monthly amortization of the property for more than three (3) years and only stopped payment by January 8,
2008. In the Preliminary Conference Order,  dated January 28, 2010, the MTCC noted the said factas admitted,
25

to wit:

The defendants proposed the following matters for stipulations:

1. That the defendants had already paid the plaintiff the total amount of Php 633,000.00 – Not Admitted

2. That the defendants have beenpaying the plaintiff the monthly amortization of the property for more
than three years and only stopped payment by January 8, 2008 – Admitted. 26

x x x           x x x          x x x[Emphasis supplied]

Moreover, based on the Statement of Account,  dated March 18, 2009, Spouses Noynay started defaulting from
27

January 8, 2008. This shows that prior to that date, amortizations covering the 3-year period, which started with
the downpayment, had been paid. This is consistent with the admission of Citihomes during the preliminary
conference. By its admission that Spouses Noynay had been paying the amortizations for three (3) years, there
is no reason to doubt Spouses Noynay's compliance with the minimum requirement of two years payment of
amortization, entitling them to the payment of the cash surrender value provided for by law and by the contract to
sell. To reiterate, Section 3(b) of the Maceda Law requires that for an actual cancellation to take place, the
notice of cancellation by notarial act and the full payment of the cash surrender value must be first received by
the buyer. Clearly, no payment of the cash surrender value was made to Spouses Noynay. Necessarily, no
cancellation of the contract to selI could be considered as validly effected.

Without the valid cancellation of the contract, there is no basis to treat the possession of the property by
Spouses Noynay as illegal.  In AMOSUP-PTGWO-ITF v. Decena,  the Court essentially held that such similar
1âwphi1
28

failure' to validly cancel the contract, meant that the possessor therein, similar to Spouses Noynay in this case,
remained entitled to the possession of the property. In the said case, the Court stated:

In the parallel case of Pagtalunan v. Dela Cruz Vda. De Manzano, which likewise originated as an action for
unlawful detainer, we affirmed the finding of the appellate court that, since the contract to sell was not validly
cancelled or rescinded under Section 3(b) of R.A. No. 6552, the respondent therein had the right to continue
occupying unmolested the property subject thereof. WHEREFORE, the petition is GRANTED. The July 16, 2012
Decision and October 15, 2012 Resolution of the Court of Appeals are hereby REVERSED and SET ASIDE.
The March 26, 2010 Decision of the Municipal Trial Court for Cities is REINSTATED.
16. ASSOCIATED MARINE OFFICERS AND SEAMEN'S UNION OF THE PHILIPPINES PTGWO-
ITF, Petitioner,
vs.
NORIEL DECENA, Respondent.

DECISION

PERLAS-BERNABE, J.:

This Petition for Review on Certiorari seeks the reversal of the Decision of the Court of Appeals (CA) dated July
1 

31, 2006, as well as the Resolution dated June 20, 2007, which dismissed the complaint for unlawful detainer
2 

filed by petitioner against respondent on the ground of prematurity, as petitioner has not shown that it complied
with the mandatory requirements for a valid and effective cancellation of the contract to sell a house and lot.

The Factual Antecedents

Associated Marine Officers and Seamen's Union of the Philippines –

PTGWO-ITF (petitioner) is a duly registered labor organization engaged in an on-going Shelter Program, which
offers residential lots and fully-furnished houses to its members-seafarers under a reimbursement scheme
requiring no down payment and no interest on the principal sum advanced for the acquisition and development
of the land and the construction of the house.

On April 27, 1995, petitioner entered into a contract under the Shelter Program with one of its members, Noriel
3 

Decena (respondent), allowing the latter to take possession of a house and lot described as 7 STOLT MODEL,
Lot 16, Block 7, in the Seamen's Village, Sitio Piela, Barangay Paliparan, Dasmariñas, Cavite, with the obligation
to reimburse petitioner the cost (US$28,563) thereof in 180 equal monthly payments. It was stipulated in said
4 

contract that, in case respondent fails to remit three (3) monthly reimbursement payments, he shall be given a 3-
month grace period within which to remit his arrears, otherwise, the contract shall be automatically revoked or
cancelled and respondent shall voluntarily vacate the premises without need of demand or judicial action. 5

Subsequently, respondent failed to pay twenty-five (25) monthly reimbursement payments covering the period
August 1999 to August 2001, despite demands. Hence, petitioner cancelled the contract and treated all his
reimbursement payments as rental payments for his occupancy of the house and lot.

On August 21, 2001, petitioner sent respondent a notice of final demand requiring him to fulfill his obligation
6 

within a 30-day grace period. Thereafter, on October 18, 2001, his wife received a notice to vacate the premises.
7 

For failure of respondent to heed said notices, petitioner filed a complaint before the barangay lupon and,
eventually, a case for unlawful detainer, docketed as Civil Case No. 1210 before the Municipal Trial Court (MTC)
8 

of Dasmariñas, Cavite.

The Ruling of the MTC

On December 4, 2002, the MTC found petitioner's case meritorious and, thus, rendered judgment ordering9 

respondent to (1) vacate the premises; (2) pay monthly rental in the amount of ₱ 8,109.00 from August 1999
with legal interests thereon until he has actually and fully paid the same; and (3) pay attorney's fees in the
amount of ₱ 30,000.00, as well as the costs of suit.

The Ruling of the RTC

On appeal (App. Civil Case No. 312-03), the Regional Trial Court (RTC) of Imus, Cavite, affirmed in toto the
10 

decision of the MTC after finding that the cancellation and revocation of the contract for failure of respondent to
remit 25 monthly reimbursement payments converted the latter's stay on the premises to one of "mere
permission" by petitioner, and that respondent's refusal to heed the notice to vacate the premises rendered his
11 

continued possession thereof unlawful. 12

With respect to the issue raised by respondent that the instant case is covered by Republic Act No. 6552 (R.A.
No. 6552), the Maceda Law, the RTC ruled in the negative, ratiocinating that the Shelter Contract Award is
13 

neither a contract of sale nor a contract to sell. Rather, it is "more akin to a contract of lease with the monthly
reimbursements as rentals." 14
The Ruling of the Court of Appeals

On petition for review (CA-G.R. SP No. 81954) before the CA, the appellate court set aside the decision of the
RTC and entered a new judgment dismissing the complaint for unlawful detainer and restoring respondent to
15 

the peaceful possession of the subject house and lot. The CA held that the contract between the parties is not a
contract of lease, but a contract to sell, which stipulates that upon full payment of the value of the house and lot,
respondent shall become the owner thereof. The issues, which involve "the propriety of terminating the
16 

relationship contracted by the parties, as well as the demand upon [respondent] to deliver the premises and to
pay unpaid reimbursements," extend beyond those commonly involved in unlawful detainer suits, thus,
17 

converting the instant case into one incapable of pecuniary estimation exclusively cognizable by the RTC. 18

Moreover, the appellate court faulted petitioner for failing to comply with the mandatory twin requirements for a
valid and effective cancellation of a contract to sell under Section 3 (b) of R.A. No. 6552: (1) to send a notarized
notice of cancellation, and (2) to refund the cash surrender value of the payments on the property.
Consequently, it held that the contract to sell still subsists, at least until properly rescinded, and the action for
ejectment filed by petitioner is premature. 19

Aggrieved, petitioner filed a motion for reconsideration, which was denied by the CA in its Resolution dated
20 

June 20, 2007. Hence, petitioner is now before this Court alleging that –

The Issues

1. The Honorable Court of Appeals erred in changing the main issue to be resolved in the instant unlawful
detainer case from who has the better right of possession to whether or not the agreement between the parties
is a contract of lease or a contract to sell, especially when the nature of the agreement between the parties was
never questioned nor raised as an issue in the court a quo.

2. Even assuming that the Honorable Court of Appeals was correct in changing the main issue to be resolved, it
nevertheless erred in determining that:

a. The agreement between the parties is allegedly one of contract to sell – when the Housing and Land
Use Regulatory Board itself already made a pronouncement that the Shelter Program and its contract
award is not a sale of real estate.

b. The action for unlawful detainer filed by petitioner AMOSUP is allegedly premature – especially
considering that Republic Act No. 6552, which requires notarial notice of rescission, is not applicable to
the case at bar and, thus, the written notice of termination previously served on the respondent is
already sufficient. 21

The Ruling of the Court

It is basic that a contract is what the law defines it to be, and not what it is called by the contracting parties. A
contract to sell is defined as a bilateral contract whereby the prospective seller, while expressly reserving the
ownership of the subject property despite delivery thereof to the prospective buyer, binds itself to sell the said
property exclusively to the prospective buyer upon fulfillment of the condition agreed upon, that is, full payment
of the purchase price. 22

The Shelter Contract Award granted to respondent expressly stipulates that "upon completion of payment of the
amount of US$28,563 representing the full value of the House and Lot subject of the Contract Award, the
UNION shall execute a Deed of Transfer and shall cause the issuance of the corresponding Transfer Certificate
of Title in favor of and in the name of the AWARDEE." It cannot be denied, therefore, that the parties herein
23 

entered into a contract to sell in the guise of a reimbursement scheme requiring respondent to make monthly
reimbursement payments which are, in actuality, installment payments for the value of the subject house and lot.

While respondent occupied the subject premises, title nonetheless remained with petitioner. Considering,
therefore, that the basis for such occupation is a contract to sell the premises on installment, the contractual
relations between the parties are more than that of a lessor-lessee. The appellate court thus correctly ruled that
24 

the Shelter Contract Award has not been converted into one of lease.

Petitioner tried, albeit in vain, to mislead the Court that the nature of the agreement between the parties, and
even the validity of the termination thereof, were never raised in the trial courts. In the pre-trial brief filed by
respondent before the MTC, the first issue he presented is "whether or not the present action is a simple case of
or an action for unlawful detainer or an action for rescission of the Contract of Shelter Award which is outside of
the jurisdiction of the Honorable Court." 25

In the parallel case of Pagtalunan v. Dela Cruz Vda. De Manzano, which likewise originated as an action for
26 

unlawful detainer, we affirmed the finding of the appellate court that, since the contract to sell was not validly
cancelled or rescinded under Section 3(b) of R.A. No. 6552, the respondent therein had the right to continue
occupying unmolested the property subject thereof. Section 3(b) reads:

SEC. 3. In all transactions or contracts involving the sale or financing of real estate on installment payments,
including residential condominium apartments but excluding industrial lots, commercial buildings and sales to
tenants under Republic Act Numbered Thirty-eight hundred forty-four, as amended by Republic Act Numbered
Sixty-three hundred eighty-nine, where the buyer has paid at least two years of installments, the buyer is entitled
to the following rights in case he defaults in the payment of succeeding installments:

xxx

(b) If the contract is canceled, the seller shall refund to the buyer the cash surrender value of the payments on
the property equivalent to fifty per cent of the total payments made, and, after five years of installments, an
additional five per cent every year but not to exceed ninety per cent of the total payments made: Provided, That
the actual cancellation of the contract shall take place after thirty days from receipt by the buyer of the notice of
cancellation or the demand for rescission of the contract by a notarial act and upon full payment of the cash
surrender value to the buyer. (Emphasis supplied)

As we emphasized in Pagtalunan, "R.A. No. 6552, otherwise known as the Realty Installment Buyer Protection
Act, recognizes in conditional sales of all kinds of real estate (industrial, commercial, residential) the right of the
seller to cancel the contract upon non-payment of an installment by the buyer, which is simply an event that
prevents the obligation of the vendor to convey title from acquiring binding force." While we agreed that the
cancellation of a contract to sell may be done outside of court, however, "the cancellation by the seller must be
in accordance with Sec. 3(b) of R.A. No. 6552, which requires a notarial act of rescission and the refund to the
buyer of the full payment of the cash surrender value of the payments on the property." In the present case, as
27 

aptly pointed out by the appellate court, petitioner failed to prove that the Shelter Contract Award had been
cancelled in accordance with R.A. No. 6552, which would have been the basis for the illegality of respondent's
possession of the subject premises. Hence, the action for ejectment must necessarily fail.

Petitioner nonetheless insists on the inapplicability of R.A. No. 6552 in this case, capitalizing on the Decision of 28 

the Housing and Land Use Regulatory Board in HLURB CASE No. IV6-090902-1842 entitled "Seamen's Village
Brotherhood Homeowners Association, Inc. v. Associated Marine Officers And Seamen's Union of the
Philippines (AMOSUP)" which held that the transaction between petitioner and the residents of Seamen's Village
cannot be considered a sale within the purview of Presidential Decree (P.D.) No. 957. It should be pointed out
29 

that the only issue resolved in that case is "whether or not the respondent (petitioner herein) is engaged in the
business of selling real estate subdivisions, so as to fall under the ambit of P.D. 957, the resolution of which
would determine whether or not respondent is required under the law to register with (the) Office and procure a
license to sell."
30

Section 2(b) of P.D. 957 defines a sale as follows:

b.) Sale or Sell – "sale" or "sell" shall include every disposition, or attempt to dispose, for a valuable
consideration, of a subdivision lot, including the building and other improvements thereon, if any, in a subdivision
project or a condominium unit in a condominium project. "Sale" or "sell" shall include a contract to sell, a contract
of purchase and sale, an exchange, an attempt to sell, an option of sale or purchase, a solicitation of a sale, or
an offer to sell, directly or by an agent, or by a circular letter, advertisement or otherwise.

A privilege given to a member of a cooperative, corporation, partnership, or any association and/or the issuance
of a certificate or receipt evidencing or giving the right of participation in, or right to any land in consideration of
payment of the membership fee or dues, shall be deemed a sale within the meaning of this definition.

A reading of the Decision in its entirety reveals a vacillation on the part of the HLURB in classifying the
transaction between petitioner and its members. While the HLURB held that there is no sale as contemplated
under the first paragraph of the aforequoted provision "for the reason that there is no valuable consideration
involved in the transaction," yet it went on to opine that the second paragraph of the same provision "appears to
31 

have an apparent application in the instant case although the same is not clear." Then, in its final
32 
disposition, the HLURB required petitioner to secure a Certificate of Registration and License to Sell for its
33 

subdivision project thereby effectively bringing it under the jurisdiction of said office. Clearly, the argument of
petitioner that respondent is not a realty installment buyer that needs to be protected by the law has no leg to
stand on.

In the interest, however, of putting an end to the controversy between the parties herein that had lasted for more
than ten (10) years, as in the cited case of Pagtalunan, the Court orders respondent to pay his arrears and settle
the balance of the full value of the subject premises. He had enjoyed the use thereof since 1995. After defaulting
in August 1999, respondent had not made any subsequent reimbursement payments. Thus, for the delay in his
reimbursement payments, we award interest at the rate of 6% per annum on the unpaid balance applying Article
2209 of the Civil Code, there being no stipulation in the Shelter Contract Award for such interest. For purposes
34  35 

of computing the legal interest, the reckoning period should be the notice of final demand, conformably with
Articles 1169 and 1589 of the same Code, which, as found by the MTC, was sent by petitioner to respondent
36  37 

on August 21, 2001. 38

In his Comment to the instant Petition, respondent claimed that he had made payments in the amount of ₱
318,167.70. The total amount for reimbursement for the subject house and lot is US$28,563, which the Shelter
39 

Contract Award requires to be paid in "180 equal monthly periodic reimbursements of US$159 or in equivalent
Philippine Currency at the time the same falls due." For lack of pertinent data with which to determine how many
40 

months respondent's alleged total payment of ₱ 318,167.70 is equivalent to, we direct petitioner to submit to the
trial court an accounting of the payments made by respondent particularly showing the number of months he
was able to make the required payments of US$159 or its peso equivalent. The balance of the full value of the
subject premises shall then be computed on the basis of the following formula: (180 months minus the number
of months that respondent had already paid) multiplied by US$159 or its peso equivalent at the time of payment.

WHEREFORE, the Decision of the Court of Appeals dated July 31, 2006 and the Resolution dated June 20,
2007 are hereby AFFIRMED with the following MODIFICATIONS:

1. The Municipal Trial Court of Dasmariñas, Cavite is directed to conduct a hearing, within a maximum
period of thirty (30) days from receipt of this Decision, to determine: (a) the unpaid balance of the full
value of the subject house and Jot; and (b) the reasonable amount of rental for the subject property at
present times.

2. Within sixty (60) days from the determination of the trial court of said balance, respondent shall pay
the amount thereof to petitioner, with interest at six percent ( 6%) per annum from August 1, 2001 up to
the date of actual payment;

3. Upon payment, petitioner shall execute a Deed of Absolute Sale of the subject property and deliver
the transfer certificate of title in favor of respondent;

4. In case of failure to pay within the mandated 60-day period, respondent shall immediately vacate the
premises without need of further demand. Petitioner, on the other hand, shall pay respondent the cash
surrender value equivalent to 50% of the total reimbursement payments made. The Shelter Contract
Award shall then be deemed cancelled thirty (30) days after receipt by respondent of the full payment of
the cash surrender value. If respondent fails to vacate the premises, he shall be charged reasonable
rental in the amount determined by the trial court.

SO ORDERED.

17. VIRGILIO R. ROMERO, petitioner,

vs.
HON. COURT OF APPEALS and ENRIQUETA CHUA VDA. DE ONGSIONG, respondents.

VITUG, J.:
The parties pose this question: May the vendor demand the rescission of a contract for the sale of a parcel of
land for a cause traceable to his own failure to have the squatters on the subject property evicted within the
contractually-stipulated period?

Petitioner Virgilio R. Romero, a civil engineer, was engaged in the business of production, manufacture and
exportation of perlite filter aids, permalite insulation and processed perlite ore. In 1988, petitioner and his foreign
partners decided to put up a central warehouse in Metro Manila on a land area of approximately 2,000 square
meters. The project was made known to several freelance real estate brokers.

A day or so after the announcement, Alfonso Flores and his wife, accompanied by a broker, offered a parcel of
land measuring 1,952 square meters. Located in Barangay San Dionisio, Parañaque, Metro Manila, the lot was
covered by TCT No. 361402 in the name of private respondent Enriqueta Chua vda. de Ongsiong. Petitioner
visited the property and, except for the presence of squatters in the area, he found the place suitable for a
central warehouse.

Later, the Flores spouses called on petitioner with a proposal that should he advance the amount of P50,000.00
which could be used in taking up an ejectment case against the squatters, private respondent would agree to
sell the property for only P800.00 per square meter. Petitioner expressed his concurrence. On 09 June 1988, a
contract, denominated "Deed of Conditional Sale," was executed between petitioner and private respondent.
The simply-drawn contract read:

DEED OF CONDITIONAL SALE

KNOW ALL MEN BY THESE PRESENTS:

This Contract, made and executed in the Municipality of Makati, Philippines this 9th day of June,
1988 by and between:

ENRIQUETA CHUA VDA. DE ONGSIONG, of legal age, widow, Filipino and

residing at 105 Simoun St., Quezon City, Metro Manila, hereinafter referred to as
the VENDOR;

-and-

VIRGILIO R. ROMERO, married to Severina L. Lat, of Legal age, Filipino, and

residing at 110 San Miguel St., Plainview Subd., Mandaluyong Metro Manila,
hereinafter referred to as the VENDEE:

W I T N E S S E T H : That

WHEREAS, the VENDOR is the owner of One (1) parcel of land with a total area of ONE
THOUSAND NINE HUNDRED FIFTY TWO (1,952) SQUARE METERS, more or less, located in
Barrio San Dionisio, Municipality of Parañaque, Province of Rizal, covered by TCT No. 361402
issued by the Registry of Deeds of Pasig and more particularly described as follows:

xxx xxx xxx

WHEREAS, the VENDEE, for (sic) has offered to buy a parcel of land and the VENDOR has
accepted the offer, subject to the terms and conditions hereinafter stipulated:

NOW, THEREFORE, for and in consideration of the sum of ONE MILLION FIVE HUNDRED
SIXTY ONE THOUSAND SIX HUNDRED PESOS (P1,561,600.00) ONLY, Philippine Currency,
payable by VENDEE to in to (sic) manner set forth, the VENDOR agrees to sell to the VENDEE,
their heirs, successors, administrators, executors, assign, all her rights, titles and interest in and
to the property mentioned in the FIRST WHEREAS CLAUSE, subject to the following terms and
conditions:

1. That the sum of FIFTY THOUSAND PESOS (P50,000.00) ONLY Philippine

Currency, is to be paid upon signing and execution of this instrument.
 2. The balance of the purchase price in the amount of ONE MILLION FIVE
HUNDRED ELEVEN THOUSAND SIX HUNDRED PESOS (P1,511,600.00)
ONLY shall be paid 45 days after the removal of all squatters from the above
described property.

3. Upon full payment of the overall purchase price as aforesaid, VENDOR without
necessity of demand shall immediately sign, execute, acknowledged (sic) and
deliver the corresponding deed of absolute sale in favor of the VENDEE free from
all liens and encumbrances and all Real Estate taxes are all paid and updated.

It is hereby agreed, covenanted and stipulated by and between the parties hereto that if after 60
days from the date of the signing of this contract the VENDOR shall not be able to remove the
squatters from the property being purchased, the downpayment made by the buyer shall be
returned/reimbursed by the VENDOR to the VENDEE.

That in the event that the VENDEE shall not be able to pay the VENDOR the balance of the
purchase price of ONE MILLION FIVE HUNDRED ELEVEN THOUSAND SIX HUNDRED
PESOS (P1,511,600.00) ONLY after 45 days from written notification to the VENDEE of the
removal of the squatters from the property being purchased, the FIFTY THOUSAND PESOS
(P50,000.00) previously paid as downpayment shall be forfeited in favor of the VENDOR.

Expenses for the registration such as registration fees, documentary stamp, transfer fee,
assurances and such other fees and expenses as may be necessary to transfer the title to the
name of the VENDEE shall be for the account of the VENDEE while capital gains tax shall be
paid by the VENDOR.

IN WITNESS WHEREOF, the parties hereunto signed those (sic) presents in the City of Makati
MM, Philippines on this 9th day of June, 1988.

(Sgd.) (Sgd.)

VIRGILIO R. ROMERO ENRIQUETA CHUA VDA.

DE ONGSIONG

Vendee Vendor

SIGNED IN THE PRESENCE OF:

(Sgd.) (Sgd.)

Rowena C. Ongsiong Jack M. Cruz 1

Alfonso Flores, in behalf of private respondent, forthwith received and acknowledged a check for
P50,000.00  from petitioner.
2 3

Pursuant to the agreement, private respondent filed a complaint for ejectment (Civil Case No. 7579) against
Melchor Musa and 29 other squatter families with the Metropolitan Trial Court of Parañaque. A few months later,
or on 21 February 1989, judgment was rendered ordering the defendants to vacate the premises. The decision
was handed down beyond the 60-day period (expiring 09 August 1988) stipulated in the contract. The writ of
execution of the judgment was issued, still later, on 30 March 1989.

In a letter, dated 07 April 1989, private respondent sought to return the P50,000.00 she received from petitioner
since, she said, she could not "get rid of the squatters" on the lot. Atty. Sergio A.F. Apostol, counsel for
petitioner, in his reply of 17 April 1989, refused the tender and stated:.

Our client believes that with the exercise of reasonable diligence considering the favorable
decision rendered by the Court and the writ of execution issued pursuant thereto, it is now
possible to eject the squatters from the premises of the subject property, for which reason, he
proposes that he shall take it upon himself to eject the squatters, provided, that expenses which
shall be incurred by reason thereof shall be chargeable to the purchase price of the land. 4
Meanwhile, the Presidential Commission for the Urban Poor ("PCUD"), through its Regional Director for Luzon,
Farley O. Viloria, asked the Metropolitan Trial Court of Parañaque for a grace period of 45 days from 21 April
1989 within which to relocate and transfer the squatter families. Acting favorably on the request, the court
suspended the enforcement of the writ of execution accordingly.

On 08 June 1989, Atty. Apostol reminded private respondent on the expiry of the 45-day grace period and his
client's willingness to "underwrite the expenses for the execution of the judgment and ejectment of the
occupants." 5

In his letter of 19 June 1989, Atty. Joaquin Yuseco, Jr., counsel for private respondent, advised Atty. Apostol that
the Deed of Conditional Sale had been rendered null and void by virtue of his client's failure to evict the
squatters from the premises within the agreed 60-day period. He added that private respondent had "decided to
retain the property."
6

On 23 June 1989, Atty. Apostol wrote back to explain:

The contract of sale between the parties was perfected from the very moment that there was a
meeting of the minds of the parties upon the subject lot and the price in the amount of
P1,561,600.00. Moreover, the contract had already been partially fulfilled and executed upon
receipt of the downpayment of your client. Ms. Ongsiong is precluded from rejecting its binding
effects relying upon her inability to eject the squatters from the premises of subject property
during the agreed period. Suffice it to state that, the provision of the Deed of Conditional Sale do
not grant her the option or prerogative to rescind the contract and to retain the property should
she fail to comply with the obligation she has assumed under the contract. In fact, a perusal of
the terms and conditions of the contract clearly shows that the right to rescind the contract and to
demand the return/reimbursement of the downpayment is granted to our client for his protection.

Instead, however, of availing himself of the power to rescind the contract and demand the return,
reimbursement of the downpayment, our client had opted to take it upon himself to eject the
squatters from the premises. Precisely, we refer you to our letters addressed to your client dated
April 17, 1989 and June 8, 1989.

Moreover, it is basic under the law on contracts that the power to rescind is given to the injured
party. Undoubtedly, under the circumstances, our client is the injured party.

Furthermore, your client has not complied with her obligation under their contract in good faith. It
is undeniable that Ms. Ongsiong deliberately refused to exert efforts to eject the squatters from
the premises of the subject property and her decision to retain the property was brought about by
the sudden increase in the value of realties in the surrounding areas.

Please consider this letter as a tender of payment to your client and a demand to execute the
absolute Deed of Sale. 7

A few days later (or on 27 June 1989), private respondent, prompted by petitioner's continued refusal to accept
the return of the P50,000.00 advance payment, filed with the Regional Trial Court of Makati, Branch 133, Civil
Case No. 89-4394 for rescission of the deed of "conditional" sale, plus damages, and for the consignation of
P50,000.00 cash.

Meanwhile, on 25 August 1989, the Metropolitan Trial Court issued an alias writ of execution in Civil Case No.
7579 on motion of private respondent but the squatters apparently still stayed on.

Back to Civil Case No. 89-4394, on 26 June 1990, the Regional Trial Court of Makati  rendered decision holding
8

that private respondent had no right to rescind the contract since it was she who "violated her obligation to eject
the squatters from the subject property" and that petitioner, being the injured party, was the party who could,
under Article 1191 of the Civil Code, rescind the agreement. The court ruled that the provisions in the contract
relating to (a) the return/reimbursement of the P50,000.00 if the vendor were to fail in her obligation to free the
property from squatters within the stipulated period or (b), upon the other hand, the sum's forfeiture by the
vendor if the vendee were to fail in paying the agreed purchase price, amounted to "penalty clauses". The court
added:
 This Court is not convinced of the ground relied upon by the plaintiff in seeking the rescission,
namely: (1) he (sic) is afraid of the squatters; and (2) she has spent so much to eject them from
the premises (p. 6, tsn, ses. Jan. 3, 1990). Militating against her profession of good faith is
plaintiffs conduct which is not in accord with the rules of fair play and justice. Notably, she
caused the issuance of an alias writ of execution on August 25, 1989 (Exh. 6) in the ejectment
suit which was almost two months after she filed the complaint before this Court on June 27,
1989. If she were really afraid of the squatters, then she should not have pursued the issuance of
an alias writ of execution. Besides, she did not even report to the police the alleged phone
threats from the squatters. To the mind of the Court, the so-called squatter factor is simply
factuitous (sic).
9

The lower court, accordingly, dismissed the complaint and ordered, instead, private respondent to eject
or cause the ejectment of the squatters from the property and to execute the absolute deed of
conveyance upon payment of the full purchase price by petitioner.

Private respondent appealed to the Court of Appeals. On 29 May 1992, the appellate court rendered its
decision.   It opined that the contract entered into by the parties was subject to a resolutory condition, i.e., the
10

ejectment of the squatters from the land, the non-occurrence of which resulted in the failure of the object of the
contract; that private respondent substantially complied with her obligation to evict the squatters; that it was
petitioner who was not ready to pay the purchase price and fulfill his part of the contract, and that the provision
requiring a mandatory return/reimbursement of the P50,000.00 in case private respondent would fail to eject the
squatters within the 60-day period was not a penal clause. Thus, it concluded.

WHEREFORE, the decision appealed from is REVERSED and SET ASIDE, and a new one
entered declaring the contract of conditional sale dated June 9, 1988 cancelled and ordering the
defendant-appellee to accept the return of the downpayment in the amount of P50,000.00 which
was deposited in the court below. No pronouncement as to costs. 11

Failing to obtain a reconsideration, petitioner filed this petition for review on certiorari raising issues that, in fine,
center on the nature of the contract adverted to and the P50,000.00 remittance made by petitioner.

A perfected contract of sale may either be absolute or conditional  depending on whether the agreement is
12

devoid of, or subject to, any condition imposed on the passing of title of the thing to be conveyed or on
the obligation of a party thereto. When ownership is retained until the fulfillment of a positive condition the
breach of the condition will simply prevent the duty to convey title from acquiring an obligatory force. If the
condition is imposed on an obligation of a party which is not complied with, the other party may either refuse to
proceed or waive said condition (Art. 1545, Civil Code). Where, of course, the condition is imposed upon
the perfection of the contract itself, the failure of such condition would prevent the juridical relation itself from
coming into existence. 13

In determining the real character of the contract, the title given to it by the parties is not as much significant as its
substance. For example, a deed of sale, although denominated as a deed of conditional sale, may be treated as
absolute in nature, if title to the property sold is not reserved in the vendor or if the vendor is not granted the right
to unilaterally rescind the contract predicated
on the fulfillment or non-fulfillment, as the case may be, of the prescribed condition. 14

The term "condition" in the context of a perfected contract of sale pertains, in reality, to the compliance by one
party of an undertaking the fulfillment of which would beckon, in turn, the demandability of the reciprocal
prestation of the other party. The reciprocal obligations referred to would normally be, in the case of vendee, the
payment of the agreed purchase price and, in the case of the vendor, the fulfillment of certain express warranties
(which, in the case at bench is the timely eviction of the squatters on the property).

It would be futile to challenge the agreement here in question as not being a duly perfected contract. A sale is at
once perfected when a person (the seller) obligates himself, for a price certain, to deliver and to transfer
ownership of a specified thing or right to another (the buyer) over which the latter agrees. 15

The object of the sale, in the case before us, was specifically identified to be a 1,952-square meter lot in San
Dionisio, Parañaque, Rizal, covered by Transfer Certificate of Title No. 361402 of the Registry of Deeds for
Pasig and therein technically described. The purchase price was fixed at P1,561,600.00, of which P50,000.00
was to be paid upon the execution of the document of sale and the balance of P1,511,600.00 payable "45 days
after the removal of all squatters from the above described property."
From the moment the contract is perfected, the parties are bound not only to the fulfillment of what has been
expressly stipulated but also to all the consequences which, according to their nature, may be in keeping with
good faith, usage and law. Under the agreement, private respondent is obligated to evict the squatters on the
property. The ejectment of the squatters is a condition the operative act of which sets into motion the period of
compliance by petitioner of his own obligation, i.e., to pay the balance of the purchase price. Private
respondent's failure "to remove the squatters from the property" within the stipulated period gives petitioner the
right to either refuse to proceed with the agreement or waive that condition in consonance with Article 1545 of
the Civil Code.  This option clearly belongs to petitioner and not to private respondent.
16

We share the opinion of the appellate court that the undertaking required of private respondent does not
constitute a "potestative condition dependent solely on his will" that might, otherwise, be void in accordance with
Article 1182 of the Civil Code  but a "mixed" condition "dependent not on the will of the vendor alone but also of
17

third persons like the squatters and government agencies and personnel concerned."  We must hasten to add,
18

however, that where the so-called "potestative condition" is imposed not on the birth of the obligation but on its
fulfillment, only the obligation is avoided, leaving unaffected the obligation itself.
19

In contracts of sale particularly, Article 1545 of the Civil Code, aforementioned, allows the obligee to choose
between proceeding with the agreement or waiving the performance of the condition. It is this provision which is
the pertinent rule in the case at bench. Here, evidently, petitioner has waived the performance of the condition
imposed on private respondent to free the property from squatters. 20

In any case, private respondent's action for rescission is not warranted. She is not the injured party.  The right of
21

resolution of a party to an obligation under Article 1191 of the Civil Code is predicated on a breach of faith by the
other party that violates the reciprocity between them.  It is private respondent who has failed in her obligation
22

under the contract. Petitioner did not breach the agreement. He has agreed, in fact, to shoulder the expenses of
the execution of the judgment in the ejectment case and to make arrangements with the sheriff to effect such
execution. In his letter of 23 June 1989, counsel for petitioner has tendered payment and demanded forthwith
the execution of the deed of absolute sale. Parenthetically, this offer to pay, having been made prior to the
demand for rescission, assuming for the sake of argument that such a demand is proper under Article 1592  of 23

the Civil Code, would likewise suffice to defeat private respondent's prerogative to rescind thereunder.

There is no need to still belabor the question of whether the P50,000.00 advance payment is reimbursable to
petitioner or forfeitable by private respondent, since, on the basis of our foregoing conclusions, the matter has
ceased to be an issue. Suffice it to say that petitioner having opted to proceed with the sale, neither may
petitioner demand its reimbursement from private respondent nor may private respondent subject it to forfeiture.

WHEREFORE, the questioned decision of the Court of Appeals is hereby REVERSED AND SET ASIDE, and
another is entered ordering petitioner to pay private respondent the balance of the purchase price and the latter
to execute the deed of absolute sale in favor of petitioner. No costs.

18. FRANCISCO GONZALES, Petitioner,

vs.
SEVERINO C. LIM and TOYOTA SHAW, INC., Respondents.

DECISION

CORONA, J.:

At bar is an appeal by certiorari under Rule 45 of the Rules of Court questioning the decision 1 and resolution2 of
the Court of Appeals (CA) in CA-G.R. CV No. 41716 entitled Severino C. Lim and Toyota Shaw, Inc. v.
Francisco Gonzales and Carmen Gonzales.

The facts follow.

Petitioner Francisco Gonzales, Roque Ma. Gonzales and Carmen Gonzales (Gonzaleses) were the owners of
Motown Vehicles, Inc. (Motown). Motown was the licensed distributor of Ford vehicles in the country. Its assets
included two buildings standing on a 4,944 sq. m. lot leased from Tanglaw Realty Inc. (Tanglaw).
In 1988, when Ford Philippines ceased operations, the Gonzaleses sold Motown’s shares of stocks to
respondents Severino C. Lim and Toyota Shaw, Inc. which was then putting up a Toyota car dealership. The
"Agreement" signed by the parties stated that the sale included Motown’s two lease contracts with Tanglaw. It
read:

WHEREAS, Motown, which owns these fixed and moveable improvements and equipments…does not own the
land on which these improvements and equipments are located, but merely leases the bare land… from
Tanglaw Realty Corp. under 2 Lease Contracts both dated June 17, 1978 both commencing Nov. 15, 1977 and
expiring Nov. 14, 2002.

x x x           x x x          x x x

4. PAYMENT — The aforementioned price amounting to ₱6,746,000.00 shall be paid by [respondents] to the
[Gonzaleses] in two (2) installments payable simultaneous to the occurrence of the following events:

1. ₱6,246,000 – [u]pon signing of this contract xxx

2. ₱500,000 – [u]pon receipt of official communication from Tanglaw Realty Corporation to the effect that
Motown can have continuing and unhampered use of the pieces of [the leased] land…covered by the 2
Lease Contracts…[I]t is understood that the continuation of the lease at a reasonable rate for the original
term of the 2 lease agreements is a central, indivisible and very basic part of this agreement, since the
[bases] for the valuation of Motown by [respondents are] its location and the improvements and
equipments contained therein.3

x x x           x x x          x x x

After paying the initial installment of ₱6,246,000 to the Gonzaleses, respondents claimed they discovered that
one of Motown’s lease contracts had already been terminated prior to the sale. As a result, they were allegedly
constrained to negotiate with Tanglaw for a new lease contract (with a higher rental).

Subsequently, respondents filed a case in the Regional Trial Court (RTC), Branch 65 of Makati, 4 for declaratory
relief with damages against the Gonzaleses, seeking release from their obligation to pay the ₱500,000 balance.

During the trial, respondents (as then plaintiffs) accused the Gonzaleses of falsely representing to them that the
latter’s two lease contracts were still subsisting at the time of the sale. They maintained that the Gonzaleses
guaranteed a "continuing and unhampered use" of the premises but Tanglaw had nonetheless threatened to
evict them from one of the leased portions.

To support their claim, they presented in court a copy of the "Agreement" indicating the Gonzaleses’ alleged
warranty that the two lease contracts with Tanglaw were still good.

Petitioner (with his then co-defendants) countered that respondents were well aware of the termination of one of
the two lease contracts at the time of sale. He denied giving a warranty on both contracts and explained that he
only signed the "Agreement" (showing Motown’s two lease contracts with Tanglaw) on prodding by respondents
that they needed it to convince Toyota Philippines they were ready with their dealership site. According to
petitioner, respondents told him it was only "for show" and amendments thereto would be made later on.

Petitioner added that his only undertaking was to help respondents negotiate a new lease contract that would
have similar terms as his. As a counterclaim, petitioner asked for the payment of respondents’ ₱500,000
balance.

After trial, the RTC dismissed respondents’ case but granted petitioner’s counterclaim of ₱500,000. The court a
quo’s decision read:

...[T]he court finds that [petitioner] did not warrant the existence of the lease on one of the premises. The court
believes that even before the ["Agreement"] has been executed[,] [respondents were] already aware that one of
the leases has been terminated…[I]f [petitioner] warranted anything at all, it was only that he will help
[respondents] procure a new lease contract under the old term.

x x x           x x x          x x x
…In view of the foregoing, the complaint is DISMISSED[.] On the counterclaim, [respondents] are ordered to pay
[petitioner] ₱500,000, representing the outstanding balance for the sale of Motown shares of stocks plus legal
interest from October 10, 1989, the date of the lease between Tanglaw Realty and Toyota Shaw, Inc., when
[petitioner] was deemed to have fulfilled his promise.

x x x           x x x          x x x

SO ORDERED.5

Respondents appealed to the CA which affirmed with modification the trial court’s decision. It agreed with the
RTC that respondents could not feign ignorance of Motown’s terminated lease contract; however, it deleted the
order directing respondents to pay petitioner ₱500,000. The CA ruled that the payment was not due since
petitioner failed to obtain the required official communication from Tanglaw. The CA decision read:

x x x           x x x          x x x

xxx. The phrase "continuation of the lease contract at a reasonable rate" proves that [respondents] did not
contemplate stepping into the shoes of Motown as lessee of the parcels of land because if what they truly
expected was to continue exactly the same lease agreement between [Tanglaw] and Motown, there would have
been no need to include [said] phrase… Clearly, [respondents] anticipated nay expected that if they continue the
lease, it would not be under the same terms and conditions as the original contract, but rather at a new,
reasonable rate. Therefore, there was no warranty from [petitioner]…

…[W]ith regard to the question of whether [respondents] are now obliged to pay [petitioner] the ₱500,000.00…,
the Court finds that [petitioner had] not been able to fulfill [his] obligation to submit the required official
communication from Tanglaw Realty Corporation. Thus, [respondents] are…freed from their obligation to pay the
final installment of ₱500,000.00.

x x x           x x x          x x x

WHEREFORE, judgment is hereby rendered MODIFYING the lower court’s decision by deleting the portion
ordering [respondents] to pay [petitioner] ₱500,000 plus legal interest. Instead, the Court hereby declares
[petitioner’s] counterclaim DISMISSED.6

Petitioner filed a motion for reconsideration (MR), contending that the payment of the ₱500,000 balance was
already due because respondents themselves had prevented him from fulfilling his undertaking in the
"Agreement." Petitioner insisted that since respondents negotiated directly with Tanglaw for a new lease
contract, petitioner’s obligation should be deemed fulfilled.

The CA denied the MR.7 Hence, this petition.8

In this petition, the lone issue for resolution is whether petitioner was still entitled to the payment of ₱500,000
despite failure to comply with the provision in the "Agreement" requiring him to obtain an official communication
from Tanglaw regarding the continuation of Motown’s lease contract.

At the outset, petitioner’s undertaking set forth in the "Agreement" may be deemed a "condition," a future and
uncertain event upon which the existence of an obligation is made to depend or that which subordinates the
existence of a liability under a contract to a certain future event. 9 It was a condition that was imposed on an
obligation after the consummation of the contract of sale, not a condition on the perfection of the contract itself
(non-fulfillment of which could have prevented the juridical relation from coming into existence).

Article 1545 of the Civil Code is pertinent:

Art. 1545. Where the obligation of either party to a contract of sale is subject to any condition which is
not performed, such party may refuse to proceed with the contract or he may waive performance of the
condition. If the other party has promised that the condition should happen or be performed, such first
mentioned party may also treat the nonperformance of the condition as a breach of warranty. (emphasis
supplied)

x x x           x x x          x x x
These options were echoed in Romero v. CA,10 where we declared that if the condition was imposed on an
obligation of a party which was not complied with, the other party may either (1) refuse to proceed with the
agreement or (2) waive the fulfillment of the condition.

In the case at bar, respondents obviously did not choose the first option as they proceeded with their contract
with petitioner despite the latter’s non-fulfillment of the condition in the agreement. In fact, in their comment, they
stated that they "took possession of the properties and caused extensive improvement and installed facilities
and equipment" thereon.11

Did respondents, however, waive fulfillment of the condition? Yes.

The records reveal that respondents negotiated directly with Tanglaw for a new lease contract even without the
required official communication that petitioner was supposed to obtain for them, a condition in the "Agreement"
which they themselves imposed on the latter. Although they had the right to require his compliance with the
condition or compel his performance of the undertaking, they opted otherwise.

Respondents’ assertion that they were merely forced to deal directly with Tanglaw because the latter had
threatened to evict them has no merit. As the RTC and the CA both held, respondents, at the time of the sale,
already knew that one of Motown’s two lease contracts with Tanglaw had been terminated. This being a finding
of fact, we shall not look into it, absent any compelling reason to do so. 12 Respondents therefore cannot invoke
this argument to justify their actions and evade their liability to petitioner.
1awphil

Moreover, respondents’ contention that the condition did not preclude them from dealing with Tanglaw or that
they were "to refrain from negotiating directly"13 can only mean that they did not really expect petitioner to comply
strictly and absolutely with it. Respondents’ conduct showed that they did not only disregard the condition but
also placed petitioner in a position that his compliance was no longer necessary. We are thus constrained to rule
that they had effectively waived compliance with the condition.

Finally, the condition was deemed waived when respondents forged their new lease contract with Tanglaw. 14

WHEREFORE, the petition is hereby GRANTED. The assailed decision and resolution of the Court of Appeals in
CA-G.R. CV No. 41716 are hereby SET ASIDE and the decision of the Regional Trial Court REINSTATED.

SO ORDERED.

19. ROLANDO T. CATUNGAL, JOSE T. CATUNGAL, JR., CAROLYN T. CATUNGAL and ERLINDA
CATUNGAL-WESSEL, Petitioners,
vs.
ANGEL S. RODRIGUEZ, Respondent.

DECISION

LEONARDO-DE CASTRO, J.:

Before the Court is a Petition for Review on Certiorari, assailing the following issuances of the Court of Appeals
in CA-G.R. CV No. 40627 consolidated with CA-G.R. SP No. 27565: (a) the August 8, 2000 Decision, 1 which
affirmed the Decision2 dated May 30, 1992 of the Regional Trial Court (RTC), Branch 27 of Lapu-lapu City, Cebu
in Civil Case No. 2365-L, and (b) the January 30, 2001 Resolution, 3 denying herein petitioners’ motion for
reconsideration of the August 8, 2000 Decision.

The relevant factual and procedural antecedents of this case are as follows:

This controversy arose from a Complaint for Damages and Injunction with Preliminary Injunction/Restraining
Order4 filed on December 10, 1990 by herein respondent Angel S. Rodriguez (Rodriguez), with the RTC, Branch
27, Lapu-lapu City, Cebu, docketed as Civil Case No. 2365-L against the spouses Agapita and Jose Catungal
(the spouses Catungal), the parents of petitioners.
In the said Complaint, it was alleged that Agapita T. Catungal (Agapita) owned a parcel of land (Lot 10963) with
an area of 65,246 square meters, covered by Original Certificate of Title (OCT) No. 105 5 in her name situated in
the Barrio of Talamban, Cebu City. The said property was allegedly the exclusive paraphernal property of
Agapita.

On April 23, 1990, Agapita, with the consent of her husband Jose, entered into a Contract to Sell 6 with
respondent Rodriguez. Subsequently, the Contract to Sell was purportedly "upgraded" into a Conditional Deed
of Sale7 dated July 26, 1990 between the same parties. Both the Contract to Sell and the Conditional Deed of
Sale were annotated on the title.

The provisions of the Conditional Deed of Sale pertinent to the present dispute are quoted below:

1. The VENDOR for and in consideration of the sum of TWENTY[-]FIVE MILLION PESOS (₱25,000,000.00)
payable as follows:

a. FIVE HUNDRED THOUSAND PESOS (₱500,000.00) downpayment upon the signing of this
agreement, receipt of which sum is hereby acknowledged in full from the VENDEE.

b. The balance of TWENTY[-]FOUR MILLION FIVE HUNDRED THOUSAND PESOS (₱24,500,000.00)

shall be payable in five separate checks, made to the order of JOSE Ch. CATUNGAL, the first check
shall be for FOUR MILLION FIVE HUNDRED THOUSAND PESOS (₱4,500,000.00) and the remaining
balance to be paid in four checks in the amounts of FIVE MILLION PESOS (₱5,000,000.00) each after
the VENDEE have (sic) successfully negotiated, secured and provided a Road Right of Way consisting
of 12 meters in width cutting across Lot 10884 up to the national road, either by widening the existing
Road Right of Way or by securing a new Road Right of Way of 12 meters in width. If however said Road
Right of Way could not be negotiated, the VENDEE shall give notice to the VENDOR for them to
reassess and solve the problem by taking other options and should the situation ultimately prove futile,
he shall take steps to rescind or cancel the herein Conditional Deed of Sale.

c. That the access road or Road Right of Way leading to Lot 10963 shall be the responsibility of the
VENDEE to secure and any or all cost relative to the acquisition thereof shall be borne solely by the
VENDEE. He shall, however, be accorded with enough time necessary for the success of his endeavor,
granting him a free hand in negotiating for the passage.

BY THESE PRESENTS, the VENDOR do hereby agree to sell by way of herein CONDITIONAL DEED OF SALE
to VENDEE, his heirs, successors and assigns, the real property described in the Original Certificate of Title No.
105 x x x.

xxxx

5. That the VENDEE has the option to rescind the sale. In the event the VENDEE exercises his option to rescind
the herein Conditional Deed of Sale, the VENDEE shall notify the VENDOR by way of a written notice
relinquishing his rights over the property. The VENDEE shall then be reimbursed by the VENDOR the sum of
FIVE HUNDRED THOUSAND PESOS (₱500,000.00) representing the downpayment, interest free, payable but
contingent upon the event that the VENDOR shall have been able to sell the property to another party. 8

In accordance with the Conditional Deed of Sale, Rodriguez purportedly secured the necessary surveys and
plans and through his efforts, the property was reclassified from agricultural land into residential land which he
claimed substantially increased the property’s value. He likewise alleged that he actively negotiated for the road
right of way as stipulated in the contract.9

Rodriguez further claimed that on August 31, 1990 the spouses Catungal requested an advance of
₱5,000,000.00 on the purchase price for personal reasons. Rodriquez allegedly refused on the ground that the
amount was substantial and was not due under the terms of their agreement. Shortly after his refusal to pay the
advance, he purportedly learned that the Catungals were offering the property for sale to third parties. 10

Thereafter, Rodriguez received letters dated October 22, 1990, 11 October 24, 199012 and October 29, 1990,13 all
signed by Jose Catungal who was a lawyer, essentially demanding that the former make up his mind about
buying the land or exercising his "option" to buy because the spouses Catungal allegedly received other offers
and they needed money to pay for personal obligations and for investing in other properties/business ventures.
Should Rodriguez fail to exercise his option to buy the land, the Catungals warned that they would consider the
contract cancelled and that they were free to look for other buyers.

In a letter dated November 4, 1990, 14 Rodriguez registered his objections to what he termed the Catungals’
unwarranted demands in view of the terms of the Conditional Deed of Sale which allowed him sufficient time to
negotiate a road right of way and granted him, the vendee, the exclusive right to rescind the contract. Still, on
November 15, 1990, Rodriguez purportedly received a letter dated November 9, 1990 15 from Atty. Catungal,
stating that the contract had been cancelled and terminated.

Contending that the Catungals’ unilateral rescission of the Conditional Deed of Sale was unjustified, arbitrary
and unwarranted, Rodriquez prayed in his Complaint, that:

1. Upon the filing of this complaint, a restraining order be issued enjoining defendants [the spouses
Catungal], their employees, agents, representatives or other persons acting in their behalf from offering
the property subject of this case for sale to third persons; from entertaining offers or proposals by third
persons to purchase the said property; and, in general, from performing acts in furtherance or
implementation of defendants’ rescission of their Conditional Deed of Sale with plaintiff [Rodriguez].

2. After hearing, a writ of preliminary injunction be issued upon such reasonable bond as may be fixed by
the court enjoining defendants and other persons acting in their behalf from performing any of the acts
mentioned in the next preceding paragraph.

3. After trial, a Decision be rendered:

a) Making the injunction permanent;

b) Condemning defendants to pay to plaintiff, jointly and solidarily:

Actual damages in the amount of ₱400,000.00 for their unlawful rescission of the Agreement and their
performance of acts in violation or disregard of the said Agreement;

Moral damages in the amount of ₱200,000.00;

Exemplary damages in the amount of ₱200,000.00; Expenses of litigation and attorney’s fees in the amount of
₱100,000.00; and

Costs of suit.16

On December 12, 1990, the trial court issued a temporary restraining order and set the application for a writ of
preliminary injunction for hearing on December 21, 1990 with a directive to the spouses Catungal to show cause
within five days from notice why preliminary injunction should not be granted. The trial court likewise ordered that
summons be served on them.17

Thereafter, the spouses Catungal filed their opposition18 to the issuance of a writ of preliminary injunction and
later filed a motion to dismiss19 on the ground of improper venue. According to the Catungals, the subject
property was located in Cebu City and thus, the complaint should have been filed in Cebu City, not Lapu-lapu
City. Rodriguez opposed the motion to dismiss on the ground that his action was a personal action as its subject
was breach of a contract, the Conditional Deed of Sale, and not title to, or possession of real property. 20

In an Order dated January 17, 1991, 21 the trial court denied the motion to dismiss and ruled that the complaint
involved a personal action, being merely for damages with a prayer for injunction.

Subsequently, on January 30, 1991, the trial court ordered the issuance of a writ of preliminary injunction upon
posting by Rodriguez of a bond in the amount of ₱100,000.00 to answer for damages that the defendants may
sustain by reason of the injunction.

On February 1, 1991, the spouses Catungal filed their Answer with Counterclaim 22 alleging that they had the
right to rescind the contract in view of (1) Rodriguez’s failure to negotiate the road right of way despite the lapse
of several months since the signing of the contract, and (2) his refusal to pay the additional amount of
₱5,000,000.00 asked by the Catungals, which to them indicated his lack of funds to purchase the property. The
Catungals likewise contended that Rodriguez did not have an exclusive right to rescind the contract and that the
contract, being reciprocal, meant both parties had the right to rescind. 23 The spouses Catungal further claimed
that it was Rodriguez who was in breach of their agreement and guilty of bad faith which justified their rescission
of the contract.24 By way of counterclaim, the spouses Catungal prayed for actual and consequential damages in
the form of unearned interests from the balance (of the purchase price in the amount) of ₱24,500,000.00, moral
and exemplary damages in the amount of ₱2,000,000.00, attorney’s fees in the amount of ₱200,000.00 and
costs of suits and litigation expenses in the amount of ₱10,000.00. 25 The spouses Catungal prayed for the
dismissal of the complaint and the grant of their counterclaim.

The Catungals amended their Answer twice,26 retaining their basic allegations but amplifying their charges of
contractual breach and bad faith on the part of Rodriguez and adding the argument that in view of Article 1191 of
the Civil Code, the power to rescind reciprocal obligations is granted by the law itself to both parties and does
not need an express stipulation to grant the same to the injured party. In the Second Amended Answer with
Counterclaim, the spouses Catungal added a prayer for the trial court to order the Register of Deeds to cancel
the annotations of the two contracts at the back of their OCT.27

On October 24, 1991, Rodriguez filed an Amended Complaint, 28 adding allegations to the effect that the
Catungals were guilty of several misrepresentations which purportedly induced Rodriguez to buy the property at
the price of ₱25,000,000.00. Among others, it was alleged that the spouses Catungal misrepresented that their
Lot 10963 includes a flat portion of land which later turned out to be a separate lot (Lot 10986) owned by
Teodora Tudtud who sold the same to one Antonio Pablo. The Catungals also allegedly misrepresented that the
road right of way will only traverse two lots owned by Anatolia Tudtud and her daughter Sally who were their
relatives and who had already agreed to sell a portion of the said lots for the road right of way at a price of
₱550.00 per square meter. However, because of the Catungals’ acts of offering the property to other buyers who
offered to buy the road lots for ₱2,500.00 per square meter, the adjacent lot owners were no longer willing to sell
the road lots to Rodriguez at ₱550.00 per square meter but were asking for a price of ₱3,500.00 per square
meter. In other words, instead of assisting Rodriguez in his efforts to negotiate the road right of way, the spouses
Catungal allegedly intentionally and maliciously defeated Rodriguez’s negotiations for a road right of way in
order to justify rescission of the said contract and enable them to offer the property to other buyers.

Despite requesting the trial court for an extension of time to file an amended Answer, 29 the Catungals did not file
an amended Answer and instead filed an Urgent Motion to Dismiss 30 again invoking the ground of improper
venue. In the meantime, for failure to file an amended Answer within the period allowed, the trial court set the
case for pre-trial on December 20, 1991.

During the pre-trial held on December 20, 1991, the trial court denied in open court the Catungals’ Urgent Motion
to Dismiss for violation of the rules and for being repetitious and having been previously denied. 31 However, Atty.
Catungal refused to enter into pre-trial which prompted the trial court to declare the defendants in default and to
set the presentation of the plaintiff’s evidence on February 14, 1992. 32

On December 23, 1991, the Catungals filed a motion for reconsideration 33 of the December 20, 1991 Order
denying their Urgent Motion to Dismiss but the trial court denied reconsideration in an Order dated February 3,
1992.34 Undeterred, the Catungals subsequently filed a Motion to Lift and to Set Aside Order of Default 35 but it
was likewise denied for being in violation of the rules and for being not meritorious. 36 On February 28, 1992, the
Catungals filed a Petition for Certiorari and Prohibition37 with the Court of Appeals, questioning the denial of their
motion to dismiss and the order of default. This was docketed as CA-G.R. SP No. 27565.

Meanwhile, Rodriguez proceeded to present his evidence before the trial court.

In a Decision dated May 30, 1992, the trial court ruled in favor of Rodriguez, finding that: (a) under the contract it
was complainant (Rodriguez) that had the option to rescind the sale; (b) Rodriguez’s obligation to pay the
balance of the purchase price arises only upon successful negotiation of the road right of way; (c) he proved his
diligent efforts to negotiate the road right of way; (d) the spouses Catungal were guilty of misrepresentation
which defeated Rodriguez’s efforts to acquire the road right of way; and (e) the Catungals’ rescission of the
contract had no basis and was in bad faith. Thus, the trial court made the injunction permanent, ordered the
Catungals to reduce the purchase price by the amount of acquisition of Lot 10963 which they misrepresented
was part of the property sold but was in fact owned by a third party and ordered them to pay ₱100,000.00 as
damages, ₱30,000.00 as attorney’s fees and costs.

The Catungals appealed the decision to the Court of Appeals, asserting the commission of the following errors
by the trial court in their appellants’ brief 38 dated February 9, 1994:

I
THE COURT A QUO ERRED IN NOT DISMISSING OF (SIC) THE CASE ON THE GROUNDS OF IMPROPER
VENUE AND LACK OF JURISDICTION.

II

THE COURT A QUO ERRED IN CONSIDERING THE CASE AS A PERSONAL AND NOT A REAL ACTION.

III

GRANTING WITHOUT ADMITTING THAT VENUE WAS PROPERLY LAID AND THE CASE IS A PERSONAL
ACTION, THE COURT A QUO ERRED IN DECLARING THE DEFENDANTS IN DEFAULT DURING THE PRE-
TRIAL WHEN AT THAT TIME THE DEFENDANTS HAD ALREADY FILED THEIR ANSWER TO THE
COMPLAINT.

IV

THE COURT A QUO ERRED IN CONSIDERING THE DEFENDANTS AS HAVING LOST THEIR LEGAL
STANDING IN COURT WHEN AT MOST THEY COULD ONLY BE CONSIDERED AS IN DEFAULT AND STILL
ENTITLED TO NOTICES OF ALL FURTHER PROCEEDINGS ESPECIALLY AFTER THEY HAD FILED THE
MOTION TO LIFT THE ORDER OF DEFAULT.

THE COURT A QUO ERRED IN ISSUING THE WRIT [OF] PRELIMINARY INJUNCTION RESTRAINING THE
EXERCISE OF ACTS OF OWNERSHIP AND OTHER RIGHTS OVER REAL PROPERTY OUTSIDE OF THE
COURT’S TERRITORIAL JURISDICTION AND INCLUDING PERSONS WHO WERE NOT BROUGHT UNDER
ITS JURISDICTION, THUS THE NULLITY OF THE WRIT.

VI

THE COURT A QUO ERRED IN NOT RESTRAINING ITSELF MOTU PROP[R]IO FROM CONTINUING WITH
THE PROCEEDINGS IN THE CASE AND IN RENDERING DECISION THEREIN IF ONLY FOR REASON OF
COURTESY AND FAIRNESS BEING MANDATED AS DISPENSER OF FAIR AND EQUAL JUSTICE TO ALL
AND SUNDRY WITHOUT FEAR OR FAVOR IT HAVING BEEN SERVED EARLIER WITH A COPY OF THE
PETITION FOR CERTIORARI QUESTIONING ITS VENUE AND JURISDICTION IN CA-G.R. NO. SP 27565 IN
FACT NOTICES FOR THE FILING OF COMMENT THERETO HAD ALREADY BEEN SENT OUT BY THE
HONORABLE COURT OF APPEALS, SECOND DIVISION, AND THE COURT A QUO WAS FURNISHED
WITH COPY OF SAID NOTICE.

VII

THE COURT A QUO ERRED IN DECIDING THE CASE IN FAVOR OF THE PLAINTIFF AND AGAINST THE
DEFENDANTS ON THE BASIS OF EVIDENCE WHICH ARE IMAGINARY, FABRICATED, AND DEVOID OF
TRUTH, TO BE STATED IN DETAIL IN THE DISCUSSION OF THIS PARTICULAR ERROR, AND,
THEREFORE, THE DECISION IS REVERSIBLE.39

On August 31, 1995, after being granted several extensions, Rodriguez filed his appellee’s brief, 40 essentially
arguing the correctness of the trial court’s Decision regarding the foregoing issues raised by the Catungals.
Subsequently, the Catungals filed a Reply Brief41 dated October 16, 1995.

From the filing of the appellants’ brief in 1994 up to the filing of the Reply Brief, the spouses Catungal were
represented by appellant Jose Catungal himself. However, a new counsel for the Catungals, Atty. Jesus N.
Borromeo (Atty. Borromeo), entered his appearance before the Court of Appeals on September 2, 1997. 42 On
the same date, Atty. Borromeo filed a Motion for Leave of Court to File Citation of Authorities 43 and a Citation of
Authorities.44 This would be followed by Atty. Borromeo’s filing of an Additional Citation of Authority and Second
Additional Citation of Authority both on November 17, 1997. 45

During the pendency of the case with the Court of Appeals, Agapita Catungal passed away and thus, her
husband, Jose, filed on February 17, 1999 a motion for Agapita’s substitution by her surviving children. 46
On August 8, 2000, the Court of Appeals rendered a Decision in the consolidated cases CA-G.R. CV No. 40627
and CA-G.R. SP No. 27565, 47 affirming the trial court’s Decision.

In a Motion for Reconsideration dated August 21, 2000, 48 counsel for the Catungals, Atty. Borromeo, argued for
the first time that paragraphs 1(b) and 549 of the Conditional Deed of Sale, whether taken separately or jointly,
violated the principle of mutuality of contracts under Article 1308 of the Civil Code and thus, said contract was
void ab initio. He adverted to the cases mentioned in his various citations of authorities to support his argument
of nullity of the contract and his position that this issue may be raised for the first time on appeal.

Meanwhile, a Second Motion for Substitution 50 was filed by Atty. Borromeo in view of the death of Jose Catungal.

In a Resolution dated January 30, 2001, the Court of Appeals allowed the substitution of the deceased Agapita
and Jose Catungal by their surviving heirs and denied the motion for reconsideration for lack of merit

Hence, the heirs of Agapita and Jose Catungal filed on March 27, 2001 the present petition for review, 51 which
essentially argued that the Court of Appeals erred in not finding that paragraphs 1(b) and/or 5 of the Conditional
Deed of Sale, violated the principle of mutuality of contracts under Article 1308 of the Civil Code. Thus, said
contract was supposedly void ab initio and the Catungals’ rescission thereof was superfluous.

In his Comment,52 Rodriguez highlighted that (a) petitioners were raising new matters that cannot be passed
upon on appeal; (b) the validity of the Conditional Deed of Sale was already admitted and petitioners cannot be
allowed to change theories on appeal; (c) the questioned paragraphs of the Conditional Deed of Sale were valid;
and (d) petitioners were the ones who committed fraud and breach of contract and were not entitled to relief for
not having come to court with clean hands.

The Court gave due course to the Petition53 and the parties filed their respective Memoranda.

The issues to be resolved in the case at bar can be summed into two questions:

I. Are petitioners allowed to raise their theory of nullity of the Conditional Deed of Sale for the first time
on appeal?

II. Do paragraphs 1(b) and 5 of the Conditional Deed of Sale violate the principle of mutuality of contracts
under Article 1308 of the Civil Code?

On petitioners’ change of theory

Petitioners claimed that the Court of Appeals should have reversed the trial courts’ Decision on the ground of the
alleged nullity of paragraphs 1(b) and 5 of the Conditional Deed of Sale notwithstanding that the same was not
raised as an error in their appellants’ brief. Citing Catholic Bishop of Balanga v. Court of Appeals, 54 petitioners
argued in the Petition that this case falls under the following exceptions:

(3) Matters not assigned as errors on appeal but consideration of which is necessary in arriving at a just
decision and complete resolution of the case or to serve the interest of justice or to avoid dispensing
piecemeal justice;

(4) Matters not specifically assigned as errors on appeal but raised in the trial court and are matters of
record having some bearing on the issue submitted which the parties failed to raise or which the lower
court ignored;

(5) Matters not assigned as errors on appeal but closely related to an error assigned; and

(6) Matters not assigned as errors but upon which the determination of a question properly assigned is
dependent.55

We are not persuaded.

This is not an instance where a party merely failed to assign an issue as an error in the brief nor failed to argue a
material point on appeal that was raised in the trial court and supported by the record. Neither is this a case
where a party raised an error closely related to, nor dependent on the resolution of, an error properly assigned in
his brief. This is a situation where a party completely changes his theory of the case on appeal and abandons
his previous assignment of errors in his brief, which plainly should not be allowed as anathema to due process.

Petitioners should be reminded that the object of pleadings is to draw the lines of battle between the litigants and
to indicate fairly the nature of the claims or defenses of both parties. 56 In Philippine National Construction
Corporation v. Court of Appeals, 57 we held that "[w]hen a party adopts a certain theory in the trial court, he will
not be permitted to change his theory on appeal, for to permit him to do so would not only be unfair to the other
party but it would also be offensive to the basic rules of fair play, justice and due process." 58

We have also previously ruled that "courts of justice have no jurisdiction or power to decide a question not in
issue. Thus, a judgment that goes beyond the issues and purports to adjudicate something on which the court
did not hear the parties, is not only irregular but also extrajudicial and invalid. The rule rests on the fundamental
tenets of fair play."59

During the proceedings before the trial court, the spouses Catungal never claimed that the provisions in the
Conditional Deed of Sale, stipulating that the payment of the balance of the purchase price was contingent upon
the successful negotiation of a road right of way (paragraph 1[b]) and granting Rodriguez the option to rescind
(paragraph 5), were void for allegedly making the fulfillment of the contract dependent solely on the will of
Rodriguez.

On the contrary, with respect to paragraph 1(b), the Catungals did not aver in the Answer (and its amended
versions) that the payment of the purchase price was subject to the will of Rodriguez but rather they claimed that
paragraph 1(b) in relation to 1(c) only presupposed a reasonable time be given to Rodriguez to negotiate the
road right of way. However, it was petitioners’ theory that more than sufficient time had already been given
Rodriguez to negotiate the road right of way. Consequently, Rodriguez’s refusal/failure to pay the balance of the
purchase price, upon demand, was allegedly indicative of lack of funds and a breach of the contract on the part
of Rodriguez.

Anent paragraph 5 of the Conditional Deed of Sale, regarding Rodriguez’s option to rescind, it was petitioners’
theory in the court a quo that notwithstanding such provision, they retained the right to rescind the contract for
Rodriguez’s breach of the same under Article 1191 of the Civil Code.

Verily, the first time petitioners raised their theory of the nullity of the Conditional Deed of Sale in view of the
questioned provisions was only in their Motion for Reconsideration of the Court of Appeals’ Decision, affirming
the trial court’s judgment. The previous filing of various citations of authorities by Atty. Borromeo and the Court
of Appeals’ resolutions noting such citations were of no moment. The citations of authorities merely listed cases
and their main rulings without even any mention of their relevance to the present case or any prayer for the
Court of Appeals to consider them.  In sum, the Court of Appeals did not err in disregarding the citations of
1âwphi1

authorities or in denying petitioners’ motion for reconsideration of the assailed August 8, 2000 Decision in view
of the proscription against changing legal theories on appeal.

Ruling on the questioned provisions of the Conditional Deed of Sale

Even assuming for the sake of argument that this Court may overlook the procedural misstep of petitioners, we
still cannot uphold their belatedly proffered arguments.

At the outset, it should be noted that what the parties entered into is a Conditional Deed of Sale, whereby the
spouses Catungal agreed to sell and Rodriguez agreed to buy Lot 10963 conditioned on the payment of a
certain price but the payment of the purchase price was additionally made contingent on the successful
negotiation of a road right of way. It is elementary that "[i]n conditional obligations, the acquisition of rights, as
well as the extinguishment or loss of those already acquired, shall depend upon the happening of the event
which constitutes the condition."60

Petitioners rely on Article 1308 of the Civil Code to support their conclusion regarding the claimed nullity of the
aforementioned provisions. Article 1308 states that "[t]he contract must bind both contracting parties; its validity
or compliance cannot be left to the will of one of them."

Article 1182 of the Civil Code, in turn, provides:

Art. 1182. When the fulfillment of the condition depends upon the sole will of the debtor, the conditional
obligation shall be void. If it depends upon chance or upon the will of a third person, the obligation shall take
effect in conformity with the provisions of this Code.

In the past, this Court has distinguished between a condition imposed on the perfection of a contract and a
condition imposed merely on the performance of an obligation. While failure to comply with the first condition
results in the failure of a contract, failure to comply with the second merely gives the other party the option to
either refuse to proceed with the sale or to waive the condition. 61 This principle is evident in Article 1545 of the
Civil Code on sales, which provides in part:

Art. 1545. Where the obligation of either party to a contract of sale is subject to any condition which is not
performed, such party may refuse to proceed with the contract or he may waive performance of the condition x x
x.

Paragraph 1(b) of the Conditional Deed of Sale, stating that respondent shall pay the balance of the purchase
price when he has successfully negotiated and secured a road right of way, is not a condition on the perfection
of the contract nor on the validity of the entire contract or its compliance as contemplated in Article 1308. It is a
condition imposed only on respondent’s obligation to pay the remainder of the purchase price. In our view and
applying Article 1182, such a condition is not purely potestative as petitioners contend. It is not dependent on the
sole will of the debtor but also on the will of third persons who own the adjacent land and from whom the road
right of way shall be negotiated. In a manner of speaking, such a condition is likewise dependent on chance as
there is no guarantee that respondent and the third party-landowners would come to an agreement regarding the
road right of way. This type of mixed condition is expressly allowed under Article 1182 of the Civil Code.

Analogous to the present case is Romero v. Court of Appeals, 62 wherein the Court interpreted the legal effect of
a condition in a deed of sale that the balance of the purchase price would be paid by the vendee when the
vendor has successfully ejected the informal settlers occupying the property. In Romero, we found that such a
condition did not affect the perfection of the contract but only imposed a condition on the fulfillment of the
obligation to pay the balance of the purchase price, to wit:

From the moment the contract is perfected, the parties are bound not only to the fulfillment of what has been
expressly stipulated but also to all the consequences which, according to their nature, may be in keeping with
good faith, usage and law. Under the agreement, private respondent is obligated to evict the squatters on the
property. The ejectment of the squatters is a condition the operative act of which sets into motion the period of
compliance by petitioner of his own obligation, i.e., to pay the balance of the purchase price. Private
respondent's failure "to remove the squatters from the property" within the stipulated period gives petitioner the
right to either refuse to proceed with the agreement or waive that condition in consonance with Article 1545 of
the Civil Code. This option clearly belongs to petitioner and not to private respondent.

We share the opinion of the appellate court that the undertaking required of private respondent does not
constitute a "potestative condition dependent solely on his will" that might, otherwise, be void in accordance with
Article 1182 of the Civil Code but a "mixed" condition "dependent not on the will of the vendor alone but also of
third persons like the squatters and government agencies and personnel concerned." We must hasten to add,
however, that where the so-called "potestative condition" is imposed not on the birth of the obligation but on its
fulfillment, only the condition is avoided, leaving unaffected the obligation itself. 63 (Emphases supplied.)

From the provisions of the Conditional Deed of Sale subject matter of this case, it was the vendee (Rodriguez)
that had the obligation to successfully negotiate and secure the road right of way. However, in the decision of the
trial court, which was affirmed by the Court of Appeals, it was found that respondent Rodriguez diligently exerted
efforts to secure the road right of way but the spouses Catungal, in bad faith, contributed to the collapse of the
negotiations for said road right of way. To quote from the trial court’s decision:

It is therefore apparent that the vendee’s obligations (sic) to pay the balance of the purchase price arises only
when the road-right-of-way to the property shall have been successfully negotiated, secured and provided. In
other words, the obligation to pay the balance is conditioned upon the acquisition of the road-right-of-way, in
accordance with paragraph 2 of Article 1181 of the New Civil Code. Accordingly, "an obligation dependent upon
a suspensive condition cannot be demanded until after the condition takes place because it is only after the
fulfillment of the condition that the obligation arises." (Javier v[s] CA 183 SCRA) Exhibits H, D, P, R, T, FF and
JJ show that plaintiff [Rodriguez] indeed was diligent in his efforts to negotiate for a road-right-of-way to the
property. The written offers, proposals and follow-up of his proposals show that plaintiff [Rodriguez] went all out
in his efforts to immediately acquire an access road to the property, even going to the extent of offering
₱3,000.00 per square meter for the road lots (Exh. Q) from the original ₱550.00 per sq. meter. This Court also
notes that defendant (sic) [the Catungals] made misrepresentation in the negotiation they have entered into with
plaintiff [Rodriguez]. (Exhs. F and G) The misrepresentation of defendant (sic) [the Catungals] as to the third lot
(Lot 10986) to be part and parcel of the subject property [(]Lot 10963) contributed in defeating the plaintiff’s
[Rodriguez’s] effort in acquiring the road-right-of-way to the property. Defendants [the Catungals] cannot now
invoke the non-fulfillment of the condition in the contract as a ground for rescission when defendants [the
Catungals] themselves are guilty of preventing the fulfillment of such condition.

From the foregoing, this Court is of the considered view that rescission of the conditional deed of sale by the
defendants is without any legal or factual basis.64 x x x. (Emphases supplied.)

In all, we see no cogent reason to disturb the foregoing factual findings of the trial court.

Furthermore, it is evident from the language of paragraph 1(b) that the condition precedent (for respondent’s
obligation to pay the balance of the purchase price to arise) in itself partly involves an obligation to do, i.e., the
undertaking of respondent to negotiate and secure a road right of way at his own expense. 65 It does not escape
our notice as well, that far from disclaiming paragraph 1(b) as void, it was the Catungals’ contention before the
trial court that said provision should be read in relation to paragraph 1(c) which stated:

c. That the access road or Road Right of Way leading to Lot 10963 shall be the responsibility of the VENDEE to
secure and any or all cost relative to the acquisition thereof shall be borne solely by the VENDEE. He shall,
however, be accorded with enough time necessary for the success of his endeavor, granting him a free hand in
negotiating for the passage. 66 (Emphasis supplied.)

The Catungals’ interpretation of the foregoing stipulation was that Rodriguez’s obligation to negotiate and secure
a road right of way was one with a period and that period, i.e., "enough time" to negotiate, had already lapsed by
the time they demanded the payment of ₱5,000,000.00 from respondent. Even assuming arguendo that the
Catungals were correct that the respondent’s obligation to negotiate a road right of way was one with an
uncertain period, their rescission of the Conditional Deed of Sale would still be unwarranted. Based on their own
theory, the Catungals had a remedy under Article 1197 of the Civil Code, which mandates:

Art. 1197. If the obligation does not fix a period, but from its nature and the circumstances it can be inferred that
a period was intended, the courts may fix the duration thereof.

The courts shall also fix the duration of the period when it depends upon the will of the debtor.

In every case, the courts shall determine such period as may under the circumstances have been probably
contemplated by the parties. Once fixed by the courts, the period cannot be changed by them.

What the Catungals should have done was to first file an action in court to fix the period within which Rodriguez
should accomplish the successful negotiation of the road right of way pursuant to the above quoted provision.
Thus, the Catungals’ demand for Rodriguez to make an additional payment of ₱5,000,000.00 was premature
and Rodriguez’s failure to accede to such demand did not justify the rescission of the contract.

With respect to petitioners’ argument that paragraph 5 of the Conditional Deed of Sale likewise rendered the
said contract void, we find no merit to this theory. Paragraph 5 provides:

5. That the VENDEE has the option to rescind the sale. In the event the VENDEE exercises his option to rescind
the herein Conditional Deed of Sale, the VENDEE shall notify the VENDOR by way of a written notice
relinquishing his rights over the property. The VENDEE shall then be reimbursed by the VENDOR the sum of
FIVE HUNDRED THOUSAND PESOS (₱500,000.00) representing the downpayment, interest free, payable but
contingent upon the event that the VENDOR shall have been able to sell the property to another party. 67

Petitioners posited that the above stipulation was the "deadliest" provision in the Conditional Deed of Sale for
violating the principle of mutuality of contracts since it purportedly rendered the contract subject to the will of
respondent.

We do not agree.

It is petitioners’ strategy to insist that the Court examine the first sentence of paragraph 5 alone and resist a
correlation of such sentence with other provisions of the contract. Petitioners’ view, however, ignores a basic
rule in the interpretation of contracts – that the contract should be taken as a whole.
Article 1374 of the Civil Code provides that "[t]he various stipulations of a contract shall be interpreted together,
attributing to the doubtful ones that sense which may result from all of them taken jointly." The same Code
further sets down the rule that "[i]f some stipulation of any contract should admit of several meanings, it shall be
understood as bearing that import which is most adequate to render it effectual." 68

Similarly, under the Rules of Court it is prescribed that "[i]n the construction of an instrument where there are
several provisions or particulars, such a construction is, if possible, to be adopted as will give effect to all" 69 and
"for the proper construction of an instrument, the circumstances under which it was made, including the situation
of the subject thereof and of the parties to it, may be shown, so that the judge may be placed in the position of
those whose language he is to interpret."70

Bearing in mind the aforementioned interpretative rules, we find that the first sentence of paragraph 5 must be
taken in relation with the rest of paragraph 5 and with the other provisions of the Conditional Deed of Sale.

Reading paragraph 5 in its entirety will show that Rodriguez’s option to rescind the contract is not absolute as it
is subject to the requirement that there should be written notice to the vendor and the vendor shall only return
Rodriguez’s downpayment of ₱500,000.00, without interest, when the vendor shall have been able to sell the
property to another party. That what is stipulated to be returned is only the downpayment of ₱500,000.00 in the
event that Rodriguez exercises his option to rescind is significant. To recall, paragraph 1(b) of the contract
clearly states that the installments on the balance of the purchase price shall only be paid upon successful
negotiation and procurement of a road right of way. It is clear from such provision that the existence of a road
right of way is a material consideration for Rodriguez to purchase the property. Thus, prior to him being able to
procure the road right of way, by express stipulation in the contract, he is not bound to make additional
payments to the Catungals. It was further stipulated in paragraph 1(b) that: "[i]f however said road right of way
cannot be negotiated, the VENDEE shall give notice to the VENDOR for them to reassess and solve the
problem by taking other options and should the situation ultimately prove futile, he [Rodriguez] shall take steps to
rescind or [cancel] the herein Conditional Deed of Sale." The intention of the parties for providing subsequently
in paragraph 5 that Rodriguez has the option to rescind the sale is undeniably only limited to the contingency
that Rodriguez shall not be able to secure the road right of way. Indeed, if the parties intended to give Rodriguez
the absolute option to rescind the sale at any time, the contract would have provided for the return of all
payments made by Rodriguez and not only the downpayment. To our mind, the reason only the downpayment
was stipulated to be returned is that the vendee’s option to rescind can only be exercised in the event that no
road right of way is secured and, thus, the vendee has not made any additional payments, other than his
downpayment.

In sum, Rodriguez’s option to rescind the contract is not purely potestative but rather also subject to the same
mixed condition as his obligation to pay the balance of the purchase price – i.e., the negotiation of a road right of
way. In the event the condition is fulfilled (or the negotiation is successful), Rodriguez must pay the balance of
the purchase price. In the event the condition is not fulfilled (or the negotiation fails), Rodriguez has the choice
either (a) to not proceed with the sale and demand return of his downpayment or (b) considering that the
condition was imposed for his benefit, to waive the condition and still pay the purchase price despite the lack of
road access. This is the most just interpretation of the parties’ contract that gives effect to all its provisions.

In any event, even if we assume for the sake of argument that the grant to Rodriguez of an option to rescind, in
the manner provided for in the contract, is tantamount to a potestative condition, not being a condition affecting
the perfection of the contract, only the said condition would be considered void and the rest of the contract will
remain valid. In Romero, the Court observed that "where the so-called ‘potestative condition’ is imposed not on
the birth of the obligation but on its fulfillment, only the condition is avoided, leaving unaffected the obligation
itself."71

It cannot be gainsaid that "contracts have the force of law between the contracting parties and should be
complied with in good faith."72 We have also previously ruled that "[b]eing the primary law between the parties,
the contract governs the adjudication of their rights and obligations. A court has no alternative but to enforce the
contractual stipulations in the manner they have been agreed upon and written." 73 We find no merit in petitioners’
contention that their parents were merely "duped" into accepting the questioned provisions in the Conditional
Deed of Sale. We note that although the contract was between Agapita Catungal and Rodriguez, Jose Catungal
nonetheless signed thereon to signify his marital consent to the same. We concur with the trial court’s finding
that the spouses Catungals’ claim of being misled into signing the contract was contrary to human experience
and conventional wisdom since it was Jose Catungal who was a practicing lawyer while Rodriquez was a non-
lawyer.74 It can be reasonably presumed that Atty. Catungal and his wife reviewed the provisions of the contract,
understood and accepted its provisions before they affixed their signatures thereon.
After thorough review of the records of this case, we have come to the conclusion that petitioners failed to
demonstrate that the Court of Appeals committed any reversible error in deciding the present controversy.
However, having made the observation that it was desirable for the Catungals to file a separate action to fix the
period for respondent Rodriguez’s obligation to negotiate a road right of way, the Court finds it necessary to fix
said period in these proceedings. It is but equitable for us to make a determination of the issue here to obviate
further delay and in line with the judicial policy of avoiding multiplicity of suits.

If still warranted, Rodriguez is given a period of thirty (30) days from the finality of this decision to negotiate a
road right of way. In the event no road right of way is secured by Rodriquez at the end of said period, the parties
shall reassess and discuss other options as stipulated in paragraph 1(b) of the Conditional Deed of Sale and, for
this purpose, they are given a period of thirty (30) days to agree on a course of action. Should the discussions of
the parties prove futile after the said thirty (30)-day period, immediately upon the expiration of said period for
discussion, Rodriguez may (a) exercise his option to rescind the contract, subject to the return of his
downpayment, in accordance with the provisions of paragraphs 1(b) and 5 of the Conditional Deed of Sale or (b)
waive the road right of way and pay the balance of the deducted purchase price as determined in the RTC
Decision dated May 30, 1992.

WHEREFORE, the Decision dated August 8, 2000 and the Resolution dated January 30, 2001 of the Court of
Appeals in CA-G.R. CV No. 40627 consolidated with CA-G.R. SP No. 27565 are AFFIRMED with the following
modification:

If still warranted, respondent Angel S. Rodriguez is given a period of thirty (30) days from the finality of this
Decision to negotiate a road right of way. In the event no road right of way is secured by respondent at the end
of said period, the parties shall reassess and discuss other options as stipulated in paragraph 1(b) of the
Conditional Deed of Sale and, for this purpose, they are given a period of thirty (30) days to agree on a course of
action. Should the discussions of the parties prove futile after the said thirty (30)-day period, immediately upon
the expiration of said period for discussion, Rodriguez may (a) exercise his option to rescind the contract,
subject to the return of his downpayment, in accordance with the provisions of paragraphs 1(b) and 5 of the
Conditional Deed of Sale or (b) waive the road right of way and pay the balance of the deducted purchase price
as determined in the RTC Decision dated May 30, 1992.

No pronouncement as to costs.

SO ORDERED.

20. HARRISON MOTORS CORPORATION, petitioner,

vs.
RACHEL A. NAVARRO, respondent.

BELLOSILLO, J.:

This is a review on certiorari of the Decision of the Court of Appeals affirming that of the Regional Trial Court of
Makati which ordered petitioner to pay private respondent P32,943.00 as reimbursement for taxes paid,
P7,500.00 as attorney's fees and the costs of suit.  1

Sometime in June of 1987 Harrison Motors Corporation through its president, Renato Claros, sold two (2) Isuzu
Elf trucks to private respondent Rachel Navarro, owner of RN Freight Lines, a franchise holder operating and
maintaining a fleet of cargo trucks all over Luzon. Petitioner, a known importer, assembler and manufacturer,
assembled the two (2) trucks using imported component parts.  Prior to the sale, Renato Claros represented to
2 

private respondent that all the BIR taxes and customs duties for the parts used on the two (2) trucks had been
paid for. 
3

On 10 September 1987 the Bureau of Internal Revenue (BIR) and the Land Transportation Office (LTO) entered
into a Memorandum of Agreement (MOA) which provided that prior to registration in the LTO of any assembled
or re-assembled motor vehicle which used imported parts, a Certificate of Payment should first be obtained from
the BIR to prove payment of all taxes required under existing laws.  4

On 12 October 1987 the Bureau of Customs (BOC) issued Customs Memorandum Order No. 44-87
promulgating rules, regulations and procedure for the voluntary payment of duties and taxes on imported motor
vehicles assembled by non-assemblers.  5

Pursuant to the 10 September 1987 MOA between the BIR and the LTO, the BIR issued on 18 December 1987
Revenue Memorandum Order No. 44-87 which provided the procedure governing the processing and issuance
of the Certificate of Payment of internal revenue taxes for purposes of registering motor vehicles.  6

On 16 June 1988 the BIR, BOC and LTO entered into a tripartite MOA which provided that prior to the
registration in the LTO of any locally assembled motor vehicle using imported component parts, a Certificate of
Payment should first be obtained from the BIR and the BOC to prove that all existing taxes and customs duties
have been paid.  7

In December of 1988 government agents seized and detained the two (2) Elf trucks of respondent after
discovering that there were still unpaid BIR taxes and customs duties thereon. The BIR and the BOC ordered
private respondent to pay the proper assessments or her trucks would be impounded.  Private respondent went
8 

to Claros to ask for the receipts evidencing payment of BIR taxes and customs duties; however, Claros refused
to comply.  Private respondent then demanded from Claros that he pay the assessed taxes and warned him that
9 

he would have to reimburse her should she be forced to pay for the assessments herself. Her demands were
again ignored.

But wanting to secure the immediate release of the trucks to comply with her business commitments, private
respondent paid the assessed BIR taxes and customs duties amounting to P32,943.00.  Consequently, she
10 

returned to petitioner's office to ask for reimbursement, but petitioner again refused, prompting her to send a
demand letter through her lawyer.  When petitioner still ignored her letter, she filed a complaint for a sum of
11 

money on 24 September 1990 with the Regional Trial Court of Makati.  12

On 24 May 1991 private respondent filed a Motion to Declare Defendant in Default which was granted by the
RTC on the same day.

On 18 November 1991 private respondent filed a Manifestation and Motion praying for the scheduling of the
reception of her evidence ex-parte since petitioner had not as yet filed a Motion to Lift Order of Default. Thus, on
22 November 1991 the trial court ordered the reception of private respondent's evidence ex-parte. 13

It was only on 2 December 1991 when petitioner finally filed a Motion to Lift Order of Default. However, on 20
January 1992 the trial court denied petitioner's motion for its failure to attach an affidavit of merit showing that it
had a valid and meritorious defense.  14

On 5 March 1992 the trial court rendered a decision ordering petitioner to reimburse private respondent in the
amount of P32,943.00 for the customs duties and internal revenue taxes the latter had to pay to discharge her
two (2) Elf trucks from government custody. Petitioner was also required to pay P7,500.00 for attorney's fees
plus the costs. 15

The Court of Appeals subsequently sustained the lower court, hence this recourse of petitioner.  16

Petitioner argues that it was no longer obliged to pay for the additional taxes and customs duties imposed on the
imported component parts by the Memorandum Orders and the two (2) Memoranda of Agreement since such
administrative regulations only took effect after the execution of its contract of sale with private respondent.
Holding it liable for payment of the taxes specified in the administrative regulations, which have the force and
effect of laws, would not only violate the non-impairment clause of the Constitution but also the principle of non-
retroactivity of laws provided in Art. 4 of the Civil Code.  Furthermore, petitioner claims that it did pay the
17 

assessed taxes and duties otherwise it would not have been able to secure the release of such spare parts from
the customs and to register the vehicles with the LTO under its name.

The records however reveal that the Memorandum Orders and Memoranda of Agreement do not impose any
additional BIR taxes or customs duties.
Customs Memorandum Order No. 44-87 is concerned with the Rules, Regulations and Procedures in the
Payment of Duties and Taxes on Imported Vehicles Locally Assembled by Non-Assemblers.  It does not charge
18 

any new tax. It simply provides the procedure on how owners/consignees or their purchasers could voluntarily
initiate payment for any unpaid customs duties on locally assembled vehicles using imported component parts.

Neither does BIR Revenue Memorandum Order No. 44-87  exact any tax. It merely outlines the procedure
19 

which governs the processing and issuance of the Certificate of Payment of internal revenue taxes for purposes
of registering motor vehicles with the arms and telling her she looked beautiful. The special treatment and sexual
advances continued during her employment for four (4) years but she never reciprocated his flirtations, until
finally, she noticed that his attitude towards her changed. He made her understand that if she would not give in
to his sexual advances he would cause her termination from the service; and he made good his threat when he
started harassing her. She just found out one day that her table which was equipped with telephone and
intercom units and containing her personal belongings was transferred without her knowledge to a place with
neither telephone nor intercom, for which reason, an argument ensued when she confronted William Chua
resulting in her being charged with gross disrespect. 11

Respondent Cortez explains, as regards the second charge, that the money entrusted to her for transmittal was
not lost; instead, she gave it to the company personnel in-charge for proper transmittal as evidenced by a receipt
duly signed by the latter.  12

With respect to the third imputation, private respondent admits that she asked someone to punch-in her time
card because at that time she was doing an errand for one of the company's officers, Richard Tan, and that was
with the permission of William Chua. She maintains that she did it in good faith believing that she was anyway
only accommodating the request of a company executive and done for the benefit of the company with the
acquiescence of her boss, William Chua. Besides, the practice was apparently tolerated as the employees were
not getting any the BIR which would then transmit the Certificate to the LTO to prove that all the BIR taxes
required under existing laws have been paid.

The 16 June 1988 tripartite MOA among the BIR, LTO and the BOC virtually contained the same provisions. The
MOA provided that prior to registration with the LTO of any assembled motor vehicle using imported component
parts, a certificate of Payment should first be secured from the BIR or the BOC which should then be duly
forwarded to LTO. The Certificate would serve as proof that all taxes and customs duties required under existing
laws, rules and regulations had already been settled.

Clearly, petitioner's contention is unmeritorious. What Sec. 10, Art. III, of the Constitution prohibits is the
passage of a law which enlarges, abridges or in any manner changes the intention of the contracting
parties.  The Memorandum Orders and the two (2) Memoranda of Agreement do not impose any additional
21 

taxes which would unduly impair the contract of sale between petitioner and private respondent. Instead, these
administrative regulations were passed to enforce payment of existing BIR taxes and customs duties at the time
of importation.

But who should pay the BIR taxes and customs duties which the administrative regulations sought to enforce?

Petitioner contends that private respondent should be the one to pay the internal revenue taxes and customs
duties. It claims that at the time the Memorandum Orders and the two (2) Memoranda of Agreement took effect
the two (2) Elf trucks were already sold to private respondent, thus, it no longer owned the vehicles. Whatever
payments private respondent made to the government after the sale were solely her concern and such burden
should not be passed on to petitioner.  Petitioner further argues that holding it liable for payment of BIR taxes
22 

and customs duties required under the administrative regulations violates the principle of non-retroactivity of
laws under the Civil Code.

Such contention deserves scant consideration. It is true that administrative rulings and regulations are generally
prospective in nature. An inspection of the two (2) Memoranda of Agreement however demonstrates that their
23 

intent is to enforce payment of taxes on assemblers/manufacturers who import component parts without paying
the correct assessments. The WHEREAS clause of the 10 September 1987 MOA clearly illustrates this —

WHEREAS, in order to avoid or evade the higher taxes on imported motor vehicles, certain persons
import parts and assemble and re-assemble them into complete motor vehicles, or assemble or re-
assemble motor vehicles using imported parts;

While the WHEREAS clause of the 16 June 1988 MOA provides —

 WHEREAS, in order to avoid or evade the higher taxes on imported motor vehicles, certain persons,
firms or corporations who are non-BOI licensed assemblers of imported motor vehicle component parts
would assemble or re-assemble them into whole unit motor vehicles;

It is also apparent in Par. 9 of the 16 June 1988 MOA that the taxes to be enforced are designated as
assembler's/manufacturer's tax. It states —

9. The BIR shall collect the assembler's/manufacturer's tax, while the BOC shall collect the duties and
taxes and ad valorem tax.

Thus, although private respondent is the one required by the administrative regulations to secure the Certificate
of Payment for the purpose of registration, petitioner as the importer and the assembler/manufacturer of the two
(2) Elf trucks is still the one liable for payment of revenue taxes and customs duties. Petitioner's obligation to pay
does not arise from the administrative regulations but from the tax laws existing at the time of importation.
Hence, even if private respondent already owned the two (2) trucks when the Memorandum Orders and
Memoranda of Agreement took effect, the fact remains that petitioner was still the one duty-bound to pay for the
BIR taxes and customs duties.

It is also quite obvious that as between petitioner, who is the importer-assembler/manufacturer, and private
respondent, who is merely the buyer, it is petitioner which has the obligation to pay taxes to the BIR and the
BOC. Petitioner would be unjustly enriched if private respondent should be denied reimbursement.  It would
24 

inequitably amass profits from selling assembled trucks even if it did not pay the taxes due on its imported spare
parts. Imposing the tax burden on private respondent would only encourage the proliferation of smugglers who
scheme to evade taxes by passing on their tax obligations to their unsuspecting buyers.

In a last ditch effort to exempt itself from liability, petitioner claims that it had paid the taxes due on the imported
parts otherwise it would not have been able to obtain their release from the BOC and to register the vehicles with
the LTO.

Non-sequitur. The fact that petitioner was able to secure the release of the parts from customs and to register
the assembled trucks with the LTO does not necessarily mean that all taxes and customs duties were legally
settled. As a matter of fact, the provisions of the two (2) Memoranda of Agreement clearly establish that the
government is aware of the widespread registration of assembled motor vehicles with the LTO even if the taxes
due on their imported component parts remain unpaid. Paragraph 1 of the 10 September 1987 MOA states —

The LTO shall make as one of the requirements for the registration of motor vehicles that were
assembled or re-assembled using imported parts, the payment to the BIR of the taxes required under
existing laws.

The same requirement shall be imposed with respect to the renewal of the registration of such motor
vehicles had they been registered or their registration been renewed in the past without the payment of
the required taxes.

While par. 1 of the 16 June 1988 MOA states —

The LTO shall make as one of the requirements for the registration of motor vehicles that were
assembled or re-assembled by non-BOI licensed assemblers using imported component parts, the
payment to the BIR and the BOC of taxes and duties required under existing laws, rules and regulations;

The same requirement shall be imposed with respect to the renewal of the registration of such motor
vehicles even if they were already registered or their registration had been renewed in the past without
the payment of the required taxes.

Obviously, the two (2) Memoranda of Agreement were executed to prevent the anomalous circumstance, as in
the case at bar, where assembled vehicles are registered with the LTO even if taxes and customs duties remain
unpaid.

Besides, petitioner's allegation that it already paid the BIR taxes and customs duties is highly doubtful. This
entire controversy would have been avoided had petitioner simply furnished private respondent with the receipts
evidencing payment of BIR taxes and customs duties. If only private respondent had the receipts to prove
payment of such assessments then she would have easily secured the release of her two (2) Elf trucks. But
petitioner arbitrarily and unjustly denied private respondent's demands. Instead, petitioner obstinately insisted
that it was no longer concerned with the problem involving the two (2) trucks since it no longer owned the
vehicles after the consummation of the sale.

It is true that the ownership of the trucks shifted to private respondent after the sale. But petitioner must
remember that prior to its consummation it expressly intimated to her that it had already paid the taxes and
customs duties. Such representation shall be considered as a seller's express warranty under Art. 1546 of the
25 

Civil Code which covers any affirmation of fact or any promise by the seller which induces the buyer to purchase
the thing and actually purchases it relying on such affirmation or promise.  It includes all warranties which are
26 

derived from express language, whether the language is in the form of a promise or
representation.  Presumably, therefore, private respondent would not have purchased the two (2) Elf trucks
27 

were it not for petitioner's assertion and assurance that all taxes on its imported parts were already settled.

This express warranty was breached the moment petitioner refused to furnish private respondent with the
corresponding receipts since such documents were the best evidence she could present to the government to
prove that all BIR taxes and customs duties on the imported component parts were fully paid. Without evidence
of payment, she was powerless to prevent the trucks from being impounded.

Under Art. 1599 of the Civil Code, once an express warranty is breached the buyer can accept or keep the
goods and maintain an action against the seller for damages. This was what private respondent did. She opted
to keep the two (2) trucks which she apparently needed for her business and filed a complaint for damages,
particularly seeking the reimbursement of the amount she paid to secure the release of her vehicles.

WHEREFORE, the Decision of the Court of Appeals dated 22 January 1998 ordering petitioner HARRISON
MOTORS CORPORATION to reimburse private respondent RACHEL A. NAVARRO for the taxes and duties
she paid in the amount of P32,943.00 and to pay her attorney's fees in the amount of P7,500.00 is AFFIRMED.
In addition, the amount of P32,943.00 shall earn interest at the legal rate from 24 September 1990 when private
respondent filed her complaint with the trial court until fully paid. Costs against petitioner.

SO ORDERED. 1âwphi1.nêt

21. JERRY T. MOLES, petitioner,

vs.
INTERMEDIATE APPELLATE COURT and MARIANO M. DIOLOSA, respondents.

Zoilo V. De la Cruz, Jr., Kenneth Barredo, Romeo Sabig and Natalio V. Sitjao for petitioners.

Rolando N. Medalla and Jose G. Guinez, Jr., for private respondents.

REGALADO, J.:

This petition for review on certiorari assails the decision of the then Intermediate Appellate Court   dismissing the
1

complaint filed by herein petitioner against the herein private respondent in the former Court of First Instance of
Negros Occidental in Civil Case No. 13821 thereof.  2

The factual backdrop of this controversy, as culled from the records,   shows that on May 17, 1978, petitioner
3

Jerry T. Moles commenced a suit against private respondent Mariano M. Diolosa in the aforesaid trial court,
Branch IV in Bacolod City, for rescission of contract with damages. Private respondent moved to dismiss on the
ground of improper venue, invoking therefor Sales Invoice No. 075A executed between petitioner and private
respondent on April 23, 1977 which provides that all judicial actions arising from this contract shall be instituted
in the City of Iloilo.   This was opposed by petitioner who averred that there is no formal document evidencing
4

the sale which is substantially verbal in character. In an order dated June 23, 1978, the trial court denied the
motion to dismiss, holding that the question of venue could not be resolved at said stage of the case. The
subsequent motion for reconsideration was likewise denied.
Consequently, private respondent, invoking the aforesaid venue stipulation, preceeded to this Court on a petition
for prohibition with preliminary injunction in G.R. No. 49078, questioning the validity of the order denying his
aforesaid two motions and seeking to enjoin the trial court from further proceeding with the case. This petition
was dismissed for lack of merit in a resolution of the Court, dated February 7, 1979, and which became final on
March 15, 1979. Thereafter, private respondent filed his answer and proceeded to trial.

The aforecited records establish that sometime in 1977, petitioner needed a linotype printing machine for his
printing business, The LM Press at Bacolod City, and applied for an industrial loan with the Development Bank
of the Philippines. (hereinafter, DBP) for the purchase thereof. An agent of Smith, Bell and Co. who is a friend of
petitioner introduced the latter to private respondent, owner of the Diolosa Publishing House in Iloilo City, who
had two available machines. Thereafter, petitioner went to Iloilo City to inspect the two machines offered for sale
and was informed that the same were secondhand but functional.

On his second visit to the Diolosa Publishing House, petitioner together with Rogelio Yusay, a letter press
machine operator, decided to buy the linotype machine, Model 14. The transaction was basically verbal in nature
but to facilitate the loan application with the DBP, a pro forma invoice, dated April 23, 1977 and reflecting the
amount of P50,000.00 as the consideration of the sale, was signed by petitioner with an addendum that payment
had not yet been made but that he promised to pay the full amount upon the release of his loan from the
aforementioned bank on or before the end of the month.   Although the agreed selling price was only
5

P40,000.00, the amount on the invoice was increased by P10,000.00, said increase being intended for the
purchase of new matrices for said machine.

Sometime between April and May, 1977, the machine was delivered to petitioner's publishing house at Tangub,
Bacolod City where it was installed by one Crispino Escurido, an employee of respondent Diolosa. Another
employee of the Diolosa Publishing House, Tomas Plondaya, stayed at petitioners house for almost a month to
train the latter's cousin in operating the machine. 6

Under date of August 29, 1977, private respondent issued a certification wherein he warranted that the machine
sold was in A-1 condition, together with other express warranties. 7

Prior to the release of the loan, a representative from the DBP, Bacolod, supposedly inspected the machine but
he merely looked at it to see that it was there .  The inspector's recommendation was favorable and, thereafter,
8

petitioner's loan of P50,000.00 was granted and released. However, before payment was made to private
respondent, petitioner required the former, in a letter dated September 30, 1977, to accomplish the following,
with the explanations indicated by him:

1.) Crossed check for P15,407.10 representing.

a) P 10,000.00-Overprice in the machine:

b) P203.00-Freight and handling of the machine;

c) P203.00-Share in the electric repair; and

d) P5,000.00- Insurance that Crispin will come back and repair the linotype machine at seller's
account as provided in the contract; after Crispin has put everything in order when he goes home
on Sunday he will return the check of P15,000.00.

2) Official receipt in the amount of P 50,000.00 as full payment of the linotype machine.

These were immediately complied with by private respondent and on the same day, September 30,1977, he
received the DBP check for P50,000.00.  9

It is to be noted that the aforesaid official receipt No. 0451, dated September 30, 1977 and prepared and signed
by private respondent, expressly states that he received from the petitioner the DBP check for P50,000.00
issued in our favor in full payment of one (1) Unit Model 14 Linotype Machine as per Pro forma Invoice dated
April 23, 1977. 
10

On November 29, 1977, petitioner wrote private respondent that the machine was not functioning properly as it
needed a new distributor bar. In the same letter, petitioner unburdened himself of his grievances and sentiments
in this wise.
 We bought this machine in good faith because we trusted you very much being our elder brother
in printing and publishing business. We did not hire anybody to look over the machine, much
more ask for a rebate in your price of P40,000.00 and believed what your trusted two men,
Tomas and Crispin, said although they were hiding the real and actual condition of the machine
for your business protection.

Until last week, we found out the worst ever to happen to us. We have been cheated because
the expert of the Linotype machine from Manila says, that the most he will buy your machine is at
P5,000.00 only. ... 11

Private respondent made no reply to said letter, so petitioner engaged the services of other technicians. Later,
after several telephone calls regarding the defects in the machine, private respondent sent two technicians to
make the necessary repairs but they failed to put the machine in running condition. In fact, since then petitioner
was never able to use the machine. 12

On February 18, 1978, not having received from private respondent the action requested in his preceding letter
as herein before stated, petitioner again wrote private respondent, this time with the warning that he would be
forced to seek legal remedies to protect his interest. 13

Obviously in response to the foregoing letter, private respondent decided to purchase a new distributor bar and,
on March 16, 1978, private respondent delivered this spare part to petitioner through one Pedro Candido.
However, when thereafter petitioner asked private respondent to pay for the price of the distributor bar, the latter
asked petitioner to share the cost with him. Petitioner thus finally decided to indorse the matter to his lawyer.

An expert witness for the petitioner, one Gil Legaspina, declared that he inspected the linotype machine involved
in this case at the instance of petitioner. In his inspection thereof, he found the following defects: (1) the vertical
automatic stop lever in the casting division was worn out; (2) the justification lever had a slight breach (balana in
the dialect); (3) the distributor bar was worn out; (4) the partition at the entrance channel had a tear; (5) there
was no "pie stacker" tube entrance; and (6) the slouch arm lever in the driving division was worn out.

It turned out that the said linotype machine was the same machine that witness Legaspina had previously
inspected for Sy Brothers, a firm which also wanted to buy a linotype machine for their printing establishment.
Having found defects in said machine, the witness informed Sy Brother about his findings, hence the purchase
was aborted. In his opinion, major repairs were needed to put the machine back in good running condition. 14

After trial, the court a quo rendered a decision the dispositive portion of which reads:

IN VIEW OF THE FOREGOING CONSIDERATIONS, judgment is hereby rendered as follows:

(1) Decreeing the rescission of the contract of sale involving one linotype machine No. 14
between the defendant as seller and the plaintiff as buyer;

(2) Ordering the plaintiff to return to the defendant at the latter's place of business in Iloilo City
the linotype machine aforementioned together with all accessories that originally were delivered
to the plaintiff;

(3) Ordering the defendant to return to the plaintiff the sum of Forty Thousand Pesos
(P40,000.00) representing the price of the linotype machine, plus interest at the legal rate
counted from May 17, 1978 when this action was instituted, until fully paid;

(4) Ordering the defendant to indemnify the plaintiff the sum of Four Thousand Five Hundred
Pesos (P4,500.00) representing unearned income or actual damages;

(5) Ordering the defendant to pay the plaintiff the sum of One Thousand Pesos (Pl,000.00) for
attorney's fees.

Costs against the defendant. 15

From this decision, private respondent appealed to the Intermediate Appellate Court which reversed the
judgment of the lower court and dismissed petitioner's complaint, hence the present petition.
We find merit in petitioner's cause.

On the matter of venue, private respondent relies on the aforementioned Sales Invoice No. 076A which allegedly
requires that the proper venue should be Iloilo City and not Bacolod City. We agree with petitioner that said
document is not the contract evidencing the sale of the linotype machine, it being merely a preliminary
memorandum of a proposal to buy one linotype machine, using for such purpose a printed form used for printing
job orders in private respondent's printing business. As hereinbefore explained, this issue on venue was brought
to Us by private respondent in a special civil action for prohibition with preliminary injunction in G.R. No. 49078.
After considering the allegations contained, the issues raised and the arguments adduced in said petition, as
well as the comments thereto, the Court dismissed the petition for lack of merit. Respondent court erred in
reopening the same issue on appeal, with a contrary ruling.

Furthermore, it was error for the respondent court, after adopting the factual findings of the lower court, to
reverse the latter's holding that the sales invoice is merely a pro forma memorandum. The records do not show
that this finding is grounded entirely on speculation, surmises or conjectures as to warrant a reversal thereof.   In
16

fact, as hereinbefore stated, private respondent expressly admitted in his official receipt No. 0451, dated
September 30, 1977, that the said sales invoice was merely a pro forma invoice. Consequently, the printed
provisions therein, especially since the printed form used was for purposes of other types of transactions, could
not have been intended by the parties to govern their transaction on the printing machine. It is obvious that a
venue stipulation, in order to bind the parties, must have been intelligently and deliberately intended by them to
exclude their case from the reglementary rules on venue. Yet, even such intended variance may not necessarily
be given judicial approval, as, for instance, where there are no restrictive or qualifying words in the agreement
indicating that venue cannot be laid in any place other than that agreed upon by the parties,   and in contracts of
17

adhesion.  18

Now, when an article is sold as a secondhand item, a question arises as to whether there is an implied warranty
of its quality or fitness. It is generally held that in the sale of a designated and specific article sold as
secondhand, there is no implied warranty as to its quality or fitness for the purpose intended, at least where it is
subject to inspection at the time of the sale. On the other hand, there is also authority to the effect that in a sale
of a secondhand articles there may be, under some circumstances, an implied warranty of fitness for the
ordinary purpose of the article sold or for the particular purpose of the buyer. 19

In a line of decisions rendered by the United States Supreme Court, it had theretofore been held that there is no
implied warranty as to the condition, adaptation, fitness, or suitability for the purpose for which made, or the
quality, of an article sold as and for a secondhand article. 20

Thus, in finding for private respondent, the respondent court cited the ruling in Sison vs. Ago, et al.   to the effect
21

that unless goods are sold as to raise an implied warranty, as a general rule there is no implied warranty in the
sale of secondhand articles. 22

Said general rule, however, is not without exceptions. Article 1562 of our Civil Code, which was taken from the
Uniform Sales Act, provides:

Art. 1562. In a sale of goods, there is an implied warranty or condition as to the quality or fitness
of the goods, as follows:

(1) Where the buyer, expressly or by implication, makes known to the seller the particular
purpose for which the goods are acquired, and it appears that the buyer relies on the seller's skill
or judgment (whether he be the grower or manufacturer or not), there is an implied warranty that
the goods shall be reasonably fit for such purpose;

xxx

In Drumar Mining Co. vs. Morris Ravine Mining Co.,   the District Court of Appeals, 3rd District, California, in
23

applying a similar provision of law, ruled:

'There is nothing in the Uniform Sales Act declaring there is no implied warranty in the sale of
secondhand goods. Section 1735 of the Civil Code declares there is no implied warranty or
condition as to the quality or fitness for any particular purpose, of goods supplied under a
contract to sell or a sale, except (this general statement is followed by an enumeration of several
exceptions). It would seem that the legislature intended this section to apply to all sales of goods,
 whether new or secondhand. In subdivision 1 of this section, this language is used: where the
buyer ... makes known to the seller the particular purpose for which the goods are required, and
it appears that the buyer relies on the seller's skill or judgment ... there is an implied warranty that
the goods shall be reasonably fit for such purpose.'

Furthermore, and of a more determinative role in this case, a perusal of past American decisions   likewise
24

reveals a uniform pattern of rulings to the effect that an express warranty can be made by and also be binding
on the seller even in the sale of a secondhand article.

In the aforecited case of Markman vs. Hallbeck, while holding that there was an express warranty in the sale of a
secondhand engine, the court said that it was not error to refuse an instruction that upon the sale of secondhand
goods no warranty was implied, since secondhand goods might be sold under such circumstances as to raise an
implied warranty.

To repeat, in the case before Us, a certification to the effect that the linotype machine bought by petitioner was in
A-1 condition was issued by private respondent in favor of the former. This cannot but be considered as an
express warranty. However, it is private respondent's submission, that the same is not binding on him, not being
a part of the contract of sale between them. This contention is bereft of substance.

It must be remembered that the certification was a condition sine qua non for the release of petitioner's loan
which was to be used as payment for the purchase price of the machine. Private respondent failed to refute this
material fact. Neither does he explain why he made that express warranty on the condition of the machine if he
had not intended to be bound by it. In fact, the respondent court, in declaring that petitioner should have availed
of the remedy of requiring repairs as provided for in said certification, thereby considered the same as part and
parcel of the verbal contract between the parties.

On the basis of the foregoing circumstances, the inescapable conclusion is that private respondent is indeed
bound by the express warranty he executed in favor of herein petitioner.

We disagree with respondent court that private respondents express warranty as to the A-1 condition of the
machine was merely dealer's talk. Private respondent was not a dealer of printing or linotype machines to whom
could be ascribed the supposed resort to the usual exaggerations of trade in said items. His certification as to
the condition of the machine was not made to induce petitioner to purchase it but to confirm in writing for
purposes of the financing aspect of the transaction his representations thereon. Ordinarily, what does not appear
on the face of the written instrument should be regarded as dealer's or trader's talk;   conversely, what is
25

specifically represented as true in said document, as in the instant case, cannot be considered as mere dealer's
talk.

On the question as to whether the hidden defects in the machine is sufficient to warrant a rescission of the
contract between the parties, we have to consider the rule on redhibitory defects contemplated in Article 1561 of
the Civil Code. A redhibitory defect must be an imperfection or defect of such nature as to engender a certain
degree of importance. An imperfection or defect of little consequence does not come within the category of being
redhibitory.
26

As already narrated, an expert witness for the petitioner categorically established that the machine required
major repairs before it could be used. This, plus the fact that petitioner never made appropriate use of the
machine from the time of purchase until an action was filed, attest to the major defects in said machine, by
reason of which the rescission of the contract of sale is sought. The factual finding, therefore, of the trial court
that the machine is not reasonably fit for the particular purpose for which it was intended must be upheld, there
being ample evidence to sustain the same.

At a belated stage of this appeal, private respondent came up for the first time with the contention that the action
for rescission is barred by prescription. While it is true that Article 1571 of the Civil Code provides for a
prescriptive period of six months for a redhibitory action a cursory reading of the ten preceding articles to which it
refers will reveal that said rule may be applied only in case of implied warranties. The present case involves one
with and express warranty. Consequently, the general rule on rescission of contract, which is four years   shall
27

apply. Considering that the original case for rescission was filed only one year after the delivery of the subject
machine, the same is well within the prescriptive period. This is aside from the doctrinal rule that the defense of
prescription is waived and cannot be considered on appeal if not raised in the trial court,   and this case does
28

not have the features for an exception to said rule.

WHEREFORE, the judgment of dismissal of the respondent court is hereby REVERSED and SET ASIDE, and
the decision of the court a quo is hereby REINSTATED.

SO ORDERED.

22. PILIPINAS MAKRO, INC., Petitioner

vs.
COCO CHARCOAL PHILIPPINES, INC. and LIM KIM SAN, Respondents

DECISION

MARTIRES, J.:

This Petition for Review on Certiorari seeks to reverse and set aside the 30 December 2010 Decision  and 7
1

April 2011 Resolution  of the Court of Appeals (CA) in CA-G.R. CV No. 83836 which reversed the 16 August
2

2004 Decision  of the Regional Trial Court, Branch 276, Muntinlupa City {RTC).
3

Petitioner Pilipinas Makro, Inc. (Makro) is a duly registered domestic corporation. In 1999, it was in need of
acquiring real properties in Davao City to build on and operate a store to establish its business presence in the
city. After conferring with authorized real estate agents, Makro found two parcels of land suitable for its purpose. 4

On 26 November 1999, Makro and respondent Coco Charcoal Phils., Inc. (Coco Charcoal)  executed a notarized
5

Deed of Absolute Sale  wherein the latter would sell its parcel of land, with a total area of 1,000 square meters
6

and covered by Transfer Certificate of Title (TCT) No. 208776, to the former for the amount of ₱8,500,000.00.
On the same date, Makro entered into another notarized Deed of Absolute Sale  with respondent Lim Kim
7

San (Lim) for the sale of the latter's land, with a total area of 1,000 square meters and covered by TCT No.
282650, for the same consideration of ₱8,500,000.00.

Coco Charcoal and Lim's parcels of land are contiguous and parallel to each other. Aside from the technical
descriptions of the properties in question, both deeds of sale contained identical provisions, similar terms,
conditions, and warranties. 8

In December 1999, Makro engaged the services of Engineer Josefina M. Vedua (Engr. Vedua), a geodetic
engineer, to conduct a resurvey and relocation of the two adjacent lots. As a result of the resurvey, it was
discovered that 131 square meters of the lot purchased from Coco Charcoal had been encroached upon by the
Department of Public Works and Highways (DPWH) for its road widening project and construction of a drainage
canal to develop and expand the Davao-Cotabato National Highway. On the other hand, 130 square meters of
the land bought from Lim had been encroached upon by the same DPWH project. Meanwhile, TCT Nos. T-
321199 and T-321049 were issued in January 2000 in favor of Makro after the deeds of sale were registered
and the titles of the previous owners were cancelled. 9

Makro informed the representatives of Coco Charcoal and Lim about the supposed encroachment on the parcels
of land due to the DPWH project. Initially, Makro offered a compromise agreement in consideration of a refund of
75% of the value of the encroached portions. Thereafter, Makro sent a final demand letter to collect the refund of
the purchase price corresponding to the area encroached upon by the road widening project, seeking to recover
₱1,113,500.00 from Coco Charcoal and ₱1,105,000.00 from Lim. Failing to recover such, Makro filed separate
complaints against Coco Charcoal and Lim to collect the refund sought.

The RTC Decision

In its 16 August 2004 Decision, the RTC granted Makro's complaint and ordered respondents to refund the
amount corresponding to the value of the encroached area.  The trial court ruled that the DPWH project
1âwphi1

encroached upon the purchased properties, such that Makro had to adjust its perimeter fences. It noted that
Makro was constrained to bring legal action after its demand for refund remained unheeded. The trial court
expounded that the road right of way includes not only the paved road, but also the shoulders and gutters. It
highlighted that the unpaved portion of the right of way was well within the area Makro had purchased.
The RTC also found respondents in bad faith because they had concealed from Makro the fact that the DPWH
had already taken possession of a portion of the lands they had sold, respectively, considering that drainage
pipes had already been installed prior to the sale. It noted that DPWH could not have undertaken the diggings
and subsequent installation of drainage pipes without Coco Charcoal and Lim's consent, being the previous
owners of the lots in question. The dispositive portion reads:

PREMISES CONSIDERED, judgment is rendered for the plaintiff and defendants LIM KIM SAN directed to
return and reimburse to plaintiff the sum of ONE MILLION FIVE HUNDRED THOUSAND (Phpl,500,000.00)
PESOS, Philippine Currency, with interest at 12% per annum, attorney's fees of Php200,000.00, exemplary
damages of Php200,000.00 to deter anybody similarly prone;

Coco Charcoal Philippines, Inc. is likewise directed to pay a refund and return to plaintiff corporation the value of
ONE MILLION FIVE HUNDRED THOUSAND (Phpl,500,000.00) PESOS, Philippine Currency, with interest at
12% per annum, representing the 131 square meters parcel of land it cannot occupy and to pay attorney's fees
in the sum of Php200,000.00 and exemplary damages of Php200,000.00 to deter anybody similarly inclined;

Both Defendants are directed to pay the cost of this litigation.

It is SO ORDERED. 10

Aggrieved, Coco Charcoal and Lim appealed before the CA.

The CA Ruling

In its 30 December 2010 Decision, the CA reversed the RTC decision. While the appellate court agreed that the
DPWH project encroached upon the frontal portions of the properties, it ruled that Makro was not entitled to a
refund. It explained that the warranty expressed in Section 4(i)  of the deeds of sale is similar to the warranty
11

against eviction set forth under Article 1548 of the Civil Code. As such, the CA posited that only a buyer in good
faith may sue to a breach of warranty against eviction. It averred that Makro could not feign ignorance of the
ongoing road widening project. The appellate court noted Makro's actual knowledge of the encroachment before
the execution of the sale constitutes its recognition that Coco Charcoal and Lim's warranty against liens,
easements, and encumbrances does not include the respective 131 and 130 square meters affected by the
DPWH project, but covers only the remainder of the property. It ruled:

WHEREFORE, premises considered, the instant appeal is GRANTED. Accordingly, the herein assailed August
16, 2004 Decision of the trial court is REVERSED and SET ASIDE, and the action instituted by appellee
MAKRO against appellants Coco Charcoal and Lim Kim San for collection of sum of money by way of refund is
hereby DISMISSED for lack of cause of action.

SO ORDERED. 12

Makro moved for reconsideration, but the same was denied by the CA in its assailed 7 April 2011 Resolution.

Hence, this present petition raising the following:

ISSUES

WHETHER THE COURT OF APPEALS ERRED IN DENYING MAKRO'S MOTION FOR EXTENSION TO FILE
A MOTION FOR RECONSIDERATION; AND

II

WHETHER THE COURT OF APPEALS ERRED IN DENYING MAKRO A REFUND ON THE GROUND OF BAD
FAITH.

THE COURT'S RULING

The petition is meritorious.

Non-extendible period to file motion for reconsideration; exceptions

Makro filed two motions for extension to file a motion for reconsideration. On the first motion, it sought an
extension after its former lawyer, Atty. Edwin Lacierda, withdrew as a counsel in view of his appointment as
press secretary for former President Benigno Aquino III. Makro again asked for an extension after its present
counsel was confined for dengue and typhoid fever. Eventually, it filed its motion for reconsideration on 7 March
2011.

In its 7 April 2011 Resolution, the CA denied Makro's motions for extension to file a motion for reconsideration,
explaining that the 15-day period for the filing of such is non-extendible and that a motion for extension is
prohibited.

It must be remembered that procedural rules are set not to frustrate the ends of substantial justice, but are tools
to expedite the resolution of cases on their merits. The Court reminds us in Gonzales v. Serrano  that the
13

prohibition on motion for extension to file a motion for reconsideration is not absolute, to wit:

The Court shall first delve on the procedural issue of the case. In Imperial v. Court of Appeals,   the Court ruled:
14

In a long line of cases starting with Habaluyas Enterprises v. Japson,   we have laid down the following
15

guideline:

Beginning one month after the promulgation of this Resolution, the rule shall be strictly enforced that no motion
for extension of time to file a motion for new trial or reconsideration may be filed with the Metropolitan or
Municipal Trial Courts, the Regional Trial Courts, and the Intermediate Appellate Court. Such a motion may be
filed only in cases pending with the Supreme Court as the court of last resort, which may in its sound discretion
either grant or deny the extension requested.

Thus, the general rule is that no motion for extension of time to file a motion for reconsideration is allowed. This
rule is consistent with the rule in the 2002 Internal Rules of the Court of Appeals that unless an appeal or a
motion for reconsideration or new trial is filed within the 15-day reglementary period, the CA's decision becomes
final. Thus, a motion for extension of time to file a motion for reconsideration does not stop the running of the 15-
day period for the computation of a decision's finality. At the end of the period, a CA judgment becomes final,
immutable and beyond our power to review.

This rule, however, admits of exceptions based on a liberal reading of the rule, so long as the petitioner is able to
prove the existence of cogent reasons to excuse its non-observance. xxx

While the CA was correct in denying his Urgent Motion for Extension to File Motion for Reconsideration for being
a prohibited motion, the Court, in the interest of justice, looked into the merits of the case, and opted to suspend
the prohibition against such motion for extension after it found that a modification of the CA Decision is
warranted by the law and the jurisprudence on administrative cases involving sexual harassment. The emerging
trend of jurisprudence, after all, is more inclined to the liberal and flexible application of procedural rules. Rules
of procedure exist to ensure the orderly, just and speedy dispensation of cases; to this end, inflexibility or
liberality must be weighed. Thus, the relaxation or suspension of procedural rules, or exemption of a case from
their operation is warranted only by compelling reasons or when the purpose of justice requires it. (emphases
and underscoring supplied)

The Court finds that cogent reason exists to justify the relaxation of the rules regarding the filing of motions for
extension to file a motion for reconsideration. The explanation put forth by Makro in filing its motions for
extension clearly were not intended to delay the proceedings but were caused by reasons beyond its control,
which cannot be avoided even with the exercise of appropriate care or prudence. Its former counsel had to
withdraw in the light of his appointment as a cabinet secretary and its new lawyer was unfortunately afflicted with
a serious illness. Thus, it would have been more prudent for the CA to relax the procedural rules so that the
substantive issues would be thoroughly ventilated.

More importantly, the liberal application of the rules becomes more imperative considering that Makro's position
is meritorious.

Express Warranty vis-a vis Implied Warranty

In addressing the issues of the present case, the following provisions of the deeds of sale between Makro and
respondents are pertinent:

Section 2. General Investigation and Relocation

Upon the execution of this Deed, the BUYER shall undertake at its own expense a general investigation and
relocation of their lots which shall be conducted by a surveyor mutually acceptable to both parties. Should there
be any discrepancy between the actual areas of the lots as resurveyed and the areas as indicated in their
Transfer Certificates of Title, the Purchase Price shall be adjusted correspondingly at the rate of PESOS: EIGHT
THOUSAND FIVE HUNDRED (Php8,500.000) per square meter. In the event that the actual area of a lot is
found to be in excess of the area specified in the Titles, the Purchase Price shall be increased on the basis of
the rate specified herein. Conversely, in the event that the actual area of a lot is found to be less than the area
specified in the Titles, the BUYER shall deduct a portion of the Purchase Price corresponding to the deficiency in
the area on the basis of the rate specified herein. In any case of discrepancy, be it more or less than the actual
area of the Property as specified in the Titles, the SELLER agrees to make the necessary correction of the title
covering the lots before the same is transferred to the BUYER. 16

Section 4. Representations and Warranties

The SELLER hereby represents and warrants to the BUYER that:

1. The Property is and shall continue to be free and clear of all easements, liens and encumbrances of any
nature whatsoever, and is, and shall continue to be, not subject to any claim set-off or defense which will prevent
the BUYER from obtaining full and absolute ownership and possession over the Property or from developing or
using it as a site for its store building.
17

Pursuant to Section 2 of the deeds of sale, Makro engaged the services of a surveyor which found that the
DPWH project had encroached upon the properties purchased. After demands for a refund had failed, it opted to
file the necessary judicial action for redress.

The courts a quo agree that the DPWH project encroached upon the properties Makro had purchased from
respondents.  Nevertheless, the CA opined that Makro was not entitled to a refund because it had actual
1âwphi1

knowledge of the ongoing road widening project. The appellate court likened Section 4(i) of the deeds of sale as
a warranty against eviction, which necessitates that the buyer be in good faith for it to be enforced.

A warranty is a collateral undertaking in a sale of either real or personal property, express or implied; that if the
property sold does not possess certain incidents or qualities, the purchaser may either consider the sale void or
claim damages for breach of warranty.  Thus, a warranty may either be express or implied.
18

An express warranty pertains to any affirmation of fact or any promise by the seller relating to the thing, the
natural tendency of which is to induce the buyer to purchase the same.  It includes all warranties derived from
19

the language of the contract, so long as the language is express-it may take the form of an affirmation, a
promise or a representation.  On the other hand, an implied warranty is one which the law derives by application
20

or inference from the nature of transaction or the relative situation or circumstances of the parties, irrespective of
any intention of the seller to create it.  In other words, an express warranty is different from an implied warranty
21

in that the former is found within the very language of the contract while the latter is by operation of law.

Thus, the CA erred in treating Section 4(i) of the deeds of sale as akin to an implied warranty against
eviction. First, the deeds of sale categorically state that the sellers assure that the properties sold were free from
any encumbrances which may prevent Makro from fully and absolutely possessing the properties in
question. Second, in order for the implied warranty against eviction to be enforceable, the following requisites
must concur: (a) there must be a final judgment; (b) the purchaser has been deprived of the whole or part of the
thing sold; (c) said deprivation was by virtue of a prior right to the sale made by the vendor; and (d) the vendor
has been summoned and made co-defendant in the suit for eviction at the instance of the vendee.  Evidently,
22

there was no final judgment and no opportunity for the vendors to have been summoned precisely because no
judicial action was instituted.

Further, even if Section 4(i) of the deeds of sale was to be deemed similar to an implied warranty against
eviction, the CA erred in concluding that Makro acted in bad faith. It is true that the warranty against eviction
cannot be enforced if the buyer knew of the risks or danger of eviction and still assumed its consequences.  The23

CA highlights that Makro was aware of the encroachments even before the sale because the ongoing road
widening project was visible enough to inform the buyer of the diminution of the land area of the property
purchased.

The Court disagrees.

It is undisputed that Makro's legal counsel conducted an ocular inspection on the properties in question before
the execution of the deeds of sale and that there were noticeable works and constructions going on near them.
Nonetheless, these are insufficient to charge Makro with actual knowledge that the DPWH project had
encroached upon respondents' properties. The dimensions of the properties in relation to the DPWH project
could have not been accurately ascertained through the naked eye. A mere ocular inspection could not have
possibly determined the exact extent of the encroachment. It is for this reason that only upon a relocation survey
performed by a geodetic engineer, was it discovered that 131 square meters and 130 square meters of the lots
purchased from Coco Charcoal and Lim, respectively, had been adversely affected by the DPWH project.

To reiterate, the fact of encroachment is settled as even the CA found that the DPWH project had disturbed a
portion of the properties Makro had purchased. The only reason the appellate court denied Makro recompense
was because of its purported actual knowledge of the intrusion which is not reason enough to deny Makro a
refund of the proportionate amount pursuant to Section 2 of the deeds of sale.

Nevertheless, the RTC errs in ordering respondents to pay ₱l,500,00.00 each to Makro. Under Section 2 of the
deeds of sale, the purchase price shall be adjusted in case of increase or decrease in the land area at the rate of
₱8,500.00 per square meter. In the case at bar, 131 square meters and 130 square meters of the properties of
Coco Charcoal and Lim, respectively, were encroached upon by the DPWH project. Applying the formula set
under the deeds of sale, Makro should be entitled to receive ₱l,113,500.00 from Coco Charcoal and
₱l,105,000.00 from Lim. It is noteworthy that Makro's complaint against respondents also prayed for the same
amounts. The RTC awarded ₱l,500,00.00 without sufficient factual basis or justifiable reasons.

Exemplary damages and attorney's fees may be awarded only for cause provided for by law.

In finding for Makro, the RTC also awarded attorney's fees and exemplary damages in its favor. The trial court
ruled that Makro was entitled to attorney's fees because it was forced to bring the matter before the court
assisted by counsel. It found the grant of exemplary damages in order because respondents were in bad faith for
concealing from Makro the fact that the DPWH had already dispossessed a portion of the lots purchased.

In ABS-CBN Broadcasting Corporation v. Court of Appeals,   the Court cautioned that the fact that a party was
24

compelled to litigate his cause does not necessarily warrant the award of attorney's fees, to wit:

As regards attorney's fees, the law is clear that in the absence of stipulation, attorney's fees may be recovered
as actual or compensatory damages under any of the circumstances provided for in Article 2208 of the Civil
Code.

The general rule is that attorney's fees cannot be recovered as part of damages because of the policy that no
premium should be placed on the right to litigate. They are not to be awarded every time a party wins a suit. The
power of the court to award attorney's fees under Article 2208 demands factual, legal, and equitable justification.
Even when a claimant is compelled to litigate with third persons or to incur expenses to protect his rights, still
attorney's fees may not be awarded where no sufficient showing of bad faith could be reflected in a party's
persistence in a case other than an erroneous conviction of the righteousness of his cause. (emphasis supplied)

Other than the bare fact that Makro was compelled to hire the services of counsel to prosecute its case, the RTC
did not provide compelling reasons to justify the award of attorney's fees. Thus, it is but right to delete the award
especially since there is no showing that respondents had acted in bad faith in refusing Makro's demand for
refund. It is in consonance with the policy that there is no premium on the right to litigate.
25

On the other hand, exemplary damages may be awarded if the defendant had acted in a wanton, fraudulent,
reckless, oppressive or malevolent manner.  The RTC found the award of exemplary damages warranted
26

because respondents allegedly concealed the fact the DPWH had already taken possession of a portion of the
land they had sold to Makro. Bad faith, however, involves a state of mind dominated by ill will or motive implying
a conscious and intentional design to do a wrongful act for a dishonest purpose or moral obliquity.  Here, there
27

is insufficient evidence to definitively ascertain that respondents' omission to mention the ongoing DPWH
projects was impelled by a conscious desire to defraud Makro. This is especially true since the road widening
project was already in progress even before the time of the sale, and which would have been noticeable when
Makro conducted its ocular inspection.

WHEREFORE, the petition is GRANTED. The 30 December 2010 Decision and 7 April 2011 Resolution of the
Court of Appeals in CA-G.R. CV No. 83836 are REVERSED and SET ASIDE. Petitioner Pilipinas Makro, Inc. is
entitled to recover ₱l,113,500.00 from respondent Coco Charcoal Phils., Inc. and ₱l,105,000.00 from respondent
Lim Kim San.

SO ORDERED.

23. POWER COMMERCIAL AND INDUSTRIAL CORPORATION, petitioner,

vs.
COURT OF APPEALS, SPOUSES REYNALDO and ANGELITA R. QUIAMBAO and PHILIPPINE NATIONAL
BANK, respondents.

PANGANIBAN, J.:

Is the seller's failure to eject the lessees from a lot that is the subject of a contract of sale with assumption of
mortgage a ground (1) for rescission of such contract and (2) for a return by the mortgagee of the amortization
payments made by the buyer who assumed such mortgage?

Petitioner posits an affirmative answer to such question in this petition for review on certiorari of the March 27,
1995 Decision  of the Court of Appeals, Eighth Division, in CA-G.R. CV Case No. 32298 upholding the validity of
1

the contract of sale with assumption of mortgage and absolving the mortgagee from the liability of returning the
mortgage payments already made. 2

The Facts

Petitioner Power Commercial & Industrial Development Corporation, an industrial asbestos manufacturer,
needed a bigger office space and warehouse for its products. For this purpose, on January 31, 1979, it entered
into a contract of sale with the spouses Reynaldo and Angelita R. Quiambao, herein private respondents. The
contract involved a 612-sq. m. parcel of land covered by Transfer Certificate of Title No. S-6686 located at the
corner of Bagtican and St. Paul Streets, San Antonio Village, Makati City. The parties agreed that petitioner
would pay private respondents P108,000.00 as down payment, and the balance of P295,000.00 upon the
execution of the deed of transfer of the title over the property. Further, petitioner assumed, as part of the
purchase price, the existing mortgage on the land. In full satisfaction thereof, he paid P79,145.77 to Respondent
Philippine National Bank ("PNB" for brevity).

On June 1, 1979, respondent spouses mortgaged again said land to PNB to guarantee a loan of P145,000.00,
P80,000.00 of which was paid to respondent spouses. Petitioner agreed to assume payment of the loan.

On June 26, 1979, the parties executed a Deed of Absolute Sale With Assumption of Mortgage which contained
the following terms and conditions: 3

That for and in consideration of the sum of Two Hundred Ninety-Five Thousand Pesos
(P295,000.00) Philippine Currency, to us in hand paid in cash, and which we hereby
acknowledge to be payment in full and received to our entire satisfaction, by POWER
COMMERCIAL AND INDUSTRIAL DEVELOPMENT CORPORATION, a 100% Filipino
Corporation, organized and existing under and by virtue of Philippine Laws with offices located at
252-C Vito Cruz Extension, we hereby by these presents SELL, TRANSFER and CONVEY by
way of absolute sale the above described property with all the improvements existing thereon
unto the said Power Commercial and Industrial Development Corporation, its successors and
assigns, free from all liens and encumbrances.
 We hereby certify that the aforesaid property is not subject to nor covered by the provisions of
the Land Reform Code — the same having no agricultural lessee and/or tenant.

We hereby also warrant that we are the lawful and absolute owners of the above described
property, free from any lien and/or encumbrance, and we hereby agree and warrant to defend its
title and peaceful possession thereof in favor of the said Power Commercial and Industrial
Development Corporation, its successors and assigns, against any claims whatsoever of any and
all third persons; subject, however, to the provisions hereunder provided to wit:

That the above described property is mortgaged to the Philippine National Bank, Cubao, Branch,
Quezon City for the amount of one hundred forty-five thousand pesos, Philippine, evidenced by
document No. 163, found on page No. 34 of Book No. XV, Series of 1979 of Notary Public Herita
L. Altamirano registered with the Register of Deeds of Pasig (Makati), Rizal . . . ;

That the said Power Commercial and Industrial Development Corporation assumes to pay in full
the entire amount of the said mortgage above described plus interest and bank charges, to the
said mortgagee bank, thus holding the herein vendor free from all claims by the said bank;

That both parties herein agree to seek and secure the agreement and approval of the said
Philippine National Bank to the herein sale of this property, hereby agreeing to abide by any and
all requirements of the said bank, agreeing that failure to do so shall give to the bank first lieu
(sic) over the herein described property.

On the same date, Mrs. C.D. Constantino, then General Manager of petitioner-corporation, submitted to PNB
said deed with a formal application for assumption of mortgage. 4

On February 15, 1980, PNB informed respondent spouses that, for petitioner's failure to submit the papers
necessary for approval pursuant to the former's letter dated January 15, 1980, the application for assumption of
mortgage was considered withdrawn; that the outstanding balance of P145,000.00 was deemed fully due and
demandable; and that said loan was to be paid in full within fifteen (15) days from notice.
5

Petitioner paid PNB P41,880.45 on June 24, 1980 and P20,283.14 on December 23, 1980, payments which
were to be applied to the outstanding loan. On December 23, 1980, PNB received a letter from petitioner which
reads:6

With regard to the presence of the people who are currently in physical occupancy of the (l)ot . . .
it is our desire as buyers and new owners of this lot to make use of this lot for our own purpose,
which is why it is our desire and intention that all the people who are currently physically present
and in occupation of said lot should be removed immediately.

For this purpose we respectfully request that . . . our assumption of mortgage be given favorable
consideration, and that the mortgage and title be transferred to our name so that we may
undertake the necessary procedures to make use of this lot ourselves.

It was our understanding that this lot was free and clear of problems of this nature, and that the
previous owner would be responsible for the removal of the people who were there. Inasmuch as
the previous owner has not been able to keep his commitment, it will be necessary for us to take
legal possession of this lot inorder (sic) to take physical possession.

On February 19, 1982, PNB sent petitioner a letter as follows: 7

(T)his refers to the loan granted to Mr. Reynaldo Quiambao which was assumed by you on June
4, 1979 for P101,500.00. It was last renewed on December 24, 1980 to mature on June 4, 1981.

A review of our records show that it has been past due from last maturity with interest arrearages
amounting to P25,826.08 as of February 19, 1982. The last payment received by us was on
December 24, 1980 for P20,283. 14. In order to place your account in current form, we request
you to remit payments to cover interest, charges, and at least part of the principal.

On March 17, 1982, petitioner filed Civil Case No. 45217 against respondent spouses for rescission and
damages before the Regional Trial Court of Pasig, Branch 159. Then, in its reply to PNB's letter of February 19,
1982, petitioner demanded the return of the payments it made on the ground that its assumption of mortgage
was never approved. On May 31, 1983,  while this case was pending, the mortgage was foreclosed. The
8

property was subsequently bought by PNB during the public auction. Thus, an amended complaint was filed
impleading PNB as party defendant.

On July 12, 1990, the trial court  ruled that the failure of respondent spouses to deliver actual possession to
9

petitioner entitled the latter to rescind the sale, and in view of such failure and of the denial of the latter's
assumption of mortgage, PNB was obliged to return the payments made by the latter. The dispositive portion of
said decision states: 
10

IN VIEW OF ALL THE FOREGOING, the Court hereby renders judgment in favor of plaintiff and
against defendants:

(1) Declaring the rescission of the Deed of Sale with Assumption of Mortgage executed between
plaintiff and defendants Spouses Quiambao, dated June 26, 1979;

(2) Ordering defendants Spouses Quiambao to return to plaintiff the amount of P187,144.77
(P108,000.00 plus P79,145.77) with legal interest of 12% per annum from date of filing of herein
complaint, that is, March 17, 1982 until the same is fully paid;

(3) Ordering defendant PNB to return to plaintiff the amount of P62,163.59 (P41,880.45 and
P20,283.14) with 12% interest thereon from date of herein judgment until the same is fully paid.

No award of other damages and attorney's fees, the same not being warranted under the facts
and circumstances of the case.

The counterclaim of both defendants spouses Quiambao and PNB are dismissed for lack of
merit.

No pronouncement as to costs.

SO ORDERED.

On appeal by respondent-spouses and PNB, Respondent Court of Appeals reversed the trial court. In the
assailed Decision, it held that the deed of sale between respondent spouses and petitioner did not obligate the
former to eject the lessees from the land in question as a condition of the sale, nor was the occupation thereof
by said lessees a violation of the warranty against eviction. Hence, there was no substantial breach to justify the
rescission of said contract or the return of the payments made. The dispositive portion of said Decision reads:  11

WHEREFORE, the Decision appealed from is hereby REVERSED and the complaint filed by
Power Commercial and Industrial Development Corporation against the spouses Reynaldo and
Angelita Quiambao and the Philippine National Bank is DISMISSED. No costs.

Hence, the recourse to this Court.

Issues

Petitioner contends that: (1) there was a substantial breach of the contract between the parties warranting
rescission; and (2) there was a "mistake in payment" made by petitioner, obligating PNB to return such
payments. In its Memorandum, it specifically assigns the following errors of law on the part of Respondent
Court: 
12

A. Respondent Court of Appeals gravely erred in failing to consider in its decision that a breach
of implied warranty under Article 1547 in relation to Article 1545 of the Civil Code applies in the
case-at-bar.

B. Respondent Court of Appeals gravely erred in failing to consider in its decision that a mistake
in payment giving rise to a situation where the principle of solutio indebiti applies is obtaining in
the case-at-bar.
 The Court's Ruling

The petition is devoid of merit. It fails to appreciate the difference between a condition and a warranty and the
consequences of such distinction.

Conspicuous Absence of an Imposed Condition

The alleged "failure" of respondent spouses to eject the lessees from the lot in question and to deliver actual and
physical possession thereof cannot be considered a substantial breach of a condition for two reasons: first, such
"failure" was not stipulated as a condition — whether resolutory or suspensive — in the contract; and second, its
effects and consequences were not specified either.  13

The provision adverted to by petitioner does not impose a condition or an obligation to eject the lessees from the
lot. The deed of sale provides in part:  14

We hereby also warrant that we are the lawful and absolute owners of the above described
property, free from any lien and/or encumbrance, and we hereby agree and warrant to defend its
title and peaceful possession thereof in favor of the said Power Commercial and Industrial
Development Corporation, its successors and assigns, against any claims whatsoever of any and
all third persons; subject, however, to the provisions hereunder provided to wit:

By his own admission, Anthony Powers, General Manager of petitioner-corporation, did not ask the corporation's
lawyers to stipulate in the contract that Respondent Reynaldo was guaranteeing the ejectment of the occupants,
because there was already a proviso in said deed of sale that the sellers were guaranteeing the peaceful
possession by the buyer of the land in question.   Any obscurity in a contract, if the above-quoted provision can
15

be so described, must be construed against the party who caused it.   Petitioner itself caused the obscurity
16

because it omitted this alleged condition when its lawyer drafted said contract.

If the parties intended to impose on respondent spouses the obligation to eject the tenants from the lot sold, it
should have included in the contract a provision similar to that referred to in Romero vs. Court of
Appeals,   where the ejectment of the occupants of the lot sold by private respondent was the operative act
17

which set into motion the period of petitioner's compliance with his own obligation, i.e., to pay the balance of the
purchase price. Failure to remove the squatters within the stipulated period gave the other party the right to
either refuse to proceed with the agreement or to waive that condition of ejectment in consonance with Article
1545 of the Civil Code. In the case cited, the contract specifically stipulated that the ejectment was a condition to
be fulfilled; otherwise, the obligation to pay the balance would not arise. This is not so in the case at bar.

Absent a stipulation therefor, we cannot say that the parties intended to make its nonfulfillment a ground for
rescission. If they did intend this, their contract should have expressly stipulated so. In Ang vs. C.A.,  rescission
18

was sought on the ground that the petitioners had failed to fulfill their obligation "to remove and clear" the lot
sold, the performance of which would have given rise to the payment of the consideration by private respondent.
Rescission was not allowed, however, because the breach was not substantial and fundamental to the fulfillment
by the petitioners of the obligation to sell.

As stated, the provision adverted to in the contract pertains to the usual warranty against eviction, and not to a
condition that was not met.

The terms of the contract are so clear as to leave no room for any other interpretation.  19

Furthermore, petitioner was well aware of the presence of the tenants at the time it entered into the sales
transaction. As testified to by Reynaldo,   petitioner's counsel during the sales negotiation even undertook the
20

job of ejecting the squatters. In fact, petitioner actually filed suit to eject the occupants. Finally, petitioner in its
letter to PNB of December 23, 1980 admitted that it was the "buyer(s) and new owner(s) of this lot."

Effective Symbolic Delivery

The Court disagrees with petitioner's allegation that the respondent spouses failed to deliver the lot sold.
Petitioner asserts that the legal fiction of symbolic delivery yielded to the truth that, at the execution of the deed
of sale, transfer of possession of said lot was impossible due to the presence of occupants on the lot sold. We
find this misleading.
Although most authorities consider transfer of ownership as the primary purpose of sale, delivery remains an
indispensable requisite as our law does not admit the doctrine of transfer of property by mere consent.   The
21

Civil Code provides that delivery can either be (1) actual (Article 1497) or (2) constructive (Articles 1498-1501).
Symbolic delivery (Article 1498), as a species of constructive delivery, effects the transfer of ownership through
the execution of a public document. Its efficacy can, however, be prevented if the vendor does not possess
control over the thing sold,   in which case this legal fiction must yield to reality.
22

The key word is control, not possession, of the land as petitioner would like us to believe. The Court has
consistently held that: 
23

. . . (I)n 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 . . . 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.

Considering that the deed of sale between the parties did not stipulate or infer otherwise, delivery was effected
through the execution of said deed. The lot sold had been placed under the control of petitioner; thus, the filing
of the ejectment suit was subsequently done. It signified that its new owner intended to obtain for itself and to
terminate said occupants' actual possession thereof. Prior physical delivery or possession is not legally required
and the execution of the deed of sale is deemed equivalent to delivery.   This deed operates as a formal or
24

symbolic delivery of the property sold and authorizes the buyer to use the document as proof of ownership.
Nothing more is required.

Requisites of Breach of Warranty Against Eviction

Obvious to us in the ambivalent stance of petitioner is its failure to establish any breach of the warranty against
eviction. Despite its protestation that its acquisition of the lot was to enable it to set up a warehouse for its
asbestos products and that failure to deliver actual possession thereof defeated this purpose, still no breach of
warranty against eviction can be appreciated because the facts of the case do not show that the requisites for
such breach have been satisfied. A breach of this warranty requires the concurrence of the following
circumstances:

(1) The purchaser has been deprived of the whole or part of the thing sold;

(2) This eviction is by a final judgment;

(3) The basis thereof is by virtue of a right prior to the sale made by the vendor; and

(4) The vendor has been summoned and made co-defendant in the suit for eviction at the instance of the
vendee.  25

In the absence of these requisites, a breach of the warranty against eviction under Article 1547 cannot
be declared.

Petitioner argues in its memorandum that it has not yet ejected the occupants of said lot, and not that it has been
evicted therefrom. As correctly pointed out by Respondent Court, the presence of lessees does not constitute an
encumbrance of the land,   nor does it deprive petitioner of its control thereof.
26

We note, however, that petitioner's deprivation of ownership and control finally occurred when it failed and/or
discontinued paying the amortizations on the mortgage, causing the lot to be foreclosed and sold at public
auction. But this deprivation is due to petitioner's fault, and not to any act attributable to the vendor-spouses.

Because petitioner failed to impugn its integrity, the contract is presumed, under the law, to be valid and
subsisting.
 Absence of Mistake In Payment

Contrary to the contention of petitioner that a return of the payments it made to PNB is warranted under Article
2154 of the Code, solutio indebiti does not apply in this case. This doctrine applies where: (1) a payment is
made when there exists no binding relation between the payor, who has no duty to pay, and the person who
received the payment, and (2) the payment is made through mistake, and not through liberality or some other
cause. 27

In this case, petitioner was under obligation to pay the amortizations on the mortgage under the contract of sale
and the deed of real estate mortgage. Under the deed of sale (Exh. "2"),   both parties agreed to abide by any
28

and all the requirements of PNB in connection with the real estate mortgage. Petitioner was aware that the deed
of mortgage (Exh. "C") made it solidarily and, therefore, primarily   liable for the mortgage obligation: 
29 30

(e) The Mortgagor shall neither lease the mortgaged property. . . nor sell or dispose of the same
in any manner, without the written consent of the Mortgagee. However, if not withstanding this
stipulation and during the existence of this mortgage, the property herein mortgaged, or any
portion thereof, is . . . sold, it shall be the obligation of the Mortgagor to impose as a condition of
the sale, alienation or encumbrance that the vendee, or the party in whose favor the alienation or
encumbrance is to be made, should take the property subject to the obligation of this mortgage in
the same terms and condition under which it is constituted, it being understood that the
Mortgagor is not in any manner relieved of his obligation to the Mortgagee under this mortgage
by such sale, alienation or encumbrance; on the contrary both the vendor and the vendee, or the
party in whose favor the alienation or encumbrance is made shall be jointly and severally liable
for said mortgage obligations. . . .

Therefore, it cannot be said that it did not have a duty to pay to PNB the amortization on the mortgage.

Also, petitioner insists that its payment of the amortization was a mistake because PNB disapproved its
assumption of mortgage after it failed to submit the necessary papers for the approval of such assumption.

But even if petitioner was a third party in regard to the mortgage of the land purchased, the payment of the loan
by petitioner was a condition clearly imposed by the contract of sale. This fact alone disproves petitioner's
insistence that there was a "mistake" in payment. On the contrary, such payments were necessary to protect its
interest as a "the buyer(s) and new owner(s) of the lot."

The quasi-contract of solutio indebiti is one of the concrete manifestations of the ancient principle that no one
shall enrich himself unjustly at the expense of another.   But as shown earlier, the payment of the mortgage was
31

an obligation petitioner assumed under the contract of sale. There is no unjust enrichment where the transaction,
as in this case, is quid pro quo, value for value.

All told, respondent Court did not commit any reversible error which would warrant the reversal of the assailed
Decision.

WHEREFORE, the petition is hereby DENIED, and the assailed Decision is AFFIRMED.

SO ORDERED.

24. MARIA LUISA DE LEON ESCALER and ERNESTO ESCALER, CECILIA J. ROXAS and PEDRO
ROXAS, petitioners,
vs.
COURT OF APPEALS, JOSE L. REYNOSO, now deceased, to be substituted by his heirs or legal
representatives and AFRICA V. REYNOSO, respondents.

Avanceña Law Office for petitioners.

Bauza, Ampil, Suarez, and Paredes Law Office for respondent Africa V. Reynoso.

CUEVAS, J.:

This is a Petition for Review on certiorari of the Decision of the then Court of Appeals (now the Intermediate
Appellate Court) and of its Resolution denying petitioners' Motion for Reconsideration, in CA G.R. No. 41953-R,
which was an appeal from the judgment of the Court of First Instance of Rizal in Civil Case No. 9014 entitled
"Maria Luisa de Leon Escaler, et al vs. Jose L. Reynoso and Africa Reynoso."

The following are the pertinent background facts:

On March 7, 1958, the spouses Africa V. Reynoso and Jose L, Reynoso sold to petitioners several others, a
parcel of land, situated in Antipolo, Rizal with an area of 239,479 square meters and covered by TCT No. 57400
of the Register of Deeds of the Province of Rizal. The Deed of Sale   contained the following covenant against
1

eviction, to wit:

That the VENDOR is the absolute owner of a parcel of land ... the ownership thereof being
evidenced by an absolute deed of sale executed in her favor by registered owner ANGELINA C.
REYNOSO, ...;

That the VENDOR warrants valid title to and ownership of said parcel of land and further, warrant
to defend the property herein sold and conveyed, unto the VENDEES, their heirs, and assignees,
from any and all claims of any persons whatsoever.

On April 21, 1961, the Register of Deeds of Rizal and A. Doronilla Resources Development, Inc. filed Case No.
4252 before the Court of First Instance of Rizal for the cancellation of OCT No. 1526 issued in the name of
Angelina C. Reynoso (predecessor-in-interest of private respondents-vendors) on February 26, 1958 under
Decree No. 62373, LRC Record No. N-13783, on the ground that the property covered by said title is already
previously registered under Transfer Certificate of Title No. 42999 issued in the name of A. Doronilla
Development, Inc. Petitioners as vendees filed their opposition to the said petition.

On June 10, 1964, an Order   was issued in the said case, the dispositive portion of which reads:
2

IN VIEW OF THE ABOVE CONSIDERATIONS, this Court is constrained to set aside Decree No.
62373 issued in LRC. Rec. No. N-13783 and the Register of Deeds of Rizal is directed to cancel
OCT No. 1526 of his office and all Transfer Certificates of Title issued subsequently thereafter to
purchaser of said property or portions thereof, the same being null and void, the expenses for
such cancellation to be charged to spouses Angelina Reynoso and Floro Reynoso. The owner's
duplicates in the possession of the transferees of the property covered by OCT No. 1526 are
declared null and void and said transferees are directed to surrender to the Register of Deeds of
Rizal, said owner's duplicates for cancellation.

The other reliefs sought for by the party oppositors are denied the same not falling within the
jurisdiction of this Court under this proceeding.

SO ORDERED.

On August 31, 1965, herein petitioners, spouses Maria de Leon Escaler and Ernesto Escaler and spouses
Cecilia J. Roxas and Pedro Roxas, filed Civil Case No. 9014 before the Court of First Instance of Rizal against
their vendors, herein private respondents, spouses Jose L. Reynoso and Africa Reynoso for the recovery of the
value of the property sold to them plus damages on the ground that the latter have violated the vendors'
"warranty against eviction."

The complaint among others, alleged that the Order issued in Case No. 4252 which cancelled the title of
Angelina C. Reynoso and all subsequent Transfer Certificates of Title derived and/or emanating therefrom and
which includes the titles of petitioners, is now final, and by reason thereof petitioners lost their right over the
property sold; and that in said Case No. 4252, the respondents were summoned and/or given their day in court
at the instance of the petitioners. 
3
The respondents, as defendants, filed their answer alleging, among others, by way of affirmative defenses that
"the cause of action, if any, of plaintiffs against defendants have been fully adjudicated in Case No. 4252 when
plaintiffs failed to file a third-party complaint against defendants." 
4

On August 18, 1967, petitioners, as plaintiffs, filed a Motion for Summary Judgment, alleging the facts already
averred in the complaint, and further alleging that the defendants were summoned and were given their day in
court at the instance of plaintiffs in Case No. 4252. In support of their said motion, the plaintiffs attached the
affidavit of Atty. Alberto R. Avanceña who had represented the plaintiffs in Case No. 4252 and had filed a joint
opposition in behalf of all the vendees. The pertinent portion of that affidavit, states—

4. That he has furnished a copy of said joint opposition to Africa Reynoso, wife of Jose L.
Reynoso, at her given address at c/o Antipolo Enterprises, Antipolo, Rizal and the latter had
received the same, as evidenced by the photostatic copy of the Registry Return Receipt thereto
affixed as Annex "C-l";

xxx xxx xxx

6. That he hereby executed this Affidavit to prove that said defendants Africa Reynoso and Jose
L. Reynoso were given their day in Court and/or were afforded their opportunity to be heard in
Case No. 4252 aforecited.

On September 27, 1967, judgment was rendered by the trial court, the pertinent portion of which reads—

Considering the foregoing motion for summary judgment and it appearing that the defendants
under a Deed of Absolute Sale (Annex "C") have expressly warranted their valid title and
ownership of the said parcel of land and further warranted to defend said property from any and
all claims of any persons whomever in favor of plaintiffs; that the said warranties were violated
when on June 10, 1964, an Order was promulgated by the Court of First Instance of Rizal in
Case No. 4252 (Related to LRC Case No. 1559, LRC Record No. N13293). In Re: Petition for
Cancellation of Original Registration, etc., covering the parcel of land in question; that said order
of June 10, 1964 has become final and executory there being no appeal interposed thereto and
defendants were summoned and were given a day in court at the instance of the plaintiffs in
Case No. 4252, the Court hereby grants the motion for summary judgment, and hereby orders
the defendants to jointly and severally return to the plaintiffs Maria Luisa de Leon Escaler and
Ernesto Escaler, Cecilia J. Roxas and Pedro Roxas, the value of the property sold to them at the
time of eviction which is not to be less than P5,500.00 to reimburse to each one of the plaintiffs
the expenses of contract and litigation and the amount of P2,250.00 to pay the attorney's fees of
P1,000.00 plus the costs of suit.

SO ORDERED.

Private respondents appealed the aforesaid decision to the then Court of Appeals   assigning as sole error—that
5

the lower court erred in finding that they were summoned and were given their day in court at the instance of
petitioners-plaintiffs in Case No. 4252.

In reversing the decision of the trial court and dismissing the case, the then Court of Appeals found and so ruled
that petitioners as vendees had not given private respondents-vendors, formal notice of the eviction case as
mandated by Arts. 1558 and 1559 of the New Civil Code.

Hence, the instant recourse, petitioners contending —

1) that the Court of Appeals erred in applying strictly to the instant case the provisions of Articles
1558 and 1559 of the new Civil Code; and

2) that the decision of the Court of First Instance of Rizal should have been affirmed by the Court
of Appeals or at least, the, Court of Appeals should have remanded the case to the trial court, for
hearing on the merits.

The petition is devoid of merit. Consequently, it must be dismissed.

Article 1548, in relation to Articles 1558. and 1559 of the New Civil Code reads as follows:
 Art. 1548, Eviction shall take place whenever by a final judgment based on a right prior to the
sale or an act imputable to the vendor, the vendee is deprived of the whole or of a part of the
thing purchased.

The vendor shall answer for the eviction even though nothing has been said in the contract on
the subject.

The contracting parties, however, may increase, diminish, or suppress this legal obligation of the
vendor.

Art. 1558. The vendor shall not be obliged to make good the proper warranty, unless he is
summoned in the suit for eviction at the instance of the vendee. (emphasis supplied)

Art. 1559. The defendant vendee shall ask, within the time fixed in the Rules of Court for
answering the complaint that the vendor be made as co-defendant.

In order that a vendor's liability for eviction may be enforced, the following requisites must concur—a) there must
be a final judgment; b) the purchaser has been deprived of the whole or part of the thing sold; c) said deprivation
was by virtue of a right prior to the sale made by the vendor; and d) the vendor has been summoned and made
co-defendant in the suit for eviction at the instance of the vendee. 
6

In the case at bar, the fourth requisite—that of being summoned in the suit for eviction (Case No. 4252) at the
instance of the vendee—is not present. All that the petitioners did, per their very admission, was to furnish
respondents, by registered mail, with a copy of the opposition they (petitioners filed in the eviction suit.
Decidedly, this is not the kind of notice prescribed by the aforequoted Articles 1558 and 1559 of the New Civil
Code. The term "unless he is summoned in the suit for eviction at the instance of the vendee" means that the
respondents as vendor/s should be made parties to the suit at the instance of petitioners-vendees, either by way
of asking that the former be made a co-defendant or by the filing of a third-party complaint against said vendors.
Nothing of that sort appeared to have been done by the petitioners in the instant case.

IN VIEW OF THE FOREGOING CONSIDERATIONS, the petition is DISMISSED and the appealed decision of
the then Court of Appeals is AFFIRMED.

No pronouncement as to costs.

SO ORDERED.

Concepcion, Jr., Abad Santos, Plana, Escolin, Relova, Gutierrez, Jr. and De la Fuente, JJ., concur.

Separate Opinions

 AQUINO, J., dissenting:
In 1958 Cecilia Roxas and Maria Luisa de Leon Escaler and ten other persons bought for P12,000 from Africa V
Reynoso, 23.9 hectares of land located at Barrio San Isidro, Antipolo, Rizal covered by OCT No. 1526 in the
name of Angelina C. Reynoso. Africa had purchased the land from Angelina (9-12, Record on Appeal). Escaler
and Roxas obtained TCT Nos. 58389 and 58393, respectively.

On April 21, 1961 the register of deeds of Rizal in Civil Case No. 4252, LRC Case No. 1559, Rec. No. 13793,
filed a petition for the cancellation of Decree No. N-62373 and OCT No. 1526 issued in the name of Angelina C.
Reynoso because the 23.9 hectare land covered by said decree and title had been previously registered in the
name of A. Doronilla Resources Development, Inc. since February 20, 1956. Angelina was furnished a copy of
the petition by registered mail, Registry Receipt No. 6883. The petition was set for hearing on May 20, 1961.

It was alleged in paragraph 5 of the petition that Angelina transferred to Africa V. Reynoso the said land. Among
the 20 persons furnished copies of the petition for cancellation were Escaler and Roxas. Escaler and Roxas filed
a joint opposition to the petition for cancellation. Their lawyer, Alberto P. Avanceña, furnished Africa Reynoso
and A Angelina C. Reynoso by registered mail with copies of said opposition sent at their common Postal
address, care of Antipolo Enterprises, Antipolo, Rizal, as shown in Registry Receipts Nos. 58558 and 58559
dated June 24, 1961 (p. 85, Record of Civil Case No. 4252).

In said joint opposition, it was alleged that Escaler and Roxas were innocent purchasers for value, that the court,
as a land registration court, had no jurisdiction over the controversy and that should the titles of Escaler and
Roxas be nullified, they are entitled to relief from the Assurance Fund.

After hearing, which lasted for three years, Judge Muñoz Palma in her order of June 10, 1964 found that the
land covered by Angelina Reynoso's title, OCT No. 1526, had been previously registered in 1907 under OCT
No. 301, which was cancelled by subsequent transfer certificates of title, the latest of which is TCT No. 42999 in
the name of A. Doronilla Resources Development, Inc.

She declared void Decree No. 62373 and Angelina Reynoso's title and those derived therefrom, like the titles of
Escaler and Roxas, in accordance with the rule that the prior registration prevails over the later registration
(Legarda and Prieto vs. Saleeby, 31 Phil. 590).

The titles of Angelina and Africa (maybe relatives by affinity) were void because they were issued for lands
already registered. The titles of Angelina and Africa may be regarded as a form of land-grabbing. The
purchasers were speculators in Antipolo lots.

More than a year later, or on August 31, 1965, Escaler and Roxas in Civil Case No. 9014 sued Africa Reynoso
to enforce the warranty against eviction contained in the deed of sale executed by Africa in 1958 in their favor.
They prayed for the return to each of the plaintiffs of P5,500 as the value of the land and P4,750 as
reimbursement of "expenses of contract", attorney's fees and litigation expenses.

Africa Reynoso in her answer alleged that Escaler and Roxas failed to file a third- party complaint against her
when the latter were sued in Civil Case No. 4252, that their action had prescribed, that they should claim from
Angelina C. Reynoso reimbursement for the expenses of cancellation of title and that their claim is against the
Assurance Fund.

Africa Reynoso filed a third-party complaint against Angelina C. Reynoso. No summons was issued. Escaler and
Roxas filed a motion for summary judgment.

On September 27, 1967, Judge Navarro ordered the spouses Africa Reynoso and Jose Reynoso to return
solidarity to the Escalers and the Roxases the value of the land amounting to P5,500, to reimburse to each one
of the plaintiffs the "expenses of contract" and litigation in the sum of P2,250 and attorney's fees of P1,000 (61,
Record on Appeal).

The Reynoso spouses appealed to the Court of Appeals which reversed the trial court's decision. The Appellate
Court held that because Escaler and Roxas did not make Africa Reynoso a co-defendant in the eviction case, as
required in articles 1558 and 1559 of the Civil Code, they could not later on enforce the warranty against Africa.
Escaler and Roxas appealed to this Court.

In my opinion, it was not possible for Escaler and Roxas to comply strictly with articles 1558 and 1559. The
eviction took place, not in an ordinary suit wherein the vendor can be made a co-defendant, but as an incident in
the cancellation of title in a land registration proceeding.

In such a case, the furnishing of the vendor with a copy of the opposition was a substantial compliance with
articles 1558 and 1559. It was a notice to the vendor. Africa's vendor, Angelina, was first notified of the
cancellation proceeding.

At least, Escaler and Roxas complied with article 1481 of the old Civil Code which requires notice to the vendor.
It was not the fault of the petitioners that the eviction case assumed the shape of a mere incident in the land
registration proceeding and not that of an ordinary contentious civil action. Africa Reynoso could not be made a
co- defendant in that incident for cancellation of title, a summary proceeding.

A contrary view would enable Africa Reynoso to enrich herself unjustly at the expense of the petitioners.
25. NUTRIMIX FEEDS V. CA

For review on certiorari is the Decision1 of the Court of Appeals in CA-G.R. CV No. 59615
modifying, on appeal, the Joint Decision 2 of the Regional Trial Court of Malolos, Bulacan, Branch 9,
in Civil Case No. 1026-M-933 for sum of money and damages with prayer for issuance of writ of
preliminary attachment, and Civil Case No. 49-M-94 4 for damages. The trial court dismissed the
complaint of the respondents, ordering them to pay the petitioner the unpaid value of the
assorted animal feeds delivered to the former by the latter, with legal interest thereon from the
filing of the complaint, including attorney's fees.

The Factual Antecedents

On April 5, 1993, the Spouses Efren and Maura Evangelista, the respondents herein, started to
directly procure various kinds of animal feeds from petitioner Nutrimix Feeds Corporation. The
petitioner gave the respondents a credit period of thirty to forty-five days to postdate checks to
be issued in payment for the delivery of the feeds. The accommodation was made apparently
because of the company president's close friendship with Eugenio Evangelista, the brother of
respondent Efren Evangelista. The various animal feeds were paid and covered by checks with due
dates from July 1993 to September 1993. Initially, the respondents were good paying customers.
In some instances, however, they failed to issue checks despite the deliveries of animal feeds
which were appropriately covered by sales invoices. Consequently, the

Sales Invoice
Date Amount
Number
21334 June 23, 1993 P 7,260.00
21420 June 26, 1993 6,990.00
21437 June 28, 1993 41,510.00
21722 July 12, 1993 45,185.00
22048 July 26, 1993 44,540.00
22054 July 27, 1993 45,246.00
22186 August 2, 1993 84,900.00

Total: P275,631.00
===========

respondents incurred an aggregate unsettled account with the petitioner in the amount
of P766,151.00. The breakdown of the unpaid obligation is as follows:

Bank Check Number Due Date Amount

United Coconut Planters Bank BTS052084 July 30, 1993 P 47,760.00
-do - BTS052087 July 30, 1993 131,340.00
-do - BTS052091 July 30, 1993 59,700.00
-do - BTS062721 August 4, 1993 47,860.00
-do - BTS062720 August 5, 1993 43,780.00
 -do - BTS062774 August 6, 1993 15,000.00
-do - BTS062748 September 11, 1993 47,180.00
-do - BTS062763 September 11, 1993 48,440.00
-do - BTS062766 September 18, 1993 49,460.00

Total: P490,520.00
==========

When the above-mentioned checks were deposited at the petitioner's depository bank, the same
were, consequently, dishonored because respondent Maura Evangelista had already closed her
account. The petitioner made several demands for the respondents to settle their unpaid
obligation, but the latter failed and refused to pay their remaining balance with the petitioner.

On December 15, 1993, the petitioner filed with the Regional Trial Court of Malolos, Bulacan, a
complaint, docketed as Civil Case No. 1026-M-93, against the respondents for sum of money and
damages with a prayer for issuance of writ of preliminary attachment. In their answer with
counterclaim, the respondents admitted their unpaid obligation but impugned their liability to the
petitioner. They asserted that the nine checks issued by respondent Maura Evangelista were made
to guarantee the payment of the purchases, which was previously determined to be procured from
the expected proceeds in the sale of their broilers and hogs. They contended that inasmuch as the
sudden and massive death of their animals was caused by the contaminated products of the
petitioner, the nonpayment of their obligation was based on a just and legal ground.

On January 19, 1994, the respondents also lodged a complaint for damages against the
petitioner, docketed as Civil Case No. 49-M-94, for the untimely and unforeseen death of their
animals supposedly effected by the adulterated animal feeds the petitioner sold to them. Within
the period to file an answer, the petitioner moved to dismiss the respondents' complaint on the
ground of litis pendentia. The trial court denied the same in a Resolution 5 dated April 26, 1994,
and ordered the consolidation of the case with Civil Case No. 1026-M-93. On May 13, 1994, the
petitioner filed its Answer with Counterclaim, alleging that the death of the respondents' animals
was due to the widespread pestilence in their farm. The petitioner, likewise, maintained that it
received information that the respondents were in an unstable financial condition and even sold
their animals to settle their obligations from other enraged and insistent creditors. It, moreover,
theorized that it was the respondents who mixed poison to its feeds to make it appear that the
feeds were contaminated.

A joint trial thereafter ensued.

During the hearing, the petitioner presented Rufino Arenas, Nutrimix Assistant Manager, as its
lone witness. He testified that on the first week of August 1993, Nutrimix President Efren
Bartolome met the respondents to discuss the possible settlement of their unpaid account. The
said respondents still pleaded to the petitioner to continue to supply them with animal feeds
because their livestock were supposedly suffering from a disease. 6

For her part, respondent Maura Evangelista testified that as direct buyers of animal feeds from the
petitioner, Mr. Bartolome, the company president, gave them a discount of P12.00 per bag and a
credit term of forty-five to seventy-five days. 7 For the operation of the respondents' poultry and
piggery farm, the assorted animal feeds sold by the petitioner were delivered in their residence
and stored in an adjacent bodega made of concrete wall and galvanized iron sheet roofing with
monolithic flooring.8

It appears that in the morning of July 26, 1993, three various kinds of animal feeds, numbering
130 bags, were delivered to the residence of the respondents in Sta. Rosa, Marilao, Bulacan. The
deliveries came at about 10:00 a.m. and were fed to the animals at approximately 1:30 p.m. at
the respondents' farm in Balasing, Sta. Maria, Bulacan. At about 8:30 p.m., respondent Maura
Evangelista received a radio message from a worker in her farm, warning her that the chickens
were dying at rapid intervals. When the respondents arrived at their farm, they witnessed the
death of 18,000 broilers, averaging 1.7 kilos in weight, approximately forty-one to forty-five days
old. The broilers then had a prevailing market price of P46.00 per kilo.9

On July 27, 1993, the respondents received another delivery of 160 bags of animal feeds from the
petitioner, some of which were distributed to the contract growers of the respondents. At that
time, respondent Maura Evangelista requested the representative of the petitioner to notify Mr.
Bartolome of the fact that their broilers died after having been fed with the animal feeds delivered
by the petitioner the previous day. She, likewise, asked that a technician or veterinarian be sent
to oversee the untoward occurrence. Nevertheless, the various feeds delivered on that day were
still fed to the animals. On July 27, 1993, the witness recounted that all of the chickens and hogs
died.10 Efren Evangelista suffered from a heart attack and was hospitalized as a consequence of
the massive death of their animals in the farm. On August 2, 1993, another set of animal feeds
were delivered to the respondents, but the same were not returned as the latter were not yet
cognizant of the fact that the cause of the death of their animals was the polluted feeds of the
petitioner.11

When respondent Maura Evangelista eventually met with Mr. Bartolome on an undisclosed date,
she attributed the improbable incident to the animal feeds supplied by the petitioner, and asked
Mr. Bartolome for indemnity for the massive death of her livestock. Mr. Bartolome disavowed
liability thereon and, thereafter, filed a case against the respondents. 12

After the meeting with Mr. Bartolome, respondent Maura Evangelista requested Dr. Rolando
Sanchez, a veterinarian, to conduct an inspection in the respondents' poultry. On October 20,
1993, the respondents took ample amounts remaining from the feeds sold by the petitioner and
furnished the same to various government agencies for laboratory examination.

Dr. Juliana G. Garcia, a doctor of veterinary medicine and the Supervising Agriculturist of the
Bureau of Animal Industry, testified that on October 20, 1993, sample feeds for chickens
contained in a pail were presented to her for examination by respondent Efren Evangelista and a
certain veterinarian.13 The Clinical Laboratory Report revealed that the feeds were negative of
salmonella14 and that the very high aflatoxin level15 found therein would not cause instantaneous
death if taken orally by birds.

Dr. Rodrigo Diaz, the veterinarian who accompanied Efren at the Bureau of Animal Industry,
testified that sometime in October 1993, Efren sought for his advice regarding the death of the
respondents' chickens. He suggested that the remaining feeds from their warehouse be brought to
a laboratory for examination. The witness claimed that the feeds brought to the laboratory came
from one bag of sealed Nutrimix feeds which was covered with a sack.

Dr. Florencio Isagani S. Medina III, Chief Scientist Research Specialist of the Philippine Nuclear
Research Institute, informed the trial court that respondent Maura Evangelista and Dr. Garcia
brought sample feeds and four live and healthy chickens to him for laboratory examination. In his
Cytogenetic Analysis,16 Dr. Medina reported that he divided the chickens into two categories,
which he separately fed at 6:00 a.m. with the animal feeds of a different commercial brand and
with the sample feeds supposedly supplied by the petitioner. At noon of the same day, one of the
chickens which had been fed with the Nutrimix feeds died, and a second chicken died at 5:45 p.m.
of the same day. Samples of blood and bone marrow were taken for chromosome analysis, which
showed pulverized chromosomes both from bone marrow and blood chromosomes. On cross-
examination, the witness admitted that the feeds brought to him were merely placed in a small
unmarked plastic bag and that he had no way of ascertaining whether the feeds were indeed
manufactured by the petitioner.

Another witness for the respondents, Aida Viloria Magsipoc, Forensic Chemist III of the Forensic
Chemist Division of the National Bureau of Investigation, affirmed that she performed a chemical
analysis17 of the animal feeds, submitted to her by respondent Maura Evangelista and Dr. Garcia
in a sealed plastic bag, to determine the presence of poison in the said specimen. The witness
verified that the sample feeds yielded positive results to the tests for COUMATETRALYL
Compound,18 the active component of RACUMIN, a brand name for a commercially known rat
poison.19 According to the witness, the presence of the compound in the chicken feeds would be
fatal to internal organs of the chickens, as it would give a delayed blood clotting effect and
eventually lead to internal hemorrhage, culminating in their inevitable death.

Paz Austria, the Chief of the Pesticide Analytical Section of the Bureau of Plants Industry,
conducted a laboratory examination to determine the presence of pesticide residue in the animal
feeds submitted by respondent Maura Evangelista and Dr. Garcia. The tests disclosed that no
pesticide residue was detected in the samples received 20 but it was discovered that the animal
feeds were positive for Warfarin, a rodenticide (anticoagulant), which is the chemical family of
Coumarin.21

After due consideration of the evidence presented, the trial court ruled in favor of the petitioner.
The dispositive portion of the decision reads:

WHEREFORE, in light of the evidence on record and the laws/jurisprudence applicable thereon,
judgment is hereby rendered:

1) in Civil Case No. 1026-M-93, ordering defendant spouses Efren and Maura Evangelista to pay
unto plaintiff Nutrimix Feeds Corporation the amount of P766,151.00 representing the unpaid
value of assorted animal feeds delivered by the latter to and received by the former, with legal
interest thereon from the filing of the complaint on December 15, 1993 until the same shall have
been paid in full, and the amount of P50,000.00 as attorney's fees. Costs against the aforenamed
defendants; and cralawlibrary

2) dismissing the complaint as well as counterclaims in Civil Case No. 49-M-94 for inadequacy of
evidence to sustain the same. No pronouncement as to costs.

SO ORDERED.22

In finding for the petitioner, the trial court ratiocinated as follows:

On the strength of the foregoing disquisition, the Court cannot sustain the Evangelistas'
contention that Nutrimix is liable under Articles 1561 and 1566 of the Civil Code governing
"hidden defects" of commodities sold. As already explained, the Court is predisposed to believe
that the subject feeds were contaminated sometime between their storage at the bodega of the
Evangelistas and their consumption by the poultry and hogs fed therewith, and that the
contamination was perpetrated by unidentified or unidentifiable ill-meaning mischief-maker(s)
over whom Nutrimix had no control in whichever way.

All told, the Court finds and so holds that for inadequacy of proof to the contrary, Nutrimix was
not responsible at all for the contamination or poisoning of the feeds supplied by it to the
Evangelistas which precipitated the mass death of the latter's chickens and hogs. By no means
and under no circumstance, therefore, may Nutrimix be held liable for the sundry damages prayed
for by the Evangelistas in their complaint in Civil Case No. 49-M-94 and answer in Civil Case No.
1026-M-93. In fine, Civil Case No. 49-M-94 deserves dismissal.

Parenthetically, vis - Ã -vis the fulminations of the Evangelistas in this specific regard, the Court
does not perceive any act or omission on the part of Nutrimix constitutive of "abuse of rights" as
would render said corporation liable for damages under Arts. 19 and 21 of the Civil Code. The
alleged "callous attitude and lack of concern of Nutrimix" have not been established with more
definitiveness.

As regards Civil Case No. 1026-M-93, on the other hand, the Court is perfectly convinced that the
deliveries of animal feeds by Nutrimix to the Evangelistas constituted a simple contract of sale,
albeit on a continuing basis and on terms or installment payments. 23

Undaunted, the respondents sought a review of the trial court's decision to the Court of Appeals
(CA), principally arguing that the trial court erred in holding that they failed to prove that their
broilers and hogs died as a result of consuming the petitioner's feeds.
On February 12, 2002, the CA modified the decision of the trial court. The fallo of the decision
reads:

WHEREFORE, premises considered, the appealed decision is hereby MODIFIED such that the
complaint in Civil Case No. 1026-M-93 is dismissed for lack of merit.

So ordered.24

In dismissing the complaint in Civil Case No. 1026-M-93, the CA ruled that the respondents were
not obligated to pay their outstanding obligation to the petitioner in view of its breach of warranty
against hidden defects. The CA gave much credence to the testimony of Dr. Rodrigo Diaz, who
attested that the sample feeds distributed to the various governmental agencies for laboratory
examination were taken from a sealed sack bearing the brand name Nutrimix. The CA further
argued that the declarations of Dr. Diaz were not effectively impugned during cross-examination,
nor was there any contrary evidence adduced to destroy his damning allegations.

On March 7, 2002, the petitioner filed with this Court the instant Petition for Review on the sole
ground that '

THE HONORABLE COURT OF APPEALS ERRED IN CONCLUDING THAT THE CLAIMS OF HEREIN
PETITIONER FOR COLLECTION OF SUM OF MONEY AGAINST PRIVATE RESPONDENTS MUST BE
DENIED BECAUSE OF HIDDEN DEFECTS.

The Present Petition

The petitioner resolutely avers that the testimony of Dr. Diaz can hardly be considered as
conclusive evidence of hidden defects that can be attributed to the petitioner. Parenthetically, the
petitioner asserts, assuming that the sample feeds were taken from a sealed sack bearing the
brand name Nutrimix, it cannot decisively be presumed that these were the same feeds brought
to the respondents' farm and given to their chickens and hogs for consumption.

It is the contention of the respondents that the appellate court correctly ordered the dismissal of
the complaint in Civil Case No. 1026-M-93. They further add that there was sufficient basis for the
CA to hold the petitioner guilty of breach of warranty thereby releasing the respondents from
paying their outstanding obligation.

The Ruling of the Court

Oft repeated is the rule that the Supreme Court reviews only errors of law in Petitions for Review
on Certiorari under Rule 45. However, this rule is not absolute. The Court may review the factual
findings of the CA should they be contrary to those of the trial court. Conformably, this Court may
review findings of facts when the judgment of the CA is premised on a misapprehension of facts. 25

The threshold issue is whether or not there is sufficient evidence to hold the petitioner guilty of
breach of warranty due to hidden defects.

The petition is meritorious.

The provisions on warranty against hidden defects are found in Articles 1561 and 1566 of the New
Civil Code of the Philippines, which read as follows:

Art. 1561. The vendor shall be responsible for warranty against hidden defects which the thing
sold may have, should they render it unfit for the use for which it is intended, or should they
diminish its fitness for such use to such an extent that, had the vendee been aware thereof, he
would not have acquired it or would have given a lower price for it; but said vendor shall not be
answerable for patent defects or those which may be visible, or for those which are not visible if
the vendee is an expert who, by reason of his trade or profession, should have known them.
Art. 1566. The vendor is responsible to the vendee for any hidden faults or defects in the thing
sold, even though he was not aware thereof.

This provision shall not apply if the contrary has been stipulated, and the vendor was not aware of
the hidden faults or defects in the thing sold.

A hidden defect is one which is unknown or could not have been known to the vendee. 26 Under the
law, the requisites to recover on account of hidden defects are as follows:

(a) the defect must be hidden;

(b) the defect must exist at the time the sale was made;

(c) the defect must ordinarily have been excluded from the contract;

(d) the defect, must be important (renders thing UNFIT or considerably decreases FITNESS);

(e) the action must be instituted within the statute of limitations. 27

In the sale of animal feeds, there is an implied warranty that it is reasonably fit and suitable to be
used for the purpose which both parties contemplated. 28 To be able to prove liability on the basis
of breach of implied warranty, three things must be established by the respondents. The first is
that they sustained injury because of the product; the second is that the injury occurred because
the product was defective or unreasonably unsafe; and finally, the defect existed when the
product left the hands of the petitioner.29 A manufacturer or seller of a product cannot be held
liable for any damage allegedly caused by the product in the absence of any proof that the
product in question was defective.30 The defect must be present upon the delivery or manufacture
of the product;31 or when the product left the seller's or manufacturer's control; 32 or when the
product was sold to the purchaser;33 or the product must have reached the user or consumer
without substantial change in the condition it was sold. Tracing the defect to the petitioner
requires some evidence that there was no tampering with, or changing of the animal feeds. The
nature of the animal feeds makes it necessarily difficult for the respondents to prove that the
defect was existing when the product left the premises of the petitioner.

A review of the facts of the case would reveal that the petitioner delivered the animal feeds,
allegedly containing rat poison, on July 26, 1993; but it is astonishing that the respondents had
the animal feeds examined only on October 20, 1993, or barely three months after their broilers
and hogs had died. On cross-examination, respondent Maura Evangelista testified in this manner:

Atty. Cruz:

Q Madam Witness, you said in the last hearing that believing that the 250 bags of feeds delivered
to (sic) the Nutrimix Feeds Corporation on August 2, 1993 were poison (sic), allegedly your
husband Efren Evangelista burned the same with the chicken[s], is that right? chanroblesvirtualawlibrary

A Yes, Sir. Some, Sir.

Q And is it not a fact, Madam Witness, that you did not, as according to you, used (sic) any of
these deliveries made on August 2, 1993? chanroblesvirtualawlibrary

A We were able to feed (sic) some of those deliveries because we did not know yet during that
time that it is the cause of the death of our chicks (sic), Sir.

Q But according to you, the previous deliveries were not used by you because you believe (sic)
that they were poison (sic)? chanroblesvirtualawlibrary

A Which previous deliveries, Sir[?]

Q Those delivered on July 26 and 22 (sic), 1993? chanroblesvirtualawlibrary

A Those were fed to the chickens, Sir. This is the cause of the death of the chickens.

Q And you stated that this last delivery on August 2 were poison (sic) also and you did not use
them, is that right? chanroblesvirtualawlibrary

Atty. Roxas:

That is misleading.

Atty. Cruz:

She stated that.

Atty. Roxas:

She said some were fed because they did not know yet of the poisoning.

Court:

And when the chickens died, they stopped naturally feeding it to the chickens.

Atty. Cruz:

Q You mean to say, Madam Witness, that although you believe (sic) that the chickens were
allegedly poisoned, you used the same for feeding your animals? chanroblesvirtualawlibrary

A We did not know yet during that time that the feeds contained poison, only during that time
when we learned about the same after the analysis.

Q Therefore you have known only of the alleged poison in the Nutrimix Feeds only after you have
caused the analysis of the same? chanroblesvirtualawlibrary

A Yes, Sir.

Q When was that, Madam Witness? chanroblesvirtualawlibrary

A I cannot be sure about the exact time but it is within the months of October to November, Sir.

Q So, before this analysis of about October and November, you were not aware that the feeds of
Nutrimix Feeds Corporation were, according to you, with poison? chanroblesvirtualawlibrary

A We did not know yet that it contained poison but we were sure that the feeds were the cause of
the death of our animals.34

We find it difficult to believe that the feeds delivered on July 26 and 27, 1993 and fed to the
broilers and hogs contained poison at the time they reached the respondents. A difference of
approximately three months enfeebles the respondents' theory that the petitioner is guilty of
breach of warranty by virtue of hidden defects. In a span of three months, the feeds could have
already been contaminated by outside factors and subjected to many conditions unquestionably
beyond the control of the petitioner. In fact, Dr. Garcia, one of the witnesses for the respondents,
testified that the animal feeds submitted to her for laboratory examination contained very high
level of aflatoxin, possibly caused by mold (aspergillus flavus). 35 We agree with the contention of
the petitioner that there is no evidence on record to prove that the animal feeds taken to the
various governmental agencies for laboratory examination were the same animal feeds given to
the respondents' broilers and hogs for their consumption. Moreover, Dr. Diaz even admitted that
the feeds that were submitted for analysis came from a sealed bag. There is simply no evidence
to show that the feeds given to the animals on July 26 and 27, 1993 were identical to those
submitted to the expert witnesses in October 1993.

It bears stressing, too, that the chickens brought to the Philippine Nuclear Research Institute for
laboratory tests were healthy animals, and were not the ones that were ostensibly poisoned.
There was even no attempt to have the dead fowls examined. Neither was there any analysis of
the stomach of the dead chickens to determine whether the petitioner's feeds really caused their
sudden death. Mere sickness and death of the chickens is not satisfactory evidence in itself to
establish a prima facie case of breach of warranty. 36

Likewise, there was evidence tending to show that the respondents combined different kinds of
animal feeds and that the mixture was given to the animals. Respondent Maura Evangelista
testified that it was common practice among chicken and hog raisers to mix animal feeds. The
testimonies of respondent Maura Evangelista may be thus summarized:

Cross-Examination

Atty. Cruz:

Q Because, Madam Witness, you ordered chicken booster mash from Nutrimix Feeds Corporation
because in July 1993 you were taking care of many chickens, as a matter of fact, majority of the
chickens you were taking care [of] were chicks and not chickens which are marketable? chanroblesvirtualawlibrary

A What I can remember was that I ordered chicken booster mash on that month of July 1993
because we have some chicks which have to be fed with chicken booster mash and I now
remember that on the particular month of July 1993 we ordered several bags of chicken booster
mash for the consumption also of our chicken in our other poultry and at the same time they were
also used to be mixed with the feeds that were given to the hogs.

Q You mean to say [that], as a practice, you are mixing chicken booster mash which is specifically
made for chick feeds you are feeding the same to the hogs, is that what you want the Court to
believe?chanroblesvirtualawlibrary

A Yes, Sir, because when you mix chicken booster mash in the feeds of hogs there is a better
result, Sir, in raising hogs.37

Re-Direct Examination

Atty. Roxas:

Q Now, you mentioned that shortly before July 26 and 27, 1993, various types of Nutrimix feeds
were delivered to you like chicks booster mash, broiler starter mash and hog finisher or hog
grower mash. What is the reason for simultaneous deliveries of various types of feeds? chanroblesvirtualawlibrary

A Because we used to mix all those together in one feeding, Sir.

Q And what is the reason for mixing the chick booster mash with broiler starter mash? chanroblesvirtualawlibrary

A So that the chickens will get fat, Sir.

Re-Cross Examination

Atty. Cruz:

Q Madam Witness, is it not a fact that the mixing of these feeds by you is your own concuction
(sic) and without the advice of a veterinarian expert to do so?chanroblesvirtualawlibrary

A That is common practice among raisers to mix two feeds, Sir.

Q By yourself, Madam Witness, who advised you to do the mixing of these two types of feeds for
feeding your chickens? chanroblesvirtualawlibrary

A That is common practice of chicken raisers, Sir. 38

Even more surprising is the fact that during the meeting with Nutrimix President Mr. Bartolome,
the respondents claimed that their animals were plagued by disease, and that they needed more
time to settle their obligations with the petitioner. It was only after a few months that the
respondents changed their justification for not paying their unsettled accounts, claiming anew that
their animals were poisoned with the animal feeds supplied by the petitioner. The volte-face of the
respondents deserves scant consideration for having been conjured as a mere afterthought.

In essence, we hold that the respondents failed to prove that the petitioner is guilty of breach of
warranty due to hidden defects. It is, likewise, rudimentary that common law places upon the
buyer of the product the burden of proving that the seller of the product breached its
warranty.39 The bevy of expert evidence adduced by the respondents is too shaky and utterly
insufficient to prove that the Nutrimix feeds caused the death of their animals. For these reasons,
the expert testimonies lack probative weight. The respondents' case of breach of implied warranty
was fundamentally based upon the circumstantial evidence that the chickens and hogs sickened,
stunted, and died after eating Nutrimix feeds; but this was not enough to raise a reasonable
supposition that the unwholesome feeds were the proximate cause of the death with that degree
of certainty and probability required. 40 The rule is well-settled that if there be no evidence, or if
evidence be so slight as not reasonably to warrant inference of the fact in issue or furnish more
than materials for a mere conjecture, the court will not hesitate to strike down the evidence and
rule in favor of the other party.41 This rule is both fair and sound. Any other interpretation of the
law would unloose the courts to meander aimlessly in the arena of speculation. 42

It must be stressed, however, that the remedy against violations of warranty against hidden
defects is either to withdraw from the contract (accion redhibitoria) or to demand a proportionate
reduction of the price (accion quanti minoris), with damages in either case. 43 In any case, the
respondents have already admitted, both in their testimonies and pleadings submitted, that they
are indeed indebted to the petitioner for the unpaid animal feeds delivered to them. For this
reason alone, they should be held liable for their unsettled obligations to the petitioner.

WHEREFORE, in light of all the foregoing, the petition is GRANTED. The assailed Decision of the
Court of Appeals, dated February 12, 2002, is REVERSED and SET ASIDE. The Decision of the
Regional Trial Court of Malolos, Bulacan, Branch 9, dated January 12, 1998, is REINSTATED. No
costs.

SO ORDERED.

26. SUPERCARS MANAGEMENT & DEVELOPMENT CORPORATION, represented by its President

Benigno Chan, petitioner,
vs.
THE LATE FILEMON FLORES, substituted by his surviving spouse, NORA C. FLORES, respondent.
1 

DECISION

SANDOVAL-GUTIERREZ, J.:
Before us is a petition for review on certiorari assailing the Decision dated November 29, 2000 and
2 

Resolution dated April 26, 2001, both issued by the Court of Appeals in CA-G.R. CV No. 40419,
3 

entitled "Filemon Flores vs. Supercars Management & Development Corporation, Mamerto Catley, Pablito
Marquez, and Rizal Commercial Banking Corporation."

In the second week of December 1988, Filemon Flores, respondent, purchased from Supercars Management
and Development Corporation, petitioner, an Isuzu Carter Crew Cab for P212,000.00 payable monthly with a
down payment equivalent to 30% of the price or P63,600.00. The balance was to be financed by the Rizal
Commercial Banking Corporation (RCBC). The sale was coursed through Pablito Marquez, petitioner's
salesman.

Upon delivery of the vehicle on December 27, 1988, respondent paid petitioner the 30% down payment, plus
premium for the vehicle's comprehensive insurance policy amounting to P7,374.80. The RCBC financed the
balance of the purchase price. Its payment was secured by a chattel mortgage of the same vehicle.

A day after the vehicle was delivered, respondent used it for his family's trip to Bauang, La Union. While
traversing the national highway in Tarlac, Tarlac, the fan belt of the vehicle snapped. Then its brakes hardened
after several stops and did not function properly; the heater plug did not also function; the engine could not start;
and the fuel consumption increased. 4

Upon their return to Manila in the first week of January 1989, respondent complained to petitioner about the
defects of the vehicle. Marquez then had the vehicle repaired and returned it to respondent that same day,
assuring the latter that it was already in good condition.

But after driving the vehicle for a few days, the same defects resurfaced, prompting respondent to send
petitioner a letter dated January 30, 1989 rescinding the contract of sale and returning the vehicle due to breach
of warranty against hidden defects. A copy of the letter was furnished RCBC.

In response to respondent's letter, petitioner directed Marquez to have the vehicle fixed. Thereafter, he returned
the vehicle to respondent with the assurance that it has no more defects. However, when respondent drove it for
a few days, he found that the vehicle was still defective.

Hence, on February 7, 1989, respondent sent petitioner another letter restating that he is rescinding the contract
of sale, a copy of which was furnished RCBC. On February 9, 1989, he returned the vehicle to petitioner. Later,
Marquez and Mamerto Catley, petitioner's salesman, tried to convince respondent to accept the vehicle as it had
been completely repaired. But respondent refused.

On March 1, 1989, respondent sent petitioner a letter demanding the refund of his down payment, plus the
premium he paid for the vehicle's insurance.

Petitioner failed to comply with petitioner's demand. Consequently, respondent stopped paying the monthly
amortization for the vehicle.

On March 21, 1989, RCBC sent respondent a letter demanding that he settle his past overdue accounts for
February 15 and March 15, 1989. In reply, respondent, through a letter dated March 31, 1989, informed RCBC
that he had rescinded the contract of sale and had returned the vehicle to petitioner. This prompted RCBC to file
with the Office of the Clerk of Court and Ex-Officio Sheriff, Regional Trial Court, Quezon City, a Petition for
Extra-judicial Foreclosure of Chattel Mortgage.

On June 2, 1989, a Notice of Sheriff's Sale of the vehicle was set.

On June 1, 1989, respondent filed with the same Office a Manifestation/Motion asking for the postponement of
the scheduled auction sale until such time that petitioner and/or RCBC shall have reimbursed him of the amount
he paid for the vehicle; and that should the auction sale be conducted, the proceeds thereof equivalent to the
amount he spent be withheld and turned over to him.

The auction sale proceeded as scheduled. RCBC, being the highest bidder, purchased the vehicle.
Subsequently, RCBC sold the vehicle to a third party.
On November 3, 1989, respondent filed with the Regional Trial Court (RTC), Branch 150, Makati City a
complaint for rescission of contract with damages against petitioner, Marquez, Catley and RCBC, docketed as
5 

Civil Case No. 89-5566.

In their separate answers, petitioner, Marquez and Catley denied having committed any breach of warranty
against hidden defects, claiming that the vehicle had only "minor and inconsequential defects" which "were
promptly and satisfactorily repaired by petitioner Supercars pursuant to its warranty as the seller." For its part,
6 

RCBC claimed that it has no liability whatsoever against respondent because it merely enforced its right under
the chattel mortgage law. All the defendants prayed for the dismissal of the complaint.

On April 13, 1992, the RTC rendered its Decision in favor of respondent and against the defendants, thus:

"WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendants,
ordering the latter to jointly and severally pay the plaintiff as follows:

1. the amount of P70,974.80 representing the 30% down payment and premium paid for one
year comprehensive motor vehicle insurance plus interests at the rate of 14% per annum from
date of filing of this complaint on October 30, 1989 until fully paid;

2. the sum of P50,000.00 as moral damages;

3. the sum of P25,000.00 as exemplary damages;

4. the sum of P20,000.00 as attorney's fees; and

5. the costs of suit.

SO ORDERED." 7

Upon motion for reconsideration by RCBC, the RTC, in an Order dated December 21, 1992, modified its
Decision by absolving RCBC from any liability and dismissing the complaint against it, thus:

xxx

"Going into the merits of defendant bank's contention that it has valid and meritorious defense which
should ultimately exculpate it from any liability, jointly and severally, with the other defendants, the Court,
after a careful review of the evidence on hand, reconsiders its Decision insofar as the said bank is
concerned. The valid exercise by the plaintiff of its right to rescind the contract of sale for the purchase of
the motor vehicle in question does not apply to defendant bank. Said contract is effective only as against
defendant Supercars Management and Development Corporation, which must principally suffer the
consequence of its breach of the contract.

This Court likewise takes notice of the fact that since the motor vehicle was voluntarily surrendered by
the plaintiff and that defendant bank merely exercised its right under the chattel mortgage law, no fault
can be attributed to the latter. The fact that the plaintiff sent a letter to the Office of the City Sheriff of
Quezon City, copy furnished the bank, seeking the postponement of the auction sale of the subject
motor vehicle, will not and cannot be considered as a valid ground to hold said bank liable for only
exercising its rights under the law. At most, the liability must really be imputed only against defendants
Supercars Management and Development Corporation, Mamerto Catley and Pablito Marquez.

"WHEREFORE, considering the foregoing premises, the Decision of this Court dated April 13, 1992,
insofar as it holds defendant Rizal Commercial Banking Corporation jointly and severally liable to the
plaintiff, is hereby MODIFIED and the case against said bank DISMISSED. Similarly, the compulsory
counterclaim against the plaintiff is likewise dismissed.

The dispositive portion of the same Decision insofar as the rest of the defendants are concerned is
hereby maintained and affirmed in toto.

SO ORDERED." 8
From the above Decision and Order, petitioner, Marquez and Catley interposed an appeal to the Court of
Appeals, docketed as CA-G.R. CV No. 40419. In a Decision dated November 29, 2000, the Appellate Court
affirmed the RTC Decision with modification in the sense that the complaint against Marquez and Catley was
dismissed, thus:

xxx

"It is with respect to appellants Catley and Marquez' liability that we are minded to modify the (appealed)
Decision. The two being mere employees (of appellant Supercars Management and Development
Corporation), they cannot be held liable to refund the amount claimed by Flores. Nor can they be made
liable for damages and attorney's fees, there being no clear evidence that they had a hand in giving rise
thereto.

WHEREFORE, the appealed Amended Decision is AFFIRMED, with the MODIFICATION that the
complaint insofar as defendants-appellants Mamerto Catley and Pablito Marquez is hereby DISMISSED.

SO ORDERED. 9

Petitioner filed a motion for reconsideration but denied in a Resolution dated April 26, 2001. 10

Hence, the instant petition.

Petitioner contends that respondent has "no right to rescind the contract of sale" because "the motor vehicle in
11 

question, as found by the RTC and the Court of Appeals, is already in the hands of a third party, one Mr. Lim –
an innocent purchaser for value." Thus, both courts erred in ordering petitioner to refund respondent of the
12 

amounts he paid for the vehicle.

The issue here is whether respondent has the right to rescind the contract of sale and to claim damages as a
result thereof.

We rule for respondent.

Respondent's complaint filed with the RTC seeks to recover from petitioner the money he paid for the vehicle
due to the latter's breach of his warranty against hidden defects under Articles 1547, 1561, and 1566 of the
13  14  15 

Civil Code. The vehicle, after it was delivered to respondent, malfunctioned despite repeated repairs by
petitioner. Obviously, the vehicle has hidden defects. A hidden defect is one which is unknown or could not have
been known to the vendee. 16

The findings of both the RTC and Court of Appeals that petitioner committed a breach of warranty against
hidden defects are fully supported by the records. The Appellate Court correctly ruled:

"The evidence clearly shows that Flores [now respondent] was justified in opting to rescind the sale
given the hidden defects of the vehicle, allowance for the repair of which he patiently extended, but
which repair did not turn out to be satisfactory.

xxx

For when by letters of January 30, 1989 and February 7, 1989, which were followed up by another dated
March 1, 1989, Flores declared his rescission of the sale, which rescission was not impugned or
opposed by appellants as in fact they accepted the return of the vehicle on February 9, 1989, such extra-
judicial rescission x x x produced legal effect (UP vs. de los Angeles, 35 SCRA 102 [1970]; Tolentino
Commentaries and Jurisprudence on the Civil Code, citing Magdalena Estate v. Myrick, 71 Phil. 344
[1940-1941]).

x x x" 17

It is well within respondent's right to recover damages from petitioner who committed a breach of warranty
against hidden defects. Article 1599 of the Civil Code partly provides:

"Article 1599. Where there is a breach of warranty by the seller, the buyer may, at his election:
 xxx

(4) Rescind the contract of sale and refuse to receive the goods, or if the goods have already been
received, return them or offer to return them to the seller and recover the price or any part thereof which
has been paid.

When the buyer has claimed and been granted a remedy in anyone of these ways, no other remedy can
thereafter be granted, without prejudice to the provisions of the second paragraph of Article 1191.

x x x." (Underscoring supplied)

Petitioner's contention that under Article 1191 of the Civil Code, rescission can no longer be availed of as the
vehicle was already in the hands of an innocent purchaser for value lacks merit. Rescission is proper if one of
the parties to a contract commits a substantial breach of its provisions. It creates an obligation to return the
object of the contract. It can be carried out only when the one who demands rescission can return whatever he
may be obliged to restore. Rescission abrogates the contract from its inception and requires a mutual restitution
of the benefits received. Petitioner is thus mandated by law to give back to respondent the purchase price upon
18 

his return of the vehicle. Records show that at the time respondent opted to rescind the contract, the vehicle was
still in his possession. He returned it to petitioner who, without objection, accepted it. Accordingly, the 30% down
payment equivalent to P63,600.00, plus the premium for the comprehensive insurance amounting to P7,374.80
paid by respondent should be returned by petitioner.

As further stated by the Court of Appeals:

"Appellant's invocation of Article 1191 of the Civil Code in support of his argument that as the vehicle
had been sold to a third party, rescission can no longer ensue is misplaced.

For, Flores is asking for the refund of the downpayment and payment for insurance premiums. This
brings us to appellant's final argument.

Appellant's professed excuse from their inability to give refund – that refund would necessitate the return
of the subject motor vehicle which is impossible because it is now in the hands of an innocent purchaser
for value – miserably fails.

x x x appellant Supercars was paid the balance of the purchase price by RCBC and, therefore, in
addition to the downpayment given by Flores, it had been fully paid for the vehicle.

Ergo, Supercars had nothing more to do with the vehicle." 19

However, the lower court's award of P50,000.00 as moral damages and P25,000.00 as exemplary damages to
respondent is erroneous. While no proof of pecuniary loss is necessary in order that moral damages may be
awarded, the amount of indemnity being left to the discretion of the court, it is nevertheless essential that the
claimant satisfactorily prove the existence of the factual basis of the damage and its causal relation to
defendant's acts. Moral damages are in the category of an award designed to compensate the claimant
for actual injury suffered and not to impose a penalty to the wrongdoer. This has not been proved by
respondent.

In contracts and quasi-contracts, the court may award exemplary damages if the defendant acted in a wanton,
fraudulent, reckless, oppressive, or malevolent manner. Likewise, respondent failed to establish that petitioner
20 

acted in such manner.

As to the award of attorney's fees, the same must be deleted since the award of moral and exemplary damages
are eliminated. Moreover, the trial court did not give any justification for granting it in its decision. It is now
21 

settled that awards of attorney's fees must be based on findings of fact and law, stated in the decision of the trial
court.
22

WHEREFORE, the petition is DENIED. The assailed Decision dated September 20, 1999 and Resolution dated
February 1, 2000 of the Court of Appeals in CA-G.R. CV No. 52177 are AFFIRMED with MODIFICATION. The
award of moral and exemplary damages and attorney's fees are DELETED. Costs against petitioner.

SO ORDERED.
27. PHILIPPINE STEEL COATING CORP., Petitioner,
vs.
EDUARD QUINONES, Respondent.

DECISION

SERENO, CJ:

Before us is a Petition for Review on Certiorari under Rule 45 of the Rules of Court assailing the Court of
Appeals (CA) Decision   and Resolution   The CA affirmed in toto the Regional Trial Court (R TC) Decision in
1 2

Civil Case No. A-1708 for damages.  3

THE FACTS

This case arose from a Complaint for damages filed by respondent Quinones (owner of Amianan Motors)
against petitioner PhilSteel. The Complaint alleged that in early 1994, Richard Lopez, a sales engineer of
PhilSteel, offered Quinones their new product: primer-coated, long-span, rolled galvanized iron (G.I.) sheets.
The latter showed interest, but asked Lopez if the primer-coated sheets were compatible with the Guilder acrylic
paint process used by Amianan Motors in the finishing of its assembled buses. Uncertain, Lopez referred the
query to his immediate superior, Ferdinand Angbengco, PhilSteel's sales manager.

Angbengco assured Quinones that the quality of their new product was superior to that of the non-primer coated
G.l. sheets being used by the latter in his business. Quinones expressed reservations, as the new product might
not be compatible with the paint process used by Amianan Motors.

Angbengco fmiher guaranteed that a laboratory test had in fact been conducted by PhilSteel, and that the results
proved that the two products were compatible; hence, Quinones was induced to purchase the product and use it
in the manufacture of bus units.

However, sometime in 1995, Quinones received several complaints from customers who had bought bus units,
claiming that the paint or finish used on the purchased vehicles was breaking and peeling off. Quinones then
sent a letter-complaint to PhilSteel invoking the warranties given by the latter. According to respondent, the
damage to the vehicles was attributable to the hidden defects of the primer-coated sheets and/or their
incompatibility with the Guilder acrylic paint process used by Amianan Motors, contrary to the prior evaluations
and assurances of PhilSteel. Because of the barrage of complaints, Quinones was forced to repair the damaged
buses.

PhilSteel counters that Quinones himself offered to purchase the subject product directly from the former without
being induced by any of PhilSteel's representatives. According to its own investigation, PhilSteel discovered that
the breaking and peeling off of the paint was caused by the erroneous painting application done by Quinones.

The RTC rendered a Decision   in favor of Quinones and ordered PhilSteel to pay damages. The trial court found
4

that Lopez's testimony was damaging to PhilSteel's position that the latter had not induced Quinones or given
him assurance that his painting system was compatible with PhilSteel's primer-coated G.I. sheets. The trial court
concluded that the paint blistering and peeling off were due to the incompatibility of the painting process with the
primer-coated G .I. sheets. The RTC also found that the assurance made by Angbengco constituted an express
warranty under Article 1546 of the Civil Code. Quinones incurred damages from the repair of the buses and
suffered business reverses. In view thereof, PhilSteel was held liable for damages.

THE RULING OF THE CA

The CA affirmed the ruling of the RTC in toto.

The appellate court ruled that PhilSteel in fact made an express warranty that the primer-coated G.I. sheets
were compatible with the acrylic paint process used by Quinones on his bus units. The assurances made by
Angbengco were confirmed by PhilSteel's own employee, Lopez.
The CA further held that the cause of the paint damage to the bus units of Quinones was the incompatibility of
the primer-coated sheet with the acrylic paint process used by Amianan Motors. The incompatibility was in fact
acknowledged through a letter dated 29 June 1996 from Angbengco himself.  5

The CA also agreed with the R TC that PhilSteel was liable for both actual and moral damages. For actual
damages, the appellate court reasoned that PhilSteel committed a breach of duty against Quinones when the
company made assurances and false representations that its primer-coated sheets were compatible with the
acrylic paint process of Quinones. The CA awarded moral damages, ruling that PhilSteel's almost two years of
undue delay in addressing the repeated complaints about paint blisters constituted bad faith.

In addition, the CA concurred with the RTC that attorney's fees were in order since Quinones was forced to file a
case to recover damages.

Accordingly, the CA dismissed the appeal of PhilSteel.

Petitioner sought a reversal of the Decision in its Motion for Reconsideration. The motion was, however, denied
by the CA in its Resolution dated 19 November 2010.

Hence, this Petition.

ISSUES

Petitioner raises the following issues:

1. Whether vague oral statements made by seller on the characteristics of a generic good can be
considered warranties that may be invoked to warrant payment of damages;

2. Whether general warranties on the suitability of products sold prescribe in six (6) months under Article
1571 of the Civil Code;

3. Assuming that statements were made regarding the characteristics of the product, whether
respondent as buyer is equally negligent; and

4. Whether non-payment of price is justified on allegations of breach of warranty. 6

OUR RULING

We DENY the Petition.

This Court agrees with the CA that this is a case of express warranty under Article 1546 of the Civil Code, which
provides:

Any affirmation of fact or any promise by the seller relating to the thing is an express warranty if the natural
tendency of such affirmation or promise is to induce the buyer to purchase the same, and if the buyer purchases
the thing relying thereon. No affirmation of the value of the thing, nor any statement purporting to be a statement
of the seller's opinion only, shall be construed as a warranty, unless the seller made such affirmation or
statement as an expert and it was relied upon by the buyer.

As held in Carrascoso, Jr. v. CA,   the following requisites must be established in order to prove that there is an
7

express warranty in a contract of sale: (1) the express warranty must be an affirmation of fact or any promise by
the seller relating to the subject matter of the sale; (2) the natural effect of the affirmation or promise is to induce
the buyer to purchase the thing; and (3) the buyer purchases the thing relying on that affirmation or promise.

An express warranty can be oral

when it is a positive affirmation of a
fact that the buyer relied on.

Petitioner argues that the purported warranties by mere "vague oral statements" cannot be invoked to warrant
the payment of damages.
A warranty is a statement or representation made by the seller of goods - contemporaneously and as part of the
contract of sale - that has reference to the character, quality or title of the goods; and is issued to promise or
undertake to insure that ce1iain facts are or shall be as the seller represents them. 8 A warranty is not
necessarily written. It may be oral as long as it is not given as a mere opinion or judgment. Rather, it is a positive
affirmation of a fact that buyers rely upon, and that influences or induces   them to purchase the product.
9

Contrary to the assertions of petitioner, the finding of the CA was that the former, through Angbengco, did not
simply make vague oral statements on purported warranties.   Petitioner expressly represented to respondent
10

that the primer-coated G .I. sheets were compatible with the acrylic paint process used by the latter on his bus
units. This representation was made in the face of respondent's express concerns regarding incompatibility.
Petitioner also claimed that the use of their product by Quinones would cut costs. Angbengco was so certain of
the compatibility that he suggested to respondent to assemble a bus using the primer-coated sheet and have it
painted with the acrylic paint used in Amianan Motors.

At the outset, Quinones had reservations about the compatibility of his acrylic paint primer with the primer-
coated G.I. sheets of PhilSteel. But he later surrendered his doubts about the product after 4 to 5 meetings with
Angbengco, together with the latter's subordinate Lopez. Only after several meetings was Quinones persuaded
to buy their G.I. sheets. On 15 April 1994, he placed an initial order for petitioner's product and, following
Angbengco's instructions, had a bus painted with acrylic paint. The results of the painting test turned out to be
successful. Satisfied with the initial success of that test, respondent made subsequent orders of the primer-
coated product and used it in Amianan Motors' mass production of bus bodies.  11

Thus, it was not accurate for petitioner to state that they had made no warranties. It insisted that at best, they
only gave "'assurances" of possible savings Quinones might have if he relied on PhilSteel's primer-coated G.I.
sheets and eliminated the need to apply an additional primer.  12

All in all, these "vague oral statements" were express affirmations not only of the costs that could be saved if the
buyer used PhilSteel's G.I. sheets, but also of the compatibility of those sheets with the acrylic painting process
customarily used in Amianan Motors. Angbengco did not aimlessly utter those "vague oral statements" for
nothing, but with a clear goal of persuading Quinones to buy PhilSteel's product.

Taken together, the oral statements of Angbengco created an express warranty. They were positive affirmations
of fact that the buyer relied on, and that induced him to buy petitioner's primer-coated G .I. sheets.

Under Article 1546 of the Civil Code, "'[ n ]o affirmation of the value of the thing, nor any statement purporting to
be a statement of the seller's opinion only, shall be construed as a warranty, unless the seller made such
affirmation or statement as an expert and it was relied upon by the buyer."

Despite its claims to the contrary, petitioner was an expert in the eyes of the buyer Quinones. The latter had
asked if the primer-coated G.I. sheets were compatible with Amianan Motors' acrylic painting process.
Petitioner's former employee, Lopez, testified that he had to refer Quinones to the former's immediate
supervisor, Angbengco, to answer that question. As the sales manager of PhilSteel, Angbengco made repeated
assurances and affirmations and even invoked laboratory tests that showed compatibility.   In the eyes of the
13

buyer Quinones, PhilSteel - through its representative, Angbengco - was an expert whose word could be relied
upon.

This Court cannot subscribe to petitioner's stand that what they told Quinones was mere dealer's talk or an
exaggeration in trade that would exempt them from liability for breach of warranty. Petitioner cites Gonzalo
Puyat & Sons v. Arco Amusement Company,   in which this Court ruled that the contract is the law between the
14

parties and should include all the things they agreed to. Therefore, what does not appear on the face of the
contract should be regarded merely as "dealer's" or "trader's talk," which cannot Bind either party. 15

Contrary however to petitioner's position, the so-called dealer's or trader's talk cannot be treated as mere
exaggeration in trade as defined in Article 1340 of the Civil Code.   Quinones did not talk to an ordinary sales
16

clerk such as can be found in a department store or even a sari-sari store. If Lopez, a sales agent, had made the
assertions of Angbengco without true knowledge about the compatibility or the authority to warrant it, then his
would be considered dealer's talk. But sensing that a person of greater competence and knowledge of the
product had to answer Quinones' concerns, Lopez wisely deferred to his boss, Angbengco.

Angbengco undisputedly assured Quinones that laboratory tests had been undertaken, and that those tests
showed that the acrylic paint used by Quinones was compatible with the primer-coated G.I. sheets of Philsteel.
Thus, Angbengco was no longer giving a mere seller's opinion or making an exaggeration in trade. Rather, he
was making it appear to Quinones that Phil Steel had already subjected the latter's primed G.I. sheets to product
testing. PhilSteel, through its representative, was in effect inducing in the mind of the buyer the belief that the
former was an expert on the primed G.I. sheets in question; and that the statements made by petitioner's
representatives, particularly Angbengco (its sales manager),   could be relied on. Thus, petitioner did induce the
17

buyer to purchase the former's G.I. sheets.

The prescription period of the

express warranty applies to the
instant case.

Neither the CA nor the RTC ruled on the prescription period applicable to this case. There being an express
warranty, this Court holds that the prescription period applicable to the instant case is that prescribed for breach
of an express warranty. The applicable prescription period is therefore that which is specified in the contract; in
its absence, that period shall be based on the general rule on the rescission of contracts: four years (see Article
1389, Civil Code).   In this case, no prescription period specified in the contract between the parties has been
18

put forward. Quinones filed the instant case on 6 September 1996  or several months after the last delivery of
19

the thing sold.   His filing of the suit was well within the prescriptive period of four years; hence, his action has
20

not prescribed.

The buyer cannot be held negligent

in the instant case.

Negligence is the absence of reasonable care and caution that an ordinarily prudent person would have used in
a given situation.   Under Article 11 73 of the Civil Code,   where it is not stipulated in the law or the contract, the
21 22

diligence required to comply with one's obligations is commonly referred to as paterfamilias; or, more
specifically, as bonos paterfamilias or "a good father of a family." A good father of a family means a person of
ordinary or average diligence. To determine the prudence and diligence that must be required of all persons, we
must use as basis the abstract average standard corresponding to a normal orderly person. Anyone who uses
diligence below this standard is guilty of negligence.  23

Respondent applied acrylic primers, which are stronger than epoxy primers. The G.I. sheets of PhilSteel were
primer-coated with epoxy primer. By applying the acrylic over the epoxy primer used on the G.I. sheets, the latter
primer was either dissolved or stripped off the surface of the iron sheets.  24

Petitioner alleges that respondent showed negligence by disregarding what it calls a "chemical reaction so
elementary that it could not have escaped respondent Quinones who has been in the business of manufacturing,
assembling, and painting motor vehicles for decades."  For this supposed negligence, petitioner insists that
25

respondent cannot hide behind an allegation of breach of warranty as an excuse for not paying the balance of
the unpaid purchase price.

It bears reiteration that Quinones had already raised the compatibility issue at the outset. He relied on the
manpower and expertise of PhilSteel, but at the same time reasonably asked for more details regarding the
product. It was not an impulsive or rush decision to buy. In fact, it took 4 to 5 meetings to convince him to buy
the primed G .I. sheets. And even after making an initial order, he did not make subsequent orders until after a
painting test, done upon the instructions of Angbengco proved successful. The test was conducted using their
acrylic paint over PhilSteel's primer-coated G.I. sheets. Only then did Quinones make subsequent orders of the
primer-coated product, which was then used in the mass production of bus bodies by Amianan Motors. " 26

This Court holds that Quinones was not negligent and should therefore not be blamed for his losses.

The nonpayment of the unpaid

purchase price was justified, since a
breach of warranty was proven.

Petitioner takes issue with the nonpayment by Quinones to PhilSteel of a balance of ₱448,041.50, an amount
that he has duly admitted.   It is the nonpayment of the unpaid balance of the purchase price, of the primer-
27

coated G.I. sheets that is at the center of the present controversy.

Quinones, through counsel, sought damages against petitioner for breach of implied warranty arising from
hidden defects under Article 156 l of the Civil Code, which provides:
The vendor shall be responsible for warranty against the hidden defects which the thing sold may have, should
they render it unfit for the use for which it is intended, or should they diminish its fitness for such use to such an
extent that, had the vendee been aware thereof he would not have acquired it or would have given a lower price
for it; but said vendor shall not be answerable for patent defects or those which may be visible, or for those
which are not visible if the vendee is an expert who, by reason of his trade or profession, should have known
them.

In seeking a remedy from the trial court, Quinones opted not to pay the balance of the purchase price, in line
with a proportionate reduction of the price under Article 1567 Civil Code, which states:

In the cases of articles 1561, 1562, 1564, 1565 and 1566, the vendee may elect between withdrawing from the
contract and demanding a proportionate reduction of the price, with damages in either case.

Petitioner reasons that since the action of respondent is based on an implied warranty, the action has already
prescribed under Article 1571   of the Civil Code. According to petitioner, Quinones can no longer put up the
28

defense of hidden defects in the product sold as a basis for evading payment of the balance.  29

We agree with petitioner that the nonpayment of the balance cannot be premised on a mere allegation of
nonexisting warranties. This Court has consistently ruled that whenever a breach of warranty is not proven,
buyers who refuse to pay the purchase price - or even the unpaid balance of the goods they ordered - must be
held liable therefor.
30

However, we uphold the finding of both the CA and the RTC that petitioner's breach of warranty was proven by
respondent.

Since what was proven was express warranty, the remedy for implied warranties under Article 1567 of the Civil
Code does not apply to the instant case. Instead, following the ruling of this Court in Harrison Motors

Corporation v. Navarro,  Article 1599 of the Civil Code applies when an express warranty is breached.  The
31
1awp++i1

provision reads:

Where there is a breach of warranty by the seller, the buyer may, at his election:

(l) Accept or keep the goods and set up against the seller, the breach of warranty by way of recoupment
in diminution or extinction of the price;

(2) Accept or keep the goods and maintain an action against the seller for damages for the breach of
warranty;

(3) Refuse to accept the goods, and maintain an action against the seller for damages for the breach of
warranty;

(4) Rescind the contract of sale and refuse to receive the goods or if the goods have already been
received, return them or offer to return them to the seller and recover the price or any part thereof which
has been paid.

When the buyer has claimed and been granted a remedy in anyone of these ways, no other
remedy can thereafter be granted, without prejudice to the provisions of the second paragraph of
article 1191.

Where the goods have been delivered to the buyer, he cannot rescind the sale if he knew of the
breach of warranty when he accepted the goods without protest, or if he fails to notify the seller
within a reasonable time of the election to rescind, or if he fails to return or to offer to return the
goods to the seller in substantially as good condition as they were in at the time the ownership
was transferred to the buyer. But if deterioration or injury of the goods is due to the breach or
warranty, such deterioration or injury shall not prevent the buyer from returning or offering to
return the goods to the seller and rescinding the sale.

Where the buyer is entitled to rescind the sale and elects to do so, he shall cease to be liable for
the price upon returning or offering to return the goods. If the price or any part thereof has
already been paid, the seller shall be liable to repay so much thereof as has been paid,
 concurrently with the return of the goods, or immediately after an offer to return the goods in
exchange for repayment of the price.

Where the buyer is entitled to rescind the sale and elects to do so, if the seller refuses to accept
an offer of the buyer to return the goods, the buyer shall thereafter be deemed to hold the goods
as bailee for the seller, but subject to a lien to secure the payment of any portion of the price
which has been paid, and with the remedies for the enforcement of such lien allowed to an
unpaid seller by article 1526.

(5) In the case of breach of warranty of quality, such loss, in the absence of special circumstances
showing proximate damage of a greater amount, is the difference between the value of the goods at the
time of delivery to the buyer and the value they would have had if they had answered to the warranty.

Quinones has opted for a reduction in price or nonpayment of the unpaid balance of the purchase price.
Applying Article 1599 (1), this Court grants this remedy.

The above provisions define the remedy of recoupment in the diminution or extinction of price in case of a
seller's breach of warranty. According to the provision, recoupment refers to the reduction or extinction of the
price of the same item, unit, transaction or contract upon which a plaintiffs claim is founded. 
32

In the case at bar, Quinones refused to pay the unpaid balance of the purchase price of the primer-coated G.I.
sheets PhilSteel had delivered to him.  He took this action after complaints piled up from his customers
1âwphi1

regarding the blistering and peeling-off of the paints applied to the bus bodies they had purchased from his
Amianan Motors. The unpaid balance of the purchase price covers the same G .I. sheets. Further, both the CA
and the RTC concurred in their finding that the seller's breach of express warranty had been established.
Therefore, this Court finds that respondent has legitimately defended his claim for reduction in price and is no
longer liable for the unpaid balance of the purchase price of ₱448,04l.50.

The award of attorney's fees is deleted.

Contrary to the finding of the CA and the RTC, this Court finds that attorney's fees are not in order. Neither of
these courts cited any specific factual basis to justify the award thereof. Records merely show that

Quinones alleged that he had agreed to pay 25% as attorney's fees to his counsel.   Hence, if the award is
33

based on a mere allegation or testimony that a party has agreed to pay a certain percentage for attorney's fees,
the award is not in order. 
34

WHEREFORE, in view of the foregoing, the instant Petition is DENIED. The Court of Appeals Decision dated 17
March 2010 and Resolution dated 19 November 20l0 denying petitioner's Motion for Reconsideration are
hereby AFFIRMED, except for the award of attorney's fees, which is hereby DELETED.

SO ORDERED.

28. ROBERTO R. DAVID, Petitioner,

vs.
EDUARDO C. DAVID, Respondent.

DECISION

BERSAMIN, J.:

In a sale with right to repurchase, title and ownership of the property sold are immediately vested in the vendee,
subject to the resolutory condition of repurchase by the vendor within the stipulated period.
 The Case

Under review at the defendant's instance is the decision promulgated on October 10, 2003,  whereby the Court
1

of Appeals (CA) affirmed the judgment rendered on December 5, 2001 by the Regional Trial Court (RTC),
Branch 61, in Baguio City ordering him to return to the plaintiff the motor vehicle and trailer subject of the
complaint, or to pay their value of ₱500,000.00 should the return not be effected, and to pay the plaintiff
₱20,000.00 as litigation expenses, ₱50,000.00 as attorney's fees, and the costs of suit. 2

Antecedents

Respondent Eduardo C. David (Eduardo) initiated this replevin suit against Roberto R. David (Roberto), his first
cousin and former business partner, to recover the possession of one unit of International CO 9670 Truck
Tractor and Mi-Bed Trailer.

It appears that on July 7, 1995, Eduardo and his brother Edwin C. David (Edwin), acting on their own and in
behalf of their co-heirs, sold their inherited properties to Roberto, specifically: (a) a parcel of land with an area of
1,231 square meters, together with all the improvements existing thereon, located in Baguio City and covered by
Transfer Certificate of Title No. T-22983 of the Registry of Deeds of Baguio City (Baguio City lot); and (b) two
units International CO 9670 Truck Tractor with two Mi-Bed Trailers.  A deed of sale with assumption of mortgage
3

(deed of sale)  embodied the terms of their agreement, stipulating that the consideration for the sale was
4

₱6,000,000.00, of which ₱2,000,000 was to be paid to Eduardo and Edwin, and the remaining ₱4,000,000.00 to
be paid to Development Bank of the Philippines (DBP) in Baguio City to settle the outstanding obligation secured
by a mortgage on such properties. The parties further agreed to give Eduardo and Edwin the right to repurchase
the properties within a period of three years from the execution of the deed of sale based on the purchase price
agreed upon, plus 12% interest per annum.

In April 1997, Roberto and Edwin executed a memorandum of agreement (MOA)  with the Spouses Marquez
5

and Soledad Go (Spouses Go), by which they agreed to sell the Baguio City lot to the latter for a consideration
of ₱10,000,000.00. The MOA stipulated that "in order to save payment of high and multiple taxes considering
that the x x x subject matter of this sale is mortgaged with DBP, Baguio City, and sold [to Roberto], Edwin will
execute the necessary Deed of Absolute Sale in favor of [the Spouses Go], in lieu of [Roberto]."  The Spouses
6

Go then deposited the amount of ₱10,000,000.00 to Roberto’s account. 7

After the execution of the MOA, Roberto gave Eduardo ₱2,800,000.00 and returned to him one of the truck
tractors and trailers subject of the deed of sale. Eduardo demanded for the return of the other truck tractor and
trailer, but Roberto refused to heed the demand.

Thus, Eduardo initiated this replevin suit against Roberto, alleging that he was exercising the right to repurchase
under the deed of sale; and that he was entitled to the possession of the other motor vehicle and trailer.

In his answer, Roberto denied that Eduardo could repurchase the properties in question; and insisted that the
MOA had extinguished their deed of sale by novation.

Judgment of the RTC

On December 5, 2001,  the RTC rendered judgment in favor of Eduardo, holding that the stipulation giving
8

Eduardo the right to repurchase had made the deed of sale a conditional sale; that Eduardo had fulfilled the
conditions for the exercise of the right to repurchase; that the ownership of the properties in question had
reverted to Eduardo; that Roberto’s defense of novation had no merit; and that due to Roberto’s bad faith in
refusing to satisfy Eduardo’s claim, Eduardo should be awarded litigation expenses and attorney’s fees. The
dispositive portion of the judgment reads:

WHEREFORE, premises considered, judgment is hereby rendered for the plaintiff and against the defendant
ORDERING the latter to return to the former the motor vehicle and trailer subject matter of the case or to pay its
value in the amount of ₱500,000 in case manual delivery can not be effected; to pay plaintiff the amount of
₱20,000 as litigation expenses; the amount of ₱50,000 as attorney's fees and the costs of this suit.

SO ORDERED. 9

Roberto appealed to the CA.

 Ruling of the CA

On October 10, 2003,  the CA promulgated its decision affirming the RTC. It opined that although there was no
10

express exercise of the right to repurchase, the sum of all the relevant circumstances indicated that there was an
exercise of the right to repurchase pursuant to the deed of sale, that the findings of the RTC to the effect that the
conditions for the exercise of the right to repurchase had been adequately satisfied by Eduardo, and that no
novation as claimed by Roberto had intervened.

On February 16, 2004,  the CA denied Roberto’s motion for reconsideration.

11 12

Hence, this petition for review on certiorari.

Issues

Roberto seeks a reversal, claiming that the CA erred:

x x x IN HOLDING THAT THE RESPONDENT HAS EXERCISED THEIR RIGHT TO REPURCHASE;

x x x IN HOLDING THAT THERE WAS NO NOVATION OF THE DEED OF SALE WITH ASSUMPTION OF
MORTGAGE WHEN THE PARTIES EXECUTED A MEMORANDUM OF AGREEMENT FOR THE SALE OF
THE SUBJECT HOUSE AND LOT AND, THEREAFTER SOLD THE SAID PROPERTY TO THIRD PERSONS;

x x x IN RESOLVING THE INSTANT CASE IN FAVOR OF RESPO[N]DENT. 13

Ruling of the Court

The petition for review has no merit.

A sale with right to repurchase is governed by Article 1601 of the Civil Code, which provides that: "Conventional
redemption shall take place when the vendor reserves the right to repurchase the thing sold, with the obligation
to comply with the provisions of Article 1616 and other stipulations which may have been agreed upon."
Conformably with Article 1616,  the seller given the right to repurchase may exercise his right of redemption by
14

paying the buyer: (a) the price of the sale, (b) the expenses of the contract, (c) legitimate payments made by
reason of the sale, and (d) the necessary and useful expenses made on the thing sold.

The deed of sale entered into by Eduardo and Roberto contained the following stipulation on the right to
repurchase, to wit:

x x x the Vendors are given the right to repurchase the aforesaid described real property, together with the
improvements thereon, and the two (2) motor vehicles, together with their respective trailers from the Vendee
within a period of three (3) years from the execution of this document on the purchase price agreed upon by the
parties after considering the amount previously paid to the Vendors in the amount of TWO MILLION PESOS
(₱2,000,000.00), Philippine Currency, with an interest of twelve percent (12%) per annum and the amount paid
with the Development Bank of the Philippines with an interest of twelve percent (12%) per annum. 15

The CA and the RTC both found and held that Eduardo had complied with the conditions stipulated in the deed
of sale and prescribed by Article 1616 of the Civil Code. Pertinently, the CA stated:

It should be noted that the alleged repurchase was exercised within the stipulated period of three (3) years from
the time the Deed of Sale with Assumption of Mortgage was executed. The only question now, therefore, which
remains to be resolved is whether or not the conditions set forth in the Deed of Sale with Assumption of
Mortgage, i.e. the tender of the purchase price previously agreed upon, which is Php2.0 Million, plus 12%
interest per annum, and the amount paid by the defendant to DBP, had been satisfied.

From the testimony of the defendant himself, these preconditions for the exercise of plaintiff's right to repurchase
were adequately satisfied by the latter. Thus, as stated, from the Php10 Million purchase price which was
directly paid to the defendant, the latter deducted his expenses plus interests and the loan, and the remaining
amount he turned over to the plaintiff. This testimony is an unequivocal acknowledgement from defendant that
plaintiff and his co-heirs exercised their right to repurchase the property within the agreed period by satisfying all
the conditions stipulated in the Deed of Sale with Assumption of Mortgage. Moreover, defendant returned to
plaintiff the amount of Php2.8 Million from the total purchase price of Php10.0 Million. This only means that this
is the excess amount pertaining to plaintiff and co-heirs after the defendant deducted the repurchase price of
Php2.0 Million plus interests and his expenses. Add to that is the fact that defendant returned one of the trucks
and trailers subject of the Deed of Sale with Assumption of Mortgage to the plaintiff. This is, at best, a tacit
acknowledgement of the defendant that plaintiff and his co-heirs had in fact exercised their right to
repurchase.  x x x
16

Considering that the factual findings of the trial court, when affirmed by the CA, are binding on the Court,  the
17

Court affirms the judgment of the CA upholding Eduardo’s exercise of the right of repurchase. Roberto could no
longer assail the factual findings because his petition for review on certiorari was limited to the review and
determination of questions of law only. A question of law exists when the doubt centers on what the law is on a
certain set of undisputed facts, while a question of fact exists when the doubt centers on the truth or falsity of the
alleged facts.  Whether the conditions for the right to repurchase were complied with, or whether there was a
18

tender of payment, is a question of fact. With both the RTC and the CA finding and holding that Eduardo had
fulfilled the conditions for the exercise of the right to repurchase, therefore, we conclude that Eduardo had
effectively repurchased the properties subject of the deed of sale.

In Metropolitan Bank and Trust Company v. Tan,  the Court ruled that a redemption within the period allowed by
19

law is not a matter of intent but of payment or valid tender of the full redemption price within the period. Verily,
the tender of payment is the seller’s manifestation of his desire to repurchase the property with the offer of
immediate performance.  As we stated in Legaspi v. Court of Appeals,  a sincere tender of payment is sufficient
20 21

to show the exercise of the right to repurchase. Here, Eduardo paid the repurchase price to Roberto by
depositing the proceeds of the sale of the Baguio City lot in the latter’s account. Such payment was an effective
exercise of the right to repurchase.

On the other hand, the Court dismisses as devoid of merit Roberto’s insistence that the MOA had extinguished
the obligations established under the deed of sale by novation.

The issue of novation involves a question of fact, as it necessarily requires the factual determination of the
existence of the various requisites of novation, namely: (a) there must be a previous valid obligation; (b) the
parties concerned must agree to a new contract; (c) the old contract must be extinguished; and (d) there must be
a valid new contract.  With both the RTC and the CA concluding that the MOA was consistent with the deed of
22

sale, novation whereby the deed of sale was extinguished did not occur. In that regard, it is worth repeating that
the factual findings of the lower courts are binding on the Court.

In sales with the right to repurchase, the title and ownership of the property sold are immediately vested in the
vendee, subject to the resolutory condition of repurchase by the vendor within the stipulated
period.  Accordingly, the ownership of the affected properties reverted to Eduardo once he complied with the
23

condition for the repurchase, thereby entitling him to the possession of the other motor vehicle with trailer.

WHEREFORE, the Court AFFIRMS the decision promulgated on October 10, 2003; and ORDERS the petitioner
to pay the costs of suit.

SO ORDERED.

29. VICENCIO T. TORRES and SOCORRO S. TORRES, petitioners,

vs.
COURT OF APPEALS, CEFERINO ILLUSCUPIDES, ARACELI ILLUSCUPIDES and EMILIO
OLORES, respondents.

G.R. No. 93390 December 9, 1992

CEFERINO ILLUSCUPIDES and ARACELI CAMACHO-ILLUSCUPIDES, petitioners,

vs.
COURT OF APPEALS, VICENCIO T. TORRES and SOCORRO S. TORRES, respondents.

 
NOCON. J.:

Before Us is the petition for review on certiorari of petitioners Ceferino Illuscupides and Araceli Camacho-
Illuscupides in G.R. No. 93390 from the decision of the Court of Appeals dated January 18, 1990. The petition
for review on certiorari in G.R. No. 92248, Vivencio T. Torres, et al. vs. Court of Appeals, et al., was dismissed
by the Court on June 18, 1990   for failure to show that a reversible error was committed by the Court of
1

Appeals, and no motion for reconsideration was taken therefrom.

The facts are undisputed: the Illuscupideses are the owners of two (2) adjoining parcels of lands located in the
Tapuac District, Dagupan City. The parcels are covered by TCT Nos. 14874 and 15167, and have a combined
area of 465 square meters. The said properties were mortgaged to the Government Service Insurance System
(GSIS).

Sometime in 1965, the Illuscupideses contracted Emilio Olores for the construction of a nine (9) door apartment
on the parcels of land for the sum of P79,400.00. While construction was going on, another door was added,
thereby increasing the cost of the construction to P97,000.00. However, the Illuscupideses could only pay Olores
P54,390.51, thus compelling the latter to sue them for the balance before the Court of First Instance of
Pangasinan in Civil Case No. D-1955. On November 1969, judgment was rendered in favor of Olores for the
unpaid balance with interests and costs. The Illuscupideses then appealed the decision to the Court of Appeals.

Meanwhile, the Illuscupideses received a notice from the GSIS that it was going to foreclosure the mortgage for
their failure to pay the loan when the same became due. To stave off the foreclosure, the Illuscupideses sold the
properties to Vivencio Torres and Socorro Torres (petitioners in G.R. No. 92248), as evidenced by the Deed of
Sale dated October 19, 1973   for P130,000.00, of which the vendees paid the vendors P10,000.00, P6,000.00
2

and P3,000.00. The vendees likewise paid P51,498.97 to the GSIS. The aforesaid payments were in
accordance to the schedule found in the promissory note executed by the parties on October 19, 1973,   which
3

provided —

Downpayment (paid on October 1973) .......... P10,000.00

Payment to the GSIS

(assumption of mortgage) .......... 51,000.00

Cash payment upon issuance of

title in the name of vendee ......... 25,000.00

Balance payable as follows:

Dec. 30, 1974 .................... 11,000.00

Dec. 30, 1975 .................... 11,000.00
Dec. 30, 1976 .................... 11,000.00
Dec. 30, 1977 .................... 11,000.00

Provided that no installment

shall be paid until after the
final adjudication of claim of
Engr. E. Olores against vendor .................... 44,000.00

—————
P130,000.00

The parties also executed on the same day an agreement   whereby the Torreses would "RESELL,
4

RETRANSFER, and RECONVEY" to the Illuscupideses "that certain building, more particularly designated as a
ten-door concrete apartment."

Olores found out about the transaction and, fearing that he would not be able to collect from the Illuscupideses,
in case the Court of Appeals would uphold the decision of the trial court in his favor, filed a new case for
rescission of the sale against the Illuscupideses and the Torreses. The Illuscupideses filed a counter-claim
against Olores, and a cross-claim against the Torreses, alleging that the Deed of Sale was a pacto de retro sale.
In 1977, the Court of Appeals upheld the decision in the collection case for the unpaid balance of the
construction costs in favor of Olores. When said judgment became final and executory. Olores tried to execute
the same but was unable to do so.

Meanwhile, trial in the rescission case continued until judgment was rendered on October 7, 1986,   the5

dispositive portion of which provided:

WHEREFORE, premises considered, by preponderance of evidence, judgment is hereby

rendered:

1. Dismissing the complaint for rescission filed by plaintiff;

2. Ordering the dismissal of the cross-claim and counterclaims of defendants Illuscupides against
defendants Torres and plaintiff;

3. Ordering defendants Illuscupides and/or Torres to deliver the P41,000.00 withheld by them as
part of the purchase price of the lots and apartments for the satisfaction of the claim of plaintiff;

4. Ordering defendants Illuscupides to pay plaintiff and defendants Torres the sum of P5,000.00
as attorney's fees each; (and)

5. Ordering the defendants Illuscupides to pay the costs.

Olores and the Illuscupides then appealed to the Court of Appeals, where the case was docketed as CA-G.R.
CV No. 14779. On January 18, 1990, the appellate court rendered a decision,   the dispositive portion of which
6

reads as follows:

WHEREFORE, the decision dated October 7, 1986 is hereby AFFIRMED insofar as the
dismissal of the complaint of plaintiff-appellant Olores, the cross-claim and counter-claim of
defendants-appellants Illuscupides, and the counter-claim of defendant-appellees Torres;
REVERSED insofar as Nos. 3, 4 and 5 of the dispositve portion of the Decision are concerned;
and the defendants-appellees spouses Vivencio Torres and Socorro Torres are ordered to
reconvey in favor of the defendants-cross-claimants spouses Ceferino Illuscupides and Socorro
Illuscupides "that certain building more particularly designated as a ten-door apartment in the
Deed of Sale executed by and between the above-named parties on October 19, 1973." Without
pronouncement as to costs.

With regard to the appeal of the Illuscupideses, the Court of Appeals did not agree with their contention that the
sale of the properties to the Torreses was actually a pacto de retro sale, since the terms of the Deed of Sale did
not provide for the redemption of the property by the vendors. However, the appellate court discovered that the
land and the apartment were sold separately, and only the land appears to have been fully paid. And since the
Agreement (Annex "F") provided that the apartment should be resold to the Illuscupideses, the appellate court
held that the Torreses should reconvey the apartment to the Illuscupideses.

The Illuscupideses filed a motion asking that the Court of Appeals rule upon the apartment rentals collected by
Torreses, since it had ruled that the apartment be reconveyed to them. The appellate court denied the motion on
the ground that the matter of the rentals was not raised as assignment of error in their brief.

From said resolution, the Illuscupideses elevated the case to this Court on a petition for review for certiorari. The
Torreses filed a separate petition for review on certiorari, but the same was dismissed by this Court on June 18,
1990. The dismissal of the Torreses' petition is now final in view of their failure to file a timely motion for
reconsideration.

In their petition, the Illuscupideses allege that the Court of Appeals erred in (1) not construing the Deed of Sale
of October 19, 1973 to be a pacto de retro sale; and (2) in not ruling upon the rentals collected by the Torreses
from the apartment after it had ordered the reconveyance of the apartment to the Illuscupides.

The petition is totally devoid of merit.

The Court of Appeals was correct in construing the Deed of Sale as an absolute sale inasmuch as the terms
thereof are clear on the matter. The Illuscupideses argue, however, that the appellate court should have taken
into account the circumstances surrounding the execution of the deed, particularly the fact that an Agreement to
resell the apartment was executed on the very same day as the deed of sale.

The argument is unavailing. Even if this Court were to agree with the Illuscupideses that parole evidence may be
allowed to add to the terms of the deed of sale, this Court has held in the case of Villarica, et al. vs. Court of
Appeals, et al.,   that —
7

[t]he right of repurchase is not a right granted the vendor by the vendee in a subsequent
instrument, but is a right reserved by the vendor in the same instrument of sale as one of the
stipulations of the contract. Once the instrument of absolute sale is executed, the vendor can no
longer reserve the right to repurchase, and any right thereafter granted the vendor by the vendee
in a separate instrument cannot be a right to repurchase but some other right like an option to
buy in the instant case. 8

As with regard to the Illuscupideses' second contention, the Court of Appeals acted correctly in not passing upon the rentals collected by the Torreses since
the Illuscupideses did not ask for the same in their original cross-claim.

WHEREFORE, the decision appealed from is hereby AFFIRMED in toto. Costs against petitioners
Illuscupideses.

SO ORDERED.

30. SPS. CARLOS AND EULALIA RAYMUNDO and SPS. ANGELITO AND JOCELYN
BUENAOBRA, Petitioners,
vs.
SPS. DOMINADOR and ROSALIA BANDONG, Respondents.

DECISION

CHICO-NAZARIO, J.:

This is a Petition for Review on Certiorari under Rule 45 of the Revised Rules of Court, filed by petitioners
Spouses Carlos and Eulalia Raymundo and Spouses Angelito and Jocelyn Buenaobra seeking the reversal and
setting aside of the Decision1 of the Court of Appeals dated 26 September 2005 and its Resolution 2 dated 24
January 2006 in CA-G.R. CV No. 59557. The Court of Appeals, in its assailed Decision and Resolution, reversed
the Decision3 of the Regional Trial Court (RTC) dated 28 January 1998, in Civil Case No. C-14980, declaring the
Deed of Sale executed by respondent Dominador Bandong (Dominador) in favor of petitioner Eulalia Raymundo
(Eulalia) as valid and binding. The dispositive portion of the asailed Court of Appeals Decision reads:

WHEREFORE, premises considered, we hereby GRANT the appeal. The January 28, 1998 decision of the RTC,
Branch 126, Caloocan City is hereby REVERSED and SET ASIDE and a new one entered:

1. ANNULLING the Deed of Absolute Sale dated February 3, 1989 as a deed of sale, and considering it
instead as a real estate mortgage of the disputed property to secure the payment of the ₱70,000.00 the
plaintiffs-appellants spouses Bandong owe the defendants-appellees spouses Raymundo. The spouses
Bandong are given one (1) year from the finality of this Decision within which to pay the ₱70,000.00
owed to the spouses Raymundo, at 12% interest per annum computed from July 17, 1991 until its full
payment.

2. ANNULLING the Deed of Absolute Sale dated September 25, 1990, between the spouses Raymundo
as vendors and the spouses Buenaobra as vendees.

3. ORDERING the Register of Deeds of Caloocan City to issue a new Transfer Certificate of Title
covering Lot 18, Block 2 of the subdivision plan PSD 16599, a portion of Lot 1073 of the Cadastral
Survey of Caloocan, in the names of the spouses Dominador and Rosalia Bandong, after the
cancellation pursuant to this Decision of TCT No. 222871 currently in the names of the spouses Angelito
and Jocelyn Buenaobra; and FURTHER ORDERING the said Register of Deeds to annotate in the new
 Transfer Certificate of Title in the names of the spouses Bandong a real estate mortgage in favor of the
spouses Carlos and Eulalia Raymundo reflecting the terms of this Decision.

4. AWARDING – moral damages in the amount of ₱50,000.00; exemplary damages of ₱20,000.00; and
attorney’s fees and expenses of litigation of ₱20,000.00, plus ₱500.00 per proven appearance of the
plaintiffs-appellants’ counsel in court – all solidarily payable by the spouses Carlos and Eulalia
Raymundo and the spouses Angelito and Jocelyn Buenaobra, to the spouses Dominador and Rosalia
Bandong.

5. ORDERING the payment of the costs of the suit, payable by the spouses Carlos and Eulalia
Raymundo and the spouses Angelito and Jocelyn Buenaobra. 4

The factual and procedural backdrop of this case are as follows:

Eulalia was engaged in the business of buying and selling large cattle from different provinces within the
Philippines. For this purpose, she employed "biyaheros" whose primary task involved the procuring of large
cattle with the financial capital provided by Eulalia and delivering the procured cattle to her for further disposal. In
order to secure the financial capital she advanced for the "biyaheros," Eulalia required them to surrender the
Transfer Certificates of Title (TCTs) of their properties and to execute the corresponding Deeds of Sale in her
favor.

Dominador had been working for Eulalia as one of her biyaheros for three decades. Considering his long years
of service without any previous derogatory record, Eulalia no longer required Dominador to post any security in
the performance of his duties.5

However, in 1989, Eulalia found that Dominador incurred shortage in his cattle procurement operation in the
amount of ₱70,000.00. Dominador and his wife Rosalia Bandong (Rosalia) then executed a Deed of Sale 6 in
favor of Eulalia on 3 February 1989, covering a parcel of land with an area of 96 square meters, more or less,
located at Caloocan City and registered under TCT No. 1421 (subject property), in the name of the Spouses
Bandong. On the strength of the aforesaid deed, the subject property was registered in the names of Eulalia and
her husband Carlos Raymundo (Carlos). The subject property was thereafter sold by the Spouses Raymundo to
Eulalia’s grandniece and herein co-petitioner, Jocelyn Buenaobra (Jocelyn). Thus, the subject property came to
be registered in the name of Jocelyn and her husband Angelito Buenaobra (Angelito).

After the TCT of the subject property was transferred to their names, the Spouses Buenaobra instituted before
the Metropolitan Trial Court (MeTC) of Caloocan City, an action for ejectment against the Spouses Bandong,
docketed as Civil Case No. 20053, seeking the eviction of the latter from the subject property, which the
Spouses Bandong opposed on the ground that they are the rightful owners and possessors thereof. The MeTC
ruled in favor of the Spouses Buenaobra which, on appeal, was affirmed in toto by the RTC 7 and subsequently,
by the Court of Appeals.8 Finally, when the case was raised on appeal before us in G.R. No. 109422, we issued
a Resolution9 dated 12 July 1993, finding that no substantial arguments were raised therein to warrant the
reversal of the appealed decision.

To assert their right to the subject property, the Spouses Bandong instituted an action for annulment of sale
before the RTC against Eulalia and Jocelyn on the ground that their consent to the sale of the subject property
was vitiated by Eulalia after they were served by Jocelyn’s counsel with the demand to vacate. This was
docketed as Civil Case No. C-14980. The Spouses Bandong alleged that there was no sale intended but only
equitable mortgage for the purpose of securing the shortage incurred by Dominador in the amount of ₱70,000
while employed as "biyahero" by Eulalia.

Eulalia countered that Dominador received from her a significant sum of money, either as cash advances for the
purpose of procuring large cattle or as personal loan, and when he could no longer pay his obligations, the
Spouses Bandong voluntarily ceded the subject property to her by executing the corresponding deed of sale in
her favor. Indeed, the Spouses Bandong personally appeared before the Notary Public and manifested that the
deed was their own voluntary act and deed.

For her part, Jocelyn maintained that she was a buyer in good faith and for value for she personally inquired
from the Register of Deeds of the presence of any liens and encumbrances on the TCT of the subject property
and found that the same was completely free therefrom. While she admitted that she had previous notice that
Dominador and a certain Lourdes Santos (Lourdes) were in possession of the subject property, Jocelyn claimed
that the said possessors already acknowledged her ownership thereof and even asked for time to vacate. In the
end, though, they refused to leave the premises.
On 28 June 1998, the RTC rendered a Decision 10 in Civil Case No. C-14980 in favor of Eulalia and Jocelyn by
declaring that the Deed of Sale between Dominador and Eulalia was valid and binding and, consequently, the
subsequent sale between Eulalia and Jocelyn was also lawful absent any showing that Jocelyn was a buyer in
bad faith. The dispositive portion of the said decision reads:

WHEREFORE, judgment is hereby rendered DISMISSING the complaint filed by the [Spouses Bandong] and
ordering said [Spouses Bandong] to pay [herein petitioners] spouses Raymundo and Buenaobra the amount of
₱50,000 and ₱30,000, respectively, as attorney’s fees and costs of the suit.

On appeal in CA-G.R. SP No. 59557, the Court of Appeals reversed the RTC Decision and found that the
transaction entered into by Dominador and Eulalia was not one of sale but an equitable mortgage considering
that the purchase price was grossly inadequate and the Spouses Bandong remained as possessors of the
subject property after Eulalia’s alleged purchase thereof. The appellate court likewise charged Jocelyn with
knowledge that the Spouses Raymundo were not the absolute owners of the subject property negating the
presumption that she was an innocent purchaser for value.

The Court of Appeals found the Motion for Reconsideration filed by petitioners unmeritorious and denied the
same in its Resolution11 dated 24 January 2006.

Hence, this instant Petition for Review on Certiorari filed by the petitioners assailing the Decision dated 26
September 2005 and the Resolution dated 24 January 2006 rendered by the Court of Appeals. For the
resolution of this Court are the following issues:

I.

WHETHER OR NOT THE DEED OF SALE BETWEEN DOMINADOR AND EULALIA IS VALID AND
BINDING.

II.

WHETHER OR NOT JOCELYN IS A BUYER IN GOOD FAITH.

In arguing that the sale between Dominador and Eulalia is valid, petitioners posit that gross inadequacy of the
price is not sufficient to invalidate the sale, and granting arguendo that insufficient consideration may void a sale,
it has not been proven that the consideration of sale between Dominador and Eulalia was grossly inadequate.

Elaborating, petitioners maintain that the amount of ₱110,000.00 (which they claimed they have given to
Dominador), or even the sum of ₱70,000.00 (which respondents admitted receiving), was a substantial
consideration, sufficient to support a sale contract. Mere inadequacy of the price is not sufficient to invalidate a
sale; the price must be grossly inadequate or utterly shocking to the conscience in order to avoid a contract of
sale.

Petitioners further aver that the alleged market value of the subject property as submitted by the appraiser, one
of respondents’ witnesses, would not serve as an objective basis in determining the actual value of the subject
property, much less the supposed amount of its purchase price, in the absence of any logical and valid basis for
its determination.

Finally, petitioners contend that so long as the contract was voluntarily entered into by the parties and in the
absence of a clear showing that their consent thereto was vitiated by fraud, mistake, violence or undue
influence, such as in the case at bar, the said contract should be upheld.

We do not agree.

An equitable mortgage is one that - although lacking in some formality, forms and words, or other requisites
demanded by a statute - nevertheless reveals the intention of the parties to charge a real property as security for
a debt and contains nothing impossible or contrary to law. 12

The instances when a contract - regardless of its nomenclature - may be presumed to be an equitable mortgage
are enumerated in the Civil Code as follows:

Art. 1602. The contract shall be presumed to be an equitable mortgage, in any of the following cases:
 (1) When the price of a sale with right to repurchase is unusually inadequate;

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

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

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

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

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

Art. 1604. The provisions of Article 1602 shall also apply to a contract purporting to be an absolute sale.

For Articles 1602 and 1604 to apply, two requisites must concur: one, the parties entered into a contract
denominated as a contract of sale; and two, their intention was to secure an existing debt by way of an equitable
mortgage.13

There is no question that Dominador and Eulalia entered into a contract of sale as evidenced by the document
denominated as Deed of Sale14 signed by them. As to whether the parties intended to transfer ownership of the
subject property or merely to constitute a security for an existing debt is an issue that needs to be addressed by
this Court.

In resolving this kind of controversy, the doctrine in Reyes v. Court of Appeals15 directs us to give utmost
consideration to the intention of the parties in light of the relative situation of each and the circumstances
surrounding the execution of the contract, thus:

In determining whether a deed absolute in form is a mortgage, the court is not limited to the written memorials of
the transaction. The decisive factor in evaluating such agreement is the intention of the parties, as shown
not necessarily by the terminology used in the contract but by all the surrounding circumstances, such
as the relative situation of the parties at that time, the attitude acts, conduct, declarations of the parties, the
negotiations between them leading to the deed, and generally, all pertinent facts having a tendency to fix and
determine the real nature of their design and understanding. x x x16 (Emphasis supplied.)

By applying the aforestated principle to the case at bar, we are constrained to rule that in executing the said
Deed of Sale, Dominador and Eulalia never intended the transfer of ownership of the subject property but to
burden the same with an encumbrance to secure the indebtedness incurred by Dominador on the occasion of
his employment with Eulalia.

By Eulalia’s own admission,17 it was her customary business practice to require her biyaheros to deliver to her
the titles to their real properties and to execute in her favor the corresponding deeds of sale over the said
properties as security for the money she provided for their cattle procurement task, and since Dominador worked
for Eulalia’s business for years, he was allowed to advance the money without any security. Significantly, it was
only after he incurred a shortage that the sale contract was executed.

We are not inclined to believe the contention of the petitioners that Dominador ceded his property to Eulalia as
payment for his obligation for it is contrary to human experience that a person would easily part with his property
after sustaining a debt. Rather, he would first look for means to settle his obligation, and the selling of a property
on which the house that shelters him and his family stands, would be his last resort. The only reasonable
conclusion that may be derived from Dominador’s act of executing a Deed of Sale in favor of Eulalia is that the
latter required him to do so in order to ensure that he will subsequently pay his obligation to her.

This conclusion is in accord with the doctrine we enunciated in Aguirre v. Court of Appeals,18 that:

The explicit provision of Article 1602 that any of those circumstances would suffice to construe a
contract of sale to be one of equitable mortgage is in consonance with the rule that the law favors the
least transmission of property rights. To stress, the existence of any one of the conditions under Article 1602,
not a concurrence, or an overwhelming number of such circumstances, suffices to give rise to the presumption
that the contract is an equitable mortgage.
While we agree in the petitioners’ insistence that inadequacy of the price is not sufficient to nullify the contract of
sale, their persistence is, however, misplaced. It is worthy to note that the factual circumstances attendant in the
case at bar call not for the application of the legal and jurisprudential principles on annulment of contract per
se, but more aptly, of the provisions of Articles 1602 and 1604 of the Civil Code on the construction of the
contract of sale as an equitable mortgage.

Consequently, the agreement between Dominador and Eulalia was not avoided in its entirety so as to prevent it
from producing any legal effect at all. Instead, we construe that said transaction is an equitable mortgage,
thereby merely altering the relationship of the parties from seller and buyer, to mortgagor and mortgagee, while
the subject property is not transferred but subjected to a lien in favor of the latter.

Moreover, granting that the purchase price is adequate, the fact that respondents remain in possession of the
subject property after its supposed sale is sufficient to support our finding that the contract is one of equitable
mortgage and not of sale. To reiterate, the existence of any one of the conditions under Article 1602, not a
concurrence, or an overwhelming number of such circumstances, suffices to give rise to the
presumption that the contract is an equitable mortgage.19

Having threshed the issue that there was no sale in favor of Eulalia but an equitable mortgage leads us
to an inevitable conclusion that she has no right to subsequently transfer ownership of the subject
property, in consonance with the principle that nobody can dispose of what he does not have.20 One of
the exceptions21 to this rule, however, can be found in Article 1506 of the Civil Code, wherein the seller
has voidable title to a property but his title has not yet been nullified at the time of the sale, and the
subsequent buyer of the property was in good faith.

An innocent purchaser for value is one who buys the property of another, without notice that some other person
has a right or interest in the property, for which a full and fair price is paid by the buyer at the time of the
purchase or before receipt of any notice of claims or interest of some other person in the property. 22

Petitioners are harping on the contention that Jocelyn was an innocent purchaser for value. Invoking the
indefeasibility of a Torrens title, they assert that there is nothing in the subject property’s TCT that should arouse
Jocelyn’s suspicion as to put her on guard that there is a defect in Eulalia’s title.

Again, we are not persuaded. The burden of proving the purchaser’s good faith lies in the one who asserts the
same. In discharging the burden, it is not enough to invoke the ordinary presumption of good faith. 23 In Arrofo v.
Quiño,24 we have elucidated that:

[A] person dealing with registered land, [is not required] to inquire further that what the Torrens title on its face
indicates. This rule, however, is not absolute but admits of exceptions.

Thus, while it is true x x x that a person dealing with registered lands need not go beyond the certificate
of title, it is likewise a well-settled rule that a purchaser or mortgagee cannot close his eyes to facts
which should put a reasonable man on his guard, and then claim that he acted in good faith under the
belief that there was no defect in the title of the vendor or mortgagor. His mere refusal to face up to the fact
that such defect exists, or his willful closing of his eyes to the possibility of the existence of a defect in the
vendor’s or mortgagor’s title, will not make him an innocent purchaser for value, if it afterwards develops that the
title was in fact defective, and it appears that he had such notice of the defect as would have led to its discovery
had he acted with the measure of precaution which may be required of a prudent man in a like situation.

In the present case, we are not convinced by the petitioners’ incessant assertion that Jocelyn is an innocent
purchaser for value. To begin with, she is a grandniece of Eulalia and resides in the same locality where the
latter lives and conducts her principal business. It is therefore impossible for her not to acquire knowledge of her
grand aunt’s business practice of requiring her biyaheros to surrender the titles to their properties and to sign the
corresponding deeds of sale over said properties in her favor, as security. This alone should have put Jocelyn on
guard for any possible abuses that Eulalia may commit with the titles and the deeds of sale in her possession.

The glaring lack of good faith of Jocelyn is more apparent in her own admission that she was aware that
Dominador and a certain Lourdes were in possession of the subject property. A buyer of real property that is in
the possession of a person other than the seller must be wary. A buyer who does not investigate the rights of the
one in possession can hardly be regarded as a buyer in good faith. 25 Jocelyn’s self-serving statement that she
personally talked to Dominador and Lourdes about her acquisition of the subject property and intention to take
possession of the same, and that Dominador and Lourdes even pleaded for time to vacate the subject property
cannot be given credence in light of the prompt filing by the Spouses Bandong of an action for the annulment of
the sale contract between Dominador and Eulalia after they received the demand to vacate from Jocelyn’s
lawyer.

In the last analysis, good faith, or the lack of it, is a question of intention.  But in ascertaining the intention that
1awphi1

impels one on a given occasion, the courts are necessarily controlled by the evidence as to the conduct and
other outward acts by which the motive may be safely determined. 26

Petitioners question further the belated filing by the Spouses Bandong of an action for the annulment of sale,
since the Spouses Bandong filed the same only after they received the notice to vacate, and not immediately
after the execution of the assailed Deed of Sale. We have repeatedly held that the one who is in actual
possession of a piece of land claiming to be the owner thereof may await to vindicate his right. His undisturbed
possession gives him a continuing right to seek the aid of a court of equity to ascertain and determine the nature
of the adverse claim of a third party and its effect on his own title, which right can be claimed only by one who is
in possession.27

Finally, we agree with the Court of Appeals that the ejectment case which had been litigated to finality by the
Spouses Buenaobra and the respondents need not alter our conclusion in the present case. Well entrenched is
the doctrine that in ejectment cases, the sole question for resolution is the physical or material possession of the
property in question, so that neither the claim of juridical possession nor an averment of ownership can outrightly
prevent the court from taking cognizance of the case. 28 In ejectment cases, all the court may do is to resolve who
is entitled to its possession although, in doing so, it may make a determination of who is the owner of the
property in order to resolve the issue of possession. But such determination of ownership is not clothed with
finality. Neither will it affect ownership of the property or constitute a binding and conclusive adjudication on the
merits with respect to the issue of ownership. 29

WHEREFORE, IN VIEW OF THE FOREGOING, the instant Petition is DENIED. The Decision dated 26

September 2005, and the Resolution dated 24 January 2006, rendered by the Court of Appeals in CA-G.R. SP
No. 59957, are hereby AFFIRMED. Costs against petitioner.

SO ORDERED.

31. HEIRS OF JOSE REYES, JR., namely: MAGDALENA C. REYES, OSCAR C. REYES, GAMALIEL C.
REYES, NENITA R. DELA CRUZ, RODOLFO C. REYES, and RODRIGO C. REYES, Petitioners,
vs.
AMANDA S. REYES, CONSOLACION S. REYES, EUGENIA R. ELVAMBUENA, LUCINA R. MENDOZA,
PEDRITO S. REYES, MERLINDA R. FAMODULAN, EDUARDO S. REYES, and JUNE S.
REYES, Respondents.

DECISION

BERSAMIN, J.:

The petitioners1 assail the decision dated July 31, 2002 rendered in C.A.-G.R. CV No. 53039, 2 by which the
Court of Appeals (CA) affirmed the decision dated May 21, 1996 of the Regional Trial Court (RTC), Branch 9, in
Malolos, Bulacan.3

Antecedents

Antonio Reyes and his wife, Leoncia Mag-isa Reyes (Leoncia), were owners of a parcel of residential land with
an area of 442 square meters, more or less, located in Pulilan, Bulacan and covered by Tax Declaration No.
7590. On that land they constructed their dwelling. The couple had four children, namely: Jose Reyes, Sr. (Jose,
Sr.), Teofilo Reyes (Teofilo), Jose Reyes, Jr. (Jose, Jr.) and Potenciana Reyes-Valenzuela (Potenciana).
Antonio Reyes died intestate, and was survived by Leoncia and their three sons, Potenciana having
predeceased her father. Potenciana also died intestate, survived by her children, namely: Gloria
ReyesValenzuela, Maria Reyes Valenzuela, and Alfredo Reyes Valenzuela. Jose, Jr., and his family resided in
the house of the parents, but Teofilo constructed on the property his own house, where he and his family
resided.
On July 9, 1955, Leoncia and her three sons executed a deed denominated Kasulatan ng Biling Mabibiling
Muli,4 whereby they sold the land and its existing improvements to the Spouses Benedicto Francia and Monica
Ajoco (Spouses Francia) for ₱500.00, subject to the vendors' right to repurchase for the same amount sa oras
na sila'y makinabang. Potenciana's heirs did not assent to that deed. Nonetheless, Teofilo and Jose, Jr. and
their respective families remained in possession of the property and paid the realty taxes thereon.

Leoncia and her children did not repay the amount of ₱500.00.

The Spouses Francia both died intestate (i.e., Monica Ajoco on September 16, 1963, and Benedicto Francia on
January 13, 1964).

Alejandro Reyes (Alejandro), the son of Jose, Sr., first partially paid to the Spouses Francia the amount of
₱265.00 for the obligation of Leoncia, his uncles and his father. Alejandro later paid the balance of ₱235.00.
Thus, on August 11, 1970, the heirs of Spouses Francia executed a deed entitled Pagsasa-ayos ng Pag-aari at
Pagsasalin,5 whereby they transferred and conveyed to Alejandro all their rights and interests in the property for
₱500.00.

On August 21, 1970, Alejandro executed a Kasulatan ng Pagmeme-ari,6 wherein he declared that he had
acquired all the rights and interests of the heirs of the Spouses Francia, including the ownership of the property,
after the vendors had failed to repurchase within the given period. On the basis of the Kasulatan ng Pagmeme-
ari, Tax Declaration No. 3703 covering the property 7 was canceled by Tax Declaration No. 8715, 8 effective 1971,
issued to Alejandro. From then on, he had paid the realty taxes for the property.

Nevertheless, on October 17, 1970, Alejandro, his grandmother (Leoncia), and his father (Jose, Sr.) executed
a Magkakalakip na Salaysay,9 by which Alejandro acknowledged the right of Leoncia, Jose, Jr., and Jose, Sr. to
repurchase the property at any time for the same amount of ₱500.00.

On October 22, 1970, Leoncia died intestate.10 She was survived by Jose, Sr., Teofilo, Jose, Jr. and the heirs of
Potenciana. Even after Leonica's death, Teofilo and Jose, Jr., with their respective families, continued to reside
in the property.

Subsequently, Tax Declaration 1228, 11 under the name of Alejandro, was issued effective 1980. All of Leoncia's
sons eventually died intestate, survived by their respective heirs, namely:

Name of Surviving Heirs

Decedent
Teofilo Jose, Romeo Reyes, Leonardo Reyes, and Leonora C. Reyes Rodrigo Reyes, Nenita Reyes-
Sr. dela Cruz, Rodolfo Reyes, Oscar Reyes, Gamaliel Reyes, Magdalena Reyes (petitioners
herein), Efren Reyes and Amado Reyes dela Cruz
Jose, Sr. Alejandro Reyes (respondents' predecessor)12

On September 2, 1993, Alejandro also died intestate. 13 Surviving him were his wife, Amanda Reyes, and their
children, namely: Consolacion Reyes, Eugenia Reyes-Elvambuena, Luciana Reyes-Mendoza, Pedrito S. Reyes,
Merlinda Reyes-Famodulan, Eduardo Reyes and June S. Reyes (respondents herein).

In 1994, respondent Amanda Reyes asked the heirs of Teofilo and Jose, Jr., to vacate the property because she
and her children already needed it. After the petitioners refused to comply, she filed a complaint against the
petitioners in the barangay, seeking their eviction from the property. When no amicable settlement was reached,
the Barangay Lupon issued a certification to file action to the respondents on September 26, 1994. 14

In the interim, petitioner Nenita R. de la Cruz and her brother Romeo Reyes also constructed their respective
houses on the property.15

RTC Proceedings and Ruling

On September 28, 1994, the respondents initiated this suit for quieting of title and reconveyance in the
RTC.16 The complaint, docketed as Civil Case No. 817-M-94 and entitled Amanda Reyes, et al. v. Heirs of Jose
Reyes, Jr., et al., was later amended. 17 They alleged that their predecessor Alejandro had acquired ownership of
the property by virtue of the deed Pagsasa-ayos ng Pag-aari at Pagsasalin executed on August 11, 1970 by the
heirs of the Spouses Francia; that on the basis of such deed of assignment, Alejandro had consolidated his
ownership of the property via his Kasulatan ng Pagmeme-ari; and that under the Magkasanib na
Salaysay, Alejandro had granted to Leoncia, his father Jose, Sr., and his uncles, Teofilo and Jose, Jr. the right to
repurchase the property, but they had failed to do so.

The respondents prayed for judgment in their favor, as follows:

WHEREFORE, it is respectfully prayed that judgment be rendered:

1. Quieting the title to the property by declaring the plaintiffs (respondents herein) as the rightful and
lawful owners thereof;

2. Ordering the defendants (petitioners herein) to vacate subject premises and reconvey and or
surrender possession thereof to the plaintiffs;

3. Ordering the defendants to recognize the right of the plaintiffs as the lawful owners of subject property;

4. Ordering the defendants to pay plaintiffs the following:

a. Moral damages in the amount of P50,000.00;

b. Exemplary damages in the amount of P20,000.00;

c. Attorney's fees of P20,000.00, acceptance fee of P10,000.00 and P500.00 per recorded Court
appearance of counsel;

d. The costs of this suit.

Plaintiffs further pray for such other relief which the Honorable Court may deem just and equitable under the
premises.18

In their answer,19 the petitioners averred that the Kasulatan ng Biling Mabibiling Muli was an equitable mortgage,
not a pacto de retro sale; that the mortgagors had retained ownership of the property; that the heirs of the
Spouses Francia could not have validly sold the property to Alejandro through the Pagsasaayos ng Pag-aari at
Pagsasalin; that Alejandro's right was only to seek reimbursement of the ₱500.00 he had paid from the co-
owners, namely: Leoncia, Teofilo, Jose, Jr. and Jose, Sr. and the heirs of Potenciana; and that Alejandro could
not have also validly consolidated ownership through the Kasulatan ng Pagmeme-ari, because a consolidation
of ownership could only be effected via a court order.

The petitioners interposed a counterclaim for the declaration of the transaction as an equitable mortgage, and of
their property as owned in common by all the heirs of Leoncia, Teofilo, Jose, Jr. and Jose, Sr.

On May 21, 1996, the RTC ruled in favor of the respondents, declaring that Alejandro had acquired ownership of
the property in 1965 by operation of law upon the failure of the petitioners' predecessors to repurchase the
property; that the joint affidavit executed by Alejandro, Leoncia and Jose, Jr. and Jose, Sr., to extend the period
of redemption was inefficacious, because there was no more period to extend due to the redemption period
having long lapsed by the time of its execution; and that the action should be dismissed insofar as the heirs of
Potenciana were concerned, considering that Potenciana, who had predeceased her parents, had no
successional rights in the property.

Accordingly, the RTC decreed as follows:

WHEREFORE, on the basis of the evidence adduced and the law/jurisprudence applicable thereon, judgment is
hereby rendered:

a) sustaining the validity of the "Kasulatan ng Biling Mabibiling Muli" (Exh. B/Exh. 1) executed on July 9,
1955 by Leoncia Mag-isa and her sons Teofilo, Jose, Sr. and Jose, Jr., all surnamed Reyes, in favor of
Spouses Benedicto Francia and Monica Ajoco as well as the "Pagsasa-ayos ng Pag-aari at
Pagsasalin" (Settlement of Estate and Assignment) [Exh. C/Exh. 4] executed on August 11, 1970 by the
 heirs of spouses Benedicto Francia and Monica Ajoco in favor of the spouses Alejandro Reyes and
Amanda Salonga;

b) declaring the aforementioned "Kasulatan Ng Biling Mabibili Muli" (Exh. B/ Exh. 1) to be a contract of
sale with right to repurchase and not an equitable mortgage;

c) confirming the consolidation of ownership, by operation of law, of spouses Alejandro M. Reyes and
Amanda Salonga over the residential lot mentioned and referred to in Exhibit B/Exhibit 1 and Exhibit
C/Exhibit 4;

d) allowing the registration with the Registry of Deeds for the Province of Bulacan of the "Kasulatan ng
Pagmeme-ari" (Document of Ownership) [Exh. E/Exh. 5] executed by Alejandro M. Reyes on August 21,
1970 or of any appropriate deed of consolidation of ownership over the residential lot covered by Exhibit
E/Exhibit 5 which the plaintiffs, as eventual owners by succession of the aforementioned proeprty, may
deem proper to execute;

e) ordering the defendants and all persons claiming rights under them to vacate the residential lot
subject of the above-entitled case and to restore possession thereof unto the plaintiffs;

f) directing the defendants (except the heirs of Potenciana Reyes-Valenzuela) to pay unto the plaintiffs
the amount of P20,000.00 as attorney's fees; and

g) dismissing the complaint in so far as the defendant heirs of Potenciana Reyes-Valenzuela are
concerned as well as their counterclaim for damages and attorney's fees. 1avvphi1

No pronouncement as to costs.

SO ORDERED. 20

Aggrieved, the petitioners appealed to the CA.

CA Ruling

In the CA, the petitioners assailed the RTC's dispositions, except the dismissal of the complaint as against
Potenciana's heirs.

In its decision dated July 31, 2002, the CA ruled that the transaction covered by the Kasulatan ng Biling
Mabibiling Muli was not a pacto de retro sale but an equitable mortgage under Article 1602 of the Civil Code;
that even after the deed's execution, Leoncia, Teofilo, Jose, Jr. and their families had remained in possession of
the property and continued paying realty taxes for the property; that the purported vendees had not declared the
property for taxation purposes under their own names; and that such circumstances proved that the parties
envisaged an equitable mortgage in the Kasulatan ng Biling Mabibiling Muli.

The CA observed that the heirs of the Spouses Francia had themselves admitted in paragraph 5 of
the Pagsasa-ayos ng Pag-aari at Pagsasalin that the property had been mortgaged to their predecessors-in-
interest, viz:

Na, sa oras ng kamatayan ay nakaiwan sila ng isang lagay na lupang nakasanla sa kanila na makikilala sa
kasulatang kalakip nito sa halagang LIMANG DAANG PISO (P500.00). Ngunit nuong nabubuhay pa ang
magasawang Benedicto Francia at Monica Ajoco ay nakatanggap na ng halagang P265.00 kay Alejandro Reyes
- Filipino, kasal kay Amanda Salonga, may sapat na gulang at naninirahan sa Pulilan, Bulacan. 21

However, the CA held that the appellants' (petitioners herein) failure to file an action for the reformation of
the Kasulatan ng Biling Mabibiling Muli to reflect the true intention of the parties within ten years from the deed's
execution on July 9, 1955, pursuant to Article 1144 of the Civil Code, 22 already barred them from claiming that
the transaction executed between Leoncia and her children, on one hand, and the Spouses Francia, on the
other hand, was an equitable mortgage. The CA agreed with the RTC that the Magkakalakip na Salaysay did
not effectively extend the period for Leoncia and her children to repurchase the property, considering that the
period to repurchase had long lapsed by the time the agreement to extend it was executed on October 17, 1970.

Issues
In this appeal, therefore, the petitioners insist that: 23

I.

The Honorable Court of Appeals erred in finding that respondents (were) already barred from claiming that the
transaction entered into by their predecessors-in-interest was an equitable mortgage and not a pacto de retro
sale;

II.

The Honorable Court of Appeals erred in affirming the findings of the court a quo that the Magkasanib na
Salaysay (Joint Affidavit), executed by Alejandro, Leoncia and Jose, Jr., wherein Leoncia and her children were
granted by Alejandro the right to repurchase the property at anytime for the amount of P500.00, was of no legal
significance.

Ruling of the Court

The petition is meritorious.

A.

The CA correctly concluded that the true agreement of the parties vis-à-vis the Kasulatan ng
Biling Mabibiling Muli was an equitable mortgage, not a pacto de retro sale. There was no
dispute that the purported vendors had continued in the possession of the property even after the
execution of the agreement; and that the property had remained declared for taxation purposes
under Leoncia's name, with the realty taxes due being paid by Leoncia, despite the execution of
the agreement. Such established circumstances are among the badges of an equitable mortgage
enumerated in Article 1602, paragraphs 2 and 5 of the Civil Code, to wit:

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

xxx

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

xxx

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

xxx

The existence of any one of the conditions enumerated under Article 1602 of the Civil Code, not
a concurrence of all or of a majority thereof, suffices to give rise to the presumption that the
contract is an equitable mortgage.24 Consequently, the contract between the vendors and
vendees (Spouses Francia) was an equitable mortgage.

B.

Are the petitioners now barred from claiming that the transaction under the Kasulatan ng Biling
Mabibiling Muli was an equitable mortgage by their failure to redeem the property for a long
period of time?

The petitioners contend that prescription, if it must apply to them, should as well be applied to the
respondents, who had similarly failed to enforce their right under the equitable mortgage within
ten years from its execution on July 9, 1955. Consequently, they urge the upholding of the
original intention of the parties to the Kasulatan ng Biling Mabibiling Muli, without taking
prescription into account, because both parties did not enforce their respective rights within the
ten-year prescriptive period, is more in keeping with fairness and equity.
We agree with the petitioners.

Considering that sa oras na sila'y makinabang, the period of redemption stated in the Kasulatan

ng Biling Mabibiling Muli, signified that no definite period had been stated, the period to redeem
should be ten years from the execution of the contract, pursuant to Articles 1142 and 1144 of the
Civil Code.25 Thus, the full redemption price should have been paid by July 9, 1955; and upon the
expiration of said 10-year period, mortgagees Spouses Francia or their heirs should have
foreclosed the mortgage, but they did not do so. Instead, they accepted Alejandro's payments,
until the debt was fully satisfied by August 11, 1970.

The acceptance of the payments even beyond the 10-year period of redemption estopped the
mortgagees' heirs from insisting that the period to redeem the property had already expired.
Their actions impliedly recognized the continued existence of the equitable mortgage. The
conduct of the original parties as well as of their successors-in-interest manifested that the
parties to the Kasulatan ng Biling Mabibiling Muli really intended their transaction to be an
equitable mortgage, not a pacto de retro sale.

In Cuyugan v. Santos,26 the purported buyer under a so-called contract to sell with right to
repurchase also accepted partial payments from the purported seller. We held that the
acceptance of partial payments was absolutely incompatible with the idea of irrevocability of the
title of ownership of the purchaser upon the expiration of the term stipulated in the original
contract for the exercise of the right of redemption. Thereby, the conduct of the parties
manifested that they had intended the contract to be a mortgage, not a pacto de retro sale.

C.

When Alejandro redeemed the property on August 11, 1970, he did not thereby become a co-
owner thereof, because his father Jose, Sr. was then still alive. Alejandro merely became the
assignee of the mortgage, and the property continued to be co-owned by Leoncia and her sons
Jose, Sr., Jose Jr., and Teofilo. As an assignee of the mortgage and the mortgage credit,
Alejandro acquired only the rights of his assignors, nothing more. He himself confirmed so in
the Magkasanib na Salaysay, whereby he acknowledged the co-owners' right to redeem the
property from him at any time (sa ano mang oras) for the same redemption price of ₱500.00.

It is worthy to note that Alejandro's confirmation in the Magkasanib na Salaysay of the co-owners'

right to redeem was made despite 15 years having meanwhile elapsed from the execution of the
original Kasulatan ng Biling Mabibiling Muli (July 9, 1955) until the execution of the Magkasanib
na Salaysay (August 21, 1970).

D.

Neither did the petitioners' failure to initiate an action for reformation within ten years from the
execution of the Kasulatan ng Biling Mabibiling Muli bar them from insisting on their rights in the
property. The records show that the parties in the Kasulatan ng Biling Mabibiling Muli had abided
by their true agreement under the deed, to the extent that they and their successors-in-interest
still deemed the agreement as an equitable mortgage despite the lapse of 15 years from the
execution of the purported pacto de retro sale. Hence, an action for reformation of the Kasulatan
ng Biling Mabibiling Muli was unnecessary, if not superfluous, considering that the reason
underlying the requirement for an action for reformation of instrument has been to ensure that the
parties to a contract abide by their true intended agreement.

The Kasulatan ng Pagmeme-ari executed by Alejandro on August 21, 1970 was ineffectual to

predicate the exclusion of the petitioners and their predecessors in interest from insisting on their
claim to the property. Alejandro's being an assignee of the mortgage did not authorize him or his
heirs to appropriate the mortgaged property for himself without violating the prohibition
against pactum commissorium contained in Article 2088 of the Civil Code, to the effect that "[t]he
creditor cannot appropriate the things given by way of pledge or mortgage, or dispose of them[;]
[a]ny stipulation to the contrary is null and void." Aptly did the Court hold in Montevirgen v. Court
of Appeals:27

The declaration, therefore, in the decision of July 1, 1971 to the effect that absolute ownership
over the subject premises has become consolidated in the respondents upon failure of the
 petitioners to pay their obligation within the specified period, is a nullity, for consolidation of
ownership is an improper and inappropriate remedy to enforce a transaction declared to be one
of mortgage. It is the duty of respondents, as mortgagees, to foreclose the mortgage if he wishes
to secure a perfect title to the mortgaged property if he buys it in the foreclosure sale.

Moreover, the respondents, as Alejandro's heirs, were entirely bound by his previous acts as
their predecessors-in-interest. Thus, Alejandro's acknowledgment of the effectivity of the
equitable mortgage agreement precluded the respondents from claiming that the property had
been sold to him with right to repurchase. 28

E.

What was the effect of the Magkasanib na Salaysay?

Both the trial court and the CA declared that the Magkasanib na Salaysay, which extended the redemption
period of the mortgaged property, was inefficacious, because the period to redeem could no longer be extended
after the original redemption period had already expired.

In contrast, the petitioners submit that disregarding the Magkasanib na Salaysay made no sense, considering

that the respondents' predecessors-in-interest admitted therein that the petitioners had a right to redeem the
property.

The respondents counter, however, that the Magkasanib na Salaysay, which acknowledged the other co-
owners' right to redeem the property, was void; that the petitioners could no longer claim to be co-owners
entitled to redeem the property, because the co-ownership had come to an end by Alejandro having openly
repudiated the co-ownership; that Alejandro's acts of repudiation had consisted of: (a) redeeming the property
from the Spouses Francia; (b) acquiring the property from the heirs of Spouses Francia by virtue of a deed of
assignment denominated as Pag-aayos ng Pag-aari at Pagsasalin; (c) executing an affidavit of consolidation of
ownership over the property (Kasulatan ng Pagmeme-ari); (d) applying for the cancellation of the tax declaration
of property in the name of Leoncia, and the subsequent issuance of a new tax declaration in his name; (e) his
continuous possession of the property from 1955, which possession the respondents as his heirs had continued
up to the present time, or for a period of almost 50 years already; and (f) the payment of the taxes by Alejandro
and the respondents for more than 30 years without any contribution from the petitioners; and that such
repudiation established that Alejandro and his successors-in-interest had already acquired sole title over the
property through acquisitive prescription.

The respondents' and the lower courts' positions cannot be sustained.

The provisions of the Civil Code governing equitable mortgages disguised as sale contracts, like the one herein,
are primarily designed to curtail the evils brought about by contracts of sale with right to repurchase, particularly
the circumvention of the usury law and pactum commissorium.29 Courts have taken judicial notice of the well-
known fact that contracts of sale with right to repurchase have been frequently resorted to in order to conceal the
true nature of a contract, that is, a loan secured by a mortgage. It is a reality that grave financial distress renders
persons hard-pressed to meet even their basic needs or to respond to an emergency, leaving no choice to them
but to sign deeds of absolute sale of property or deeds of sale with pacto de retro if only to obtain the much-
needed loan from unscrupulous money lenders.30 This reality precisely explains why the pertinent provision of
the Civil Code includes a peculiar rule concerning the period of redemption, to wit:

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

xxx

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

xxx

Ostensibly, the law allows a new period of redemption to be agreed upon or granted even after the expiration of
the equitable mortgagor's right to repurchase, and treats such extension as one of the indicators that the true
agreement between the parties is an equitable mortgage, not a sale with right to repurchase. It was indubitable,
therefore, that the Magkasanib na Salaysay effectively afforded to Leoncia, Teofilo, Jose, Sr. and Jose, Jr. a
fresh period within which to pay to Alejandro the redemption price of ₱500.00.

F.

Did Alejandro and his heirs (respondents herein) acquire the mortgaged property through prescription?

It is true that Alejandro became a co-owner of the property by right of representation upon the death of his
father, Jose Sr.31 As a co-owner, however, his possession was like that of a trustee and was not regarded as
adverse to his co-owners but in fact beneficial to all of them. 32

Yet, the respondents except to the general rule, asserting that Alejandro, having earlier repudiated the co-
ownership, acquired ownership of the property through prescription.

The Court cannot accept the respondents' posture.

In order that a co-owner's possession may be deemed adverse to that of the cestui que trust or the other co-
owners, the following elements must concur:

1. The co-owner has performed unequivocal acts of repudiation of the co-ownership amounting

to an ouster of the cestui que trust or the other co-owners;

2. Such positive acts of repudiation have been made known to the cestui que trust or the other
co-owners;

3. The evidence on the repudiation is clear and conclusive; and

4. His possession is open, continuous, exclusive, and notorious. 33

The concurrence of the foregoing elements was not established herein. For one, Alejandro did not have adverse
and exclusive possession of the property, as, in fact, the other co-owners had continued to possess it, with
Alejandro and his heirs occupying only a portion of it. Neither did the cancellation of the previous tax
declarations in the name of Leoncia, the previous co-owner, and the issuance of a new one in Alejandro's name,
and Alejandro's payment of the realty taxes constitute repudiation of the co-ownership. The sole fact of a co-
owner declaring the land in question in his name for taxation purposes and paying the land taxes did not
constitute an unequivocal act of repudiation amounting to an ouster of the other co-owner and could not
constitute adverse possession as basis for title by prescription. 34 Moreover, according to Blatero v. Intermediate
Appellate Court,35 if a sale a retro is construed as an equitable mortgage, then the execution of an affidavit of
consolidation by the purported buyer to consolidate ownership of the parcel of land is of no consequence and
the "constructive possession" of the parcel of land will not ripen into ownership, because only possession
acquired and enjoyed in the concept of owner can serve as title for acquiring dominion. 36

In fine, the respondents did not present proof showing that Alejandro had effectively repudiated the co-
ownership. Their bare claim that Alejandro had made oral demands to vacate to his co-owners was self-serving
and insufficient. Alejandro's execution of the affidavit of consolidation of ownership on August 21, 1970 37 and his
subsequent execution on October 17, 1970 of the joint affidavit 38 were really equivocal and ambivalent acts that
did not manifest his desire to repudiate the co-ownership.

The only unequivocal act of repudiation was done by the respondents when they filed the instant action for
quieting of title on September 28, 1994, nearly a year after Alejandro's death on September 2, 1993. However,
their possession could not ripen into ownership considering that their act of repudiation was not coupled with
their exclusive possession of the property.

G.

The respondents can only demand from the petitioners the partition of the co-owned property and the
reimbursement from their co-owners of the amount advanced by Alejandro to repay the obligation. They may
also seek from their co-owners the proportional reimbursement of the realty taxes paid for the property, pursuant
to Article 488 of the Civil Code.39 In the alternative, they may opt to foreclose the equitable mortgage,
considering that the petitioners' period to redeem the mortgaged property, which was ten years from the
execution on October 17, 1970 of the Magkakasanib na Salaysay, had already long lapsed. We clarify, however,
that the respondents may take these recourses only through the appropriate actions commenced in court.

H.

The petitioners' counterclaim for damages is dismissed for their failure to prove their entitlement to it. 40

WHEREFORE, we grant the petition for review on certiorari.

The decision dated July 31, 2002 rendered by the Court of Appeals is reversed and set aside, and another
judgment is rendered:

a) Upholding the validity of the Kasulatan ng Biling Mabibiling Muli (Deed of Sale with Right of
Repurchase) executed on July 9, 1955 by Leoncia Mag-isa Reyes and her sons Teofilo, Jose, Sr. and
Jose, Jr., all surnamed Reyes, in favor of the late Spouses Benedicto Francia and Monica Ajoco as well
as the Pagsasa-ayos ng Pag-aari at Pagsasalin (Settlement of Estate and Assignment) executed on
August 11, 1970 by the heirs of the late Spouses Benedicto Francia and Monica Ajoco in favor of the
spouses Alejandro Reyes and Amanda Salonga;

b) Declaring the Kasulatan ng Biling Mabibili Muli to be an equitable mortgage, not a contract of sale with
right to repurchase; 1avvphi1

c) Finding the Magkakalakip na Salaysay executed on October 17, 1970 by and among Leoncia Mag-isa
Reyes, Jose Reyes, Sr. and Alejandro Reyes valid and effective;

c) Nullifying the Kasulatan ng Pagmeme-ari executed by Alejandro M. Reyes on August 21, 1970; and

d) Dismissing the petitioners' counterclaim.

Costs of suit to be paid by the respondents.

SO ORDERED.

32. KINGS PROPERTIES CORPORATION, Petitioner,

vs.
CANUTO A. GALIDO, Respondent.

DECISION

CARPIO, J.:

The Case

Kings Properties Corporation (petitioner) filed this Petition for Review on Certiorari 1 assailing the Court of
Appeals’ Decision 2 dated 20 December 2004 in CA-G.R. CV No. 68828 as well as the Resolution 3 dated 10
October 2005 denying the Motion for Reconsideration. In the assailed decision, the Court of Appeals reversed
the Regional Trial Court’s Decision 4 dated 4 July 2000. This case involves an action for cancellation of
certificates of title, registration of deed of sale and issuance of certificates of title filed by Canuto A. Galido
(respondent) before Branch 71 of the Regional Trial Court of Antipolo City (trial court).

The Facts
On 18 April 1966, the heirs of Domingo Eniceo, namely Rufina Eniceo and Maria Eniceo, were awarded with
Homestead Patent No. 112947 consisting of four parcels of land located in San Isidro, Antipolo, Rizal (Antipolo
property) and particularly described as follows:

1. Lot No. 1 containing an area of 96,297 square meters;

Lot No. 3 containing an area of 25,170 square meters;

Lot No. 4 containing an area of 26,812 square meters; and

Lot No. 5 containing an area of 603 square meters.

The Antipolo property with a total area of 14.8882 hectares was registered under Original Certificate of Title
(OCT) No. 535. 5 The issuance of the homestead patent was subject to the following conditions:

To have and to hold the said tract of land, with the appurtenances thereunto of right belonging unto the said
Heirs of Domingo Eniceo and to his heir or heirs and assigns forever, subject to the provisions of sections 118,
121, 122 and 124 of Commonwealth Act No. 141, as amended, which provide that except in favor of the
Government or any of its branches, units or institutions, the land hereby acquired shall be inalienable and shall
not be subject to incumbrance for a period of five (5) years next following the date of this patent, and shall not be
liable for the satisfaction of any debt contracted prior to the expiration of that period; that it shall not be alienated,
transferred or conveyed after five (5) years and before twenty-five (25) years next following the issuance of title,
without the approval of the Secretary of Agriculture and Natural Resources; that it shall not be incumbered,
alienated, or transferred to any person, corporation, association, or partnership not qualified to acquire public
lands under the said Act and its amendments; x x x 6

On 10 September 1973, a deed of sale covering the Antipolo property was executed between Rufina Eniceo and
Maria Eniceo as vendors and respondent as vendee. Rufina Eniceo and Maria Eniceo sold the Antipolo property
to respondent for ₱250,000. 7 A certain Carmen Aldana delivered the owner’s duplicate copy of OCT No. 535 to
respondent. 8

Petitioner alleges that when Maria Eniceo died in June 1975, Rufina Eniceo and the heirs of Maria Eniceo
(Eniceo heirs), 9 who continued to occupy the Antipolo property as owners, thought that the owner’s duplicate
copy of OCT No. 535 was lost. 10

On 5 April 1988, the Eniceo heirs registered with the Registry of Deeds of Marikina City (Registry of Deeds) a
Notice of Loss dated 2 April 1988 of the owner’s copy of OCT No. 535. The Eniceo heirs also filed a petition for
the issuance of a new owner’s duplicate copy of OCT No. 535 with Branch 72 of the Regional Trial Court (RTC)
of Antipolo, Rizal. The case was docketed as LRC Case No. 584-A. 11

On 31 January 1989, the RTC rendered a decision finding that the certified true copy of OCT No. 535 contained
no annotation in favor of any person, corporation or entity. The RTC ordered the Registry of Deeds to issue a
second owner’s copy of OCT No. 535 in favor of the Eniceo heirs and declared the original owner’s copy of OCT
NO. 535 cancelled and considered of no further value. 12

On 6 April 1989, the Registry of Deeds issued a second owner’s copy of OCT No. 535 in favor of the Eniceo
heirs. 13

Petitioner states that as early as 1991, respondent knew of the RTC decision in LRC Case No. 584-A because
respondent filed a criminal case against Rufina Eniceo and Leonila Bolinas (Bolinas) for giving false testimony
upon a material fact during the trial of LRC Case No. 584-A. 14

Petitioner alleges that sometime in February 1995, Bolinas came to the office of Alberto Tronio Jr. (Tronio),
petitioner’s general manager, and offered to sell the Antipolo property. During an on-site inspection, Tronio saw
a house and ascertained that the occupants were Bolinas’ relatives. Tronio also went to the Registry of Deeds to
verify the records on file. Tronio ascertained that OCT No. 535 was clean and had no lien and encumbrances.
After the necessary verification, petitioner decided to buy the Antipolo property. 15

On 14 March 1995, respondent caused the annotation of his adverse claim in OCT No. 535. 16
On 20 March 1995, the Eniceo heirs executed a deed of absolute sale in favor of petitioner covering lots 3 and 4
of the Antipolo property for ₱500,000. 17

On the same date, Transfer Certificate of Title (TCT) Nos. 277747 and 277120 were issued. TCT No. 277747
covering lots 1 and 5 of the Antipolo property was registered in the names of Rufina Eniceo, Ambrosio Eniceo,
Rodolfo Calove, Fernando Calove and Leonila Calove Bolinas. 18 TCT No. 277120 covering lots 3 and 4 of the
Antipolo property was registered in the name of petitioner. 19

On 5 April 1995, the Eniceo heirs executed another deed of sale in favor of petitioner covering lots 1 and 5 of the
Antipolo property for ₱1,000,000. TCT No. 278588 was issued in the name of petitioner and TCT No. 277120
was cancelled. 20

On 17 August 1995, the Secretary of the Department of Environment and Natural Resources (DENR Secretary)
approved the deed of sale between the Eniceo heirs and respondent. 21

On 16 January 1996, respondent filed a civil complaint with the trial court against the Eniceo heirs and petitioner.
Respondent prayed for the cancellation of the certificates of title issued in favor of petitioner, and the registration
of the deed of sale and issuance of a new transfer certificate of title in favor of respondent. 22

On 4 July 2000, the trial court rendered its decision dismissing the case for lack of legal and factual basis. 23

Respondent appealed to the Court of Appeals (CA). On 20 December 2004, the CA rendered a decision
reversing the trial court’s decision. 24 Respondent filed a motion for reconsideration, which the CA denied in its
Resolution dated 10 October 2005.

Aggrieved by the CA’s decision and resolution, petitioner elevated the case before this Court.

The Ruling of the Trial Court

The trial court stated that although respondent claims that the Eniceo heirs sold to him the Antipolo property,
respondent did not testify in court as to the existence, validity and genuineness of the purported deed of sale
and his possession of the duplicate owner’s copy of OCT No. 535. The trial court stated that as owner of a
property consisting of hectares of land, respondent should have come to court to substantiate his claim and
show that the allegations of the Eniceo heirs and petitioner are mere fabrications. 25

The trial court noticed that respondent did not register the deed of sale with the Register of Deeds immediately
after its alleged execution on 10 September 1973. Further, respondent waited for 22 long years before he had
the sale approved by the DENR Secretary. The trial court declared that respondent slept on his rights. The trial
court concluded that respondent’s failure to register the sale and secure the cancellation of OCT No. 535
militates against his claim of ownership. The trial court believed that respondent has not established the
preponderance of evidence necessary to justify the relief prayed for in his complaint. 26

The trial court stated that Bolinas was able to prove that the Eniceo heirs have remained in actual possession of
the land. The filing of a petition for the issuance of a new owner’s duplicate copy requires the posting of the
petition in three different places which serves as a notice to the whole world. Respondent’s failure to oppose this
petition can be deemed as a waiver of his right, which is fatal to his cause. 27

The trial court noted that petitioner is a buyer in good faith and for value because petitioner has exercised due
diligence in inspecting the property and verifying the title with the Register of Deeds. 28

The trial court held that even if the court were to believe that the deed of sale in favor of respondent were
genuine, still it could not be considered a legitimate disposition of property, but merely an equitable mortgage.
The trial court stated that respondent never obtained possession of the Antipolo property at any given time and a
buyer who does not take possession of a property sold to him is presumed to be a mortgagee only and not a
vendee. 29

The Ruling of the Court of Appeals

The CA ruled that the deed of sale in favor of respondent, being a notarized document, has in its favor the
presumption of regularity and carries the evidentiary weight conferred upon it with respect to its due execution.
The CA added that whoever asserts forgery has the burden of proving it by clear, positive and convincing
 evidence because forgery can never be presumed. The CA found that petitioner and the Eniceo heirs have not
substantiated the allegation of forgery. 30

The CA pointed out that laches has not set in. One of the requisites of laches, which is injury or prejudice to the
defendant in the event relief is accorded to the complainant or the suit is not held to be barred, is wanting in the
instant case. The CA added that unrecorded sales of land brought under the Torrens system are valid between
parties because registration of the instrument is merely intended to bind third persons. 31

The CA declared that petitioner’s contention regarding the validity of the questioned deed on the ground that it
was executed without the approval of the DENR Secretary is untenable. The DENR Secretary approved the
deed of sale on 17 August 1995. However, even supposing that the sale was not approved, the requirement for
the DENR Secretary’s approval is merely directory and its absence does not invalidate any alienation, transfer or
conveyance of the homestead after 5 years and before 25 years from the issuance of the title which can be
complied with at any time in the future. 32

The CA ruled that petitioner is a buyer in bad faith because it purchased the disputed properties from the Eniceo
heirs after respondent had caused the inscription on OCT No. 535 of an adverse claim. Registration of the
adverse claim serves as a constructive notice to the whole world. Petitioner cannot feign ignorance of facts
which should have put it on guard and then claim that it acted under the honest belief that there was no defect in
the title of the vendors. Knowing that an adverse claim was annotated in the certificates of title of the Eniceo
heirs, petitioner was forewarned that someone is claiming an interest in the disputed properties. 33

The CA found no merit in petitioner’s contention that the questioned deed of sale is an equitable mortgage. The
CA stated that for the presumption of an equitable mortgage to arise, one must first satisfy the requirement that
the parties entered into a contract denominated as a contract of sale and that their intention was to secure an
existing debt by way of mortgage. 34

The CA stated that the execution of the notarized deed of sale, even without actual delivery of the disputed
properties, transferred ownership from the Eniceo heirs to respondent. The CA held that respondent’s
possession of the owner’s duplicate copy of OCT No. 535 bolsters the contention that the Eniceo heirs sold the
disputed properties to him by virtue of the questioned deed. 35

The CA reversed the trial court’s decision. The dispositive portion of the CA decision reads:

WHEREFORE, the appealed decision of the Regional Trial Court of Rizal (Antipolo, Branch 71) is REVERSED
and SET ASIDE and another rendered as follows:

1. Declaring null and void Transfer Certificates of Titles Nos. 277747, 277120 and 278588 of the Registry of
Deeds of Marikina City (the last two in the name of defendant-appellee Kings Properties Corporation), the
derivative titles thereof and the instruments which were the bases of the issuance of said certificates of title; and

2. Declaring plaintiff-appellant Canuto A. Galido the owner of fee simple of Lot Nos. 1, 3, 4, 5 formerly registered
under Original Certificate of Title No. 535 in the name of the Heirs of Domingo Eniceo, represented by Rufina
Eniceo, and ordering the Register of Deeds of Marikina City to issue new transfer certificates of title for said
parcels of land in the name of plaintiff-appellant Canuto A. Galido, upon payment of the proper fees and
presentation of the deed of sale dated September 10, 1973 executed by Rufina Eniceo and Maria Eniceo, as
sole heirs of the late Domingo Eniceo, in favor of the latter. 36

The Issues

Petitioner raises two issues in this petition:

1. Whether the adverse claim of respondent over the Antipolo property should be barred by
laches; 37 and

2. Whether the deed of sale delivered to respondent should be presumed an equitable mortgage
pursuant to Article 1602(2) and 1604 of the Civil Code. 38

The Ruling of the Court

Validity of the deed of sale to respondent

The contract between the Eniceo heirs and respondent executed on 10 September 1973 was a perfected
contract of sale. A contract is perfected once there is consent of the contracting parties on the object certain and
on the cause of the obligation. 39 In the present case, the object of the sale is the Antipolo property and the price
certain is ₱250,000.

The contract of sale has also been consummated because the vendors and vendee have performed their
respective obligations under the contract. In a contract of sale, the seller obligates himself to transfer the
ownership of the determinate thing sold, and to deliver the same to the buyer, who obligates himself to pay a
price certain to the seller. 40 The execution of the notarized deed of sale and the delivery of the owner’s duplicate
copy of OCT No. 535 to respondent is tantamount to a constructive delivery of the object of the sale. In Navera
v. Court of Appeals, the Court ruled that since the sale was made in a public instrument, it was clearly
tantamount to a delivery of the land resulting in the symbolic possession thereof being transferred to the buyer. 41

Petitioner alleges that the deed of sale is a forgery. The Eniceo heirs also claimed in their answer that the deed
of sale is fake and spurious. 42 However, as correctly held by the CA, forgery can never be presumed. The party
alleging forgery is mandated to prove it with clear and convincing evidence. 43 Whoever alleges forgery has the
burden of proving it. In this case, petitioner and the Eniceo heirs failed to discharge this burden.

Petitioner invokes the belated approval by the DENR Secretary, made within 25 years from the issuance of the
homestead, to nullify the sale of the Antipolo property. The sale of the Antipolo property cannot be annulled on
the ground that the DENR Secretary gave his approval after 21 years from the date the deed of sale in favor of
respondent was executed. Section 118 of Commonwealth Act No. 141 or the Public Land Act (CA 141), as
amended by Commonwealth Act No. 456, 44 reads:

SEC. 118. Except in favor of the Government or any of its branches, units, or institutions, or legally constituted
banking corporations, lands acquired under free patent or homestead provisions shall not be subject to
encumbrance or alienation from the date of the approval of the application and for a term of five years from and
after the date of the issuance of the patent or grant x x x

No alienation, transfer, or conveyance of any homestead after five years and before twenty-five years after the
issuance of title shall be valid without the approval of the Secretary of Agriculture and Natural
Resources, 45 which approval shall not be denied except on constitutional and legal grounds.

In Spouses Alfredo v. Spouses Borras, 46 the Court explained the implications of Section 118 of CA 141. Thus:

A grantee or homesteader is prohibited from alienating to a private individual a land grant within five years from
the time that the patent or grant is issued. A violation of this prohibition renders a sale void. This , however,
expires on the fifth year. From then on until the next 20 years, the land grant may be alienated provided the
Secretary of Agriculture and Natural Resources approves the alienation. The Secretary is required to approve
the alienation unless there are "constitutional and legal grounds" to deny the approval. In this case, there are no
apparent or legal grounds for the Secretary to disapprove the sale of the Subject Land.

The failure to secure the approval of the Secretary does not ipso factomake a sale void. The absence of
approval by the Secretary does not a sale made after the expiration of the 5-year period, for in such event the
requirement of Section 118 of the Public Land Act becomes merely directory or a formality. The approval may be
secured later, producing the effect of ratifying and adopting the transaction as if the sale had been previously
authorized. (Underscoring supplied)

Equitable Mortgage

Petitioner contends that the deed of sale in favor of respondent is an equitable mortgage because the Eniceo
heirs remained in possession of the Antipolo property despite the execution of the deed of sale.

An equitable mortgage is "one which although lacking in some formality, or form or words, or other requisites
demanded by a statute, nevertheless reveals the intention of the parties to charge real property as security for a
debt, and contains nothing impossible or contrary to law." 47 The essential requisites of an equitable mortgage
are:

1. The parties entered into a contract denominated as a contract of sale; and

2. Their intention was to secure existing debt by way of a mortgage. 48

In Lim v. Calaguas, 49 the Court held that in order for the presumption of equitable mortgage to apply, there must
be: (1) something in the language of the contract; or (2) in the conduct of the parties which shows clearly and
beyond doubt that they intended the contract to be a mortgage and not a pacto de retro sale. 50 Proof by parol
evidence should be presented in court. Parol evidence is admissible to support the allegation that an instrument
in writing, purporting on its face to transfer the absolute title to property, was in truth and in fact given merely as
security for the payment of a loan. The presumption of equitable mortgage under Article 1602 of the Civil Code is
not conclusive. It may be rebutted by competent and satisfactory proof of the contrary. 51

Petitioner claims that an equitable mortgage can be presumed because the Eniceo heirs remained in possession
of the Antipolo property. Apart from the fact that the Eniceo heirs remained in possession of the Antipolo
property, petitioner has failed to substantiate its claim that the contract of sale was intended to secure an
existing debt by way of mortgage. In fact, mere tolerated possession is not enough to prove that the transaction
was an equitable mortgage. 52

Furthermore, petitioner has not shown any proof that the Eniceo heirs were indebted to respondent. On the
contrary, the deed of sale executed in favor of respondent was drafted clearly to convey that the Eniceo heirs
sold and transferred the Antipolo property to respondent. The deed of sale even inserted a provision about
defrayment of registration expenses to effect the transfer of title to respondent.

In any event, as pointed out by respondent in his Memorandum, this defense of equitable mortgage is available
only to petitioner’s predecessors-in-interest who should have demanded, but did not, for the reformation of the
deed of sale. 53 A perusal of the records shows that the Eniceo heirs never presented the defense of equitable
mortgage before the trial court. In their Answer 54 and Memorandum 55 filed before the trial court, the Eniceo heirs
claimed that the alleged deed of sale dated 10 September 1973 between Rufina Eniceo and Maria Eniceo was
fake and spurious. The Eniceo heirs contended that even assuming there was a contract, no consideration was
involved. It was only in the Appellees’ Brief 56 filed before the CA that the Eniceo heirs claimed as an alternative
defense that the deed should be presumed as an equitable mortgage.

In Philippine Ports Authority v. City of Iloilo, 57 we ruled that a party who adopts a certain theory upon which the
case is tried and decided by the lower court will not be permitted to change the theory on appeal. A theory of the
case not brought to the attention of the lower court will not be considered by a reviewing court, as a new theory
cannot be raised for the first time at such late stage.

Although petitioner raised the defense of equitable mortgage in the lower court, he cannot claim that the deed
was an equitable mortgage because petitioner was not a privy to the deed of sale dated 10 September 1973.
Petitioner merely stepped into the shoes of the Eniceo heirs. Petitioner, who merely acquired all the rights of its
predecessors, cannot espouse a theory that is contrary to the theory of the case claimed by the Eniceo heirs.

The Court notes that the Eniceo heirs have not appealed the CA’s decision, hence, as to the Eniceo heirs, the
CA’s decision that the contract was a sale and not an equitable mortgage is now final. Since petitioner merely
assumed the rights of the Eniceo heirs, petitioner is now estopped from questioning the deed of sale dated 10
September 1973.

Petitioner is not a buyer in good faith

Petitioner maintains that the subsequent sale must be upheld because petitioner is a buyer in good faith, having
exercised due diligence by inspecting the property and the title sometime in February 1995.

In Agricultural and Home Extension Development Group v. Court of Appeals, 58 a buyer in good faith is defined
as "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."

In Balatbat v. Court of Appeals, 59 the Court held that in the realm of double sales, the registration of an adverse
claim places any subsequent buyer of the registered land in bad faith because such annotation was made in the
title of the property before the Register of Deeds and he could have discovered that the subject property was
already sold. 60 The Court explained further, thus:

A purchaser of a valued piece of property cannot just close his eyes to facts which should put a reasonable man
upon his guard and then claim that he acted in good faith and under the belief that there were no defect in the
title of the vendor. One who purchases real estate with knowledge of a defect or lack of title in his vendor cannot
claim that he has acquired title thereto in good faith as against the true owner of the land or of an interest
therein; and the same rule must be applied to one who has knowledge of facts which should have put him upon
such inquiry and investigation as be necessary to acquaint him with the defects in the title of his vendor. 61

Petitioner does not dispute that respondent registered his adverse claim with the Registry of Deeds on 14 March
1995. The registration of the adverse claim constituted, by operation of law, notice to the whole world. 62 From
that date onwards, subsequent buyers were deemed to have constructive notice of respondent’s adverse claim.

Petitioner purchased the Antipolo property only on 20 March 1995 and 5 April 1995 as shown by the dates in the
deeds of sale. On the same dates, the Registry of Deeds issued new TCTs in favor of petitioner with the
annotated adverse claim. Consequently, the adverse claim registered prior to the second sale charged petitioner
with constructive notice of the defect in the title of Eniceo heirs. Therefore, petitioner cannot be deemed as a
purchaser in good faith when they bought and registered the Antipolo property.

In Carbonell v. Court of Appeals, 63 this Court ruled that in double sales, the first buyer always has priority rights
over subsequent buyers of the same property. Being the first buyer, he is necessarily in good faith compared to
subsequent buyers. The good faith of the first buyer remains all throughout despite his subsequent acquisition of
knowledge of the subsequent sale. On the other hand, the subsequent buyer, who may have entered into a
contract of sale in good faith, would become a buyer in bad faith by his subsequent acquisition of actual or
constructive knowledge of the first sale. 64 The separate opinion of then Justice Teehankee is instructive, thus:

The governing principle here is prius tempore, potior jure(first in time, stronger in right). Knowledge gained by
the first buyer of the second sale cannot defeat the first buyer’s rights except only as provided by the Code and
that is where the second buyer first registers in good faith the second sale ahead of the first. Such knowledge of
the first buyer does bar her from availing of her rights under the law, among them, to first her purchase as
against the second buyer. But in converso knowledge gained by the second buyer of the first sale defeats his
rights even if he is first to register the second sale, since such knowledge taints his prior registration with bad
faith.

This is the price exacted by Article 1544 of the Civil Code for the second buyer being able to displace the first
buyer: that before the second buyer can obtain priority over the first, he must show that he acted in good faith
throughout (i.e., in ignorance of the first sale and of the first buyer’s rights) – from the time of acquisition until the
title is transferred to him by registration or failing registration, by delivery of possession. The second buyer must
show continuing good faith and innocence or lack of knowledge of the first sale until his contract ripens into full
ownership through prior registration as provided by law. 65

Laches

Petitioner contends that respondent is guilty of laches because he slept on his rights by failing to register the
sale of the Antipolo property at the earliest possible time. Petitioner claims that despite respondent’s knowledge
of the subsequent sale in 1991, respondent still failed to have the deed of sale registered with the Registry of
Deeds.

The essence of laches is the failure or neglect, for an unreasonable and unexplained length of time, to do that
which, through due diligence, could have been done earlier, thus giving rise to a presumption that the party
entitled to assert it had either abandoned or declined to assert it. 66

Respondent discovered in 1991 that a new owner’s copy of OCT No. 535 was issued to the Eniceo heirs.
Respondent filed a criminal case against the Eniceo heirs for false testimony. When respondent learned that the
Eniceo heirs were planning to sell the Antipolo property, respondent caused the annotation of an adverse claim.
On 16 January 1996, when respondent learned that OCT No. 535 was cancelled and new TCTs were issued,
respondent filed a civil complaint with the trial court against the Eniceo heirs and petitioner. Respondent’s
actions negate petitioner’s argument that respondent is guilty of laches.

True, unrecorded sales of land brought under Presidential Decree No. 1529 or the Property Registration Decree
(PD 1529) are effective between and binding only upon the immediate parties. The registration required in
Section 51 of PD 1529 is intended to protect innocent third persons, that is, persons who, without knowledge of
the sale and in good faith, acquire rights to the property. 67 Petitioner, however, is not an innocent purchaser for
value.
WHEREFORE, we DENY the petition. We AFFIRM the 20 December 2004 Decision and 10 October 2005
Resolution of the Court of Appeals in CA-G.R. CV No. 68828.

SO ORDERED.

33. HEIRS OF THE LATE SPOUSES AURELIO AND ESPERANZA BALITE; Namely, ANTONIO T. BALITE,
FLOR T. BALITE-ZAMAR, VISITACION T. BALITE-DIFUNTORUM, PEDRO T. BALITE, PABLO T. BALITE,
GASPAR T. BALITE, CRISTETA T. BALITE and AURELIO T. BALITE JR., All Represented by GASPAR T.
BALITE, petitioners,
vs.
RODRIGO N. LIM, respondent.

DECISION

PANGANIBAN, J.:

A deed of sale that allegedly states a price lower than the true consideration is nonetheless binding between the
parties and their successors in interest. Furthermore, a deed of sale in which the parties clearly intended to
transfer ownership of the property cannot be presumed to be an equitable mortgage under Article 1602 of the
Civil Code. Finally, an agreement that purports to sell in metes and bounds a specific portion of an unpartitioned
co-owned property is not void; it shall effectively transfer the seller’s ideal share in the co-ownership.

The Case

Before us is a Petition for Review under Rule 45 of the Rules of Court, assailing the February 11, 2002
1 

Decision of the Court of Appeals (CA) in CA-GR CV No. 65395. The decretal portion of the Decision reads as
2 

follows:

"IN THE LIGHT OF ALL THE FOREGOING, the Decision of the Court a quo subject of the appeal is
hereby SET ASIDE AND REVERSED and another Decision is hereby rendered as follows:

1. The "Deed of Absolute Sale" (Exhibit "A") is valid only insofar as the pro indiviso share of
Esperanza Balite over the property covered by Original Certificate of Title No. 10824 is concerned;

2. The Register of Deeds is hereby ordered to cancel Transfer Certificate of Title No. 6683 and to issue
another over the entirety of the property covered by Original Certificate of Title No. 10824, upon the
payment of the capital gains tax due, as provided for by law, (based on the purchase price of the
property in the amount of P1,000,000.00), with the following as co-owners, over the property described
therein:

a) Each of the [petitioners] over an undivided portion of 975 square meters;

b) The [respondent], with an undivided portion of 9,751 square meters.

3. The [respondent] is hereby ordered to pay to the [petitioners] the amount of P120,000.00, within a
period of five (5) months from the finality of the Decision of this Court;

4. In the event that the [respondent] refuses or fails to remit the said amount to the [petitioner] within the
period therefor, the rights and obligations of the parties shall be governed by Republic 6552 (Maceda
Law)." 3
 The Facts

The CA summarized the facts in this manner:

"The spouses Aurelio x x x and Esperanza Balite were the owners of a parcel of land, located [at]
Poblacion (Barangay Molave), Catarman, Northern Samar, with an area of seventeen thousand five
hundred fifty-one (17,551) square meters, [and] covered by Original Certificate of Title [OCT] No. 10824.
When Aurelio died intestate [in 1985, his wife], Esperanza Balite, and their children, x x x [petitioners]
Antonio Balite, Flor Balite-Zamar, Visitacion Balite-Difuntorum, Pedro Balite, Pablo Balite, Gaspar Balite,
Cristeta (Tita) Balite and Aurelio Balite, Jr., inherited the [subject] property and became co-owners
thereof, with Esperanza x x x inheriting an undivided [share] of [9,751] square meters.

"In the meantime, Esperanza x x x [became] ill and was in dire need of money for her hospital expenses
x x x. She, through her daughter, Cristeta, offered to sell to Rodrigo Lim, [her] undivided share x x x for
the price of P1,000,000.00. x x x Esperanza x x x and Rodrigo x x x agreed that, under the "Deed of
Absolute Sale", to be executed by Esperanza x x x over the property, it will be made to appear that the
purchase price of the property would be P150,000.00, although the actual price agreed upon by them for
the property was P1,000,000.00.

"On April 16, 1996, Esperanza x x x executed a "Deed of Absolute Sale" in favor of Rodrigo N. Lim over
a portion of the property, covered by [OCT] No. 10824, with an area of 10,000 square meters, for the
price of P150,000.00 x x x.

[They] also executed, on the same day, a "Joint Affidavit" under which they declared that the real price of
the property was P1,000,000.00, payable to Esperanza x x x, by installments, as follows:

1. P30,000.00 – upon signing today of the document of sale.

2. P170,000.00 – payable upon completion of the actual relocation survey of the land sold by a
Geodetic Engineer.

3. P200,000.00 – payable on or before May 15, 1996.

4. P200,000.00 – payable on or before July 15, 1996.

5. P200,000.00 – payable on or before September 15, 1996.

6. P200,000.00 – payable on or before December 15, 1996.

"Only Esperanza and two of her children, namely, Antonio x x x and Cristeta x x x, knew about the said
transaction. x x x Geodetic Engineer Bonifacio G. Tasic conducted a subdivision survey of the property
and prepared a "Sketch Plan" showing a portion of the property, identified as Lot 243 with an area of
10,000 square meters, under the name Rodrigo N. Lim.

"The "Sketch Plan" was signed by Rodrigo x x x and Esperanza. Thereafter, Rodrigo x x x took actual
possession of the property and introduced improvements thereon. He remitted to Esperanza x x x and
Cristeta x x x sums of money in partial payments of the x x x property for which he signed "Receipts".

"Gaspar, Visitacion, Flor, Pedro and Aurelio, Jr. x x x learned of the sale, and on August 21, 1996, they
wrote a letter to the Register of Deeds [RD] of Northern Samar, [saying] that they [were] not x x x
informed of the sale of a portion of the said property by their mother x x x nor did they give their consent
thereto, and requested the [RD] to:

"x x x hold in abeyance any processal or approval of any application for registration of title of
ownership in the name of the buyer of said lot, which has not yet been partitioned judicially or
extrajudicially, until the issue of the legality/validity of the above sale has been cleared."

"On August 24, 1996, Antonio x x x received from Rodrigo x x x, the amount of P30,000.00 in partial
payment of [the] property and signed a "Receipt" for the said amount, declaring therein that "the
remaining balance of P350,000.00 shall personally and directly be released to my mother, Esperanza
Balite, only." However, Rodrigo x x x drew and issued RCBC Check No. 309171, dated August 26, 1996,
[payable] to the order of Antonio Balite in the amount of P30,000.00 in partial payment of the property.

"On October 1, 1996, Esperanza x x x executed a "Special Power of Attorney" appointing her son,
Antonio, to collect and receive, from Rodrigo, the balance of the purchase price of the x x x property and
to sign the appropriate documents therefor.

"On October 23, 1996, Esperanza signed a letter addressed to Rodrigo informing the latter that her
children did not agree to the sale of the property to him and that she was withdrawing all her
commitments until the validity of the sale is finally resolved:

xxx   xxx   xxx

"On October 31, 1996, Esperanza died intestate and was survived by her aforenamed children.

"[Meanwhile], Rodrigo caused to be published, in the Samar Reporter, on November 14, 21 and 28,
1996, the aforesaid "Deed of Absolute Sale". Earlier, on November 21, 1996, Antonio received the
amount of P10,000.00 from Rodrigo for the payment of the estate tax due from the estate of Esperanza.

"Also, the capital gains tax, in the amount of P14,506.25, based on the purchase price of P150,000.00
appearing on the "Deed of Absolute Sale", was paid to the Bureau of Internal Revenue which issued a
"Certification" of said payments, on March 5, 1997, authorizing the registration of the "Deed of Absolute
Sale" x x x. However, the [RD] refused to issue a title over the property to and under the name of
Rodrigo unless and until the owner’s duplicate of OCT No. 10824 was presented to [it]. Rodrigo filed a
"Petition for Mandamus" against the RD with the Regional Trial Court of Northern Samar (Rodrigo Lim
versus Fernando Abella, Special Civil Case No. 48). x x x. On June 13, 1997, the court issued an
Order to the RD to cancel OCT No. 10824 and to issue a certificate of title over Lot 243 under the name
of Rodrigo.

"On June 27, 1997, [petitioners] filed a complaint against Rodrigo with the Regional Trial Court of
Northern Samar, entitled and docketed as "Heirs of the Spouses Aurelio Balite, et al. versus Rodrigo
Lim,  Civil Case No. 920, for "Annulment of Sale, Quieting of Title, Injunction and Damages x x x,
[the origin of the instant case.]

xxx   xxx   xxx

"The [petitioners] had a "Notice of Lis Pendens", dated June 23, 1997, annotated, on June 27, 1997, at
the dorsal portion of OCT No. 10824.

"In the meantime, the RD cancelled, on July 10, 1997, OCT No. 10824 and issued Transfer Certificate of
Title [TCT] No. 6683 to and under the name of Rodrigo over Lot 243. The "Notice of Lis Pendens" x x x
was carried over in TCT No. 6683.

"Subsequently, Rodrigo secured a loan from the Rizal Commercial Banking Corporation in the amount
of P2,000,000.00 and executed a "Real Estate Mortgage" over the [subject] property as security therefor.

"On motion of the [petitioners], they were granted x x x leave to file an "Amended Complaint" impleading
the bank as [additional] party-defendant. On November 26, 1997, [petitioners] filed their "Amended
Complaint".

The [respondent] opposed the "Amended Complaint" x x x contending that it was improper for
[petitioners] to join, in their complaint, an ordinary civil action for the nullification of the "Real Estate
Mortgage" executed by the respondent in favor of the Bank as the action of the petitioners before the
court was a special civil action.

"On March 30, 1998, the court issued an Order rejecting the "Amended Complaint" of the petitioners on
the grounds that: (a) the Bank cannot be impleaded as party-defendant under Rule 63, Section 1 of the
1997 Rules of Civil Procedure; (b) the "Amended Complaint" constituted a collateral attack on TCT No.
6683. The [petitioners] did not file any motion for the reconsideration of the order of the court." 4
The trial court dismissed the Complaint and ordered the cancellation of the lis pendens annotated at the back of
TCT No. 6683. It held that, pursuant to Article 493 of the Civil Code, a co-owner has the right to sell his/her
undivided share. The sale made by a co-owner is not invalidated by the absence of the consent of the other co-
owners. Hence, the sale by Esperanza of the 10,000-square-meter portion of the property was valid; the excess
from her undivided share should be taken from the undivided shares of Cristeta and Antonio, who expressly
agreed to and benefited from the sale.

Ruling of the Court of Appeals

The CA held that the sale was valid and binding insofar as Esperanza Balite’s undivided share of the property
was concerned. It affirmed the trial court’s ruling that the lack of consent of the co-owners did not nullify the sale.
The buyer, respondent herein, became a co-owner of the property to the extent of the pro indiviso share of the
vendor, subject to the portion that may be allotted to him upon the termination of the co-ownership. The
appellate court disagreed with the averment of petitioners that the registration of the sale and the issuance of
TCT No. 6683 was ineffective and that they became the owners of the share of Esperanza upon the latter’s
death.

The CA likewise rejected petitioners’ claim that the sale was void allegedly because the actual purchase price of
the property was not stated in the Deed of Absolute Sale. It found that the true and correct consideration for the
sale was P1,000,000 as declared by Esperanza and respondent in their Joint Affidavit. Applying Article 1353 of 5 

the Civil Code, it held that the falsity of the price or consideration stated in the Deed did not render it void. The
CA pointed out, however, that the State retained the right to recover the capital gains tax based on the true price
of P1,000,000.

The appellate court rejected petitioners’ contention that, because of the allegedly unconscionably low and
inadequate consideration involved, the transaction covered by the Deed was an equitable mortgage under
Article 1602 of the Civil Code. Observing that the argument had never been raised in the court a quo, it ruled
that petitioners were proscribed from making this claim, for the first time, on appeal.

The CA further held that the remaining liability of respondent was P120,000. It relied on the Receipt dated
August 24, 1996, which stated that his outstanding balance for the consideration was P350,000. It deducted
therefrom the amounts of P30,000 received by Antonio on August 27, 1996; and P200,000, which was the
amount of the check dated September 15, 1996, issued by respondent payable to Esperanza.

Finally, the appellate court noted that the mortgage over the property had been executed after the filing of the
Complaint. What petitioners should have filed was a supplemental complaint instead of an amended complaint.
Contrary to respondent’s argument, it also held that the bank was not an indispensable party to the case; but
was merely a proper party. Thus, there is no necessity to implead it as party-defendant, although the court a
quo had the option to do so. And even if it were not impleaded, the appellate court ruled that the bank would still
have been bound by the outcome of the case, as the latter was a mortgagee pendente lite over real estate that
was covered by a certificate of title with an annotated lis pendens.

Hence, this Petition. 6

Issues

In their Memorandum, petitioners present the following issues:

"A

"Whether or not the [CA] seriously erred in not deciding that the Deed of Absolute Sale dated April 16,
1996 is null and void on the grounds that it is falsified; it has an unlawful cause; and it is contrary to law
and/or public policy.

"B

"Whether or not the [CA] gravely erred in not finding that the amount paid by [respondent] is only three
hundred twenty thousand (P320,000.00) pesos and that respondent’s claim that he has paid one million
pesos except P44,000.00 as balance, is fraudulent and false.

"C
 "Whether or not the [CA] seriously erred in not deciding that at the time the Deed of Sale was registered
x x x on May 30, 1997, said Deed of Sale can no longer bind the property covered by OCT No. 10824
because said land had already become the property of all the petitioners upon the death of their mother
on October 31, 1996 and therefore such registration is functus of[f]icio involving a null and void
document.

"D

"Whether or not the [CA] seriously erred in not ruling that petitioners’ amended complaint dated
November 27, 1997 was proper and admissible and deemed admitted to conform to evidence presented.

"E

"Whether or not the [CA] seriously erred in not declaring that TCT No. T-6683 in the name of
Respondent Rodrigo N. Lim is null and void and all dealings involving the same are likewise null and
void and/or subject to the decision of the case at bar in view of the notice of lis pendens annotated
therein.

"F

"Even assuming but without admitting that the Deed of Sale is enforceable, the respondent court
seriously erred in not deciding that the consideration is unconscionably low and inadequate and
therefore the transaction between the executing parties constitutes an equitable mortgage.

"G

"The [CA] greatly erred in not rendering judgment awarding damages and attorney’s fee[s] in favor of
petitioners among others." 7

In sum, the issues raised by petitioners center on the following: 1) whether the Deed of Absolute Sale is valid,
and 2) whether there is still any sum for which respondent is liable.

The Court’s Ruling

The Petition has no merit.

First Issue:

Validity of the Sale

Petitioners contend that the Deed of Absolute Sale is null and void, because the undervalued consideration
indicated therein was intended for an unlawful purpose -- to avoid the payment of higher capital gains taxes on
the transaction. According to them, the appellate court’s reliance on Article 1353 of the Civil Code was
erroneous. They further contend that the Joint Affidavit is not proof of a true and lawful cause, but an integral
part of a scheme to evade paying lawful taxes and registration fees to the government.

We have before us an example of a simulated contract. Article 1345 of the Civil Code provides that the
simulation of a contract may either be absolute or relative. In absolute simulation, there is a colorable contract
but without any substance, because the parties have no intention to be bound by it. An absolutely simulated
contract is void, and the parties may recover from each other what they may have given under the "contract." On8 

the other hand, if the parties state a false cause in the contract to conceal their real agreement, such a contract
is relatively simulated. Here, the parties’ real agreement binds them.9

In the present case, the parties intended to be bound by the Contract, even if it did not reflect the actual
purchase price of the property. That the parties intended the agreement to produce legal effect is revealed by
the letter of Esperanza Balite to respondent dated October 23, 1996 and petitioners’ admission that there was a
10 

partial payment of P320,000 made on the basis of the Deed of Absolute Sale. There was an intention to transfer
the ownership of over 10,000 square meters of the property . Clear from the letter is the fact that the objections
of her children prompted Esperanza to unilaterally withdraw from the transaction.
Since the Deed of Absolute Sale was merely relatively simulated, it remains valid and enforceable. All the
essential requisites prescribed by law for the validity and perfection of contracts are present. However, the
parties shall be bound by their real agreement for a consideration of P1,000,000 as reflected in their Joint
Affidavit.
11

The juridical nature of the Contract remained the same. What was concealed was merely the actual price.
Where the essential requisites are present and the simulation refers only to the content or terms of the contract,
the agreement is absolutely binding and enforceable between the parties and their successors in interest.
12 

Petitioners cannot be permitted to unmake the Contract voluntarily entered into by their predecessor, even if the
stated consideration was included therein for an unlawful purpose. "The binding force of a contract must be
recognized as far as it is legally possible to do so." However, as properly held by the appellate court, the
13 

government has the right to collect the proper taxes based on the correct purchase price.

Being onerous, the Contract had for its cause or consideration the price of P1,000,000. Both this consideration
as well as the subject matter of the contract -- Esperanza’s share in the property covered by OCT No. 10824 --
are lawful. The motives of the contracting parties for lowering the price of the sale -- in the present case, the
reduction of capital gains tax liability -- should not be confused with the consideration. Although illegal, the
14 

motives neither determine nor take the place of the consideration.  15

Deed of Sale not an

Equitable Mortgage

Petitioner further posits that even assuming that the deed of sale is valid it should only be deemed an equitable
mortgage pursuant to Articles 1602 and 1604 of the Civil Code, because the price was clearly inadequate. They
add that the presence of only one of the circumstances enumerated under Article 1602 would be sufficient to
consider the Contract an equitable mortgage. We disagree.

For Articles 1602 and 1604 to apply, two requisites must concur: one, the parties entered into a contract
denominated as a contract of sale; and, two, their intention was to secure an existing debt by way of mortgage. 16

Indeed, the existence of any of the circumstances enumerated in Article 1602, not a concurrence or an
overwhelming number thereof, suffices to give rise to the presumption that a contract purporting to be an
absolute sale is actually an equitable mortgage. In the present case, however, the Contract does not merely
17 

purport to be an absolute sale. The records and the documentary evidence introduced by the parties indubitably
show that the Contract is, indeed, one of absolute sale. There is no clear and convincing evidence that the
parties agreed upon a mortgage of the subject property.

Furthermore, the voluntary, written and unconditional acceptance of contractual commitments negates the
theory of equitable mortgage. There is nothing doubtful about the terms of, or the circumstances surrounding,
the Deed of Sale that would call for the application of Article 1602. The Joint Affidavit indisputably confirmed that
the transaction between the parties was a sale.

When the words of a contract are clear and readily understandable, there is no room for construction. Contracts
are to be interpreted according to their literal meaning and should not be interpreted beyond their obvious
intendment. The contract is the law between the parties.
18 

Notably, petitioners never raised as an issue before the trial court the fact that the document did not express the
true intent and agreement of the contracting parties. They raised mere suppositions on the inadequacy of the
price, in support of their argument that the Contract should be considered as an equitable mortgage.

We find no basis to conclude that the purchase price of the property was grossly inadequate. Petitioners did not
present any witness to testify as to the market values of real estate in the subject’s locale. They made their claim
on the basis alone of the P2,000,000 loan that respondent had been able to obtain from the Rizal Commercial
Banking Corporation. This move did not sufficiently show the alleged inadequacy of the purchase price. A
mortgage is a mere security for a loan. There was no showing that the property was the only security relied upon
by the bank; or that the borrowers had no credit worthiness, other than the property offered as collateral.

Co-Ownership
The appellate court was correct in affirming the validity of the sale of the property insofar as the pro
indiviso share of Esperanza Balite was concerned.

Article 493 of the Civil Code gives the owner of an undivided interest in the property the right to freely sell and
19 

dispose of such interest. The co-owner, however, has no right to sell or alienate a specific or determinate part of
the thing owned in common, because such right over the thing is represented by an aliquot or ideal portion
without any physical division. Nonetheless, the mere fact that the deed purports to transfer a concrete portion
does not per se render the sale void. The sale is valid, but only with respect to the aliquot share of the selling
20 

co-owner. Furthermore, the sale is subject to the results of the partition upon the termination of the co-
ownership.

Hence, the transaction between Esperanza Balite and respondent could be legally recognized only in respect to
the former’s pro indiviso share in the co-ownership. As a matter of fact, the Deed of Absolute Sale executed
between the parties expressly referred to the 10,000-square-meter portion of the land sold to respondent as the
share of Esperanza in the conjugal property. Her clear intention was to sell merely her ideal or undivided share
in it. No valid objection can be made against that intent. Clearly then, the sale can be given effect to the extent of
9,751 square meters, her ideal share in the property as found by both the trial and the appellate courts.

Transfer of Property

During her lifetime, Esperanza had already sold to respondent her share in the subject parcel; hence her heirs
could no longer inherit it. The property she had transferred or conveyed no longer formed part of her estate to
which her heirs may lay claim at the time of her death. The transfer took effect on April 16, 1996 (the date the
Deed of Absolute Sale was executed), and not on May 30, 1997, when the Deed of Absolute Sale was
registered. Thus, petitioners’ claim that the property became theirs upon the death of their mother is untenable.

Second Issue:

Respondent’s Liability

Petitioners insist that the appellate court erred in holding that respondent’s outstanding liability on the Deed of
Sale was P120,000, when the Receipts on record show payments in the total amount of P320,000 only. They
argue that the August 24, 1996 Receipt, on which the appellate court based its conclusion, was unreliable.

To begin with, this Court is not a trier of facts.  It is not its function to examine and determine the weight of the
21 

evidence. Well-entrenched is the doctrine that only errors of law, and not of facts, are reviewable by this Court
22 

in a petition for review on certiorari under Rule 45 of the Revised Rules of Court. Philippine Airlines, Inc. v. Court
of Appeals has held that factual findings of the Court of Appeals are binding and conclusive upon the Supreme
23 

Court. These findings may be reviewed only under exceptional circumstances such as, among others, when the
24 

inference is manifestly mistaken; the judgment is based on a misapprehension of facts; findings of the trial court
25  26 

contradict those of the CA; or the CA manifestly overlooked certain relevant and undisputed facts that, if
27 

properly considered, would justify a different conclusion. 28

Although the factual findings of the two lower courts were not identical, we hold that in the present case, the
findings of the CA are in accord with the documents on record. The trial court admitted in evidence the August
24, 1996 Receipt signed by Antonio Balite. Interestingly, he was never presented in the lower court to dispute
the veracity of the contents of that Receipt, particularly the second paragraph that had categorically stated the
outstanding balance of respondent as of August 24, 1996, to be P350,000. Furthermore, the evidence shows
that subsequent payments of P30,000 and P200,000 were made by the latter. Thus, we affirm the CA’s Decision
holding that the remaining unpaid balance of the price was P120,000.

WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED. Costs against the petitioners.

SO ORDERED.

34. REPUELA ESTATE OF SPS LARAWAN

This Petition for Review on Certiorari under Rule 45 of the Rules of Court assails the May 29, 2014
Decision1 and the June 10, 2015 Resolution 2 of the Court of Appeals (CA) in CA-G.R. CV No.
03976, which reversed and set aside the February 23, 2011 Decision 3 of the Regional Trial Court
(RTC), Seventh Judicial Region, Branch 7, Cebu City, in Civil Case No. CEB-28524, a case for
Annulment of Documents, Quieting of Title, Redemption, Damages, and Attorney's Fees.

The Antecedents

Spouses Lorenzo and Magdalena Repuela owned Lot No. 3357 (subject property), situated in
Lawaan III, Talisay City, Cebu, and covered by Transfer Certificate of Title (TCT) No. 5154. After
they had passed away, their children Marcelino Repuela (Marcelino) and Cipriano Repuela
(Cipriano) succeeded them as owners of the subject property. 4

Cipriano and Marcelino (Repuela brothers) claimed that sometime in July 1963, after the death of
their parents, they went to the house of Otillo Larawan (Otillo) to borrow P200.00 for Marcelino's
fare to Iligan City; that to secure the loan, the spouses Otillo and Juliana Larawan (Spouses
Larawan) required them to turn over the certificate of title for Lot No. 3357; that they were made
to sign a purported mortgage contract but they were not given a copy of the said document; that
Cipriano affixed his signature while Marcelino, being illiterate, just placed his thumb mark on the
document; that they remained in possession of the land despite the mortgage and had been
planting bamboos, corn, bananas, and papayas thereon and sharing the produce between them;
and that they also paid the taxes due on the property. 5

In October 2002, as recalled by Cipriano's daughter, Cristina Repuela Ramos (Cristina), she went
to the City Treasurer's Office of Talisay City, upon the request of her father, to verify whether
Spouses Larawan were paying the realty taxes on the mortgaged property. She learned that
Spouses Larawan did not pay the taxes and the tax declaration on the subject property was
already in their names as early as 1964; that in the Registry of Deeds of Cebu, TCT No. 5154 was
already cancelled and a new certificate of title, TCT No. 10506, had been issued to Otillo; that
Spouses Larawan were able to transfer the certificate of title to their names by virtue of
the Extajudicial Declaration of Heirs and Sale bearing the signature of her father Cipriano and the
thumb mark of her uncle Marcelino; and that her father and uncle remembered that they were
made to sign a blank document.

On January 17, 2003, Cipriano and Marcelino, on account of this predicament, were compelled to
file a complaint before the RTC for the annulment of the Extrajudicial Declaration of Heirs and
Sale and the cancellation of TCT No. 10506. During the trial, Catalina Burlas (Burlas), who lived
next to the subject property, and Alma Abellanosa (Abellanosa), City Assessor of Talisay City,
were also presented as witnesses for the Repuela brothers. 6

Burlas testified that the Repuela brothers confided in her about Marcelino's desire to go to Iligan
City but they had no money for his fare; that another neighbor referred the Repuela brothers to
Otillo, who could lend them P200.00 but only upon the signing of a deed of mortgage and the
surrender of the certificate of title as collateral; that Marcelino was able to leave for Iligan but he
came back after three months to help Cipriano in cultivating the land; that she did not see any
other person till the land except the Repuela brothers; and that she could not recall a time when
Otillo, whom she personally knew, ever visited or cultivated the subject property. 7

Abellanosa, as City Assessor, stated that based on the records of her office, Lot No. 3357 was
declared for taxation purposes for the first time in 1961 when Tax Declaration No. 12543 was
issued in the name of Lorenzo Repuela; that in 1964, Tax Declaration No. 24112 was issued in the
name of Spouses Larawan on the basis of a deed of sale; and that the subsequent tax
declarations had Spouses Larawan as the owners.8

For the Estate of Spouses Larawan, on the other hand, the transaction between the Repuela
brothers and Otillo was a sale and not a mortgage of a parcel of land. The Estate also invoked
laches on the part of the Repuela brothers for failing to file a complaint during the lifetime of
Spouses Larawan. Galileo Larawan (Galileo), son of Spouses Larawan and the sole witness for the
Estate, testified that he knew of the transaction between his father and the Repuela brothers
because his father brought him along to the office of Atty. Celestino Bacalso (Atty. Bacalso),
where the document entitled Extrajudicial Declaration of Heirs and Sale was prepared; that the
said document was signed by Cipriano and thumbmarked by Marcelino which was witnessed by
Hilario Bacalso and Fernando Abellanosa; that he witnessed the Repuela brothers affix their
signature and thumbmark after Atty. Bacalso read and explained to them the contents of the
document in the Cebuano dialect; that after the document was notarized, his father handed
P2,000.00 to the Repuela brothers as consideration for the sale; and that he was only six (6)
years old when these all happened.9

Galileo also pointed out that the new certificate of title, TCT No. 10506, in the name of Spouses
Larawan, was issued by the Register of Deeds on August 20, 1963; that his mother paid the real
estate taxes during her lifetime and, after her death, he himself made the payments; that he
secured the tax declaration for the subject property from the office of the Talisay City Assessor;
that their family had been in possession of the subject property and they had harvested and
enjoyed the produce of the land such as bamboos, jackfruit and 100 coconut trees; and that there
were no other persons claiming ownership over the land, as the Repuela brothers never offered to
redeem the subject property from their family. 10

The Ruling of the RTC

After the trial, the RTC decided in favor of the Repuela brothers. It held that the transaction
between the parties was not a sale but an equitable mortgage. The testimony of Galileo for the
respondent, who was admittedly just six (6) years old then, was "likely colored by the lens of
adult perspective and self-interest." It believed the claim of Cipriano, who only had the benefit of
a Grade One education, and the illiterate Marcelino, that they merely signed a document without
knowing its nature. The trial court gave more credence to the claim of possession of the Repuela
brothers because the same was affirmed by a disinterested person, Burlas, who had been living in
the area since she was small and whose lot adjoined the subject property. According to her, only
Cipriano and Marcelino cultivated the land and she never saw anyone, not even Otillo, work on the
land.11

Moreover, it was the trial court's opinion that the evidence of possession weighed more on the
side of the Repuela brothers than that of the Estate of Spouses Larawan. Their assertion of
possession was bolstered by the fact that they too paid taxes on the property, an indication that
they were still in possession of the subject property. Considering that they still possessed the
subject property even after the execution of the sale, in the concept of an owner and continued
paying the land taxes thereon, the RTC was of the view that the contract, entered into by the
Repuela brothers and Otillo, was an equitable mortgage under Article 1602 of the Civil
Code.12 Thus, the RTC disposed:  chanRoblesvirtualLawlibrary

Hence, the Court:  ChanRoblesVirtualawlibrary

1. Declares the sale in the document, "Extrajudicial Declaration of Heirs and Sale," signed by
Cipriano and Marcelino Repuela in favor of Otillo Larawan and spouse on July 1, 1963, as in effect
an equitable mortgage;

2. Gives Cipriano and Marcelino Repuela thirty (30) days from the finality of this decision to
redeem the property in the amount of Two Thousand Pesos (P2,000.00), with interest at the legal
rate computed from the date of the filing of the Complaint; and

3. Directs defendants to pay plaintiffs:  ChanRoblesVirtualawlibrary

a. P20,000.00, as attorney's fees, and

b. P20,000.00, as litigation expenses. chanroblesvirtuallawlibrary

Costs are assessed against the defendants.

SO ORDERED.13
Not in conformity, the Estate of Spouses Larawan appealed the case to the CA.

The Ruling of the CA

On May 29, 2014, the CA reversed and set aside the February 23, 2011 Decision of the RTC for
the following reasons:  ChanRoblesVirtualawlibrary

1. The Repuela brothers failed to present any direct and positive proof to rebut the presumption of
the document's due execution. They failed to prove any factual circumstance to point that the
transaction covered therein was one of mortgage, or at the least, that such was their intention;

2. The Repuela brothers had not proven continued possession of the subject property which would
have given the impression that it was not sold but merely mortgaged;

3. None of the enumerated circumstances in Article 1602 of the Civil Code was present in order
for the presumption of equitable mortgage to apply. Contrary to the factual finding of the trial
court, the evidence did not show that they were still in possession of the property even after the
execution of the document and that they continued paying the taxes on the property immediately
after the execution of the deed; and,

4. Granting arguendo that the transaction was a mortgage, their cause of action was already
barred by laches as 39 years had already elapsed before they asserted their rights over the
subject property.14

The decretal portion of the CA decision reads:  ChanRoblesVirtualawlibrary

WHEREFORE, premises considered, the instant appeal is GRANTED. The February 23, 2011
Decision of the RTC Branch 7 of Cebu City in Civil Case No. CEB-28524 is REVERSED and SET
ASIDE and the complaint for Annulment of Documents, Quieting of Title, Redemption, Damages
and Attorney's Fees is DISMISSED.

15
SO ORDERED.  cralawlawlibrary

After their motion for reconsideration was denied by the CA in its Resolution, dated June 10,
2015, the heirs of the Repuela brothers (petitioners) filed the subject petition.

Issue

Whether the Extrajudicial Declaration of Heirs

and Sale amounted to an equitable mortgage.

Petitioners explain that the Repuela brothers only filed the case in 2003 because they found no
urgency to file it as there were no indications that their title and possession over the subject
property were threatened. They claim that their predecessors-in-interest were in peaceful, open,
continuous, and public possession as owners of the subject property from the time of the
transaction in 1963 until the time when they decided to partition their property and learned, in the
process, that the tax declaration and title of their lot were already transferred in the name of
Spouses Larawan. They argue that considering that they, who were claiming to be the owners
thereof, were in actual possession of the property, their right to seek reconveyance, which in
effect sought to quiet the title to the property, never prescribed. 16

Petitioners further argue that the existence of the Extrajudicial Declaration of Heirs and Sale was
not enough proof that the Repuela brothers really intended to sell the property, and that the
stipulations in the contract should be construed together with the parties' contemporaneous and
subsequent acts as regards the execution of the contract. The same was true with the issuance of
a new owner's TCT in favor of Spouses Larawan. It neither imports conclusive evidence of
ownership nor proves that the agreement between the parties was one of sale. A conveyance by
registration in the name of the transferee and the issuance of a new certificate is not secured from
the operation of the equitable doctrine, to the effect that any conveyance intended as security for
a debt would be held in effect to be a mortgage, than most informal conveyance that could be
devised.17

The CA, according to petitioners, should have given more credence to the testimonies of the
Repuela brothers, as corroborated and affirmed by the disinterested witness, Burlas, over that of
Galileo, the lone witness for the respondent. As correctly observed by the trial court, Galileo was
just six (6) years old when he supposedly witnessed the alleged transaction in the office of Atty.
Bacalso, and so he could not have possibly known the nature of the executed contract. Echoing
the RTC, they pointed out that a six-year old boy's curiosity and concerns could not have
extended to things of this nature and that his recollection of events was likely colored by the lens
of adult perspective and self-interest, as Galileo himself admitted that he did not read the
document.18

Finally, they stress that the Repuela brothers remained in possession of the subject property even
after the transaction and they also paid the taxes thereon for the years 1985 to 2002 on
December 18, 2002. These circumstances surrounding the transaction entered into by and
between the Repuela brothers and Otillo would naturally lead anyone to infer that this instance
was espoused in Article 1602 of the Civil Code. This is in line with jurisprudence consistently
holding that the presence of one, and not the confluence of several circumstances, is sufficient to
prove that a contract of sale is one of an equitable mortgage. 19

The Position of Respondent

In its Comment,20 dated December 28, 2015, respondent Estate of Spouses Larawan (respondent)

averred that the extrajudicial settlement and sale executed by the parties could not be presumed
as an equitable mortgage. First, the said contract was "not a sale with right to repurchase" and
the price of the sale was not unusually inadequate. Second, there is no documentary evidence
that would support the claim of possession by the Repuela brothers, as lessee or otherwise,
continuously from the execution of the document of sale until the filing of the case. Third, the
third situation (when upon or after the expiration of the right to repurchase, another instrument
extending the period of redemption or granting a new period was executed) wherein a contract
shall be presumed to be an equitable mortgage is not applicable in the instant case. The
Extrajudicial Declaration of Heirs and Sale did not provide for a right to repurchase. As such, there
was no period of redemption to be extended or a new period to be executed. Fourth, there was no
showing that Otillo, as purchaser, retained for himself a part of the purchase price. He paid the
amount of P2,000.00 as sale consideration to the Repuela brothers. 21 Fifth, there was no
agreement in the contract of sale that the Repuela brothers, as vendors, bound themselves to pay
the taxes on the thing sold. And finally, the Extrajudicial Declaration of Heirs and Sale was quite
clear and specific that what was involved was a sale of the subject property. From the terms of
the contract, no inference could be made that the real intention of the parties was to secure the
payment of a debt or the performance of any other obligation.

The Court's Ruling

The Court finds merit in the petition.

An equitable mortgage is one which, although lacking in some formality, or form, or words, or
other requisites demanded by a statute, reveals the intention of the parties to charge real
property as security for a debt, and contains nothing impossible or contrary to law. 22

For a presumption of an equitable mortgage to arise, two requisites must first be satisfied,
namely: that the parties entered into a contract denominated as a contract of sale and that their
intention was to secure an existing debt by way of mortgage. 23 There is no single conclusive test
to determine whether a deed of sale, absolute on its face, is really a simple loan accommodation
secured by a mortgage. Article 1602, in relation to Article 1604 of the Civil Code, however,
enumerates several instances when a contract, purporting to be, and in fact styled as, an absolute
sale, is presumed to be an equitable mortgage. Thus:  ChanRoblesVirtualawlibrary
ART. 1602. The contract shall be presumed to be an equitable mortgage, in any of the following
cases: chanRoblesvirtualLawlibrary

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

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

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

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

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

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

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

xxx

ART. 1604. The provisions of Article 1602 shall also apply to a contract purporting to be
an absolute sale. [Emphases and underscoring supplied]

Evident from Article 1602, the presence of any of the circumstances set forth therein suffices for a
contract to be deemed an equitable mortgage. No concurrence or an overwhelming number is
needed.24 In other words, the fact that some or most of the circumstances mentioned are absent
in a case will not negate the existence of an equitable mortgage.

In this case, it appears that two (2) instances enumerated in Article 1602 — possession of the
subject property and inference that the transaction was in fact a mortgage attended the assailed
transaction.

Possession as Lessee or
otherwise

Article 1602 (2) of the Civil Code provides that when the supposed vendor remains in possession
of the property even after the conclusion of the transaction, the purported contract of sale is
presumed to be an equitable mortgage. In general terms, possession is the holding of a thing or
the enjoyment of a right, whether by material occupation or by the fact that the right is subjected
to the will of the claimant. The gathering of the products of and the act of planting on the land
constitute occupation, possession and cultivation. 25
cralawred

In this case, petitioners insist that the Repuela brothers remained in possession of the subject
property after the transaction, as was corroborated by a disinterested person, Burlas, who lived in
the adjoining lot from the time she was a child. According to her, it was only the Repuela brothers
who tilled the land and planted corn, bananas and camote. She never saw Otillo, whom she also
knew, till or work on the land.

The respondent's claim of possession, as supported by a transfer certificate of title and tax
declaration of the subject property, both in the name of Spouses Larawan is, to the Court's mind,
not persuasive. These documents do not prove actual possession. They do not rebut the
overwhelming evidence of the Repuela brothers that they were in actual possession. The fact of
registration in the name of Spouses Larawan does not change the picture. A conveyance of land,
accompanied by registration in the name of the transferee and the issuance of a new certificate, is
no more secured from the operation of this equitable doctrine than the most informal conveyance
that could be devised. In an equitable mortgage, title to the property in issue, which has been
transferred to the respondents actually remains or is transferred back to the petitioner as owner-
mortgagor, conformably to the well-established doctrine that the mortgagee does not become the
owner of the mortgaged property because the ownership remains with the mortgagor pursuant to
Article 2088, of the Civil Code.26

Inference can be made

that the transaction was
an equitable mortgage

From the attending circumstances of the case, it can be inferred that the real intention of the
Repuela brothers was to secure their indebtedness from Spouses Larawan. They needed money
for Marcelino's fare so they went to the house of Otillo to borrow P200.00. Considering that
Spouses Larawan would only agree to extend the loan if they would surrender their certificate of
title over the subject property, they obliged in the belief that its purpose was only to secure their
loan. In other words, they surrendered the title to Spouses Larawan as security to obtain the
much needed loan. It was never their intention to sell the subject property.

As held in Banga v. Sps. Bello,27 in determining whether a deed, absolute in form, is a mortgage,
the court is not limited to the written memorials of the transaction. "The decisive factor in
evaluating such agreement is the intention of the parties, as shown not necessarily by the
terminology used in the contract but by all the surrounding circumstances, such as the relative
situation of the parties at that time, the attitude, acts, conduct, declarations of the parties, the
negotiations between them leading to the deed, and generally, all pertinent facts having a
tendency to fix and determine the real nature of their design and understanding." 28

There is a presumption of
mistake

Granting that indeed Cipriano and Marcelino, signed and thumbmarked, respectively,
the Extrajudicial Declaration of Heirs and Sale, there is still reason to believe that they did so
without understanding the real nature, effects and consequences of what they did as they were
never explained to them. Cipriano, who only finished Grade One, and Marcelino, an illiterate, were
in dire need of money. As such, the possibility that they affixed their conformity to the onerous
contract to their detriment just to get the loan was not remote. In dire need as they were, they
signed a document despite knowing that it did not express their real intention. "Necessitous men
are not, truly speaking, free men; but to answer a present emergency, will submit to any terms
that the crafty may impose upon them." 29 For this reason, the Repuela brothers should be given
the protection afforded by the Civil Code provisions on equitable mortgage.

As aptly explained in Cruz v. Court of Appeals,30 the Court held:  ChanRoblesVirtualawlibrary

Vendors covered by Art. 1602 usually find themselves in an unequal position when bargaining
with the vendees, and will readily sign onerous contracts to get the money they need. Necessitous
men are not really free men in the sense that to answer a pressing emergency they will submit to
any terms that the crafty may impose on them. This is precisely the evil that Art. 1602 seeks to
guard against. The evident intent of the provision is to give the supposed vendor maximum
safeguards for the protection of his legal rights under the true agreement of the parties. 31

Besides, where a party is unable to read or when the contract is in a language not understood by
a party and mistake or fraud is alleged, the obligation to show that the terms of the contract had
been fully explained to the said party who is unable to read or understand the language of the
contract devolves on the party seeking to enforce it. Indeed, that burden to show that the other
party fully understood the contents of the document rests upon the party who seeks to enforce
the contract. If he fails to discharge this burden, the presumption of mistake, if not, fraud, stands
unrebutted and controlling.32 Respondent failed to overcome this burden.

In the case at bench, Galileo's testimony that he had witnessed the Repuela brothers affix their
conformity after Atty. Bacalso read and explained to them the contents of the document in the
Cebuano dialect, fails to convince this Court. As keenly observed by the RTC, Galileo was just six
(6) years old when he witnessed the transaction in the office of Atty. Bacalso. To the Court's
mind, Galileo could not have possibly known the nature of the purported contract, much less,
perceived with certainty if the Repuela brothers were indeed apprised of the true nature of the
said contract before they were made to sign and thumbmark it. For this reason, the presumption
of mistake, if not fraud, shall remain.

Furthermore, it must be pointed out that the law accords the equitable mortgage presumption in
situations when doubt exists as to the true intent of the parties to the contract, 33 as in this case.
Courts are generally inclined to construe one purporting to be a sale as an equitable mortgage,
which involves a lesser transmission of rights and interests over the property in controversy. 34

There was no prescription

or laches

Contrary to the findings of the CA that petitioners' cause of action was already barred by laches
because of the 39 years that had already lapsed before they asserted their rights over the
property, the Court holds otherwise. In  Inamarga v. Alano,35 the Court considered the deed of
sale as equitable mortgage and wrote:  ChanRoblesVirtualawlibrary

xxx Where there is no consent given by one party in a purported contract, such contract was not
perfected; therefore, there is no contract to speak of. The deed of sale relied upon by petitioner is
deemed a void contract. This being so, the action based on said deed of sale shall not
prescribe in accordance with Article 1410 of the Civil Code. 36 [Emphasis supplied]

Legal Interest

In the case of Muñoz v. Ramirez,37 the Court stated that where it was established that the
reciprocal obligations of the parties were under an equitable mortgage, reconveyance of the
property should be ordered to the rightful owner therein upon the payment of the loan within 90
days from the finality of that decision. 38

In the case at bench, the RTC ordered the Repuela brothers to pay their loan amounting to
P2,000.00 with interest at the legal rate computed from the date of the filing of the complaint in
order for them to repair the property.

In determining the legal rate applicable in this case, Circular No. 799, series of 2013, issued by
the Office of the Governor of the Bangko Sentral ng Pilipinas on June 21, 2013, which was the
basis of the Court in Nacar v. Gallery Frames,39 provides that effective July 1, 2013, the rate of
interest for the loan or forbearance of any money, goods or credits and the rate allowed in
judgments, in the absence of an express contract as to such rate of interest, shall be six percent
(6%) per annum. Applying the foregoing, the rate of interest of 12% per annum on the obligation
of the Repuela brothers shall apply from the date of the filing of the complaint on January 17,
2003 until June 30, 2013 only. From July 1, 2013 until fully paid, the legal rate of 6% per annum
shall be applied to their unpaid obligation.

WHEREFORE, the petition is GRANTED. The assailed May 29, 2014 Decision and the June 10,
2015 Resolution of the Court of Appeals in CA-G.R. CV No. 03976 are SET ASIDE. The February
23, 2011 Decision of the Regional Trial Court, Cebu City, Seventh Judicial Region, Branch 7 in Civil
Case No. CEB-28524 is REINSTATED with MODIFACATION in that the 12% interest per annum
shall only apply from January 17, 2003 until June 30, 2013 only, after which date and until fully
paid, the mortgage indebtedness of Cipriano Repuela and Marcelino Repuela shall earn interest at
6% per annum.

SO ORDERED.  cralawlawlibrary
35. CARLOS ALONZO and CASIMIRA ALONZO, petitioners,
vs.
INTERMEDIATE APPELLATE COURT and TECLA PADUA, respondents.

Perpetuo L.B. Alonzo for petitioners.

Luis R. Reyes for private respondent.

CRUZ, J.:

The question is sometimes asked, in serious inquiry or in curious conjecture, whether we are a court of law or a
court of justice. Do we apply the law even if it is unjust or do we administer justice even against the law? Thus
queried, we do not equivocate. The answer is that we do neither because we are a court both of law and of
justice. We apply the law with justice for that is our mission and purpose in the scheme of our Republic. This
case is an illustration.

Five brothers and sisters inherited in equal pro indiviso shares a parcel of land registered in 'the name of their
deceased parents under OCT No. 10977 of the Registry of Deeds of Tarlac. 1

On March 15, 1963, one of them, Celestino Padua, transferred his undivided share of the herein petitioners for the sum of P550.00 by way of absolute
sale. 2 One year later, on April 22, 1964, Eustaquia Padua, his sister, sold her own share to the same vendees, in an instrument denominated "Con Pacto de
Retro Sale," for the sum of P 440.00. 3

By virtue of such agreements, the petitioners occupied, after the said sales, an area corresponding to two-fifths
of the said lot, representing the portions sold to them. The vendees subsequently enclosed the same with a
fence. In 1975, with their consent, their son Eduardo Alonzo and his wife built a semi-concrete house on a part
of the enclosed area. 4

On February 25, 1976, Mariano Padua, one of the five coheirs, sought to redeem the area sold to the spouses
Alonzo, but his complaint was dismissed when it appeared that he was an American citizen .  On May 27, 1977, 5

however, Tecla Padua, another co-heir, filed her own complaint invoking the same right of redemption claimed
by her brother.  6

The trial court * also dismiss this complaint, now on the ground that the right had lapsed, not having been exercised within thirty days from notice of the
sales in 1963 and 1964. Although there was no written notice, it was held that actual knowledge of the sales by the co-heirs satisfied the requirement of the
law. 7

In truth, such actual notice as acquired by the co-heirs cannot be plausibly denied. The other co-heirs, including
Tecla Padua, lived on the same lot, which consisted of only 604 square meters, including the portions sold to the
petitioners .   Eustaquia herself, who had sold her portion, was staying in the same house with her sister Tecla,
8

who later claimed redemption petition.   Moreover, the petitioners and the private respondents were close friends
9

and neighbors whose children went to school together. 10

It is highly improbable that the other co-heirs were unaware of the sales and that they thought, as they alleged, that the area occupied by the petitioners had
merely been mortgaged by Celestino and Eustaquia. In the circumstances just narrated, it was impossible for Tecla not to know that the area occupied by the
petitioners had been purchased by them from the other. co-heirs. Especially significant was the erection thereon of the permanent semi-concrete structure by
the petitioners' son, which was done without objection on her part or of any of the other co-heirs.

The only real question in this case, therefore, is the correct interpretation and application of the pertinent law as
invoked, interestingly enough, by both the petitioners and the private respondents. This is Article 1088 of the
Civil Code, providing as follows:

Art. 1088. Should any of the heirs sell his hereditary rights to a stranger before the partition, any
or all of the co-heirs may be subrogated to the rights of the purchaser by reimbursing him for the
price of the sale, provided they do so within the period of one month from the time they were
notified in writing of the sale by the vendor.

In reversing the trial court, the respondent court ** declared that the notice required by the said article was written notice and that actual
notice would not suffice as a substitute. Citing the same case of De Conejero v. Court of Appeals 11 applied by the trial court, the respondent court held that
that decision, interpreting a like rule in Article 1623, stressed the need for written notice although no particular form was required.
Thus, according to Justice J.B.L. Reyes, who was the ponente of the Court, furnishing the co-heirs with a copy
of the deed of sale of the property subject to redemption would satisfy the requirement for written notice. "So
long, therefore, as the latter (i.e., the redemptioner) is informed in writing of the sale and the particulars thereof,"
he declared, "the thirty days for redemption start running. "

In the earlier decision of Butte v. UY, 12 " the Court, speaking through the same learned jurist, emphasized that the written notice should be
given by the vendor and not the vendees, conformably to a similar requirement under Article 1623, reading as follows:

Art. 1623. The right of legal pre-emption or redemption shall not be exercised except within thirty
days from the notice in writing by the prospective vendor, or by the vendors, as the case may be.
The deed of sale shall not be recorded in the Registry of Property, unless accompanied by an
affidavit of the vendor that he has given written notice thereof to all possible redemptioners.

The right of redemption of co-owners excludes that of the adjoining owners.

As "it is thus apparent that the Philippine legislature in Article 1623 deliberately selected a particular method of
giving notice, and that notice must be deemed exclusive," the Court held that notice given by the vendees and
not the vendor would not toll the running of the 30-day period.

The petition before us appears to be an illustration of the Holmes dictum that "hard cases make bad laws" as the
petitioners obviously cannot argue against the fact that there was really no written notice given by the vendors to
their co-heirs. Strictly applied and interpreted, Article 1088 can lead to only one conclusion, to wit, that in view of
such deficiency, the 30 day period for redemption had not begun to run, much less expired in 1977.

But as has also been aptly observed, we test a law by its results; and likewise, we may add, by its purposes. It is
a cardinal rule that, in seeking the meaning of the law, the first concern of the judge should be to discover in its
provisions the in tent of the lawmaker. Unquestionably, the law should never be interpreted in such a way as to
cause injustice as this is never within the legislative intent. An indispensable part of that intent, in fact, for we
presume the good motives of the legislature, is to render justice.

Thus, we interpret and apply the law not independently of but in consonance with justice. Law and justice are
inseparable, and we must keep them so. To be sure, there are some laws that, while generally valid, may seem
arbitrary when applied in a particular case because of its peculiar circumstances. In such a situation, we are not
bound, because only of our nature and functions, to apply them just the same, in slavish obedience to their
language. What we do instead is find a balance between the word and the will, that justice may be done even as
the law is obeyed.

As judges, we are not automatons. We do not and must not unfeelingly apply the law as it is worded, yielding
like robots to the literal command without regard to its cause and consequence. "Courts are apt to err by sticking
too closely to the words of a law," so we are warned, by Justice Holmes again, "where these words import a
policy that goes beyond them." 13 While we admittedly may not legislate, we nevertheless have the power to interpret the law in such a way as to
reflect the will of the legislature. While we may not read into the law a purpose that is not there, we nevertheless have the right to read out of it the reason for
its enactment. In doing so, we defer not to "the letter that killeth" but to "the spirit that vivifieth," to give effect to the law maker's will.

The spirit, rather than the letter of a statute determines its construction, hence, a statute must be
read according to its spirit or intent. For what is within the spirit is within the letter but although it
is not within the letter thereof, and that which is within the letter but not within the spirit is not
within the statute. Stated differently, a thing which is within the intent of the lawmaker is as much
within the statute as if within the letter; and a thing which is within the letter of the statute is not
within the statute unless within the intent of the lawmakers. 14

In requiring written notice, Article 1088 seeks to ensure that the redemptioner is properly notified of the sale and to indicate the date of
such notice as the starting time of the 30-day period of redemption. Considering the shortness of the period, it is really necessary, as a
general rule, to pinpoint the precise date it is supposed to begin, to obviate any problem of alleged delays, sometimes consisting of only
a day or two.

The instant case presents no such problem because the right of redemption was invoked
not days but years after the sales were made in 1963 and 1964. The complaint was filed by Tecla Padua in
1977, thirteen years after the first sale and fourteen years after the second sale. The delay invoked by the
petitioners extends to more than a decade, assuming of course that there was a valid notice that tolled the
running of the period of redemption.
Was there a valid notice? Granting that the law requires the notice to be written, would such notice be necessary
in this case? Assuming there was a valid notice although it was not in writing. would there be any question that
the 30-day period for redemption had expired long before the complaint was filed in 1977?

In the face of the established facts, we cannot accept the private respondents' pretense that they were unaware
of the sales made by their brother and sister in 1963 and 1964. By requiring written proof of such notice, we
would be closing our eyes to the obvious truth in favor of their palpably false claim of ignorance, thus exalting the
letter of the law over its purpose. The purpose is clear enough: to make sure that the redemptioners are duly
notified. We are satisfied that in this case the other brothers and sisters were actually informed, although not in
writing, of the sales made in 1963 and 1964, and that such notice was sufficient.

Now, when did the 30-day period of redemption begin?

While we do not here declare that this period started from the dates of such sales in 1963 and 1964, we do say
that sometime between those years and 1976, when the first complaint for redemption was filed, the other co-
heirs were actually informed of the sale and that thereafter the 30-day period started running and ultimately
expired. This could have happened any time during the interval of thirteen years, when none of the co-heirs
made a move to redeem the properties sold. By 1977, in other words, when Tecla Padua filed her complaint, the
right of redemption had already been extinguished because the period for its exercise had already expired.

The following doctrine is also worth noting:

While the general rule is, that to charge a party with laches in the assertion of an alleged right it
is essential that he should have knowledge of the facts upon which he bases his claim, yet if the
circumstances were such as should have induced inquiry, and the means of ascertaining the
truth were readily available upon inquiry, but the party neglects to make it, he will be chargeable
with laches, the same as if he had known the facts. 15

It was the perfectly natural thing for the co-heirs to wonder why the spouses Alonzo, who were not among them, should enclose a portion of the inherited lot
and build thereon a house of strong materials. This definitely was not the act of a temporary possessor or a mere mortgagee. This certainly looked like an act
of ownership. Yet, given this unseemly situation, none of the co-heirs saw fit to object or at least inquire, to ascertain the facts, which were readily available. It
took all of thirteen years before one of them chose to claim the right of redemption, but then it was already too late.

We realize that in arriving at our conclusion today, we are deviating from the strict letter of the law, which the
respondent court understandably applied pursuant to existing jurisprudence. The said court acted properly as it
had no competence to reverse the doctrines laid down by this Court in the above-cited cases. In fact, and this
should be clearly stressed, we ourselves are not abandoning the De Conejero and Buttle doctrines. What we are
doing simply is adopting an exception to the general rule, in view of the peculiar circumstances of this case.

The co-heirs in this case were undeniably informed of the sales although no notice in writing was given them.
And there is no doubt either that the 30-day period began and ended during the 14 years between the sales in
question and the filing of the complaint for redemption in 1977, without the co-heirs exercising their right of
redemption. These are the justifications for this exception.

More than twenty centuries ago, Justinian defined justice "as the constant and perpetual wish to render every
one his due." 16 That wish continues to motivate this Court when it assesses the facts and the law in every case brought to it for decision. Justice is
always an essential ingredient of its decisions. Thus when the facts warrants, we interpret the law in a way that will render justice, presuming that it was the
intention of the lawmaker, to begin with, that the law be dispensed with justice. So we have done in this case.

WHEREFORE, the petition is granted. The decision of the respondent court is REVERSED and that of the trial
court is reinstated, without any pronouncement as to costs. It is so ordered.

36. FRANCISCO GARCIA, PAZ GARCIA, and MARIA GARCIA, petitioners,

vs.
JOSE CALALIMAN, PACIENCIA TRABADILLO & HON. COURT OF APPEALS, Third Division, respondents.

Jose Gaton for petitioners.

Ricardo Q. Castro for respondents.

PARAS, J.:

This is a petition for review on certiorari of the decision * of the Court of Appeals in CA-G.R. No. 22179-R,
promulgated on August 31, 1966, reversing the decision of the Court of First Instance of Iloilo ** in Civil Case
No. 3489, and rendering a new one dismissing the complaint of petitioner herein, the dispositive portion of which
reads as follows:

WHEREFORE, the judgment appealed from is hereby reversed and another entered, dismissing
plaintiff's complaint. No pronouncement as to costs. (p. 29 Rollo)

The facts of the case are as follows:

On February 11, 1946, one Gelacio Garcia died intestate, leaving a parcel of unregistered land about 372 sq.
meters, situated in the Municipality of Tubungan, Province of Iloilo (Exhibits, p. 19). On his death the property
was inherited by his nephews, nieces, grandnephews who are the descendants of his late brothers, Pedro,
Simeon, Buenaventura and Marcos (TSN, Sept. 6,1956, p. 3).

On December 3, 1954, the heirs, Juanita Bertomo, Joaquin Garcia, Porfirio Garcia, Dioscoro Garcia, Flora
Garcia, Consolacion Garcia, Remedios Garcia, Trinidad Garcia, Baltazar Garcia signed a document entitled,
"Extra-judicial Partition and Deed of Sale" (Exhibits, p. 19). The parcel of land subject of the document was
described as follows:

A parcel of residential land, about 372 square meters, lst class, Identified as Assessor's Lot No.
107, Block No. 8, bounded on the north by Paz and Federal Streets; on the south by Tabaosares
and Antonia Tacalinar; on the East by Piedad Street; and on the West by Paz Street. This parcel
of land has no concrete monuments to indicate its boundaries but there are dikes, stones and
temporary fences used as landmarks and boundary signals. This parcel of land is covered by
Tax Declaration No. 1149, S. of 1947, in the name of Gelacio Garcia, and its assessed value of
P110.00. (p. 19, Exhibits)

The last paragraph of the same document states:

That for and in consideration of the sum of FIVE HUNDRED PESOS (P500.00), Philippine
Currency, to us in hand paid by the spouses, JOSE CALALIMAN, and PACIENCIA
TRABADILLO, all of legal age, Filipinos and residents of the municipality of Tubungan, province
of Iloilo, Philippines, receipt of which we hereby acknowledged and confessed to our entire
satisfaction, do by these presents, cede, sell, convey and transfer the above-described parcel of
land unto the said spouses, Jose Calaliman and Paciencia Trabadillo, their heirs, successors and
assigns free from all liens and encumbrances whatever. (p. 19, Exhibits)

The document was inscribed in the Register of Deeds of Iloilo on February 24,1955, Inscription No. 20814, Page
270, Vol. 64 (Exhibits, p. 20).

On December 17, 1954 another group of heirs, Rosario Garcia, Margarita Garcia, Dolores Rufino, Resurreccion
Tagarao, Serafin Tagarao, Buenaventura Tagarao, Fortunata Garcia and Simeon Garcia, all residents of
Isabela, Negros Occidental, also sold to the spouses Jose Calaliman and Paciencia Trabadillo through their
attorney-in-fact, Juanito Bertomo, their shares, rights, interest and participation in the same parcel of land. The
Deed of Sale was registered in the Register of Deeds of Iloilo also on December 22, 1954, Inscription No.
20640, p. 88, Vol. 64 (Exhibits, p. 2122).

On May 7, 1955 the heirs Francisco Garcia, Paz Garcia, and Maria Garcia, petitioners herein, filed against the
spouses Jose Calaliman and Paciencia Trabadillo, private respondents herein, Civil Case No. 3489 with the
Court of First Instance of Iloilo, for legal redemption of the 3/4 portion of the parcel of land inherited by the heirs
from the late Gelacio Garcia, which portion was sold by their co-heirs to the defendants. In the complaint
(Record on Appeal, p. 4) plaintiffs alleged, among others:
 5. That, plaintiffs' co-owners had never offered for sale their interest and shares over the said
land to the plaintiffs prior to the sale in favor of the defendants, nor given notice of such intention
on their part; and that, no notice in writing has been given by said co-owners to the plaintiffs of
the said sale, such that, plaintiffs came to learn of it only from other source;

6. That, plaintiffs would have purchased the interest and shares of their co-owners had the latter
offered the same to them prior to the sale thereof to the defendants; and that, within 30 days
after learning of the sale made to the defendants under annexes 'A', 'B' and 'B-l', plaintiffs made
repeated offer to the defendants to allow them to redeem said interest and shares acquired by
the defendants in accordance with the right granted to the plaintiffs by law in such a case,
offering a reasonable price thereof of P300 taking into consideration the fact that the defendants
had acquired only 3/4 of the land of 372 square meters more or less, in area with assessed value
of P110 and a fair market value of 372 at Pl per square meter, the price actually obtaining in the
locality at the time of the sale thereof under Annexes 'A', 'B' and 'B-l'; however, the defendants
refused and have until the present refused to grant redemption thereof giving no reason why
other than challenging the plaintiffs to bring their case in court:

7. That, the circumstances surrounding the transaction between the defendants and plaintiffs' co-
owners, the vendors, were such that defendants could not have actually paid nor the vendors
actually received the total price of P800 as stipulated in the deeds Annexes 'A', 'B' and 'B-l' while
the said price fixed is grossly excessive and highly exaggerated and prohibitive for evidently
ulterior motive:

8. That, the land herein described is an ancestral property and plaintiffs have actually a house
standing thereon and having lived thereon ever since, such that, the defendants' refusal to allow
redemption thereof has caused the plaintiffs mental torture, worry and anxiety, forcing them to
litigate and retain services of counsel, therefore, plaintiffs demand against the defendants P500
for moral damage, P500 for exemplary damage, P300 for attorney's fees, aside from actual
expenses incurred; and, furthermore, P5 monthly as reasonable value of defendants' occupation
of a portion of the premises counting from the filing of this complaint.

They prayed that the trial court render judgment:

1. Declaring the plaintiffs to be entitled to redeem from the defendants for the price of P300 or for
such reasonable price as may be determined by this Honorable Court the interest and shares
over the land described in this complaint of plaintiffs' co-owners, Joaquin, Porfirio, Flora,
Dioscoro, Consolacion, Remedios, Trinidad, Baltazar, Rosario, Margarita, Dolores, Fortunata
and Simon, all surnamed Garcia, and Resurreccion, Serafin and Buenaventura, all surnamed
Tagarao, sold by them to the defendants under the deeds of sale Annexes 'A', 'B' and 'B-l' of this
complaint; and ordering the defendants to execute the proper instrument of reconveyance or
redemption thereof in favor of the plaintiffs; and, ordering them to vacate the premises;

2. Condemning the defendants to pay to the plaintiffs P500 for moral damage; P500 for
exemplary damage; P300 for attorney's fees and actual expenses incurred; P5 monthly from the
filing of this complaint as reasonable value of defendants' occupation of a portion of the land; the
costs of this action; and, for such other relief and remedy as may be legal, just and equitable."

On the other hand, the defendants, private respondents herein, alleged in their answer the following special
affirmative defenses (Record on Appeal, p. 14):

1. That plaintiffs have no cause of action against the herein defendants;

2. That due notices in writing have been sent to plaintiff Francisco Garcia at his residence at
2875 Felix Huertas St., Sta. Cruz, Manila, sometime last June 1953, in which plaintiff Francisco
Garcia was informed of his co-owners signified intention to sell their shares, and likewise, the
other plaintiffs Paz and Maria Garcia were personally notified of the same hence, for that reason,
they are now barred to claim legal redemption of the land in question, having filed their belated
claim too late."

The trial court rendered judgment on September 12, 1957 in favor of the plaintiffs (Record on Appeal, p. 15), the
dispositive portion of which reads as follows:
 WHEREFORE, judgment is hereby rendered:

(a) Sentencing the defendants to resell the property to the plaintiffs for P800.00 which is the total
consideration of the two deeds of sale Exhibits A and B;

(b) In the event that the defendants fail to execute the deed of resale within ten days from the
date this decision becomes final, the Clerk of Court is hereby ordered to execute the
corresponding deed pursuant to the provisions of Section 10 of Rule 39 of the Rules of Court;

(c) Without pronouncement as to costs.

On October 14, 1957 plaintiffs filed their notice of Appeal predicated on "(a) failure of the Court to adjudge the
real or reasonable price of the sale or otherwise the redemption value thereof; (b) failure of the Court to adjudge
damages including attorney's fees in favor of the plaintiffs and the costs." (Record on Appeal, p. 18).

Defendants filed their own notice of appeal on October 15, 1957 (Record on Appeal, p. 19).

On appeal the Court of Appeals in a decision promulgated on August 31, 1966 reversed the decision of the trial
court and rendered another one dismissing plaintiff's complaint with no pronouncement as to costs (Rollo, p. 22).

The instant petition for review by certiorari was filed with the Court on December 12, 1966 (Rollo, p. 11). The
Court at first dismissed the petition in a resolution dated December 22, 1966, for insufficient supporting papers
(Rollo, p. 35) but reconsidered the said Resolution of Dismissal later in a Resolution dated February 8, 1967
(Rollo, p. 97) as prayed for in a motion for reconsideration filed by petitioners on February 1, 1967 (Rollo, p. 38).
The same Resolution of February 8, 1967 gave due course to the petition.

The Brief for the Petitioners was filed on June 9,1967 (Rollo, p. 106); the Brief for the Respondents was received
in the Court on August 31, 1967 (Rollo, p. 119).

Petitioners having manifested they would not file reply brief on September 14,1967 (Rollo, p. 122) the Court
considered the case submitted for decision, in a Resolution dated September 21, 1967 (Rollo, p. 124).

Petitioners assign the following errors:

I. THE HONORABLE COURT OF APPEALS ERRED IN DECLARING THAT THE 30-DAY

PERIOD PRESCRIBED IN ARTICLE 1088 OF THE NEW CIVIL CODE FOR A CO-HEIR TO
EXERCISE HIS RIGHT OF LEGAL REDEMPTION, HAD ALREADY ELAPSED WHEN THE
HEREIN PLAINTIFFS FILED THE ACTION ON MAY 7,1955.

II. THE HONORABLE COURT OF APPEALS ERRED IN DECLARING THAT THERE WAS NO
OFFER TO REIMBURSE THE DEFENDANTS FOR THE PORTION OF THE LAND IN
QUESTION SOLD TO THEM BY THE CO-HEIRS OF THE PLAINTIFFS.

III. THE HONORABLE COURT OF APPEALS ERRED IN REVERSING THE JUDGMENT OF

THE LOWER COURT, AND IN NOT ADJUDGING DAMAGES, ATTORNEY'S FEES AND
COSTS IN FAVOR OF THE PLAINTIFFS.

(Brief for the Petitioners, p. 1)

There is no question that the provision of law applicable in the instant case is Art. 1088 of the New Civil Code
(Art. 1067, Old Civil Code) as the matter concerns heirs and inheritance not yet distributed (Wenceslao v.
Calimon, 46 Phil. 906 [1923]). Art. 1088 states:

Article 1088. Should any of the heirs sell his hereditary rights to a stranger before the partition,
any or all of the co-heirs may be subrogated to the rights of the purchaser by reimbursing him for
the price of the sale, provided they do so within the period of one month from the time they were
notified in writing of the sale by the vendor.

The main issue is whether or not petitioners took all the necessary steps to effectuate their exercise of the right
of legal redemption within the period fixed by Art. 1088 of the Civil Code.
It is undisputed that no notification in writing was ever received by petitioners about the sale of the hereditary
interest of some of their co-heirs in the parcel of land they inherited from the late Gelacio Garcia, although in a
letter dated June 23, 1953 petitioner Francisco Garcia wrote one of his co- heirs, Joaquin Garcia, who is an
uncle of petitioners, proposing to buy the hereditary interests of his co-heirs in their unpartitioned inheritance,
(Exhibit, p. 3). Although said petitioner asked that his letter be answered "in order that I will know the results of
what I have requested you," (Exhibit, p. 14) there is no proof that he was favored with one.

Petitioners came to know that their co-heirs were selling the property on December 3, 1954 when one of the
heirs, Juanito Bertomo, asked Petitioner Paz Garcia to sign a document prepared in the Municipality of
Tubungan because the land they inherited was going to be sold to private respondent, Jose Calaliman (TSN,
September 6, 1957, p. 60). The document mentioned by petitioner Paz Garcia could be no other than the one
entitled "Extra-Judicial Partition and Deed of Sale" dated December 3, 1954 as it is in this document that the
name of Paz Garcia, Maria Garcia and Amado Garcia appear unsigned by them (Exhibits, p. 19).

It is not known whether the other heirs whose names appear in the document had already signed the document
at the time Paz Garcia was approached by Juanito Bertomo. Paz Garcia, however, testified that she immediately
informed her brother Francisco that Juanita Bertomo wanted to sell the land to Jose Calaliman (TSN, September
6,1957, p. 62). On December 26, 1954 he wrote respondents giving them notice of his desire to exercise the
right of legal redemption and that he will resort to court action if denied the right (Exhibits, p. 8). The respondents
received the letter on January 13, 1955 but petitioner Francisco Garcia did not get any answer from them.
Neither did respondents show him a copy of the document of sale nor inform him about the price they paid for
the sale when he went home to Tubungan from Manila sometime in March 1955 and went to see the respondent
spouse about the matter on March 24,1955 (TSN, September 6,1957, p. 18).

Because of the refusal of respondent Jose Calaliman to show him the document of sale or reveal to him the
price paid for the parcel of land, petitioner Francisco Garcia went to the Office of the Register of Deeds on the
same date, March 24,1955 and there found two documents of sale regarding the same parcel of land (TSN, Ibid,
p. 19).

Petitioners filed the case for legal redemption with the trial court on May 7, 1955. Respondents claim that the 30-
day period prescribed in Article 1088 of the New Civil Code for petitioners to exercise the right to legal
redemption had already elapsed at that time and that the requirement of Article 1088 of the New Civil Code that
notice would be in writing is deemed satisfied because written notice would be superfluous, the purpose of the
law having been fully served when petitioner Francisco Garcia went to the Office of the Register of Deeds and
saw for himself, read and understood the contents of the deeds of sale (Brief for respondents, p. 6).

The issue has been squarely settled in the case of Castillo v. Samonte, where this Court observed:

Both the letter and spirit of the new Civil Code argue against any attempt to widen the scope of
the notice specified in Article 1088 by including therein any other kind of notice, such as verbal or
by registration. If the intention of the law had been to include verbal notice or any other means of
information as sufficient to give the effect of this notice, then there would have been no necessity
or reasons to specify in Article 1088 of the New Civil Code that the said notice be made in writing
for, under the old law, a verbal notice or information was sufficient (106 Phil. 1023 [1960]).

In the above-quoted decision the Court did not consider the registration of the deed of sale with the Register of
Deeds sufficient notice, most specially because the property involved was unregistered land, as in the instant
case. The Court took note of the fact that the registration of the deed of sale as sufficient notice of a sale under
the provision of Section 51 of Act No. 496 applies only to registered lands and has no application whatsoever to
a case where the property involved is, admittedly, unregistered land.

Consistent with aforesaid ruling, in the interpretation of a related provision (Article 1623 of the New Civil Code)
this Court had stressed that written notice is indispensable, actual knowledge of the sale acquired in some other
manners by the redemptioner, notwithstanding. He or she is still entitled to written notice, as exacted by the
Code, to remove all uncertainty as to the sale, its terms and its validity, and to quiet any doubt that the alienation
is not definitive. The law not having provided for any alternative, the method of notifications remains exclusive,
though the Code does not prescribe any particular form of written notice nor any distinctive method for written
notification of redemption (Conejero et al. v. Court of Appeals et al., 16 SCRA 775 [1966]; Etcuban v. Court of
Appeals, 148 SCRA 507 [1987]; Cabrera v. Villanueva, G.R. No. 75069, April 15,1988).

Petitioners fault the appellate court in not awarding them damages, attorney's fees and costs. After finding in
favor of respondent spouses and against petitioners herein it is untenable for petitioners to expect that the
appellate court would award damages and attorney's fees and costs. However as already discussed, petitioners
have not lost their right to redeem, for in the absence of a written notification of the sale by the vendors, the 30-
day period has not even begun to run. Petitioners clearly can claim attorney's fees for bad faith on the part of
respondents, first, for refusing redemption, and secondly for declaring the entire land as theirs, although they
knew some heirs had not sold their shares.

PREMISES CONSIDERED, the decision of the Court of Appeals is REVERSED and the decision of the trial
court is REINSTATED with the modification that petitioners be awarded damages, attorney's fees and costs in
the amount prayed for.

SO ORDERED.

37. PRIMARY STRUCTURES CORP. represented herein by its President ENGR. WILLIAM C.
LIU, Petitioner,
vs.
SPS. ANTHONY S. VALENCIA and SUSAN T. VALENCIA, Respondents.

DECISION

VITUG, J.:

On appeal is the decision of the Court of Appeals in CA-G.R. CV No. 59960, promulgated on 13 February 2001,
which has affirmed in toto the decision of the Regional Trial Court of Cebu City dismissing the complaint of
petitioners for legal redemption over certain rural lots sold to respondents.

Petitioner is a private corporation based in Cebu City and the registered owner of Lot 4523 situated in Liloan,
Cebu, with an area of 22,214 square meters. Adjacent to the lot of petitioner are parcels of land, identified to be
Lot 4527, Lot 4528, and Lot 4529 with a total combined area of 3,751 square meters. The three lots,
aforenumbered, have been sold by Hermogenes Mendoza to respondent spouses sometime in December 1994.
Petitioner learned of the sale of the lots only in January, 1996, when Hermogenes Mendoza sold to petitioner Lot
No. 4820, a parcel also adjacent to Lot 4523 belonging to the latter. Forthwith, it sent a letter to respondents, on
30 January 1996, signifying its intention to redeem the three lots. On 30 May 1996, petitioner sent another letter
to respondents tendering payment of the price paid to Mendoza by respondents for the lots. Respondents, in
response, informed petitioner that they had no intention of selling the parcels. Thereupon, invoking the
provisions of Articles 1621 and 1623, petitioner filed an action against respondents to compel the latter to allow
the legal redemption. Petitioner claimed that neither Mendoza, the previous owner, nor respondents gave formal
or even just a verbal notice of the sale of the lots as so required by Article 1623 of the Civil Code.

After trial, the Regional Trial Court of Cebu dismissed petitioner’s complaint and respondents' counterclaim; both
parties appealed the decision of the trial court to the Court of Appeals. The appellate court affirmed the assailed
decision.

Basically, the issues posed for resolution by the Court in the instant petition focus on the application of Article
1621 and Article 1623 of the Civil Code, which read:

"ART. 1621. The owners of adjoining lands shall also have the right of redemption when a piece of rural land,
the area of which does not exceed one hectare, is alienated unless the grantee does not own any rural land.

"This right is not applicable to adjacent lands which are separated by brooks, drains, ravines, roads and other
apparent servitudes for the benefit of other estates.

"If two or more adjoining owners desire to exercise the right of redemption at the same time, the owner of the
adjoining land of smaller area shall be preferred; and should both lands have the same area, the one who first
requested the redemption."
"ART. 1623. The right of legal pre-emption or redemption shall not be exercised except within thirty days from
the notice in writing by the prospective vendor, or by the vendor, as the case may be. The deed of sale shall not
be recorded in the Registry of Property, unless accompanied by an affidavit of the vendor that he has given
written notice thereof to all possible redemptioners.

"The right of redemption of co-owners excludes that of adjoining owners."

Whenever a piece of rural land not exceeding one hectare is alienated, the law grants to the adjoining owners a
right of redemption except when the grantee or buyer does not own any other rural land. In order that the right
1 

may arise, the land sought to be redeemed and the adjacent property belonging to the person exercising the
right of redemption must both be rural lands. If one or both are urban lands, the right cannot be invoked. 2

The trial court found the lots involved to be rural lands. Unlike the case of Fabia vs. Intermediate Appellate
Court (which ruled, on the issue of whether a piece of land was rural or not, that the use of the property for
3 

agricultural purpose would be essential in order that the land might be characterized as rural land for purposes
of legal redemption), respondents in the instant case, however, did not dispute before the Court of Appeals the
holding of the trial court that the lots in question are rural lands. In failing to assail this factual finding on appeal,
respondents would be hardput to now belatedly question such finding and to ask the Court to still entertain that
issue.

Article 1621 of the Civil Code expresses that the right of redemption it grants to an adjoining owner of the
property conveyed may be defeated if it can be shown that the buyer or grantee does not own any other rural
land. The appellate court, sustaining the trial court, has said that there has been no evidence proffered to show
that respondents are not themselves owners of rural lands for the exclusionary clause of the law to apply.

With respect to the second issue, Article 1623 of the Civil Code provides that the right of legal pre-emption or
redemption shall not be exercised except within thirty days from notice in writing by the prospective vendor, or by
the vendor, as the case may be. In stressing the mandatory character of the requirement, the law states that the
deed of sale shall not be recorded in the Registry of Property unless the same is accompanied by an affidavit of
the vendor that he has given notice thereof to all possible redemptioners.

The Court of Appeals has equated the statement in the deed of sale to the effect that the vendors have complied
with the provisions of Article 1623 of the Civil Code, as being the written affirmation under oath, as well as the
evidence, that the required written notice to petitioner under Article 1623 has been met. Respondents, like the
appellate court, overlook the fact that petitioner is not a party to the deed of sale between respondents and
Mendoza and has had no hand in the preparation and execution of the deed of sale.  It could not thus be
1âwphi1

considered a binding equivalent of the obligatory written notice prescribed by the Code.

In Verdad vs. Court of Appeals this court ruled:

4 

"We hold that the right of redemption was timely exercised by private respondents. Concededly, no written notice
of the sale was given by the Burdeos heirs (vendors) to the co-owners required under Article 1623 of the Civil
Code -

"x x x           x x x          x x x

Hence, the thirty-day period of redemption had yet to commence when private respondent Rosales sought to
exercise the right of redemption on 31 March 1987, a day after she discovered the sale from the Office of the
City Treasurer of Butuan City, or when the case was initiated, on 16 October 1987, before the trial court.

"The written notice of sale is mandatory. This Court has long established the rule that notwithstanding actual
knowledge of a co-owner, the latter is still entitled to a written notice from the selling co-owner in order to remove
all uncertainties about the sale, its terms and conditions, as well as its efficacy and status.

"Even in Alonzo vs. Intermediate Appellate Court (150 SCRA 259), relied upon by petitioner in contending that
actual knowledge should be an equivalent to a written notice of sale, the Court made it clear that it was not
reversing the prevailing jurisprudence; said the Court:

"’We realize that in arriving at our conclusion today, we are deviating from the strict letter of the law, which the
respondent court understandably applied pursuant to existing jurisprudence. The said court acted properly as it
had no competence to reverse the doctrines laid down by this Court in the above-cited cases. In fact, and this
should be clearly stressed, we ourselves are not abandoning the De Conejero and Buttle doctrines. What we are
doing simply is adopting an exception to the general rule, in view of the peculiar circumstances of this case.’

"In Alonzo, the right of legal redemption was invoked several years, not just days or months, after the
consummation of the contracts of sale. The complaint for legal redemption itself was there filed more than
thirteen years after the sales were concluded." 5

WHEREFORE, the instant petition is GRANTED, and the assailed decision of the Court of Appeals is reversed
and set aside. Petitioner is hereby given a period of thirty days from finality of this decision within which to
exercise its right of legal redemption. No costs.

SO ORDERED.

38. VIEGELY SAMELO, represented by Attorney-in-Fact CRISTINA SAMELO, Petitioner,

vs.
MANOTOK SERVICES, INC., allegedly represented by PERPETUA BOCANEGRA (deceased), Respondent.

DECISION

BRION, J.:

Before us is the petition for review on certiorari filed by Viegely Samelo (petitioner), represented by her attorney-
1 

in-fact Cristina Samelo, to challenge the decision dated June 21, 2005 and the resolution dated November 10,
2 

2005 of the Court of Appeals (CA) in CA-G.R. SP No. 85664.

3 

Background Facts

Manotok Services, Inc. (respondent) alleged that it is the administrator of a parcel of land known as Lot 9-A,
Block 2913, situated at 2882 Dagupan Extension, Tondo, Manila. On January 31, 1997, the respondent entered
into a contract with the petitioner for the lease of a portion of Lot 9-A, Block 2913, described as Lot 4, Block 15
(subject premises). The lease contract was for a period of one (1) year, with a monthly rental of ₱3,960.00. After
the expiration of the lease contract on December 31, 1997, the petitioner continued occupying the subject
premises without paying the rent. On August 5, 1998, the respondent, thru its President Rosa Manotok, sent a
4 

letter to the petitioner demanding that she vacate the subject premises and pay compensation for its use and
occupancy. The petitioner, however, refused to heed these demands.
5 

On November 18, 1998, the respondent filed a complaint for unlawful detainer against the petitioner before the
Metropolitan Trial Court (MeTC), Branch 3, Manila. The case was docketed as Civil Case No. 161588-CV. The
6 

respondent prayed, among others, that the petitioner and those claiming rights under her be ordered to vacate
the subject premises, and to pay compensation for its use and occupancy.

In her answer, the petitioner alleged that the respondent had no right to collect rentals because the subject
premises are located inside the property of the Philippine National Railways (PNR). She also added that the
respondent had no certificate of title over the subject premises. The petitioner further claimed that her signature
in the contract of lease was obtained through the respondent’s misrepresentation. She likewise maintained that
she is now the owner of the subject premises as she had been in possession since 1944. 7

The MeTC Ruling

The MeTC, in its judgment of March 28, 2002, decided in favor of the respondent, and ordered the petitioner to
8 

vacate the subject premises and to deliver their peaceful possession to the respondent. The MeTC held that the
only issue to be resolved in an unlawful detainer case is physical possession or possession de facto, and that
the respondent had established its right of possession over the subject premises. It added that the petitioner’s
right under the lease contract already ceased upon the expiration of the said contract. It further ruled that the
petitioner is already estopped from questioning the right of the respondent over the subject premises when she
entered into a contract of lease with the respondent. The dispositive portion of the MeTC judgment reads:
WHEREFORE, premises considered, judgment is hereby rendered for the plaintiff and against defendant,
ordering the latter and all persons claiming rights under her:

1. To vacate the premises located at 2882 Dagupan Extension, Tondo, Manila, and deliver the peaceful
possession thereof to the plaintiff[;]

2. To pay plaintiff the sum of ₱40,075.20 as compensation for the use and occupancy of the premises
from January 1, 1998 to August 30, 1998, plus ₱4,554.00 a month starting September 1, 1998, until
defendant and all person[s] claiming rights under her to finally vacate the premises[;]

3. To pay plaintiff the sum of ₱5,000.00 for and as attorney’s fees; and

4. To pay the cost of suit. 9

The RTC Decision

The petitioner filed an appeal with the Regional Trial Court (RTC), Branch 50, Manila. The RTC, in its
10 

decision of July 1, 2004, set aside the MeTC’s decision, and dismissed the complaint for unlawful detainer. The
11 

RTC held, among others, that the respondent had no right to collect rentals as it failed to show that it had
authority to administer the subject premises and to enter into a contract of lease with the petitioner. It also ruled
that the subject premises, which were formerly owned by the PNR, are now owned by the petitioner by virtue of
her possession and stay in the premises since 1944.

The CA Decision

Aggrieved by the reversal, the respondent filed a petition for review with the CA, docketed as CA-G.R. SP No.
85664. The CA, in its decision of June 21, 2005, reversed and set aside the RTC decision, and reinstated the
12 

MeTC judgment. The CA held that the petitioner is now estopped from questioning the right of the respondent
over the subject property. It explained that in an action involving the possession of the subject premises, a
tenant cannot controvert the title of his landlord or assert any rights adverse to that title, without first delivering to
the landlord the premises acquired by virtue of the agreement between themselves. The appellate court added
that the petitioner cannot claim that she repudiated the lease contract, in the absence of any unequivocal acts of
repudiation.

The CA further held that the only issue in an ejectment suit is physical or material possession, although the trial
courts may provisionally resolve the issue of ownership for the sole purpose of determining the issue of
possession. It explained that the issue of ownership is not required to determine the issue of possession since
the petitioner tacitly admitted that she is a lessee of the subject premises. 13

The petitioner moved to reconsider this decision, but the CA denied her motion in its resolution dated November
10, 2005. 14

In presenting her case before this Court, the petitioner argued that the CA erred in ruling that a tenant is not
permitted to deny the title of his landlord. She maintained that the respondent is not the owner or administrator of
the subject premises, and insisted that she had been in possession of the land in question since 1944. She
further added that she repudiated the lease contract by filing a case for fraudulent misrepresentation,
intimidation, annulment of lease contract, and quieting of title with injunction before another court. 15

The Court’s Ruling

We find the petition unmeritorious.

Respondent has a better right of possession over the subject premises

"An action for unlawful detainer exists when a person unlawfully withholds possession of any land or building
against or from a lessor, vendor, vendee or other persons, after the expiration or termination of the right to hold
possession, by virtue of any contract, express or implied." "The only issue to be resolved in an unlawful detainer
16 

case is physical or material possession of the property involved, independent of any claim of ownership by any
of the parties involved." "Thus, when the relationship of lessor and lessee is established in an unlawful detainer
17 

case, any attempt of the parties to inject the question of ownership into the case is futile, except insofar as it
might throw light on the right of possession." 18
In the present case, it is undisputed that the petitioner and the respondent entered into a contract of lease. We
note in this regard that in her answer with affirmative defenses and counterclaim before the MeTC, the petitioner
did not deny that she signed the lease contract (although she maintained that her signature was obtained
through the respondent’s misrepresentations). Under the lease contract, the petitioner obligated herself to pay a
monthly rental to the respondent in the amount of ₱3,960.00. The lease period was for one year, commencing
on January 1, 1997 and expiring on December 31, 1997. It bears emphasis that the respondent did not give the
petitioner a notice to vacate upon the expiration of the lease contract in December 1997 (the notice to vacate
was sent only on August 5, 1998), and the latter continued enjoying the subject premises for more than 15 days,
without objection from the respondent. By the inaction of the respondent as lessor, there can be no inference
that it intended to discontinue the lease contract. An implied new lease was therefore created pursuant to Article
19 

1670 of the Civil Code, which expressly provides:

Article 1670. If at the end of the contract the lessee should continue enjoying the thing leased for fifteen days
with the acquiescence of the lessor, and unless a notice to the contrary by either party has previously been
given, it is understood that there is an implied new lease, not for the period of the original contract, but for the
time established in Articles 1682 and 1687. The other terms of the original contract shall be revived.

"An implied new lease or tacita reconduccion will set in when the following requisites are found to exist: a) the
term of the original contract of lease has expired; b) the lessor has not given the lessee a notice to vacate; and
c) the lessee continued enjoying the thing leased for fifteen days with the acquiescence of the lessor." As earlier
20 

discussed, all these requisites have been fulfilled in the present case.

Article 1687 of the Civil Code on implied new lease provides:

Article 1687. If the period for the lease has not been fixed, it is understood to be from year to year, if the rent
agreed upon is annual; from month to month, if it is monthly; from week to week, if the rent is weekly; and from
day to day, if the rent is to be paid daily.

Since the rent was paid on a monthly basis, the period of lease is considered to be from month to month, in
accordance with Article 1687 of the Civil Code. "[A] lease from month to month is considered to be one with a
definite period which expires at the end of each month upon a demand to vacate by the lessor." When the
21 

respondent sent a notice to vacate to the petitioner on August 5, 1998, the tacita reconduccion was aborted, and
the contract is deemed to have expired at the end of that month. "[A] notice to vacate constitutes an express act
on the part of the lessor that it no longer consents to the continued occupation by the lessee of its
property." After such notice, the lessee’s right to continue in possession ceases and her possession becomes
22 

one of detainer.23

Estoppel of tenant

We find no merit in the petitioner’s allegation that the respondent had no authority to lease the subject premises
because the latter failed to prove that it is its owner or administrator.

The Rules of Court protects the respondent, as lessor, from being questioned by the petitioner, as lessee,
regarding its title or better right of possession over the subject premises. Section 2(b), Rule 131 of the Rules of
Court states that the tenant is not permitted to deny the title of his landlord at the time of the commencement of
the relation of landlord and tenant between them. Article 1436 of the Civil Code likewise states that a lessee or a
bailee is estopped from asserting title to the thing leased or received, as against the lessor or bailor.

These provisions bar the petitioner from contesting the respondent’s title over the subject premises. "The
juridical relationship between x x x [a] lessor and x x x [a lessee] carries with it a recognition of the lessor's title.
As [lessee, the petitioner is] estopped [from denying the] landlord's title, or to assert a better title not only in
[herself], but also in some third person while [she remains] in possession of the subject premises and until [she
surrenders] possession to the landlord. This estoppel applies even though the lessor had no title at the time the
relation of [the] lessor and [the] lessee was created, and may be asserted not only by the original lessor, but also
by those who succeed to his title." Once a contact of lease is shown to exist between the parties, the lessee
24 

cannot by any proof, however strong, overturn the conclusive presumption that the lessor has a valid title to or a
better right of possession to the subject premises than the lessee.

The Court thus explained in Tamio v. Ticson: 25

Indeed, the relation of lessor and lessee does not depend on the former’s title but on the agreement between the
parties, followed by the possession of the premises by the lessee under such agreement. As long as the latter
remains in undisturbed possession, it is immaterial whether the lessor has a valid title – or any title at all – at the
time the relationship was entered into. [citations omitted]

The issue of ownership

We are likewise unpersuaded by the petitioner’s claim that she has "acquired possessory rights leading to
ownership" over the subject premises, having been in possession thereof since 1944. We emphasize that aside
26 

from her self-serving allegation, the petitioner did not present any documentary evidence to substantiate her
claim that she stayed on the subject premises since 1944. That the petitioner presented certificates of title of the
Manila Railroad Company over certain properties in Tondo, Manila, which allegedly cover the subject premises,
is of no moment. One cannot recognize the right of another, and at the same time claim adverse possession
which can ripen to ownership, thru acquisitive prescription. "For prescription to set in, the possession must be
adverse, continuous, public, and to the exclusion of [others]." Significantly, the RTC decision failed to state its
27 

basis for concluding that the petitioner stayed in the subject premises since 1944.

At any rate, we hold that no need exists to resolve the issue of ownership in this case, since it is not required to
determine the issue of possession; the execution of the lease contract between the petitioner, as lessee, and the
respondent, as lessor, belies the former’s claim of ownership.  We reiterate that the fact of the lease and the
1âwphi1

expiration of its term are the only elements in an action for unlawful detainer. "The defense of ownership does
not change the summary nature of [this] action. x x x. Although a wrongful possessor may at times be upheld by
the courts, this is merely temporary and solely for the maintenance of public order. The question of ownership is
to be settled in the proper court and in a proper action." 28

Interest on rentals due

Additionally, the petitioner is liable to pay interest by way of damages for her failure to pay the rentals due for the
use of the subject premises. We reiterate that the respondent’s extrajudicial demand on the petitioner was made
29 

on August 5, 1998. Thus, from this date, the rentals due from the petitioner shall earn interest at 6% per annum,
until the judgment in this case becomes final and executory. After the finality of judgment, and until full payment
of the rentals and interests due, the legal rate of interest to be imposed shall be 12%.

WHEREFORE, in light of all the foregoing, we DENY the petition. The decision and the resolution of the Court of
Appeals dated June 21, 2005 and November 10, 2005, respectively, in CA-G.R. SP No. 85664 are AFFIRMED
with the MODIFICATION that the unpaid rentals shall earn a corresponding interest of six percent (6%) per
annum, to be computed from August 5, 1998 until the finality of this decision. After this decision becomes final
and executory, the rate of legal interest shall be computed at twelve percent (12%) per annum from such finality
until its satisfaction.

SO ORDERED.

39. REGINA P. DIZON, AMPARO D. BARTOLOME, FIDELINA D. BALZA, ESTER ABAD DIZON and
JOSEPH ANTHONY DIZON, RAYMUND A. DIZON, GERARD A. DIZON and JOSE A. DIZON, JR., petitioners,
vs.
COURT OF APPEALS and OVERLAND EXPRESS LINES, INC., respondents.

x---------------------------------------------------------x

G.R. No. 124741 January 28, 2003

REGINA P. DIZON, AMPARO D. BARTOLOME, FIDELINA D. BALZA, ESTER ABAD DIZON and JOSEPH
ANTHONY DIZON, RAYMUND A. DIZON, GERARD A. DIZON and JOSE A. DIZON, JR., petitioners,
vs.
COURT OF APPEALS HON. MAXIMIANO C. ASUNCION and OVERLAND EXPRESS LINES,
INC., respondents.
 RESOLUTION

YNARES-SANTIAGO, J.:

On January 28, 1999, this Court rendered judgment in these consolidated cases as follows:

WHEREFORE, in view of the foregoing, both petitions are GRANTED. The decision dated March 29,
1994 and the resolution dated October 19, 1995 in CA-G.R. CV Nos. 25153-54, as well as the decision
dated December 11, 1995 and the resolution dated April 23, 1997 in CA-G.R. SP No. 33113 of the Court
of Appeals are hereby REVERSED and SET ASIDE.

Let the records of this case be remanded to the trial court for immediate execution of the judgment dated
November 22, 1982 in Civil Case No. VIII-29155 of the then City Court (now Metropolitan Trial Court) of
Quezon City, Branch III as affirmed in the decision dated September 26, 1984 of the then Intermediate
Appellate Court (now Court of Appeals) and in the resolution dated June 19, 1985 of this Court.

However, petitioners are ordered to REFUND to private respondent the amount of P300,000.00 which
they received through Alice A. Dizon on June 20, 1975.

SO ORDERED.

Private respondent filed a Motion for Reconsideration, Second Motion for Reconsideration, and Motion to
Suspend Procedural Rules in the Higher Interest of Substantial Justice, all of which have been denied by this
Court. This notwithstanding, the cases were set for oral argument on March 21, 2001, on the following issues:

1. WHETHER THERE ARE CIRCUMSTANCES THAT WOULD JUSTIFY SUSPENSION OF THE

RULES OF COURT;

2. WHETHER THE SUM OF P300,000.00 RECEIVED BY ALICE DIZON FROM PRIVATE

RESPONDENT WAS INTENDED AS PARTIAL PAYMENT OF THE PURCHASE PRICE OF THE
PROPERTY, OR AS PAYMENT OF BACK RENTALS ON THE PROPERTY;

3. WHETHER ALICE DIZON WAS AUTHORIZED TO RECEIVE THE SUM OF P300,000.00 ON

BEHALF OF PETITIONERS;

4. (A) IF SO, WHETHER PETITIONERS ARE ESTOPPED FROM QUESTIONING THE BELATED
EXERCISE BY PRIVATE RESPONDENT OF ITS OPTION TO BUY WHEN THEY ACCEPTED THE
SAID PARTIAL PAYMENT;

(B) IF SO, WHETHER ALICE DIZON CAN VALIDLY BIND PETITIONERS IN THE ABSENCE OF A
WRITTEN POWER OF ATTORNEY;

5. (A) WHETHER THERE WAS A PERFECTED CONTRACT OF SALE BETWEEN THE PARTIES;

(B) WHETHER THERE WAS A CONTRACT OF SALE AT LEAST WITH RESPECT TO THE SHARES
OF FIDELA AND ALICE DIZON; AND

6. WHETHER PRIVATE RESPONDENT'S ACTION FOR SPECIFIC PERFORMANCE HAS

PRESCRIBED.

In order to resolve the first issue, it is necessary to pass upon the other questions which relate to the merits of
the case. It is only where there exist strong compelling reasons, such as serving the ends of justice and
preventing a miscarriage thereof, that this Court can suspend the rules. 1

After reviewing the records, we find that, despite all of private respondent's protestations, there is absolutely no
written proof of Alice Dizon's authority to bind petitioners. First of all, she was not even a co-owner of the
property. Neither was she empowered by the co-owners to act on their behalf.

The acceptance of the amount of P300,000.00, purportedly as partial payment of the purchase price of the land,
was an act integral to the sale of the land. As a matter of fact, private respondent invokes such receipt of
payment as giving rise to a perfected contract of sale. In this connection, Article 1874 of the Civil Code is explicit
that: "When a sale of a piece of land or any interest therein is through an agent, the authority of the latter shall
be in writing; otherwise, the sale shall be void."

When the sale of a piece of land or any interest thereon is through an agent, the authority of the latter
shall be in writing; otherwise, the sale shall be void. Thus the authority of an agent to execute a contract
for the sale of real estate must be conferred in writing and must give him specific authority, either to
conduct the general business of the principal or to execute a binding contract containing terms and
conditions which are in the contract he did execute. A special power of attorney is necessary to enter
into any contract by which the ownership of an immovable is transmitted or acquired either gratuitously
or for a valuable consideration. The express mandate required by law to enable an appointee of an
agency (couched) in general terms to sell must be one that expressly mentions a sale or that includes a
sale as a necessary ingredient of the act mentioned. For the principal to confer the right upon an agent
to sell real estate, a power of attorney must so express the powers of the agent in clear and
unmistakable language. When there is any reasonable doubt that the language so used conveys such
power, no such construction shall be given the document. 2

It necessarily follows, therefore, that petitioners cannot be deemed to have received partial payment of the
supposed purchase price for the land through Alice Dizon. It cannot even be said that Alice Dizon's acceptance
of the money bound at least the share of Fidela Dizon, in the absence of a written power of attorney from the
latter. It should be borne in mind that the Receipt dated June 20, 1975, while made out in the name of Fidela
Dizon, was signed by Alice Dizon alone.

Moreover, there could not have been a perfected contract of sale. As we held in our Decision dated January 28,
1999, the implied renewal of the contract of lease between the parties affected only those terms and conditions
which are germane to the lessee's right of continued enjoyment of the property. The option to purchase afforded
private respondent expired after the one-year period granted in the contract. Otherwise stated, the implied
renewal of the lease did not include the option to purchase. We see no reason to disturb our ruling on this
point, viz:

In this case, there was a contract of lease for one (1) year with option to purchase. The contract of lease
expired without the private respondent, as lessee, purchasing the property but remained in possession
thereof. Hence, there was an implicit renewal of the contract of lease on a monthly basis. The other
terms of the original contract of lease which are revived in the implied new lease under Article 1670 of
the New Civil Code are only those terms which are germane to the lessee's right of continued enjoyment
of the property leased. Therefore, an implied new lease does not ipso facto carry with it any implied
revival of private respondent's option to purchase (as lessee thereof) the leased premises. The provision
entitling the lessee the option to purchase the leased premises is not deemed incorporated in the
impliedly renewed contract because it is alien to the possession of the lessee. Private respondent's right
to exercise the option to purchase expired with the termination of the original contract of lease for one
year. The rationale of this Court is that:

"This is a reasonable construction of the provision, which is based on the presumption that when
the lessor allows the lessee to continue enjoying possession of the property for fifteen days after
the expiration of the contract he is willing that such enjoyment shall be for the entire period
corresponding to the rent which is customarily paid — in this case up to the end of the month
because the rent was paid monthly. Necessarily, if the presumed will of the parties refers to the
enjoyment of possession the presumption covers the other terms of the contract related to such
possession, such as the amount of rental, the date when it must be paid, the care of the property,
the responsibility for repairs, etc. But no such presumption may be indulged in with respect to
special agreements which by nature are foreign to the right of occupancy or enjoyment inherent
in a contract of lease."3

There being no merit in the arguments advanced by private respondent, there is no need to suspend the Rules
of Court and to admit the motion for reconsideration. While it is within the power of the Court to suspend its own
rules, or to except a particular case from its operation, whenever the interest of justice require it, however, the
movant must show strong compelling reasons such as serving the ends of justice and preventing a grave
miscarriage thereof,4 none of which obtains in this case.

Litigation must end sometime and somewhere. An effective and efficient administration of justice requires that,
once a judgment has become final, the winning party be not, through a mere subterfuge, deprived of the fruits of
the verdict. Courts must, therefore, guard against any scheme calculated to bring about that result. Constituted
as they are to put an end to controversies, courts should frown upon any attempt to prolong them. 5

ACCORDINGLY, the Motion to Suspend Procedural Rules in the Higher Interest of Substantial Justice filed by
private respondent is DENIED WITH FINALITY. No further pleadings will be entertained in these cases.

SO ORDERED.

Davide, Jr., C .J ., see separate opinion.

Puno, J., concur.

Separate Opinions

DAVIDE, JR., C.J., concurring:

After a meticulous evaluation of the antecedent facts in these cases I respectfully submit that private
respondent's submission that the sum of P3,000 was intended as partial payment of the purchase price; it was
received by Alice Dizon for and in behalf of Fidela Dizon, mother of petitioners; and that Fidela Dizon ratified the
at of Alice by accepting the cashier's check representing that consideration drawn in favor of Fidela Dizon, and
in encashing it. Neither Alice nor Fidela returned the money.

Therefore, there was indeed, a perfected sale in favor of private respondent of, at the very least, the rights,
shares and participation in the property in question to private respondent. Hence, private respondent became a
co-owner of the property as regards Fidela's co-owner.

That private respondent exercised its option to buy beyond the term of the original terms of the lease contract is
then rendered academic. For, by accepting the P300,000 as partial payment of the land in question and using it
for her own benefit and advantages Fidela effectively estopped herself from insisting or a technicality.

I therefore vote to grant, pro hac vice, the second motion for reconsideration and to modify the decision by now
declaring that Fidela Dizon is bound by the perfected sale to private respondent of, at least, her rights,
participation, or share in the property in question.