[ G.R. No. 224678.

July 03, 2018 ]

SPOUSES STILIANOPOULOS V. REGISTER OF
DEEDS
PERLAS-BERNABE, J.:

Assailed in this petition for review on certiorari[1] are the Decision[2] dated
March 16, 2016 and the Resolution[3] dated May 19, 2016 of the Court of
Appeals (CA) in CA-G.R. CV No. 104207, which partially reversed and set
aside the Decision[4] dated August 19, 2013 and the Order[5] dated April
30, 2014 of the Regional Trial Court of Legazpi City, Albay, Branch 2
(RTC) in Civil Case No. 10805, and accordingly, held that the claim of
petitioners Spouses Jose Manuel (Jose Manuel) and Maria Esperanza
Ridruejo Stilianopoulos (collectively; petitioners) against the Assurance
Fund is already barred by prescription.
The Facts

This case stemmed from a Complaint[6] for Declaration of Nullity of

Transfer Certificate of Title (TCT) No. 42486, Annulment of TCT No.
52392 and TCT No. 59654, and Recovery of Possession of Lot No. 1320
with Damages (subject complaint) filed by petitioners against respondents
The Register of Deeds for Legazpi City (RD-Legazpi) and The National
Treasurer (National Treasurer), as well as Jose Fernando Anduiza (Anduiza),
Spouses Rowena Hua-Amurao (Rowena) and Edwin Amurao (collectively;
Spouses Amurao), and Joseph Funtanares Co, et al. (the Co Group) before
the RTC.

Petitioners alleged that they own a 6,425-square meter property known as

Lot No. 1320, as evidenced by TCT No. 13450[7] in the name of Jose
Manuel, who is a resident of Spain and without any administrator of said
property in the Philippines.[8] On October 9, 1995, Anduiza caused the
cancellation of TCT No. 13450 and issuance of TCT No. 42486[9] in his
name.[10]

Thereafter, Anduiza mortgaged Lot No. 1320 to Rowena.[11] As a result

of Anduiza's default, Rowena foreclosed the mortgage, and consequently,
caused the cancellation of TCT No. 42486 and issuance of TCT No.
52392[12] in her name on July 19, 2001.[13] On April 15, 2008, Rowena
then sold Lot No. 1320 to the Co Group, resulting in the cancellation of
TCT No. 52392 and issuance of TCT No. 59654[14] in the latter's name.[15]

According to petitioners, their discovery of the aforesaid transactions

only on January 28, 2008 prompted them to file a complaint for recovery of
title on May 2, 2008.[16] However, such complaint was dismissed for
petitioners' failure to allege the assessed value of Lot No. 1320. Thus, they
filed the subject complaint on March 18, 2009, praying that: (a) TCT Nos.
42486, 52392, and 59654 in the respective names of Anduiza, Rowena, and
the Co Group be annulled; (b) all defendants be held solidarily liable to pay
petitioners damages and attorney's fees; and (c) the RD-Legazpi and the
National Treasurer, through the Assurance Fund, be ordered to pay
petitioners' claims should the defendants be unable to pay the same in whole
or in part.[17] In support of their complaint, petitioners claimed that they
were deprived of the possession and ownership of Lot No. 1320 without
negligence on their part and through fraud, and in consequence of errors,
omissions, mistakes, or misfeasance of officials and employees of RD-
Legazpi.[18]

In their defense, Spouses Amurao and the Co Group both maintained that
they purchased Lot No. 1320 in good faith and for value, and that
petitioners' cause of action has already prescribed, considering that they
only had ten (10) years from the issuance of TCT No. 42486 in the name
of Anduiza on October 9, 1995 within which to file a complaint for
recovery of possession.[19] For their part,[20] the RD-Legazpi and the
National Treasurer also invoked the defense of prescription, arguing that the
right to bring an action against the Assurance Fund must be brought within
six (6) years from the time the cause of action occurred, or in this case, on
October 9, 1995 when Anduiza caused the cancellation of petitioners' TCT
over Lot No. 1320.[21] Notably, Anduiza did not file any responsive
pleading despite due notice.[22]

The RTC Ruling

In a Decision[23] dated August 19, 2013 the RTC: (a) dismissed the case
against Spouses Amurao and the Co Group as they were shown to be
purchasers in good faith and for value; and (b) found Anduiza guilty of
fraud in causing the cancellation of petitioners' TCT over Lot No. 1320,
and thus, ordered him to pay petitioners the amount of P5,782,500.00
representing the market value of Lot No. 1320, as well as P10,000.00 as
exemplary damages; and (c) held the National Treasurer, as custodian
of the Assurance Fund, subsidiarily liable to Anduiza's monetary
liability should the latter be unable to fully pay the same.[24]

Prefatorily, the RTC characterized the subject complaint filed on March 18,
2009, as one for reconveyance based on an implied trust, which is subject to
an extinctive prescription of ten (10) years ordinarily counted from the time
of the repudiation of the trust, i.e., when Anduiza registered TCT No. 42486
in his name on October 9, 1995. This notwithstanding, the RTC found that
since: (a) petitioners are residing in Spain; (b) they are in possession of the
owner's duplicate copy of TCT No. 13450 registered in their names; and (c)
Anduiza's act of fraudulently cancelling their title was unknown to – if not
effectively concealed from – them, the ten (10)-year prescriptive period
should be reckoned from their actual discovery of the fraud in 2008.[25] As
such, petitioners' complaint for reconveyance – as well as their claim
against the Assurance Fund which has a six (6)-year prescriptive period
– has not prescribed.[26]
Anent the merits of the case, the RTC found that Anduiza had indeed
acquired title over Lot No. 1320 in bad faith and through fraud – a fact
which is further highlighted by his failure to refute petitioner's allegations
against him on account of his omission to file a responsive pleading despite
due notice.[27] This notwithstanding, the RTC held that petitioners could no
longer recover Lot No. 1320 from Spouses Amurao and/or the Co Group as
the latter are innocent purchasers for value and in good faith, absent any
evidence to the contrary. As such, it is only proper that Anduiza be made to
pay compensatory damages corresponding to the value of the loss of
property, as well as exemplary damages as stated above.[28]

Finally, the RTC found that Anduiza alone could not have perpetrated
the fraud without the active participation of the RD-Legazpi. It then
proceeded to point out that the evidence on record clearly established the
irregularities in the cancellation of petitioners' title and the issuance of
Anduiza's title, all of which cannot be done successfully without the
complicity of the RD-Legazpi. Hence, the Assurance Fund may be held
answerable for the monetary awards in favor of petitioners, should Anduiza
be unable to pay the same in whole or in part.[29]

Aggrieved, petitioners moved for reconsideration,[30] while the RD Legazpi

and the National Treasurer moved for a partial reconsideration;[31] both of
which were denied in an Order[32] dated April 30, 2014. Thus, they filed
their respective notices of appeal.[33] However, in an Order[34] dated June
11, 2014, the petitioners' notice of appeal was denied due course due to their
failure to pay the appellate docket and other lawful fees.[35] Consequently,
the Co Group moved for a partial entry of judgment,[36] which the RTC
granted in an Order[37] dated July 22, 2014. As such, only the appeal of the
RD-Legazpi and the National Treasurer questioning the subsidiary liability
of the Assurance Fund was elevated to the CA.[38]

The CA Ruling

In a Decision[39] dated March 16, 2016, the CA reversed and set aside
the RTC's ruling insofar as the National Treasurer's subsidiary liability
was concerned.[40] It held that petitioners only had six (6) years from the
time Anduiza caused the cancellation of TCT No. 13450 on October 9, 1995,
or until October 9, 2001, within which to claim compensation from the
Assurance Fund. Since the petitioners only filed their claim on March 18,
2009, their claim against the Assurance Fund is already barred by
prescription.[41]

Dissatisfied, petitioners moved for reconsideration,[42] which was, however,

denied in a Resolution[43] dated May 19, 2016; hence, this petition.[44]

The Issue Before the Court

The essential issue for resolution is whether or not the CA correctly held that
the petitioners' claim against the Assurance Fund has already been barred by
prescription.

The Court's Ruling

The petition is granted.

I. Nature and Purpose of the Assurance Fund

It is a fundamental principle that "a Torrens certificate of Title is

indefeasible and binding upon the whole world unless it is nullified by a
court of competent jurisdiction x x x in a direct proceeding for
cancellation of the title."[45] "The purpose of adopting a Torrens System
in our jurisdiction is to guarantee the integrity of land titles and to protect
their indefeasibility once the claim of ownership is established and
recognized. This is to avoid any possible conflicts of title that may arise by
giving the public the right to rely upon the face of the Torrens title and
dispense with the need of inquiring further as to the ownership of the
property."[46]

As a corollary, "every person dealing with registered land may safely

rely on the correctness of the certificate of title issued therefor and the
law will in no way oblige him to go behind the certificate to determine
the condition of the property. When a certificate of title is clean and free
from any encumbrance, potential purchasers have every right to rely on
such certificate. Individuals who rely on a clean certificate of title in
making the decision to purchase the real property are often referred to
as 'innocent purchasers for value' and 'in good faith."'[47] "Where
innocent third persons, relying on the correctness of the certificate of title
thus issued, acquire rights over the property[,] the court cannot disregard
such rights and order the total cancellation of the certificate. The effect of
such an outright cancellation would be to impair public confidence in the
certificate of title, for everyone dealing with property registered under the
Torrens system would have to inquire in every instance whether the title has
been regularly or irregularly issued."[48]

The rationale for the rule on innocent purchasers for value "is the public's
interest in sustaining 'the indefeasibility of a certificate of title, as evidence
of the lawful ownership of the land or of any encumbrance' on it."[49]
Notably, the term "innocent purchaser for value" may also refer to an
innocent mortgagee who had no knowledge of any defects in the title of the
mortgagor of the property, such as in this case.

However, while "public policy and public order demand x x x that titles over
lands under the Torrens system should be given stability for on it greatly
depends the stability of the country's economy[,] x x x [p]ublic policy also
dictates that those unjustly deprived of their rights over real property by
reason of the operation of our registration laws be afforded remedies."[50]
Thus, as early as the 1925 case of Estrellado v. Martinez,[51] it has been
discerned that remedies, such as an action against the Assurance Fund, are
available remedies to the unwitting owner:

The authors of the Torrens system x x x wisely included provisions intended

to safeguard the rights of prejudiced parties rightfully entitled to an interest
in land but shut off from obtaining titles thereto [because of the
indefeasibility of a Torrens title]. [Therefore,] [a]s suppletory to the
registration of titles, pecuniary compensation by way of damages was
provided for in certain cases for persons who had lost their property. For this
purpose, an assurance fund was created. x x x[52] (Emphasis and
underscoring supplied)

The Assurance Fund is a long-standing feature of our property registration

system which is intended "to relieve innocent persons from the harshness of
the doctrine that a certificate is conclusive evidence of an indefeasible title
to land x x x."[53] Originally, claims against the Assurance Fund were
governed by Section 101[54] of Act No. 496, otherwise known as the "Land
Registration Act." The language of this provision was substantially carried
over to our present "Property Registration Decree," i.e., Presidential Decree
No. (PD) 1529,[55] Section 95 of which reads:

Section 95. Action for compensation from funds. – A person who, without
negligence on his part, sustains loss or damage, or is deprived of land or any
estate or interest therein in consequence of the bringing of the land under the
operation of the Torrens system or arising after original registration of land,
through fraud or in consequence of any error, omission, mistake or
misdescription in any certificate of title or in any entry or memorandum in
the registration book, and who by the provisions of this Decree is barred or
otherwise precluded under the provision of any law from bringing an action
for the recovery of such land or the estate or interest therein, may bring an
action in any court of competent jurisdiction for the recovery of damages to
be paid out of the Assurance Fund.

In Register of Deeds of Negros Occidental v. Anglo, Sr.[56] (Anglo, Sr.),

the Court held that "[b]ased solely on Section 95 of Presidential Decree No.
1529, the following conditions must be met: First, the individual must
sustain loss or damage, or the individual is deprived of land or any estate or
interest. Second, the individual must not be negligent. Third, the loss,
damage, or deprivation is the consequence of either (a) fraudulent
registration under the Torrens system after the land's original registration, or
(b) any error, omission, mistake, or misdescription in any certificate of title
or in any entry or memorandum in the registration book. [And] [f]ourth, the
individual must be barred or otherwise precluded under the provision of any
law from bringing an action for the recovery of such land or the estate or
interest therein."[57]
Anent the first ground (i.e., item [a] of the third condition above), it should
be clarified that loss, damage, or deprivation of land or any estate or interest
therein through fraudulent registration alone is not a valid ground to recover
damages against the Assurance Fund. Section 101 of PD 1529 explicitly
provides that "[t]he Assurance Fund shall not be liable for any loss,
damage or deprivation caused or occasioned by a breach of trust,
whether express, implied or constructive or by any mistake in the
resurvey or subdivision of registered land resulting in the expansion of
area in the certificate of title." It is hornbook doctrine that "[w]hen a
party uses fraud or concealment to obtain a certificate of title of
property, a constructive trust is created in favor of the defrauded
party."[58] However, as stated in Section 101 of PD 1529, the inability to
recover from the defrauding party does not make the Assurance Fund liable
therefor.

Instead, the loss, damage or deprivation becomes compensable under the

Assurance Fund when the property has been further registered in the
name of an innocent purchaser for value. This is because in this
instance, the loss, damage or deprivation are not actually caused by any
breach of trust but rather, by the operation of the Torrens system of
registration which renders indefeasible the title of the innocent
purchaser for value. To note, it has been held that a mortgagee in good
faith (such as Rowena) stands as an innocent mortgagee for value with the
rights of an innocent purchaser for value.[59]

In the 1916 case of Dela Cruz v. Fabie,[60] the Court discussed that it is
necessary for the property to have transferred to a registered innocent
purchaser – not to a mere registered purchaser – before recovery from the
Assurance Fund may prosper, viz.:

The Attorney-General did not err when he wrote in his brief in the preceding
case: "To hold that the principal may recover damages from the assurance
fund on account of such a fraudulent act as that charged to Vedasto
Velazquez in this case would be equivalent to throwing open the door to
fraud, to the great advantage of the registered landowner and his agent and
to the ruin and rapid disappearance of the assurance fund, and the general
funds of the Insular Treasury would become liable for the claims for
indemnity in cases where none such was due. This course would in time
wreck the Insular Treasury and enrich designing scoundrels." (Brief, p. 16.)

xxxx

The simple allegation contained in the complaint that Fabie is a registered

purchaser is not the same as that of his being a registered innocent
purchaser. The fact of the sale and the fact of the registration are not
sufficient to allow the understanding that it was also admitted in the
demurrer that he was an innocent purchaser.
There is no law or doctrine that authorizes such an interpretation. The
plaintiff must set forth in his complaint all the facts that necessarily conduce
toward the result sought by his action. The action was for the purpose of
recovering from the assurance fund indemnity for the damage suffered by
the plaintiff in losing the ownership of his land as a result of the registration
obtained by an innocent holder for value (purchase). It is a necessary
requirement of the law that the registered property shall have been conveyed
to an innocent holder for value who shall also have registered his
acquisition. Necessarily the complaint must show these facts as they are
required by the law. x x x[61] (Emphasis and underscoring supplied)

Later, in the 1936 case of La Urbana v. Bernardo,[62] the Court qualified

that ''it is a condition sine qua non that the person who brings an action for
damages against the assurance fund be the registered owner, and, as to
holders of transfer certificates of title, that they be innocent purchasers in
good faith and for value."[63]

In sum, the Court herein holds that an action against the Assurance Fund on
the ground of "fraudulent registration under the Torrens system after the
land's original registration" may be brought only after the claimant's
property is registered in the name of an innocent purchaser for value. This is
because it is only after the registration of the innocent purchaser for value's
title (and not the usurper's title which constitutes a breach of trust) can be
said that the claimant effectively "sustains loss or damage, or is deprived of
land or any estate or interest therein in consequence of the bringing of the
land under the operation of the Torrens system." The registration of the
innocent purchaser for value's title is therefore a condition sine qua non in
order to properly claim against the Assurance Fund.

II. Action for Compensation Against

the Assurance Fund; Prescriptive Period

An action for compensation against the Assurance Fund is a separate

and distinct remedy, apart from review of decree of registration or
reconveyance of title, which can be availed of when there is an unjust
deprivation of property.[64] This is evident from the various provisions of
Chapter VII of PD 1529 which provide for specific parameters that govern
the action.

Among others, Section 95 of PD 1529 cited above states the conditions to

claim against the Assurance Fund. Meanwhile, Section 96 of the same law
states against whom the said action may be filed:

Section 96. Against whom action filed. – If such action is brought to

recover for loss or damage or for deprivation of land or of any estate or
interest therein arising wholly through fraud, negligence, omission,
mistake or misfeasance of the court personnel, Register of Deeds, his
deputy, or other employees of the Registry in the performance of their
respective duties, the action shall be brought against the Register of
Deeds of the province or city where the land is situated and the National
Treasurer as defendants. But if such action is brought to recover for loss or
damage or for deprivation of land or of any interest therein arising through
fraud, negligence, omission, mistake or misfeasance of person other than
court personnel, the Register of Deeds, his deputy or other employees of the
Registry, such action shall be brought against the Register of Deeds, the
National Treasurer and other person or persons, as co-defendants. It shall be
the duty of the Solicitor General in person or by representative to appear and
to defend all such suits with the aid of the fiscal of the province or city
where the land lies: Provided, however, that nothing in this Decree shall be
construed to deprive the plaintiff of any right of action which he may have
against any person for such loss or damage or deprivation without joining
the National Treasurer as party defendant. In every action filed against the
Assurance Fund, the court shall consider the report of the Commissioner of
Land Registration. (Emphases and underscoring supplied)

As Section 96 of PD 1529 provides, "if [the] action is brought to recover for

loss or damage or for deprivation of land or of any interest therein arising
through fraud, negligence, omission, mistake or misfeasance of person other
than court personnel, the Register of Deeds, his deputy or other employees
of the Registry, such action shall be brought against the Register of Deeds,
the National Treasurer and other person or persons, as co-defendants." The
phrase "other person or persons" would clearly include the usurper who
fraudulently registered the property under his name.

To recover against the Assurance Fund, however, it must appear that the
execution against "such defendants other than the National Treasurer and the
Register of Deeds" is "returned unsatisfied in whole and in part." "[O]nly
then shall the court, upon proper showing, order the amount of the execution
and costs, or so much thereof as remains unpaid, to be paid by the National
Treasurer out of the Assurance Fund." Section 97 of PD 1529 states:

Section 97. Judgment, how satisfied. – If there are defendants other than
the National Treasurer and the Register of Deeds and judgment is
entered for the plaintiff and against the National Treasury, the Register
of Deeds and any of the other defendants, execution shall first issue
against such defendants other than the National Treasurer and the
Register of Deeds. If the execution is returned unsatisfied in whole or in
part, and the officer returning the same certificates that the amount due
cannot be collected from the land or personal property of such other
defendants, only then shall the court, upon proper showing, order the
amount of the execution and costs, or so much thereof as remains
unpaid, to be paid by the National Treasurer out of the Assurance
Fund. In an action under this Decree, the plaintiff cannot recover as
compensation more than the fair market value of the land at the time he
suffered the loss, damage, or deprivation thereof. (Emphasis supplied)
Based on the afore-cited provision, it is apparent that a prior declaration of
insolvency or inability to recover from the usurper is not actually required
before the claimant may file an action against the Assurance Fund. Whether
or not funds are to be paid out of the Assurance Fund is a matter to be
determined and resolved at the execution stage of the proceedings. Clearly,
this should be the proper treatment of the insolvency requirement, contrary
to the insinuation made in previous cases on the subject.[65]

Another important provision in Chapter VII of PD 1529 is Section 102,

which incidentally stands at the center of the present controversy. This
provision sets a six (6)-year prescriptive period "from the time the right to
bring such action first occurred" within which ore may proceed to file an
action for compensation against the Assurance Fund, viz.:

Section 102. Limitation of Action. – Any action for compensation against

the Assurance Fund by reason of any loss, damage or deprivation of land or
any interest therein shall be instituted within a period of six years from the
time the right to bring such action first occurred: Provided, That the right of
action herein provided shall survive to the legal representative of the person
sustaining loss or damage, unless barred in his lifetime; and Provided,
further, That if at the time such right of action first accrued the person
entitled to bring such action was a minor or insane or imprisoned, or
otherwise under legal disability, such person or anyone claiming from, by or
under him may bring the proper action at any time within two years after
such disability has been removed, notwithstanding the expiration of the
original period of six years first above provided. (Emphasis supplied)

Jurisprudence has yet to interpret the meaning of the phrase "from the time
the right to bring such action first occurred''; hence, the need to clarify the
same.

The general rule is that "a right of action accrues only from the moment the
right to commence the action comes into existence, and prescription begins
to run from that time x x x."[66] However, in cases involving fraud, the
common acceptation is that the period of prescription runs from the
discovery of the fraud. Under the old Code of Civil Procedure, an action for
relief on the ground of fraud prescribes in four years, "but the right of action
in such case shall not be deemed to have accrued until the discovery of the
fraud."[67] Meanwhile, under prevailing case law, "[w]hen an action for
reconveyance is based on fraud, it must be filed within four (4) years from
discovery of the fraud, and such discovery is deemed to have taken place
from the issuance of the original certificate of title. x x x The rule is that
the registration of an instrument in the Office of the RD constitutes
constructive notice to the whole world and therefore the discovery of the
fraud is deemed to have taken place at the time of registration."[68]

However, in actions for compensation against the Assurance Fund grounded

on fraud, registration of the innocent purchaser for value's title should only
be considered as a condition sine qua non to file such an action and not as a
form of constructive notice for the purpose of reckoning prescription. This is
because the concept of registration as a form of constructive notice is
essentially premised on the policy of protecting the innocent purchaser
for value's title, which consideration does not, however, obtain in
Assurance Fund cases. As earlier intimated, an action against the
Assurance Fund operates as form of relief in favor of the original property
owner who had been deprived of his land by virtue of the operation of the
Torrens registration system. It does not, in any way, affect the rights of the
innocent purchaser for value who had apparently obtained the property from
a usurper but nonetheless, stands secure because of the indefeasibility of his
Torrens certificate of title. The underlying rationale for the constructive
notice rule – given that it is meant to protect the interest of the innocent
purchaser for value and not the original title holder/claimant – is therefore
absent in Assurance Fund cases. Accordingly, it should not be applied,
especially since its application with respect to reckoning prescription would
actually defeat the Assurance Fund's laudable purpose.

The Assurance Fund was meant as a form of State insurance that allows
recompense to an original title holder who, without any negligence on his
part whatsoever, had been apparently deprived of his land initially by a
usurper. The ordinary remedies against the usurper would have allowed the
original titleholder to recover his property. However, if the usurper is able to
transfer the same to an innocent purchaser for value and he is unable to
compensate the original title holder for the loss, then the latter is now left
without proper recourse. As exemplified by this case, original title holders
are, more often than not, innocently unaware of the unscrupulous
machinations of usurpers and later on, the registration of an innocent
purchaser for value's title. If the constructive notice rule on registration were
to apply in cases involving claims against the Assurance Fund, then original
title holders – who remain in possession of their own duplicate certificates of
title, as petitioners in this case – are in danger of losing their final bastion of
recompense on the ground of prescription, despite the lack of any negligence
or fault on their part. Truly, our lawmakers would not have intended such an
unfair situation. As repeatedly stated, the intent of the Assurance Fund is to
indemnify the innocent original title holder for his property loss, which loss
is attributable to not only the acts of a usurper but ultimately the operation of
the Torrens System of registration which, by reasons of public policy, tilts
the scales in favor of innocent purchasers for value.

Thus, as aptly pointed out by Associate Justice Marvic M.V.F. Leonen

during the deliberations on this case, the constructive notice rule on
registration should not be made to apply to title holders who have been
unjustly deprived of their land without their negligence. The actual title
holder cannot be deprived of his or her rights twice – first, by
fraudulent registration of the title in the name of the usurper and
second, by operation of the constructive notice rule upon registration of
the title in the name of the innocent purchaser for value. As such,
prescription, for purposes of determining the right to bring an action
against the Assurance Fund, should be reckoned from the moment the
innocent purchaser for value registers his or her title and upon actual
knowledge thereof of the original title holder/claimant. As above-
discussed, the registration of the innocent purchaser for value's title is a
prerequisite for a claim against the Assurance Fund on the ground of fraud to
proceed, while actual knowledge of the registration is tantamount to the
discovery of the fraud. More significantly, this interpretation preserves and
actualizes the intent of the law, and provides some form of justice to
innocent original titleholders. In Alonzo v. Intermediate Appellate Court,
[69] this Court exhorted that:

[I]n seeking the meaning of the law, the first concern of the judge should be
to discover in its provisions the intent 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. x x
x[70]

In this case, it has been established that petitioners are residents of Spain and
designated no administrator over their property, i.e., Lot No. 1320, in the
Philippines. They remain in possession of the owner's duplicate copy of TCT
No. 13450 in their names,[71] the surrender of which was necessary in order
to effect a valid transfer of title to another person through a voluntary
instrument.[72] As the records show, not only did Anduiza, the usurper,
forge a deed of sale purportedly transferring petitioners' property in his
favor,[73] they were also not required by the RD-Legazpi or through a court
order to surrender possession of their owner's duplicate certificate of title for
the proper entry of a new certificate of title[74] in Anduiza's favor. Neither
was the issuance of TCT No. 42486 in the name of Anduiza
recorded/registered in the Primary Entry Book, nor was a copy of the deed
of sale in his favor kept on file with the RD-Legazpi.[75] Consequently,
petitioners were not in any way negligent as they, in fact, had the right to
rely on their owner's duplicate certificate of title and the concomitant
protection afforded thereto by the Torrens system, unless a better right, i.e.,
in favor of an innocent purchaser for value, intervenes.[76] As it turned out,
Anduiza mortgaged Lot No. 1320 to Spouses Amurao, particularly Rowena.
As a result of Anduiza's default, Rowena foreclosed the mortgage, and
consequently, caused the cancellation of TCT No. 42486 and issuance of
TCT No. 52392 in her name on July 19, 2001.[77] Spouses Amurao and
later, the Co group, in whose favor the subject lot was sold – by virtue of the
final judgment of the RTC – were conclusively deemed as innocent
purchasers for value. Their status as such had therefore been settled and
hence, cannot be revisited, lest this Court deviate from the long-standing
principle of immutability of judgments, which states:
A definitive final judgment, however erroneous, is no longer subject to
change or revision.

A decision that has acquired finality becomes immutable and unalterable.

This quality of immutability precludes the modification of a final judgment,
even if the modification is meant to correct erroneous conclusions of fact
and law. And this postulate holds true whether the modification is made by
the court that rendered it or by the highest court in the land. The orderly
administration of justice requires that, at the risk of occasional errors, the
judgments/resolutions of a court must reach a point of finality set by the law.
The noble purpose is to write finis to dispute once and for all. This is a
fundamental principle in our justice system, without which there would be
no end to litigations. Utmost respect and adherence to this principle must
always be maintained by those who exercise the power of adjudication. Any
act, which violates such principle, must immediately be struck down.
Indeed, the principle of conclusiveness of prior adjudications is not confined
in its operation to the judgments of what are ordinarily known as courts, but
extends to all bodies upon which judicial powers had been conferred.[78]

In this regard, the RTC held that the Assurance Fund would be subsidiarily
liable to petitioners, should the judgment debt be left unsatisfied from the
land or personal property of Anduiza. If the constructive notice rule were to
be applied, then petitioners' claim against the Assurance Fund filed on
March 18, 2009 would be barred, considering the lapse of more than six (6)
years from the registration of Spouses Amurao's title over the subject lot on
July 19, 2001. However, as earlier explained, the constructive notice rule
holds no application insofar as reckoning the prescriptive period for
Assurance Fund cases. Instead, the six (6)-year prescriptive period under
Section 102 of PD 1529 should be counted from January 28, 2008, or the
date when petitioners discovered the anomalous transactions over their
property, which included the registration of Rowena's title over the same.
Thus, when they filed their complaint on March 18, 2009, petitioners' claim
against the Assurance Fund has not yet prescribed. Accordingly, the CA
erred in ruling otherwise.

To recount, the CA held that prescription under Section 102 of PD 1529 runs
from the time of the registration of the title in favor of the person who
caused the fraud, i.e., the usurper.[79] As basis, the CA relied on the case of
Guaranteed Homes, Inc. v. Heirs of Valdez (Guaranteed Homes, Inc.),[80]
wherein the Court made the following statement:

Lastly, respondents' claim against the Assurance Fund also cannot prosper.
Section 101 of P.D. No. 1529 clearly provides that the Assurance Fund shall
not be liable for any loss, damage or deprivation of any right or interest in
land which may have been caused by a breach of trust, whether express,
implied or constructive. Even assuming arguendo that they are entitled to
claim against the Assurance Fund, the respondents' claim has already
prescribed since any action for compensation against the Assurance Fund
must be brought within a period of six (6) years from the time the right to
bring such action first occurred, which in this case was in 1967.[81]
(Emphasis supplied)

After a careful perusal of the Guaranteed Homes, Inc. case in its entirety, the
Court herein discerns that the foregoing pronouncement on prescription was
mere obiter dicta, and hence, non-binding.[82] Actually, the issue for
resolution in that case revolved only around petitioner Guaranteed Homes,
Inc.'s motion to dismiss Pablo Pascua's (respondent's predecessor) complaint
for reconveyance on the ground of failure to state a cause of action.
Ultimately, the Court held that respondent's complaint failed to state a cause
of action for the reasons that: (a) the complaint does not allege any defect in
the TCT assailed therein; (b) the transfer document relied upon by
Guaranteed Homes, Inc. (i.e., the Extrajudicial Settlement of a Sole Heir and
Confirmation of Sales) was registered and had an operative effect; and (c)
respondent cannot make a case for quieting of title since their title was
cancelled, but added, as an aside, that the claim against the Assurance Fund
would be improper "since the Assurance Fund shall not be liable for any
loss, damage or deprivation of any right or interest in land which may have
been caused by a breach of trust, whether express, implied or constructive",
and moreover, "[e]ven assuming arguendo that they are entitled to claim
against the Assurance Fund, the respondents' claim has already
prescribed."[83] Thus, as it was not a pronouncement that was made in
relation to the actual issues involved, the quoted excerpt by the CA from
Guaranteed Homes, Inc. is not binding jurisprudence and hence, would not
necessarily apply to this case.

In any event, the reckoning of the six (6)-year period from the time a
certificate of title was issued in favor of the usurper is incorrect doctrine.[84]
At the risk of belaboring the point, the registration of the property in the
name of an innocent purchaser for value is integral in every action against
the Assurance Fund on the ground of "fraudulent registration under the
Torrens system after the land's original registration." This is because it is
only at that moment when the claimant suffers loss, damage or deprivation
of land caused by the operation of the Torrens system of registration, for
which the State may be made accountable. To follow the CA's ruling based
on the obiter dictum in Guaranteed Homes, Inc. is to recognize that the right
of action against the Assurance Fund arises already at the point when the
usurper fraudulently registers his title. By legal attribution, this latter act is a
breach of an implied trust, which, however, by express provision of Section
101 of PD 1529, does not render the Assurance Fund liable. Thus, the CA
committed reversible error in ruling that the prescriptive period under
Section 102 of PD1529 for filing a claim against the Assurance Fund should
be reckoned from the registration of the usurper's title. On the contrary, the
period should be reckoned from the moment the innocent purchaser for
value registers his or her title and upon actual knowledge thereof of the
original title holder/claimant. In this light, the claim has yet to prescribe.
WHEREFORE, the petition is GRANTED. The Decision dated March 16,
2016 and the Resolution dated May 19, 2016 of the Court of Appeals in CA-
G.R. CV No. 104207 are hereby REVERSED and SET ASIDE. The
Decision dated August 19, 2013 and the Order dated April 30, 2014 of the
Regional Trial Court of Legazpi City, Albay, Branch 2 (RTC), are hereby
REINSTATED in toto. Accordingly, the RTC is hereby DIRECTED to
conduct execution proceedings with reasonable dispatch.

SO ORDERED.

G.R. No. 179965 February 20, 2013

DIEGO v. DIEGO and DIEGO
DEL CASTILLO, J.:

It is settled jurisprudence, to the point of being elementary, that an

agreement which stipulates that the seller shall execute a deed of sale
only upon or after tl1ll payment of the purchase price is a contract to
sell, not a contract of sale. In Reyes v. Tuparan, 1 this Court declared in
categorical terms that "[w]here the vendor promises to execute a deed of
absolute sale upon the completion by the vendee of the payment of the price,
the contract is only a contract to sell. The aforecited stipulation shows that
the vendors reserved title to the subject property until full payment of the
purchase price."

In this case, it is not disputed as in tact both parties agreed that the deed of
sale shall only be executed upon payment of the remaining balance of the
purchase price. Thus, pursuant to the above stated jurisprudence, we
similarly declare that the transaction entered into by the parties is a contract
to sell.

Before us is a Petition for Review on Certiorari2 questioning the June 29,

2007 Decision3 and the October 3, 2007 Resolution4 of the Court of
Appeals (CA) in CA-G.R. CV No. 86512, which affirmed the April 19, 2005
Decision5 of the Regional Trial Court (RTC), Branch 40, of Dagupan City
in Civil Case No. 99-02971-D.

Factual Antecedents

In 1993, petitioner Nicolas P. Diego (Nicolas) and his brother Rodolfo,

respondent herein, entered into an oral contract to sell covering Nicolas’s
share, fixed at ₱500,000.00, as co-owner of the family’s Diego Building
situated in Dagupan City. Rodolfo made a downpayment of ₱250,000.00.
It was agreed that the deed of sale shall be executed upon payment of
the remaining balance of ₱250,000.00. However, Rodolfo failed to pay the
remaining balance.
Meanwhile, the building was leased out to third parties, but Nicolas’s share
in the rents were not remitted to him by herein respondent Eduardo,
another brother of Nicolas and designated administrator of the Diego
Building. Instead, Eduardo gave Nicolas’s monthly share in the rents to
Rodolfo. Despite demands and protestations by Nicolas, Rodolfo and
Eduardo failed to render an accounting and remit his share in the rents and
fruits of the building, and Eduardo continued to hand them over to Rodolfo.

Thus, on May 17, 1999, Nicolas filed a Complaint against Rodolfo and
Eduardo before the RTC of Dagupan City and docketed as Civil Case No.
99-02971-D. Nicolas prayed that Eduardo be ordered to render an
accounting of all the transactions over the Diego Building; that Eduardo and
Rodolfo be ordered to deliver to Nicolas his share in the rents; and that
Eduardo and Rodolfo be held solidarily liable for attorney’s fees and
litigation expenses.

Rodolfo and Eduardo filed their Answer with Counterclaim7 for damages
and attorney’s fees. They argued that Nicolas had no more claim in the rents
in the Diego Building since he had already sold his share to Rodolfo.
Rodolfo admitted having remitted only ₱250,000.00 to Nicolas. He asserted
that he would pay the balance of the purchase price to Nicolas only after the
latter shall have executed a deed of absolute sale.

Ruling of the Regional Trial Court

After trial on the merits, or on April 19, 2005, the trial court rendered its
Decision8 dismissing Civil Case No. 99-02971-D for lack of merit and
ordering Nicolas to execute a deed of absolute sale in favor of Rodolfo upon
payment by the latter of the ₱250,000.00 balance of the agreed purchase
price. It made the following interesting pronouncement:

It is undisputed that plaintiff (Nicolas) is one of the co-owners of the Diego

Building, x x x. As a co-owner, he is entitled to [his] share in the rentals of
the said building. However, plaintiff [had] already sold his share to
defendant Rodolfo Diego in the amount of ₱500,000.00 and in fact, [had]
already received a partial payment in the purchase price in the amount of
₱250,000.00. Defendant Eduardo Diego testified that as per agreement,
verbal, of the plaintiff and defendant Rodolfo Diego, the remaining balance
of ₱250,000.00 will be paid upon the execution of the Deed of Absolute
Sale. It was in the year 1997 when plaintiff was being required by defendant
Eduardo Diego to sign the Deed of Absolute Sale. Clearly, defendant
Rodolfo Diego was not yet in default as the plaintiff claims which cause
[sic] him to refuse to sign [sic] document. The contract of sale was already
perfected as early as the year 1993 when plaintiff received the partial
payment, hence, he cannot unilaterally revoke or rescind the same. From
then on, plaintiff has, therefore, ceased to be a co-owner of the building and
is no longer entitled to the fruits of the Diego Building.
Equity and fairness dictate that defendant [sic] has to execute the necessary
document regarding the sale of his share to defendant Rodolfo Diego.
Correspondingly, defendant Rodolfo Diego has to perform his obligation as
per their verbal agreement by paying the remaining balance of
₱250,000.00.9

To summarize, the trial court ruled that as early as 1993, Nicolas was no
longer entitled to the fruits of his aliquot share in the Diego Building
because he had "ceased to be a co-owner" thereof. The trial court held that
when Nicolas received the ₱250,000.00 downpayment, a "contract of sale"
was perfected. Consequently, Nicolas is obligated to convey such share to
Rodolfo, without right of rescission. Finally, the trial court held that the
₱250,000.00 balance from Rodolfo will only be due and demandable when
Nicolas executes an absolute deed of sale.

Ruling of the Court of Appeals

Nicolas appealed to the CA which sustained the trial court’s Decision in

toto. The CA held that since there was a perfected contract of sale
between Nicolas and Rodolfo, the latter may compel the former to execute
the proper sale document. Besides, Nicolas’s insistence that he has since
rescinded their agreement in 1997 proved the existence of a perfected sale. It
added that Nicolas could not validly rescind the contract because: "1)
Rodolfo ha[d] already made a partial payment; 2) Nicolas ha[d] already
partially performed his part regarding the contract, and 3) Rodolfo opposes
the rescission."

The CA then proceeded to rule that since no period was stipulated within
which Rodolfo shall deliver the balance of the purchase price, it was
incumbent upon Nicolas to have filed a civil case to fix the same. But
because he failed to do so, Rodolfo cannot be considered to be in delay or
default.

Finally, the CA made another interesting pronouncement, that by virtue of

the agreement Nicolas entered into with Rodolfo, he had already transferred
his ownership over the subject property and as a consequence, Rodolfo is
legally entitled to collect the fruits thereof in the form of rentals. Nicolas’
remaining right is to demand payment of the balance of the purchase price,
provided that he first executes a deed of absolute sale in favor of Rodolfo.

Nicolas moved for reconsideration but the same was denied by the CA in its
Resolution dated October 3, 2007.

Hence, this Petition.

Issues

The Petition raises the following errors that must be rectified:

I

THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING

THAT THERE WAS NO PERFECTED CONTRACT OF SALE
BETWEEN PETITIONER NICOLAS DIEGO AND RESPONDENT
RODOLFO DIEGO OVER NICOLAS’S SHARE OF THE BUILDING
BECAUSE THE SUSPENSIVE CONDITION HAS NOT YET BEEN
FULFILLED.

II

THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT

THE CONTRACT OF SALE BETWEEN PETITIONER AND
RESPONDENT RODOLFO DIEGO REMAINS LEGALLY BINDING
AND IS NOT RESCINDED GIVING MISPLACED RELIANCE ON
PETITIONER NICOLAS’ STATEMENT THAT THE SALE HAS NOT
YET BEEN REVOKED.

III

THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING

THAT PETITIONER NICOLAS DIEGO ACTED LEGALLY AND
CORRECTLY WHEN HE UNILATERALLY RESCINDED AND
REVOKED HIS AGREEMENT OF SALE WITH RESPONDENT
RODOLFO DIEGO CONSIDERING RODOLFO’S MATERIAL,
SUBSTANTIAL BREACH OF THE CONTRACT.

IV

THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT

PETITIONER HAS NO MORE RIGHTS OVER HIS SHARE IN THE
BUILDING, DESPITE THE FACT THAT THERE WAS AS YET NO
PERFECTED CONTRACT OF SALE BETWEEN PETITIONER
NICOLAS DIEGO AND RODOLFO DIEGO AND THERE WAS YET NO
TRANSFER OF OWNERSHIP OF PETITIONER’S SHARE TO
RODOLFO DUE TO THE NON-FULFILLMENT BY RODOLFO OF THE
SUSPENSIVE CONDITION UNDER THE CONTRACT.

THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING

THAT RESPONDENT RODOLFO HAS UNJUSTLY ENRICHED
HIMSELF AT THE EXPENSE OF PETITIONER BECAUSE DESPITE
NOT HAVING PAID THE BALANCE OF THE PURCHASE PRICE OF
THE SALE, THAT RODOLFO HAS NOT YET ACQUIRED
OWNERSHIP OVER THE SHARE OF PETITIONER NICOLAS, HE HAS
ALREADY BEEN APPROPRIATING FOR HIMSELF AND FOR HIS
PERSONAL BENEFIT THE SHARE OF THE INCOME OF THE
BUILDING AND THE PORTION OF THE BUILDING ITSELF WHICH
WAS DUE TO AND OWNED BY PETITIONER NICOLAS.

VI

THE HONORABLE COURT OF APPEALS ERRED IN NOT

AWARDING ACTUAL DAMAGES, ATTORNEY’S FEES AND
LITIGATION EXPENSES TO THE PETITIONER DESPITE THE FACT
THAT PETITIONER’S RIGHTS HAD BEEN WANTONLY VIOLATED
BY THE RESPONDENTS.11

Petitioner’s Arguments

In his Petition, the Supplement12 thereon, and Reply,13 Nicolas argues that,
contrary to what the CA found, there was no perfected contract of sale even
though Rodolfo had partially paid the price; that in the absence of the third
element in a sale contract – the price – there could be no perfected sale; that
failing to pay the required price in full, Nicolas had the right to rescind the
agreement as an unpaid seller.

Nicolas likewise takes exception to the CA finding that Rodolfo was not in
default or delay in the payment of the agreed balance for his (Nicolas’s)
failure to file a case to fix the period within which payment of the balance
should be made. He believes that Rodolfo’s failure to pay within a
reasonable time was a substantial and material breach of the agreement
which gave him the right to unilaterally and extrajudicially rescind the
agreement and be discharged of his obligations as seller; and that his
repeated written demands upon Rodolfo to pay the balance granted him such
rights.

Nicolas further claims that based on his agreement with Rodolfo, there was
to be no transfer of title over his share in the building until Rodolfo has
effected full payment of the purchase price, thus, giving no right to the latter
to collect his share in the rentals.

Finally, Nicolas bewails the CA’s failure to award damages, attorney’s fees
and litigation expenses for what he believes is a case of unjust enrichment at
his expense.

Respondents’ Arguments

Apart from echoing the RTC and CA pronouncements, respondents accuse

the petitioner of "cheating" them, claiming that after the latter received the
₱250,000.00 downpayment, he "vanished like thin air and hibernated in the
USA, he being an American citizen,"14 only to come back claiming that the
said amount was a mere loan.
They add that the Petition is a mere rehash and reiteration of the petitioner’s
arguments below, which are deemed to have been sufficiently passed upon
and debunked by the appellate court.

Our Ruling

The Court finds merit in the Petition.

The contract entered into by Nicolas and Rodolfo was a contract to sell.

a) The stipulation to execute a deed of sale upon full payment of the

purchase price is a unique and distinguishing characteristic of a
contract to sell. It also shows that the vendor reserved title to the property
until full payment.

There is no dispute that in 1993, Rodolfo agreed to buy Nicolas’s share in

the Diego Building for the price of ₱500,000.00. There is also no dispute
that of the total purchase price, Rodolfo paid, and Nicolas received
₱250,000.00. Significantly, it is also not disputed that the parties agreed that
the remaining amount of ₱250,000.00 would be paid after Nicolas shall have
executed a deed of sale.

This stipulation, i.e., to execute a deed of absolute sale upon full payment of
the purchase price, is a unique and distinguishing characteristic of a contract
to sell. In Reyes v. Tuparan,15 this Court ruled that a stipulation in the
contract, "[w]here the vendor promises to execute a deed of absolute sale
upon the completion by the vendee of the payment of the price," indicates
that the parties entered into a contract to sell.

According to this Court, this particular provision is tantamount to a

reservation of ownership on the part of the vendor. Explicitly stated, the
Court ruled that the agreement to execute a deed of sale upon full payment
of the purchase price "shows that the vendors reserved title to the subject
property until full payment of the purchase price.

In Tan v. Benolirao,17 this Court, speaking through Justice Brion, ruled that
the parties entered into a contract to sell as revealed by the following
stipulation:

d) That in case, BUYER has complied with the terms and conditions of this
contract, then the SELLERS shall execute and deliver to the BUYER the
appropriate Deed of Absolute Sale;18

The Court further held that "[j]urisprudence has established that where the
seller promises to execute a deed of absolute sale upon the completion by the
buyer of the payment of the price, the contract is only a contract to sell."19
b) The acknowledgement receipt signed by Nicolas as well as the
contemporaneous acts of the parties show that they agreed on a contract to
sell, not of sale. The absence of a formal deed of conveyance is indicative of
a contract to sell.

In San Lorenzo Development Corporation v. Court of Appeals,20 the facts

show that spouses Miguel and Pacita Lu (Lu) sold a certain parcel of land to
Pablo Babasanta (Pablo). After several payments, Pablo wrote Lu
demanding "the execution of a final deed of sale in his favor so that he could
effect full payment of the purchase price."21 To prove his allegation that
there was a perfected contract of sale between him and Lu, Pablo presented a
receipt signed by Lu acknowledging receipt of ₱50,000.00 as partial
payment.22

However, when the case reached this Court, it was ruled that the transaction
entered into by Pablo and Lu was only a contract to sell, not a contract of
sale. The Court held thus:

The receipt signed by Pacita Lu merely states that she accepted the sum of
fifty thousand pesos (₱50,000.00) from Babasanta as partial payment of 3.6
hectares of farm lot situated in Sta. Rosa, Laguna. While there is no
stipulation that the seller reserves the ownership of the property until full
payment of the price which is a distinguishing feature of a contract to sell,
the subsequent acts of the parties convince us that the Spouses Lu never
intended to transfer ownership to Babasanta except upon full payment of the
purchase price.

Babasanta’s letter dated 22 May 1989 was quite telling. He stated therein
that despite his repeated requests for the execution of the final deed of sale
in his favor so that he could effect full payment of the price, Pacita Lu
allegedly refused to do so. In effect, Babasanta himself recognized that
ownership of the property would not be transferred to him until such time as
he shall have effected full payment of the price. Moreover, had the sellers
intended to transfer title, they could have easily executed the document of
sale in its required form simultaneously with their acceptance of the partial
payment, but they did not. Doubtlessly, the receipt signed by Pacita Lu
should legally be considered as a perfected contract to sell.23

In the instant case, records show that Nicolas signed a mere receipt24
acknowledging partial payment of ₱250,000.00 from Rodolfo. It states:

July 8, 1993

Received the amount of [₱250,000.00] for 1 share of Diego Building as

partial payment for Nicolas Diego.

(signed)
Nicolas Diego25
As we ruled in San Lorenzo Development Corporation v. Court of
Appeals,26 the parties could have executed a document of sale upon receipt
of the partial payment but they did not. This is thus an indication that
Nicolas did not intend to immediately transfer title over his share but only
upon full payment of the purchase price. Having thus reserved title over the
property, the contract entered into by Nicolas is a contract to sell. In
addition, Eduardo admitted that he and Rodolfo repeatedly asked Nicolas to
sign the deed of sale27 but the latter refused because he was not yet paid the
full amount. As we have ruled in San Lorenzo Development Corporation v.
Court of Appeals,28 the fact that Eduardo and Rodolfo asked Nicolas to
execute a deed of sale is a clear recognition on their part that the ownership
over the property still remains with Nicolas. In fine, the totality of the
parties’ acts convinces us that Nicolas never intended to transfer the
ownership over his share in the Diego Building until the full payment of the
purchase price. Without doubt, the transaction agreed upon by the parties
was a contract to sell, not of sale.

In Chua v. Court of Appeals,29 the parties reached an impasse when the

seller wanted to be first paid the consideration before a new transfer
certificate of title (TCT) is issued in the name of the buyer. Contrarily, the
buyer wanted to secure a new TCT in his name before paying the full
amount. Their agreement was embodied in a receipt containing the following
terms: "(1) the balance of ₱10,215,000.00 is payable on or before 15 July
1989; (2) the capital gains tax is for the account of x x x; and (3) if [the
buyer] fails to pay the balance x x x the [seller] has the right to forfeit the
earnest money x x x."30 The case eventually reached this Court. In resolving
the impasse, the Court, speaking through Justice Carpio, held that "[a]
perusal of the Receipt shows that the true agreement between the parties was
a contract to sell."31 The Court noted that "the agreement x x x was
embodied in a receipt rather than in a deed of sale, ownership not having
passed between them."32 The Court thus concluded that "[t]he absence of a
formal deed of conveyance is a strong indication that the parties did not
intend immediate transfer of ownership, but only a transfer after full
payment of the purchase price."33 Thus, the "true agreement between the
parties was a contract to sell."34

In the instant case, the parties were similarly embroiled in an impasse. The
parties’ agreement was likewise embodied only in a receipt. Also, Nicolas
did not want to sign the deed of sale unless he is fully paid. On the other
hand, Rodolfo did not want to pay unless a deed of sale is duly executed in
his favor. We thus say, pursuant to our ruling in Chua v. Court of Appeals35
that the agreement between Nicolas and Rodolfo is a contract to sell.

This Court cannot subscribe to the appellate court’s view that Nicolas should
first execute a deed of absolute sale in favor of Rodolfo, before the latter can
be compelled to pay the balance of the price. This is patently ridiculous, and
goes against every rule in the book. This pronouncement virtually places the
prospective seller in a contract to sell at the mercy of the prospective buyer,
and sustaining this point of view would place all contracts to sell in jeopardy
of being rendered ineffective by the act of the prospective buyers, who
naturally would demand that the deeds of absolute sale be first executed
before they pay the balance of the price. Surely, no prospective seller would
accommodate.

In fine, "the need to execute a deed of absolute sale upon completion of

payment of the price generally indicates that it is a contract to sell, as it
implies the reservation of title in the vendor until the vendee has completed
the payment of the price."36 In addition, "[a] stipulation reserving
ownership in the vendor until full payment of the price is x x x typical in a
contract to sell."37 Thus, contrary to the pronouncements of the trial and
appellate courts, the parties to this case only entered into a contract to sell; as
such title cannot legally pass to Rodolfo until he makes full payment of the
agreed purchase price.

c) Nicolas did not surrender or deliver title or possession to Rodolfo.

Moreover, there could not even be a surrender or delivery of title or

possession to the prospective buyer Rodolfo. This was made clear by the
nature of the agreement, by Nicolas’s repeated demands for the return of all
rents unlawfully and unjustly remitted to Rodolfo by Eduardo, and by
Rodolfo and Eduardo’s repeated demands for Nicolas to execute a deed of
sale which, as we said before, is a recognition on their part that ownership
over the subject property still remains with Nicolas.

Significantly, when Eduardo testified, he claimed to be knowledgeable about

the terms and conditions of the transaction between Nicolas and Rodolfo.
However, aside from stating that out of the total consideration of
₱500,000.00, the amount of ₱250,000.00 had already been paid while the
remaining ₱250,000.00 would be paid after the execution of the Deed of
Sale, he never testified that there was a stipulation as regards delivery of title
or possession.38

It is also quite understandable why Nicolas belatedly demanded the payment

of the rentals. Records show that the structural integrity of the Diego
Building was severely compromised when an earthquake struck Dagupan
City in 1990.39 In order to rehabilitate the building, the co-owners obtained
a loan from a bank.40 Starting May 1994, the property was leased to third
parties and the rentals received were used to pay off the loan.41 It was only
in 1996, or after payment of the loan that the co-owners started receiving
their share in the rentals.42 During this time, Nicolas was in the USA but
immediately upon his return, he demanded for the payment of his share in
the rentals which Eduardo remitted to Rodolfo. Failing which, he filed the
instant Complaint. To us, this bolsters our findings that Nicolas did not
intend to immediately transfer title over the property.
It must be stressed that it is anathema in a contract to sell that the
prospective seller should deliver title to the property to the prospective buyer
pending the latter’s payment of the price in full. It certainly is absurd to
assume that in the absence of stipulation, a buyer under a contract to sell is
granted ownership of the property even when he has not paid the seller in
full. If this were the case, then prospective sellers in a contract to sell would
in all likelihood not be paid the balance of the price.

This ponente has had occasion to rule that "[a] contract to sell is one where
the prospective seller reserves the transfer of title to the prospective buyer
until the happening of an event, such as full payment of the purchase price.
What the seller obliges himself to do is to sell the subject property only
when the entire amount of the purchase price has already been delivered to
him. ‘In other words, the full payment of the purchase price partakes of a
suspensive condition, the nonfulfillment of which prevents the obligation to
sell from arising, and thus, ownership is retained by the prospective seller
without further remedies by the prospective buyer.’ It does not, by itself,
transfer ownership to the buyer."43

The contract to sell is terminated or cancelled.

Having established that the transaction was a contract to sell, what happens
now to the parties’ agreement?

The remedy of rescission is not available in contracts to sell.44 As

explained in Spouses Santos v. Court of Appeals:45

In view of our finding in the present case that the agreement between the
parties is a contract to sell, it follows that the appellate court erred when it
decreed that a judicial rescission of said agreement was necessary. This is
because there was no rescission to speak of in the first place. As we earlier
pointed out, in a contract to sell, the title remains with the vendor and does
not pass on to the vendee until the purchase price is paid in full. Thus, in a
contract to sell, the payment of the purchase price is a positive
suspensive condition. Failure to pay the price agreed upon is not a mere
breach, casual or serious, but a situation that prevents the obligation of
the vendor to convey title from acquiring an obligatory force. This is
entirely different from the situation in a contract of sale, where non-
payment of the price is a negative resolutory condition. The effects in
law are not identical. In a contract of sale, the vendor has lost
ownership of the thing sold and cannot recover it, unless the contract of
sale is rescinded and set aside. In a contract to sell, however, the vendor
remains the owner for as long as the vendee has not complied fully with
the condition of paying the purchase price. If the vendor should eject
the vendee for failure to meet the condition precedent, he is enforcing
the contract and not rescinding it. When the petitioners in the instant case
repossessed the disputed house and lot for the failure of private respondents
to pay the purchase price in full, they were merely enforcing the contract and
not rescinding it. As petitioners correctly point out, the Court of Appeals
erred when it ruled that petitioners should have judicially rescinded the
contract pursuant to Articles 1592 and 1191 of the Civil Code. Article 1592
speaks of non-payment of the purchase price as a resolutory condition. It
does not apply to a contract to sell. As to Article 1191, it is subordinated to
the provisions of Article 1592 when applied to sales of immovable property.
Neither provision is applicable in the present case.46

Similarly, we held in Chua v. Court of Appeals47 that "Article 1592 of the

Civil Code permits the buyer to 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. However, Article 1592 does not apply to a
contract to sell where the seller reserves the ownership until full payment of
the price,"48 as in this case.1âwphi1

Applying the above jurisprudence, we hold that when Rodolfo failed to fully
pay the purchase price, the contract to sell was deemed terminated or
cancelled.49 As we have held in Chua v. Court of Appeals,50 "[s]ince the
agreement x x x is a mere contract to sell, the full payment of the purchase
price partakes of a suspensive condition. The non-fulfillment of the
condition prevents the obligation to sell from arising and ownership is
retained by the seller without further remedies by the buyer." Similarly, we
held in Reyes v. Tuparan51 that "petitioner’s obligation to sell the subject
properties becomes demandable only upon the happening of the positive
suspensive condition, which is the respondent’s full payment of the purchase
price. Without respondent’s full payment, there can be no breach of contract
to speak of because petitioner has no obligation yet to turn over the title.
Respondent’s failure to pay in full the purchase price in full is not the breach
of contract contemplated under Article 1191 of the New Civil Code but
rather just an event that prevents the petitioner from being bound to convey
title to respondent." Otherwise stated, Rodolfo has no right to compel
Nicolas to transfer ownership to him because he failed to pay in full the
purchase price. Correlatively, Nicolas has no obligation to transfer his
ownership over his share in the Diego Building to Rodolfo.52

Thus, it was erroneous for the CA to rule that Nicolas should have filed a
case to fix the period for Rodolfo’s payment of the balance of the purchase
price. It was not Nicolas’s obligation to compel Rodolfo to pay the balance;
it was Rodolfo’s duty to remit it.

It would appear that after Nicolas refused to sign the deed as there was yet
no full payment, Rodolfo and Eduardo hired the services of the Daroya
Accounting Office "for the purpose of estimating the amount to which
[Nicolas] still owes [Rodolfo] as a consequence of the unconsummated
verbal agreement regarding the former’s share in the co-ownership of [Diego
Building] in favor of the latter."53 According to the accountant’s report,
after Nicolas revoked his agreement with Rodolfo due to non-payment, the
downpayment of ₱250,000.00 was considered a loan of Nicolas from
Rodolfo.54 The accountant opined that the ₱250,000.00 should earn interest
at 18%.55 Nicolas however objected as regards the imposition of interest as
it was not previously agreed upon. Notably, the contents of the accountant’s
report were not disputed or rebutted by the respondents. In fact, it was stated
therein that "[a]ll the bases and assumptions made particularly in the fixing
of the applicable rate of interest have been discussed with [Eduardo]."56

We find it irrelevant and immaterial that Nicolas described the termination

or cancellation of his agreement with Rodolfo as one of rescission. Being a
layman, he is understandably not adept in legal terms and their implications.
Besides, this Court should not be held captive or bound by the conclusion
reached by the parties. The proper characterization of an action should be
based on what the law says it to be, not by what a party believed it to be. "A
contract is what the law defines it to be x x x and not what the contracting
parties call it."57

On the other hand, the respondents’ additional submission – that Nicolas

cheated them by "vanishing and hibernating" in the USA after receiving
Rodolfo’s ₱250,000.00 downpayment, only to come back later and claim
that the amount he received was a mere loan – cannot be believed. How the
respondents could have been cheated or disadvantaged by Nicolas’s leaving
is beyond comprehension. If there was anybody who benefited from
Nicolas’s perceived "hibernation", it was the respondents, for they certainly
had free rein over Nicolas’s interest in the Diego Building. Rodolfo put off
payment of the balance of the price, yet, with the aid of Eduardo, collected
and appropriated for himself the rents which belonged to Nicolas.

Eduardo is solidarily liable with Rodolfo as regards the share of Nicolas in

the rents.

For his complicity, bad faith and abuse of authority as the Diego Building
administrator, Eduardo must be held solidarily liable with Rodolfo for all
that Nicolas should be entitled to from 1993 up to the present, or in respect
of actual damages suffered in relation to his interest in the Diego Building.
Eduardo was the primary cause of Nicolas’s loss, being directly responsible
for making and causing the wrongful payments to Rodolfo, who received
them under obligation to return them to Nicolas, the true recipient.1âwphi1
As such, Eduardo should be principally responsible to Nicolas as well.
Suffice it to state that every person must, in the exercise of his rights and in
the performance of his duties, act with justice, give everyone his due, and
observe honesty and good faith; and every person who, contrary to law,
wilfully or negligently causes damage to another, shall indemnify the latter
for the same.58

Attorney’s fees and other costs.

"Although attorney’s fees are not allowed in the absence of stipulation, the
court can award the same when the defendant’s act or omission has
compelled the plaintiff to incur expenses to protect his interest or where the
defendant acted in gross and evident bad faith in refusing to satisfy the
plaintiff’s plainly valid, just and demandable claim."59 In the instant case, it
is beyond cavil that petitioner was constrained to file the instant case to
protect his interest because of respondents’ unreasonable and unjustified
refusal to render an accounting and to remit to the petitioner his rightful
share in rents and fruits in the Diego Building. Thus, we deem it proper to
award to petitioner attorney’s fees in the amount of ₱50,000.00,60 as well as
litigation expenses in the amount of ₱20,000.00 and the sum of ₱1,000.00
for each court appearance by his lawyer or lawyers, as prayed for.

WHEREFORE, premises considered, the Petition is GRANTED. The June

29, 2007 Decision and October 3, 2007 Resolution of the Court of Appeals
in CA-G.R. CV No. 86512, and the April 19, 2005 Decision of the Dagupan
City Regional Trial Court, Branch 40 in Civil Case No. 99-02971-D, are
hereby ANNULLED and SET ASIDE.

The Court further decrees the following:

1. The oral contract to sell between petitioner Nicolas P. Diego and

respondent Rodolfo P. Diego is DECLARED terminated/cancelled;

2. Respondents Rodolfo P. Diego and Eduardo P. Diego are ORDERED to

surrender possession and control, as the case may be, of Nicolas P. Diego’s
share in the Diego Building. Respondents are further commanded to return
or surrender to the petitioner the documents of title, receipts, papers,
contracts, and all other documents in any form or manner pertaining to the
latter’s share in the building, which are deemed to be in their unauthorized
and illegal possession;

3. Respondents Rodolfo P. Diego and Eduardo P. Diego are ORDERED to

immediately render an accounting of all the transactions, from the period
beginning 1993 up to the present, pertaining to Nicolas P. Diego’s share in
the Diego Building, and thereafter commanded to jointly and severally remit
to the petitioner all rents, monies, payments and benefits of whatever kind or
nature pertaining thereto, which are hereby deemed received by them during
the said period, and made to them or are due, demandable and forthcoming
during the said period and from the date of this Decision, with legal interest
from the filing of the Complaint;

4. Respondents Rodolfo P. Diego and Eduardo P. Diego are ORDERED,

immediately and without further delay upon receipt of this Decision, to
solidarily pay the petitioner attorney’s fees in the amount of ₱50,000.00;
litigation expenses in the amount of ₱20,000.00 and the sum of ₱1,000.00
per counsel for each court appearance by his lawyer or lawyers;

5. The payment of ₱250,000.00 made by respondent Rodolfo P. Diego, with

legal interest from the filing of the Complaint, shall be APPLIED, by way of
compensation, to his liabilities to the petitioner and to answer for all
damages and other awards and interests which are owing to the latter under
this Decision; and

6. Respondents’ counterclaim is DISMISSED.

SO ORDERED.

G.R. No. 146839 March 23, 2011

CATUNGAL v. RODRIGUEZ
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. 1055 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 with respondent Rodriguez. Subsequently, the
Contract to Sell was purportedly "upgraded" into a Conditional Deed of Sale
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, 199015 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

Counterclaim22 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 Dismiss30 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 reconsideration33

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 Default35 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’
brief38 dated February 9, 1994:

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 Authorities43 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 Substitution50 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.1âwphi1 In sum, the Court of Appeals did not err in
disregarding the citations of authorities or in denying the prerpetitioners’
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 the 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 the 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 the 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 the 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 down payment 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 down payment 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.

April 19, 2017, G.R. No. 194533

PHILIPPINE STEEL COATING CORP v. QUINONES,

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 1 and Resolution 2
The CA affirmed in toto the Regional Trial Court (R TC) Decision in 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 further 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 the 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 4 in favor of Quinones and ordered PhilSteel

to pay damages. The trial court found 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 the 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 the respondent as the 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, 7 the following requisites must be

established in order to prove that there is an 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
the 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 certain facts are or shall be as the
seller represents them. 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.

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 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. 13
In the eyes of the buyer Quinones, PhilSteel - through its representative,
Angbengco - was an expert whose word could be relied upon.

This Court cannot subscribe to the 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, 14 in which this Court ruled
that the contract is the law between the 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. 16 Quinones did not talk to an ordinary sales 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), 17 could be relied on. Thus,
petitioner did induce the 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). 18 In this case, no prescription period specified in the
contract between the parties has been put forward. Quinones filed the instant
case on 6 September 199619 or several months after the last delivery of the
thing sold. 20 His filing of the suit was well within the prescriptive period of
four years; hence, his action has 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. 21 Under Article 11 73
of the Civil Code, 22 where it is not stipulated in the law or the contract, the
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."25 For this supposed
negligence, petitioner insists that 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. 27 It is the
nonpayment of the unpaid balance of the purchase price, of the primer-
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 28 of the
Civil Code. According to the petitioner, Quinones can no longer put up the
defense of hidden defects in the product sold as a basis for evading payment
of the balance. 29

We agree with the 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 the 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,31 Article 1599 of the Civil Code applies when an

express warranty is breached.1awp++i1 The 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.1âwphi1 He took this action after complaints piled up from his
customers 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. 33 Hence, if the award is 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.

October 4, 2017
G.R. No. 196419
PILIPINAS MAKRO, INC. v.
COCO CHARCOAL PHILIPPINES, INC. and LIM KIM SAN
DECISION

MARTIRES, J.:

This Petition for Review on Certiorari seeks to reverse and set aside the 30
December 2010 Decision1 and 7 April 2011 Resolution2 of the Court of
Appeals (CA) in CA-G.R. CV No. 83836 which reversed the 16 August
2004 Decision3 of the Regional Trial Court, Branch 276, Muntinlupa City
{RTC).

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)5 executed a notarized Deed of Absolute Sale wherein the
latter would sell its parcel of land, with a total area of 1,000 square meters
and covered by a 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 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 canceled.

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.1âwphi1 The trial court ruled that the DPWH project
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)11 of the
deeds of sale is similar to the warranty 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 13that the 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, 14 the Court ruled:

In a long line of cases starting with Habaluyas Enterprises v. Japson, 15 we

have laid down the following 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.1âwphi1 Nevertheless,
the CA opined that Makro was not entitled to a refund because it had actual
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.18 Thus, a warranty may either be
express or implied.

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.19 It includes all warranties derived from 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.20 On the other hand,
an implied warranty is one which the law derives by application 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.21 In other
words, an express warranty is different from an implied warranty 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.22 Evidently, 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.23 The 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, 24 the Court

cautioned that the fact that a party was 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.26
The RTC found the award of exemplary damages warranted 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.27 Here, there 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.

G.R. No. 171590 February 12, 2014

BIGNA v.UNION BANK

DECISION

DEL CASTILLO, J.:

The gross negligence of the seller in defending its title to the property
subject matter of the sale - thereby contravening the express undertaking
under the deed of sale to protect its title against the claims of third persons
resulting in the buyer's eviction from the property -. amounts to bad faith,
and the buyer is entitled to the remedies afforded under Article 1555 of the
Civil Code.

Before us are consolidated Petitions for Review on Certiorari1 assailing the

August 25, 2005 Decision2 of the Court of Appeals (CA) in CA-G.R. CV
No. 67788 as well as its February 10, 2006 Resolution3 denying the parties’
respective motions for reconsideration.

Factual Antecedents

In 1984, Alfonso de Leon (Alfonso) mortgaged in favor of Union Bank of

the Philippines (Union Bank) real property situated at Esteban Abada,
Loyola Heights, Quezon City, which was registered in his and his wife
Rosario’s name and covered by Transfer Certificate of Title (TCT) No.
286130 (TCT 286130).

The property was foreclosed and sold at auction to Union Bank. After
the redemption period expired, the bank consolidated its ownership,
whereupon TCT 362405 was issued in its name in 1987.

In 1988, Rosario filed against Alfonso and Union Bank, Civil Case No. Q-
52702 for annulment of the 1984 mortgage, claiming that Alfonso
mortgaged the property without her consent, and for reconveyance.

In a September 6, 1989 Letter-Proposal,4 Bignay Ex-Im Philippines, Inc.

(Bignay), through its President, Milagros Ong Siy (Siy), offered to
purchase the property. The written offer stated, among others, that –

The property is the subject of a pending litigation between Rosario de Leon

and Union Bank for nullification of the foreclosure before the Regional Trial
Court of Quezon City. Should this offer be approved by your management,
we suggest that instead of the usual conditional sale, a deed of absolute sale
be executed to document the transaction in our favor, subject to a mortgage
in favor of the bank to secure the balance.

This documentation is intended to isolate the property from any lis pendens
that the former owner may annotate on the title and to allow immediate
reconstitution thereof since the original Torrens title was burned in 1988
when the City Hall housing the Register of Deeds of Quezon City was
gutted by fire.5

On December 20, 1989, a Deed of Absolute Sale was executed by and

between Union Bank and Bignay whereby the property was conveyed to
Bignay for ₱4 million. The deed of sale was executed by the parties through
Bignay’s Siy and Union Bank’s Senior Vice President Anthony Robles
(Robles). One of the terms of the deed of sale is quoted below:
Section 1. The VENDEE hereby recognizes that the Parcel/s of Land with
improvements thereon is acquired through foreclosure proceedings and
agrees to buy the Parcel/s of Land with improvement[s] thereon in its
present state and condition. The VENDOR, therefore, does not make any x x
x representations or warranty with respect to the Parcel/s of Land but it will
defend its title to the Parcel/s of Land with improvement[s] thereon against
the claims of any person whomsoever.

On December 27, 1989, Bignay mortgaged the property to Union Bank,

presumably to secure a loan obtained from the latter.

On December 12, 1991, a Decision was rendered in Civil Case No. Q-

52702, decreeing as follows:

WHEREFORE, premises above considered, finding that defendant Alfonso

de Leon, Jr. had alone executed the mortgage (Exh. 7) on their conjugal
property with T.C.T. No. 286130 (Exh. L) upon a forged signature (Exh. M-
1) of his wife plaintiff Rosario T. de Leon, the Court hereby declares NULL
and VOID the following documents:

1. Said Mortgage Contract dated April 11, 1984 (Exh. 7) executed by and
between defendants Alfonso de Leon, Jr. alone and Union Bank of the
Philippines;

2. Sheriff’s Sale dated June 12, 1985 (Exh. F);

3. T.C.T. No. 362405 (Exh. O) issued in the name of defendant Union Bank
on June 10, 1987 which replaced the said T.C.T. No. 286130;

4. Sale and mortgage by and between Union Bank and Bignay Ex-Im Phil.
Inc. on December 27, 1989 over the subject conjugal property as annotated
on T.C.T. No. 362405 (Exh. O).

Further, the Court hereby declares plaintiff Rosario T. de Leon the owner
still of the undivided ONE HALF (1/2) of the subject property covered by
T.C.T. No. 286130.

The order dated February 2, 1988 granting a writ of possession in favor of

Union Bank is hereby SET ASIDE and QUASHED.

Defendant Alfonso de Leon, Jr. is hereby ordered to pay his co-defendant

Union Bank of the Philippines the sum of his ₱1M loan with interest from
the time the same was extended to him which is hereby charged against his
other undivided share of ONE HALF (1/2) of the subject property with
T.C.T. No. 286130.

No damages is [sic], however, adjudicated against defendant Union Bank of

the Philippines there being no substantial evidence that it is in complicity
with defendant Alfonso de Leon, Jr. in the presentation of the forged
signature of his wife plaintiff on the Special Power of Attorney (Exh. M).

Without cost, except for the professional fee, if any, for the examination of
the forged signature (Exh. M-1) which shall be paid by defendant Alfonso de
Leon, Jr.

SO ORDERED

Union Bank appealed the above Decision with the CA. It likewise sought a
new trial of the case, which the trial court denied. The CA appeal was
dismissed for failure to file the appellant’s brief; the ensuing Petition for
Review with this Court was similarly denied for late filing and payment of
legal fees.10

Union Bank next filed with the CA an action to annul the trial court’s
December 12, 1991 judgment.11 In a September 9, 1993 Resolution,
however, the CA again dismissed the Petition12 for failure to comply with
Supreme Court Circular No. 28-91.13 The bank’s Motion for
Reconsideration was once more denied.14

This time, Bignay filed a Petition for annulment of the December 12, 1991
Decision, docketed as CA-G.R. SP No. 33901. In a July 15, 1994
Decision,15 the CA dismissed the Petition. Bignay’s resultant Petition for
Certiorari with this Court suffered the same fate.16

Meanwhile, as a result of the December 12, 1991 Decision in Civil Case No.
Q-52702, Bignay was evicted from the property; by then, it had demolished
the existing structure on the lot and begun construction of a new building.

The ruling of the Regional Trial Court

On March 21, 1994, Bignay filed Civil Case No. 94-1129 for breach of
warranty against eviction under Articles 1547 and 1548 of the Civil Code,
with damages, against Union Bank and Robles. The case was assigned to
Branch 141 of the Makati Regional Trial Court (RTC). Bignay alleged in its
Complaint that at the time of the sale, the title to the property was lost due to
fire at the Register of Deeds; that at the time of the sale, Union Bank
represented that there were no liens or encumbrances over the property other
than those annotated on the title and that a reconstitution of the lost title
would be made; that on these assurances, Bignay began and completed
construction of a building on the property; that it turned out that the property
was the subject of a case by Rosario, and Bignay began to receive copies of
court orders and pleadings relative to the case; that it issued a demand to
Union Bank for the latter to make good on its warranties; that despite such
demands, it appeared that Bignay was in jeopardy of losing the property as a
result of Union Bank’s lack of candor and bad faith in not disclosing the
pending case. Bignay prayed to be awarded the following:
1. ₱54,000,000.00 as actual damages;

2. ₱2,000,000.00 as exemplary damages;

3. ₱1,000,000.00 by way of attorney’s fees; and

4. Costs of suit.

In a March 10, 1995 Order18 of the trial court, Robles was dropped as party
defendant upon agreement of the parties and in view of Union Bank’s
admission and confirmation that it had authorized all of Robles’s acts
relative to the sale.

Union Bank interposed a Motion to Dismiss grounded on lack of or failure

to state a cause of action, claiming that it made no warranties in favor of
Bignay when it sold the property to the latter on December 20, 1989. The
trial court deferred the resolution of the motion on finding that the ground
relied upon did not appear to be indubitable. Union Bank thus filed its
Answer Ad Cautelam, where it alleged that Bignay was not an innocent
purchaser for value, knowing the condition of the property as evidenced by
Siy’s September 6, 1989 letter-proposal to purchase the same. It interposed a
counterclaim as well, grounded on two promissory notes signed by Siy in
favor of the bank – 1) Promissory Note No. 90-1446 dated December 20,
1990 for the amount of ₱1.5 million payable on demand with annual interest
of 33%, and 2) Promissory Note No. 91-0286 dated February 26, 1991 for
the amount of ₱2 million payable on demand with annual interest of 30% –
which resulted in outstanding liabilities, inclusive of interest and penalties,
in the total amount of more than ₱10.4 million as of December 20, 1996.

During the trial, Siy testified that she was a client of Union Bank and that
she was a regular buyer of some of the bank’s acquired assets. She admitted
that she maintained a close business relationship with Robles, who would
identify cheap bank properties for her and then facilitate or assist her in the
acquisition thereof. To do this, she claimed that she signed papers in blank
and left them with Robles, who would then use the same in preparing the
necessary documents, such as the supposed September 6, 1989 letter-
proposal, which Siy claimed she knew nothing about.21

Siy further testified that for his services, Robles was given a 3% commission
each time she obtained a loan from Union Bank. Moreover, she claimed that
she gifted Robles with shares of stock in one of her corporations,
International General Auto Parts Corporation (IGAPC), and made him an
incorporator and director thereof.22

Finally, Siy testified that the existing structure on the subject property was
demolished and a new one was constructed at a cost of ₱20 million. From
the new structure, Bignay earned a monthly rental income of ₱60,000.00,
until the lessee was evicted on account of the execution of the Decision in
Civil Case No. Q-52702.23

On the other hand, Robles – testifying for Union Bank – denied that he
prepared the September 6, 1989 letter proposal. He added that Siy was
apprised of the then-pending Civil Case No. Q-52702. He also admitted that
Siy gave him shares of stock in IGAPC and made him an incorporator and
director thereof.24

Evidence on Union Bank’s counterclaim was likewise received by the trial

court.

On March 21, 2000, the trial court rendered its Decision25 in Civil Case No.
94-1129, which decreed thus:

WHEREFORE, a decision is hereby rendered ordering the defendant to pay

the plaintiff the sum of Four Million (₱4,000,000.00) Pesos representing the
cost of the land and Twenty Million (₱20,000,000.00) Pesos representing the
value of the building constructed on the subject land, and the costs of this
suit.

The counterclaim interposed by the defendant is hereby dismissed without

prejudice.

SO ORDERED.26

The trial court found that Union Bank’s Senior Vice President, Robles,
maintained a secret alliance and relationship of trust with Bignay’s Siy,
whereby Robles would look out for desirable properties from the bank’s
asset inventory, recommend them to Siy, then facilitate the negotiation, sale,
and documentation for her. In return, he would receive a 3% commission
from Siy, or some other benefit; in fact, Siy made him an incorporator and
director of one of her corporations, IGAPC. The trial court believed Siy’s
claim that she signed papers in blank and left them with Robles in order to
facilitate the negotiation and purchase of bank properties which they both
considered to be cheap and viable. In this connection, the trial court
concluded that it was Robles – and not Siy – who prepared the September 6,
1989 letter proposal on a piece of paper signed in blank by Siy, and that
even though the pending Civil Case No. Q-52702 was mentioned in the
letter-proposal, Siy in fact had no knowledge thereof. This is proved by the
fact that she proceeded to construct a costly building on the property; if Siy
knew of the pending Civil Case No. Q-52702, it is highly doubtful that she
would do so.

The trial court thus declared that Union Bank, through Robles, acted in bad
faith in selling the subject property to Bignay; for this reason, the stipulation
in the December 20, 1989 deed of sale limiting Union Bank’s liability in
case of eviction cannot apply, because under Article 1553 of the Civil Code,
"[a]ny stipulation exempting the vendor from the obligation to answer for
eviction shall be void if he acted in bad faith." Moreover, it held that in its
handling of Civil Case No. Q-52702, the bank was guilty of gross
negligence amounting to bad faith, which thus contravened its undertaking
in the deed of sale to "defend its title to the Parcel/s of Land with
improvement thereon against the claims of any person whatsoever."

In resolving the controversy, the trial court applied Article 1555 of the Civil
Code, which provides thus:

Art. 1555. When the warranty has been agreed upon or nothing has
been stipulated on this point, in case of eviction occurs, the vendee shall
have the right to demand of the vendor:

(1) The return of the value which the thing sold had at the time of the
eviction, be it greater or less than the price of the sale;

(2) The income or fruits, if he has been ordered to deliver them to the
party who won the suit against him;

(3) The costs of the suit which caused the eviction, and, in a proper case,
those of the suit brought against the vendor for the warranty;

(4) The expenses of the contract, if the vendee has paid them;

(5) The damages and interests, and ornamental expenses, if the sale was
made in bad faith.

Thus, it held that Bignay was entitled to the return of the value of the
property (₱4 million), as well as the cost of the building erected thereon
(₱20 million), since Union Bank acted in bad faith. At the same time, the
trial court held that the bank’s counterclaim was not at all connected with
Bignay’s Complaint, which makes it a permissive counterclaim for which
the docket fees should accordingly be paid. Since the bank did not pay the
docket fees, the trial court held that it did not acquire jurisdiction over its
counterclaim; thus, it dismissed the same.

The ruling of the Court of Appeals

Union Bank took the trial court’s March 21, 2000 Decision to the CA on
appeal. On August 25, 2005, the CA issued the assailed Decision, decreeing
as follows:

WHEREFORE, the instant Appeal is PARTLY GRANTED. Judgment is

hereby rendered ordering the defendant-appellant to pay plaintiff-appellee
the sum of ₱4,000,000.00 representing the cost of the land and
₱20,000,000.00 representing the value of the building constructed on the
subject land.
On the Counterclaim, judgment is rendered ordering plaintiff-appellee to pay
defendant-appellant the principal amount of ₱1,500,000.00 under
Promissory Note No. 90-1446 dated December 18, 1990, plus the stipulated
interests and stipulated penalty charges from the date of maturity of the loan
or from June 6, 1991 until its full payment and also to pay the principal
amount of ₱2,000,000.00 under Promissory Note No. 90-0286 dated
February 25, 1991, plus the stipulated interests and stipulated penalty
charges from date of maturity of the loan or from August 26, 1991 until full
payment thereof.

No pronouncement as to costs.

SO ORDERED.27

Applying Articles 1548 and 1549 of the Civil Code,28 the CA held that
Union Bank is liable pursuant to its commitment under the December 20,
1989 deed of sale to defend the title to the property against the claims of
third parties. It shared the trial court’s opinion that the bank was guilty of
negligence in the handling and prosecution of Civil Case No. Q-52702, for
which reason it should be made answerable since it lost its title to the whole
property when it could have protected its right to Alfonso’s share therein
considering that the Decision in Civil Case No. Q-52702 merely awarded
Rosario’s conjugal share. In other words, the CA intimated that if Union
Bank exercised prudence, it could have maintained at least its rights and title
to Alfonso’s one-half share in the property, and the trial court’s Decision
completely nullifying the Alfonso-Union Bank mortgage, the bank’s new
title TCT 362405, and the Union Bank-Bignay sale could have been
avoided.

The CA added that the declaration contained in the September 6, 1989 letter
proposal to the effect that Siy knew about the pending Civil Case No. Q-
52702 cannot bind Bignay because the proposal was supposedly prepared
and signed by Siy in her personal capacity, and not for and on behalf of
Bignay. It further affirmed the trial court’s view that it was Robles – and not
Siy – who prepared the said letter-proposal on a piece of paper which she
signed in blank and left with Robles to facilitate her transactions with Union
Bank.

Regarding the bank’s counterclaim, the CA held that Union Bank timely
paid the docket fees therefor – amounting to ₱32,940.00 – at the time it filed
its Answer Ad Cautelam on November 4, 1994, as shown by Official
Receipt Nos. 4272579 and 4271965 to such effect and the rubberstamped
mark on the face of the answer itself. It added that since the trial court
received the bank’s evidence on the counterclaim during the trial, it should
have made a ruling thereon.
Bignay filed its Motion for Partial Reconsideration questioning the appellate
court’s ruling on Union Bank’s counterclaim. On the other hand, Union
Bank in its Motion for Reconsideration30 took exception to the CA’s
application of Articles 1548 and 1549 of the Civil Code, as well as its
finding that the bank was negligent in the handling and prosecution of Civil
Case No. Q-52702.

On February 10, 2006, the CA issued the second assailed Resolution

denying the parties’ respective motions for reconsideration.

Thus, the present Petitions were filed. G.R. No. 171590 was initiated by
Bignay, while G.R. No. 171598 was filed by Union Bank. In a June 21, 2006
Resolution31 of the Court, both Petitions were ordered consolidated.

Issues

The following issues are raised:

By Bignay as petitioner in G.R. No. 171590

1. IN A PERMISSIVE COUNTERCLAIM, WHEN SHOULD THE

DOCKET FEES BE PAID TO ENABLE THE TRIAL COURT TO
ACQUIRE JURISDICTION OVER THE CASE?

2. IN THE EVENT OF NON-PAYMENT OF DOCKET FEES FOR

PERMISSIVE COUNTERCLAIMS, CAN THE COURT DISMISS THE
SAID COUNTERCLAIMS?32

By Union Bank as petitioner in G.R. No. 171598

The portion of the [D]ecision of the Honorable Court of Appeals dated

August 25, 2005 ordering petitioner to pay private respondent the total
amount of ₱24.0 million should be set aside for it has altogether ignored:

I. THE TESTIMONY OF ROBLES;

II. THAT THE LETTER-PROPOSAL DATED SEPTEMBER 6, 1989 WAS

SIGNED BY SIY IN BEHALF OF (BIGNAY);

III. THE FACT THAT THE APPLICATION OF ARTS. 1548 AND 1549
OF THE CIVIL CODE WAS PATENTLY ERRONEOUS.33

The Parties’ Respective Arguments

G.R. No. 171590. As petitioner in G.R. No. 171590, Bignay registers its
doubts as to whether Union Bank indeed paid the docket fees on its
permissive counterclaim, arguing that if the bank indeed paid the docket
fees, the trial court would have so held in its March 21, 2000 Decision;
instead, it specifically declared therein that the docket fees on the
counterclaim remained unpaid at that point in time. In other words, Bignay
appears to insinuate that there was an irregularity surrounding the bank’s
alleged payment of the docket fees on its counterclaim. It adds that since
Union Bank is guilty of negligence and bad faith in transacting with Bignay,
it should be penalized through the proper dismissal of its counterclaim; the
Court should instead require Union Bank to prosecute its claims in a
separate action.

In the alternative, Bignay claims that the amount of ₱1,039,457.33 should be

deducted from its adjudged liabilities to Union Bank, as it has been proved
during trial that it paid such amount to the bank, as shown by receipts duly
marked and offered in evidence as Exhibits "H" to "H-6."

Bignay thus prays in its Petition that the assailed dispositions of the CA be
modified to the extent that Union Bank’s counterclaim should be denied and
dismissed.

In its Comment34 praying that the CA’s ruling on its counterclaim be

affirmed, Union Bank insists that it timely paid the docket fees on its
counterclaim, arguing that the official receipts proving payment as well as
the rubber stamp-mark on the face of its answer may not be overturned by
Bignay’s baseless suspicions, claims and insinuations not supported by
controverting evidence or proof. It adds that, contrary to Bignay’s assertion,
a separate case for the prosecution of its counterclaim is unnecessary since
the same may sufficiently be tried in Civil Case No. 94-1129 precisely as a
permissive counterclaim; and by allowing its permissive counterclaim,
multiplicity of suits is avoided.

In a Reply35 to the bank’s Comment, Bignay among others vehemently

insists that at the time of the rendition of the trial court’s judgment in Civil
Case No. 94-1129, Union Bank had not yet paid the docket fees on its
counterclaim; the bank’s claim that it paid the docket fees when it filed its
Answer Ad Cautelam is absolutely questionable. If indeed the bank paid the
docket fees, then it should have questioned the trial court’s dismissal of its
counterclaim in a motion for reconsideration and attached the receipts
showing its payment of the fees; yet it did not. Besides, if indeed the fact of
payment of docket fees was stamped on the face of the bank’s Answer Ad
Cautelam when it filed the same, the trial court should have noticed it, or at
least its attention would have been directed to the fact; but it was not. And if
indeed the docket fees were paid as early as 1994, it is incredible how Union
Bank never informed the trial court of its payment, even after the adverse
Decision in the case was rendered. Bignay adds that in a September 12, 2005
letter36 to the Clerk of Court of the Makati City RTC, its counsel inquired
into the circumstances surrounding the sudden appearance of official
receipts – copies of which were attached to the letter – indicating that Union
Bank paid the docket fees on its permissive counterclaim, when it appears
that no such payment was in fact made; up to now, however, it has not
received any reply from the said office.

G.R. No. 171598. In its Petition in G.R. No. 171598, Union Bank insists that
the September 6, 1989 letter-proposal effectively limited its liability for
eviction since from said letter it is seen that Bignay knew beforehand of
the pendency of Civil Case No. Q-52702. It insists that under the
December 20, 1989 deed of sale, it did not make any representations or
warranty with respect to the property; thus, the application of Articles 1548
and 1549 of the Civil Code by the CA was erroneous. Thus, the bank seeks a
partial reversal of the CA’s disposition – particularly the portion of the
Decision which holds it liable to pay Bignay the respective sums of ₱4
million for the cost of the land, and ₱20 million for the cost of the building.

In its Comment,37 Bignay claims that in urging the Court to consider the
testimony of Robles and Siy’s declaration in the September 6, 1989 letter-
proposal, Union Bank is raising questions of fact in its Petition which this
Court may not resolve. It likewise reiterates its argument relating to the
bank’s counterclaim; only this time, Bignay claims that the official receipts
evidencing the bank’s supposed payment of the docket fees were falsified.

Our Ruling

The Court finds for Bignay.

Indeed, this Court is convinced – from an examination of the evidence and

by the concurring opinions of the courts below – that Bignay purchased the
property without knowledge of the pending Civil Case No. Q-52702. Union
Bank is therefore answerable for its express undertaking under the
December 20, 1989 deed of sale to "defend its title to the Parcel/s of Land
with improvement thereon against the claims of any person whatsoever." By
this warranty, Union Bank represented to Bignay that it had title to the
property, and by assuming the obligation to defend such title, it promised to
do so at least in good faith and with sufficient prudence, if not to the best of
its abilities.

The record reveals, however, that Union Bank was grossly negligent in the
handling and prosecution of Civil Case No. Q-52702. Its appeal of the
December 12, 1991 Decision in said case was dismissed by the CA for
failure to file the required appellant’s brief. Next, the ensuing Petition for
Review on Certiorari filed with this Court was likewise denied due to late
filing and payment of legal fees. Finally, the bank sought the annulment of
the December 12, 1991 judgment, yet again, the CA dismissed the petition
for its failure to comply with Supreme Court Circular No. 28-91. As a result,
the December 12, 1991 Decision became final and executory, and Bignay
was evicted from the property. Such negligence in the handling of the case is
far from coincidental; it is decidedly glaring, and amounts to bad faith.
"[N]egligence may be occasionally so gross as to amount to malice [or bad
faith]."38 Indeed, in culpa contractual or breach of contract, gross
negligence of a party amounting to bad faith is a ground for the recovery of
damages by the injured party.39

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.40 In case eviction occurs, the
vendee shall have the right to demand of the vendor, among others, the
return of the value which the thing sold had at the time of the eviction, be it
greater or less than the price of the sale; the expenses of the contract, if the
vendee has paid them; and the damages and interests, and ornamental
expenses, if the sale was made in bad faith.41 There appears to be no dispute
as to the value of the building constructed on the property by Bignay; the
only issue raised by Union Bank in these Petitions is the propriety of the
award of damages, and the amount thereof is not in issue. The award in
favor of Bignay of ₱4 million, or the consideration or cost of the property,
and ₱20 million – the value of the building it erected thereon – is no longer
in issue and is thus in order.

However, the Court disagrees with the CA on the issue of Union Bank’s
counterclaim.1âwphi1 Bignay correctly observes that if the bank indeed paid
the docket fees therefor, the trial court would have so held in its March 21,
2000 Decision; yet in its judgment, the trial court specifically declared that
the docket fees remained unpaid at the time of its writing, thus –

Anent the counterclaims interposed by defendant for the collection of certain

sum of money adverted earlier hereof [sic], this Court could not exercise
jurisdiction over the same as defendant did not pay the docket fees therefor.
Although the counterclaims were denominated as compulsory in the answer,
the matters therein alleged were not connected with the plaintiff’s complaint.
The counterclaims could stand independently from the plaintiff’s complaint
hence they are a [sic] permissive counterclaims. During the pre-trial, this
Court had already ruled that the counterclaims were permissive yet the
records showed that defendant had not paid the docket fees. This Court,
therefore, has not acquired jurisdiction over said case.42

And if it is true that the bank paid the docket fees on its counterclaim as
early as in 1994, it would have vigorously insisted on such fact after being
apprised of the trial court’s March 21, 2000 Decision. It is indeed surprising
that the supposed payment was never raised by the bank in a timely motion
for reconsideration, considering that the trial court dismissed its
counterclaim; if there is any opportune time to direct the court’s attention to
such payment and cause the counterclaim to be reinstated, it was at that
point and no other. All it had to do was prove payment by presenting to the
court the official receipts or any other acceptable documentary evidence, and
thus secure the proper reversal of the ruling on its counterclaim. Still,
nothing was heard from the bank on the issue, until it filed its brief with the
CA on appeal. Indeed, "whatever is repugnant to the standards of human
knowledge, observation and experience becomes incredible and must lie
outside judicial cognizance."43

More than the above, this Court finds true and credible the trial court's
express declaration that no docket fees have been paid on the bank's
counterclaim; the trial court's pronouncement enjoys the presumption of
regularity. Indeed, the sudden appearance of the receipts supposedly
evidencing payment of the "docket fees is highly questionable and irregular,
and deserves to be thoroughly investigated; the actuations of the bank
relative thereto go against the common experience of mankind, if they are
not entirely anomalous.

WHEREFORE, the Court resolves as follows:

1. The Petition in G.R. No. 171590 is GRANTED. The August 25, 2005
Decision and February 10, 2006 Resolution of the Court of Appeals in CA-
G.R. CV No. 67788 are MODIFIED, in that Union Bank of the Philippines's
counterclaim is ordered DISMISSED.

2. The Petition in G.R. No. 171598 is DENIED.

SO ORDERED.

March 25, 2019

G.R. No. 200676

SPOUSES BATALLA v.PRUDENTIAL BANK

DECISION

REYES, J. JR., J.:

Before the Court is a petition for review on certiorari under Rule 45 of the
Rules of Court seeking to reverse and set aside the October 10, 2011
Decision and February 1, 2012 Resolution of the Court of Appeals (CA) in
CA-G.R. CV No. 92097, which affirmed with modification the July 23,
2008 Decision3 of the Regional Trial Court, Branch 4, Legazpi City (RTC).

In March 1998, petitioner Spouses Luis G. Batalla and Salvacion Batalla

(Spouses Batalla) purchased a brand new Honda Civic from respondent
Honda Cars San Pablo, Inc. (Honda). Respondent Alicia Rantael (Rantael),
then acting manager of Pilipinas Bank, now merged with respondent
Prudential Bank (Prudential), brokered the deal.4

To finance the purchase of the said motor vehicle, Spouses Batalla applied
for a car loan with Prudential. On March 23, 1998, they executed a
promissory note for the sum of ₱292,200.00 payable within 36 months. On
May 29, 1998, the Car Loan Agreement5 was approved. As such, Prudential
issued a Manager's Check in the said amount payable to Honda.6

For their part, Spouses Batalla paid ₱214,000.00 corresponding to the

remaining portion of the purchase price for the Honda Civic. In addition,
they also paid ₱11,000.000.00 for delivery cost and the installation of a
remote control door mechanism, and ₱28,333.56 for insurance.

On April 21, 1998, Spouses Batalla received the car after Rantael informed
them that it was parked near Prudential. However, after three days, the rear
right door of the car broke down. The Spouses Batalla consulted a certain
Jojo Sanchez (Sanchez), who claimed that the power lock of the rear right
door was defective and that the car was no longer brand new because the
paint of the roof was merely retouched.8

On May 3, 1998, Spouses Batalla sent a letter to the manager of

Prudential notifying it of the said defects and demanding the immediate
replacement of the motor vehicle. On August 27, 1998, they took the car to
the Auto Body Shop for a thorough evaluation of the status of the vehicle.
According to Arturo Villanueva (Villanueva), the vehicle was no longer
brand new because the rooftop was no longer shiny in appearance.
Thereafter, the manager of Prudential, together with two individuals from
Honda, met Spouses Batalla and offered to repair the vehicle. Spouses
Batalla rejected it because they wanted the car to be replaced with a brand
new one without hidden defects.9

Unable to secure a brand new car in replacement of the alleged defective

vehicle, Spouses Batalla filed a Complaint for Rescission of Contracts and
Damages10 against Prudential and Honda.

The RTC Decision

In its July 23, 2008 Decision, the RTC dismissed the Spouses Batalla's
complaint. The trial court ruled that the car sold to Spouses Batalla was a
brand new one and that any perceived defects could not be attributed to
Honda. It highlighted that Spouses Batalla failed to prove that the defects in
the car door were due to the fault of Honda and that the car was merely
repainted to make it appear brand new. In addition, the RTC expounded that
the perceived defects were minor defects which did not diminish the fitness
of the car for its intended use. On the other hand, it posited that Spouses
Batalla must pay the loan amount to Prudential as they admitted that they
have not paid the same. The RTC disposed:

WHEREFORE, premises considered, judgment is hereby rendered in favor

of defendants Prudential Bank, Honda Cars San Pablo, Inc., and Alicia
Rantael, on the one hand and against the plaintiffs spouses Luis G. Batalla
and Salvacion Batalla, on the other hand, as follows:
The Complaint is hereby ordered DISMISSED for lack of cause of action;

The plaintiffs are hereby ordered to pay the defendants as follows;

To defendant Prudential Bank - Two Hundred Ninety Two Thousand Two

Hundred Pesos (₱292,200.00), Philippine currency, plus 30% interest per
annum from April 23 1998 until fully paid;

To defendant Honda Cars San Pablo, Inc., - One Hundred Seventy Five
Thousand Five Hundred Pesos (₱175,500.00), Philippine currency, for
attorney's fees and travelling expenses of counsel;

To defendant Alicia Rantael - Twenty Five Thousand Pesos (₱25,000.00),

Philippine currency, for attorney's fees.

The cross-claim of defendant Prudential Bank against defendant Honda Cars

San Pablo, Inc., is ordered DISMISSED for being moot and academic.

SO ORDERED.11

Undeterred, Spouses Batalla appealed to the CA.

The CA Decision

In its October 10, 2011 Decision, the CA affirmed with modification the
RTC decision. The appellate court ruled that Spouses Batalla cannot rescind
the promissory note and car loan agreement on account of the car's alleged
defects because they are distinct from the contract of sale entered into with
Honda. In any case, it found that the documentary evidence, which Spouses
Batalla never disputed, presented by Honda, proved that the motor vehicle
was brand new with no signs of alteration and tampering. The CA, however,
reduced the attorney's fees in favor of Honda from ₱175,000.00 to
₱30,000.00. Thus, it ruled:

WHEREFORE, premises considered, the instant appeal is Denied.

Accordingly, the Judgment of the Regional Trial Court, Branch 4 of Legazpi
City, Albay in Civil Case No. 9995 dated July 23, 2008 is hereby
AFFIRMED with the modification of reducing the attorney's fees in the sum
of P30,000.00 awarded in favor of appellee Honda Motors, San Pablo, Inc.

SO ORDERED.12

Unsatisfied, Spouses Batalla moved for reconsideration but it was denied by

the CA in its February 1, 2012 Resolution.

Hence, this present petition raising:

The Issues
I

WHETHER THE MOTOR VEHICLE DELIVERED BY HONDA HAD

HIDDEN DEFECTS; AND

II

WHETHER SPOUSES BATALLA MAY RESCIND THE CONTRACT OF

SALE, CAR LOAN AGREEMENT AND PROMISSORY NOTE DUE TO
THE DEFECTS OF THE MOTOR VEHICLE SOLD.

Spouses Batalla argued that the car loan it obtained from Prudential was for
the purchase of a brand new motor vehicle. They lamented that what was
delivered to them was a defective vehicle as manifested by Honda's offer to
repair the vehicle. Spouses Batalla assailed that because of the breach of the
implied warranty against hidden defects, they were entitled to rescind the
contract of sale, together with the car loan and the promissory note.

In its Comment13 dated May 27, 2013, Prudential countered that the car
loan and promissory note are distinct transactions from the contract of sale.
It explained that while Rantael may have assisted in the acquisition of the
motor vehicle, it does not change the fact that the transaction of Spouses
Battala with it was for a loan and not a sale of a motor vehicle. Thus,
Prudential averred that it cannot be held liable for any breach of warranty
because it was never a party to the sale. In their Comment dated May 14,
2013,[14] Rantael and Honda also posited that the contract between Spouses
Batalla and Prudential was different from the contract between Honda and
them.

In their Joint Reply15 dated March 25, 2015, Spouses Batalla reiterated that
they were entitled to the remedy of rescission of the contract because the
motor vehicle delivered to them was not brand new and had hidden defects.
They were constrained to pursue such action because respondents refused to
replace the car with a brand-new one.

The Court's Ruling

The petition is without merit.

It is axiomatic that petitions for review on certiorari under Rule 45 of the

Rules of Court are limited to questions of law.16 Questions of fact are
beyond the ambit of a petition under Rule 45 because the Court is not a trier
of facts and it is not its function to examine, review or evaluate evidence all
over again.17 Nevertheless, the following are exceptions to the rule that only
questions of law may be raised in a petition for review on certiorari, to wit:
(1) When the conclusion is a finding grounded entirely on speculation,
surmises or conjectures;

(2) When the inference made is manifestly mistaken, absurd or impossible;

(3) Where there is a grave abuse of discretion;

(4) When the judgment is based on a misapprehension of facts;

(5) When the findings of fact are conflicting;

(6) When the Court of Appeals, in making its findings, went beyond the
issues of the case and the same is contrary to the admissions of both
appellant and appellee;

(7) The findings of the Court of Appeals are contrary to those of the trial
court;

(8) When the findings of fact are conclusions without citation of specific
evidence on which they are based;

(9) When the facts set forth in the petition as well as in the petitioner's main
and reply briefs are not disputed by the respondents; and

(10) The finding of fact of the Court of Appeals is premised on the supposed
absence of evidence and is contradicted by the evidence on record.18

In the case at bench, none of the exceptions are present. The courts a quo
have consistently found that the motor vehicle delivered to Spouses Batalla
was brand new. In addition, they ruled that if there were defects, it could not
be attributed to Honda, or, were minor defects that could have been easily
repaired. Moreover, these findings of fact are sufficiently supported by the
evidence on record.

Even if this procedural issue is set aside, the petition of Spouses Batalla still
deserves scant consideration.

Spouses Batalla anchored their complaint for rescission of contract against

Prudential and Honda on the allegation that the car delivered to them was
not brand new and that it contained hidden defects. In support of their
allegations, they presented Villanueva who testified that the car was no
longer brand new because the roof was no longer shiny and appeared to be
only repainted — he also testified that the rear door was damaged. Spouses
Batalla also offered in evidence computer printouts from the Land
Transportation Office (LTO) where it was indicated that the car was first
registered on April 25, 1994.
As correctly observed by the RTC, however, the evidence of the respondents
outweighed the evidence presented by Spouses Batalla. The trial court noted
that several documentary evidence attest to the fact that the car was brand
new. In addition, the purported printout from the LTO was a mere
photocopy and was never authenticated. Further, the document's credibility
is seriously in doubt, especially as to the entry that the car was first
registered in 1994, because the car model that Spouses Batalla bought was
manufactured only in 1998.

In the present case, the RTC gave little credence to the testimony of
Villanueva that the car delivered to Spouses Batalla was not brand new on
account of the condition of its rooftop painting. As pointed out by the trial
court, Villanueva only had limited formal training in painting and that his
assessment as to the condition of the car paint was made only after a visual
examination. As such, the RTC cannot be faulted if it was left unconvinced
of Villanueva's testimony for lack of certainty and technical basis.

Under Rule 130, Section 48 of the Rules of Court, the opinion of a witness
on a matter requiring special knowledge, skill, experience or training which
he is shown to possess, may be received in evidence. In turn, the
determination of the credibility of the expert witnesses and the evaluation of
their testimony is left to the discretion of the trial court whose ruling is not
reviewable in the absence of abuse of discretion.19 Here, the RTC found
that Villanueva had no special knowledge or training with regards to car
painting and that his method of examination of Spouses Batalla's vehicle
was wanting as it was limited to a mere visual examination rendering its
results inconclusive.

Neither could the alleged defects of the car door be sufficient basis to prove
that what was delivered to Spouses Batalla was a second hand car. As they
admitted, they immediately had a remote control door mechanism installed.
It could not be readily ascertained whether the defects in the car door were
existing at the time of the car's manufacture or was caused by the installation
of the remote control door system. Thus, the defects in the car door or in the
paint, neither establish that the car was second hand nor could it be
attributed, to the fault of Honda.

Even assuming that the car delivered to Spouses Batalla had a defective car
door, they still do not have any grounds for rescinding the contract of sale.

Article 1561 of the Civil Code provides for an implied warranty against
hidden defects in that the vendor shall be responsible for any hidden defects
which render the thing sold 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. In an implied warranty against hidden defects, vendors
cannot raise the defense of ignorance as they are responsible to the vendee
for any hidden defects even if they were not aware of its existence.20
In order for the implied warranty against hidden defects to be applicable, the
following conditions must be met:

a. Defect is Important or Serious

i. The thing sold is unfit for the use which it is intended

ii. Diminishes its fitness for such use or to such an extent that the buyer
would not have acquired it had he been aware thereof

b. Defect is Hidden

c. Defect Exists at the time of the sale

d. Buyer gives Notice of the defect to the seller within reasonable time.21
(Emphasis supplied)

In case of a breach of an implied warranty against hidden defects, the buyer

may either elect between withdrawing from the contract and demanding a
proportionate reduction of the price, with damages in either case.22 Here,
Spouses Batalla opted to withdraw from the contract of sale after their
demand for a replacement car was not granted.

As can be seen, the redhibitory action pursued by Spouses Batalla was

without basis. For one, it was not sufficiently proven that the defects of the
car door were important or serious. The hidden defect contemplated under
Article 1561 of the Civil Code is an imperfection or defect of such nature as
to engender a certain degree of importance and not merely one of little
consequence.23 Spouses Batalla failed to prove that such defect had severely
diminished the roadworthiness of the motor vehicle. In fact, they admitted
that they had no problem as to the road worthiness of the car.24

In addition, it cannot be ascertained whether the defects existed at the time

of the sale.1âшphi1 As previously mentioned, a remote control door
mechanism was immediately installed after the car was delivered to Spouses
Batalla. The modification made to the motor vehicle raises the possibility
that the defect could have been caused or had occurred after the installation
of the remote control door system. As the party alleging hidden defects,
Spouses Batalla had the burden to prove the same. Unfortunately, they failed
to do so considering that they did not present as witnesses, the persons who
had actually examined the car door and found it defective. Their testimony
could have shed light on the origin of the said defect and whether it was of
such extent that the motor vehicle was unfit for its intended use or its fitness
had been greatly diminished. Thus, other than Spouses Batalla's own
testimony claiming that the car doors were defective, no other evidence was
presented to establish the severity of the said defects and whether they had
persisted at the time of the sale.
Loan agreement independent of

the contract of sale

Other than rescission of the contract of sale, Spouses Batalla also sought for
the rescission of the car loan agreement and promissory note with
Prudential. They believed that they had ground to rescind the car loan
agreement and promissory note they executed with Prudential. Spouses
Batalla surmised that the object of these documents was the delivery of a
brand new car without hidden defects, and because of the alleged defects of
the vehicle, there was no valid object for the contract.

A contract of loan is one where one of the parties delivers money or other
consumable thing upon the condition that the same amount of the same kind
and quality shall be paid.25 It is perfected upon delivery of the object of the
contract.26 On the other hand, a contract of sale is a special contract
whereby the seller obligates himself to deliver a determinate thing and to
transfer its ownership to the buyer.27 The same is perfected by mere consent
of the parties.28

Thus, it is readily apparent that a contract of loan is distinct and separate

from a contract of sale. In a loan, the object certain is the money or
consumable thing borrowed by the obligor, while in a sale the object is a
determinate thing to be sold to the vendee for a consideration. In addition, a
loan agreement is perfected only upon the delivery of the object i.e., money
or another consumable thing, while a contract of sale is perfected by mere
consent of the parties.

Under this premise, it is not hard to see the absurdity in the position of
Spouses Batalla that they could rescind the car loan agreement and
promissory note with Prudential on the ground of alleged defects of the car
delivered to them by Honda. The transactions of Spouses Batalla with
Prudential and Honda are distinct and separate from each other. From the
time Spouses Batalla accepted the loan proceeds from Prudential, the loan
agreement had been perfected. As such, they were bound to comply with
their obligations under the loan agreement regardless of the outcome of the
contract of sale with Honda. Even assuming that the car that Spouses Batalla
received was not brand new or had hidden defects, they could not renege on
their obligation of paying Prudential the loan amount.

Spouses Batalla erroneously relies on Supercars Management &

Development Corporation v. Flores29 as basis to rescind the loan agreement
with Prudential on account of the perceived defects of the car delivered to
them. In the said case, only the contract of sale with the car dealer was
rescinded on account of breach of contract for delivering a defective vehicle.
While therein lendee-bank was originally impleaded for rescission of
contract, the trial court dropped it as party-defendant because the breach of
contract pertained to the contract of sale and not to the car loan agreement.
In the same vein, Spouses Batalla's recourse in case of defects in the motor
vehicle delivered to them was limited against Honda and does not extend to
Prudential as it merely lent the money to purchase the car.

WHEREFORE, the petition is DENIED. The October 10, 2011 Decision and
February 1, 2012 Resolution of the Court of Appeals in CA-G.R. CV No.
92097 are AFFIRMED.

SO ORDERED.

G.R. No. 110295 October 18, 1993

COCA-COLA v. C A

DAVIDE, JR., J.:

This case concerns the proprietress of a school canteen which had to close
down as a consequence of the big drop in its sales of soft drinks
triggered by the discovery of foreign substances in certain beverages
sold by it. The interesting issue posed is whether the subsequent action for
damages by the proprietress against the soft drinks manufacturer
should be treated as one for breach of implied warranty against hidden
defects or merchantability, as claimed by the manufacturer, the petitioner
herein which must therefore be filed within six months from the delivery of
the thing sold pursuant to Article 1571 of the Civil Code, or one for quasi-
delict, as held by the public respondent, which can be filed within four years
pursuant to Article 1146 of the same Code.

On 7 May 1990, Lydia L. Geronimo, the herein private respondent, filed a

complaint for damages against petitioner with the Regional Trial Court
(RTC) of Dagupan City. 1 The case was docketed as Civil Case No. D-9629.
She alleges in her complaint that she was the proprietress of Kindergarten
Wonderland Canteen docketed as located in Dagupan City, an enterprise
engaged in the sale of soft drinks (including Coke and Sprite) and other
goods to the students of Kindergarten Wonderland and to the public; on or
about 12 August 1989, some parents of the students complained to her that
the Coke and Sprite soft drinks sold by her contained fiber-like matter
and other foreign substances or particles; he then went over her stock of
softdrinks and discovered the presence of some fiber-like substances in the
contents of some unopened Coke bottles and a plastic matter in the contents
of an unopened Sprite bottle; she brought the said bottles to the Regional
Health Office of the Department of Health at San Fernando, La Union, for
examination; subsequently, she received a letter from the Department of
Health informing her that the samples she submitted "are adulterated;" as a
consequence of the discovery of the foreign substances in the beverages,
her sales of soft drinks severely plummeted from the usual 10 cases per
day to as low as 2 to 3 cases per day resulting in losses of from P200.00
to P300.00 per day, and not long after that she had to lose shop on 12
December 1989; she became jobless and destitute; she demanded from the
petitioner the payment of damages but was rebuffed by it. She prayed for
judgment ordering the petitioner to pay her P5,000.00 as actual damages,
P72,000.00 as compensatory damages, P500,000.00 as moral damages,
P10,000.00 as exemplary damages, the amount equal to 30% of the damages
awarded as attorney's fees, and the costs. 2

The petitioner moved to dismiss 3 the complaint on the grounds of failure to

exhaust administrative remedies and prescription. Anent the latter ground,
the petitioner argued that since the complaint is for breach of warranty under
Article 1561 of the said Code. In her Comment 4 thereto, private respondent
alleged that the complaint is one for damages which does not involve an
administrative action and that her cause of action is based on an injury to
plaintiff's right which can be brought within four years pursuant to Article
1146 of the Civil Code; hence, the complaint was seasonably filed.
Subsequent related pleadings were thereafter filed by the parties. 5

In its Order of 23 January 1991, 6 the trial court granted the motion to
dismiss. It ruled that the doctrine of exhaustion of administrative
remedies does not apply as the existing administrative remedy is not
adequate. It also stated that the complaint is based on a contract, and
not on quasi-delict, as there exists pre-existing contractual relation
between the parties; thus, on the basis of Article 1571, in relation to
Article 1562, the complaint should have been filed within six months
from the delivery of the thing sold.

Her motion for the reconsideration of the order having been denied by the
trial court in its Order of 17 April 1991, 7 the private respondent came to
this Court via a petition for review on certiorari which we referred to the
public respondent "for proper determination and disposition. 8 The public
respondent docketed the case as CA-G.R. SP No. 25391.

In a decision promulgated on 28 January 1992, 9 the public respondent

annulled the questioned orders of the RTC and directed it to conduct further
proceedings in Civil Case No. D-9629. In holding for the private respondent,
it ruled that:

Petitioner's complaint being one for quasi-delict, and not for breach of
warranty as respondent contends, the applicable prescriptive period is four
years.

It should be stressed that the allegations in the complaint plainly show that it
is an action or damages arising from respondent's act of "recklessly and
negligently manufacturing adulterated food items intended to be sold or
public consumption" (p. 25, rollo). It is truism in legal procedure that what
determines the nature of an action are the facts alleged in the complaint and
those averred as a defense in the defendant's answer (I Moran 126; Calo v.
Roldan, 76 Phil. 445; Alger Electric, Inc. v. CA, 135 SCRA 340).

Secondly, despite the literal wording of Article 2176 of the Civil code, the
existence of contractual relations between the parties does not absolutely
preclude an action by one against the other for quasi-delict arising from
negligence in the performance of a contract.

In Singson v. Court of Appeals (23 SCRA 1117), the Supreme Court ruled:

It has been repeatedly held: that the existence of a contract between the
parties does not bar the commission of a tort by the one against the other and
the consequent recovery of damages therefor
. . . . Thus in Air France vs. Carrascoso, . . . (it was held that) although the
relation between a passenger and a carrier is "contractual both in origin and
in nature the act that breaks the contract may also be a tort.

Significantly, in American jurisprudence, from which Our law on Sales was

taken, the authorities are one in saying that he availability of an action or
breach of warranty does not bar an action for torts in a sale of defective
goods. 10

Its motion for the reconsideration of the decision having been denied by the
public respondent in its Resolution of 14 May 1993, 11 the petitioner took
his recourse under Rule 45 of the Revised Rules of Court. It alleges in its
petition that:

I.

THE HONORABLE COURT OF APPEALS COMMITTED A GRAVE

AND REVERSIBLE ERROR IN RULING THAT ARTICLE 2176, THE
GENERAL PROVISION ON QUASI-DELICTS, IS APPLICABLE IN
THIS CASE WHEN THE ALLEGATIONS OF THE COMPLAINT
CLEARLY SHOW THAT PRIVATE RESPONDENT'S CAUSE OF
ACTION IS BASEDON BREACH OF A SELLER'S IMPLIED
WARRANTIES UNDER OUR LAW ON SALES.

II.

CORROLARILY, THE HONORABLE COURT OF APPEALS

COMMITTED A GRAVE AND REVERSIBLE ERROR IN
OVERRULING PETITIONER'S ARGUMENT THAT PRIVATE
RESPONDENT'S CAUSE OF ACTION HAD PRESCRIBED UNDER
ARTICLE 1571 OF THE CIVIL CODE. 12

The petitioner insists that a cursory reading of the complaint will reveal that
the primary legal basis for private respondent's cause of action is not Article
2176 of the Civil Code on quasi-delict — for the complaint does not ascribe
any tortious or wrongful conduct on its part — but Articles 1561 and 1562
thereof on breach of a seller's implied warranties under the law on sales. It
contends the existence of a contractual relation between the parties (arising
from the contract of sale) bars the application of the law on quasi-delicts and
that since private respondent's cause of action arose from the breach of
implied warranties, the complaint should have been filed within six months
room delivery of the soft drinks pursuant to Article 171 of the Civil Code.

In her Comment the private respondent argues that in case of breach of

the seller's implied warranties, the vendee may, under Article 1567 of
the Civil Code, elect between withdrawing from the contract or
demanding a proportionate reduction of the price, with damages in
either case. She asserts that Civil Case No. D-9629 is neither an action for
rescission nor for proportionate reduction of the price, but for damages
arising from a quasi-delict and that the public respondent was correct in
ruling that the existence of a contract did not preclude the action for quasi-
delict. As to the issue of prescription, the private respondent insists that
since her cause of action is based on quasi-delict, the prescriptive period
therefore is four (4) years in accordance with Article 1144 of the Civil
Code and thus the filing of the complaint was well within the said
period.

We find no merit in the petition. The public respondent's conclusion that the
cause of action in Civil Case No. D-9629 is found on quasi-delict and that,
therefore, pursuant to Article 1146 of the Civil Code, it prescribes in four (4)
years is supported by the allegations in the complaint, more particularly
paragraph 12 thereof, which makes reference to the reckless and negligent
manufacture of "adulterated food items intended to be sold for public
consumption."

The vendee's remedies against a vendor with respect to the warranties

against hidden defects of or encumbrances upon the thing sold are not
limited to those prescribed in Article 1567 of the Civil Code which provides:

Art. 1567. In the case 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 either
case. 13

The vendee may also ask for the annulment of the contract upon proof of
error or fraud, in which case the ordinary rule on obligations shall be
applicable. 14 Under the law on obligations, responsibility arising from
fraud is demandable in all obligations and any waiver of an action for future
fraud is void. Responsibility arising from negligence is also demandable in
any obligation, but such liability may be regulated by the courts, according
to the circumstances. 15 Those guilty of fraud, negligence, or delay in the
performance of their obligations and those who in any manner contravene
the tenor thereof are liable for damages. 16
The vendor could likewise be liable for quasi-delict under Article 2176 of
the Civil Code, and an action based thereon may be brought by the vendee.
While it may be true that the pre-existing contract between the parties may,
as a general rule, bar the applicability of the law on quasi-delict, the liability
may itself be deemed to arise from quasi-delict, i.e., the acts which breaks
the contract may also be a quasi-delict. Thus, in Singson vs. Bank of the
Philippine Islands, 17 this Court stated:

We have repeatedly held, however, that the existence of a contract between

the parties does not bar the commission of a tort by the one against the other
and the consequent recovery of damages therefor. 18 Indeed, this view has
been, in effect, reiterated in a comparatively recent case. Thus, in Air France
vs. Carrascoso, 19 involving an airplane passenger who, despite hi first-class
ticket, had been illegally ousted from his first-class accommodation and
compelled to take a seat in the tourist compartment, was held entitled to
recover damages from the air-carrier, upon the ground of tort on the latter's
part, for, although the relation between the passenger and a carrier is
"contractual both in origin and nature . . . the act that breaks the contract
may also be a tort.

Otherwise put, liability for quasi-delict may still exist despite the presence of
contractual relations. 20

Under American law, the liabilities of a manufacturer or seller of injury-

causing products may be based on negligence, 21 breach of warranty, 22
tort, 23 or other grounds such as fraud, deceit, or misrepresentation. 24
Quasi-delict, as defined in Article 2176 of the Civil Code, (which is known
in Spanish legal treaties as culpa aquiliana, culpa extra-contractual or cuasi-
delitos) 25 is homologous but not identical to tort under the common law, 26
which includes not only negligence, but also intentional criminal acts, such
as assault and battery, false imprisonment and deceit. 27

It must be made clear that our affirmance of the decision of the public
respondent should by no means be understood as suggesting that the private
respondent's claims for moral damages have sufficient factual and legal
basis.

IN VIEW OF ALL THE FOREGOING, the instant petition is hereby

DENIED for lack of merit, with costs against the petitioner.

SO ORDERED.

G.R. No. 141480 November 29, 2006

DE GUZMAN, vs.TOYOTA CUBAO

DECISION
AZCUNA, J.:

This is a petition for review on certiorari under Rule 45 of the Rules of Court
seeking to annul the Order, dated September 9, 1999, of the Regional Trial
Court of Quezon City (the RTC), Branch 105, which dismissed the
complaint for damages filed by petitioner Carlos B. De Guzman against
respondent Toyota Cubao, Inc.

On November 27, 1997, the petitioner purchased from the respondent a

brand new white Toyota Hi-Lux 2.4 SS double cab motor vehicle, 1996
model, in the amount of ₱508,000. Petitioner made a down payment of
₱152,400, leaving a balance of ₱355,600 which was payable in 36
months with 54% interest. The vehicle was delivered to the petitioner two
days later.

On October 18, 1998, the petitioner demanded the replacement of the engine
of the vehicle because it developed a crack after traversing Marcos Highway
during a heavy rain. Petitioner asserted that the respondent should replace
the engine with a new one based on an implied warranty. Respondent
countered that the alleged damage on the engine was not covered by a
warranty.

On April 20, 1999, the petitioner filed a complaint for damages against the
respondent with the RTC. Respondent moved to dismiss the case on the
ground that under Article 1571 of the Civil Code, the petitioner’s cause of
action had prescribed as the case was filed more than six months from the
date the vehicle was sold and/or delivered.

In an Order dated September 9, 1999, the RTC granted the respondent’s

motion and dismissed the complaint, thus:

For the Court’s consideration are: (1) defendant’s Motion to Dismiss; (2)
plaintiff’s Opposition thereto; (3) defendant’s Reply; and (4) plaintiff’s
Rejoinder.

The Court agrees with the plaintiff’s counsel that the subject pick-up is a
consumer product because it is used for personal, family or agricultural
purposes, contrary to defendant counsel’s claim that it is not because it is a
non-consumable item.

Since no warranty card or agreement was attached to the complaint, the

contract of sale of the subject pick-up carried an implied warranty that it was
free from any hidden faults or defects, or any charge or encumbrance not
declared or known to the buyer. The prescriptive period thereof is six (6)
months under the Civil Code (Art. 1571).
Under RA No. 7394, the provisions of the Civil Code on conditions and
warranties shall govern all contracts of sale with condition and warranties
(Art. 67). The duration of the implied warranty (not accompanied by an
express warranty) shall endure not less than sixty days nor more than one
(1) year following the sale of new consumer products (Art. 68, par. [e]).
The two (2) year prescriptive period under Art. 169 cannot prevail over Art.
68 because the latter is the specific provision on the matter.

The Court has noted that the prescriptive period for implied and express
warranties cannot be the same. In the Civil Code, a redhibitory action for
violation of an implied warranty against hidden defects prescribes in six
(6) months, while if it is based on an express warranty[,] the action
prescribes in four (4) years. Under RA No. 7394, the implied warranty
cannot be more than one (1) year; however, the implied warranty can only
be of equal duration to that an express warranty when the implied warranty
of merchantability accompanies an express warranty (Art. 68, par. [e]).
Therefore, the prescriptive period of two years under Art. 169 does not cover
an implied warranty, which is not accompanied by an express warranty. It is
applicable to cases where there is an express warranty in the sale of the
consumer product.

Relative to plaintiff’s argument that the claim for moral and exemplary
damages and attorney’s fees is based on quasi-delict or breach of contract,
such are merely ancillary to the main cause of action which is based on
warranty against hidden defects. Without the latter, the former cannot stand
alone.

Based on the record, the subject vehicle was purchased on 27 November

1997 and delivered on 29 November 1997. This case was filed only on 20
April 1999 or almost nineteen (19) months from [the] sale and/or delivery.
Applying Art. 1571 of Civil Code, the action is barred by prescription
because the complaint was filed more than six (6) months after the sale
and/or delivery of the vehicle. In addition, the duration of the implied
warranty of not more than one (1) year under Art. 68, par (e) of RA No.
7394 has already elapsed.

Accordingly, defendant’s Motion is granted and the plaintiff’s Complaint is

ordered dismissed.

SO ORDERED3

On December 21, 1999, the RTC denied petitioner’s motion for

reconsideration, as follows:

Submitted for resolution are: (1) plaintiff’s Motion for Reconsideration; (2)
defendant’s Opposition; and (3) plaintiff’s Reply.
Although plaintiff’s motion was filed beyond the ten-day period, the Court is
convinced that it was not for the purpose of delay; hence, it cannot be
considered as a mere scrap of paper.

After a thorough study, the Court resolves that while reference to Art. 68,
par. (e) of RA No. 7394 may have been misplaced, yet the subject sale
carried an implied warranty whose prescriptive period is six (6) months
under Art. 1571 of the Civil Code.

Accordingly, plaintiff’s Motion for Reconsideration is DENIED.

SO ORDERED.4

Petitioner thereupon filed a petition for review on certiorari with this Court.

The petition should be denied.

First, on procedural grounds, the petition should forthwith be denied for

violation of the hierarchy of courts. Petitioner states that the present petition
is an "appeal by certiorari on pure questions of law, from the final Order of
Branch 105 of the Regional Trial Court of Quezon City in Civil Case No. Q-
99-37381 … under Rule 45 of the Rules of Court." Upon receipt of the
Order of the RTC, dated September 9, 1999, on September 21, 1999,
petitioner filed a motion for reconsideration on September 28, 1999. On
December 21, 1999, the RTC denied petitioner’s motion. When petitioner
received a copy of the said order on January 18, 2000, he had fifteen (15)
days from receipt within which to appeal to the Court of Appeals by filing a
notice of appeal under Section 2(a) of Rule 41, from an order of the RTC
issued in the exercise of its original jurisdiction. The RTC’s order dated
September 9, 1999 and its subsequent order dated December 21, 1999
partake of the nature of a final disposition of the case. Hence, the appropriate
remedy petitioner should have taken was to file a notice of appeal from the
RTC to the Court of Appeals, not a petition for review on certiorari directly
with this Court.

Although petitioner intended his petition, filed on February 2, 2000, to be

one filed under Rule 45 and he filed it well within the 15-day reglementary
period counted from January 18, 2000, the same was in effect a petition for
certiorari under Rule 65, and is therefore dismissible for violation of the
hierarchy of courts under Section 4 thereof. Petitioner failed to show that
special and important reasons or exceptional and compelling circumstances
exist to justify a direct filing of the petition with this Court instead of first
taking an appeal to the Court of Appeals.5 Likewise, petitioner cannot find
refuge in the argument that he was raising pure questions of law. The sole
matter petitioner assails in this action is the RTC’s order of dismissal of his
complaint for damages on the ground of prescription which was tantamount
to an adjudication on the merits. Again, petitioner should have resorted to
the remedy of appealing the case to the Court of Appeals by filing a notice
of appeal with the RTC.

Second, even if the Court were to disregard the procedural infirmity, the
petition should be denied for lack of merit.

In his complaint, petitioner alleged and prayed, thus:

2. Last 27 November 1997, the plaintiff purchased from the defendant a

brand new Toyota Hilux 2.4 motor vehicle with [E]ngine [N]o. 2-L-
9514743. It was delivered to the plaintiff on 29 November 1997. Copies of
the Vehicle Sales Invoice and Vehicle Delivery Note issued by the defendant
are hereto attached as Annexes "A" and "B," respectively.

3. Last 18 October 1998, after only 12,000 kilometers of use, the vehicle’s
engine cracked. Although it was previously driven through a heavy rain, it
didn’t pass through flooded streets high enough to stop sturdy and resistant
vehicles. Besides, vehicles of this class are advertised as being capable of
being driven on flooded areas or rugged terrain.

4. As plaintiff knows no reason why the vehicle’s engine would crack just
like that, the same could only be due to the fact that said engine and/or the
vehicle itself was defective even from the time it was bought.

5. Brought to the attention, defendant refused to answer for this defect

saying it is not covered by the vehicle’s warranty. It refused to replace the
vehicle as plaintiff demanded (or at least its engine, or even repair the
damage).

6. As a result of defendant’s actions, plaintiff suffered mental anxiety and

sleepless nights for which he demands an award of ₱200,000.00 moral
damages.

7. By way of example for the public good, plaintiff should also be awarded
exemplary damages in the amount of ₱200,000.00.

8. Forced to litigate to enforce his rights, plaintiff incurred, and shall further
incur, litigation-related expenses (including those for his counsel’s fees) in
the total estimated sum of ₱100,000.

WHEREFORE, it is respectfully prayed that judgment be rendered ordering

defendant:

a. to replace the subject vehicle with a brand new one or at least to replace
its engine all at defendant’s cost;

b. pay the plaintiff:

i. ₱200,000 – moral damages;

ii. ₱200,000 – exemplary damages;

iii. ₱200,000 – attorney’s fees and litigation expenses; and

iv. the costs of suit.

Other reliefs just and equitable are, likewise, prayed for.6

Petitioner contends that the dismissal on the ground of prescription was

erroneous because the applicable provision is Article 169 of Republic Act
No. 7394 (otherwise known as "The Consumer Act of the Philippines"
which was approved on April 13, 1992), and not Article 1571 of the Civil
Code. Petitioner specifies that in his complaint, he neither asked for a
rescission of the contract of sale nor did he pray for a proportionate
reduction of the purchase price. What petitioner claims is the enforcement of
the contract, that is, that respondent should replace either the vehicle or its
engine with a new one. In this regard, petitioner cites Article 169 of
Republic Act No. 7394 as the applicable provision, so as to make his suit
come within the purview of the two-year prescriptive period. Tangentially,
petitioner also justifies that his cause of action has not yet prescribed
because this present suit, which was an action based on quasi-delict,
prescribes in four years.

On the other hand, respondent maintains that petitioner’s cause of action was
already barred by the statute of limitations under Article 1571 of the Civil
Code for having been filed more than six months from the time the vehicle
was purchased and/or delivered. Respondent reiterates that Article 169 of
Republic Act No. 7394 does not apply.

Petitioner’s argument is erroneous. Article 1495 of the Civil Code states that
in a contract of sale, the vendor is bound to transfer the ownership of and
deliver the thing that is the object of sale. Corollarily, the pertinent
provisions of the Code set forth the available remedies of a buyer against the
seller on the basis of a warranty against hidden defects:

Art. 1561. 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 this trade
or profession, should have known them. (Emphasis supplied)

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.

Art. 1571. Actions arising from the provisions of the preceding ten articles
shall be barred after six months from the delivery of the thing sold.

(Emphasis supplied)

Under Article 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. In the absence of an existing express warranty on the part
of the respondent, as in this case, the allegations in petitioner’s complaint for
damages were clearly anchored on the enforcement of an implied warranty
against hidden defects, i.e., that the engine of the vehicle which respondent
had sold to him was not defective. By filing this case, petitioner wants to
hold respondent responsible for breach of implied warranty for having sold a
vehicle with defective engine. Such being the case, petitioner should have
exercised this right within six months from the delivery of the thing sold.7
Since petitioner filed the complaint on April 20, 1999, or more than nineteen
months counted from November 29, 1997 (the date of the delivery of the
motor vehicle), his cause of action had become time-barred.

Petitioner contends that the subject motor vehicle comes within the context
of Republic Act No. 7394. Thus, petitioner relies on Article 68 (f) (2) in
relation to Article 169 of Republic Act No. 7394. Article 4 (q) of the said
law defines "consumer products and services" as goods, services and credits,
debts or obligations which are primarily for personal, family, household or
agricultural purposes, which shall include, but not limited to, food, drugs,
cosmetics, and devices. The following provisions of Republic Act No. 7394
state:

Art. 67. Applicable Law on Warranties. — The provisions of the Civil Code
on conditions and warranties shall govern all contracts of sale with
conditions and warranties.

Art. 68. Additional Provisions on Warranties. — In addition to the Civil

Code provisions on sale with warranties, the following provisions shall
govern the sale of consumer products with warranty:

e) Duration of warranty. The seller and the consumer may stipulate the
period within which the express warranty shall be enforceable. If the implied
warranty on merchantability accompanies an express warranty, both will be
of equal duration.1âwphi1

Any other implied warranty shall endure not less than sixty (60) days nor
more than one (1) year following the sale of new consumer products.
f) Breach of warranties — xxx

xxx

2) In case of breach of implied warranty, the consumer may retain in the

goods and recover damages, or reject the goods, cancel the contract and
recover from the seller so much of the purchase price as has been paid,
including damages. (Emphasis supplied.)

Consequently, even if the complaint is made to fall under the Republic Act
No. 7394, the same should still be dismissed since the prescriptive period for
implied warranty thereunder, which is one year, had likewise lapsed.

WHEREFORE, the petition is DENIED for being in violation of the

hierarchy of courts, and in any event, for lack of merit.

No costs.

SO ORDERED.

SECOND DIVISION

January 18, 2017

G.R. No. 211175

ATTY. GEROMO, v. LA PAZ HOUSING

DECISION

MENDOZA, J.:

Before the Court is a Petition for Review on Certiorari under Rule 45 of the
Rules of Court assailing the September 26, 2013 Decision 1 and the January
29, 2014 Resolution2 of the Court of Appeals (CA), in CA-G.R. SP No.
123139, which affirmed the January 11, 2012 Decision3 of the Office of the
President (OP), dismissing the action for damages filed by the petitioners
before the Housing and Land Regulatory Board (HLURB) against La Paz
Housing and Development Corporation (La Paz) and the Government
Service Insurance System (GSIS), on the ground of breach of warranty
against hidden defects.

The Antecedents

Petitioners Atty. Reyes G. Geromo (Geromo), Florencio Buentipo, Jr.

(Buentipo), Ernaldo Yambot (Yambot), and Lydia Bustamante (Bustamante)
acquired individual housing units of Adelina 1-A Subdivision (Adelina) in
San Pedro, Laguna from La Paz, through GSIS financing, as evidenced by
their deeds of conditional sale. The properties were all situated along the old
Litlit Creek.

In 1987, Geromo, Bustamante and Yambot started occupying their

respective residential dwellings, which were all located along Block 2
(Pearl Street) of the said subdivision. Buentipo, on the other hand, opted to
demolish the turned-over unit and build a new structure thereon. After more
than two (2) years of occupation, cracks started to appear on the floor
and walls of their houses. The petitioners, through the President of the
Adelina 1-A Homeowners Association, requested La Paz, being the
owner/developer, to take remedial action. They collectively decided to
construct a riprap/retaining wall along the old creek believing that
water could be seeping underneath the soil and weakening the
foundation of their houses. Although La Paz was of the view that it was
not required to build a retaining wall, it decided to give the petitioners
₱3,000.00 each for expenses incurred in the construction of the said
riprap/retaining wall. The petitioners claimed that despite the retaining wall,
the condition of their housing units worsened as the years passed. When they
asked La Paz to shoulder the repairs, it denied their request, explaining that
the structural defects could have been caused by the 1990 earthquake and the
renovations/improvements introduced to the units that overloaded the
foundation of the original structures.

In 1998, the petitioners decided to leave their housing units in Adelina.

In May 2002, upon the request of the petitioners, the Municipal Engineer of
San Pedro and the Mines and Geosciences Bureau (MGB) of the Department
of Environment and Natural Resources (DENR) conducted an ocular
inspection of the subject properties. They found that there was "differential
settlement of the area where the affected units were constructed. "6

On the basis thereof, Geromo filed a complaint for breach of contract with
damages against La Paz and GSIS before the HLURB. 7 On May 3, 2003,
Buentipo, Yambot and Bustamante filed a similar complaint against La Paz
and GSIS. 8 They all asserted that La Paz was liable for implied warranty
against hidden defects and that it was negligent in building their houses on
unstable land. Later on, the said complaints were consolidated.

La Paz, in its Answer, averred that it had secured the necessary permits and
licenses for the subdivision project; that the houses thereon were built in
accordance with the plans and specifications of the National Building Code
and were properly delivered to the petitioners; that it did not violate
Presidential Decree (P.D.) No. 957 as it was issued compliance documents,
such as development permits, approved alteration plan, license to sell, and
certificate of completion by HLURB; that the Philippine Institute of
Volcanology and Seismology (PHILVOLCS), based on the serial photo
interpretation of its field surveyors in 1996, reported that a portion of the
topography of the subdivision developed an active fault line; and lastly, that
there were unauthorized, irregular renovation/alteration and additional
construction in the said units. Hence, it argued that it should not be held
liable for any damage incurred and that the same should be for the sole
account of the petitioners.9

In its defense, GSIS moved for the dismissal of the complaint for lack of
cause of action. It asserted that the deeds of conditional sale were executed
between La Paz and the petitioners only and that its only participation in the
transactions was to grant loans to the petitioners for the purchase of their
respective properties. 10

The Decision of the HLURB Arbiter

In its August 9, 2004 Decision, 11 the HLURB Arbiter found La Paz liable
for the structural damage on the petitioners' housing units, explaining that
the damage was caused by its failure to properly fill and compact
the soil on which the houses were built and to maintain a three
(3) meter easement from the edge of the creek as required by
law. As to GSIS, the HLURB ruled that there was no cogent reason to find
it liable for the structural defects as it merely facilitated the financing of the
affected units. The decretal portion of the decision of the HLURB Arbiter
reads:

WHEREFORE, premises considered, judgment is hereby rendered as

follows:

1) Ordering respondent La Paz Housing and Dev't. Corp. to immediately

undertake and cause the necessary repairs/ construction of the subject units
to make it suitable for human habitation for which it was originally intended
for;

2) In the alternative, if it is no longer possible for the said units to be

repaired to make it suitable for human habitation, respondent LPHDC is
hereby ordered to give each complainant a substitute property of the same
nature and area, more or less, within the subdivision project or in any project
owned and developed by LPHDC within the vicinity of San Pedro, Laguna;

3) Ordering respondent LPHDC to pay complainants:

a. the equivalent sum of what each complainant may prove by documentary

evidence such as receipts and the like, as actual damages;

b. the sum of ₱15,000.00 each as moral damages;

c. the sum of ₱10,000.00 each as exemplary damages;

d. the sum of ₱10,000.00 as attorney's fees.;

e. cost of suit.

SO ORDERED.12

The Decision of the HLURB

Board of Commissioners

In its September 12, 2005 Decision, 13 the HLURB Board of

Commissioners set aside the Arbiter's decision, explaining that there was no
concrete evidence presented to prove that the houses of the petitioners were
indeed damaged by the failure of La Paz to comply with the building
standards or easement requirements.

The petitioners moved for reconsideration, but the HLURB Board of

Commissioners denied their motion in its Resolution, 14 dated January 31,
2006.

The Decision of the OP

Aggrieved, the petitioners elevated the case to the OP which initially

dismissed the appeal on December 18, 2006 for late filing. 15 The
petitioners questioned the dismissal before the CA and, in its Decision, 16
dated March 31, 2009, the appellate court reversed the resolution of the OP
and ordered the latter to resolve the appeal on the merits.

On January 11, 2012, the OP finally rendered a decision dismissing the

appeal for lack of merit. It found that on the culpability of La Paz, the
petitioners merely relied on the report submitted by the team that conducted
the "ocular inspection" of the subject properties. It wrote that "[w]hat is
visual to the eye, though, is not always reflective of the real cause behind.
xxx other than the ocular inspection, no investigation was conducted to
determine the real cause of damage on the housing units." According to the
OP, the petitioners "did not even show that the plans, specifications and
designs of their houses were deficient and defective." It concluded that the
petitioners failed to show that La Paz was negligent or at fault in the
construction of the houses in question or that improper filing and
compacting of the soil was the proximate cause of damage. 17

The CA Decision

Not in conformity, the petitioners appealed the OP decision, dated January

11, 2012, before the CA. On September 26, 2013, the CA affirmed the ruling
of the OP and found that the petitioners had no cause of action against La
Paz for breach of warranty against hidden defects as their contracts
were merely contracts to sell, the titles not having been legally passed on
to the petitioners. It likewise ruled that La Paz could not be held liable for
damages as there was not enough evidence on record to prove that it acted
fraudulently and maliciously against the petitioners. 18

On January 29, 2014, the CA denied the motion for reconsideration19 filed
by the petitioners.

Hence, the present petition raising the following

ISSUES

The CA gravely erred in the issuance of the assailed Decision and

challenged Resolution which affirmed in toto the Decision of the O.P.
[dismissing the petition for lack of merit] despite the conclusive:

A. Findings of the MGB, DENR, Engineer's Office, San Pedro, Laguna and
HLURB Director that petitioners' housing are unfit for human habitation.
Hence, they are entitled to the protective mantle of PD 957 which was
enacted to protect the subdivision lot buyers against the commission of fraud
or negligence by the developer/contractor like La Paz.

B. The contractual relationship between the parties is not governed by

Articles 1477 or 1478, the New Civil Code as the correct issue is the liability
of La Paz as the contractor/developer to the petitioners' housing units
declared by government agencies unfit for human habitation. What governs
are Art. 2176 in relation to Art. 1170, 1173 and Art. 19 in relation to Art. 20
and Art. 21, the Civil Code of the Philippines.

C. La Paz is liable for warranty against hidden defects when it sold to the
petitioners the housing units declared unfit for human habitation. La Paz's
defense of force majeure will not lie.

D. GSIS' privity to the Contract (Deed of Conditional Sale) executed by and

between the petitioners and La Paz for the housing loans which it financed
makes it jointly and severally liable for the petitioners' defective housing
units.20

The central issue in this case is whether La Paz should be held liable for the
structural defects on its implied warranty against hidden defects.

The petitioners assert that La Paz was grossly negligent when it constructed
houses over a portion of the old Litlit Creek. They claim that La Paz merely
covered the old creek with backfilled materials without properly compacting
the soil.21 They argue that they, or any buyer for that matter, could not have
known that the soil beneath the cemented flooring of their housing units
were not compacted or leveled properly and that the water beneath
continuously seeped, causing the soil foundation to soften resulting in the
differential settlement of the area. 22
The Court's Ruling

After a judicious review of the records of this case, the Court finds merit in
the petition.

Under the Civil Code, the vendor shall be answerable for warranty against
hidden defects on the thing sold under the following circumstances:

Art. 1561. 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 this trade
or profession, should have known them. (Emphasis supplied)

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.

For the implied warranty against hidden defects to be applicable, the

following conditions must be met:

a. Defect is Important or Serious

i. The thing sold is unfit for the use which it is intended

ii. Diminishes its fitness for such use or to such an extent that the buyer
would not have acquired it had he been aware thereof

b. Defect is Hidden

c. Defect Exists at the time of the sale

d. Buyer gives Notice of the defect to the seller within reasonable time

Here, the petitioners observed big cracks on the walls and floors of their
dwellings within two years from the time they purchased the units. The
damage in their respective houses was substantial and serious. They reported
the condition of their houses to La Paz, but the latter did not present a
concrete plan of action to remedy their predicament. They also brought up
the issue of water seeping through their houses during heavy rainfall, but
again La Paz failed to properly address their concerns. The structural cracks
and water seepage were evident indications that the soil underneath the said
structures could be unstable. Verily, the condition of the soil would not be in
the checklist that a potential buyer would normally inquire about from the
developer considering that it is the latter's prime obligation to ensure
suitability and stability of the ground.

Furthermore, on June 11, 2002, HLURB Director Belen G. Ceniza, after

confirming the cracks on the walls and floors of their houses, requested
MGB-DENR and the Office of the Municipal Mayor to conduct a
geological/geohazard assessment and thorough investigation on the entire
Adelina subdivision. 23 Thus, in its August 8, 2002 Letter-Report, 24 MGB
reported that there was evident ground settlement in the area of the Litlit
Creek where the houses of the petitioners were located, probably "caused by
hydrocompaction of the backfill and or alluvial deposits xxx." The
Engineering Department of San Pedro Municipality, on the other hand,
confirmed the settlement affecting at least six (6) houses along Block 2,
Pearl St., including that of Geromo, resulting in various structural
damage.25 Records reveal that a portion of Pearl Street itself had sunk,
cracking the concrete pavement of the road. For several years, the petitioners
had to endure the conditions of their homes while La Paz remained silent on
their constant follow-ups. Eventually, they had to leave their own dwellings
due to safety concerns.

Based on the said findings, the Court is of the considered view that the
petitioners were justified in abandoning their dwellings as they were living
therein under unsafe conditions. With the houses uncared for, it was no
surprise that, by the time the case was filed in 2004, they were in a worse
condition.

La Paz remained unconcerned even after receiving incident reports of

structural issues from homeowners and despite constant follow-ups from
them for many years. In fact, the petitioners took it upon themselves to build
a riprap/retaining wall due to La Paz's indifference.

One of the purposes of P.D. No. 957, also known as The Subdivision and
Condominium Buyers' Protective Decree, is to discourage and prevent
unscrupulous owners, developers, agents, and sellers from reneging on their
obligations and representations to the detriment of innocent purchasers.26

Considering the nature of the damage sustained by the structures, even

without the findings of the local governmental agency and the MGB-DENR,
La Paz is still liable under the doctrine of res ipsa loquitur. In the case of
D.M Consunji, Inc. v. CA, 27 the Court expounded on this doctrine in this
wise:

The concept of res ipsa loquitur has been explained in this wise:

While negligence is not ordinarily inferred or presumed, and while the mere
happening of an accident or injury will not generally give rise to an
inference or presumption that it was due to negligence on the defendant’s
part, under the doctrine of res ipsa loquitur, which means, literally, the thing
or transaction speaks for itself, or in one jurisdiction, that the thing or
instrumentality speaks for itself, the facts or circumstances accompanying an
injury may be such as to raise a presumption, or at least permit an inference
of negligence on the part of the defendant, or some other person who is
charged with negligence.

x x x where it is shown that the thing or instrumentality which caused the

injury complained of was under the control or management of the defendant,
and that the occurrence resulting in the injury was such as in the ordinary
course of things would not happen if those who had its control or
management used proper care, there is sufficient evidence, or, as sometimes
stated, reasonable evidence, in the absence of explanation by the defendant,
that the injury arose from or was caused by the defendant's want of care.

One of the theoretical bases for the doctrine is its necessity, i.e., that
necessary evidence is absent or not available.

The res ipsa loquitur doctrine is based in part upon the theory that the
defendant in charge of the instrumentality which causes the injury either
knows the cause of the accident or has the best opportunity of ascertaining it
and that the plaintiff has no such knowledge, and therefore is compelled to
allege negligence in general terms and to rely upon the proof of the
happening of the accident in order to establish negligence. The inference that
the doctrine permits is grounded upon the fact that the chief evidence of the
true cause, whether culpable or innocent, is practically accessible to the
defendant but inaccessible to the injured person.

It has been said that the doctrine of res ipsa loquitur furnishes a bridge by
which a plaintiff, without knowledge of the cause, reaches over to
defendant who knows or should know the cause, for any explanation of
care exercised by the defendant in respect of the matter of which the
plaintiff complains. The res ipsa loquitur doctrine, another court has said, is
a rule of necessity, in that it proceeds on the theory that under the peculiar
circumstances in which the doctrine is applicable, it is within the power of
the defendant to show that there was no negligence on his part, and direct
proof of defendants negligence is beyond plaintiffs power. Accordingly,
some courts add to the three prerequisites for the application of the res ipsa
loquitur doctrine the further requirement that for the res ipsa loquitur
doctrine to apply, it must appear that the injured party had no knowledge or
means of knowledge as to the cause of the accident, or that the party to be
charged with negligence has superior knowledge or opportunity for
explanation of the accident. 28

Under the said doctrine, expert testimony may be dispensed with to sustain
an allegation of negligence if the following requisites obtain: a) the event is
of a kind which does not ordinarily occur unless someone is negligent; b) the
cause of the injury was under the exclusive control of the person in charge;
and c) the injury suffered must not have been due to any voluntary action or
contribution on the part of the person injured.29

In this case, the subdivision plan/layout was prepared and approved by La

Paz. The actual excavation, filling and levelling of the subdivision grounds
were exclusively done under its supervision and control. There being no
contributory fault on the part of the petitioner, there can be no other
conclusion except that it was the fault of La Paz for not properly compacting
the soil, which used to be an old creek.

It should have taken adequate measures to ensure the structural stability of

the land before they started building the houses thereon.1âwphi1 The uneven
street pavements and visible cracks on the houses were readily apparent yet
La Paz did not undertake any corrective or rehabilitative work.

La Paz's argument that the damage could have been sustained because of the
1990 earthquake or through the various enhancements undertaken by the
petitioners on their respective structures was not substantiated. Records
undeniably show that the petitioners had raised their concerns as early as
1988 - before the earthquake occurred in 1990.

On Damages

Due to the indifference and negligence of La Paz, it should compensate the

petitioners for the damages they sustained. On actual damages, the standing
rule is that to be entitled to them, there must be pleading and proof of actual
damages suffered.

Actual damages, to be recoverable, must not only be capable of proof, but

must actually be proved with a reasonable degree of certainty. Courts cannot
simply rely on speculation, conjecture or guesswork in determining the fact
and amount of damages. To justify an award of actual damages, there must
be competent proof of the actual amount of loss, credence can be given only
to claims which are duly supported by receipts.30

In this regard, the petitioners failed to prove with concrete evidence the
amount of the actual damages they suffered. For this reason, the Court does
not have any basis for such an award.

Nevertheless, temperate or moderate damages may be recovered when some

pecuniary loss has been suffered but its amount cannot, from the nature of
the case, be proved with certainty. 31 The amount thereof is usually left to
the discretion of the courts but the same should be reasonable, bearing in
mind that temperate damages should be more than nominal but less than
compensatory.32 In this case, the petitioners suffered some form of
pecuniary loss due to the impairment of the structural integrity of their
dwellings. In view of the circumstances obtaining, an award of temperate
damages amounting to ₱200,000.00 is just and reasonable.
The petitioners are also entitled to moral and exemplary damages. Moral
damages are not meant to be punitive but are designed to compensate and
alleviate the physical suffering, mental anguish, fright, serious anxiety,
besmirched reputation, wounded feelings, moral shock, social humiliation,
and similar harm unjustly caused to a person. To be entitled to such an
award, the claimant must satisfactorily prove that he indeed suffered
damages and that the injury causing the same sprung from any of the cases
listed in Articles 2219 33 and 2220 34 of the Civil Code. Moreover, the
damages must be shown to be the proximate result of a wrongful act or
omission. Moral damages may be awarded when the breach of contract was
attended with bad faith, 35 or is guilty of gross negligence amounting to bad
faith. 36 Obviously, the uncaring attitude of La Paz amounted to bad faith.
For said reason, the Court finds it proper to award moral damages in the
amount of ₱150,000.00.

Petitioners are also entitled to exemplary damages which are awarded when
a wrongful act is accompanied by bad faith or when the guilty party acted in
a wanton, fraudulent, reckless, oppressive, or malevolent manner" 37 under
Article 2232 38 of the Civil Code. The indifference of La Paz in addressing
the petitioners' concerns and its subsequent failure to take remedial measures
constituted bad faith.

Considering that the award of moral and exemplary damages is proper in

this case, attorney's fees and cost of the suit may also be recovered as
provided under Article 220839 of the Civil Code.40

GSIS not liable

As to the petitioners' prayer to make GSIS jointly and severally liable with
La Paz, the Court finds that there is no legal basis to juridically bind GSIS
because it was never a party in the contracts between La Paz and the
petitioners. The housing loan agreements that the petitioners entered into
with GSIS were separate and distinct from the purchase contracts they
executed with La Paz. GSIS merely agreed to pay the purchase price of the
housing unit that each petitioner purchased from La Paz. It was merely the
lender, not the developer.

WHEREFORE, the petition is GRANTED. The August 9, 2004 Decision of

the HLURB Arbiter is hereby REINSTATED with MODIFICATIONS to
read as follows:

WHEREFORE, Judgment is hereby rendered

1) Ordering respondent La Paz Housing and Development Corporation to

immediately undertake and cause the necessary repairs/construction of the
subject units to make it suitable for human habitation for which it was
originally intended;
2) In the alternative, if it would no longer possible for the said units to be
repaired to make it suitable for human habitation, ordering respondent La
Paz to give each petitioner another property of the same nature and size,
more or less, within the subdivision project or in any project owned and
developed by La Paz in San Pedro, Laguna, or pay the monetary equivalent
thereof; and

3) Ordering respondent La Paz to pay each of the petitioners:

a. the sum of ₱200,000.00 as temperate damages;

b. the sum of ₱150,000.00 as moral damages;

c. the sum of ₱150,000.00 as exemplary damages;

d. the sum of ₱100,000.00 as attorney's fees; and

e. cost of suit.

All awards shall earn legal interest at the rate of six percent (6%) per annum
from the finality of judgment until full payment, in line with recent
jurisprudence.41

SO ORDERED.